Phibro Animal Health Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended December 31, 2022. The financial statements are unaudited. Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally.
Financial performance
| Metric | Three months ended Dec. 31, 2022 | Change vs. 2021 | Six months ended Dec. 31, 2022 | Change vs. 2021 |
|---|---|---|---|---|
| Net sales | $244.6 million | Up 5% | $477.2 million | Up 7% |
| Gross profit | $77.4 million | Up 9% | $146.0 million | Up 8% |
| Gross margin | 31.6% | Up 120 bps | 30.6% | Up 30 bps |
| Operating income | $15.8 million | Down 29% | $29.5 million | Down 20% |
| Net income | $7.2 million | Down 59% | $11.1 million | Down 54% |
| Net income per share | $0.18 | Down $0.25 | $0.27 | Down $0.32 |
| Adjusted EBITDA | $30.9 million | Up 6% | $53.0 million | Up 3% |
Sales growth was led by Animal Health, particularly nutritional specialties and MFAs, and by Performance Products. Mineral Nutrition declined in the quarter because of lower demand, despite higher prices. Adjusted EBITDA improved, but GAAP profitability was pressured by higher selling, general and administrative expenses, foreign currency effects, increased interest expense and a $6.6 million environmental remediation charge.
Liquidity, cash flow and debt
- Cash and cash equivalents were $68.4 million at December 31, 2022, compared with $74.2 million at June 30, 2022. Cash and short-term investments totaled $78.4 million.
- Six-month operating cash flow was negative $13.2 million, compared with positive $23.9 million in the prior-year period. Working-capital uses included $29.1 million of inventory investment, $14.6 million of lower accounts payable and $7.7 million of other current assets.
- Investing activities used $26.0 million, including $33.0 million of capital expenditures. Capital spending included $15.0 million for additional land and building at an operating facility.
- Financing activities provided $33.0 million, primarily from net revolver borrowings of $39.0 million and proceeds from a new $12.0 million term loan, partly offset by debt repayments and $9.7 million of dividends.
- Total debt included $184.0 million drawn under the revolver, $276.8 million of long-term debt and $15.4 million of current debt maturities. The revolver commitment was increased to $310.0 million, with $123.5 million available at December 31, 2022, subject to restrictions.
- The credit facilities mature in April 2026; the new $12.0 million term loan matures in September 2027. The company was in compliance with its financial covenants at December 31, 2022.
- Management expects cash, operating cash flows and available financing to support needs for at least the next twelve months, while cautioning that adverse operating results, covenant violations and macroeconomic conditions could reduce liquidity.
Material changes versus the prior comparable period
- Six-month sales increased $29.8 million, or 7%, with Animal Health up 9%, Performance Products up 8% and Mineral Nutrition essentially flat.
- Gross margin expanded despite higher raw-material and logistics costs, supported by pricing, product mix and lower production costs in the quarter.
- SG&A increased 18% for the six months and included $6.6 million of environmental remediation costs related primarily to a tentative settlement involving historical contamination at a California facility. Excluding this charge and the prior-year $1.2 million investment-sale gain, six-month SG&A increased 10%.
- Six-month foreign currency results shifted from a $2.1 million gain in 2021 to a $5.1 million loss in 2022, reducing income before taxes by approximately $7.1 million.
- Net interest expense increased 19% for the six months because of higher debt outstanding, partially offset by interest income and hedging effects.
- Inventory increased to $289.0 million from $259.2 million at June 30, 2022, while total assets increased to $961.8 million from $931.7 million.
Outlook, contingencies and key risks
- The company provided no specific revenue or earnings guidance in the filing.
- The FDA continues to review the regulatory status of carbadox, sold as Mecadox. Sales for the twelve months ended December 31, 2022 were $20.0 million. Loss of approval could materially affect results.
- A tentative environmental settlement relating to the Omega Chemical groundwater matter was reached in January 2023, subject to negotiation and court approval. The company recorded a related reserve; total estimated environmental liabilities were approximately $10.5 million at December 31, 2022.
- The Russia-Ukraine conflict, COVID-19, supply-chain disruption, inflation, raw-material availability and currency volatility remain potential sources of adverse impact. Sales to Russia and Ukraine represented approximately 1% of consolidated sales.
- Other principal risks include restrictions on antibacterials, animal disease outbreaks, regulatory actions, product liability, competition, customer consolidation, dependence on manufacturing facilities and suppliers, environmental obligations, leverage and debt covenants.
- The company amended its credit facilities and interest-rate swap in November 2022 to replace LIBOR with SOFR. A $300.0 million swap effectively fixed the related floating-rate exposure at 0.61% through June 2025.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the tentative Omega Chemical environmental settlement receives court approval and whether payments or liabilities differ from the recorded reserve.
- The FDA’s eventual decision regarding carbadox and the potential effect on Mecadox sales.
- Inventory growth, negative operating cash flow and the sustainability of working-capital investment.
- Revolver utilization, interest-rate exposure, covenant compliance and the effect of higher benchmark rates on future interest expense.
- Whether Animal Health growth and pricing can offset weakness in Mineral Nutrition and higher corporate and employee-related costs.
- The company’s ability to maintain dividends while funding capital expenditures and servicing substantial debt.