Phibro Animal Health Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, compared with the three months ended September 30, 2020. The filing was signed November 2, 2021. Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $214.7 million | $195.2 million | 10% |
| Gross profit | $64.7 million | $64.1 million | 1% |
| Gross margin | 30.1% | 32.8% | Down 270 bps |
| Operating income | $14.6 million | $15.7 million | Down 7% |
| Net income | $6.5 million | $12.3 million | Down 47% |
| Diluted EPS | $0.16 | $0.30 | Down $0.14 |
| Adjusted EBITDA | $22.5 million | $24.3 million | Down 8% |
| Operating cash flow | $3.8 million | $1.7 million | Up $2.1 million |
Net sales increased across all segments: Animal Health rose 10% to $141.0 million, Mineral Nutrition rose 6% to $54.4 million, and Performance Products rose 25% to $19.2 million. Animal Health Adjusted EBITDA declined 8% to $27.6 million, while Mineral Nutrition increased 49% to $4.5 million and Performance Products increased 8% to $2.1 million.
Profitability was pressured by higher logistics and manufacturing costs, unfavorable Animal Health product and geographic mix, increased SG&A, and a $5.8 million unfavorable swing in foreign currency results from a $3.6 million gain in the prior year to a $2.1 million loss. The effective tax rate increased to 31.9% from 25.5%, including a $0.4 million expense related to changes in uncertain tax positions; excluding that item, the rate was 27.4%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $41.2 million; short-term investments were $56.0 million, for total cash and short-term investments of $97.2 million.
- Operating activities generated $3.8 million. Investing activities used $20.7 million, including $7.4 million of capital expenditures and $13.0 million invested in short-term investments. Financing activities provided $8.3 million, including $15.0 million of net revolver borrowings, partially offset by $4.9 million of dividends and $1.9 million of scheduled debt payments.
- Total debt consisted of $296.3 million of term debt, before issuance costs, and $110.0 million drawn on the revolver. The revolver capacity was $250.0 million, with $137.3 million available after $2.7 million of letters of credit and other commitments.
- The credit facilities mature in April 2026. The company was in compliance with its maximum 4.00:1.00 First Lien Net Leverage Ratio and minimum 3.00:1.00 interest coverage covenant as of September 30, 2021.
- Working capital was $260.1 million, and the current asset-to-current liability ratio was 2.84:1. Management expects cash, operating cash flow and financing arrangements to provide adequate liquidity for at least the next twelve months, subject to operating and market risks.
Material changes and unusual items
- Sales growth did not translate into earnings growth because gross margin contracted and SG&A increased. Total segment Adjusted EBITDA fell 8% to $22.5 million.
- Inventory increased to $221.3 million from $216.3 million, partly reflecting forecast demand and safety stocks intended to mitigate supply disruptions.
- Accumulated other comprehensive loss increased to $122.2 million, primarily due to a $7.0 million unfavorable foreign currency translation adjustment.
- The company declared a quarterly dividend of $0.12 per Class A and Class B share, payable December 15, 2021.
- The $4.8 million minimum contingent consideration liability related to the Osprey acquisition was paid in October 2021.
Outlook, risks and contingencies
Management stated that global food and animal production was returning to stability, but COVID-19 continued to create uncertainty regarding demand, supply chains, logistics, raw material costs, labor, manufacturing and customer operations. Production facilities continued operating without interruption, although the company incurred additional safety and supply-chain costs.
The FDA’s regulatory review of carbadox remains a significant business risk. The company disputes the FDA’s position regarding the product’s safety and regulatory method. Carbadox sales were approximately $20 million during the twelve months ended September 30, 2021; loss of approval could materially affect results.
Other key risks include raw-material price and availability, foreign currency volatility, animal disease outbreaks, regulatory restrictions on antibacterials, customer and industry consolidation, substantial indebtedness, covenant restrictions, dependence on international operations and manufacturing facilities, product liability, environmental obligations, and general economic conditions.
The company is involved in environmental investigation and remediation matters, including the Omega Chemical Site groundwater matter. Estimated environmental liabilities were approximately $4.3 million, but the ultimate liability associated with the groundwater plume cannot currently be predicted with reasonable certainty. Management believes existing claims and litigation are not expected to have a material adverse effect, although future costs could be material.
Investor verification points
- Verify whether margin pressure from logistics, manufacturing costs, raw materials and product mix persists in subsequent quarters.
- Monitor Animal Health Adjusted EBITDA and the regulatory status and sales exposure of carbadox.
- Assess revolver usage, debt covenant headroom, interest-rate exposure and the April 2026 debt maturity.
- Track inventory levels, safety-stock requirements and operating cash conversion.
- Review COVID-19, supply-chain, foreign-currency and international-market developments.
- Follow the Omega Chemical Site and other environmental matters for changes in estimated liability.
- Reconcile management’s non-GAAP Adjusted EBITDA with GAAP operating income and net income.