Business Context and Reporting Period
Phibro Animal Health Corporation is a global developer, manufacturer and marketer of animal health, mineral nutrition and performance products. This unaudited Form 10-Q covers the three and nine months ended March 31, 2022, compared with the periods ended March 31, 2021. The filing was signed May 4, 2022.
- Animal Health products serve poultry, cattle, swine and aquaculture markets.
- Mineral Nutrition products primarily serve North American livestock customers.
- Performance Products are used mainly in personal care, industrial chemical and chemical catalyst applications.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2022 | Year-over-Year | Nine Months Ended March 31, 2022 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $239.6 million | Up 13% | $687.0 million | Up 12% |
| Gross profit | $71.6 million | Up 4% | $207.0 million | Up 3% |
| Gross margin | 29.9% | Down 280 bps | 30.1% | Down 280 bps |
| Operating income | $19.2 million | Down 5% | $56.1 million | Up 1% |
| Net income | $17.7 million | Up 45% | $41.7 million | Up 12% |
| Diluted earnings per share | $0.44 | Up $0.14 | $1.03 | Up $0.11 |
| Adjusted EBITDA | $28.0 million | Comparable | $79.6 million | Down 2% |
Net income benefited substantially from foreign currency gains of $10.6 million in the quarter and $12.6 million for the nine-month period, compared with gains of $0.6 million and $3.6 million, respectively, in the prior-year periods. Adjusted EBITDA excludes foreign currency gains and other specified items and therefore did not increase in line with GAAP net income.
Segment Results
- Animal Health: Sales increased 11% in the quarter and 10% for the nine months. Vaccines grew 21% and 22%, respectively. Adjusted EBITDA declined 6% in the quarter and 4% year to date, primarily from higher employee-related and other selling, general and administrative costs.
- Mineral Nutrition: Sales increased 19% in the quarter and 16% year to date, mainly from higher average selling prices linked to raw material costs. Adjusted EBITDA increased 40% and 39%, respectively.
- Performance Products: Sales increased 15% in the quarter and 12% year to date, while Adjusted EBITDA declined 2% and 12%, respectively, due largely to higher raw material and production costs.
Cash Flow, Liquidity and Debt
| Item | March 31, 2022 | June 30, 2021 or Prior Period |
|---|---|---|
| Cash and cash equivalents | $70.7 million | $50.2 million |
| Cash and short-term investments | $92.8 million | $93.2 million |
| Working capital | $281.5 million | $251.0 million |
| Current assets/current liabilities | 2.64:1 | 2.62:1 |
| Total debt, including revolver | Approximately $415.6 million | Approximately $392.1 million |
| Revolver availability | $123.3 million | Not specified in the filing excerpt |
- Operating cash flow was $30.1 million for the nine months, down from $45.2 million. The reduction primarily reflected increased inventories of $30.5 million and higher receivables of $10.8 million.
- Investing activities used $13.0 million, including $25.2 million of capital expenditures and $10.8 million for a business acquisition.
- Financing activities provided $4.0 million, including $29.0 million of net revolver borrowings, offset by $14.6 million of dividends and $5.6 million of scheduled debt payments.
- The $300.0 million term loan and $250.0 million revolver mature in April 2026. The company was in compliance with its financial covenants at March 31, 2022.
- Management expects cash on hand, operating cash flow and available financing to support liquidity for at least the next twelve months, while noting that adverse operating results or covenant violations could impair funding flexibility.
Material Changes Versus the Prior Comparable Period
- Sales growth was broad-based, but gross margin fell from 32.7% to 29.9% in the quarter and from 32.9% to 30.1% year to date because of raw material, logistics and production cost inflation.
- Operating income declined in the quarter despite higher sales, reflecting margin pressure and increased SG&A.
- GAAP net income rose primarily because of significantly larger foreign currency gains, while Adjusted EBITDA was flat for the quarter and down 2% year to date.
- Inventory increased to $249.9 million from $216.3 million at June 30, 2021, partly reflecting safety stocks and anticipated demand.
- In February 2022, the company acquired an ethanol-fermentation processing-aids business for $13.7 million. The preliminary purchase accounting included $10.8 million of definite-lived intangible assets and $0.6 million of goodwill.
- The company paid $4.8 million of contingent consideration related to a prior acquisition in October 2021.
Outlook, Risks and Unusual Items
- The company provided no specific numerical revenue, earnings or margin guidance in the filing text.
- COVID-19 continues to create uncertainty around demand, supply chains, manufacturing, raw material costs and customer operations, although production facilities continued operating without interruption during the reported period.
- Russia and Ukraine represented approximately 1% of annual consolidated sales. The company has no production or direct distribution operations and no planned investments in Russia, but identified risks from sanctions, logistics, inflation, foreign exchange, interest rates and cybersecurity.
- The FDA continues to evaluate the approval and regulatory method for Mecadox, the company’s carbadox product. Sales were approximately $20 million for the twelve months ended March 31, 2022. Loss of approval could adversely affect results.
- Environmental liabilities include estimated investigation and remediation costs of approximately $4.3 million. Potential additional liability associated with the Omega Chemical Site groundwater matter cannot currently be estimated with certainty.
- Foreign currency gains, acquisition-related costs, a $1.2 million gain on sale of an investment, and changes in tax positions affected period comparability. Adjusted EBITDA is a non-GAAP measure and is not standardized across companies.
- Key ongoing risks include raw material availability and pricing, disease outbreaks, regulatory restrictions on antibacterials, customer consolidation, product liability, substantial indebtedness, debt covenants, foreign exchange volatility and dependence on manufacturing operations and suppliers.
Important Facts for Investors to Verify
- Whether margin pressure from raw materials, logistics and production costs persists or is offset by pricing.
- Whether Animal Health Adjusted EBITDA stabilizes after higher employee and corporate costs.
- The sustainability and cash-flow impact of elevated inventory and planned capital expenditures.
- Future FDA actions regarding Mecadox and the potential effect on approximately $20 million of annual sales.
- Revolver utilization, debt covenant compliance and the effect of interest-rate and LIBOR-transition changes before the April 2026 maturity.
- The financial and operational contribution of the February 2022 acquisition.
- Potential additional environmental costs related to the Omega Chemical Site and other remediation matters.
- Future effects of COVID-19, the Russia-Ukraine conflict, sanctions, supply-chain disruption and foreign currency movements.