Phibro Animal Health Corporation — Fiscal 2023 Third Quarter 10-Q
Reporting period: Three and nine months ended March 31, 2023, compared with the prior-year periods ended March 31, 2022. The filing was signed May 3, 2023. Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally.
Financial highlights
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $245.7 million, up 3% | $722.8 million, up 5% |
| Gross profit | $75.5 million; 30.7% margin | $221.6 million; 30.7% margin |
| Operating income | $18.6 million; 7.6% margin | $48.1 million; 6.7% margin |
| Net income | $10.0 million; $0.25 per share | $21.1 million; $0.52 per share |
| Adjusted EBITDA | $27.4 million; 11.1% of sales | $80.4 million; 11.1% of sales |
| Cash flow from operations | Not separately provided for the quarter | $(6.9) million |
- Animal Health sales increased 11% in the quarter and 10% year to date, led by MFAs and other products, nutritional specialties and vaccines.
- Mineral Nutrition sales declined 9% in the quarter and 3% year to date, reflecting lower trace-mineral demand.
- Performance Products sales declined 17% in the quarter and 1% year to date.
- Quarterly gross margin improved 80 basis points year over year, while nine-month gross margin improved 60 basis points.
- SG&A increased 9% in the quarter and 15% year to date. The nine-month amount included $6.9 million of environmental remediation costs, primarily related to the Omega Chemical Site settlement.
Balance sheet, debt and liquidity
- At March 31, 2023, cash and cash equivalents were $37.2 million and short-term investments were $40.0 million, for combined liquidity of $77.2 million.
- Working capital was $358.4 million, and the reported current-assets-to-current-liabilities ratio was 3.39:1.
- Total debt consisted of $193.0 million drawn on the revolving facility, $273.0 million of long-term debt and $15.4 million of current maturities. Gross debt was approximately $481.4 million before considering debt issuance costs.
- The revolver commitment was $310.0 million. After $2.5 million of letters of credit, $114.5 million remained available, subject to facility restrictions.
- The credit facilities mature in April 2026; the additional $12.0 million term loan matures in September 2027. The company was in compliance with its debt covenants at March 31, 2023.
- Management expects cash, operating cash flow and financing arrangements to provide adequate liquidity for at least the next twelve months, while noting that adverse operating results or covenant violations could impair funding flexibility.
Cash flow and capital allocation
- Operating activities used $6.9 million during the first nine months, compared with $30.1 million provided in the prior-year period. Working-capital usage included $30.5 million for inventories and $19.7 million for accounts payable timing.
- Investing activities used $63.7 million, including $40.9 million of capital expenditures and $23.0 million of net purchases of short-term investments. Capital spending primarily supported production capacity, productivity improvements and the purchase of additional land and a building.
- Financing activities provided $33.3 million, including $48.0 million of net revolver borrowings and $12.0 million of term-loan proceeds, partially offset by debt repayments and $14.6 million of dividends.
- The board declared a quarterly dividend of $0.12 per share, payable June 28, 2023, subject to applicable restrictions and board approval.
Material changes versus the prior comparable period
- Revenue growth was concentrated in Animal Health and was partially offset by declines in Mineral Nutrition and Performance Products.
- Net income fell 43% in the quarter and 49% for the nine-month period, despite higher sales and gross profit.
- Operating income declined 3% in the quarter and 14% year to date as SG&A and strategic investments increased.
- Net foreign-currency results shifted from a $10.6 million gain in the prior-year quarter and a $12.6 million gain year to date to a $0.4 million gain and a $4.6 million loss, respectively.
- Net interest expense increased 32% in the quarter and 23% year to date due to higher debt and floating interest rates.
- Adjusted EBITDA declined 2% in the quarter but increased 1% year to date. Animal Health improved, while Mineral Nutrition and corporate expenses weakened.
- Cash declined by $37.0 million from June 30, 2022, primarily because of operating working-capital needs, capital expenditures and net investment purchases.
Outlook, unusual items and risks
- No specific financial revenue, earnings or margin guidance is provided in the filing.
- Management expects adequate liquidity for at least the next twelve months but identifies macroeconomic conditions, inflation, interest rates, currency movements, supply-chain disruption and covenant compliance as uncertainties.
- In February 2023, Phibro-Tech and affiliates entered into a cash-out settlement relating to the Omega Chemical Site groundwater matter. The agreement contemplates payments through February 2024 and requires EPA, DOJ and court approval. Environmental liabilities were estimated at $8.6 million at March 31, 2023, compared with $4.3 million at June 30, 2022.
- The FDA’s review of carbadox remains a significant regulatory risk. Mecadox sales were $20.8 million for the twelve months ended March 31, 2023; the product remained available at the filing date.
- Sales to Russia and Ukraine represented approximately 1% of consolidated sales. The company has no production or direct distribution operations in Russia, but escalation of the conflict could affect logistics, sanctions, currencies, interest rates, input costs and cybersecurity.
- Other key risks include animal-disease trends, weather, raw-material availability and pricing, product approvals, restrictions on antibacterials, competition, environmental obligations, litigation, substantial indebtedness and foreign-exchange exposure.
- The company uses interest-rate swaps and foreign-currency contracts for hedging and does not use derivatives for trading or speculation.
- Management concluded that disclosure controls were effective as of March 31, 2023, with no material changes in internal control over financial reporting.
Investor verification points
- Verify the final cash payments and regulatory or court approvals associated with the Omega Chemical Site settlement.
- Monitor the FDA’s carbadox proceedings and the potential impact on Mecadox sales and profitability.
- Assess whether negative operating cash flow and elevated inventory balances normalize in subsequent quarters.
- Track revolver utilization, floating-rate interest expense, covenant headroom and debt maturities.
- Evaluate the sustainability of Animal Health growth against weakness in Mineral Nutrition and Performance Products.
- Reconcile non-GAAP Adjusted EBITDA with GAAP results, particularly the treatment of foreign-currency effects, environmental costs and corporate expenses.