Phibro Animal Health Corporation — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended December 31, 2021, compared with December 31, 2020. 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, 2021 | Year-over-year change | Six months ended Dec. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $232.7 million | 13% | $447.4 million | 11% |
| Gross profit | $70.7 million | 4% | $135.4 million | 2% |
| Operating income | $22.3 million | 12% | $36.9 million | 4% |
| Net income | $17.5 million | 36% | $24.0 million | (4%) |
| Diluted EPS | $0.43 | Up from $0.32 | $0.59 | Down from $0.62 |
| Adjusted EBITDA | $29.1 million | 2% | $51.6 million | (2%) |
| Operating cash flow | Not separately provided | — | $23.9 million | Down $4.7 million |
Margins and segment trends
- Gross margin was 30.4% for the quarter and 30.3% for the six-month period, down from 33.1% and 33.0%, respectively. Higher raw material, logistics and production costs and unfavorable mix pressured margins.
- Animal Health sales rose 11% in the quarter and 10% year to date. Vaccines increased 20% and 22%, respectively; MFAs and other products increased 12% and 9%.
- Mineral Nutrition sales increased 23% in the quarter and 15% year to date, primarily from higher average selling prices linked to raw material costs.
- Performance Products sales declined 4% in the quarter but increased 10% year to date. Profitability declined because of higher raw material and production costs.
- Consolidated Adjusted EBITDA margin was 12.5% in the quarter and 11.5% year to date, compared with 13.8% and 13.2% in the prior-year periods.
Liquidity, cash flow and debt
- Cash and cash equivalents were $63.4 million at December 31, 2021, compared with $50.2 million at June 30, 2021. Cash and short-term investments totaled $95.5 million.
- Working capital was $259.6 million, and the current-assets-to-current-liabilities ratio was 2.69:1.
- Operating cash flow was $23.9 million, including a $22.0 million use of cash for inventory. Capital expenditures were $15.1 million.
- Total debt consisted of $294.4 million of term-loan principal, less issuance costs, and $107.0 million drawn under the revolving facility. The term loan matures in April 2026.
- The $250 million revolver had $140.3 million of availability after $2.7 million of letters of credit, subject to facility restrictions. The company was in compliance with its debt covenants at December 31, 2021.
- The company paid $9.7 million of dividends and $4.8 million of contingent consideration during the six months. A quarterly dividend of $0.12 per share was declared for payment on March 23, 2022.
- Management expects cash on hand, operating cash flow and financing arrangements to provide adequate liquidity for at least the next twelve months, while noting that adverse operating conditions or covenant violations could limit funding flexibility.
Material changes versus the prior comparable period
- Quarterly sales growth was broad-based, but gross-margin compression limited gross-profit growth to 4% despite 13% sales growth.
- Quarterly net income benefited from a $4.8 million favorable change in foreign-currency results, including a $4.2 million net gain versus a $0.6 million net loss in the prior-year quarter.
- Six-month net income declined 4% despite 11% sales growth, reflecting margin pressure, higher employee-related and strategic-investment costs, a higher effective tax rate, and less favorable foreign-currency gains.
- The effective tax rate increased to 25.8% for the quarter and 27.6% year to date, from 20.3% and 22.9%. The 2021 periods included uncertain-tax-position effects and a GILTI-related benefit.
- Inventory increased to $230.8 million from $216.3 million at June 30, 2021, as the company built safety stocks and prepared for expected demand and potential supply disruptions.
- Accumulated other comprehensive loss increased to $128.8 million, primarily due to a $17.3 million unfavorable foreign-currency translation adjustment for the six months.
Outlook, commentary and risks
- Management stated that the global food and animal production industry was returning toward stability, but COVID-19 remained fluid and continued to create risks involving demand, supply chains, logistics, raw materials, labor and manufacturing costs.
- The FDA scheduled a March 10, 2022 virtual public hearing concerning the safety of carbadox, marketed by Phibro as Mecadox. Sales of Mecadox were approximately $22 million for the twelve months ended December 31, 2021. Loss of approval could materially affect results.
- Key ongoing risks include regulatory restrictions on antibacterials, animal-disease outbreaks, raw-material availability and prices, currency volatility, customer consolidation, competition, dependence on manufacturing and suppliers, and substantial indebtedness.
- Environmental investigations and remediation obligations remain outstanding. Estimated environmental liabilities were approximately $4.3 million, while potential liability relating to the Omega Chemical Superfund groundwater plume could not be estimated with reasonable certainty.
- The company uses interest-rate swaps and foreign-currency options for hedging and does not use derivatives for speculative purposes. A $150 million interest-rate swap was scheduled to mature in June 2022, with another swap expected to increase to $300 million of notional principal in July 2022.
- There were no material changes to previously disclosed risk factors, contractual obligations or internal controls. Disclosure controls were determined to be effective.
- After quarter-end, the company entered into a severance protection agreement with CFO Damian Finio, providing specified salary and bonus benefits upon qualifying termination.
Important facts for investors to verify
- Whether pricing actions and volume growth can offset raw-material, logistics, labor and production-cost inflation.
- The outcome and potential commercial impact of the FDA’s carbadox hearing and any subsequent regulatory action.
- Inventory normalization, operating cash conversion and capital-expenditure requirements.
- Revolver availability, interest-rate exposure, covenant compliance and debt maturities.
- The effect of foreign-currency movements on earnings, accumulated other comprehensive loss and cash flow.
- The ultimate cost and timing of environmental remediation and related litigation.
- The comparability of Adjusted EBITDA, a non-GAAP measure, including the company’s exclusion of foreign-currency gains and losses and other items.