Phibro Animal Health Corporation — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2021, compared with March 31, 2020; balance sheet compared with June 30, 2020. The requested metadata identifies “2020 Q3,” but the filing is for fiscal third quarter 2021.
Business context
Phibro develops, manufactures and markets animal health and mineral nutrition products for poultry, swine, cattle and aquaculture, along with performance products for personal care, industrial chemical and chemical catalyst applications. Operations are organized into Animal Health, Mineral Nutrition and Performance Products.
Financial performance and liquidity
| Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Nine months ended March 31, 2021 | Nine months ended March 31, 2020 |
|---|---|---|---|---|
| Net sales | $211.7 million | $210.7 million | $613.1 million | $614.5 million |
| Gross profit | $69.2 million | $69.6 million | $201.5 million | $196.3 million |
| Gross margin | 32.7% | 33.0% | 32.9% | 31.9% |
| Operating income | $20.1 million | $21.3 million | $55.7 million | $51.1 million |
| Net income | $12.2 million | $13.5 million | $37.3 million | $27.9 million |
| Diluted EPS | $0.30 | $0.33 | $0.92 | $0.69 |
| Adjusted EBITDA | $28.1 million | $30.1 million | $80.9 million | $78.3 million |
- Cash flow: Nine-month operating cash flow was $45.2 million, down from $55.5 million. Capital expenditures were $22.2 million, versus $24.0 million, and investing cash usage was $11.4 million, compared with $110.9 million in the prior period, which included acquisition spending.
- Cash and liquidity: Cash and cash equivalents were $49.1 million and short-term investments were $44.0 million at March 31, 2021. Working capital was $233.2 million, and the current-assets-to-current-liabilities ratio was 2.60:1.
- Debt: The company had $176.0 million outstanding under its revolver, $204.2 million of net term loan debt, including current maturities, and $2.7 million of outstanding letters of credit. Revolver availability was $71.3 million at March 31, 2021.
- Dividends: The company paid $14.6 million in dividends during the nine months and declared a $0.12-per-share dividend payable June 23, 2021.
Material changes versus the prior comparable period
- Third-quarter sales increased less than 1%, while nine-month sales declined less than 1%.
- Third-quarter gross profit decreased 1% and gross margin declined 30 basis points, primarily because of lower Animal Health volume and unfavorable mix. Nine-month gross profit increased 3%, with a 100-basis-point margin improvement.
- Third-quarter operating income fell 6% and net income fell 10%, reflecting lower gross profit and higher SG&A. Nine-month operating income rose 9% and net income rose 34%, benefiting from higher gross profit, lower interest expense and a $5.5 million year-over-year improvement in foreign currency results.
- Animal Health sales declined 3% in the quarter and 1% year to date. MFAs and other products and vaccines declined, while nutritional specialties increased.
- Mineral Nutrition sales increased 3% in the quarter but were essentially flat year to date. Performance Products sales increased 23% in the quarter and 11% year to date.
- Third-quarter Adjusted EBITDA declined 7%, mainly due to weaker Animal Health results and higher corporate costs. Nine-month Adjusted EBITDA increased 3%.
- Inventory increased to $206.3 million from $196.7 million at June 30, 2020, partly reflecting safety stocks and anticipated demand. Accounts receivable increased to $135.6 million from $126.5 million.
Guidance, outlook, risks and unusual items
- Outlook: Management stated that the food and animal production industry was returning to stability but that the COVID-19 outlook remained uncertain. Management expects adequate liquidity for at least the next twelve months based on cash, operating cash flow and financing arrangements, but provided no formal earnings guidance in the filing.
- COVID-19: Manufacturing facilities continued operating without interruption, but the company experienced safety-related costs, supply-chain and logistics challenges, raw-material volatility and changes in customer demand. Future effects remain difficult to predict.
- Carbadox regulatory matter: The FDA has challenged Phibro’s conclusions regarding the product’s safety and may pursue withdrawal of carbadox if a regulatory method is not accepted. Carbadox sales were approximately $19 million for the twelve months ended March 31, 2021; loss of those sales could materially affect results.
- Credit refinancing: In April 2021, the company entered into a new credit agreement with a $300 million term loan and a $250 million revolving facility, maturing in April 2026. The facilities refinanced the prior debt and retained substantially similar covenants and collateral arrangements.
- Environmental contingencies: The company is involved in EPA and litigation matters concerning groundwater contamination associated with the Omega Chemical Superfund Site. Estimated environmental investigation, remediation and closure costs were approximately $4.3 million at March 31, 2021, but potential ultimate liabilities remain uncertain.
- Internal controls: Management concluded that disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting. Remediation efforts continued, including new tax and internal-controls personnel, regional SOX oversight, enhanced authorization procedures and access-control improvements. The weaknesses had not yet been remediated.
- Other unusual items: Nine-month 2021 results included favorable foreign currency gains of $3.6 million and tax benefits related to GILTI regulations, intercompany dividends and reversal of an uncertain tax position. The effective tax rate was 26.0%, versus 28.7% in the prior year; excluding specified items, management estimated the current-period rate at 30.3%.
Important facts for investors to verify
- Progress and potential outcome of the FDA’s carbadox regulatory process and the related $19 million trailing-twelve-month sales exposure.
- Whether the April 2021 refinancing improves maturity risk and borrowing capacity without increasing leverage or covenant pressure.
- Resolution, reserves and potential additional costs related to the Omega Chemical groundwater matter and other environmental claims.
- Timing and effectiveness of remediation of the identified material weaknesses in internal control over financial reporting.
- Whether Animal Health weakness, COVID-19 effects, raw-material inflation and currency volatility persist, and whether Mineral Nutrition and Performance Products can offset them.
- Conversion of earnings to cash, particularly the effects of elevated inventory and receivables on operating cash flow.
- Adjusted EBITDA trends and reconciliation items, recognizing that Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures used by other companies.