Phibro Animal Health Corporation — Fiscal 2022 First Quarter 10-Q
Reporting period: Three months ended September 30, 2022, compared with the three months ended September 30, 2021. The financial statements are unaudited. Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally.
Financial performance and key metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $232.5 million | $214.7 million | Up 8% |
| Gross profit | $68.6 million | $64.7 million | Up 6% |
| Gross margin | 29.5% | 30.1% | Down 60 bps |
| Operating income | $13.7 million | $14.6 million | Down 6% |
| Operating margin | 5.9% | 6.8% | Down 90 bps |
| Net income | $3.9 million | $6.5 million | Down 41% |
| Net margin | 1.7% | 3.0% | Down 130 bps |
| Diluted EPS | $0.10 | $0.16 | Down 41% |
| Adjusted EBITDA | $22.1 million | $22.5 million | Down 1% |
| Net cash from operating activities | $(10.7) million | $3.8 million | Down $14.5 million |
- Revenue by segment: Animal Health revenue increased 10% to $154.9 million; Mineral Nutrition increased 10% to $59.6 million; Performance Products decreased 6% to $18.0 million.
- Revenue drivers: Animal Health benefited from higher processing-aid, dairy and domestic vaccine demand. Mineral Nutrition benefited primarily from higher trace-mineral selling prices. Performance Products was affected by lower demand for copper-based products.
- Profitability: Gross profit increased, but margin declined because of product and geographic mix and higher raw-material and logistics costs. SG&A rose 10% to $55.0 million, primarily from higher headcount and employee-related costs.
- Other expenses: Net foreign-currency losses increased to $5.2 million from $2.1 million, mainly due to movements in the Brazilian and Argentine currencies. Net interest expense increased to $3.1 million from $2.9 million.
- Taxes: The effective tax rate was 28.8%, compared with 31.9%. The current-period provision included a $0.9 million benefit related to exchange-rate differences on intercompany dividends and a $0.2 million expense from changes in uncertain tax positions. Excluding these items, management indicated an effective rate of 42.8%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $76.3 million at September 30, 2022, compared with $74.2 million at June 30, 2022. Short-term investments were $10.0 million, producing total cash and short-term investments of $86.3 million.
- Operating activities used $10.7 million of cash, primarily reflecting a $25.0 million inventory investment, $7.7 million used for other current assets and $10.3 million used for accrued expenses and other liabilities. Accounts receivable provided $22.3 million.
- Investing activities used $16.1 million, including $23.2 million of capital expenditures. Capital expenditures included $15.0 million for additional land and a building at an operating facility.
- Financing activities provided $29.3 million, including $26.0 million of net revolver borrowings and $12.0 million of proceeds from a new term loan, partially offset by debt repayments and $4.9 million of dividends.
- Total debt consisted of $171.0 million drawn under the revolving credit facility, $15.4 million of current debt maturities and $280.7 million of long-term debt, before considering cash and short-term investments.
- The revolver had a $250.0 million commitment at September 30, 2022, with $2.5 million of letters of credit and $76.5 million available, subject to restrictions. In November 2022, the commitment was increased to $310.0 million and the benchmark was changed from LIBOR to SOFR.
- The company was in compliance with its debt covenants at September 30, 2022. Management expects cash, operating cash flows and financing arrangements to support ongoing needs for at least the next twelve months, while noting that adverse operating results or covenant violations could impair liquidity.
- Working capital was $326.7 million, and the reported current-asset-to-current-liability ratio was 3.08:1.
Material changes and unusual items
- Revenue growth did not translate into earnings growth because of higher SG&A, increased interest expense, currency losses and modest gross-margin compression.
- Animal Health Adjusted EBITDA declined 2% to $27.0 million despite 10% revenue growth, primarily due to higher SG&A. Mineral Nutrition Adjusted EBITDA increased 17% to $5.3 million, and Performance Products increased 11% to $2.4 million.
- The company entered into a $12.0 million term loan in September 2022, maturing in September 2027, with an initial interest rate of 5.37%.
- An interest-rate swap was increased to a $300.0 million notional amount through June 2025, effectively fixing the related floating-rate debt at 0.62%. The company also uses foreign-currency options to hedge inventory purchases.
- The company declared a quarterly dividend of $0.12 per share, payable December 21, 2022, subject to the applicable conditions and board approval process.
Outlook, risks and contingencies
- The filing does not provide quantitative revenue or earnings guidance. Management expects adequate liquidity for at least the next twelve months but makes no assurance regarding future funding requirements.
- Russia and Ukraine sales represented approximately 1% of consolidated sales. The company has no production or direct distribution operations and no planned investments in Russia, but identifies risks from sanctions, supply-chain disruption, inflation, currency and interest-rate volatility, and cybersecurity threats.
- The FDA’s regulatory review of carbadox, the active ingredient in Mecadox, remains a significant product risk. Mecadox sales were approximately $20 million for the twelve months ended September 30, 2022. The company stated that the product remained available and that it intends to defend its safety and regulatory approval.
- Key ongoing risks include COVID-19-related disruption, animal-disease outbreaks, restrictions on antibacterials, raw-material price and availability volatility, customer and market consolidation, competition, foreign-currency movements, substantial indebtedness, debt covenants, environmental liabilities and regulatory or product-liability claims.
- Phibro-Tech and related subsidiaries are involved in EPA and CERCLA matters concerning groundwater contamination associated with the Omega Chemical Superfund Site. The company cannot currently predict potential liability. Estimated environmental investigation, remediation and closure costs were approximately $4.3 million at September 30, 2022.
- Management stated that the disclosed claims and lawsuits are not expected to have a material adverse effect, although environmental and regulatory outcomes remain uncertain.
- Disclosure controls and procedures were evaluated as effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether Animal Health growth can offset margin pressure, higher SG&A and increased currency-related losses.
- Inventory levels, working-capital conversion and the sustainability of negative operating cash flow during the quarter.
- Debt reduction, variable-rate exposure, SOFR transition effects and compliance with leverage and interest-coverage covenants.
- The FDA’s ultimate disposition of the carbadox review and the potential effect on Mecadox revenue and profitability.
- Progress and potential liability associated with the Omega Chemical groundwater litigation and remediation matters.
- The company’s ability to fund capital expenditures, dividends and operations without materially increasing borrowings.