Phibro Animal Health Corporation — Fiscal 2021 Second Quarter 10-Q
Reporting period: Three and six months ended December 31, 2020, compared with the same periods ended December 31, 2019. The company develops, manufactures and markets animal health, mineral nutrition and performance products globally. Financial statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $206.1 million | Down 4% | $401.3 million | Down 1% |
| Gross profit | $68.3 million | Down 1% | $132.4 million | Up 4% |
| Gross margin | 33.1% | Up 80 basis points | 33.0% | Up 160 basis points |
| Operating income | $19.9 million | Up 1% | $35.6 million | Up 20% |
| Net income | $12.8 million | Up 8% | $25.1 million | Up 74% |
| Diluted EPS | $0.32 | Up $0.03 | $0.62 | Up $0.26 |
| Adjusted EBITDA | $28.5 million | Flat | $52.8 million | Up 10% |
The six-month net income increase primarily reflected higher operating income, lower interest expense and a $5.5 million favorable swing in foreign currency results. The effective tax rate was 22.9% for the six-month period versus 29.6% in the prior year; management reported that the current-period rate would have been 31.7% excluding specified GILTI, intercompany-dividend and uncertain-tax-position benefits.
Segment and geographic trends
- Animal Health: Six-month sales were $264.6 million, essentially flat. MFAs and other sales declined 4%, primarily due to lower demand in China after regulatory changes, while nutritional specialties increased 9% and vaccines increased 1%. Six-month Adjusted EBITDA rose 8% to $63.5 million.
- Mineral Nutrition: Six-month sales declined 3% to $105.6 million, principally due to lower average selling prices. Adjusted EBITDA increased 1% to $7.2 million.
- Performance Products: Six-month sales increased 4% to $31.1 million, and Adjusted EBITDA increased 84% to $4.2 million, driven by higher copper-based product volumes and lower input and production costs.
- For the quarter, international demand was weaker in China and Latin America, while domestic and international dairy-related nutritional specialty sales grew. Asia Pacific sales declined 22% for the quarter and 22% for the six months.
Cash flow, liquidity and debt
- Six-month operating cash flow was $28.6 million, broadly comparable with $28.5 million in the prior year.
- Investing activities used $21.3 million, including $14.7 million of capital expenditures and $6.0 million of net purchases of short-term investments. The prior-year period included $54.5 million of business acquisitions.
- Financing activities used $10.1 million, including $9.7 million of dividends and $9.4 million of scheduled debt repayments, partially offset by $9.0 million of net Revolver borrowings.
- Cash and cash equivalents were $34.5 million, and short-term investments were $61.0 million, for total cash and short-term investments of $95.5 million at December 31, 2020.
- Working capital was $236.6 million, and the current-assets-to-current-liabilities ratio was 2.63:1.
- Total debt consisted of $178.0 million outstanding under the Revolver, $208.8 million of net Term A Loan debt, including current maturities, and $2.7 million of letters of credit. Revolver availability was $69.3 million.
- The credit facilities mature June 29, 2022. The company was in compliance with its maximum 4.00:1.00 First Lien Net Leverage Ratio and minimum 3.00:1.00 interest coverage covenant as of December 31, 2020.
- Management expects cash, operating cash flow and financing arrangements to support liquidity for at least the next twelve months, while noting that adverse operating results, covenant breaches, COVID-19 effects or difficult financial markets could impair liquidity.
Material changes, outlook and risks
- COVID-19 caused industry demand disruption, supply-chain and logistics challenges, additional safety costs and reduced travel, although production facilities continued operating without interruption. Management stated that the industry was returning toward stability but that the outlook remained uncertain.
- Carbadox remains a material regulatory contingency. The FDA withdrew its prior notice of opportunity for hearing in July 2020 and proposed reviewing the regulatory method for carbadox. Phibro disputes the FDA’s position and has requested continuation of the hearing process. Carbadox sales were approximately $18 million for the twelve months ended December 31, 2020; an inability to defend the product could adversely affect results.
- The company recorded $4.4 million of estimated environmental investigation, remediation and closure costs at December 31, 2020. Potential liability relating to the Omega Chemical Superfund groundwater site remains uncertain because the EPA investigation and related litigation are ongoing.
- Restructuring liabilities were $1.5 million at December 31, 2020, relating to contract termination and employee separation costs. No new restructuring charges were recorded during the six months.
- Foreign currency gains were $3.0 million for the six months versus losses of $2.5 million in the prior year, creating a significant year-over-year earnings benefit. The company uses foreign-currency contracts and interest-rate swaps for hedging, not speculation.
- The company’s disclosure controls and procedures were not effective as of December 31, 2020 because of previously disclosed material weaknesses in internal control over financial reporting. Remediation is ongoing, with no stated completion date or assurance of success.
- The company declared a quarterly dividend of $0.12 per Class A and Class B share, payable March 24, 2021, subject to applicable conditions and board approval.
Most important facts for investors to verify
- Progress and outcome of the FDA’s carbadox regulatory review, including potential effects on approximately $18 million of annual sales.
- Whether COVID-19, supply-chain disruptions, raw-material prices and international demand affect future sales and margins.
- Debt maturity and refinancing requirements before the June 2022 credit-facility maturity, including covenant compliance and Revolver availability.
- Whether the material weaknesses in internal control are remediated and independently validated.
- Potential exposure from the Omega Chemical groundwater litigation and other environmental claims beyond the $4.4 million estimated liability.
- The sustainability of reported earnings growth after excluding favorable tax items and the significant foreign-currency benefit.
- Changes in inventory, which increased to $213.3 million from $196.7 million, and whether safety-stock levels convert into sales or create obsolescence risk.