Phibro(PAHC) - 2024 Q4 - Annual Report

PART I Business Phibro Animal Health Corporation, a global animal health and mineral nutrition company, markets approximately 750 product lines across three segments, with Animal Health being the largest contributor and growing 7% in FY2024, complemented by a recent $350 million acquisition agreement - Phibro is a global diversified animal health and mineral nutrition company, marketing approximately 750 product lines in over 80 countries to about 4,200 customers[9] Net Sales by Business Segment (FY2022-2024) | Segment | FY 2024 (in millions) | FY 2023 (in millions) | FY 2022 (in millions) | YoY Change (24/23) | | :--- | :--- | :--- | :--- | :--- | | Animal Health | $706 | $660 | $607 | 7% | | Mineral Nutrition | $244 | $243 | $260 | 0% | | Performance Products | $68 | $75 | $76 | -10% | | Total | $1,018 | $978 | $942 | 4% | Net Sales by Species (FY2022-2024) | Species | FY 2024 (in millions) | FY 2023 (in millions) | FY 2022 (in millions) | YoY Change (24/23) | | :--- | :--- | :--- | :--- | :--- | | Poultry | $370 | $331 | $319 | 12% | | Dairy | $161 | $190 | $186 | -15% | | Cattle | $130 | $128 | $127 | 1% | | Swine | $97 | $89 | $80 | 9% | | Other | $260 | $240 | $230 | 8% | - In April 2024, Phibro entered into an agreement to acquire Zoetis's medicated feed additive (MFA) product portfolio and related assets for $350 million; the portfolio generated approximately $400 million in revenue in 2023, with the acquisition expected to close between October and December 2024[81] Animal Health Segment The Animal Health segment, accounting for 69% of FY2024 sales, grew 7% to $706.5 million, driven by strong MFA and vaccine sales despite a decline in nutritional specialties Animal Health Net Sales by Product Group (FY2022-2024) | Product Group | FY 2024 (in millions) | FY 2023 (in millions) | FY 2022 (in millions) | YoY Change (24/23) | | :--- | :--- | :--- | :--- | :--- | | MFAs and other | $421 | $387 | $362 | 9% | | Nutritional specialties | $165 | $173 | $157 | -5% | | Vaccines | $121 | $100 | $88 | 21% | | Total Animal Health | $706 | $660 | $607 | 7% | - The company is expanding its companion animal business with products like Rejensa® for dogs and a development pipeline that includes treatments for atopic dermatitis, mitral heart valve disease, pain, and oral care[17] - Phibro is investing in global vaccine production, with a facility in Sligo, Ireland that began commercial sales in FY2022, and a new facility in Guarulhos, Brazil that started marketing autogenous vaccines in FY2023[22] Mineral Nutrition Segment The Mineral Nutrition segment, marketing trace minerals, reported stable net sales of $243.7 million in FY2024, driven by increased demand primarily in North America - The segment manufactures and markets trace minerals like zinc, manganese, copper, and iron, which are used to fortify animal feed[23] - Key product lines include GemStone®, a line of chelated organic trace minerals, and Vistore®, a portfolio of chloride mineral options[34] Performance Products Segment The Performance Products segment experienced a 10% net sales decrease to $67.5 million in FY2024 due to lower demand for personal care and industrial chemicals - This segment manufactures and markets specialty ingredients for personal care, industrial chemical, and chemical catalyst industries, operating through its PhibroChem, Ferro Metal and Chemical Corporation Limited, and Phibro-Tech business units[24][35] Compliance with Government Regulation Phibro's products face extensive global regulation, notably the FDA's potential withdrawal of Mecadox® (carbadox) and ongoing compliance with MIA restrictions - In November 2023, the FDA issued a final order to revoke the approved method for detecting carbadox residues and proposed withdrawing approval for all New Animal Drug Applications (NADAs) for carbadox; Phibro has requested a full evidentiary hearing and filed a lawsuit to invalidate the order, with sales of Mecadox (carbadox) approximately $22 million for the year ended June 30, 2024[46] - Effective January 2017, in alignment with FDA guidance, the company removed non-therapeutic production claims from its Medically Important Antimicrobial (MIA) products and limited their use to therapeutic purposes under veterinary oversight[46][44] - In the E.U., the company is awaiting reauthorization for its nicarbazin and semduramicin products, with current Brand Specific Approvals (BSAs) remaining valid during the European Food Safety Authority (EFSA) review[49] Environmental, Health and Safety Phibro's operations incur ongoing EHS compliance costs, with FY2024 capital expenditures of $2.6 million and environmental liabilities totaling $4.3 million - Capital expenditures related to environmental, health, and safety regulations were $2.6 million for the fiscal year ended June 30, 2024[76] - Accruals for environmental liabilities totaled $4.3 million as of June 30, 2024, down from $8.5 million as of June 30, 2023[79] - In February 2023, a subsidiary signed a definitive settlement agreement for the Omega Chemical Superfund Site, making total cash payments of $5 million to resolve liability for groundwater contamination[79] Risk Factors The company faces significant business, operational, and ownership risks, including regulatory challenges for products like Mecadox®, international instability, supply chain disruptions, and concentrated voting power - Business Risks: Outbreaks of animal diseases, negative public perception of products like MFAs, and increased restrictions on antibacterials could reduce demand; the potential FDA withdrawal of Mecadox® (carbadox), which had FY2024 sales of ~$22 million, poses a material risk[85][86][90] - Operational & International Risks: The company depends on manufacturing facilities in Israel (21% of FY2024 net sales) and Brazil (16% of FY2024 net sales), exposing it to geopolitical and economic instability in those regions; it also faces risks from raw material price volatility, supply chain disruptions, and cybersecurity threats[118][119][157] - Acquisition Risk: The company may fail to consummate or successfully integrate the proposed $350 million acquisition of assets from Zoetis, which could disrupt business and prevent the realization of anticipated benefits[132] - Ownership & Governance Risks: BFI Co., LLC controls ~90.9% of the combined voting power, making Phibro a 'controlled company' exempt from certain Nasdaq corporate governance requirements, such as having a majority of independent directors or a nominating committee; this concentration of power limits other shareholders' influence[161][162] Cybersecurity Phibro manages cybersecurity risk through an enterprise-wide program aligned with NIST and Israel National Cyber Directorate frameworks, overseen by the CIO with continuous monitoring and training - The company's cybersecurity program is aligned with the U.S. National Institute of Standards Technology (NIST) Cybersecurity Framework and the Israel National Cyber Directorate[183] - Preventive measures include a Security Operations Center (SOC), Managed Detection and Response (MDR) services, and a comprehensive employee training program with monthly training and bi-weekly simulations[183] - Governance is managed by the Chief Information Officer (CIO), who provides periodic reports to the Board of Directors and executive management on cybersecurity risks, threats, and program assessments[184] Properties Phibro operates global manufacturing, research, sales, and administrative properties, with key owned facilities in Brazil, Israel, and the United States, alongside leased sites Key Manufacturing & Research Properties | Location | Segment(s) | Purpose(s) | | :--- | :--- | :--- | | Guarulhos, Brazil | Animal Health | Manufacturing, Sales, Research, Admin | | Beit Shemesh, Israel | Animal Health | Manufacturing and Research | | Neot Hovav, Israel | Animal Health | Manufacturing and Research | | Quincy, Illinois, USA | Animal Health & Mineral Nutrition | Manufacturing, Sales, Research, Admin | | Omaha, Nebraska, USA | Animal Health & Mineral Nutrition | Manufacturing, Sales, Research | | Sligo, Ireland | Animal Health | Manufacturing | Legal Proceedings The company is subject to various claims and litigation in the ordinary course of business but does not expect material financial impact from their resolution - Phibro is involved in routine litigation and claims but does not expect the outcomes to materially impact its financial condition[186] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Phibro's Class A common stock trades on Nasdaq (PAHC), with 20.3 million shares outstanding as of August 23, 2024, and the company intends to pay regular quarterly dividends - Class A common stock is traded on Nasdaq (PAHC); Class B common stock is not listed[189] - As of August 23, 2024, there were 20,337,574 Class A shares and 20,166,034 Class B shares outstanding[190] - The company intends to pay regular quarterly dividends, subject to Board of Directors' approval and financial conditions[191] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 net sales increased 4% to $1.018 billion, but net income significantly declined 93% to $2.4 million due to foreign currency losses, a pension charge, and acquisition costs Summary Results of Operations (FY2024 vs. FY2023) | Metric | FY 2024 (in millions) | FY 2023 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,017.7 | $977.9 | 4% | | Gross Profit | $313.1 | $298.2 | 5% | | Operating Income | $53.3 | $71.8 | -26% | | Net Income | $2.4 | $32.6 | -93% | | Diluted EPS | $0.06 | $0.81 | -93% | - The significant decrease in net income was driven by a $23.9 million foreign currency loss (vs. $2.5 million loss in prior year), a $10.7 million pension settlement charge, and $6.4 million in acquisition-related transaction costs[225][227][232] - Adjusted EBITDA decreased 1% to $111.2 million; Animal Health Adjusted EBITDA grew by $9.5 million, but this was offset by declines in other segments and an $8.3 million increase in corporate expenses[233] - Cash flow from operating activities increased significantly to $87.6 million in FY2024 from $13.3 million in FY2023, driven by changes in operating assets and liabilities[240] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign exchange rates, primarily Brazilian real and Israeli shekel, and floating interest rates, mitigated by derivatives and an interest rate swap - The company's primary foreign currency exposures are to the Brazilian real and Israeli shekel; it uses foreign currency derivative contracts to mitigate some of this risk[272] - The company's debt carries floating interest rates; a 100-basis point increase in SOFR would increase annual interest expense by $1.9 million, considering the effect of an existing interest rate swap[273] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2022-2024, with PricewaterhouseCoopers LLP issuing an unqualified opinion on both the financials and internal controls - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[277] - The auditor identified Revenue Recognition as a critical audit matter due to the high degree of effort required in performing procedures related to the timing and amount of net sales recorded[284] Notes to Consolidated Financial Statements The notes detail significant accounting policies and events, including the $350 million Zoetis acquisition, July 2024 debt refinancing, a $10.7 million pension settlement, and environmental liabilities - Proposed Acquisition: The company entered an agreement in April 2024 to acquire a portfolio of assets from Zoetis for $350 million, with closing expected between October and December 2024[325] - Debt Refinancing: In July 2024, the company entered into a new credit agreement to refinance all outstanding debt and to finance the Zoetis acquisition; the new facilities include Term A-1 Loans, Term A-2 Loans, and a $310 million Revolving Credit Commitment[342][401] - Pension Settlement: In July 2023, the company transferred a portion of its pension benefit obligation via an annuity purchase, resulting in a non-cash settlement expense of $10.7 million[363] - Environmental Liabilities: The company's estimated liability for environmental investigation and remediation was $4.3 million as of June 30, 2024, down from $8.5 million in 2023, following a settlement related to the Omega Chemical Site[385] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2024, a conclusion concurred by the independent auditor - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2024[405] - Management concluded that internal control over financial reporting was effective as of June 30, 2024; this assessment was audited by PricewaterhouseCoopers LLP, who concurred[406] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[408] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[408] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by beneficial owners and management is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[408] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[409] Principal Accountant Fees and Services Information detailing fees paid to and services provided by the principal accountant is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[410] PART IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and an index of all exhibits filed as part of the Form 10-K report - This section contains the list of consolidated financial statements and an index of exhibits filed with the annual report[412]