UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020 | |
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number: 001-36410
Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)
Delaware | 13-1840497 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
Glenpointe Centre East, 3rd Floor 300 Frank W. Burr Boulevard, Suite 21 Teaneck, New Jersey (Address of Principal Executive Offices) | 07666-6712 (Zip Code) |
(201) 329-7300
(Registrant’s telephone number, including area code)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Class A Common Stock, $0.0001 par value per share | PAHC | Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☒
As of January 29, 2018,April 30, 2020, there were 19,589,88920,287,574 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 20,602,83620,166,034 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
2
PART I—FINANCIAL INFORMATION
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
| | | Three Months | | | Six Months | | ||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | ||||||||||||
| | | (unaudited) (in thousands, except per share amounts) | | |||||||||||||||||||||
Net sales | | | | $ | 205,876 | | | | | $ | 191,598 | | | | | $ | 399,288 | | | | | $ | 379,585 | | |
Cost of goods sold | | | | | 138,957 | | | | | | 128,100 | | | | | | 268,987 | | | | | | 255,088 | | |
Gross profit | | | | | 66,919 | | | | | | 63,498 | | | | | | 130,301 | | | | | | 124,497 | | |
Selling, general and administrative expenses | | | | | 42,981 | | | | | | 40,870 | | | | | | 83,976 | | | | | | 80,056 | | |
Operating income | | | | | 23,938 | | | | | | 22,628 | | | | | | 46,325 | | | | | | 44,441 | | |
Interest expense, net | | | | | 3,050 | | | | | | 3,872 | | | | | | 6,168 | | | | | | 7,779 | | |
Foreign currency (gains) losses, net | | | | | (323) | | | | | | (548) | | | | | | 2 | | | | | | (214) | | |
Income before income taxes | | | | | 21,211 | | | | | | 19,304 | | | | | | 40,155 | | | | | | 36,876 | | |
Provision (benefit) for income taxes | | | | | 14,179 | | | | | | 5,887 | | | | | | 17,231 | | | | | | 11,282 | | |
Net income | | | | $ | 7,032 | | | | | $ | 13,417 | | | | | $ | 22,924 | | | | | $ | 25,594 | | |
Net income per share | | | | | | ||||||||||||||||||||
basic | | | | $ | 0.17 | | | | | $ | 0.34 | | | | | $ | 0.57 | | | | | $ | 0.65 | | |
diluted | | | | $ | 0.17 | | | | | $ | 0.34 | | | | | $ | 0.57 | | | | | $ | 0.64 | | |
Weighted average common shares outstanding | | | | | | ||||||||||||||||||||
basic | | | | | 40,186 | | | | | | 39,411 | | | | | | 40,065 | | | | | | 39,409 | | |
diluted | | | | | 40,364 | | | | | | 40,002 | | | | | | 40,329 | | | | | | 39,954 | | |
Dividends per share | | | | $ | 0.10 | | | | | $ | 0.10 | | | | | $ | 0.20 | | | | | $ | 0.20 | | |
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net sales | $ | 210,739 | $ | 205,736 | $ | 614,471 | $ | 624,112 | ||||||||
Cost of goods sold | 141,188 | 140,864 | 418,153 | 424,791 | ||||||||||||
Gross profit | 69,551 | 64,872 | 196,318 | 199,321 | ||||||||||||
Selling, general and administrative expenses | 48,232 | 42,304 | 145,243 | 128,194 | ||||||||||||
Operating income | 21,319 | 22,568 | 51,075 | 71,127 | ||||||||||||
Interest expense, net | 3,263 | 2,931 | 10,049 | 8,729 | ||||||||||||
Foreign currency (gains) losses, net | (608 | ) | 122 | 1,895 | 104 | |||||||||||
Income before income taxes | 18,664 | 19,515 | 39,131 | 62,294 | ||||||||||||
Provision for income taxes | 5,163 | 4,666 | 11,221 | 16,383 | ||||||||||||
Net income | $ | 13,501 | $ | 14,849 | $ | 27,910 | $ | 45,911 | ||||||||
Net income per share | ||||||||||||||||
basic | $ | 0.33 | $ | 0.37 | $ | 0.69 | $ | 1.14 | ||||||||
diluted | $ | 0.33 | $ | 0.37 | $ | 0.69 | $ | 1.13 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
basic | 40,454 | 40,442 | 40,454 | 40,398 | ||||||||||||
diluted | 40,504 | 40,531 | 40,504 | 40,519 |
The accompanying notes are an integral part of these consolidated financial statements
3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
| | | Three Months | | | Six Months | | ||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | ||||||||||||
| | | (unaudited) (in thousands) | | |||||||||||||||||||||
Net income | | | | $ | 7,032 | | | | | $ | 13,417 | | | | | $ | 22,924 | | | | | $ | 25,594 | | |
Change in fair value of derivative instruments | | | | | (276) | | | | | | 270 | | | | | | (898) | | | | | | 304 | | |
Foreign currency translation adjustment | | | | | (5,005) | | | | | | (2,296) | | | | | | (1,772) | | | | | | (3,189) | | |
Unrecognized net pension gains (losses) | | | | | 95 | | | | | | 4,671 | | | | | | 226 | | | | | | 11,840 | | |
(Provision) benefit for income taxes | | | | | 809 | | | | | | (1,894) | | | | | | 996 | | | | | | (4,644) | | |
Other comprehensive income (loss) | | | | | (4,377) | | | | | | 751 | | | | | | (1,448) | | | | | | 4,311 | | |
Comprehensive income | | | | $ | 2,655 | | | | | $ | 14,168 | | | | | $ | 21,476 | | | | | $ | 29,905 | | |
|
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 13,501 | $ | 14,849 | $ | 27,910 | $ | 45,911 | ||||||||
Change in fair value of derivative instruments | (9,995 | ) | (1,464 | ) | (9,999 | ) | (3,166 | ) | ||||||||
Foreign currency translation adjustment | (23,873 | ) | (1,846 | ) | (28,493 | ) | (5,365 | ) | ||||||||
Unrecognized net pension gains (losses) | 129 | 117 | 387 | 349 | ||||||||||||
(Provision) benefit for income taxes | 2,457 | 336 | 2,394 | 701 | ||||||||||||
Other comprehensive income (loss) | (31,282 | ) | (2,857 | ) | (35,711 | ) | (7,481 | ) | ||||||||
Comprehensive income (loss) | $ | (17,781 | ) | $ | 11,992 | $ | (7,801 | ) | $ | 38,430 |
The accompanying notes are an integral part of these consolidated financial statements
4
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
| | | (unaudited) (in thousands, except share and per share amounts) | | |||||||||
ASSETS | | | | ||||||||||
Cash and cash equivalents | | | | $ | 40,185 | | | | | $ | 56,083 | | |
Short-term investments | | | | | 27,000 | | | | | | — | | |
Accounts receivable, net | | | | | 132,242 | | | | | | 125,847 | | |
Inventories, net | | | | | 173,613 | | | | | | 161,233 | | |
Other current assets | | | | | 23,407 | | | | | | 20,502 | | |
Total current assets | | | | | 396,447 | | | | | | 363,665 | | |
Property, plant and equipment, net | | | | | 127,940 | | | | | | 127,351 | | |
Intangibles, net | | | | | 56,454 | | | | | | 54,602 | | |
Goodwill | | | | | 29,624 | | | | | | 23,982 | | |
Other assets | | | | | 52,665 | | | | | | 53,797 | | |
Total assets | | | | $ | 663,130 | | | | | $ | 623,397 | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | ||||||||||
Current portion of long-term debt | | | | $ | 9,458 | | | | | $ | 6,250 | | |
Accounts payable | | | | | 64,779 | | | | | | 56,894 | | |
Accrued expenses and other current liabilities | | | | | 52,999 | | | | | | 52,652 | | |
Total current liabilities | | | | | 127,236 | | | | | | 115,796 | | |
Revolving credit facility | | | | | 71,000 | | | | | | 65,000 | | |
Long-term debt | | | | | 235,910 | | | | | | 241,891 | | |
Other liabilities | | | | | 60,659 | | | | | | 49,553 | | |
Total liabilities | | | | | 494,805 | | | | | | 472,240 | | |
Commitments and contingencies (Note 9) | | | | ||||||||||
Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 19,585,889 and 19,249,132 shares issued and outstanding at December 31, 2017, and June 30, 2017, respectively; 30,000,000 Class B shares authorized, 20,602,836 and 20,626,836 shares issued and outstanding at December 31, 2017, and June 30, 2017, respectively | | | | | 4 | | | | | | 4 | | |
Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding | | | | | — | | | | | | — | | |
Paid-in capital | | | | | 127,540 | | | | | | 123,840 | | |
Retained earnings | | | | | 97,666 | | | | | | 82,750 | | |
Accumulated other comprehensive income (loss) | | | | | (56,885) | | | | | | (55,437) | | |
Total stockholders’ equity | | | | | 168,325 | | | | | | 151,157 | | |
Total liabilities and stockholders’ equity | | | | $ | 663,130 | | | | | $ | 623,397 | | |
|
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
(unaudited) | ||||||||
(in thousands, except share and per share amounts) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 26,748 | $ | 57,573 | ||||
Short-term investments | 55,000 | 24,000 | ||||||
Accounts receivable, net | 151,556 | 159,022 | ||||||
Inventories, net | 177,287 | 198,322 | ||||||
Other current assets | 27,564 | 27,245 | ||||||
Total current assets | 438,155 | 466,162 | ||||||
Property, plant and equipment, net | 143,112 | 140,235 | ||||||
Intangibles, net | 73,208 | 47,478 | ||||||
Goodwill | 52,679 | 27,348 | ||||||
Other assets | 68,896 | 45,448 | ||||||
Total assets | $ | 776,050 | $ | 726,671 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current portion of long-term debt | $ | 17,188 | $ | 12,540 | ||||
Accounts payable | 68,162 | 73,189 | ||||||
Accrued expenses and other current liabilities | 75,882 | 68,498 | ||||||
Total current liabilities | 161,232 | 154,227 | ||||||
Revolving credit facility | 146,000 | 96,000 | ||||||
Long-term debt | 203,851 | 217,635 | ||||||
Other liabilities | 69,622 | 42,794 | ||||||
Total liabilities | 580,705 | 510,656 | ||||||
Commitments and contingencies (Note 9) | ||||||||
Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,287,574 shares issued and outstanding at March 31, 2020, and June 30, 2019; 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at March 31, 2020, and June 30, 2019 | 4 | 4 | ||||||
Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Paid-in capital | 134,960 | 133,266 | ||||||
Retained earnings | 182,273 | 168,926 | ||||||
Accumulated other comprehensive income (loss) | (121,892 | ) | (86,181 | ) | ||||
Total stockholders' equity | 195,345 | 216,015 | ||||||
Total liabilities and stockholders' equity | $ | 776,050 | $ | 726,671 |
The accompanying notes are an integral part of these consolidated financial statements
5
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
| | | Six Months | | |||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | ||||||
| | | (unaudited) (in thousands) | | |||||||||
OPERATING ACTIVITIES | | | | ||||||||||
Net income | | | | $ | 22,924 | | | | | $ | 25,594 | | |
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | | ||||||||||
Depreciation and amortization | | | | | 13,275 | | | | | | 12,762 | | |
Amortization of debt issuance costs and debt discount | | | | | 441 | | | | | | 508 | | |
Acquisition-related cost of goods sold | | | | | 1,671 | | | | | | — | | |
Acquisition-related accrued compensation | | | | | 924 | | | | | | 840 | | |
Acquisition-related accrued interest | | | | | 505 | | | | | | 855 | | |
Pension settlement cost | | | | | — | | | | | | 1,702 | | |
Deferred income taxes | | | | | 5,725 | | | | | | 3,736 | | |
Foreign currency (gains) losses, net | | | | | 11 | | | | | | 293 | | |
Other | | | | | 418 | | | | | | 310 | | |
Changes in operating assets and liabilities, net of business acquisition: | | | | ||||||||||
Accounts receivable, net | | | | | (5,075) | | | | | | (1,583) | | |
Inventories, net | | | | | (10,845) | | | | | | 7,017 | | |
Other current assets | | | | | (4,751) | | | | | | 919 | | |
Other assets | | | | | 664 | | | | | | (512) | | |
Accounts payable | | | | | 7,473 | | | | | | (4,667) | | |
Accrued expenses and other liabilities | | | | | 3,733 | | | | | | (41) | | |
Net cash provided (used) by operating activities | | | | | 37,093 | | | | | | 47,733 | | |
INVESTING ACTIVITIES | | | | ||||||||||
Purchases of short-term investments | | | | | (27,000) | | | | | | — | | |
Capital expenditures | | | | | (8,851) | | | | | | (10,564) | | |
Business acquisition | | | | | (15,000) | | | | | | — | | |
Other, net | | | | | (716) | | | | | | (201) | | |
Net cash provided (used) by investing activities | | | | | (51,567) | | | | | | (10,765) | | |
FINANCING ACTIVITIES | | | | ||||||||||
Revolving credit facility borrowings | | | | | 109,870 | | | | | | 73,000 | | |
Revolving credit facility repayments | | | | | (103,870) | | | | | | (93,500) | | |
Payments of long-term debt, capital leases and other | | | | | (3,236) | | | | | | (2,776) | | |
Proceeds from common shares issued | | | | | 3,700 | | | | | | 110 | | |
Dividends paid | | | | | (8,008) | | | | | | (7,882) | | |
Net cash provided (used) by financing activities | | | | | (1,544) | | | | | | (31,048) | | |
Effect of exchange rate changes on cash | | | | | 120 | | | | | | (305) | | |
Net increase (decrease) in cash and cash equivalents | | | | | (15,898) | | | | | | 5,615 | | |
Cash and cash equivalents at beginning of period | | | | | 56,083 | | | | | | 33,605 | | |
Cash and cash equivalents at end of period | | | | $ | 40,185 | | | | | $ | 39,220 | | |
|
Nine Months | ||||||||
For the Periods Ended March 31 | 2020 | 2019 | ||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 27,910 | $ | 45,911 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
Depreciation and amortization | 24,177 | 20,407 | ||||||
Amortization of debt issuance costs and debt discount | 662 | 662 | ||||||
Stock-based compensation | 1,694 | 1,694 | ||||||
Acquisition-related costs of goods sold | 280 | — | ||||||
Acquisition-related accrued interest | 200 | — | ||||||
Deferred income taxes | (1,279 | ) | 1,742 | |||||
Foreign currency (gains) losses, net | 676 | (290 | ) | |||||
Other | 620 | (804 | ) | |||||
Changes in operating assets and liabilities, net of business acquisitions: | ||||||||
Accounts receivable, net | 4,009 | (17,924 | ) | |||||
Inventories, net | 6,584 | (13,471 | ) | |||||
Other current assets | (1,841 | ) | (4,111 | ) | ||||
Other assets | (1,369 | ) | (147 | ) | ||||
Accounts payable | (4,159 | ) | 4,375 | |||||
Accrued expenses and other liabilities | (2,693 | ) | (5,754 | ) | ||||
Net cash provided (used) by operating activities | 55,471 | 32,290 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchases of short-term investments | (55,000 | ) | (28,000 | ) | ||||
Maturities of short-term investments | 24,000 | 29,000 | ||||||
Capital expenditures | (23,969 | ) | (19,774 | ) | ||||
Business acquisitions | (54,549 | ) | (9,838 | ) | ||||
Other, net | (1,339 | ) | (264 | ) | ||||
Net cash provided (used) by investing activities | (110,857 | ) | (28,876 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Revolving credit facility borrowings | 194,000 | 157,000 | ||||||
Revolving credit facility repayments | (144,000 | ) | (131,000 | ) | ||||
Payments of long-term debt and other | (9,486 | ) | (9,504 | ) | ||||
Issuance of acquisition note payable | — | 3,775 | ||||||
Payment of acquisition note payable | — | (3,775 | ) | |||||
Proceeds from common shares issued | — | 1,134 | ||||||
Dividends paid | (14,563 | ) | (13,738 | ) | ||||
Net cash provided (used) by financing activities | 25,951 | 3,892 | ||||||
Effect of exchange rate changes on cash | (1,390 | ) | (598 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (30,825 | ) | 6,708 | |||||
Cash and cash equivalents at beginning of period | 57,573 | 29,168 | ||||||
Cash and cash equivalents at end of period | $ | 26,748 | $ | 35,876 |
The accompanying notes are an integral part of these consolidated financial statements
6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Shares of Common Stock | Common Stock | Preferred Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
(in thousands, except share amounts) | ||||||||||||||||||||||||||||
As of June 30, 2019 | 40,453,608 | $ | 4 | $ | — | $ | 133,266 | $ | 168,926 | $ | (86,181 | ) | $ | 216,015 | ||||||||||||||
Comprehensive income (loss) | — | — | — | — | 2,515 | (7,547 | ) | (5,032 | ) | |||||||||||||||||||
Dividends declared ($0.12 per share) | — | — | — | — | (4,854 | ) | — | (4,854 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 565 | — | — | 565 | |||||||||||||||||||||
As of September 30, 2019 | 40,453,608 | $ | 4 | $ | — | $ | 133,831 | $ | 166,587 | $ | (93,728 | ) | $ | 206,694 | ||||||||||||||
Comprehensive income (loss) | — | — | — | — | 11,894 | 3,118 | 15,012 | |||||||||||||||||||||
Dividends declared ($0.12 per share) | — | — | — | — | (4,855 | ) | — | (4,855 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 564 | — | — | 564 | |||||||||||||||||||||
As of December 31, 2019 | 40,453,608 | $ | 4 | $ | — | $ | 134,395 | $ | 173,626 | $ | (90,610 | ) | $ | 217,415 | ||||||||||||||
Comprehensive income (loss) | — | — | — | — | 13,501 | (31,282 | ) | (17,781 | ) | |||||||||||||||||||
Dividends declared ($0.12 per share) | — | — | — | — | (4,854 | ) | — | (4,854 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 565 | — | — | 565 | |||||||||||||||||||||
As of March 31, 2020 | 40,453,608 | $ | 4 | $ | — | $ | 134,960 | $ | 182,273 | $ | (121,892 | ) | $ | 195,345 |
Shares of Common Stock | Common Stock | Preferred Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
(in thousands, except share amounts) | ||||||||||||||||||||||||||||
As of June 30, 2018 | 40,357,708 | $ | 4 | $ | — | $ | 129,873 | $ | 131,560 | $ | (76,483 | ) | $ | 184,954 | ||||||||||||||
Adoption of new revenue standard | — | — | 1,245 | — | 1,245 | |||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | 16,314 | (7,195 | ) | 9,119 | ||||||||||||||||||||
Exercise of stock options | 17,860 | — | — | 211 | — | — | 211 | |||||||||||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | (4,037 | ) | — | (4,037 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 565 | — | — | 565 | |||||||||||||||||||||
As of September 30, 2018 | 40,375,568 | $ | 4 | $ | — | $ | 130,649 | $ | 145,082 | $ | (83,678 | ) | $ | 192,057 | ||||||||||||||
Comprehensive income (loss) | — | — | — | — | 14,748 | 2,571 | 17,319 | |||||||||||||||||||||
Exercise of stock options | 11,000 | — | — | 130 | — | — | 130 | |||||||||||||||||||||
Dividends declared ($0.12 per share) | — | — | — | — | (4,846 | ) | — | (4,846 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 564 | — | — | 564 | |||||||||||||||||||||
As of December 31, 2018 | 40,386,568 | $ | 4 | $ | — | $ | 131,343 | $ | 154,984 | $ | (81,107 | ) | $ | 205,224 | ||||||||||||||
Comprehensive income (loss) | — | — | — | — | 14,849 | (2,857 | ) | 11,992 | ||||||||||||||||||||
Exercise of stock options | 67,040 | — | — | 793 | — | — | 793 | |||||||||||||||||||||
Dividends declared ($0.12 per share) | — | — | — | — | (4,855 | ) | — | (4,855 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 565 | — | — | 565 | |||||||||||||||||||||
As of March 31, 2019 | 40,453,608 | $ | 4 | $ | — | $ | 132,701 | $ | 164,978 | $ | (83,964 | ) | $ | 213,719 |
The accompanying notes are an integral part of these consolidated financial statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
1. | Description of Business |
Phibro Animal Health Corporation (“Phibro” or “PAHC”) and its subsidiaries (together, the “Company”) is a diversified global developer, manufacturer and marketer of a broad range of animal health and mineral nutrition products for food animals including poultry, swine, dairy and beef cattle, dairy and aquaculture. The Company is also a manufacturer and marketer of performance products for use in the personal care, automotive, industrial chemical and chemical catalyst industries. Unless otherwise indicated or the context requires otherwise, references in this report to “we,” “our,” “us,” and similar expressions refer to Phibro and its subsidiaries.
The unaudited consolidated financial information for the three and sixnine months ended DecemberMarch 31, 20172020 and 2016,2019, is presented on the same basis as the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 20172019 (the “Annual Report”), filed with the Securities and Exchange Commission on August 30, 201727, 2019 (File no. 001-36410). In the opinion of management, these financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of the Company for the interim periods, and the adjustments are of a normal and recurring nature. The financial results for any interim period are not necessarily indicative of the results for the full year. The consolidated balance sheet information as of June 30, 2017,2019, was derived from the audited consolidated financial statements, which include the accounts of Phibro and its consolidated subsidiaries, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain. The pandemic is expected to affect our sales, expenses, reserves and allowances, manufacturing operations, research and development costs and employee-related amounts. The pandemic may have significant economic impact on local, regional, national and international customers and markets. New information that may emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
The consolidated financial statements include the accounts of Phibro and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated infrom the consolidated financial statements. The decision whether or not to consolidate an entity requires consideration of majority voting interests, as well as effective control over the entity.
2. | Summary of Significant Accounting Policies and New Accounting Standards |
Our significant accounting policies are described in the notes to the consolidated financial statements included in our Annual Report. We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), effective July 1, 2019. See “New Accounting Standards” and “Note 7—Leases.” As of DecemberMarch 31, 2017,2020, there have been no other material changes to anyour significant accounting policies.
Leases
We determine at the inception of an arrangement whether the arrangement contains a lease. If an arrangement contains a lease, we assess the lease term when the underlying asset is available for use (“lease commencement”). Individual lease terms reflect the non-cancellable period of the significant accounting policies contained therein, except for the additionlease, reasonably certain renewal periods and consideration of our policy on short-term investments.
We recognize a right-of-use (“ROU”) asset and a corresponding lease liability at lease commencement for leases with terms exceeding twelve months. Short-term leases with terms of twelve months or less are not recognized on the consolidated balance sheet classificationand lease payments are recognized on a straight-line basis over the term.
The values of the ROU assets and lease liabilities are calculated based on the present value of the fixed payment obligations over the lease term, using our incremental borrowing rate (“IBR”), determined at lease commencement. The IBR reflects the timerate of purchaseinterest we would expect to pay on a secured basis to borrow an amount equal to the lease payments under similar terms. The IBR incorporates the term and economic environment of the respective lease arrangements.
We have elected to account for lease and non-lease components together as a single lease component and include fixed payment obligations related to such non-lease components in the measurement of ROU assets and lease liabilities. Fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments can include index-based lease payments, real estate taxes, maintenance costs, utilization charges and other non-lease services paid to lessors and
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
are not determinable at each balance sheet date. Investments held at financial institutions may at times exceed insured amounts. We believe we mitigate such risk by investinglease commencement. Variable lease payments are not included in or through major financial institutions.
Net Income per Share and Weighted Average Shares
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period.
Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period after giving effect to potential dilutive common shares resulting from the assumed exercise of stock options. For the threeoptions and six months ended December 31, 2017 and 2016, allvesting of restricted stock units. All common share equivalents were included in the calculation of diluted net income per share.
| | | Three Months | | | Six Months | | ||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | ||||||||||||
Net income | | | | $ | 7,032 | | | | | $ | 13,417 | | | | | $ | 22,924 | | | | | $ | 25,594 | | |
Weighted average number of shares – basic | | | | | 40,186 | | | | | | 39,411 | | | | | | 40,065 | | | | | | 39,409 | | |
Dilutive effect of stock options | | | | | 178 | | | | | | 591 | | | | | | 264 | | | | | | 545 | | |
Weighted average number of shares – diluted | | | | | 40,364 | | | | | | 40,002 | | | | | | 40,329 | | | | | | 39,954 | | |
Net income per share | | | | | | ||||||||||||||||||||
basic | | | | $ | 0.17 | | | | | $ | 0.34 | | | | | $ | 0.57 | | | | | $ | 0.65 | | |
diluted | | | | $ | 0.17 | | | | | $ | 0.34 | | | | | $ | 0.57 | | | | | $ | 0.64 | | |
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income | $ | 13,501 | $ | 14,849 | $ | 27,910 | $ | 45,911 | ||||||||
Weighted average number of shares – basic | 40,454 | 40,442 | 40,454 | 40,398 | ||||||||||||
Dilutive effect of stock options and restricted stock units | 50 | 89 | 50 | 121 | ||||||||||||
Weighted average number of shares – diluted | 40,504 | 40,531 | 40,504 | 40,519 | ||||||||||||
Net income per share | ||||||||||||||||
basic | $ | 0.33 | $ | 0.37 | $ | 0.69 | $ | 1.14 | ||||||||
diluted | $ | 0.33 | $ | 0.37 | $ | 0.69 | $ | 1.13 |
New Accounting Standards
ASU 2020-04,Reference Rate Reform (Topic 848), provides optional expedients and Hedging (Topic 815): Targeted Improvementsexceptions to AccountingGAAP guidance for Hedging Activities
ASU 2015-11, Inventory2019-12, Income Taxes (Topic 330)740): Simplifying the Accounting for Income Taxes, requires entities to measure inventory at the lower of costremoves certain exceptions and net realizable value (“NRV”). NRV is defined as “the estimated selling pricesamends certain requirements in the ordinary courseexisting income tax guidance to ease accounting requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of business, less reasonably predictable costsadoption of completion, disposal, and transportation.” We adopted this guidance on our consolidated financial statements.
ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, modifies existing disclosure requirements for defined benefit pension and itother postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, modifies existing disclosure requirements for fair value measurement. This ASU is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, allows reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects related to adjustments resulting from the United States Tax Cuts and Jobs Act. This ASU is effective for our consolidated financial statements beginning July 1, 2019. The adoption of this guidance did not have a material effect on our consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606)842), establishes principles requires an entity to recognize assets and liabilities on the balance sheet for both financing and operating leases and requires additional qualitative and quantitative disclosures regarding leasing arrangements. We adopted ASU 2016-02 and its amendments effective July 1, 2019, using a modified retrospective transition approach, which does not require modifications to periods prior to the date of initial application. We utilized certain permitted practical expedients intended to ease transition to the new standard, including carrying forward the original lease classifications without reassessment. We did not use hindsight in our assessment of lease terms as of the effective date. Upon adoption of ASU 2016-02 on July 1, 2019, we recognized initial ROU assets and lease liabilities of $18,576 and $19,368 respectively, on the consolidated balance sheet. The difference in the amounts of the ROU assets and lease liabilities recognized relates to landlord incentives and deferred rent. An adjustment to opening retained earnings was not required, and the recognition of revenue from contracts with customers. The underlying principle islease expense in the consolidated statements of operations did not change significantly. Refer to identify the performance obligations of a contract, allocate the revenue to each performance obligation and then to recognize revenue when the company satisfies a specific performance obligation of the contract. ASU 2014-09 and its amendments are effective“Note 7—Leases” for our consolidated financial statements beginning July 1, 2018. We expect to apply the new standard using the modified retrospective method. We continue to evaluate the effect that the adoption of this guidance may have on our consolidated financial statements.
| | | Three Months | | | Six Months | | ||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | ||||||||||||
Interest expense, net | | | | | | ||||||||||||||||||||
Term loan | | | | $ | 2,110 | | | | | $ | 2,866 | | | | | $ | 4,143 | | | | | $ | 5,771 | | |
Revolving credit facility | | | | | 739 | | | | | | 731 | | | | | | 1,420 | | | | | | 1,686 | | |
Amortization of debt issuance costs and debt discount | | | | | 220 | | | | | | 255 | | | | | | 441 | | | | | | 508 | | |
Acquisition-related accrued interest | | | | | 252 | | | | | | 462 | | | | | | 505 | | | | | | 855 | | |
Other | | | | | 2 | | | | | | 47 | | | | | | 241 | | | | | | 128 | | |
Interest expense | | | | | 3,323 | | | | | | 4,361 | | | | | | 6,750 | | | | | | 8,948 | | |
Interest (income) | | | | | (273) | | | | | | (489) | | | | | | (582) | | | | | | (1,169) | | |
| | | | $ | 3,050 | | | | | $ | 3,872 | | | | | $ | 6,168 | | | | | $ | 7,779 | | |
Depreciation and amortization | | | | | | ||||||||||||||||||||
Depreciation of property, plant and equipment | | | | $ | 5,222 | | | | | $ | 4,952 | | | | | $ | 10,405 | | | | | $ | 9,683 | | |
Amortization of intangible assets | | | | | 1,397 | | | | | | 1,434 | | | | | | 2,846 | | | | | | 2,962 | | |
Amortization of other assets | | | | | 12 | | | | | | 58 | | | | | | 24 | | | | | | 117 | | |
| | | | $ | 6,631 | | | | | $ | 6,444 | | | | | $ | 13,275 | | | | | $ | 12,762 | | |
|
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
Inventories | | | | | | | | | | | | | |
Raw materials | | | | $ | 65,976 | | | | | $ | 54,861 | | |
Work-in-process | | | | | 13,325 | | | | | | 12,402 | | |
Finished goods | | | | | 94,312 | | | | | | 93,970 | | |
| | | | $ | 173,613 | | | | | $ | 161,233 | | |
|
3. | Acquisition |
In September 2017,August 2019, we acquired the business and assets of Osprey Biotechnics, Inc. (“Osprey”). Osprey is a businessdeveloper, manufacturer and marketer of microbial products and bioproducts for $15,000.a variety of applications, serving customers in the animal health and nutrition, environmental, industrial and plant protection industries. The business develops, manufacturesis included in the Animal Health segment.
We acquired assets used in Osprey’s business, including intellectual property, working capital and markets animal health products. property, plant and equipment, for an aggregate net cash payment of $54,549. The agreement also includes a future additional payment to be determined based on Osprey’s financial performance for the year ending June 30, 2021. We recorded a $7,553 liability for the estimated future payment. The additional payment will be no less than $4,840 and has no maximum limit.
We accounted for the acquisition as a business combination in accordance with ASCFASB Accounting Standards Codification No. 805, Business Combinations. Pro forma information giving effect to the acquisition has not been provided because the results are not material to the consolidated financial statements. NetThe preliminary fair values of the acquired assets acquired included accounts receivable, inventories, property, plant and equipment, intangible assets, goodwill, accounts payable, accrued expenses and other liabilities. Goodwill is not deductible for income tax purposes. liabilities as of the acquisition date were:
Working capital, net | $ | 2,366 | ||
Property, plant and equipment | 2,005 | |||
Definite-lived intangible assets | 32,400 | |||
Goodwill | 25,331 | |||
Net assets acquired | $ | 62,102 |
We may further refine the determination of certain assets and liabilities during the measurement period. The definite-lived intangible assets relate to trade names, developed products and customer relationships and will be amortized over estimated useful lives ranging from five to twelve years. The preliminary amount of goodwill has been allocated to our Animal Health segment and is deductible for income taxes.
4. | Statements of Operations—Additional Information |
We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle, and aquaculture. The products help prevent, control and treat diseases, enhance nutrition to help improve health and contribute to balanced mineral nutrition. The animal health and mineral nutrition products are sold directly to integrated poultry, swine and cattle integrators and through commercial animal feed manufacturers, wholesalers and distributors. The animal health industry and demand for many of the animal health products in a particular region are affected by changing disease pressures and by weather conditions, as product usage follows varying weather patterns and seasons. Our operations are primarily focused in regions where the majority of livestock production is consolidated in large commercial farms.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We have a diversified portfolio of products that are classified within our three business segments—Animal Health, Mineral Nutrition and Performance Products. Each segment has its own dedicated management and sales team.
Animal Health
The Animal Health business develops, manufactures and markets products in three main categories:
Mineral Nutrition
The Mineral Nutrition business is includedcomprised of formulations and concentrations of trace minerals such as zinc, manganese, copper, iron and other compounds, with a focus on customers in North America. The customers use these products to fortify the daily feed requirements of their livestock’s diets and maintain an optimal balance of trace elements in each animal. We manufacture and market a broad range of mineral nutrition products for food animals including poultry, swine and beef and dairy cattle.
Performance Products
The Performance Products business manufactures and markets a number of specialty ingredients for use in the Animal Health segment.personal care, industrial chemical and chemical catalyst industries, predominantly in the United States.
The following tables present our revenues disaggregated by major product category and geographic region:
Net Sales by Product Type | ||||||||||||||||
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Animal Health | ||||||||||||||||
MFAs and other | $ | 82,670 | $ | 84,095 | $ | 249,659 | $ | 264,153 | ||||||||
Nutritional specialties | 34,636 | 28,227 | 98,131 | 84,657 | ||||||||||||
Vaccines | 21,668 | 16,867 | 56,723 | 51,130 | ||||||||||||
Total Animal Health | $ | 138,974 | $ | 129,189 | $ | 404,513 | $ | 399,940 | ||||||||
Mineral Nutrition | 56,200 | 60,653 | 164,534 | 177,810 | ||||||||||||
Performance Products | 15,565 | 15,894 | 45,424 | 46,362 | ||||||||||||
Total | $ | 210,739 | $ | 205,736 | $ | 614,471 | $ | 624,112 |
11
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
Goodwill roll-forward | | | | ||||||||||
Balance at beginning of period | | | | $ | 23,982 | | | | | $ | 21,121 | | |
Purchase price allocation adjustment | | | | | — | | | | | | 2,861 | | |
Acquisition | | | | | 5,642 | | | | | | — | | |
Balance at end of period | | | | $ | 29,624 | | | | | $ | 23,982 | | |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net Sales by Region | ||||||||||||||||
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
United States | $ | 126,827 | $ | 122,651 | $ | 368,230 | $ | 363,202 | ||||||||
Latin America and Canada | 40,284 | 31,197 | 119,730 | 110,353 | ||||||||||||
Europe, Middle East and Africa | 31,958 | 27,317 | 83,311 | 78,340 | ||||||||||||
Asia Pacific | 11,670 | 24,571 | 43,200 | 72,217 | ||||||||||||
Total | $ | 210,739 | $ | 205,736 | $ | 614,471 | $ | 624,112 |
Net sales by region are based on country of destination.
Deferred revenue was $4,826 and $5,464 as of March 31, 2020, and June 30, 2019, respectively. Accrued expenses and other current liabilities included $1,070 and $965 of the total deferred revenue as of March 31, 2020, and June 30, 2019, respectively. The deferred revenue resulted primarily from certain customer arrangements, including technology licensing fees and discounts on future product sales. The transaction price associated with our deferred revenue arrangements is generally based on the stand-alone sales prices of the individual products or services.
Our customer payment terms generally range from 30 to 120 days globally and do not include any significant financing components. Payment terms vary based on industry and business practices within the regions in which we operate. Our average worldwide collection period for accounts receivable is approximately 60 to 70 days after the revenue is recognized.
Interest Expense and Depreciation and Amortization
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Interest expense, net | ||||||||||||||||
Term loan | $ | 1,888 | $ | 2,077 | $ | 5,967 | $ | 6,391 | ||||||||
Revolving credit facility | 1,400 | 1,022 | 4,361 | 2,689 | ||||||||||||
Amortization of debt issuance costs and debt discount | 220 | 221 | 662 | 662 | ||||||||||||
Acquisition-related accrued interest | 75 | — | 200 | — | ||||||||||||
Other | 78 | 99 | 241 | 382 | ||||||||||||
Interest expense | 3,661 | 3,419 | 11,431 | 10,124 | ||||||||||||
Interest (income) | (398 | ) | (488 | ) | (1,382 | ) | (1,395 | ) | ||||||||
$ | 3,263 | $ | 2,931 | $ | 10,049 | $ | 8,729 |
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Depreciation and amortization | ||||||||||||||||
Depreciation of property, plant and equipment | $ | 5,824 | $ | 5,324 | $ | 17,395 | $ | 15,820 | ||||||||
Amortization of intangible assets | 2,325 | 1,538 | 6,659 | 4,550 | ||||||||||||
Amortization of other assets | 99 | 13 | 123 | 37 | ||||||||||||
$ | 8,248 | $ | 6,875 | $ | 24,177 | $ | 20,407 |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. | Balance Sheets—Additional Information |
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Inventories | ||||||||
Raw materials | $ | 67,107 | $ | 64,441 | ||||
Work-in-process | 9,132 | 10,699 | ||||||
Finished goods | 101,048 | 123,182 | ||||||
$ | 177,287 | $ | 198,322 |
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Goodwill roll-forward | ||||||||
Balance at beginning of period | $ | 27,348 | $ | 27,348 | ||||
Osprey acquisition | 25,331 | — | ||||||
Balance at end of period | $ | 52,679 | $ | 27,348 |
We evaluate our investments in equity method investees for impairment if circumstances indicate that the fair value of the investment may be impaired. The assets underlying a $3,905$3,635 equity investment are currently idled; we have concluded that the investment is not currently impaired, based on expected future operating cash flows and/or disposal value.
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Other assets | ||||||||
ROU operating lease assets | $ | 22,083 | $ | — | ||||
Deferred income taxes | 19,552 | 16,770 | ||||||
Deposits | 5,319 | 7,024 | ||||||
Insurance investments | 5,535 | 5,431 | ||||||
Equity method investments | 4,958 | 4,196 | ||||||
Indemnification asset | 3,000 | 3,000 | ||||||
Deferred financing fees | 1,149 | 1,531 | ||||||
Other | 7,300 | 7,496 | ||||||
$ | 68,896 | $ | 45,448 |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
Accrued expenses and other current liabilities | | | | | | | | | | | | | |
Employee related | | | | $ | 22,590 | | | | | $ | 26,553 | | |
Commissions and rebates | | | | | 5,830 | | | | | | 6,443 | | |
Insurance related | | | | | 1,549 | | | | | | 1,515 | | |
Professional fees | | | | | 3,944 | | | | | | 3,823 | | |
Income and other taxes | | | | | 4,000 | | | | | | 3,035 | | |
Other | | | | | 15,086 | | | | | | 11,283 | | |
| | | | $ | 52,999 | | | | | $ | 52,652 | | |
|
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
Accumulated other comprehensive income (loss) | | | | ||||||||||
Derivative instruments | | | | $ | 1,788 | | | | | $ | 2,686 | | |
Foreign currency translation adjustment | | | | | (45,328) | | | | | | (43,556) | | |
Unrecognized net pension gains (losses) | | | | | (17,833) | | | | | | (18,059) | | |
(Provision) benefit for income taxes on derivative instruments | | | | | (483) | | | | | | (1,553) | | |
(Provision) benefit for incomes taxes on long-term intercompany investments | | | | | 8,166 | | | | | | 8,166 | | |
(Provision) benefit for income taxes on pension gains (losses) | | | | | (3,195) | | | | | | (3,121) | | |
| | | | $ | (56,885) | | | | | $ | (55,437) | | |
|
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Accrued expenses and other current liabilities | ||||||||
Employee related | $ | 29,474 | $ | 28,298 | ||||
Current operating lease liabilities | 6,416 | — | ||||||
Commissions and rebates | 7,550 | 8,397 | ||||||
Professional fees | 6,448 | 5,212 | ||||||
Income and other taxes | 5,403 | 6,067 | ||||||
Restructuring costs | 2,214 | 3,590 | ||||||
Insurance-related | 1,341 | 1,279 | ||||||
Derivatives | 1,871 | — | ||||||
Other | 15,165 | 15,655 | ||||||
$ | 75,882 | $ | 68,498 |
During the three months ended June 30, 2019, we initiated business restructuring activities related to productivity and cost saving initiatives in the Animal Health segment. We recorded pre-tax charges of $6,281 for these activities, including $3,500 related to the termination of a contract manufacturing agreement and $2,781 for employee separation charges. As of June 30, 2019, $691 had been paid.
During the nine months ended March 31, 2020, we recorded $425 related to employee separation charges. The charges are included in selling, general and administrative expenses in our consolidated statements of operations. The following table summarizes the activity of the restructuring liability during the nine months ended March 31, 2020:
Liability balance at June 30, 2019 | $ | 5,590 | ||
Charges | 425 | |||
Payments | (2,601 | ) | ||
Liability balance at March 31, 2020 | $ | 3,414 |
As of March 31, 2020, $2,214 was included in accrued expenses and other current liabilities and $1,200 was included in other liabilities. We expect to record an additional charge for employee separation costs of an estimated $500 and plan to complete the additional separation actions by June 30, 2020.
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Other liabilities | ||||||||
Long-term operating lease liabilities | $ | 16,361 | $ | — | ||||
Long-term and deferred income taxes | 9,291 | 8,978 | ||||||
Derivatives | 8,722 | 977 | ||||||
Supplemental retirement benefits, deferred compensation and other | 7,927 | 7,605 | ||||||
Acquisition-related consideration | 7,753 | — | ||||||
International retirement plans | 4,818 | 5,133 | ||||||
Restructuring costs | 1,200 | 2,000 | ||||||
U.S. pension plan | 945 | 3,934 | ||||||
Other long-term liabilities | 12,605 | 14,167 | ||||||
$ | 69,622 | $ | 42,794 |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Accumulated other comprehensive income (loss) | ||||||||
Derivative instruments | $ | (10,593 | ) | $ | (594 | ) | ||
Foreign currency translation adjustment | (99,718 | ) | (71,225 | ) | ||||
Unrecognized net pension gains (losses) | (19,663 | ) | (20,050 | ) | ||||
(Provision) benefit for income taxes on derivative instruments | 2,638 | 148 | ||||||
(Provision) benefit for incomes taxes on long-term intercompany investments | 8,166 | 8,166 | ||||||
(Provision) benefit for income taxes on pension gains (losses) | (2,722 | ) | (2,626 | ) | ||||
$ | (121,892 | ) | $ | (86,181 | ) |
6. Debt
Term Loans and Revolving Credit Facilities
Pursuant to a credit agreement (the “Credit Agreement”), we have a revolving credit facility (the “Revolver”), where we can borrow up to $250,000, subject to the terms of the agreement, and a term A loan with an aggregate initial principal amount of $250,000 (the “Term A Loan,” and together with the Revolver, the “Credit Facilities”). The Credit Facilities have applicable margins equal to 2.00%, 1.75% or 1.50%, in the case of LIBOR and Eurodollar rate loans and 1.00%, 0.75% or 0.50%, in the case of base rate loans; the applicable margins are based on the First Lien Net Leverage Ratio, as defined in the Credit Agreement. The liborLIBOR rate is subject to a floor of 0.00%.
The Credit Facilities require, among other things, the maintenance of (i) a maximum First Lien Net Leverage Ratio and (ii) a minimum consolidated interest coverage ratio, each calculated on a trailing four quarter basis, and contain an acceleration clause should an event of default (as defined in the agreement governing the Credit Facilities)Agreement) occur. As of DecemberMarch 31, 2017,2020, we were in compliance with the covenants of the Credit Facilities. The Credit Facilities mature on June 29, 2022.
As of DecemberMarch 31, 2017,2020, we had $71,000$146,000 in borrowings under the Revolver and had outstanding letters of credit of $4,606,$2,709, leaving $174,394$101,291 available for borrowings and letters of credit under the Revolver. We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The terms of these letters of credit are all less than one year or less.
As of March 31, 2020, the interest rates for the Revolver and the Term A Loan were 2.54% and 3.19%, respectively. The weighted-average interest rates for the outstanding Revolver were 3.44% and 3.82% for the nine months ended March 31, 2020 and 2019, respectively. The weighted-average interest rates for the Term A Loan were 3.01%3.45% and 3.29%, respectively,3.50% for the sixnine months ended DecemberMarch 31, 2017.
In July 2017, we entered into an interest rate swap agreement on $150 million$150,000 of notional principal that effectively converts the floating LIBOR or base rate portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325% plus the applicable rate. The agreement matures concurrentconcurrently with the Credit Agreement. The
In March 2020, we entered into an interest rate swap has beenagreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.620% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300,000 through June 30, 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.620% plus the applicable rate. We designated the interest rate swaps as a highly effective cash flow hedge.hedges. For additional details, see “—Derivatives.”
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-Term Debt
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
Term A Loan due June 2022 | | | | $ | 246,875 | | | | | $ | 250,000 | | |
Capitalized lease obligations | | | | | 166 | | | | | | — | | |
| | | | | 247,041 | | | | | | 250,000 | | |
Unamortized debt issuance costs and debt discount | | | | | (1,673) | | | | | | (1,859) | | |
| | | | | 245,368 | | | | | | 248,141 | | |
Less: current maturities | | | | | (9,458) | | | | | | (6,250) | | |
| | | | $ | 235,910 | | | | | $ | 241,891 | | |
|
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Term A Loan due June 2022 | $ | 221,875 | $ | 231,250 | ||||
Other | — | 40 | ||||||
221,875 | 231,290 | |||||||
Unamortized debt issuance costs and debt discount | (836 | ) | (1,115 | ) | ||||
221,039 | 230,175 | |||||||
Less: current maturities | (17,188 | ) | (12,540 | ) | ||||
$ | 203,851 | $ | 217,635 |
7. | Leases |
Our lease portfolio consists of real estate, vehicles and equipment ROU assets, classified as operating leases. The remaining non-cancelable lease terms, inclusive of renewal options reasonably certain of exercise, range from one to 16 years.
The following table summarizes the ROU assets and the related lease liabilities recorded on the consolidated balance sheet:
As of | March 31, 2020 | Balance Sheet Classification | ||||
Assets: | ||||||
Operating lease ROU assets | $ | 22,083 | Other Assets | |||
Liabilities: | ||||||
Current portion | 6,416 | Accrued expenses and other current liabilities | ||||
Non-current portion | 16,361 | Other liabilities | ||||
Total operating lease liabilities | $ | 22,777 |
The following table summarizes the composition of net lease cost:
Three months | Nine months | |||||||
For the Periods Ended March 31 | 2020 | 2020 | ||||||
Operating lease expense | $ | 1,885 | $ | 5,647 | ||||
Variable lease expense | 361 | 992 | ||||||
Short-term lease expense | 196 | 613 | ||||||
Total lease cost | $ | 2,442 | $ | 7,252 |
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables include other supplemental information:
Three months | Nine months | |||||||
For the Periods Ended March 31 | 2020 | 2020 | ||||||
Operating cash flows used for ROU operating leases | $ | 1,884 | $ | 5,529 | ||||
Right of use assets obtained in exchange for new operating lease liabilities | $ | 830 | $ | 8,591 |
As of | ||||
March 31, 2020 | ||||
Weighted average remaining lease term (in years) – ROU operating leases | 6.5 | |||
Weighted average discount rate – ROU operating leases | 4.07 | % | ||
At March 31, 2020, maturities of future lease liabilities were:
For the Years Ending June 30 | ||||
2020 | $ | 1,981 | ||
2021 | 6,665 | |||
2022 | 5,076 | |||
2023 | 2,829 | |||
2024 | 2,378 | |||
2025 and thereafter | 7,413 | |||
Total lease payments | 26,342 | |||
Less: interest | 3,565 | |||
Total operating lease liabilities | $ | 22,777 |
As of March 31, 2020, we had approximately $5,600 of undiscounted lease payment obligations associated with an executed lease agreement for which the related lease had not commenced. The undiscounted payments are based on an initial lease term of seven years. We do not have control of the underlying assets prior to lease commencement, which is expected to be prior to June 30, 2020.
Our lease agreements do not contain any material restrictive covenants or residual value guarantee provisions.
Future minimum lease payments for operating leases accounted for under ASC 840, “Leases,” with remaining non-cancelable terms in excess of one year at June 30, 2019, were:
For the Years Ending June 30 | ||||
2020 | $ | 5,815 | ||
2021 | 4,160 | |||
2022 | 3,191 | |||
2023 | 1,445 | |||
2024 | 865 | |||
Thereafter | 765 | |||
Total minimum lease payments | $ | 16,241 |
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. | Related Party Transactions |
Certain relatives of Jack C. Bendheim, our Chairman, President and Chief Executive Officer, provided services to us as employees or consultants and received aggregate compensation and benefits of approximately $409$364 and $1,129$392 during the three and six months ended DecemberMarch 31, 2017,2020 and 2019, respectively, and $445$1,204 and $1,047$1,605 during the three and sixnine months ended DecemberMarch 31, 2016,2020 and 2019, respectively. Mr. Bendheim has sole authority to vote shares of our stock owned by BFI Co., LLC, an investment vehicle of the Bendheim family.
9. | Commitments and Contingencies |
Environmental
Our operations and properties are subject to extensive federal, state, local and foreign laws and regulations, including those governing pollution; protection of the environment; the use, management, and release of hazardous materials, substances and wastes; air emissions; greenhouse gas emissions; water use, supply and discharges; the investigation and remediation of contamination; the manufacture, distribution, and sale of regulated materials, including pesticides; the importing, exporting and transportation of products; and the health and safety of our employees (collectively, “Environmental Laws”). As such, the nature of our current and former operations exposes us to the risk of claims with respect to such matters, including fines, penalties, and remediation obligations that may be imposed by regulatory authorities.
Under certain circumstances, we might be required to curtail operations until a particular problem is remedied. Known costs and expenses under Environmental Laws incidental to ongoing operations, including the cost of litigation proceedings relating to environmental matters, are included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under Environmental Laws or to investigate or remediate potential or actual contamination, and from time to time we establish reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under Environmental Laws and the time period during which such costs are likely to be incurred are difficult to predict.
While we believe that our operations are currently in material compliance with Environmental Laws, we have, from time to time, received notices of violation from governmental authorities, and have been involved in civil or criminal action for such violations. Additionally, at various sites, our subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with historic operations of the sites. We devote considerable resources to complying with Environmental Laws and managing environmental liabilities. We have developed programs to identify requirements under, and maintain compliance with, Environmental Laws; however, we cannot predict with certainty the effect of increased and more stringent regulation on our operations, future capital expenditure requirements, or the cost of compliance.
The nature of our current and former operations exposes us to the risk of claims with respect to environmental matters and we cannot assure we will not incur material costs and liabilities in connection with such claims. Based upon our experience to date, we believe that the future cost of compliance with existing Environmental Laws, and liabilities for known environmental claims pursuant to such Environmental Laws, will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
The United States Environmental Protection Agency (the “EPA”) is investigating and planning for the remediation of offsite contaminated groundwater that has migrated from the Omega Chemical Corporation Superfund Site (“Omega Chemical Site”), which is upgradient of a facility inthe Santa Fe Springs, California operated byfacility of our subsidiary, Phibro-Tech, Inc. (“Phibro-Tech”). The EPA has named Phibro-Tech and certain other subsidiaries of PAHC as potentially responsible parties (“PRPs”) due to groundwater contamination from Phibro-Tech’s Santa Fe Springs facility that has allegedly commingled with contaminated groundwater from the Omega Chemical Site. In September 2012, the EPA notified approximately 140 PRPs, including Phibro-Tech and the other subsidiaries, that they have been identified as potentially responsible for remedial action for the groundwater plume affected by the Omega Chemical Site and for EPA oversight and response costs. Phibro-Tech contends that any groundwater contamination at its site is localized and due to historical operations that pre-date Phibro-Tech and/or contaminated groundwater that has migrated from upgradient properties. In addition, a successor to a prior owner of the Phibro-Tech site has asserted that PAHC and Phibro-Tech are obligated to provide indemnification for its potential liability and defense costs relating to the groundwater plume affected by the Omega Chemical Site. Phibro-Tech has vigorously contested this position and has asserted that the successor to the prior owner is required to indemnify Phibro-Tech for its potential liability and
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
defense costs. Furthermore, a nearby property owner has filed a complaint in the Superior Court of the State of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for alleged contamination of groundwater underneath its property, and a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling has filed a complaint under CERCLA, RCRAthe Comprehensive Environmental Response, Compensation, and Liability Act and the common law public nuisance doctrineResource Conservation and Recovery Act in the United States District Court for the Central District of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for contribution toward past and future costs associated with the investigation and remediation of the groundwater plume affected by the Omega Chemical Site. Due to the ongoing nature of the EPA’s investigation, the preliminary stage of the ongoing litigation and Phibro-Tech’s dispute with the prior owner’s successor, at this time we cannot predict with any degree of certainty what, if any, liability Phibro-Tech or the other subsidiaries may ultimately have for investigation, remediation and the EPA oversight and response costs associated with the affected groundwater plume.
Based upon information available, to the extent such costs can be estimated with reasonable certainty, we estimated the cost for further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites, to be approximately $6,866$4,940 and $7,211$5,890 at DecemberMarch 31, 2017,2020, and June 30, 2017,2019, respectively, which is included in current and long-term liabilities on the consolidated balance sheets. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption and elsewhere in this report, it should be noted that we take and have taken the position that neither PAHC nor any of our subsidiaries isare liable for
Claims and Litigation
PAHC and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities, payment disputes and governmental regulation. Certain of these actions seek damages in various amounts. In many cases, such claims are covered by insurance. We believe that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
10. | Derivatives |
We monitor our exposure to foreign currency exchange rates and interest rates and from time-to-time use derivatives to manage certain of these risks. We designate derivatives as a hedge of a forecasted transaction or of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). All changes in the fair value of a highly effective cash flow hedge are recorded in accumulated other comprehensive income (loss).
We routinely assess whether the derivatives used to hedge transactions are effective. If we determine a derivative ceases to be an effective hedge, we discontinue hedge accounting in the period of the assessment for that derivative, and immediately recognize any unrealized gains or losses related to the fair value of that derivative in the consolidated statements of operations.
We record derivatives at fair value in the consolidated balance sheets. For additional details regarding fair value, see “—Fair Value Measurements.”
Instrument | | | Hedge | | | Notional Amount at December 31, 2017 | | | Consolidated Balance Sheet | | | Fair value as of | | |||||||||
| December 31, 2017 | | | June 30, 2017 | | |||||||||||||||||
Options | | | Brazilian Real calls | | | R$— | | | Other current assets | | | | $ | — | | | | | $ | 2,686 | | |
Swap | | | Interest rate swap | | | $150,000 | | | Other assets | | | | $ | 1,788 | | | | | $ | — | | |
For the Three Months Ended December 31 | | ||||||||||||||||||||||||||||||||||||||||||
Instrument | | | Hedge | | | Gain (Loss) recorded in OCI | | | Gain (Loss) recognized in consolidated statements of operations | | | Consolidated Statement of Operations Line Item Total | | ||||||||||||||||||||||||||||||
| 2017 | | | 2016 | | | Consolidated Statement of Operations | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | |||||||||||||||||||||||
Options | | | Brazilian Real calls | | | | $ | (1,781) | | | | | $ | 270 | | | | Cost of goods sold | | | | $ | 517 | | | | | $ | (393) | | | | | $ | 138,957 | | | | | $ | 128,100 | | |
Swap | | | Interest rate swap | | | | $ | 1,505 | | | | | $ | — | | | | Interest expense, net | | | | $ | — | | | | | $ | — | | | | | $ | 3,050 | | | | | $ | 3,872 | | |
For the Six Months Ended December 31 | | ||||||||||||||||||||||||||||||||||||||||||
Instrument | | | Hedge | | | Gain (Loss) recorded in OCI | | | Gain (Loss) recognized in consolidated statements of operations | | | Consolidated Statement of Operations Line Item Total | | ||||||||||||||||||||||||||||||
| 2017 | | | 2016 | | | Consolidated Statement of Operations | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | |||||||||||||||||||||||
Options | | | Brazilian Real calls | | | | $ | (2,686) | | | | | $ | 304 | | | | Cost of goods sold | | | | $ | 703 | | | | | $ | (1,528) | | | | | $ | 268,987 | | | | | $ | 255,088 | | |
Swap | | | Interest rate swap | | | | $ | 1,788 | | | | | $ | — | | | | Interest expense, net | | | | $ | — | | | | | $ | — | | | | | $ | 6,168 | | | | | $ | 7,779 | | |
In July 2017, we entered into an interest rate swap agreement on the first $150,000 of notional principal that effectively converts the floating LIBOR or base rate portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325% plus the applicable rate. The agreement matures concurrentconcurrently with the Credit Agreement. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.620% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300,000 through June 30, 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.620% plus the applicable rate. The forecasted transactions are probable of occurring, and the interest rate swap hasswaps have been designated as a highly effective cash flow hedge.hedges.
We entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The fair valueindividual option contracts mature monthly through March 2022. The forecasted inventory purchases are probable of occurring and the interest rate swap agreement is recordedindividual option contracts were designated as an asset or liability with a corresponding amount included in accumulatedhighly effective cash flow hedges.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Outstanding derivatives that are designated and effective as cash flow hedges as of March 31, 2020, were:
Hedge | Notional Amount at March 31, 2020 | Consolidated Balance Sheet | Asset (Liability) fair value as of | |||||||||||
Instrument | March 31, 2020 | June 30, 2019 | ||||||||||||
Options | Brazilian Real calls | R$135,000 | (1) | $ | 83 | $ | 413 | |||||||
Options | Brazilian Real puts | R$135,000 | (1) | $ | (3,586 | ) | $ | (30 | ) | |||||
Swap | Interest rate swap | $300,000 | Other liabilities | $ | (7,090 | ) | $ | (977 | ) |
___________________
(1) | We record the net fair values of our outstanding foreign currency option contracts within the respective balance sheet line item based on the net financial position and maturity date of the individual contracts as of the balance sheet date. As of March 31, 2020, other current liabilities and other liabilities included net fair values of $1,871 and $1,632, respectively. As of June 30, 2019, other current assets included net fair values of $383. |
The following tables show the effects of derivatives on the consolidated statements of operations and other comprehensive income (loss).
For the Three Months Ended March 31 | ||||||||||||||||||||||||||||
Gain (Loss) recorded in OCI | Gain (Loss) recognized in consolidated statements of operations | Consolidated Statement of Operations Line Item Total | ||||||||||||||||||||||||||
Instrument | Hedge | 2020 | 2019 | Consolidated Statement of Operations | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Options | Brazilian Real calls | $ | (3,945 | ) | $ | (30 | ) | Cost of goods sold | $ | (8 | ) | $ | (5 | ) | $ | 141,188 | $ | 140,864 | ||||||||||
Swap | Interest rate swap | $ | (6,050 | ) | $ | (1,434 | ) | Interest expense, net | $ | 59 | $ | 247 | $ | 3,263 | $ | 2,931 |
For the Nine Months Ended March 31 | ||||||||||||||||||||||||||||
Gain (Loss) recorded in OCI | Gain (Loss) recognized in consolidated statements of operations | Consolidated Statement of Operations Line Item Total | ||||||||||||||||||||||||||
Instrument | Hedge | 2020 | 2019 | Consolidated Statement of Operations | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Options | Brazilian Real calls | $ | (3,886 | ) | $ | 374 | Cost of goods sold | $ | (116 | ) | $ | 1,079 | $ | 418,153 | $ | 424,791 | ||||||||||||
Swap | Interest rate swap | $ | (6,113 | ) | $ | (3,540 | ) | Interest expense, net | $ | 228 | $ | 523 | $ | 10,049 | $ | 8,729 |
We recognize gains (losses) related to foreign currency derivatives as a component of cost of goods sold at the time the hedged item is sold. Realized net losses of $107 related to matured contracts were recorded as a component of inventory as of March 31, 2020.
11. | Fair Value Measurements |
Short-term investments
As of March 31, 2020, our short-term investments consist of cash deposits held at financial institutions. We consider the carrying amounts of these short-term investments to be representative of their fair value.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Current Assets and Liabilities
We consider the carrying amounts of current assets and current liabilities to be representative of their fair value because of the current nature of thethese items.
Contingent Consideration on Acquisitions
We determine the fair value of contingent consideration on acquisitions based on contractual terms, our current forecast of performance factors related to the acquired business and an applicable discount rate.
Letters of Credit
We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The carrying values of these letters of credit are considered to be representative of their fair values because of the nature of the instruments.
Debt
We record debt, including term loans and revolver balances, at book value in our consolidated financial statements. We believe the carrying value of the debt is approximately equal to its fair value, due to the variable nature of the instruments.
Derivatives
We determine the fair value of derivative instruments based upon pricing models using observable market inputs for these types of financial instruments, such as spot and forward currency translation rates,rates.
Non-financial assets
Our non-financial assets, which primarily consist of goodwill, other intangible assets, property and interest rate curves.
Fair Value of Assets (Liabilities)
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||||||||||||||||||||||||||
| | | Level 1 | | | Level 2 | | | Level 3 | | | Level 1 | | | Level 2 | | | Level 3 | | ||||||||||||||||||
Short-term investments | | | | $ | 27,000 | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | |
Derivatives asset | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | 2,686 | | | | | $ | — | | |
Interest rate swap | | | | $ | — | | | | | $ | 1,788 | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | |
Contingent consideration on acquisitions | | | | $ | — | | | | | $ | — | | | | | $ | (8,079) | | | | | $ | — | | | | | $ | — | | | | | $ | (7,644) | | |
As of | March 31, 2020 | June 30, 2019 | ||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Short-term investments | $ | 55,000 | $ | — | $ | — | $ | 24,000 | $ | — | $ | — | ||||||||||||
Foreign currency derivatives | $ | — | $ | (3,503 | ) | $ | — | $ | — | $ | 383 | $ | — | |||||||||||
Interest rate swap | $ | — | $ | (7,090 | ) | $ | — | $ | — | $ | (977 | ) | $ | — | ||||||||||
Contingent consideration on acquisitions | $ | — | $ | — | $ | (7,753 | ) | $ | — | $ | — | $ | — |
The table below provides a summary of the changes in the fair value of Level 3 assets (liabilities):liabilities:
Balance at June 30, 2019 | $ | — | ||
Osprey acquisition | (7,553 | ) | ||
Acquisition-related accrued interest | (200 | ) | ||
Balance at March 31, 2020 | $ | (7,753 | ) |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We evaluate performance and allocate resources, based on the Animal Health, Mineral Nutrition and Performance Products segments. Certain of our costs and assets are not directly attributable to these segments and we refer to these items as Corporate. We do not allocate Corporate costs or assets to the segments because they are not used to evaluate the segments’ operating results or financial position. Corporate costs include certain costs related to executive management, business technology, legal, finance, human resources and business development. Corporate assets include cash and cash equivalents, certain debt issue costs, income tax related assets and certain other assets.
We evaluate performance of our segments based on Adjusted EBITDA. We define Adjusted EBITDA as income before income taxes plus (a) interest expense, net, (b) depreciation and amortization, (c) (income) loss from, and disposal of, discontinued operations, (d) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (e) certain items that we consider to be unusual, non-operational or non-recurring.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.
Three Months | Nine Months | |||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net sales | ||||||||||||||||
Animal Health | $ | 138,974 | $ | 129,189 | $ | 404,513 | $ | 399,940 | ||||||||
Mineral Nutrition | 56,200 | 60,653 | 164,534 | 177,810 | ||||||||||||
Performance Products | 15,565 | 15,894 | 45,424 | 46,362 | ||||||||||||
Total segments | $ | 210,739 | $ | 205,736 | $ | 614,471 | $ | 624,112 | ||||||||
Depreciation and amortization | ||||||||||||||||
Animal Health | $ | 6,665 | $ | 5,571 | $ | 19,760 | $ | 16,420 | ||||||||
Mineral Nutrition | 629 | 592 | 1,871 | 1,805 | ||||||||||||
Performance Products | 509 | 273 | 1,303 | 825 | ||||||||||||
Total segments | $ | 7,803 | $ | 6,436 | $ | 22,934 | $ | 19,050 | ||||||||
Adjusted EBITDA | ||||||||||||||||
Animal Health | $ | 34,635 | $ | 33,241 | $ | 93,534 | $ | 104,882 | ||||||||
Mineral Nutrition | 4,055 | 5,287 | 11,214 | 11,934 | ||||||||||||
Performance Products | 1,506 | 1,330 | 3,815 | 3,560 | ||||||||||||
Total segments | $ | 40,196 | $ | 39,858 | $ | 108,563 | $ | 120,376 |
Reconciliation of income before income taxes to Adjusted EBITDA | ||||||||||||||||
Income before income taxes | $ | 18,664 | $ | 19,515 | $ | 39,131 | $ | 62,294 | ||||||||
Interest expense, net | 3,263 | 2,931 | 10,049 | 8,729 | ||||||||||||
Depreciation and amortization - Total segments | 7,803 | 6,436 | 22,934 | 19,050 | ||||||||||||
Depreciation and amortization - Corporate | 445 | 439 | 1,243 | 1,357 | ||||||||||||
Corporate costs | 10,064 | 9,850 | 30,283 | 28,654 | ||||||||||||
Restructure costs | — | — | 425 | — | ||||||||||||
Stock-based compensation | 565 | 565 | 1,694 | 1,694 | ||||||||||||
Acquisition-related cost of goods sold | — | — | 280 | — | ||||||||||||
Acquisition-related transaction costs | — | — | 462 | — | ||||||||||||
Acquisition-related other | — | — | 167 | — | ||||||||||||
Other, net | — | — | — | (1,506 | ) | |||||||||||
Foreign currency (gains) losses, net | (608 | ) | 122 | 1,895 | 104 | |||||||||||
Adjusted EBITDA - Total segments | $ | 40,196 | $ | 39,858 | $ | 108,563 | $ | 120,376 |
22
| | | Three Months | | | Six Months | | ||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | ||||||||||||
Net sales | | | | | | ||||||||||||||||||||
Animal Health | | | | $ | 132,845 | | | | | $ | 123,673 | | | | | $ | 261,686 | | | | | $ | 248,174 | | |
Mineral Nutrition | | | | | 59,616 | | | | | | 56,699 | | | | | | 111,689 | | | | | | 108,291 | | |
Performance Products | | | | | 13,415 | | | | | | 11,226 | | | | | | 25,913 | | | | | | 23,120 | | |
Total segments | | | | $ | 205,876 | | | | | $ | 191,598 | | | | | $ | 399,288 | | | | | $ | 379,585 | | |
Depreciation and amortization | | | | | | ||||||||||||||||||||
Animal Health | | | | $ | 5,265 | | | | | $ | 5,011 | | | | | $ | 10,519 | | | | | $ | 9,909 | | |
Mineral Nutrition | | | | | 584 | | | | | | 542 | | | | | | 1,169 | | | | | | 1,084 | | |
Performance Products | | | | | 259 | | | | | | 235 | | | | | | 505 | | | | | | 453 | | |
Total segments | | | | $ | 6,108 | | | | | $ | 5,788 | | | | | $ | 12,193 | | | | | $ | 11,446 | | |
Adjusted EBITDA | | | | | | ||||||||||||||||||||
Animal Health | | | | $ | 35,036 | | | | | $ | 34,609 | | | | | $ | 68,778 | | | | | $ | 67,228 | | |
Mineral Nutrition | | | | | 5,614 | | | | | | 4,741 | | | | | | 9,330 | | | | | | 8,729 | | |
Performance Products | | | | | 264 | | | | | | 260 | | | | | | 512 | | | | | | 1,002 | | |
Total segments | | | | $ | 40,914 | | | | | $ | 39,610 | | | | | $ | 78,620 | | | | | $ | 76,959 | | |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | Three Months | | | Six Months | | ||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | ||||||||||||
Reconciliation of income before income taxes to Adjusted EBITDA | | | | | | ||||||||||||||||||||
Income before income taxes | | | | $ | 21,211 | | | | | $ | 19,304 | | | | | $ | 40,155 | | | | | $ | 36,876 | | |
Interest expense, net | | | | | 3,050 | | | | | | 3,872 | | | | | | 6,168 | | | | | | 7,779 | | |
Depreciation and amortization – Total segments | | | | | 6,108 | | | | | | 5,788 | | | | | | 12,193 | | | | | | 11,446 | | |
Depreciation and amortization – Corporate | | | | | 523 | | | | | | 656 | | | | | | 1,082 | | | | | | 1,316 | | |
Corporate costs | | | | | 8,436 | | | | | | 8,416 | | | | | | 16,025 | | | | | | 15,940 | | |
Acquisition-related cost of goods sold | | | | | 1,422 | | | | | | — | | | | | | 1,671 | | | | | | — | | |
Acquisition-related accrued compensation | | | | | 487 | | | | | | 420 | | | | | | 924 | | | | | | 840 | | |
Acquisition-related transaction costs | | | | | — | | | | | | — | | | | | | 400 | | | | | | 1,274 | | |
Pension settlement cost | | | | | — | | | | | | 1,702 | | | | | | — | | | | | | 1,702 | | |
Foreign currency (gains) losses, net | | | | | (323) | | | | | | (548) | | | | | | 2 | | | | | | (214) | | |
Adjusted EBITDA – Total segments | | | | $ | 40,914 | | | | | $ | 39,610 | | | | | $ | 78,620 | | | | | $ | 76,959 | | |
|
As of | | | December 31, 2017 | | | June 30, 2017 | | ||||||
Identifiable assets | | | | ||||||||||
Animal Health | | | | $ | 465,058 | | | | | $ | 442,521 | | |
Mineral Nutrition | | | | | 63,407 | | | | | | 55,184 | | |
Performance Products | | | | | 23,541 | | | | | | 23,681 | | |
Total segments | | | | | 552,006 | | | | | | 521,386 | | |
Corporate | | | | | 111,124 | | | | | | 102,011 | | |
Total | | | | $ | 663,130 | | | | | $ | 623,397 | | |
|
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
Identifiable assets | ||||||||
Animal Health | $ | 555,917 | $ | 508,864 | ||||
Mineral Nutrition | 68,693 | 67,662 | ||||||
Performance Products | 32,232 | 32,886 | ||||||
Total segments | 656,842 | 609,412 | ||||||
Corporate | 119,208 | 117,259 | ||||||
Total | $ | 776,050 | $ | 726,671 |
The Animal Health segment includes all goodwill of the Company. The Animal Health segment includes advances to and investment in an equity method investee of $3,905$3,635 and $3,719$3,287 as of DecemberMarch 31, 20172020, and June 30, 2017,2019, respectively. The Performance Products segment includes an investment in an equity method investee of $624$884 and $516$759 as of DecemberMarch 31, 20172020, and June 30, 2017,2019, respectively. Corporate assets include cash and cash equivalents, certainshort-term investments, debt issuance costs, income tax relatedtax-related assets and certain other assets.
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Our management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. This MD&A should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Our future results could differ materially from our historical performance as a result of various factors such as those discussed in “Risk Factors” and “Forward-Looking Statements.”
Overview of our business
Phibro Animal Health Corporation is a global diversified animal health and mineral nutrition company. We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle, and aquaculture. Our products help prevent, control and treat diseases, enhance nutrition to help improve health and performance and contribute to balanced mineral nutrition. We alsoIn addition to animal health and mineral nutrition products, we manufacture and market specific ingredients for use in the personal care, automotive, industrial chemical and chemical catalyst industries.
Effects of the COVID-19 pandemic
We experienced limited financial disruption from the coronavirus pandemic (“COVID-19”) on a healthy and growing livestock industry. Someour consolidated financial results during the three months ended March 31, 2020.
Phibro is an integral participant in the public perceive risksessential production of meat, milk, eggs and fish for human consumption. In the face of the pandemic, we have focused on the safety of our employees, while continuing to human healthsupply our customers. Our global production facilities have continued to operate without interruption, despite supply chain and logistical challenges. Our sales and technical service people remain in close virtual contact with our customers, as most travel and in-person meetings have been cancelled. Most of our administrative and management staff are working remotely. We are experiencing some cost increases from the safety measures implemented to protect our employees and from supply chain disruptions. We have maintained headcount and compensation at constant levels. We are closely monitoring sales trends, cash flow and liquidity. We have reviewed the provisions of the CARES (Coronavirus Aid, Relief, and. Economic Security) Act and related legislation and do not expect any significant financial effect on Phibro.
We currently are seeing unprecedented demand disruption and production impacts in the global food animal industry, due to the consumptionCOVID-19 pandemic. While our sales to date have continued close to our expectations, we anticipate a decline in demand for our products in the near term, as our customers attempt to navigate rapidly evolving market conditions. The effects COVID-19 will have on our consolidated results going forward and the broader economic environment are uncertain. The demand for our products will be dependent upon economic conditions and the ability of food derived from animals that utilize certainour customers and end users of our products including certain of our MFA products. In particular, there is increased focus, primarily in the United States, on the use of medically important antimicrobials, as defined by the FDA. Medically important antimicrobials (“MIAs”) include classes that are prescribed in animal and human health and are listed in the Appendix of the FDA-CVM Guidance for Industry (GFI) 152. Our products that contain virginiamycin, oxytetracycline or neomycin have previously been classified by the FDA as medically important antimicrobials. This may lead to a decline in the demand foroperate their businesses and production of food products derived from animals that utilize our MIA productsfacilities, among other factors. Our future operational results may be impacted by government mandated response efforts, supply chain and manufacturing disruptions, increased volatility in turn, demand for our MIA products. Livestock producers may experienceraw material costs and decreased demand for their products or reputational harm as a result of evolving consumer views of nutrition and health-related concerns, animal rights, and other concerns. Any reputational harm to the livestock industry may also extend to companies in related industries, including us. In addition, campaigns by interest groups, activists and others with respect to perceived risks associated with the use of our products in animals, including position statements by livestock producers and their customers based on non-use of certain medicated products in livestock production, whether or not scientifically-supported, could affect public perceptions and reduce the use of our products. Those adverse consumer views related to the use of one or more of our products in animals could have a material adverse effect on our financial condition and results of operations.
24
Analysis of the consolidated statements of operations
Summary Results of Operations
| | | Three Months | | | Six Months | | ||||||||||||||||||||||||||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | ||||||||||||||||||||||||||||||
| | | (in thousands, except per share amounts and percentages) | | |||||||||||||||||||||||||||||||||||||||||||||
Net sales | | | | $ | 205,876 | | | | | $ | 191,598 | | | | | $ | 14,278 | | | | | | 7% | | | | | $ | 399,288 | | | | | $ | 379,585 | | | | | $ | 19,703 | | | | | | 5% | | |
Gross profit | | | | | 66,919 | | | | | | 63,498 | | | | | | 3,421 | | | | | | 5% | | | | | | 130,301 | | | | | | 124,497 | | | | | | 5,804 | | | | | | 5% | | |
Selling, general and administrative expenses | | | | | 42,981 | | | | | | 40,870 | | | | | | 2,111 | | | | | | 5% | | | | | | 83,976 | | | | | | 80,056 | | | | | | 3,920 | | | | | | 5% | | |
Operating income | | | | | 23,938 | | | | | | 22,628 | | | | | | 1,310 | | | | | | 6% | | | | | | 46,325 | | | | | | 44,441 | | | | | | 1,884 | | | | | | 4% | | |
Interest expense, net | | | | | 3,050 | | | | | | 3,872 | | | | | | (822) | | | | | | (21)% | | | | | | 6,168 | | | | | | 7,779 | | | | | | (1,611) | | | | | | (21)% | | |
Foreign currency (gains) losses, net | | | | | (323) | | | | | | (548) | | | | | | 225 | | | | | | * | | | | | | 2 | | | | | | (214) | | | | | | 216 | | | | | | * | | |
Income before income taxes | | | | | 21,211 | | | | | | 19,304 | | | | | | 1,907 | | | | | | 10% | | | | | | 40,155 | | | | | | 36,876 | | | | | | 3,279 | | | | | | 9% | | |
Provision (benefit) for income taxes | | | | | 14,179 | | | | | | 5,887 | | | | | | 8,292 | | | | | | 141% | | | | | | 17,231 | | | | | | 11,282 | | | | | | 5,949 | | | | | | 53% | | |
Net income | | | | $ | 7,032 | | | | | $ | 13,417 | | | | | $ | (6,385) | | | | | | (48)% | | | | | $ | 22,924 | | | | | $ | 25,594 | | | | | $ | (2,670) | | | | | | (10)% | | |
Net income per share | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
basic | | | | $ | 0.17 | | | | | $ | 0.34 | | | | | $ | (0.17) | | | | | | | | | | | $ | 0.57 | | | | | $ | 0.65 | | | | | $ | (0.08) | | | | |||||
diluted | | | | $ | 0.17 | | | | | $ | 0.34 | | | | | $ | (0.17) | | | | | | | | | | | $ | 0.57 | | | | | $ | 0.64 | | | | | $ | (0.07) | | | | |||||
Weighted average number of shares outstanding | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
basic | | | | | 40,186 | | | | | | 39,411 | | | | | | | | | | | | | | | | | | 40,065 | | | | | | 39,409 | | | | | ||||||||||
diluted | | | | | 40,364 | | | | | | 40,002 | | | | | | | | | | | | | | | | | | 40,329 | | | | | | 39,954 | | | | | ||||||||||
Ratio to net sales | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
Gross profit | | | | | 32.5% | | | | | | 33.1% | | | | | | | | | | | | | | | | | | 32.6% | | | | | | 32.8% | | | | | ||||||||||
Selling, general and administrative expenses | | | | | 20.9% | | | | | | 21.3% | | | | | | | | | | | | | | | | | | 21.0% | | | | | | 21.1% | | | | | ||||||||||
Operating income | | | | | 11.6% | | | | | | 11.8% | | | | | | | | | | | | | | | | | | 11.6% | | | | | | 11.7% | | | | | ||||||||||
Income before income taxes | | | | | 10.3% | | | | | | 10.1% | | | | | | | | | | | | | | | | | | 10.1% | | | | | | 9.7% | | | | | ||||||||||
Net income | | | | | 3.4% | | | | | | 7.0% | | | | | | | | | | | | | | | | | | 5.7% | | | | | | 6.7% | | | | | ||||||||||
Effective tax rate | | | | | 66.8% | | | | | | 30.5% | | | | | | | | | | | | | | | | | | 42.9% | | | | | | 30.6% | | | | |
Three Months | Nine Months | |||||||||||||||||||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||
(in thousands, except per share amounts and percentages) | ||||||||||||||||||||||||||||||||
Net sales | $ | 210,739 | $ | 205,736 | $ | 5,003 | 2 | % | $ | 614,471 | $ | 624,112 | $ | (9,641 | ) | (2 | )% | |||||||||||||||
Gross profit | 69,551 | 64,872 | 4,679 | 7 | % | 196,318 | 199,321 | (3,003 | ) | (2 | )% | |||||||||||||||||||||
Selling, general and administrative expenses | 48,232 | 42,304 | 5,928 | 14 | % | 145,243 | 128,194 | 17,049 | 13 | % | ||||||||||||||||||||||
Operating income | 21,319 | 22,568 | (1,249 | ) | (6 | )% | 51,075 | 71,127 | (20,052 | ) | (28 | )% | ||||||||||||||||||||
Interest expense, net | 3,263 | 2,931 | 332 | 11 | % | 10,049 | 8,729 | 1,320 | 15 | % | ||||||||||||||||||||||
Foreign currency (gains) losses, net | (608 | ) | 122 | (730 | ) | * | 1,895 | 104 | 1,791 | * | ||||||||||||||||||||||
Income before income taxes | 18,664 | 19,515 | (851 | ) | (4 | )% | 39,131 | 62,294 | (23,163 | ) | (37 | )% | ||||||||||||||||||||
Provision for income taxes | 5,163 | 4,666 | 497 | 11 | % | 11,221 | 16,383 | (5,162 | ) | (32 | )% | |||||||||||||||||||||
Net income | $ | 13,501 | $ | 14,849 | $ | (1,348 | ) | (9 | )% | $ | 27,910 | $ | 45,911 | $ | (18,001 | ) | (39 | )% | ||||||||||||||
Net income per share | ||||||||||||||||||||||||||||||||
basic | $ | 0.33 | $ | 0.37 | $ | (0.04 | ) | $ | 0.69 | $ | 1.14 | $ | (0.45 | ) | ||||||||||||||||||
diluted | $ | 0.33 | $ | 0.37 | $ | (0.04 | ) | $ | 0.69 | $ | 1.13 | $ | (0.44 | ) | ||||||||||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||||||||||||||
basic | 40,454 | 40,442 | 40,454 | 40,398 | ||||||||||||||||||||||||||||
diluted | 40,504 | 40,531 | 40,504 | 40,519 | ||||||||||||||||||||||||||||
Ratio to net sales | ||||||||||||||||||||||||||||||||
Gross profit | 33.0 | % | 31.5 | % | 31.9 | % | 31.9 | % | ||||||||||||||||||||||||
Selling, general and administrative expenses | 22.9 | % | 20.6 | % | 23.6 | % | 20.5 | % | ||||||||||||||||||||||||
Operating income | 10.1 | % | 11.0 | % | 8.3 | % | 11.4 | % | ||||||||||||||||||||||||
Income before income taxes | 8.9 | % | 9.5 | % | 6.4 | % | 10.0 | % | ||||||||||||||||||||||||
Net income | 6.4 | % | 7.2 | % | 4.5 | % | 7.4 | % | ||||||||||||||||||||||||
Effective tax rate | 27.7 | % | 23.9 | % | 28.7 | % | 26.3 | % |
_________________
Certain amounts and percentages may reflect rounding adjustments.
*
25
Net sales, Adjusted EBITDA and reconciliation of GAAP net income to Adjusted EBITDA
We report Net sales and Adjusted EBITDA by segment to understand the operating performance of each segment. This enables us to monitor changes in net sales, costs and other actionable operating metrics at the segment level. See “—General description of non-GAAP financial measures” for descriptions of EBITDA and Adjusted EBITDA.
Segment net sales and Adjusted EBITDA:
| | | Three Months | | | Six Months | | ||||||||||||||||||||||||||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | ||||||||||||||||||||||||||||||
| | | (in thousands, except percentages) | | |||||||||||||||||||||||||||||||||||||||||||||
Net sales | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
MFAs and other | | | | $ | 82,018 | | | | | $ | 77,475 | | | | | $ | 4,543 | | | | | | 6% | | | | | $ | 161,621 | | | | | $ | 160,894 | | | | | $ | 727 | | | | | | 0% | | |
Nutritional specialties | | | | | 32,623 | | | | | | 29,247 | | | | | | 3,376 | | | | | | 12% | | | | | | 63,400 | | | | | | 55,551 | | | | | | 7,849 | | | | | | 14% | | |
Vaccines | | | | | 18,204 | | | | | | 16,951 | | | | | | 1,253 | | | | | | 7% | | | | | | 36,665 | | | | | | 31,729 | | | | | | 4,936 | | | | | | 16% | | |
Animal Health | | | | | 132,845 | | | | | | 123,673 | | | | | | 9,172 | | | | | | 7% | | | | | | 261,686 | | | | | | 248,174 | | | | | | 13,512 | | | | | | 5% | | |
Mineral Nutrition | | | | | 59,616 | | | | | | 56,699 | | | | | | 2,917 | | | | | | 5% | | | | | | 111,689 | | | | | | 108,291 | | | | | | 3,398 | | | | | | 3% | | |
Performance Products | | | | | 13,415 | | | | | | 11,226 | | | | | | 2,189 | | | | | | 19% | | | | | | 25,913 | | | | | | 23,120 | | | | | | 2,793 | | | | | | 12% | | |
Total | | | | $ | 205,876 | | | | | $ | 191,598 | | | | | $ | 14,278 | | | | | | 7% | | | | | $ | 399,288 | | | | | $ | 379,585 | | | | | $ | 19,703 | | | | | | 5% | | |
Adjusted EBITDA | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
Animal Health | | | | $ | 35,036 | | | | | $ | 34,609 | | | | | $ | 427 | | | | | | 1% | | | | | $ | 68,778 | | | | | $ | 67,228 | | | | | $ | 1,550 | | | | | | 2% | | |
Mineral Nutrition | | | | | 5,614 | | | | | | 4,741 | | | | | | 873 | | | | | | 18% | | | | | | 9,330 | | | | | | 8,729 | | | | | | 601 | | | | | | 7% | | |
Performance Products | | | | | 264 | | | | | | 260 | | | | | | 4 | | | | | | 2% | | | | | | 512 | | | | | | 1,002 | | | | | | (490) | | | | | | (49)% | | |
Corporate | | | | | (8,436) | | | | | | (8,416) | | | | | | (20) | | | | | | * | | | | | | (16,025) | | | | | | (15,940) | | | | | | (85) | | | | | | * | | |
Total | | | | $ | 32,478 | | | | | $ | 31,194 | | | | | $ | 1,284 | | | | | | 4% | | | | | $ | 62,595 | | | | | $ | 61,019 | | | | | $ | 1,576 | | | | | | 3% | | |
Adjusted EBITDA ratio to segment net sales | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
Animal Health | | | | | 26.4% | | | | | | 28.0% | | | | | | | | | | | | | | | | | | 26.3% | | | | | | 27.1% | | | | | ||||||||||
Mineral Nutrition | | | | | 9.4% | | | | | | 8.4% | | | | | | | | | | | | | | | | | | 8.4% | | | | | | 8.1% | | | | | ||||||||||
Performance Products | | | | | 2.0% | | | | | | 2.3% | | | | | | | | | | | | | | | | | | 2.0% | | | | | | 4.3% | | | | | ||||||||||
Corporate (1) | | | | | (4.1)% | | | | | | (4.4)% | | | | | | | | | | | | | | | | | | (4.0)% | | | | | | (4.2)% | | | | | ||||||||||
Total (1) | | | | | 15.8% | | | | | | 16.3% | | | | | | | | | | | | | | | | | | 15.7% | | | | | | 16.1% | | | | |
Three Months | Nine Months | |||||||||||||||||||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||
Net sales | (in thousands, except percentages) | |||||||||||||||||||||||||||||||
MFAs and other | $ | 82,670 | $ | 84,095 | $ | (1,425 | ) | (2 | )% | $ | 249,659 | $ | 264,153 | $ | (14,494 | ) | (5 | )% | ||||||||||||||
Nutritional specialties | 34,636 | 28,227 | 6,409 | 23 | % | 98,131 | 84,657 | 13,474 | 16 | % | ||||||||||||||||||||||
Vaccines | 21,668 | 16,867 | 4,801 | 28 | % | 56,723 | 51,130 | 5,593 | 11 | % | ||||||||||||||||||||||
Animal Health | 138,974 | 129,189 | 9,785 | 8 | % | 404,513 | 399,940 | 4,573 | 1 | % | ||||||||||||||||||||||
Mineral Nutrition | 56,200 | 60,653 | (4,453 | ) | (7 | )% | 164,534 | 177,810 | (13,276 | ) | (7 | )% | ||||||||||||||||||||
Performance Products | 15,565 | 15,894 | (329 | ) | (2 | )% | 45,424 | 46,362 | (938 | ) | (2 | )% | ||||||||||||||||||||
Total | $ | 210,739 | $ | 205,736 | $ | 5,003 | 2 | % | $ | 614,471 | $ | 624,112 | $ | (9,641 | ) | (2 | )% | |||||||||||||||
Adjusted EBITDA | ||||||||||||||||||||||||||||||||
Animal Health | $ | 34,635 | $ | 33,241 | $ | 1,394 | 4 | % | $ | 93,534 | $ | 104,882 | $ | (11,348 | ) | (11 | )% | |||||||||||||||
Mineral Nutrition | 4,055 | 5,287 | (1,232 | ) | (23 | )% | 11,214 | 11,934 | (720 | ) | (6 | )% | ||||||||||||||||||||
Performance Products | 1,506 | 1,330 | 176 | 13 | % | 3,815 | 3,560 | 255 | 7 | % | ||||||||||||||||||||||
Corporate | (10,064 | ) | (9,850 | ) | (214 | ) | * | (30,283 | ) | (28,654 | ) | (1,629 | ) | * | ||||||||||||||||||
Total | $ | 30,132 | $ | 30,008 | $ | 124 | 0 | % | $ | 78,280 | $ | 91,722 | $ | (13,442 | ) | (15 | )% | |||||||||||||||
Adjusted EBITDA ratio to segment net sales | ||||||||||||||||||||||||||||||||
Animal Health | 24.9 | % | 25.7 | % | 23.1 | % | 26.2 | % | ||||||||||||||||||||||||
Mineral Nutrition | 7.2 | % | 8.7 | % | 6.8 | % | 6.7 | % | ||||||||||||||||||||||||
Performance Products | 9.7 | % | 8.4 | % | 8.4 | % | 7.7 | % | ||||||||||||||||||||||||
Corporate(1) | (4.8 | )% | (4.8 | )% | (4.9 | )% | (4.6 | )% | ||||||||||||||||||||||||
Total(1) | 14.3 | % | 14.6 | % | 12.7 | % | 14.7 | % |
________________ |
(1)
26
The table below sets forth a reconciliation of net income, as reported under GAAP, to Adjusted EBITDA:
| | | Three Months | | | Six Months | | ||||||||||||||||||||||||||||||||||||||||||
For the Periods Ended December 31 | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | ||||||||||||||||||||||||||||||
| | | (in thousands, except percentages) | | |||||||||||||||||||||||||||||||||||||||||||||
Net income | | | | $ | 7,032 | | | | | $ | 13,417 | | | | | $ | (6,385) | | | | | | (48)% | | | | | $ | 22,924 | | | | | $ | 25,594 | | | | | $ | (2,670) | | | | | | (10)% | | |
Interest expense, net | | | | | 3,050 | | | | | | 3,872 | | | | | | (822) | | | | | | (21)% | | | | | | 6,168 | | | | | | 7,779 | | | | | | (1,611) | | | | | | (21)% | | |
Provision (benefit) for income taxes | | | | | 14,179 | | | | | | 5,887 | | | | | | 8,292 | | | | | | 141% | | | | | | 17,231 | | | | | | 11,282 | | | | | | 5,949 | | | | | | 53% | | |
Depreciation and amortization | | | | | 6,631 | | | | | | 6,444 | | | | | | 187 | | | | | | 3% | | | | | | 13,275 | | | | | | 12,762 | | | | | | 513 | | | | | | 4% | | |
EBITDA | | | | | 30,892 | | | | | | 29,620 | | | | | | 1,272 | | | | | | 4% | | | | | | 59,598 | | | | | | 57,417 | | | | | | 2,181 | | | | | | 4% | | |
Acquisition-related cost of goods sold | | | | | 1,422 | | | | | | — | | | | | | 1,422 | | | | | | * | | | | | | 1,671 | | | | | | — | | | | | | 1,671 | | | | | | * | | |
Acquisition-related accrued compensation | | | | | 487 | | | | | | 420 | | | | | | 67 | | | | | | 16% | | | | | | 924 | | | | | | 840 | | | | | | 84 | | | | | | 10% | | |
Acquisition-related transaction costs | | | | | — | | | | | | — | | | | | | — | | | | | | * | | | | | | 400 | | | | | | 1,274 | | | | | | (874) | | | | | | (69)% | | |
Pension settlement cost | | | | | — | | | | | | 1,702 | | | | | | (1,702) | | | | | | * | | | | | | — | | | | | | 1,702 | | | | | | (1,702) | | | | | | * | | |
Foreign currency (gains) losses, net | | | | | (323) | | | | | | (548) | | | | | | 225 | | | | | | * | | | | | | 2 | | | | | | (214) | | | | | | 216 | | | | | | * | | |
Adjusted EBITDA | | | | $ | 32,478 | | | | | $ | 31,194 | | | | | $ | 1,284 | | | | | | 4% | | | | | $ | 62,595 | | | | | $ | 61,019 | | | | | $ | 1,576 | | | | | | 3% | | |
|
Three Months | Nine Months | |||||||||||||||||||||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||||||
Net income | $ | 13,501 | $ | 14,849 | $ | (1,348 | ) | (9 | )% | $ | 27,910 | $ | 45,911 | $ | (18,001 | ) | (39 | )% | ||||||||||||||
Interest expense, net | 3,263 | 2,931 | 332 | 11 | % | 10,049 | 8,729 | 1,320 | 15 | % | ||||||||||||||||||||||
Provision for income taxes | 5,163 | 4,666 | 497 | 11 | % | 11,221 | 16,383 | (5,162 | ) | (32 | )% | |||||||||||||||||||||
Depreciation and amortization | 8,248 | 6,875 | 1,373 | 20 | % | 24,177 | 20,407 | 3,770 | 18 | % | ||||||||||||||||||||||
EBITDA | 30,175 | 29,321 | 854 | 3 | % | 73,357 | 91,430 | (18,073 | ) | (20 | )% | |||||||||||||||||||||
Restructuring costs | — | — | — | * | 425 | — | 425 | * | ||||||||||||||||||||||||
Stock-based compensation | 565 | 565 | — | 0 | % | 1,694 | 1,694 | — | 0 | % | ||||||||||||||||||||||
Acquisition-related cost of goods sold | — | — | — | * | 280 | — | 280 | * | ||||||||||||||||||||||||
Acquisition-related transaction costs | — | — | — | * | 462 | — | 462 | * | ||||||||||||||||||||||||
Acquisition-related other, net(1) | — | — | — | * | 167 | — | 167 | * | ||||||||||||||||||||||||
Other, net | — | — | — | * | — | (1,506 | ) | 1,506 | * | |||||||||||||||||||||||
Foreign currency (gains) losses, net | (608 | ) | 122 | (730 | ) | * | 1,895 | 104 | 1,791 | * | ||||||||||||||||||||||
Adjusted EBITDA | $ | 30,132 | $ | 30,008 | $ | 124 | 0 | % | $ | 78,280 | $ | 91,722 | $ | (13,442 | ) | (15 | )% |
______________
Certain amounts and percentages may reflect rounding adjustments.
*
Comparison of three months ended DecemberMarch 31, 20172020 and 2016
Net sales
Net sales of $205.9$210.7 million for the three months ended DecemberMarch 31, 2017,2020, increased $14.3$5.0 million, or 2%, as compared to the three months ended March 31, 2019. Animal Health increased $9.8 million, while Mineral Nutrition and Performance Products declined $4.5 million and $0.3 million, respectively.
Animal Health
Net sales of $139.0 million for the three months ended March 31, 2020, increased $9.8 million, or 8%. Net sales of MFAs and other declined $1.4 million, or 2%, as increased demand from poultry and cattle customers in the U.S. and Latin America were offset by reduced volumes in China due to African Swine Fever and regulatory changes that took effect January 1, 2020. Net sales of nutritional specialty products grew $6.4 million, or 23%, due to growth of domestic poultry and dairy products and the recent Osprey acquisition, which accounted for approximately half of the nutritional specialties sales growth. Net sales of vaccines increased $4.8 million, or 28%, driven by strong international demand for our poultry vaccines and growth in adjuvant sales.
Mineral Nutrition
Net sales of $56.2 million for the three months ended March 31, 2020, decreased $4.5 million, or 7%, due to lower average selling prices, partially offset by increased overall unit volume. The decline in average selling prices is correlated with the movement of the underlying raw material costs.
Performance Products
Net sales of $15.6 million for the three months ended March 31, 2020, decreased $0.3 million, or 2%, driven by lower volumes of ingredients for personal care products.
27
Gross profit
Gross profit of $69.6 million for the three months ended March 31, 2020, increased $4.7 million, or 7%, as compared to the three months ended DecemberMarch 31, 2016. Animal Health, Mineral Nutrition and Performance Products grew $9.2 million, $2.9 million and $2.2 million, respectively.
Animal Health gross profit increased $3.9$5.4 million due to volume growth higher average selling prices on selectedin nutritional specialty and vaccine products, partially offset by lower volume in MFAs and lower unit costs fromother. Favorable product mix contributed to an improved operating efficiencies.gross profit ratio compared to the prior year. Mineral Nutrition gross profit increased $0.9decreased $0.8 million, due to favorable product mix and higheras the decline in average selling prices partiallyand unfavorable product mix more than offset by higherlower raw material costs. Performance Products gross profit was equal to the prior year as higher average selling prices of copper-based products and higher volumes of copper-based and personal care products were offset by higher products costs of copper-based products.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) of $43.0$48.2 million for the three months ended DecemberMarch 31, 2017,2020, increased $2.1$5.9 million, or 5%14%, as compared to the three months ended DecemberMarch 31, 2016. SG&A for the three months ended December 31, 2016, included $1.7 million in costs relating to the partial settlement of the pension plan. Excluding these costs, SG&A increased $3.8 million or 10%.
Animal Health SG&A increased $3.8$5.0 million, compareddue to the prior year, driven byincreased investments in product development and organization development. A recentmarketing costs, the effect of the Osprey acquisition also contributed to the Animal Healthand increased variable compensation. Mineral Nutrition SG&A increase. Mineral Nutrition andincreased $0.5 million due to employee-related costs. Performance Products SG&A increased less than $0.1 million. Corporate expenses increased $0.3 million each. Corporate was level with last year, as reduced pension costs offset increases in other expenses.
Interest expense, net
Interest expense, net of $3.1$3.3 million for the three months ended DecemberMarch 31, 2017, decreased $0.82020, increased $0.3 million, or 21%11%, as compared to the three months ended DecemberMarch 31, 2016.2019. The increase in interest expense was primarily driven by the increase in outstanding borrowings on the Revolver, partially offset by the benefit of lower variable interest rates. Interest expense decreased $1.0 million compared to the prior year, primarilyincome from our short-term investments declined due to lower interest rates in the new Credit Facilities completed in June 2017. Interest income decreased $0.2 million due to less interest income on deposits in foreign jurisdictions.
Foreign currency (gains) losses, net
Foreign currency (gains) losses, net for the three months ended DecemberMarch 31, 2017,2020, amounted to net gains of $0.3($0.6) million, as compared to $0.5$0.1 million in net gainslosses for the three months ended DecemberMarch 31, 2016. Foreign currency losses in the three months ended December 31, 2017, were primarily due to the movement of the Brazilian, South African and Mexican currencies relative to the U.S. dollar.2019. Foreign currency gains andfrom third party balances were partially offset by foreign currency losses primarily arise from intercompany balances.
Provision (benefit) for income taxes
The provision for income taxes was $14.2$5.2 million and $5.9$4.7 million for the three months ended DecemberMarch 31, 20172020 and 2016,2019, respectively. The effective income tax ratesrate was 27.7% and 23.9% for these periods were 66.8%the three months ended March 31, 2020 and 30.5%,2019, respectively. The provision for income taxes for the three months ended DecemberMarch 31, 20172019, included a $0.5 million benefit from increased foreign tax credits, a $0.2 million benefit from an adjustment to the following discrete items:
Net income
Net income of $7.0$13.5 million for the three months ended DecemberMarch 31, 2017,2020, decreased $6.4$1.3 million, as compared to net income of $13.4$14.8 million for the three months ended DecemberMarch 31, 2016.2019. The decrease was a result of the factors described above, primarily due to a $8.3$1.2 million increasedecline in operating income, increased interest expense of $0.3 million, increased income tax expense.expense of $0.5 million, partially offset by favorable foreign currency gains of $0.7 million. The decline in operating income was driven by increased SG&A costs of $5.9 million, partially offset by $4.7 million of increased gross profit driven by volume growth in our Animal Health segment.
28
Adjusted EBITDA
Adjusted EBITDA of $32.5$30.1 million for the three months ended DecemberMarch 31, 2017,2020, was comparable to the three months ended March 31, 2019. Animal Health Adjusted EBITDA increased $1.3$1.4 million driven by increased gross profit from volume growth, partially offset by increased SG&A costs as a result of investments in product development and marketing and the effect of the Osprey acquisition. Mineral Nutrition Adjusted EBITDA decreased $1.2 million, driven by decreased gross profit and increased SG&A costs. Performance Products Adjusted EBITDA increased $0.2 million, while Corporate expenses increased $0.2 million.
Comparison of nine months ended March 31, 2020 and 2019
Net sales
Net sales of $614.5 million for the nine months ended March 31, 2020, decreased $9.6 million, or 4%2%, as compared to the threenine months ended DecemberMarch 31, 2016.2019. Animal Health Adjusted EBITDA increased $0.4$4.6 million, while Mineral Nutrition and Performance Products declined $13.3 million and $0.9 million, respectively.
Animal Health
Net sales of $404.5 million for the nine months ended March 31, 2020, increased $4.6 million, or 1%. Net sales of MFAs and other declined $14.5 million, or 5%, due to a sales decline of $25.8 million in China due to African Swine Fever and regulatory changes. Net sales growth in other products and increased gross profit, partially offset by increased SG&A. Mineral Nutrition Adjusted EBITDA increased $0.9regions were a partial offset. Net sales of nutritional specialty products grew $13.5 million, or 18%16%, due to favorable product mixvolume growth in poultry and higherdairy products. The recent Osprey acquisition accounted for approximately half of the nutritional specialty sales growth. Net sales of vaccines increased $5.6 million, or 11%, due to international demand and increased market penetration. Excluding a domestic distribution arrangement that was terminated in October 2018, net sales of vaccines would have increased approximately 15%.
Mineral Nutrition
Net sales of $164.5 million for the nine months ended March 31, 2020, decreased $13.3 million, or 7%, driven by lower average selling prices, partially offset by higherincreased unit volumes. The decline in average selling prices is correlated with the movement of the underlying raw material costs.
Performance Products Adjusted EBITDA was similar to the prior year as higher volumes and selling prices were offset by higher product costs. Corporate expenses were consistent with prior year as increases in various expenses were offset by reduced pension costs.
Net sales of $399.3$45.4 million for the sixnine months ended DecemberMarch 31, 2017, increased $19.72020, decreased $0.9 million, or 5%2%. Increased volumes of personal care ingredients were more than offset by lower volumes of copper-based products.
Gross profit
Gross profit of $196.3 million for the nine months ended March 31, 2020, decreased $3.0 million, or 2%, as compared to the sixnine months ended DecemberMarch 31, 2016. Animal Health, Mineral Nutrition and Performance Products grew $13.5 million, $3.4 million and $2.8 million, respectively.
Animal Health gross profit increased $7.1decreased $2.2 million due to volume growthdeclines and higher average selling pricesunfavorable product mix in MFAs and other, partially offset by volume growth in nutritional specialtiesspecialty and vaccines, as well as lower unit costs from improved operating efficiencies.vaccine products. Mineral Nutrition gross profit increased $0.7decreased $0.4 million, due to favorable product mix and higheras declines in average selling prices partially offset by higheroutpaced favorable raw material costs.costs and increased unit volume. Performance Products gross profit decreased $0.3 million due to higher product costs of copper-based products, partially offset by higher average selling prices of copper-based products.$0.2 million.
29
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A&A”) of $84.0$145.2 million for the sixnine months ended DecemberMarch 31, 2017,2020, increased $3.9$17.0 million, or 5%13%, as compared to the sixnine months ended DecemberMarch 31, 2016.2019. SG&A for the sixnine months ended DecemberMarch 31, 2017 and 2016,2020, included $0.4 million and $1.3of restructuring costs, $0.5 million inof acquisition-related transaction costs respectively.and $0.2 million of other acquisition-related costs. SG&A for the sixnine months ended DecemberMarch 31, 2016,2019, included $1.7a $1.5 million in costs relating tobenefit from the partial settlementcancellation of a certain business arrangement. Excluding the pension plan. Excludingeffects of these costs, SG&A increased $6.5$14.5 million, or 8%11%.
Animal Health SG&A increased $6.2$12.5 million, as comparedincluding increased investments in product development, the effect of the Osprey acquisition and increased variable compensation. Mineral Nutrition SG&A increased $0.4 million due to increased employee-related costs. Performance Products SG&A was comparable to the prior year, driven by investments in productyear. Corporate expenses increased $1.5 million due to increased costs of strategic initiatives and organization development. A recent acquisition also contributed to the Animal Health SG&A increase. Mineral Nutrition and Performance Products SG&A increased $0.2 million and
Interest expense, net
Interest expense, net of $6.2$10.0 million for the sixnine months ended DecemberMarch 31, 2017, decreased $1.62020, increased $1.3 million, or 21%15%, as compared to the sixnine months ended DecemberMarch 31, 2016.2019. The increase in interest expense was primarily driven by the increase in outstanding borrowings on the Revolver, partially offset by the benefit of lower variable interest rates. Interest expense decreased $2.2 million comparedincome from short-term investments was comparable to the prior year, primarily due to lower interest rates in the new Credit Facilities completed in June 2017. Interest income decreased $0.6 million due to less interest income on deposits in foreign jurisdictions.
Foreign currency (gains) losses, net
Foreign currency (gains) losses, net for the sixnine months ended DecemberMarch 31, 2017,2020, amounted to net losses of less than $0.1$1.9 million, as compared to $0.2net losses of $0.1 million in net gains for the sixnine months ended DecemberMarch 31, 2016. Foreign2019. Increased foreign currency losses infrom the six months ended December 31, 2017,effects of currency devaluations and intercompany transactions were primarily due to the movement of the Brazilian, South African and Mexican currencies relative to the U.S. dollar. Foreignpartially offset by third-party currency gains and losses primarily arise from intercompany balances.
Provision (benefit) for income taxes
The provision for income taxes was $17.2$11.2 million and $11.3$16.4 million for the sixnine months ended DecemberMarch 31, 20172020 and 2016,2019, respectively. The effective income tax ratesrate was 28.7% and 26.3% for these periods were 42.9%the nine months ended March 31, 2020 and 30.6%,2019, respectively. The provision for income taxes for the sixnine months ended DecemberMarch 31, 20172019, included a $1.0 benefit from increased foreign tax credits, a $0.4 million benefit from adjustments to the following discrete items:
Net income
Net income of $22.9$27.9 million for the sixnine months ended DecemberMarch 31, 2017,2020, decreased $2.7$18.0 million, as compared to net income of $25.6$45.9 million for the sixnine months ended DecemberMarch 31, 2016.2019. The decrease was a result of the factors described above, primarily due to a $5.9$20.1 million increasedecline in operating income, coupled with unfavorable foreign currency movements of $1.8 million and increased interest expense of $1.3 million, partially offset by lower income tax expense.expense of $5.2 million. The decline in operating income was driven by a $3.0 million reduction in gross profit and increased SG&A costs of $17.0 million. The decline in gross profit was attributable to overall product mix in our Animal Health business coupled with the effects of lower average selling prices in the Mineral Nutrition segment. Increased SG&A costs reflect our continued investments in product development and strategic growth initiatives.
30
Adjusted EBITDA
Adjusted EBITDA of $62.6$78.3 million for the sixnine months ended DecemberMarch 31, 2017, increased $1.62020, decreased $13.4 million, or 3%15%, as compared to the sixnine months ended DecemberMarch 31, 2016.2019. Animal Health Adjusted EBITDA increased $1.6decreased $11.4 million or 2%, due to sales growth and increasedthe gross profit partially offsetdecline, coupled with increased SG&A costs. The SG&A increase was driven by increased SG&A.investments in product development and strategic growth initiatives and the effects of the Osprey acquisition. Mineral Nutrition Adjusted EBITDA declined $0.7 million as a result of lower gross profit and increased $0.6 million, or 7%, due to favorable mix
Analysis of financial condition, liquidity and capital resources
Net increase (decrease) in cash and cash equivalents was:
| | | Six Months | | |||||||||||||||
For the Periods December 31 | | | 2017 | | | 2016 | | | Change | | |||||||||
| | | (in thousands) | | |||||||||||||||
Cash provided by/(used in): | | | | | |||||||||||||||
Operating activities | | | | $ | 37,093 | | | | | $ | 47,733 | | | | | $ | (10,640) | | |
Investing activities | | | | | (51,567) | | | | | | (10,765) | | | | | | (40,802) | | |
Financing activities | | | | | (1,544) | | | | | | (31,048) | | | | | | 29,504 | | |
Effect of exchange-rate changes on cash and cash equivalents | | | | | 120 | | | | | | (305) | | | | | | 425 | | |
Net increase/(decrease) in cash and cash equivalents | | | | $ | (15,898) | | | | | $ | 5,615 | | | | | $ | (21,513) | | |
|
Nine Months | ||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | Change | |||||||||
(in thousands) | ||||||||||||
Cash provided by/(used in): | ||||||||||||
Operating activities | $ | 55,471 | $ | 32,290 | $ | 23,181 | ||||||
Investing activities | (110,857 | ) | (28,876 | ) | (81,981 | ) | ||||||
Financing activities | 25,951 | 3,892 | 22,059 | |||||||||
Effect of exchange-rate changes on cash | ||||||||||||
and cash equivalents | (1,390 | ) | (598 | ) | (792 | ) | ||||||
Net increase/(decrease) in cash and cash equivalents | $ | (30,825 | ) | $ | 6,708 | $ | (37,533 | ) |
_______________
Certain amounts may reflect rounding adjustments.
Net cash provided (used) by operating activities was comprised of:
| | | Six Months | | |||||||||||||||
For the Periods December 31 | | | 2017 | | | 2016 | | | Change | | |||||||||
| | | (in thousands) | | |||||||||||||||
EBITDA | | | | $ | 59,598 | | | | | $ | 57,417 | | | | | $ | 2,181 | | |
Adjustments | | | | | |||||||||||||||
Acquisition-related cost of goods sold | | | | | 1,671 | | | | | | — | | | | | | 1,671 | | |
Acquisition-related accrued compensation | | | | | 924 | | | | | | 840 | | | | | | 84 | | |
Acquisition-related transaction costs | | | | | 400 | | | | | | 1,274 | | | | | | (874) | | |
Pension settlement cost | | | | | — | | | | | | 1,702 | | | | | | (1,702) | | |
Foreign currency (gains) losses, net | | | | | 2 | | | | | | (214) | | | | | | 216 | | |
Interest paid | | | | | (5,595) | | | | | | (7,651) | | | | | | 2,056 | | |
Income taxes paid | | | | | (9,708) | | | | | | (6,305) | | | | | | (3,403) | | |
Changes in operating assets and liabilities and other items | | | | | (9,799) | | | | | | 1,944 | | | | | | (11,743) | | |
Cash used for acquisition-related transaction costs | | | | | (400) | | | | | | (1,274) | | | | | | 874 | | |
Net cash provided (used) by operating activities | | | | $ | 37,093 | | | | | $ | 47,733 | | | | | $ | (10,640) | | |
|
Nine Months | ||||||||||||
For the Periods Ended March 31 | 2020 | 2019 | Change | |||||||||
(in thousands) | ||||||||||||
EBITDA | $ | 73,357 | $ | 91,430 | $ | (18,073 | ) | |||||
Adjustments | ||||||||||||
Restructuring costs | 425 | — | 425 | |||||||||
Stock-based compensation | 1,694 | 1,694 | — | |||||||||
Acquisition-related cost of goods sold | 280 | — | 280 | |||||||||
Acquisition-related transaction costs | 462 | — | 462 | |||||||||
Acquisition other, net | 167 | — | 167 | |||||||||
Other, net | — | (1,506 | ) | 1,506 | ||||||||
Foreign currency (gains) losses, net | 1,895 | 104 | 1,791 | |||||||||
Interest paid, net | (9,171 | ) | (7,691 | ) | (1,480 | ) | ||||||
Income taxes paid | (15,045 | ) | (13,169 | ) | (1,876 | ) | ||||||
Changes in operating assets and liabilities and other items | 1,869 | (38,572 | ) | 40,441 | ||||||||
Cash used for acquisition-related transaction costs | (462 | ) | — | (462 | ) | |||||||
Net cash provided (used) by operating activities | $ | 55,471 | $ | 32,290 | $ | 23,181 |
_______________
Certain amounts may reflect rounding adjustments.
Certain amounts in the prior period have been reclassified to conform to the current year presentation
31
Operating activities
Operating activities provided $55.5 million of net cash provided by operating activities was $37.1 million for the sixnine months ended DecemberMarch 31, 2017.2020. Cash provided by net income adjusted for the effect ofand non-cash charges,items, including depreciation and amortization, was partially offset by $9.8 million of cash used$55.0 million. Cash provided in the ordinary course of business for changes in operating assets and liabilities and other items. Increased inventories used $10.8items was $0.5 million. Inventory provided $6.6 million of cash from timing of domestic sales and purchases. Accounts receivable provided $4.0 million of cash due to the timing of sales, purchasescollections in international regions. Cash uses included $4.2 million for accounts payable and production. Accounts receivable used $5.1$2.7 million of cashfor accrued expenses and other liabilities, due to the timing of salesdomestic payments. Other current assets and collections in international regions. A $7.5other assets used $1.8 million source of cash from increased accounts payable was primarily relatedand $1.3 million, respectively, due to the timing of inventory purchases. Seasonality was a significant reasonpayments in international regions.
Investing activities
Investing activities used $110.9 million of net cash for the increases in inventories and accounts payable.
Financing activities
Financing activities provided $26.0 million of net cash for the acquisition of a business. Other investing activities used $0.7 million of cash.
Liquidity and capital resources
We believe our cash on hand, our operating cash flows and our financing arrangements, including the availability of borrowings under the Revolver and foreign credit lines, will be sufficient to support our futureongoing cash needs. Our operating plan projectsWe are aware of the current and potential future effects of COVID-19 on the financial markets. At this time, we expect adequate liquidity throughoutfor at least the year.next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will be able to comply with the terms of the covenants under the Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise.arise, including those caused by COVID-19. There can be no assurance that a challenging economic environment or an economic downturn would not affect our liquidity or our ability to obtain future financing.financing or fund operations or investment opportunities. In addition, our debt covenants may restrict our ability to invest.
Certain relevant measures of our liquidity and capital resources follow:
As of | | | December 31, 2017 | | | June 30, 2017 | | | Change | | |||||||||
| | | (in thousands, except ratios) | | |||||||||||||||
Cash and cash equivalents and short-term investments | | | | $ | 67,185 | | | | | $ | 56,083 | | | | | $ | 11,102 | | |
Working capital | | | | | 211,484 | | | | | | 198,036 | | | | | | 13,448 | | |
Ratio of current assets to current liabilities | | | | | 2.80:1 | | | | | | 2.81:1 | | | |
March 31, | June 30, | |||||||
As of | 2020 | 2019 | ||||||
(in thousands, except ratios) | ||||||||
Cash and cash equivalents and short-term investments | $ | 81,748 | $ | 81,573 | ||||
Working capital | 212,363 | 242,902 | ||||||
Ratio of current assets to current liabilities | 2.47:1 | 2.71:1 |
We define working capital as total current assets (excluding cash and cash equivalents and short-term investments) less total current liabilities (excluding current portion of long-term debt). We calculate the ratio of current assets to current liabilities based on this definition.
At DecemberMarch 31, 2017,2020, we had $71.0$146.0 million in outstanding borrowings under the Revolver. We had outstanding letters of credit and other commitments of $4.6$2.7 million, leaving $174.4$101.3 million available for borrowings and letters of credit.
32
We currently intend to pay quarterly dividends of $0.10 per share, representing $16.1 million annually on our Class A and Class B common stock, subject to approval from the Board of Directors. We declared and paid a cash dividend of $0.10 per share on Class A and Class B common stock during the three months ended December 31, 2017. On February 5, 2018,May 4, 2020, our Board of Directors declared a cash dividend of $0.10$0.12 per share on each share of our Class A and Class B common stock outstanding on the record date of March 7, 2018,June 3, 2020, payable on June 24, 2020. Our future ability to pay dividends will depend upon our results of operations, financial condition, capital requirements, our ability to obtain funds from our subsidiaries and other factors that our Board of Directors deems relevant. Additionally, the terms of our current and any future agreements governing our indebtedness could limit our ability to pay dividends or make other distributions.
As of March 28, 2018.
Contractual obligations
As of DecemberMarch 31, 2017,2020, there were no material changes in payments due under contractual obligations from those disclosed in the Annual Report on Form 10-K for the year ended June 30, 2017.
Off-balance sheet arrangements
We do not currently use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.
In the ordinary course of business, we may indemnify our counterparties against certain liabilities that may arise. These indemnifications typically pertain to environmental matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to certain restrictions and limitations.
Adjusted EBITDA
Adjusted EBITDA is an alternative view of performance used by management as our primary operating measure, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted EBITDA to portray the results of our operations prior to considering certain income statement elements. We have defined EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes, and (iii) depreciation and amortization. We have defined Adjusted EBITDA as EBITDA plus (a) (income) loss from, and disposal of, discontinued operations, (b) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.
The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:
Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. We present Adjusted EBITDA is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure
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is that it provides a view of our operations without including all events during a period, such as the depreciation of property, plant and equipment or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies.
Certain significant items
Adjusted EBITDA is calculated prior to considering certain items. We evaluate such items on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual or non-operational nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis. An example
We consider acquisition-related activities and business restructuring costs related to productivity and cost saving initiatives, including employee separation costs, to be unusual items that we do not expect to occur as part of an unusual item is the lossour normal business on extinguishment of debt incurred in fiscal year 2017.a regular basis. We consider foreign currency gains and losses to be non-operational because they arise principally from intercompany transactions and are largely non-cash in nature.
New accounting standards
We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), effective July 1, 2019.
For discussion of new accounting standards, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies and New Accounting Standards.”
Critical Accounting Policies
Critical accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Significant estimates include depreciation and amortization periods of long-lived and intangible assets, recoverability of long-lived and intangible assets and goodwill, realizability of deferred income tax and value-added tax assets, assessment of the incremental borrowing rates and reasonably certain renewal periods associated with our lease agreements, legal and environmental matters and actuarial assumptions related to our pension plans. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain. The pandemic is expected to affect our sales, expenses, reserves and allowances, manufacturing operations, research and development costs and employee-related amounts. The pandemic may have significant economic impact on local, regional, national and international customers and markets. New information that may emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
Our significant accounting policies are described in the notes to the consolidated financial statements included in the Annual Report. As of DecemberMarch 31, 2017,2020, there have been no material changes to any of the critical accounting policies contained therein.
Forward-Looking Statements
This reportQuarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “believe,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements.
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All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Examples of such risks and uncertainties include:
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While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, we are exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates and commodity prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. We use, from time to time, foreign currency contracts and interest rate swaps as a means of hedging exposure to foreign currency risks and fluctuating interest rates, respectively. We also utilize, on a limited basis, certain commodity derivatives, primarily on copper used in manufacturing processes, to hedge the cost of anticipated purchase or supply requirements. We do not utilize derivative instruments for trading or speculative purposes. We do not hedge our exposure to market risks in a manner that completely eliminates the effects of changing market conditions on earnings, cash flows and fair values. We monitor the financial stability and credit standing of our major counterparties.
For financial market risks related to changes in interest rates and foreign currency exchange rates, and commodity prices, reference is made to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures about Market Risk” section in the Annual Report and to the notes to the consolidated financial statements included therein. ThereAs of the date of this report, there were no material changes in the Company’s financial market risks from the risks disclosed in the Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation as of DecemberMarch 31, 2017,2020, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of such period, our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, as described in Management’s Report on Internal Control over Financial Reporting in “Item 9A. Controls and Procedures” in the Annual Report on Form 10-K for the year ended June 30, 2017.2019.
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Material Weakness Remediation Plan
We arecontinue to make further progress in the process of implementing a broad range of changes to our internal control over financial reporting to remediate the material weaknesses that existed as of June 30, 2017.described in this item. Our actions to address the material weaknesses have included the design and implementation of additional formal accounting policies and procedures to ensure transactions are properly initiated, recorded, processed, reported, appropriately authorized and approved. Also, our efforts to ensure maintenance of the appropriate level of segregation of duties includes restricting access to key financial systems and records to appropriate users. We are determiningcontinue to make improvements by reducing the number of segregation of duties conflicts and continue to evaluate the extent it is necessary to limit access by and modify responsibilities of certain personnel, as well as designing and implementing additional user access controls and compensating
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the three months ended DecemberMarch 31, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. | Legal Proceedings |
Information required by this Item is incorporated herein by reference to “Notes to the Consolidated Financial Statements—Commitments and Contingencies” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Risk Factors” section in the Annual Report, which could materially affect our business, financial condition or future results.
Risks Factors Relating to our Business
A pandemic, epidemic, or outbreak of an infectious disease in humans, such as COVID-19, may materially and adversely affect our business and our financial results.
In late 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, suppliers, consumer sentiment, economies and financial markets, and have led to an economic downturn in many countries in which we operate. Disruptions due to COVID-19 or other similar health epidemics could extend to our manufacturing facilities and our supply chain, as well as to our customers and end users of our products who raise animals or who process meat, milk, eggs and seafood for human consumption. The continued spread of COVID-19 or other disease epidemics may result in a period of economic and business disruption and could have a material adverse impact on our business and financial results.
Workforce limitations and travel restrictions resulting from pandemics, epidemics and disease outbreaks, and related government actions such as quarantines, shelter-in-place and “social distancing” requirements, travel restrictions and other similar government orders, may impact many aspects of our business. Our operations could be negatively impacted if a significant percentage of our workforce is unable to work or if we must alter the way in which we conduct our business because of illness or governmental restrictions. These negative impacts could include disruptions or slowdowns in manufacturing of our products, disruptions in our logistics and supply chain operations such as difficulty in importing and exporting our products or raw materials, and difficulties related to the transport of our products. In addition, we may take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including temporarily requiring employees to work remotely if possible, suspending all non-essential travel worldwide for our employees, and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect our business. These limitations and restrictions could also negatively affect operations at our third-party manufacturers and suppliers, which could result in delays or disruptions in the supply of the products and raw materials that they manufacture for us and increase the costs of such products and raw materials, both of which could ultimately negatively impact sales of our products.
The ongoing economic downturn and quarantines due to COVID-19 could lead to decreased demand for protein, which may lead to end users of our products reducing their herd or flock sizes. Protein processing plants may reduce or temporarily cease operations due to quarantines and “social distancing” requirements, which may also result in end users of our products reducing herd or flock sizes due to lack of processing capacity. In addition, demand for protein could be reduced because consumers may associate human health fears related to COVID-19 with animal diseases, food, food production or food animals, whether or not it is scientifically valid. Reductions in demand for animal protein resulting from these factors could in turn affect the demand for our products in a manner that has a significant adverse effect on our financial condition and results of operations.
The COVID-19 pandemic continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or similar health epidemics is highly uncertain and subject to change. We cannot presently predict the full scope and severity of any potential disruptions to our business, operating results, cash flows and/or financial condition, but we expect that the resulting adverse impact on our business and financial results could be material.
There were no other material changes in the Company’s risk factors from the risks disclosed in the Annual Report.
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Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
Exhibit 101.INS* XBRL Instance Document
Exhibit 101.SCH* XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB* XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
_________________
* | Furnished with this Quarterly Report. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Phibro Animal Health Corporation | |||||||||||
May 7, 2020 | By: | /s/ Jack C. Bendheim Jack C. Bendheim | |||||||||
By: | /s/ Richard G. Johnson Richard G. Johnson |
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