FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended DecemberMarch 31, 20172021
OR
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 | (I.R.S. Employer | ||||
incorporation or organization) | Identification No.) | ||||
| | ||||
Glenpointe Centre East, | 07666-6712 | ||||
300 Frank W. Burr Boulevard, Suite 21 | (Zip Code) | ||||
Teaneck, New Jersey | | ||||
(Address of Principal Executive Offices) | |
(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 | | 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 JanuaryApril 29, 2018,2021, there were 19,589,88920,337,574 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
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |||||||
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2
Item 1. Financial Statements
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 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (unaudited) | ||||||||||
| | (in thousands, except per share amounts) | ||||||||||
Net sales | | $ | 211,729 | | $ | 210,739 | | $ | 613,072 | | $ | 614,471 |
Cost of goods sold | |
| 142,564 | |
| 141,188 | |
| 411,523 | |
| 418,153 |
Gross profit | |
| 69,165 | |
| 69,551 | |
| 201,549 | |
| 196,318 |
Selling, general and administrative expenses | |
| 49,033 | |
| 48,232 | |
| 145,839 | |
| 145,243 |
Operating income | |
| 20,132 | |
| 21,319 | |
| 55,710 | |
| 51,075 |
Interest expense, net | |
| 2,933 | |
| 3,263 | |
| 8,957 | |
| 10,049 |
Foreign currency (gains) losses, net | |
| (583) | |
| (608) | |
| (3,590) | |
| 1,895 |
Income before income taxes | |
| 17,782 | |
| 18,664 | |
| 50,343 | |
| 39,131 |
Provision for income taxes | |
| 5,621 | |
| 5,163 | |
| 13,079 | |
| 11,221 |
Net income | | $ | 12,161 | | $ | 13,501 | | $ | 37,264 | | $ | 27,910 |
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Net income per share | |
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basic | | $ | 0.30 | | $ | 0.33 | | $ | 0.92 | | $ | 0.69 |
diluted | | $ | 0.30 | | $ | 0.33 | | $ | 0.92 | | $ | 0.69 |
Weighted average common shares outstanding | |
| | |
| | |
| | |
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basic | |
| 40,483 | |
| 40,454 | |
| 40,463 | |
| 40,454 |
diluted | |
| 40,504 | |
| 40,504 | |
| 40,504 | |
| 40,504 |
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 | | |
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| | Three Months | | Nine Months | ||||||||
For the Periods Ended March 31 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (unaudited) | ||||||||||
| | (in thousands) | ||||||||||
Net income | | $ | 12,161 | | $ | 13,501 | | $ | 37,264 | | $ | 27,910 |
Change in fair value of derivative instruments | |
| 5,749 | |
| (9,995) | |
| 10,567 | |
| (9,999) |
Foreign currency translation adjustment | |
| (9,122) | |
| (23,873) | |
| (4,345) | |
| (28,493) |
Unrecognized net pension gains | |
| 144 | |
| 129 | |
| 416 | |
| 387 |
(Provision) benefit for income taxes | |
| (1,473) | |
| 2,457 | |
| (2,745) | |
| 2,394 |
Other comprehensive income (loss) | |
| (4,702) | |
| (31,282) | |
| 3,893 | |
| (35,711) |
Comprehensive income (loss) | | $ | 7,459 | | $ | (17,781) | | $ | 41,157 | | $ | (7,801) |
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 | | |
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| | March 31, | | June 30, | ||
As of |
| 2021 |
| 2020 | ||
|
| (in thousands, except share and per share amounts) | ||||
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 49,103 | | $ | 36,343 |
Short-term investments | |
| 44,000 | |
| 55,000 |
Accounts receivable, net | |
| 135,562 | |
| 126,522 |
Inventories, net | |
| 206,258 | |
| 196,659 |
Other current assets | |
| 36,795 | |
| 37,313 |
Total current assets | |
| 471,718 | |
| 451,837 |
Property, plant and equipment, net | |
| 150,188 | |
| 148,109 |
Intangibles, net | |
| 64,434 | |
| 70,997 |
Goodwill | |
| 52,679 | |
| 52,679 |
Other assets | |
| 65,998 | |
| 60,478 |
Total assets | | $ | 805,017 | | $ | 784,100 |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
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Current portion of long-term debt | | $ | 23,437 | | $ | 18,750 |
Accounts payable | |
| 62,803 | |
| 66,091 |
Accrued expenses and other current liabilities | |
| 82,651 | |
| 72,397 |
Total current liabilities | |
| 168,891 | |
| 157,238 |
Revolving credit facility | |
| 176,000 | |
| 169,000 |
Long-term debt | |
| 180,786 | |
| 199,257 |
Other liabilities | |
| 63,419 | |
| 70,401 |
Total liabilities | |
| 589,096 | |
| 595,896 |
Commitments and contingencies (Note 8) | |
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|
Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,337,574 and 20,287,574 shares issued and outstanding at March 31, 2021, and June 30, 2020, respectively. 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at March 31, 2021, and June 30, 2020 | |
| 4 | |
| 4 |
Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, 0 shares issued and outstanding | |
| — | | | — |
Paid-in capital | |
| 136,654 | |
| 135,525 |
Retained earnings | |
| 205,755 | |
| 183,060 |
Accumulated other comprehensive loss | |
| (126,492) | |
| (130,385) |
Total stockholders’ equity | |
| 215,921 | |
| 188,204 |
Total liabilities and stockholders’ equity | | $ | 805,017 | | $ | 784,100 |
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 | | |
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| | | | | | |
| | Nine Months | ||||
For the Periods Ended March 31 |
| 2021 |
| 2020 | ||
| | (unaudited) | ||||
| | (in thousands) | ||||
OPERATING ACTIVITIES |
| |
|
| |
|
Net income | | $ | 37,264 | | $ | 27,910 |
Adjustments to reconcile net income to | |
| | |
| |
net cash provided (used) by operating activities: | |
| | |
| |
Depreciation and amortization | |
| 24,042 | |
| 24,177 |
Amortization of debt issuance costs | |
| 662 | |
| 662 |
Stock-based compensation | |
| 1,129 | |
| 1,694 |
Acquisition-related items | |
| 0 | |
| 480 |
Deferred income taxes | |
| 18 | |
| (1,279) |
Foreign currency (gains) losses, net | |
| (7,293) | |
| 676 |
Other | |
| 389 | |
| 620 |
Changes in operating assets and liabilities, net of business acquisitions: | |
| | |
| |
Accounts receivable, net | |
| (8,410) | |
| 4,009 |
Inventories, net | |
| (8,091) | |
| 6,584 |
Other current assets | |
| 3,746 | |
| (1,841) |
Other assets | |
| (1,019) | |
| (1,369) |
Accounts payable | |
| (751) | |
| (4,159) |
Accrued expenses and other liabilities | |
| 3,550 | |
| (2,693) |
Net cash provided by operating activities | |
| 45,236 | |
| 55,471 |
INVESTING ACTIVITIES | |
|
| |
|
|
Purchases of short-term investments | |
| (50,000) | |
| (55,000) |
Maturities of short-term investments | |
| 61,000 | |
| 24,000 |
Capital expenditures | | | (22,226) | | | (23,969) |
Business acquisitions | |
| - | |
| (54,549) |
Other, net | |
| (164) | |
| (1,339) |
Net cash used by investing activities | |
| (11,390) | |
| (110,857) |
FINANCING ACTIVITIES | |
| | |
| |
Revolving credit facility borrowings | |
| 135,000 | |
| 194,000 |
Revolving credit facility repayments | |
| (128,000) | |
| (144,000) |
Payments of long-term debt and other | |
| (14,063) | |
| (9,486) |
Dividends paid | |
| (14,569) | |
| (14,563) |
Net cash provided (used) by financing activities | |
| (21,632) | |
| 25,951 |
Effect of exchange rate changes on cash | |
| 546 | |
| (1,390) |
Net increase (decrease) in cash and cash equivalents | |
| 12,760 | |
| (30,825) |
Cash and cash equivalents at beginning of period | |
| 36,343 | |
| 57,573 |
Cash and cash equivalents at end of period | | $ | 49,103 | | $ | 26,748 |
The accompanying notes are an integral part of these consolidated financial statements
6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONTENTSCHANGES IN STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | |
| | Shares of | | | | | | | | | | | | | | Other | | | | |
| | Common | | Common | | Preferred | | Paid-in | | Retained | | Comprehensive | | | | |||||
|
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Total | ||||||
| | (unaudited) | ||||||||||||||||||
| | (in thousands, except share amounts) | ||||||||||||||||||
As of June 30, 2020 |
| 40,453,608 | | $ | 4 | | $ | — | | $ | 135,525 | | $ | 183,060 | | $ | (130,385) | | $ | 188,204 |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | 12,302 | | | (3,805) | | | 8,497 |
Dividends declared ($0.12 per share) |
| — |
| | — |
| | — |
| | — |
| | (4,854) |
| | — |
| | (4,854) |
Stock-based compensation expense |
| — |
| | — |
| | — |
| | 565 |
| | — |
| | — |
| | 565 |
As of September 30, 2020 | | 40,453,608 | | $ | 4 | | $ | — | | $ | 136,090 | | $ | 190,508 | | $ | (134,190) | | $ | 192,412 |
Comprehensive income | | — | | | — | | | — | | | — | | | 12,801 | | | 12,400 | | | 25,201 |
Dividends declared ($0.12 per share) | | — | | | — | | | — | | | — | | | (4,855) | | | — | | | (4,855) |
Stock-based compensation expense | | — | | | — | | | — | | | 564 | | | — | | | — | | | 564 |
As of December 31, 2020 |
| 40,453,608 | | $ | 4 | | $ | — | | $ | 136,654 | | $ | 198,454 | | $ | (121,790) | | $ | 213,322 |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | 12,161 | | | (4,702) | | | 7,459 |
Shares issued pursuant to stock incentive plan | | 50,000 | | | — | | | — | | | — | | | — | | | — | | | — |
Dividends declared ($0.12 per share) | | — | | | — | | | — | | | — | | | (4,860) | | | — | | | (4,860) |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — |
As of March 31, 2021 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 136,654 | | $ | 205,755 | | $ | (126,492) | | $ | 215,921 |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| | | | Accumulated | | | | |
| | Shares of | | | | | | | | | | | | | | Other | | | | |
| | Common | | Common | | Preferred | | Paid-in | | Retained | | Comprehensive | | | | |||||
|
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Total | ||||||
| | (unaudited) | ||||||||||||||||||
| | (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 | | — | | | — | | | — | | | — | | | 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 |
The accompanying notes are an integral part of these consolidated financial statements
7
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, 20172021 and 2016,2020, 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, 20172020 (the “Annual Report”), filed with the Securities and Exchange Commission on August 30, 201726, 2020 (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, 2017,2020, 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 uncertain. Although vaccines are now available, distribution efforts vary widely country-by-country and state-by-state. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the pandemic. The pandemic may have significant economic impacts on customers, suppliers and markets. The pandemic may affect our future revenues, expenses, reserves and allowances, manufacturing operations and employee-related costs. 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.
Our significant accounting policies are described in the notes to the consolidated financial statements included in our Annual Report. As of DecemberMarch 31, 2017,2021, there have been no material changes to any of the significant accounting policies contained therein, except for the addition of our policy on short-term investments.
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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income | | $ | 12,161 | | $ | 13,501 | | $ | 37,264 | | $ | 27,910 |
Weighted average number of shares – basic | |
| 40,483 | |
| 40,454 | |
| 40,463 | |
| 40,454 |
Dilutive effect of stock options and restricted stock units | |
| 21 | |
| 50 | |
| 41 | |
| 50 |
Weighted average number of shares – diluted | |
| 40,504 | |
| 40,504 | |
| 40,504 | |
| 40,504 |
Net income per share | |
| | |
|
| |
| | |
|
|
basic | | $ | 0.30 | | $ | 0.33 | | $ | 0.92 | | $ | 0.69 |
diluted | | $ | 0.30 | | $ | 0.33 | | $ | 0.92 | | $ | 0.69 |
New Accounting Standards
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-12, Derivatives2020-04 and Hedging2021-01, Reference Rate Reform (Topic 815): Targeted Improvements848), provide optional expedients and exceptions to AccountingGAAP guidance, if certain criteria are met, for Hedging Activities simplifiescontracts, hedging relationships and derivative instruments that reference the applicationLondon Interbank Offered Rate (LIBOR) and other interbank offered rates expected to be discontinued or modified by rate reform. The overall purpose of hedge accounting guidance and improvesTopic 848 is to ease the financial reporting ofburdens related to the expected market transition to alternative reference rates. These ASUs may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. We continue to better portray the economic results of an entity’s risk management activities in its financial statements. We elected early adoption of this guidance and applied the qualitative method, and it did not have a material effect on our consolidated financial statements. For additional details, see “—Derivatives.”
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. ASU 2019-12 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. ASU 2018-14 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 disclosures.
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. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019. The adoption did not have a material effect on our consolidated financial statements.
3. Statements of Operations—Additional Information
Disaggregated revenue, deferred revenue and customer payment terms
We develop, manufacture and market a broad range of products for the recognition of revenue from contracts with customers.food animals including poultry, swine, beef and dairy cattle, and aquaculture. The underlying principle isproducts help prevent, control and treat diseases, enhance nutrition to identify the performance obligations of a contract, allocate the revenuehelp improve health and contribute to each performance obligationbalanced mineral nutrition. The animal health and thenmineral nutrition products are sold directly to recognize revenue when the company satisfies a specific performance obligationintegrated poultry, swine and cattle integrators and through commercial animal feed manufacturers, wholesalers and distributors. The animal health industry and demand for many of the contract. ASU 2014-09animal health products in a particular region are affected by changing disease pressures and its amendmentsby weather conditions, as product usage follows varying weather patterns and seasons. Our operations are effective for ourprimarily focused in regions where the majority of livestock production is 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 adoptionin large commercial farms.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | 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 | | |
|
Animal Health
The Animal Health business develops, manufactures and markets animal healthproducts in three main categories:
● | MFAs and Other: MFAs and other products primarily consist of concentrated medicated products that are administered through animal feeds, commonly referred to as Medicated Feed Additives (“MFAs”). Specific product classifications include antibacterials, which inhibit the growth of pathogenic bacteria that cause bacterial infections in animals; anticoccidials, which inhibit the growth of coccidia (parasites) that damage the intestinal tract of animals; and other related products. |
● | Nutritional Specialties: Nutritional specialty products enhance nutrition to help improve health and performance in areas such as immune system function and digestive health. |
● | Vaccines: Our vaccines are primarily focused on preventing diseases in poultry and swine. They protect animals from either viral or bacterial disease challenges. We develop, manufacture and market conventionally licensed and autogenous vaccine products and produce and market adjuvants to vaccine manufacturers. We have developed and market an innovative and proprietary delivery platform for vaccines. |
Mineral Nutrition
The Mineral Nutrition business is comprised of formulations and concentrations of trace minerals such as zinc, manganese, copper, iron, and other compounds, with a focus on customers in North America. Our 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 accountedmanufacture 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 specialty ingredients for use in the acquisitionpersonal 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 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Animal Health |
| |
|
| |
| | |
|
| |
|
MFAs and other | | $ | 78,530 | | $ | 82,670 | | $ | 238,810 | | $ | 249,659 |
Nutritional specialties | |
| 36,978 | |
| 34,636 | |
| 105,972 | |
| 98,131 |
Vaccines | |
| 18,872 | |
| 21,668 | |
| 54,205 | |
| 56,723 |
Total Animal Health | | $ | 134,380 | | $ | 138,974 | | $ | 398,987 | | $ | 404,513 |
Mineral Nutrition | |
| 58,153 | |
| 56,200 | |
| 163,750 | |
| 164,534 |
Performance Products | |
| 19,196 | |
| 15,565 | |
| 50,335 | |
| 45,424 |
Total | | $ | 211,729 | | $ | 210,739 | | $ | 613,072 | | $ | 614,471 |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net Sales by Region
| | | | | | | | | | | | |
| | Three Months | | Nine Months | ||||||||
For the Periods Ended March 31 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
United States | | $ | 129,370 | | $ | 126,826 | | $ | 370,446 | | $ | 368,230 |
Latin America and Canada | |
| 37,386 | |
| 40,284 | |
| 115,808 | |
| 119,730 |
Europe, Middle East and Africa | |
| 27,802 | |
| 31,958 | |
| 84,959 | |
| 83,311 |
Asia Pacific | |
| 17,171 | |
| 11,670 | |
| 41,859 | |
| 43,200 |
Total | | $ | 211,729 | | $ | 210,739 | | $ | 613,072 | | $ | 614,471 |
Net sales by region are based on country of destination.
Deferred revenue was $3,815 and $4,570 as a business combination in accordance with ASC 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. Net assets acquired included accounts receivable, inventories, property, plantof March 31, 2021, and equipment, intangible assets, goodwill, accounts payable, accruedJune 30, 2020, respectively. Accrued expenses and other liabilities. Goodwillcurrent liabilities included $1,325 and $1,109 of the total deferred revenue as of March 31, 2021, and June 30, 2020, 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 deductibleinclude 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 income tax purposes. We may further refineaccounts receivable is approximately 60 days after the determinationrevenue is recognized.
Interest Expense and Depreciation and Amortization
| | | | | | | | | | | | |
| | Three Months | | Nine Months | ||||||||
For the Periods Ended March 31 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest expense, net | | | | | | | | | | | | |
Term loan | | $ | 1,857 | | $ | 1,888 | | $ | 5,796 | | $ | 5,967 |
Revolving credit facility | |
| 938 | |
| 1,400 | |
| 3,017 | |
| 4,361 |
Amortization of debt issuance costs | |
| 221 | |
| 220 | |
| 662 | |
| 662 |
Other | |
| 65 | |
| 153 | |
| 191 | |
| 441 |
Interest expense | |
| 3,081 | |
| 3,661 | |
| 9,666 | |
| 11,431 |
Interest income | |
| (148) | |
| (398) | |
| (709) | |
| (1,382) |
| | $ | 2,933 | | $ | 3,263 | | $ | 8,957 | | $ | 10,049 |
| | | | | | | | | | | | |
| | Three Months | | Nine Months | ||||||||
For the Periods Ended March 31 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Depreciation and amortization | |
| | |
|
| |
| | |
|
|
Depreciation of property, plant and equipment | | $ | 5,763 | | $ | 5,824 | | $ | 17,479 | | $ | 17,395 |
Amortization of intangible assets | |
| 2,155 | |
| 2,325 | |
| 6,563 | |
| 6,659 |
Amortization of other assets | |
| — | |
| 99 | |
| 0 | |
| 123 |
| | $ | 7,918 | | $ | 8,248 | | $ | 24,042 | | $ | 24,177 |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 | | |
|
4. Balance Sheets—Additional Information
| | | | | | |
| | March 31, | | June 30, | ||
As of |
| 2021 |
| 2020 | ||
Inventories | | | | | |
|
Raw materials | | $ | 61,457 | | $ | 73,837 |
Work-in-process | | | 11,587 | | | 8,881 |
Finished goods | | | 133,214 | | | 113,941 |
| | $ | 206,258 | | $ | 196,659 |
| | | | | | |
|
| March 31, |
| June 30, | ||
As of |
| 2021 |
| 2020 | ||
Goodwill roll-forward |
| |
| |
|
|
Balance at beginning of period |
| $ | 52,679 | | $ | 27,348 |
Osprey acquisition |
| | 0 | |
| 25,331 |
Balance at end of period |
| $ | 52,679 | | $ | 52,679 |
| | | | | | |
|
| March 31, | | June 30, | ||
As of |
| 2021 |
| 2020 | ||
Other assets | | | | | | |
ROU operating lease assets | | $ | 31,842 |
| $ | 22,873 |
Deferred income taxes | |
| 8,245 |
| | 11,430 |
Deposits | |
| 5,024 |
| | 5,158 |
Insurance investments | |
| 5,891 |
| | 5,801 |
Equity method investments | |
| 4,290 |
| | 4,219 |
Fair value of derivative | | | 2,705 | | | — |
Indemnification asset | |
| 0 |
| | 3,000 |
Debt issuance costs | |
| 638 |
| | 1,021 |
Other | |
| 7,363 |
| | 6,976 |
| | $ | 65,998 |
| $ | 60,478 |
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$2,583 equity investment are currently idled; we haveidle. We concluded the investment is not currently impaired based on expected future operating cash flows and/orand disposal value.
| | | | | | |
|
| March 31, |
| June 30, | ||
As of | | 2021 | | 2020 | ||
Accrued expenses and other current liabilities |
| |
|
| |
|
Employee-related | | $ | 30,823 | | $ | 25,825 |
Current operating lease liabilities | |
| 6,354 | |
| 6,439 |
Commissions and rebates | | | 6,545 | | | 5,782 |
Professional fees | |
| 6,284 | |
| 5,766 |
Income and other taxes | | | 3,466 | | | 3,821 |
Derivatives | | | 5,325 | | | 5,757 |
Contingent consideration | |
| 4,840 | |
| — |
Restructuring costs | |
| 1,135 | |
| 2,314 |
Insurance-related | |
| 1,360 | |
| 1,272 |
Other | |
| 16,519 | |
| 15,421 |
| | $ | 82,651 | | $ | 72,397 |
In connection with productivity and cost-saving initiatives in the Animal Health segment, we incurred business restructuring costs related to the termination of a contract manufacturing agreement and employee separation charges.
12
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) | | |
|
The following table summarizes the activity of the restructuring liability during the nine months ended March 31, 2021:
| | | |
Liability balance at June 30, 2020 |
| $ | 2,860 |
Charges | |
| 0 |
Payments | |
| (1,725) |
Liability balance at March 31, 2021 | | $ | 1,135 |
As of March 31, 2021, $800 and $335 of the restructuring liability balance related to contract termination and employee separation costs, respectively.
| | | | | | |
|
| March 31, |
| June 30, | ||
As of |
| 2021 |
| 2020 | ||
Other liabilities | | | | | | |
Long-term operating lease liabilities | | $ | 27,007 | | $ | 17,276 |
Long-term and deferred income taxes | |
| 12,366 | | | 11,680 |
Supplemental retirement benefits, deferred compensation and other | | | 8,463 | | | 8,067 |
International retirement plans | |
| 5,360 | |
| 5,499 |
U.S. pension plan | |
| 1,349 | |
| 3,563 |
Derivatives | | | 261 | | | 7,691 |
Contingent consideration | | | 0 | | | 4,840 |
Restructuring costs | |
| 0 | |
| 546 |
Other long-term liabilities | |
| 8,613 | |
| 11,239 |
| | $ | 63,419 | | $ | 70,401 |
| | | | | | |
| | March 31, |
| June 30, | ||
As of |
| 2021 |
| 2020 | ||
Accumulated other comprehensive income (loss) | | |
| | |
|
Derivative instruments | | $ | (2,881) | | $ | (13,448) |
Foreign currency translation adjustment | |
| (108,083) | |
| (103,738) |
Unrecognized net pension losses | |
| (22,155) | |
| (22,571) |
Benefit for income taxes on derivative instruments | |
| 615 | |
| 3,256 |
Benefit for incomes taxes on long-term intercompany investments | | | 8,166 | | | 8,166 |
Provision for income taxes on net pension losses | | | (2,154) | | | (2,050) |
| | $ | (126,492) | | $ | (130,385) |
5. Debt
Term Loans and Revolving Credit Facilities
2021 Credit Agreement – Subsequent Event
In April 2021, we entered into an amended and restated credit agreement (the “Credit“2021 Credit Agreement”), under which we have a term A loan in an aggregate initial principal amount of $300,000 (the “2021 Term A Loan”) and a revolving credit facility (the “Revolver”), whereunder which we can borrow up to $250,000, subject to the terms of the agreement (the “2021 Revolver” and together with the 2021 Term A Loan, the “2021 Credit Facilities”). The 2021 Credit Agreement amends and restates the credit agreement entered into in June 2017 (the “2017 Credit Agreement”). The 2021 Credit Facilities were used to refinance all of the Term A loans and revolving credit facility amounts outstanding under the 2017 Credit Agreement and to pay fees and expenses of the transaction. The 2021 Revolver contains a letter of credit facility. The 2021 Credit Facilities mature in April 2026. Refer to “Note 12 – Subsequent Event” for further information.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2017 Credit Agreement
At March 31, 2021, under the 2017 Credit Agreement, we had a term A loan with an aggregate initial principal amount of $250,000 (the “Term“2017 Term A Loan,”Loan”) and a revolving credit facility under which we could borrow up to $250,000, subject to the terms of the agreement (the “2017 Revolver” and together with the Revolver,2017 Term A Loan, the “Credit“2017 Credit Facilities”). The interest rate per annum applicable to the loans under the 2017 Credit Facilities havewas based on a fluctuating rate of interest plus an applicable marginsrate 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 arerates were based on the First Lien Net Leverage Ratio, as defined in the 2017 Credit Agreement. The liborLIBOR rate iswas subject to a floor of 0.00%.
The 2017 Credit Agreement required, among other things, the maintenance ofcompliance with financial covenants that permitted: (i) a maximum First Lien Net Leverage Ratio of 4.00:1.00 and (ii) a minimum consolidated interest coverage ratio of 3.00:1.00, each calculated on a trailing four quarter basis, and containfour-quarter basis. The 2017 Credit Agreement contained an acceleration clause should an event of default (as defined in the agreement governing the2017 Credit Facilities)Agreement) occur. As of DecemberMarch 31, 2017,2021, we were in compliance with the covenants of the Credit Facilities. The Credit Facilities mature on June 29, 2022.
As of DecemberMarch 31, 2017,2021, we had $71,000$176,000 in borrowings under the 2017 Revolver and had outstanding letters of credit of $4,606,$2,709, leaving $174,394$71,291 available for borrowings and letters of credit under the 2017 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.
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 concurrent within June 2022. We designated the Credit Agreement. The interest rate swap has been designated as a highly effective cash flow hedge. For additional details, see “—“Note 9 — Derivatives.”
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 0.62%, plus the applicable rate. In July 2022, this agreement increases to a notional principal amount of $300,000 through June 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.62%, plus the applicable rate. We designated the interest rate swaps as highly effective cash flow hedges. For additional details, see “Note 9 — Derivatives.”
The 2017 and 2020 interest rate swap agreements will continue to remain in place on our interest obligations associated with the 2021 Credit Facilities.
As of March 31, 2021, the interest rates for the 2017 Revolver and the 2017 Term A Loan were 2.14% and 3.26%, respectively. The weighted-average interest rates for the 2017 Revolver were 2.25% and 3.44% for the nine months ended March 31, 2021 and 2020, respectively. The weighted-average interest rates for the 2017 Term A Loan were 3.36% and 3.45% for the nine months ended March 31, 2021 and 2020, respectively.
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 | | 2021 | | 2020 | ||
2017 Term A Loan due June 2022 | | $ | 204,687 | | $ | 218,750 |
Unamortized debt issuance costs | |
| (464) | |
| (743) |
| |
| 204,223 | |
| 218,007 |
Less: current maturities | |
| (23,437) | |
| (18,750) |
| | $ | 180,786 | | $ | 199,257 |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Leases
Our lease portfolio consists of real estate, vehicles and equipment ROU assets, classified as operating leases. During the three months ended March 31, 2021, we amended and extended the lease agreement for our corporate office, increasing the value of our lease commitments. The remaining non-cancelable lease terms, inclusive of renewal options reasonably certain of exercise, range from one to 15 years.
The following table summarizes the ROU assets and the related lease liabilities recorded on the consolidated balance sheet:
| | | | | | | | |
| | March 31, | | June 30, | | | ||
As of |
| 2021 |
| 2020 |
| Balance Sheet Classification | ||
Assets: |
| |
|
| |
|
|
|
Operating lease ROU assets | | $ | 31,842 | | $ | 22,873 |
| Other Assets |
| | | | | | | | |
Liabilities: | |
|
| |
|
|
|
|
Current portion | |
| 6,354 | |
| 6,439 |
| Accrued expenses and |
Non-current portion | |
| 27,007 | |
| 17,276 |
| Other liabilities |
Total operating lease liabilities | | $ | 33,361 | | $ | 23,715 |
|
|
| | | | | |
As of |
| March 31, 2021 |
| June 30, 2020 | |
Weighted average remaining lease term (in years) - ROU operating leases |
| 8.61 |
| 6.49 | |
Weighted average discount rate - ROU operating leases |
| 4.07 | % | 4.40 | % |
The following table summarizes the composition of net lease expense:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | March 31, | | | March 31, | |||||||
|
| 2021 |
| 2020 | | 2021 |
| 2020 | ||||
| | | | | | | | | | | | |
Operating lease expense | | $ | 1,919 | | $ | 1,885 | | $ | 5,901 | | | 5,647 |
Variable lease expense | |
| 317 | | | 361 | |
| 928 | | | 992 |
Short-term lease expense | |
| 219 | | | 196 | |
| 622 | | | 613 |
Total lease expense | | $ | 2,455 | | $ | 2,442 | | $ | 7,451 | | $ | 7,252 |
The following table includes supplemental cash flow information:
| | | | | | |
| | Nine Months Ended | ||||
| | March 31, | ||||
| | 2021 |
| 2020 | ||
Operating cash flows used for ROU operating leases | | $ | 6,131 | | $ | 5,529 |
Right of use assets obtained in exchange for new operating lease liabilities | | $ | 13,882 | | $ | 8,591 |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At March 31, 2021, maturities of future lease liabilities were:
| | | |
For the Years Ending June 30, |
| | |
2021 | | $ | 2,047 |
2022 | |
| 7,047 |
2023 | |
| 5,143 |
2024 | |
| 4,101 |
2025 | |
| 3,320 |
2026 and thereafter | |
| 18,357 |
Total lease payments | |
| 40,015 |
Less: interest | |
| 6,654 |
Total operating lease liabilities | | $ | 33,361 |
There were no significant future payment obligations related to executed lease agreements for which the related lease had not yet commenced as of March 31, 2021. Our lease agreements do not contain any material restrictive covenants or residual guarantee provisions.
7. 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$372 and $1,129$364 during the three and six months ended DecemberMarch 31, 2017,2021 and 2020, respectively, and $445$1,297 and $1,047$1,204 during the three and sixnine months ended DecemberMarch 31, 2016,2021 and 2020, respectively. Mr. Bendheim has sole authority to vote shares of our stock owned by BFI Co., LLC, an investment vehicle of the Bendheim family.
8. The provision was necessary to eliminate the income taxes remaining in AOCI after all related foreign currency derivatives had matured and were completely cleared from AOCI;
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.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 uponon 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”("Phibro-Tech"). The EPA has entered into a settlement agreement with a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling ("OPOG") to remediate the contaminated groundwater that has migrated from the Omega Chemical Site in accordance with a general remedy selected by EPA. 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 defense costs. Furthermore, a nearby property owner has filed a complaint in the Superior Courtmembers 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 hasOPOG 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$4,305 and $7,211 at December$5,254 as of March 31, 2017,2021, and June 30, 2017,2020, 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
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Claims and Litigation
PAHC and its subsidiaries are party to a number ofvarious 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.
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 “—“Note 10 — 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 concurrent within June 2022. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the Credit Agreement.floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.62% 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 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.62% plus the applicable rate. The forecasted transactions are probable of occurring, and the interest rate swap hasswaps have been designated as a highly effective cash flow hedge.hedges.
We entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The fair valueindividual option contracts mature monthly through February 2023. The forecasted inventory purchases are probable of occurring and the interest rate swap agreement is recordedindividual option contracts were designated as an asset or liability with a corresponding amount included in accumulatedhighly effective cash flow hedges.
The following table details the Company’s outstanding derivatives that are designated and effective as cash flow hedges as of March 31, 2021:
| | | | | | | | | | | | | |
| | | | Notional | | | | Fair value as of | |||||
| | | | Amount at | | Consolidated | | March 31, | | June 30, | |||
Instrument |
| Hedge |
| March 31, 2021 |
| Balance Sheet |
| 2021 |
| 2020 | |||
Options |
| Brazilian Real calls |
| R$ | 132,000 |
| (1) |
| $ | 431 | | $ | 126 |
Options | | Brazilian Real puts | | R$ | 132,000 | | (1) | | $ | (2,710) | | $ | (3,900) |
Swap | | Interest rate swaps | | $ | 300,000 | | (2) | | $ | (602) | | $ | (9,674) |
(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, 2021, and June 30, 2020, accrued expenses and other current liabilities included net fair values of $2,018 and $2,477, respectively. As of March 31, 2021, and June 30, 2020, other liabilities included net fair values of $261 and $1,297, respectively. |
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(2) | We classify the current and noncurrent amounts associated with our interest rate swaps based on the expected timing of the cash flows. As of March 31, 2021, and June 30, 2020, accrued expenses and other current liabilities included net fair values of $3,307 and $3,280, respectively. As of March 31, 2021, other assets included net fair values of $2,705.As of June 30, 2020, other liabilities included net fair values of $6,394. |
The following tables show the effects of derivatives on the consolidated statements of operations and other comprehensive income (loss).
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Consolidated Statement | ||||
| | | | | | | | | | Gain (Loss) recognized in consolidated | | of Operations line | ||||||||||
For the Three Months Ended March 31 | | Gain (Loss) recorded in OCI | | statements of operations | | item total | ||||||||||||||||
|
| |
| | |
| | |
| Consolidated |
| | |
| | |
| | |
| | |
| | | | | | | | |
| Statement of | | | | | | | | | | | | |
Instrument | | Hedge |
| 2021 |
| 2020 |
| Operations |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||
Options |
| Brazilian Real puts and calls | | $ | (836) | | $ | (3,945) |
| Cost of goods sold | | $ | (384) | | $ | (8) | | $ | 142,564 | | $ | 141,188 |
Swap |
| Interest rate swap | | $ | 6,585 | | $ | (6,050) |
| Interest expense, net | | $ | (825) | | $ | 59 | | $ | 2,933 | | $ | 3,263 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Consolidated Statement | ||||
| | | | | | | | | | Gain (Loss) recognized in | | of Operations line | ||||||||||
For the Nine Months Ended March 31 | | Gain (Loss) recorded in OCI | | consolidated statements of operations | | item total | ||||||||||||||||
|
| |
| | |
| | |
| Consolidated |
| | |
| | |
| | |
| | |
| | | | | | | | | | Statement | | | | | | | | | | | | |
Instrument |
| Hedge |
| 2021 |
| 2020 |
| of Operations |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||
Options |
| Brazilian Real puts and calls | | $ | 1,495 | | $ | (3,886) |
| Cost of goods sold | | $ | (521) | | $ | (116) | | $ | 411,523 | | $ | 418,153 |
Swap |
| Interest rate swap | | $ | 9,072 | | $ | (6,113) |
| Interest expense, net | | $ | (2,466) | | $ | 228 | | $ | 8,957 | | $ | 10,049 |
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 $1,826 related to matured contracts were recorded as a component of inventory as of March 31, 2021. We anticipate the net losses included in inventory will be recognized in cost of goods sold within the next twelve months.
10. Fair Value Measurements
Short-term investments
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.
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.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Debt
We record debt, including term loans and revolver balances, at amortized cost 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 and our evaluation of estimated market prices.
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) | | |
| | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | June 30, 2020 | ||||||||||||||
As of |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||
Short-term investments | | $ | 44,000 | | $ | — | | $ | — | | $ | 55,000 | | $ | 0 | | $ | 0 |
Foreign currency derivatives | | $ | — | | $ | (2,279) | | $ | — | | $ | 0 | | $ | (3,774) | | $ | 0 |
Interest rate swaps | | $ | — | | $ | (602) | | $ | — | | $ | 0 | | $ | (9,674) | | $ | 0 |
Contingent consideration on acquisitions | | $ | — | | $ | — | | $ | (4,840) | | $ | 0 | | $ | 0 | | $ | (4,840) |
There were 0 transfers between levels during the periods presented.
The table below provides a summary ofcontingent consideration on acquisitions is the changesminimum amount payable in accordance with the fair value of Level 3 assets (liabilities):
11. Business Segments
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.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.
| | | 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 | | |
|
| | | 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 | | |
|
| | | | | | | | | | | | | |
|
| Three Months |
| Nine Months |
| ||||||||
For the Periods Ended March 31 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | | ||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health | | $ | 134,380 | | $ | 138,974 | | $ | 398,987 | | $ | 404,513 | |
Mineral Nutrition | |
| 58,153 | |
| 56,200 | |
| 163,750 | |
| 164,534 | |
Performance Products | |
| 19,196 | |
| 15,565 | |
| 50,335 | |
| 45,424 | |
Total segments | | $ | 211,729 | | $ | 210,739 | | $ | 613,072 | | $ | 614,471 | |
| | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | |
Animal Health | | $ | 6,457 | | $ | 6,665 | | $ | 19,476 | | $ | 19,760 | |
Mineral Nutrition | |
| 646 | |
| 629 | |
| 2,042 | |
| 1,871 | |
Performance Products | |
| 416 | |
| 509 | |
| 1,284 | |
| 1,303 | |
Total segments | | $ | 7,519 | | $ | 7,803 | | $ | 22,802 | | $ | 22,934 | |
| | | | | | | | | | | | | |
Adjusted EBITDA | | | | | | | | | | | | | |
Animal Health | | $ | 30,962 | | $ | 34,635 | | $ | 94,412 | | $ | 93,534 | |
Mineral Nutrition | |
| 5,232 | |
| 4,055 | |
| 12,464 | |
| 11,214 | |
Performance Products | |
| 2,929 | |
| 1,506 | |
| 7,167 | |
| 3,815 | |
Total segments | | $ | 39,123 | | $ | 40,196 | | $ | 114,043 | | $ | 108,563 | |
Reconciliation of income before income taxes to Adjusted EBITDA | | | | | | | | | | | | | |
Income before income taxes | | $ | 17,782 | | $ | 18,664 | | $ | 50,343 | | $ | 39,131 | |
Interest expense, net | |
| 2,933 | |
| 3,263 | |
| 8,957 | |
| 10,049 | |
Depreciation and amortization – Total segments | |
| 7,519 | |
| 7,803 | |
| 22,802 | |
| 22,934 | |
Depreciation and amortization – Corporate | |
| 399 | |
| 445 | |
| 1,240 | |
| 1,243 | |
Corporate costs | | | 11,073 | | | 10,064 | | | 33,162 | | | 30,283 | |
Stock-based compensation | |
| — | |
| 565 | |
| 1,129 | |
| 1,694 | |
Restructuring costs | |
| — | |
| 0 | |
| — | |
| 425 | |
Acquisition-related cost of goods sold | |
| — | |
| 0 | |
| — | |
| 280 | |
Acquisition-related transaction costs | |
| — | |
| 0 | |
| — | |
| 462 | |
Acquisition-related other | |
| — | |
| 0 | |
| — | |
| 167 | |
Foreign currency (gains) losses, net | |
| (583) | |
| (608) | |
| (3,590) | |
| 1,895 | |
Adjusted EBITDA – Total segments | | $ | 39,123 | | $ | 40,196 | | $ | 114,043 | | $ | 108,563 | |
| | | | | | |
| | March 31, |
| June 30, | ||
|
| 2021 |
| 2020 | ||
Identifiable assets |
| |
|
| |
|
Animal Health | | $ | 565,958 | | $ | 560,663 |
Mineral Nutrition | |
| 70,269 | |
| 65,686 |
Performance Products | |
| 35,291 | |
| 31,016 |
Total segments | |
| 671,518 | |
| 657,365 |
Corporate | |
| 133,499 | |
| 126,735 |
Total | | $ | 805,017 | | $ | 784,100 |
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 and $3,719 as of December 31, 2017 and June 30, 2017, respectively. The Performance Products segment includes an investment in an equity method investee of $624 and $516 as of December 31, 2017 and June 30, 2017, respectively. Corporate assets include cash and cash equivalents, certainshort-term investments, debt issuance costs, income tax relatedtax-related assets and certain other assets.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. Subsequent Event
In April 2021, we entered into the 2021 Credit Agreement under which we have the 2021 Term A Loan in an aggregate initial principal amount of $300,000 and the 2021 Revolver under which we can borrow up to $250,000, subject to the terms of the agreement. The 2021 Credit Agreement amends and restates the 2017 Credit Agreement. The 2021 Credit Facilities were used to refinance the outstanding 2017 Term A Loan and 2017 Revolver balances and to pay fees and expenses of the transaction. The 2021 Revolver contains a letter of credit facility.
The 2021 Credit Facilities mature in April 2026. The 2021 Term A Loan is repayable in quarterly installments as set forth below, with the balance payable at maturity.
| | | |
Payment Date |
| Quarterly Installment | |
June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022 | | $ | 1,875 |
June 30, 2022, September 30, 2022, December 31, 2022, March 31, 2023 | | $ | 3,750 |
June 30, 2023, September 30, 2023, December 31, 2023, March 31, 2024 | | $ | 3,750 |
June 30, 2024, September 30, 2024, December 31, 2024, March 31, 2025 | | $ | 5,625 |
June 30, 2025, September 30, 2025, December 31, 2025, March 31, 2026 | | $ | 7,500 |
Borrowings under the 2021 Credit Facilities bear interest at rates based on the First Lien Net Leverage Ratio, as defined in the 2021 Credit Agreement. The interest rate per annum applicable to the loans under the Credit Facilities will be based on a fluctuating rate of interest equal to the sum of an applicable rate and, at the Company’s election from time to time, either (1) a base rate determined by reference to the highest of (a) the “prime rate” as publicly announced from time to time (b) the federal funds effective rate plus 0.50% and (c) one-month LIBOR plus 1.00%, or (2) a Eurocurrency rate determined by reference to LIBOR with a term as selected by the Company, of one day or one, three or six months (or twelve months or any shorter amount of time if consented to by all of the lenders under the applicable loan). The Credit Facilities have applicable rates equal to (x) 1.00%, in the case of base rate loans, and 2.00%, in the case of LIBOR loans, if the First Lien Net Leverage Ratio is greater than or equal to 3.50:1.00, (y) 0.75%, in the case of base rate loans, and 1.75%, in the case of LIBOR loans, if the 2021 First Lien Net Leverage Ratio is less 3.50:1.00 but greater than or equal to 2.25:1.00, and (z) 0.50%, in the case of base rate loans, and 1.50%, in the case of LIBOR loans, if the First Lien Net Leverage Ratio is less than 2.25:1.00.
The applicable rates under the 2021 Credit Agreement compare with the 2017 Credit Agreement as follows:
| | | | | | | | | | | |
First Lien Net | | 2021 Credit Agreement | | | | 2017 Credit Agreement |
| ||||
Leverage Ratio | | Applicable rates* | | | | Applicable rates* | | ||||
|
| Base Rate loans |
| LIBOR loans |
| |
| Base Rate loans |
| LIBOR loans | |
≥3.50:1.00 |
| 1.00% | | 2.00% | | ≥3.00:1.00 |
| 1.00% | | 2.00% | |
≥2.25:1.00 and <3.50:1.00 |
| 0.75% | | 1.75% | | ≥2.25:1.00 and <3.00:1.00 |
| 0.75% | | 1.75% | |
<2.25:1.00 |
| 0.50% | | 1.50% | | <2.25:1.00 |
| 0.50% | | 1.50% | |
* Range of applicable rates, depending upon the First Lien Net Leverage ratio
The Company must pay a quarterly commitment fee based upon the product of (i) the applicable rate as described below and (ii) the actual daily amount by which the aggregate revolving commitments exceed the sum of (A) the outstanding revolving credit loans under the 2021 Revolver and (B) obligations associated with any outstanding letters of credit in the applicable quarterly period. The Company also must pay the letter of credit issuer fees based upon the amount available to be drawn under such letters of credit.
The applicable rate under the Credit Facilities with respect to the commitment fee described in the immediately preceding paragraph is equal to (x) 0.30% if the First Lien Net Leverage Ratio is greater than or equal to 3.50:1.00, (y) 0.25% if the First Lien Net Leverage Ratio is less 3.50:1.00 but greater than or equal to 2.25:1.00, and (z) 0.20% if the First Lien Net Leverage Ratio is less than 2.25:1.00.
22
TABLE OF CONTENTSTable of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The 2021 Credit Agreement is subject to substantially the same affirmative and negative covenants and events of default as the 2017 Credit Agreement, subject to certain exceptions and thresholds. The 2021 Credit Facilities are secured by substantially the same collateral as the collateral that secured the obligations under the 2017 Credit Agreement, subject to certain exceptions and thresholds.
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
The global food and uncertainties
Phibro is an integral participant in the public perceiveessential 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 supply 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 have experienced some cost increases from the safety measures implemented to protect our employees as well as from supply chain disruptions. We have maintained headcount and compensation at or above constant levels. We continue to monitor sales trends, cash flow and liquidity.
The uncertainties surrounding the COVID-19 pandemic remain fluid. We are unable to predict the supply, distribution or effectiveness of COVID-19 vaccines and hence the impact on the economies where we manufacture and sell our products. While we continue to adapt our operations and mitigate the risks to human health related toand challenges posed by COVID-19, the consumptiondemand 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 certainto operate their businesses and production facilities. Our business and future operational results may be impacted by government mandated response efforts, supply chain and manufacturing disruptions, increased volatility in raw material costs and decreased demand due to changes in our customer purchasing patterns and preferences. We are unable to predict with confidence the nature and timing of when any of these events may occur and the effects COVID-19 will have on our MFA products. In particular, there is increased focus, primarily inbusiness, our consolidated results and the United States, onbroader economic environment going forward. We will continue to evaluate the use of medically important antimicrobials, as defined by the FDA. Medically important antimicrobials (“MIAs”) include classes that are prescribed in animalnature and human health and are listed in the Appendixextent 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 foreffects of COVID-19 on our business, consolidated results of operations, financial condition, and production of food products derived from animals that utilize our MIA productsliquidity. For additional considerations and in turn, demand for our MIA products. Livestock producers may experience 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 useCOVID-19 on our business, please refer to “Risk Factors” in Item 1A. of our products in animals, including position statements by livestock producersAnnual Report.
24
Trends 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.
In April 2016, the FDAFood and Drug Administration ("FDA") began initial steps to withdraw approval of Mecadox (carbadox)carbadox via a regulatory process known as a Notice of Opportunity for Hearing ("NOOH"), due to concerns that certain residues from the product may persist in animal tissues for longer than previously determined. This initial action byThe NOOH process provided Phibro with an opportunity to defend the FDA does not prohibit the sale or usesafety of Mecadox in the United States. In July 2016, we submitted our data, analyses and informationcarbadox prior to the FDA taking final steps to remove carbadox from the market. Over the next four years, as part of an ongoing process of responding to the inquiries from the FDA's Center for Veterinary Medicine ("CVM"), we provided extensive and meticulous research and data that we believeconfirmed the safety of carbadox. In March 2018, the FDA indefinitely stayed the withdrawal proceedings. In July 2020, the FDA announced it does not agree with Phibro's scientific conclusions that carbadox is safe under the current conditions of use. Instead of proceeding to a hearing on the scientific concerns raised in the 2016 NOOH, consistent with the normal regulatory procedure, the FDA announced that it was withdrawing the current NOOH, and issuing a proposed order to review the regulatory method for carbadox. The approved regulatory method determines if there are residues of carcinogenic concern in animal tissue at the time of slaughter. If the order is finalized, the FDA has indicated it plans to issue a new NOOH proposing the withdrawal of carbadox from the market because of a lack of an approved regulatory method.
In September 2020, Phibro commented on the proposed order, reiterating the safety of carbadox and the appropriateness of the regulatory method, and further offered to work with the CVM to generate additional data to support the continued safe use of Mecadox. The timingexisting regulatory method or select a suitable alternative regulatory method. Phibro disagrees with the agency's actions and has submitted a request to the FDA Office of the FDA’s responseCommissioner that the agency continue the NOOH process it started in 2016 and proceed with a hearing to our submissionreview the substantial body of data supporting the safety of carbadox. There is not subject to a predetermined deadline. Shouldno defined timeline for the conclusion of this matter.Should we be unable to successfully defend the safety of the product, the loss of Mecadoxcarbadox sales would have a negativean adverse effect on theour financial condition and results of our operations.
25
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 |
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change | | | ||||||||||
| | (in thousands, except per share amounts and percentages) | | | ||||||||||||||||||||
Net sales |
| $ | 211,729 |
| $ | 210,739 |
| $ | 990 |
| 0 | % | $ | 613,072 |
| $ | 614,471 |
| $ | (1,399) |
| (0) | % | |
Gross profit | |
| 69,165 | |
| 69,551 | |
| (386) | | (1) | % |
| 201,549 | |
| 196,318 | |
| 5,231 | | 3 | % | |
Selling, general and administrative expenses | |
| 49,033 | |
| 48,232 | |
| 801 | | 2 | % |
| 145,839 | |
| 145,243 | |
| 596 | | 0 | % | |
Operating income | |
| 20,132 | |
| 21,319 | |
| (1,187) | | (6) | % |
| 55,710 | |
| 51,075 | |
| 4,635 | | 9 | % | |
Interest expense, net | |
| 2,933 | |
| 3,263 | |
| (330) | | (10) | % |
| 8,957 | |
| 10,049 | |
| (1,092) | | (11) | % | |
Foreign currency (gains) losses, net | |
| (583) | |
| (608) | |
| 25 | | * | |
| (3,590) | |
| 1,895 | |
| (5,485) | | * | | |
Income before income taxes | |
| 17,782 | |
| 18,664 | |
| (882) | | (5) | % |
| 50,343 | |
| 39,131 | |
| 11,212 | | 29 | % | |
Provision for income taxes | |
| 5,621 | |
| 5,163 | |
| 458 | | 9 | % |
| 13,079 | |
| 11,221 | |
| 1,858 | | 17 | % | |
Net income | | $ | 12,161 | | $ | 13,501 | | $ | (1,340) | | (10) | % | $ | 37,264 | | $ | 27,910 | | $ | 9,354 | | 34 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share | |
|
| |
| | |
| |
| | |
|
| |
| | |
| | | | |
|
basic | | $ | 0.30 | | $ | 0.33 | | $ | (0.03) | | | | $ | 0.92 | | $ | 0.69 | | $ | 0.23 | | | | |
diluted | | $ | 0.30 | | $ | 0.33 | | $ | (0.03) | | | | $ | 0.92 | | $ | 0.69 | | $ | 0.23 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding | |
|
| |
| | |
|
| | | |
|
| |
| | |
|
| | | |
|
basic | |
| 40,483 | |
| 40,454 | |
|
| | | |
| 40,463 | |
| 40,454 | |
|
| | | |
|
diluted | |
| 40,504 | |
| 40,504 | |
|
| | | |
| 40,504 | |
| 40,504 | |
|
| | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Ratio to net sales | |
|
| |
| | |
|
| | | |
|
| |
| | |
|
| | | |
|
Gross profit | |
| 32.7 | % |
| 33.0 | % |
|
| | | |
| 32.9 | % |
| 31.9 | % |
|
| | | |
|
Selling, general and administrative expenses | |
| 23.2 | % |
| 22.9 | % |
|
| | | |
| 23.8 | % |
| 23.6 | % |
|
| | | |
|
Operating income | |
| 9.5 | % |
| 10.1 | % |
|
| | | |
| 9.1 | % |
| 8.3 | % |
|
| | | |
|
Income before income taxes | |
| 8.4 | % |
| 8.9 | % |
|
| | | |
| 8.2 | % |
| 6.4 | % |
|
| | | |
|
Net income | |
| 5.7 | % |
| 6.4 | % |
|
| | | |
| 6.1 | % |
| 4.5 | % |
| | | | |
|
Effective tax rate | |
| 31.6 | % |
| 27.7 | % |
|
| | | |
| 26.0 | % |
| 28.7 | % |
|
| | | |
|
Certain amounts and percentages may reflect rounding adjustments.
* | Calculation not meaningful |
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 descriptionsmeasures.”
26
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 |
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change | | ||||||||||
| | (in thousands, except percentages) | |||||||||||||||||||||
Net sales |
| |
|
| |
|
| |
|
|
| | |
|
| |
|
| |
|
| | |
MFAs and other | | $ | 78,530 | | $ | 82,670 | | $ | (4,140) |
| (5) | % | $ | 238,810 | | $ | 249,659 | | $ | (10,849) | | (4) | % |
Nutritional specialties | |
| 36,978 | |
| 34,636 | |
| 2,342 |
| 7 | % |
| 105,972 | |
| 98,131 | |
| 7,841 | | 8 | % |
Vaccines | |
| 18,872 | |
| 21,668 | |
| (2,796) |
| (13) | % |
| 54,205 | |
| 56,723 | |
| (2,518) | | (4) | % |
Animal Health | |
| 134,380 | |
| 138,974 | |
| (4,594) |
| (3) | % |
| 398,987 | |
| 404,513 | |
| (5,526) | | (1) | % |
Mineral Nutrition | |
| 58,153 | |
| 56,200 | |
| 1,953 |
| 3 | % |
| 163,750 | |
| 164,534 | |
| (784) | | (0) | % |
Performance Products | |
| 19,196 | |
| 15,565 | |
| 3,631 |
| 23 | % |
| 50,335 | |
| 45,424 | |
| 4,911 | | 11 | % |
Total | | $ | 211,729 | | $ | 210,739 | | $ | 990 |
| 0 | % | $ | 613,072 | | $ | 614,471 | | $ | (1,399) | | (0) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| | | |
Animal Health | | $ | 30,962 | | $ | 34,635 | | $ | (3,673) |
| (11) | % | $ | 94,412 | | $ | 93,534 | | $ | 878 | | 1 | % |
Mineral Nutrition | |
| 5,232 | |
| 4,055 | |
| 1,177 |
| 29 | % |
| 12,464 | |
| 11,214 | |
| 1,250 | | 11 | % |
Performance Products | |
| 2,929 | |
| 1,506 | |
| 1,423 |
| 94 | % |
| 7,167 | |
| 3,815 | |
| 3,352 | | 88 | % |
Corporate | |
| (11,073) | |
| (10,064) | |
| (1,009) |
| 10 | % |
| (33,162) | |
| (30,283) | |
| (2,879) | | 10 | % |
Total | | $ | 28,050 | | $ | 30,132 | | $ | (2,082) |
| (7) | % | $ | 80,881 | | $ | 78,280 | | $ | 2,601 | | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA ratio to segment net sales | |
|
| |
| | |
|
|
|
| |
|
| |
| | |
|
| | | |
Animal Health | |
| 23.0 | % |
| 24.9 | % |
|
|
|
| |
| 23.7 | % |
| 23.1 | % |
|
| | | |
Mineral Nutrition | |
| 9.0 | % |
| 7.2 | % |
|
|
|
| |
| 7.6 | % |
| 6.8 | % |
|
| | | |
Performance Products | |
| 15.3 | % |
| 9.7 | % |
|
|
|
| |
| 14.2 | % |
| 8.4 | % |
|
| | | |
Corporate(1) | |
| (5.2) | % |
| (4.8) | % |
|
|
|
| |
| (5.4) | % |
| (4.9) | % |
|
| | | |
Total(1) | |
| 13.2 | % |
| 14.3 | % |
|
|
|
| |
| 13.2 | % |
| 12.7 | % |
|
| | | |
(1) | Reflects ratio to total net sales |
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 |
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change | | | ||||||||||
| | (in thousands, except percentages) | | |||||||||||||||||||||
Net income | | $ | 12,161 | | $ | 13,501 | | $ | (1,340) |
| (10) | % | $ | 37,264 | | $ | 27,910 | | $ | 9,354 |
| 34 | % | |
Interest expense, net | | | 2,933 | | | 3,263 | | | (330) | | (10) | % | | 8,957 | | | 10,049 | | | (1,092) | | (11) | % | |
Provision for income taxes | | | 5,621 | | | 5,163 | | | 458 | | 9 | % | | 13,079 | | | 11,221 | | | 1,858 | | 17 | % | |
Depreciation and amortization | | | 7,918 | | | 8,248 | | | (330) | | (4) | % | | 24,042 | | | 24,177 | | | (135) | | (1) | % | |
EBITDA | | | 28,633 | | | 30,175 | | | (1,542) | | (5) | % | | 83,342 | | | 73,357 | | | 9,985 | | 14 | % | |
Stock-based compensation | | | — | | | 565 | | | (565) | | * | | | 1,129 | | | 1,694 | | | (565) | | (33) | % | |
Restructuring costs | | | — | | | — | | | — | | * | | | — | | | 425 | | | (425) | | * | | |
Acquisition-related cost of goods sold |
| | — |
| | — |
| | — |
| * | | | — |
| | 280 |
| | (280) | | * | | |
Acquisition-related transaction costs |
| | — | | | — | | | — | | * | | | — | | | 462 | | | (462) | | * | | |
Acquisition-related other, net |
| | — |
| | — |
| | — |
| * | | | — |
| | 167 |
| | (167) | | * | | |
Foreign currency (gains) losses, net | | | (583) |
| | (608) |
| | 25 |
| * | | | (3,590) |
| | 1,895 |
| | (5,485) | | * | | |
Adjusted EBITDA | | $ | 28,050 | | $ | 30,132 | | $ | (2,082) |
| (7) | % | $ | 80,881 | | $ | 78,280 | | $ | 2,601 | | 3 | % | |
Certain amounts and percentages may reflect rounding adjustments.
*
27
Comparison of three months ended DecemberMarch 31, 20172021 and 2016
Net sales
Net sales of $205.9$211.7 million for the three months ended DecemberMarch 31, 2017,2021, increased $14.3$1.0 million, or less than 1%, as compared to the three months ended March 31, 2020. Animal Health decreased $4.6 million, while Mineral Nutrition and Performance Products increased $2.0 million and $3.6 million, respectively.
Animal Health
Net sales of $134.4 million for the three months ended March 31, 2021, declined $4.6 million, or 3%. Net sales of MFAs and other decreased $4.1 million, or 5%, driven by lower international demand, primarily poultry products in the Latin America region, as well as timing of certain domestic customer orders. Net sales of nutritional specialty products increased $2.3 million, or 7%, principally due to international volume growth in dairy products. Net sales of vaccines declined $2.8 million, or 13%, as challenging economic conditions in Eastern Europe more than offset domestic volume growth and increased demand in the Asia Pacific region.
Mineral Nutrition
Net sales of $58.2 million for the three months ended March 31, 2021, increased $2.0 million, or 3%, driven by increased average selling prices. The increase in average selling prices is correlated with the movement of the underlying raw material costs.
Performance Products
Net sales of $19.2 million for the three months ended March 31, 2021, increased $3.6 million, or 23%. The increase was driven by strong demand for copper-based products coupled with favorable product pricing correlated with underlying raw material costs.
Gross profit
Gross profit of $69.2 million for the three months ended March 31, 2021, decreased $0.4 million, or 1%, as compared to the three months ended March 31, 2020. Gross margin decreased 30 basis points to 32.7% of net sales for the three months ended March 31, 2021, as compared to 33.0% for the three months ended March 31, 2020.
Animal Health gross profit decreased $3.2 million due to lower sales and unfavorable product mix. Mineral Nutrition gross profit increased $1.2 million, driven primarily by favorable product mix. Performance Products gross profit increased $1.6 million driven by volumes and favorable product mix.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) of $49.0 million for the three months ended March 31, 2021, increased $0.8 million, or 2%, as compared to the three months ended March 31, 2020. SG&A for the three months ended March 31, 2020, included $0.6 million of stock-based compensation. Excluding these costs, SG&A increased $1.4 million, or 3%.
Animal Health SG&A increased $0.3 million, due to investments in market expansion initiatives in certain international regions, partially offset by decreased marketing and sales team travel costs driven by COVID-19 limitations. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Corporate SG&A increased $1.0 million due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations.
Interest expense, net
Interest expense, net of $2.9 million for the three months ended March 31, 2021, decreased $0.3 million, or 10%, as compared to the three months ended March 31, 2020. Interest expense, net decreased primarily due to favorable variable borrowing rates, partially offset by reduced interest income from short-term investments.
28
Foreign currency gains, net
Foreign currency gains, net were $0.6 million for the three months ended March 31, 2021 and 2020.
Provision for income taxes
The provision for income taxes was $5.6 million and $5.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate was 31.6% and 27.7% for the three months ended March 31, 2021 and 2020, respectively. The provision for income taxes during the three months ended March 31, 2021, included a $0.6 million expense related to a detailed deferred tax analysis of property, plant, and equipment and intangible assets. The effective income tax rate, without this expense, would have been 27.9% for the three months ended March 31, 2021.
Net income
Net income of $12.2 million for the three months ended March 31, 2021, decreased $1.3 million, as compared to net income of $13.5 million for the three months ended March 31, 2020. Operating income declined $1.2 million, driven by lower gross profit and increased SG&A expenses. The decrease in gross profit and the overall gross margin was primarily driven by lower volume and unfavorable product mix in the Animal Health segment, partially offset by increased gross profit in the Mineral Nutrition and Performance Products segments. SG&A expenses increased due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations. Interest expense was lower by $0.3 million, while income tax expense increased $0.5 million.
Adjusted EBITDA
Adjusted EBITDA of $28.1 million for the three months ended March 31, 2021, declined $2.1 million, or 7%, as compared to the three months ended DecemberMarch 31, 2016.2020. Animal Health Adjusted EBITDA decreased $3.7 million on lower sales and gross profit and increased SG&A costs. Mineral Nutrition andAdjusted EBITDA increased $1.2 million, driven by increased gross profit on favorable product mix. Performance Products grew $9.2Adjusted EBITDA increased $1.4 million $2.9driven by increased gross profit. Corporate expenses increased $1.0 million, primarily due to investments in strategic initiatives and $2.2 million, respectively.
Comparison of nine months ended March 31, 2021 and 2020
Net sales
Net sales of $132.8$613.1 million for the threenine months ended DecemberMarch 31, 2017, grew $9.22021, decreased $1.4 million, or 7%. The growth was primarily dueless than 1%, as compared to volume increases across all product groups within the segment. Nutritional specialty products grew $3.4nine months ended March 31, 2020. Animal Health and Mineral Nutrition declined $5.5 million and $0.8 million, respectively. Performance Products increased $4.9 million.
Animal Health
Net sales of $399.0 million for the nine months ended March 31, 2021, declined $5.5 million, or 12%, primarily due to volume growth of our products for the dairy and poultry industries in the United States and by penetration into various international countries. Vaccines grew $1.3 million, or 7%, primarily due to volume growth in international markets; domestic growth was moderate due to reduced disease pressure. MFAs and other grew $4.5 million or 6%1%. International net sales of MFAs and other increased $8.7 million due to growth across most regions, notably due to additional penetration in the cattle sector, and included the benefit of a recent acquisition. Domestic netNet sales of MFAs and other declined $4.2$10.8 million, or 4%, due to $2.1 millionreduced demand in China following regulatory changes effective January 1, 2020, and lower volume in Latin America, partially offset by net sales of medically important antimicrobialsgrowth in other products and due to unfavorable timing of certain customer orders. We believeregions, including domestic sales of medically important antimicrobials have stabilized at current levels.
Mineral Nutrition
Net sales of $163.8 million for the nine months ended March 31, 2021, decreased $0.8 million, or less than 1%. Lower overall average selling prices were partially offset by increased unit volumes. The decline in average selling prices is correlated with the movement of personal carethe underlying raw material costs.
29
Performance Products
Net sales of $50.3 million for the nine months ended March 31, 2021, increased $4.9 million, or 11%, driven by increased volumes of copper-based products.
Gross profit
Gross profit of $66.9$201.5 million for the threenine months ended DecemberMarch 31, 2017,2021, increased $3.4$5.2 million, or 5%3%, as compared to the threenine months ended DecemberMarch 31, 2016.2020. Gross profit decreasedmargin increased 100 basis points to 32.5%32.9% of net sales for the threenine months ended DecemberMarch 31, 2017,2021, as compared to 33.1%31.9% for the threenine months ended DecemberMarch 31, 2016.2020. The threenine months ended DecemberMarch 31, 2017,2020, included $1.4$0.3 million of acquisition-related cost of goods sold. Excluding the effects of the acquisition-related cost of goods sold,
Animal Health gross profit increased $3.9$0.5 million, due to volume growth, higher average selling prices on selectedincreased volumes of nutritional specialty products and favorable production costs, primarily related to foreign currency movements. These increases were partially offset by lower unit costs from improved operating efficiencies.volumes of MFAs and other and vaccine products and unfavorable product mix. Mineral Nutrition gross profit increased $0.9$1.1 million, due todriven by favorable raw material costs and product mix, and higher average selling prices, partially offset by higher raw material costs.declines in average selling prices. 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 offsetincreased $3.3 million, driven by higher products costs of copper-based products.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) of $43.0$145.8 million for the threenine months ended DecemberMarch 31, 2017,2021, increased $2.1$0.6 million, or 5%less than 1%, as compared to the threenine months ended DecemberMarch 31, 2016.2020. SG&A for the threenine months ended DecemberMarch 31, 2016,2021 included $1.1 million of stock-based compensation. SG&A for the nine months ended March 31, 2020, included $1.7 million inof stock-based compensation, $0.4 million of restructuring costs, relating to the partial settlement$0.5 million of the pension plan.acquisition-related transaction costs and $0.2 million of other acquisition-related costs. Excluding these costs, SG&A increased $3.8$2.3 million, or 10%2%.
Animal Health SG&A increased $3.8decreased $0.6 million comparedprimarily due to the prior year,favorable effects of foreign currency exchange and decreased marketing and sales team travel costs driven by COVID-19 limitations. These expense declines were partially offset by increased professional fees to support the continued use of carbadox and investments in product and organization development. A recent acquisition also contributed to the Animal Health SG&A increase.market expansion initiatives in certain international regions. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Corporate expenses increased less than $0.1$2.9 million, each. Corporate was level with last year, driven by investments in strategic initiatives, as reduced pensionwell as incremental costs for performance-related compensation, professional fees and information technology. These cost increases were partially offset increasesby lower travel expenses driven by COVID-19 limitations. The stock-based compensation, restructuring costs, acquisition-related transaction costs and other acquisition-related costs resulted in other expenses.
Interest expense, net
Interest expense, net of $3.1$9.0 million for the threenine months ended DecemberMarch 31, 2017,2021, decreased $0.8$1.1 million, or 21%11%, as compared to the threenine months ended DecemberMarch 31, 2016.2020. Interest expense, net decreased $1.0 million compared to the prior year, primarily due to favorable variable interest rates, partially offset by higher levels of debt outstanding and 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,gains, net for the threenine months ended DecemberMarch 31, 2017, amounted to net gains of $0.32021, were $3.6 million, as compared to $0.5net losses of $1.9 million in net gains for the threenine months ended DecemberMarch 31, 2016.2020. Foreign currency losses in the three months ended December 31, 2017, weregains primarily due toarose from intercompany balances, driven by the movement of the Brazilian,Mexican, South African, Turkish and MexicanBrazilian currencies relative to the U.S. dollar. Foreign currency gains and losses primarily arise from intercompany balances.
Provision (benefit) for income taxes
The provision for income taxes was $14.2$13.1 million and $5.9$11.2 million for the threenine months ended DecemberMarch 31, 20172021 and 2016,2020, respectively. The effective income tax ratesrate was 26.0% and 28.7% for these periods were 66.8%the nine months ended March 31, 2021 and 30.5%,2020, respectively. The provision for income taxes during the nine months ended March 31, 2021, included (i) a $1.5 million benefit for the three monthsyears ended December 31, 2017 included the following discrete items:
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of an uncertain tax position and (iv) a $0.6 million expense related to a detailed deferred tax assetsanalysis of property, plant, and liabilities to reflect the reduced income tax rate;
Net income
Net income of $7.0$37.3 million for the threenine months ended DecemberMarch 31, 2017, decreased $6.42021, increased $9.4 million, as compared to net income of $13.4$27.9 million for the threenine months ended DecemberMarch 31, 2016.2020. The decreaseincrease was primarily driven by higher operating income of $4.6 million, lower interest expense of $1.1 million and increased foreign currency gains of $5.5 million, partially offset by a result of the factors described above, primarily due to a $8.3$1.9 million increase in income tax expense.
Adjusted EBITDA
Adjusted EBITDA increased $0.9 million, or 18%, due to favorable product mix and higher average selling prices, partially offset by higher 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.
Analysis of financial condition, liquidity and capital resources
Net increase (decrease) in cash and cash equivalents was:
| | | | | | | | | |
|
| Nine Months | |||||||
For the Periods Ended March 31 |
| 2021 |
| 2020 |
| Change | |||
| | (in thousands) | |||||||
Cash provided (used) by: | |
| | |
| | |
| |
Operating activities | | $ | 45,236 | | $ | 55,471 | | $ | (10,235) |
Investing activities | |
| (11,390) | |
| (110,857) | |
| 99,467 |
Financing activities | |
| (21,632) | |
| 25,951 | |
| (47,583) |
Effect of exchange-rate changes on cash and cash equivalents | |
| 546 | |
| (1,390) | |
| 1,936 |
Net increase/(decrease) in cash and cash equivalents | | $ | 12,760 | | $ | (30,825) | | $ | 43,585 |
| | | 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) | | |
|
Certain amounts may reflect rounding adjustments.
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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 |
| 2021 |
| 2020 |
| Change | |||
| | (in thousands) | |||||||
EBITDA | | $ | 83,342 | | $ | 73,357 | | $ | 9,985 |
Adjustments: |
| |
|
| | |
| | |
Stock-based compensation |
| | 1,129 |
| | 1,694 |
| | (565) |
Restructuring costs |
| | — |
| | 425 |
| | |
Acquisition-related cost of goods sold |
| | — |
| | 280 |
| | (280) |
Acquisition-related transaction costs |
| | — |
| | 462 |
| | (462) |
Acquisition other, net |
| | — |
| | 167 |
| | |
Foreign currency (gains) losses, net |
| | (3,590) |
| | 1,895 |
| | (5,485) |
Interest paid, net |
| | (8,123) |
| | (9,171) |
| | 1,048 |
Income taxes paid |
| | (14,335) |
| | (15,045) |
| | 710 |
Changes in operating assets and liabilities and other items |
| | (13,187) |
| | 1,407 |
| | (14,594) |
Net cash provided by operating activities | | $ | 45,236 | | $ | 55,471 | | $ | (10,235) |
Certain amounts may reflect rounding adjustments.
Operating activities
Operating activities provided $45.2 million of net cash provided by operating activities was $37.1 million for the sixnine months ended DecemberMarch 31, 2017.2021. 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$56.2 million. Cash used in the ordinary course of business for changes in operating assets and liabilities and other items. Increased inventoriesitems was $11.0 million. Accounts receivable used $10.8$8.4 million of cash due to theincreased domestic sales and timing of collections, partially offset by lower sales purchases and favorable collections in international regions. Cash used for inventory was $8.1 million. Inventory increases were primarily due to forecasted future demand and internal production schedules. For certain products, we are maintaining safety stocks to mitigate potential disruptions in production. Accounts receivableOther assets and accounts payable used $5.1$1.0 million and $0.8 million of cash, respectively. Prepaid expenses and other current assets provided $3.7 million of cash due to the timing of salesdomestic payments. Accrued expenses and collections in international regions. A $7.5other liabilities provided cash of $3.6 million source of cash from increased accounts payable was primarily relateddue to the timing of inventory purchases. Seasonality was a significant reasonpayments for employee-related liabilities, partially offset by payments made for environmental remediation procedures.
Investing activities
Investing activities used $11.4 million of net cash for the increases in inventories and accounts payable.
Financing activities
Financing activities used $15.0$21.6 million of net cash for the acquisition of a business. Other investing activities used $0.7 million of cash.
Liquidity and capital resources
In April 2021, we entered into an amended and restated credit agreement (the “2021 Credit Agreement”) under which we have a term A loan in an aggregate initial principal amount of $300 million (the “2021 Term A Loan”) and a revolving credit facility under which we can borrow up to $250 million, subject to the terms of the agreement (the “2021 Revolver” and together with the 2021 Term A Loan, the “2021 Credit Facilities”). The 2021 Credit Agreement amends and restates the credit agreement entered into in June 2017 (the “2017 Credit Agreement”). The 2021 Credit Facilities were used to refinance all of the Term A loans and revolving credit facility amounts outstanding under the 2017 Credit Agreement and to pay fees and expenses of the transaction. The 2021
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Revolver contains a letter of credit facility. The 2021 Credit Facilities mature in April 2026. Refer to “Note 12 – Subsequent Event” for further information.
We believe our cash on hand, our operating cash flowsflow and our financing arrangements, including the availability of borrowings under the 2021 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. 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 2021 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 |
| 2021 |
| 2020 | ||
| | (in thousands, except ratios) | ||||
Cash and cash equivalents and short-term investments | | $ | 93,103 | | $ | 91,343 |
Working capital | |
| 233,161 | |
| 222,006 |
Ratio of current assets to current liabilities | |
| 2.60:1 | |
| 2.60:1 |
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.
As of March 31, 2017,2021, we had $71.0$176.0 million in outstanding borrowings under the Revolver. We2017 Revolver and had outstanding letters of credit and other commitments of $4.6$2.7 million, leaving $174.4$71.3 million available for borrowings and letters of credit.
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. WeOur Board of Directors declared and paid a cash dividend of $0.10$0.12 per share on Class A and Class B common stock, during the three months ended December 31, 2017. On February 5, 2018,payable on June 23, 2021. 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 declared a cash dividend of $0.10 per share on each sharedeems relevant. Additionally, the terms of our Class Acurrent and Class B common stock outstanding on the record dateany future agreements governing our indebtedness could limit our ability to pay dividends or make other distributions.
As of March 7, 2018, payable on March 28, 2018.
Contractual obligations
During the three months ended March 31, 2021, we amended and extended the lease agreement for our corporate office, increasing the value of our lease commitments. For the nine months ended March 31, 2021, the total right of use assets obtained in exchange for new operating lease liabilities were $13.9 million. As of Decemberour March 31, 2017, there2021, our total lease commitment value was $40.0 million.
In April 2021, we entered into the 2021 Credit Agreement. Refer to “Note 12 – Subsequent Event” for further information.
There were no other 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.Report.
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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:
● | senior management receives a monthly analysis of our operating results that is prepared on an Adjusted EBITDA basis; |
● | our annual budgets are prepared on an Adjusted EBITDA basis; and |
● | other goal setting and performance measurements are prepared on an Adjusted EBITDA basis. |
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. 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 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;business and 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.
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New accounting standards
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 and/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 ofIn presenting our consolidated financial statements in accordance with generally accepted 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, legal and environmental matters and actuarial assumptions relatedAmerica (GAAP), we are required to our pension plans. Thesemake estimates and assumptions impactthat affect the reported amountamounts of assets, liabilities, revenues and liabilitiesexpenses. Actual results that differ from our estimates and disclosuresassumptions could have an unfavorable effect on our financial position and results of contingentoperations. Critical accounting policies include revenue recognition, business combinations, long-lived assets, goodwill, and liabilities asincome taxes.
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 uncertain. The pandemic may affect our future sales, expenses, reserves and allowances, manufacturing operations and employee-related costs. The pandemic may have significant economic impacts on our customers, suppliers and markets where we compete and operate. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the datepandemic. Our financial statements include estimates of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined toCOVID-19 and there may be necessary. Actual results could differ from those estimates. Our significant accounting policies are described in the notes to the consolidated financial statements included in the Annual Report. As of December 31, 2017, 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. 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:
● | the negative effects of a pandemic, epidemic, or outbreak of an infectious disease in humans, such as COVID-19, on our business, financial results, manufacturing facilities and supply chain, as well as our customers and protein processors; |
● | perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products could cause a decline in the sales of those products; |
● | restrictions on the use of antibacterials in food-producing animals may become more prevalent; |
● | a material portion of our sales and gross profits are generated by antibacterials and other related products; |
● | competition in each of our markets from a number of large and small companies, some of which have greater financial, research and development (“R&D”), production and other resources than we have; |
● | outbreaks of animal diseases could significantly reduce demand for our products; |
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● | our business may be negatively affected by weather conditions and the availability of natural resources; |
● | the continuing trend toward consolidation of certain customer groups as well as the emergence of large buying groups; |
● | our ability to control costs and expenses; |
● | any unforeseen material loss or casualty; |
● | exposure relating to rising costs and reduced customer income; |
● | competition deriving from advances in veterinary medical practices and animal health technologies; |
● | unanticipated safety or efficacy concerns; |
● | our dependence on suppliers having current regulatory approvals; |
● | our raw materials are subject to price fluctuations and their availability can be limited; |
● | natural and man-made disasters, including but not limited to fire, snow and ice storms, flood, hail, hurricanes and earthquakes; |
● | terrorist attacks, particularly attacks on or within markets in which we operate; |
● | our ability to successfully implement our strategic initiatives; |
● | our reliance on the continued operation of our manufacturing facilities and application of our intellectual property; |
● | adverse U.S. and international economic market conditions, including currency fluctuations; |
● | failure of our product approval, R&D, acquisition and licensing efforts to generate new products; |
● | the risks of product liability claims, legal proceedings and general litigation expenses; |
● | the impact of current and future laws and regulatory changes; |
● | modification of foreign trade policy may harm our food animal product customers |
● | our dependence on our Israeli and Brazilian operations; |
● | our substantial level of indebtedness and related debt-service obligations; |
● | restrictions imposed by covenants in our debt agreements; |
● | the risk of work stoppages; and |
● | other factors as described in “Risk Factors” in Item 1A. of our Annual Report. |
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
36
their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
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, 2017,2021, 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.
Material Weakness Remediation Plan
We arecontinue to make further progress in the process of implementing a broad range of changes to our internal controlcontrols over financial reporting to remediate the material weaknesses that existeddescribed in "Item 9A. Controls and Procedures" in the Annual Report.
During the quarter ended September 30, 2020, we completed a gap analysis of our key controls. In completing this analysis, we identified areas where new controls were needed and enhancements to existing controls, policies and procedures needed to be made.
We continue to execute further steps in our remediation plan by enhancing and supplementing the finance team through an increased number of compliance-focused roles, reassigning responsibilities, and adding additional resources with an appropriate level of knowledge and experience commensurate with our financial reporting requirements. During the quarter ended March 31, 2021, we hired a Vice President, Global Tax and a Manager of Internal Controls in North America, as well as appointed managers to oversee Sarbanes-Oxley (“SOX”) compliance in each of June 30, 2017. our key regions, reporting to our VP of Finance and Internal Controls, in order to better align our resources to our financial reporting requirements and strengthen, monitor and support our remediation efforts.
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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, and appropriately authorized and approved. Also,approved across our key business cycles. During the quarter ended March 31, 2021, and with the oversight of our Board of Directors, we enhanced our delegation of authority and established new management authorization levels. We also initiated a global SOX awareness program, featuring the Chief Executive Officer of the Company and other key members of management to continue to emphasize the importance of SOX and the related compliance procedures for our company as part of the overall training and education element of our remediation plan.
Our efforts include ensuring access to ensure maintenance ofkey financial systems and records is restricted to appropriate users and the appropriate level of segregation of duties includes restrictingis maintained. During the quarter ended March 31, 2021, and in accordance with our remediation plan, we have finalized the design and implementation of user access tocontrols and segregation of duties monitoring controls and made continued improvements by reducing the number of segregation of duties conflicts within our key financial systems and recordsevaluated mitigating controls. We continue to appropriate users. We are determining the extent it is necessaryevaluate opportunities to limit access by and modify responsibilities of certain personnel, as well as designingpersonnel.
We are committed to maintaining a strong control environment and implementing additional user access controls and compensating
Changes in Internal Control over Financial Reporting
Other than the changes discussed above in connection with the changes designed and implemented as a result of our remediation plan of the previously identified material weaknesses, there were no changes in internal control over financial reporting during the three months ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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.
There were no material changes in the Company’s risk factors from the risks disclosed in the Annual Report.
None.
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Not applicable.
None.
| | |||||
Exhibit 31.1 | Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302 | |||||
Exhibit 31.2 | Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302 | |||||
Exhibit 32.1 | Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906 | |||||
Exhibit 32.2 | Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906 | |||||
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 | |||||
Exhibit 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
*
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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 6, 2021 | By: | /s/ Jack C. Bendheim | |||||||
| | Jack C. Bendheim | |||||||
| | Chairman, President and Chief Executive Officer | |||||||
| | ||||||||
May 6, 2021 | By: | /s/ Damian Finio | |||||||
| | Damian Finio | |||||||
| Chief Financial Officer |
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