Company Quick10K Filing
Phibro Animal Health
Price21.05 EPS1
Shares41 P/E21
MCap853 P/FCF32
Net Debt173 EBIT63
TEV1,026 TEV/EBIT16
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-Q 2019-12-31 Filed 2020-02-03
10-Q 2019-09-30 Filed 2019-11-04
10-K 2019-06-30 Filed 2019-08-27
10-Q 2019-03-31 Filed 2019-05-06
10-Q 2018-12-31 Filed 2019-02-06
10-Q 2018-09-30 Filed 2018-11-06
10-K 2018-06-30 Filed 2018-08-27
10-Q 2018-03-31 Filed 2018-05-07
10-Q 2017-12-31 Filed 2018-02-05
10-Q 2017-09-30 Filed 2017-11-06
10-K 2017-06-30 Filed 2017-08-30
10-Q 2017-03-31 Filed 2017-05-08
10-Q 2016-12-31 Filed 2017-02-06
10-Q 2016-09-30 Filed 2016-11-09
10-K 2016-06-30 Filed 2016-08-29
10-Q 2016-03-31 Filed 2016-05-09
10-Q 2015-12-31 Filed 2016-02-09
10-Q 2015-09-30 Filed 2015-11-09
10-K 2015-06-30 Filed 2015-09-10
10-Q 2015-03-31 Filed 2015-05-11
10-Q 2014-12-31 Filed 2015-02-10
10-Q 2014-09-30 Filed 2014-11-12
10-K 2014-06-30 Filed 2014-09-18
10-Q 2014-03-31 Filed 2014-05-13
8-K 2020-07-27 Other Events, Exhibits
8-K 2020-07-17 Regulation FD, Exhibits
8-K 2020-05-07
8-K 2020-05-04
8-K 2020-02-07
8-K 2020-02-03
8-K 2019-11-04
8-K 2019-11-04
8-K 2019-08-27
8-K 2019-08-01
8-K 2019-07-29
8-K 2019-05-08
8-K 2019-05-06
8-K 2019-02-06
8-K 2018-11-05
8-K 2018-11-05
8-K 2018-08-27
8-K 2018-07-31
8-K 2018-07-30
8-K 2018-05-07
8-K 2018-05-07
8-K 2018-02-05

PAHC 10Q Quarterly Report

Part I&Mdash;Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii&Mdash;Other Information
Item 1.Legal Proceedings
Item 1A. Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.1 tm2015303d1_ex31-1.htm
EX-31.2 tm2015303d1_ex31-2.htm
EX-32.1 tm2015303d1_ex32-1.htm
EX-32.2 tm2015303d1_ex32-2.htm

Phibro Animal Health Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.80.60.40.30.1-0.12014201620182020
Assets, Equity
0.30.20.10.1-0.0-0.12014201620182020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12014201620182020
Ops, Inv, Fin

10-Q 1 tm2015303d1_10q.htm FORM 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_______________________________

 

FORM 10-Q

_______________________________

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

Commission File Number: 001-36410

_______________________________

 

Phibro Animal Health Corporation

(Exact name of registrant as specified in its charter)

  Delaware     13-1840497  
  (State or other jurisdiction of
incorporation or organization)
    (I.R.S. Employer
Identification No.)
 
  Glenpointe Centre East, 3rd Floor
300 Frank W. Burr Boulevard, Suite 21
Teaneck, New Jersey
(Address of Principal Executive Offices)
    07666-6712
(Zip Code)
 

(201) 329-7300

(Registrant’s telephone number, including area code)

______________________________

 

Securities registered pursuant to Section 12(b) of the Act:

  Title of each class     Trading Symbol(s)     Name of each exchange on which registered  
  Class A Common Stock, $0.0001
par value per share
    PAHC     Nasdaq Stock Market  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 April 30, 2020, there were 20,287,574 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 20,166,034 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.

 

 

 

 

PHIBRO ANIMAL HEALTH CORPORATION

 

TABLE OF CONTENTS

 

  Page
PART I—FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited) 3
  Consolidated Statements of Operations 3
  Consolidated Statements of Comprehensive Income 4
  Consolidated Balance Sheets 5
  Consolidated Statements of Cash Flows 6
  Consolidated Statements of Changes in Stockholders’ Equity 7
  Notes to Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 36
PART II—OTHER INFORMATION  
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Mine Safety Disclosures 39
Item 5. Other Information 39
SIGNATURES 40

 

2 

 

PART I—FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three  Months   Nine  Months 
For the Periods Ended March 31  2020   2019   2020   2019 
   (unaudited) 
   (in thousands, except per share amounts) 
                 
Net sales  $210,739   $205,736   $614,471   $624,112 
Cost of goods sold   141,188    140,864    418,153    424,791 
Gross profit   69,551    64,872    196,318    199,321 
Selling, general and administrative expenses   48,232    42,304    145,243    128,194 
Operating income   21,319    22,568    51,075    71,127 
Interest expense, net   3,263    2,931    10,049    8,729 
Foreign currency (gains) losses, net   (608)   122    1,895    104 
Income before income taxes   18,664    19,515    39,131    62,294 
Provision for income taxes   5,163    4,666    11,221    16,383 
Net income  $13,501   $14,849   $27,910   $45,911 
                     
Net income per share                    
basic  $0.33   $0.37   $0.69   $1.14 
diluted  $0.33   $0.37   $0.69   $1.13 
Weighted average common shares outstanding                    
basic   40,454    40,442    40,454    40,398 
diluted   40,504    40,531    40,504    40,519 

 

The accompanying notes are an integral part of these consolidated financial statements

 

3 

 

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three  Months   Nine  Months 
For the Periods Ended March 31  2020   2019   2020   2019 
   (unaudited) 
   (in thousands) 
Net income  $13,501   $14,849   $27,910   $45,911 
                     
Change in fair value of derivative instruments   (9,995)   (1,464)   (9,999)   (3,166)
Foreign currency translation adjustment   (23,873)   (1,846)   (28,493)   (5,365)
Unrecognized net pension gains (losses)   129    117    387    349 
(Provision) benefit for income taxes   2,457    336    2,394    701 
Other comprehensive income (loss)   (31,282)   (2,857)   (35,711)   (7,481)
                     
Comprehensive income (loss)  $(17,781)  $11,992   $(7,801)  $38,430 

 

The accompanying notes are an integral part of these consolidated financial statements

 

4 

 

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   March 31,   June 30, 
As of  2020   2019 
   (unaudited) 
   (in thousands, except share and per share amounts) 
ASSETS          
Cash and cash equivalents  $26,748   $57,573 
Short-term investments   55,000    24,000 
Accounts receivable, net   151,556    159,022 
Inventories, net   177,287    198,322 
Other current assets   27,564    27,245 
Total current assets   438,155    466,162 
Property, plant and equipment, net   143,112    140,235 
Intangibles, net   73,208    47,478 
Goodwill   52,679    27,348 
Other assets   68,896    45,448 
Total assets  $776,050   $726,671 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current portion of long-term debt  $17,188   $12,540 
Accounts payable   68,162    73,189 
Accrued expenses and other current liabilities   75,882    68,498 
Total current liabilities   161,232    154,227 
Revolving credit facility   146,000    96,000 
Long-term debt   203,851    217,635 
Other liabilities   69,622    42,794 
Total liabilities   580,705    510,656 
           
Commitments and contingencies (Note 9)          
           
Common stock,  par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,287,574 shares issued and outstanding at March 31, 2020, and June 30, 2019; 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at March 31, 2020, and June 30, 2019   4    4 
Preferred stock,  par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding        
Paid-in capital   134,960    133,266 
Retained earnings   182,273    168,926 
Accumulated other comprehensive income (loss)   (121,892)   (86,181)
Total stockholders' equity   195,345    216,015 
Total liabilities and stockholders' equity  $776,050   $726,671 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5 

 

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine  Months 
For the Periods Ended March 31  2020   2019 
   (unaudited) 
   (in thousands) 
OPERATING ACTIVITIES          
Net income  $27,910   $45,911 
Adjustments to reconcile net income to net cash provided (used) by operating activities:          
Depreciation and amortization   24,177    20,407 
Amortization of debt issuance costs and debt discount   662    662 
Stock-based compensation   1,694    1,694 
Acquisition-related costs of goods sold   280     
Acquisition-related accrued interest   200     
Deferred income taxes   (1,279)   1,742 
Foreign currency (gains) losses, net   676    (290)
Other   620    (804)
Changes in operating assets and liabilities, net of business acquisitions:          
Accounts receivable, net   4,009    (17,924)
Inventories, net   6,584    (13,471)
Other current assets   (1,841)   (4,111)
Other assets   (1,369)   (147)
Accounts payable   (4,159)   4,375 
Accrued expenses and other liabilities   (2,693)   (5,754)
Net cash provided (used) by operating activities   55,471    32,290 
INVESTING ACTIVITIES          
Purchases of short-term investments   (55,000)   (28,000)
Maturities of short-term investments   24,000    29,000 
Capital expenditures   (23,969)   (19,774)
Business acquisitions   (54,549)   (9,838)
Other, net   (1,339)   (264)
Net cash provided (used) by investing activities   (110,857)   (28,876)
FINANCING ACTIVITIES          
Revolving credit facility borrowings   194,000    157,000 
Revolving credit facility repayments   (144,000)   (131,000)
Payments of long-term debt and other   (9,486)   (9,504)
Issuance of acquisition note payable       3,775 
Payment of acquisition note payable       (3,775)
Proceeds from common shares issued       1,134 
Dividends paid   (14,563)   (13,738)
Net cash provided (used) by financing activities   25,951    3,892 
Effect of exchange rate changes on cash   (1,390)   (598)
Net increase (decrease) in cash and cash equivalents   (30,825)   6,708 
Cash and cash equivalents at beginning of period   57,573    29,168 
Cash and cash equivalents at end of period  $26,748   $35,876 

 

The accompanying notes are an integral part of these consolidated financial statements

 

6 

 

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

   Shares of Common Stock   Common
Stock
   Preferred Stock   Paid-in Capital   Retained Earnings   Accumulated Other Comprehensive Income (Loss)   Total 
   (in thousands, except share amounts) 
As of June 30, 2019   40,453,608   $4   $   $133,266   $168,926   $(86,181)  $216,015 
Comprehensive income (loss)                   2,515    (7,547)   (5,032)
Dividends declared ($0.12 per share)                   (4,854)       (4,854)
Stock-based compensation expense               565            565 
As of September 30, 2019   40,453,608   $4   $   $133,831   $166,587   $(93,728)  $206,694 
Comprehensive income (loss)                   11,894    3,118    15,012 
Dividends declared ($0.12 per share)                   (4,855)       (4,855)
Stock-based compensation expense               564            564 
As of December 31, 2019   40,453,608   $4   $   $134,395   $173,626   $(90,610)  $217,415 
Comprehensive income (loss)                   13,501    (31,282)   (17,781)
Dividends declared ($0.12 per share)                   (4,854)       (4,854)
Stock-based compensation expense               565            565 
As of March 31, 2020   40,453,608   $4   $   $134,960   $182,273   $(121,892)  $195,345 

 

   Shares of Common Stock   Common
Stock
   Preferred Stock   Paid-in
Capital
   Retained Earnings   Accumulated Other Comprehensive Income (Loss)   Total 
   (in thousands, except share amounts) 
As of June 30, 2018   40,357,708   $4   $   $129,873   $131,560   $(76,483)  $184,954 
Adoption of new revenue standard                     1,245        1,245 
Comprehensive income (loss)                   16,314    (7,195)   9,119 
Exercise of stock options   17,860            211            211 
Dividends declared ($0.10 per share)                   (4,037)       (4,037)
Stock-based compensation expense               565            565 
As of September 30, 2018   40,375,568   $4   $   $130,649   $145,082   $(83,678)  $192,057 
Comprehensive income (loss)                   14,748    2,571    17,319 
Exercise of stock options   11,000            130            130 
Dividends declared ($0.12 per share)                   (4,846)       (4,846)
Stock-based compensation expense               564            564 
As of December 31, 2018   40,386,568   $4   $   $131,343   $154,984   $(81,107)  $205,224 
Comprehensive income (loss)                   14,849    (2,857)   11,992 
Exercise of stock options   67,040            793            793 
Dividends declared ($0.12 per share)                   (4,855)       (4,855)
Stock-based compensation expense               565            565 
As of March 31, 2019   40,453,608   $4   $   $132,701   $164,978   $(83,964)  $213,719 

 

The accompanying notes are an integral part of these consolidated financial statements

 

7 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)

 

1.Description of Business

 

 

Phibro Animal Health Corporation (“Phibro” or “PAHC”) and its subsidiaries (together, the “Company”) is a diversified global developer, manufacturer and marketer of a broad range of animal health and mineral nutrition products for food animals including poultry, swine, dairy and beef cattle, and aquaculture. The Company is also a manufacturer and marketer of performance products for use in the personal care, 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 nine months ended March 31, 2020 and 2019, is presented on the same basis as the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “Annual Report”), filed with the Securities and Exchange Commission on August 27, 2019 (File no. 001-36410). In the opinion of management, these financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of the Company for the interim periods, and the adjustments are of a normal and recurring nature. The financial results for any interim period are not necessarily indicative of the results for the full year. The consolidated balance sheet information as of June 30, 2019, was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain. The pandemic is expected to affect our sales, expenses, reserves and allowances, manufacturing operations, research and development costs and employee-related amounts. The pandemic may have significant economic impact on local, regional, national and international customers and markets. New information that may emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.

 

The consolidated financial statements include the accounts of Phibro and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated from the consolidated financial statements. The decision whether or not to consolidate an entity requires consideration of majority voting interests, as well as effective control over the entity.

 

2.Summary of Significant Accounting Policies and New Accounting Standards

 

 

Our significant accounting policies are described in the notes to the consolidated financial statements included in our Annual Report. We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), effective July 1, 2019. See “New Accounting Standards” and “Note 7—Leases.” As of March 31, 2020, there have been no other material changes to our significant accounting policies.

 

Leases

 

We determine at the inception of an arrangement whether the arrangement contains a lease. If an arrangement contains a lease, we assess the lease term when the underlying asset is available for use (“lease commencement”). Individual lease terms reflect the non-cancellable period of the lease, reasonably certain renewal periods and consideration of termination options. We determine the lease classification as either operating or financing at lease commencement, which governs the pattern of expense recognition and presentation in our consolidated financial statements. Our current lease portfolio only includes operating leases.

 

We recognize a right-of-use (“ROU”) asset and a corresponding lease liability at lease commencement for leases with terms exceeding twelve months. Short-term leases with terms of twelve months or less are not recognized on the consolidated balance sheet and lease payments are recognized on a straight-line basis over the term.

 

The values of the ROU assets and lease liabilities are calculated based on the present value of the fixed payment obligations over the lease term, using our incremental borrowing rate (“IBR”), determined at lease commencement. The IBR reflects the rate of interest we would expect to pay on a secured basis to borrow an amount equal to the lease payments under similar terms. The IBR incorporates the term and economic environment of the respective lease arrangements.

 

We have elected to account for lease and non-lease components together as a single lease component and include fixed payment obligations related to such non-lease components in the measurement of ROU assets and lease liabilities. Fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments can include index-based lease payments, real estate taxes, maintenance costs, utilization charges and other non-lease services paid to lessors and

8 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

are not determinable at lease commencement. Variable lease payments are not included in the measurement of ROU assets and lease liabilities and are recognized in the period incurred.

 

Net Income per Share and Weighted Average Shares

Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period.

Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period after giving effect to potential dilutive common shares resulting from the assumed exercise of stock options and vesting of restricted stock units. All common share equivalents were included in the calculation of diluted net income per share in the periods included in the consolidated financial statements.

   Three  Months   Nine  Months 
For the Periods Ended March 31  2020   2019   2020   2019 
Net income  $13,501   $14,849   $27,910   $45,911 
                     
Weighted average number of shares – basic   40,454    40,442    40,454    40,398 
Dilutive effect of stock options and restricted stock units   50    89    50    121 
Weighted average number of shares – diluted   40,504    40,531    40,504    40,519 
                     
Net income per share                    
basic  $0.33   $0.37   $0.69   $1.14 
diluted  $0.33   $0.37   $0.69   $1.13 

New Accounting Standards

ASU 2020-04, Reference Rate Reform (Topic 848), provides optional expedients and exceptions to GAAP guidance for contracts and hedging relationships that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates expected to be discontinued by rate reform. The purpose of this guidance is to ease the financial reporting burdens related to the expected market transition to alternative reference rates. This ASU may be applied beginning with the interim period ended March 31, 2020, and prospectively through December 31, 2022. We are currently evaluating the effect of adoption of this guidance on our consolidated financial statements.

 

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, removes certain exceptions and amends certain requirements in the existing income tax guidance to ease accounting requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of 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 other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

 

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, modifies existing disclosure requirements for fair value measurement. This ASU is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

9 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, allows reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects related to adjustments resulting from the United States Tax Cuts and Jobs Act. This ASU is effective for our consolidated financial statements beginning July 1, 2019. The adoption of this guidance did not have a material effect on our consolidated financial statements.

 

ASU 2016-02, Leases (Topic 842), requires an entity to recognize assets and liabilities on the balance sheet for both financing and operating leases and requires additional qualitative and quantitative disclosures regarding leasing arrangements. We adopted ASU 2016-02 and its amendments effective July 1, 2019, using a modified retrospective transition approach, which does not require modifications to periods prior to the date of initial application. We utilized certain permitted practical expedients intended to ease transition to the new standard, including carrying forward the original lease classifications without reassessment. We did not use hindsight in our assessment of lease terms as of the effective date. Upon adoption of ASU 2016-02 on July 1, 2019, we recognized initial ROU assets and lease liabilities of  $18,576 and $19,368 respectively, on the consolidated balance sheet. The difference in the amounts of the ROU assets and lease liabilities recognized relates to landlord incentives and deferred rent. An adjustment to opening retained earnings was not required, and the recognition of lease expense in the consolidated statements of operations did not change significantly. Refer to “Note 7—Leases” for further information.

 

3.Acquisition

In August 2019, we acquired the business and assets of Osprey Biotechnics, Inc. (“Osprey”). Osprey is a developer, manufacturer and marketer of microbial products and bioproducts for a variety of applications, serving customers in the animal health and nutrition, environmental, industrial and plant protection industries. The business is included in the Animal Health segment.

We acquired assets used in Osprey’s business, including intellectual property, working capital and property, plant and equipment, for an aggregate net cash payment of  $54,549. The agreement also includes a future additional payment to be determined based on Osprey’s financial performance for the year ending June 30, 2021. We recorded a $7,553 liability for the estimated future payment. The additional payment will be no less than $4,840 and has no maximum limit.

We accounted for the acquisition as a business combination in accordance with FASB Accounting Standards Codification No. 805, Business Combinations. Pro forma information giving effect to the acquisition has not been provided because the results are not material to the consolidated financial statements. The preliminary fair values of the acquired assets and liabilities as of the acquisition date were:

Working capital, net   $2,366 
Property, plant and equipment    2,005 
Definite-lived intangible assets    32,400 
Goodwill    25,331 
Net assets acquired   $62,102 

We may further refine the determination of certain assets during the measurement period. The definite-lived intangible assets relate to trade names, developed products and customer relationships and will be amortized over estimated useful lives ranging from five to twelve years. The preliminary amount of goodwill has been allocated to our Animal Health segment and is deductible for income taxes.

4.Statements of Operations—Additional Information

We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle, and aquaculture. The products help prevent, control and treat diseases, enhance nutrition to help improve health and contribute to balanced mineral nutrition. The animal health and mineral nutrition products are sold directly to integrated poultry, swine and cattle integrators and through commercial animal feed manufacturers, wholesalers and distributors. The animal health industry and demand for many of the animal health products in a particular region are affected by changing disease pressures and by weather conditions, as product usage follows varying weather patterns and seasons. Our operations are primarily focused in regions where the majority of livestock production is consolidated in large commercial farms.

10 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We have a diversified portfolio of products that are classified within our three business segments—Animal Health, Mineral Nutrition and Performance Products. Each segment has its own dedicated management and sales team.

Animal Health

The Animal Health business develops, manufactures and markets products in three main categories:

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, swine and cattle. They protect animals from either viral or bacterial disease challenges. We develop, manufacture and market conventionally licensed and autogenous vaccine products and also 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. The customers use these products to fortify the daily feed requirements of their livestock’s diets and maintain an optimal balance of trace elements in each animal. We manufacture and market a broad range of mineral nutrition products for food animals including poultry, swine and beef and dairy cattle.

Performance Products

The Performance Products business manufactures and markets a number of specialty ingredients for use in the personal care, industrial chemical and chemical catalyst industries, predominantly in the United States.

The following tables present our revenues disaggregated by major product category and geographic region:

Net Sales by Product Type                
   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   2020   2019 
         
Animal Health                    
MFAs and other  $82,670   $84,095   $249,659   $264,153 
Nutritional specialties   34,636    28,227    98,131    84,657 
Vaccines   21,668    16,867    56,723    51,130 
Total Animal Health  $138,974   $129,189   $404,513   $399,940 
Mineral Nutrition   56,200    60,653    164,534    177,810 
Performance Products   15,565    15,894    45,424    46,362 
Total  $210,739   $205,736   $614,471   $624,112 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Net Sales by Region                
   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   2020   2019 
         
United States  $126,827   $122,651   $368,230   $363,202 
Latin America and Canada   40,284    31,197    119,730    110,353 
Europe, Middle East and Africa   31,958    27,317    83,311    78,340 
Asia Pacific   11,670    24,571    43,200    72,217 
Total  $210,739   $205,736   $614,471   $624,112 

Net sales by region are based on country of destination.

Deferred revenue was $4,826 and $5,464 as of March 31, 2020, and June 30, 2019, respectively. Accrued expenses and other current liabilities included $1,070 and $965 of the total deferred revenue as of March 31, 2020, and June 30, 2019, respectively. The deferred revenue resulted primarily from certain customer arrangements, including technology licensing fees and discounts on future product sales. The transaction price associated with our deferred revenue arrangements is generally based on the stand-alone sales prices of the individual products or services.

 

Our customer payment terms generally range from 30 to 120 days globally and do not include any significant financing components. Payment terms vary based on industry and business practices within the regions in which we operate. Our average worldwide collection period for accounts receivable is approximately 60 to 70 days after the revenue is recognized.

Interest Expense and Depreciation and Amortization

   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   2020   2019 
Interest expense, net                    
Term loan  $1,888   $2,077   $5,967   $6,391 
Revolving credit facility   1,400    1,022    4,361    2,689 
Amortization of debt issuance costs and debt discount   220    221    662    662 
Acquisition-related accrued interest   75        200     
Other   78    99    241    382 
Interest expense   3,661    3,419    11,431    10,124 
Interest (income)   (398)   (488)   (1,382)   (1,395)
   $3,263   $2,931   $10,049   $8,729 

 

   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   2020   2019 
Depreciation and amortization                    
Depreciation of property, plant and equipment  $5,824   $5,324   $17,395   $15,820 
Amortization of intangible assets   2,325    1,538    6,659    4,550 
Amortization of other assets   99    13    123    37 
   $8,248   $6,875   $24,177   $20,407 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5.Balance Sheets—Additional Information

 

   March 31,   June 30, 
As of  2020   2019 
Inventories          
Raw materials  $67,107   $64,441 
Work-in-process   9,132    10,699 
Finished goods   101,048    123,182 
   $177,287   $198,322 

 

   March 31,   June 30, 
As of  2020   2019 
Goodwill roll-forward          
Balance at beginning of period  $27,348   $27,348 
Osprey acquisition   25,331     
Balance at end of period  $52,679   $27,348 

 

We evaluate our investments in equity method investees for impairment if circumstances indicate that the fair value of the investment may be impaired. The assets underlying a $3,635 equity investment are currently idled; we have concluded that the investment is not currently impaired, based on expected future operating cash flows and/or disposal value.

   March 31,   June 30, 
As of  2020   2019 
Other assets          
ROU operating lease assets  $22,083   $ 
Deferred income taxes   19,552    16,770 
Deposits   5,319    7,024 
Insurance investments   5,535    5,431 
Equity method investments   4,958    4,196 
Indemnification asset   3,000    3,000 
Deferred financing fees   1,149    1,531 
Other   7,300    7,496 
   $68,896   $45,448 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   March 31,   June 30, 
As of  2020   2019 
Accrued expenses and other current liabilities          
Employee related  $29,474   $28,298 
Current operating lease liabilities   6,416     
Commissions and rebates   7,550    8,397 
Professional fees   6,448    5,212 
Income and other taxes   5,403    6,067 
Restructuring costs   2,214    3,590 
Insurance-related   1,341    1,279 
Derivatives   1,871     
Other   15,165    15,655 
   $75,882   $68,498 

During the three months ended June 30, 2019, we initiated business restructuring activities related to productivity and cost saving initiatives in the Animal Health segment. We recorded pre-tax charges of $6,281 for these activities, including $3,500 related to the termination of a contract manufacturing agreement and $2,781 for employee separation charges. As of June 30, 2019, $691 had been paid.

During the nine months ended March 31, 2020, we recorded $425 related to employee separation charges. The charges are included in selling, general and administrative expenses in our consolidated statements of operations. The following table summarizes the activity of the restructuring liability during the nine months ended March 31, 2020:

Liability balance at June 30, 2019   $5,590 
Charges    425 
Payments    (2,601)
Liability balance at March 31, 2020   $3,414 

As of March 31, 2020, $2,214 was included in accrued expenses and other current liabilities and $1,200 was included in other liabilities. We expect to record an additional charge for employee separation costs of an estimated $500 and plan to complete the additional separation actions by June 30, 2020.

   March 31,   June 30, 
As of  2020   2019 
Other liabilities          
Long-term operating lease liabilities  $16,361   $ 
Long-term and deferred income taxes   9,291    8,978 
Derivatives   8,722    977 
Supplemental retirement benefits, deferred compensation and other   7,927    7,605 
Acquisition-related consideration   7,753     
International retirement plans   4,818    5,133 
Restructuring costs   1,200    2,000 
U.S. pension plan   945    3,934 
Other long-term liabilities   12,605    14,167 
   $69,622   $42,794 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   March 31,   June 30, 
As of  2020   2019 
Accumulated other comprehensive income (loss)          
Derivative instruments  $(10,593)  $(594)
Foreign currency translation adjustment   (99,718)   (71,225)
Unrecognized net pension gains (losses)   (19,663)   (20,050)
(Provision) benefit for income taxes on derivative instruments   2,638    148 
(Provision) benefit for incomes taxes on long-term intercompany investments   8,166    8,166 
(Provision) benefit for income taxes on pension gains (losses)   (2,722)   (2,626)
   $(121,892)  $(86,181)

 

6.       Debt

 

Term Loans and Revolving Credit Facilities

Pursuant to a credit agreement (the “Credit Agreement”), we have a revolving credit facility (the “Revolver”), where we can borrow up to $250,000, subject to the terms of the agreement, and a term A loan with an aggregate initial principal amount of  $250,000 (the “Term A Loan,” and together with the Revolver, the “Credit Facilities”). The Credit Facilities have applicable margins equal to 2.00%, 1.75% or 1.50%, in the case of LIBOR and Eurodollar rate loans and 1.00%, 0.75% or 0.50%, in the case of base rate loans; the applicable margins are based on the First Lien Net Leverage Ratio, as defined in the Credit Agreement. The LIBOR rate is subject to a floor of 0.00%. The Credit Facilities mature on June 29, 2022.

The Credit Facilities require, among other things, the maintenance of  (i) a maximum First Lien Net Leverage Ratio and (ii) a minimum consolidated interest coverage ratio, each calculated on a trailing four quarter basis, and contain an acceleration clause should an event of default (as defined in the Credit Agreement) occur. As of March 31, 2020, we were in compliance with the financial covenants.

As of March 31, 2020, we had $146,000 in borrowings under the Revolver and had outstanding letters of credit of  $2,709, leaving $101,291 available for borrowings and letters of credit under the Revolver. We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The terms of these letters of credit are all less than one year.

As of March 31, 2020, the interest rates for the Revolver and the Term A Loan were 2.54% and 3.19%, respectively. The weighted-average interest rates for the outstanding Revolver were 3.44% and 3.82% for the nine months ended March 31, 2020 and 2019, respectively. The weighted-average interest rates for the Term A Loan were 3.45% and 3.50% for the nine months ended March 31, 2020 and 2019, respectively.

 

In July 2017, we entered into an interest rate swap agreement on $150,000 of notional principal that effectively converts the floating LIBOR 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 concurrently with the Credit Agreement.

 

In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.620% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300,000 through June 30, 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.620% plus the applicable rate. We designated the interest rate swaps as highly effective cash flow hedges. For additional details, see “—Derivatives.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Long-Term Debt

   March 31,   June 30, 
As of  2020   2019 
Term A Loan due June 2022  $221,875   $231,250 
Other       40 
    221,875    231,290 
Unamortized debt issuance costs and debt discount   (836)   (1,115)
    221,039    230,175 
Less:  current maturities   (17,188)   (12,540)
   $203,851   $217,635 
7.Leases

 

Our lease portfolio consists of real estate, vehicles and equipment ROU assets, classified as operating leases. The remaining non-cancelable lease terms, inclusive of renewal options reasonably certain of exercise, range from one to 16 years.

 

The following table summarizes the ROU assets and the related lease liabilities recorded on the consolidated balance sheet:

 

As of  March 31,
2020
   Balance Sheet Classification
Assets:        
Operating lease ROU assets   $22,083   Other Assets
Liabilities:        
Current portion    6,416   Accrued expenses and other current liabilities
Non-current portion    16,361   Other liabilities
Total operating lease liabilities   $22,777    

 

The following table summarizes the composition of net lease cost:

 

   Three months   Nine months 
For the Periods Ended March 31  2020   2020 
         
Operating lease expense  $1,885   $5,647 
Variable lease expense   361    992 
Short-term lease expense   196    613 
Total lease cost  $2,442   $7,252 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables include other supplemental information:

   Three months   Nine months 
For the Periods Ended March 31  2020   2020 
Operating cash flows used for ROU operating leases  $1,884   $5,529 
Right of use assets obtained in exchange for new operating lease liabilities  $830   $8,591 

 

As of    
   March 31, 2020 
Weighted average remaining lease term (in years) – ROU operating leases    6.5 
Weighted average discount rate – ROU operating leases    4.07%
      

 

At March 31, 2020, maturities of future lease liabilities were:

 

For the Years Ending June 30    
2020  $1,981 
2021   6,665 
2022   5,076 
2023   2,829 
2024   2,378 
2025 and thereafter    7,413 
Total lease payments    26,342 
Less: interest    3,565 
Total operating lease liabilities   $22,777 

 

As of March 31, 2020, we had approximately $5,600 of undiscounted lease payment obligations associated with an executed lease agreement for which the related lease had not commenced. The undiscounted payments are based on an initial lease term of seven years. We do not have control of the underlying assets prior to lease commencement, which is expected to be prior to June 30, 2020.

Our lease agreements do not contain any material restrictive covenants or residual value guarantee provisions.

Future minimum lease payments for operating leases accounted for under ASC 840, “Leases,” with remaining non-cancelable terms in excess of one year at June 30, 2019, were:

For the Years Ending June 30    
2020  $5,815 
2021   4,160 
2022   3,191 
2023   1,445 
2024   865 
Thereafter    765 
Total minimum lease payments   $16,241 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8.Related Party Transactions

Certain relatives of Jack C. Bendheim, our Chairman, President and Chief Executive Officer, provided services to us as employees or consultants and received aggregate compensation and benefits of approximately $364 and $392 during the three months ended March 31, 2020 and 2019, respectively, and $1,204 and $1,605 during the nine months ended March 31, 2020 and 2019, respectively. Mr. Bendheim has sole authority to vote shares of our stock owned by BFI Co., LLC, an investment vehicle of the Bendheim family.

9.Commitments and Contingencies

Environmental

Our operations and properties are subject to extensive federal, state, local and foreign laws and regulations, including those governing pollution; protection of the environment; the use, management, and release of hazardous materials, substances and wastes; air emissions; greenhouse gas emissions; water use, supply and discharges; the investigation and remediation of contamination; the manufacture, distribution, and sale of regulated materials, including pesticides; the importing, exporting and transportation of products; and the health and safety of our employees (collectively, “Environmental Laws”). As such, the nature of our current and former operations exposes us to the risk of claims with respect to such matters, including fines, penalties, and remediation obligations that may be imposed by regulatory authorities.

Under certain circumstances, we might be required to curtail operations until a particular problem is remedied. Known costs and expenses under Environmental Laws incidental to ongoing operations, including the cost of litigation proceedings relating to environmental matters, are included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under Environmental Laws or to investigate or remediate potential or actual contamination, and from time to time we establish reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under Environmental Laws and the time period during which such costs are likely to be incurred are difficult to predict.

  

While we believe that our operations are currently in material compliance with Environmental Laws, we have, from time to time, received notices of violation from governmental authorities, and have been involved in civil or criminal action for such violations. Additionally, at various sites, our subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with historic operations of the sites. We devote considerable resources to complying with Environmental Laws and managing environmental liabilities. We have developed programs to identify requirements under, and maintain compliance with, Environmental Laws; however, we cannot predict with certainty the effect of increased and more stringent regulation on our operations, future capital expenditure requirements, or the cost of compliance.

 

The nature of our current and former operations exposes us to the risk of claims with respect to environmental matters and we cannot assure we will not incur material costs and liabilities in connection with such claims. Based upon our experience to date, we believe that the future cost of compliance with existing Environmental Laws, and liabilities for known environmental claims pursuant to such Environmental Laws, will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.

 

The United States Environmental Protection Agency (the “EPA”) is investigating and planning for the remediation of offsite contaminated groundwater that has migrated from the Omega Chemical Corporation Superfund Site (“Omega Chemical Site”), which is upgradient of the Santa Fe Springs, California facility of our subsidiary, Phibro-Tech, Inc. (“Phibro-Tech”). The EPA has named Phibro-Tech and certain other subsidiaries of PAHC as potentially responsible parties (“PRPs”) due to groundwater contamination from Phibro-Tech’s Santa Fe Springs facility that has allegedly commingled with contaminated groundwater from the Omega Chemical Site. In September 2012, the EPA notified approximately 140 PRPs, including Phibro-Tech and the other subsidiaries, that they have been identified as potentially responsible for remedial action for the groundwater plume affected by the Omega Chemical Site and for EPA oversight and response costs. Phibro-Tech contends that any groundwater contamination at its site is localized and due to historical operations that pre-date Phibro-Tech and/or contaminated groundwater that has migrated from upgradient properties. In addition, a successor to a prior owner of the Phibro-Tech site has asserted that PAHC and Phibro-Tech are obligated to provide indemnification for its potential liability and defense costs relating to the groundwater plume affected by the Omega Chemical Site. Phibro-Tech has vigorously contested this position and has asserted that the successor to the prior owner is required to indemnify Phibro-Tech for its potential liability and

 

18 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

defense costs. Furthermore, a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling has filed a complaint under the Comprehensive Environmental Response, Compensation, and Liability Act and the Resource 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 $4,940 and $5,890 at March 31, 2020, and June 30, 2019, respectively, which is included in current and long-term liabilities on the consolidated balance sheets. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption and elsewhere in this report, it should be noted that we take and have taken the position that neither PAHC nor any of our subsidiaries are liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible.

Claims and Litigation

PAHC and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities, payment disputes and governmental regulation. Certain of these actions seek damages in various amounts. In many cases, such claims are covered by insurance. We believe that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, cash flows or liquidity.

10.Derivatives

We monitor our exposure to foreign currency exchange rates and interest rates and from time-to-time use derivatives to manage certain of these risks. We designate derivatives as a hedge of a forecasted transaction or of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). All changes in the fair value of a highly effective cash flow hedge are recorded in accumulated other comprehensive income (loss).

We routinely assess whether the derivatives used to hedge transactions are effective. If we determine a derivative ceases to be an effective hedge, we discontinue hedge accounting in the period of the assessment for that derivative, and immediately recognize any unrealized gains or losses related to the fair value of that derivative in the consolidated statements of operations.

We record derivatives at fair value in the consolidated balance sheets. For additional details regarding fair value, see “—Fair Value Measurements.”

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 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 concurrently with the Credit Agreement. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.620% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300,000 through June 30, 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.620% plus the applicable rate. The forecasted transactions are probable of occurring, and the interest rate swaps have been designated as highly effective cash flow hedges.

 

We entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The individual option contracts mature monthly through March 2022. The forecasted inventory purchases are probable of occurring and the individual option contracts were designated as highly effective cash flow hedges.

19 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Outstanding derivatives that are designated and effective as cash flow hedges as of March 31, 2020, were:

   Hedge  Notional
Amount at
March 31,
2020
  Consolidated
Balance Sheet
  Asset (Liability)
fair value as of
 
Instrument           March 31,
2020
   June 30,
2019
 
Options   Brazilian Real calls  R$135,000  (1)  $83   $413 
Options   Brazilian Real puts  R$135,000  (1)  $(3,586)  $(30)
Swap   Interest rate swap  $300,000  Other liabilities  $(7,090)  $(977)

 

___________________

(1)We record the net fair values of our outstanding foreign currency option contracts within the respective balance sheet line item based on the net financial position and maturity date of the individual contracts as of the balance sheet date. As of March 31, 2020, other current liabilities and other liabilities included net fair values of $1,871 and $1,632, respectively. As of June 30, 2019, other current assets included net fair values of  $383.

The following tables show the effects of derivatives on the consolidated statements of operations and other comprehensive income for the three and nine months ended March 31, 2020 and 2019.

For the Three Months Ended March 31
      Gain (Loss) recorded in OCI   Gain (Loss) recognized in
consolidated statements of operations
  Consolidated Statement
of Operations Line
Item Total
 
Instrument  Hedge  2020   2019   Consolidated
Statement
of Operations
  2020   2019   2020   2019 
Options   Brazilian Real calls  $(3,945)  $(30)  Cost of goods sold  $(8)  $(5)  $141,188   $140,864 
Swap   Interest rate swap  $(6,050)  $(1,434)  Interest expense, net  $59   $247   $3,263   $2,931 

 

For the Nine Months Ended March 31
      Gain (Loss) recorded in OCI   Gain (Loss) recognized in
consolidated statements of operations
  Consolidated Statement
of Operations Line
Item Total
 
Instrument  Hedge  2020   2019   Consolidated
Statement
of Operations
  2020   2019   2020   2019 
Options   Brazilian Real calls  $(3,886)  $374   Cost of goods sold  $(116)  $1,079   $418,153   $424,791 
Swap   Interest rate swap  $(6,113)  $(3,540)  Interest expense, net  $228   $523   $10,049   $8,729 

We recognize gains (losses) related to foreign currency derivatives as a component of cost of goods sold at the time the hedged item is sold. Realized net losses of $107 related to matured contracts were recorded as a component of inventory as of March 31, 2020.

11.Fair Value Measurements

Short-term investments

As of March 31, 2020, our short-term investments consist of cash deposits held at financial institutions. We consider the carrying amounts of these short-term investments to be representative of their fair value.

20 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Current Assets and Liabilities

We consider the carrying amounts of current assets and current liabilities to be representative of their fair value because of the current nature of these items.

Contingent Consideration on Acquisitions

We determine the fair value of contingent consideration on acquisitions based on contractual terms, our current forecast of performance factors related to the acquired business and an applicable discount rate.

Letters of Credit

We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The carrying values of these letters of credit are considered to be representative of their fair values because of the nature of the instruments.

Debt

We record debt, including term loans and revolver balances, at book value in our consolidated financial statements. We believe the carrying value of the debt is approximately equal to its fair value, due to the variable nature of the instruments.

Derivatives

We determine the fair value of derivative instruments based upon pricing models using observable market inputs for these types of financial instruments, such as spot and forward currency translation rates.

Non-financial assets

Our non-financial assets, which primarily consist of goodwill, other intangible assets, property and equipment, and lease-related ROU assets, are not required to be measured at fair value on a recurring basis, and instead are reported at carrying value in the consolidated balance sheet. We assess the carrying values of non-financial assets for impairment on a periodic basis or whenever events or changes in circumstances indicate an asset may not be fully recoverable.

Fair Value of Assets (Liabilities)

As of  March 31, 2020   June 30, 2019 
   Level 1   Level 2   Level 3   Level 1   Level 2   Level 3 
Short-term investments   $55,000   $   $   $24,000   $   $ 
Foreign currency derivatives   $   $(3,503)  $   $   $383   $ 
Interest rate swap   $   $(7,090)  $   $   $(977)  $ 
Contingent consideration on acquisitions   $   $   $(7,753)  $   $   $ 

 

The table below provides a summary of the changes in the fair value of Level 3 liabilities:

 

Balance at June 30, 2019  $ 
Osprey acquisition   (7,553)
Acquisition-related accrued interest   (200)
Balance at March 31, 2020  $(7,753)

 

21 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

12.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.

We evaluate performance of our segments based on Adjusted EBITDA. We define Adjusted EBITDA as income before income taxes plus (a) interest expense, net, (b) depreciation and amortization, (c) (income) loss from, and disposal of, discontinued operations, (d) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (e) certain items that we consider to be unusual, non-operational or non-recurring.

The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.

   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   2020   2019 
Net sales                    
Animal Health  $138,974   $129,189   $404,513   $399,940 
Mineral Nutrition   56,200    60,653    164,534    177,810 
Performance Products   15,565    15,894    45,424    46,362 
Total segments  $210,739   $205,736   $614,471   $624,112 
                     
Depreciation and amortization                    
Animal Health  $6,665   $5,571   $19,760   $16,420 
Mineral Nutrition   629    592    1,871    1,805 
Performance Products   509    273    1,303    825 
Total segments  $7,803   $6,436   $22,934   $19,050 
                     
Adjusted EBITDA                    
Animal Health  $34,635   $33,241   $93,534   $104,882 
Mineral Nutrition   4,055    5,287    11,214    11,934 
Performance Products   1,506    1,330    3,815    3,560 
Total segments  $40,196   $39,858   $108,563   $120,376 

 

Reconciliation of income before income taxes to Adjusted EBITDA                    
Income before income taxes  $18,664   $19,515   $39,131   $62,294 
Interest expense, net   3,263    2,931    10,049    8,729 
Depreciation and amortization - Total segments   7,803    6,436    22,934    19,050 
Depreciation and amortization - Corporate   445    439    1,243    1,357 
Corporate costs   10,064    9,850    30,283    28,654 
Restructure costs           425     
Stock-based compensation   565    565    1,694    1,694 
Acquisition-related cost of goods sold           280     
Acquisition-related transaction costs           462     
Acquisition-related other           167     
Other, net               (1,506)
Foreign currency (gains) losses, net   (608)   122    1,895    104 
Adjusted EBITDA - Total segments  $40,196   $39,858   $108,563   $120,376 

 

22 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   March 31,   June 30, 
As of  2020   2019 
Identifiable assets          
Animal Health  $555,917   $508,864 
Mineral Nutrition   68,693    67,662 
Performance Products   32,232    32,886 
Total segments   656,842    609,412 
Corporate   119,208    117,259 
Total  $776,050   $726,671 

The Animal Health segment includes all goodwill of the Company. The Animal Health segment includes advances to and investment in an equity method investee of $3,635 and $3,287 as of March 31, 2020, and June 30, 2019, respectively. The Performance Products segment includes an investment in an equity method investee of $884 and $759 as of March 31, 2020, and June 30, 2019, respectively. Corporate assets include cash and cash equivalents, short-term investments, debt issuance costs, income tax-related assets and certain other assets.

 

23 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

Our management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. This MD&A should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Our future results could differ materially from our historical performance as a result of various factors such as those discussed in “Risk Factors” and “Forward-Looking Statements.”

 

Overview of our business

 

Phibro Animal Health Corporation is a global diversified animal health and mineral nutrition company. We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle, and aquaculture. Our products help prevent, control and treat diseases, enhance nutrition to help improve health and performance and contribute to balanced mineral nutrition. In addition to animal health and mineral nutrition products, we manufacture and market specific ingredients for use in the personal care, industrial chemical and chemical catalyst industries.

 

Effects of the COVID-19 pandemic

 

We experienced limited financial disruption from the coronavirus pandemic (“COVID-19”) on our consolidated financial results during the three months ended March 31, 2020.

 

Phibro is an integral participant in the essential 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 are experiencing some cost increases from the safety measures implemented to protect our employees and from supply chain disruptions. We have maintained headcount and compensation at constant levels. We are closely monitoring sales trends, cash flow and liquidity. We have reviewed the provisions of the CARES (Coronavirus Aid, Relief, and. Economic Security) Act and related legislation and do not expect any significant financial effect on Phibro.

 

We currently are seeing unprecedented demand disruption and production impacts in the global food animal industry, due to the COVID-19 pandemic. While our sales to date have continued close to our expectations, we anticipate a decline in demand for our products in the near term, as our customers attempt to navigate rapidly evolving market conditions. The effects COVID-19 will have on our consolidated results going forward and the broader economic environment are uncertain. The demand for our products will be dependent upon economic conditions and the ability of our customers and end users of our products to operate their businesses and production facilities, among other factors. Our 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 certainty the nature and timing of when any of these events may occur. We will continue to evaluate the nature and extent of the effects of COVID-19 on our business, consolidated results of operations, financial condition, and liquidity. For additional considerations and risks associated with COVID-19 on our business, please refer to the updates to Item 1A. “Risk Factors.”

  

24 

 

 

Analysis of the consolidated statements of operations

 

Summary Results of Operations

 

   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   Change   2020   2019   Change 
   (in thousands, except per share amounts and percentages) 
Net sales  $210,739   $205,736   $5,003    2%  $614,471   $624,112   $(9,641)   (2)%
Gross profit   69,551    64,872    4,679    7%   196,318    199,321    (3,003)   (2)%
Selling, general and administrative expenses   48,232    42,304    5,928    14%   145,243    128,194    17,049    13%
Operating income   21,319    22,568    (1,249)   (6)%   51,075    71,127    (20,052)   (28)%
Interest expense, net   3,263    2,931    332    11%   10,049    8,729    1,320    15%
Foreign currency (gains) losses, net   (608)   122    (730)   *    1,895    104    1,791    * 
Income before income taxes   18,664    19,515    (851)   (4)%   39,131    62,294    (23,163)   (37)%
Provision for income taxes   5,163    4,666    497    11%   11,221    16,383    (5,162)   (32)%
Net income  $13,501   $14,849   $(1,348)   (9)%  $27,910   $45,911   $(18,001)   (39)%
                                         
Net income per share                                        
basic  $0.33   $0.37   $(0.04)       $0.69   $1.14   $(0.45)     
diluted  $0.33   $0.37   $(0.04)       $0.69   $1.13   $(0.44)     
                                         
Weighted average number of shares outstanding                                        
basic   40,454    40,442              40,454    40,398           
diluted   40,504    40,531              40,504    40,519           
                                         
Ratio to net sales                                        
Gross profit   33.0%   31.5%             31.9%   31.9%          
Selling, general and administrative expenses   22.9%   20.6%             23.6%   20.5%          
Operating income   10.1%   11.0%             8.3%   11.4%          
Income before income taxes   8.9%   9.5%             6.4%   10.0%          
Net income   6.4%   7.2%             4.5%   7.4%          
Effective tax rate   27.7%   23.9%             28.7%   26.3%          

_________________

Certain amounts and percentages may reflect rounding adjustments.

*    Calculation not meaningful

 

 

25 

 

 

Net sales, Adjusted EBITDA and reconciliation of GAAP net income to Adjusted EBITDA

 

We report Net sales and Adjusted EBITDA by segment to understand the operating performance of each segment. This enables us to monitor changes in net sales, costs and other actionable operating metrics at the segment level. See “—General description of non-GAAP financial measures.”

 

Segment net sales and Adjusted EBITDA:

 

   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   Change   2020   2019   Change 
Net sales  (in thousands, except percentages) 
MFAs and other  $82,670   $84,095   $(1,425)   (2)%  $249,659   $264,153   $(14,494)   (5)%
Nutritional specialties   34,636    28,227    6,409    23%   98,131    84,657    13,474    16%
Vaccines   21,668    16,867    4,801    28%   56,723    51,130    5,593    11%
Animal Health   138,974    129,189    9,785    8%   404,513    399,940    4,573    1%
Mineral Nutrition   56,200    60,653    (4,453)   (7)%   164,534    177,810    (13,276)   (7)%
Performance Products   15,565    15,894    (329)   (2)%   45,424    46,362    (938)   (2)%
Total  $210,739   $205,736   $5,003    2%  $614,471   $624,112   $(9,641)   (2)%
                                         
Adjusted EBITDA                                        
Animal Health  $34,635   $33,241   $1,394    4%  $93,534   $104,882   $(11,348)   (11)%
Mineral Nutrition   4,055    5,287    (1,232)   (23)%   11,214    11,934    (720)   (6)%
Performance Products   1,506    1,330    176    13%   3,815    3,560    255    7%
Corporate   (10,064)   (9,850)   (214)   *    (30,283)   (28,654)   (1,629)   * 
Total  $30,132   $30,008   $124    0%  $78,280   $91,722   $(13,442)   (15)%
                                         
Adjusted EBITDA ratio to segment net sales                                        
Animal Health   24.9%   25.7%             23.1%   26.2%          
Mineral Nutrition   7.2%   8.7%             6.8%   6.7%          
Performance Products   9.7%   8.4%             8.4%   7.7%          
Corporate (1)   (4.8)%   (4.8)%             (4.9)%   (4.6)%          
Total (1)   14.3%   14.6%             12.7%   14.7%          
________________

(1)    Reflects ratio to total net sales

 

26 

 

 

The table below sets forth a reconciliation of net income, as reported under GAAP, to Adjusted EBITDA:

 

   Three Months   Nine Months 
For the Periods Ended March 31  2020   2019   Change   2020   2019   Change 
   (in thousands, except percentages) 
Net income  $13,501   $14,849   $(1,348)   (9)%  $27,910   $45,911   $(18,001)   (39)%
Interest expense, net   3,263    2,931    332    11%   10,049    8,729    1,320    15%
Provision for income taxes   5,163    4,666    497    11%   11,221    16,383    (5,162)   (32)%
Depreciation and amortization   8,248    6,875    1,373    20%   24,177    20,407    3,770    18%
EBITDA   30,175    29,321    854    3%   73,357    91,430    (18,073)   (20)%
Restructuring costs               *    425        425    * 
Stock-based compensation   565    565        0%   1,694    1,694        0%
Acquisition-related cost of goods sold               *    280        280    * 
Acquisition-related transaction costs               *    462        462    * 
Acquisition-related other, net (1)               *    167        167    * 
Other, net               *        (1,506)   1,506    * 
Foreign currency (gains) losses, net   (608)   122    (730)   *    1,895    104    1,791    * 
Adjusted EBITDA  $30,132   $30,008   $124    0%  $78,280   $91,722   $(13,442)   (15)%

______________

Certain amounts and percentages may reflect rounding adjustments.

*    Calculation not meaningful

 

Comparison of three months ended March 31, 2020 and 2019

Net sales

Net sales of $210.7 million for the three months ended March 31, 2020, increased $5.0 million, or 2%, as compared to the three months ended March 31, 2019. Animal Health increased $9.8 million, while Mineral Nutrition and Performance Products declined $4.5 million and $0.3 million, respectively.

Animal Health

Net sales of $139.0 million for the three months ended March 31, 2020, increased $9.8 million, or 8%. Net sales of MFAs and other declined $1.4 million, or 2%, as increased demand from poultry and cattle customers in the U.S. and Latin America were offset by reduced volumes in China due to African Swine Fever and regulatory changes that took effect January 1, 2020. Net sales of nutritional specialty products grew $6.4 million, or 23%, due to growth of domestic poultry and dairy products and the recent Osprey acquisition, which accounted for approximately half of the nutritional specialties sales growth. Net sales of vaccines increased $4.8 million, or 28%, driven by strong international demand for our poultry vaccines and growth in adjuvant sales.

Mineral Nutrition

Net sales of  $56.2 million for the three months ended March 31, 2020, decreased $4.5 million, or 7%, due to lower average selling prices, partially offset by increased overall unit volume. The decline in average selling prices is correlated with the movement of the underlying raw material costs.

Performance Products

Net sales of  $15.6 million for the three months ended March 31, 2020, decreased $0.3 million, or 2%, driven by lower volumes of ingredients for personal care products.

27 

 

 

Gross profit

Gross profit of $69.6 million for the three months ended March 31, 2020, increased $4.7 million, or 7%, as compared to the three months ended March 31, 2019. Gross profit increased to 33.0% of net sales for the three months ended March 31, 2020, as compared to 31.5% for the three months ended March 31, 2019.

Animal Health gross profit increased $5.4 million due to volume growth in nutritional specialty and vaccine products, partially offset by lower volume in MFAs and other. Favorable product mix contributed to an improved gross profit ratio compared to the prior year. Mineral Nutrition gross profit decreased $0.8 million, as the decline in average selling prices and unfavorable product mix more than offset lower raw material costs. Performance Products gross profit increased $0.1 million.

 

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) of $48.2 million for the three months ended March 31, 2020, increased $5.9 million, or 14%, as compared to the three months ended March 31, 2019.

Animal Health SG&A increased $5.0 million, due to increased investments in product development and marketing costs, the effect of the Osprey acquisition and increased variable compensation. Mineral Nutrition SG&A increased $0.5 million due to employee-related costs. Performance Products SG&A increased $0.1 million. Corporate expenses increased $0.3 million due to increased public company costs.

Interest expense, net

Interest expense, net of $3.3 million for the three months ended March 31, 2020, increased $0.3 million, or 11%, as compared to the three months ended March 31, 2019. The increase in interest expense was primarily driven by the increase in outstanding borrowings on the Revolver, partially offset by the benefit of lower variable interest rates. Interest income from our short-term investments declined due to lower rates.

Foreign currency (gains) losses, net

Foreign currency (gains) losses, net for the three months ended March 31, 2020, amounted to net gains of ($0.6) million, as compared to $0.1 million in net losses for the three months ended March 31, 2019. Foreign currency gains from third party balances were partially offset by foreign currency losses from intercompany balances.

Provision for income taxes

The provision for income taxes was $5.2 million and $4.7 million for the three months ended March 31, 2020 and 2019, respectively. The effective income tax rate was 27.7% and 23.9% for the three months ended March 31, 2020 and 2019, respectively. The provision for income taxes for the three months ended March 31, 2019, included a $0.5 million benefit from increased foreign tax credits, a $0.2 million benefit from an adjustment to the previously recorded mandatory toll charge on deemed repatriation of undistributed earnings of foreign subsidiaries and a $0.1 million benefit from the exercise of employee stock options. The effective income tax rate, without these benefits, would have been 27.8% for the three months ended March 31, 2019.

 

Net income

Net income of $13.5 million for the three months ended March 31, 2020, decreased $1.3 million, as compared to net income of $14.8 million for the three months ended March 31, 2019. The decrease was primarily due to a $1.2 million decline in operating income, increased interest expense of $0.3 million, increased income tax expense of $0.5 million, partially offset by favorable foreign currency gains of $0.7 million. The decline in operating income was driven by increased SG&A costs of $5.9 million, partially offset by $4.7 million of increased gross profit driven by volume growth in our Animal Health segment.

28 

 

 

Adjusted EBITDA

Adjusted EBITDA of $30.1 million for the three months ended March 31, 2020, was comparable to the three months ended March 31, 2019. Animal Health Adjusted EBITDA increased $1.4 million driven by increased gross profit from volume growth, partially offset by increased SG&A costs as a result of investments in product development and marketing and the effect of the Osprey acquisition. Mineral Nutrition Adjusted EBITDA decreased $1.2 million, driven by decreased gross profit and increased SG&A costs. Performance Products Adjusted EBITDA increased $0.2 million, while Corporate expenses increased $0.2 million.

Comparison of nine months ended March 31, 2020 and 2019

Net sales

Net sales of $614.5 million for the nine months ended March 31, 2020, decreased $9.6 million, or 2%, as compared to the nine months ended March 31, 2019. Animal Health increased $4.6 million, while Mineral Nutrition and Performance Products declined $13.3 million and $0.9 million, respectively.

Animal Health

Net sales of $404.5 million for the nine months ended March 31, 2020, increased $4.6 million, or 1%. Net sales of MFAs and other declined $14.5 million, or 5%, due to a sales decline of $25.8 million in China due to African Swine Fever and regulatory changes. Net sales growth in other products and regions were a partial offset. Net sales of nutritional specialty products grew $13.5 million, or 16%, due to volume growth in poultry and dairy products. The recent Osprey acquisition accounted for approximately half of the nutritional specialty sales growth. Net sales of vaccines increased $5.6 million, or 11%, due to international demand and increased market penetration. Excluding a domestic distribution arrangement that was terminated in October 2018, net sales of vaccines would have increased approximately 15%.

 

Mineral Nutrition

Net sales of  $164.5 million for the nine months ended March 31, 2020, decreased $13.3 million, or 7%, driven by lower average selling prices, partially offset by increased unit volumes. The decline in average selling prices is correlated with the movement of the underlying raw material costs.

Performance Products

Net sales of $45.4 million for the nine months ended March 31, 2020, decreased $0.9 million, or 2%. Increased volumes of personal care ingredients were more than offset by lower volumes of copper-based products.

Gross profit

Gross profit of $196.3 million for the nine months ended March 31, 2020, decreased $3.0 million, or 2%, as compared to the nine months ended March 31, 2019. Gross profit as a percentage of net sales for the nine months ended March 31, 2020, was 31.9% and comparable to the prior year. The nine months ended March 31, 2020, included $0.3 million of acquisition-related cost of goods sold.

Animal Health gross profit decreased $2.2 million due to volume declines and unfavorable product mix in MFAs and other, partially offset by volume growth in nutritional specialty and vaccine products. Mineral Nutrition gross profit decreased $0.4 million, as declines in average selling prices outpaced favorable raw material costs and increased unit volume. Performance Products gross profit decreased $0.2 million.

29 

 

 

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) of $145.2 million for the nine months ended March 31, 2020, increased $17.0 million, or 13%, as compared to the nine months ended March 31, 2019. SG&A for the nine months ended March 31, 2020, included $0.4 million of restructuring costs, $0.5 million of acquisition-related transaction costs and $0.2 million of other acquisition-related costs. SG&A for the nine months ended March 31, 2019, included a $1.5 million benefit from the cancellation of a certain business arrangement. Excluding the effects of these costs, SG&A increased $14.5 million, or 11%.

Animal Health SG&A increased $12.5 million, including increased investments in product development, the effect of the Osprey acquisition and increased variable compensation. Mineral Nutrition SG&A increased $0.4 million due to increased employee-related costs. Performance Products SG&A was comparable to the prior year. Corporate expenses increased $1.5 million due to increased costs of strategic initiatives and public company costs. The restructuring costs, acquisition-related transaction costs, other acquisition-related costs and the benefit in the prior year from the cancellation of a certain business arrangement resulted in a net $2.5 million increase to SG&A.

Interest expense, net

Interest expense, net of $10.0 million for the nine months ended March 31, 2020, increased $1.3 million, or 15%, as compared to the nine months ended March 31, 2019. The increase in interest expense was primarily driven by the increase in outstanding borrowings on the Revolver, partially offset by the benefit of lower variable interest rates. Interest income from short-term investments was comparable to the prior year.

Foreign currency (gains) losses, net

Foreign currency (gains) losses, net for the nine months ended March 31, 2020, amounted to net losses of $1.9 million, as compared to net losses of $0.1 million for the nine months ended March 31, 2019. Increased foreign currency losses from the effects of currency devaluations and intercompany transactions were partially offset by third-party currency gains.

 

Provision for income taxes

The provision for income taxes was $11.2 million and $16.4 million for the nine months ended March 31, 2020 and 2019, respectively. The effective income tax rate was 28.7% and 26.3% for the nine months ended March 31, 2020 and 2019, respectively. The provision for income taxes for the nine months ended March 31, 2019, included a $1.0 benefit from increased foreign tax credits, a $0.4 million benefit from adjustments to the previously recorded mandatory toll charge on deemed repatriation of undistributed earnings of foreign subsidiaries and a $0.3 million benefit from the exercise of employee stock options. The effective income tax rate for the nine months ended March 31, 2019, would have been 29.0%, excluding these benefits.

 

Net income

Net income of $27.9 million for the nine months ended March 31, 2020, decreased $18.0 million, as compared to net income of $45.9 million for the nine months ended March 31, 2019. The decrease was primarily due to a $20.1 million decline in operating income, coupled with unfavorable foreign currency movements of $1.8 million and increased interest expense of $1.3 million, partially offset by lower income tax expense of $5.2 million. The decline in operating income was driven by a $3.0 million reduction in gross profit and increased SG&A costs of $17.0 million. The decline in gross profit was attributable to overall product mix in our Animal Health business coupled with the effects of lower average selling prices in the Mineral Nutrition segment. Increased SG&A costs reflect our continued investments in product development and strategic growth initiatives.

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Adjusted EBITDA

Adjusted EBITDA of $78.3 million for the nine months ended March 31, 2020, decreased $13.4 million, or 15%, as compared to the nine months ended March 31, 2019. Animal Health Adjusted EBITDA decreased $11.4 million due to the gross profit decline, coupled with increased SG&A costs. The SG&A increase was driven by investments in product development and strategic growth initiatives and the effects of the Osprey acquisition. Mineral Nutrition Adjusted EBITDA declined $0.7 million as a result of lower gross profit and increased SG&A costs. Performance Products Adjusted EBITDA increased $0.3 million as compared to the prior year. Corporate expenses increased $1.6 million driven by investments in strategic initiatives and increased public company 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  2020   2019   Change 
   (in thousands) 
Cash provided by/(used in):               
Operating activities  $55,471   $32,290   $23,181 
Investing activities   (110,857)   (28,876)   (81,981)
Financing activities   25,951    3,892    22,059 
Effect of exchange-rate changes on cash               
and cash equivalents   (1,390)   (598)   (792)
Net increase/(decrease) in cash and cash equivalents  $(30,825)  $6,708   $(37,533)

_______________

Certain amounts may reflect rounding adjustments.

Net cash provided (used) by operating activities was comprised of:

   Nine Months 
For the Periods Ended March 31  2020   2019   Change 
   (in thousands) 
EBITDA  $73,357   $91,430   $(18,073)
Adjustments               
Restructuring costs   425        425 
Stock-based compensation   1,694    1,694     
Acquisition-related cost of goods sold   280        280 
Acquisition-related transaction costs   462        462 
Acquisition other, net   167        167 
Other, net       (1,506)   1,506 
Foreign currency (gains) losses, net   1,895    104    1,791 
Interest paid, net   (9,171)   (7,691)   (1,480)
Income taxes paid   (15,045)   (13,169)   (1,876)
Changes in operating assets and liabilities and other items   1,869    (38,572)   40,441 
Cash used for acquisition-related transaction costs   (462)       (462)
Net cash provided (used) by operating activities  $55,471   $32,290   $23,181 

_______________

Certain amounts may reflect rounding adjustments.

Certain amounts in the prior period have been reclassified to conform to the current year presentation

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Operating activities

Operating activities provided $55.5 million of net cash for the nine months ended March 31, 2020. Cash provided by net income and non-cash items, including depreciation and amortization, was $55.0 million. Cash provided in the ordinary course of business for changes in operating assets and liabilities and other items was $0.5 million. Inventory provided $6.6 million of cash from timing of domestic sales and purchases. Accounts receivable provided $4.0 million of cash due to the timing of collections in international regions. Cash uses included $4.2 million for accounts payable and $2.7 million for accrued expenses and other liabilities, due to the timing of domestic payments. Other current assets and other assets used $1.8 million and $1.3 million, respectively, due to the timing of payments in international regions.

Investing activities

Investing activities used $110.9 million of net cash for the nine months ended March 31, 2020. Capital expenditures were $24.0 million as we continued to invest in our existing asset base and for capacity expansion and productivity improvements. The Osprey acquisition used $54.5 million of cash. We invested $31.0 million in short-term investments.

Financing activities

Financing activities provided $26.0 million of net cash for the nine months ended March 31, 2020. Net borrowings on our Revolver provided $50.0 million, primarily to fund the Osprey acquisition. We paid $14.6 million in dividends to holders of our Class A and Class B common stock. We paid $9.5 million in scheduled debt and other requirements.

Liquidity and capital resources

We believe our cash on hand, our operating cash flows and our financing arrangements, including the availability of borrowings under the Revolver and foreign credit lines, will be sufficient to support our ongoing cash needs. We are aware of the current and potential future effects of COVID-19 on the financial markets. At this time, we expect adequate liquidity for at least the next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will be able to comply with the terms of the covenants under the Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise, 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 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:

   March 31,   June 30, 
As of  2020   2019 
   (in thousands, except ratios) 
Cash and cash equivalents and short-term investments  $81,748   $81,573 
Working capital   212,363    242,902 
Ratio of current assets to current liabilities   2.47:1    2.71:1 

We define working capital as total current assets (excluding cash and cash equivalents and short-term investments) less total current liabilities (excluding current portion of long-term debt). We calculate the ratio of current assets to current liabilities based on this definition.

At March 31, 2020, we had $146.0 million in outstanding borrowings under the Revolver. We had outstanding letters of credit and other commitments of $2.7 million, leaving $101.3 million available for borrowings and letters of credit.

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We currently intend to pay quarterly dividends on our Class A and Class B common stock, subject to approval from the Board of Directors. On May 4, 2020, our Board of Directors declared a cash dividend of $0.12 per share on Class A and Class B common stock outstanding on the record date of June 3, 2020, payable on June 24, 2020. Our future ability to pay dividends will depend upon our results of operations, financial condition, capital requirements, our ability to obtain funds from our subsidiaries and other factors that our Board of Directors deems relevant. Additionally, the terms of our current and any future agreements governing our indebtedness could limit our ability to pay dividends or make other distributions.

As of March 31, 2020, our cash and cash equivalents and short-term investments included $79.6 million held by our international subsidiaries. There are no restrictions on cash distributions to PAHC from our international subsidiaries.

Contractual obligations

As of March 31, 2020, there were no material changes in payments due under contractual obligations from those disclosed in the Annual Report on Form 10-K for the year ended June 30, 2019.

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. We present Adjusted EBITDA to permit investors to more fully understand how management assesses performance.

We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure

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is that it provides a view of our operations without including all events during a period, such as the depreciation of property, plant and equipment or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies.

Certain significant items

Adjusted EBITDA is calculated prior to considering certain items. We evaluate such items on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual or non-operational nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis.

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 our normal business on a regular basis. We consider foreign currency gains and losses to be non-operational because they arise principally from intercompany transactions and are largely non-cash in nature.

New accounting standards

We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), effective July 1, 2019.

For discussion of new accounting standards, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies and New Accounting Standards.”

Critical Accounting Policies

Critical accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Significant estimates include depreciation and amortization periods of long-lived and intangible assets, recoverability of long-lived and intangible assets and goodwill, realizability of deferred income tax and value-added tax assets, assessment of the incremental borrowing rates and reasonably certain renewal periods associated with our lease agreements, legal and environmental matters and actuarial assumptions related to our pension plans. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain. The pandemic is expected to affect our sales, expenses, reserves and allowances, manufacturing operations, research and development costs and employee-related amounts. The pandemic may have significant economic impact on local, regional, national and international customers and markets. New information that may emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.

Our significant accounting policies are described in the notes to the consolidated financial statements included in the Annual Report. As of March 31, 2020, there have been no material changes to any of the critical accounting policies contained therein, other than those related to the adoption of the new lease standard, ASU 2016-02, Leases (Topic 842). See “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies and New Accounting Standards” for the changes made to our lease accounting policy.

Forward-Looking Statements

This Quarterly 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,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “believe,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

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