UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
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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 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
(unaudited) | ||||||||||||
(in thousands, except per share amounts) | ||||||||||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Operating income |
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Interest expense, net |
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Foreign currency (gains), net |
| ( |
| ( |
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Income before income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | $ | | $ | | ||||
Net income per share |
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basic | $ | | $ | | $ | | $ | | ||||
diluted | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding |
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basic |
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diluted |
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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 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Change in fair value of derivative instruments |
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Foreign currency translation adjustment |
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| ( |
| ( |
| ( | ||||
Unrecognized net pension gains |
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Provision for income taxes |
| ( |
| ( |
| ( |
| ( | ||||
Other comprehensive income (loss) |
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| ( |
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Comprehensive income | $ | | $ | | $ | | $ | |
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 |
| 2022 |
| 2021 | ||
(unaudited) | ||||||
| (in thousands, except share and per share amounts) | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | | $ | | ||
Short-term investments |
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Accounts receivable, net |
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Inventories, net |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Intangibles, net |
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Goodwill |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current portion of long-term debt | $ | | $ | | ||
Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Revolving credit facility |
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Long-term debt |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 7) |
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Common stock, par value $ |
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Preferred stock, par value $ |
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Paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
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 |
| 2022 |
| 2021 | ||
(unaudited) | ||||||
(in thousands) | ||||||
OPERATING ACTIVITIES |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to |
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net cash provided (used) by operating activities: |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Stock-based compensation |
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Acquisition-related items |
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Deferred income taxes |
| ( |
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Foreign currency (gains), net |
| ( |
| ( | ||
(Gain) on sale of investment | ( | — | ||||
Other |
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Changes in operating assets and liabilities, net of business acquisition: |
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Accounts receivable, net |
| ( |
| ( | ||
Inventories, net |
| ( |
| ( | ||
Other current assets |
| ( |
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Other assets |
| ( |
| ( | ||
Accounts payable |
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Accrued expenses and other liabilities |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Purchases of short-term investments |
| ( |
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Maturities of short-term investments |
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Capital expenditures | ( | ( | ||||
Business acquisition | ( | — | ||||
Sale of investment | | — | ||||
Other, net |
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| ( | ||
Net cash used by investing activities |
| ( |
| ( | ||
FINANCING ACTIVITIES |
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Revolving credit facility borrowings |
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Revolving credit facility repayments |
| ( |
| ( | ||
Payments of long-term debt and other |
| ( |
| ( | ||
Dividends paid |
| ( |
| ( | ||
Payment of contingent consideration | ( | — | ||||
Net cash provided (used) by financing activities |
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| ( | ||
Effect of exchange rate changes on cash |
| ( |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | |
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
Accumulated | ||||||||||||||||||||
Others | ||||||||||||||||||||
Shares of | Comprehensive | |||||||||||||||||||
Common | Common | Preferred | Paid-in | Retained | Income | |||||||||||||||
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total | |||||||
(unaudited) | ||||||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||||||
As of June 30, 2021 |
| | $ | | $ | — | $ | | $ | | $ | ( | $ | | ||||||
Comprehensive income (loss) | — | — | — | — | | ( | ( | |||||||||||||
Dividends declared ($ |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
As of September 30, 2021 | | $ | | $ | — | $ | | $ | | $ | ( | $ | | |||||||
Comprehensive income (loss) | — | — | — | — | | ( | | |||||||||||||
Dividends declared ($ | — | — | — | — | ( | — | ( | |||||||||||||
As of December 31, 2021 |
| | $ | | $ | — | $ | | $ | | $ | ( | $ | | ||||||
Comprehensive income | — | — | — | — | | | | |||||||||||||
Dividends declared ($ | — | — | — | — | ( | — | ( | |||||||||||||
As of March 31, 2022 | | $ | | $ | — | $ | | $ | | $ | ( | $ | |
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| Other | |||||||||||||||
Shares of | Comprehensive | |||||||||||||||||||
Common | Common | Preferred | Paid-in | Retained | Income | |||||||||||||||
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total | |||||||
(unaudited) | ||||||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||||||
As of June 30, 2020 | | $ | | $ | — | $ | | $ | | $ | ( | $ | | |||||||
Comprehensive income (loss) |
| — |
| — |
| — |
| — |
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| ( |
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Dividends declared ($ |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Stock-based compensation expense |
| — |
| — |
| — |
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| — |
| — |
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As of September 30, 2020 | | $ | | $ | — | $ | | $ | | $ | ( | $ | | |||||||
Comprehensive income | — | — | — | — | | | | |||||||||||||
Dividends declared ($ | — | — | — | — | ( | — | ( | |||||||||||||
Stock-based compensation expense | — | — | — | | — | — | | |||||||||||||
As of December 31, 2020 |
| | $ | | $ | — | $ | | $ | | $ | ( | $ | | ||||||
Comprehensive income (loss) | — | — | — | — | | ( | | |||||||||||||
Shares issued pursuant to stock incentive plan | | — | — | — | — | — | — | |||||||||||||
Dividends declared ($ | — | — | — | — | ( | — | ( | |||||||||||||
As of March 31, 2021 | | $ | | $ | — | $ | | $ | | $ | ( | $ | |
The accompanying notes are an integral part of these consolidated financial statements
7
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, dairy and beef cattle, swine, 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, 2022 and 2021, 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, 2021 (the “Annual Report”), filed with the Securities and Exchange Commission on August 25, 2021 (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, 2021, 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 uncertain. Although vaccines are available, distribution efforts vary widely country-by-country and state-by-state. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the pandemic. The pandemic may have significant economic impacts on customers, suppliers and markets. The pandemic may affect our future revenues, expenses, reserves and allowances, manufacturing operations and employee-related costs. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
The consolidated financial statements include the accounts of Phibro and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated from the consolidated financial statements. The decision 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. As of March 31, 2022, there have been no material changes to any of the significant accounting policies contained therein.
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 vesting of
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. There are no outstanding restricted stock units as of March 31, 2022.
Three Months | Nine Months | |||||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average number of shares – basic |
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Dilutive effect of restricted stock units |
| — |
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Weighted average number of shares – diluted |
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Net income per share |
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basic | $ | | $ | | $ | | $ | | ||||
diluted | $ | | $ | | $ | | $ | |
New Accounting Standards
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2021-10 Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance has established annual disclosure requirements over transactions with a government that are accounted for by applying a grant accounting model to include the nature of the transactions and the related accounting policy used to account for the transactions, the line items and the amounts included in the balance sheet and income statement, and the significant terms and conditions of the transactions (including commitments and contingencies). The disclosures are required for the annual periods beginning after December 15, 2021. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.
ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, requires revenue contract assets and liabilities acquired in a business combination be recognized and measured under the revenue standard provided in Topic 606. Under previous guidance, revenue contract assets and liabilities would have been measured at fair value. The ASU is required to be adopted for annual periods beginning after December 15, 2022. Early adoption is permitted and would be applied retrospectively in the year adopted. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.
ASU 2020-04 and 2021-01, Reference Rate Reform (Topic 848), provide optional expedients and exceptions to GAAP guidance, if certain criteria are met, for contracts, hedging relationships and derivative instruments that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates expected to be discontinued or modified by rate reform. The overall purpose of Topic 848 is to ease the financial reporting burdens related to the expected market transition to alternative reference rates. These ASUs may be applied prospectively to contract modifications made and hedging relationships entered on or before December 31, 2022. We continue to evaluate 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. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and must be applied on a retrospective basis. The adoption did not have a material effect on our consolidated financial statements.
3. Statements of Operations—Additional Information
Disaggregated revenue, deferred revenue and customer payment terms
We develop, manufacture and market a broad range of products for food animals including poultry, beef and dairy cattle, swine, 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, cattle, and swine integrators and through commercial animal feed manufacturers, wholesalers and distributors. The animal health industry and demand
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 on regions where the majority of livestock production is consolidated in large commercial farms.
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. MFAs and other also include other processing aids used to improve production efficiency in the ethanol fermentation industry. |
● | Nutritional specialties: Nutritional specialty products enhance nutrition to help improve health and performance in areas such as immune system function and digestive health. We are also a developer, manufacturer and marketer of microbial products and bioproducts for a variety of applications serving animal health and nutrition, environmental, industrial and agricultural customers. |
● | Vaccines: Our vaccines are primarily focused on preventing diseases in poultry and swine. They protect animals from either viral or bacterial disease challenges. We develop, manufacture and market conventionally licensed and autogenous vaccine products and produce and market adjuvants to vaccine manufacturers. We have developed and market an innovative and proprietary delivery platform for vaccines. |
Mineral Nutrition
The Mineral Nutrition business is comprised of formulations and concentrations of trace minerals such as zinc, manganese, copper, iron, and other compounds, with a focus on customers in North America. Our customers use these products to fortify the daily feed requirements of their livestock’s diets and maintain an optimal balance of trace elements in each animal. We manufacture and market a broad range of mineral nutrition products for food animals including beef and dairy cattle, swine and poultry.
Performance Products
The Performance Products business manufactures and markets specialty ingredients for use in the personal care, industrial chemical and chemical catalyst industries, predominantly in the United States.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Animal Health |
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MFAs and other | $ | | $ | | $ | | $ | | ||||
Nutritional specialties |
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Vaccines |
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Total Animal Health | $ | | $ | | $ | | $ | | ||||
Mineral Nutrition |
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Performance Products |
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Total | $ | | $ | | $ | | $ | |
Net Sales by Region
Three Months | Nine Months | |||||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
United States | $ | | $ | | $ | | $ | | ||||
Latin America and Canada |
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Europe, Middle East and Africa |
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Asia Pacific |
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Total | $ | | $ | | $ | | $ | |
Net sales by region are based on country of destination.
Deferred revenue was $
Our customer payment terms generally range from
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest Expense and Depreciation and Amortization
Three Months | Nine Months | |||||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest expense, net | ||||||||||||
Term loan | $ | | $ | | $ | | $ | | ||||
Revolving credit facility |
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Amortization of debt issuance costs |
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Other |
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Interest expense |
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Interest income |
| ( |
| ( |
| ( |
| ( | ||||
$ | | $ | | $ | | $ | | |||||
Three Months | Nine Months | |||||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Depreciation and amortization |
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Depreciation of property, plant and equipment | $ | | $ | | $ | | $ | | ||||
Amortization of intangible assets |
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$ | | $ | | $ | | $ | |
4. Balance Sheets—Additional Information
March 31, | June 30, | |||||
As of |
| 2022 |
| 2021 | ||
Inventories |
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Raw materials | $ | $ | | |||
Work-in-process | | |||||
Finished goods | | |||||
$ | | $ | |
| March 31, | June 30, | ||||
As of |
| 2022 |
| 2021 | ||
Other assets | ||||||
ROU operating lease assets | $ | |
| $ | | |
Deferred income taxes |
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Deposits |
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Insurance investments |
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Equity method investments |
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Derivative instruments | | | ||||
U.S. pension plan |
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Debt issuance costs |
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Other | | | ||||
$ | |
| $ | |
In February 2022, we acquired a business for $
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
allocation is preliminary and subject to change, including final working capital adjustments. The business is included in the MFAs and other product category under the Animal Health segment.
| March 31, |
| June 30, | |||
As of |
| 2022 |
| 2021 | ||
Goodwill |
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Balance at beginning of period | $ | | $ | | ||
Acquisition |
| |
| — | ||
Foreign currency translation |
| |
| — | ||
Balance at end of period | $ | | $ | |
| March 31, |
| June 30, | |||
As of |
| 2022 |
| 2021 | ||
Accrued expenses and other current liabilities |
|
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Employee related | $ | | $ | | ||
Current operating lease liabilities |
| |
| | ||
Commissions and rebates | | | ||||
Professional fees |
| |
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Income and other taxes | | | ||||
Derivative instruments | | | ||||
Contingent consideration |
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Restructuring costs |
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Insurance-related |
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Other |
| |
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$ | | $ | |
| March 31, |
| June 30, | |||
As of |
| 2022 |
| 2021 | ||
Other liabilities | ||||||
Long-term operating lease liabilities | $ | | $ | | ||
Long-term and deferred income taxes |
| | | |||
Supplemental retirement benefits, deferred compensation and other | | | ||||
International retirement plans |
| |
| | ||
Other long-term liabilities |
| |
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$ | | $ | |
March 31, |
| June 30, | ||||
As of |
| 2022 |
| 2021 | ||
Accumulated other comprehensive loss |
|
| ||||
Derivative instruments | $ | | $ | ( | ||
Foreign currency translation adjustment |
| ( |
| ( | ||
Unrecognized net pension losses |
| ( |
| ( | ||
(Provision) benefit for income taxes on derivative instruments |
| ( |
| | ||
Benefit for income taxes on long-term intercompany investments | | | ||||
Provision for income taxes on net pension losses | ( | ( | ||||
$ | ( | $ | ( |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Debt
Term Loans and Revolving Credit Facilities
In April 2021, we entered into an amended and restated credit agreement (the “2021 Credit Agreement”) under which we have a term A loan in an aggregate initial principal amount of $
The 2021 Credit Agreement requires, among other things, compliance with financial covenants that permit: (i)
As of March 31, 2022, we had $
In July 2017, we entered into an interest rate swap agreement on $
In March 2020, we entered into an interest rate swap agreement on an additional $
The 2017 and 2020 interest rate swap agreements will continue to remain in place on our interest obligations associated with the 2021 Credit Facilities.
As of March 31, 2022, the interest rates for the 2021 Revolver and the 2021 Term A Loan were
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-Term Debt
| March 31, |
| June 30, | |||
As of | 2022 | 2021 | ||||
2021 Term A Loan due April 2026 | $ | | $ | | ||
Unamortized debt issuance costs |
| ( |
| ( | ||
| |
| | |||
Less: current maturities |
| ( |
| ( | ||
$ | | $ | |
6. Related Party Transactions
Certain relatives of Jack C. Bendheim, our Chairman, President and Chief Executive Officer, provided services to the Company as employees or consultants and received aggregate compensation and benefits of approximately $
7. 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 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 on our experience, 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 entered
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
into a settlement agreement with a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling ("OPOG") to remediate the contaminated groundwater that has migrated from the Omega Chemical Site in accordance with a general remedy selected by EPA. The EPA has named Phibro-Tech and certain other subsidiaries of PAHC as potentially responsible parties (“PRPs”) due to groundwater contamination from Phibro-Tech’s Santa Fe Springs facility that has allegedly commingled with contaminated groundwater from the Omega Chemical Site. In September 2012, the EPA notified approximately
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 $
Claims and Litigation
PAHC and its subsidiaries are party to various 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.
8. 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 no longer is an effective hedge, we discontinue hedge accounting in the period of the assessment for that derivative, and immediately recognize any unrealized gains or losses related to the fair value of that derivative in the consolidated statements of operations.
We record derivatives at fair value in the consolidated balance sheets. For additional details regarding fair value, see “Note 9 — Fair Value Measurements.”
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In July 2017, we entered into an interest rate swap agreement on the first $
We have entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The individual option contracts mature monthly through
. The forecasted inventory purchases are probable of occurring and the individual option contracts were designated as highly effective cash flow hedges.The consolidated balance sheet includes the net fair values of our outstanding foreign currency option contracts within the respective line items, based on the net financial position and maturity date of the individual contracts. The consolidated balance sheet includes the net fair values of our outstanding interest rate swaps within the respective balance sheet line items, based on the expected timing of the cash flows. The consolidated balance sheet includes assets and liabilities for the fair values of outstanding derivatives that are designated and effective as cash flow hedges as follows:
March 31, | June 30, | |||||
As of |
| 2022 |
| 2021 | ||
Other current assets |
|
|
|
| ||
Brazil Real options, net | $ | | $ | — | ||
Interest rate swaps |
| |
| — | ||
Other assets | ||||||
Brazil Real options, net | | | ||||
Interest rate swaps | | | ||||
Accrued expense and other current liabilities |
|
|
|
| ||
Brazil Real options, net |
| — |
| ( | ||
Interest rate swaps |
| ( |
| ( | ||
Total Fair Value |
|
|
| |||
Brazil Real options, net |
| |
| | ||
Interest rate swaps |
| |
| ( |
Notional amounts of the derivatives as of the balance sheet date were:
March 31, | |||
As of |
| 2022 | |
Brazil Real call options | R$ | | |
Brazil Real put options |
| R$ | |
Interest rate swaps | $ | |
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The consolidated statements of operations and statements of other comprehensive income (“OCI”) for the periods ended March 31, 2022 and 2021 included the effects of derivatives as follows:
| Three Months |
| Nine Months | |||||||||
For the Periods Ended March 31 | 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Brazil Real options, net |
|
|
|
|
|
|
| |||||
Expense recorded in consolidated statement of operations | $ | | $ | | $ | | $ | | ||||
Consolidated statement of operations - total cost of goods sold | $ | | $ | | $ | | $ | | ||||
(Income) expense recorded in OCI | $ | ( | $ | | $ | ( | $ | ( | ||||
Interest rate swaps |
|
|
|
|
|
|
|
| ||||
Expense recorded in consolidated statements of operations | $ | | $ | | $ | | $ | | ||||
Consolidated statement of operations - total interest expense, net | $ | | $ | | $ | | $ | | ||||
(Income) recorded in OCI | $ | ( | $ | ( | $ | ( | $ | ( |
We recognize gains and losses related to foreign currency derivatives as a component of cost of goods sold at the time the hedged item is sold. Inventory as of March 31, 2022, included realized net losses of $
9. Fair Value Measurements
Short-term investments
Our short-term investments consist of cash deposits held at financial institutions. We consider the carrying amounts of these short-term investments to be representative of their fair value.
Current Assets and Liabilities
We consider the carrying amounts of current assets and current liabilities to be representative of their fair value because of the current nature of 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.
Debt
We record debt, including term loans and revolver balances, at amortized cost in our consolidated financial statements. We believe the carrying value of the debt is approximately equal to its fair value, due to the variable nature of the instruments and our evaluation of estimated market prices.
Derivatives
We determine the fair value of derivative instruments based upon pricing models using observable market inputs for these types of financial instruments, such as spot and forward currency translation rates.
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. Assets and liabilities may be required to be measured at fair value on a non-recurring basis, either upon initial recognition or for subsequent accounting or reporting, including the initial recognition of net assets acquired in a business
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
combination. These fair value measurements involve unobservable inputs that reflect estimates and assumptions that represent Level 3 inputs.
Fair Value of Assets (Liabilities)
As of | March 31, 2022 | June 30, 2021 | ||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | |||||||
Short-term investments | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Foreign currency derivatives | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Interest rate swaps | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Contingent consideration on acquisitions | $ | | $ | | $ | | $ | | $ | | $ | ( |
There were
The contingent consideration on acquisitions was the minimum amount payable in accordance with the acquisition agreement for Osprey. The contingent consideration of $
10. 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, and (d) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency (gains) losses, net and certain items that we consider to be unusual, non-operational or non-recurring.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.
| Three Months |
| Nine Months | ||||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health | $ | | $ | | $ | | $ | | |||||
Mineral Nutrition |
| |
| |
| |
| | |||||
Performance Products |
| |
| |
| |
| | |||||
Total segments | $ | | $ | | $ | | $ | | |||||
Depreciation and amortization | |||||||||||||
Animal Health | $ | | $ | | $ | | $ | | |||||
Mineral Nutrition |
| |
| |
| |
| | |||||
Performance Products |
| |
| |
| |
| | |||||
Total segments | $ | | $ | | $ | | $ | | |||||
Adjusted EBITDA | |||||||||||||
Animal Health | $ | | $ | | $ | | $ | | |||||
Mineral Nutrition |
| |
| |
| |
| | |||||
Performance Products |
| |
| |
| |
| | |||||
Total segments | $ | | $ | | $ | | $ | | |||||
Reconciliation of income before income taxes to Adjusted EBITDA | |||||||||||||
Income before income taxes | $ | | $ | | $ | | $ | | |||||
Interest expense, net |
| |
| |
| |
| | |||||
Depreciation and amortization – Total segments |
| |
| |
| |
| | |||||
Depreciation and amortization – Corporate |
| |
| |
| |
| | |||||
Corporate costs | | | | | |||||||||
Gain on sale of investment |
| — |
| |
| ( |
| — | |||||
Acquisition-related costs of goods sold |
| |
| |
| |
| — | |||||
Acquisition-related transaction costs |
| |
| |
| |
| — | |||||
Stock-based compensation |
| — |
| |
| — |
| | |||||
Foreign currency (gains) , net |
| ( |
| ( |
| ( |
| ( | |||||
Adjusted EBITDA – Total segments | $ | | $ | | $ | | $ | |
March 31, |
| June 30, | ||||
As of |
| 2022 |
| 2021 | ||
Identifiable assets |
|
|
|
| ||
Animal Health | $ | | $ | | ||
Mineral Nutrition |
| |
| | ||
Performance Products |
| |
| | ||
Total segments |
| |
| | ||
Corporate |
| |
| | ||
Total | $ | | $ | |
The Animal Health segment includes all goodwill of the Company. Corporate assets include cash and cash equivalents, short-term investments, debt issuance costs, income tax-related assets and certain other assets.
20
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” in Item 1A of our Annual Report 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, beef and dairy cattle, swine, 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.
Conflict between Russia and Ukraine
In response to the military conflict between Russia and Ukraine that began in February 2022, our Company and employees have provided support to Ukraine in the form of monetary donations, free product and humanitarian services. Our limited intent for the Russian market is to continue to provide medicines and vaccines, and related regulatory and technical support, to help existing customers combat disease challenges in the production of food animals on their farms. We have no production or direct distribution operations and no planned investments in Russia.
Since the conflict began, the United States and other North Atlantic Treaty Organization (NATO) member states, as well as non-member states, announced targeted economic sanctions on Russia, including certain Russian citizens and enterprises. The continuation of the conflict may trigger additional economic and other sanctions, as well as broader military conflicts. The potential impact of the conflict and any resulting bans, sanctions, boycotts or broader military conflicts on our business is uncertain at the current time due to the fluid nature of the conflict. The potential impacts could include supply chain and logistics disruptions, macroeconomic impacts resulting from the exclusion of Russian financial institutions from the global banking system, volatility in foreign exchange rates and interest rates, inflationary pressures on raw materials and energy as well as heightened cybersecurity threats. Our sales to Russia and Ukraine represent approximately 1% of annual consolidated net sales.
We cannot know if the conflict, which is unfolding in real-time, could escalate and result in broader economic and security concerns that could adversely affect our business, financial condition, or results of operations.
Effects of the COVID-19 pandemic
The global food and animal production industry has experienced demand disruption, production impacts, price volatility and international currency volatility due to the COVID-19 pandemic. The response to the global outbreak of COVID-19 continues to evolve. Governmental authorities continue to implement measures to contain virus outbreaks, such as travel bans, quarantines, shelter-in-place orders, site closures and business shutdowns. Although vaccines are now available, distribution efforts vary widely country-by-country and state-by-state. The pandemic has had significant economic impacts on customers, suppliers and markets. New information may continue to emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the economic impact. We believe the global food and animal production industry is returning to stability, but the potential impact of COVID-19 continues to evolve and future industry outlooks remain uncertain.
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
21
people remain in close virtual contact with our customers in instances where face-to-face interactions are not available. Some of our administrative and management staff are still working remotely, while others have returned to the office with varying frequency. We have experienced some cost increases from supply chain disruptions as well as the safety measures implemented to protect our employees. We have maintained headcount and compensation at or above constant levels. We continue to monitor sales trends, cash flow and liquidity.
The uncertainties surrounding the COVID-19 pandemic remain fluid, particularly regarding the emergence of virus variants and the effectiveness of vaccines against the current and any future variants. We are still unable to predict with confidence the effectiveness of measures to contain COVID-19 and hence the impact on the economies where we manufacture and sell our products. While we continue to adapt our operations and mitigate the risks and challenges posed by COVID-19, 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. Our current operational results have been impacted while our future operational results may continue to be impacted by government-mandated response efforts, supply chain and manufacturing disruptions, increased volatility in raw material costs and decreased demand due to changes in our customer purchasing patterns and preferences. We are unable to predict with confidence the nature and timing of when any of these events may occur and the effects COVID-19 will have on our business, our consolidated results and the broader economic environment going forward. 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, see “Risk Factors” in Item 1A of our Annual Report.
Trends and uncertainties
In April 2016, the Food and Drug Administration ("FDA") began initial steps to withdraw approval of carbadox via a regulatory process known as a Notice of Opportunity for Hearing ("NOOH"), due to concerns that certain residues from the product may persist in animal tissues for longer than previously determined. The NOOH process provided Phibro with an opportunity to defend the safety of carbadox prior to the FDA taking final steps to remove carbadox from the market. Over the next four years, as part of an ongoing process of responding to the inquiries from the FDA's Center for Veterinary Medicine ("CVM"), we provided extensive and meticulous research and data that confirmed the safety of carbadox. In March 2018, the FDA indefinitely stayed the withdrawal proceedings. In July 2020, the FDA announced it does not agree with Phibro's scientific conclusions that carbadox is safe under the current conditions of use. Instead of proceeding to a hearing on the scientific concerns raised in the 2016 NOOH, consistent with the normal regulatory procedure, the FDA announced that it was withdrawing the current NOOH, and issuing a proposed order to review the regulatory method for carbadox. The approved regulatory method determines if there are residues of carcinogenic concern in animal tissue at the time of slaughter. If the order is finalized, the FDA has indicated it plans to issue a new NOOH proposing the withdrawal of carbadox from the market because of a lack of an approved regulatory method.
In September 2020, Phibro commented on the proposed order, reiterating the safety of carbadox and the appropriateness of the regulatory method, and further offered to work with the CVM to generate additional data to support the existing regulatory method or select a suitable alternative regulatory method. Phibro disagreed with the agency's actions and submitted a request to the FDA Office of the Commissioner that the agency continue the NOOH process it started in 2016 and proceed with a hearing to review the substantial body of data supporting the safety of carbadox.
On March 10, 2022, the FDA held a virtual public hearing seeking data and information related to the safety of carbadox. Phibro has continued an ongoing process of responding collaboratively and transparently to CVM’s inquiries to provide extensive and meticulous research and data that confirm the safety of carbadox. Carbadox has been approved and sold in the United States for 50 years and is a widely used treatment for controlling bacterial diseases in swine, including Salmonella and swine dysentery. In the event the FDA continues to assert that carbadox should be removed from the market, we will argue that we are entitled to and expect to have a full evidentiary hearing on the merits before an administrative law judge. Should we be unable to successfully defend the safety of the product, the loss of carbadox sales will have an adverse effect on our financial condition and results of operations. Sales of Mecadox (carbadox) for the twelve months ended March 31, 2022, were $20 million. As of the date of this Quarterly Report on Form 10-Q, Mecadox continues to be available for use by swine producers.
22
Analysis of the consolidated statements of operations
Summary Results of Operations
Three Months | Nine Months | ||||||||||||||||||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| Change |
|
| 2022 |
| 2021 |
| Change | ||||||||||||
(in thousands, except per share amounts and percentages) | |||||||||||||||||||||||||
Net sales |
| $ | 239,619 |
| $ | 211,729 |
| $ | 27,890 |
| 13 | % |
| $ | 686,996 |
| $ | 613,072 |
| $ | 73,924 |
| 12 | % | |
Gross profit |
| 71,626 |
| 69,165 |
| 2,461 | 4 | % |
| 206,976 |
| 201,549 |
| 5,427 | 3 | % | |||||||||
Selling, general and administrative expenses |
| 52,432 |
| 49,033 |
| 3,399 | 7 | % |
| 150,876 |
| 145,839 |
| 5,037 | 3 | % | |||||||||
Operating income |
| 19,194 |
| 20,132 |
| (938) | (5) | % |
| 56,100 |
| 55,710 |
| 390 | 1 | % | |||||||||
Interest expense, net |
| 2,925 |
| 2,933 |
| (8) | — | % |
| 8,767 |
| 8,957 |
| (190) | (2) | % | |||||||||
Foreign currency (gains), net |
| (10,564) |
| (583) |
| (9,981) | * |
| (12,625) |
| (3,590) |
| (9,035) | * | |||||||||||
Income before income taxes |
| 26,833 |
| 17,782 |
| 9,051 | 51 | % |
| 59,958 |
| 50,343 |
| 9,615 | 19 | % | |||||||||
Provision for income taxes |
| 9,144 |
| 5,621 |
| 3,523 | 63 | % |
| 18,270 |
| 13,079 |
| 5,191 | 40 | % | |||||||||
Net income | $ | 17,689 | $ | 12,161 | $ | 5,528 | 45 | % | $ | 41,688 | $ | 37,264 | $ | 4,424 | 12 | % | |||||||||
Net income per share |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Basic | $ | 0.44 | $ | 0.30 | $ | 0.14 | 47 | % | $ | 1.03 | $ | 0.92 | $ | 0.11 | 12 | % | |||||||||
Diluted | $ | 0.44 | $ | 0.30 | $ | 0.14 | 47 | % | $ | 1.03 | $ | 0.92 | $ | 0.11 | 12 | % | |||||||||
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Basic |
| 40,504 |
| 40,483 |
|
|
|
| 40,504 |
| 40,463 |
|
| ||||||||||||
Diluted |
| 40,504 |
| 40,504 |
|
|
|
| 40,504 |
| 40,504 |
|
| ||||||||||||
Ratio to net sales |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Gross profit |
| 29.9 | % |
| 32.7 | % |
|
|
|
| 30.1 | % |
| 32.9 | % |
|
| ||||||||
Selling, general and administrative expenses |
| 21.9 | % |
| 23.2 | % |
|
|
|
| 22.0 | % |
| 23.8 | % |
|
| ||||||||
Operating income |
| 8.0 | % |
| 9.5 | % |
|
|
|
| 8.2 | % |
| 9.1 | % |
|
| ||||||||
Income before income taxes |
| 11.2 | % |
| 8.4 | % |
|
|
|
| 8.7 | % |
| 8.2 | % |
|
| ||||||||
Net income |
| 7.4 | % |
| 5.7 | % |
|
|
|
| 6.1 | % |
| 6.1 | % |
|
| ||||||||
Effective tax rate |
| 34.1 | % |
| 31.6 | % |
|
|
|
| 30.5 | % |
| 26.0 | % |
|
|
Certain amounts and percentages may reflect rounding adjustments.
* | Calculation not meaningful |
23
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 |
| 2022 |
| 2021 |
| Change |
| 2022 |
| 2021 |
| Change | |||||||||||
Net sales | (in thousands, except percentages) | ||||||||||||||||||||||
MFAs and other | $ | 84,330 | $ | 78,530 | $ | 5,800 |
| 7 | % | $ | 259,812 | $ | 238,810 | $ | 21,002 | 9 | % | ||||||
Nutritional specialties |
| 41,394 |
| 36,978 |
| 4,416 |
| 12 | % |
| 114,721 |
| 105,972 |
| 8,749 | 8 | % | ||||||
Vaccines |
| 22,865 |
| 18,872 |
| 3,993 |
| 21 | % |
| 65,987 |
| 54,205 |
| 11,782 | 22 | % | ||||||
Animal Health |
| 148,589 |
| 134,380 |
| 14,209 |
| 11 | % |
| 440,520 |
| 398,987 |
| 41,533 | 10 | % | ||||||
Mineral Nutrition |
| 69,033 |
| 58,153 |
| 10,880 |
| 19 | % |
| 190,120 |
| 163,750 |
| 26,370 | 16 | % | ||||||
Performance Products |
| 21,997 |
| 19,196 |
| 2,801 |
| 15 | % |
| 56,356 |
| 50,335 |
| 6,021 | 12 | % | ||||||
Total | $ | 239,619 | $ | 211,729 | $ | 27,890 |
| 13 | % | $ | 686,996 | $ | 613,072 | $ | 73,924 | 12 | % | ||||||
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Animal Health | $ | 29,232 | $ | 30,962 | $ | (1,730) |
| (6) | % | $ | 90,565 | $ | 94,412 | $ | (3,847) | (4) | % | ||||||
Mineral Nutrition |
| 7,303 |
| 5,232 |
| 2,071 |
| 40 | % |
| 17,361 |
| 12,464 |
| 4,897 | 39 | % | ||||||
Performance Products |
| 2,865 |
| 2,929 |
| (64) |
| (2) | % |
| 6,327 |
| 7,167 |
| (840) | (12) | % | ||||||
Corporate |
| (11,404) |
| (11,073) |
| (331) |
| (3) | % |
| (34,699) |
| (33,162) |
| (1,537) | (5) | % | ||||||
Total | $ | 27,996 | $ | 28,050 | $ | (54) |
| — | % | $ | 79,554 | $ | 80,881 | $ | (1,327) | (2) | % | ||||||
Adjusted EBITDA ratio to segment net sales |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Animal Health |
| 19.7 | % |
| 23.0 | % |
|
|
|
|
| 20.6 | % |
| 23.7 | % |
|
| |||||
Mineral Nutrition |
| 10.6 | % |
| 9.0 | % |
|
|
|
|
| 9.1 | % |
| 7.6 | % |
|
| |||||
Performance Products |
| 13.0 | % |
| 15.3 | % |
|
|
|
|
| 11.2 | % |
| 14.2 | % |
|
| |||||
Corporate(1) |
| (4.8) | % |
| (5.2) | % |
|
|
|
|
| (5.1) | % |
| (5.4) | % |
|
| |||||
Total(1) |
| 11.7 | % |
| 13.2 | % |
|
|
|
|
| 11.6 | % |
| 13.2 | % |
|
|
(1) | Reflects ratio to total net sales |
24
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 |
| 2022 |
| 2021 |
| Change |
| 2022 |
| 2021 |
| Change | |||||||||||
(in thousands, except percentages) | |||||||||||||||||||||||
Net income | $ | 17,689 | $ | 12,161 | $ | 5,528 |
| 45 | % | $ | 41,688 | $ | 37,264 | $ | 4,424 |
| 12 | % | |||||
Interest expense, net | 2,925 | 2,933 | (8) | — | % | 8,767 | 8,957 | (190) | (2) | % | |||||||||||||
Provision for income taxes | 9,144 | 5,621 | 3,523 | 63 | % | 18,270 | 13,079 | 5,191 | 40 | % | |||||||||||||
Depreciation and amortization | 8,445 | 7,918 | 527 | 7 | % | 24,300 | 24,042 | 258 | 1 | % | |||||||||||||
EBITDA | 38,203 | 28,633 | 9,570 | 33 | % | 93,025 | 83,342 | 9,683 | 12 | % | |||||||||||||
Gain on sale of investment | — | — | — | * | (1,203) | — | (1,203) | * | |||||||||||||||
Acquisition-related cost of goods sold |
| 78 |
| — |
| 78 | * | 78 | — | 78 | * | ||||||||||||
Acquisition-related transaction costs |
| 279 | — | 279 | * | 279 | — | 279 | * | ||||||||||||||
Stock-based compensation | — | — | — | * | — | 1,129 | (1,129) | * | |||||||||||||||
Foreign currency (gains), net | (10,564) |
| (583) |
| (9,981) |
| * | (12,625) |
| (3,590) |
| (9,035) | * | ||||||||||
Adjusted EBITDA | $ | 27,996 | $ | 28,050 | $ | (54) |
| — | % | $ | 79,554 | $ | 80,881 | $ | (1,327) | (2) | % |
Certain amounts may reflect rounding adjustments.
* Calculation not meaningful
Comparison of three months ended March 31, 2022 and 2021
Net sales
Net sales of $239.6 million for the three months ended March 31, 2022, increased $27.9 million, or 13%, as compared to the three months ended March 31, 2021. Animal Health, Mineral Nutrition, and Performance Products increased $14.2 million, $10.9 million, and $2.8 million, respectively.
Animal Health
Net sales of $148.6 million for the three months ended March 31, 2022, increased $14.2 million, or 11%. Net sales of MFAs and other increased $5.8 million, or 7%, driven by increased sales of processing aids used to improve production efficiency in the ethanol fermentation industry. Net sales of nutritional specialty products increased $4.4 million, or 12%, due to higher demand in dairy and microbial products, plus increased revenues from our companion animal product. Net sales of vaccines increased $4.0 million, or 21%, due to increased domestic and international volumes.
Mineral Nutrition
Net sales of $69.0 million for the three months ended March 31, 2022, increased $10.9 million, or 19%, primarily driven by higher average selling prices of trace minerals. The increase in average selling prices is due to the movement of the underlying raw material costs.
Performance Products
Net sales of $22.0 million for the three months ended March 31, 2022, increased $2.8 million, or 15%, as a result of higher volumes of ingredients for personal care products and higher volumes and average selling prices of copper-based products.
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Gross profit
Gross profit of $71.6 million for the three months ended March 31, 2022, increased $2.5 million, or 4%, as compared to the three months ended March 31, 2021. Gross margin decreased 280 basis points to 29.9% of net sales for the three months ended March 31, 2022, as compared to 32.7% for the three months ended March 31, 2021.
Animal Health gross profit increased $0.5 million, primarily driven by higher sales volume, offset by increased raw material and logistics costs. Mineral Nutrition gross profit increased $2.2 million, driven primarily by higher average selling prices, partially offset by an increase in raw material costs. Performance Products gross profit decreased $0.2 million, as a result of higher raw material and production costs.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) of $52.4 million for the three months ended March 31, 2022, increased $3.4 million, or 7%, as compared to the three months ended March 31, 2021. SG&A for the three months ended March 31, 2022, included acquisition-related costs of $0.3 million.
Animal Health SG&A increased $2.8 million, primarily due to an increase in the number of employees and employee-related costs, in addition to travel expenses. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Excluding the acquisition-related costs, Corporate costs increased by $0.3 million primarily due to increased technology-related costs.
Interest expense, net
Interest expense, net of $2.9 million for the three months ended March 31, 2022, was comparable to the three months ended March 31, 2021.
Foreign currency (gains), net
Foreign currency (gains), net for the three months ended March 31, 2022, amounted to net gains of $10.6 million, as compared to $0.6 million of net gains for the three months ended March 31, 2021. Foreign currency (gains), net primarily arose from intercompany balances. Current period gains were driven by the movement of the Turkish and Brazilian currencies relative to the U.S. dollar.
Provision for income taxes
The provision for income taxes was $9.1 million and $5.6 million for the three months ended March 31, 2022 and 2021, respectively. The effective income tax rate was 34.1% and 31.6% for the three months ended March 31, 2022 and 2021, respectively. The provision for income taxes during the three months ended March 31, 2022, included a $0.4 million expense for a change in deferred taxes, a $0.1 million expense related to the finalized regulations for the Global Intangible Low-Taxed Income (“GILTI”) tax, and a $0.1 million expense related to an uncertain tax position adjustment. The effective income tax rate, without these items, would have been 31.8% for the three months ended March 31, 2022. The provision for income taxes during the three months ended March 31, 2021, included a $0.6 million expense related to a detailed deferred tax analysis of property, plant, and equipment and intangible assets. The effective income tax rate, without this expense, would have been 27.9% for the three months ended March 31, 2021.
Net income
Net income of $17.7 million for the three months ended March 31, 2022, increased $5.5 million, as compared to net income of $12.2 million for the three months ended March 31, 2021. Operating income decreased $0.9 million, driven by higher SG&A, partially offset by favorable gross profit. The increase in gross profit in the Animal Health and Mineral Nutrition segments was due to higher product demand and higher selling prices, respectively. Gross profit in the Performance Products segment decreased due to higher raw material and production costs. Interest expense was comparable, while foreign currency (gains), net increased $10.0 million. Income tax expense increased $3.5 million.
26
Adjusted EBITDA
Adjusted EBITDA of $28.0 million for the three months ended March 31, 2022, was comparable to the three months ended March 31, 2021. Animal Health Adjusted EBITDA decreased $1.7 million due to higher SG&A, partially offset by higher revenue and gross profit. Mineral Nutrition Adjusted EBITDA increased $2.1 million, driven by increased gross profit. Performance Products Adjusted EBITDA was comparable to the three months ended March 31, 2021. Corporate expenses increased $0.3 million, primarily due to increased technology-related costs.
Comparison of nine months ended March 31, 2022 and 2021
Net sales
Net sales of $687.0 million for the nine months ended March 31, 2022, increased $73.9 million, or 12%, as compared to the nine months ended March 31, 2021. Animal Health, Mineral Nutrition, and Performance Products sales increased $41.5 million, $26.4 million, and $6.0 million, respectively.
Animal Health
Net sales of $440.5 million for the nine months ended March 31, 2022, increased $41.5 million, or 10%. Net sales of MFAs and other increased $21.0 million, or 9%, due to higher demand in international markets and higher sales of processing aids used to improve production efficiency in the ethanol fermentation industry. Net sales of nutritional specialty products grew $8.7 million, or 8%, driven by higher demand in dairy and microbial products, plus increased revenues from our companion animal product. Net sales of vaccines increased $11.8 million, or 22%, due to increased domestic and international volumes.
Mineral Nutrition
Net sales of $190.1 million for the nine months ended March 31, 2022, increased $26.4 million, or 16%. The increase was mainly attributable to an increase in average selling prices. The increase in average selling prices is correlated with the movement of the underlying raw material costs.
Performance Products
Net sales of $56.4 million for the nine months ended March 31, 2022, increased $6.0 million, or 12%, driven by higher demand for industrial chemicals and ingredients for personal care products and by higher average selling prices of the underlying raw materials.
Gross profit
Gross profit of $207.0 million for the nine months ended March 31, 2022, increased $5.4 million, or 3%, as compared to the nine months ended March 31, 2021. Gross margin decreased 280 basis points to 30.1% of net sales for the nine months ended March 31, 2022, as compared to 32.9% for the nine months ended March 31, 2021.
Animal Health gross profit increased $1.2 million as increases in product demand and average selling prices were largely offset by higher raw material and logistics costs. Mineral Nutrition gross profit increased $5.2 million, with increases in average selling prices, partially offset by increased raw material costs. Performance Products gross profit decreased $1.0 million due to higher raw material costs and production costs.
Selling, general and administrative expenses
SG&A of $150.9 million for the nine months ended March 31, 2022, increased $5.0 million, or 3%, as compared to the nine months ended March 31, 2021. SG&A for the nine months ended March 31, 2022, included a gain on sale of investment of $1.2 and acquisition-related costs of $0.3 million. SG&A for the nine months ended March 31, 2021, included $1.1 million of stock-based compensation expense. Without these items, SG&A for the nine months ended March 31, 2022 increased $7.4 million, or 5%.
27
Animal Health SG&A increased $5.5 million primarily due to an increase in the number of employees and employee-related costs, in addition to travel expenses. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Excluding the gain on sale of investment, acquisition-related costs, and stock-based compensation, Corporate expenses increased $1.5 million due to strategic investments and increased technology-related costs.
Interest expense, net
Interest expense, net of $8.8 million for the nine months ended March 31, 2022, decreased $0.2 million, or 2%, as compared to the nine months ended March 31, 2021, due to reduced amortization of debt issuance costs subsequent to the April 2021 debt refinancing.
Foreign currency (gains), net
Foreign currency (gains), net for the nine months ended March 31, 2022, amounted to net gains of $12.6 million, as compared to net gains of $3.6 million for the nine months ended March 31, 2021. Foreign currency (gains), net primarily arose from intercompany balances. Current period gains were driven by the movement of the Turkish and Brazilian currencies relative to the U.S. dollar.
Provision for income taxes
The provision for income taxes was $18.3 million and $13.1 million for the nine months ended March 31, 2022 and 2021, respectively. The effective income tax rate was 30.5% and 26.0% for the nine months ended March 31, 2022 and 2021, respectively. The provision for income taxes for the nine months ended March 31, 2022, included a $0.4 million expense for a change in deferred taxes, a $0.6 million expense from changes in uncertain tax positions related to prior years, and a $0.1 million benefit related to final regulations for the GILTI tax. The effective income tax rate, without these items, would have been 29.0% for the nine months ended March 31, 2022. The provision for income taxes during the nine months ended March 31, 2021, included (i) a $1.5 million benefit for the years ended June 30, 2020 and 2019, related to final regulations issued in July 2020 for the Global Intangible Low-Taxed Income (“GILTI”) tax, (ii) an $0.8 million benefit related to exchange rate differences on intercompany dividends, (iii) a $0.6 million benefit for the reversal of an uncertain tax position, and (iv) a $0.6 million expense related to a detailed deferred tax analysis of property, plant, and equipment and intangible assets. The effective income tax rate, without these items, would have been 30.3% for the nine months ended March 31, 2021.
Net income
Net income of $41.7 million for the nine months ended March 31, 2022, increased $4.4 million, as compared to net income of $37.3 million for the nine months ended March 31, 2021. Operating income increased $0.4 million, driven by higher gross profit, offset by higher SG&A. The increase in gross profit was primarily driven by higher average selling prices in Mineral Nutrition, offset by a decrease in gross profit in Performance Products due to higher raw material and production costs. SG&A expenses increased due to higher employee-related costs and strategic investments. The variance in foreign currency (gains), net resulted in a $9.0 million increase in income before income taxes. Income tax expense increased $5.2 million.
28
Adjusted EBITDA
Adjusted EBITDA of $79.6 million for the nine months ended March 31, 2022, decreased $1.3 million, or 2%, as compared to the nine months ended March 31, 2021. Animal Health Adjusted EBITDA decreased $3.8 million, resulting from an increase in SG&A, partially offset by higher sales and increased gross profit. Mineral Nutrition Adjusted EBITDA increased $4.9 million with higher sales and related gross profit. Performance Products Adjusted EBITDA decreased $0.8 million with lower gross profit. Corporate expenses increased $1.5 million due to increased strategic investments and technology-related costs.
Analysis of financial condition, liquidity and capital resources
Net increase in cash and cash equivalents was:
| Nine Months | ||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| Change | |||
(in thousands) | |||||||||
Cash provided (used) by: | |||||||||
Operating activities | $ | 30,075 | $ | 45,236 | $ | (15,161) | |||
Investing activities |
| (13,042) |
| (11,390) |
| (1,652) | |||
Financing activities |
| 3,954 |
| (21,632) |
| 25,586 | |||
Effect of exchange-rate changes on cash and cash equivalents |
| (451) |
| 546 |
| (997) | |||
Net increase in cash and cash equivalents | $ | 20,536 | $ | 12,760 | $ | 7,776 |
Certain amounts may reflect rounding adjustments.
Net cash provided by operating activities was comprised of:
| Nine Months | ||||||||
For the Periods Ended March 31 |
| 2022 |
| 2021 |
| Change | |||
(in thousands) | |||||||||
EBITDA | $ | 93,025 | $ | 83,342 | $ | 9,683 | |||
Adjustments: |
|
|
|
| |||||
Gain on sale of investment | (1,203) | — | (1,203) | ||||||
Acquisition-related cost of goods sold | 78 | — | 78 | ||||||
Acquisition-related transaction costs | 279 | — | 279 | ||||||
Stock-based compensation |
| — |
| 1,129 |
| (1,129) | |||
Foreign currency (gains), net |
| (12,625) |
| (3,590) |
| (9,035) | |||
Interest paid, net |
| (8,220) |
| (8,123) |
| (97) | |||
Income taxes paid |
| (13,432) |
| (14,335) |
| 903 | |||
Changes in operating assets and liabilities and other items |
| (27,827) |
| (13,187) |
| (14,640) | |||
Net cash provided by operating activities | $ | 30,075 | $ | 45,236 | $ | (15,161) |
Certain amounts may reflect rounding adjustments.
Operating activities
Operating activities provided $30.1 million of net cash for the nine months ended March 31, 2022. Cash provided by net income and non-cash items, including depreciation and amortization, was $52.0 million. Cash used in the ordinary course of business for changes in operating assets and liabilities and other items was $27.8 million. Cash used for receivables was $10.8 million as a result of the increase in revenue. Cash used for inventory was $30.5 million. Inventory increases were primarily due to forecasted future demand and internal production schedules. For certain products, we are maintaining safety stocks to mitigate potential disruptions in production. Accounts payable provided $20.0 million of cash due to timing of purchases and payments. Accrued expenses and other liabilities provided cash of $3.7 million primarily due to employee-related liabilities.
29
Investing activities
Investing activities used $13.0 million of net cash for the nine months ended March 31, 2022. Capital expenditures were $25.2 million as we continued to invest in expanding production capacity and productivity improvements. We used $10.8 million for the acquisition of a business. Reductions of our short-term investments provided $20.9 million of cash. We received $1.4 million of cash proceeds from the sale of an investment.
Financing activities
Financing activities provided $4.0 million of net cash for the nine months ended March 31, 2022. Net borrowings on our 2021 Revolver provided $29.0 million. We paid $14.6 million in dividends to holders of our Class A and Class B common stock. We paid $5.6 million in scheduled debt maturities and other requirements. In October 2021, we made a $4.8 million payment for the contingent consideration related to a previous acquisition.
Liquidity and capital resources
We believe our cash on hand, operating cash flows and financing arrangements, including the availability of borrowings under the 2021 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. 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 comply with the terms of the covenants under the 2021 Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise, including those caused by COVID-19, as well as shipping and labor costs and material availability. There can be no assurance that a challenging economic environment or an economic downturn would not affect our liquidity or 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 |
| 2022 |
| 2021 | ||
(in thousands, except ratios) | ||||||
Cash and cash equivalents and short-term investments | $ | 92,848 | $ | 93,212 | ||
Working capital |
| 281,527 |
| 250,956 | ||
Ratio of current assets to current liabilities |
| 2.64:1 |
| 2.62:1 |
We define working capital as total current assets (excluding cash and cash equivalents and short-term investments) less total current liabilities (excluding current portion of long-term debt). We calculate the ratio of current assets to current liabilities based on this definition.
As of March 31, 2022, we had $124.0 million in outstanding borrowings under the 2021 Revolver and had outstanding letters of credit and other commitments of $2.7 million, leaving $123.3 million available for further borrowings and letters of credit, subject to restrictions in our 2021 Credit Facilities.
We currently intend to pay quarterly dividends on our Class A and Class B common stock, subject to approval from the Board of Directors. Our Board of Directors declared a cash dividend of $0.12 per share on Class A and Class B common stock, payable on June 22, 2022. 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, 2022, our cash and cash equivalents and short-term investments included $91.9 million held by our international subsidiaries. There are no restrictions on cash distributions to PAHC from our international subsidiaries.
30
Contractual obligations
As of March 31, 2022, there were no material changes in payments due under contractual obligations from those disclosed in the Annual Report. During the nine months ended March 31, 2022, we executed a lease amendment for certain land and manufacturing facilities that provides options to extend the lease an additional 10 years. The future lease payments have been discounted and included in our lease liabilities as of March 31, 2022. The lease payments for years 2036 through 2045 range between $0.7 million and $0.8 million annually.
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.
General description of non-GAAP financial measures
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 (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.
The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:
● | senior management receives a monthly analysis of our operating results that is prepared on an Adjusted EBITDA basis; |
● | our annual budgets are prepared on an Adjusted EBITDA basis; and |
● | other goal setting and performance measurements are prepared on an Adjusted EBITDA basis. |
Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted EBITDA is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure is that it provides a view of our operations without including all events during a period, such as the depreciation of property, plant and equipment or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies.
31
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 and items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis.
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
For discussion of new accounting standards, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies and New Accounting Standards.”
Critical Accounting Policies
Critical accounting policies are those that require application of management’s most difficult, subjective and/or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all accounting policies require management to make difficult, subjective or complex judgments or estimates. In presenting our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results that differ from our estimates and assumptions could have an unfavorable effect on our financial position and results of operations. Critical accounting policies include revenue recognition, business combinations, long-lived assets, goodwill, and income taxes.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain. The pandemic may affect our future sales, expenses, reserves and allowances, manufacturing operations and employee-related costs. The pandemic may have significant economic impacts on our customers, suppliers and markets where we compete and operate. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
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,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Examples of such risks and uncertainties include:
● | the negative effects of a pandemic, epidemic, or outbreak of an infectious disease in humans, such as COVID-19, on our business, financial results, manufacturing facilities and supply chain, as well as our customers, protein processors and markets; |
32
● | perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products could cause a decline in the sales of those products; |
● | restrictions on the use of antibacterials in food-producing animals may become more prevalent; |
● | the potential FDA withdrawal of approval of our Mecadox (carbadox) product; |
● | a material portion of our sales and gross profits are generated by antibacterials and other related products; |
● | competition in each of our markets from a number of large and small companies, some of which have greater financial, research and development (“R&D”), production and other resources than we have; |
● | outbreaks of animal diseases could significantly reduce demand for our products; |
● | our business may be negatively affected by weather conditions and the availability of natural resources; |
● | climate change could have a material adverse impact on our operations and our customers’ businesses; |
● | the continuing trend toward consolidation of certain customer groups as well as the emergence of large buying groups; |
● | our ability to control costs and expenses; |
● | any unforeseen material loss or casualty; |
● | exposure relating to rising costs and reduced customer income; |
● | competition deriving from advances in veterinary medical practices and animal health technologies; |
● | unanticipated safety or efficacy concerns; |
● | our dependence on suppliers having current regulatory approvals; |
● | our raw materials are subject to price fluctuations and their availability can be limited; |
● | natural and man-made disasters, including but not limited to fire, snow and ice storms, flood, hail, hurricanes, and earthquakes; |
● | business interruption from political and social instability, including crime, civil disturbance, terrorist activities, outbreaks of disease and pandemics and armed conflicts, such as the current armed conflict between Russia and Ukraine; |
● | terrorist attacks, particularly attacks on or within markets in which we operate; |
● | our ability to successfully implement our strategic initiatives; |
● | our reliance on the continued operation of our manufacturing facilities and application of our intellectual property; |
● | adverse U.S. and international economic market conditions, including currency fluctuations; |
● | failure of our product approval, R&D, acquisition and licensing efforts to generate new products; |
● | the risks of product liability claims, legal proceedings and general litigation expenses; |
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● | the impact of current and future laws and regulatory changes; |
● | modification of foreign trade policy may harm our food animal product customers; |
● | our dependence on our Israeli and Brazilian operations; |
● | our substantial level of indebtedness and related debt-service obligations; |
● | restrictions imposed by covenants in our debt agreements; |
● | the risk of work stoppages; and |
● | other factors as described in “Risk Factors” in Item 1A of our Annual Report. |
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, we are exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates and commodity prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. We use, from time to time, foreign currency contracts and interest rate swaps as a means of hedging exposure to foreign currency risks and fluctuating interest rates, respectively. We do not utilize derivative instruments for trading or speculative purposes. We do not hedge our exposure to market risks in a manner that eliminates the effects of changing market conditions on earnings, cash flows and fair values. We monitor the financial stability and credit standing of our major counterparties.
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures about Market Risk” section in the Annual Report and to the notes to the consolidated financial statements included therein. As of the date of this report, there were no material changes in the Company’s financial market risks from the risks disclosed in the Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation as of March 31, 2022, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of such period, our disclosure controls and procedures were effective.
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Changes in Internal Control over Financial Reporting
There were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2022.
PART II—OTHER INFORMATION
Item 1.Legal Proceedings
Information required by this Item is incorporated herein by reference to “Notes to the Consolidated Financial Statements—Commitments and Contingencies” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Risk Factors” section in the Annual Report, which could materially affect our business, financial condition or future results.
There were no material changes in the Company’s risk factors from the risks disclosed in the Annual Report.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
Item 6.Exhibits
Exhibit 31.1 |
| Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302 |
Exhibit 31.2 | Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302 | |
Exhibit 32.1 | Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906 | |
Exhibit 32.2 | Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906 | |
Exhibit 101 .INS | XBRL Instance Document | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
Exhibit 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Phibro Animal Health Corporation | ||
May 4, 2022 | By: | /s/ Jack C. Bendheim |
Jack C. Bendheim | ||
Chairman, President and Chief Executive Officer | ||
May 4, 2022 | By: | /s/ Damian Finio |
Damian Finio | ||
| Chief Financial Officer |
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