UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2023
OR
For the transition period from to
Commission File Number: 001-36410
Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)
| |
| |
Delaware | 13-1840497 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
Glenpointe Centre East, 3rd Floor | |
300 Frank W. Burr Boulevard, Suite 21 | |
| |
Teaneck, New Jersey | 07666-6712 |
(Address of Principal Executive Offices) | (Zip Code) |
(201) 329-7300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Class A Common Stock, $0.0001 | | PAHC | | Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 28,November 3, 2023, there were 20,337,574 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 20,166,034 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
| Page | |
| ||
3 | ||
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
| 8 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
| ||
33 | ||
| ||
| ||
| ||
| ||
| ||
| ||
34 | ||
34 | ||
35 |
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | |
| | Three Months | | Nine Months | | Three Months |
| ||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | | ||||||||||||||
| | (unaudited) | | (unaudited) | | ||||||||||||||
| | (in thousands, except per share amounts) | | (in thousands, except per share amounts) | | ||||||||||||||
Net sales | | $ | 245,673 | | $ | 239,619 | | $ | 722,840 | | $ | 686,996 | | $ | 231,349 | | $ | 232,521 | |
Cost of goods sold | |
| 170,133 | |
| 167,993 | |
| 501,269 | |
| 480,020 | |
| 163,623 | |
| 163,875 | |
Gross profit | |
| 75,540 | |
| 71,626 | |
| 221,571 | |
| 206,976 | |
| 67,726 | |
| 68,646 | |
Selling, general and administrative expenses | |
| 56,987 | |
| 52,432 | |
| 173,490 | |
| 150,876 | |
| 68,452 | |
| 54,962 | |
Operating income | |
| 18,553 | |
| 19,194 | |
| 48,081 | |
| 56,100 | |||||||
Operating (loss) income | |
| (726) | |
| 13,684 | | ||||||||||||
Interest expense, net | |
| 3,871 | |
| 2,925 | |
| 10,822 | |
| 8,767 | |
| 4,564 | |
| 3,067 | |
Foreign currency (gains) losses, net | |
| (422) | |
| (10,564) | |
| 4,629 | |
| (12,625) | |||||||
Income before income taxes | |
| 15,104 | |
| 26,833 | |
| 32,630 | |
| 59,958 | |||||||
Provision for income taxes | |
| 5,062 | |
| 9,144 | |
| 11,522 | |
| 18,270 | |||||||
Net income | | $ | 10,042 | | $ | 17,689 | | $ | 21,108 | | $ | 41,688 | |||||||
Foreign currency losses, net | |
| 6,689 | |
| 5,200 | | ||||||||||||
(Loss) income before income taxes | |
| (11,979) | |
| 5,417 | | ||||||||||||
(Benefit) provision for income taxes | |
| (3,964) | |
| 1,561 | | ||||||||||||
Net (loss) income | | $ | (8,015) | | $ | 3,856 | | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income per share | |
|
| |
|
| |
|
| |
|
| |||||||
basic and diluted | | $ | 0.25 | | $ | 0.44 | | $ | 0.52 | | $ | 1.03 | |||||||
Net (loss) income per share | |
|
| |
|
| | ||||||||||||
basic | | $ | (0.20) | | $ | 0.10 | | ||||||||||||
diluted | | $ | (0.20) | | $ | 0.10 | | ||||||||||||
Weighted average common shares outstanding | |
| | |
| | |
| | |
| | |
| | |
| | |
basic and diluted | |
| 40,504 | |
| 40,504 | |
| 40,504 | |
| 40,504 | |||||||
basic | |
| 40,504 | |
| 40,504 | | ||||||||||||
diluted | | | 40,504 | | | 40,504 | |
The accompanying notes are an integral part of these consolidated financial statements
3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| | | | | | | | | | | | | | | | | | | |
| | Three Months | | Nine Months | | Three Months |
| ||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | | ||||||||||||||
| | (unaudited) | | (unaudited) | | ||||||||||||||
| | (in thousands) | | (in thousands) | | ||||||||||||||
Net income | | $ | 10,042 | | $ | 17,689 | | $ | 21,108 | | $ | 41,688 | |||||||
Net (loss) income | | $ | (8,015) | | $ | 3,856 | | ||||||||||||
Change in fair value of derivative instruments | |
| (3,765) | |
| 14,958 | |
| 1,804 | |
| 19,739 | |
| (1,891) | |
| 7,105 | |
Foreign currency translation adjustment | |
| 1,469 | |
| 3,514 | |
| 1,597 | |
| (13,761) | |
| (3,560) | |
| (4,143) | |
Pension settlement recognition | | | 10,425 | | | — | | ||||||||||||
Unrecognized net pension gains | |
| 177 | |
| 120 | |
| 545 | |
| 354 | |
| 644 | |
| 176 | |
(Provision) benefit for income taxes | |
| 896 | |
| (3,770) | |
| (587) | |
| (5,023) | |||||||
Other comprehensive income (loss) | |
| (1,223) | |
| 14,822 | |
| 3,359 | |
| 1,309 | |||||||
Comprehensive income | | $ | 8,819 | | $ | 32,511 | | $ | 24,467 | | $ | 42,997 | |||||||
Provision for income taxes | |
| (2,264) | |
| (1,820) | | ||||||||||||
Other comprehensive income | |
| 3,354 | |
| 1,318 | | ||||||||||||
Comprehensive (loss) income | | $ | (4,661) | | $ | 5,174 | |
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, | | September 30, | | June 30, | ||||
As of |
| 2023 |
| 2022 |
| 2023 |
| 2023 | ||||
| | (unaudited) | | (unaudited) | ||||||||
|
| (in thousands, except share and per share amounts) |
| (in thousands, except share and per share amounts) | ||||||||
ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 37,238 | | $ | 74,248 | | $ | 43,153 | | $ | 41,281 |
Short-term investments | |
| 40,000 | |
| 17,000 | |
| 48,000 | |
| 40,000 |
Accounts receivable, net | |
| 152,740 | |
| 166,537 | |
| 149,228 | |
| 163,479 |
Inventories, net | |
| 292,833 | |
| 259,158 | |
| 279,154 | |
| 277,570 |
Other current assets | |
| 62,672 | |
| 49,289 | |
| 64,889 | |
| 63,393 |
Total current assets | |
| 585,483 | |
| 566,232 | |
| 584,424 | |
| 585,723 |
Property, plant and equipment, net | |
| 188,939 | |
| 165,490 | |
| 193,359 | |
| 195,568 |
Intangibles, net | |
| 56,901 | |
| 63,861 | |
| 52,184 | |
| 54,987 |
Goodwill | |
| 53,243 | |
| 53,226 | |
| 53,251 | |
| 53,274 |
Other assets | |
| 80,866 | |
| 82,890 | |
| 81,305 | |
| 81,845 |
Total assets | | $ | 965,432 | | $ | 931,699 | | $ | 964,523 | | $ | 971,397 |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
| | |
| | |
| |
Current portion of long-term debt | | $ | 15,420 | | $ | 15,000 | | $ | 24,150 | | $ | 22,295 |
Accounts payable | |
| 75,768 | |
| 95,596 | |
| 77,216 | |
| 73,853 |
Accrued expenses and other current liabilities | |
| 74,120 | |
| 80,236 | |
| 70,989 | |
| 79,852 |
Total current liabilities | |
| 165,308 | |
| 190,832 | |
| 172,355 | |
| 176,000 |
Revolving credit facility | |
| 193,000 | |
| 145,000 | |
| 154,000 | |
| 141,000 |
Long-term debt | |
| 273,016 | |
| 272,925 | |
| 304,717 | |
| 311,541 |
Other liabilities | |
| 61,780 | |
| 60,500 | |
| 60,382 | |
| 60,347 |
Total liabilities | |
| 693,104 | |
| 669,257 | |
| 691,454 | |
| 688,888 |
Commitments and contingencies (Note 7) | |
| | |
| | ||||||
Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,337,574 shares issued and outstanding at March 31, 2023, and June 30, 2022; 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at March 31, 2023, and June 30, 2022 | |
| 4 | |
| 4 | ||||||
Commitments and contingencies (Note 8) | |
| | |
| | ||||||
Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,337,574 shares issued and outstanding at September 30, 2023, and June 30, 2023; 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at September 30, 2023, and June 30, 2023 | |
| 4 | |
| 4 | ||||||
Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding | |
| — | | | — | |
| — | | | — |
Paid-in capital | |
| 135,803 | |
| 135,803 | |
| 135,884 | |
| 135,803 |
Retained earnings | |
| 254,275 | |
| 247,748 | |
| 248,037 | |
| 260,912 |
Accumulated other comprehensive loss | |
| (117,754) | |
| (121,113) | |
| (110,856) | |
| (114,210) |
Total stockholders’ equity | |
| 272,328 | |
| 262,442 | |
| 273,069 | |
| 282,509 |
Total liabilities and stockholders’ equity | | $ | 965,432 | | $ | 931,699 | | $ | 964,523 | | $ | 971,397 |
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 | | Three Months | | ||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 | |||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | | ||||||||
| | (unaudited) | | (unaudited) | | ||||||||
| | (in thousands) | | (in thousands) | | ||||||||
OPERATING ACTIVITIES |
| |
|
| |
|
| |
|
| |
| |
Net income | | $ | 21,108 | | $ | 41,688 | |||||||
Adjustments to reconcile net income to | |
| | |
| | |||||||
net cash (used) provided by operating activities: | |
| | |
| | |||||||
Net (loss) income | | $ | (8,015) | | $ | 3,856 | | ||||||
Adjustments to reconcile net (loss) income to | |
| | |
| | | ||||||
net cash provided (used) by operating activities: | |
| | |
| | | ||||||
Depreciation and amortization | |
| 25,438 | |
| 24,300 | |
| 8,871 | |
| 8,450 | |
Amortization of debt issuance costs | |
| 514 | |
| 442 | |
| 260 | |
| 147 | |
Acquisition-related items | |
| — | |
| 78 | |||||||
Stock-based compensation | | | 81 | | | — | | ||||||
Deferred income taxes | |
| 235 | |
| (120) | |
| (2,691) | |
| (13) | |
Foreign currency gains, net | |
| (5,024) | |
| (13,492) | |||||||
Gain on sale of investment | | | — | | | (1,203) | |||||||
Foreign currency losses, net | |
| 3,222 | |
| 3,370 | | ||||||
Pension settlement cost | | | 10,425 | | | — | | ||||||
Other | |
| (1,201) | |
| 284 | |
| 959 | |
| (309) | |
Changes in operating assets and liabilities, net of business acquisition: | |
| | |
| | |||||||
Changes in operating assets and liabilities: | |
| | |
| | | ||||||
Accounts receivable, net | |
| 14,985 | |
| (10,815) | |
| 12,781 | |
| 22,347 | |
Inventories, net | |
| (30,458) | |
| (30,548) | |
| (5,005) | |
| (24,977) | |
Other current assets | |
| (7,481) | |
| (1,879) | |
| (3,297) | |
| (7,682) | |
Other assets | |
| (317) | |
| (2,364) | |
| (191) | |
| (31) | |
Accounts payable | |
| (19,718) | |
| 19,961 | |
| 4,603 | |
| (5,595) | |
Accrued expenses and other liabilities | |
| (5,009) | |
| 3,743 | |
| (5,804) | |
| (10,261) | |
Net cash (used) provided by operating activities | |
| (6,928) | |
| 30,075 | |||||||
Net cash provided (used) by operating activities | |
| 16,199 | |
| (10,698) | | ||||||
INVESTING ACTIVITIES | |
|
| |
|
| |
|
| |
|
| |
Purchases of short-term investments | |
| (40,000) | |
| (54,100) | |
| (17,000) | |
| — | |
Maturities of short-term investments | |
| 17,000 |
|
| 75,000 | |
| 9,000 |
|
| 7,000 | |
Capital expenditures | | | (40,903) |
|
| (25,154) | | | (7,476) |
|
| (23,176) | |
Business acquisition | | | — | | | (10,786) | |||||||
Sale of investment | | | — | | | 1,353 | |||||||
Other, net | |
| 167 | |
| 645 | |
| 124 | |
| 27 | |
Net cash used by investing activities | |
| (63,736) | |
| (13,042) | |
| (15,352) | |
| (16,149) | |
FINANCING ACTIVITIES | |
| | |
| | |
| | |
| | |
Revolving credit facility borrowings | |
| 229,000 | |
| 215,000 | |
| 51,000 | |
| 62,000 | |
Revolving credit facility repayments | |
| (181,000) | |
| (186,000) | |
| (38,000) | |
| (36,000) | |
Proceeds from long-term debt | | | 12,000 | | | — | | | — | | | 12,000 | |
Payments of long-term debt | |
| (11,460) | |
| (5,625) | |
| (5,105) | |
| (3,750) | |
Debt issuance costs | | | (640) | | | — | | | — | | | (71) | |
Payments of insurance premium financing | | | (1,739) | | | — | | ||||||
Dividends paid | |
| (14,581) | |
| (14,581) | |
| (4,860) | |
| (4,860) | |
Payment of contingent consideration | |
| — | |
| (4,840) | |||||||
Net cash provided by financing activities | |
| 33,319 | |
| 3,954 | |
| 1,296 | |
| 29,319 | |
Effect of exchange rate changes on cash | |
| 335 | |
| (451) | |
| (271) | |
| (440) | |
Net (decrease) increase in cash and cash equivalents | |
| (37,010) | |
| 20,536 | |||||||
Net increase in cash and cash equivalents | |
| 1,872 | |
| 2,032 | | ||||||
Cash and cash equivalents at beginning of period | |
| 74,248 | |
| 50,212 | |
| 41,281 | |
| 74,248 | |
Cash and cash equivalents at end of period | | $ | 37,238 | | $ | 70,748 | | $ | 43,153 | | $ | 76,280 | |
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 | | | | | | | | | | | | | | | | | | | Accumulated | | | | ||
| | | | | | | | | | | | | | | | Other | | | | | | | | | | | | | | | | | | | Other | | | | ||
| | Shares of | | | | | | | | | | | | | | Comprehensive | | | | | Shares of | | | | | | | | | | | | | | Comprehensive | | | | ||
| | Common | | Common | | Preferred | | Paid-in | | Retained | | Income | | | | | Common | | Common | | Preferred | | Paid-in | | Retained | | Income | | | | ||||||||||
|
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total |
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total | ||||||||||||
| | (unaudited) | | (unaudited) | ||||||||||||||||||||||||||||||||||||
| | (in thousands, except share and per share amounts) | | (in thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||
As of June 30, 2022 |
| 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 247,748 | | $ | (121,113) | | $ | 262,442 | ||||||||||||||||||||
Comprehensive income | | — | | | — | | | — | | | — | | | 3,856 | | | 1,318 | | | 5,174 | ||||||||||||||||||||
As of June 30, 2023 |
| 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 260,912 | | $ | (114,210) | | $ | 282,509 | ||||||||||||||||||||
Comprehensive (loss) income | | — | | | — | | | — | | | — | | | (8,015) | | | 3,354 | | | (4,661) | ||||||||||||||||||||
Dividends declared ($0.12 per share) |
| — |
| | — |
| | — |
| | — |
| | (4,860) |
| | — |
| | (4,860) | | — | | | — | | | — | | | — | | | (4,860) | | | — | | | (4,860) |
As of September 30, 2022 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 246,744 | | $ | (119,795) | | $ | 262,756 | ||||||||||||||||||||
Comprehensive income | | — | | | — | | | — | | | — | | | 7,210 | | | 3,264 | | | 10,474 | ||||||||||||||||||||
Dividends declared ($0.12 per share) | | — | | | — | | | — | | | — | | | (4,860) | | | — | | | (4,860) | ||||||||||||||||||||
As of December 31, 2022 |
| 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 249,094 | | $ | (116,531) | | $ | 268,370 | ||||||||||||||||||||
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | 10,042 | | | (1,223) | | | 8,819 | ||||||||||||||||||||
Dividends declared ($0.12 per share) | | — | | | — | | | — | | | — | | | (4,861) | | | — | | | (4,861) | ||||||||||||||||||||
As of March 31, 2023 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 254,275 | | $ | (117,754) | | $ | 272,328 | ||||||||||||||||||||
Stock-based compensation expense |
| — |
| | — |
| | — |
| | 81 |
| | — |
| | — |
| | 81 | ||||||||||||||||||||
As of September 30, 2023 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,884 | | $ | 248,037 | | $ | (110,856) | | $ | 273,069 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Accumulated | | | | ||
|
| |
| | |
| | |
| | |
| | | | Other | | | |
| |
| | |
| | |
| | |
| | | | Other | | | | ||
| | Shares of | | | | | | | | | | | | | | Comprehensive | | | | | Shares of | | | | | | | | | | | | | | Comprehensive | | | | ||
| | Common | | Common | | Preferred | | Paid-in | | Retained | | Income | | | | | Common | | Common | | Preferred | | Paid-in | | Retained | | Income | | | | ||||||||||
|
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total |
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total | ||||||||||||
| | (unaudited) | | (unaudited) | ||||||||||||||||||||||||||||||||||||
| | (in thousands, except share and per share amounts) | | (in thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||
As of June 30, 2021 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 218,015 | | $ | (115,293) | | $ | 238,529 | ||||||||||||||||||||
Comprehensive income (loss) |
| — | |
| — | |
| — | |
| — | |
| 6,534 | |
| (6,898) | |
| (364) | ||||||||||||||||||||
Dividends declared ($0.12 per share) |
| — | |
| — | |
| — | |
| — | |
| (4,860) | |
| — | |
| (4,860) | ||||||||||||||||||||
As of September 30, 2021 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 219,689 | | $ | (122,191) | | $ | 233,305 | ||||||||||||||||||||
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | 17,465 | | | (6,615) | | | 10,850 | ||||||||||||||||||||
Dividends declared ($0.12 per share) | | — | | | — | | | — | | | | | | (4,861) | | | — | | | (4,861) | ||||||||||||||||||||
As of December 31, 2021 |
| 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 232,293 | | $ | (128,806) | | $ | 239,294 | ||||||||||||||||||||
As of June 30, 2022 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 247,748 | | $ | (121,113) | | $ | 262,442 | ||||||||||||||||||||
Comprehensive income | | — | | | — | | | — | | | — | | | 17,689 | | | 14,822 | | | 32,511 |
| — | |
| — | |
| — | |
| — | |
| 3,856 | |
| 1,318 | |
| 5,174 |
Dividends declared ($0.12 per share) | | — | | | — | | | — | | | — | | | (4,860) | | | — | | | (4,860) |
| — | |
| — | |
| — | |
| — | |
| (4,860) | |
| — | |
| (4,860) |
As of March 31, 2022 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 245,122 | | $ | (113,984) | | $ | 266,945 | ||||||||||||||||||||
As of September 30, 2022 | | 40,503,608 | | $ | 4 | | $ | — | | $ | 135,803 | | $ | 246,744 | | $ | (119,795) | | $ | 262,756 |
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 and companion animals including poultry, swine, beef and dairy cattle, aquaculture and dogs. 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,September 30, 2023 and 2022, 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, 20222023 (the “Annual Report”), filed with the Securities and Exchange Commission on August 24, 202230, 2023 (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, 20222023, 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 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,September 30, 2023, there have been no material changes to any of the significant accounting policies contained therein.
Net (Loss) Income per Share and Weighted Average Shares
Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the reporting period.
Diluted net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the reporting period after giving effect to dilutive common share equivalents. There were no commonequivalents, resulting from the assumed vesting of restricted stock units. The restricted stock units have been excluded from the computation of diluted earnings per share equivalents infor the periods included inthree months ended September 30, 2023, as the consolidated financial statements.effect would have been antidilutive.
| | | | | | | | | | | | | | | | | | | |
| | Three Months | | Nine Months | | Three Months | | ||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||||||
Net income | | $ | 10,042 | | $ | 17,689 | | $ | 21,108 | | $ | 41,688 | |||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 |
| ||||||||||||||
Net (loss) income | | $ | (8,015) | | $ | 3,856 | | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Weighted average number of shares – basic and diluted | |
| 40,504 | |
| 40,504 | |
| 40,504 | |
| 40,504 | |||||||
Weighted average number of shares – basic | |
| 40,504 | |
| 40,504 | | ||||||||||||
Dilutive effect of restricted stock units | | | — | | | — | | ||||||||||||
Weighted average number of shares - diluted | | | 40,504 | | | 40,504 | | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net income per share - basic and diluted | | $ | 0.25 | | $ | 0.44 | | $ | 0.52 | | $ | 1.03 | |||||||
Net (loss) income per share | | | | | | | | ||||||||||||
basic | | $ | (0.20) | | $ | 0.10 | | ||||||||||||
diluted | | $ | (0.20) | | $ | 0.10 | |
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 governmentWe do not expect the new accounting standards that are accounted forpending adoption by applyingus to have a grant accounting model. The disclosures include the nature of the transactions and the related accounting policy used to account for the transactions, the line items and amounts included in thematerial effect on our consolidated balance sheet and consolidated statement of operations, 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 intend to include these disclosures for the year ending June 30, 2023.
ASU 2020-04, 2021-01 and 2022-06, Reference Rate Reform (Topic 848), provide optional expedients to GAAP guidance if certain criteria are met for contracts, hedging relationships and derivative instruments that reference the London Interbank Offered Rate (“LIBOR”) planned to be discontinued by rate reform. In November 2022, we amended our 2021 Credit Agreement and our 2020 interest rate swap agreement to replace LIBOR as the interest rate benchmark with the Secured Overnight Financing Rate (“SOFR”), as provided for under ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the SOFR Overnight Index Swap (OIS) Rate as a Benchmark for Hedge Accounting Purposes. We applied the optional expedients to treat the amendments as a continuation of existing contracts at the time the amendments were executed.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 and companion animals including poultry, swine, beef and dairy cattle, aquaculture, and dogs. The products help prevent, control and treat diseases and supportenhance nutrition to help improve animal health and well-being. TheWe sell animal health and mineral nutrition products are sold directly to integrated poultry, cattle and swine customers and through commercial animal feed manufacturers, wholesalers, distributors and veterinarians. The animal health industry and demand for many of the animal health products in a particular region are affected by changing disease pressures and by weather conditions, as product usage follows varying weather patterns and seasons. Our operations are primarily focused 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 |
● | 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: Vaccine products are primarily focused on preventing diseases in poultry, swine, beef and |
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
autogenous vaccine products, as well as adjuvants for animal vaccine manufacturers. We have |
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 poultry, swine, and beef and dairy cattle.
Performance Products
The Performance Products business manufactures and markets specialty ingredients for use in the personal care, industrial chemical and chemical catalyst industries.
9
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 | | Three Months | ||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | ||||||||||||||
Animal Health |
| |
|
| |
| | |
|
| |
| | |
|
| |
|
MFAs and other | | $ | 93,217 | | $ | 84,330 | | $ | 283,186 | | $ | 259,812 | | $ | 94,104 | | $ | 92,790 |
Nutritional specialties | |
| 45,016 | |
| 41,394 | |
| 127,926 | |
| 114,721 | |
| 40,210 | |
| 39,054 |
Vaccines | |
| 26,201 | |
| 22,865 | |
| 71,984 | |
| 65,987 | |
| 26,216 | |
| 23,015 |
Total Animal Health | | $ | 164,434 | | $ | 148,589 | | $ | 483,096 | | $ | 440,520 | | $ | 160,530 | | $ | 154,859 |
Mineral Nutrition | |
| 62,922 | |
| 69,033 | |
| 184,212 | |
| 190,120 | |
| 56,026 | |
| 59,646 |
Performance Products | |
| 18,317 | |
| 21,997 | |
| 55,532 | |
| 56,356 | |
| 14,793 | |
| 18,016 |
Total | | $ | 245,673 | | $ | 239,619 | | $ | 722,840 | | $ | 686,996 | | $ | 231,349 | | $ | 232,521 |
Net Sales by Region
| | | | | | | | | | | | | | | | | | |
| | Three Months | | Nine Months | | Three Months | ||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | ||||||||||||||
United States | | $ | 148,529 | | $ | 146,820 | | $ | 433,716 | | $ | 412,284 | | $ | 131,287 | | $ | 135,804 |
Latin America and Canada | |
| 53,881 | |
| 45,048 | |
| 159,946 | |
| 135,722 | |
| 58,703 | |
| 52,246 |
Europe, Middle East and Africa | |
| 28,174 | |
| 29,931 | |
| 85,518 | |
| 90,889 | |
| 26,879 | |
| 29,517 |
Asia Pacific | |
| 15,089 | |
| 17,820 | |
| 43,660 | |
| 48,101 | |
| 14,480 | |
| 14,954 |
Total | | $ | 245,673 | | $ | 239,619 | | $ | 722,840 | | $ | 686,996 | | $ | 231,349 | | $ | 232,521 |
Net sales by region are based on country of destination.
Deferred revenue was $1,479 and $2,051 as of March 31, 2023 and June 30, 2022, respectively. Accrued expenses and other current liabilities included $508 and $822 of the total deferred revenue as of March 31, 2023 and June 30, 2022, respectively. The deferred revenue resulted primarily from certain customer arrangements, including technology licensing fees and discounts on future product sales. The transaction price associated with our deferred revenue arrangements is generally based on the stand-alone sales prices of the individual products or services.
Our customer payment terms generally range from 30 to 120 days globally and excludedo not include any significant financing components. Payment terms vary based on industry and business practices within the regions in which we operate. Our average worldwide collection period for accounts receivable is approximately 60 days after the revenue is recognized.
Interest Expense
| | | | | | | | |
| | Three Months | | | ||||
For the Periods Ended September 30 |
| 2023 |
| 2022 |
| | ||
Interest expense, net | | | | | | | | |
2021 Credit Facilities | | $ | 5,101 | | $ | 3,547 | | |
2022 Term Loan | | | 216 | | | — | | |
Amortization of debt issuance costs | |
| 260 | |
| 147 | | |
Other | |
| 68 | |
| 1 | | |
Interest expense | |
| 5,645 | |
| 3,695 | | |
Interest income | |
| (1,081) | |
| (628) | | |
| | $ | 4,564 | | $ | 3,067 | | |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Depreciation and Amortization
| | | | | | |
| | Three Months | ||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | ||
Depreciation and amortization | |
| | |
|
|
Depreciation of property, plant and equipment | | $ | 6,431 | | $ | 6,051 |
Amortization of intangible assets | |
| 2,440 | |
| 2,399 |
| | $ | 8,871 | | $ | 8,450 |
Pension Settlement
In July 2023, we entered into an annuity purchase agreement to irrevocably transfer a portion of our pension benefit obligation to a third-party insurance company. The annuity purchase price was $26,381 and was approximately equal to the benefit obligation transferred. The annuity purchase was funded from pension assets. During the three months ended September 30, 2023, we recognized a partial settlement of the pension plan and recorded $10,425, in selling, general and administrative expenses in our consolidated statement of operations, resulting from the recognition of net pension losses previously included in Accumulated other comprehensive loss.
Interest Expense
| | | | | | | | | | | | |
| | Three Months | | Nine Months | ||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Interest expense, net | | | | | | | | | | | | |
2021 Term A loan | | $ | 1,450 | | $ | 2,208 | | $ | 4,836 | | $ | 6,745 |
Revolving credit facility | |
| 3,067 | |
| 690 | |
| 7,480 | |
| 1,936 |
2022 Term loan | | | 191 | | | — | | | 379 | | | — |
Amortization of debt issuance costs | |
| 188 | |
| 147 | |
| 514 | |
| 442 |
Other | |
| 10 | |
| 67 | |
| 20 | |
| 156 |
Interest expense | |
| 4,906 | |
| 3,112 | |
| 13,229 | |
| 9,279 |
Interest income | |
| (1,035) | |
| (187) | |
| (2,407) | |
| (512) |
| | $ | 3,871 | | $ | 2,925 | | $ | 10,822 | | $ | 8,767 |
Depreciation and Amortization
| | | | | | | | | | | | |
| | Three Months | | Nine Months | ||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Depreciation and amortization | |
| | |
|
| |
| | |
|
|
Depreciation of property, plant and equipment | | $ | 6,067 | | $ | 6,214 | | $ | 18,177 | | $ | 17,792 |
Amortization of intangible assets | |
| 2,422 | |
| 2,231 | |
| 7,261 | |
| 6,508 |
| | $ | 8,489 | | $ | 8,445 | | $ | 25,438 | | $ | 24,300 |
4. Balance Sheets—Additional Information
| | | | | | |
| | March 31, | | June 30, | ||
As of |
| 2023 |
| 2022 | ||
Inventories | | | | | |
|
Raw materials | | $ | 86,596 | | $ | 87,030 |
Work-in-process | | | 20,113 | | | 15,468 |
Finished goods | | | 186,124 | | | 156,660 |
| | $ | 292,833 | | $ | 259,158 |
| | | | | | |
| | September 30, | | June 30, | ||
As of |
| 2023 |
| 2023 | ||
Inventories | | | | | |
|
Raw materials | | $ | 84,369 | | $ | 84,328 |
Work-in-process | | | 25,159 | | | 22,350 |
Finished goods | | | 169,626 | | | 170,892 |
| | $ | 279,154 | | $ | 277,570 |
| | | | | | |
|
| March 31, | | June 30, | ||
As of |
| 2023 |
| 2022 | ||
Other assets | | | | | | |
ROU operating lease assets | | $ | 36,452 |
| $ | 37,680 |
Deferred income taxes | |
| 6,268 |
| | 5,849 |
Deposits | |
| 6,162 |
| | 5,905 |
Insurance investments | |
| 6,087 |
| | 5,984 |
Equity method investments | |
| 5,463 |
| | 4,362 |
Derivative instruments | | | 9,926 | | | 12,976 |
Debt issuance costs | |
| 1,532 |
| | 1,436 |
Other | | | 8,976 | | | 8,698 |
| | $ | 80,866 |
| $ | 82,890 |
| | | | | | |
|
| September 30, | | June 30, | ||
As of |
| 2023 |
| 2023 | ||
Other assets | | | | | | |
ROU operating lease assets | | $ | 36,320 |
| $ | 35,759 |
Deferred income taxes | |
| 8,981 |
| | 8,711 |
Deposits | |
| 6,518 |
| | 6,617 |
Insurance investments | |
| 6,096 |
| | 6,067 |
Equity method investments | |
| 5,814 |
| | 5,027 |
Derivative instruments | | | 8,500 | | | 10,225 |
Debt issuance costs | |
| 1,284 |
| | 1,408 |
Other | | | 7,792 | | | 8,031 |
| | $ | 81,305 |
| $ | 81,845 |
| | | | | | |
|
| September 30, |
| June 30, | ||
As of |
| 2023 |
| 2023 | ||
Accrued expenses and other current liabilities |
| |
|
| |
|
Employee related | | $ | 26,647 | | $ | 29,359 |
Current operating lease liabilities | |
| 6,452 | |
| 6,053 |
Commissions and rebates | | | 3,442 | | | 5,833 |
Professional fees | |
| 4,643 | |
| 5,032 |
Income and other taxes | | | 5,951 | | | 8,663 |
Insurance-related | |
| 1,364 | |
| 1,284 |
Insurance premium financing | | | 2,898 | | | 4,769 |
Other | |
| 19,592 | |
| 18,859 |
| | $ | 70,989 | | $ | 79,852 |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | |
|
| March 31, |
| June 30, | ||
As of |
| 2023 |
| 2022 | ||
Accrued expenses and other current liabilities |
| |
|
| |
|
Employee related | | $ | 28,084 | | $ | 34,278 |
Current operating lease liabilities | |
| 6,215 | |
| 6,051 |
Commissions and rebates | | | 5,178 | | | 7,125 |
Professional fees | |
| 6,073 | |
| 5,493 |
Income and other taxes | | | 7,618 | | | 7,211 |
Insurance-related | |
| 1,354 | |
| 1,174 |
Other | |
| 19,598 | |
| 18,904 |
| | $ | 74,120 | | $ | 80,236 |
| | | | | | |
|
| September 30, |
| June 30, | ||
As of |
| 2023 |
| 2023 | ||
Other liabilities | | | | | | |
Long-term operating lease liabilities | | $ | 29,022 | | $ | 29,077 |
Long-term and deferred income taxes | |
| 12,823 | | | 12,146 |
Supplemental retirement benefits, deferred compensation and other | | | 6,628 | | | 6,552 |
U.S. pension plan | |
| 1,687 | |
| 2,286 |
International retirement plans | |
| 4,130 | |
| 4,210 |
Other long-term liabilities | |
| 6,092 | |
| 6,076 |
| | $ | 60,382 | | $ | 60,347 |
| | | | | | |
|
| March 31, |
| June 30, | ||
As of |
| 2023 |
| 2022 | ||
Other liabilities | | | | | | |
Long-term operating lease liabilities | | $ | 30,060 | | $ | 31,508 |
Long-term and deferred income taxes | |
| 12,149 | | | 9,264 |
Supplemental retirement benefits, deferred compensation and other | | | 7,210 | | | 7,368 |
U.S. pension plan | |
| 1,779 | |
| 1,793 |
International retirement plans | |
| 4,441 | |
| 4,620 |
Other long-term liabilities | |
| 6,141 | |
| 5,947 |
| | $ | 61,780 | | $ | 60,500 |
| | | | | | | | | | | | |
| | March 31, |
| June 30, | | September 30, |
| June 30, | ||||
As of |
| 2023 |
| 2022 |
| 2023 |
| 2023 | ||||
Accumulated other comprehensive loss | | |
| | |
| | |
| | |
|
Derivative instruments | | $ | 22,695 | | $ | 20,891 | | $ | 22,698 | | $ | 24,589 |
Foreign currency translation adjustment | |
| (117,437) | |
| (119,034) | |
| (118,622) | |
| (115,062) |
Unrecognized net pension losses | |
| (23,663) | |
| (24,208) | |
| (12,927) | |
| (23,996) |
Provision for income taxes on derivative instruments | |
| (5,732) | |
| (5,281) | ||||||
Benefit for income taxes on long-term intercompany investments | | | 8,166 | | | 8,166 | ||||||
Provision for income taxes on net pension losses | | | (1,783) | | | (1,647) | ||||||
Income tax (provision) benefit | |
| (2,005) | |
| 259 | ||||||
| | $ | (117,754) | | $ | (121,113) | | $ | (110,856) | | $ | (114,210) |
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 had a term A loan in an aggregate initial principal amount of $300,000 (the “2021 Term A Loan”) and a revolving credit facility under which we could borrow up to an aggregate amount of $250,000, subject to the terms of the 2021 Credit Agreement (the “2021 Revolver” and together with the 2021 Term A Loan, the “2021 Credit Facilities”). In November 2022, we amended the 2021 Credit Facilities to increase the revolving commitments under the 2021 Revolver to an aggregate amount of $310,000 and to adopt SOFRSecured Overnight Financing Rate (“SOFR”) as the reference for the fluctuating rate of interest on the 2021 Credit Facilities, replacing the LIBORLondon Interbank Offered Rate (“LIBOR”) reference rate. All other terms and conditionsIn June 2023, we obtained an additional incremental term loan (the “2023 Incremental Term Loan”) in the amount of $50,000 (the 2021 Revolver, the 2021 Term A Loan and the 2023 Incremental Term Loan are collectively referred to as the “2021 Credit Agreement were unchanged.Facilities”).
The 2021 Term A Loan isand the 2023 Incremental Term Loan are repayable in quarterly installments, with the balancebalances payable at maturity. The 2021 Revolver includescontains a letter of credit facility. The interest rate per annum applicable to the loans under2021 Revolver and the 2021 Credit FacilitiesTerm A Loan is based on a fluctuating rate of interest plus an applicable rate equal to 1.50%, 1.75%, 2.00% or 2.25% in the case of adjusted SOFR rate loans and 0.50%, 0.75%, 1.00% or 1.25%, in the case of base rate loans. The interest rate per annum applicable to the 2023 Incremental Term Loan is based on a fluctuating rate of interest plus an applicable rate equal to 2.00%, 1.75%2.25%, 2.50% or 1.50%2.75% in the case of adjusted SOFR rate loans and 1.00%, 0.75%1.25%, 1.50% or 0.50%1.75% in the case of base rate loans. The applicable rates are based on the First Lien Net Leverage Ratio (as defined in the 2021 Credit Agreement)Agreement, as amended). The 2021 Credit Facilities mature in April 2026.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The 2021 Credit Agreement requires, among other things, compliance with financial covenants that permit: (i) a maximum First Lien Net Leverage Ratio of 4.00:1.00 (or, specifically with respect to the test periods ending September 30, 2023, December 31, 2023, March 31, 2024, and June 30, 2024, a maximum of 4.25:1.00); and (ii) a minimum interest coverage ratio of 3.00:1.00, each calculated on a trailing four-quarter basis. The 2021 Credit Agreement contains an acceleration clause should an event of default (as defined in the 2021 Credit Agreement) occur. As of March 31,September 30, 2023, we were in compliance with the financial covenants.
As of March 31,September 30, 2023, we had $193,000$154,000 in borrowings drawn under the 2021 Revolver and had outstanding letters of credit of $2,479, leaving $114,521$153,521 available for further borrowings and letters of credit under the 2021 Revolver, subject to restrictions in our 2021 Credit Facilities. We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The terms of these letters of credit extendare all less than one year.
In July 2017, we entered into an12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest Rates
Interest rates as of the balance sheet dates and the weighted-average rates for the periods presented were:
| | | | | | | | | | |
|
| | | | | | Three Months | |||
| | September 30, | June 30, | | Ended September 30, | |||||
| | 2023 | 2023 | | 2023 | | 2022 | | ||
2021 Revolver |
| 6.23 | % | 6.09 | % |
| 6.19 | % | 3.92 | % |
2021 Term A Loan | | 2.36 | % | 2.36 | % | | 2.36 | % | 2.37 | % |
2023 Incremental Term Loan | | 7.66 | % | 7.44 | % | | 7.57 | % | — | |
2022 Term Loan | | 7.42 | % | 7.25 | % | | 7.43 | % | — | |
Interest rates as of the balance sheet dates are based on rates in effect as of those dates, including SOFR fluctuating rates of interest, rate swap agreement on $150,000 of notional principal that effectively converted the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.83%. The agreement matured in June 2022. We had designatedapplicable rates and the interest rate swap as a highly effective cash flow hedge. For additional details, see “Note 8 — Derivatives.”agreement.
In March 2020, we entered into an interest rate swap agreement on $150,000 of notional principal that effectively converted the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.62%. In July 2022, this agreement increased to a notional principal amount of $300,000. In November 2022, we amended the March 2020 interest rate swapthis agreement to convert the floating portion of our interest obligation to SOFR. The agreement effectively converts the floating portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.61% through June 2025. We have designated the interest rate swap as a highly effective cash flow hedge. For additional details, see “Note 89 — Derivatives.”
As of March 31, 2023, the interest rates for the 2021 Revolver and the 2021 Term A Loan were 6.18% and 2.36%, respectively. The weighted-average interest rates for the 2021 Revolver were 5.07% and 1.87% for the nine months ended March 31, 2023 and 2022, respectively. The weighted-average interest rates for the 2021 Term A Loan were 2.37% and 2.98% for nine months ended March 31, 2023 and 2022, respectively.
Other Long-Term Debt
In September 2022, we entered into a credit agreement (the “2022 Term Loan”) in the amount of $12,000, collateralized by certain facilities. The 2022 Term Loan matures in September 2027. The interest rate per annum applicable to the 2022 Term Loan is based on a fluctuating rate of interest, at the Company’s election from time to time, equal to either (i) one-month Adjustedadjusted SOFR plus 1.00%2.0%, or (ii) a base rate determined by reference to the greater of (a) the prime rate and (b) the Federal Funds Effective Rate plus 0.50%0.5%. The 2022 Term Loan is repayable in monthly installments of $35, with the balance payable at maturity. The weighted-average interest rate was 6.07% for the period during which the 2022 Term Loan was outstanding in the nine months ended March 31, 2023.
Maturities of Long-Term Debt
| | | | | | | | | | | | |
|
| March 31, |
| June 30, |
| September 30, | | June 30, | ||||
As of | | 2023 | | 2022 | | 2023 | | 2023 | ||||
2021 Term A Loan due April 2026 | | $ | 277,500 | | $ | 288,750 | | $ | 270,000 | | $ | 273,750 |
2023 Incremental Term Loan due April 2026 | | | 48,750 | | | 50,000 | ||||||
2022 Term Loan due September 2027 | |
| 11,790 | |
| - | |
| 11,580 | |
| 11,685 |
| |
| 289,290 | |
| 288,750 | |
| 330,330 | |
| 335,435 |
Unamortized debt issuance costs | |
| (854) | |
| (825) | |
| (1,463) | |
| (1,599) |
| |
| 288,436 | |
| 287,925 | |
| 328,867 | |
| 333,836 |
Less: current maturities | |
| (15,420) | |
| (15,000) | |
| (24,150) | |
| (22,295) |
| | $ | 273,016 | | $ | 272,925 | | $ | 304,717 | | $ | 311,541 |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $385$438 and $465$780 during the three months ended March 31, 2023 and 2022, and $1,561 and $1,765 during the nine months ended March 31,September 30, 2023 and 2022, respectively. Mr. Bendheim has sole authority to vote shares of our stock owned by BFI Co., LLC, an investment vehicle of the Bendheim family.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Stock Incentive Plan
Restricted Stock Units
In July 2023, our Board of Directors approved the grant of 300,000 restricted stock units (“RSUs”) to an officer of the Company, pursuant to the Company's 2008 Incentive Plan and the RSU award agreement. Each RSU represents the right to receive a share of our common stock upon vesting. The RSUs are subject to performance-based vesting. The RSUs will vest on June 30, 2027, subject to continuation of employment on such date, in increments of 10% (but no less than 20%) (with linear interpolation between increments) based upon the arithmetic average of the Company’s closing stock price per share for each trading day in the 90-calendar day period ending on the vesting date (the “90-Day Average”). None of the RSUs will vest if the 90-Day Average is below $20, and 100% of the RSUs will vest if the 90-Day Average is $60 or above. In the event of a change in control of the Company, following which either (i) 100% of the shares of stock cease to be traded on a nationally recognized stock exchange and the Company is no longer listed on any such exchange or (ii) a Qualifying Termination occurs within 12 months, all unvested RSUs will immediately vest in full.
We used a Monte Carlo simulation model to determine the grant date fair value of the RSUs. Assumptions used by the model were based on information as of the grant date and included a risk-free rate of return, expected volatility and an expected dividend yield. The risk-free rate of return is based on U.S. treasury yields for bonds with similar maturities. Expected volatility is based on the historical volatility of the Company’s common stock. The expected dividend yield considers estimated annual dividends and the closing share price of the underlying common stock.
The total grant date fair value of the RSUs was $1,284, equivalent to $4.28 per share. We will recognize the total grant date fair value of the RSUs as stock-based compensation expense on a straight-line basis over the vesting period. Stock-based compensation expense related to the RSUs was $81 for the three months ended September 30, 2023. We expect stock-based compensation expense related to the RSUs will be $321 in each of the years ending June 30, 2024, 2025, 2026 and 2027.
8. 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.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 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 the EPA. The EPA has named Phibro-Tech and certain other subsidiaries of PAHC as potentially responsible parties (“PRPs”) due to groundwater contamination from Phibro-Tech’s Santa Fe Springs facility that has allegedly commingled with contaminated groundwater from the Omega Chemical Site. In September 2012, the EPA notified approximately 140 PRPs, including Phibro-Tech and the other subsidiaries, that they have been identified as potentially responsible for remedial action for the groundwater plume affected by the Omega Chemical Site and for EPA oversight and response costs. Phibro-Tech contends that any groundwater contamination at its site is localized and due to historical operations that pre-date Phibro-Tech and/or contaminated groundwater that has migrated from upgradient properties. In addition, a successor to a prior owner of the Phibro-Tech site has asserted that PAHC and Phibro-Tech are obligated to provide indemnification for its potential liability and defense costs relating to the
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
groundwater plume affected by the Omega Chemical Site. PAHC and Phibro-Tech have vigorously contested this position and have asserted that the successor to the prior owner is required to indemnify Phibro-Tech for its potential liability and defense costs. In 2014, several members of OPOG filed a complaint under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and the Resource Conservation and Recovery Act in the United States District Court for the Central District of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for contribution toward past and future costs associated with the investigation and remediation of the groundwater plume affected by the Omega Chemical Site. In August 2022, the United States Department of Justice (the “DOJ”), on behalf of the EPA, sent Phibro-Tech and certain other PRPs a pre-litigation notice letter regarding potential CERCLA Sec. 107 cost recovery claims seeking unrecovered past costs related to the groundwater plume affected by the Omega Chemical Site, along with a declaration allocating liability for future costs.
In February 2023, the plaintiffs in the OPOG lawsuit and certain defendants in the OPOG lawsuit, including Phibro-Tech, signed a definitive settlement agreement that provides for a “cash-out” settlement, with contribution protection, for Phibro-Tech and its affiliates (as well as certain other defendants) releasing Phibro-Tech and its affiliates from liability for contamination of the groundwater plume affected by the Omega Chemical Site (with certain exceptions), including past and future EPA response costs that were the subject of the August 2022 pre-litigation notice letter sent by the DOJ on behalf of the EPA. As part of the settlement, Phibro-Tech also resolved all claims for indemnification and contribution between Phibro-Tech and the successor to the prior owner of the Phibro-Tech site. The definitive settlement agreement contemplates cash payments by Phibro-Tech and one of its affiliates over a period ending in February 2024. The definitive settlement agreement is subject to formal approval by the EPA, the DOJ and the district court. In the nine months ended March 31, 2023, we recognized expense for the definitive settlement agreement and other related costs, which is included in our consolidated statement of operations as selling, general and administrative expenses.
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, including a portion of the remaining liability for the OPOG lawsuit referred todescribed in the preceding paragraph, to be approximately $8,614$8,531 and $4,287$8,505 at March 31,September 30, 2023 and June 30, 2022,2023, respectively, which is included in current and long-term liabilities on the consolidated balance sheets. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption and elsewhere in this report, it should be noted that we take and have taken the position that neither PAHC nor any of our subsidiaries are liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Development Agreements
We have entered into various licensing agreements for the development, manufacture and commercialization of certain companion animal products. Under the agreements, we may be liable for future payments upon the achievement of certain development milestones and as a percentage of net sales.
8.9. 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 accumulatedAccumulated other comprehensive income (loss).loss.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We routinely assess whether the derivatives used to hedge transactions are effective. If we determine a derivative no longer isceases to be an effective hedge, we discontinue hedge accounting in the period of the assessment for that derivative, and immediately recognize any unrealized gains or losses related to the fair value of that derivative in the consolidated statements of operations.
We record derivatives at fair value in the consolidated balance sheets. For additional details regarding fair value, see “Note 910 — Fair Value Measurements.”
In July 2017, we entered into an interest rate swap agreement on the first $150,000 of notional principal that effectively converted the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.83%. The agreement matured in June 2022. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converted the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.62%. In July 2022, this agreement increased to a notional principal amount of $300,000. In November 2022, we amended the March 2020 interest rate swap agreement to convert the floating portion of our interest obligation to SOFR. The agreement effectively converts the floating portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.61% through June 2025. We have designated the interest rate swap as a highly effective cash flow hedge.
We have entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The individual option contracts mature monthly through August 2023. 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 swapswaps 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, | | September 30, | | June 30, | ||||
As of |
| 2023 |
| 2022 |
| 2023 |
| 2023 | ||||
Other current assets |
| |
|
| |
|
| |
|
| |
|
Brazil Real options, net | | $ | 536 | | $ | 498 | | $ | — | | $ | 333 |
Interest rate swap | |
| 12,233 | |
| 7,417 | |
| 14,198 | |
| 14,031 |
Other assets | | | | | | | | | | | | |
Brazil Real options, net | | | — | | | 104 | ||||||
Interest rate swap | | | 9,926 | | | 12,871 | | | 8,500 | | | 10,225 |
Total Fair Value | |
| | |
| | |
| | |
| |
Brazil Real options, net | |
| 536 | |
| 602 | |
| — | |
| 333 |
Interest rate swap | |
| 22,159 | |
| 20,288 | |
| 22,698 | |
| 24,256 |
Notional amounts of the derivatives as of the balance sheet date were:
| | | | | | |
| | March 31, | | September 30, | ||
As of |
| 2023 |
| 2023 | ||
Brazil Real call options | | R$ | 25,000 | |||
Brazil Real put options |
| R$ | (25,000) | |||
Interest rate swap | | $ | 300,000 | | $ | 300,000 |
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The consolidated statements of operations and statements of other comprehensive (loss) income (“OCI”) for the periods ended March 31,September 30, 2023 and 2022 included the effects of derivatives as follows:
| | | | | | | | | | | | | | | | | | | |
|
| Three Months |
| Nine Months |
| Three Months | | ||||||||||||
For the Periods Ended March 31 | | 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | | ||||||||||||||
Brazil Real options, net |
| |
|
| |
| | |
|
| |
| | |
|
| |
| |
Expense recorded in consolidated statements of operations | | $ | 368 | | $ | 155 | | $ | 1,161 | | $ | 682 | |||||||
(Income) expense recorded in consolidated statements of operations | | $ | (181) | | $ | 438 | | ||||||||||||
Consolidated statement of operations - total cost of goods sold | | $ | 170,133 | | $ | 167,993 | | $ | 501,269 | | $ | 480,020 | | $ | 163,623 | | $ | 163,875 | |
Expense (income) recorded in OCI | | $ | (83) | | $ | (2,058) | | $ | 67 | | $ | (1,651) | |||||||
Expense recorded in comprehensive (loss) income | | $ | 333 | | $ | 168 | | ||||||||||||
Interest rate swap | |
| | |
| | |
| | |
| | |
| | |
| | |
Expense (income) recorded in consolidated statements of operations | | $ | (2,994) | | $ | 814 | | $ | (6,502) | | $ | 2,556 | |||||||
Income recorded in consolidated statements of operations | | $ | (3,570) | | $ | (1,211) | | ||||||||||||
Consolidated statement of operations - total interest expense, net | | $ | 3,871 | | $ | 2,925 | | $ | 10,822 | | $ | 8,767 | | $ | 4,564 | | $ | 3,067 | |
Expense (income) recorded in OCI | | $ | 3,848 | | $ | (12,900) | | $ | (1,871) | | $ | (18,088) | |||||||
Expense (income) recorded in comprehensive (loss) income | | $ | 1,558 | | $ | (7,273) | |
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,September 30, 2023, included realized net gains of $532$1,182 related to matured contracts. We anticipate the net gains included in inventory will be recognized in cost of goods sold within the next twelve to eighteen months.
9.10. Fair Value Measurements
Short-term Investments
Our short-term investments consist of cash deposits held at financial institutions. We consider the carrying amounts of these short-term investments to be representative of their fair value.
Current Assets and Liabilities
We consider the carrying amounts of current assets and current liabilities to be representative of their fair value because of the current nature of these items.
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 ROUright-of-use (“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 combination. These fair value measurements involve unobservable inputs that reflect estimates and assumptions that represent Level 3 inputs.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value of Assets (Liabilities)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 | ||||||||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||||
Short-term investments | | $ | 40,000 | | $ | — | | $ | — | | $ | 17,000 | | $ | — | | $ | — | | $ | 48,000 | | $ | — | | $ | — | | $ | 40,000 | | $ | — | | $ | — |
Foreign currency derivatives | | $ | — | | $ | 536 | | $ | — | | $ | — | | $ | 602 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 333 | | $ | — |
Interest rate swap | | $ | — | | $ | 22,159 | | $ | — | | $ | — | | $ | 20,288 | | $ | — | | $ | — | | $ | 22,698 | | $ | — | | $ | — | | $ | 24,256 | | $ | — |
There were no transfers between levels during the periods presented.
10.11. Business Segments
We evaluate performance and allocate resources, based on the Animal Health, Mineral Nutrition and Performance Products segments. Certain of our costs and assets are not directly attributable to these segments and we refer to these items as Corporate. We do not allocate Corporate costs or assets to the segments because they are not used to evaluate the segments’ operating results or financial position. Corporate includescosts include certain costs related to executive management, business technology, legal, finance, human resources and business development. The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.
We evaluate performance of our segments based on Adjusted EBITDA. We calculate 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 (e) certain items that we consider to be unusual, non-operational or non-recurring.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | |
|
| Three Months |
| Nine Months | ||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health | | $ | 164,434 | | $ | 148,589 | | $ | 483,096 | | $ | 440,520 |
Mineral Nutrition | |
| 62,922 | |
| 69,033 | |
| 184,212 | |
| 190,120 |
Performance Products | |
| 18,317 | |
| 21,997 | |
| 55,532 | |
| 56,356 |
Total segments | | $ | 245,673 | | $ | 239,619 | | $ | 722,840 | | $ | 686,996 |
| | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | |
Animal Health | | $ | 6,888 | | $ | 6,935 | | $ | 20,733 | | $ | 19,872 |
Mineral Nutrition | |
| 671 | |
| 661 | |
| 1,985 | |
| 1,960 |
Performance Products | |
| 453 | |
| 436 | |
| 1,348 | |
| 1,292 |
Total segments | | $ | 8,012 | | $ | 8,032 | | $ | 24,066 | | $ | 23,124 |
Adjusted EBITDA | | | | | | | | | | | | |
Animal Health | | $ | 34,217 | | $ | 29,232 | | $ | 98,240 | | $ | 90,565 |
Mineral Nutrition | |
| 3,859 | |
| 7,303 | |
| 13,555 | |
| 17,361 |
Performance Products | |
| 2,413 | |
| 2,865 | |
| 7,069 | |
| 6,327 |
Total segments | | $ | 40,489 | | $ | 39,400 | | $ | 118,864 | | $ | 114,253 |
Reconciliation of income before income taxes to Adjusted EBITDA | | | | | | | | | | | | |
Income before income taxes | | $ | 15,104 | | $ | 26,833 | | $ | 32,630 | | $ | 59,958 |
Interest expense, net | |
| 3,871 | |
| 2,925 | |
| 10,822 | |
| 8,767 |
Depreciation and amortization – Total segments | |
| 8,012 | |
| 8,032 | |
| 24,066 | |
| 23,124 |
Depreciation and amortization – Corporate | |
| 477 | |
| 413 | |
| 1,372 | |
| 1,176 |
Corporate costs | | | 13,122 | | | 11,404 | | | 38,451 | | | 34,699 |
Environmental remediation costs | | | 325 | | | — | | | 6,894 | | | — |
Gain on sale of investment | | | — | | | — | | | — | | | (1,203) |
Acquisition-related cost of goods sold | |
| — | |
| 78 | |
| — | |
| 78 |
Acquisition-related transaction costs | |
| — | |
| 279 | |
| — | |
| 279 |
Foreign currency (gains) losses, net | |
| (422) | |
| (10,564) | |
| 4,629 | |
| (12,625) |
Adjusted EBITDA – Total segments | | $ | 40,489 | | $ | 39,400 | | $ | 118,864 | | $ | 114,253 |
| | | | | | |
|
| Three Months | ||||
For the Periods Ended September 30 |
| 2023 |
| 2022 | ||
Net sales |
|
|
|
|
|
|
Animal Health | | $ | 160,530 | | $ | 154,859 |
Mineral Nutrition | |
| 56,026 | |
| 59,646 |
Performance Products | |
| 14,793 | |
| 18,016 |
Total segments | | $ | 231,349 | | $ | 232,521 |
| | | | | | |
Depreciation and amortization | | | | | | |
Animal Health | | $ | 7,349 | | $ | 6,911 |
Mineral Nutrition | |
| 646 | |
| 655 |
Performance Products | |
| 426 | |
| 442 |
Total segments | | $ | 8,421 | | $ | 8,008 |
Adjusted EBITDA | | | | | | |
Animal Health | | $ | 28,494 | | $ | 26,964 |
Mineral Nutrition | |
| 2,881 | |
| 5,297 |
Performance Products | |
| 1,409 | |
| 2,364 |
Total segments | | $ | 32,784 | | $ | 34,625 |
Reconciliation of income before income taxes to Adjusted EBITDA | | | | | | |
(Loss) income before income taxes | | $ | (11,979) | | $ | 5,417 |
Interest expense, net | |
| 4,564 | |
| 3,067 |
Depreciation and amortization – Total segments | |
| 8,421 | |
| 8,008 |
Depreciation and amortization – Corporate | |
| 450 | |
| 442 |
Corporate costs | | | 14,133 | | | 12,491 |
Pension settlement cost | | | 10,425 | | | — |
Stock-based compensation | | | 81 | | | — |
Foreign currency losses, net | |
| 6,689 | |
| 5,200 |
Adjusted EBITDA – Total segments | | $ | 32,784 | | $ | 34,625 |
| | | | | | |
| | March 31, |
| June 30, | ||
As of |
| 2023 |
| 2022 | ||
Identifiable assets |
| |
|
| |
|
Animal Health | | $ | 686,510 | | $ | 654,862 |
Mineral Nutrition | |
| 91,205 | |
| 87,379 |
Performance Products | |
| 47,522 | |
| 39,490 |
Total segments | |
| 825,237 | |
| 781,731 |
Corporate | |
| 140,195 | |
| 149,968 |
Total | | $ | 965,432 | | $ | 931,699 |
| | | | | | |
| | September 30, |
| June 30, | ||
As of |
| 2023 |
| 2023 | ||
Identifiable assets |
| |
|
| |
|
Animal Health | | $ | 679,935 | | $ | 698,522 |
Mineral Nutrition | |
| 74,060 | |
| 75,814 |
Performance Products | |
| 49,939 | |
| 49,678 |
Total segments | |
| 803,934 | |
| 824,014 |
Corporate | |
| 160,589 | |
| 147,383 |
Total | | $ | 964,523 | | $ | 971,397 |
The Animal Health segment includes all goodwill of the Company. Corporate assets include cash and cash equivalents, short-term investments, interest rate swap agreement, debt issuance costs, income tax-related assets and certain other assets.
19
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 leading global diversified animal health and mineral nutrition company. We develop, manufacture and market a broad range of products for food and companion animals including poultry, swine, beef and dairy cattle, aquaculture, and dogs. Our products help prevent, control and treat diseases, and support nutrition to help improve animal health and well-being. 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.
Armed Conflict between Conflicts
Hamas and Israel
On October 7, 2023, Hamas militants crossed into Israel from Gaza in a large-scale, surprise terrorist attack. Hamas terrorists invaded Israel, first firing rockets into the country and then carrying out attacks inflicting mass casualties with hundreds more taken hostage. In order to provide immediate assistance to the victims of the attacks and their families, we and our employees provided monetary donations that will be distributed to charities that offer relief services, welfare, equipment, food and other necessities.
We have three manufacturing sites in Israel. A manufacturing plant in Neot Hovav that produces active pharmaceutical ingredients for certain of our anticoccidial and antimicrobial products, a facility in Beit Shemesh that produces vaccines and a plant in Petah Tikvah that manufactures premix products and nutritionals. In addition, we have an office location near Tel Aviv in Airport City. As of September 30, 2023, we had approximately 550 employees located in Israel. While we have had some disruption to our operations, at the current time, we have confidence in our ability to meet our supply commitment to customers and maintain sufficient inventory to continue regional support. While the situation surrounding the ongoing conflict remains fluid, our operations in Israel have navigated numerous challenging situations over the years.
The prolonged continuation or escalation of this conflict may trigger bans, economic and other sanctions, as well as broader military conflict, which could include neighboring nations. The potential impacts of the current conflict, or escalation thereof, on our business is unclear but may include, without limitation, the possible disruption of our operations, particularly at our facilities in Israel, supply chain and logistics disruptions, personnel and raw material shortages, and other consequences, including as a result of the actions of, or disruption of the operations of, certain regulatory and governmental authorities and of certain of our suppliers, collaborative partners, licensees, manufacturing sites, distributors and customers. Our Israeli manufacturing facilities and local operations account for 27% of our consolidated assets as of September 30, 2023, and 19% of our consolidated net sales, for the three months ended September 30, 2023.
Russia and Ukraine
In response to the armed conflict between Russia and Ukraine that began in February 2022, we and our employees have provided support to Ukraine in the form of monetary donations, free products 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.
20
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 or escalation of the conflict may trigger additional economic and other sanctions, as well as broader military conflict. The potential impacts of 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.are uncertain. 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 annual sales to Russia and Ukraine represent approximately 1% of consolidated net sales.
We cannot know if the conflict 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 currency volatility in international markets due to the COVID-19 pandemic. The situation surrounding the COVID-19 pandemic remains fluid. We are unable to predict the future impact of COVID-19 on the economies where we manufacture and/or sell our products. We 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.
20
Regulatory Developmentsdevelopments
In April 2016, the Food and Drug Administration (“FDA”) began initial steps to withdraw approval of carbadox (the active ingredient in our Mecadox product) 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. In the years following, Phibro has continued an ongoing process of responding collaboratively and transparently to the FDA’s Center for Veterinary Medicine (“CVM”) inquiries and has provided extensive and meticulous research and data that confirmed the safety of carbadox. In July 2020, the FDA announced it would not proceed to a hearing on the scientific concerns raised in the 2016 NOOH, consistent with the normal regulatory procedure, but instead announced that it was withdrawing the 2016 NOOH and issuing a proposed order to review the regulatory method for carbadox. Phibro reiterated the safety of carbadox and the appropriateness of the regulatory method and offered to work with the CVM to generate additional data to support the existing regulatory method or select a suitable alternative regulatory method.
In the eventMarch 2022, the FDA continuesheld a Part 15 virtual public hearing seeking data and information related to assertthe safety of carbadox in which Phibro participated and again detailed the extensive research and data that confirm the safety of carbadox. In November 2023, the FDA, through CVM, provided notice of a Federal Register publication issuing a final order to revoke the approved method for detecting residues of carbadox. The FDA has also provided notice of a second Federal Register publication proposing to withdraw approval of all new animal drug applications (NADAs) providing for use of carbadox should be removed fromin medicated swine feed and announcing an opportunity for Phibro to request a hearing on this proposal. This second action is based on CVM’s determination that there is no approved regulatory method to detect carbadox residues in the market,edible tissues of the treated swine. Phibro intends to take appropriate action and next steps to continue to defend swine producers’ ability to use Mecadox, and 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,September 30, 2023, were $20.8approximately $20 million. As of the date of the filing of this Quarterly Report on Form 10-Q, Mecadox continues to be available for use by swine producers. For additional information, see also “Business-Compliance“Business – Compliance with Government Regulations-United States-Carbadox”Regulation – United States – Carbadox”; and “Business-Compliance“Business – Compliance with Government Regulations-Global policyRegulation – Global Policy and guidance”Guidance” in Item 1 of our Annual Report.
21
Analysis of the consolidated statements of operations
Summary Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months | | | Nine Months | | | Three Months | | |||||||||||||||||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| Change |
|
| 2023 |
| 2022 |
| Change | | ||||||||||||||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 |
| Change | | |||||||||||||||||||||||||||||
| | | | | | (in thousands, except per share amounts and percentages) | | | | | | | (in thousands, except per share amounts and percentages) | | ||||||||||||||||||||||
Net sales |
| $ | 245,673 | | $ | 239,619 |
| $ | 6,054 |
| 3 | % | | $ | 722,840 |
| $ | 686,996 |
| $ | 35,844 |
| 5 | % | | $ | 231,349 |
| $ | 232,521 |
| $ | (1,172) |
| (1) | % |
Gross profit | |
| 75,540 | |
| 71,626 | |
| 3,914 | | 5 | % | |
| 221,571 | |
| 206,976 | |
| 14,595 | | 7 | % | |
| 67,726 | |
| 68,646 | |
| (920) | | (1) | % |
Selling, general and administrative expenses | |
| 56,987 | |
| 52,432 | |
| 4,555 | | 9 | % | |
| 173,490 | |
| 150,876 | |
| 22,614 | | 15 | % | |
| 68,452 | |
| 54,962 | |
| 13,490 | | 25 | % |
Operating income | |
| 18,553 | |
| 19,194 | |
| (641) | | (3) | % | |
| 48,081 | |
| 56,100 | |
| (8,019) | | (14) | % | ||||||||||||
Operating (loss) income | |
| (726) | |
| 13,684 | |
| (14,410) | | * | | ||||||||||||||||||||||||
Interest expense, net | |
| 3,871 | |
| 2,925 | |
| 946 | | 32 | % | |
| 10,822 | |
| 8,767 | |
| 2,055 | | 23 | % | |
| 4,564 | |
| 3,067 | |
| 1,497 | | 49 | % |
Foreign currency (gains) losses, net | |
| (422) | |
| (10,564) | |
| 10,142 | | * | | |
| 4,629 | |
| (12,625) | |
| 17,254 | | * | | ||||||||||||
Income before income taxes | |
| 15,104 | |
| 26,833 | |
| (11,729) | | (44) | % | |
| 32,630 | |
| 59,958 | |
| (27,328) | | (46) | % | ||||||||||||
Provision for income taxes | |
| 5,062 | |
| 9,144 | |
| (4,082) | | (45) | % | |
| 11,522 | |
| 18,270 | |
| (6,748) | | (37) | % | ||||||||||||
Net income | | $ | 10,042 | | $ | 17,689 | | $ | (7,647) | | (43) | % | | $ | 21,108 | | $ | 41,688 | | $ | (20,580) | | (49) | % | ||||||||||||
Foreign currency losses, net | |
| 6,689 | |
| 5,200 | |
| 1,489 | | * | | ||||||||||||||||||||||||
(Loss) income before income taxes | |
| (11,979) | |
| 5,417 | |
| (17,396) | | * | | ||||||||||||||||||||||||
(Benefit) provision for income taxes | |
| (3,964) | |
| 1,561 | |
| (5,525) | | * | | ||||||||||||||||||||||||
Net (loss) income | | $ | (8,015) | | $ | 3,856 | | $ | (11,871) | | * | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share | |
|
| |
| | |
| |
| | | |
|
| |
| | |
| | | | | ||||||||||||
basic and diluted | | $ | 0.25 | | $ | 0.44 | | $ | (0.19) | | (43) | % | | $ | 0.52 | | $ | 1.03 | | $ | (0.51) | | (49) | % | ||||||||||||
Net (loss) income per share | |
|
| |
| | |
| | | | | ||||||||||||||||||||||||
Basic | | $ | (0.20) | | $ | 0.10 | | $ | (0.30) | | * | | ||||||||||||||||||||||||
Diluted | | $ | (0.20) | | $ | 0.10 | | $ | (0.30) | | * | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding | |
|
| |
| | |
|
| | | | |
|
| |
| | |
|
| | | | |
|
| |
| | |
|
| | | |
basic and diluted | |
| 40,504 | |
| 40,504 | |
|
| | | | |
| 40,504 | |
| 40,504 | |
|
| | | | ||||||||||||
Basic | |
| 40,504 | |
| 40,504 | |
|
| | | | ||||||||||||||||||||||||
Diluted | | | 40,504 | | | 40,504 | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio to net sales | |
|
| |
| | |
|
| | | | |
|
| |
| | |
|
| | | | |
|
| |
| | |
|
| | | |
Gross profit | |
| 30.7 | % |
| 29.9 | % |
|
| | | | |
| 30.7 | % |
| 30.1 | % |
|
| | | | |
| 29.3 | % |
| 29.5 | % |
|
| | | |
Selling, general and administrative expenses | |
| 23.2 | % |
| 21.9 | % |
|
| | | | |
| 24.0 | % |
| 22.0 | % |
|
| | | | |
| 29.6 | % |
| 23.6 | % |
|
| | | |
Operating income | |
| 7.6 | % |
| 8.0 | % |
|
| | | | |
| 6.7 | % |
| 8.2 | % |
|
| | | | ||||||||||||
Income before income taxes | |
| 6.1 | % |
| 11.2 | % |
|
| | | | |
| 4.5 | % |
| 8.7 | % |
|
| | | | ||||||||||||
Net income | |
| 4.1 | % |
| 7.4 | % |
|
| | | | |
| 2.9 | % |
| 6.1 | % |
| | | | | ||||||||||||
Operating (loss) income | |
| (0.3) | % |
| 5.9 | % |
|
| | | | ||||||||||||||||||||||||
(Loss) income before income taxes | |
| (5.2) | % |
| 2.3 | % |
|
| | | | ||||||||||||||||||||||||
Net (loss) income | |
| (3.5) | % |
| 1.7 | % |
| | | | | ||||||||||||||||||||||||
Effective tax rate | |
| 33.5 | % |
| 34.1 | % |
|
| | | | |
| 35.3 | % |
| 30.5 | % |
|
| | | | |
| 33.1 | % |
| 28.8 | % |
|
| | | |
Certain amounts and percentages may reflect rounding adjustments.
* | Calculation not meaningful |
Net sales, Adjusted EBITDA and reconciliation of GAAP net (loss) 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.”
22
Segment net sales and Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months | | | Nine Months | | ||||||||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| Change |
| | 2023 |
| 2022 |
| Change | | ||||||||||
Net sales | | | | | | | (in thousands, except percentages) | | | | | | | | | | ||||||||
MFAs and other | | $ | 93,217 | | $ | 84,330 | | $ | 8,887 |
| 11 | % | | $ | 283,186 | | $ | 259,812 | | $ | 23,374 | | 9 | % |
Nutritional specialties | |
| 45,016 | |
| 41,394 | |
| 3,622 |
| 9 | % | |
| 127,926 | |
| 114,721 | |
| 13,205 | | 12 | % |
Vaccines | |
| 26,201 | |
| 22,865 | |
| 3,336 |
| 15 | % | |
| 71,984 | |
| 65,987 | |
| 5,997 | | 9 | % |
Animal Health | |
| 164,434 | |
| 148,589 | |
| 15,845 |
| 11 | % | |
| 483,096 | |
| 440,520 | |
| 42,576 | | 10 | % |
Mineral Nutrition | |
| 62,922 | |
| 69,033 | |
| (6,111) |
| (9) | % | |
| 184,212 | |
| 190,120 | |
| (5,908) | | (3) | % |
Performance Products | |
| 18,317 | |
| 21,997 | |
| (3,680) |
| (17) | % | |
| 55,532 | |
| 56,356 | |
| (824) | | (1) | % |
Total | | $ | 245,673 | | $ | 239,619 | | $ | 6,054 |
| 3 | % | | $ | 722,840 | | $ | 686,996 | | $ | 35,844 | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | |
|
| |
|
| |
|
|
|
| | |
|
| |
|
| |
|
| | | |
Animal Health | | $ | 34,217 | | $ | 29,232 | | $ | 4,985 |
| 17 | % | | $ | 98,240 | | $ | 90,565 | | $ | 7,675 | | 8 | % |
Mineral Nutrition | |
| 3,859 | |
| 7,303 | |
| (3,444) |
| (47) | % | |
| 13,555 | |
| 17,361 | |
| (3,806) | | (22) | % |
Performance Products | |
| 2,413 | |
| 2,865 | |
| (452) |
| (16) | % | |
| 7,069 | |
| 6,327 | |
| 742 | | 12 | % |
Corporate | |
| (13,122) | |
| (11,404) | |
| (1,718) |
| 15 | % | |
| (38,451) | |
| (34,699) | |
| (3,752) | | 11 | % |
Total | | $ | 27,367 | | $ | 27,996 | | $ | (629) |
| (2) | % | | $ | 80,413 | | $ | 79,554 | | $ | 859 | | 1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA as a percentage of segment net sales | |
|
| |
| | |
|
|
|
| | |
|
| |
| | |
|
| | | |
Animal Health | |
| 20.8 | % |
| 19.7 | % |
|
|
|
| | |
| 20.3 | % |
| 20.6 | % |
|
| | | |
Mineral Nutrition | |
| 6.1 | % |
| 10.6 | % |
|
|
|
| | |
| 7.4 | % |
| 9.1 | % |
|
| | | |
Performance Products | |
| 13.2 | % |
| 13.0 | % |
|
|
|
| | |
| 12.7 | % |
| 11.2 | % |
|
| | | |
Corporate(1) | |
| (5.3) | % |
| (4.8) | % |
|
|
|
| | |
| (5.3) | % |
| (5.1) | % |
|
| | | |
Total(1) | |
| 11.1 | % |
| 11.7 | % |
|
|
|
| | |
| 11.1 | % |
| 11.6 | % |
|
| | | |
| | | | | | | | | | | | |
| | Three Months | | |||||||||
For the Periods Ended September 30 | | 2023 |
| 2022 |
| Change | | |||||
Net sales | | (in thousands, except percentages) | | |||||||||
MFAs and other | | $ | 94,104 | | $ | 92,790 | | $ | 1,314 | | 1 | % |
Nutritional specialties | |
| 40,210 | |
| 39,054 | |
| 1,156 | | 3 | % |
Vaccines | |
| 26,216 | |
| 23,015 | |
| 3,201 | | 14 | % |
Animal Health | |
| 160,530 | |
| 154,859 | |
| 5,671 | | 4 | % |
Mineral Nutrition | |
| 56,026 | |
| 59,646 | |
| (3,620) | | (6) | % |
Performance Products | |
| 14,793 | |
| 18,016 | |
| (3,223) | | (18) | % |
Total | | $ | 231,349 | | $ | 232,521 | | $ | (1,172) | | (1) | % |
| | | | | | | | | | | | |
Adjusted EBITDA | |
|
| |
|
| |
|
| | | |
Animal Health | | $ | 28,494 | | $ | 26,964 | | $ | 1,530 | | 6 | % |
Mineral Nutrition | |
| 2,881 | |
| 5,297 | |
| (2,416) | | (46) | % |
Performance Products | |
| 1,409 | |
| 2,364 | |
| (955) | | (40) | % |
Corporate | |
| (14,133) | |
| (12,491) | |
| (1,642) | | 13 | % |
Total | | $ | 18,651 | | $ | 22,134 | | $ | (3,483) | | (16) | % |
| | | | | | | | | | | | |
Adjusted EBITDA as a percentage of segment net sales | |
|
| |
| | |
|
| | | |
Animal Health | |
| 17.7 | % |
| 17.4 | % |
|
| | | |
Mineral Nutrition | |
| 5.1 | % |
| 8.9 | % |
|
| | | |
Performance Products | |
| 9.5 | % |
| 13.1 | % |
|
| | | |
Corporate (1) | |
| (6.1) | % |
| (5.4) | % |
|
| | | |
Total (1) | |
| 8.1 | % |
| 9.5 | % |
|
| | | |
(1) | Reflects ratio to total net sales |
The table below sets forth a reconciliation of net (loss) income, as reported under GAAP, to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months | | | Nine Months | | ||||||||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| Change |
| | 2023 |
| 2022 |
| Change | | ||||||||||
| | | | | | | (in thousands, except percentages) | | | | | | | |||||||||||
Net income | | $ | 10,042 | | $ | 17,689 | | $ | (7,647) | | (43) | % | | $ | 21,108 | | $ | 41,688 | | $ | (20,580) |
| (49) | % |
Interest expense, net | | | 3,871 | | | 2,925 | | | 946 | | 32 | % | | | 10,822 | | | 8,767 | | | 2,055 | | 23 | % |
Provision for income taxes | | | 5,062 | | | 9,144 | | | (4,082) | | (45) | % | | | 11,522 | | | 18,270 | | | (6,748) | | (37) | % |
Depreciation and amortization | | | 8,489 | | | 8,445 | | | 44 | | 1 | % | | | 25,438 | | | 24,300 | | | 1,138 | | 5 | % |
EBITDA | | | 27,464 | | | 38,203 | | | (10,739) | | (28) | % | | | 68,890 | | | 93,025 | | | (24,135) | | (26) | % |
Environmental remediation costs | | | 325 | | | — | | | 325 | | * | | | | 6,894 | | | — | | | 6,894 | | * | |
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) | | * | |
Foreign currency (gains) losses, net | | | (422) |
| | (10,564) |
| | 10,142 |
| * | | | | 4,629 |
| | (12,625) |
| | 17,254 | | * | |
Adjusted EBITDA | | $ | 27,367 | | $ | 27,996 | | $ | (629) |
| (2) | % | | $ | 80,413 | | $ | 79,554 | | $ | 859 | | 1 | % |
| | | | | | | | | | | | |
| | Three Months | | |||||||||
For the Periods Ended September 30 | | 2023 |
| 2022 |
| Change | | |||||
| | (in thousands, except percentages) | | |||||||||
Net (loss) income | | $ | (8,015) | | $ | 3,856 | | $ | (11,871) |
| * | |
Interest expense, net | | | 4,564 | | | 3,067 | | | 1,497 | | 49 | % |
(Benefit) provision for income taxes | | | (3,964) | | | 1,561 | | | (5,525) | | * | |
Depreciation and amortization | | | 8,871 | | | 8,450 | | | 421 | | 5 | % |
EBITDA | | | 1,456 | | | 16,934 | | | (15,478) | | (91) | % |
Pension settlement cost | | | 10,425 |
| | — |
| | 10,425 | | * | |
Stock-based compensation | | | 81 | | | — | | | 81 | | * | |
Foreign currency losses, net | | | 6,689 |
| | 5,200 |
| | 1,489 | | * | |
Adjusted EBITDA | | $ | 18,651 | | $ | 22,134 | | $ | (3,483) | | (16) | % |
Certain amounts may reflect rounding adjustments.
* Calculation not meaningful
Adjusted net (loss) income
We report adjusted net (loss) income to portray the results of our operations prior to considering certain income statement elements. See “—General description of non-GAAP financial measures.”
A reconciliation of net (loss) income, as reported under GAAP, to adjusted net income:
23
| | | | | | | | | | | |
| Three Months |
| |||||||||
For the Periods Ended September 30 | 2023 |
| 2022 |
| Change |
| |||||
| (in thousands, except per share amounts and percentages) |
| |||||||||
Net (loss) income | $ | (8,015) | | $ | 3,856 | | $ | (11,871) |
| * | |
Acquisition-related intangible amortization (1) |
| 1,673 | |
| 1,657 | |
| 16 |
| 1 | % |
Acquisition-related intangible amortization (2) |
| 766 | |
| 739 | |
| 27 |
| 4 | % |
Pension settlement cost (2) | | 10,425 | | | — | | | 10,425 |
| * | |
Stock-based compensation (2) | | 81 | | | — | | | 81 | | * | |
Foreign currency losses, net (3) |
| 6,689 | |
| 5,200 | |
| 1,489 |
| 29 | % |
Adjustments to income taxes (4) |
| (6,079) | |
| (3,126) | |
| (2,953) |
| * | |
Adjusted net income | $ | 5,540 | | $ | 8,326 | | $ | (2,786) |
| (33) | % |
| | | | | | | | | | | |
Statement of Operations Line Items - adjusted | | | | | | | | | | | |
Adjusted cost of goods sold (1) | $ | 161,950 | | $ | 162,218 | | $ | (268) |
| (0) | % |
Adjusted gross profit |
| 69,399 | |
| 70,303 | |
| (904) | | (1) | % |
Adjusted selling, general and administrative (2) |
| 57,180 | |
| 54,223 | |
| 2,957 |
| 5 | % |
Adjusted interest expense, net |
| 4,564 | |
| 3,067 | |
| 1,497 |
| 49 | % |
Adjusted income before income taxes |
| 7,655 | |
| 13,013 | |
| (5,358) |
| (41) | % |
Adjusted provision for income taxes (4) |
| 2,115 | |
| 4,687 | |
| (2,572) |
| (55) | % |
Adjusted net income | $ | 5,540 | | $ | 8,326 | | $ | (2,786) |
| (33) | % |
|
| | |
| | |
|
|
|
| |
Adjusted net income per share |
| | |
| | |
|
|
|
| |
diluted | $ | 0.14 | | $ | 0.21 | | $ | (0.07) |
| (33) | % |
|
| | |
| | |
|
|
|
| |
Weighted average common shares outstanding |
| | |
| | |
|
|
|
| |
diluted |
| 40,504 | |
| 40,504 | |
|
|
|
| |
|
| | |
| | |
|
|
| | |
Ratio to net sales |
| | |
| | |
|
|
|
| |
Adjusted gross profit |
| 30.0 | % |
| 30.2 | % |
|
|
|
| |
Adjusted selling, general and administrative |
| 24.7 | % |
| 23.3 | % |
|
|
|
| |
Adjusted (loss) income before income taxes |
| 3.3 | % |
| 5.6 | % |
|
|
|
| |
Adjusted net (loss) income |
| 2.4 | % |
| 3.6 | % |
|
|
|
| |
Adjusted effective tax rate |
| 27.6 | % |
| 36.0 | % |
|
|
|
| |
Certain amounts and percentages may reflect rounding adjustments.
* Calculation not meaningful
(1) Adjusted cost of goods sold excludes acquisition-related intangible amortization
(2) Adjusted selling, general and administrative excludes acquisition-related intangible amortization, pension settlement cost and stock-based compensation
(3) Foreign currency losses, net are excluded from adjusted net income
(4) Adjusted provision for income taxes excludes the income tax effect of pre-tax income adjustments and certain income tax items
Comparison of three months ended March 31,September 30, 2023 and 2022
Net sales
Net sales of $245.7$231.3 million for the three months ended March 31,September 30, 2023, increased $6.1decreased $1.2 million, or 3%1%, as compared to the three months ended March 31,September 30, 2022. Animal Health increased $15.8 million.$5.7 million, while Mineral Nutrition and Performance Products decreased $6.1$3.6 million and $3.7$3.2 million, respectively.
24
Animal Health
Net sales of $164.4$160.5 million for the three months ended March 31,September 30, 2023, increased $15.8$5.7 million, or 11%4%. Net sales of MFAs and other increased $8.9$1.3 million, or 11%1%, due toprimarily driven by increased demand for our MFAs in the U.S., Latin America and Canada and for oursales of processing aids used in the ethanol fermentation industry. Net sales of nutritional specialty products increased $3.6$1.2 million, or 9%3%, due mostly to higher domestic demand and higher average selling prices for dairy products, along with growthincreased volumes in the companion animal product.poultry customers, primarily domestic. Net sales of vaccines increased $3.3$3.2 million, or 15%14%, due to an increase in domestic and international demand, along with newpoultry product launchesintroductions in Latin America.America and growth in the U.S. swine sector, partially offset by timing of deliveries in other international regions.
Mineral Nutrition
Net sales of $62.9$56.0 million for the three months ended March 31,September 30, 2023, decreased $6.1$3.6 million, or 9%6%, driven by a decreasedue to declines in demand for trace minerals as customers reduced purchases with the higher costs of capital, partially offset by higher average selling prices. The increase in average selling prices is correlatedand reduced volumes due to the movement of the underlying raw material costs.reduced demand.
Performance Products
Net sales of $18.3$14.8 million for the three months ended March 31,September 30, 2023, decreased $3.7$3.2 million, or 17%18%, driven by decreasedas a result of lower demand for boththe ingredients used in personal care product ingredients and copper-related products, partially offset by higher average selling prices for these products.
Gross profit
Gross profit of $75.5$67.7 million for the three months ended March 31,September 30, 2023, increased $3.9decreased $0.9 million, or 5%1%, as compared to the three months ended March 31,September 30, 2022. Gross margin increased 80 basis pointsdecreased to 30.7%29.3% of net sales for the three months ended March 31,September 30, 2023, as compared to 29.9%29.5% for the three months ended March 31, 2022, due to higher product demand and favorable product and geographical mix.September 30, 2022.
Animal Health gross profit increased $7.5$2.4 million, primarily driven by higher sales volumes and favorable production costs.volume. Mineral Nutrition gross profit decreased $3.4$2.3 million, driven by lower sales volume and an increase in raw materialhigher costs. Performance Products gross profit decreased $0.2$1.1 million as a result of lower product demand and highersales volumes of ingredients for personal care products, along with increased costs for raw materials.these products.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) of $57.0$68.5 million for the three months ended March 31,September 30, 2023, increased $4.6$13.5 million, or 9%25%, as compared to the three months ended March 31,September 30, 2022. SG&A for the three months ended March 31,September 30, 2023, included $0.3$10.4 million of additional environmental remediation costs. SG&A for the three months ended March 31, 2022, included $0.3pension settlement cost and $0.1 million of acquisition-related transaction costs.stock-based compensation. Excluding these items, SG&A increased $4.5$3.0 million.
Animal Health SG&A increased $2.3$1.3 million, primarily due to an increase in employee and employee-related costs. Mineral Nutrition SG&A was comparable to the prior year.increased $0.2 million, while Performance Products SG&A increased $0.3decreased $0.1 million. Corporate costs increased by $1.8$1.6 million, driven by the planned increase indue to strategic investments.investments and employee-related costs.
24
Interest expense, net
Interest expense, net of $3.9$4.6 million for the three months ended March 31,September 30, 2023, increased by $0.9$1.5 million, as compared to the three months ended March 31,September 30, 2022, due toas a result of the increased debt outstandingwith the issuance of 2023 Incremental Term Loan and the higher floatingvariable interest rates on portions of debt outstanding, partially offset by increased interest income and a lower average fixed rate from our interest rate swap agreements.rates.
Foreign currency gains,losses, net
Foreign currency gains,losses, net for the three months ended March 31,September 30, 2023, were $0.4$6.7 million, as compared to $10.6$5.2 million of net gainslosses for the three months ended March 31,September 30, 2022. PriorCurrent period gainslosses were driven by fluctuations in certain currencies relativerelated to the U.S. dollar.
Provision for income taxes
The provision for income taxes was $5.1 million and $9.1 million for the three months ended March 31, 2023 and 2022, respectively. The effective income tax rate was 33.5% and 34.1% for the three months ended March 31, 2023 and 2022, respectively. The current provision for income taxes was impacted by the final foreign tax credit regulations that were in effect during the three months ended March 31, 2023, in addition to losses generated in international jurisdictions where no tax benefit is being recognized.
Net income
Net income of $10.0 million for the three months ended March 31, 2023, decreased $7.6 million, as compared to net income of $17.7 million for the three months ended March 31, 2022. Operating income decreased $0.6 million, driven by higher SG&A, partially offset by favorable gross profit. The increase in gross profit was due to higher product demand and higher average selling prices. Interest expense, net increased $0.9 million and foreign currency gains, net decreased $10.1 million. Income tax expense decreased by $4.1 million.
Adjusted EBITDA
Adjusted EBITDA of $27.4 million for the three months ended March 31, 2023, decreased $0.6 million, or 2%, as compared to the three months ended March 31, 2022. Animal Health Adjusted EBITDA increased $5.0 million due to gross profit from increased sales, partially offset by higher SG&A. Mineral Nutrition Adjusted EBITDA decreased $3.4 million, driven by lower gross profit. Performance Products Adjusted EBITDA decreased $0.5 million due to lower gross profit and higher SG&A. Corporate expenses increased $1.7 million, driven by increased strategic investments.
Comparison of nine months ended March 31, 2023 and 2022
Net sales
Net sales of $722.8 million for the nine months ended March 31, 2023, increased $35.8 million, or 5%, as compared to the nine months ended March 31, 2022. Animal Health sales increased by $42.6 million. Mineral Nutrition and Performance Products sales decreased $5.9 million and $0.8 million, respectively.
Animal Health
Net sales of $483.1 million for the nine months ended March 31, 2023, increased $42.6 million, or 10%. Net sales of MFAs and other increased $23.4 million, or 9%, due to higher demand for MFAsdollar, primarily in U.S., Latin AmericaArgentina and Canada and for processing aids used in the ethanol fermentation industry. Net sales of nutritional specialty products increased $13.2 million, or 12%, driven by strong demand in dairy products and increased sales of our companion animal product. Net sales of vaccines increased $6.0 million, or 9%, due to increased domestic and international volumes.Brazil.
25
Mineral Nutrition
Net sales of $184.2 million for the nine months ended March 31, 2023, decreased $5.9 million, or 3%, driven by a decrease in demand for trace minerals, partially offset by higher average selling prices. The increase in average selling prices is correlated to the movement of the underlying raw material costs.
Performance Products
Net sales of $55.5 million for the nine months ended March 31, 2023, decreased $0.8 million, or 1%, driven by decreased demand in personal care product ingredients and copper-related products, partially offset by higher average selling prices for these products.
Gross profit
Gross profit of $221.6 million for the nine months ended March 31, 2023, increased $14.6 million, or 7%, as compared to the nine months ended March 31, 2022. Gross margin increased 60 basis points to 30.7% of net sales for the nine months ended March 31, 2023, as compared to 30.1% for the nine months ended March 31, 2022.
Animal Health gross profit increased $16.4 million as a result of higher product demand, partially offset by higher raw material and logistics costs. Mineral Nutrition gross profit decreased $3.6 million, driven by lower sales volume and an increase in raw material costs. Performance Products gross profit increased $1.8 million due to higher sales, partially offset by higher raw material costs.
Selling, general and administrative expenses
SG&A of $173.5 million for the nine months ended March 31, 2023, increased $22.6 million, or 15%, as compared to the nine months ended March 31, 2022. SG&A for the nine months ended March 31, 2023, included $6.9 million of environmental remediation costs mostly related to the definitive settlement agreement related to the Omega Chemical Site. SG&A for the nine months ended March 31, 2022, included a $1.2 million gain on sale of investment and $0.3 million acquisition-related transaction costs. Excluding these items, SG&A increased $14.8 million, or 10%.
Animal Health SG&A increased $9.4 million primarily due to an increase in employee-related costs. Mineral Nutrition SG&A increased $0.3 million. Performance Products SG&A increased $1.1 million, mainly due to an increase in employee-related costs. Corporate expenses increased $4.0 million due to an increase in employee-related costs and strategic investments.
Interest expense, net
Interest expense, net of $10.8 million for the nine months ended March 31, 2023, increased $2.1 million, or 23%, as compared to the nine months ended March 31, 2022. Interest expense increased as a result of increased debt outstanding and higher floating interest rates on portions of debt outstanding, partially offset by increased interest income and a lower average fixed rate from our interest rate swap agreements.
Foreign currency (gains) losses, net
Foreign currency (gains) losses, net for the nine months ended March 31, 2023, amounted to net losses of $4.6 million, as compared to net gains of $12.6 million for the nine months ended March 31, 2022. Current period losses were driven by fluctuations in certain currencies relative to the U.S. dollar.
Provision(Benefit) provision for income taxes
The benefit for income taxes was $4.0 million for the three months ended September 30, 2023, compared to the provision for income taxes was $11.5 million and $18.3of $1.6 million for the ninethree months ended March 31, 2023 and 2022, respectively.September 30, 2022. The effective income tax rate was 35.3%33.1% and 30.5%28.8% for the ninethree months ended March 31,September 30, 2023 and 2022, respectively. The provisionbenefit for income taxes forduring the ninethree months ended March 31,September 30, 2023, included (i) a $0.9$1.2 million benefit related to exchange rate differencesthe determination of whether a foreign tax is eligible for a U.S. foreign tax credit related to our fiscal year 2023, based on intercompany dividendsIRS guidance provided subsequent to our fiscal year-end and (ii) a $0.2 million expense from changes in uncertain tax positions related to prior years. The provision for income taxes for the three months ended September 30, 2022, included (i) a $0.9 million benefit related to exchange rate differences on intercompany dividends and (ii) a $0.2 million expense from changes in uncertain tax positions related to prior years. The effective income tax rate, without these items, would have been 24.8 % and 42.8% for the three months ended September 30, 2023 and 2022, respectively.
Net (loss) income
Net loss of $8.0 million for the three months ended September 30, 2023, represented a decrease of $11.9 million compared to net income of $3.9 million for the three months ended September 30, 2022. Operating loss resulted in a decrease of $14.4 million, driven mostly by higher SG&A, which included the $10.4 million pension settlement cost. Interest expense, net increased $1.5 million due to the issuance of new debt and higher variable interest rates. Foreign currency losses, net also increased by $1.5 million. Income tax expense decreased by $5.5 million.
Adjusted EBITDA
Adjusted EBITDA of $18.7 million for the three months ended September 30, 2023, decreased $3.5 million, as compared to the three months ended September 30, 2022. Animal Health Adjusted EBITDA increased $1.5 million due to higher gross profit, partially offset by increased SG&A. Mineral Nutrition Adjusted EBITDA decreased $2.4 million, due to lower sales. Performance Products Adjusted EBITDA decreased $1.0 million due to lower sales and gross profit. Corporate expenses increased $1.6 million, due to increased strategic investments and employee-related costs.
Adjusted provision for income taxes
The adjusted effective income tax rates for the three months ended September 30, 2023 and 2022, were 27.6% and 36.0%, respectively. The improvement in our adjusted effective income tax rate was driven by a favorable mix of international earnings and the benefit of recently implemented tax savings strategies.
Adjusted net income
Adjusted net income of $5.5 million for the three months ended September 30, 2023, decreased $2.8 million, or 33.0%, as compared to the prior year. The decrease was driven by lower gross profit, higher SG&A expenses and higher interest expense, partially offset by a lower tax provision. The lower gross profit results from lower sales. SG&A expenses increased due to strategic investments and increased employee-related costs.
Adjusted diluted earnings per share
Adjusted diluted earnings per share was $0.14 for the quarter, a decrease of $0.07, or 33.0% as compared to the adjusted diluted earnings per share of $0.21 in the prior year.
26
effective income tax rate, without these items, would have been 37.5% for the nine months ended March 31, 2023. The provision for income taxes for the nine months ended March 31, 2022, included a $0.5 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 $0.2 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.
Net income
Net income of $21.1 million for the nine months ended March 31, 2023, decreased $20.6 million, as compared to net income of $41.7 million for the nine months ended March 31, 2022. Operating income decreased $8.0 million driven by higher SG&A, partially offset by higher gross profit. The increase in gross profit was driven by higher product demand in Animal Health, partially offset by higher raw material cost and production costs. SG&A expenses increased by $22.6 million due to environmental remediation costs, higher employee-related costs and strategic investments. The change in foreign currency (gains) losses resulted in a $4.6 million reduction in income before income taxes for the nine months ended March 31, 2023. Income tax expense decreased $6.7 million.
Adjusted EBITDA
Adjusted EBITDA of $80.4 million for the nine months ended March 31, 2023, increased $0.9 million, or 1%, as compared to the nine months ended March 31, 2022. Animal Health Adjusted EBITDA increased $7.7 million, resulting from higher sales and increased gross profit, partially offset by higher SG&A. Performance Products Adjusted EBITDA increased $0.7 million, driven by higher sales and gross profit, partially offset by an increase in SG&A. Mineral Nutrition Adjusted EBITDA decreased $3.8 million. Corporate expenses increased $3.8 million due to increased employee-related costs and strategic investments.
Analysis of financial condition, liquidity and capital resources
Net (decrease) increase in cash and cash equivalents was:
| | | | | | | | | | | | | | | | | | |
|
| Nine Months |
| Three Months | ||||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| Change | ||||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 |
| Change | ||||||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Cash (used) provided by: | | | | | | | | | | |||||||||
Cash provided (used) by: | | | | | | | | | | |||||||||
Operating activities | | $ | (6,928) | | $ | 30,075 | | $ | (37,003) | | $ | 16,199 | | $ | (10,698) | | $ | 26,897 |
Investing activities | |
| (63,736) | |
| (13,042) | |
| (50,694) | |
| (15,352) | |
| (16,149) | |
| 797 |
Financing activities | |
| 33,319 | |
| 3,954 | |
| 29,365 | |
| 1,296 | |
| 29,319 | |
| (28,023) |
Effect of exchange-rate changes on cash and cash equivalents | |
| 335 | |
| (451) | |
| 786 | |
| (271) | |
| (440) | |
| 169 |
Net (decrease) increase in cash and cash equivalents | | $ | (37,010) | | $ | 20,536 | | $ | (57,546) | |||||||||
Net increase in cash and cash equivalents | | $ | 1,872 | | $ | 2,032 | | $ | (160) |
Certain amounts may reflect rounding adjustments.
27
Net cash (used) provided by operating activities was comprised of:
| | | | | | | | | | | | | | | | | | |
|
| Nine Months |
| Three Months | ||||||||||||||
For the Periods Ended March 31 |
| 2023 |
| 2022 |
| Change | ||||||||||||
For the Periods Ended September 30 |
| 2023 |
| 2022 |
| Change | ||||||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
EBITDA | | $ | 68,890 | | $ | 93,025 | | $ | (24,135) | | $ | 1,456 | | $ | 16,934 | | $ | (15,478) |
Adjustments: |
| | |
| | |
| | |
| | |
| | |
| | |
Environmental remediation costs | | | 6,894 | | | — | | | 6,894 | |||||||||
Gain on sale of investment |
| | — |
| | (1,203) |
| | 1,203 | |||||||||
Acquisition-related cost of goods sold |
| | — |
| | 78 |
| | (78) | |||||||||
Acquisition-related transaction costs |
| | — |
| | 279 |
| | (279) | |||||||||
Foreign currency (gains) losses, net |
| | 4,629 |
| | (12,625) |
| | 17,254 | |||||||||
Pension settlement cost | | | 10,425 | | | — | | | 10,425 | |||||||||
Stock-based compensation |
| | 81 |
| | — |
| | 81 | |||||||||
Foreign currency losses, net |
| | 6,689 |
| | 5,200 |
| | 1,489 | |||||||||
Interest paid, net |
| | (10,289) |
| | (8,220) |
| | (2,069) |
| | (4,304) |
| | (2,906) |
| | (1,398) |
Income taxes paid |
| | (16,163) |
| | (13,432) |
| | (2,731) |
| | (4,658) |
| | (3,802) |
| | (856) |
Changes in operating assets and liabilities and other items |
| | (60,889) |
| | (27,827) |
| | (33,062) |
| | 6,510 |
| | (26,124) |
| | 32,634 |
Net cash (used) provided by operating activities | | $ | (6,928) | | $ | 30,075 | | $ | (37,003) | |||||||||
Net cash provided (used) by operating activities | | $ | 16,199 | | $ | (10,698) | | $ | 26,897 |
Certain amounts may reflect rounding adjustments.
Operating activities
Operating activities used $6.9provided $16.2 million of net cash for the ninethree months ended March 31,September 30, 2023. Cash provided by net (loss) income and non-cash items, including depreciation and amortization, was $41.1$13.1 million. Cash usedprovided in the ordinary course of business for changes in operating assets and liabilities and other items was $60.9$3.1 million. Cash provided by receivables was $15.0$12.8 million as a result of an increasequarterly variations in net sales and a favorable reduction in days sales outstanding.levels. Cash used for inventory was $30.5$5.0 million due to increased cost for raw material and production costs, product mix, lowerforecasted future demand in Mineral Nutrition, and a projected increase in demand.internal production schedules. Other current assets used $3.3 million of cash, primarily due to prepayment of taxes. Accounts payable used $19.7provided $4.6 million of cash due to timing of purchases and payments. Accrued expenses and other liabilities used cash of $5.0$5.8 million primarily due to changes in employee-related liabilities and lease payments.payments of commissions and rebates.
Investing activities
Investing activities used $63.7$15.4 million of net cash for the ninethree months ended March 31,September 30, 2023. Capital expenditures totaled $40.9$7.5 million related primarilyas we continue to continued investmentsinvest in expandedexpanding production capacity and productivity improvements, and the $15.0 million purchase of additional land and building at an operating facility.improvements. Net purchases and maturities of our short-term investments used $23.0 million.$8.0 million in cash.
27
Financing activities
Financing activities provided $33.3$1.3 million of net cash for the ninethree months ended March 31,September 30, 2023. Net borrowings on our 2021 Revolver provided $48.0 million. Proceeds from the 2022 Term Loan provided $12.0 million.$13.0 million in cash. We paid $11.5$6.8 million in scheduled debt maturities.maturities and insurance premium financing. We also paid $14.6$4.9 million in dividends to holders of our Class A common stock and Class B common stock.
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 the macroeconomic market conditions in the financial markets. At this time, we expect adequate liquidity for at least the next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will 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.arise. There can be no assurance that a challenging economic environment or an economic downturn would not affect our
28
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, |
| September 30, |
| June 30, | ||||
As of |
| 2023 |
| 2022 |
| 2023 |
| 2023 | ||||
| | (in thousands, except ratios) | | (in thousands, except ratios) | ||||||||
Cash and cash equivalents and short-term investments | | $ | 77,238 | | $ | 91,248 | | $ | 91,153 | | $ | 81,281 |
Working capital | |
| 358,357 | |
| 299,152 | |
| 345,066 | |
| 350,737 |
Ratio of current assets to current liabilities | |
| 3.39:1 | |
| 2.70:1 | |
| 3.33:1 | |
| 3.28:1 |
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,September 30, 2023, we had $193.0$154.0 million in outstanding borrowings under the 2021 Revolver and had outstanding letters of credit and other commitments of $2.5 million, leaving $114.5$153.5 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 common stock 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 common stock and Class B common stock, payable on June 28,December 20, 2023. 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,September 30, 2023, our cash and cash equivalents and short-term investments included $75.6$89.6 million held by our international subsidiaries. There are no restrictions on cash distributions to PAHC from our international subsidiaries. Distributions may be subject to taxation by U.S. or non-U.S. taxing authorities.
Contractual obligations
As of March 31,September 30, 2023, there were no material changes in payments due under contractual obligations from those disclosed in the Annual Report.
28
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 reflect the results of our operations prior to considering certain income statement elements. We have defined EBITDA as net (loss) income (loss) plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes, and (iii) depreciation
29
and amortization. We have definedcalculate 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(gains) losses, net 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 netnet(loss) 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 (loss) 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 acquired intangibles, and does not provide a comparable view of our performance to other companies.
Adjusted net income and adjusted diluted earnings per share
Adjusted net income and adjusted diluted earnings per share represent alternative views of performance and we believe investors’ understanding of our performance is enhanced by disclosing these performance measures. We report adjusted net (loss) income and adjusted diluted earnings per share to portray the results of our operations prior to considering certain income statement elements. We have defined adjusted net income as net (loss) income plus (i) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, (ii) amortization of acquired intangibles and other acquisition-related costs, such as accrued compensation and accrued interest, (iii) stock-based compensation, (iv) certain items that we consider to be unusual or non-recurring and (v) the income tax effect of pre-tax (loss) income adjustments and certain income tax items. Adjusted diluted earnings per share is calculated using the adjusted net income
29
divided by the diluted weighted average number of shares. The adjusted net income and adjusted diluted earnings per share measures are not, and should not be viewed as, a substitute for GAAP reported net (loss) income.
Adjusted net income and adjusted diluted earnings per share are non-GAAP financial measure that have no standardized meaning prescribed by GAAP and, therefore, have limits in their usefulness to investors. Because of its non-standardized definition, adjusted net income and adjusted diluted earnings per share, unlike GAAP net (loss) income, may not be comparable to the calculation of similar measures of other companies. Adjusted net (loss) income and adjusted diluted earnings per share are presented to permit investors to more fully understand how management assesses performance.
Certain significant items
Adjusted EBITDA, isadjusted net income and adjusted diluted earnings per share are calculated prior to considering certain items. We evaluate such items on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual or non-operational nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis.
We consider acquisition-related activities and business restructuring costs related to productivity and cost saving initiatives, including employee separation costs, to be unusual items that we do not expect to occur as part of our normal business on a regular basis. We consider foreign currency gains and losses to be non-operational because they arise principally from intercompany transactions and are largely non-cash in nature.
New accounting standards
For discussion of new accounting standards, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies and New Accounting Standards.”
30
Critical Accounting Policies
CriticalOur significant accounting policies, which include management’s best estimates and judgments, are those that require application of management’s most difficult, subjective and/or complex judgments, often as a result ofincluded in Note 2 to 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 for the year ended June 30, 2023 included in accordanceour Annual Report on Form 10-K filed with generally acceptedthe Securities Exchange Commission on August 30, 2023. There have been no significant changes in our critical 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.since June 30, 2023.
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:
● |
● | 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; |
30
● | 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; |
● |
our business may be negatively affected by weather conditions and the availability of natural resources; |
● | 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; |
● | climate change could have a material adverse impact on our operations and our customers’ businesses; |
● | actions of regulatory bodies, including obtaining approvals related to the testing, manufacturing and marketing of certain of our products; |
● | the continuing trend toward consolidation of certain customer groups as well as the emergence of large buying groups; |
31
● | our ability to control costs and expenses; |
● | any unforeseen material loss or casualty; |
● | misuse or extra-label use of our products; |
● | exposure relating to rising costs and reduced customer income; |
● | heightened competition, including those from generics and those 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 |
● | terrorist attacks, particularly attacks on or within markets in which we |
● | risks related to changes in tax rates and exposure; |
● | our ability to successfully implement our strategic initiatives; |
● | our reliance on the continued operation of our manufacturing facilities and application of our intellectual property; |
31
● | adverse U.S. and international economic market conditions, including currency fluctuations; |
● | failure of our product approval, R&D, acquisition and licensing efforts to generate new products; |
● | the risks of product liability claims, legal proceedings and general litigation expenses; |
● | the impact of current and future laws and regulatory changes, including risks related to the protection of our customers’ privacy and risks related to environmental, health and safety laws and regulations; |
● | modification of foreign trade policy may harm our food animal product customers; |
● | our dependence on our Israeli and Brazilian operations; |
● | impact of increased or decreased inventory levels at our direct customers or channel distributors; |
● | our substantial level of indebtedness and related debt-service obligations; |
● | restrictions imposed by covenants in our debt agreements; |
● | the risk of work stoppages; and |
32
● | 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.
32
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)1934, as amended). Based upon that evaluation as of March 31,September 30, 2023, 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.
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,September 30, 2023.
33
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”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 theItem 1A of our 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.
33
Item 5. Other Information
On May 1, 2023, Mr. Gerald K. Carlson, a member of the Board of the Directors of the Company (the “Board”), informed the Company that he intended to resign his position as Director of the Company effective immediately. Mr. Carlson was a Class II director of the Company. Mr. Carlson’s resignation was not the result of any disagreement with the Company. The Board has not filled the vacancy left by Mr. Carlson’s resignation.
None.
Item 6.Exhibits
| | |
Exhibit 10.1 | | |
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 | | Inline XBRL Instance Document |
Exhibit 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
Exhibit 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
Exhibit 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
Exhibit 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
Exhibit 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
34
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 | |
| | |
| By: | /s/ Jack C. Bendheim |
| | Jack C. Bendheim |
| | Chairman, President and Chief Executive Officer |
| | |
| By: | /s/ |
| |
|
|
| Chief Financial Officer |
35