PHIBRO ANIMAL HEALTH CORP - Quarter Report: 2020 March (Form 10-Q)

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

_______________________________

FORM 10-Q

_______________________________

(Mark One)

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

For the transition period from _____ to _____

Commission File Number: 001-36410

_______________________________

Phibro Animal Health Corporation

(Exact name of registrant as specified in its charter)

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

(201) 329-7300

(Registrant’s telephone number, including area code)

______________________________

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 30, 2020, there were 20,287,574 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 20,166,034 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.

PHIBRO ANIMAL HEALTH CORPORATION

TABLE OF CONTENTS

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months					Nine Months
For the Periods Ended March 31	2020			2019		2020		2019
	(unaudited)
	(in thousands, except per share amounts)

Net sales	$	210,739		$	205,736	$	614,471	$	624,112
Cost of goods sold		141,188			140,864		418,153		424,791
Gross profit		69,551			64,872		196,318		199,321
Selling, general and administrative expenses		48,232			42,304		145,243		128,194
Operating income		21,319			22,568		51,075		71,127
Interest expense, net		3,263			2,931		10,049		8,729
Foreign currency (gains) losses, net		(608	)		122		1,895		104
Income before income taxes		18,664			19,515		39,131		62,294
Provision for income taxes		5,163			4,666		11,221		16,383
Net income	$	13,501		$	14,849	$	27,910	$	45,911

Net income per share
basic	$	0.33		$	0.37	$	0.69	$	1.14
diluted	$	0.33		$	0.37	$	0.69	$	1.13
Weighted average common shares outstanding
basic		40,454			40,442		40,454		40,398
diluted		40,504			40,531		40,504		40,519

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

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months						Nine Months
For the Periods Ended March 31	2020			2019			2020			2019
	(unaudited)
	(in thousands)
Net income	$	13,501		$	14,849		$	27,910		$	45,911

Change in fair value of derivative instruments		(9,995	)		(1,464	)		(9,999	)		(3,166	)
Foreign currency translation adjustment		(23,873	)		(1,846	)		(28,493	)		(5,365	)
Unrecognized net pension gains (losses)		129			117			387			349
(Provision) benefit for income taxes		2,457			336			2,394			701
Other comprehensive income (loss)		(31,282	)		(2,857	)		(35,711	)		(7,481	)

Comprehensive income (loss)	$	(17,781	)	$	11,992		$	(7,801	)	$	38,430

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

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,			June 30,
As of	2020			2019
	(unaudited)
	(in thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents	$	26,748		$	57,573
Short-term investments		55,000			24,000
Accounts receivable, net		151,556			159,022
Inventories, net		177,287			198,322
Other current assets		27,564			27,245
Total current assets		438,155			466,162
Property, plant and equipment, net		143,112			140,235
Intangibles, net		73,208			47,478
Goodwill		52,679			27,348
Other assets		68,896			45,448
Total assets	$	776,050		$	726,671

LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt	$	17,188		$	12,540
Accounts payable		68,162			73,189
Accrued expenses and other current liabilities		75,882			68,498
Total current liabilities		161,232			154,227
Revolving credit facility		146,000			96,000
Long-term debt		203,851			217,635
Other liabilities		69,622			42,794
Total liabilities		580,705			510,656

Commitments and contingencies (Note 9)

Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,287,574 shares issued and outstanding at March 31, 2020, and June 30, 2019; 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at March 31, 2020, and June 30, 2019		4			4
Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding		—			—
Paid-in capital		134,960			133,266
Retained earnings		182,273			168,926
Accumulated other comprehensive income (loss)		(121,892	)		(86,181	)
Total stockholders' equity		195,345			216,015
Total liabilities and stockholders' equity	$	776,050		$	726,671

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

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

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

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

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

Description of Business

Phibro Animal Health Corporation (“Phibro” or “PAHC”) and its subsidiaries (together, the “Company”) is a diversified global developer, manufacturer and marketer of a broad range of animal health and mineral nutrition products for food animals including poultry, swine, dairy and beef cattle, and aquaculture. The Company is also a manufacturer and marketer of performance products for use in the personal care, industrial chemical and chemical catalyst industries. Unless otherwise indicated or the context requires otherwise, references in this report to “we,” “our,” “us,” and similar expressions refer to Phibro and its subsidiaries.

The unaudited consolidated financial information for the three and nine months ended March 31, 2020 and 2019, is presented on the same basis as the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “Annual Report”), filed with the Securities and Exchange Commission on August 27, 2019 (File no. 001-36410). In the opinion of management, these financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of the Company for the interim periods, and the adjustments are of a normal and recurring nature. The financial results for any interim period are not necessarily indicative of the results for the full year. The consolidated balance sheet information as of June 30, 2019, was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.

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

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

Summary of Significant Accounting Policies and New Accounting Standards

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

Leases

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Net Income per Share and Weighted Average Shares

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

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

	Three Months				Nine Months
For the Periods Ended March 31	2020		2019		2020		2019
Net income	$	13,501	$	14,849	$	27,910	$	45,911

Weighted average number of shares – basic		40,454		40,442		40,454		40,398
Dilutive effect of stock options and restricted stock units		50		89		50		121
Weighted average number of shares – diluted		40,504		40,531		40,504		40,519

Net income per share
basic	$	0.33	$	0.37	$	0.69	$	1.14
diluted	$	0.33	$	0.37	$	0.69	$	1.13

New Accounting Standards

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

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

ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, modifies existing disclosure requirements for defined benefit pension and other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

Acquisition

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

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

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

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

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

Statements of Operations—Additional Information

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Animal Health

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

•

MFAs and Other: MFAs and other products primarily consist of concentrated medicated products that are administered through animal feeds, commonly referred to as Medicated Feed Additives (“MFAs”). Specific product classifications include antibacterials, which inhibit the growth of pathogenic bacteria that cause bacterial infections in animals; anticoccidials, which inhibit the growth of coccidia (parasites) that damage the intestinal tract of animals; and other related products.

•

Nutritional Specialties: Nutritional specialty products enhance nutrition to help improve health and performance in areas such as immune system function and digestive health.

•

Vaccines: Our vaccines are primarily focused on preventing diseases in poultry, swine and cattle. They protect animals from either viral or bacterial disease challenges. We develop, manufacture and market conventionally licensed and autogenous vaccine products and also produce and market adjuvants to vaccine manufacturers. We have developed and market an innovative and proprietary delivery platform for vaccines.

Mineral Nutrition

The Mineral Nutrition business is comprised of formulations and concentrations of trace minerals such as zinc, manganese, copper, iron and other compounds, with a focus on customers in North America. The customers use these products to fortify the daily feed requirements of their livestock’s diets and maintain an optimal balance of trace elements in each animal. We manufacture and market a broad range of mineral nutrition products for food animals including poultry, swine and beef and dairy cattle.

Performance Products

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

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

Net Sales by Product Type
	Three Months				Nine Months
For the Periods Ended March 31	2020		2019		2020		2019

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net Sales by Region
	Three Months				Nine Months
For the Periods Ended March 31	2020		2019		2020		2019

United States	$	126,827	$	122,651	$	368,230	$	363,202
Latin America and Canada		40,284		31,197		119,730		110,353
Europe, Middle East and Africa		31,958		27,317		83,311		78,340
Asia Pacific		11,670		24,571		43,200		72,217
Total	$	210,739	$	205,736	$	614,471	$	624,112

Net sales by region are based on country of destination.

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

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

Interest Expense and Depreciation and Amortization

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Balance Sheets—Additional Information

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

6. Debt

Term Loans and Revolving Credit Facilities

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

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

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

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

In July 2017, we entered into an interest rate swap agreement on $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325% plus the applicable rate. The agreement matures concurrently with the Credit Agreement.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Long-Term Debt

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

Leases

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

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

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

The following table summarizes the composition of net lease cost:

	Three months		Nine months
For the Periods Ended March 31	2020		2020

Operating lease expense	$	1,885	$	5,647
Variable lease expense		361		992
Short-term lease expense		196		613
Total lease cost	$	2,442	$	7,252

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables include other supplemental information:

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

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

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Related Party Transactions

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

Commitments and Contingencies

Environmental

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

defense costs. Furthermore, a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling has filed a complaint under the Comprehensive Environmental Response, Compensation, and Liability Act and the Resource Conservation and Recovery Act in the United States District Court for the Central District of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for contribution toward past and future costs associated with the investigation and remediation of the groundwater plume affected by the Omega Chemical Site. Due to the ongoing nature of the EPA’s investigation, the preliminary stage of the ongoing litigation and Phibro-Tech’s dispute with the prior owner’s successor, at this time we cannot predict with any degree of certainty what, if any, liability Phibro-Tech or the other subsidiaries may ultimately have for investigation, remediation and the EPA oversight and response costs associated with the affected groundwater plume.

Based upon information available, to the extent such costs can be estimated with reasonable certainty, we estimated the cost for further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites, to be approximately $4,940 and $5,890 at March 31, 2020, and June 30, 2019, respectively, which is included in current and long-term liabilities on the consolidated balance sheets. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption and elsewhere in this report, it should be noted that we take and have taken the position that neither PAHC nor any of our subsidiaries are liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible.

Claims and Litigation

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

10.

Derivatives

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

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

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

In July 2017, we entered into an interest rate swap agreement on the first $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325% plus the applicable rate. The agreement matures concurrently with the Credit Agreement. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.620% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300,000 through June 30, 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.620% plus the applicable rate. The forecasted transactions are probable of occurring, and the interest rate swaps have been designated as highly effective cash flow hedges.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

___________________

(1)

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

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

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

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

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

11.

Fair Value Measurements

Short-term investments

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Current Assets and Liabilities

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

Contingent Consideration on Acquisitions

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

Letters of Credit

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

Debt

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

Derivatives

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

Non-financial assets

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

Fair Value of Assets (Liabilities)

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12.

Business Segments

We evaluate performance and allocate resources, based on the Animal Health, Mineral Nutrition and Performance Products segments. Certain of our costs and assets are not directly attributable to these segments and we refer to these items as Corporate. We do not allocate Corporate costs or assets to the segments because they are not used to evaluate the segments’ operating results or financial position. Corporate costs include certain costs related to executive management, business technology, legal, finance, human resources and business development.

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

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

	Three Months				Nine Months
For the Periods Ended March 31	2020		2019		2020		2019
Net sales
Animal Health	$	138,974	$	129,189	$	404,513	$	399,940
Mineral Nutrition		56,200		60,653		164,534		177,810
Performance Products		15,565		15,894		45,424		46,362
Total segments	$	210,739	$	205,736	$	614,471	$	624,112

Depreciation and amortization
Animal Health	$	6,665	$	5,571	$	19,760	$	16,420
Mineral Nutrition		629		592		1,871		1,805
Performance Products		509		273		1,303		825
Total segments	$	7,803	$	6,436	$	22,934	$	19,050

Adjusted EBITDA
Animal Health	$	34,635	$	33,241	$	93,534	$	104,882
Mineral Nutrition		4,055		5,287		11,214		11,934
Performance Products		1,506		1,330		3,815		3,560
Total segments	$	40,196	$	39,858	$	108,563	$	120,376

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

Introduction

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

Overview of our business

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

Effects of the COVID-19 pandemic

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

Phibro is an integral participant in the essential production of meat, milk, eggs and fish for human consumption. In the face of the pandemic, we have focused on the safety of our employees, while continuing to supply our customers. Our global production facilities have continued to operate without interruption, despite supply chain and logistical challenges. Our sales and technical service people remain in close virtual contact with our customers, as most travel and in-person meetings have been cancelled. Most of our administrative and management staff are working remotely. We are experiencing some cost increases from the safety measures implemented to protect our employees and from supply chain disruptions. We have maintained headcount and compensation at constant levels. We are closely monitoring sales trends, cash flow and liquidity. We have reviewed the provisions of the CARES (Coronavirus Aid, Relief, and. Economic Security) Act and related legislation and do not expect any significant financial effect on Phibro.

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

Analysis of the consolidated statements of operations

Summary Results of Operations

	Three Months											Nine Months
For the Periods Ended March 31	2020			2019			Change					2020			2019			Change
	(in thousands, except per share amounts and percentages)
Net sales	$	210,739		$	205,736		$	5,003		2	%	$	614,471		$	624,112		$	(9,641	)	(2	)%
Gross profit		69,551			64,872			4,679		7	%		196,318			199,321			(3,003	)	(2	)%
Selling, general and administrative expenses		48,232			42,304			5,928		14	%		145,243			128,194			17,049		13	%
Operating income		21,319			22,568			(1,249	)	(6	)%		51,075			71,127			(20,052	)	(28	)%
Interest expense, net		3,263			2,931			332		11	%		10,049			8,729			1,320		15	%
Foreign currency (gains) losses, net		(608	)		122			(730	)	*			1,895			104			1,791		*
Income before income taxes		18,664			19,515			(851	)	(4	)%		39,131			62,294			(23,163	)	(37	)%
Provision for income taxes		5,163			4,666			497		11	%		11,221			16,383			(5,162	)	(32	)%
Net income	$	13,501		$	14,849		$	(1,348	)	(9	)%	$	27,910		$	45,911		$	(18,001	)	(39	)%

Net income per share
basic	$	0.33		$	0.37		$	(0.04	)			$	0.69		$	1.14		$	(0.45	)
diluted	$	0.33		$	0.37		$	(0.04	)			$	0.69		$	1.13		$	(0.44	)

Weighted average number of shares outstanding
basic		40,454			40,442								40,454			40,398
diluted		40,504			40,531								40,504			40,519

Ratio to net sales
Gross profit		33.0	%		31.5	%							31.9	%		31.9	%
Selling, general and administrative expenses		22.9	%		20.6	%							23.6	%		20.5	%
Operating income		10.1	%		11.0	%							8.3	%		11.4	%
Income before income taxes		8.9	%		9.5	%							6.4	%		10.0	%
Net income		6.4	%		7.2	%							4.5	%		7.4	%
Effective tax rate		27.7	%		23.9	%							28.7	%		26.3	%

_________________

Certain amounts and percentages may reflect rounding adjustments.

* Calculation not meaningful

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

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

Segment net sales and Adjusted EBITDA:

	Three Months											Nine Months
For the Periods Ended March 31	2020			2019			Change					2020			2019			Change
Net sales	(in thousands, except percentages)
MFAs and other	$	82,670		$	84,095		$	(1,425	)	(2	)%	$	249,659		$	264,153		$	(14,494	)	(5	)%
Nutritional specialties		34,636			28,227			6,409		23	%		98,131			84,657			13,474		16	%
Vaccines		21,668			16,867			4,801		28	%		56,723			51,130			5,593		11	%
Animal Health		138,974			129,189			9,785		8	%		404,513			399,940			4,573		1	%
Mineral Nutrition		56,200			60,653			(4,453	)	(7	)%		164,534			177,810			(13,276	)	(7	)%
Performance Products		15,565			15,894			(329	)	(2	)%		45,424			46,362			(938	)	(2	)%
Total	$	210,739		$	205,736		$	5,003		2	%	$	614,471		$	624,112		$	(9,641	)	(2	)%

Adjusted EBITDA
Animal Health	$	34,635		$	33,241		$	1,394		4	%	$	93,534		$	104,882		$	(11,348	)	(11	)%
Mineral Nutrition		4,055			5,287			(1,232	)	(23	)%		11,214			11,934			(720	)	(6	)%
Performance Products		1,506			1,330			176		13	%		3,815			3,560			255		7	%
Corporate		(10,064	)		(9,850	)		(214	)	*			(30,283	)		(28,654	)		(1,629	)	*
Total	$	30,132		$	30,008		$	124		0	%	$	78,280		$	91,722		$	(13,442	)	(15	)%

Adjusted EBITDA ratio to segment net sales
Animal Health		24.9	%		25.7	%							23.1	%		26.2	%
Mineral Nutrition		7.2	%		8.7	%							6.8	%		6.7	%
Performance Products		9.7	%		8.4	%							8.4	%		7.7	%
Corporate ⁽¹⁾		(4.8	)%		(4.8	)%							(4.9	)%		(4.6	)%
Total ⁽¹⁾		14.3	%		14.6	%							12.7	%		14.7	%

________________

(1) Reflects ratio to total net sales

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

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

______________

Certain amounts and percentages may reflect rounding adjustments.

* Calculation not meaningful

Comparison of three months ended March 31, 2020 and 2019

Net sales

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

Animal Health

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

Mineral Nutrition

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

Performance Products

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

Gross profit

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

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

Selling, general and administrative expenses

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

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

Interest expense, net

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

Foreign currency (gains) losses, net

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

Provision for income taxes

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

Net income

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

Adjusted EBITDA

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

Comparison of nine months ended March 31, 2020 and 2019

Net sales

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

Animal Health

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

Mineral Nutrition

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

Performance Products

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

Gross profit

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

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

Selling, general and administrative expenses

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

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

Interest expense, net

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

Foreign currency (gains) losses, net

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

Provision for income taxes

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

Net income

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

Adjusted EBITDA

Adjusted EBITDA of $78.3 million for the nine months ended March 31, 2020, decreased $13.4 million, or 15%, as compared to the nine months ended March 31, 2019. Animal Health Adjusted EBITDA decreased $11.4 million due to the gross profit decline, coupled with increased SG&A costs. The SG&A increase was driven by investments in product development and strategic growth initiatives and the effects of the Osprey acquisition. Mineral Nutrition Adjusted EBITDA declined $0.7 million as a result of lower gross profit and increased SG&A costs. Performance Products Adjusted EBITDA increased $0.3 million as compared to the prior year. Corporate expenses increased $1.6 million driven by investments in strategic initiatives and increased public company costs.

Analysis of financial condition, liquidity and capital resources

Net increase (decrease) in cash and cash equivalents was:

	Nine Months
For the Periods Ended March 31	2020			2019			Change
	(in thousands)
Cash provided by/(used in):
Operating activities	$	55,471		$	32,290		$	23,181
Investing activities		(110,857	)		(28,876	)		(81,981	)
Financing activities		25,951			3,892			22,059
Effect of exchange-rate changes on cash
and cash equivalents		(1,390	)		(598	)		(792	)
Net increase/(decrease) in cash and cash equivalents	$	(30,825	)	$	6,708		$	(37,533	)

_______________

Certain amounts may reflect rounding adjustments.

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

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

_______________

Certain amounts may reflect rounding adjustments.

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

Operating activities

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

Investing activities

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

Financing activities

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

Liquidity and capital resources

We believe our cash on hand, our operating cash flows and our financing arrangements, including the availability of borrowings under the Revolver and foreign credit lines, will be sufficient to support our ongoing cash needs. We are aware of the current and potential future effects of COVID-19 on the financial markets. At this time, we expect adequate liquidity for at least the next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will be able to comply with the terms of the covenants under the Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise, including those caused by COVID-19. There can be no assurance that a challenging economic environment or an economic downturn would not affect our liquidity or our ability to obtain future financing or fund operations or investment opportunities. In addition, our debt covenants may restrict our ability to invest.

Certain relevant measures of our liquidity and capital resources follow:

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

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

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

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

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

Contractual obligations

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

Off-balance sheet arrangements

We do not currently use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.

In the ordinary course of business, we may indemnify our counterparties against certain liabilities that may arise. These indemnifications typically pertain to environmental matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to certain restrictions and limitations.

Adjusted EBITDA

Adjusted EBITDA is an alternative view of performance used by management as our primary operating measure, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted EBITDA to portray the results of our operations prior to considering certain income statement elements. We have defined EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes, and (iii) depreciation and amortization. We have defined Adjusted EBITDA as EBITDA plus (a) (income) loss from, and disposal of, discontinued operations, (b) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.

The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:

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senior management receives a monthly analysis of our operating results that is prepared on an Adjusted EBITDA basis;

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our annual budgets are prepared on an Adjusted EBITDA basis; and

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other goal setting and performance measurements are prepared on an Adjusted EBITDA basis.

Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. We present Adjusted EBITDA to permit investors to more fully understand how management assesses performance.

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

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

Certain significant items

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

We consider acquisition-related activities and business restructuring costs related to productivity and cost saving initiatives, including employee separation costs, to be unusual items that we do not expect to occur as part of our normal business on a regular basis. We consider foreign currency gains and losses to be non-operational because they arise principally from intercompany transactions and are largely non-cash in nature.

New accounting standards

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

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

Critical Accounting Policies

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

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

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “believe,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Examples of such risks and uncertainties include:

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the negative effects of a pandemic, epidemic, or outbreak of an infectious disease in humans, such as COVID-19, on our business, financial results, manufacturing facilities and supply chain, as well as our customers and protein processors;

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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;

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restrictions on the use of antibacterials in food-producing animals may become more prevalent;

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a material portion of our sales and gross profits are generated by antibacterials and other related products;

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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;

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outbreaks of human or animal diseases could significantly reduce demand for our products;

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our business may be negatively affected by weather conditions and the availability of natural resources;

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the continuing trend toward consolidation of certain customer groups as well as the emergence of large buying groups;

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our ability to control costs and expenses;

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any unforeseen material loss or casualty;

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exposure relating to rising costs and reduced customer income;

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competition deriving from advances in veterinary medical practices and animal health technologies;

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unanticipated safety or efficacy concerns;

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our dependence on suppliers having current regulatory approvals;

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our raw materials are subject to price fluctuations and their availability can be limited;

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natural and man-made disasters, including but not limited to human and animal disease epidemics, fire, snow and ice storms, flood, hail, hurricanes and earthquakes;

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terrorist attacks, particularly attacks on or within markets in which we operate;

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our ability to successfully implement our strategic initiatives;

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our reliance on the continued operation of our manufacturing facilities and application of our intellectual property;

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adverse U.S. and international economic market conditions, including currency fluctuations;

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failure of our product approval, R&D, acquisition and licensing efforts to generate new products;

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the risks of product liability claims, legal proceedings and general litigation expenses;

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the impact of current and future laws and regulatory changes;

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modification of foreign trade policy may harm our food animal product customers

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our dependence on our Israeli and Brazilian operations;

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our substantial level of indebtedness and related debt-service obligations;

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restrictions imposed by covenants in our debt agreements;

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the risk of work stoppages; and

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other factors as described in “Risk Factors” in Item 1A. of our Annual Report on Form 10-K and set forth in this Quarterly Report on Form 10-Q.

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 completely eliminates the effects of changing market conditions on earnings, cash flows and fair values. We monitor the financial stability and credit standing of our major counterparties.

For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures about Market Risk” section in the Annual Report and to the notes to the consolidated financial statements included therein. As of the date of this report, there were no material changes in the Company’s financial market risks from the risks disclosed in the Annual Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation as of March 31, 2020, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of such period, our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, as described in Management’s Report on Internal Control over Financial Reporting in “Item 9A. Controls and Procedures” in the Annual Report on Form 10-K for the year ended June 30, 2019.

Material Weakness Remediation Efforts

We continue to make further progress in implementing a broad range of changes to our internal control over financial reporting to remediate the material weaknesses described in this item. Our actions to address the material weaknesses have included the design and implementation of additional formal accounting policies and procedures to ensure transactions are properly initiated, recorded, processed, reported, appropriately authorized and approved. Also, our efforts to ensure maintenance of the appropriate level of segregation of duties includes restricting access to key financial systems and records to appropriate users. We continue to make improvements by reducing the number of segregation of duties conflicts and continue to evaluate the extent it is necessary to limit access and modify responsibilities of certain personnel, as well as designing and implementing additional user access controls and compensating controls. We have completed a gap analysis of our key controls. In completing this analysis, we identified areas where new controls were needed and enhancements to existing controls, policies and procedures need to be made. Through this analysis, we have developed a workplan for remediation of our material weaknesses. We are executing our remediation plan by enhancing and supplementing the finance team through an increased number of roles, reassigning responsibilities, enhancing key financial systems and adding additional resources with an appropriate level of knowledge and experience in internal control over financial reporting commensurate with our financial reporting requirements. We will continue to build on the progress we have made in our remediation plan. We cannot determine when our remediation plan will be fully completed, and we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

Information required by this Item is incorporated herein by reference to “Notes to the Consolidated Financial Statements—Commitments and Contingencies” in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Risk Factors” section in the Annual Report, which could materially affect our business, financial condition or future results.

Risks Factors Relating to our Business

A pandemic, epidemic, or outbreak of an infectious disease in humans, such as COVID-19, may materially and adversely affect our business and our financial results.

In late 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, suppliers, consumer sentiment, economies and financial markets, and have led to an economic downturn in many countries in which we operate. Disruptions due to COVID-19 or other similar health epidemics could extend to our manufacturing facilities and our supply chain, as well as to our customers and end users of our products who raise animals or who process meat, milk, eggs and seafood for human consumption. The continued spread of COVID-19 or other disease epidemics may result in a period of economic and business disruption and could have a material adverse impact on our business and financial results.

Workforce limitations and travel restrictions resulting from pandemics, epidemics and disease outbreaks, and related government actions such as quarantines, shelter-in-place and “social distancing” requirements, travel restrictions and other similar government orders, may impact many aspects of our business. Our operations could be negatively impacted if a significant percentage of our workforce is unable to work or if we must alter the way in which we conduct our business because of illness or governmental restrictions. These negative impacts could include disruptions or slowdowns in manufacturing of our products, disruptions in our logistics and supply chain operations such as difficulty in importing and exporting our products or raw materials, and difficulties related to the transport of our products. In addition, we may take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including temporarily requiring employees to work remotely if possible, suspending all non-essential travel worldwide for our employees, and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect our business. These limitations and restrictions could also negatively affect operations at our third-party manufacturers and suppliers, which could result in delays or disruptions in the supply of the products and raw materials that they manufacture for us and increase the costs of such products and raw materials, both of which could ultimately negatively impact sales of our products.

The ongoing economic downturn and quarantines due to COVID-19 could lead to decreased demand for protein, which may lead to end users of our products reducing their herd or flock sizes. Protein processing plants may reduce or temporarily cease operations due to quarantines and “social distancing” requirements, which may also result in end users of our products reducing herd or flock sizes due to lack of processing capacity. In addition, demand for protein could be reduced because consumers may associate human health fears related to COVID-19 with animal diseases, food, food production or food animals, whether or not it is scientifically valid. Reductions in demand for animal protein resulting from these factors could in turn affect the demand for our products in a manner that has a significant adverse effect on our financial condition and results of operations.

The COVID-19 pandemic continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or similar health epidemics is highly uncertain and subject to change. We cannot presently predict the full scope and severity of any potential disruptions to our business, operating results, cash flows and/or financial condition, but we expect that the resulting adverse impact on our business and financial results could be material.

There were no other material changes in the Company’s risk factors from the risks disclosed in the Annual Report.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

Exhibit 31.1 Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302

Exhibit 31.2 Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302

Exhibit 32.1 Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906

Exhibit 32.2 Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906

Exhibit 101.INS* XBRL Instance Document

Exhibit 101.SCH* XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 101.LAB* XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

_________________

Furnished with this Quarterly Report. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933 and are deemed not filed for purposes of section 18 of the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Phibro Animal Health Corporation

May 7, 2020	By:	/s/ Jack C. Bendheim Jack C. Bendheim Chairman, President and Chief Executive Officer
May 7, 2020	By:	/s/ Richard G. Johnson Richard G. Johnson Chief Financial Officer