PHIBRO ANIMAL HEALTH CORPORATION 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
Phibro is an integral participant in the essential production of meat, milk,
eggs and fish for human consumption. In the face of the pandemic, we have
focused on the safety of our employees, while continuing to supply our
customers. Our global production facilities have continued to operate without
interruption, despite supply chain and logistical challenges. Our sales and
technical service people remain in close virtual contact with our customers, as
most travel and in-person meetings have been cancelled. Most of our
administrative and management staff are working remotely. We are experiencing
some cost increases from the safety measures implemented to protect our
employees and from supply chain disruptions. We have maintained headcount and
compensation at constant levels. We are closely monitoring sales trends, cash
flow and liquidity. We have reviewed the provisions of the CARES (Coronavirus
Aid, Relief, and. Economic Security) Act and related legislation and do not
expect any significant financial effect on Phibro.
We currently are seeing unprecedented demand disruption and production impacts
in the global food animal industry, due to the COVID-19 pandemic. While our
sales to date have continued close to our expectations, we anticipate a decline
in demand for our products in the near term, as our customers attempt to
navigate rapidly evolving market conditions. The effects COVID-19 will have on
our consolidated results going forward and the broader economic environment are
uncertain. The demand for our products will be dependent upon economic
conditions and the ability of our customers and end users of our products to
operate their businesses and production facilities, among other factors. Our
future operational results may be impacted by government mandated response
efforts, supply chain and manufacturing disruptions, increased volatility in raw
material costs and decreased demand due to changes in our customer purchasing
patterns and preferences. We are unable to predict with certainty the nature and
timing of when any of these events may occur. We will continue to evaluate the
nature and extent of the effects of COVID-19 on our business, consolidated
results of operations, financial condition, and liquidity. For additional
considerations and risks associated with COVID-19 on our business, please refer
to the updates to Item 1A. "Risk Factors."
24
Analysis of the consolidated statements of operations
Summary Results of Operations
Three Months Nine Months
For the Periods Ended
March 31 2020 2019 Change 2020 2019 Change
(in thousands, except per share amounts and percentages)
Net sales $ 210,739 $ 205,736 $ 5,003 2 % $ 614,471 $ 624,112 $ (9,641 ) (2 )%
Gross profit 69,551 64,872 4,679 7% 196,318 199,321 (3,003 ) (2 )% Selling, general and administrative expenses 48,232 42,304 5,928 14 % 145,243 128,194 17,049 13 % Operating income
21,319 22,568 (1,249 ) (6 )% 51,075 71,127 (20,052 ) (28 )% Interest expense, net 3,263 2,931 332 11 % 10,049 8,729 1,320 15 % Foreign currency (gains) losses, net
(608 ) 122 (730 ) * 1,895 104 1,791 *
Income before income
taxes 18,664 19,515 (851 ) (4 )% 39,131 62,294 (23,163 ) (37 )%
Provision for income
taxes 5,163 4,666 497 11 % 11,221 16,383 (5,162 ) (32 )%
Net income $ 13,501 $ 14,849 $ (1,348 ) (9 )% $ 27,910 $ 45,911 $ (18,001 ) (39 )%
Net income per share
basic $ 0.33 $ 0.37 $ (0.04 ) $ 0.69 $ 1.14 $ (0.45 )
diluted $ 0.33 $ 0.37 $ (0.04 ) $ 0.69 $ 1.13 $ (0.44 )
Weighted average number
of shares outstanding
basic 40,454 40,442 40,454 40,398
diluted 40,504 40,531 40,504 40,519
Ratio to net sales
Gross profit 33.0 % 31.5 % 31.9 % 31.9 %
Selling, general and
administrative expenses 22.9 % 20.6 % 23.6 % 20.5 %
Operating income 10.1 % 11.0 % 8.3 % 11.4 %
Income before income
taxes 8.9 % 9.5 % 6.4 % 10.0 %
Net income 6.4 % 7.2 % 4.5 % 7.4 %
Effective tax rate 27.7 % 23.9 % 28.7 % 26.3 %
_________________
Certain amounts and percentages may reflect rounding adjustments.
* Calculation not meaningful
25
Net sales, Adjusted EBITDA and reconciliation of GAAP net income to Adjusted EBITDA
We report Net sales and Adjusted EBITDA by segment to understand the operating performance of each segment. This enables us to monitor changes in net sales, costs and other actionable operating metrics at the segment level. See "-General description of non-GAAP financial measures."
Segment net sales and Adjusted EBITDA:
Three Months Nine Months
For the Periods Ended
March 31 2020 2019 Change 2020 2019 Change
Net sales (in thousands, except percentages)
MFAs and other $ 82,670 $ 84,095 $ (1,425 ) (2 )% $ 249,659 $ 264,153 $ (14,494 ) (5 )%
Nutritional specialties 34,636 28,227 6,409 23 % 98,131 84,657 13,474 16 %
Vaccines 21,668 16,867 4,801 28 % 56,723 51,130 5,593 11 %
Animal Health 138,974 129,189 9,785 8 % 404,513 399,940 4,573 1 %
Mineral Nutrition 56,200 60,653 (4,453 ) (7 )% 164,534 177,810 (13,276 ) (7 )%
Performance Products 15,565 15,894 (329 ) (2 )% 45,424 46,362 (938 ) (2 )%
Total $ 210,739 $ 205,736 $ 5,003 2 % $ 614,471 $ 624,112 $ (9,641 ) (2 )%
Adjusted EBITDA
Animal Health $ 34,635 $ 33,241 $ 1,394 4 % $ 93,534 $ 104,882 $ (11,348 ) (11 )%
Mineral Nutrition 4,055 5,287 (1,232 ) (23 )% 11,214 11,934 (720 ) (6 )%
Performance Products 1,506 1,330 176 13 % 3,815 3,560 255 7 %
Corporate (10,064 ) (9,850 ) (214 ) * (30,283 ) (28,654 ) (1,629 ) *
Total $ 30,132 $ 30,008 $ 124 0 % $ 78,280 $ 91,722 $ (13,442 ) (15 )%
Adjusted EBITDA ratio to segment net sales Animal Health 24.9 % 25.7 % 23.1 % 26.2 % Mineral Nutrition 7.2 % 8.7 % 6.8 % 6.7 % Performance Products 9.7 % 8.4 % 8.4 % 7.7 % Corporate (1) (4.8 )% (4.8 )% (4.9 )% (4.6 )% Total (1) 14.3 % 14.6 % 12.7 % 14.7 % ________________
(1) Reflects ratio to total net sales
26
The table below sets forth a reconciliation of net income, as reported under
GAAP, to Adjusted EBITDA:
Three Months Nine Months
For the Periods Ended
March 31 2020 2019 Change 2020 2019 Change
(in thousands, except percentages)
Net income $ 13,501 $ 14,849 $ (1,348 ) (9
)%
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 %
______________
Certain amounts and percentages may reflect rounding adjustments.
* Calculation not meaningful
Comparison of three months ended
Net sales
Net sales of$210.7 million for the three months endedMarch 31, 2020 , increased$5.0 million , or 2%, as compared to the three months endedMarch 31, 2019 .Animal Health increased$9.8 million , while Mineral Nutrition and Performance Products declined$4.5 million and$0.3 million , respectively.
Net sales of$139.0 million for the three months endedMarch 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 theU.S. andLatin America were offset by reduced volumes inChina due to African Swine Fever and regulatory changes that took effectJanuary 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 endedMarch 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 endedMarch 31, 2020 , decreased$0.3 million , or 2%, driven by lower volumes of ingredients for personal care products. 27 Gross profit Gross profit of$69.6 million for the three months endedMarch 31, 2020 , increased$4.7 million , or 7%, as compared to the three months endedMarch 31, 2019 . Gross profit increased to 33.0% of net sales for the three months endedMarch 31, 2020 , as compared to 31.5% for the three months endedMarch 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 endedMarch 31, 2020 , increased$0.3 million , or 11%, as compared to the three months endedMarch 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 endedMarch 31, 2020 , amounted to net gains of($0.6) million , as compared to$0.1 million in net losses for the three months endedMarch 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 endedMarch 31, 2020 and 2019, respectively. The effective income tax rate was 27.7% and 23.9% for the three months endedMarch 31, 2020 and 2019, respectively. The provision for income taxes for the three months endedMarch 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 endedMarch 31, 2019 .
Net income
Net income of$13.5 million for the three months endedMarch 31, 2020 , decreased$1.3 million , as compared to net income of$14.8 million for the three months endedMarch 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 ourAnimal Health segment. 28 Adjusted EBITDA
Adjusted EBITDA of$30.1 million for the three months endedMarch 31, 2020 , was comparable to the three months endedMarch 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
Net sales
Net sales of$614.5 million for the nine months endedMarch 31, 2020 , decreased$9.6 million , or 2%, as compared to the nine months endedMarch 31, 2019 .Animal Health increased$4.6 million , while Mineral Nutrition and Performance Products declined$13.3 million and$0.9 million , respectively.
Net sales of$404.5 million for the nine months endedMarch 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 inChina 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 inOctober 2018 , net sales of vaccines would have increased approximately 15%.
Mineral Nutrition
Net sales of$164.5 million for the nine months endedMarch 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 endedMarch 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 endedMarch 31, 2020 , decreased$3.0 million , or 2%, as compared to the nine months endedMarch 31, 2019 . Gross profit as a percentage of net sales for the nine months endedMarch 31, 2020 , was 31.9% and comparable to the prior year. The nine months endedMarch 31, 2020 , included$0.3 million of acquisition-related cost of goods sold.Animal Health gross profit decreased$2.2 million due to volume declines and unfavorable product mix in MFAs and other, partially offset by volume growth in nutritional specialty and vaccine products. Mineral Nutrition gross profit decreased$0.4 million , as declines in average selling prices outpaced favorable raw material costs and increased unit volume. Performance Products gross profit decreased$0.2 million . 29
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") of $145.2 million for the
nine months ended March 31, 2020 , increased $17.0 million , or 13%, as compared
to the nine months ended March 31, 2019 . SG&A for the nine months ended
March 31, 2020 , included $0.4 million of restructuring costs, $0.5 million of
acquisition-related transaction costs and $0.2 million of other
acquisition-related costs. SG&A for the nine months ended March 31, 2019 ,
included a $1.5 million benefit from the cancellation of a certain business
arrangement. Excluding the effects of these costs, SG&A increased $14.5 million ,
or 11%.
Animal Health SG&A increased $12.5 million , including increased investments in
product development, the effect of the Osprey acquisition and increased variable
compensation. Mineral Nutrition SG&A increased $0.4 million due to increased
employee-related costs. Performance Products SG&A was comparable to the prior
year. Corporate expenses increased $1.5 million due to increased costs of
strategic initiatives and public company costs. The restructuring costs,
acquisition-related transaction costs, other acquisition-related costs and the
benefit in the prior year from the cancellation of a certain business
arrangement resulted in a net $2.5 million increase to SG&A.
Interest expense, net
Interest expense, net of$10.0 million for the nine months endedMarch 31, 2020 , increased$1.3 million , or 15%, as compared to the nine months endedMarch 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 endedMarch 31, 2020 , amounted to net losses of$1.9 million , as compared to net losses of$0.1 million for the nine months endedMarch 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 endedMarch 31, 2020 and 2019, respectively. The effective income tax rate was 28.7% and 26.3% for the nine months endedMarch 31, 2020 and 2019, respectively. The provision for income taxes for the nine months endedMarch 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 endedMarch 31, 2019 , would have been 29.0%, excluding these benefits. Net income Net income of$27.9 million for the nine months endedMarch 31, 2020 , decreased$18.0 million , as compared to net income of$45.9 million for the nine months endedMarch 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 ourAnimal 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. 30 Adjusted EBITDA
Adjusted EBITDA of$78.3 million for the nine months endedMarch 31, 2020 , decreased$13.4 million , or 15%, as compared to the nine months endedMarch 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 ) 1,506Foreign 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
31
Operating activities
Operating activities provided$55.5 million of net cash for the nine months endedMarch 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 endedMarch 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 endedMarch 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.
AtMarch 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. 32 We currently intend to pay quarterly dividends on our Class A and Class B common stock, subject to approval from the Board of Directors. OnMay 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 ofJune 3, 2020 , payable onJune 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
Contractual obligations
As of
Off-balance sheet arrangements
We do not currently use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.
In the ordinary course of business, we may indemnify our counterparties against certain liabilities that may arise. These indemnifications typically pertain to environmental matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to certain restrictions and limitations. Adjusted EBITDA
Adjusted EBITDA is an alternative view of performance used by management as our primary operating measure, and we believe that investors' understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted EBITDA to portray the results of our operations prior to considering certain income statement elements. We have defined EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes, and (iii) depreciation and amortization. We have defined Adjusted EBITDA as EBITDA plus (a) (income) loss from, and disposal of, discontinued operations, (b) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.
The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:
• senior management receives a monthly analysis of our operating results that is
prepared on an Adjusted EBITDA basis;
• our annual budgets are prepared on an Adjusted EBITDA basis; and
• other goal setting and performance measurements are prepared on an Adjusted
EBITDA basis.
Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. We present Adjusted EBITDA to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure
33
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
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 inthe 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 ofMarch 31, 2020 , there have been no material changes to any of the critical accounting policies contained therein, other than those related to the adoption of the new lease standard, ASU 2016-02, Leases (Topic 842). See "Notes to Consolidated Financial Statements-Summary of Significant Accounting Policies and New Accounting Standards" for the changes made to our lease accounting policy.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are
subject to risks and uncertainties. All statements other than statements of
historical or current fact included in this report are forward-looking
statements. Forward-looking statements discuss our current expectations and
projections relating to our financial condition, results of operations, plans,
objectives, future performance and business. You can identify forward-looking
statements by the fact that they do not relate strictly to historical or current
facts. These statements may include words such as "aim," "anticipate,"
"estimate," "expect," "forecast," "outlook," "potential," "project,"
"projection," "plan," "intend," "seek," "believe," "may," "could," "would,"
"will," "should," "can," "can have," "likely," the negatives thereof and other
words and terms of similar meaning in connection with any discussion of the
timing or nature of future operating or financial performance or other events.
For example, all statements we make relating to our estimated and projected
earnings, revenues, costs, expenditures, cash flows, growth rates and financial
results, our plans and objectives for future operations, growth or initiatives,
strategies, or the expected outcome or impact of pending or threatened
litigation are forward-looking statements.
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All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Examples of such risks and uncertainties include:
• the negative effects of a pandemic, epidemic, or outbreak of an infectious
disease in humans, such as COVID-19, on our business, financial results,
manufacturing facilities and supply chain, as well as our customers and protein
processors;
• perceived adverse effects on human health linked to the consumption of food
derived from animals that utilize our products could cause a decline in the
sales of those products;
• restrictions on the use of antibacterials in food-producing animals may become
more prevalent;
• a material portion of our sales and gross profits are generated by
antibacterials and other related products;
• competition in each of our markets from a number of large and small companies,
some of which have greater financial, research and development ("R&D"),
production and other resources than we have;
• outbreaks of human or animal diseases could significantly reduce demand for our
products;
• our business may be negatively affected by weather conditions and the
availability of natural resources;
• the continuing trend toward consolidation of certain customer groups as well as
the emergence of large buying groups;
• our ability to control costs and expenses;
• any unforeseen material loss or casualty;
• exposure relating to rising costs and reduced customer income;
• competition deriving from advances in veterinary medical practices and animal
health technologies;
• unanticipated safety or efficacy concerns;
• our dependence on suppliers having current regulatory approvals;
• our raw materials are subject to price fluctuations and their availability can
be limited;
• natural and man-made disasters, including but not limited to human and animal
disease epidemics, fire, snow and ice storms, flood, hail, hurricanes and
earthquakes;
• terrorist attacks, particularly attacks on or within markets in which we
operate;
• our ability to successfully implement our strategic initiatives;
• our reliance on the continued operation of our manufacturing facilities and
application of our intellectual property;
• adverse
fluctuations;
• failure of our product approval, R&D, acquisition and licensing efforts to
generate new products;
• the risks of product liability claims, legal proceedings and general litigation
expenses;
• the impact of current and future laws and regulatory changes;
• modification of foreign trade policy may harm our food animal product customers
• our dependence on our Israeli and Brazilian operations;
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• our substantial level of indebtedness and related debt-service obligations;
• restrictions imposed by covenants in our debt agreements;
• the risk of work stoppages; and
• other factors as described in "Risk Factors" in Item 1A. of our Annual Report
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.
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