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
The global food and animal production industry has experienced demand
disruption, production impacts, price declines and currency volatility in
international markets due to the COVID-19 pandemic. The response to the global
outbreak of COVID-19 continues to evolve. Governmental authorities continue to
implement measures to contain virus outbreaks, such as travel bans, quarantines,
shelter-in-place orders, site closures and business shutdowns. Although vaccines
are now available, distribution efforts vary widely country-by-country and
state-by-state. The pandemic may have significant economic impacts on customers,
suppliers and markets. New information may continue to emerge concerning
COVID-19 and the actions required to contain or treat it may affect the duration
and severity of the economic impact. We believe the global food and animal
production industry is returning to stability, but the potential impact of
COVID-19 continues to evolve and future industry outlooks remain uncertain.
Phibro is an integral participant in the essential production of meat, milk,
eggs and fish for human consumption. In the face of the pandemic, we have
focused on the safety of our employees, while continuing to supply our
customers. Our global production facilities have continued to operate without
interruption, despite supply chain and logistical challenges. Our sales and
technical service 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 have experienced
some cost increases from the safety measures implemented to protect our
employees as well as from supply chain disruptions. We have maintained headcount
and compensation at or above constant levels. We continue to monitor sales
trends, cash flow and liquidity.
The uncertainties surrounding the COVID-19 pandemic remain fluid. We are unable
to predict the supply, distribution or effectiveness of COVID-19 vaccines and
hence the impact on the economies where we manufacture and sell our products.
While we continue to adapt our operations and mitigate the risks and challenges
posed by COVID-19, the demand for our products will be dependent upon economic
conditions and the ability of our customers and end users of our products to
operate their businesses and production facilities. Our business and 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 confidence the nature and timing
of when any of these events may occur and the effects COVID-19 will have on our
business, our consolidated results and the broader economic environment going
forward. We will continue to evaluate the nature and extent of the effects of
COVID-19 on our business, consolidated results of operations, financial
condition, and liquidity. For additional considerations and risks associated
with COVID-19 on our business, please refer to "Risk Factors" in Item 1A. of our
Annual Report.
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Trends and uncertainties
InApril 2016 , theFood and Drug Administration ("FDA") began initial steps to withdraw approval of carbadox via a regulatory process known as a Notice of Opportunity for Hearing ("NOOH"), due to concerns that certain residues from the product may persist in animal tissues for longer than previously determined. The NOOH process provided Phibro with an opportunity to defend the safety of carbadox prior to the FDA taking final steps to remove carbadox from the market. Over the next four years, as part of an ongoing process of responding to the inquiries from theFDA's Center for Veterinary Medicine ("CVM"), we provided extensive and meticulous research and data that confirmed the safety of carbadox. InMarch 2018 , the FDA indefinitely stayed the withdrawal proceedings. InJuly 2020 , the FDA announced it does not agree with Phibro's scientific conclusions that carbadox is safe under the current conditions of use. Instead of proceeding to a hearing on the scientific concerns raised in the 2016 NOOH, consistent with the normal regulatory procedure, the FDA announced that it was withdrawing the current NOOH, and issuing a proposed order to review the regulatory method for carbadox. The approved regulatory method determines if there are residues of carcinogenic concern in animal tissue at the time of slaughter. If the order is finalized, the FDA has indicated it plans to issue a new NOOH proposing the withdrawal of carbadox from the market because of a lack of an approved regulatory method. InSeptember 2020 , Phibro commented on the proposed order, reiterating the safety of carbadox and the appropriateness of the regulatory method, and further offered to work with the CVM to generate additional data to support the existing regulatory method or select a suitable alternative regulatory method. Phibro disagrees with the agency's actions and has submitted a request to theFDA Office of the Commissioner that the agency continue the NOOH process it started in 2016 and proceed with a hearing to review the substantial body of data supporting the safety of carbadox. There is no defined timeline for the conclusion of this matter.Should we be unable to successfully defend the safety of the product, the loss of carbadox sales would have an adverse effect on our financial condition and results of operations. Sales of carbadox for the twelve months endedMarch 31, 2021 , were$19 million . 25
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Analysis of the consolidated statements of operations
Summary Results of Operations
Three Months Nine Months
For the Periods Ended
March 31 2021 2020 Change 2021 2020 Change
(in thousands, except per share amounts and percentages)
Net sales $ 211,729 $ 210,739 $ 990 0 % $ 613,072 $ 614,471 $ (1,399) (0) %
Gross profit 69,165 69,551 (386) (1) % 201,549 196,318 5,231 3 %
Selling, general and
administrative expenses 49,033 48,232 801 2 % 145,839 145,243 596 0 %
Operating income 20,132 21,319 (1,187) (6) % 55,710 51,075 4,635 9 %
Interest expense, net 2,933 3,263 (330) (10) % 8,957 10,049 (1,092) (11) %
Foreign currency (gains)
losses, net (583) (608) 25 * (3,590) 1,895 (5,485) *
Income before income
taxes 17,782 18,664 (882) (5) % 50,343 39,131 11,212 29 %
Provision for income
taxes 5,621 5,163 458 9 % 13,079 11,221 1,858 17 %
Net income $ 12,161 $ 13,501 $ (1,340) (10) % $ 37,264 $ 27,910 $ 9,354 34 %
Net income per share
basic $ 0.30 $ 0.33 $ (0.03) $ 0.92 $ 0.69 $ 0.23
diluted $ 0.30 $ 0.33 $ (0.03) $ 0.92 $ 0.69 $ 0.23
Weighted average number
of shares outstanding
basic 40,483 40,454 40,463 40,454
diluted 40,504 40,504 40,504 40,504
Ratio to net sales
Gross profit 32.7 % 33.0 % 32.9 % 31.9 %
Selling, general and
administrative expenses 23.2 % 22.9 % 23.8 % 23.6 %
Operating income 9.5 % 10.1 % 9.1 % 8.3 %
Income before income
taxes 8.4 % 8.9 % 8.2 % 6.4 %
Net income 5.7 % 6.4 % 6.1 % 4.5 %
Effective tax rate 31.6 % 27.7 % 26.0 % 28.7 %
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."
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Segment net sales and Adjusted EBITDA:
Three Months Nine Months
For the Periods Ended
March 31 2021 2020 Change 2021 2020 Change
(in thousands, except percentages)
Net sales
MFAs and other $ 78,530 $ 82,670 $ (4,140) (5) % $ 238,810 $ 249,659 $ (10,849) (4) %
Nutritional specialties 36,978 34,636 2,342 7 %
105,972 98,131 7,841 8 %
Vaccines 18,872 21,668 (2,796) (13) % 54,205 56,723 (2,518) (4) %
Animal Health 134,380 138,974 (4,594) (3) % 398,987 404,513 (5,526) (1) %Mineral Nutrition 58,153 56,200 1,953 3 % 163,750 164,534 (784) (0) % Performance Products 19,196 15,565 3,631 23 % 50,335 45,424 4,911 11 % Total$ 211,729 $ 210,739 $ 990 0 %
Adjusted EBITDA Animal Health$ 30,962 $ 34,635 $ (3,673) (11) %$ 94,412 $ 93,534 $ 878 1 % Mineral Nutrition 5,232 4,055 1,177 29 % 12,464 11,214 1,250 11 % Performance Products 2,929 1,506 1,423 94 %
7,167 3,815 3,352 88 %
Corporate (11,073) (10,064) (1,009) 10 % (33,162) (30,283) (2,879) 10 %
Total $ 28,050 $ 30,132 $ (2,082) (7) % $ 80,881 $ 78,280 $ 2,601 3 %
Adjusted EBITDA ratio to
segment net sales
Animal Health 23.0 % 24.9 % 23.7 % 23.1 %
Mineral Nutrition 9.0 % 7.2 % 7.6 % 6.8 %Performance Products 15.3 % 9.7 %
14.2 % 8.4 %
Corporate(1) (5.2) % (4.8) % (5.4) % (4.9) %
Total(1) 13.2 % 14.3 % 13.2 % 12.7 %
(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 2021 2020 Change 2021 2020 Change
(in thousands, except percentages)
Net income $ 12,161 $ 13,501 $ (1,340)
(10) %
2,933 3,263 (330) (10) % 8,957 10,049 (1,092) (11) % Provision for income taxes
5,621 5,163 458 9 % 13,079 11,221 1,858 17 % Depreciation and amortization
7,918 8,248 (330) (4) % 24,042 24,177 (135) (1) %
EBITDA 28,633 30,175 (1,542)(5) % 83,342 73,357 9,985 14 % Stock-based compensation
- 565 (565) * 1,129 1,694 (565) (33) %
Restructuring costs - - - * - 425 (425) *
Acquisition-related cost of goods sold - - - * - 280 (280) *
Acquisition-related transaction costs - - - * - 462 (462) *
Acquisition-related other, net - - - * - 167 (167) *
Foreign currency (gains) losses, net (583) (608) 25
* (3,590) 1,895 (5,485) *
Adjusted EBITDA $ 28,050 $ 30,132 $ (2,082) (7) % $ 80,881 $ 78,280 $ 2,601 3 %
Certain amounts may reflect rounding adjustments.
* Calculation not meaningful
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Comparison of three months ended
Net sales
Net sales of$211.7 million for the three months endedMarch 31, 2021 , increased$1.0 million , or less than 1%, as compared to the three months endedMarch 31, 2020 .Animal Health decreased$4.6 million , while Mineral Nutrition and Performance Products increased$2.0 million and$3.6 million , respectively.
Net sales of$134.4 million for the three months endedMarch 31, 2021 , declined$4.6 million , or 3%. Net sales of MFAs and other decreased$4.1 million , or 5%, driven by lower international demand, primarily poultry products in theLatin America region, as well as timing of certain domestic customer orders. Net sales of nutritional specialty products increased$2.3 million , or 7%, principally due to international volume growth in dairy products. Net sales of vaccines declined$2.8 million , or 13%, as challenging economic conditions inEastern Europe more than offset domestic volume growth and increased demand in theAsia Pacific region.
Mineral Nutrition
Net sales of$58.2 million for the three months endedMarch 31, 2021 , increased$2.0 million , or 3%, driven by increased average selling prices. The increase in average selling prices is correlated with the movement of the underlying raw material costs. Performance Products Net sales of$19.2 million for the three months endedMarch 31, 2021 , increased$3.6 million , or 23%. The increase was driven by strong demand for copper-based products coupled with favorable product pricing correlated with underlying
raw material costs. Gross profit Gross profit of$69.2 million for the three months endedMarch 31, 2021 , decreased$0.4 million , or 1%, as compared to the three months endedMarch 31, 2020 . Gross margin decreased 30 basis points to 32.7% of net sales for the three months endedMarch 31, 2021 , as compared to 33.0% for the three months endedMarch 31, 2020 .Animal Health gross profit decreased$3.2 million due to lower sales and unfavorable product mix. Mineral Nutrition gross profit increased$1.2 million , driven primarily by favorable product mix. Performance Products gross profit increased$1.6 million driven by volumes and favorable product mix.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") of $49.0 million for the
three months ended March 31, 2021 , increased $0.8 million , or 2%, as compared to
the three months ended March 31, 2020 . SG&A for the three months ended March 31,
2020 , included $0.6 million of stock-based compensation. Excluding these costs,
SG&A increased $1.4 million , or 3%.
Animal Health SG&A increased $0.3 million , due to investments in market
expansion initiatives in certain international regions, partially offset by
decreased marketing and sales team travel costs driven by COVID-19 limitations.
Mineral Nutrition and Performance Products SG&A were comparable to the prior
year. Corporate SG&A increased $1.0 million due to investments in strategic
initiatives and incremental performance-related compensation costs, partially
offset by a decline in travel costs driven by COVID-19 limitations.
Interest expense, net
Interest expense, net of$2.9 million for the three months endedMarch 31, 2021 , decreased$0.3 million , or 10%, as compared to the three months endedMarch 31, 2020 . Interest expense, net decreased primarily due to favorable variable borrowing rates, partially offset by reduced interest income from short-term investments. 28 Table of Contents Foreign currency gains, net
Foreign currency gains, net were
Provision for income taxes The provision for income taxes was$5.6 million and$5.2 million for the three months endedMarch 31, 2021 and 2020, respectively. The effective income tax rate was 31.6% and 27.7% for the three months endedMarch 31, 2021 and 2020, respectively. The provision for income taxes during the three months endedMarch 31, 2021 , included a$0.6 million expense related to a detailed deferred tax analysis of property, plant, and equipment and intangible assets. The effective income tax rate, without this expense, would have been 27.9% for the three months endedMarch 31, 2021 .
Net income
Net income of$12.2 million for the three months endedMarch 31, 2021 , decreased$1.3 million , as compared to net income of$13.5 million for the three months endedMarch 31, 2020 . Operating income declined$1.2 million , driven by lower gross profit and increased SG&A expenses. The decrease in gross profit and the overall gross margin was primarily driven by lower volume and unfavorable product mix in theAnimal Health segment, partially offset by increased gross profit in the Mineral Nutrition and Performance Products segments. SG&A expenses increased due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations. Interest expense was lower by$0.3 million , while income tax expense increased$0.5 million .
Adjusted EBITDA
Adjusted EBITDA of$28.1 million for the three months endedMarch 31, 2021 , declined$2.1 million , or 7%, as compared to the three months endedMarch 31, 2020 . Animal Health Adjusted EBITDA decreased$3.7 million on lower sales and gross profit and increased SG&A costs. Mineral Nutrition Adjusted EBITDA increased$1.2 million , driven by increased gross profit on favorable product mix. Performance Products Adjusted EBITDA increased$1.4 million driven by increased gross profit. Corporate expenses increased$1.0 million , primarily due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations.
Comparison of nine months ended
Net sales
Net sales of$613.1 million for the nine months endedMarch 31, 2021 , decreased$1.4 million , or less than 1%, as compared to the nine months endedMarch 31, 2020 .Animal Health and Mineral Nutrition declined$5.5 million and$0.8 million , respectively. Performance Products increased$4.9 million .
Net sales of$399.0 million for the nine months endedMarch 31, 2021 , declined$5.5 million , or 1%. Net sales of MFAs and other declined$10.8 million , or 4%, due to reduced demand inChina following regulatory changes effectiveJanuary 1, 2020 , and lower volume inLatin America , partially offset by net sales growth in other products and regions, including domestic swine. Net sales of nutritional specialty products grew$7.8 million , or 8%, due to international and domestic volume growth in dairy products, partially offset by lower sales in domestic poultry. Net sales of vaccines declined$2.5 million , or 4%, as challenging economic conditions inEastern Europe more than offset domestic volume growth and increased demand in theAsia Pacific region.
Mineral Nutrition
Net sales of
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Performance Products
Net sales of
Gross profit
Gross profit of$201.5 million for the nine months endedMarch 31, 2021 , increased$5.2 million , or 3%, as compared to the nine months endedMarch 31, 2020 . Gross margin increased 100 basis points to 32.9% of net sales for the nine months endedMarch 31, 2021 , as compared to 31.9% for the nine months endedMarch 31, 2020 . The nine months endedMarch 31, 2020 , included$0.3 million of acquisition-related cost of goods sold.Animal Health gross profit increased$0.5 million , due to increased volumes of nutritional specialty products and favorable production costs, primarily related to foreign currency movements. These increases were partially offset by lower volumes of MFAs and other and vaccine products and unfavorable product mix. Mineral Nutrition gross profit increased$1.1 million , driven by favorable raw material costs and product mix, partially offset by declines in average selling prices. Performance Products gross profit increased$3.3 million , driven by higher volume coupled with decreases in raw material and production costs.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") of $145.8 million for the
nine months ended March 31, 2021 , increased $0.6 million , or less than 1%, as
compared to the nine months ended March 31, 2020 . SG&A for the nine months ended
March 31, 2021 included $1.1 million of stock-based compensation. SG&A for the
nine months ended March 31, 2020 , included $1.7 million of stock-based
compensation, $0.4 million of restructuring costs, $0.5 million of
acquisition-related transaction costs and $0.2 million of other
acquisition-related costs. Excluding these costs, SG&A increased $2.3 million ,
or 2%.
Animal Health SG&A decreased $0.6 million primarily due to the favorable effects
of foreign currency exchange and decreased marketing and sales team travel costs
driven by COVID-19 limitations. These expense declines were partially offset by
increased professional fees to support the continued use of carbadox and
investments in market expansion initiatives in certain international regions.
Mineral Nutrition and Performance Products SG&A were comparable to the prior
year. Corporate expenses increased $2.9 million , driven by investments in
strategic initiatives, as well as incremental costs for performance-related
compensation, professional fees and information technology. These cost increases
were partially offset by lower travel expenses driven by COVID-19 limitations.
The stock-based compensation, restructuring costs, acquisition-related
transaction costs and other acquisition-related costs resulted in a net $1.7
million decrease to SG&A.
Interest expense, net
Interest expense, net of $9.0 million for the nine months ended March 31, 2021 ,
decreased $1.1 million , or 11%, as compared to the nine months ended March 31,
2020 . Interest expense, net decreased primarily due to favorable variable
interest rates, partially offset by higher levels of debt outstanding and lower
interest income from short-term investments.
Foreign currency (gains) losses, net
Foreign currency gains, net for the nine months endedMarch 31, 2021 , were$3.6 million , as compared to net losses of$1.9 million for the nine months endedMarch 31, 2020 . Foreign currency gains primarily arose from intercompany balances, driven by the movement of the Mexican, South African, Turkish and Brazilian currencies relative to theU.S. dollar.
Provision for income taxes
The provision for income taxes was$13.1 million and$11.2 million for the nine months endedMarch 31, 2021 and 2020, respectively. The effective income tax rate was 26.0% and 28.7% for the nine months endedMarch 31, 2021 and 2020, respectively. The provision for income taxes during the nine months endedMarch 31, 2021 , included (i) a$1.5 million benefit for the years endedJune 30, 2020 and 2019 related to final regulations issued inJuly 2020 for the Global Intangible Low-Taxed Income ("GILTI") tax, (ii) an$0.8 million benefit related to exchange rate differences on intercompany dividends, (iii) a$0.6 million benefit for the reversal 30 Table of Contents
of an uncertain tax position and (iv) a
Net income
Net income of$37.3 million for the nine months endedMarch 31, 2021 , increased$9.4 million , as compared to net income of$27.9 million for the nine months endedMarch 31, 2020 . The increase was primarily driven by higher operating income of$4.6 million , lower interest expense of$1.1 million and increased foreign currency gains of$5.5 million , partially offset by a$1.9 million increase to the provision for income taxes. The increase in operating income was driven by a$5.2 million increase in gross profit, partially offset by increased SG&A costs of$0.6 million . Adjusted EBITDA
Adjusted EBITDA of$80.9 million for the nine months endedMarch 31, 2021 , increased$2.6 million , or 3%, as compared to the nine months endedMarch 31, 2020 . Animal Health Adjusted EBITDA increased$0.9 million , driven by increased gross profit and lower SG&A expenses. Mineral Nutrition and Performance Products Adjusted EBITDA increased$1.3 million and$3.4 million , respectively, on higher gross profit. Corporate expenses increased$2.9 million driven by investments in strategic initiatives as well as incremental costs for performance-related compensation, professional fees and information technology. These cost increases were partially offset by lower travel expenses driven by COVID-19 limitations.
Analysis of financial condition, liquidity and capital resources
Net increase (decrease) in cash and cash equivalents was:
Nine MonthsFor the Periods Ended March 31 2021 2020
Change
(in thousands)
Cash provided (used) by:
Operating activities $ 45,236 $ 55,471 $ (10,235)
Investing activities (11,390) (110,857) 99,467
Financing activities (21,632) 25,951 (47,583)
Effect of exchange-rate changes on cash and cash
equivalents 546 (1,390) 1,936
Net increase/(decrease) in cash and cash
equivalents $ 12,760 $
(30,825)
Certain amounts may reflect rounding adjustments.
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Net cash provided (used) by operating activities was comprised of:
Nine MonthsFor the Periods Ended March 31 2021 2020
Change
(in thousands)
EBITDA $ 83,342 $ 73,357 $ 9,985
Adjustments:
Stock-based compensation 1,129 1,694 (565)
Restructuring costs - 425Acquisition-related cost of goods sold - 280 (280) Acquisition-related transaction costs - 462 (462) Acquisition other, net -
167
Foreign currency (gains) losses, net (3,590) 1,895 (5,485) Interest paid, net (8,123) (9,171) 1,048 Income taxes paid (14,335) (15,045) 710 Changes in operating assets and liabilities and other items (13,187) 1,407 (14,594) Net cash provided by operating activities$ 45,236 $
55,471
Certain amounts may reflect rounding adjustments.
Operating activities
Operating activities provided$45.2 million of net cash for the nine months endedMarch 31, 2021 . Cash provided by net income and non-cash items, including depreciation and amortization, was$56.2 million . Cash used in the ordinary course of business for changes in operating assets and liabilities and other items was$11.0 million . Accounts receivable used$8.4 million of cash due to increased domestic sales and timing of collections, partially offset by lower sales and favorable collections in international regions. Cash used for inventory was$8.1 million . Inventory increases were primarily due to forecasted future demand and internal production schedules. For certain products, we are maintaining safety stocks to mitigate potential disruptions in production. Other assets and accounts payable used$1.0 million and$0.8 million of cash, respectively. Prepaid expenses and other current assets provided$3.7 million of cash due to timing of domestic payments. Accrued expenses and other liabilities provided cash of$3.6 million due to timing of payments for employee-related liabilities, partially offset by payments made for environmental remediation procedures. Investing activities
Investing activities used
Financing activities
Financing activities used$21.6 million of net cash for the nine months endedMarch 31, 2021 . Net borrowings on our Revolver provided$7.0 million . We paid$14.6 million in dividends to holders of our Class A and Class B common stock. We paid$14.1 million in scheduled debt and other requirements.
Liquidity and capital resources
InApril 2021 , we entered into an amended and restated credit agreement (the "2021 Credit Agreement") under which we have a term A loan in an aggregate initial principal amount of$300 million (the "2021 Term A Loan") and a revolving credit facility under which we can borrow up to$250 million , subject to the terms of the agreement (the "2021 Revolver" and together with the 2021 Term A Loan, the "2021 Credit Facilities"). The 2021 Credit Agreement amends and restates the credit agreement entered into inJune 2017 (the "2017 Credit Agreement"). The 2021 Credit Facilities were used to refinance all of the Term A loans and revolving credit facility amounts outstanding under the 2017 Credit Agreement and to pay fees and expenses of the transaction. The 2021 32
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Revolver contains a letter of credit facility. The 2021 Credit Facilities mature
in
We believe our cash on hand, operating cash flow and financing arrangements, including the availability of borrowings under the 2021 Revolver and foreign credit lines, will be sufficient to support our ongoing cash needs. We are aware of the current and potential future effects of COVID-19 on the financial markets. We expect adequate liquidity for at least the next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will be able to comply with the terms of the covenants under the 2021 Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise, including those caused by COVID-19. 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 2021 2020
(in thousands, except ratios)
Cash and cash equivalents and short-term investments $ 93,103 $ 91,343
Working capital 233,161 222,006
Ratio of current assets to current liabilities 2.60:1 2.60:1
We define working capital as total current assets (excluding cash and cash equivalents and short-term investments) less total current liabilities (excluding current portion of long-term debt). We calculate the ratio of current assets to current liabilities based on this definition.
As ofMarch 31, 2021 , we had$176.0 million in outstanding borrowings under the 2017 Revolver and had outstanding letters of credit and other commitments of$2.7 million , leaving$71.3 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. Our Board of Directors declared a cash dividend of$0.12 per share on Class A and Class B common stock, payable onJune 23, 2021 . 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
During the three months endedMarch 31, 2021 , we amended and extended the lease agreement for our corporate office, increasing the value of our lease commitments. For the nine months endedMarch 31, 2021 , the total right of use assets obtained in exchange for new operating lease liabilities were$13.9 million . As of ourMarch 31, 2021 , our total lease commitment value was$40.0 million .
In
There were no other material changes in payments due under contractual obligations from those disclosed in the Annual Report.
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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 (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.
The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:
? senior management receives a monthly analysis of our operating results that is
prepared on an Adjusted EBITDA basis;
? our annual budgets are prepared on an Adjusted EBITDA basis; and
? other goal setting and performance measurements are prepared on an Adjusted
EBITDA basis.
Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted EBITDA is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure is that it provides a view of our operations without including all events during a period, such as the depreciation of property, plant and equipment or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies.
Certain significant items
Adjusted EBITDA is calculated prior to considering certain items. We evaluate
such items on an individual basis. Such evaluation considers both the
quantitative and the qualitative aspect of their unusual or non-operational
nature. Unusual, in this context, may represent items that are not part of our
ongoing business and items that, either as a result of their nature or size, we
would not expect to occur as part of our normal business on a regular basis.
We consider acquisition-related activities and business restructuring costs
related to productivity and cost-saving initiatives, including employee
separation costs, to be unusual items that we do not expect to occur as part of
our normal business on a regular basis. We consider foreign currency gains and
losses to be non-operational because they arise principally from intercompany
transactions and are largely non-cash in nature.
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New accounting standards
For discussion of new accounting standards, see "Notes to Consolidated Financial Statements-Summary of Significant Accounting Policies and New Accounting Standards."
Critical Accounting Policies
Critical accounting policies are those that require application of management's most difficult, subjective and/or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all accounting policies require management to make difficult, subjective or complex judgments or estimates. In presenting our consolidated financial statements in accordance with generally accepted accounting principles inthe United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results that differ from our estimates and assumptions could have an unfavorable effect on our financial position and results of operations. Critical accounting policies include revenue recognition, business combinations, long-lived assets, goodwill, and income taxes. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain. The pandemic may affect our future sales, expenses, reserves and allowances, manufacturing operations and employee-related costs. The pandemic may have significant economic impacts on our customers, suppliers and markets where we compete and operate. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "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:
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 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;
? the continuing trend toward consolidation of certain customer groups as well as
the emergence of large buying groups;
? our ability to control costs and expenses;
? any unforeseen material loss or casualty;
? exposure relating to rising costs and reduced customer income;
? competition deriving from advances in veterinary medical practices and animal
health technologies;
? unanticipated safety or efficacy concerns;
? our dependence on suppliers having current regulatory approvals;
? our raw materials are subject to price fluctuations and their availability can
be limited;
? natural and man-made disasters, including but not limited to fire, snow and ice
storms, flood, hail, hurricanes and earthquakes;
? 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;
? our substantial level of indebtedness and related debt-service obligations;
? restrictions imposed by covenants in our debt agreements;
? the risk of work stoppages; and
? other factors as described in "Risk Factors" in Item 1A. of our Annual Report.
While we believe that our assumptions are reasonable, we caution that it is very
difficult to predict the impact of known factors, and it is impossible for us to
anticipate all factors that could affect our actual results. Important factors
that could cause actual results to differ materially from our expectations, or
cautionary statements, are disclosed under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward-looking statements are expressly qualified in
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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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