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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 September 30, 2022

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

(I.R.S. Employer

incorporation or organization)

Identification No.)

Glenpointe Centre East, 3rd Floor

300 Frank W. Burr Boulevard, Suite 21

Teaneck, New Jersey

07666-6712

(Address of Principal Executive Offices)

(Zip Code)

(201) 329-7300

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Class A Common Stock, $0.0001
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 November 4, 2022, there were 20,337,574 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 20,166,034 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.

PHIBRO ANIMAL HEALTH CORPORATION

TABLE OF CONTENTS

Page

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

SIGNATURES

33

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months

For the Periods Ended September 30

    

2022

    

2021

(unaudited)

(in thousands, except per share amounts)

Net sales

$

232,521

$

214,665

Cost of goods sold

 

163,875

 

149,987

Gross profit

 

68,646

 

64,678

Selling, general and administrative expenses

 

54,962

 

50,066

Operating income

 

13,684

 

14,612

Interest expense, net

 

3,067

 

2,889

Foreign currency losses, net

 

5,200

 

2,128

Income before income taxes

 

5,417

 

9,595

Provision for income taxes

 

1,561

 

3,061

Net income

$

3,856

$

6,534

Net income per share

 

  

 

  

basic and diluted

$

0.10

$

0.16

Weighted average common shares outstanding

 

 

basic and diluted

 

40,504

 

40,504

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

3

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months

For the Periods Ended September 30

    

2022

    

2021

(unaudited)

(in thousands)

Net income

$

3,856

$

6,534

Change in fair value of derivative instruments

 

7,105

 

(29)

Foreign currency translation adjustment

 

(4,143)

 

(6,964)

Unrecognized net pension gains

 

176

 

117

Provision for income taxes

 

(1,820)

 

(22)

Other comprehensive income (loss)

 

1,318

 

(6,898)

Comprehensive income (loss)

$

5,174

$

(364)

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

4

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 

June 30, 

As of

    

2022

    

2022

(unaudited)

 

(in thousands, except share and per share amounts)

ASSETS

Cash and cash equivalents

$

76,280

$

74,248

Short-term investments

 

10,000

 

17,000

Accounts receivable, net

 

142,728

 

166,537

Inventories, net

 

280,842

 

259,158

Other current assets

 

60,230

 

49,289

Total current assets

 

570,080

 

566,232

Property, plant and equipment, net

 

179,393

 

165,490

Intangibles, net

 

61,133

 

63,861

Goodwill

 

53,209

 

53,226

Other assets

 

84,563

 

82,890

Total assets

$

948,378

$

931,699

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

Current portion of long-term debt

$

15,420

$

15,000

Accounts payable

 

88,379

 

95,596

Accrued expenses and other current liabilities

 

68,700

 

80,236

Total current liabilities

 

172,499

 

190,832

Revolving credit facility

 

171,000

 

145,000

Long-term debt

 

280,738

 

272,925

Other liabilities

 

61,385

 

60,500

Total liabilities

 

685,622

 

669,257

Commitments and contingencies (Note 7)

 

 

Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,337,574 shares issued and outstanding at September 30, 2022, and June 30, 2022; 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at September 30, 2022, and June 30, 2022

 

4

 

4

Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding

 

Paid-in capital

 

135,803

 

135,803

Retained earnings

 

246,744

 

247,748

Accumulated other comprehensive loss

 

(119,795)

 

(121,113)

Total stockholders’ equity

 

262,756

 

262,442

Total liabilities and stockholders’ equity

$

948,378

$

931,699

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

5

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months

For the Periods Ended September 30

    

2022

    

2021

(unaudited)

(in thousands)

OPERATING ACTIVITIES

 

  

 

  

Net income

$

3,856

$

6,534

Adjustments to reconcile net income to

 

 

net cash provided by operating activities:

 

 

Depreciation and amortization

 

8,450

 

7,854

Amortization of debt issuance costs

 

147

 

148

Deferred income taxes

 

(13)

 

(31)

Foreign currency losses, net

 

3,370

 

2,155

Other

 

(309)

 

70

Changes in operating assets and liabilities:

 

 

Accounts receivable, net

 

22,347

 

4,373

Inventories, net

 

(24,977)

 

(9,873)

Other current assets

 

(7,682)

 

14

Other assets

 

(31)

 

(741)

Accounts payable

 

(5,595)

 

514

Accrued expenses and other liabilities

 

(10,261)

 

(7,196)

Net cash (used in) provided by operating activities

 

(10,698)

 

3,821

INVESTING ACTIVITIES

 

  

 

  

Purchases of short-term investments

 

 

(32,000)

Maturities of short-term investments

 

7,000

 

 

19,000

Capital expenditures

(23,176)

 

 

(7,449)

Other, net

 

27

 

(217)

Net cash used in investing activities

 

(16,149)

 

(20,666)

FINANCING ACTIVITIES

 

 

Revolving credit facility borrowings

 

62,000

 

86,000

Revolving credit facility repayments

 

(36,000)

 

(71,000)

Proceeds from long-term debt

12,000

Payments of long-term debt

 

(3,750)

 

(1,875)

Debt issuance costs

(71)

Dividends paid

 

(4,860)

 

(4,860)

Net cash provided by financing activities

 

29,319

 

8,265

Effect of exchange rate changes on cash

 

(440)

 

(457)

Net increase (decrease) in cash and cash equivalents

 

2,032

 

(9,037)

Cash and cash equivalents at beginning of period

 

74,248

 

50,212

Cash and cash equivalents at end of period

$

76,280

$

41,175

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

6

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Accumulated

Other

Shares of

Comprehensive

Common

Common

Preferred

Paid-in

Retained

Income

    

Stock

    

Stock

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

(unaudited)

(in thousands, except share and per share amounts)

As of June 30, 2022

    

40,503,608

$

4

$

$

135,803

$

247,748

$

(121,113)

$

262,442

Comprehensive income

3,856

1,318

5,174

Dividends declared ($0.12 per share)

 

 

 

 

 

(4,860)

 

 

(4,860)

As of September 30, 2022

40,503,608

$

4

$

$

135,803

$

246,744

$

(119,795)

$

262,756

Accumulated

    

    

  

    

  

Other

Shares of

Comprehensive

Common

Common

Preferred

Paid-in

Retained

Income

    

Stock

    

Stock

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

(unaudited)

(in thousands, except share and per share amounts)

As of June 30, 2021

40,503,608

$

4

$

$

135,803

$

218,015

$

(115,293)

$

238,529

Comprehensive income (loss)

 

 

 

 

 

6,534

 

(6,898)

 

(364)

Dividends declared ($0.12 per share)

 

 

 

 

 

(4,860)

 

 

(4,860)

As of September 30, 2021

40,503,608

$

4

$

$

135,803

$

219,689

$

(122,191)

$

233,305

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

(unaudited)

1.  Description of Business

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

The unaudited consolidated financial information for the three months ended September 30, 2022 and 2021, is presented on the same basis as the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “Annual Report”), filed with the Securities and Exchange Commission on August 24, 2022 (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, 2022, was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.

The consolidated financial statements include the accounts of Phibro and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated from the consolidated financial statements. The decision to consolidate an entity requires consideration of majority voting interests, as well as effective control over the entity.

2.  Summary of Significant Accounting Policies and New Accounting Standards

Our significant accounting policies are described in the notes to the consolidated financial statements included in our Annual Report. As of September 30, 2022, there have been no material changes to any of the significant accounting policies contained therein.

Net Income per Share and Weighted Average Shares

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

Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period after giving effect to dilutive common share equivalents. There were no common share equivalents in the periods included in the consolidated financial statements.

Three Months

For the Periods Ended September 30

    

2022

    

2021

Net income

$

3,856

$

6,534

Weighted average number of shares – basic and diluted

 

40,504

 

40,504

Net income per share - basic and diluted

$

0.10

$

0.16

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

New Accounting Standards

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance has established annual disclosure requirements over transactions with a government that are accounted for by applying a grant accounting model. The disclosures include the nature of the transactions and the related accounting policy used to account for the transactions, the line items and amounts included in the consolidated balance sheet and consolidated statement of operations, and the significant terms and conditions of the transactions, including commitments and contingencies. The disclosures are required for the annual periods beginning after December 15, 2021. We intend to include these disclosures for the year ending June 30, 2023.

ASU 2020-04 and 2021-01, Reference Rate Reform (Topic 848), provide optional expedients to GAAP guidance if certain criteria are met, for contracts, hedging relationships and derivative instruments that reference the London Interbank Offered Rate (“LIBOR”) planned to be discontinued by rate reform. In November 2022, we amended our 2021 Credit Agreement and intend to amend our 2020 interest rate swap agreement to replace LIBOR as the interest rate benchmark with the Secured Overnight Financing Rate (“SOFR”), as provided for under ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the SOFR Overnight Index Swap (OIS) Rate as a Benchmark for Hedge Accounting Purposes. We intend to apply the optional expedient to treat the amendment as a continuation of existing contracts during the three months ending December 31, 2022.

3.  Statements of Operations—Additional Information

Disaggregated revenue, deferred revenue and customer payment terms

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

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

Animal Health

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

MFAs and other: MFAs and other products primarily consist of concentrated medicated products 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. The MFAs and other category also include other antibacterial products and processing aids used in the ethanol fermentation industry.
Nutritional specialties: Nutritional specialty products enhance nutrition to help improve health and performance in areas such as immune system function and digestive health. We are also a developer, manufacturer and marketer of microbial products and bioproducts for a variety of applications serving animal health and nutrition, environmental, industrial and agricultural customers.
Vaccines: Our vaccines are primarily focused on preventing diseases in poultry and swine. They protect animals from either viral or bacterial disease challenges. We develop, manufacture and market conventionally licensed and autogenous

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

vaccine products, as well as adjuvants to vaccine manufacturers. We have also developed and market an innovative and proprietary delivery platform for vaccines.

Mineral Nutrition

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

Performance Products

The Performance Products business manufactures and markets specialty ingredients for use in the personal care, industrial chemical and chemical catalyst industries.

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

Net Sales by Product Type

Three Months

For the Periods Ended September 30

    

2022

    

2021

Animal Health

  

 

  

MFAs and other

$

92,790

$

83,758

Nutritional specialties

 

39,054

 

35,997

Vaccines

 

23,015

 

21,249

Total Animal Health

$

154,859

$

141,004

Mineral Nutrition

 

59,646

 

54,432

Performance Products

 

18,016

 

19,229

Total

$

232,521

$

214,665

Net Sales by Region

Three Months

For the Periods Ended September 30

    

2022

    

2021

United States

$

135,804

$

126,319

Latin America and Canada

 

52,246

 

42,660

Europe, Middle East and Africa

 

29,517

 

30,935

Asia Pacific

 

14,954

 

14,751

Total

$

232,521

$

214,665

Net sales by region are based on country of destination.

Deferred revenue was $1,601 and $2,051 as of September 30, 2022, and June 30, 2022, respectively. Accrued expenses and other current liabilities included $458 and $822 of the total deferred revenue as of September 30, 2022, and June 30, 2022, respectively. The deferred revenue resulted primarily from certain customer arrangements, including technology licensing fees and discounts on future product sales. The transaction price associated with our deferred revenue arrangements is generally based on the stand-alone sales prices of the individual products or services.

Our customer payment terms generally range from 30 to 120 days globally and exclude any significant financing components. Payment terms vary based on industry and business practices within the regions in which we operate. Our average worldwide collection period for accounts receivable is approximately 60 days after the revenue is recognized.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Interest Expense

Three Months

For the Periods Ended September 30

    

2022

    

2021

Interest expense, net

Term loan

$

1,738

$

2,273

Revolving credit facility

 

1,809

 

599

Amortization of debt issuance costs

 

147

 

148

Other

 

1

 

45

Interest expense

 

3,695

 

3,065

Interest income

 

(628)

 

(176)

$

3,067

$

2,889

Depreciation and Amortization

Three Months

For the Periods Ended September 30

    

    

2022

    

2021

Depreciation and amortization

 

 

  

Depreciation of property, plant and equipment

$

6,051

$

5,714

Amortization of intangible assets

 

2,396

 

2,135

Amortization of other assets

 

3

 

5

$

8,450

$

7,854

4.  Balance Sheets—Additional Information

September 30, 

June 30, 

As of

    

2022

    

2022

Inventories

  

Raw materials

$

94,943

$

87,030

Work-in-process

17,389

15,468

Finished goods

168,510

156,660

$

280,842

$

259,158

    

September 30, 

June 30, 

As of

    

2022

    

2022

Other assets

ROU operating lease assets

$

36,259

 

$

37,680

Deferred income taxes

 

5,453

 

5,849

Deposits

 

5,868

 

5,905

Insurance investments

 

6,012

 

5,984

Equity method investments

 

4,580

 

4,362

Derivative instruments

16,532

12,976

Debt issuance costs

 

1,342

 

1,436

Other

8,517

8,698

$

84,563

 

$

82,890

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

    

September 30, 

    

June 30, 

As of

    

2022

    

2022

Accrued expenses and other current liabilities

 

  

 

  

Employee related

$

26,646

$

34,278

Current operating lease liabilities

 

5,674

 

6,051

Commissions and rebates

6,128

7,125

Professional fees

 

4,529

 

5,493

Income and other taxes

6,598

7,211

Insurance-related

 

1,223

 

1,174

Other

 

17,902

 

18,904

$

68,700

$

80,236

    

September 30, 

    

June 30, 

As of

    

2022

    

2022

Other liabilities

Long-term operating lease liabilities

$

30,287

$

31,508

Long-term and deferred income taxes

 

11,584

9,264

Supplemental retirement benefits, deferred compensation and other

7,453

7,368

U.S. pension plan

 

1,791

 

1,793

International retirement plans

 

4,354

 

4,620

Other long-term liabilities

 

5,916

 

5,947

$

61,385

$

60,500

September 30, 

    

June 30, 

As of

    

2022

    

2022

Accumulated other comprehensive loss

  

  

Derivative instruments

$

27,996

$

20,891

Foreign currency translation adjustment

 

(123,177)

 

(119,034)

Unrecognized net pension losses

 

(24,032)

 

(24,208)

Provision for income taxes on derivative instruments

 

(7,057)

 

(5,281)

Benefit for income taxes on long-term intercompany investments

8,166

8,166

Provision for income taxes on net pension losses

(1,691)

(1,647)

$

(119,795)

$

(121,113)

5.  Debt

Term Loans and Revolving Credit Facilities

In April 2021, we entered into an amended and restated credit agreement (the “2021 Credit Agreement”) under which we have a term A loan in an aggregate initial principal amount of $300,000 (the “2021 Term A Loan”) and a revolving credit facility under which we can borrow up to an aggregate amount of $250,000, subject to the terms of the 2021 Credit Agreement (the “2021 Revolver” and together with the 2021 Term A Loan, the “2021 Credit Facilities”).

The 2021 Term A Loan is repayable in quarterly installments, with the balance payable at maturity. The 2021 Revolver contains a letter of credit facility. The interest rate per annum applicable to the loans under the 2021 Credit Facilities is based on a fluctuating rate of interest plus an applicable rate 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 rates are based on the First Lien Net Leverage Ratio (as defined in the 2021 Credit Agreement). The 2021 Credit Facilities mature in April 2026.

The 2021 Credit Agreement requires, among other things, compliance with financial covenants that permit: (i) a maximum First Lien Net Leverage Ratio of 4.00:1.00 and (ii) a minimum interest coverage ratio of 3.00:1.00, each calculated on a trailing four-

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quarter basis. The 2021 Credit Agreement contains an acceleration clause should an event of default (as defined in the 2021 Credit Agreement) occur. As of September 30, 2022, we were in compliance with the financial covenants.

As of September 30, 2022, we had $171,000 in borrowings drawn under the 2021 Revolver and had outstanding letters of credit of $2,479, leaving $76,521 available for further borrowings and letters of credit under the 2021 Revolver, subject to restrictions in our 2021 Credit Facilities. We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The terms of these letters of credit are all less than one year.

In July 2017, we entered into an interest rate swap agreement on $150,000 of notional principal that effectively converted the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325%. The agreement matured in June 2022. We designated the interest rate swap as a highly effective cash flow hedge. For additional details, see “Note 8 — Derivatives.”

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 0.62%. In July 2022, this agreement increased to a notional principal amount of $300,000 through June 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.62%. We designated the interest rate swap as a highly effective cash flow hedge. For additional details, see “Note 8 — Derivatives.”

As of September 30, 2022, the interest rates for the 2021 Revolver and the 2021 Term A Loan were 4.56% and 2.37%, respectively. The weighted-average interest rates for the 2021 Revolver were 3.92% and 1.83% for the three months ended September 30, 2022 and 2021, respectively. The weighted-average interest rates for the 2021 Term A Loan were 2.37% and 2.98% for three months ended September 30, 2022 and 2021, respectively.

Other Long-Term Debt

In September 2022, we entered into a credit agreement (the “2022 Term Loan”) in the amount of $12,000, collateralized by certain facilities. The 2022 Term Loan matures in September 2027. The interest rate per annum applicable to the 2022 Term Loan is based on a fluctuating rate of interest, at the Company’s election from time to time, equal to either (i) one-month Adjusted SOFR plus 1.0%, or (ii) a base rate determined by reference to the greater of (a) the prime rate and (b) the Federal Funds Effective Rate plus 0.5%. The 2022 Term Loan is repayable in monthly installments of $35, with the balance payable at maturity. The initial interest rate was 5.37%.

Maturities of Long-Term Debt

    

September 30, 

    

June 30, 

As of

2022

2022

2021 Term A Loan due April 2026

$

285,000

$

288,750

2022 Term Loan due September 2027

 

12,000

 

-

 

297,000

 

288,750

Unamortized debt issuance costs

 

(842)

 

(825)

 

296,158

 

287,925

Less: current maturities

 

(15,420)

 

(15,000)

$

280,738

$

272,925

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6.  Related Party Transactions

Certain relatives of Jack C. Bendheim, our Chairman, President and Chief Executive Officer, provided services to the Company as employees or consultants and received aggregate compensation and benefits of approximately $780 and $829 during the three months ended September 30, 2022 and 2021, respectively. Mr. Bendheim has sole authority to vote shares of our stock owned by BFI Co., LLC, an investment vehicle of the Bendheim family.

7.  Commitments and Contingencies

Environmental

Our operations and properties are subject to extensive federal, state, local and foreign laws and regulations, including those governing pollution; protection of the environment; the use, management, and release of hazardous materials, substances and wastes; air emissions; greenhouse gas emissions; water use, supply and discharges; the investigation and remediation of contamination; the manufacture, distribution, and sale of regulated materials, including pesticides; the importing, exporting and transportation of products; and the health and safety of our employees (collectively, “Environmental Laws”). As such, the nature of our current and former operations exposes us to the risk of claims with respect to such matters, including fines, penalties, and remediation obligations that may be imposed by regulatory authorities. Under certain circumstances, we might be required to curtail operations until a particular problem is remedied. Known costs and expenses under Environmental Laws incidental to ongoing operations, including the cost of litigation proceedings relating to environmental matters, are included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under Environmental Laws or to investigate or remediate potential or actual contamination, and from time to time we establish reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under Environmental Laws and the period during which such costs are likely to be incurred are difficult to predict.

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

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

The United States Environmental Protection Agency (the “EPA”) is investigating and planning for the remediation of offsite contaminated groundwater that has migrated from the Omega Chemical Corporation Superfund Site (“Omega Chemical Site”), which is upgradient of the Santa Fe Springs, California facility of our subsidiary, Phibro-Tech, Inc. (“Phibro-Tech”). The EPA has entered into a settlement agreement with a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling (“OPOG”) to remediate the contaminated groundwater that has migrated from the Omega Chemical Site in accordance with a general remedy selected by EPA. The EPA has named Phibro-Tech and certain other subsidiaries of PAHC as potentially responsible parties (“PRPs”) due to groundwater contamination from Phibro-Tech’s Santa Fe Springs facility that has allegedly commingled with contaminated groundwater from the Omega Chemical Site. In September 2012, the EPA notified approximately 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. PAHC and Phibro-Tech have vigorously contested this position and have

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

asserted that the successor to the prior owner is required to indemnify Phibro-Tech for its potential liability and defense costs. Furthermore, several members of OPOG filed a complaint under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and the Resource Conservation and Recovery Act in the United States District Court for the Central District of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for contribution toward past and future costs associated with the investigation and remediation of the groundwater plume affected by the Omega Chemical Site, and the United States Department of Justice, on behalf of the EPA, sent Phibro-Tech and certain other PRPs a pre-litigation notice letter in August 2022 regarding potential CERCLA Sec. 107 cost recovery claims seeking unrecovered past costs related to the groundwater plume affected by the Omega Chemical Site, along with a declaration allocating liability for future costs. 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 $4,293 and $4,287 at September 30, 2022, and June 30, 2022, 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 various claims and lawsuits arising out of the normal course of business including product liabilities, payment disputes and governmental regulation. Certain of these actions seek damages in various amounts. In many cases, such claims are covered by insurance. We believe that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, cash flows or liquidity.

Development Agreements

We have entered into various licensing agreements for the development, manufacture and commercialization of certain companion animal products. Under the agreements, we may be liable for future payments upon the achievement of certain development milestones and as a percentage of net sales.

8.  Derivatives

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

We routinely assess whether the derivatives used to hedge transactions are effective. If we determine a derivative no longer is an effective hedge, we discontinue hedge accounting in the period of the assessment for that derivative, and immediately recognize any unrealized gains or losses related to the fair value of that derivative in the consolidated statements of operations.

We record derivatives at fair value in the consolidated balance sheets. For additional details regarding fair value, see “Note 9 — Fair Value Measurements.”

In July 2017, we entered into an interest rate swap agreement on the first $150,000 of notional principal that effectively converted the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325%. The

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

agreement matured in June 2022. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.62%. The March 2020 agreement increased the notional principal amount of $300,000 beginning in June 2022 and is in effect through June 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.62%.

We have entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The individual option contracts mature monthly through August 2023. The forecasted inventory purchases are probable of occurring and the individual option contracts were designated as highly effective cash flow hedges.

The consolidated balance sheet includes the net fair values of our outstanding foreign currency option contracts within the respective line items, based on the net financial position and maturity date of the individual contracts. The consolidated balance sheet includes the net fair values of our outstanding interest rate swaps within the respective balance sheet line items, based on the expected timing of the cash flows. The consolidated balance sheet includes assets and liabilities for the fair values of outstanding derivatives that are designated and effective as cash flow hedges as follows:

September 30, 

June 30, 

As of

    

2022

    

2022

Other current assets

 

  

 

  

Brazil Real options, net

$

434

$

498

Interest rate swaps

 

11,029

 

7,417

Other assets

Brazil Real options, net

104

Interest rate swaps

16,532

12,871

Total Fair Value

 

 

Brazil Real options, net

 

434

 

602

Interest rate swaps

 

27,561

 

20,288

Notional amounts of the derivatives as of the balance sheet date were:

September 30, 

As of

    

2022

Brazil Real call options

R$

58,000

Brazil Real put options

 

R$

(58,000)

Interest rate swaps

$

300,000

The consolidated statements of operations and statements of other comprehensive income (“OCI”) for the periods ended September 30, 2022 and 2021 included the effects of derivatives as follows:

 

Three Months

For the Periods Ended September 30

    

2022

    

2021

Brazil Real options, net

  

 

  

Expense recorded in consolidated statements of operations

$

438

$

428

Consolidated statement of operations - total cost of goods sold

$

163,875

$

149,987

Expense recorded in OCI

$

168

$

767

Interest rate swaps

 

 

(Income) expense recorded in consolidated statements of operations

$

(1,211)

$

868

Consolidated statement of operations - total interest expense, net

$

3,067

$

2,889

Income recorded in OCI

$

(7,273)

$

(738)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We recognize gains and losses related to foreign currency derivatives as a component of cost of goods sold at the time the hedged item is sold. Inventory as of September 30, 2022, included realized net losses of $456 related to matured contracts. We anticipate the net losses included in inventory will be recognized in cost of goods sold within the next eighteen months.

9.  Fair Value Measurements

Short-term investments

Our short-term investments consist of cash deposits held at financial institutions. We consider the carrying amounts of these short-term investments to be representative of their fair value.

Current Assets and Liabilities

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

Contingent Consideration on Acquisitions

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

Debt

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

Derivatives

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

Non-financial assets

Our non-financial assets, which primarily consist of goodwill, other intangible assets, property and equipment, and lease-related ROU assets, are not required to be measured at fair value on a recurring basis, and instead are reported at carrying value in the consolidated balance sheet. Assets and liabilities may be required to be measured at fair value on a non-recurring basis, either upon initial recognition or for subsequent accounting or reporting, including the initial recognition of net assets acquired in a business combination. These fair value measurements involve unobservable inputs that reflect estimates and assumptions that represent Level 3 inputs.

Fair Value of Assets (Liabilities)

As of

September 30, 2022

June 30, 2022

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

Short-term investments

$

10,000

$

$

$

17,000

$

$

Foreign currency derivatives

$

$

434

$

$

$

602

$

Interest rate swaps

$

$

27,561

$

$

$

20,288

$

There were no transfers between levels during the periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10.  Business Segments

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

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

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

    

Three Months

For the Periods Ended September 30

    

2022

    

2021

Net sales

 

 

 

 

 

 

Animal Health

$

154,859

$

141,004

Mineral Nutrition

 

59,646

 

54,432

Performance Products

 

18,016

 

19,229

Total segments

$

232,521

$

214,665

Depreciation and amortization

Animal Health

$

6,911

$

6,420

Mineral Nutrition

 

655

 

639

Performance Products

 

442

 

419

Total segments

$

8,008

$

7,478

Adjusted EBITDA

Animal Health

$

26,964

$

27,637

Mineral Nutrition

 

5,297

 

4,533

Performance Products

 

2,364

 

2,138

Total segments

$

34,625

$

34,308

Reconciliation of income before income taxes to Adjusted EBITDA

Income before income taxes

$

5,417

$

9,595

Interest expense, net

 

3,067

 

2,889

Depreciation and amortization – Total segments

 

8,008

 

7,478

Depreciation and amortization – Corporate

 

442

 

376

Corporate costs

12,491

11,842

Foreign currency losses, net

 

5,200

 

2,128

Adjusted EBITDA – Total segments

$

34,625

$

34,308

September 30, 

    

June 30, 

As of

    

2022

    

2022

Identifiable assets

 

  

 

  

Animal Health

$

650,436

$

654,862

Mineral Nutrition

 

93,988

 

87,379

Performance Products

 

50,926

 

39,490

Total segments

 

795,350

 

781,731

Corporate

 

153,028

 

149,968

Total

$