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

FORM 10-Q

(Mark One)

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_____ to_____

Commission File Number: 001-36410

Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)

	Delaware			13-1840497
	(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

	Glenpointe Centre East, 3rd Floor 300 Frank W. Burr Boulevard, Suite 21 Teaneck, New Jersey (Address of Principal Executive Offices)			07666-6712 (Zip Code)

(201) 329-7300
(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.) Yes ☒ No ☐

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

Large accelerated filer

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Accelerated filer

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Non-accelerated filer

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Smaller reporting company

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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 May 13, 2014, there were 17,442,953 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 21,348,600 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.

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PHIBRO ANIMAL HEALTH CORPORATION

TABLE OF CONTENTS

				Page
	PART I— FINANCIAL INFORMATION
	Item 1. Financial Statements (unaudited)
	Consolidated statements of operations					3
	Consolidated statements of comprehensive income					4
	Consolidated balance sheets					5
	Consolidated statements of cash flows					6
	Consolidated statement of changes in stockholders’ deficit					7
	Notes to the consolidated financial statements					8
	Item 2. Management’s discussion and analysis of financial condition and results of operations					19
	Item 3. Quantitative and qualitative disclosures about market risk					33
	Item 4. Controls and Procedures					33
	PART II—OTHER INFORMATION
	Item 1. Legal proceedings					34
	Item 1A. Risk factors					34
	Item 2. Unregistered sales of equity securities and use of proceeds					34
	Item 3. Defaults upon senior securities					34
	Item 4. Mine safety disclosures					34
	Item 5. Other information					34
	Item 6. Exhibits					34
	SIGNATURES					35

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months								Nine Months
For the Periods Ended March 31	2014				2013				2014				2013
	(unaudited) (in thousands, except per share amounts)
Net sales		$	173,267			$	162,685			$	508,237			$	488,950
Cost of goods sold			120,425				116,929				354,727				358,142
Gross profit			52,842				45,756				153,510				130,808
Selling, general and administrative expenses			35,520				31,295				102,773				88,982
Operating income			17,322				14,461				50,737				41,826
Interest expense			7,805				7,801				23,362				23,516
Interest expense, shareholders			1,005				1,100				3,014				3,247
Interest (income)			(66	)			(26	)			(178	)			(108	)
Foreign currency (gains) losses, net			275				838				2,088				1,132
Other (income) expense, net			—				482				—				528
Income before income taxes			8,303				4,266				22,451				13,511
Provision (benefit) for income taxes			1,933				86				7,936				(5,401	)
Net income		$	6,370			$	4,180			$	14,515			$	18,912
Net income per share – basic and diluted(1)		$	0.21			$	0.14			$	0.48			$	0.62
Weighted average number of shares (1):
basic			30,458				30,458				30,458				30,458
diluted			30,657				30,458				30,525				30,458
Dividends per share(2)		$	0.3628			$	—			$	0.3628			$	0.0435
Weighted average number of shares (2)			68,910				68,910				68,910				68,910

(1) after 0.442-for-1 split
(2) before 0.442-for-1 split

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PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months							Nine Months
For the Periods Ended March 31	2014			2013				2014				2013
	(unaudited) (in thousands)
Net income		$	6,370		$	4,180			$	14,515			$	18,912
Other comprehensive income (loss):
Fair value of derivative instruments			572			274				709				692
Foreign currency translation adjustment			2,373			700				(762	)			232
Unrecognized net pension gains (losses)			249			435				678				1,054
Tax (provision) benefit on other comprehensive income (loss)			221			(287	)			—				(681	)
Other comprehensive income			3,415			1,122				625				1,297
Comprehensive income		$	9,785		$	5,302			$	15,140			$	20,209

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PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of	March 31, 2014
	(unaudited) (in thousands)
ASSETS
Cash and cash equivalents		$	10,979		$	27,369
Accounts receivable, net			107,705			99,137
Inventories			142,804			140,032
Prepaid expenses and other current assets			31,159			29,848
Total current assets			292,647			296,386
Property, plant and equipment, net			107,211			104,422
Intangibles, net			31,412			35,155
Other assets			42,007			38,179
Total assets		$	473,277		$	474,142
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current portion of long-term debt		$	72		$	64
Accounts payable			60,752			57,902
Accrued expenses and other current liabilities			54,513			57,438
Total current liabilities			115,337			115,404
Domestic senior credit facility			42,500			34,000
Long-term debt			297,933			297,666
Long-term debt, shareholders			33,961			33,874
Other liabilities			62,271			62,136
Total liabilities			552,002			543,080
Commitments and contingencies (Note 10)
Common stock, par value $0.0001, 200,000,000 shares authorized; 68,910,000 shares issued and outstanding			7			7
Preferred stock, par value $1.00, 1,000,000 shares authorized; 0 shares issued and outstanding			—			—
Paid-in capital			18,021			42,948
Accumulated deficit			(79,606	)		(94,121	)
Accumulated other comprehensive income (loss)			(17,147	)		(17,772	)
Total stockholders’ deficit			(78,725	)		(68,938	)
Total liabilities and stockholders’ deficit		$	473,277		$	474,142

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PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months
For the Periods Ended March 31	2014				2013
	(unaudited) (in thousands)
OPERATING ACTIVITIES
Net income		$	14,515			$	18,912
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization			15,615				14,277
Amortization of deferred financing costs			798				1,066
Amortization of imputed interest and debt discount			384				336
Deferred income taxes			661				(8,870	)
Foreign currency (gains) losses, net			1,550				518
Other			(374	)			(1,280	)
Changes in operating assets and liabilities:
Accounts receivable			(8,769	)			3,179
Inventories			(3,802	)			(20,360	)
Prepaid expenses and other current assets			(1,168	)			(4,633	)
Other assets			(1,420	)			(535	)
Accounts payable			2,752				(5,506	)
Accrued expenses and other liabilities			(4,112	)			(5,549	)
Net cash provided (used) by operating activities			16,630				(8,445	)
INVESTING ACTIVITIES
Capital expenditures			(14,248	)			(14,203	)
Business acquisition			—				(18,692	)
Sales of assets			110				1,116
Net cash provided (used) by investing activities			(14,138	)			(31,779	)
FINANCING ACTIVITIES
Borrowings under the domestic senior credit facility			145,000				60,000
Repayments of the domestic senior credit facility			(136,500	)			(37,000	)
Payments of long-term debt, capital leases and other			(2,040	)			(5,174	)
Dividend paid to common shareholders			(25,000	)			(3,000	)
Net cash provided (used) by financing activities			(18,540	)			14,826
Effect of exchange rate changes on cash			(342	)			(228	)
Net increase (decrease) in cash and cash equivalents			(16,390	)			(25,626	)
Cash and cash equivalents at beginning of period			27,369				53,900
Cash and cash equivalents at end of period		$	10,979			$	28,274
Supplemental cash flow information
Interest paid		$	32,088			$	32,295
Income taxes paid, net			4,923				6,168
Non-cash investing and financing activities
Capital improvements			1,315				—
Business acquisition			—				4,550
Capital lease additions			29				103

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PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

	Common Stock
	(unaudited) (in thousands)
As of June 30, 2013		$	7	$	—	$	42,948		$	(94,121	)	$	(17,772	)	$	(68,938	)
Comprehensive income:
Net income										14,515						14,515
Other comprehensive income (loss):
Fair value of derivative instruments													709			709
Foreign currency translation adjustment													(762	)		(762	)
Unrecognized net pension gains (losses)													678			678
Comprehensive income																15,140
Dividends paid to common stockholders							(25,000	)								(25,000	)
Compensation expense related to share-based compensation plans							73									73
As of March 31, 2014		$	7	$	—		18,021		$	(79,606	)	$	(17,147	)	$	(78,725	)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

General

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

The unaudited consolidated financial information for the three and nine months ended March 31, 2014 and 2013 is presented on the same basis as the financial statements included in the Company’s registration statement on Form S-1, as amended (File No. 333-194467), which was declared effective on April 10, 2014 (the “Registration Statement”). In the opinion of management, these financial statements include all adjustments necessary for a fair statement of financial position, results of operations and cash flows 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, 2013 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. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Registration Statement.

The consolidated financial statements include the accounts of PAHC and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Certain reclassifications have been made to prior year amounts to conform to current year presentation.

Use of Estimates

Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates include reserves for bad debts, inventory obsolescence, 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, legal and environmental matters and actuarial assumptions related to our pension plans. We regularly evaluate our estimates and assumptions using historical experience and other factors. Our estimates are based on complex judgments, probabilities and assumptions that we believe to be reasonable.

Summary of New Accounting Standards and Significant Accounting Policies

The Company has elected to adopt new accounting standards within the specified effective date established for public companies, where applicable, as opposed to a deferred effective date allowed for emerging growth companies.

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The guidance clarifies when it is appropriate for an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. Early adoption is permitted. The guidance should be

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

applied prospectively to all unrecognized tax benefits that exist at the effective date; however, retrospective application is also permitted. The Company has elected to early adopt the provisions of this pronouncement, and it did not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financials (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting a discontinued operation while enhancing disclosures in this area. Under the new guidance, a disposal of a component of an entity or group of components of an entity that represents a strategic shift that has, or will have, a major effect on operations and financial results is a discontinued operation when any of the following occurs: (i) it meets the criteria to be classified as held for sale, (ii) it is disposed of by sale, or (iii) it is disposed of other than by sale. Also, a business that, on acquisition, meets the criteria to be classified as held for sale is reported in discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations, as well as disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The guidance is effective prospectively for all disposals (or classifications as held for sale) of components of an entity and all businesses that, on acquisition, are classified as held for sale, that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. As this guidance relates to presentation and disclosure, the adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

Our significant accounting policies are described in the notes to the consolidated financial statements included in the Registration Statement. As of March 31, 2014, there have been no material changes to any of the significant accounting policies contained therein.

Subsequent Event

Initial Public Offering

On April 16, 2014, we completed our initial public offering (“IPO”) of 8,333,333 shares of Class A common stock at a price to the public of $15.00 per share. The proceeds to us from this offering were approximately $114,229, after deducting underwriting discounts of approximately $8,438 and offering expenses payable by us of approximately $2,333 (after giving effect to the reimbursement of certain expenses by the underwriters).

Immediately following the consummation of the IPO, there were 38,791,553 total shares outstanding, consisting of 17,442,953 outstanding shares of Class A common stock and 21,348,600 outstanding shares of Class B common stock, after giving effect to the 0.442-for-1 stock split and reclassification of our common stock which took place immediately prior to the completion of the IPO. The shares of Class B common stock have economic rights identical to the shares of Class A common stock and entitle the holders to 10 votes per share on all matters to be voted on by stockholders generally.

Issuance of 2014 Revolving Credit Facility and Term B Loan

On April 16, 2014, Phibro, together with certain of its subsidiaries acting as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as Administrative Agent, Collateral Agent and L/C Issuer and each lender from time to time party thereto (the “Lenders”). Under the Credit Agreement, the Lenders agreed to extend credit to the Company in the form of (i) Term B loan in an aggregate principal amount equal to $290,000 (the “Term B Loan”) and (ii) revolving credit facility in an aggregate principal amount of $100,000 (the “Revolving Credit Facility,” and together with the Term B Loan, the “Credit Facilities”). The Revolving Credit Facility contains a letter of credit facility.

Borrowings under the Revolving Credit Facility bear interest at rates based on the ratio of the Company and its subsidiaries’ net consolidated first lien indebtedness to the Company and its subsidiaries’ consolidated EBITDA for applicable periods specified in the Credit Facilities (the “First Lien Net Leverage

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Ratio”). The interest rate per annum applicable to the loans under the Credit Facilities will be based on a fluctuating rate of interest equal to the sum of an applicable rate and, at the Company’s election from time to time, either (1) a base rate determined by reference to the highest of (a) the rate as publicly announced from time to time by Bank of America as its “prime rate,” (b) the federal funds effective rate plus 0.50% and (c) one-month LIBOR plus 1.00%, or (2) a Eurocurrency rate determined by reference to LIBOR with a term as selected by the Company, of one day or one, two, three or six months (or twelve months or any shorter amount of time if consented to by all of the lenders under the applicable loan). The Revolving Credit Facility has applicable rates equal to 1.75%, in the case of base rate loans, and 2.75%, in the case of LIBOR loans, and the Term B Loan has applicable margins equal to 2.00%, in the case of base rate loans, and 3.00%, in the case of LIBOR loans. Interest on the Term B Loan will be subject to a floor of 1.00% in the case of LIBOR loans.

The maturity dates of the Revolving Credit Facility and the Term B Loan are April 15, 2019 and April 15, 2021, respectively. We issued the Term B Loan at 99.75% of par value, with proceeds of $284,740, after deducting $5,260 of original issue discount and costs related to the issuance of these facilities.

Retirement of 9.25% Senior Notes, Mayflower Term Loan, BFI Term Loan and Domestic Senior Credit Facility

On April 16, 2014, we retired $24,000 of term loan payable to Mayflower due December 31, 2016, $10,000 of term loan payable to BFI due August 1, 2014 and outstanding borrowings under our domestic senior credit facility.

On April 16, 2014, we called for redemption on May 16, 2014 of $300,000 of 9.25% senior notes due July 1, 2018 (the “Senior Notes”), and deposited the necessary funds with the trustee for payment of the principal, accrued interest and redemption premium.

Effect of the Transaction

As a result of the retirement of our prior indebtedness, our consolidated statement of operations for the quarter and year ended June 30, 2014 will include a loss on extinguishment of debt as follows:

Redemption premium	$	17,184
Write-off of original issue discount related to retired Senior Notes and BFI		2,123
Write-off of capitalized debt issuance costs related to retired Senior Notes, Mayflower term loan, BFI term loan and cancelled domestic senior credit facility and other items		4,391
Loss on extinguishment of debt	$	23,698

Net Income per Share and Weighted Average Shares

For purposes of calculating net income per share, we have adjusted the weighted average number of shares for the 0.442-for-1 stock split. For purposes of calculating diluted net income per share, we have assumed a market value of $15.00 per share.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Three Months						Nine Months
For the Periods Ended March 31	2014			2013			2014			2013
Net income		$	6,370		$	4,180		$	14,515		$	18,912
Weighted average number of shares – basic			30,458			30,458			30,458			30,458
Dilutive effect of stock options			158			—			53			—
Dilutive effect of BFI warrant			41			—			14			—
Weighted average number of shares – diluted			30,657			30,458			30,525			30,458
Net income per share:
basic		$	0.21		$	0.14		$	0.48		$	0.62
diluted		$	0.21		$	0.14		$	0.48		$	0.62

For the three and nine month periods ended March 31, 2014, there were no shares excluded from the calculation of diluted net income per share. For the three and nine month periods ended March 31, 2013, the stock options and warrants to purchase 2,519 shares of common stock had an exercise price greater than the market price and were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options and warrants calculated under the treasury stock method would be anti-dilutive.

Revision to Prior Period Consolidated Financial Statements