10-Q 1 t1402033-10q.htm FORM 10-Q
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
  • QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
  • TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to_____
Commission File Number: 001-36410
 
Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
13-1840497
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
Glenpointe Centre East, 3rd Floor
300 Frank W. Burr Boulevard, Suite 21
Teaneck, New Jersey
(Address of Principal Executive Offices)
07666-6712
(Zip Code)
(201) 329-7300
(Registrant’s telephone number, including area code)
 
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
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 6, 2014, there were 17,442,953 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 21,512,275 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)
PART II—OTHER INFORMATION

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
2014
2013
(unaudited)
(in thousands, except per share amounts)
Net sales
$
187,458
$
162,228
Cost of goods sold
127,129
112,716
Gross profit
60,329
49,512
Selling, general and administrative expenses
35,224
33,115
Operating income
25,105
16,397
Interest expense
3,552
7,774
Interest expense, stockholders
1,005
Interest (income)
(62
)
(44
)
Foreign currency (gains) losses, net
(1,204
)
648
Income before income taxes
22,819
7,014
Provision for income taxes
2,338
1,171
Net income
$
20,481
$
5,843
Net income per share
basic
$
0.53
$
0.19
diluted
$
0.52
$
0.19
Weighted average common shares outstanding
basic
38,900
30,458
diluted
39,584
30,458
Dividends per share
$
0.10
$

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months
For the Periods Ended September 30
2014
2013
(unaudited)
(in thousands)
Net income
$
20,481
$
5,843
Fair value of derivative instruments
(429
)
372
Foreign currency translation adjustment
(9,980
)
(132
)
Unrecognized net pension gains (losses)
285
203
(Provision) benefit for income taxes
(224
)
Other comprehensive income (loss)
(10,124
)
219
Comprehensive income
$
10,357
$
6,062

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
As of
September 30,
2014
June 30,
2014
(unaudited)
(in thousands, except share
and per share amounts)
ASSETS
Cash and cash equivalents
$
19,749
$
11,821
Accounts receivable, net
110,756
113,858
Inventories, net
146,382
143,184
Prepaid expenses and other current assets
26,967
30,426
Total current assets
303,854
299,289
Property, plant and equipment, net
105,437
109,159
Intangibles, net
28,710
29,803
Other assets
32,819
34,072
Total assets
$
470,820
$
472,323
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt
$
2,950
$
2,969
Accounts payable
64,544
59,608
Accrued expenses and other current liabilities
39,293
49,861
Total current liabilities
106,787
112,438
Long-term debt
285,713
286,422
Other liabilities
56,710
58,314
Total liabilities
449,210
457,174
Commitments and contingencies (Note 9)
Common stock, par value $0.0001; 300,000,000 Class A shares authorized, 17,442,953 shares issued and outstanding at September 30, 2014 and June 30, 2014; 30,000,000 Class B shares authorized, 21,512,275 and 21,348,600 shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively
4
4
Preferred stock, par value $0.0001; 16,000,000 shares authorized, no shares issued and outstanding
Paid-in capital
128,557
132,453
Accumulated deficit
(76,767
)
(97,248
)
Accumulated other comprehensive income (loss)
(30,184
)
(20,060
)
Total stockholders’ equity
21,610
15,149
Total liabilities and stockholders’ equity
$
470,820
$
472,323

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months
For the Periods Ended September 30
2014
2013
(unaudited)
(in thousands)
OPERATING ACTIVITIES
Net income
$
20,481
$
5,843
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization
5,353
5,201
Amortization of deferred financing costs and debt discount
242
391
Deferred income taxes
(1,003
)
551
Foreign currency (gains) losses, net
(316
)
173
Other
(97
)
(38
)
Changes in operating assets and liabilities:
Accounts receivable, net
1,418
4,822
Inventories, net
(7,499
)
(1,565
)
Prepaid expenses and other current assets
3,472
(2,649
)
Other assets
32
(43
)
Accounts payable
5,432
(5,128
)
Accrued interest
16
(6,927
)
Accrued expenses and other liabilities
(10,171
)
(853
)
Net cash provided (used) by operating activities
17,360
(222
)
INVESTING ACTIVITIES
Capital expenditures
(3,975
)
(4,222
)
Other
15
1
Net cash provided (used) by investing activities
(3,960
)
(4,221
)
FINANCING ACTIVITIES
Borrowings under the domestic senior and revolving credit facility
42,500
Repayments of the domestic senior and revolving credit facility
(28,500
)
Payments of long-term debt, capital leases and other
(861
)
(17
)
Dividends paid
(3,896
)
Net cash provided (used) by financing activities
(4,757
)
13,983
Effect of exchange rate changes on cash
(715
)
(58
)
Net increase (decrease) in cash and cash equivalents
7,928
9,482
Cash and cash equivalents at beginning of period
11,821
27,369
Cash and cash equivalents at end of period
$
19,749
$
36,851
Non-cash investing and financing activities
Capital improvements
1,315

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND 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 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 Phibro and its subsidiaries.
The unaudited consolidated financial information for the three months ended September 30, 2014 and 2013, 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, 2014 (the “Annual Report”). 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, 2014, 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 Annual Report.
The consolidated financial statements include the accounts of Phibro 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.
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, 2014, 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 potential dilutive common shares resulting from the exercise of stock options and warrants. For the period ended September 30, 2013, the stock options and warrants had an exercise price greater than the estimated market value and were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options and warrants was anti-dilutive.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Three Months
For the Periods Ended September 30
2014
2013
Net income
$
20,481
$
5,843
Weighted average number of shares – basic
38,900
30,458
Dilutive effect of all stock options and warrant
684
Weighted average number of shares – diluted
39,584
30,458
Net income per share:
basic
$
0.53
$
0.19
diluted
$
0.52
$
0.19
New Accounting Standards
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, changes the criteria for reporting a discontinued operation while enhancing disclosures. 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. We do not expect adoption of this guidance will have a material effect on our consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), establishes principles for the recognition of revenue from contracts with customers. The underlying principle is to identify the performance obligations of a contract, allocate the revenue to each performance obligation and then to recognize revenue when the company satisfies a specific performance obligation of the contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. The guidance should be applied retrospectively to each prior reporting period presented. We are currently evaluating the impact that adopting this guidance will have on our consolidated financial statements.
ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. Management will need to assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Management will need to consider relevant conditions that are known and reasonably knowable at the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. Under the new standard, the definition of substantial doubt incorporates a likelihood threshold of “probable” similar to the current use of that term in U.S. Generally Accepted Accounting Principles (“GAAP”) for loss contingencies. ASU 2014-15 will be effective for annual periods ending after December 15, 2016. Earlier adoption is permitted. We do not expect adoption of this guidance will have a material effect on our consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3.
  • Statements of Operations—Additional Information
 
Three Months
For the Periods Ended September 30
2014
2013
Depreciation and amortization
Depreciation of property, plant and equipment
$
4,228
$
3,852
Amortization of intangible assets
1,069
1,349
Amortization of other assets
56
$
5,353
$
5,201
4.
  • Balance Sheets—Additional Information
 
As of
September 30,
2014
June 30,
2014
Inventories
Raw materials
$
53,419
$
44,306
Work-in-process
7,508
7,518
Finished goods
85,455
91,360
$
146,382
$
143,184
 
As of
September 30,
2014
June 30,
2014
Goodwill roll-forward
Balance at beginning and end of period
$
12,613
$
12,613
Accrued expenses and other current liabilities
Employee related accruals
$
15,636
$
20,813
Commissions and rebates
3,230
2,973
Insurance related
1,366
1,395
Professional fees
3,260
4,229
Deferred consideration on acquisitions
1,449
1,420
Product liability claims
5,286
Other accrued liabilities
14,352
13,745
$
39,293
$
49,861
 
As of
September 30,
2014
June 30,
2014
Accumulated other comprehensive income (loss)
Derivative instruments
$
(43
)
$
386
Foreign currency translation adjustment
(11,389
)
(1,409
)
Unrecognized net pension gains (losses)
(16,378
)
(16,663
)
Income tax (provision) benefit on derivative instruments
63
63
Income tax (provision) benefit on pension gains (losses)
(2,437
)
(2,437
)
$
(30,184
)
$
(20,060
)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.
  • Debt
Revolving Credit Facility and Term B Loan
Borrowings under the Revolving Credit Facility and Term B Loan (the “Credit Facilities”) bear interest based on a fluctuating rate equal to the sum of an applicable margin and, at the Company’s election from time to time, either (1) 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), or (2) 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%. The Revolving Credit Facility has applicable margins equal to 2.50% or 2.75% in the case of LIBOR loans and 1.50% or 1.75% in the case of base rate loans; the applicable margins are based on the First Lien Net Leverage Ratio (as defined in the agreement). The Term B Loan has applicable margins equal to 3.00% in the case of LIBOR loans and 2.00% in the case of base rate loans. The LIBOR rate on the Term B Loan is subject to a floor of 1.00%. The rate of interest on the Term B Loan was 4.00% at September 30, 2014.
As of September 30, 2014, we had no outstanding borrowings under the Revolving Credit Facility and had outstanding letters of credit and other commitments of $17,140, leaving $82,860 available for borrowings and letters of credit under the Revolving Credit Facility. 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.
The Revolving Credit Facility requires, among other things, the maintenance of a maximum consolidated First Lien Net Leverage Ratio calculated on a trailing four quarter basis, and contains an acceleration clause should an event of default (as defined in the agreement) occur. The permitted maximum ratio is 4.50:1.00 for measurement periods through June 30, 2015, and 4.25:1.00 for measurements periods thereafter. As of September 30, 2014, we were in compliance with the covenants of the Credit Facilities.
Long-Term Debt
 
As of
September 30,
2014
June 30,
2014
Term B loan due April 15, 2021
$
289,275
$
290,000
Capitalized lease obligations
65
94
289,340
290,094
Unamortized debt discount
(677
)
(703
)
288,663
289,391
Less: current maturities
(2,950
)
(2,969
)
$
285,713
$
286,422
6.
  • Warrant and Dividends
Class B Common Stock Warrant
On August 1, 2014, a common stock purchase warrant for the purchase of 386,750 shares of Class B common stock, held by BFI Co., LLC (“BFI”), was automatically exercised at the exercise price of $11.83 per share on a cashless basis, resulting in a net issuance of 163,675 shares of Class B common stock to BFI.
Dividends
In September 2014, we paid a $0.10 per share dividend to holders of our Class A and Class B common stock. We intend to pay regular quarterly dividends to holders of our Class A and Class B common stock out of assets legally available for this purpose. Our future ability to pay dividends will

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.
7.
  • Employee Benefit Plans
The Company maintains a noncontributory defined benefit pension plan for all domestic nonunion employees employed on or prior to December 31, 2013, who meet certain requirements of age, length of service and hours worked per year. Plan benefits are based upon years of service and average compensation, as defined within the plan.
Net periodic pension expense was:
 
Three Months
For the Periods Ended September 30
2014
2013
Service cost – benefits earned during the period
$
821
$
704
Interest cost on benefit obligation
734
641
Expected return on plan assets
(766
)
(698
)
Amortization of net actuarial (gain) loss and prior service costs
286
203
Net periodic pension expense
$
1,075
$
850
8.
  • Income Taxes
The tax provision is comprised primarily of income taxes relating to profitable foreign jurisdictions, partially offset by a benefit of $1,218 from the recognition of certain previously unrecognized tax benefits. The provision for income taxes on domestic pre-tax income was substantially offset by the release of a valuation allowance previously recorded on accumulated domestic net operating losses. The Company continues to maintain a full valuation allowance against net deferred tax assets from domestic and certain foreign jurisdictions.
We have not provided for United States or additional foreign taxes on undistributed earnings of foreign subsidiaries, which earnings have been or are intended to be indefinitely reinvested. It is not practicable at this time to determine the amount of income tax liability that would result should such earnings be repatriated. Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
9.
  • 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 generally 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

remediate potential or actual contamination and from time to time we establish reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under Environmental Laws and the time period during which such costs are likely to be incurred are difficult to predict.
While we believe that our operations are currently in material compliance with Environmental Laws, we have, from time to time, received notices of violation from governmental authorities, and have been involved in civil or criminal action for such violations. Additionally, at various sites, our subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with historic operations of the sites. We devote considerable resources to complying with Environmental Laws and managing environmental liabilities. We have developed programs to identify requirements under, and maintain compliance with Environmental Laws; however, we cannot predict with certainty the effect of increased and more stringent regulation on our operations, future capital expenditure requirements, or the cost of compliance.
The nature of our current and former operations exposes us to the risk of claims with respect to environmental matters and we cannot assure you we will not incur material costs and liabilities in connection with such claims. Based upon our experience to date, we believe that the future cost of compliance with existing Environmental Laws, and liabilities for known environmental claims pursuant to such Environmental Laws, will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
The U.S. 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 Phibro-Tech’s Santa Fe Springs, California facility. 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 groundwater contamination at its site is due to historical operations that pre-date Phibro-Tech and/or contaminated groundwater that has migrated from upgradient properties. In addition, a successor to a prior owner of the Phibro-Tech site has asserted that PAHC and Phibro-Tech are obligated to provide indemnification for its potential liability and defense costs relating to the groundwater plume affected by the Omega Chemical Site. Phibro-Tech has vigorously contested this position and has asserted that the successor to the prior owner is required to indemnify Phibro-Tech for its potential liability and defense costs. Furthermore, a nearby property owner has filed a complaint in the Superior Court of the State of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for alleged contamination of groundwater underneath its property; a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling has filed a complaint under CERCLA 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 that same group of companies has served Phibro-Tech with a Notice of Endangerment and Intent to Sue Pursuant to RCRA § 7002(a)(1)(B) seeking to abate alleged imminent and substantial endangerment to health or the environment resulting from the lack of adequate offsite monitoring and groundwater source control associated with former and/or continuing operations at Phibro-Tech’s Santa Fe Springs facility. Due to the ongoing nature of the EPA’s investigation 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

problems at operating sites, closed sites and third-party sites, and closure costs for closed sites, to be approximately $7,044 and $7,273 at September 30, 2014, and June 30, 2014, 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 is liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible.
Claims and Litigation
PAHC and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities, payment disputes and governmental regulation. Certain of these actions seek damages in various amounts. In many cases, such claims are covered by insurance. We believe that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
10.
  • Derivatives
We monitor our exposure to commodity prices, interest rates and foreign currency exchange rates, and 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). We record the portion of the changes in the expected cash flows related to a recognized asset or liability (the effective portion) in accumulated other comprehensive income (loss). As the hedged item is realized, we report the gain or loss included in accumulated other comprehensive income (loss) in the consolidated statements of operations on the same line as the hedged item. We immediately recognize in the consolidated statements of operations in the same line as the hedged item, the portion of the changes in fair value of derivatives used as cash flow hedges that is not offset by changes in the expected cash flows related to a recognized asset or liability (the ineffective portion).
We routinely assess whether the derivatives used to hedge transactions are effective. If we determine a derivative ceases to be an effective hedge, we discontinue hedge accounting, and recognize in the consolidated statements of operations, in the period the derivative no longer qualifies as a hedge, any gains or losses on the derivative.
We record derivatives at fair value in prepaid expenses and other current assets in the consolidated balance sheets. We determine the fair value of derivative instruments based upon pricing models using observable market inputs for these types of financial instruments (level 2 inputs per ASC 820).
At September 30, 2014, the following outstanding derivatives were designated and effective as cash flow hedges:
 
Instrument
Hedge
Notional
Amount at
September 30,
2014
Fair value as of
September 30,
2014
June 30,
2014
Options
Brazilian Real calls
R$78,000
$
174
$
432
Options
Brazilian Real puts
(R$78,000
)
$
(217
)
$
(46
)
The unrecognized gains (losses) at September 30, 2014, are unrealized and will change depending on future exchange rates until the underlying contracts mature. Of the ($43) of unrecognized gains (losses) on derivative instruments included in accumulated other comprehensive income (loss) at September 30, 2014, we anticipate ($43) of the current fair value would be recorded in earnings within the next twelve months. We recognize gains (losses) on derivative instruments as a component of cost of goods sold when the hedged item is sold. We hedge forecasted transactions for periods not exceeding the next twenty-four months.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.
  • Fair Value Measurements
In assessing the fair value of financial instruments at September 30, 2014, we used a variety of methods and assumptions which were based on estimates of market conditions and risks existing at the time.
Current Assets and Liabilities
We consider the carrying amounts of current assets and current liabilities, except the current portion of long-term debt, to be representative of their fair value because of the current nature of these items.
Long Term Debt
We estimated the fair value of the Term B Loan based on quoted broker prices (level 2 inputs per ASC 820).
 
As of
September 30,
2014
June 30,
2014
Fair values
Term B Loan
$
285,659
$
289,638
12.
  • Business Segments
The Animal Health segment manufactures and markets products for the poultry, swine, cattle, dairy, aquaculture and ethanol markets. The business includes net sales of medicated feed additives and other related products, nutritional specialty products and vaccines. The Mineral Nutrition segment manufactures and markets trace minerals for the cattle, swine, poultry and pet food markets. The Performance Products segment manufactures and markets a variety of products for use in the personal care, automotive, industrial chemical and chemical catalyst industries.
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. We do not allocate such items to the principal segments because they are not used to evaluate their operating results or financial position. Corporate costs include the departmental operating costs of the Board of Directors, the Chairman, President and Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, the Senior Vice President and General Counsel, the Senior Vice President of Human Resources, the Chief Information Officer and the Executive Vice President of Corporate Strategy. Costs include the executives and their staffs and include compensation and benefits, outside services, professional fees and office space. Assets include cash and cash equivalents, debt issue costs and certain other assets.
We evaluate performance of our segments based on Adjusted EBITDA. We define Adjusted EBITDA as EBITDA plus (a) (income) loss from, and disposal of, discontinued operations, (b) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (c) certain items that we consider to be unusual or non-recurring. We define EBITDA as net income plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes and (iii) depreciation and amortization.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in the “—Summary of Significant Accounting Policies and New Accounting Standards.”

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Three Months
For the Periods Ended September 30
2014
2013
Net sales
Animal Health
$
117,225
$
101,171
Mineral Nutrition
55,447
46,186
Performance Products
14,786
14,871
$
187,458
$
162,228
Adjusted EBITDA
Animal Health
$
32,454
$
24,107
Mineral Nutrition
3,479
2,460
Performance Products
1,036
1,096
Corporate
(6,511
)
(6,065
)
$
30,458
$
21,598
Reconciliation of Adjusted EBITDA to income before income taxes
Adjusted EBITDA
$
30,458
$
21,598
Depreciation and amortization
(5,353
)
(5,201
)
Interest expense, net
(3,490
)
(8,735
)
Foreign currency gains (losses), net
1,204
(648
)
Income before income taxes
$
22,819
$
7,014
 
As of
September 30,
2014
June 30,
2014
Identifiable assets