PAHC US Equity☆

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Introduction

Our management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. This MD&A should be read in conjunction with the “Selected Financial Data” and our consolidated financial statements and related notes thereto included under the section entitled “Financial Statements and Supplementary Data.” Our future results could differ materially from our historical performance as a result of various factors such as those discussed in “Risk Factors” and “Forward-Looking Statements.”

Overview of our business

Phibro Animal Health Corporation is a global diversified animal health and mineral nutrition company. We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle and aquaculture. Our products help prevent, control and treat diseases, enhance nutrition to help improve health and performance and contribute to balanced mineral nutrition. In addition to animal health and mineral nutrition products, we manufacture and market specific ingredients for use in the personal care, industrial chemical and chemical catalyst industries. We sell more than 1,600 product presentations in over 75 countries to approximately 3,700 customers.

Factors affecting our performance

Effects of the COVID-19 pandemic

During the three months ended June 30, 2020, the global food animal industry experienced unprecedented demand disruption and production impacts due to the COVID-19 pandemic. The downstream effects from the demand disruption, production impacts and broader changes in economic conditions caused a decline in the demand for our products during the quarter ended June 30, 2020.

Phibro is an integral participant in the essential production of meat, milk, eggs and fish for human consumption. In the face of the pandemic, we have focused on the safety of our employees, while continuing to supply our customers. Our global production facilities have continued to operate without interruption, despite supply chain and logistical challenges. Our sales and technical service people remain in close virtual contact with our customers, as most travel and in-person meetings have been cancelled. Most of our administrative and management staff are working remotely. We are experiencing some cost increases from the safety measures implemented to protect our employees as well as from supply chain disruptions. We have maintained headcount and compensation at constant levels. We are closely monitoring sales trends, cash flow and liquidity.

We experienced a short-term decline in demand for our products during the quarter ended June 30, 2020, due to the pandemic, primarily in the Animal Health segment. The animal production industry faced unprecedented demand disruptions, production impacts, price declines and currency volatility in international markets. Animal producers rapidly adjusted the number of animals and amount of milk being produced. The industry continues to adjust and has partially recovered from the disruptions, but has not yet returned to typical levels.

The effects COVID-19 will have on our consolidated results going forward and the broader economic environment are uncertain. The demand for our products will be dependent upon economic conditions and the ability of our customers and end users of our products to operate their businesses and production facilities, among other factors. Our future operational results may be impacted by government mandated

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response efforts, supply chain and manufacturing disruptions, increased volatility in raw material costs and decreased demand due to changes in our customer purchasing patterns and preferences. We are unable to predict with certainty the nature and timing of when any of these events may occur. We will continue to evaluate the nature and extent of the effects of COVID-19 on our business, consolidated results of operations, financial condition, and liquidity. For additional considerations and risks associated with COVID-19 on our business, please refer to the updates to Item 1A. “Risk Factors.”

Industry growth

According to Vetnosis, the global livestock animal health sector represented approximately $19.7 billion of sales in 2019. The market is projected to grow at a compound annual growth rate of approximately 2.2% per year between 2019 and 2024. We believe global population growth, the growth of the global middle class and the productivity improvements needed due to limitations of arable land and water supplies have supported and will continue to support this growth.

Regulatory Developments

Our business depends heavily on a healthy and growing livestock industry. Some in the public perceive risks to human health related to the consumption of food derived from animals that utilize certain of our products, including certain of our MFA products. In particular, there is increased focus, in the United States and other countries, on the use of medically important antimicrobials. As defined by the FDA, medically important antimicrobials (“MIAs”) include classes that are prescribed in animal and human health and are listed in the Appendix of the FDA-CVM Guidance for Industry (GFI) 152. Our products that contain virginiamycin, oxytetracycline or neomycin are classified by the FDA as medically important antimicrobials. In addition to the United States, the World Health Organization (WHO), the E.U., Australia and Canada have promulgated rating lists for antimicrobials that are used in veterinary medicine and that include certain of our products.

The classification of our products as MIAs or similar listings may lead to a decline in the demand for and production of food products derived from animals that utilize our products and, in turn, demand for our products. Livestock producers may experience decreased demand for their products or reputational harm as a result of evolving consumer views of nutrition and health-related concerns, animal rights, and other concerns. Any reputational harm to the livestock industry may also extend to companies in related industries, including us. In addition, campaigns by interest groups, activists and others with respect to perceived risks associated with the use of our products in animals, including position statements by livestock producers and their customers based on non-use of certain medicated products in livestock production, whether or not scientifically-supported, could affect public perceptions and reduce the use of our products. Those adverse consumer views related to the use of one or more of our products in animals could have a material adverse effect on our financial condition and results of operations.

In April 2016, the FDA began initial steps to withdraw approval of Mecadox (carbadox) via a regulatory process known as a Notice of Opportunity for Hearing (“NOOH”), due to concerns that certain residues from the product may persist in tissues for longer than previously determined. The NOOH process provided Phibro with an opportunity to defend the safety of Mecadox prior to the FDA taking final steps to remove Mecadox from the market. Over the next four years, as part of an ongoing process of responding to CVM’s inquiries, we provided extensive and meticulous research and data that confirmed the safety of carbadox. In March 2018, the FDA indefinitely stayed the withdrawal proceedings. In July 2020, the FDA published a notice in the Federal Register that it does not agree with Phibro’s scientific conclusions that carbadox is safe under the current conditions of use. Instead of proceeding to a hearing on the scientific concerns raised in the 2016 NOOH, as would be the normal regulatory procedure, the FDA announced that it was withdrawing the current NOOH, and issuing a proposed order to review the regulatory method for carbadox. The approved regulatory method determines if there are residues of carcinogenic concern in animal tissue at the time of slaughter. If the order (after the 60-day comment period) is finalized, the FDA has indicated it plans to issue a new NOOH proposing the withdrawal of carbadox from the market because of lack of an approved regulatory method. The 60-day comment period ends September 18, 2020. Phibro disagrees with the agency’s actions and has submitted a request to the FDA Office of the Commissioner that the agency continue the process it started in 2016 and proceed with a hearing to review the substantial

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body of data supporting the safety of carbadox. We have complete confidence in the safety of Mecadox. Mecadox has been approved and sold in the United States for more than 45 years and is a widely used treatment for controlling bacterial diseases including Salmonella and swine dysentery. Mecadox is not used in human medicine and the class of drug is not considered a medically important antimicrobial. The approved Mecadox label requires a 42-day withdrawal period pre-harvesting, and to date we have not seen any hazardous residues of carbadox being detected from pig meat treated in accordance with the approved label. Should we be unable to successfully defend the safety of the product, the loss of Mecadox sales would have an adverse effect on our financial condition and results of operations. As of the date of this Annual Report on Form 10-K, Mecadox continues to be available for use by swine producers.

Our global sales of antibacterials, anticoccidials and other products were $322 million, $350 million and $337 million for the years ended June 30, 2020, 2019 and 2018, respectively. Mecadox sales of $17 million are included in the preceding amount disclosed for the year ended June 30, 2020.

Competition

The animal health industry is highly competitive. We believe many of our competitors are conducting R&D activities in areas served by our products and in areas in which we are developing products. Our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses. In addition to competition from established participants, there could be new entrants to the animal health medicines and vaccines industry in the future. Principal methods of competition vary depending on the region, species, product category or individual products, including reliability, reputation, quality, price, service and promotion to veterinary professionals and livestock producers.

Foreign exchange

We conduct operations in many areas of the world, involving transactions denominated in a variety of currencies. For the year ended June 30, 2020, we generated approximately 41% of our revenues from operations outside the United States. Although a portion of our revenues are denominated in various currencies, the selling prices of the majority of our sales outside the United States are referenced in U.S. dollars, and as a result, our revenues have not been significantly directly affected by currency movements. We are subject to currency risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. We manufacture some of our major products in Brazil and Israel and production costs are largely denominated in local currencies, while the selling prices of the products are largely set in U.S. dollars. As such, we are exposed to changes in cost of goods sold resulting from currency movements and may not be able to adjust our selling prices to offset such movements. In addition, we incur selling and administrative expenses in various currencies and are exposed to changes in such expenses resulting from currency movements. Because our financial statements are reported in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations.

Climate

The animal health industry and demand for many of our animal health products in a particular region are affected by changing disease pressures and by weather conditions, as usage of our products follows varying weather patterns and weather-related pressures from diseases. As a result, we may experience regional and seasonal fluctuations in our results of operations.

In addition, livestock producers depend on the availability of natural resources, including abundant rainfall to sustain large supplies of drinking water, grasslands and grain production. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, livestock producers may purchase less of our products.

Product development initiatives

Our future success depends on our existing product portfolio, including additional approvals for new claims for our products, for use of our products in new markets, for use of our products with new species

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and for cross-clearances enabling the use of our medicated products in conjunction with other products. Our future success also depends on our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition. The majority of our R&D programs focus on product lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations. We commit substantial effort, funds and other resources to expanding our product approvals and R&D, both through our own dedicated resources and through collaborations with third parties. We also commit significant resources to development of new vaccine technologies. We currently are working to develop a potential vaccine for African Swine Fever, a virulent disease that is highly lethal in swine. We also have developed an innovative, automated vaccination delivery system that insures vaccination injection accuracy, enables real-time oversight and offers data analytics to optimize the management of the vaccination process.

Analysis of the consolidated statements of operations

Summary Results of Operations

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

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Ratio to net sales ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Certain amounts and percentages may reflect rounding adjustments.

*

Calculation not meaningful

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Changes in net sales from period to period primarily result from changes in volumes and average selling prices. Although a portion of our net sales is denominated in various currencies, the selling prices of the majority of our sales outside the United States are referenced in U.S. dollars, and as a result, currency movements have not significantly directly affected our revenues.

Our effective income tax rate has varied from period to period and from the federal statutory rate, due to the mix of taxable profits in various jurisdictions; changes in tax rates from period to period, including changes in income tax legislation in the United States and various international jurisdictions; and the effects of certain other items. Our future effective income tax rate will vary due to the relative amounts of taxable income in various jurisdictions, future changes in tax rates and legislation and other factors. We intend to continue to reinvest indefinitely the undistributed earnings of our foreign subsidiaries where we could be subject to applicable non-U.S. income and withholding taxes if amounts are repatriated to the U.S. See “Notes to Consolidated Financial Statements — Income Taxes” for additional information.

Net sales, Adjusted EBITDA and reconciliation of GAAP net income to Adjusted EBITDA

We report Net sales and Adjusted EBITDA by segment to understand the operating performance of each segment. This enables us to monitor changes in net sales, costs and other actionable operating metrics at the segment level. See “— General description of non-GAAP financial measures” for descriptions of EBITDA and Adjusted EBITDA.

Segment net sales and Adjusted EBITDA:

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Net sales ​ ​ ​ ​ ​ ​ ​ ​

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

​ ​ ​ (in thousands) ​

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(1)

Reflects ratio to total net sales.

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A reconciliation of net income, as reported under GAAP, to Adjusted EBITDA:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

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Certain amounts and percentages may reflect rounding adjustments.

*

Calculation not meaningful

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Comparison of the years ended June 30, 2020 and 2019

Net sales

Net sales of $800.4 million for the year ended June 30, 2020, decreased $27.6 million, or 3%, as compared to the year ended June 30, 2019. Animal Health, Mineral Nutrition and Performance Products sales declined $5.1 million, $19.4 million and $3.2 million, respectively.

Animal Health

Net sales of $526.9 million for the year ended June 30, 2020, decreased $5.1 million, or 1%. Net sales of MFAs and other declined $28.2 million, or 8%, due to a $30.9 million sales decline in China driven by the effects of African Swine Fever and regulatory changes. Net sales of nutritional specialty products grew $16.0 million, or 14%, due to volume growth in poultry and dairy products. The recent Osprey acquisition accounted for approximately two-thirds of the nutritional specialty sales growth. Net sales of vaccines increased $7.0 million, or 10%, due to international demand and increased market penetration. Excluding a domestic distribution arrangement that was terminated in October 2018, net sales of vaccines would have increased approximately 14%.

We experienced a short-term decline in demand for our products during the quarter ended June 30, 2020 due to the COVID-19 pandemic, primarily in the Animal Health segment. The animal production industry faced unprecedented demand disruptions, production impacts, price declines and currency volatility in international markets. Animal producers rapidly adjusted the number of animals and amount of milk being produced.

Mineral Nutrition

Net sales of $214.4 million for the year ended June 30, 2020, decreased $19.4 million, or 8%, primarily driven by lower average selling prices. The decline in average selling prices is correlated with the movement of the underlying raw material costs.

Performance Products

Net sales of $59.0 million for the year ended June 30, 2020, decreased $3.2 million, or 5%. The decline was driven by lower volumes of copper-based products partially offset by increased volumes of personal care ingredients.

Gross profit

Gross profit of $256.9 million for the year ended June 30, 2020, decreased $7.7 million, or 3%, as compared to the year ended June 30, 2019. Gross profit as a percentage of net sales for the year ended June 30, 2020, increased to 32.1% as compared to 32.0% for the year ended June 30, 2019. The year ended June 30, 2020, included $0.3 million of acquisition-related cost of goods sold.

Animal Health gross profit decreased $6.0 million due to volume declines in MFAs and other, partially offset by volume growth in nutritional specialty and vaccine products. In the Animal Health segment, unfavorable product mix contributed to a lower gross profit ratio compared to the prior year. Mineral Nutrition gross profit decreased $0.7 million, as declines in average selling prices outpaced favorable raw material costs and increased unit volumes. Performance Products gross profit decreased $0.7 million due to lower overall volume.

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) of $187.7 million for the year ended June 30, 2020, increased $6.3 million, or 3%, as compared to the year ended June 30, 2019. SG&A for the year ended June 30, 2020, included $0.4 million of restructuring costs, $0.5 million of acquisition-related transaction costs and a $2.8 million benefit from acquisition-related other, primarily as a result of a reduction to acquisition-related contingent consideration. SG&A for the year ended June 30, 2019, included $6.3 million

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of restructuring costs, $0.2 million of acquisition-related transaction costs and a $1.5 million benefit from the cancellation of a certain business arrangement. Excluding the effects of these costs, SG&A increased $13.2 million, or 8%.

Animal Health SG&A increased $10.8 million, including increased investments in product development and the effect of the Osprey acquisition. Mineral Nutrition SG&A increased $0.5 million due to increased employee-related costs. Performance Products SG&A increased $0.2 million. Corporate expenses increased $1.7 million due to increased costs of strategic initiatives and public company costs. The restructuring costs, acquisition-related transaction costs, acquisition-related other items and the benefit in the prior year from the cancellation of a certain business arrangement resulted in a net $6.9 million decrease to SG&A.

Interest expense, net

Interest expense, net of $12.9 million for the year ended June 30, 2020, increased $1.1 million, or 9%, as compared to the year end June 30, 2019. The increase in interest expense was primarily driven by the increase in outstanding borrowings on the Revolver. The increased outstanding borrowings were partially offset by the benefit of lower variable interest rates. Interest income from short-term investments was comparable to the prior year.

Foreign currency (gains) losses, net

Foreign currency (gains) losses, net for the year ended June 30, 2020, amounted to net losses of $0.8 million, as compared to net gains of $0.1 million for the year ended June 30, 2019. Increased foreign currency losses from the effects of currency devaluations were partially offset by foreign currency gains from intercompany transactions, driven by currency volatility during the three months ended June 30, 2020.

Provision for income taxes

In March 2020, in response to economic instability prompted by the COVID-19 pandemic, the United States government enacted the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES act established various stimulus measures, including certain tax provisions. We have utilized certain CARES Act provisions, including modifications to the interest deduction limitation, technical corrections to tax depreciation methods for qualified improvement property and deferral of employer social security payments.

The provision for income taxes was $22.0 million and $16.8 million for the years ended June 30, 2020 and 2019, respectively. The effective income tax rates were 39.6% and 23.5% for the years ended June 30, 2020 and 2019, respectively. The fiscal year 2020 effective income tax rate was substantially higher than the federal statutory rate primarily due to income tax expense for:

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Global Intangible Low-Taxed Income (GILTI) federal tax of $3.5 million, net of foreign tax credits, which added 6.2 percentage points to the effective income tax rate. The GILTI federal tax for the year ended June 30, 2019 was $0.5 million. GILTI for the current year was elevated due to the interplay of domestic profitability and limitations on offsetting credits.

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•

Changes in uncertain tax positions of $2.9 million, which added 5.2 percentage points to the effective income tax rate. Changes in uncertain tax positions for the year ended June 30, 2019 were a benefit of $(0.8) million. Changes in uncertain tax positions for the current year were elevated due to the complex nature of tax law in various jurisdictions and related interpretations of tax law.

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•

Increases in the valuation allowance of $2.0 million, which added 3.6 percentage points to the effective income tax rate. Increases in the valuation allowance for the year ended June 30, 2019 was negligible. Increases in the valuation allowance for the current year were elevated due to losses in certain international jurisdictions, in part due to the unfavorable effect of foreign currency losses, partially caused by the economic effects of the pandemic, and in part due to the start-up of new international locations with no current income tax benefit.

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Net income

Net income of $33.6 million for the year ended June 30, 2020, decreased $21.2 million, or 39%, as compared to net income of $54.7 million for the year ended June 30, 2019. The decrease was primarily due to a $14.0 million decline in operating income, coupled with a $5.2 million increase in the provision for income taxes, higher interest expense of $1.1 million and unfavorable foreign currency movements of $0.9 million. The decline in operating income was driven by a $7.7 million reduction in gross profit and increased SG&A costs of $6.3 million. The decline in gross profit was primarily driven by lower overall volume and unfavorable product mix in our Animal Health business. Increased SG&A costs reflect our investments in product development and strategic growth initiatives and the effects of the Osprey acquisition.

Adjusted EBITDA

Adjusted EBITDA of $102.1 million for the year ended June 30, 2020, decreased $15.9 million, or 13%, as compared to the year ended June 30, 2019. Animal Health Adjusted EBITDA decreased $12.9 million due to the sales and related gross profit declines, coupled with increased SG&A costs. The SG&A increase was driven by investments in product development and strategic growth initiatives and the effects of the Osprey acquisition. Mineral Nutrition Adjusted EBITDA declined $1.0 million as a result of lower gross profit and increased SG&A costs. Performance Products Adjusted EBITDA decreased $0.2 million as compared to the prior year. Corporate expenses increased $1.7 million driven by investments in strategic initiatives and increased public company costs.

Comparison of the years ended June 30, 2019 and 2018

Net sales

Net sales of $828.0 million for the year ended June 30, 2019, increased $8.0 million, or 1%, as compared to the year ended June 30, 2018. Animal Health net sales were comparable to the prior year. Mineral Nutrition declined $1.1 million, while Performance Products grew $8.9 million.

Animal Health

Net sales of $532.0 million for the year ended June 30, 2019, were comparable to the prior year. Net sales of MFAs and other increased $13.8 million, or 4%, driven by year over year international volume growth, particularly in the Asia Pacific and Latin America regions, partially offset by lower domestic demand from the poultry and swine sectors. While the Asia Pacific region reported strong sales growth for the full year, sales in the region declined in the fourth quarter of fiscal year 2019, due to reduced demand for MFAs related to African Swine Fever in China. Net sales of nutritional specialty products declined by $9.8 million, or 8%, primarily due to volume declines from the continued negative dairy industry conditions and reduced demand from poultry customers. Net sales of vaccines declined $3.8 million, or 5%, due to turbulent economic conditions in certain international countries and the loss of a domestic distribution arrangement; volume growth in other international markets partially offset the reductions.

Mineral Nutrition

Net sales of $233.8 million for the year ended June 30, 2019, declined $1.1 million. Lower volumes and product mix were the primarily drivers of the decline. An increase in overall selling prices partially offset the volume decline. Our selling prices of mineral nutrition products generally move in direct correlation with the underlying commodity costs.

Performance Products

Net sales of $62.2 million for the year ended June 30, 2019, increased $8.9 million, or 17%, primarily due to volume growth of personal care and copper-based products.

Gross profit

Gross profit of $264.6 million for the year ended June 30, 2019, declined $2.3 million, or 1%, as compared to the year ended June 30, 2018. As a percentage of net sales, gross profit declined to 32.0% for the year ended June 30, 2019, as compared to 32.5% for the year ended June 30, 2018.

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Animal Health gross profit decreased $3.1 million due to volume declines in the nutritional specialty and vaccine categories, partially offset by international volume growth and favorable product mix in MFAs and other. Mineral Nutrition gross profit decreased $3.5 million, primarily due to unfavorable product mix and constrained pricing in a competitive environment. Performance Products gross profit increased $2.6 million, primarily due to volume growth and manufacturing cost efficiencies. Gross profit for the year ended June 30, 2018, included $1.7 million of acquisition-related cost of goods sold.

Selling, general and administrative expenses

SG&A of $181.4 million for the year ended June 30, 2019, increased $13.4 million, or 8%, as compared to the year ended June 30, 2018. SG&A for the year ended June 30, 2019, included $6.3 million of restructuring-related costs, $2.3 million of stock-based compensation, $0.2 million of acquisition-related transaction costs and a $1.5 million benefit from the cancellation of a certain business arrangement. SG&A for the year ended June 30, 2018, included $0.3 million of stock-based compensation, $1.2 million in acquisition-related compensation costs, $0.4 million in acquisition-related transaction costs and a benefit of $0.5 million associated with other acquisition-related costs. Excluding the effects of these costs, SG&A increased $7.5 million, or 5%.

Animal Health SG&A increased $3.6 million primarily due to increased costs related to increased investments in marketing and product development. These increases were partially offset by close control of other spending and a reduction in variable compensation. Mineral Nutrition SG&A declined by $0.7 million on spending control. Performance Products SG&A declined $0.1 million. Corporate costs increased $4.7 million, primarily due to increased business development expenses and public company costs associated with strengthening and testing of controls over financial reporting, partially offset by a reduction in variable compensation. The restructuring-related costs, stock-based compensation, cancellation of a business arrangement, acquisition-related compensation costs and acquisition-related transaction costs resulted in a net $5.9 million increase in SG&A.

During the three months ended June 30, 2019, we recorded pre-tax charges of $6.3 million for business restructuring activities related to productivity and cost saving initiatives in the Animal Health segment. The charges included $3.5 million related to termination of a contract manufacturing agreement and $2.8 million for employee separation costs. The charges are included in selling, general and administrative expenses in our consolidated statements of operations. We expect to record an additional charge for employee separation costs of an estimated $1.0 million and complete actions by December 31, 2019.

Interest expense, net

Interest expense, net of $11.8 million for the year ended June 30, 2019, decreased $0.1 million, or 1%, as compared to the year ended June 30, 2018. Interest expense on the Term loan and Revolver increased $1.2 million due to higher debt levels and higher variable interest rates. Interest expense for the year ended June 30, 2018 included $1.1 million of acquisition-related accrued interest. Interest income from short-term investments improved by $0.2 million.

Foreign currency (gains) losses, net

Foreign currency (gains) losses, net for the year ended June 30, 2019, amounted to net gains of $(0.1) million, as compared to $(1.1) million in net gains for the year ended June 30, 2018. Foreign currency gains and losses primarily arose from cash and intercompany balances.

Provision for income taxes

In December 2017, the United States government enacted comprehensive income tax legislation (the “Tax Act”). The Tax Act made broad and complex changes to United States income tax law and includes numerous elements that affect the Company, including a reduced federal corporate income tax rate of 21%, creating a territorial tax system that includes a one-time mandatory transition tax on previously deferred foreign earnings and changes to business-related exclusions, deductions and credits. Our provision for income taxes reflects a statutory 21.0 % and 28.1% weighted-average federal income tax rate for our fiscal years ending June 30, 2019 and 2018, respectively. The Tax Act also has consequences related to our international operations.

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The provision for income taxes, effective income tax rate and certain income tax items for the years ended June 30, 2019 and 2018, are reflected in the table below:

​ ​ ​ (in thousands, except percentages) ​

Provision for income taxes ​ ​ ​ $ 16,792 ​ ​ ​ ​ $ 23,187 ​ ​

Effective income tax rate ​ ​ ​ ​ 23.5% ​ ​ ​ ​ ​ 26.3% ​ ​

Certain income tax items ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Mandatory toll charge ​ ​ ​ ​ (360) ​ ​ ​ ​ ​ 403 ​ ​

Reduction of domestic deferred tax assets ​ ​ ​ ​ — ​ ​ ​ ​ ​ 2,289 ​ ​

Reduction of foreign deferred tax assets ​ ​ ​ ​ — ​ ​ ​ ​ ​ 1,156 ​ ​

Release of unrecognized tax benefits ​ ​ ​ ​ (1,271) ​ ​ ​ ​ ​ (994) ​ ​

Total ​ ​ ​ $ (3,358) ​ ​ ​ ​ $ (957) ​ ​

The mandatory toll charge on deemed repatriation of undistributed earnings of foreign subsidiaries resulted from a one-time tax under the Tax Act.

The reduction of deferred tax assets resulted from the remeasurement of deferred tax assets and liabilities, to reflect the reduced federal statutory income tax rate under the Tax Act.

The reduction of foreign deferred tax assets resulted from the remeasurement of deferred tax assets, to reflect a reduced income tax rate in certain international jurisdictions.

The recognition of federal and foreign prior-year tax credits resulted from the implementation of the Tax Act.

The reclassification from accumulated other comprehensive income (“AOCI”) reflected the reclassification of income taxes remaining in AOCI, after all related foreign currency derivatives had matured and were completely cleared from AOCI.

Net income

Net income of $54.7 million for the year ended June 30, 2019, decreased $10.2 million, as compared to net income of $64.9 million for the year ended June 30, 2018. Operating income declined $15.7 million, driven by a decrease in gross profit of $2.3 million and increased SG&A expenses of $13.4 million, including $6.3 million of restructuring costs. Foreign currency movements resulted in a reduction of foreign currency gains of $1.0 million. These declines were partially offset by decreased income tax expense of $6.4 million. The year ended June 30, 2018 included additional income tax expense from the initial application of the comprehensive U.S. income tax legislation and certain other items.

Adjusted EBITDA

Adjusted EBITDA of $118.0 million for the year ended June 30, 2019, decreased $10.9 million, or 8%, as compared to the year ended June 30, 2018. Animal Health Adjusted EBITDA declined $5.9 million compared to the prior year. Volume declines in the nutritional specialty and vaccine categories were partially offset by year over year international volume growth and favorable unit costs and product mix in MFAs and other. Investments in organization and business development were offset by close control of other spending and a reduction in variable compensation. Mineral Nutrition Adjusted EBITDA decreased $2.9 million, or 15%, due to the effect of unfavorable product mix and constrained pricing in a competitive

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environment. Performance Products Adjusted EBITDA increased $2.8 million, primarily due to sales volume growth, favorable product mix and manufacturing efficiencies. Corporate expenses increased $5.0 million due to increased business development expenses and public company costs associated with strengthening and testing of controls over financial reporting, partially offset by a reduction in variable compensation.

Analysis of financial condition, liquidity and capital resources

Net increase (decrease) in cash and cash equivalents was:

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Net cash provided (used) by operating activities was comprised of:

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Adjustments ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Certain amounts may reflect rounding adjustments.

Operating activities

Operating activities provided $59.3 million of net cash for the year ended June 30, 2020. Cash provided by net income, adjusted for the effect of non-cash charges, was partially offset by $13.7 million of cash used in the ordinary course of business for changes in operating assets and liabilities. Accounts receivable provided $28.7 million of cash, due to reduced sales levels and improved collection timing; days sales

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outstanding at June 30, 2020, of 61 days improved from 70 days at the prior year end. Inventory used $12.9 million of cash, driven by the timing of sales and consistent production levels, primarily in our Animal Health segment. Other current assets and other assets used $11.2 million and $2.1 million, respectively, due to the timing of payments in international regions and timing of domestic tax and insurance payments. Accounts payable used $7.7 million of cash, primarily due to the timing of domestic inventory purchases. Accrued expenses and other liabilities used $8.5 million, driven by payments for long-term incentive compensation and restructuring costs.

Operating activities provided $47.2 million for the year ended June 30, 2019. Cash provided by net income, adjusted for the effect of non-cash charges, was partially offset by $35.9 million of cash used in the ordinary course of business for changes in operating assets and liabilities. Accounts receivable used $23.7 million of cash, primarily due to the timing of sales and collections in international regions. Increased inventories used $21.0 million of cash due to the timing of sales, purchases and production, primarily in our Animal Health segment. Other current assets used $7.5 million of cash due to the timing of payments. Cash used was partially offset by $16.2 million of cash provided by accounts payable and accrued expenses, including $5.6 million of accrued restructuring costs.

Investing activities

Investing activities used $120.4 million of net cash for the year ended June 30, 2020. Capital expenditures were $34.0 million as we continued to invest in our existing asset base and for capacity expansion and productivity improvements. The Osprey acquisition used $54.5 million of cash. We purchased $31.0 million of short-term investments.

Investing activities used $14.1 million of net cash for the year ended June 30, 2019. Capital expenditures were $29.9 million as we invested in our existing asset base and for capacity expansion and productivity improvements. Cash used for business acquisitions was $9.8 million. Maturities of short-term investments provided $26.0 million of cash.

Financing activities

Financing activities provided $40.9 million of net cash for the year ended June 30, 2020. Net borrowings on our Revolver provided $73.0 million, primarily to fund the Osprey acquisition. We paid $19.4 million in dividends to holders of our Class A and Class B common stock. We paid $12.7 million in scheduled debt and other requirements.

Financing activities used $4.1 million of net cash for the year ended June 30, 2019. Net borrowings on our Revolver provided $26.0 million. We paid $18.6 million in dividends to holders of our Class A and Class B common stock. We paid $12.6 million in scheduled debt and other requirements. The issuance of shares of common stock related to the exercise of employee stock options provided cash of $1.1 million.

Liquidity and capital resources

We believe our cash on hand, our operating cash flows and our financing arrangements, including the availability of borrowings under the Revolver and foreign credit lines, will be sufficient to support our ongoing cash needs. We have considered the current and potential future effects of COVID-19 on the financial markets. At this time, we expect adequate liquidity for at least the next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will be able to comply with the terms of the covenants under the Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise, including those caused by COVID-19. There can be no assurance that a challenging economic environment or an economic downturn would not affect our liquidity or our ability to obtain future financing or fund operations or investment opportunities. In addition, our debt covenants may restrict our ability to invest.

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Certain relevant measures of our liquidity and capital resources follow:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

​ ​ ​ (in thousands, except ratios) ​

We define working capital as total current assets (excluding cash and cash equivalents and short-term investments) less total current liabilities (excluding current portion of long-term debt). We calculate the ratio of current assets to current liabilities based on this definition.

At June 30, 2020, we had $169.0 million in outstanding borrowings under the Revolver. We had outstanding letters of credit and other commitments of $2.7 million, leaving $78.3 million available for borrowings and letters of credit.

We currently intend to pay quarterly dividends on our Class A and Class B common stock, subject to approval from the Board of Directors. Our Board of Directors has declared a cash dividend of $0.12 per share on Class A common stock and Class B common stock, payable on September 23, 2020. Our future ability to pay dividends will depend upon our results of operations, financial condition, capital requirements, our ability to obtain funds from our subsidiaries and other factors that our Board of Directors deems relevant. Additionally, the terms of our current and any future agreements governing our indebtedness could limit our ability to pay dividends or make other distributions.

At June 30, 2020, our cash and cash equivalents and short-term investments included $89.6 million held by our international subsidiaries. There are no restrictions on cash distributions to PAHC from our international subsidiaries.

Analysis of the consolidated balance sheets

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

​ ​ ​ (in thousands) ​

DSO ​ ​ ​ ​ 61 ​ ​ ​ ​ ​ 70 ​ ​ ​ ​ ​ 58 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Payment terms outside the U.S. are typically longer than in the United States. We regularly monitor our accounts receivable for collectability, particularly in countries where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment. We calculate DSO based on a 360-day year and compare accounts receivable with sales for the quarter ending at the balance sheet date.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​

​ ​ ​ (in thousands) ​

Inventory decreased by $1.7 million in 2020, primarily due to the effect of currency fluctuations. Inventories increased $12.9 million, net of business acquisitions, as measured by exchange rates at the time of the transactions.

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Contractual obligations

Payments due under contractual obligations as of June 30, 2020, were:

​ ​ ​ Years ​ ​ ​ ​ ​ ​ ​

​ ​ ​ Within 1 ​ ​ Over 1 to 3 ​ ​ Over 3 to 5 ​ ​ Over 5 ​ ​ Total ​

​ ​ ​ (in thousands) ​

For purposes of estimating interest payments, we assumed long-term debt will decrease in accordance with the scheduled payments and the Revolver continues unchanged at the June 30, 2020, balance. We assumed future interest rates are the same as the rates at June 30, 2020.

Excluded from the contractual obligations table is the liability for unrecognized tax benefits totaling $10.5 million. This liability for unrecognized tax benefits has been excluded because we cannot make a reliable estimate of the periods in which the liability will be realized.

Our Board of Directors declared a cash dividend of $0.12 per share on Class A common stock and Class B common stock, representing $4.9 million, payable on September 23, 2020.

The Company expects to contribute approximately $1.6 million to the domestic pension plan during 2021.

Off-balance sheet arrangements

We currently do not use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.

In the ordinary course of business, we may indemnify our counterparties against certain liabilities that may arise. These indemnifications typically pertain to environmental matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to certain restrictions and limitations.

Selected Quarterly Financial Data (Unaudited)

To facilitate quarterly comparisons, the following unaudited information presents the quarterly results of operations, including segment data, for the years ended June 30, 2020 and 2019. This quarterly financial data was prepared on the same basis as, and should be read in conjunction with, the audited consolidated financial statements and related notes included herein.

​ ​ ​ Quarters ​ ​ Year ​

​ ​ ​ (in thousands) ​

Net sales ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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​ ​ ​ Quarters ​ ​ Year ​

​ ​ ​ (in thousands) ​

Adjusted EBITDA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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​ ​ ​ Quarters ​ ​ Year ​

​ ​ ​ (in thousands) ​

Net sales ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted EBITDA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other ​ ​ ​ ​ — ​ ​ ​ ​ ​ (1,506) ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ (1,506) ​ ​

​

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General description of non-GAAP financial measures

Adjusted EBITDA

Adjusted EBITDA is an alternative view of performance used by management as our primary operating measure, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted EBITDA to portray the results of our operations prior to considering certain income statement elements. We have defined EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes, and (iii) depreciation and amortization. We have defined Adjusted EBITDA as EBITDA plus (a) (income) loss from, and disposal of, discontinued operations, (b) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.

The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:

•

senior management receives a monthly analysis of our operating results that is prepared on an Adjusted EBITDA basis;

​

•

our annual budgets are prepared on an Adjusted EBITDA basis; and

​

•

other goal setting and performance measurements are prepared on an Adjusted EBITDA basis.

​

Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted EBITDA is presented to permit investors to more fully understand how management assesses performance.

We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure is that it provides a view of our operations without including all events during a period, such as the depreciation of property, plant and equipment or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies.

Certain significant items

Adjusted EBITDA is calculated prior to considering certain items. We evaluate such items on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual or non-operational nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis.

We consider acquisition-related activities and business restructuring costs related to productivity and cost saving initiatives, including employee separation costs, to be unusual items that we do not expect to occur as part of our normal business on a regular basis. We consider foreign currency gains and losses to be non-operational because they arise principally from intercompany transactions and are largely non-cash in nature.

New accounting standards

We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), effective July 1, 2019.

For discussion of new accounting standards, see “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies and New Accounting Standards.”

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Critical accounting policies

Critical accounting policies are those that require application of management’s most difficult, subjective and/or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all accounting policies require management to make difficult, subjective or complex judgments or estimates. In presenting our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results that differ from our estimates and assumptions could have an unfavorable effect on our financial position and results of operations.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain. The pandemic may have significant economic impact on customers, suppliers and markets. New information may emerge concerning COVID-19 and the actions required to contain or treat the virus may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.

The following is a summary of accounting policies that we consider critical to the consolidated financial statements.

Revenue Recognition

We recognize revenue from product sales when control of the products has transferred to the customer, typically when title and risk of loss transfer to the customer. Certain of our businesses have terms where control of the products transfers to the customer on shipment, while others have terms where control transfers to the customer on delivery.

Revenue reflects the total consideration to which we expect to be entitled, in exchange for delivery of products or services, net of variable consideration. Variable consideration includes customer programs and incentive offerings, including pricing arrangements, rebates and other volume-based incentives. We record reductions to revenue for estimated variable consideration at the time we record the sale. Our estimates for variable consideration reflect the amount by which we expect variable consideration to effect the revenue recognized. Such estimates are based on contractual terms and historical experience, and are adjusted to reflect future expectations as new information becomes available. Historically, we have not had significant adjustments to our estimates of customer incentives. Sales returns and product recalls have been insignificant and infrequent due to the nature of the products we sell.

Net sales include shipping and handling fees billed to customers. The associated costs are considered fulfillment activities, not additional promised services to the customer, and are included in costs of goods sold when the related revenue is recognized in the consolidated statements of operations. Net sales exclude value-added and other taxes based on sales.

Business Combinations

Our consolidated financial statements reflect the operations of an acquired business beginning as of the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values at the date of acquisition; goodwill is recorded for any excess of the purchase price over the fair values of the net assets acquired. Significant judgment may be required to determine the fair values of certain tangible and intangible assets and in assigning their respective useful lives. Significant judgment also may be required to determine the fair values of contingent consideration, if any. We typically utilize third-party valuation specialists to assist us in determining fair values of significant tangible and intangible assets and contingent consideration. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain. We typically use an income method to measure the fair value of intangible assets, based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect consideration of other marketplace participants, and include the amount and timing of future cash flows, specifically the expected revenue growth rate applied to the cash flows. Unanticipated market or

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macroeconomic events and circumstances could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment. Our estimates of the useful lives of intangible assets primarily are based on a number of factors including the competitive environment, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the products are sold. Intangible assets are amortized over their estimated lives. Intangible assets associated with acquired in-process research and development activities (“IPR&D”) are not amortized until a product is available for sale and regulatory approval is obtained.

Long-Lived Assets and Goodwill

We periodically review our long-lived and amortizable intangible assets for impairment and assess whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset, a significant adverse change in the manner in which the asset is being used or in its physical condition or a history of operating or cash flow losses associated with the use of an asset. We recognize an impairment loss when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying value over its fair value. In addition, we periodically reassess the estimated remaining useful lives of our long-lived and amortizable intangible assets. Changes to estimated useful lives would affect the amount of depreciation and amortization recorded in the consolidated statements of operations.

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. We assess goodwill for impairment annually during the fourth quarter, or more frequently if impairment indicators exist. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. We may elect to assess our goodwill for impairment using a qualitative or a quantitative approach, to determine whether it is more likely than not that the fair value of goodwill is greater than its carrying value. During the three months ended June 30, 2020, we tested goodwill using a quantitative approach, which involved estimating fair values of reporting units using the discounted cash flow method. We determined goodwill was not impaired. We have not recorded any goodwill impairment charges in the periods included in the consolidated financial statements.

We evaluate our investments in equity method investees for impairment if circumstances indicate that the fair value of the investment may be impaired. The assets underlying a $2.9 million equity investment are currently idled; we have concluded the investment is not currently impaired, based on expected future operating cash flows and/or disposal value.

Income Taxes

The provision for income taxes includes U.S. federal, state, and foreign income taxes and foreign withholding taxes. Our annual effective income tax rate is determined based on our income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences give rise to deferred tax assets and liabilities. Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent the tax effect of items recorded as tax expense in our income statement for which payment has been deferred, the tax effect of expenditures for which a deduction has already been taken in our tax return but has not yet been recognized in our income statement or the tax effect of assets recorded at fair value in business combinations for which there was no corresponding tax basis adjustment.

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. Inherent in determining our annual effective income tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets, primarily net operating loss carryforwards,

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is dependent upon generating sufficient future taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. We establish valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit.

We may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority in the jurisdictions where we operate. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly.

We account for income tax contingencies using a benefit recognition model. If our initial assessment does not result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit if: (i) there are changes in tax law or there is new information that sufficiently raise the likelihood of prevailing on the technical merits of the position to “more likely than not;” (ii) the statute of limitations expires; or (iii) there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, and changes in tax law or receipt of new information that would either increase or decrease the technical merits of a position relative to the “more-likely-than-not” standard.

Our assessments concerning uncertain tax positions are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible changes related to our uncertain tax positions, and such changes could be significant.

Because there are a number of estimates and assumptions inherent in calculating the various components of our income tax provision, certain future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on those estimates and our effective income tax rate.

We consider undistributed earnings of foreign subsidiaries to be indefinitely reinvested in our international operations. The undistributed earnings of foreign subsidiaries were subject to the U.S. one-time mandatory toll charge and are eligible to be repatriated to the U.S. without additional U.S. tax under the Tax Act. Should our plans change and we decide to repatriate some or all of the remaining cash held by our international subsidiaries, the amounts repatriated could be subject to applicable non-U.S. income and withholding taxes in international jurisdictions.

For more information regarding our significant accounting policies, estimates and assumptions, see “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies and New Accounting Standards.”

Contingencies

Legal matters

We are subject to numerous contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, environmental claims and proceedings and government investigations. Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial. We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.

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We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Environmental

Our operations and properties are subject to Environmental Laws and regulations. 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 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 impact 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 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.

For additional details, see “Notes to Consolidated Financial Statements — Commitments and Contingencies.”

For additional details, see “Business — Environmental, Health and Safety.”

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

​

Foreign exchange risk

Portions of our net sales and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 75 countries and, as a result, our revenues are influenced by changes in foreign exchange rates. Because we operate in multiple foreign currencies, changes in those currencies relative to the U.S. dollar could affect our revenue and expenses, and consequently, net income. Exchange rate fluctuations may also have an effect beyond our reported financial results and directly affect operations. These fluctuations may affect the ability to buy and sell our goods and services in markets affected by significant exchange rate variances.

Our primary foreign currency exposures are to the Brazilian and Israeli currencies. From time to time, we manage foreign exchange risk through the use of foreign currency derivative contracts. We use these contracts to mitigate the potential earnings effects from exposure to foreign currencies.

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We analyzed our foreign currency derivative contracts at June 30, 2020 to determine their sensitivity to exchange rate changes. The analysis indicates that if the U.S. dollar were to appreciate or depreciate by 10%, the fair value of these contracts would decrease by $1.8 million or increase by $1.9 million. For additional details, see “Notes to Consolidated Financial Statements — Derivatives.”

Interest rate risk

Substantially all of our outstanding debt is floating rate debt. Our Credit Facilities carry floating interest rates based on LIBOR and the Prime Rate; therefore, our profitability and cash flows are exposed to interest rate fluctuations. In July 2017, we entered into an interest rate swap agreement on $150 million of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325% plus the applicable rate. The agreement matures concurrently with the Credit Agreement.

In March 2020, we entered into an interest rate swap agreement on an additional $150 million of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.620% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300 million through June 30, 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300 million of debt to a fixed interest rate of 0.620% plus the applicable rate. We designated the interest rate swaps as highly effective cash flow hedges.

Based on our outstanding debt balances as of June 30, 2020, and considering the interest rate swap agreements, a 100 basis point increase in LIBOR would increase annual interest expense and decrease cash flows by $0.9 million. For additional details, see “Notes to the Consolidated Financial Statements — Debt” and “Notes to the Consolidated Financial Statements — Derivatives.”

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Item 8.

Financial Statements and Supplementary Data

​

PHIBRO ANIMAL HEALTH CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

​ Report of Independent Registered Public Accounting Firm ​ ​ ​ ​ 84 ​ ​

​ Consolidated Balance Sheets as of June 30, 2020 and 2019 ​ ​ ​ ​ 88 ​ ​

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Phibro Animal Health Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Phibro Animal Health Corporation and its subsidiaries (the “Company”) as of June 30, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to: (i) the Company not maintaining an effective control environment due to a lack of sufficient resources with an appropriate level of accounting knowledge, experience and training commensurate with its financial reporting requirements, which contributed to material weaknesses related to: (ii) the Company not designing and maintaining effective internal controls to ensure processing and reporting of valid transactions is complete, accurate, and timely and (iii) the Company not maintaining effective internal control that restricts access to key financial systems and records to appropriate users and ensures that appropriate segregation of duties is maintained.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2020 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also

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included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

August 26, 2020

We have served as the Company’s auditor since 1998.

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CONSOLIDATED STATEMENTS OF OPERATIONS

​ ​ ​ (in thousands, except per share amounts) ​

Income before income taxes ​ ​ ​ ​ 55,512 ​ ​ ​ ​ ​ 71,505 ​ ​ ​ ​ ​ 88,070 ​ ​

Provision for income taxes ​ ​ ​ ​ 21,960 ​ ​ ​ ​ ​ 16,792 ​ ​ ​ ​ ​ 23,187 ​ ​

Net income per share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

basic ​ ​ ​ $ 0.83 ​ ​ ​ ​ $ 1.35 ​ ​ ​ ​ $ 1.61 ​ ​

diluted ​ ​ ​ $ 0.83 ​ ​ ​ ​ $ 1.35 ​ ​ ​ ​ $ 1.61 ​ ​

Weighted average common shares outstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

​ ​ ​ (in thousands) ​

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

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CONSOLIDATED BALANCE SHEETS

​ ​ ​ (in thousands, except share and per share amounts) ​

ASSETS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash and cash equivalents ​ ​ ​ $ 36,343 ​ ​ ​ ​ $ 57,573 ​ ​

Short-term investments ​ ​ ​ ​ 55,000 ​ ​ ​ ​ ​ 24,000 ​ ​

Accounts receivable, net ​ ​ ​ ​ 126,522 ​ ​ ​ ​ ​ 159,022 ​ ​

Other current assets ​ ​ ​ ​ 37,313 ​ ​ ​ ​ ​ 27,245 ​ ​

Property, plant and equipment, net ​ ​ ​ ​ 148,109 ​ ​ ​ ​ ​ 140,235 ​ ​

Intangibles, net ​ ​ ​ ​ 70,997 ​ ​ ​ ​ ​ 47,478 ​ ​

LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Current portion of long-term debt ​ ​ ​ $ 18,750 ​ ​ ​ ​ $ 12,540 ​ ​

Accounts payable ​ ​ ​ ​ 66,091 ​ ​ ​ ​ ​ 73,189 ​ ​

Total current liabilities ​ ​ ​ ​ 157,238 ​ ​ ​ ​ ​ 154,227 ​ ​

Revolving credit facility ​ ​ ​ ​ 169,000 ​ ​ ​ ​ ​ 96,000 ​ ​

Other liabilities ​ ​ ​ ​ 70,401 ​ ​ ​ ​ ​ 42,794 ​ ​

Commitments and contingencies (Note 13) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total stockholders’ equity ​ ​ ​ ​ 188,204 ​ ​ ​ ​ ​ 216,015 ​ ​

Total liabilities and stockholders’ equity ​ ​ ​ $ 784,100 ​ ​ ​ ​ $ 726,671 ​ ​

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS

​ ​ ​ (in thousands) ​

OPERATING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of debt issuance costs ​ ​ ​ ​ 882 ​ ​ ​ ​ ​ 882 ​ ​ ​ ​ ​ 883 ​ ​

Stock-based compensation ​ ​ ​ ​ 2,259 ​ ​ ​ ​ ​ 2,259 ​ ​ ​ ​ ​ 334 ​ ​

Acquisition-related items ​ ​ ​ ​ (2,433) ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ 3,908 ​ ​

Deferred income taxes ​ ​ ​ ​ 8,125 ​ ​ ​ ​ ​ (105) ​ ​ ​ ​ ​ 6,389 ​ ​

Other ​ ​ ​ ​ 818 ​ ​ ​ ​ ​ (302) ​ ​ ​ ​ ​ 1,181 ​ ​

Other current assets ​ ​ ​ ​ (11,137) ​ ​ ​ ​ ​ (7,173) ​ ​ ​ ​ ​ 134 ​ ​

Other assets ​ ​ ​ ​ (2,121) ​ ​ ​ ​ ​ (299) ​ ​ ​ ​ ​ (152) ​ ​

Accounts payable ​ ​ ​ ​ (7,672) ​ ​ ​ ​ ​ 12,092 ​ ​ ​ ​ ​ 2,446 ​ ​

INVESTING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Capital expenditures ​ ​ ​ ​ (34,045) ​ ​ ​ ​ ​ (29,891) ​ ​ ​ ​ ​ (18,548) ​ ​

Business acquisitions ​ ​ ​ ​ (54,549) ​ ​ ​ ​ ​ (9,838) ​ ​ ​ ​ ​ (15,000) ​ ​

Other, net ​ ​ ​ ​ (796) ​ ​ ​ ​ ​ (404) ​ ​ ​ ​ ​ (1,064) ​ ​

FINANCING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Issuance of acquisition note payable ​ ​ ​ ​ — ​ ​ ​ ​ ​ 3,775 ​ ​ ​ ​ ​ — ​ ​

Payment of acquisition note payable ​ ​ ​ ​ — ​ ​ ​ ​ ​ (3,775) ​ ​ ​ ​ ​ — ​ ​

Proceeds from common stock issued ​ ​ ​ ​ — ​ ​ ​ ​ ​ 1,134 ​ ​ ​ ​ ​ 5,699 ​ ​

Supplemental cash flow information ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Property, plant and equipment ​ ​ ​ ​ 4,353 ​ ​ ​ ​ ​ 2,890 ​ ​ ​ ​ ​ 8,449 ​ ​

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

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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)

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 animals including poultry, swine, dairy and beef cattle and aquaculture. 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.

2.

Summary of Significant Accounting Policies and New Accounting Standards

​

Principles of Consolidation and Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of Phibro and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated from the consolidated financial statements. The decision whether or not to consolidate an entity requires consideration of majority voting interests, as well as effective control over the entity.

We present our financial statements on the basis of our fiscal year ending June 30. All references to years in these consolidated financial statements refer to the fiscal year ending or ended on June 30 of that year.

Risks and Uncertainties

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain. The pandemic may affect our future revenues, expenses, reserves and allowances, manufacturing operations and employee-related costs. The pandemic may have significant economic impact on customers, suppliers and markets. New information may emerge concerning COVID-19 and the actions required to contain or treat the virus may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.

The issue of the potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on or banning of the use of antibiotics in food-producing animals. The sale of antibiotics and antibacterials is a material portion of our business. Should product bans or restrictions, public perception, competition or other developments result in restrictions on the sale of such products, it could have a material adverse effect on our financial position, results of operations and cash flows.

An outbreak of disease carried by food animals, which could lead to the widespread death or precautionary destruction of food animals as well as reduced consumption and demand for animal protein, could adversely affect demand for our products. Such occurrences could have a material adverse effect on our financial condition, results of operations and cash flows.

The testing, manufacturing, and marketing of certain of our products are subject to extensive regulation by numerous government authorities in the United States and other countries.

We have significant assets in Israel, Brazil and other locations outside of the United States and a significant portion of our sales and earnings are attributable to operations conducted abroad. Our assets, results of operations and future prospects are subject to currency exchange fluctuations and restrictions, energy shortages, other economic developments, political or social instability in some countries, and uncertainty of, and governmental control over, commercial rights, which could result in a material adverse effect on our financial position, results of operations and cash flows.

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We are subject to environmental laws and regulations governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of regulated materials, including pesticides, and the health and safety of employees. As such, the nature of our current and former operations and those of our subsidiaries expose Phibro and our subsidiaries to the risk of claims with respect to such matters.

Use of Estimates

The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). Preparation of these financial statements 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. Estimates are used when accounting for the valuation of intangible assets, depreciation and amortization periods of long-lived and intangible assets, recoverability of long-lived and intangible assets and goodwill, realizability of deferred income tax assets, sales discounts, rebates, allowances and incentives, contingencies, employee compensation 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.

Revenue Recognition

We recognize revenue from product sales when control of the product has transferred to the customer, typically when title and risk of loss transfer to the customer. Certain of our businesses have terms where control of the underlying product transfers to the customer on shipment, while others have terms where control transfers to the customer on delivery.

Revenue reflects the total consideration to which we expect to be entitled in exchange for delivery of products or services, net of variable consideration. Variable consideration includes customer programs and incentive offerings, including pricing arrangements, rebates and other volume-based incentives. We record reductions to revenue for estimated variable consideration at the time we record the sale. Our estimates for variable consideration reflect the amount by which we expect variable consideration to effect the revenue recognized. Such estimates are generally based on contractual terms and historical experience, and are adjusted to reflect future expectations as new information becomes available. Historically, we have not had significant adjustments to our estimates of variable compensation. Sales returns and product recalls have been insignificant and infrequent due to the nature of the products we sell.

Net sales include shipping and handling fees billed to customers. The associated costs are considered fulfillment activities and are included in costs of goods sold in the consolidated statements of operations when the related revenue is recognized. Net sales exclude value-added and other taxes based on sales.

Cash and Cash Equivalents

Cash equivalents include highly liquid investments with maturities of three months or less when purchased. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. We believe we mitigate such risk by investing in or through major financial institutions.

Short-term Investments

Short-term investments include highly liquid investments with maturities greater than three months and less than one year at the time of purchase. We classify these investments as held to maturity and we record the related interest income as earned. We determine the appropriate balance sheet classification at the time of purchase and at each balance sheet date. Investments held at financial institutions may at times exceed insured amounts. We believe we mitigate such risk by investing in or through major financial institutions.

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Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We grant credit terms in the normal course of business and generally do not require collateral or other security to support credit sales. Our ten largest customers represented, in aggregate, approximately 19% and 31% of accounts receivable at June 30, 2020 and 2019, respectively.

The allowance for doubtful accounts is our best estimate of the credit losses in existing accounts receivable. We monitor the financial performance and creditworthiness of our customers so that we can properly assess and respond to changes in their credit profile. We also monitor domestic and international economic conditions for the potential effect on our customers. Past due balances are reviewed individually for collectability. Account balances are charged against the allowance when we determine it is probable the receivable will not be recovered.

Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined principally under weighted average and standard cost methods, which approximate first-in, first-out (FIFO) cost. Obsolete and unsalable inventories, if any, are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead.

Property, Plant and Equipment

Property, plant and equipment are stated at cost.

Depreciation is charged to results of operations using the straight-line method based upon the assets’ estimated useful lives, ranging from two to thirty years for buildings and improvements, and three to ten years for machinery and equipment. We capitalize costs that extend the useful life or productive capacity of an asset. Repair and maintenance costs are expensed as incurred. In the case of disposals, the assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in the consolidated statements of operations.

Leases

We determine at the inception of an arrangement whether the arrangement contains a lease. If an arrangement contains a lease, we assess the lease term when the underlying asset is available for use (“lease commencement”). Individual lease terms reflect the non-cancellable period of the lease, reasonably certain renewal periods and consideration of termination options. We determine the lease classification as either operating or financing at lease commencement, which governs the pattern of expense recognition and presentation in our consolidated financial statements. Our current lease portfolio only includes operating leases.

We recognize a right-of-use (“ROU”) asset and a corresponding lease liability at lease commencement for leases with terms exceeding twelve months. Short-term leases with terms of twelve months or less are not recognized on the consolidated balance sheet and lease payments are recognized on a straight-line basis over the term.

The values of the ROU assets and lease liabilities are calculated based on the present value of the fixed payment obligations over the lease term, using our incremental borrowing rate (“IBR”), determined at lease commencement. The IBR reflects the rate of interest we would expect to pay on a secured basis to borrow an amount equal to the lease payments under similar terms. The IBR incorporates the term and economic environment of the respective lease arrangements.

We have elected to account for lease and non-lease components together as a single lease component and include fixed payment obligations related to such non-lease components in the measurement of ROU assets and lease liabilities. Fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments can include index-based lease payments, real estate taxes, maintenance costs,

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utilization charges and other non-lease services paid to lessors and are not determinable at lease commencement. Variable lease payments are not included in the measurement of ROU assets and lease liabilities and are recognized in the period incurred.

Capitalized Software Costs

We capitalize costs to obtain, develop and implement software for internal use. Amounts paid to third parties and costs of internal employees who are directly associated with the software project are also capitalized, depending on the stage of development.

We expense software costs that do not meet the capitalization criteria. Capitalized software costs are included in property, plant and equipment on the consolidated balance sheets and are amortized on a straight-line basis over three to seven years.

Debt Issuance Costs

Costs and original issue discounts or premiums related to issuance or modification of our debt are deferred on the consolidated balance sheet and amortized over the lives of the respective debt instruments. Amortization of debt issuance costs is included in interest expense in the consolidated statements of operations.

Business Combinations

Our consolidated financial statements reflect the operations of an acquired business beginning as of the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values at the date of acquisition; goodwill is recorded for any excess of the purchase price over the fair values of the net assets acquired.

Significant judgment may be required to determine the fair values of certain tangible and intangible assets and in assigning their respective useful lives. Significant judgment also may be required to determine the fair values of contingent consideration, if any. We typically utilize third-party valuation specialists to assist us in determining fair values of significant tangible and intangible assets and contingent consideration. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain. We typically use an income method to measure the fair value of intangible assets, based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect consideration of other marketplace participants, and include the amount and timing of future cash flows, specifically the expected revenue growth rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment. Our estimates of the useful lives of intangible assets primarily are based on a number of factors including the competitive environment, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the products are sold. Intangible assets are amortized over their estimated lives. Intangible assets associated with acquired in-process research and development activities (“IPR&D”) are not amortized until a product is available for sale and regulatory approval is obtained.

Long-Lived Assets and Goodwill

We periodically review our long-lived and amortizable intangible assets for impairment and assess whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset, a significant adverse change in the manner in which the asset is being used or in its physical condition or a history of operating or cash flow losses associated with the use of an asset. We recognize an impairment loss when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying value over its fair value. In addition, we periodically reassess the estimated

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remaining useful lives of our long-lived and amortizable intangible assets. Changes to estimated useful lives would affect the amount of depreciation and amortization recorded in the consolidated statements of operations.

We periodically review our indefinite-lived intangible assets associated with acquired IPR&D for impairment and assess whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. We recognize an impairment loss when the carrying amount of an asset exceeds the anticipated future discounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying value over its fair value. We assess IPR&D for impairment annually during our fourth quarter, or more frequently if impairment indicators exist.

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. We assess goodwill for impairment annually during our fourth quarter, or more frequently if impairment indicators exist. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. We may elect to assess our goodwill for impairment using a qualitative or a quantitative approach, to determine whether it is more likely than not that the fair value of goodwill is greater than its carrying value. During the three months ended June 30, 2020, we tested goodwill using a quantitative approach, which involved estimating fair values of reporting units using the discounted cash flow method. We determined goodwill was not impaired. We have not recorded any goodwill impairment charges in the periods included in the consolidated financial statements.

Foreign Currency Translation

We generally use local currency as the functional currency to measure the financial position and results of operations of each of our international subsidiaries. We translate assets and liabilities of these operations at the exchange rates in effect at the balance sheet date. We translate income statement accounts at the average rates of exchange prevailing during the period. Translation adjustments that arise from the use of differing exchange rates from period to period are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Certain of our Israeli operations have designated the U.S. dollar as their functional currency. Gains and losses arising from remeasurement of local currency accounts into U.S. dollars are included in determining net income.

Comprehensive Income

Comprehensive income consists of net income and the changes in: (i) the fair value of derivative instruments that qualify for hedge accounting; (ii) foreign currency translation adjustments; (iii) unrecognized net pension gains (losses); and (iv) the related (provision) benefit for income taxes.

Derivative Financial Instruments

We record all derivative financial instruments on the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recorded in results of operations or other comprehensive income (loss), depending on whether a derivative is designated and effective as part of a hedge transaction and, if so, the type of hedge transaction. Gains and losses on derivative instruments designated and effective as part of a hedge transaction are included in the results of operations in the periods in which operations are affected by the underlying hedged item.

From time to time, we use certain derivative instruments to mitigate the risk associated with certain economic factors, such as exchange rates and interest rates, which may potentially affect our future cash flows. As of June 30, 2020, we used (i) foreign currency option contracts to mitigate certain exposures related to changes in foreign currency exchange rates on forecasted inventory purchases, and (ii) interest rate swaps on $300,000 of notional principal to manage future cash flow exposure resulting from variable interest rates on that amount of debt. To qualify a derivative as a hedge, we document the nature and relationships between hedging instruments and hedged items, the prospective effectiveness of the hedging instrument as well as the ultimate effectiveness, the risk-management objectives, the strategies for undertaking the

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various hedge transactions and the methods of assessing hedge effectiveness. We do not engage in trading or other speculative uses of financial instruments.

Environmental Liabilities

Expenditures for ongoing compliance with environmental regulations are expensed or capitalized as appropriate. We capitalize expenditures made to extend the useful life or productive capacity of an asset, including expenditures that prevent future environmental contamination. Other expenditures are expensed as incurred and are recorded in selling, general and administrative expenses in the consolidated statements of operations. We record the expense and related liability in the period an environmental assessment indicates remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. All available evidence is considered, including prior experience in remediation of contaminated sites, other companies’ experiences and data released by the U.S. Environmental Protection Agency and other organizations. The estimated liabilities are not discounted. We record anticipated recoveries under existing insurance contracts if probable.

Income Taxes

The provision for income taxes includes U.S. federal, state, and foreign income taxes and foreign withholding taxes. Our annual effective income tax rate is determined based on our income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate and the tax effects of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences give rise to deferred tax assets and liabilities. Deferred tax assets generally represent the tax effect of items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent the tax effect of items recorded as tax expense in our income statement for which payment has been deferred, the tax effect of expenditures for which a deduction has already been taken in our tax return but has not yet been recognized in our income statement, and the tax effect of assets recorded at fair value in business combinations for which there was no corresponding tax basis adjustment.

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. Inherent in determining our annual effective income tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets, primarily net operating loss carryforwards, is dependent upon generating sufficient future taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. We establish valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit.

We may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority in the jurisdictions where we operate. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly.

Because there are a number of estimates and assumptions inherent in calculating the various components of our income tax provision, future events such as changes in tax legislation, the geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an effect on those estimates and our effective income tax rate.

Advertising

Advertising and marketing costs are expensed as incurred and are reflected in selling, general and administrative expenses.

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Research and Development Expenditures

Research and development expenditures are expensed as incurred and are recorded in selling, general and administrative expenses in the consolidated statements of operations. Most of our manufacturing facilities have scientists and technicians on staff involved in product development, quality assurance and providing technical services to customers. Research, development and technical service efforts are conducted at various facilities. Our animal health research and development activities relate to: fermentation development and microbiological strain improvement; vaccine development; chemical synthesis and formulation development; nutritional specialties development; and ethanol-related products.

Stock-Based Compensation

We recognize expense for stock-based compensation to employees, including grants of stock options and restricted stock units, over the requisite service period based on the grant date fair value of the awards. We determine the fair value of stock options and restricted stock units using the Black-Scholes option-pricing model and the Monte Carlo simulation model, respectively. Each model uses historical and current market data to estimate the fair value. The models incorporate various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the awards.

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 assumed exercise of stock options and vesting of restricted stock units. All common share equivalents were included in the calculation of diluted net income per share in the periods included in the consolidated financial statements.

Net income per share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

basic ​ ​ ​ $ 0.83 ​ ​ ​ ​ $ 1.35 ​ ​ ​ ​ $ 1.61 ​ ​

diluted ​ ​ ​ $ 0.83 ​ ​ ​ ​ $ 1.35 ​ ​ ​ ​ $ 1.61 ​ ​

New Accounting Standards

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), provides optional expedients and exceptions to GAAP guidance for contracts and hedging relationships that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates expected to be discontinued by rate reform. The purpose of this guidance is to ease the financial reporting burdens related to the expected market transition to alternative reference rates. This ASU may be applied beginning with the interim period ended March 31, 2020, and prospectively through December 31, 2022. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, removes certain exceptions and amends certain requirements in the existing income tax guidance to ease accounting requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning

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after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

ASU 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans, modifies existing disclosure requirements for defined benefit pension and other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020 and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, modifies existing disclosure requirements for fair value measurement. This ASU is effective for fiscal years beginning after December 15, 2019. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.

ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income allows reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects related to adjustments resulting from the United States Tax Cuts and Jobs Act. This ASU was effective for our consolidated financial statements beginning July 1, 2019. The adoption of this guidance did not have a material effect on our consolidated financial statements.

ASU 2016-02, Leases (Topic 842), requires an entity to recognize assets and liabilities on the balance sheet for both financing and operating leases and requires additional qualitative and quantitative disclosures regarding leasing arrangements. We adopted ASU 2016-02 and its amendments effective July 1, 2019, using a modified retrospective transition approach, which does not require modifications to periods prior to the date of initial application. We elected not to reassess whether expired or existing contracts contain leases and carried forward the original lease classifications prior to adoption. We also did not use hindsight in our assessment of lease terms as of the effective date. Please refer to our lease policy for our elections regarding the accounting of short-term leases and the assessment of lease components. Upon adoption of ASU 2016-02, we recognized initial ROU assets and lease liabilities of $18,576 and $19,368, respectively, on the consolidated balance sheet. The difference in the amounts of the ROU assets and lease liabilities recognized relates to landlord incentives and deferred rent. An adjustment to opening retained earnings was not required, and the recognition of lease expense in the consolidated statements of operations did not change significantly. Refer to “Note 7 — Leases” for further information.

3.

Acquisition

​

In August 2019, we acquired the business and assets of Osprey Biotechnics, Inc. (“Osprey”). Osprey is a developer, manufacturer and marketer of microbial products and bioproducts for a variety of applications, serving customers in the animal health and nutrition, environmental, industrial and plant protection industries. We acquired Osprey to gain access to Osprey’s microbial technology and developed products and expand our customer relationships. The business is included in the Animal Health segment.

We acquired assets used in Osprey’s business, including intellectual property, working capital and property, plant and equipment, for an aggregate cash payment of $54,549. The acquisition agreement included contingent consideration, with the payment amount to be determined based on Osprey’s financial performance for the year ending June 30, 2021. The payment will be no less than $4,840 and has no maximum limit. Total consideration of $62,102 included a $7,553 liability for the estimated contingent consideration, based on the expected financial performance of the Osprey business. During the three months ended June 30, 2020, we updated our expectations of the future financial performance of the business and adjusted the contingent consideration amount to the minimum value of $4,840. The adjustment of $2,988 was recorded as a reduction to selling, general and administrative expenses. In connection with the Osprey acquisition, we incurred acquisition-related transaction costs of $462 and $213 during the years ended June 30, 2020 and 2019, respectively; the costs are included in selling, general and administrative expenses.

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We accounted for the acquisition as a business combination in accordance with FASB Accounting Standards Codification No. 805, Business Combinations. Pro forma information giving effect to the acquisition has not been provided because the results are not material to the consolidated financial statements. The fair values of the acquired assets and liabilities as of the acquisition date were:

​ Working capital, net ​ ​ ​ $ 2,366 ​ ​

​ Property, plant and equipment ​ ​ ​ ​ 2,005 ​ ​

​ Definite-lived intangible assets ​ ​ ​ ​ 32,400 ​ ​

​ Goodwill ​ ​ ​ ​ 25,331 ​ ​

​ Net assets acquired ​ ​ ​ $ 62,102 ​ ​

Definite-lived intangible assets include $18,900 for customer relationships, $12,200 for developed products and $1,300 for tradename. The definite-lived intangible assets will be amortized over periods ranging from 5 – 12 years. Goodwill represents the expected future benefits from the combination of Osprey’s business with Phibro. The amount of goodwill expected to be deductible for tax purposes is $25,331.

4.

Statements of Operations — Additional Information

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Disaggregated revenue, deferred revenue and customer payment terms

We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle and aquaculture. The products help prevent, control and treat diseases, enhance nutrition to help improve health and contribute to balanced mineral nutrition. The animal health and mineral nutrition products are sold directly to integrated poultry, swine and cattle integrators and through commercial animal feed manufacturers, wholesalers and distributors. 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 in 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:

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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.

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Nutritional Specialties: Nutritional specialty products enhance nutrition to help improve health and performance in areas such as immune system function and digestive health.

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

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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.

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The 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 a number of specialty ingredients for use in the personal care, industrial chemical and chemical catalyst industries, predominantly in the United States.

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

Net Sales by Product Type

Animal Health ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net Sales by Region

Net sales by region are based on country of destination.

Deferred revenue was $4,570 and $5,464 as of June 30, 2020 and June 30, 2019, respectively. Accrued expenses and other current liabilities included $1,109 and $965 of the total deferred revenue as of June 30, 2020 and June 30, 2019, respectively. The deferred revenue results 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 do not include 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 to 70 days after the revenue is recognized.

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Interest Expense and Depreciation and Amortization

Interest expense, net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Revolving credit facility ​ ​ ​ ​ 5,317 ​ ​ ​ ​ ​ 3,748 ​ ​ ​ ​ ​ 2,777 ​ ​

Amortization of debt issuance costs ​ ​ ​ ​ 882 ​ ​ ​ ​ ​ 882 ​ ​ ​ ​ ​ 883 ​ ​

Other ​ ​ ​ ​ 663 ​ ​ ​ ​ ​ 494 ​ ​ ​ ​ ​ 1,622 ​ ​

Interest (income) ​ ​ ​ ​ (1,757) ​ ​ ​ ​ ​ (1,901) ​ ​ ​ ​ ​ (1,693) ​ ​

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Depreciation and amortization ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of other assets ​ ​ ​ ​ 222 ​ ​ ​ ​ ​ 49 ​ ​ ​ ​ ​ 48 ​ ​

Depreciation of property, plant and equipment includes amortization of capitalized software costs of $1,038, $1,217 and $1,519 during 2020, 2019 and 2018, respectively.

Amortization of intangible assets as of June 30, 2020, is expected to be $8,732, $8,608, $8,608, $8,428, $6,773 and $29,848 for 2021, 2022, 2023, 2024, 2025 and thereafter, respectively.

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5.

Balance Sheets — Additional Information

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