PHIBRO ANIMAL HEALTH CORP (PAHC) FY 2021 MD&A

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Our management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. This MD&A should be read in conjunction with our consolidated financial statements and related notes thereto included 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 and Risk Factors Summary.”

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 1,625 product presentations in over 80 countries to approximately 3,725 customers.

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Factors affecting our performance

Effects of the COVID-19 pandemic

The global food and animal production industry has experienced demand disruption, production impacts, price volatility and currency volatility in international markets due to the COVID-19 pandemic. The response to the global outbreak of COVID-19 continues to evolve. Governmental authorities continue to implement measures to contain virus outbreaks, such as travel bans, quarantines, shelter-in-place orders, site closures and business shutdowns. Although vaccines are now available, distribution efforts vary widely country-by-country and state-by-state. The pandemic may have significant economic impacts on customers, suppliers and markets. New information may continue to emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the economic impact. We believe the global food and animal production industry is returning to stability, but the potential impact of COVID-19 continues to evolve and future industry outlooks remain uncertain.

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

The uncertainties surrounding the COVID-19 pandemic remain fluid. We are unable to predict the supply, distribution or effectiveness of COVID-19 vaccines and hence the impact on the economies where we manufacture and sell our products. While we continue to adapt our operations and mitigate the risks and challenges posed by COVID-19, the demand for our products will be dependent upon economic conditions and the ability of our customers and end users of our products to operate their businesses and production facilities. Our business and future operational results may be impacted by government mandated response efforts, supply chain and manufacturing disruptions, increased volatility in raw material costs and decreased demand due to changes in our customer purchasing patterns and preferences. We are unable to predict with confidence the nature and timing of when any of these events may occur and the effects COVID-19 will have on our business, our consolidated results and the broader economic environment going forward.We will continue to evaluate the nature and extent of the effects of COVID-19 on our business, consolidated results of operations, financial condition, and liquidity. For additional considerations and risks associated with COVID-19 on our business, please refer to Item 1A. “Risk Factors.”

Industry growth

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 growth of the animal health industry.

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

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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 carbadox (the active ingredient in our Mecadox product) via a regulatory process known as a Notice of Opportunity for Hearing (“NOOH”), due to concerns that certain residues from the product may persist in animal tissues for longer than previously determined. The NOOH process provided Phibro with an opportunity to defend the safety of carbadox prior to the FDA taking final steps to remove carbadox from the market. Over the next four years, as part of an ongoing process of responding to the inquiries from the FDA’s Center for Veterinary Medicine (“CVM”), 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 announced it does not agree with Phibro’s scientific conclusions that carbadox is safe under the current conditions of use. Instead of proceeding to a hearing on the scientific concerns raised in the 2016 NOOH, consistent with the normal regulatory procedure, the FDA announced that it was withdrawing the current NOOH and issuing a proposed order to review the regulatory method for carbadox. The approved regulatory method determines if there are residues of carcinogenic concern in animal tissue at the time of slaughter. If the order is finalized, the FDA has indicated it plans to issue a new NOOH proposing the withdrawal of carbadox from the market because of a lack of an approved regulatory method.

In September 2020, Phibro commented on the proposed order, reiterating the safety of carbadox and the appropriateness of the regulatory method, and further offered to work with the CVM to generate additional data to support the existing regulatory method or select a suitable alternative regulatory method. Phibro disagrees with the agency’s actions and has submitted a request to the FDA Office of the Commissioner that the agency continue the NOOH process it started in 2016 and proceed with a hearing to review the substantial body of data supporting the safety of carbadox. There is no defined timeline for the conclusion of this matter. Should we be unable to successfully defend the safety of the product, the loss of carbadox sales would have an adverse effect on our financial condition and results of operations. Sales of carbadox for the twelve months ended June 30, 2021, were $23 million. 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 $330 million, $322 million and $350 million for the years ended June 30, 2021, 2020 and 2019, respectively.

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, 2021, we generated approximately 40% 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 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

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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

Adverse weather events and natural disasters may interfere with and negatively impact operations at our manufacturing sites, research and development facilities and offices, which could have a material adverse effect on our financial condition and results of operations, especially if the impact of an event or disaster is frequent or prolonged.

Our operations, and the activities of our customers, could be disrupted by climate change. The physical changes caused by climate change may prompt changes in regulations or consumer preferences which in turn could have negative consequences for our and our customers’ businesses. Climate change may negatively impact our customers’ operations, particularly those in the livestock industry, through climate-related impacts such as increased air and water temperatures, rising water levels and increased incidence of disease in livestock. Potential physical risks from climate change may include altered distribution and intensity of rainfall, prolonged droughts or flooding, increased frequency of wildfires and other natural disasters, rising sea levels, and a rising heat index, any of which could cause negative impacts to our and our customers’ businesses. If such events affect our customers’ businesses, they may purchase fewer of our products, and our revenues may be negatively impacted. Climate driven changes could have a material adverse effect on our financial condition and results of operations.

There has been a broad range of proposed and promulgated state, national and international regulations aimed at reducing the effects of climate change. Such regulations could result in additional costs to maintain compliance and additional income or other taxes. Climate change regulations continue to evolve, and it is not possible to accurately estimate potential future compliance costs.

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 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.

Our current strategic initiatives include a number of projects. We are working to develop a vaccine for African Swine Fever, a virulent disease that is highly lethal in swine. We also have developed pHi-Tech, a portable electronic vaccination device and software that ensures proper delivery of vaccines and provides health management information. We are developing a facility in Sligo, Ireland for the production of animal vaccines and have recently received EU GMP approval for the facility and have submitted product registration applications in various markets. We are developing microbial products and bioproducts for a variety of applications serving animal health and nutrition, environmental, industrial and agricultural customers. We continue to build our companion animal business and pipeline. Our Rejensa joint supplement for dogs continues to gain customer acceptance. Our companion animal development pipeline includes an early-stage atopic dermatitis compound, a novel Lyme vaccine delivery system product and two early-stage oral care compounds.

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Analysis of the consolidated statements of operations

Summary Results of Operations

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Certain amounts and percentages may reflect rounding adjustments.

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 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 changes in uncertain tax positions and valuation allowances. 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.

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

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Certain amounts and percentages may reflect rounding adjustments.

Comparison of the years ended June 30, 2021 and 2020

Net sales

Net sales of $833.4 million for the year ended June 30, 2021, increased $33.0 million, or 4%, as compared to the year ended June 30, 2020. Animal Health, Mineral Nutrition and Performance Products increased $18.8 million, $6.1 million, and $8.0 million, respectively.

Animal Health

Net sales of $545.7 million for the year ended June 30, 2021, increased $18.8 million, or 4%. Net sales of MFAs and other increased $7.7 million, or 2%, due to increased domestic demand in swine and increased international sales in poultry. These gains were partially offset by an $8.9 million decline in net sales in China following regulatory changes effective January 1, 2020. Net sales of nutritional specialty products grew $13.5 million, or 10%, due to international and domestic volume growth in dairy products, partially offset by lower sales in domestic poultry. Net sales of vaccines declined $2.4 million, or 3%, as challenging economic conditions in Eastern Europe more than offset domestic volume growth and increased demand in the Asia Pacific region.

Mineral Nutrition

Net sales of $220.6 million for the year ended June 30, 2021, increased $6.1 million, or 3%, due to higher overall average selling prices and increased unit volumes. The increase in average selling prices is correlated with the movement of the underlying raw material costs.

Performance Products

Net sales of $67.1 million for the year ended June 30, 2021, increased $8.0 million, or 14%, driven by increased volumes of copper-based products.

Gross profit

Gross profit of $271.4 million for the year ended June 30, 2021, increased $14.5 million, or 6%, as compared to the year ended June 30, 2020. Gross margin increased 50 basis points to 32.6% of net sales for the year ended June 30, 2021, as compared to 32.1% for the year ended June 30, 2020. The year ended June 30, 2020, included $0.3 million of acquisition-related cost of goods sold.

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Animal Health gross profit increased $7.2 million due to sales growth. Mineral Nutrition gross profit increased $2.4 million, driven by increases in average selling prices, partially offset by increases in raw material costs. Performance Products gross profit increased $4.8 million, driven by higher volumes, higher average selling prices and decreases in raw material and production costs. Acquisition-related cost of goods sold in the prior year accounted for $0.3 million of the gross profit improvement in the current year.

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) of $196.5 million for the year ended June 30, 2021, increased $8.8 million, or 5%, as compared to the year ended June 30, 2020. SG&A for the year ended June 30, 2021, included $1.1 million of stock-based compensation. SG&A for the year ended June 30, 2020, included $2.3 million of stock-based compensation, $0.4 million of restructuring costs, $0.5 million of acquisition-related transaction costs and income of $2.8 million from other acquisition-related items. Excluding these items, SG&A increased $8.0 million, or 4%.

Animal Health SG&A increased $5.6 million, primarily due to increased professional fees to support the continued use of carbadox and investments in international expansion initiatives. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Corporate expenses increased $2.5 million, driven by investments in strategic initiatives, plus incremental costs for performance-related compensation and information technology. Overall costs, including marketing, product development and travel, continued to be restrained due to COVID-19 limitations. The stock-based compensation, restructuring costs, acquisition-related transaction costs and other acquisition-related income items accounted for a net $0.8 million increase in SG&A.

Interest expense, net

Interest expense, net of $12.9 million for the year ended June 30, 2021, was flat as compared to the year ended June 30, 2020. Interest expense decreased primarily due to favorable variable interest rates, offset by higher levels of debt outstanding and a $1.0 million of expense related to the April 2021 refinancing.

Foreign currency (gains) losses, net

Foreign currency gains, net for the year ended June 30, 2021, were $4.5 million, as compared to net losses of $0.8 million for the year ended June 30, 2020. Foreign currency gains, net primarily arose from intercompany balances, driven by the movement of the Mexican, South African and Turkish currencies relative to the U.S. dollar.

Provision for income taxes

The provision for income taxes was $12.1 million and $22.0 million for the years ended June 30, 2021 and 2020, respectively. The effective income tax rate was 18.2% and 39.6% for the years ended June 30, 2021 and 2020, respectively. Our effective income tax rate has varied from period to period and from the federal statutory rate, due to the mix of income in the various jurisdictions where we have operations; changes in tax rates from period to period; and the effects of certain other items. The provision for income taxes during the year ended June 30, 2021, included (i) a $5.3 million benefit from the reversal of uncertain tax positions related to settlements and lapse of statute of limitations of prior years, (ii) a $1.5 million benefit related to final regulations issued in July 2020 for the Global Intangible Low-Taxed Income (“GILTI”) tax related to the years ended June 30, 2020 and 2019, (iii) a $1.2 million benefit related to exchange rate differences on intercompany dividends, and (iv) a $0.9 million benefit related to a detailed analysis of various other items. The effective income tax rate, without these items, would have been 31.6% for the year ended June 30, 2021. The provision for income taxes for the years ended June 30, 2021 and 2020, included $0.9 million and $3.5 million of GILTI federal tax expense, respectively.

Net income

Net income of $54.4 million for the year ended June 30, 2021, increased $20.8 million, as compared to net income of $33.6 million for the year ended June 30, 2020. The increase was primarily driven by higher operating income of $5.7 million, increased foreign currency gains of $5.3 million and a $9.9 million decrease to the provision for income taxes. The increase in operating income was driven by a $14.5 million increase in gross profit, partially offset by increased SG&A costs of $8.8 million.

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Adjusted EBITDA

Adjusted EBITDA of $107.9 million for the year ended June 30, 2021, increased $5.7 million, or 6%, as compared to the year ended June 30, 2020. Animal Health Adjusted EBITDA increased $0.8 million, driven by increased gross profit, partially offset by higher SG&A expenses. Mineral Nutrition and Performance Products Adjusted EBITDA for the year ended June 30, 2021, increased $2.4 million and $4.9 million, respectively, on higher gross profit. Corporate expenses increased $2.4 million driven by investments in strategic initiatives as well as incremental costs for performance-related compensation and information technology.

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 August 2019 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.

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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 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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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.

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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Certain amounts may reflect rounding adjustments.

Operating activities

Operating activities provided $48.3 million of net cash for the year ended June 30, 2021. Profitable business performance resulted in cash provided by net income and non-cash items, including depreciation and amortization, of $78.2 million. Cash used in the ordinary course of business for changes in operating assets and liabilities and other items was $29.9 million. Accounts receivable used $18.2 million of cash due to increased sales and timing of collections. Cash used for inventory was $12.5 million. Inventory increases were primarily due to forecasted future demand and internal production schedules. For certain products, we are maintaining safety stocks to mitigate potential disruptions in production. Other assets and prepaid expenses used $1.9 million and $1.6 million of cash, respectively. Accounts payable provided $3.1 million of cash due to timing of payments. Accrued expenses and other liabilities provided cash of $1.2 million due to timing of payments for employee-related liabilities.

Operating activities provided $59.3 million of net cash for the year ended June 30, 2020. Profitable business performance resulted in cash provided by net income, adjusted for the effect of non-cash charges of $73.0 million. Cash used in the ordinary course of business for changes in operating assets and liabilities and other items was $13.7 million. Accounts receivable provided $28.7 million of cash, due to reduced sales levels and improved collection timing; days sales 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.

Investing activities

Investing activities used $18.6 million of net cash for the year ended June 30, 2021. Capital expenditures were $29.3 million as we continued to invest in expanding production capacity and productivity improvements. Net proceeds from maturities of short-term investments were $12.0 million. Other investing activities used $1.6 million of cash.

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 manufacturing facilities 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

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Financing activities

Financing activities used $17.0 million of net cash for the year ended June 30, 2021. We used proceeds from the April 2021 refinancing to pay all outstanding term loan and revolving credit balances under the 2017 Credit Facilities. We paid $2.9 million in debt issuance costs relating to the refinancing. We paid $19.4 million in dividends to holders of our Class A and Class B common stock.

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.

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. Certain relevant measures of our liquidity and capital resources follow:

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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, 2021, we had $95.0 million in outstanding borrowings under the 2021 Revolver. We had outstanding letters of credit and other commitments of $2.7 million, leaving $152.3 million available for borrowings and letters of credit, subject to restriction in our Credit Facilities.

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 22, 2021. Our future ability to pay dividends will depend upon our results of operations, financial condition, capital requirements, our ability to obtain funds from our subsidiaries and other factors that our Board of Directors deems relevant. Additionally, the terms of our current and any future agreements governing our indebtedness could limit our ability to pay dividends or make other distributions.

Based on the funded status on June 30, 2021, the Company does not expect to contribute to the domestic pension plan during 2022.

At June 30, 2021, our cash and cash equivalents and short-term investments included $91.6 million held by our international subsidiaries. There are no restrictions on cash distributions to PAHC from our international subsidiaries.

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Contractual obligations

Payments due under contractual obligations as of June 30, 2021, were:

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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, 2021, balance. We assumed future interest rates and applicable rates are the same as the rates at June 30, 2021.

Excluded from the contractual obligations table is the liability for unrecognized tax benefits totaling $5.7 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.

Analysis of the consolidated balance sheets

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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.

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Inventory increased by $19.7 million in 2021, primarily due to additional volumes and the effect of currency fluctuations. Inventories increased by $12.5 million, as measured by exchange rates at the time of the transactions.

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.

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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, 2021 and 2020. 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.

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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 (c)

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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:

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

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

Critical accounting policies

Critical accounting policies are those that require application of management’s most difficult, subjective and/or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all accounting policies require management to make difficult, subjective or complex judgments or estimates. In presenting our consolidated financial statements in accordance with generally accepted accounting principles 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 uncertain. Although vaccines are now available, distribution efforts vary widely country-by-country and state-by-state. New information may continue to emerge concerning COVID-19, and actions required to contain or treat it may affect the duration and severity of the pandemic. The pandemic may have significant economic impacts on customers, suppliers and markets. The pandemic may affect our future revenues, expenses, reserves and allowances, manufacturing operations and employee-related

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costs. 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 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 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 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.

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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, 2021, we tested goodwill using a qualitative approach and 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 $2.7 million equity investment are currently idled; we have concluded the investment is not 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, 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

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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.

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.

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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.”

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