Balchem Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise. Balchem develops and sells specialty ingredients for human and animal nutrition, food, medical-device sterilization, plant nutrition and industrial markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $231.3m | $236.7m | $463.8m | $465.6m |
| Gross margin | $77.3m | $71.9m | $150.5m | $143.4m |
| Gross margin percentage | 33.4% | 30.4% | 32.5% | 30.8% |
| Operating earnings | $42.8m | $39.9m | $77.2m | $78.3m |
| Operating margin | 18.5% | 16.9% | 16.7% | 16.8% |
| Net earnings | $30.1m | $29.8m | $52.8m | $58.7m |
| Diluted earnings per share | $0.93 | $0.92 | $1.63 | $1.81 |
| Interest expense, net | $5.2m | $1.0m | $10.7m | $1.5m |
- Cash flow: In the first half, operating activities provided $69.8m, investing activities used $13.7m, and financing activities used $58.1m. Capital expenditures and intangible-asset purchases were $18.0m. Cash increased $0.3m to $66.9m.
- Liquidity and debt: Working capital was $222.1m, versus $195.8m at year-end 2022. Revolver borrowings were $405.6m, leaving $144.4m available under the $550m facility, which matures in 2027. The stated borrowing rate was 6.33%; the company reported compliance with its financial covenants. Cash less revolver borrowings was approximately $338.7m net debt.
- Balance sheet: Total assets were $1.619bn and stockholders’ equity was $1.007bn at June 30, 2023. Cash held by foreign subsidiaries was $58.6m; the company said it intended to reinvest these funds abroad.
Changes versus comparable periods
- Q2 sales fell 2.3%, while gross margin increased 7.6% and net earnings rose 1.1%. Lower manufacturing input costs and higher selling prices supported gross-margin improvement. Operating expenses rose 8.0%.
- For the first half, sales were down 0.4%, operating earnings down 1.3%, and net earnings down 10.0%. Gross margin improved, but higher operating expenses and sharply higher interest expense weighed on earnings.
- Human Nutrition and Health sales increased 3.1% in Q2 and 5.6% for the half, helped by the Kappa vitamin K2 and Bergstrom MSM acquisitions; weaker food-and-beverage and minerals demand partly offset growth. Animal Nutrition and Health sales declined 2.0% in Q2 and 4.3% for the half, with weaker monogastric markets partly offset by ruminant growth. Specialty Products sales decreased 10.7% in Q2 and 7.2% for the half, mainly on lower volumes in plant nutrition and performance gases.
- Interest expense increased substantially, which management attributed to acquisition-related borrowings and higher interest rates. The six-month effective tax rate decreased to 21.8% from 23.6%, primarily due to lower state taxes and greater stock-based compensation tax benefits.
Outlook, commentary and notable items
- No quantified revenue or earnings guidance is provided in the filing. Management expects operating cash flow to fund working-capital needs and necessary capital investment and says it is pursuing additional acquisition candidates; it may seek additional borrowing or capital-markets funding if needed.
- Management cautions that sales may fluctuate with macroeconomic conditions, competition, customer preferences and new-product execution. Disclosed risks include input-cost and supply-chain pressures, foreign currency and interest-rate exposure, acquisition integration, manufacturing reliability, cybersecurity, regulation, litigation and product liability.
- Q2 operating expenses included $6.1m of restructuring-related impairment and asset-disposal charges. Favorable adjustments to acquisition transaction costs reduced expense by $8.0m in Q2 and $6.4m in the first half; these items affect comparability.
- The Bergstrom acquisition earn-out liability was $5.0m at June 30, 2023. Balchem settled its interest-rate and cross-currency swaps at maturity on June 27, 2023 and had no derivatives outstanding at quarter-end. Management estimates a 100-basis-point rate change on quarter-end borrowings would alter annual interest expense and cash flow by approximately $4.1m.
- At the Verona, Missouri facility, the company recorded a loss contingency related to an EPA inspection and compliance matter that it considers probable and reasonably estimable, but not material. It reported that requirements under an amended EPA compliance order had been completed by June 30. Management does not expect pending legal matters overall to materially affect financial position, results, liquidity or cash flows.
Key facts for investors to verify
- Whether sales and volumes in Animal Nutrition and Health and Specialty Products stabilize, and whether Human Nutrition and Health growth continues beyond acquisition contributions.
- Whether gross-margin improvement from pricing and lower manufacturing costs is sustainable, and how restructuring and acquisition-related costs develop.
- How debt repayment, variable-rate borrowing costs and available revolver capacity evolve; assess the impact of rates after the swaps’ maturity.
- Cash-flow conversion and capital spending, including the practical availability of foreign-held cash for U.S. obligations.
- Progress on integrating Kappa and Bergstrom, achievement of acquisition benefits, and any changes to the Bergstrom earn-out estimate or EPA-related contingencies.