Balchem Corporation (BCPC) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar amounts below are in millions unless noted.
Business context
Balchem develops and sells specialty ingredients and products across Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), Specialty Products, and Industrial Products. On May 27, 2019, it acquired Belgian specialty-gas company Chemogas, expanding packaged ethylene oxide operations in Europe and Asia.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $161.6 | $163.7 | $318.6 | $325.1 |
| Gross margin | $53.9 | $53.5 | $103.0 | $104.9 |
| Gross margin percentage | 33.4% | 32.7% | 32.3% | 32.3% |
| Operating earnings | $26.4 | $27.1 | $52.9 | $54.3 |
| Net earnings | $19.8 | $19.7 | $38.6 | $39.0 |
| Diluted EPS | $0.61 | $0.61 | $1.19 | $1.21 |
| Operating cash flow | — | — | $48.8 | $46.7 |
Q2 revenue fell 1.3% year over year, while net earnings rose 0.8%. For the first half, revenue declined 2.0% and net earnings declined 1.1%. Q2 operating margin was 16.3%, versus 16.6%; first-half operating margin was 16.6%, versus 16.7%. Lower operating earnings were partly offset by reduced interest expense. First-half capital expenditures were $14.7 million, compared with $7.7 million.
Segments and material changes
- HNH: Q2 revenue rose 1.0% to $85.9 million and segment earnings increased 27.4% to $12.3 million. First-half revenue rose 1.8% to $171.0 million.
- ANH: Q2 revenue increased 3.4% to $43.5 million, but earnings fell 28.2% to $5.0 million. First-half revenue declined 1.5% and earnings fell 29.0%, primarily due to lower feed-grade choline volumes and margins, increased competition, and the absence of the prior-year benefit from supply disruptions in China.
- Specialty Products: Q2 revenue rose 8.9% to $24.9 million; first-half revenue increased 6.7% to $43.3 million. Growth reflected Chemogas and higher ethylene oxide volumes for medical-device sterilization.
- Industrial Products: Q2 revenue declined 47.0% to $7.3 million; first-half revenue fell 38.4% to $17.4 million, mainly from lower choline-derivative sales for shale-fracking applications.
Financial position, outlook, and risks
- Cash was $41.7 million at June 30, down from $54.3 million at year-end. Working capital was $169.8 million, compared with $144.3 million.
- Revolving debt was $228.6 million, up from $156.0 million at year-end; $271.4 million remained available under the $500 million facility. The company reported compliance with its debt covenants. Cash less revolving debt was approximately $186.9 million of net debt.
- Cash used for the Chemogas acquisition, net of acquired cash, was $94.7 million. The purchase-price allocation, including $59.3 million of goodwill, remained preliminary. The acquisition was primarily debt-funded.
- Management expects operations to generate sufficient cash for working capital and necessary capital investments and is pursuing additional acquisitions. No quantitative earnings or revenue guidance is provided; interim results are not necessarily indicative of full-year results.
- Interest-rate and cross-currency swaps were entered into to hedge acquisition-related exposures. At quarter-end, derivative liabilities totaled $4.6 million. A 100-basis-point interest-rate move on the outstanding borrowings was estimated to affect annual interest expense and cash flow by about $2.3 million.
- An insignificant business portion was classified as held for sale: assets of $12.3 million and liabilities of $0.5 million. The sale was subject to closing conditions and timing was uncertain; no gain or loss had been recognized.
- Management cited competition and market economics in animal nutrition, commodity exposure, foreign exchange and interest-rate risk, and acquisition/integration risks. It reported no material change in the risk factors from its 2018 Form 10-K and no material change in internal controls.
Important facts for investors to verify
- Whether Chemogas integration, preliminary purchase accounting, and expected synergies affect subsequent results as anticipated.
- Whether continued weakness in industrial shale-fracking demand and competitive pressure in feed-grade choline persist.
- How acquisition-related borrowing, available revolver capacity, and hedges affect interest expense and leverage.
- Whether the held-for-sale transaction closes on the expected terms and timing.
- How much of reported cash is practically available for U.S. needs: $27.1 million was held by foreign subsidiaries and management intended to reinvest it abroad.