Balchem Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless noted otherwise, amounts below are in millions of dollars. Balchem develops and sells specialty ingredients and products for food, nutrition, pharmaceutical, animal health, and medical-device sterilization markets.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $160.5 | $87.6 | $378.7 | $255.5 |
| Gross margin | $44.5 (27.7%) | $24.5 (28.0%) | $100.0 (26.4%) | $73.6 (28.8%) |
| Operating earnings | $25.3 (15.8%) | $17.0 (19.4%) | $55.1 (14.6%) | $49.5 (19.4%) |
| Net earnings | $15.2 | $11.7 | $33.8 | $34.1 |
| Diluted EPS | $0.49 | $0.38 | $1.09 | $1.11 |
| Operating cash flow | — | — | $49.2 | $39.9 |
Q3 sales rose 83.2% and net earnings rose 30.2% year over year. For the nine-month period, sales increased 48.2%, while net earnings declined 0.9%. The filing attributes much of the sales increase to the SensoryEffects acquisition; reported year-over-year comparisons therefore include different ownership periods.
Business and material changes
On May 7, 2014, Balchem acquired all of Performance Chemicals & Ingredients Company, doing business as SensoryEffects, for approximately $569.2 million, including working capital acquired. SensoryEffects contributed $58.9 million of sales and $3.5 million of net earnings from acquisition through September 30. The purchase-price allocation remains preliminary; reported goodwill from the acquisition was $357.1 million.
Q3 segment sales were $71.8 million for SensoryEffects, $75.0 million for Animal Nutrition & Health, and $13.7 million for Specialty Products. Management cited acquired SensoryEffects sales, stronger ruminant-feed demand, and industrial choline-related sales, including shale-fracturing applications, as growth drivers. The acquired product lines had lower gross margins, weighing on consolidated margin.
Liquidity, debt, and outlook
At September 30, cash and cash equivalents were $25.4 million, compared with $208.7 million at December 31, 2013; working capital was $83.4 million, down from $242.0 million. Operating cash flow was $49.2 million for the first nine months. Investing cash outflow was $572.6 million, principally reflecting the acquisition; capital expenditures were $5.9 million.
Debt outstanding was $341.3 million: $35.0 million current and $306.3 million long-term. The May 2014 facility comprises a $350 million term loan and a $100 million revolving facility; the revolver was undrawn at quarter-end. The loans mature May 7, 2019, bear a floating rate plus a leverage-based spread (1.90% at September 30), are secured by company assets, and include financial covenants. Balchem reported covenant compliance. Management expects operations to generate sufficient cash flow for working capital, capital investment, and debt service, and said it continues to pursue acquisition candidates. No quantified earnings or revenue guidance is provided.
Margins, unusual items, and risks
- Q3 operating expenses included $5.8 million of additional amortization related to acquired intangible assets and $0.5 million of integration costs. Excluding amortization and integration costs, management reported Q3 operating earnings of $31.7 million, or 19.8% of sales.
- For the nine months, the acquired-inventory fair-value adjustment increased cost of sales by $4.7 million; acquisition-related transaction and integration costs were $3.3 million, and acquired-intangible amortization increased expense by $9.3 million. Excluding amortization, the inventory adjustment, and transaction/integration costs, management reported operating earnings of $72.7 million, or 19.2% of sales.
- The nine-month effective tax rate was 34.8%, compared with 31.2% in 2013; management cited acquisition-related jurisdictions, state tax apportionment, income mix, and timing of credits and deductions.
- A 100-basis-point interest-rate change applied to quarter-end borrowings would change annual interest expense and cash flow by approximately $3.4 million. The company also cites foreign-currency and raw-material price exposure.
- Contingencies include ongoing evaluation of a former waste-drum site and a former owner’s Superfund remediation at the Verona facility; management believes litigation and claims will not materially affect financial position, results, or liquidity. Future lease payments totaled $8.4 million. The filing identifies no material change to previously disclosed risk factors.
Investor facts to verify
- How SensoryEffects performs after integration, including its lower-margin product mix and the final acquisition accounting and working-capital adjustment.
- Whether operating margins and earnings recover as acquisition-related amortization, inventory step-up, and integration costs evolve.
- Debt amortization, floating-rate exposure, covenant headroom, and the company’s capacity to fund further acquisitions while maintaining liquidity.
- Whether growth drivers cited by management—particularly dairy economics and industrial/shale-related demand—persist, and how foreign exchange and raw-material costs affect results.