Balchem Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Dollar amounts below are in millions unless otherwise stated.
Business context
Balchem develops and sells specialty ingredients and products serving human nutrition and health, animal nutrition and health, and specialty products markets, including medical-device sterilization and plant nutrition.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $202.4 | $173.4 | $388.0 | $347.8 |
| Gross margin | $59.4 | $55.4 | $118.2 | $110.7 |
| Gross margin % | 29.4% | 31.9% | 30.5% | 31.8% |
| Operating earnings | $30.6 | $26.9 | $61.2 | $53.2 |
| Operating margin | 15.1% | 15.5% | 15.8% | 15.3% |
| Net earnings | $22.7 | $21.1 | $46.1 | $40.9 |
| Diluted EPS | $0.70 | $0.65 | $1.41 | $1.26 |
| Operating cash flow | — | $76.4 | $67.2 |
- Q2 sales increased 16.7% and net earnings increased 7.6% year over year. H1 sales rose 11.6% and net earnings rose 12.8%.
- H1 sales growth was broad-based: Human Nutrition & Health (HNH) +11.9%, Animal Nutrition & Health (ANH) +11.2%, and Specialty Products +10.4%.
- H1 segment operating earnings were $38.7 million for HNH, $8.6 million for ANH, and $16.9 million for Specialty Products. ANH earnings declined 40.5%, despite higher sales.
- H1 operating cash flow increased 13.7%. Investing cash outflow was $13.5 million, largely reflecting capital expenditures and intangible-asset spending; financing cash outflow was $65.7 million.
Liquidity, debt and financial position
- At June 30, 2021, cash and equivalents were $79.9 million; working capital was $186.5 million.
- Revolving debt was $123.6 million, down from $163.6 million at year-end 2020. The $500 million facility had $376.4 million available and matures June 27, 2023. The stated borrowing rate was 1.095%; the company was in compliance with its covenants.
- H1 debt repayments were $45.0 million, partially offset by $5.0 million of new borrowing. The company paid $18.7 million in dividends and repurchased $10.8 million of stock.
- Cash declined $4.7 million during H1. Approximately $57.7 million was held by foreign subsidiaries and management said it intended to reinvest those funds abroad; repatriation could entail additional withholding taxes.
Material changes, outlook and risks
- Verona flood: Localized flash flooding in May shut the Missouri plant for several weeks. Management estimated a negative Q2 direct financial impact of approximately $3.8 million, mainly damaged inventory and cleanup services. The plant was operational again by filing time; customer needs were largely met through inventory and alternate capacity. An insurance claim was filed, with expected partial recovery, but the amount and timing were not stated.
- Cost and margin pressure: Higher raw-material and distribution costs, together with flood recovery costs, reduced gross margin percentage. Favorable product mix and manufacturing efficiencies partially offset the pressure.
- Tax: Effective tax rates rose to 24.3% in Q2 and 23.1% in H1, from 18.7% and 19.0%, respectively, primarily due to reduced tax credits and stock-compensation tax benefits; H1 also reflected higher enacted state tax rates.
- Management outlook: No quantitative earnings or revenue guidance was provided. Management expected operations to generate sufficient cash for working capital and necessary investment, described liquidity as strong, and said it was pursuing acquisition candidates. It continued to monitor COVID-19 and related market conditions; aggregate demand effects had not appeared material to the company.
- Other exposures: The Verona site received an EPA General Notice Letter concerning potential liability for 1,4-dioxane contamination. Balchem believed the contamination related to the former owner’s operations and was studying site conditions. Management said other litigation and claims were not expected to materially affect financial position, results, or liquidity. The filing reported no material changes to the prior annual report’s risk factors.
- A 100-basis-point interest-rate change applied to period-end borrowings would change annual interest expense and cash flow by approximately $1.236 million. Interest-rate and cross-currency swaps were designated as effective hedges at quarter-end.
Important facts for investors to verify
- Whether insurance proceeds are received for the Verona flood, and how much of the estimated $3.8 million impact is ultimately recovered.
- Whether higher raw-material and distribution costs persist, and whether gross-margin pressure eases.
- Whether ANH operating earnings recover from the sharp year-over-year decline.
- Developments in the EPA’s 1,4-dioxane inquiry, including any remediation obligations or related costs.
- Use of foreign-held cash, remaining revolving-credit capacity, and any acquisition or capital-allocation decisions.