Balchem Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated figures; dollar amounts below are in millions unless stated otherwise.
Business context
Balchem develops and sells specialty ingredients and products across Human Nutrition & Health, Animal Nutrition & Health, Specialty Products, and Industrial Products. The company says first-half results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $163.7 | $147.1 | $325.1 | $284.8 |
| Gross margin | $53.5 | $46.8 | $104.9 | $91.2 |
| Gross margin % | 32.7% | 31.8% | 32.3% | 32.0% |
| Operating earnings | $27.6 | $24.8 | $55.0 | $47.5 |
| Operating margin | 16.9% | 16.9% | 16.9% | 16.7% |
| Net earnings | $19.7 | $16.5 | $39.0 | $32.1 |
| Diluted EPS | $0.61 | $0.51 | $1.21 | $1.00 |
Q2 sales rose 11.3% and net earnings rose 19.0% year over year; H1 sales rose 14.2% and net earnings rose 21.8%. Lower effective tax rates—21.5% in Q2 and 22.3% in H1, versus 26.7% and 25.9%—partly supported earnings growth.
H1 operating cash flow was $46.7, compared with $45.7 a year earlier. Capital expenditures were $7.7 versus $10.8; cash increased $22.1 to $62.5. Receivables and inventories used $7.6 and $9.6 of operating cash, respectively.
Segments and material changes
- Human Nutrition & Health: Q2 sales rose 9.0% to $85.0; H1 sales rose 11.2% to $168.1. IFP contributed to growth in Powder Systems and Encapsulates, while segment earnings declined 11.1% in Q2 as margin percentage fell and R&D spending increased.
- Animal Nutrition & Health: Q2 sales rose 13.5% to $42.0; H1 sales rose 17.4% to $88.2. Higher feed-grade choline prices and volumes drove earnings growth. Ruminant-product sales weakened, with management citing lower selling prices and, for H1, weaker dairy economics.
- Specialty Products: Q2 sales increased 10.1% to $22.9, mainly on plant nutrition and medical-device sterilization volumes. H1 sales increased 2.7% to $40.6; segment earnings decreased 4.9%.
- Industrial Products: Q2 sales increased 22.5% to $13.8; H1 sales increased 48.8% to $28.2, chiefly from choline-related products used in shale-fracturing applications.
Operating expenses increased to $25.8 in Q2 and $49.9 in H1. Comparisons were affected by prior-year indemnification settlement income of $2.1, higher compensation and R&D costs, additional IFP-period expenses, lower transaction costs, and H1 insurance proceeds of $1.6 related to the Clearfield fire. Q2 interest expense included a $0.4 write-off of deferred financing costs after refinancing.
Liquidity, debt, and capital
At June 30, cash was $62.5, total assets $989.5, and stockholders’ equity $663.2. Working capital was $180.5, up from $90.9 at year-end; the filing’s text does not attribute this increase to a single cause. Cash held by foreign subsidiaries was $31.6, which Balchem intends to reinvest abroad and does not currently expect to repatriate.
On June 27, the company replaced its prior facility with a five-year senior secured revolving credit agreement, expiring June 27, 2023, with capacity of $500.0. It used the facility to repay $210.75 of term debt due in May 2019. At quarter-end, $210.75 was drawn and $289.25 remained available; the stated interest rate was 3.228%. The company was in compliance with quarterly covenants. A 100-basis-point rate change would affect annual interest expense and cash flow by approximately $2.1.
H1 financing included $13.4 in dividends paid and $6.6 in proceeds from exercised stock options. Balchem reported no material changes to contractual obligations outside the ordinary course of business and expects operating cash flow to fund working capital, capital investment, and debt service.
Outlook, risks, and unusual items
- No specific earnings, revenue, or margin guidance is provided. Management says it continues to pursue acquisition candidates and may seek additional borrowing or access to financial markets for acquisitions and other needs.
- Management identifies dairy-industry economics, feed-grade choline prices and volumes, foreign exchange, and raw-material prices as relevant business exposures. The company manages foreign-exchange and input-cost exposure, where possible, through pricing and operational measures; it reports no derivative instruments.
- Accounting for certain Tax Cuts and Jobs Act effects remained provisional at June 30, including analysis of deferred taxes, foreign earnings, GILTI, and compensation deductibility. The company said these assessments could be updated during the measurement period.
- The company adopted ASC 606 using the modified retrospective method; adoption had no material financial-statement impact. Its reported revenue effect was a decrease of $0.1 for Q2 and an increase of $0.4 for H1.
- Balchem describes the Verona, Missouri Superfund remediation obligations as primarily the prior owner’s responsibility and says it is indemnified by the sellers. Management believes other litigation, claims, and assessments will not materially affect financial position, results, or liquidity. No material risk-factor changes from the 2017 Form 10-K were reported.
Key facts for investors to verify
- How much of sales growth reflects underlying demand and pricing versus IFP acquisition contributions, particularly in Human Nutrition & Health.
- Whether higher feed-grade choline prices and volumes—and the resulting Animal Nutrition & Health earnings improvement—are sustainable, given weaker ruminant-market economics.
- How final Tax Act and GILTI accounting affects the effective tax rate and reported earnings.
- Revolver utilization, floating-rate exposure, covenant headroom, and the treatment of cash held overseas.
- Whether working-capital growth, especially receivables and inventories, converts into cash in subsequent periods.