Balchem Corporation — Q2 2015 Form 10-Q
Business context and period. Balchem develops and sells specialty ingredients for food, nutrition, pharmaceutical, animal-health, industrial and medical-device sterilization markets. This unaudited report covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. The company reports four segments: SensoryEffects, Animal Nutrition & Health, Specialty Products and Industrial Products. Prior segment information was retrospectively revised to match the new structure.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales ($ millions) | 134.8 | 132.2 | 279.6 | 218.2 |
| Gross margin ($ millions) | 41.9 | 32.3 | 85.0 | 55.6 |
| Gross margin (%) | 31.1% | 24.5% | 30.4% | 25.5% |
| Operating earnings ($ millions) | 23.8 | 16.5 | 48.8 | 29.9 |
| Operating margin | 17.6% | 12.5% | 17.5% | 13.7% |
| Net earnings ($ millions) | 14.9 | 9.7 | 30.1 | 18.6 |
| Diluted EPS | $0.47 | $0.31 | $0.95 | $0.60 |
Q2 sales rose 1.9%, operating earnings 44.0% and net earnings 53.3%. Six-month sales increased 28.1%, operating earnings 63.5% and net earnings 61.5%. The effective tax rate declined to 32.7% from 36.4% in Q2 and to 33.5% from 35.0% year to date.
Segments and drivers
- SensoryEffects: Q2 sales increased 36.7% to $67.2 million and segment earnings were $9.1 million, versus $2.9 million. Six-month sales rose 120.0% to $135.0 million, substantially reflecting the May 2014 acquisition; the acquired business contributed $72.2 million to the six-month sales increase.
- Animal Nutrition & Health: Q2 sales fell 3.7% to $41.6 million, while earnings rose to $7.5 million. Ruminant product growth and improved mix were offset by lower global feed-grade choline sales, including foreign-exchange pressure.
- Specialty Products: Q2 sales increased 1.2% to $13.8 million and earnings rose 11.5% to $6.1 million, primarily on product mix and lower raw-material costs.
- Industrial Products: Q2 sales fell 53.8% to $12.1 million and earnings declined to $1.1 million, principally due to weaker shale-fracturing demand and lower volumes. Six-month sales declined 29.0%.
Cash flow, liquidity and debt
- Six-month operating cash flow was $49.9 million, versus $27.6 million; capital expenditures were $15.3 million, versus $3.5 million. Investing cash outflow was $15.9 million, with no acquisition payment in the 2015 period; the 2014 period included the SensoryEffects acquisition.
- Cash and equivalents were $72.2 million at June 30, up from $50.3 million at year-end. Working capital was $119.5 million, compared with $85.8 million at December 31, 2014. Cash included $10.7 million held by foreign subsidiaries that management intended to keep invested abroad.
- Total debt was $315.0 million: $35.0 million current and $280.0 million long term. The company repaid $17.5 million of principal in the first half and had $100.0 million available on its revolving facility. The loans mature in May 2019, bear a variable rate (1.69% at June 30), are secured by company assets, and were covenant-compliant at period end.
- Management expects operating cash flow to fund working capital, capital investment and debt service, and continues to pursue acquisition candidates. A 100-basis-point interest-rate change would affect annual interest expense and cash flow by approximately $3.15 million.
Material changes, outlook and risks
Profitability improved amid favorable product mix, lower raw-material costs and operating efficiencies. Comparability is affected by the SensoryEffects acquisition: 2014 included a $4.7 million acquired-inventory fair-value charge and acquisition-related transaction and integration costs. Higher acquired-intangible amortization also weighed on 2015 operating expenses. Management’s stated operating-earnings figures excluding specified acquisition-related items are non-GAAP-style comparisons; the filing provides no numeric full-year revenue or earnings guidance.
Key exposures include reduced activity in North American shale-fracturing markets, foreign-currency movements, raw-material prices, dairy-industry economics and competition in commodity choline. The filing also describes environmental monitoring/remediation matters at company sites, leases, and an unfunded retiree medical obligation of $1.2 million; management believes litigation and claims will not materially affect financial position, results or liquidity. No material changes to the risks in the 2014 Form 10-K were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much reported growth and margin improvement reflects acquisition timing, and how the acquired business performs on a comparable basis.
- Whether Industrial Products weakness and foreign-exchange pressure in feed-grade choline persist.
- Progress and returns on the $15.3 million of first-half capital spending, including animal-nutrition capacity expansion.
- Debt repayment, covenant headroom and sensitivity to variable interest rates; confirm the availability and terms of the revolving facility.
- Potential cash-tax cost if foreign-held funds are repatriated, and any material developments in environmental contingencies.