Balchem Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Dollar amounts are in thousands, except per-share data. Balchem develops and sells specialty ingredients and products for food, nutrition, pharmaceutical, animal-health and medical-device sterilization markets.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $85,995 | $84,651; up 1.6% |
| Gross profit / margin | $23,215 / 27.0% | $24,232 / 28.6% |
| Operating earnings / margin | $13,355 / 15.5% | $15,865 / 18.7% |
| Net earnings | $8,894 | $10,888; down 18.3% |
| Basic / diluted EPS | $0.30 / $0.29 | $0.37 / $0.36 |
| Operating cash flow | $10,240 | $4,353 |
| Capital expenditures | $1,138 | $3,400 |
Gross margin contracted by 1.6 percentage points. Management attributed the decline to higher raw-material costs, unfavorable product mix and manufacturing variances. Operating expenses rose to $9,860 from $8,367, including $1,345 of transaction-related professional fees; excluding those fees, operating earnings were $14,700, or 17.1% of sales. The effective tax rate was 33.5%, versus 31.4%, primarily reflecting the timing of tax credits and deductions.
Cash and cash equivalents were $207,330 at March 31, 2014, down from $208,747 at year-end 2013. Working capital was $256,543, compared with $242,021. Total liabilities were $38,247; the company reported no borrowings at quarter-end. Operating cash flow improved mainly because of favorable working-capital movements, partly offset by lower earnings. Investing cash use included a $5,500 escrow deposit for the announced acquisition; financing cash use included $7,856 of dividends paid.
Business trends and changes
- Food, Pharma & Nutrition: Sales rose 10.4% to $12,150, helped by human choline products and food-sector sales. Segment earnings increased 3.7% to $2,601.
- Animal Nutrition & Health: Sales increased 0.3% to $61,053, while segment earnings fell 13.7% to $7,293. Higher raw-material costs and mix weighed on margins; lower chelated-mineral volumes reflected production issues that management said had been resolved. Encapsulated animal specialty sales also declined.
- Specialty Products: Sales were essentially flat at $12,792; segment earnings declined to $4,806 from $4,909.
Foreign sales were $29,851, versus $29,211. Cash increased through operations and was reduced by investing and financing outflows. The company paid the accelerated 2012 annual dividend during Q1 2014; it reported no dividends paid in Q1 2013.
Outlook, significant events and risks
Balchem entered a definitive agreement on March 31, 2014, to acquire Performance Chemicals & Ingredients Company (SensoryEffects) for $567 million in cash, subject to adjustments and customary closing conditions. Closing was expected in Q2 2014, and a substantial portion of the purchase price was expected to be debt financed. The $5,500 escrow deposit was released upon signing and received by Balchem in April. The filing provides no quantified earnings or synergy guidance for the acquisition.
The company said operating cash flow was expected to fund working capital, capital investment and future debt service, and that it continued to pursue acquisitions. It may seek additional bank loans or capital-market financing. Management cited exposure to foreign-exchange movements and raw-material prices, managed where possible through pricing and operations. The company noted that Q1 results are not necessarily indicative of full-year results. It reported no material changes to the risk factors in its 2013 Form 10-K.
Contingencies include environmental matters at the Slate Hill, New York site and the Verona, Missouri Superfund site, as well as ordinary-course litigation and claims. Management did not expect these matters to materially affect financial position, results or liquidity; some remediation monitoring or further action may remain. Operating lease commitments totaled $3,698. The company also disclosed approximately $3,200 of unrecognized tax benefits and $1,100 of accrued interest and penalties related to uncertain tax positions.
Important facts for investors to verify
- Whether the SensoryEffects acquisition closed as expected, its final purchase price and the amount, terms and cost of debt financing.
- Post-acquisition leverage, liquidity and debt-service capacity, given the company’s pre-deal cash balance and expected substantial borrowing.
- Whether gross-margin pressure from raw materials, product mix and manufacturing performance persists, particularly in Animal Nutrition & Health.
- Whether operating cash flow remains strong after considering working-capital timing and acquisition-related cash needs.
- Any developments in environmental matters, tax exposures, acquisition integration or the Taminco choline-facility joint venture.