Balchem Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; dollar amounts are in thousands unless otherwise noted. Balchem develops and sells specialty ingredients for food, pharmaceutical, nutrition, animal-health, medical-device sterilization, and industrial markets. Its segments are Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition & Health.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $74,687 | $61,458 | $147,695 | $121,361 |
| Gross margin | $21,761; 29.1% | $19,116; 31.1% | $42,541; 28.8% | $36,530; 30.1% |
| Operating earnings | $14,059; 18.8% of sales | $12,441; 20.2% | $27,357; 18.5% | $22,935; 18.9% |
| Net earnings | $9,572 | $8,339 | $18,484 | $15,368 |
| Diluted EPS | $0.32 | $0.28 | $0.61 | $0.52 |
| Operating cash flow | Not presented by quarter | $17,117 | $15,547 |
- Q2 sales increased 21.5% and net earnings increased 14.8% year over year; first-half sales rose 21.7% and net earnings rose 20.3%.
- First-half capital expenditures were $3,210, implying operating cash flow less capital expenditures of approximately $13,907. Cash increased to $89,742 from $77,253 at year-end 2010; working capital was $124,536, up from $100,144.
- June 30 debt on the balance sheet was $4,520, including $1,565 current and $2,955 long-term. The European term loan was reported at $4,497 translated; neither the $6,000 U.S. nor €3,000 European revolving facility had amounts drawn. Cash substantially exceeded reported debt.
- Total assets were $249,962 and stockholders’ equity was $212,479 at June 30, 2011.
Material changes and operating drivers
- Animal Nutrition & Health was the largest growth contributor: Q2 segment sales rose 27.3% to $51,764, with higher feed and industrial choline sales, including industrial applications such as natural-gas fracking. First-half segment sales rose 26.6% to $102,449.
- Specialty Products sales rose 17.6% in Q2, aided by ethylene oxide demand and propylene oxide sales associated with the Aberco business acquired in 2010. Food, Pharma & Nutrition sales increased 3.0%; higher human choline sales were partly offset by lower calcium-product sales following the 2010 sale of a non-core product line.
- Gross and operating margins declined despite higher sales and earnings. Management attributed pressure principally to higher key raw-material costs; first-half Animal Nutrition & Health results also reflected temporary inefficiencies at certain choline plants. Segment margin trends varied, with Specialty Products benefiting from volume efficiencies and mix.
- Operating expenses increased 15.4% in Q2 and 11.7% for the first half, reflecting Aberco-related costs, added headcount and payroll costs, and consulting fees for acquisition evaluations. Expenses as a share of sales declined year over year.
Outlook, risks, and unusual items
- The filing provides no specific earnings, revenue, or margin guidance. Management expected operating cash flow to fund working capital and necessary capital investment, and said it was pursuing acquisition candidates; it may seek additional financing if needed.
- Management identified raw-material prices, foreign exchange, and operating performance as exposures. The company manages these risks where possible through pricing and operational measures and had no derivative instruments. A 100-basis-point interest-rate change was estimated to affect annual interest expense and cash flow by approximately $45.
- Management believed both revolving credit facilities would be renewed in the normal course; each was due to mature May 31, 2012. The European term loan matured May 1, 2014.
- Other income included a $188 gain from the sale of the non-core calcium carbonate product line and favorable foreign-exchange fluctuations. First-half cash-flow reconciliation included a $94 asset-impairment loss; the filing text does not clearly identify the asset or explain the impairment.
- Environmental matters include ongoing discussions with New York regulators about possible further monitoring at a former drum site and a Superfund designation at the Verona facility. The company said it believed Verona remediation was complete, with the prior owner responsible for any further remedy and contractual indemnification in place. Management said litigation and other claims were not expected to materially affect financial position, results, or liquidity.
- The company reported no material change in its annual-report risk factors, no significant change in internal control over financial reporting, and effective disclosure controls. Results for the six months are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether volume growth and segment demand—especially choline and industrial applications—continue, and how much growth reflects acquired sales or pricing versus underlying volume.
- Whether raw-material inflation and choline-plant inefficiencies continue to pressure gross and operating margins.
- The nature and significance of the $94 impairment loss and the sustainability of the calcium-carbonate sale gain and favorable currency effects.
- Cash conversion and working-capital needs, including the effect of rising receivables and inventories, and the renewal of revolving facilities by their stated maturity dates.
- Any developments in the environmental matters, unrecognized tax positions, or other contingencies; the filing reports approximately $420 of accrued tax-position interest and penalties.