Balchem Corporation (10-Q) — quarter ended June 30, 2022
All financial amounts are in millions of dollars, except per-share data. Balchem manufactures specialty ingredients and products serving human and animal nutrition, food, medical-device sterilization, plant nutrition, and industrial markets. It reports Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), and Specialty Products segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change | Six months 2022 | Six months 2021 |
|---|---|---|---|---|---|
| Net sales | $236.7 | $202.4 | +17.0% | $465.6 | $388.0 |
| Gross margin | $71.9 | $59.4 | +20.9% | $143.4 | $118.2 |
| Gross margin % | 30.4% | 29.4% | +1.0 pp | 30.8% | 30.5% |
| Operating earnings | $39.9 | $30.6 | +30.5% | $78.3 | $61.2 |
| Operating margin | 16.9% | 15.1% | +1.8 pp | 16.8% | 15.8% |
| Net earnings | $29.8 | $22.7 | +31.0% | $58.7 | $46.1 |
| Diluted EPS | $0.92 | $0.70 | +31.4% | $1.81 | $1.41 |
Q2 sales gains spanned all segments: HNH +18.1%, ANH +14.9%, and Specialty Products +7.7%. Management attributed growth mainly to higher selling prices; ANH and Specialty Products also faced negative volume/mix and foreign-exchange effects. Q2 cost of sales rose 15.3%, with raw-material inflation partly offset by comparison with prior-year Verona flood-recovery costs. Operating expenses increased 10.8%, slower than sales growth.
For the six months, operating cash flow was $55.3 versus $76.4 a year earlier. Management cited working-capital changes, inventory restocking, sales timing, and supplier payments. Investing cash outflow was $316.4, including $295.7 net cash paid for Kappa and $20.8 for capital expenditures and intangible assets. Financing cash inflow was $239.7, principally reflecting acquisition borrowing.
Liquidity, debt, and capital allocation
- Cash was $76.2 at June 30, down from $103.2 at year-end 2021; working capital was $233.0, up from $178.4.
- Revolving debt was $433.6, versus $108.6 at December 31, 2021. The company reported $66.4 of availability under its then-current $500 million facility and compliance with its covenants.
- On July 27, 2022, Balchem entered a new $550 million revolving facility due July 27, 2027, using proceeds to repay the prior facility. Management said it expects operations to generate sufficient cash for working capital and necessary investment and is pursuing acquisition candidates.
- Six-month dividends paid were $20.7; share repurchases were $35.2. Of $76.2 cash, $61.4 was held by foreign subsidiaries and management intended to reinvest it abroad.
Acquisition, outlook, and risks
- Balchem completed its acquisition of Kappa Bioscience on June 21, adding specialty vitamin K2 to HNH. Kappa’s post-close results were not material to reported earnings. The preliminary purchase accounting included $212.6 of goodwill and $24.8 of contingent consideration payable in 2024 if performance and other conditions are met; valuations remain subject to review.
- Management reported severe input-cost inflation, raw-material shortages, logistics disruptions, and labor-availability challenges, expected to continue for some time. No quantified earnings or revenue guidance is provided in the filing.
- Foreign-exchange movements reduced six-month comprehensive income; the company also has floating-rate debt. Management estimated that a 100-basis-point rate move would change annual interest expense and cash flow by approximately $4.3 at June 30 borrowing levels.
- At its Verona, Missouri site, the company and a prior owner received an EPA notice concerning a focused investigation of contaminants, primarily 1,4-dioxane and chlorobenzene. They were negotiating the scope of the investigation; the filing does not quantify a potential cost. Management said other litigation, claims, and assessments were not expected to materially affect financial position, results, or liquidity.
- Balchem added Russia’s invasion of Ukraine and related potential supply interruptions, material access, and cost pressures—particularly for European facilities—as a risk factor. Disclosure controls were judged effective; Kappa was being integrated into internal controls and was expected to be excluded from the year-end 2022 controls assessment.
Most important facts for investors to verify
- Whether pricing actions can continue to offset raw-material inflation without further weakening volume or mix.
- Kappa’s finalized purchase-price allocation, integration costs, contribution to growth, and likelihood/size of the 2024 contingent payment.
- Debt, borrowing costs, covenant headroom, and liquidity following the July 2022 refinancing.
- Working-capital and inventory trends, and the durability of operating cash generation after the acquisition.
- Potential scope, timing, and financial exposure associated with the Verona EPA investigation and international supply-chain risks.