Balchem Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The interim financial statements are unaudited. Dollar amounts below are in thousands except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $83,296 | $79,014 | $167,947 | $155,217 |
| Gross margin | $24,885 | $22,584 | $49,117 | $43,742 |
| Gross margin percentage | 29.9% | 28.6% | 29.2% | 28.2% |
| Earnings from operations | $16,616 | $14,825 | $32,481 | $28,500 |
| Operating margin | 19.9% | 18.8% | 19.3% | 18.4% |
| Net earnings | $11,582 | $9,972 | $22,470 | $19,240 |
| Diluted EPS | $0.38 | $0.33 | $0.73 | $0.64 |
| Operating cash flow | Not separately stated | Not separately stated | $23,784 | $31,223 |
Q2 sales rose 5.4% and net earnings rose 16.1% year over year; first-half sales rose 8.2% and net earnings rose 16.8%. Management attributed improved gross margins mainly to higher volume and operating efficiencies. Operating expenses increased 6.6% in Q2 and 9.1% for the first half, including higher headcount, compensation, and advertising.
Segments and operating developments
- Animal Nutrition & Health: Sales increased 5.8% in Q2 and 10.0% in the first half. Segment earnings increased 22.5% and 28.8%, respectively. Growth included stronger industrial applications, including fracking-related demand, and sales of ReaShure and NitroShure. Industrial uses represented approximately 39% of segment sales in Q2 and 35% for the first half.
- Specialty Products: Sales increased 6.1% in Q2 and 5.2% in the first half; segment earnings increased 8.9% and 6.4%. Higher volumes of propylene oxide and ethylene oxide and favorable mix contributed.
- Food, Pharma & Nutrition: Sales increased 3.1% in Q2 and 2.8% in the first half, but segment earnings declined 3.5% and 5.3%. Higher raw-material costs for human choline products weighed on results.
A key supplier’s force majeure disrupted feed-grade choline production and sales in June; the company said the situation was corrected in early July and full production capability restored. AminoShure-L sales remained affected by the suspension announced in Q2 2012.
Liquidity, capital resources, and balance sheet
- Cash and cash equivalents were $171,220 at June 30, 2013, up from $144,737 at year-end 2012. Cash included $66,000 in certificates of deposit and $50,337 in a money-market fund.
- Working capital was $213,332, versus $181,675 at December 31, 2012. Total current liabilities were $25,469 and total liabilities were $34,058.
- The company reported no borrowings at June 30, 2013. First-half capital expenditures were $5,171, principally for the new Covington, Virginia manufacturing facility.
- Operating cash flow fell to $23,784 from $31,223, primarily due to less favorable working-capital movements, including inventory and accounts payable/accrued expenses. Cash increased by $26,483 in the first half.
- First-half financing cash flow was $8,107, including $5,088 from option exercises and $3,164 of excess tax benefits from stock compensation. No dividends were paid in the 2013 first half; $5,237 was paid in the 2012 first half.
Outlook, risks, and contingencies
No numerical earnings or revenue guidance is provided. Management expects operations to generate sufficient cash to fund working capital and necessary capital investment, and said it is pursuing acquisition candidates; it may seek loans or access financial markets if needed. The filing cautions that first-half results are not necessarily indicative of full-year results.
Key exposures include foreign-exchange movements and commodity/raw-material prices, which the company manages where possible through pricing and operations; it reported no derivatives or hedging instruments. Management reported no material change in the risk factors from the 2012 Form 10-K. The company has environmental matters involving its Slate Hill, New York site and the Verona, Missouri Superfund site; management described potential Slate Hill monitoring costs as historically less than $5 per year and said the prior owner is responsible for further Superfund remedies, with contractual indemnification. Management believes litigation, claims, and assessments will not materially affect financial position, results, or liquidity.
Unrecognized tax benefits were approximately $2,700 at June 30, 2013, and accrued interest and penalties on uncertain tax positions were approximately $765. The company did not anticipate a material change in unrecognized tax benefits over the following twelve months. Operating lease minimum payments totaled $4,105. The postretirement medical obligation was $1,353 and is unfunded.
Important facts for investors to verify
- Whether supplier-related production disruption remained resolved after early July and whether it affected subsequent sales or costs.
- Sustainability of ANH growth, including the contribution and concentration of industrial/fracking-related demand.
- Whether choline raw-material costs, human-choline weakness, and product mix continue to pressure FPN margins.
- Conversion of reported earnings into cash, given the year-over-year decline in operating cash flow and increased inventory.
- Capital spending and progress at the Covington facility, as well as the funding approach for any acquisitions.
- Developments in environmental remediation and uncertain tax positions.