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BCPC > SEC Filings for BCPC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for BALCHEM CORP


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (All dollar amounts in thousands)

This Report contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our expectation or belief concerning future events that involve risks and uncertainties. Our actions and performance could differ materially from what is contemplated by the forward-looking statements contained in this Report. Factors that might cause differences from the forward-looking statements include those referred to or identified in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 and other factors that may be identified elsewhere in this Report. Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements.

Overview

We develop, manufacture, distribute and market specialty performance ingredients and products for the food, nutritional, pharmaceutical, animal health and medical device sterilization industries. Our three reportable segments are strategic businesses that offer products and services to different markets:
Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition & Health.

Specialty Products

Our Specialty Products segment operates in industry as ARC Specialty Products.

Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. Contract sterilizers, medical device manufacturers, and medical gas distributors are our principal customers for this product. In addition, we also sell single use canisters with 100% ethylene oxide for use in medical device sterilization. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.

We sell propylene oxide as a fumigant: to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. We also sell propylene oxide to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization in various chemical synthesis applications, by example to make paints more durable, manufacturing specialty starches and textile coatings.

Food, Pharma & Nutrition

The Food, Pharma & Nutrition ("FPN") segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. We also market human grade choline nutrient products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function.


Animal Nutrition & Health

Our Animal Nutrition & Health ("ANH") segment provides the animal nutrition market with nutritional products derived from our microencapsulation and chelation technologies in addition to basic choline chloride. Commercial sales of REASHURE® Choline, an encapsulated choline product, NITROSHURETM, an encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin product for dairy cows, boosts health and milk production in transition and lactating dairy cows, delivering nutrient supplements that survive the rumen and are biologically available, providing required nutritional levels. We also market chelated mineral supplements for use in animal feed throughout the world, as our proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals. ANH also manufactures and supplies basic choline chloride, an essential nutrient for animal health, predominantly to the poultry and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline deficiency can result in reduced growth and perosis in poultry; fatty liver, kidney necrosis and general poor health condition in swine. Certain derivatives of choline chloride are also manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. The ANH segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are also used in a wide range of industrial applications.

The Company sells products for all three segments through its own sales force, independent distributors, and sales agents.

The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three and six months ended June 30, 2013 and June 30, 2012:

Business Segment Net Sales:

                              Three Months Ended           Six Months Ended
                                   June 30,                    June 30,
                               2013          2012         2013          2012
Specialty Products          $   13,219     $ 12,457     $  25,999     $  24,714
Food, Pharma & Nutrition        12,146       11,776        23,154        22,513
Animal Nutrition & Health       57,931       54,781       118,794       107,990
Total                       $   83,296     $ 79,014     $ 167,947     $ 155,217


Business Segment Earnings From Operations:

                              Three Months Ended          Six Months Ended
                                   June 30,                   June 30,
                               2013          2012         2013         2012
Specialty Products          $    5,279     $  4,849     $ 10,188     $  9,578
Food, Pharma & Nutrition         3,269        3,389        5,776        6,098
Animal Nutrition & Health        8,068        6,587       16,517       12,824
Total                       $   16,616     $ 14,825     $ 32,481     $ 28,500

RESULTS OF OPERATIONS

Three months ended June 30, 2013 compared to three months ended June 30, 2012.

Net Sales

Net sales for the three months ended June 30, 2013 were $83,296 as compared with $79,014 for the three months ended June 30, 2012, an increase of $4,282 or 5.4%. Net sales for the Specialty Products segment were $13,219 for the three months ended June 30, 2013, as compared with $12,457 for the three months ended June 30, 2012, an increase of $762 or 6.1%. Approximately half of this increase in sales was due to higher volumes of propylene oxide for use in industrial applications and nutmeat fumigation. The balance of the increased sales was principally from ethylene oxide products for medical device sterilization, resulting primarily from increased volumes. Net sales for the Food, Pharma & Nutrition segment were $12,146 for the three months ended June 30, 2013 compared with $11,776 for the three months ended June 30, 2012, an increase of $370 or 3.1%. This result was primarily due to increased sales of approximately $575 for VITASHURE® products for nutritional enhancement, including sustained release amino acid products for sports performance products. Also contributing to the higher sales was a 5.3% increase in sales in the food sector, principally due to higher volumes sold of encapsulated ingredients for baking and prepared food markets. Partially offsetting this was a $462 decrease in sales of human choline products for both food applications and the supplement markets. Net sales of $57,931 were realized for the three months ended June 30, 2013 for the Animal Nutrition & Health segment, as compared with $54,781 for the prior year comparable period, an increase of $3,150 or 5.8%. The ANH specialty ingredients, largely targeted to the ruminant and companion animal markets, realized a 9% sales decline from the prior year comparable period. This decrease was primarily due to lower volumes, related mainly to the adverse impact of the previously announced second quarter 2012 suspension of sales of AminoShure®-L, 52% lysine (the "Product"). Sales of non-AminoShure products were up 11.4% compared with the prior year comparable period, led by strong volume growth of NitroShure™ and ReaShure®. Global feed grade choline product sales decreased by approximately 3% due to lower volumes related to a disruption to production and sales in June due to the declaration of force majeure by a key supplier. This situation corrected itself in early July and full production capability has been restored. The lower volumes were partially offset by modest price increases, implemented globally, to partially offset increased raw material costs, along with an improved product
mix. Although sales volumes were negatively impacted by the aforementioned force majeure, the Company experienced increased sales of various choline and choline derivative products used for industrial applications, predominantly in North America, including usage in fracking for oil and natural gas. Industrial sales grew 28.8% over the prior year period with the increase coming primarily from higher volumes for usage in fracking. Sales for industrial applications comprised approximately 39% of the sales in this segment for the three months ended June 30, 2013.


Gross Margin

Gross margin for the three months ended June 30, 2013 increased to $24,885 compared to $22,584 for the three months ended June 30, 2012, an increase of 10.2%. This $2,301 increase was principally a result of higher sales volumes. Gross margin percentage for the three months ended June 30, 2013 increased to 29.9% as compared to 28.6% in the prior year comparative period, primarily due to operating efficiencies from increased volumes. Gross margin percentage for the Specialty Products segment increased by 2.7% primarily due to operating efficiencies from increased volumes and a favorable product mix. Gross margin percentage in the Food, Pharma & Nutrition segment decreased by 1.5% primarily due to higher raw material costs for human choline products. Gross margin percentage in the Animal Nutrition and Health segment increased by 1.6%, principally due to operating efficiencies from increased volumes and an improved product mix, partially offset by higher costs of certain petro-chemical commodities used to manufacture choline and derivatives.

Operating Expenses

Operating expenses for the three months ended June 30, 2013 were $8,269, as compared to $7,759 for the three months ended June 30, 2012, an increase of $510 or 6.6%. This was primarily due to an increase of employee headcount and additional compensation-related expenses totaling approximately $445 and higher advertising of $145, partially offset by the exclusion of costs of $160 related to the Product sales suspension which were incurred in the second quarter 2012. Operating expenses were 9.9% of sales or 0.1 percentage point more than the operating expenses as a percent of sales in last year's comparable period. During the three months ended June 30, 2013 and 2012, the Company spent $947 and $947 respectively, on research and development programs, substantially all of which pertained to the Company's Food, Pharma & Nutrition and Animal Nutrition & Health segments.

Earnings From Operations

Principally as a result of the above-noted details, earnings from operations for the three months ended June 30, 2013 increased to $16,616 as compared to $14,825 for the three months ended June 30, 2012, an increase of $1,791 or 12.1%. Earnings from operations as a percentage of sales ("operating margin") for the three months ended June 30, 2013 increased to 19.9% from 18.8% for the three months ended June 30, 2012. The Company is continuing to focus on leveraging its plant capabilities, driving efficiencies from core volume growth, broadening product applications of human and animal health specialty products into both the domestic and international markets, as well as capitalizing logistically on the Company's varied choline production capabilities. Earnings from operations for the Specialty Products segment were $5,279, an increase of $430 or 8.9%, primarily due to the above-noted higher sales of propylene oxide and ethylene oxide, a favorable product mix, and operating efficiencies from increased volumes, partially offset by certain higher operating expenses. Earnings from operations for Food, Pharma & Nutrition were $3,269, a decrease of $120 or 3.5%, due largely to the aforementioned higher raw material costs. Earnings from operations for Animal Nutrition & Health increased by $1,481 to $8,068, a 22.5% increase from the prior year comparable period, principally due to the aforementioned higher sales and operating efficiencies from increased volumes, partially offset by higher costs of certain petro-chemical commodities used to manufacture choline and derivatives and certain higher operating expenses.


Other Expenses (Income)

Interest income for the three months ended June 30, 2013 totaled $61 as compared to $1 for the three months ended June 30, 2012. The Company has invested available cash primarily in certificates of deposit and money market investments that have been classified as cash equivalents due to the short maturities of these investments. Interest expense was $2 for the three months ended June 30, 2013 compared to $3 for the three months ended June 30, 2012. Other income of $7 and $1 for the three months ended June 30, 2013 and 2012, respectively, is primarily the result of favorable fluctuations in foreign currency exchange rates between the U.S. dollar (the reporting currency) and functional foreign currencies.

Income Tax Expense

The Company's effective tax rate for the three months ended June 30, 2013 and 2012 was 30.6% and 32.7%, respectively. This decrease in the effective tax rate is primarily attributable to the timing of certain tax credits and deductions.

Net Earnings

Principally as a result of the above-noted details, net earnings were $11,582 for the three months ended June 30, 2013, as compared with $9,972 for the three months ended June 30, 2012, an increase of 16.1%.

Six months ended June 30, 2013 compared to six months ended June 30, 2012.


Net Sales

Net sales for the six months ended June 30, 2013 were $167,947 as compared with $155,217 for the six months ended June 30, 2012, an increase of $12,730 or 8.2%. Net sales for the Specialty Products segment were $25,999 for the six months ended June 30, 2013, as compared with $24,714 for the six months ended June 30, 2012, an increase of $1,285 or 5.2%. Approximately half of this increase in sales was due to higher volumes of propylene oxide for use in industrial applications and nutmeat fumigation. The balance of the increased sales was principally from ethylene oxide products for medical device sterilization, resulting from slightly higher average selling prices and increased volumes. Net sales for the Food, Pharma & Nutrition segment were $23,154 for the six months ended June 30, 2013 compared with $22,513 for the six months ended June 30, 2012, an increase of $641 or 2.8%. This result was primarily due to a 6.7% increase in sales in the food sector, principally due to higher volumes sold of encapsulated ingredients for baking and prepared food markets. Also contributing to the higher sales was increased sales of approximately $903 for VitaShure® products for nutritional enhancement, including sustained release amino acid products for sports performance products. Partially offsetting these increases in FPN was a $903 decrease in sales of human choline products for both food applications and the supplement markets. Net sales of $118,794 were realized for the six months ended June 30, 2013 for the Animal Nutrition & Health segment, as compared with $107,990 for the prior year comparable period, an increase of $10,804 or 10.0%. The ANH specialty ingredients, largely targeted to the ruminant and companion animal markets, realized 1% sales growth from the prior year comparable period. The slight improvement was due to modest price increases partially to offset higher raw material costs, and an improved product mix. This was offset by lower volumes, including related to the Product sales suspension. Sales of non-AminoShure products were up 23.9% compared with the prior year comparable period, led by strong volume growth of ReaShure® and NitroShure™. Global feed grade choline product sales increased by approximately 2% due to modest price increases, implemented globally, to partially offset increased raw material costs, along with an improved product mix. This was partially offset by lower volumes related to a disruption to production and sales in June due to the declaration of force majeure by a key supplier. This situation corrected itself in early July and full production capability has been restored. The Company experienced increased sales of various choline and choline derivative products used for industrial applications, predominantly in North America, including usage in fracking for oil and natural gas. Industrial sales grew 28.9% over the prior year period with the increase coming primarily from higher volumes for usage in fracking. Sales for industrial applications comprised approximately 35% of the sales in this segment for the six months ended June 30, 2013.

Gross Margin

Gross margin for the six months ended June 30, 2013 increased to $49,117 compared to $43,742 for the six months ended June 30, 2012, an increase of 12.3%. This $5,375 increase was principally a result of higher sales volumes. Gross margin percentage for the six months ended June 30, 2013 increased to 29.2% as compared to 28.2% in the prior year comparative period, primarily due to operating efficiencies from increased volumes. Gross margin percentage for the Specialty Products segment increased by 2.4% primarily due to a favorable product mix and operating efficiencies from increased volumes. Gross margin percentage in the Food, Pharma & Nutrition segment decreased by 2.1% primarily due to higher raw material costs for human choline products. Gross margin percentage in the Animal Nutrition and Health segment increased by 1.8%, principally due to operating efficiencies from increased volumes and an improved product mix.

Operating Expenses

Operating expenses for the six months ended June 30, 2013 were $16,636, as compared to $15,242 for the six months ended June 30, 2012, an increase of $1,394 or 9.1%. This was primarily due to an increase of employee headcount and additional compensation-related expenses totaling approximately $1,005 and higher advertising of $283, partially offset by the exclusion of costs of $160 related to the Product sales suspension which were incurred in the second quarter 2012. During the six months ended June 30, 2013 and 2012, the Company spent $1,785 and $1,723 respectively, on research and development programs, substantially all of which pertained to the Company's Food, Pharma & Nutrition and Animal Nutrition & Health segments.


Earnings From Operations

Principally as a result of the above-noted details, earnings from operations for the six months ended June 30, 2013 increased to $32,481 as compared to $28,500 for the six months ended June 30, 2012, an increase of $3,981 or 14.0%. Earnings from operations as a percentage of sales ("operating margin") for the six months ended June 30, 2013 increased to 19.3% from 18.4% for the six months ended June 30, 2012. The Company is continuing to focus on leveraging its plant capabilities, driving efficiencies from core volume growth, broadening product applications of human and animal health specialty products into both the domestic and international markets, as well as capitalizing logistically on the Company's varied choline production capabilities. Earnings from operations for the Specialty Products segment were $10,188, an increase of $610 or 6.4%, primarily due to the above-noted higher sales of propylene oxide and ethylene oxide, a favorable product mix, and operating efficiencies from increased volumes, partially offset by certain higher operating expenses. Earnings from operations for Food, Pharma & Nutrition were $5,776, a decrease of $322 or 5.3%, due largely to the aforementioned higher raw material costs for human choline products. Earnings from operations for Animal Nutrition & Health increased by $3,693 to $16,517, a 28.8% increase from the prior year comparable period, principally due to the aforementioned higher sales and operating efficiencies from increased volumes, partially offset by certain higher operating expenses.

Other Expenses (Income)

Interest income for the six months ended June 30, 2013 totaled $113 as compared to $8 for the six months ended June 30, 2012. The Company has invested available cash primarily in certificates of deposit and money market investments that have been classified as cash equivalents due to the short maturities of these investments. Interest expense was $3 for the six months ended June 30, 2013 compared to $6 for the six months ended June 30, 2012. Other expense of $46 for the six months ended June 30, 2013 is primarily the result of unfavorable fluctuations in foreign currency exchange rates between the U.S. dollar (the reporting currency) and functional foreign currencies. Other income of $10 for the six months ended June 30, 2012 is primarily the result of favorable fluctuations in foreign currency exchange rates between the U.S. dollar (the reporting currency) and functional foreign currencies.

Income Tax Expense

The Company's effective tax rate for the six months ended June 30, 2013 and 2012 was 31.0% and 32.5%, respectively. This decrease in the effective tax rate is primarily attributable to the timing of certain tax credits and deductions.


Net Earnings

Principally as a result of the above-noted details, net earnings were $22,470 for the six months ended June 30, 2013, as compared with $19,240 for the six months ended June 30, 2012, an increase of 16.8%.

FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
(All amounts in thousands, except share and per share data)

Contractual Obligations

The Company's contractual obligations and commitments principally include obligations associated with future minimum non-cancelable operating lease obligations and purchase obligations principally related to open purchase orders for inventory not yet received or recorded on our balance sheet.

The Company knows of no current or pending demands on, or commitments for, its liquid assets that will materially affect its liquidity.

During the six months ended June 30, 2013, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2012. The Company expects its operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments. The Company is actively pursuing additional acquisition candidates. The Company could seek additional bank loans or access to financial markets to fund such acquisitions, its operations, working capital, necessary capital investments or other cash requirements should it deem it necessary to do so.

Cash

Cash and cash equivalents increased to $171,220 at June 30, 2013 from $144,737 at December 31, 2012 primarily resulting from the activity detailed below. At June 30, 2013, the Company had $1,781 of cash and cash equivalents held by our foreign subsidiaries. It is our intention to permanently reinvest these funds in our foreign operations by continuing to make additional plant related investments as needed, and potentially invest in partnerships and/or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fund our U.S. operations or obligations. However, if these funds are needed for our operations in the U.S., we could be required to pay additional U.S. taxes to repatriate these funds. Working capital amounted to $213,332 at June 30, 2013 as compared to $181,675 at December 31, 2012, an increase of $31,657.

Operating Activities

Cash flows from operating activities provided $23,784 for the six months ended June 30, 2013 compared to $31,223 for the six months ended June 30, 2012. The decrease in cash flows from operating activities was primarily due to unfavorable changes in various components of working capital, particularly in inventories and accounts payable and accrued expenses, along with a less favorable change in income taxes.


Investing Activities

Capital expenditures were $5,171 for the six months ended June 30, 2013 compared to $3,198 for the six months ended June 30, 2012. The capital expenditures for 2013 were predominantly for the Company's new manufacturing facility in Covington, Virginia.

Financing Activities

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,055,434 shares have been purchased, none of which remained in treasury at June 30, 2013. During the six months ended June 30, 2013, a total of 1,266 shares have been purchased at an average cost of $44.13 per share. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors.

Proceeds from stock options exercised totaled $5,088 and $877 for the six months ended June 30, 2013 and 2012, respectively. Dividend payments were $-0- and $5,237 for the six months ended June 30, 2013 and 2012, respectively.

Other Matters Impacting Liquidity

The Company currently provides postretirement benefits in the form of a retirement medical plan under a collective bargaining agreement covering eligible retired employees of its Verona, Missouri facility. The amount recorded on the Company's balance sheet as of June 30, 2013 for this obligation is $1,353. The postretirement plan is not funded. Historical cash payments made under such plan have typically been less than $100 per year.

Critical Accounting Policies

There were no changes to the Company's Critical Accounting Policies, as described in its December 31, 2012 Annual Report on Form 10-K, during the six months ended June 30, 2013.

Related Party Transactions

The Company was not engaged in related party transactions during the six months ended June 30, 2013.


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