BALCHEM CORPORATION This report contains forward-looking statements, within the meaning of Section 21E of the Exchange Act, which reflect our expectation or belief concerning future events that involve risks and uncertainties. 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 the Annual Report on Form 10-K for the year endedDecember 31, 2021 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 nutritional, food, pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets. Our three reportable segments are strategic businesses that offer products and services to different markets: Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products, as more fully described in Note 11 of the condensed consolidated financial statements. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated".Balchem is committed to solving today's challenges to shape a healthier tomorrow by operating responsibly and providing innovative solutions for the health and nutritional needs of the world. Sustainability is at the heart of our company's vision to make the world a healthier place, and we proudly support the Ten Principles of the United Nations Global Compact on human rights, labor, environment and anti-corruption. InJanuary 2022 ,Balchem was named one of America's Most Responsible Companies byNewsweek magazine for the second consecutive year. This list, compiled by Newsweek in partnership withStatista Inc. , recognizes the most responsible companies in theU.S. across a variety of industries, and is based on publicly available environmental, social and governance (ESG) data. Our Sustainability Framework focuses on the most critical ESG topics relevant to our business and stakeholders. We are very proud of our ESG accomplishments to date and are pleased with the recognition by 27
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Newsweek.Balchem will continue to foster these fundamental principles broadly along our entire value chain, develop new ideas and technologies that help us work smarter, and help build a world that is a better place to live. As ofJune 30, 2022 , we employed approximately 1,359 full time employees worldwide. Although we are facing challenging labor markets, we believe that we have been successful in attracting skilled and experienced personnel in a competitive environment and that our human capital resources are adequate to perform all business functions. In addition, we continue to enhance technology in order to optimize productivity and performance.
Acquisition of Kappa
OnJune 21, 2022 , we completed the acquisition of Kappa (as defined in Note 2 "Significant Acquisitions"), a leading science-based manufacturer of specialty Vitamin K2 for the human nutrition industry, headquartered inOslo, Norway . Details related to the Kappa acquisition are disclosed in Note 2, "Significant Acquisitions". The acquisition strengthens our scientific and technical expertise, geographic reach, and marketplace leadership, which should ultimately lead to accelerated growth forBalchem's portfolios within the Human Nutrition & Health segment. COVID-19 Response The COVID-19 response effort has been a significant focus for us since early 2020. Our focus has been on employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate. As a result of our broad based risk mitigation efforts against the direct impacts of the Covid-19 pandemic, our manufacturing sites have been operating at near normal conditions, our research and development teams have continued to innovate in our laboratories, and all of our other employees have been effectively carrying on their responsibilities and functions remotely or in a reduced density hybrid setting. We are increasingly focused on managing the extraordinary supply chain disruptions that are challenging the markets we operate within that are, at least in part, related to the pandemic and/or the global recovery from the pandemic. We are experiencing severe input cost inflation, raw material shortages, logistics disruptions, and labor availability issues. These indirect pandemic related challenges accelerated as 2021 progressed, continued into the first and second quarters of 2022, and are likely to continue for some time.
Segment Results
We sell products for all three segments through our 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 endedJune 30, 2022 and 2021: Business Segment Net Sales Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Human Nutrition & Health$ 131,628 $ 111,471 $ 254,073 $ 215,987 Animal Nutrition & Health 62,600 54,481 131,942 105,629 Specialty Products 36,647 34,022 69,981 62,030 Other and Unallocated (1) 5,818 2,391 9,564 4,375 Total$ 236,693 $ 202,365 $ 465,560 $ 388,021 28
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Business Segment Earnings From Operations Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Human Nutrition & Health $ 23,705 $ 19,021 $ 44,008 $ 38,711
Animal Nutrition & Health 7,586 3,561 18,907 8,617
Specialty Products 9,919 9,729 17,680 16,918
Other and Unallocated (1) (1,290) (1,718) (2,339) (3,078)
Total $ 39,920 $ 30,593 $ 78,256 $ 61,168
(1) Other and Unallocated consists of a few minor businesses which individually do not
meet the quantitative thresholds for separate presentation and corporate expenses that
have not been allocated to a segment. Unallocated corporate expenses consist of: (i)
Transaction and integration costs, ERP implementation costs, and unallocated legal fees
totaling $872 and $1,176 for the three and six months ended June 30, 2022 , respectively,
and $466 and $700 for the three and six months ended June 30, 2021 , respectively, and (ii)
Unallocated amortization expense of $741 and $1,479 for the three and six months ended
June 30, 2022 , respectively, and $604 and $1,208 for the three and six months ended
June 30, 2021 , respectively, related to an intangible asset in connection with a
company-wide ERP system implementation.
RESULTS OF OPERATIONS
(All amounts in thousands, except share and per share data)
Three months ended June 30, 2022 compared to three months ended June 30, 2021 .
Net Earnings
Three Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Net sales $ 236,693 $ 202,365 $ 34,328 17.0 %
Gross margin 71,876 59,447 12,429 20.9 %
Operating expenses 31,956 28,854 3,102 10.8 %
Earnings from operations 39,920 30,593 9,327 30.5 %
Other (income) expense, net 662 574 88 15.3 %
Income tax expense 9,476 7,288 2,188 30.0 %
Net earnings $ 29,782 $ 22,731 $ 7,051 31.0 %
Net Sales
Three Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Human Nutrition & Health $ 131,628 $ 111,471 $ 20,157 18.1 %
Animal Nutrition & Health 62,600 54,481 8,119 14.9 %
Specialty Products 36,647 34,022 2,625 7.7 %
Other 5,818 2,391 3,427 143.3 %
Total $ 236,693 $ 202,365 $ 34,328 17.0 %
•The increase in net sales within the Human Nutrition & Health segment for the
second quarter of 2022 as compared to the second quarter of 2021 was driven both
by sales growth within food and beverage markets as well as higher sales within
the minerals and nutrients business. Total sales for this segment grew 18.1%,
with average selling prices contributing 16.2%, volume and mix contributing
2.2%, and the change in foreign currency exchange rates contributing -0.3%.
•The increase in net sales within the Animal Nutrition & Health segment for the
second quarter of 2022 compared to the second quarter of 2021 was the result of
higher sales in monogastric and companion animal markets, partially offset by
lower
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sales in ruminant animal markets and an unfavorable impact related to changes in
foreign currency exchange rates. Total sales for this segment grew 14.9%, with
average selling prices contributing 28.1%, the change in foreign currency
exchange rates contributing -3.4%, and volume and mix contributing -9.9%.
•The increase in Specialty Products segment sales for the second quarter of 2022
compared to 2021 was due to higher sales of products in the medical device
sterilization market, partially offset by lower plant nutrition sales, and an
unfavorable impact related to changes in foreign currency exchange rates. Total
sales for this segment grew 7.7% with average selling prices contributing 17.4%,
volume and mix contributing -7.0%, and the change in foreign currency exchange
rates contributing -2.7%.
•Sales relating to Other increased from the prior year due to higher demand.
•Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market.
Gross Margin
Three Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Gross margin $ 71,876 $ 59,447 $ 12,429 20.9 % % of net sales 30.4 % 29.4 % Gross margin dollars increased in the second quarter of 2022 compared to the second quarter of 2021 due to the aforementioned higher sales of$34,328 , partially offset by an increase in cost of goods sold of$21,899 . The 15.3% increase in cost of goods sold was driven mainly by the higher sales as well as the significant inflation of manufacturing input costs, primarily related to raw materials, partially offset by the timing of costs associated with the recovery from a flash flood event at our Verona manufacturing facility in the prior year. Operating Expenses Three Months Ended June 30, Increase (in thousands) 2022 2021 (Decrease) % Change Operating expenses$ 31,956 $ 28,854 $ 3,102 10.8 % % of net sales 13.5 % 14.3 %
The increase in operating expenses was primarily due to certain higher
compensation-related costs of
Earnings from Operations
Three Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Human Nutrition & Health $ 23,705 $ 19,021 $ 4,684 24.6 %
Animal Nutrition & Health 7,586 3,561 4,025 113.0 %
Specialty Products 9,919 9,729 190 2.0 %
Other and unallocated (1,290) (1,718) 428 24.9 %
Earnings from operations $ 39,920 $ 30,593 $ 9,327 30.5 %
% of net sales (operating
margin) 16.9 % 15.1 %
•Earnings from operations for the Human Nutrition & Health segment increased
primarily due to the aforementioned higher sales. Gross margin as a percentage
of sales remained relatively flat as a significant increase in certain
manufacturing input
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costs, largely related to raw materials, was offset by the timing of costs
associated with the recovery of a flash flood event at our Verona facility in
the prior year. Additionally, total operating expenses for this segment
increased by $1,453 , primarily due to higher compensation-related costs of $785 .
•Animal Nutrition & Health segment earnings from operations increased primarily
due to the aforementioned higher sales and a 500 basis point increase in gross
margin as a percentage of sales, due to the timing of costs associated with the
recovery of a flash flood event at our Verona facility in the prior year,
partially offset by a significant increase in certain manufacturing input costs,
largely related to raw materials. Additionally, operating expenses for this
segment increased by $550 , primarily due to higher advertising and marketing
expenses of $317 and higher compensation-related costs of $250 .
•The increase in earnings from operations for the Specialty Products segment was
primarily due to the aforementioned higher sales, partially offset by a 160
basis point decrease in gross margin as a percentage of sales, due to a
significant increase in certain manufacturing input costs, largely related to
raw materials. Additionally, total operating expenses for this segment increased
by $502 , primarily related to higher compensation-related costs of $458 .
•The increase in Other and unallocated was primarily driven by the aforementioned higher sales, partially offset by an increase in transaction costs, primarily related to the Kappa acquisition.
Other Expenses (Income)
Three Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Interest expense $ 960 $ 608 $ 352 57.9 %
Other, net (298) (34) (264) 776.5 %
$ 662 $ 574 $ 88 15.3 %
Interest expense for the three months ended
Income Tax Expense
Three Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Income tax expense $ 9,476 $ 7,288 $ 2,188 30.0 %
Effective tax rate 24.1 % 24.3 %
The decrease in the effective tax rate was primarily due to the prior year being
negatively impacted by clarifying regulations related to tax reform, which was
offset by lower tax benefits from stock-based compensation in the current
quarter.
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Six months ended
Net Earnings
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Net sales $ 465,560 $ 388,021 $ 77,539 20.0 %
Gross margin 143,382 118,174 25,208 21.3 %
Operating expenses 65,126 57,006 8,120 14.2 %
Earnings from operations 78,256 61,168 17,088 27.9 %
Other expense, net 1,368 1,166 202 17.3 %
Income tax expense 18,176 13,860 4,316 31.1 %
Net earnings $ 58,712 $ 46,142 $ 12,570 27.2 %
Net Sales
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Human Nutrition & Health $ 254,073 $ 215,987 $ 38,086 17.6 %
Animal Nutrition & Health 131,942 105,629 26,313 24.9 %
Specialty Products 69,981 62,030 7,951 12.8 %
Other 9,564 4,375 5,189 118.6 %
Total $ 465,560 $ 388,021 $ 77,539 20.0 %
•The increase in net sales within the Human Nutrition & Health segment for the
six months ended June 30, 2022 as compared to 2021 was primarily attributed to
sales growth within food and beverage markets. Total sales for this segment grew
17.6%, with average selling prices contributing 16.2%, volume and mix
contributing 1.7%, and the change in foreign currency exchange rates
contributing -0.3%.
•The increase in net sales within the Animal Nutrition & Health segment for the
six months ended June 30, 2022 compared to 2021 was primarily the result of
higher sales in monogastric markets. Total sales for this segment grew 24.9%,
with average selling prices contributing 30.1%, volume and mix contributing
-2.4%, and the change in foreign currency exchange rates contributing -2.8%.
•The increase in Specialty Products segment sales for the six months ended
June 30, 2022 compared to 2021 was primarily due to higher sales of products in
the medical device sterilization market. Total sales for this segment grew
12.8%, with average selling prices contributing 16.7%, volume and mix
contributing -1.6%, and the change in foreign currency exchange rates
contributing -2.3%.
•Sales relating to Other increased from the prior year due to higher demand.
Gross Margin
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Gross margin $ 143,382 $ 118,174 $ 25,208 21.3 %
% of net sales 30.8 % 30.5 %
Gross margin dollars increased for the six months ended June 30, 2022 compared
to 2021 due to the aforementioned higher sales of $77,539 , partially offset by
an increase in cost of goods sold of $52,331 . The 19.4% increase in cost of
goods sold was mainly driven by the significant inflation of manufacturing input
costs, primarily related to raw materials, partially offset by the timing of
costs associated with a flash flood event at our Verona manufacturing facility
in the prior year.
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Operating Expenses
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Operating expenses $ 65,126 $ 57,006 $ 8,120 14.2 %
% of net sales 14.0 % 14.7 %
The increase in operating expenses was primarily due to higher
compensation-related costs of
Earnings from Operations
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Human Nutrition & Health $ 44,008 $ 38,711 $ 5,297 13.7 %
Animal Nutrition & Health 18,907 8,617 10,290 119.4 %
Specialty Products 17,680 16,918 762 4.5 %
Other and unallocated (2,339) (3,078) 739 24.0 %
Earnings from operations $ 78,256 $ 61,168 $ 17,088 27.9 %
% of net sales (operating
margin) 16.8 % 15.8 %
•Earnings from operations for the Human Nutrition & Health segment increased
primarily due to the aforementioned higher sales and a 100 basis point increase
in gross margin as a percentage of sales, primarily related to the timing of
costs associated with the recovery of a flash flood event at our Verona
manufacturing facility in the prior year, partially offset by a significant
increase in certain manufacturing input costs, largely related to raw materials.
Additionally, operating expenses for this segment increased by $4,110 , primarily
due to higher compensation-related costs of $2,086 .
•Animal Nutrition & Health segment earnings from operations increased primarily
due to the aforementioned higher sales and a 530 basis point increase in gross
margin as a percentage of sales primarily related to the timing of costs
associated with the recovery of a flash flood event at our Verona manufacturing
facility in the prior year, partially offset by a significant increase in
certain manufacturing input costs, largely related to raw materials.
Additionally, operating expenses for this segment increased by $1,759 , primarily
related to higher compensation-related costs of $932 and an increase in
advertising and marketing of $505 .
•The increase in earnings from operations for the Specialty Products segment was
primarily due to the aforementioned higher sales, partially offset by a 250
basis point decrease in gross margin as a percentage of sales, primarily due to
a significant increase in certain manufacturing input costs, largely related to
raw materials.
•Earnings from operations relating to Other increased from the prior year
primarily due to the aforementioned higher sales, partially offset by an
increase in transaction costs, mainly related to the Kappa acquisition.
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Other Expenses (Income)
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Interest expense $ 1,505 $ 1,333 $ 172 12.9 %
Other, net (137) (167) 30 (18.0) %
$ 1,368 $ 1,166 $ 202 17.3 %
Interest expense for the six months ended
Income Tax Expense
Six Months Ended June 30, Increase
(in thousands) 2022 2021 (Decrease) % Change
Income tax expense $ 18,176 $ 13,860 $ 4,316 31.1 %
Effective tax rate 23.6 % 23.1 %
The increase in the effective tax rate was primarily due to lower tax benefits from stock-based compensation and a reduction in certain tax credits.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
(All amounts in thousands, except share and per share data)
In June 2022 we drew down an additional $345,000 from our revolving credit
facility to fund the acquisition of Kappa. In connection with this transaction,
the seller has an opportunity to receive an additional payment in 2024 if
certain financial performance targets and other metrics are met, and therefore
we recorded a contingent consideration liability of kr245,000 (translated to
$24,793 ) as of June 30, 2022 . Excluding the events previously mentioned, there
were no other material changes during the six months ended June 30, 2022 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, 2021 . We
expect our operations to continue generating sufficient cash flow to fund
working capital requirements and necessary capital investments. We are actively
pursuing additional acquisition candidates. On July 27, 2022 , we entered into an
Amended and Restated Credit Agreement with a bank syndicate providing for a
revolving loan of $550,000 , due July 27, 2027 . The revolving loan proceeds were
used to pay down the existing debt under the 2018 Credit Agreement and may be
used for working capital, letters of credit, and other corporate purposes. We
could seek additional bank loans or access to financial markets to fund such
acquisitions, our operations, working capital, necessary capital investments or
other cash requirements should we deem it necessary to do so.
Cash
Cash and cash equivalents decreased to$76,183 atJune 30, 2022 from$103,239 atDecember 31, 2021 . AtJune 30, 2022 , the Company had$61,390 of cash and cash equivalents held by foreign subsidiaries. We presently intend to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fundU.S. operations or obligations. However, if these funds are needed forU.S. operations, we could be required to pay additional withholding taxes to repatriate these funds. Working capital was$232,998 atJune 30, 2022 as compared to$178,430 atDecember 31, 2021 , an increase of$54,568 . Working capital reflects the payment of the 2021 declared dividend in 2022 of$20,704 , payments on the revolving loan and acquired debt of$70,648 , and capital expenditures and intangible assets acquired of$20,799 . 34
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