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, 2020 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 10 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". In May, ourVerona, Missouri plant experienced a flash flood event as a result of very localized storms in the southwest part of the state. The plant was shut down for several weeks as we repaired affected equipment, cleaned the site, and safely re-started activities. The negative direct financial impact to the quarter was approximately$3.8 million , primarily due to the write off of damaged inventory and the costs associated with external service providers used for the clean-up efforts. Customer requirements were largely satisfied through inventory on hand and by leveraging alternate and redundant manufacturing capabilities across our supply chain. The manufacturing site is now fully operational and we have filed a related insurance claim with the expectation to partially offset these expenses with future insurance recoveries. As ofJune 30, 2021 , we had approximately 1,327 full time employees worldwide. We believe that we have been successful in attracting skilled and experienced personnel in a competitive environment. Management believes that our human capital resources are adequate to perform all business functions. COVID-19 Response The COVID-19 response effort has been a primary focus for us since early last year. 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. To date, all of our manufacturing sites are operating at near normal conditions enabling us to supply our customers with the important products and services they need, our research and development teams are advancing our innovation efforts, and all of our other employees are effectively carrying on their responsibilities and functions remotely. While the impact on demand in aggregate does not appear to be material to our Company, we are continuing to watch the markets that we serve closely. We have stress tested our balance sheet under various significant downturn scenarios and, given our relatively low net debt position, cash on hand, access to our undrawn revolving loans under the Credit Agreement, and expected free cash flows, we are pleased with the strength of our balance sheet as we continue through this uncertain market environment. 25 -------------------------------------------------------------------------------- Table of Contents 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, 2021 and 2020: Business Segment Net Sales Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Human Nutrition & Health$ 111,471 $ 97,428 $ 215,987 $ 192,936 Animal Nutrition & Health 54,481 46,344 105,629 94,985 Specialty Products 34,022 28,194 62,030 56,190 Other and Unallocated (1) 2,391 1,389 4,375 3,680 Total$ 202,365 $ 173,355 $ 388,021 $ 347,791 Business Segment Earnings From Operations Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Human Nutrition & Health$ 19,021 $ 15,497 $ 38,711 $ 27,632 Animal Nutrition & Health 3,561 6,430 8,617 14,474 Specialty Products 9,729 8,008 16,918 15,994 Other and Unallocated (1) (1,718) (3,018) (3,078) (4,905) Total$ 30,593 $ 26,917 $ 61,168 $ 53,195 (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$466 and$700 for the three and six months endedJune 30, 2021 , respectively, and$746 and$2,018 for the three and six months endedJune 30, 2020 , respectively, and (ii) Unallocated amortization expense of$604 and$1,208 for the three and six months endedJune 30, 2021 , respectively, and$405 and$806 for the three and six months endedJune 30, 2020 , respectively, related to an intangible asset in connection with a company-wide ERP system implementation. 26
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RESULTS OF OPERATIONS (All amounts in thousands, except share and per share data) Three months endedJune 30, 2021 compared to three months endedJune 30, 2020 . Net Earnings Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Net sales$ 202,365 $ 173,355 $ 29,010 16.7 % Gross margin 59,447 55,380 4,067 7.3 % Operating expenses 28,854 28,463 391 1.4 % Earnings from operations 30,593 26,917 3,676 13.7 % Other (income) expense, net 574 944 (370) (39.2) % Income tax expense 7,288 4,848 2,440 50.3 % Net earnings$ 22,731 $ 21,125 $ 1,606 7.6 % Net Sales Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Human Nutrition & Health$ 111,471 $ 97,428 $ 14,043 14.4 % Animal Nutrition & Health 54,481 46,344 8,137 17.6 % Specialty Products 34,022 28,194 5,828 20.7 % Other 2,391 1,389 1,002 72.1 % Total$ 202,365 $ 173,355 $ 29,010 16.7 % •The increase in net sales within the HNH segment for the three months endedJune 30, 2021 as compared to 2020 was driven both by strong sales growth within food and beverage markets as well as higher sales within the Minerals and Nutrients business. •The increase in net sales within the ANH segment for the three months endedJune 30, 2021 compared to 2020 was primarily the result of higher sales in both Monogastric and Ruminant animal markets and a favorable impact related to changes in foreign currency exchange rates. •The increase in Specialty Products segment sales for the three months endedJune 30, 2021 compared to 2020 was primarily due to higher sales for products in both the plant nutrition business and the medical device sterilization market. •Sales relating to Other increased from the prior year due to higher demand. Gross Margin Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Gross margin$ 59,447 $ 55,380 $ 4,067 7.3 % % of net sales 29.4 % 31.9 %
Gross margin as a percentage of sales decreased for the three months ended
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Table of Contents Operating Expenses Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Operating expenses$ 28,854 $ 28,463 $ 391 1.4 % % of net sales 14.3 % 16.4 % The increase in operating expenses was primarily due to an increase in certain higher compensation-related costs, partially offset by the prior year being negatively impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment, and a decrease in transaction and integration costs. Earnings from Operations Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Human Nutrition & Health$ 19,021 $ 15,497 $ 3,524 22.7 % Animal Nutrition & Health 3,561 6,430 (2,869) (44.6) % Specialty Products 9,729 8,008 1,721 21.5 % Other and unallocated (1,718) (3,018) 1,300 (43.1) % Earnings from operations$ 30,593 $ 26,917 $ 3,676 13.7 % % of net sales (operating margin) 15.1 % 15.5 % •Earnings from operations for the HNH segment increased primarily due to the aforementioned higher sales and overall manufacturing efficiencies, partially offset by higher raw material and distribution costs and the costs associated with the recovery from the flash flood event that we experienced at ourVerona, Missouri manufacturing site. •ANH segment earnings from operations decreased primarily due to increases in raw material and distribution costs and the costs associated with the recovery from the flash flood event. •The increase in earnings from operations for the Specialty Products segment was primarily due to the aforementioned higher sales, partially offset by increases in raw material and distribution costs. •The increase in Other and unallocated was primarily driven by the prior year being negatively impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment and a decrease in transaction and integration costs, partially offset by an increase in costs related to a company-wide ERP implementation. Other Expenses (Income) Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Interest expense $ 608$ 960 $ (352) (36.7) % Other, net (34) (16) (18) 112.5 % $ 574$ 944 $ (370) (39.2) %
Interest expense for the three months ended
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Table of Contents Income Tax Expense Three Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Income tax expense$ 7,288 $ 4,848 $ 2,440 50.3 % Effective tax rate 24.3 % 18.7 %
The increase of effective tax rate was primarily due to a reduction in certain tax credits and lower tax benefits from stock-based compensation.
Six months endedJune 30, 2021 compared to six months endedJune 30, 2020 . Net Earnings Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Net sales$ 388,021 $ 347,791 $ 40,230 11.6 % Gross margin 118,174 110,711 7,463 6.7 % Operating expenses 57,006 57,516 (510) (0.9) % Earnings from operations 61,168 53,195 7,973 15.0 % Other (income) expense, net 1,166 2,732 (1,566) (57.3) % Income tax expense 13,860 9,570 4,290 44.8 % Net earnings$ 46,142 $ 40,893 $ 5,249 12.8 % Net Sales Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Human Nutrition & Health$ 215,987 $ 192,936 $ 23,051 11.9 % Animal Nutrition & Health 105,629 94,985 10,644 11.2 % Specialty Products 62,030 56,190 5,840 10.4 % Other 4,375 3,680 695 18.9 % Total$ 388,021 $ 347,791 $ 40,230 11.6 % •The increase in net sales within the HNH segment for the six months endedJune 30, 2021 as compared to 2020 was primarily driven by both strong sales growth in the food and beverage markets, as well as higher sales of chelated minerals and choline nutrients. •The increase in net sales within the ANH segment for the six months endedJune 30, 2021 compared to 2020 was primarily the result of higher sales in both Monogastric and Ruminant animal markets and a favorable impact related to changes in foreign currency exchange rates. •The increase in Specialty Products segment sales for the six months endedJune 30, 2021 compared to 2020 was primarily due to higher sales of products in both the medical device sterilization market and plant nutrition business. •Sales relating to Other increased from the prior year due to higher demand. 29 --------------------------------------------------------------------------------
Table of Contents Gross Margin Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Gross margin$ 118,174 $ 110,711 $ 7,463 6.7 % % of net sales 30.5 % 31.8 % Gross margin as a percentage of sales decreased for the six months endedJune 30, 2021 compared to 2020 primarily due to a significant increase in certain raw material and distribution costs and the costs associated with the recovery from the flash flood event that we experienced at ourVerona, Missouri manufacturing site, partially offset by favorable mix and overall plant efficiencies. Operating Expenses Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Operating expenses$ 57,006 $ 57,516 $ (510) (0.9) % % of net sales 14.7 % 16.5 % The decrease in operating expenses was primarily due to lower transaction and integration costs and the prior year being unfavorably impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment, partially offset by certain higher compensation-related costs. Earnings from Operations Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Human Nutrition & Health$ 38,711 $ 27,632 $ 11,079 40.1 % Animal Nutrition & Health 8,617 14,474 (5,857) (40.5) % Specialty Products 16,918 15,994 924 5.8 % Other and unallocated (3,078) (4,905) 1,827 (37.2) % Earnings from operations$ 61,168 $ 53,195 $ 7,973 15.0 % % of net sales (operating margin) 15.8 % 15.3 % •Earnings from operations for the HNH segment increased primarily due to the aforementioned higher sales and overall manufacturing efficiencies, partially offset by higher raw material and distribution costs, and the costs associated with the recovery from the flash flood event that we experienced at ourVerona, Missouri manufacturing site. •ANH segment earnings from operations decreased primarily due to an increase in raw material costs and distribution costs along with the costs associated with the recovery from the flash flood event. •The increase in earnings from operations for the Specialty Products segment was primarily due to the aforementioned higher sales, partially offset by higher raw material and distribution costs. •The increase in Other and unallocated was primarily driven by the prior year being negatively impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment and a decrease in transaction and integration costs, partially offset by an increase in costs related to a company-wide ERP implementation. 30 --------------------------------------------------------------------------------
Table of Contents Other Expenses (Income) Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Interest expense$ 1,333 $ 2,656 $ (1,323) (49.8) % Other, net (167) 76 (243) (319.7) %$ 1,166 $ 2,732 $ (1,566) (57.3) % Interest expense for the six months endedJune 30, 2021 and 2020 was primarily related to outstanding borrowings under the Credit Agreement. Income Tax Expense Six Months Ended June 30, Increase (in thousands) 2021 2020 (Decrease) % Change Income tax expense$ 13,860 $ 9,570 $ 4,290 44.8 % Effective tax rate 23.1 % 19.0 %
The increase of effective tax rate was primarily due to a reduction in certain tax credits, lower tax benefits from stock-based compensation, and higher enacted state tax rates.
FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES (All amounts in thousands, except share and per share data) During the six months endedJune 30, 2021 , 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 endedDecember 31, 2020 . 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. 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$79,902 atJune 30, 2021 from$84,571 atDecember 31, 2020 . AtJune 30, 2021 , the Company had$57,722 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$186,504 atJune 30, 2021 as compared to$172,460 atDecember 31, 2020 , an increase of$14,044 . Working capital reflects the payment of the 2020 declared dividend in 2021 of$18,700 , net payments on the revolving debt of$40,000 , and capital expenditures and intangible assets acquired of$13,760 . Six Months EndedJune 30 ,
Increase
(in thousands) 2021 2020 (Decrease) % Change Cash flows provided by operating activities$ 76,389 $ 67,180 $ 9,209 13.7 % Cash flows used in investing activities (13,520) (13,593) 73 0.5 % Cash flows used in financing activities (65,727) (42,927) (22,800) (53.1) %
Operating Activities The increase in cash flows from operating activities was primarily due to improved changes in assets and liabilities and increased earnings.
31 -------------------------------------------------------------------------------- Table of Contents Investing Activities We continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and intangible assets were$13,760 and$13,265 for the six months endedJune 30, 2021 and 2020, respectively. Financing Activities We borrowed$5,000 against the revolving loan and made total debt payments of$45,000 during the six months endedJune 30, 2021 , resulting in$376,431 available under the Credit Agreement as ofJune 30, 2021 . We have an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program inJune 1999 , a total of 2,654,520 shares have been purchased, and we had 66,055 shares remaining in treasury atJune 30, 2021 . The Company repurchases shares from employees in connection with settlement of transactions under the Company's equity incentive plans. We also intend to acquire shares from time to time at prevailing market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market conditions and other factors. Proceeds from stock options exercised were$3,886 and$6,802 for the six months endedJune 30, 2021 and 2020, respectively. Dividend payments were$18,700 and$16,704 for the six months endedJune 30, 2021 and 2020, respectively. Other Matters Impacting Liquidity We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 14 - Employee Benefit Plans. The liability recorded in other long-term liabilities on the consolidated balance sheets as ofJune 30, 2021 andDecember 31, 2020 was$1,429 and$1,374 , respectively, and the plans are not funded. Historical cash payments made under these plans have typically been less than$100 per year. We do not anticipate any changes to the payments made in the current year for the plans. OnJune 1, 2018 , we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as ofJune 30, 2021 andDecember 31, 2020 was$5,714 and$3,581 , respectively, and was included in other long-term obligations on our balance sheet. The related rabbi trust assets were$5,714 and$3,581 as ofJune 30, 2021 andDecember 31, 2020 , respectively, and were included in other non-current assets on the balance sheets. Chemogas has an unfunded defined benefit plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amount recorded for these obligations on our balance sheets as ofJune 30, 2021 andDecember 31, 2020 were$945 and$950 , respectively, and were included in other long-term obligations. Critical Accounting Policies There were no changes to the Company's Critical Accounting Policies, as described in itsDecember 31, 2020 Annual Report on Form 10-K, during the six months endedJune 30, 2021 . Related Party Transactions We were engaged in related party transactions withSt. Gabriel CC Company, LLC during the three and six months endedJune 30, 2021 . Refer to Note 17, "Related Party Transactions". 32
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