BALCHEM CORP
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
For the quarterly period ended
June 30, 2022
OR
For the transition period from ____ to ____
Commission file number:
1-13648
_______________________________________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (
845
)
326-5600
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☑
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☑
No
☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☑ | Accelerated filer | ☐ | ||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☑
As of July 21, 2022, the registrant had
32,120,593
shares of its Common Stock, $.06 2/3 par value, outstanding.
BALCHEM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page No. | ||||||||||||||
Part I. Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
| Assets | June 30, 2022 (unaudited) | December 31, 2021 | ||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $
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| Inventories |
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| Prepaid expenses |
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| Derivative assets |
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| Other current assets |
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| Total current assets |
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| Property, plant and equipment, net |
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| Goodwill |
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| Intangible assets with finite lives, net |
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| Right of use assets - operating leases |
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| Right of use assets - finance lease |
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| Other assets |
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| Total assets | $ |
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$ |
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| Liabilities and Stockholders' Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Trade accounts payable | $ |
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$ |
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| Accrued expenses |
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| Accrued compensation and other benefits |
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| Dividends payable |
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| Income taxes payable |
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| Operating lease liabilities - current |
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| Finance lease liabilities - current |
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| Total current liabilities |
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| Revolving loan |
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| Deferred income taxes |
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| Operating lease liabilities - non-current |
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| Finance lease liabilities - non-current |
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| Derivative liabilities |
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| Contingent consideration liability |
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| Other long-term obligations |
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| Total liabilities |
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| Commitments and contingencies (Note 16) |
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| Stockholders' equity: | ||||||||||||||
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Preferred stock, $
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Common stock, $
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| Additional paid-in capital |
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| Retained earnings |
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| Accumulated other comprehensive income |
(
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(
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| Total stockholders' equity |
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| Total liabilities and stockholders' equity | $ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
(unaudited)
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net sales | $ |
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$ |
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$ |
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$ |
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| Cost of sales |
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| Gross margin |
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| Operating expenses: | ||||||||||||||||||||||||||
| Selling expenses |
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| Research and development expenses |
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| General and administrative expenses |
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| Earnings from operations |
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| Other expenses, net: | ||||||||||||||||||||||||||
| Interest expense, net |
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| Other (income) expense, net |
(
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(
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(
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(
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| Earnings before income tax expense |
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| Income tax expense |
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| Net earnings | $ |
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$ |
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$ |
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$ |
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| Net earnings per common share - basic | $ |
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$ |
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$ |
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$ |
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| Net earnings per common share - diluted | $ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(unaudited)
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net earnings | $ |
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$ |
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$ |
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$ |
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| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
| Foreign currency translation adjustment |
(
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(
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(
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| Unrealized gain on cash flow hedge |
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| Change in postretirement benefit plans |
(
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(
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| Other comprehensive income (loss) |
(
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(
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(
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| Comprehensive income | $ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
5
BALCHEM CORPORATION
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the three and six months ended June 30, 2022 and 2021
(Dollars in thousands, except share and per share data)
|
Total
Stockholders' Equity |
Retained
Earnings |
Accumulated
Other Comprehensive (Loss) Income |
Common Stock |
Additional
Paid-in Capital |
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| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2021 | $ |
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$ |
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$ |
(
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$ |
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$ |
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| Net earnings |
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— | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive (loss) |
(
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— |
(
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— | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock |
(
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— | — |
(
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(
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(
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| Dividends |
(
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(
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— | — | — | — | ||||||||||||||||||||||||||||||||
| Shares and options issued under stock plans |
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— | — |
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| Balance - March 31, 2022 |
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(
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| Net earnings |
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— | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive (loss) |
(
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— |
(
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— | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock |
(
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— | — |
(
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— |
(
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| Shares and options issued under stock plans |
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— | — |
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| Balance - June 30, 2022 | $ |
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$ |
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$ |
(
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$ |
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$ |
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| Balance - December 31, 2020 | $ |
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$ |
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$ |
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$ |
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$ |
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| Net earnings |
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— | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive (loss) |
(
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— |
(
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— | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock |
(
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— | — |
(
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(
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(
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| Shares and options issued under stock plans |
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— | — |
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| Balance - March 31, 2021 |
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(
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| Net earnings |
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— | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income |
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— |
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— | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock |
(
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— | — |
(
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(
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(
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| Shares and options issued under stock plans |
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— | — |
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| Balance - June 30, 2021 | $ |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
6
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
|
Six Months Ended
June 30, |
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| 2022 | 2021 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net earnings | $ |
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$ |
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| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization |
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| Stock compensation expense |
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| Deferred income taxes |
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| Provision for doubtful accounts |
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(
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| Unrealized loss/(gain) on foreign currency transaction and deferred compensation |
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(
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| Asset impairment charge |
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| Loss/(gain) on disposal of assets |
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(
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| Changes in assets and liabilities | ||||||||||||||
| Accounts receivable |
(
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(
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| Inventories |
(
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(
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| Prepaid expenses and other current assets |
(
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(
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| Accounts payable and accrued expenses |
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| Income taxes |
(
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| Other |
(
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | ||||||||||||||
| Cash paid for acquisition, net of cash acquired |
(
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| Capital expenditures and intangible assets acquired |
(
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(
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| Proceeds from sale of assets |
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| Investment in affiliates |
(
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| Net cash used in investing activities |
(
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(
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| Cash flows from financing activities: | ||||||||||||||
| Proceeds from revolving loan |
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| Principal payments on revolving loan |
(
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(
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| Principal payments on acquired debt |
(
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| Principal payments on finance lease |
(
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(
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| Proceeds from stock options exercised |
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| Dividends paid |
(
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(
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| Purchase of common stock |
(
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(
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| Net cash provided by (used in) financing activities |
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(
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| Effect of exchange rate changes on cash |
(
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(
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| Decrease in cash and cash equivalents |
(
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(
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| Cash and cash equivalents beginning of period |
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| Cash and cash equivalents end of period | $ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All dollar amounts in thousands, except share and per share data)
NOTE 1 –
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in the December 31, 2021 consolidated financial statements, and should be read in conjunction with the consolidated financial statements and notes, which appear in the Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated financial statements reflect the operations of Balchem Corporation and its subsidiaries (the "Company"). All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited condensed consolidated financial statements furnished in this Form 10-Q include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal, recurring nature. The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” or “GAAP”) governing interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934 (the "Exchange Act") and therefore do not include some information and notes necessary to conform to annual reporting requirements. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results expected for the full year or any interim period.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, this Standard Update is in effect from March 12, 2020 through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The Company adopted the Standard Update in 2021. The adoption of the Standard update did not have a significant impact on the Company's consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a significant impact on the Company's consolidated financial statements and disclosures.
8
NOTE 2 –
SIGNIFICANT ACQUISITIONS
On June 21, 2022, Balchem and its wholly-owned subsidiary, Balchem B.V., completed the acquisition of Kechu BidCo AS and its subsidiary companies, including Kappa Bioscience AS, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway (all acquired companies being hereinafter collectively referred to as “Kappa”). The Company made payments of approximately kr
3,301,341
("kr" indicates the Norwegian krone) on the acquisition date, amounting to approximately kr
2,997,669
to the former shareholder and approximately kr
303,672
to Kappa's lenders to pay off all Kappa bank debt. Net of cash acquired of kr
63,064
, total payments on the acquisition date were kr
3,238,277
. Considering net cash acquired of $
6,365
, these payments translated to approximately $
326,820
paid on the acquisition date, amounting to $
302,537
paid to the former shareholder and approximately $
30,648
to Kappa's lenders. The acquisition was primarily financed through the 2018 Credit Agreement (see Note 8, "Revolving Loan"). 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 contingent consideration of kr
245,000
(translated to $
24,793
) as of June 30, 2022. Kappa manufactures specialty vitamin K2, a fast-growing specialty vitamin that plays a crucial role in the human body for bone health, heart health, immunity, and athletic performance. Primarily, vitamin K2 supports the transport and distribution of calcium in the body. Vitamin K2 is important at all life stages, from pregnancy and early life to healthy aging. Kappa's K2VITAL
®
branded vitamin K2 is the leading synthetic vitamin K2 and is backed by strong intellectual property and a deep clinical research portfolio. The acquisition strengthens the Company's scientific and technical expertise, geographic reach, and marketplace leadership, which should ultimately lead to accelerated growth for the Company's portfolios within the Human Nutrition & Health segment.
The goodwill of $
212,591
that arose on the acquisition date consists largely of expected synergies, including the combined entities' experience and technical problem-solving capabilities, and acquired workforce. The goodwill is assigned to the Human Nutrition & Health business segment and is not deductible for income tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
| Cash and cash equivalents | $ |
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| Accounts receivable |
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| Inventories |
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| Property, plant and equipment |
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| Right of use assets |
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| Customer relationships |
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| Developed technology |
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| Trademarks |
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| Other assets |
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| Accounts payable |
(
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| Bank debt |
(
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| Lease liabilities |
(
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| Other liabilities |
(
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| Deferred income taxes, net |
(
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| Goodwill |
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| Total consideration on acquisition date |
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| Contingent consideration liability |
(
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| Net gains on foreign currency exchange forward contracts |
(
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| Amount paid to shareholders |
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| Kappa bank debt paid on purchase date |
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| Total amount paid on acquisition date | $ |
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The estimated fair value of tangible and intangible assets acquired and liabilities assumed is based on management’s estimates and assumptions, which are subject to change. In preparing our preliminary fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Valuation methods utilized include net realizable value for inventory, multi-period excess earnings method for customer relationships, the relief from royalty method for other intangible assets, and a scenario-based approach for the contingent consideration. The purchase price and related allocation of assets acquired and liabilities assumed is preliminary pending management's final review of fair value calculations and deferred tax liabilities related to certain non-deductible assets.
9
Customer relationships are amortized over a
15-year
period utilizing a percentage of excess earnings over economic life method. The corporate trademark and product trademarks are amortized over
2
years and
10
years, respectively, and developed technology is amortized over
12
years, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.
Transaction and integration costs related to the Kappa acquisition are included in selling, general, and administrative expenses and were $
451
for both the three and six months ended June 30, 2022. There were
no
such amounts related to this acquisition for the three and six months ended June 30, 2021.
The following preliminary unaudited pro forma information has been prepared as if the acquisition had occurred on January 1, 2021.
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| Net Sales | Net Earnings | Net Sales | Net Earnings | |||||||||||||||||||||||
| Kappa actual results included in the Company's consolidated income statement from June 21, 2022 through June 30, 2022 | $ |
|
$ |
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$ |
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$ |
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| 2022 Supplemental pro forma combined financial information | $ |
|
$ |
|
$ |
|
$ |
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| 2021 Supplemental pro forma combined financial information | $ |
|
$ |
|
$ |
|
$ |
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Kappa's net sales and net earnings from June 21, 2022 through June 30, 2022 were not material. As such, they were not included in the Company's condensed consolidated statements of earnings for the three and six months ended June 30, 2022. 2022 supplemental pro forma net earnings for the three and six months ended June 30, 2022, excluded $
643
and $
722
, respectively, of acquisition-related costs incurred. The pro forma information presented does not purport to be indicative of the results that actually would have been attained if the Kappa acquisition had occurred at the beginning of the periods presented, and is not intended to be a projection of future results.
NOTE 3 –
STOCKHOLDERS’ EQUITY
STOCK-BASED COMPENSATION
The Company’s results for the three and six months ended June 30, 2022 and 2021 reflected the following stock-based compensation cost, and such compensation cost had the following effects on net earnings:
| Increase/(Decrease) for the | Increase/(Decrease) for the | |||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Cost of sales | $ |
|
$ |
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$ |
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$ |
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| Operating expenses |
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| Net earnings |
(
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(
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(
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(
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||||||||||||||||||||||
As allowed by ASC 718, the Company has made an estimate of expected forfeitures based on its historical experience and is recognizing compensation cost only for those stock-based compensation awards expected to vest.
The Company’s stock incentive plans allow for the granting of stock awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. No option will be exercisable for longer than
ten years
after the date of grant. The Company has approved and reserved a number of shares to be issued upon exercise of the outstanding options that is adequate to cover all exercises. As of June 30, 2022, the plans had
534,120
shares available for future awards. Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally
three years
for stock options,
to
four years
for employee restricted stock awards,
three years
for employee
10
performance share awards, and
three years
for non-employee director restricted stock awards. Certain awards provide for accelerated vesting if there is a change in control (as defined in the plans) or other qualifying events.
Option activity for the six months ended June 30, 2022 and 2021 is summarized below:
| For the six months ended June 30, 2022 | Shares (000s) |
Weighted
Average Exercise Price |
Aggregate
Intrinsic Value |
Weighted
Average Remaining Contractual Term |
||||||||||||||||||||||
| Outstanding as of December 31, 2021 |
|
$ |
|
$ |
|
|||||||||||||||||||||
| Granted |
|
|
||||||||||||||||||||||||
| Exercised |
(
|
|
||||||||||||||||||||||||
| Forfeited |
(
|
|
||||||||||||||||||||||||
| Canceled |
|
|
||||||||||||||||||||||||
| Outstanding as of June 30, 2022 |
|
$ |
|
$ |
|
|
||||||||||||||||||||
| Exercisable as of June 30, 2022 |
|
$ |
|
$ |
|
|
||||||||||||||||||||
| For the six months ended June 30, 2021 | Shares (000s) |
Weighted
Average Exercise Price |
Aggregate
Intrinsic Value |
Weighted
Average Remaining Contractual Term |
||||||||||||||||||||||
| Outstanding as of December 31, 2020 |
|
$ |
|
$ |
|
|||||||||||||||||||||
| Granted |
|
|
||||||||||||||||||||||||
| Exercised |
(
|
|
||||||||||||||||||||||||
| Forfeited |
(
|
|
||||||||||||||||||||||||
| Canceled |
(
|
|
||||||||||||||||||||||||
| Outstanding as of June 30, 2021 |
|
$ |
|
$ |
|
|
||||||||||||||||||||
| Exercisable as of June 30, 2021 |
|
$ |
|
$ |
|
|
||||||||||||||||||||
ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yields of
0.5
% and
0.5
%; expected volatilities of
31
% and
33
%; risk-free interest rates of
2.0
% and
0.5
%; and expected lives of
4.9
years and
4.9
years, in each case for the six months ended June 30, 2022 and 2021, respectively.
The Company used a projected expected life for each award granted based on historical experience of employees’ exercise behavior. Expected volatility is based on the Company’s historical volatility levels. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury Zero coupon issues with a remaining term equal to the expected life.
11
Other information pertaining to option activity during the three and six months ended June 30, 2022 and 2021 is as follows:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Weighted-average fair value of options granted | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Total intrinsic value of stock options exercised ($000s) | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
Non-vested restricted stock activity for the six months ended June 30, 2022 and 2021 is summarized below:
| Six Months Ended June 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Shares (000s) |
Weighted
Average Grant Date Fair Value |
Shares (000s) |
Weighted
Average Grant Date Fair Value |
|||||||||||||||||||||||
| Non-vested balance as of December 31 |
|
$ |
|
|
$ |
|
||||||||||||||||||||
| Granted |
|
|
|
|
||||||||||||||||||||||
| Vested |
(
|
|
(
|
|
||||||||||||||||||||||
| Forfeited |
(
|
|
(
|
|
||||||||||||||||||||||
| Non-vested balance as of June 30 |
|
$ |
|
|
$ |
|
||||||||||||||||||||
Non-vested performance share activity for the six months ended June 30, 2022 and 2021 is summarized below:
| Six Months Ended June 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Shares (000s) |
Weighted
Average Grant Date Fair Value |
Shares (000s) |
Weighted
Average Grant Date Fair Value |
|||||||||||||||||||||||
| Non-vested balance as of December 31 |
|
$ |
|
|
$ |
|
||||||||||||||||||||
| Granted |
|
|
|
|
||||||||||||||||||||||
| Vested |
(
|
|
(
|
|
||||||||||||||||||||||
| Forfeited |
(
|
|
(
|
|
||||||||||||||||||||||
| Non-vested balance as of June 30 |
|
$ |
|
|
$ |
|
||||||||||||||||||||
The performance share (“PS”) awards provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and relative total shareholder return (TSR) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents. Expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions used in the fair value determination were risk free interest rates of
1.8
% and
0.2
%; dividend yields of
0.5
% and
0.6
%; volatilities of
32
% and
33
%; and initial TSR’s of -
15.7
% and
11.7
%, in each case for the six months ended June 30, 2022 and 2021, respectively. Expense is estimated based on the number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest
100
% at the end of the third year following the grant in accordance with the performance metrics set forth.
As of June 30, 2022 and 2021, there were $
19,988
and $
19,796
, respectively, of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the plans. As of June 30, 2022, the unrecognized
12
compensation cost is expected to be recognized over a weighted-average period of approximately
1.7
years. The Company estimates that share-based compensation expense for the year ended December 31, 2022 will be approximately $
13,000
.
REPURCHASE OF COMMON STOCK
The Company's Board of Directors has approved a 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
3,068,905
shares have been purchased. The Company’s prior presentation of reflecting treasury stock separately within stockholders’ equity has been adjusted to conform to the presentation prescribed by the State of Maryland, where the Company is incorporated. In connection therewith, adjustments to balances previously reflected as treasury stock of $
8,472
, $
2,210
, and $
7,873
as of June 30, 2021, March 31, 2021, and December 31, 2020, respectively, were made to the condensed consolidated statements of changes in stockholders’ equity and prior references to “Treasury shares purchased” were updated to “Repurchases of common stock”, accordingly. There was no impact to total stockholders’ equity in any of the years presented as a result of these updates. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it is advisable to do so based on its assessment of corporate cash flow, market conditions and other factors. The Company also repurchases shares from employees in connection with settlement of transactions under the Company's equity incentive plans. During the six months ended June 30, 2022 and 2021, the Company purchased
250,661
and
86,124
shares, respectively, from open market purchases and from employees on a net-settlement basis to provide cash to employees to cover the associated employee payroll taxes. These shares were purchased at an average cost of $
140.42
and $
125.81
, respectively.
NOTE 4 –
INVENTORIES
Inventories at June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| Raw materials | $ |
|
$ |
|
||||||||||
| Work in progress |
|
|
||||||||||||
| Finished goods |
|
|
||||||||||||
| Total inventories | $ |
|
$ |
|
||||||||||
NOTE 5 –
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2022 and December 31, 2021 are summarized as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| Land | $ |
|
$ |
|
||||||||||
| Building |
|
|
||||||||||||
| Equipment |
|
|
||||||||||||
| Construction in progress |
|
|
||||||||||||
|
|
|
|||||||||||||
| Less: accumulated depreciation |
|
|
||||||||||||
| Property, plant and equipment, net | $ |
|
$ |
|
||||||||||
NOTE 6 –
INTANGIBLE ASSETS
13
Identifiable intangible assets with finite lives at June 30, 2022 and December 31, 2021 are summarized as follows:
|
Amortization
Period (in years) |
Gross Carrying Amount at
6/30/2022 |
Accumulated Amortization at 6/30/2022 | Gross Carrying Amount at 12/31/2021 | Accumulated Amortization at 12/31/2021 | ||||||||||||||||||||||||||||
| Customer relationships & lists |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Trademarks & trade names |
|
|
|
|
|
|||||||||||||||||||||||||||
| Developed technology |
|
|
|
|
|
|||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|||||||||||||||||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||
Amortization of identifiable intangible assets was approximately $
5,850
and $
11,761
for the three and six months ended June 30, 2022, respectively, and $
6,229
and $
12,713
for the three and six months ended June 30, 2021, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, estimated amortization expense is $
14,485
for the remainder of 2022, $
27,923
for 2023, $
19,659
for 2024, $
16,117
for 2025, $
15,710
for 2026 and $
14,949
for 2027. At June 30, 2022 and December 31, 2021, there were
no
identifiable intangible assets with indefinite useful lives as defined by ASC 350. Identifiable intangible assets are reflected in “Intangible assets with finite lives, net” in the Company’s condensed consolidated balance sheets. There were no changes to the useful lives of intangible assets subject to amortization during the six months ended June 30, 2022 and 2021.
NOTE 7 –
EQUITY-METHOD INVESTMENT
NOTE 8 –
REVOLVING LOAN
14
Amounts outstanding under the 2018 Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the 2018 Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the 2018 Credit Agreement, and the interest rate was
2.538
% at June 30, 2022. The Company is also required to pay a commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as defined in the 2018 Credit Agreement and ranges from
0.15
% to
0.275
% (
0.15
% at June 30, 2022). The unused portion of the revolving loan amounted to $
66,431
at June 30, 2022. The Company is also required to pay, as applicable, letter of credit fees, administrative agent fees, and other fees to the arrangers and lenders.
Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the 2018 Credit Agreement, which is not materially different than the effective interest method. Costs associated with the issuance of the extinguished debt instrument were capitalized and amortized over the term of the respective financing arrangement using the effective interest method. Capitalized costs net of accumulated amortization totaled $
280
and $
421
at June 30, 2022 and December 31, 2021, respectively, and are included in other assets on the condensed consolidated balance sheets. Amortization expense pertaining to these costs totaled $
70
and $
141
for the three and six months ended June 30, 2022 and 2021, respectively, and are included in "Interest expense" in the accompanying condensed consolidated statements of earnings.
The 2018 Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At June 30, 2022, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements is secured by assets of the Company.
NOTE 9–
NET EARNINGS PER SHARE
The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per share:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net Earnings - Basic and Diluted | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Shares (000s) | ||||||||||||||||||||||||||
| Weighted Average Common Shares - Basic |
|
|
|
|
||||||||||||||||||||||
| Effect of Dilutive Securities – Stock Options, Restricted Stock, and Performance Shares |
|
|
|
|
||||||||||||||||||||||
| Weighted Average Common Shares - Diluted |
|
|
|
|
||||||||||||||||||||||
| Net Earnings Per Share - Basic | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Net Earnings Per Share - Diluted | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
The number of anti-dilutive shares were
294,568
and
237,453
for the three and six months ended June 30, 2022, respectively, and
153,868
and
304,324
for the three and six months ended
June 30, 2021
, respectively. Anti-dilutive shares could potentially dilute basic earnings per share in future periods and therefore, were not included in diluted earnings per share.
NOTE 10 –
INCOME TAXES
The Company’s effective tax rate for the three months ended June 30, 2022 and 2021, was
24.1
% and
24.3
%, respectively, and
23.6
% and
23.1
% for the six months ended June 30, 2022 and 2021. The decrease in the effective tax rate for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 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. The increase in the effective tax rate for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to lower tax benefits from stock-based compensation and a reduction in certain tax credits.
Balchem will continue to evaluate and analyze the impact of the U.S. Tax Cuts and Jobs Act that was enacted on December 22, 2017 and the additional guidance that has been issued, and may be issued, by the U.S. Department of Treasury, the Securities and Exchange Commission ("SEC"), and/or the Financial Accounting Standards Board ("FASB") regarding this act.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
15
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and would establish a valuation allowance if it believed that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.
The Company accounts for uncertainty in income taxes utilizing ASC 740-10, "Income Taxes". ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosures. The application of ASC 740-10 requires judgment related to the uncertainty in income taxes and could impact our effective tax rate.
The Company files income tax returns in the U.S. and in various states and foreign countries. As of June 30, 2022, in the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2017. As of June 30, 2022 and December 31, 2021, the Company had approximately $
5,902
and $
5,881
, respectively, of unrecognized tax benefits, which are included in "Other long-term obligations" on the Company’s condensed consolidated balance sheets. The Company includes interest expense or income as well as potential penalties on unrecognized tax positions as a component of "Income tax expense" in the condensed consolidated statements of earnings. The total amounts of accrued interest and penalties related to uncertain tax positions at June 30, 2022 and December 31, 2021 were approximately $
2,214
and $
2,106
, respectively, and are included in "Other long-term obligations."
NOTE 11 –
SEGMENT INFORMATION
Balchem Corporation reports
three
business segments: Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated."
Human Nutrition & Health
The Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for nutrition and health 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. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technologies have been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customers' appreciation of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation. This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. The Company partners with its customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company has expertise in trends analysis and product development. With its strong manufacturing capabilities in customized spray dried and emulsified powders, extrusion and agglomeration, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, ice cream bases and variegates, the Company is a one-stop solutions provider for beverage and dairy product development needs. Additionally, this 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, sports and protein bars, dietary plans, and nutritional supplements. The Company also creates cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients. Through the Kappa acquisition, this segment recently began manufacturing specialty vitamin K2, which is a fast-growing specialty vitamin that plays a crucial role in the human body for bone health, heart health, immunity, and athletic performance.
Animal Nutrition & Health
The Company’s Animal Nutrition & Health ("ANH") segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, the Company’s microencapsulated products boost health and milk production by delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine
16
industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity.
Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
Specialty Products
Ethylene oxide, at the 100% level and blended with carbon dioxide, 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. The Company’s 100% ethylene oxide product and blends are distributed worldwide in specially designed, reusable and recyclable drum and cylinder packaging, to assure compliance with safety, quality and environmental standards as outlined by the applicable regulatory agencies in the countries our products are shipped to. The Company’s inventory of these specially built drums and cylinders, along with its
five
filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.
The Company also distributes a number of other gases for various uses, most notably propylene oxide and ammonia. Propylene oxide is marketed and sold in the U.S. as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shelled and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. The Company distributes its propylene oxide product in the U.S. primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the Environmental Protection Agency ("EPA") and the Department of Transportation ("DOT"). Propylene oxide is also sold worldwide to customers in approved reusable and recyclable drum and cylinder packaging for various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings. Ammonia is used primarily as a refrigerant, and also for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and cylinder packaging approved for use in the countries these products are shipped to. The Company's inventory of cylinders for these products also represents a significant capital investment.
The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily to producers of high value crops. The Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate
®
product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.
The segment information is summarized as follows:
| Business Segment Assets |
June 30,
2022 |
December 31,
2021 |
||||||||||||
| Human Nutrition & Health | $ |
|
$ |
|
||||||||||
| Animal Nutrition & Health |
|
|
||||||||||||
| Specialty Products |
|
|
||||||||||||
|
Other and Unallocated
(1)
|
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
17
| Business Segment Net Sales |
Three Months Ended
June 30, |
Six Months Ended
June 30, |
||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Human Nutrition & Health | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Animal Nutrition & Health |
|
|
|
|
||||||||||||||||||||||
| Specialty Products |
|
|
|
|
||||||||||||||||||||||
|
Other and Unallocated
(2)
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Business Segment Earnings Before Income Taxes |
Three Months Ended
June 30, |
Six Months Ended
June 30, |
||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Human Nutrition & Health | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Animal Nutrition & Health |
|
|
|
|
||||||||||||||||||||||
| Specialty Products |
|
|
|
|
||||||||||||||||||||||
|
Other and Unallocated
(2)
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Interest and other expense |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Depreciation/Amortization |
Three Months Ended
June 30, |
Six Months Ended
June 30, |
||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Human Nutrition & Health | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Animal Nutrition & Health |
|
|
|
|
||||||||||||||||||||||
| Specialty Products |
|
|
|
|
||||||||||||||||||||||
|
Other and Unallocated
(2)
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Capital Expenditures |
Six Months Ended
June 30, |
|||||||||||||
| 2022 | 2021 | |||||||||||||
| Human Nutrition & Health | $ |
|
$ |
|
||||||||||
| Animal Nutrition & Health |
|
|
||||||||||||
| Specialty Products |
|
|
||||||||||||
|
Other and Unallocated
(2)
|
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
|
(1)
Other and Unallocated assets consist of certain cash, capitalized loan issuance costs, other assets, investments, and income taxes, which the Company does not allocate to its individual business segments. It also includes assets associated with a few minor businesses which individually do not meet the quantitative thresholds for separate presentation.
|
||
|
(2)
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 $
|
||
18
NOTE 12 –
REVENUE
Revenue Recognition
Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to realize in exchange for those goods.
The following table presents revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues.
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Product Sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Co-manufacturing |
|
|
|
|
||||||||||||||||||||||
| Consignment |
|
|
|
|
||||||||||||||||||||||
| Product Sales Revenue |
|
|
|
|
||||||||||||||||||||||
| Royalty Revenue |
|
|
|
|
||||||||||||||||||||||
| Total Revenue | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
The following table presents revenues disaggregated by geography, based on the shipping addresses of customers:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Foreign Countries |
|
|
|
|
||||||||||||||||||||||
| Total Revenue | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
Product Sales Revenues
The Company’s primary operation is the manufacturing and sale of health and nutrition ingredient products, in which the Company receives an order from a customer and fulfills that order. The Company’s product sales are considered point-in-time revenue and consist of
three
sub-streams: product sales, co-manufacturing, and consignment.
Under the co-manufacturing agreements, the Company is responsible for the manufacture of a finished good where the customer provides the majority of the raw materials. The Company controls the manufacturing process and the ultimate end-product before it is shipped to the customer. Based on these factors, the Company has determined that it is the principal in these agreements and therefore revenue is recognized in the gross amount of consideration the Company expects to be entitled for the goods provided.
Royalty Revenues
Royalty revenue consists of agreements with customers to use the Company’s intellectual property in exchange for a sales-based royalty. Royalties are considered over time revenue and are recorded in the HNH segment.
Contract Liabilities
The Company records contract liabilities when cash payments are received or due in advance of performance, including amounts which are refundable.
The Company’s payment terms vary by the type and location of customers and the products offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products are delivered to the customer.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses.
19
NOTE 13 –
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the six months ended June 30, 2022 and 2021 for income taxes and interest is as follows:
|
Six Months Ended
June 30, |
||||||||||||||
| 2022 | 2021 | |||||||||||||
| Income taxes | $ |
|
$ |
|
||||||||||
| Interest | $ |
|
$ |
|
||||||||||
NOTE 14 –
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive (loss)/income were as follows:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net foreign currency translation adjustment | $ |
(
|
$ |
|
$ |
(
|
$ |
(
|
||||||||||||||||||
| Net change of cash flow hedge (see Note 20 for further information) | ||||||||||||||||||||||||||
| Unrealized gain on cash flow hedge |
|
|
|
|
||||||||||||||||||||||
| Tax |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Net of tax |
|
|
|
|
||||||||||||||||||||||
| Net change in postretirement benefit plan (see Note 15 for further information) | ||||||||||||||||||||||||||
| Amortization of prior service cost |
|
|
|
|
||||||||||||||||||||||
| Amortization of gain |
|
(
|
|
(
|
||||||||||||||||||||||
| Gain arising during the period and prior service credit |
(
|
|
(
|
(
|
||||||||||||||||||||||
| Total before tax |
(
|
|
(
|
|
||||||||||||||||||||||
| Tax |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Net of tax and adjustment |
(
|
|
(
|
|
||||||||||||||||||||||
| Total other comprehensive (loss)/income | $ |
(
|
$ |
|
$ |
(
|
$ |
(
|
||||||||||||||||||
Included in "Net foreign currency translation adjustment" were gains of $
3,963
and $
5,086
, related to a net investment hedge, which were net of taxes of $
1,309
and $
1,642
for the three and six months ended June 30, 2022, respectively. Included in "Net foreign currency translation adjustment" w
as a loss of $
1,024
and a gain of $
2,173
, re
lated to a net investment hedge, which were net of taxes of $
336
and $
690
for the three and six months ended June 30, 2021, respectively. See Note 20, "Derivative Instruments and Hedging Activities."
20
Accumulated other comprehensive (loss)/income at June 30, 2022 and December 31, 2021 consisted of the following:
|
Foreign currency
translation adjustment |
Cash flow hedge |
Postretirement
benefit plan |
Total | |||||||||||||||||||||||
| Balance December 31, 2021 | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
||||||||||||||||||
| Other comprehensive (loss)/income |
(
|
|
(
|
(
|
||||||||||||||||||||||
| Balance June 30, 2022 | $ |
(
|
$ |
|
$ |
|
$ |
(
|
||||||||||||||||||
NOTE 15 –
EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsored
two
401(k) savings plans for eligible employees, which were merged into
one
plan on January 1st, 2021. The remaining plan allows participants to make pretax contributions and the Company matches certain percentages of those pretax contributions. The remaining plan also has a discretionary profit sharing portion and matches 401(k) contributions with shares of the Company’s Common Stock. All amounts contributed to the plan are deposited into a trust fund administered by independent trustees. On June 21, 2022, the Company completed the acquisition of Kappa, which sponsors
one
defined contribution plan for its employees.
Postretirement Medical Plans
The Company provides postretirement benefits in the form of
two
unfunded postretirement medical plans; one that is under a collective bargaining agreement and covers eligible retired employees of the Verona facility and a plan for those named as executive officers in the Company’s proxy statement.
|
Six Months Ended
June 30, |
||||||||||||||
| 2022 | 2021 | |||||||||||||
| Service cost | $ |
|
$ |
|
||||||||||
| Interest cost |
|
|
||||||||||||
| Amortization of prior service cost |
|
|
||||||||||||
| Amortization of gain |
|
(
|
||||||||||||
| Net periodic benefit cost | $ |
|
$ |
|
||||||||||
T
he amounts recorded for these obligations on the Company’s condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 are $
1,221
and $
1,293
, respectively, and are included in "Other long-term obligations." These plans are unfunded and approved claims are paid from Company funds. Historical cash payments made under such plans have typically been less than $
200
per year.
Defined Benefit Pension Plans
On May 27, 2019, the Company acquired Chemogas, which has an unfunded defined benefit pension plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amounts recorded for these obligations on the Company's condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 were $
641
and $
684
, respectively, and were included in "Other long-term obligations."
21
Net periodic benefit costs for such benefit pensions plans were as follows:
|
Six Months Ended
June 30, |
||||||||||||||
| 2022 | 2021 | |||||||||||||
| Service cost with interest to end of year | $ |
|
$ |
|
||||||||||
| Interest cost |
|
|
||||||||||||
| Expected return on plan assets |
(
|
(
|
||||||||||||
| Amortization of gain |
|
|
||||||||||||
| Total net periodic benefit cost | $ |
|
$ |
|
||||||||||
Deferred Compensation Plan
NOTE 16 –
COMMITMENTS AND CONTINGENCIES
Aggregate future minimum rental payments required under all non-cancelable operating and finance leases at June 30, 2022 are as follows:
| Year | |||||
| July 1, 2022 to December 31, 2022 | $ |
|
|||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| 2027 |
|
||||
| Thereafter |
|
||||
| Total minimum lease payments | $ |
|
|||
The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983 because of dioxin contamination on portions of the site. Remediation was conducted by the prior owner under the oversight of the EPA and the Missouri Department of Natural Resources. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for certain potential liabilities associated with the Superfund site. In February 2022, BCP Ingredients, Inc. ("BCP"), the Company subsidiary that operates the site, along with the prior owner of the site received a Special Notice Letter from EPA for the performance of a focused remedial investigation/feasibility study ("RI/FS") at the site with regard to the presence of certain contaminants at the site, focusing primarily on the presence of 1,4 dioxane and chlorobenzene. BCP and the site's prior owner are currently negotiating with the EPA and the State of Missouri with respect to a proposed Administrative Settlement Agreement and Order on Consent that defines the scope and performance of the focused RI/FS.
From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity.
22
NOTE 17 –
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments,
none
of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at June 30, 2022 and December 31, 2021 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximate fair value due to the short-term maturity of these instruments. Cash and cash equivalents at June 30, 2022 and December 31, 2021
includes $
927
and $
933
in money
market funds, respectively.
Non-current assets at June 30, 2022 and December 31, 2021
includes $
8,255
and $
6,267
, respectively, of rabbi trust funds related to the Company's deferred compensation plan. The money market and rabbi trust funds ar
e valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”
NOTE 18 –
RELATED PARTY TRANSACTIONS
NOTE 19 –
LEASES
23
does not make economic sense to buy the equipment. Instead, the Company has historically replaced the equipment with new leases. Therefore, the Company determined that the reasonably certain criterion could not be met as it relates to purchase options. The Company has no residual value guarantees in lease transactions.
On June 22, 2022, the Company signed a
ten-year
real estate sublease for approximately
40,000
square feet of office space, which will serve as the Company's corporate headquarters and a laboratory facility. The sublease will not commence until the sublandlord substantially completes its work per the sublease agreement, which will most likely occur in the third quarter of 2022. This new sublease will replace the current lease for the Company's corporate headquarters, however the Company anticipates that it will continue to lease the laboratory space in the previous corporate headquarters. The Company will recognize a right of use asset and a lease liability at the commencement date based on ASC 842, Lease Accounting. As of June 30, 2022 the Company did not record a right of use asset or lease liability on the balance sheet in connection with this lease.
The Company has not identified any embedded leases. As indicated above, the Company elected the practical expedient to combine lease and non-lease components and recognizes the combined amount on the condensed consolidated balance sheet. Management determined that since the Company has a centralized treasury function, the parent company would either fund or guarantee a subsidiary's loan for borrowing over a similar term. As such, the Company's management determined it is appropriate to utilize a corporate based borrowing rate for all locations. The Company developed
four
tranches of leases based on lease terms and these tranches reflect the composition of the current lease portfolio. The Company's borrowing history shows that interest rates of a term loan or a line of credit depend on the duration of the loan rather than the nature of the assets purchased by those funds. Based on this understanding, the Company elected to use a portfolio approach to discount rates, applying corporate rates to the tranches of leases based on lease terms. Based on the Company's risk rating, the company applied the following discount rates for new leases entered into during 2022: (1)
1
-
2
years,
1.45
% (2)
3
-
4
years,
2.04
% (3)
5
-
9
years,
2.38
% and (4)
10
+ years,
3.10
%.
In connection with its December 2019 acquisition of Zumbro River Brand, Inc., the Company assumed the finance lease commitment for a warehouse, with an expiration date of March 31, 2033. The warehouse can be purchased at a pre-determined price beginning in 2023. At June 30, 2022 and December 31, 2021, the Company had finance lease liabilities of $
2,387
and $
2,470
, respectively, which were recorded under "Lease liabilities" (current and non-current) on the condensed consolidated balance sheets.
Right of use assets and lease liabilities at June 30, 2022 and December 31, 2021 are summarized as follows:
| Right of use assets | June 30, 2022 | December 31, 2021 | ||||||||||||
| Operating leases | $ |
|
$ |
|
||||||||||
| Finance leases |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
| Lease liabilities - current | June 30, 2022 | December 31, 2021 | ||||||||||||
| Operating leases | $ |
|
$ |
|
||||||||||
| Finance leases |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
| Lease liabilities - non-current | June 30, 2022 | December 31, 2021 | ||||||||||||
| Operating leases | $ |
|
$ |
|
||||||||||
| Finance leases |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
24
For the three and six months ended June 30, 2022 and 2021, the Company's total lease costs were as follows, which included amounts recognized in earnings, amounts capitalized on the balance sheets, and the cash flows arising from lease transactions:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Lease Cost | ||||||||||||||||||||||||||
| Operating lease cost | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Finance Lease cost | ||||||||||||||||||||||||||
| Amortization of ROU asset |
|
|
|
|
||||||||||||||||||||||
| Interest on lease liabilities |
|
|
|
|
||||||||||||||||||||||
| Total finance lease |
|
|
|
|
||||||||||||||||||||||
| Total lease cost | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||||||||||||
| Operating cash flows from operating leases | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Operating cash flows from finance leases |
|
|
|
|
||||||||||||||||||||||
| Financing cash flows from finance leases |
|
|
|
|
||||||||||||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities, net of right-of-use assets disposed | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Weighted-average remaining lease term - operating leases |
|
|
|
|
||||||||||||||||||||||
| Weighted-average remaining lease term - finance leases |
|
|
|
|
||||||||||||||||||||||
| Weighted-average discount rate - operating leases |
|
% |
|
% |
|
% |
|
% | ||||||||||||||||||
| Weighted-average discount rate - finance leases |
|
% |
|
% |
|
% |
|
% | ||||||||||||||||||
NOTE 20 –
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In May 2019, the Company entered into an interest rate swap (cash flow hedge) with JP Morgan Chase, N.A. (the "Swap Counterparty") and a cross-currency swap (net investment hedge) with JP Morgan Chase, N.A. (the "Bank Counterparty"). The Company's primary objective for holding derivative financial instruments is to manage interest rate risk and foreign currency risk.
On May 28, 2019, the Company entered into a pay-fixed (
2.05
%), receive-floating interest rate swap with a notional amount of $
108,569
and a maturity date of June 27, 2023. The Company's risk management objective and strategy with respect to the interest rate swap is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective since changes in the cash flows of the interest rate swap are expected to exactly offset the changes in the cash flows attributable to fluctuations in the contractually specified interest rate on the interest payments associated with the 2018 Credit Agreement. The net interest expense related to the interest rate swap contract was $
364
and $
877
for the three and six months ended June 30, 2022, and $
534
and $
1,055
for the three and six months ended June 30, 2021, respectively, and was recorded in the condensed consolidated statements of earnings under "Interest expense, net." In addition, in connection with the Company's entering into the Amended
25
and Restated Credit Agreement on July 27, 2022 (see Note 8 "Revolving Loan"), the Company also modified its existing interest rate swap under the relief provided for in ASC 848, "Reference Rate Reform".
On May 28, 2019, the Company also entered into a pay-fixed (
0.00
%), receive-fixed (
2.05
%) cross-currency swap to manage foreign exchange risk related to the Company's net investment in Chemogas. The derivative has a notional amount of $
108,569
, an effective date of May 28, 2019, and a maturity date of June 27, 2023. The interest income related to the cross-currency swap contract was $
563
and $
1,113
for the three and six months ended June 30, 2022, and $
563
and $
1,119
for the three and six months ended June 30, 2021, respectively, which were recorded in the condensed consolidated statements of earnings under "Interest expense, net."
The derivative instruments are with a single counterparty and are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. As such, the derivative instruments are categorized as a master netting arrangement and presented as a net "Derivative asset" or "Derivative liability" on the condensed consolidated balance sheets.
As of June 30, 2022 and December 31, 2021, the fair value of the derivative instruments is presented as follows in the Company's condensed consolidated balance sheets:
| Derivative assets (liabilities) | June 30, 2022 | December 31, 2021 | ||||||||||||
| Interest rate swap | $ |
|
$ |
(
|
||||||||||
| Cross-currency swap |
|
(
|
||||||||||||
| Derivative assets (liabilities) | $ |
|
$ |
(
|
||||||||||
On a quarterly basis, the Company assesses whether the hedging relationship related to the interest rate swap is highly effective at achieving offsetting changes in cash flow attributable to the risk being hedged based on the following factors: (1) the key features and terms as enumerated above for the interest rate swap and hedged transactions match during the period (2) it is probable that the Swap Counterparty will not default on its obligations under the swap, and (3) the Company performs a qualitative review each quarter to assess whether the relationship qualifies for hedge accounting.
In addition, on a quarterly basis the Company assesses whether the hedging relationship related to the cross-currency swap is highly effective based on the following evaluations: (1) the Company will always have a sufficient amount of non-functional currency (EUR) net investment balance to at least meet the cross-currency notional amount until the maturity date of the hedge (2) it is probable that the Swap Counterparty will not default on its obligations under the swap, and (3) the Company performs a qualitative review each quarter to assess whether the relationship qualifies for hedge accounting.
If any mismatches arise for either the interest rate swap or cross-currency swap, the Company will perform a regression analysis to determine if the hedged transaction is highly effective. If determined not to be highly effective, the Company will discontinue hedge accounting.
As of June 30, 2022, the Company assessed the hedging relationships for the interest rate swap and cross-currency swap and determined them to be highly effective. As such, the net change in fair values of the derivative instruments was recorded in accumulated other comprehensive income.
26
Losses and gains on our hedging instruments are recognized in accumulated other comprehensive income (loss) and categorized as follows for the three and six months ended June 30, 2022 and 2021:
| Location within Statements of Comprehensive Income |
Three Months Ended
June 30, |
Six Months Ended
June 30, |
||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Cash flow hedge (interest rate swap), net of tax | Unrealized gain/(loss) on cash flow hedge, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Net investment hedge (cross-currency swap), net of tax | Net foreign currency translation adjustment |
|
(
|
|
|
|||||||||||||||||||||||||||
| Total | $ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||||||||
On June 21, 2022, the Company completed the acquisition of Kappa (as defined in Note 2 "Significant Acquisitions"). In the process of acquiring Kappa, the Company entered into
four
short-term foreign currency exchange forward contracts with JP Morgan Chase, N.A to manage fluctuations in foreign currency exchange rates related to the acquisition. The Company did not designate these contracts as hedged transactions under the applicable sections of ASC Topic 815, "Derivatives and Hedging". For the six months ended June 30, 2022, the net gains on these forward contracts of $
512
were recorded in other income or loss in the condensed consolidated statements of earnings. As of June 30, 2022, the Company did not maintain any open foreign currency exchange forward contracts as all four contracts expired before June 30, 2022.
The following table summarizes the key terms of the
four
forward exchange contracts:.
| Date entered into | Date expired on | Balchem to sell | Balchem to buy | |||||||||||||||||
| June 15, 2022 | June 21, 2022 | USD |
|
NOK |
|
|||||||||||||||
| June 15, 2022 | June 17, 2022 | USD |
|
EUR |
|
|||||||||||||||
| June 15, 2022 | June 21, 2022 | USD |
|
EUR |
|
|||||||||||||||
| June 15, 2022 | June 21, 2022 | EUR |
|
NOK |
|
|||||||||||||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(All amounts in thousands, except share and per share data)
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 ended December 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. In January 2022, Balchem was named one of America’s Most Responsible Companies by Newsweek magazine for the second consecutive year. This list, compiled by Newsweek in partnership with Statista Inc., recognizes the most responsible companies in the U.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
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 of June 30, 2022, we employed approximately 1,359 f
ull
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
On June 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 in Oslo, 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 for Balchem'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 ended June 30, 2022 and 2021:
| Business Segment Net Sales |
Three Months Ended
June 30, |
Six Months Ended
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 | ||||||||||||||||||
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| Business Segment Earnings From Operations |
Three Months Ended
June 30, |
Six Months Ended
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. Unalloca
ted 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 expens
e 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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 $1,544 and higher advertising and marketing expenses of $555.
Earnings from Operations
| Three Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
30
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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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 June 30, 2022 and 2021 was primarily related to outstanding borrowings under the 2018 Credit Agreement.
Income Tax Expense
| Three Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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 June 30, 2022 compared to six months ended June 30, 2021.
Net Earnings
| Six Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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 $4,201, an increase in advertising and marketing of $1,043, and higher travel expenses of $735.
Earnings from Operations
| Six Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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.
33
Other Expenses (Income)
| Six Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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 June 30, 2022 and 2021 was primarily related to outstanding borrowings under the 2018 Credit Agreement.
Income Tax Expense
| Six Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % 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 at June 30, 2022 from $103,239 at December 31, 2021. At June 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 fund U.S. operations or obligations. However, if these funds are needed for U.S. operations, we could be required to pay additional withholding taxes to repatriate these funds. Working capital was $232,998 at June 30, 2022 as compared to $178,430 at December 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
| Six Months Ended June 30, |
Increase
(Decrease) |
|||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | |||||||||||||||||||||||
| Cash flows provided by operating activities | $ | 55,261 | $ | 76,389 | $ | (21,128) | (27.7) | % | ||||||||||||||||||
| Cash flows used in investing activities | (316,412) | (13,520) | (302,892) | (2240.3) | % | |||||||||||||||||||||
| Cash flows provided by (used in) financing activities | 239,694 | (65,727) | 305,421 | 464.7 | % | |||||||||||||||||||||
Operating Activities
The decrease in cash flows from operating activities was primarily driven by changes in working capital and the timing of increased sales, restocking of inventory, and payments to suppliers.
Investing Activities
As previously noted, on June 21, 2022, we completed the acquisition of Kappa, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway. Cash paid for the acquisition, net of cash acquired, amounted to
$295,660
.
We continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and inta
ngible assets were $20,799 and $13,760 f
or the six months ended June 30, 2022 and 2021, respectively.
Financing Activities
As previously noted, the acquisition of Kappa was primarily funded through the 2018 Credit Agreement. We borrowed $365,000 against the revolving loan and made total loan payments of $40,000 during the six months ended June 30, 2022, resulting in $66,431 available under the 2018 Credit Agreement as of June 30, 2022. In addition, we also made payments of $30,648 on the acquired debt related to the acquisition of Kappa.
We have 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 3,068,905 shares have been purchased. We repurchase shares from employees in connection with settlement of transactions under our 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 exercis
ed were $1,328 and $3,886 for the six months ended June 30, 2022 and 2021, respectively. Dividend payments were $20,704 and $18,700 for the six mont
hs ended June 30, 2022 and 2021, respectively.
Other Matters Impacting Liquidity
We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 15 – Employee Benefit Plans. The liabil
ity recorded in "Other long-term liabilities" on the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 was $1,221 and $1,293, respectively, an
d 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.
On June 1, 2018, we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compen
sated 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 of June 30, 2022 and December 31, 2021 was $8,220 and $6,251, respectively, and was included in "other long-term obligations" on our balance sheet. The related rabbi trust assets were $8,255 a
nd $6,267 as of June 30, 2022 and December 31, 2021, respectively, and were included in "other non-current assets" on the condensed consolidated 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 of June 30, 2022 and December 31, 2021 were $641 and $684, respective
ly, and were included in "other long-term obligations."
35
Critical Accounting Policies
There were no changes to the Company's Critical Accounting Policies, as described in its December 31, 2021 Annual Report on Form 10-K, during the six months ended June 30, 2022.
Related Party Transactions
We were engaged in related party transactions with St. Gabriel CC Company, LLC during the three and six months ended June 30, 2022. Refer to Note 18, "Related Party Transactions".
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents are held primarily in certificates of deposit and money market investment funds. In the second quarter of 2019, we entered into an interest rate swap and cross-currency swap for hedging purposes. Refer to details noted above (see Note
20, "Derivative Instruments and Hedging Activities"
). Additionally, as of June 30, 2022, our borrowings were under a revolving loan bearing interest at a fluctuating rate as defined by the 2018 Credit Agreement plus an applicable rate. The applicable rate is based upon our consolidated net leverage ratio, as defined in the 2018 Credit Agreement. A 100 basis point increase or decrease in interest rates, applied to our borrowings at June 30, 2022, would result in an increase or decrease in annual interest expense and a corresponding reduction or increase in cash flow of approximate
ly
$4,336
.
We are exposed to commodity price risks, including prices of our primary raw materials. Our objective is to seek a reduction in the potential negative earnings impact of raw material pricing arising in our business activities. We manage these financial exposures, where possible, through pricing and operational means. Our practices may change as economic conditions change. Additionally, as disclosed below in Part II, Item 1A, we are monitoring market risks related to the current COVID-19 pandemic very closely.
Interest Rate Risk
We have exposure to market risk for changes in interest rates, including the interest rate relating to the 2018 Credit Agreement. In the second quarter of 2019, we began to manage our interest rate exposure through the use of derivative instruments. All of our derivative instruments are utilized for risk management purposes, and are not used for trading or speculative purposes. We have hedged a portion of our floating interest rate exposure using an interest rate swap (see Note 20, "Derivative Instruments and Hedging Activities"). As of June 30, 2022, the notional amount of our outstanding interest rate swap was $108,569.
Foreign Currency Exchange Risk
The financial condition and results of operations of our foreign subsidiaries are reported in Euros, Canadian Dollars, Malaysian Ringgits, Singapore Dollars, Australian Dollars, Philippine Pesos, and Norwegian Kroner, and then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Therefore, we are exposed to foreign currency exchange risk related to these currencies. In the second quarter of 2019, we entered into a cross-currency swap, with a notional amount of $108,569, which we designated as a hedge of our net investment in Chemogas (see Note 20, "Derivative Instruments and Hedging Activities").
On June 21, 2022, the Company completed the acquisition of Kappa. In the process of acquiring Kappa, the Company entered into four short-term foreign currency exchange forward contracts with JP Morgan Chase, N.A to manage our exposure related to changes in foreign currency exchange rates in connection with the Kappa acquisition. These contracts did not qualify for hedge accounting under the applicable sections of ASC Topic 815. For the six months ended June 30, 2022, the net gains on these forward contracts amounted to $512 and were recorded in "other (income) expense, net" on the condensed consolidated statements of earnings. As of June 30, 2022, the Company did not maintain any open foreign currency exchange forward contracts as all four contracts were settled as of June 30, 2022.
Item 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
Prior to filing this report, we completed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act as of June 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.
(b)
Changes in Internal Controls
36
Except with respect to the acquisition of Kappa described below, there have been no changes in the internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
On June 21, 2022, we completed the acquisition of Kappa (See Note 2, "Significant Acquisitions"). We are integrating Kappa into our overall internal control over financial reporting process and expect to exclude the business from our assessment of internal control over financial reporting as of December 31, 2022. Total assets of the Kappa business represented approximately 24.8 % of our consolidated total assets as of June 30, 2022.
Part
II. Other Information
Item 1A. Risk Factors
There have been no material changes in the Risk Factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except as follows:
Operational Risks
Our foreign sales and operations may be adversely affected by supply chain disruptions due to political unrest, terrorist acts, and national and international conflict, including Russia's invasion of Ukraine. .
We conduct a portion of our sales and manufacturing outside the United States. Our foreign sales and operations are subject to a number of risks, including political and economic instability, which could have a material adverse impact on our ability to increase or maintain our international sales and operations. National and international conflicts such as war, border closures, civil disturbances and terrorist acts, including Russia's invasion of Ukraine, may increase the likelihood of already strained supply interruptions and further hinder our ability to access the materials and energy we need to manufacture our products. Additional supply chain disruptions will make it harder for us to find favorable pricing and reliable sources for the materials we need. As a result, such disruptions will put upward pressure on our costs and increase the risk that we may be unable to acquire the materials and services we need to continue to make certain products, in particular at our manufacturing facilities in Europe.
Item 2C. Issuer Purchase of Equity Securities
The following table summarizes the share repurchase activity for the six months ended June 30, 2022:
|
Total Number of Shares
Purchased
(1)
|
Average Price Paid Per Share |
Total Number of Shares
Purchased as
Part of Publicly Announced
Programs
(1)
|
Approximate Dollar Value of Shares that May Yet Be
Purchased Under the Plans or Programs |
|||||||||||||||||||||||
| January 1-31, 2022 | 88,154 | $ | 147.03 | 88,154 | $ | 125,951,395 | ||||||||||||||||||||
| February 1-28, 2022 | 57,531 | $ | 139.75 | 57,531 | $ | 111,675,367 | ||||||||||||||||||||
| March 1-31, 2022 | 100,000 | $ | 135.98 | 100,000 | $ | 95,065,135 | ||||||||||||||||||||
| First Quarter | 245,685 | 245,685 | ||||||||||||||||||||||||
| April 1-30, 2022 | 245 | $ | 125.36 | 245 | $ | 87,609,591 | ||||||||||||||||||||
| May 1-31, 2022 | 4,550 | $ | 120.01 | 4,550 | $ | 83,324,693 | ||||||||||||||||||||
| June 1-30, 2022 | 181 | $ | 125.87 | 181 | $ | 83,370,521 | ||||||||||||||||||||
| Second Quarter | 4,976 | 4,976 | ||||||||||||||||||||||||
| Total | 250,661 | 250,661 | ||||||||||||||||||||||||
|
(1)
Our Board of Directors has approved a 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 3,068,905 shares have been purchased. There is no expiration for this program.
|
||||||||||||||||||||||||||
37
Item 6. Exhibits
| Exhibit Number | Description | |||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BALCHEM CORPORATION | |||||
| By: /s/ Theodore L. Harris | |||||
| Theodore L. Harris, Chairman, President and Chief Executive Officer | |||||
| By: /s/ Martin Bengtsson | |||||
| Martin Bengtsson, Chief Financial Officer and Treasurer | |||||
| Date: July 29, 2022 | |||||
39
TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial StatementsprintNote 1 Condensed Consolidated Financial StatementsprintNote 2 Significant AcquisitionsprintNote 3 Stockholders EquityprintNote 4 InventoriesprintNote 5 Property, Plant and EquipmentprintNote 6 Intangible AssetsprintNote 7 Equity-method InvestmentprintNote 8 Revolving LoanprintNote 9 Net Earnings Per ShareprintNote 10 Income TaxesprintNote 11 Segment InformationprintNote 12 RevenueprintNote 13 Supplemental Cash Flow InformationprintNote 14 Accumulated Other Comprehensive Income (loss)printNote 15 Employee Benefit PlansprintNote 16 Commitments and ContingenciesprintNote 17 Fair Value Of Financial InstrumentsprintNote 18 Related Party TransactionsprintNote 19 LeasesprintNote 20 Derivative Instruments and Hedging ActivitiesprintItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1A. Risk FactorsprintItem 2C. Issuer Purchase Of Equity SecuritiesprintItem 6. Exhibitsprint