What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-28 compared with 2023-04-28 · 123 added, 54 removed, 139 unchanged (56% of the section changed)

42 unchanged sentences

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 2023, Balchem was named one of America’s Most Responsible Companies by Newsweek magazine for the third consecutive year.

This prestigious 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 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 March 31, 2023, we employed approximately 1,331 fu ll time employees worldwide.

We are very proud of our ESG accomplishments to date and 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, 2023, we employed approximately 1,284 fu ll time employees worldwide.

Although we are facing challenging labor markets, we believe that we have been successful in attracting skilled, experienced, and diverse personnel in a competitive environment and that our human capital resources are adequate to perform all business functions.

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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 months ended March 31, 2023 and 2022:

Business Segment Net Sales Three Months Ended March 31,

The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three and six months ended June 30, 2023 and 2022:

Business Segment Net Sales Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Human Nutrition & Health $ 135,669 $ 131,628 $ 268,322 $ 254,073

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Other and Unallocated (1)

1,528 5,818 4,295 9,564

Total $ 231,252 $ 236,693 $ 463,792 $ 465,560

Business Segment Earnings From Operations Three Months Ended March 31,

Business Segment Earnings From Operations Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Human Nutrition & Health $ 27,499 $ 23,705 $ 45,934 $ 44,008

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(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 fee s totaling $565 and $304 for the three months ended March 31, 2023 and 2022, respectively, and (ii) Unallocated amortization expense of $312 a nd $738 for the three months ended March 31, 2023 and 2022, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.

Results of Operations - Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31, Increase

Unallocated corporate expenses consist of:

(i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling $651 and $1,216 for the three and six months ended June 30, 2023, respectively, and $872 and $1,176 for the three and six months ended June 30, 2022, respectively, and (ii) Unallocated amortization expense of $0 and $312 for the three and six months ended June 30, 2023, and $741 and $1,479 for the three and six months ended June 30, 2022, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.

Results of Operations - Three Months Ended June 30, 2023 and 2022

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

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Net earnings $ 30,110 $ 29,782 $ 328 1.1 %

Three Months Ended March 31, Increase

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

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Total $ 231,252 $ 236,693 $ (5,441) (2.3) %

• The increase in net sales within the Human Nutrition & Health segment for the first quarter of 2023 as compared to the first quarter of 2022 was primarily driven by the contribution from recent acquisitions, partially offset by lower sales within the minerals and nutrients business and food and beverage markets.

• The increase in net sales within the Human Nutrition & Health segment for the second quarter of 2023 as compared to the second quarter of 2022 was primarily driven by the contribution from recent acquisitions, partially offset by lower sales within food and beverage markets and the minerals and nutrients business.

Total sales for this segment grew 3.1%, with average selling prices contributing 5.8%, the change in foreign currency exchange rates contributing 0.1%, and volume and mix contributing -2.8%.

• The decrease in net sales within the Animal Nutrition & Health segment for the first quarter of 2023 compared to the first quarter of 2022 was driven by lower sales in both monogastric and ruminant species markets in Europe and an unfavorable impact related to changes in foreign currency exchange rates, partially offset by higher sales in both monogastric and ruminant species markets in North America.

• The decrease in net sales within the Animal Nutrition & Health segment for the second quarter of 2023 compared to the second quarter of 2022 was driven by lower sales in monogastric markets, partially offset by higher sales in the ruminant species markets.

Total sales for this segment decreased by 2.0%, with average selling prices contributing -1.6%, volume and mix contributing -1.0%, and the change in foreign currency exchange rates contributing 0.6%.

• The decrease in net sales within the Specialty Products segment for the second quarter of 2023 compared to the second quarter of 2022 was due to lower sales in both the plant nutrition and performance gases businesses.

Total sales for this segment decreased by 10.7%, with volume and mix contributing -15.9%, the change in foreign currency exchange rates contributing 0.5%, and average selling prices contributing 4.7%.

• The decrease in net sales within the Specialty Products segment for the first quarter of 2023 compared to the first quarter of 2022 was primarily due to lower plant nutrition sales and an unfavorable impact related to changes in foreign currency exchange rates, partially offset by higher sales of products in the performance gases business.

• Sales relating to Other decreased from the prior year due to lower 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.

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Gross margin $ 77,349 $ 71,876 $ 5,473 7.6 %

% of net sales 33.4 % 30.4 %

Gross margin dollars increased in the second quarter of 2023 compared to the second quarter of 2022 due to higher average selling prices and a decrease in cost of goods sold of $10,914.

The 6.6% decrease in cost of goods sold was mainly driven by certain lower manufacturing input costs.

Operating Expenses

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Operating expenses $ 34,513 $ 31,956 $ 2,557 8.0 %

% of net sales 14.9 % 13.5 %

The increase in operating expenses in the second quarter of 2023 compared to the second quarter of 2022 was primarily due to restructuring-related impairment and asset disposal charges of $6,146, incremental operating expenses related to the acquisitions of Kappa and Bergstrom of $3,210, and an increase in amortization of $691, partially offset by favorable adjustments to transaction costs of $8,000.

Earnings from Operations

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Human Nutrition & Health $ 27,499 $ 23,705 $ 3,794 16.0 %

Animal Nutrition & Health 7,662 7,586 76 1.0 %

Specialty Products 9,298 9,919 (621) (6.3) %

Other and unallocated (1,623) (1,290) (333) (25.8) %

Earnings from operations $ 42,836 $ 39,920 $ 2,916 7.3 %

% of net sales (operating margin) 18.5 % 16.9 %

• Human Nutrition & Health segment earnings from operations increased $3,794.

Gross margin contribution from incremental sales was $6,792, which was partially offset by an increase in operating expenses of $2,996, primarily due to restructuring-related impairment and asset disposal charges of $4,769, incremental operating expenses related to the Kappa and Bergstrom acquisitions of $3,133, and higher amortization of $1,207, partially offset by favorable adjustments to transaction costs of $6,400.

• Animal Nutrition & Health segment earnings from operations increased $76.

Gross margin contribution was $96, which was offset by a slight increase in operating expenses of $21, primarily due to restructuring-related impairment charges of $1,088, partially offset by favorable adjustments to transaction costs of $1,600.

• Specialty Products segment earnings from operations decreased $621, primarily driven by lower sales volumes, partially offset by higher average selling prices and lower manufacturing input costs.

• The decrease in Other and unallocated was primarily driven by the aforementioned lower sales.

Other Expenses

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Interest expense $ 5,163 $ 960 $ 4,203 437.8 %

Other (income) expense, net (727) (298) (429) 144.0 %

$ 4,436 $ 662 $ 3,774 570.1 %

Interest expense for the three months ended June 30, 2023 and 2022 was primarily related to outstanding borrowings under the 2022 Credit Agreement.

The increase of $4,203 in interest expense is due to the additional borrowings in connection with the acquisitions and higher interest rates.

Income Tax Expense

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Income tax expense $ 8,290 $ 9,476 $ (1,186) (12.5) %

Effective tax rate 21.6 % 24.1 %

The decrease in the effective tax rate was primarily due to certain lower state taxes and higher tax benefits from stock-based compensation.

Results of Operations - Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Net sales $ 463,792 $ 465,560 $ (1,768) (0.4) %

Gross margin 150,519 143,382 7,137 5.0 %

Operating expenses 73,275 65,126 8,149 12.5 %

Earnings from operations 77,244 78,256 (1,012) (1.3) %

Other expenses 9,725 1,368 8,357 610.9 %

Income tax expense 14,699 18,176 (3,477) (19.1) %

Net earnings $ 52,820 $ 58,712 $ (5,892) (10.0) %

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

Human Nutrition & Health $ 268,322 $ 254,073 $ 14,249 5.6 %

Animal Nutrition & Health 126,218 131,942 (5,724) (4.3) %

Specialty Products 64,957 69,981 (5,024) (7.2) %

Other 4,295 9,564 (5,269) (55.1) %

Total $ 463,792 $ 465,560 $ (1,768) (0.4) %

• The increase in net sales within the Human Nutrition & Health segment for the six months ended June 30, 2023 as compared to 2022 was primarily driven by the contribution from recent acquisitions, partially offset by lower sales within food and beverage markets and the minerals business.

Total sales for this segment grew 5.6%, with average selling prices contributing 8.7% and volume and mix contributing -3.1%.

• The decrease in net sales within the Animal Nutrition & Health segment for the for the six months ended June 30, 2023 as compared to 2022 was driven by lower sales in monogastric markets and an unfavorable impact related to changes in foreign currency exchanges rates, partially offset by higher sales in the ruminant species markets.

Total sales for this segment decreased by 4.3%, with volume and mix contributing -5.6%, the change in foreign currency exchange rates contributing -0.4%, and average selling prices contributing 1.7%.

• The decrease in net sales within the Specialty Products segment for the six months ended June 30, 2023 as compared to 2022 was primarily due to lower sales in both the plant nutrition and performance gases businesses, and an unfavorable impact related to changes in foreign currency exchange rates.

Total sales for this segment decreased by 7.2%, with volume and mix contributing -13.9%, the change in foreign currency exchange rates contributing -0.4%, and average selling prices contributing 7.1%.

• Sales relating to Other decreased from the prior year due to lower demand.

Three Months Ended March 31, Increase

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

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% of net sales 32.5 % 30.8 %

Gross margin dollars increased in the first quarter of 2023 compared to the first quarter of 2022 due to the aforementioned higher sales of $3,673, partially offset by an increase in cost of goods sold of $2,009.

The 1.3% increase in cost of goods sold was mainly driven by certain higher manufacturing input costs.

Gross margin dollars increased in the six months ended June 30, 2023 as compared to 2022 due to higher average selling prices and a decrease in cost of goods sold of $8,905.

The 2.8% decrease in cost of goods sold was mainly driven by certain lower manufacturing input costs.

Operating Expenses

Three Months Ended March 31, Increase

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

1 unchanged sentence

% of net sales 15.8 % 14.0 %

The increase in operating expenses in the first quarter of 2023 compared to the first quarter of 2022 was primarily due to incremental operating expenses related to the acquisitions of $4,958 and higher amortization of $1,039 from the Kappa and Bergstrom acquisitions.

The increase in operating expenses in the six months ended June 30, 2023 as compared to 2022 was primarily due to the incremental operating expenses related the Kappa and Bergstrom acquisitions of $6,561, restructuring-related impairment and asset disposal charges of $6,146, and higher amortization of $1,728, partially offset by favorable adjustments to transaction costs of $6,400.

Earnings from Operations

Three Months Ended March 31, Increase

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

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% of net sales (operating margin) 16.7 % 16.8 %

• Human Nutrition & Health segment earnings from operations decreased $1,868.

Gross margin contribution from incremental sales were $2,807, but this was more than offset by an increase in operating expenses of $4,675, primarily due to incremental operating expenses related to the Kappa and Bergstrom acquisitions of $4,549 and higher amortization of $1,564, partially offset by gains on disposal of assets of $972.

• Animal Nutrition & Health segment earnings from operations decreased $1,823, primarily due to the lower sales.

Additionally, operating expenses for this segment increased by $518, which was largely related to incremental operating expenses from the Bergstrom acquisition of $380.

• Specialty Products segment earnings from operations increased $185, primarily due to a 359 basis point improvement in gross margin as a percentage of sales, resulting from higher average selling prices, only partially offset by higher manufacturing input costs and lower sales volumes.

Additionally, operating expenses for this segment increased by $471, which was largely due to compensation-related costs.

• Human Nutrition & Health segment earnings from operations increased $1,926.

Gross margin contribution from incremental sales was $9,599, which was partially offset by an increase in operating expenses of $7,671, primarily due to the incremental operating expenses related to the Kappa and Bergstrom acquisitions of $6,395, and restructuring-related impairment and asset disposal charges of $4,769, partially offset by favorable adjustments to transaction costs of $5,120.

• Animal Nutrition & Health segment earnings from operations decreased $1,747.

Gross margin decreased $1,209 primarily due to lower sales.

Additionally, operating expenses for this segment increased by $538, which was largely related to restructuring-related impairment charges of $1,088, higher amortization of $247, and an increase in travel expenses of $208, partially offset by favorable adjustments to transaction costs of $1,280.

• Specialty Products segment earnings from operations decreased $436, which was primarily driven by the aforementioned lower sales, partially offset by a 850 basis point increase in gross margin as a percent of sales.

The increase in gross margin was due to higher average selling prices and decreases in certain manufacturing input costs.

• The decrease in Other and unallocated was primarily driven by the aforementioned lower sales.

Other Expenses

Three Months Ended March 31, Increase

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

2 unchanged sentences

$ 9,725 $ 1,368 $ 8,357 610.9 %

Interest expense for the three months ended March 31, 2023 and 2022 was primarily related to outstanding borrowings under the 2022 Credit Agreement.

The increase in interest expense is due to the additional borrowings in connection with the acquisitions and rising interest rates.

Interest expense for the six months ended June 30, 2023 and 2022 was primarily related to outstanding borrowings under the 2022 Credit Agreement.

The increase of $9,223 in interest expense is due to the additional borrowings in connection with the acquisitions and higher interest rates.

Income Tax Expense

Three Months Ended March 31, Increase

Six Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

1 unchanged sentence

Effective tax rate 21.8 % 23.6 %

The decrease in the effective tax rate was primarily due to higher tax benefits from stock based compensation, an increase in certain tax credits and certain lower state taxes.

The decrease in the effective tax rate was primarily due to certain lower state taxes and higher tax benefits from stock-based compensation.

Liquidity and Capital Resources

During the three months ended March 31, 2023, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

During the six months ended June 30, 2023, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments.

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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 and cash equivalents decreased to $60,199 at March 31, 2023 from $66,560 at December 31, 2022.

At March 31, 2023, the Company had $54,820 of cash and cash equivalents held by foreign subsidiaries.

Cash and cash equivalents increased to $66,856 at June 30, 2023 from $66,560 at December 31, 2022.

At June 30, 2023, the Company had $58,626 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;

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operations, we could be required to pay additional withholding taxes to repatriate these funds.

Working capital was $219,080 at March 31, 2023 as compared to $195,761 at December 31, 2022, an increase of $23,319.

Cash at March 31, 2023 reflects the payment of the 2022 declared dividend in 2023 of $22,867, net repayments on the revolving loan of $9,000, and capital expenditures and intangible assets acquired of $9,720.

Three Months Ended March 31, Increase

Working capital was $222,148 at June 30, 2023 as compared to $195,761 at December 31, 2022, an increase of $26,387.

Cash at June 30, 2023 reflects net repayments on the revolving loan of $35,000, the payment of declared dividends in 2023 of $22,869, and capital expenditures and intangible assets acquired of $17,952.

Three Months Ended June 30, Increase

(in thousands) 2023 2022 % Change

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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 $9,720 and $10,256 f or the three months ended March 31, 2023 and 2022, respectively.

Total investments in property, plant and equipment and inta ngible assets were $17,952 and $20,799 f or the six months ended June 30, 2023 and 2022, respectively.

Financing Activities

During the first quarter of 2023, we borrowed $13,000 under the 2022 Credit Agreement and made total loan payments of $22,000, resulting in $118,431 available under the 2022 Credit Agreement as of March 31, 2023.

During 2023, we borrowed $13,000 under the 2022 Credit Agreement and made total loan payments of $48,000, resulting in $144,431 available under the 2022 Credit Agreement as of June 30, 2023.

We have an approved stock repurchase program.

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Since the inception of the program in June 1999, a total of 3,099,224 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 $2,453 and $498 for the three months ended March 31, 2023 and 2022, respectively.

Dividend payments were $22,867 and $20,703 for the three mont hs ended March 31, 2023 and 2022, respectively.

We 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.

Open market repurchases of common stock could be made pursuant to a trading plan established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions.

We also repurchase (withhold) shares from employees in connection with the tax settlement of vested shares and/or exercised stock options under the Company's omnibus incentive plan.

Share repurchases are funded with existing cash on hand.

Proceeds from stock options exercised were $3,826 and $1,328 for the six months ended June 30, 2023 and 2022, respectively.

Dividend payments were $22,869 and $20,704 for the six months ended June 30, 2023 and 2022, 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 March 31, 2023 and December 31, 2022 was $1,384 and $1,465, respectively, an d the plans are not funded.

The liabil ity recorded in "Other long-term liabilities" on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 was $1,419 and $1,465, respectively, an d the plans are not funded.

Historical cash payments made under these plans have typically been less than $200 per year.

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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 March 31, 2023 and December 31, 2022 were $395 and $393, respective ly, and were included in "Other long-term obligations."

We provide an unfunded, nonquali fied deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees.

The amount recorded for these obligations on our balance sheets as of June 30, 2023 and December 31, 2022 were $392 and $393, respectively, and were included in "Other long-term obligations."

We provide an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees.

Assets of the plan are held in a rabbi trust, which are included in "Non-current assets" on the Company's condensed consolidated balance sheet.

They are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company.

The deferred compensation liability as of March 31, 2023 and December 31, 2022 was $9,320 and $8,527, respectively, and is included in "Other long-term obligations" on the condensed consolidated balance sheets.

The related rabbi trust assets were $9,339 and $8,547 as of March 31, 2023 and December 31, 2022, respectively, and were included in "Other non-current assets" on the condensed consolidated balance sheets.

The deferred compensation liability as of June 30, 2023 and December 31, 2022 was $9,618 and $8,527, respectively, and is included in "Other long-term obligations" on the condensed consolidated balance sheets.

The related rabbi trust assets were $9,635 and $8,547 as of June 30, 2023 and December 31, 2022, respectively, and were included in "Other non-current assets" on the condensed consolidated balance sheets.

Significant Accounting Policies

There were no changes to our Significant Accounting Policies, as described in its December 31, 2022 Annual Report on Form 10-K, during the three months ended March 31, 2023.

There were no changes to our Significant Accounting Policies, as described in its December 31, 2022 Annual Report on Form 10 - K, during the six months ended June 30, 2023.

Related Party Transactions

We were engaged in related party transactions with St.

Gabriel CC Company, LLC during the three months ended March 31, 2023.

Gabriel CC Company, LLC during the three and six months ended June 30, 2023.

Refer to Note 18, Related Party Transactions .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis