GlobeNewswire Inc | Jul 31, 2020 07:00AM EDT

July 31, 2020

NEW HAMPTON, N.Y., July 31, 2020 (GLOBE NEWSWIRE) -- Balchem Corporation (NASDAQ: BCPC) reported today record second quarter net earnings of $21.1 million for 2020, compared to net earnings of $19.8 million for the second quarter 2019. Record second quarter adjusted net earnings(a) were $27.6 million, compared to $25.2 million in the prior year quarter, and adjusted EBITDA(a) was an all-time record of $43.9 million, compared to $40.0 million in the prior year quarter.

Second Quarter 2020 Financial Highlights:

-- Net sales of $173.4 million, an increase of $11.8 million, or 7.3%, compared to the prior year quarter, with year over year sales growth in Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. -- GAAP net earnings were $21.1 million, an increase of $1.3 million, or 6.5% from the prior year. These net earnings resulted in GAAP earnings per share of $0.65. -- Adjusted net earnings of $27.6 million increased $2.3 million or 9.2% from the prior year, resulting in adjusted earnings per share(a) of $0.85. -- Adjusted EBITDA was $43.9 million, an increase of $3.9 million, or 9.8%, from the prior year. -- Quarterly cash flows from operations were $44.6 million for the second quarter 2020, an increase of 69.5% from the prior year, with quarterly free cash flow(a) of $37.0 million, an increase of 83.9% from the prior year.

Recent Highlights:

-- Strong cash flows in the second quarter enabled the company to make $35.0 million of repayments of its revolving debt, lowering net debt to $142.2 million, with an overall leverage ratio on a net debt basis of 0.9. -- The COVID-19 response effort has been a primary focus for the company since early in the first quarter. Our focus has been on employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate. To date, all of our manufacturing sites are operating at near normal conditions enabling us to supply our customers with the important products and services they need, our research and development teams are advancing our innovation efforts, and all of our other employees are effectively carrying on their responsibilities and functions remotely. -- We released our second annual Sustainability Report in April in support of our Environmental, Social, and Corporate Governance ideals. We are committed to providing solutions for the health and nutrition needs of the world, acting as strong stewards of all our stakeholders, and making the world a healthier place.

Ted Harris, Chairman, CEO, and President of Balchem said, We are extremely pleased with these strong second quarter results which reflect record second quarter sales, net earnings, and earnings per share as well as sales growth in all three of our reporting segments."

Mr. Harris added, "Our strong second quarter and year to date results reported today are a direct result of the extraordinary talents and efforts of the Balchem team as well as the strength of our market positions and the resilience of our business model."

Results for Period Ended June 30, 2020 (unaudited)(Dollars in thousands, except per share data)

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net sales $ 173,355 $ 161,554 $ 347,791 $ 318,583 Gross margin 55,380 53,918 110,711 103,013 Operating expenses 28,463 27,516 57,516 50,131 Earnings from 26,917 26,402 53,195 52,882 operations Other expense 944 1,521 2,732 3,208 Earnings before 25,973 24,881 50,463 49,674 income tax expense Income tax expense 4,848 5,052 9,570 11,062 Net earnings $ 21,125 $ 19,829 $ 40,893 $ 38,612 Diluted net earnings per common $ 0.65 $ 0.61 $ 1.26 $ 1.19 share Adjusted EBITDA^(a) $ 43,885 $ 39,979 $ 86,256 $ 79,659 Adjusted net $ 27,562 $ 25,246 $ 54,003 $ 48,976 earnings^(a) Adjusted net earnings per common $ 0.85 $ 0.77 $ 1.66 $ 1.51 share^(a) Shares used in the calculations of diluted and 32,470 32,583 32,492 32,540 adjusted net earnings per common share (a) See ?Non-GAAP Financial Information? for a reconciliation of GAAP and non-GAAP financial measures.

Financial Results for the Second Quarter of 2020:

The Human Nutrition & Health segment generated quarterly sales of $97.4 million, an increase of $11.6 million or 13.5% compared to the prior year quarter. The increase was primarily driven by strong sales growth of chelated minerals and choline nutrients as well as increased sales into the food and beverage markets from both the legacy business and the Zumbro acquisition we closed in December 2019, partially offset by lower sales to food service related markets and the elimination of sales associated with the Reading, Pennsylvania manufacturing site that we divested in 2019. This segment generated quarterly earnings from operations of $15.5 million, an increase of $3.2 million or 25.6% compared to $12.3 million in the prior year quarter, primarily due to the aforementioned higher sales and lower selling expenses principally due to lower travel and a decrease in bad debt expense. Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $4.8 million and $4.9 million for the second quarter of 2020 and 2019, respectively, adjusted earnings from operations(a) for this segment were $20.3 million, compared to $17.2 million in the prior year quarter.

The Animal Nutrition & Health segment generated sales of $46.3 million, an increase of $2.9 million or 6.6% compared to the prior year quarter. The increase was primarily the result of higher volumes in both the ruminant species and monogastric species markets. Second quarter earnings from operations for this segment of $6.4 million increased $1.4 million or 27.4% compared to $5.0 million in the prior year quarter, primarily due to the aforementioned higher sales, certain lower raw material costs, and lower selling expenses principally due to lower travel. Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $0.2 million in the second quarters of 2020 and 2019, adjusted earnings from operations for this segment were $6.6 million, compared to $5.2 million in the prior year quarter.

The Specialty Products segment generated sales of $28.2 million, an increase of $3.3 million or 13.2% compared to the prior year quarter, primarily due to higher sales of ethylene oxide for the medical device sterilization market due to the incremental contribution of Chemogas, offset partially by lower legacy sales which were negatively impacted by reduced elective surgical procedures during the pandemic. Second quarter earnings from operations for this segment were $8.0 million, versus $8.9 million in the prior year comparable quarter, a decrease of $0.9 million or 9.8%, primarily due to lower legacy ethylene oxide sales, product mix within plant nutrition, and higher operating expenses due to the acquisition of Chemogas. Excluding the effect of non-cash expense associated with amortization of acquired intangible assets for the second quarter of 2020 and 2019 of $1.6 million and $1.1 million, respectively, adjusted earnings from operations for this segment were $9.6 million, compared to $10.0 million in the prior year quarter.

Consolidated gross margin for the quarter ended June30, 2020 of $55.4 million increased by $1.5 million or 2.7%, compared to $53.9 million for the prior year comparable period. Gross margin as a percentage of sales was 31.9% as compared to 33.4% in the prior year period, a decrease of 143 basis points. The decrease was primarily due to mix and certain COVID-19 expenses, partially offset by certain lower raw material costs. Operating expenses of $28.5 million for the quarter increased $0.9 million from the prior year comparable quarter, primarily due to incremental operating expenses related to the Chemogas and Zumbro acquisitions and a goodwill impairment charge related to business formerly included in the Industrial Products segment, partially offset by lower selling expenses driven by reduced travel and a decrease in bad debt expense. Excluding non-cash operating expenses associated with amortization of intangible assets of $6.2 million, operating expenses were $22.2 million, or 12.8% of sales.

Interest expense was $1.0 million in the second quarter of 2020. Our effective tax rates for the three months ended June30, 2020 and 2019 were 18.7% and 20.3%, respectively. The decrease in the effective tax rate from the prior year is primarily due to lower enacted tax rates from several states, certain higher tax credits, and excess tax benefits from stock-based compensation.

For the quarter ended June30, 2020, cash flows provided by operating activities were $44.6 million, and free cash flow was $37.0 million. The $195.9 million of net working capital on June30, 2020 included a cash balance of $76.4 million, which reflects repayments of the revolving debt of $35.0 million, and capital expenditures and intangible assets acquired of $7.9 million.

Ted Harris said, We are very proud of the strong performance reported in the second quarter of 2020. The Balchem team has continued to respond extraordinarily well to the challenges and uncertainties created by the pandemic, with the safety of our employees as our top priority. The progress we have made driving our business forward and advancing our key growth initiatives more than offset the headwinds we faced from the challenging macro-economic environment."

Mr. Harris went on to add, In addition, our strong cash conversion and the further improvement in our balance sheet over the course of the quarter provides financial strength as we continue to progress our organic growth initiatives and seek value-creating acquisitions.

Quarterly Conference Call

A quarterly conference call will be held on Friday, July31, 2020, at 11:00 AM Eastern Time (ET) to review second quarter 2020 results. Ted Harris, Chairman of the Board, CEO and President and Martin Bengtsson, CFO will host the call. We invite you to listen to the conference by calling toll-free 1-877-407-8289 (local dial-in 1-201-689-8341), five minutes prior to the scheduled start time of the conference call. The conference call will be available for replay two hours after the conclusion of the call through end of day Friday, August 14, 2020. To access the replay of the conference call, dial 1-877-660-6853 (local dial-in 1-201-612-7415), and use conference ID #13707371.

Segment Information

Previously, Balchem's four reportable segments were: Human Nutrition & Health, Animal Nutrition & Health, Specialty Products, and Industrial Products. However, effective the first quarter of 2020, in order to align with the Company's strategic focus on health and nutrition, allocation of resources, and evaluation of operating performance, Balchem revised its presentation to three reportable segments: Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. The Human Nutrition & Health segment delivers customized food and beverage ingredient systems, as well as key nutrients into a variety of applications across the food, supplement and pharmaceutical industries. The Animal Nutrition & Health segment manufactures and supplies products to numerous animal health markets. Through Specialty Products, Balchem provides specialty-packaged chemicals for use in healthcare and other industries, and also provides chelated minerals to the micronutrient agricultural market. Sales and production of products outside of our reportable segments and other minor business activities are included in Other and Unallocated. There was no change to the Consolidated Financial Statements.

Forward-Looking Statements

This release contains forward-looking statements, which reflect Balchems expectation or belief concerning future events that involve risks and uncertainties. Balchem can give no assurance that the expectations reflected in forward-looking statements will prove correct and various factors could cause results to differ materially from Balchems expectations, including risks and factors identified in Balchems annual report on Form 10-K for the year ended December 31, 2019. Forward-looking statements are qualified in their entirety by the above cautionary statement. Balchem assumes no duty to update its outlook or other forward-looking statements as of any future date.

Contact: Mary Ann Brush, Balchem Corporation (Telephone: 845-326-5600)

Selected Financial Data (unaudited) ($ in 000s)

Business Three Months Ended Six Months EndedSegment Net June 30, June 30,Sales: 2020 2019 2020 2019Human Nutrition $ 97,428 $ 85,872 $ 192,936 $ 171,021 & HealthAnimalNutrition & 46,344 43,480 94,985 86,841 HealthSpecialty 28,194 24,907 56,190 43,331 ProductsOther andUnallocated ^ 1,389 7,295 3,680 17,390 (1)Total $ 173,355 $ 161,554 $ 347,791 $ 318,583

BusinessSegmentEarnings Three Months Ended Six Months EndedBefore June 30, June 30,IncomeTaxes: 2020 2019 2020 2019HumanNutrition & $ 15,497 $ 12,338 $ 27,632 $ 26,041 HealthAnimalNutrition & 6,430 5,045 14,474 10,301 HealthSpecialty 8,008 8,879 15,994 15,576 ProductsOther andUnallocated (3,018 ) 140 (4,905 ) 964 ^(1)Interestand other (944 ) (1,521 ) (2,732 ) (3,208 )expenseTotal $ 25,973 $ 24,881 $ 50,463 $ 49,674 ^(1) Other and Unallocated consists of a few minor businesses whichindividually do not meet the quantitative thresholds for separate presentationand corporate expenses that have not been allocated to a segment. Unallocatedcorporate expenses consist of: (i) Transaction and integration costs, ERPimplementation costs, and unallocated legal fees totaling $746 and $2,018 forthe three and six months ended June 30, 2020, respectively, and $761 and $1,565for the three and six months ended June 30, 2019 respectively (refer to note 4for descriptions of these charges), and (ii) Unallocated amortization expenseof $405 and $806 for the three and six months ended June 30, 2020,respectively, and $10 and $19 for the three and six months ended June 30, 2019,respectively, related to an intangible asset in connection with a company-wideERP system implementation.

Selected Balance Sheet Items (Dollars in thousands) June 30, 2020 December 31, 2019 (unaudited) Cash and Cash Equivalents $ 76,407 $ 65,672 Accounts Receivable, net 97,107 93,444 Inventories 81,546 83,893 Other Current Assets 8,802 11,937 Total Current Assets 263,862 254,946 Property, Plant & Equipment, net 217,003 216,859 Goodwill 522,929 523,998 Intangible Assets with Finite Lives, net 130,866 143,924 Right of Use Assets 6,159 7,338 Other Assets 10,437 8,617 Total Assets $ 1,151,256 $ 1,155,682 Current Liabilities $ 67,960 $ 92,258 Revolving Loan 218,569 248,569 Deferred Income Taxes 57,237 56,431 Derivative Liabilities 2,168 2,103 Long-Term Obligations 12,799 12,654 Total Liabilities 358,733 412,015 Stockholders' Equity 792,523 743,667 Total Liabilities and Stockholders' $ 1,151,256 $ 1,155,682 Equity

Balchem CorporationCondensed Consolidated Statements of Cash Flows(Dollars in thousands)(unaudited)

Six Months Ended June 30, 2020 2019Cash flows from operating activities: Net earnings $ 40,893 $ 38,612 Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization 25,294 21,732 Stock compensation expense 4,501 3,622 Other adjustments 2,697 (2,187 ) Changes in assets and liabilities (6,205 ) (12,967 ) Net cash provided by operating activities 67,180 48,812 Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired ? (94,690 ) Capital expenditures and intangible assets (13,265 ) (14,714 ) acquiredProceeds from insurance and sale of assets 22 2,729 Purchase of convertible note (350 ) (1,000 ) Net cash used in investing activities (13,593 ) (107,675 ) Cash flows from financing activities: Proceeds from revolving loan 10,000 108,569 Principal payments on revolving loan (40,000 ) (36,000 ) Principal payments on acquired debt ? (12,222 ) Proceeds from stock options exercised 6,802 1,809 Dividends paid (16,704 ) (15,135 ) Purchase of treasury stock (3,025 ) (727 ) Net cash (used in) provided by financing (42,927 ) 46,294 activities Effect of exchange rate changes on cash 75 (25 ) Increase (decrease) in cash and cash equivalents 10,735 (12,594 ) Cash and cash equivalents, beginning of period 65,672 54,268 Cash and cash equivalents, end of period $ 76,407 $ 41,674

Non-GAAP Financial Information

In addition to disclosing financial results in accordance with United States (U.S.) generally accepted accounting principles (GAAP), this earnings release contains non-GAAP financial measures that we believe are helpful in understanding and comparing our past financial performance and our future results. The non-GAAP financial measures disclosed by the company exclude certain business combination accounting adjustments and certain other items related to acquisitions, certain unallocated equity compensation, and certain one-time or unusual transactions. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated. Management believes that these non-GAAP measures provide useful information about the Company's core operating results and thus are appropriate to enhance the overall understanding of the Company's past financial performance and its prospects for the future. The non-GAAP financial measures in this press release include adjusted gross margin, adjusted earnings from operations, adjusted net earnings and the related adjusted per diluted share amounts, EBITDA, adjusted EBITDA, adjusted income tax expense, and free cash flow. EBITDA is defined as earnings before interest, other expense/income, taxes, depreciation and amortization. Adjusted EBITDA is defined as earnings before interest, other expense/income, taxes, depreciation, amortization, stock-based compensation, transaction and integration costs, indemnification settlements, legal settlements, ERP implementation costs, unallocated legal fees, the fair valuation of acquired inventory, goodwill impairment, and restructuring costs. Adjusted income tax expense is defined as income tax expense adjusted for the impact of ASU 2016-09. Free cash flow is defined as net cash provided by operating activities less capital expenditures and capitalized ERP implementation costs.

Set forth below are reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Table 1

Reconciliation of Non-GAAP Measures to GAAP(Dollars in thousands, except per share data)(unaudited)

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019Reconciliation of adjusted gross marginGAAP gross margin $ 55,380 $ 53,918 $ 110,711 $ 103,013 Inventory valuation ? ? 208 ? adjustment ^(2)Amortization of 742 661 1,466 1,395 intangible assets ^(3)Adjusted gross margin $ 56,122 $ 54,579 $ 112,385 $ 104,408 Reconciliation ofadjusted earnings from operationsGAAP earnings from $ 26,917 $ 26,402 $ 53,195 $ 52,882 operationsInventory valuation ? ? 208 ? adjustment ^(2)Amortization of 6,985 6,128 13,964 11,970 intangible assets ^(3)Transaction andintegration costs, ERPimplementation costs, and 746 761 2,018 1,565 unallocated legal fees ^(4)Goodwill impairment ^(5) 1,228 ? 1,228 ? Adjusted earnings from $ 35,876 $ 33,291 $ 70,613 $ 66,417 operations Reconciliation of adjusted net earningsGAAP net earnings $ 21,125 $ 19,829 $ 40,893 $ 38,612 Inventory valuation ? ? 208 ? adjustment ^(2)Amortization of 7,056 6,199 14,105 12,112 intangible assets ^(3)Transaction andintegration costs, ERPimplementation costs, and 746 761 2,018 1,565 unallocated legal fees ^(4)Goodwill impairment ^(5) 1,228 ? 1,228 ? Income tax adjustment ^ (2,593 ) (1,543 ) (4,449 ) (3,313 )(6)Adjusted net earnings $ 27,562 $ 25,246 $ 54,003 $ 48,976 Adjusted net earnings per $ 0.85 $ 0.77 $ 1.66 $ 1.51 common share - diluted

The following table sets forth a reconciliation of Net Income calculated using amounts determined in accordance with GAAP to EBITDA and to Adjusted EBITDA for the three and six months ended June30, 2020 and 2019.

Table 2 (unaudited)

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019Net income - as reported $ 21,125 $ 19,829 $ 40,893 $ 38,612 Add back: Provision for income taxes 4,848 5,052 9,570 11,062 Other expense 944 1,521 2,732 3,208 Depreciation and 12,674 10,825 25,153 21,590 amortizationEBITDA 39,591 37,227 78,348 74,472 Add back certain items: Non-cash compensationexpense related to equity 2,320 1,991 4,454 3,622 awardsInventory valuation ? ? 208 ? adjustment ^(2)Transaction and integrationcosts, ERP implementation 746 761 2,018 1,565 costs, and unallocatedlegal fees ^(4)Goodwill impairment ^(5) 1,228 ? 1,228 ? Adjusted EBITDA $ 43,885 $ 39,979 $ 86,256 $ 79,659

The following table sets forth a reconciliation of our GAAP effective income tax rate to our non-GAAP effective income tax rate for the three and six months ended June30, 2020 and 2019.

Table 3(unaudited)

Three Months Ended June 30, Effective Effective 2020 Tax 2019 Tax Rate RateGAAP Income Tax Expense $ 4,848 18.7 % $ 5,052 20.3 %Impact of ASU 2016-09 ^ 673 98 (7)Adjusted Income Tax $ 5,521 21.3 % $ 5,150 20.7 %Expense

Six Months Ended June 30, Effective Effective 2020 Tax 2019 Tax Rate RateGAAP Income Tax $ 9,570 19.0 % $ 11,062 22.3 %ExpenseImpact of ASU 2016-09 830 209 ^(7)Adjusted Income Tax $ 10,400 20.6 % $ 11,271 22.7 %Expense

The following table sets forth a reconciliation of net cash provided by operating activities to free cash flow for the three and six months ended June30, 2020 and 2019.

Table 4(unaudited)

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019Net cash providedby operating $ 44,615 $ 26,329 $ 67,180 $ 48,812 activitiesCapitalexpenditures andcapitalized ERP (7,595 ) (6,200 ) (12,747 ) (14,688 )implementationcostsFree cash flow $ 37,020 $ 20,129 $ 54,433 $ 34,124

^(2) Inventory valuation adjustment: Business combination accounting principlesrequire us to measure acquired inventory at fair value. The fair value ofinventory reflects the acquired company?s cost of manufacturing plus a portionof the expected profit margin. The non-GAAP adjustment to our cost of salesexcludes the expected profit margin component that is recorded under businesscombination accounting principles. We believe the adjustment is useful toinvestors as an additional means to reflect cost of sales and gross margintrends of our business.

^(3) Amortization of intangible assets: Amortization of intangible assetsconsists of amortization of customer relationships, trademarks and trade names,developed technology, regulatory registration costs, patents and trade secrets,capitalized loan issuance costs, and other intangibles acquired primarily inconnection with business combinations. We record expense relating to theamortization of these intangibles in our GAAP financial statements.Amortization expenses for our intangible assets are inconsistent in amount andare significantly impacted by the timing and valuation of an acquisition.Consequently, our non-GAAP adjustments exclude these expenses to facilitate anevaluation of our current operating performance and comparisons to our pastoperating performance.

^(4) Transaction and integration costs, ERP implementation costs andunallocated legal fees: Transaction and integration costs related toacquisitions and divestitures are expensed in our GAAP financial statements.ERP implementation costs related to a company-wide ERP system implementationare expensed in our GAAP financial statements. Unallocated legal fees fortransaction-related non-compete agreement disputes are expensed in our GAAPfinancial statements. Management excludes these items for the purposes ofcalculating Adjusted EBITDA and other non-GAAP financial measures. We believethat excluding these items from our non-GAAP financial measures is useful toinvestors because these are items associated with each transaction and areinconsistent in amount and frequency causing comparison of current andhistorical financial results to be difficult.

^(5) Goodwill impairment: A goodwill impairment charge related to businessformerly included in the Industrial Products segment is expensed in our GAAPfinancial statements. Management excludes this item for the purposes ofcalculating Adjusted EBITDA and other non-GAAP financial measures. We believethat excluding this item from our non-GAAP financial measures is useful toinvestors because this item is inconsistent in amount and frequency causingcomparison of current and historical financial results to be difficult.

^(6) Income tax adjustment: For purposes of calculating adjusted net earningsand adjusted diluted earnings per share, we adjust the provision for (benefitfrom) income taxes to tax effect the taxable and deductible non-GAAPadjustments described above as they have a significant impact on our income tax(benefit) provision. Additionally, the income tax adjustment is adjusted forthe impact of adopting ASU 2016-09, ?Improvements to Employee Share-BasedPayment Accounting? and uses our non-GAAP effective rate applied to both ourGAAP earnings before income tax expense and non-GAAP adjustments describedabove. See Table 3 for the calculation of our non-GAAP effective tax rate.

^(7) Impact of ASU 2016-09: The primary impact of ASU No. 2016-09,"Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), wasthe recognition during the three and six months ended June30, 2020 and 2019,of excess tax benefits as a reduction to the provision for income taxes and theclassification of these excess tax benefits in operating activities in theconsolidated statement of cash flows instead of financing activities.