Balchem Corp.'s second-quarter net income fell nearly 16% due to costs related to its acquisition of SensoryEffects, which creates specialty ingredients and flavorings for finished products. However, net sales increased 58.7% to $132.2 million.
Excluding the impact of the SensoryEffects acquisition, net sales were up 15.1% compared with second quarter 2013 and increased 11.4% on a sequential basis.
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The Animal Nutrition & Health ("ANH") segment, including specialties, choline and industrial derivative products, realized sales of $69.4 million, an increase of approximately 20%, or $11.5 million over the prior year comparable quarter. Sales in the ANH specialty ingredients sector were very strong increasing approximately 46% from the prior year comparable quarter primarily due to higher volumes sold, with particular strength in our rumen protected choline, urea, amino acids and chelated minerals. Dairy economics continue to support strong demand for our products and milk prices are currently forecasted to remain strong through the balance of the year.
Our monogastric product sales were up 14.2% from the prior year comparable quarter primarily due to increased volumes sold of choline products sourced from our Italian operation into the European and other international poultry markets, as well as strong chelated mineral sales globally. Sales of industrial grade products were up approximately 17% from the prior year comparable quarter as volume sold of various choline and choline derivatives for industrial applications, notably for natural gas fracking in North America, increased appreciably. This sector comprised approximately 38% of the sales in the total ANH segment for the quarter, vs 33% in Q1 2014.
Earnings from operations for the entire ANH segment increased approximately 20% to $9.7 million as compared to $8.1 million in the prior year comparable quarter. The ARC Specialty Products segment generated second quarter sales of $13.6 million, which was a 3.2% improvement over the comparable prior year quarter, as increased sales of ethylene oxide for medical device sterilization were partially offset by lower sales volumes of propylene oxide for industrial applications. Earnings from operations for this segment, at $5.5 million, improved by $0.2 million over the prior year comparable quarter, in direct correlation with the revenue growth noted.
Sales of our SensoryEffects segment, formerly the Food, Pharma & Nutrition segment, which now includes encapsulates, human choline and customized food and beverage solutions, were $49.2 million, an increase of $37.1 million from the comparable prior year quarter. Net sales from the acquisition of the SensoryEffects business contributed $36.4 million of this overall increase. We also realized 15.7% growth in sales of encapsulated ingredients for baking and food preservation with strength in both the domestic and international markets. Earnings from operations for this segment were $2.9 million, versus $3.3 million in the prior year comparable quarter. Excluding the effect of non-cash expense associated with amortization of SensoryEffects acquired intangible assets of $3.6 million and one time inventory revaluation adjustments of $4.7 million relating to acquisition accounting, non-GAAP earnings from operations for this segment was $11.2 million.
Consolidated gross margin for the quarter ended June 30, 2014 increased 30% to $32.3 million, as compared to $24.9 million for the prior year comparable period. Gross margin for the three months ended June 30, 2014 reflects a decrease to 24.5% of sales as compared to 29.9% in the prior year comparative period. On a non-GAAP basis, gross margin was $37.2 million, which reflects the impact of the inventory valuation adjustment and the amortization of certain intangible assets. On a non-GAAP basis, gross margin was 28.1% of sales, as margins now reflect a product mix weighting for the partial quarter of the SensoryEffects acquisition, as well as some adversely impacted margins due to increases in certain petrochemical raw materials.
Operating (Selling, Research & Development, General & Administrative) expenses at $15.8 million for the second quarter were up significantly from the prior year comparable quarter principally due to recognition of SensoryEffects operating expenses, transaction and integration costs and amortization expense related to the aforementioned acquisition. Excluding transaction and integration costs of $1.5 million and non-cash operating expense associated with amortization of intangible assets of $4.5 million, operating expenses were $9.8 million, or 7.4% of sales. Interest expense was $1.3 million in the second quarter of 2014, substantially all of which related to the debt financing of the SensoryEffects acquisition.
Our effective tax rate for the three months ended June 30, 2014 and 2013 was 36.4% and 30.6%, respectively. This increase in the effective tax rate was primarily attributable to the impact of the SensoryEffects acquisition, including a change in apportionment relating to state income taxes, a change in the income proportion towards jurisdictions with higher tax rates, and the timing of certain tax credits and deductions.
The Company continues to maintain and grow a solid financial structure. Diligent working capital controls contribute strongly to the business performance. The $116.8 million of net working capital on June 30, 2014 included a cash balance of $59.7 million and reflects $3.5 million of capital expense funding year-to-date. Total outstanding debt at June 30, 2014, including borrowings under our revolver was $400 million.
Commenting further, Dino A. Rossi, Chairman, CEO and President of Balchem said, "This record quarter revenue result reflects a partial quarter of the SensoryEffects acquisition, and also includes acquisition accounting, intangible and inventory valuation step-ups and transaction/ integration expenses, that take the edge off of the normally conveyed earnings results. The legacy Balchem business realized a 15% revenue and a 12% operating earnings increase in Q2 vs. comparable Q2 2013, with each segment achieving record revenue levels and Animal Nutrition & Health and Food, Pharma & Nutrition achieving record earnings results. We have worked diligently to achieve a number of integration items, including organizational structure, combining sales efforts and greater in-depth knowledge transfers. We look forward to adding clarity, via the numbers with the coming quarters. The U.S. GAAP results are reflected in the initial page of this announcement; however, the following Reconciliation of non-GAAP measures gives greater recognition to the economic benefit of the acquisition wherein we show that the non-GAAP net earnings and EPS are up 36% and 33%, respectively, over the comparable Q2 results of 2013. We are pleased with the performance of the legacy Balchem and initial, albeit partial, quarterly results of the SensoryEffects business."