Balchem Corporation — Q1 2023 Form 10-Q
Business context and period. Balchem develops and sells specialty ingredients for human and animal nutrition, food, pharmaceutical, medical-device sterilization, plant nutrition and industrial markets. This unaudited report covers the three months ended March 31, 2023; comparisons are with Q1 2022. Unless stated otherwise, amounts are in thousands of dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $232,540 | $228,867 | +1.6% |
| Gross margin | $73,170 | $71,506 | +2.3% |
| Gross margin % | 31.5% | 31.2% | +0.3 percentage points |
| Operating expenses | $38,762 | $33,170 | +16.9% |
| Operating earnings / margin | $34,408 / 14.8% | $38,336 / 16.8% | −10.2% / −2.0 percentage points |
| Interest expense, net | $5,565 | $545 | +$5,020 |
| Net earnings | $22,710 | $28,930 | −21.5% |
| Diluted EPS | $0.70 | $0.89 | −21.3% |
| Operating cash flow | $34,838 | $7,021 | +$27,817 |
| Capital expenditures and intangible assets acquired | $9,720 | $10,256 | −$536 |
Revenue growth did not translate into earnings growth: higher operating expenses, acquisition-related amortization and sharply higher interest costs more than offset improved gross margin. Interest expense rose with acquisition-related borrowing and higher rates. The effective tax rate declined to 22.0% from 23.1%, primarily due to stock-compensation tax benefits, certain tax credits and lower state taxes.
Segment sales and operating earnings
| Segment | Sales Q1 2023 | Sales change | Operating earnings Q1 2023 | Operating earnings change |
|---|---|---|---|---|
| Human Nutrition and Health | $132,653 | +8.3% | $18,435 | −9.2% |
| Animal Nutrition and Health | $64,889 | −6.4% | $9,498 | −16.1% |
| Specialty Products | $32,231 | −3.3% | $7,946 | +2.4% |
| Other and Unallocated | $2,767 | −26.1% | ($1,471) | More loss |
Human Nutrition and Health sales benefited mainly from the Kappa and Bergstrom acquisitions; price contributed 11.8%, while volume and mix reduced growth by 3.4%. Animal Nutrition and Health weakness reflected lower European market sales and unfavorable currency effects, partly offset by North American sales. Specialty Products declined on lower plant-nutrition sales and currency effects, partly offset by performance-gas sales; higher prices supported segment earnings.
Balance sheet, liquidity and capital
- Cash was $60,199 at March 31, 2023, down from $66,560 at year-end; working capital was $219,080, up from $195,761.
- Revolving debt was $431,569, down from $440,569. The $550,000 facility matures July 27, 2027; $118,431 remained available. The reported interest rate was 6.066%, and the company said it was in compliance with its covenants.
- Current assets were $335,603 and current liabilities $116,523. Total liabilities were $655,349; total stockholders’ equity was $973,416.
- Operating cash flow increased substantially, primarily from changes in working capital. Financing cash outflows included $22,867 of dividends and $3,849 of share repurchases; net debt repayments were $9,000.
- Cash decreased by $6,361 in the quarter. Of period-end cash, $54,820 was held by foreign subsidiaries and management said it intended to reinvest those funds abroad; repatriation for U.S. needs could incur additional withholding taxes.
Outlook, risks and notable items
- Management expects operations to generate sufficient cash to fund working capital and necessary capital investments and said it is pursuing additional acquisition candidates. No numerical earnings or revenue guidance was provided.
- Management cited exposure to inflation and economic conditions, raw-material prices and supply, competition, foreign exchange, interest rates, acquisitions, operational and supply-chain disruption, cybersecurity, product safety, regulation and litigation, among other risks. A 100-basis-point change in rates on period-end borrowings would change annual interest expense and cash flow by approximately $4,316.
- The EPA issued a 2022 Special Notice Letter concerning a focused remedial investigation/feasibility study at the Verona, Missouri site, including potential 1,4-dioxane contamination. The company and the prior owner jointly responded. The company also entered into an amended EPA compliance order in January 2023 and stated it is committed to compliance. Management does not expect pending legal matters to materially affect financial position, results, liquidity or cash flows.
- Q1 included $4,958 of incremental operating expenses related to acquisitions, as well as higher amortization. Kappa and Bergstrom together contributed reported sales of $14,130 and a net loss of $3,909 in the quarter; the filing does not separately identify their individual contributions.
- The filing reports a $13,000 contingent-consideration liability related to Bergstrom, with a potential additional payment in Q2 2024 subject to performance targets. The Kappa purchase-price allocation remained preliminary.
- Management reported effective disclosure controls as of March 31, 2023. Kappa and Bergstrom, representing approximately 19.9% and 4.8% of consolidated assets, respectively, were still being integrated and excluded from the quarter’s internal-control assessment.
Key facts for investors to verify
- Whether the modest consolidated sales increase can be sustained and whether volume and mix recover in the animal nutrition and other pressured markets.
- Whether acquisition-related costs and amortization moderate, and whether acquired businesses contribute profit after financing costs.
- How floating-rate debt costs, covenant headroom and available revolving-credit capacity evolve; the reported sensitivity indicates meaningful exposure to rate changes.
- Whether working-capital-driven cash-flow improvement is repeatable, given the much lower operating cash flow in Q1 2022.
- Developments in the Verona EPA investigation and compliance order, and the eventual amount and timing of contingent acquisition consideration.