Balchem Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial amounts are in thousands of dollars unless stated otherwise. Balchem develops and sells specialty ingredients for food, nutrition, animal health, agriculture, industrial uses, and medical-device sterilization.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $138,509 | $140,128 | $412,444 | $419,763 |
| Gross margin | $44,656 | $43,174 | $133,929 | $128,171 |
| Gross margin percentage | 32.2% | 30.8% | 32.5% | 30.5% |
| Earnings from operations | $22,946 | $22,922 | $66,247 | $71,734 |
| Net earnings | $14,012 | $13,976 | $40,048 | $44,063 |
| Diluted EPS | $0.44 | $0.44 | $1.26 | $1.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $79,817 | $78,850 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $18,801 | $28,117 |
In Q3, sales declined 1.2% year over year, while operating earnings were essentially flat and net earnings rose 0.3%. For the first nine months, sales fell 1.7%, operating earnings declined 7.6%, and net earnings declined 9.1%. Reported nine-month operating margin was 16.1%, down from 17.1%; management’s specified adjusted comparison was 22.9% versus 22.2%, excluding amortization, acquisition-inventory valuation, transaction and integration costs, a prior-year equity compensation charge, and a favorable legal settlement.
Financial position and liquidity
- Cash and cash equivalents were $32,533 at September 30, 2016, versus $84,795 at December 31, 2015. Working capital was $98,991, down from $117,172.
- Debt outstanding was $299,250: $271,250 under the term loan and $28,000 drawn on the revolving facility. The stated interest rate was 2.02%; $72,000 of revolving capacity remained available. Debt matures May 7, 2019, and the company reported compliance with its covenants.
- Nine-month operating cash flow of $79,817 was more than offset by $129,167 of investing outflows, chiefly the Albion acquisition. Financing outflows were $3,419. Cash decreased by $52,262.
- Total assets were $946,832 and stockholders’ equity was $516,422. Total liabilities were $430,410.
Material changes and management commentary
- Balchem acquired Albion International on February 1, 2016, for approximately $116.4 million including debt repayment and working-capital adjustments. It funded $65 million with its revolving facility and the balance primarily from cash. Albion contributed $37,915 in sales and $801 in net earnings from acquisition through September 30.
- Albion’s preliminary purchase-price allocation included $60,177 of goodwill and acquired finite-lived intangibles. The allocation remained subject to adjustment. Acquired-inventory fair-value charges increased cost of sales by $5,363 during the first nine months; acquisition and integration costs were also reported.
- Human Nutrition & Health and Specialty Products sales benefited from Albion. Industrial Products sales fell 59.7% for the nine-month period, primarily because of lower demand for choline products used in shale-fracking applications. Animal Nutrition & Health sales fell 4.6%, reflecting lower selling prices and weaker dairy economics, partly offset by product and volume gains.
- Management said operations are expected to generate sufficient cash to fund working capital, capital investment, and debt service, and that Balchem continues to pursue acquisition candidates. No quantified earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Management cited exposure to foreign-exchange and raw-material price changes, competitive pressures, and end-market conditions including dairy economics and shale-fracking activity. A 100-basis-point change in interest rates would change annual interest expense and cash flow by approximately $2,993, based on period-end borrowings.
- Cash held by foreign subsidiaries was $18,571 and management said it intended to reinvest those funds abroad; repatriation could result in additional U.S. taxes.
- Unrecognized tax benefits were approximately $6,839, excluding the uncertainty over settlement timing. The company also reported environmental remediation matters and other litigation; management did not expect currently known matters to materially affect financial position, results, or liquidity.
- The Albion acquisition was being integrated into internal controls and was expected to be included in the company’s year-end 2016 internal-control assessment. Management reported disclosure controls were effective and no material changes in risk factors from the 2015 Form 10-K.
Important facts for investors to verify
- How Albion performs and whether its preliminary purchase-price allocation, integration, and expected benefits change.
- Whether weakness in Industrial Products and animal-nutrition markets persists, and how volume, pricing, and product mix affect margins.
- Cash generation, working-capital movements, remaining acquisition funding needs, and the pace of debt reduction ahead of 2019 maturity.
- The scale and timing of acquisition-related, inventory fair-value, tax, environmental, and other contingent costs.
- Whether foreign cash remains reinvested abroad and the potential tax consequences if repatriated.