Balchem Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Dollar amounts are in thousands, except per-share data. Balchem develops and sells specialty ingredients for human and animal nutrition, specialty applications, and industrial markets.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $161,410 | $137,728 | +17.2% |
| Gross margin | $51,459 | $44,429 | +15.8% |
| Gross margin percentage | 31.9% | 32.3% | Down 0.4 percentage points |
| Operating earnings | $27,412 | $22,703 | +20.7% |
| Operating margin | 17.0% | 16.5% | Up 0.5 percentage points |
| Net earnings | $19,346 | $15,518 | +24.7% |
| Diluted EPS | $0.60 | $0.48 | Up $0.12 |
| Cash provided by operations | $25,479 | $22,802 | +$2,677 |
| Capital expenditures | $3,735 | $2,934 | +$801 |
Revenue growth came from Human Nutrition & Health (+13.6%), Animal Nutrition & Health (+21.2%), and Industrial Products (+87.1%); Specialty Products sales declined 5.6%. Segment operating earnings were $13,003, $7,484, $2,479, and $5,135, respectively. IFP, acquired in June 2017, contributed to growth in Human Nutrition & Health powder systems and encapsulates.
Liquidity, debt, and balance sheet
- Cash was $42,679 at March 31, up from $40,416 at December 31, 2017; working capital was $113,693, versus $90,940.
- Total debt was $210,750, including $35,000 classified as current; cash less total debt was approximately $168,071. The company had $100,000 available on its revolving facility.
- Debt bears a variable rate; the reported rate was 3.38%. The loans mature May 7, 2019, with $184,500 of principal scheduled for 2019. Balchem reported compliance with its covenants.
- Operating cash flow increased year over year. Financing uses included $8,750 of term-loan payments and $13,421 of dividends. Cash included $30,757 held by foreign subsidiaries that Balchem intends to reinvest abroad.
Changes, outlook, and risks
- Feed-grade choline sales rose 34.1%, primarily from higher prices and volumes. Ruminant nutrition sales declined amid weaker dairy economics and increased competition. Specialty Products was affected by unfavorable weather and lower plant-nutrition volumes. Industrial Products benefited from higher choline-derivative sales for shale-fracturing uses.
- Gross margin percentage decreased despite higher gross profit; management cited improved segment margins in Human and Animal Nutrition and Industrial Products, offset by lower Specialty Products margin. Operating expenses included IFP expenses, higher R&D and compensation costs, and increased transaction/integration costs; $1,590 of insurance proceeds related to the Clearfield fire partly offset expenses.
- The effective tax rate fell to 23.2% from 25.1%, primarily due to the U.S. Tax Cuts and Jobs Act. Accounting for certain tax-reform effects, including GILTI and compensation deductibility, remained under review and provisional amounts could change.
- Management expects operations to generate sufficient cash for working capital, investment, and debt service, and continues to pursue acquisition opportunities. The filing provides no quantified earnings or revenue guidance; Q1 results are not necessarily indicative of full-year results.
- Risks include dairy-market conditions, competition, weather, raw-material pricing, foreign-exchange movements, and variable interest rates. A 100-basis-point rate change was estimated to affect annual interest expense and cash flow by about $2,108.
- Balchem adopted ASC 606 on January 1, 2018; the reported revenue impact was an increase of $458, with no material impact on net income. Environmental matters include ongoing evaluation of the Slate Hill site; management said other litigation and claims were not expected to materially affect financial position, results, or liquidity.
Important facts for investors to verify
- Whether sales growth and margins are sustainable, distinguishing volume, pricing, acquisition contribution, and the effects of unusual insurance proceeds and transaction costs.
- How the company plans to repay or refinance debt ahead of the May 2019 maturity, and how floating rates affect interest expense.
- Final tax-reform accounting, including GILTI and Section 162(m), and any resulting changes to tax expense or balances.
- The impact of dairy economics, competition, and weather on Animal Nutrition and Specialty Products, and the durability of Industrial Products growth.
- Foreign cash availability for U.S. needs, the status of environmental matters, and the related-party transactions and exposure involving the St. Gabriel joint venture.