Balchem Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless stated otherwise, financial amounts are in thousands of dollars. Prior-period comparisons are to 2017; balance-sheet comparisons are to December 31, 2017.
Business context and reporting period
Balchem develops and sells specialty ingredients and products across Human Nutrition & Health, Animal Nutrition & Health, Specialty Products, and Industrial Products. The interim statements are unaudited. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method; management reported no material financial-statement impact.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $155.0 million | $150.7 million | $480.1 million | $435.5 million |
| Gross margin | $48.0 million; 31.0% | $46.2 million; 30.6% | $152.9 million; 31.9% | $137.4 million; 31.5% |
| Operating earnings | $25.5 million; 16.4% | $23.1 million; 15.3% | $80.5 million; 16.8% | $70.6 million; 16.2% |
| Net earnings | $19.2 million | $16.0 million | $58.2 million | $48.1 million |
| Diluted EPS | $0.59 | $0.50 | $1.79 | $1.49 |
| Operating cash flow | Not presented quarterly | $79.2 million | $79.5 million |
- Q3 sales grew 2.9%, operating earnings 10.5%, and net earnings 19.8%. For nine months, sales rose 10.2%, operating earnings 14.0%, and net earnings 21.1%.
- Nine-month investing cash outflow was $26.3 million, including $13.3 million of capital expenditures and $17.4 million of acquisition payments. Financing cash outflow was $49.4 million. Cash increased $2.3 million to $42.7 million.
- At September 30, cash was $42.7 million, current assets $225.7 million, current liabilities $66.0 million, and working capital $159.8 million. The company reported $178.0 million outstanding on its revolving loan; net debt, using reported cash, was approximately $135.3 million.
- Total assets were $986.1 million, total liabilities $300.9 million, and stockholders’ equity $685.2 million. The filing reports no current portion of debt at quarter-end.
Material changes and management commentary
- Q3 Human Nutrition & Health sales increased 5.6%, Animal Nutrition & Health 6.3%, and Specialty Products 2.1%; Industrial Products sales declined 21.1%, principally from lower shale-fracking-related volumes.
- For nine months, all segments grew sales: Human Nutrition & Health 9.2%, Animal Nutrition & Health 13.7%, Specialty Products 2.5%, and Industrial Products 19.1%. Growth included higher feed-grade choline sales and contributions from IFP; 2018 includes nine months of IFP expenses versus four months in the 2017 comparison.
- Management attributed Q3 gross-margin improvement to pricing and product mix in several segments, partly offset by higher raw-material costs and mix in Human Nutrition & Health. Nine-month operating expenses included higher compensation, R&D and acquisition-related expenses, partly offset by Clearfield fire insurance proceeds and lower amortization.
- On June 27, 2018, Balchem replaced its prior facility with a five-year senior secured revolving credit agreement providing up to $500 million, maturing June 27, 2023. Proceeds repaid $210.8 million of the prior term loan; $178.0 million was drawn at quarter-end, leaving $322.0 million available. The reported rate was 3.367%; the company was covenant-compliant.
- Management stated it expects operating cash flow to fund working capital, capital investment, and debt service, and continues to consider acquisitions. No specific earnings or revenue guidance was provided.
Outlook, risks, contingencies, and unusual items
- Management cautioned that interim results are not necessarily indicative of full-year results. Key exposures discussed include dairy-industry economics, commodity competition, foreign exchange and raw-material prices. A 100-basis-point rate change on quarter-end borrowings would change annual interest expense and cash flow by approximately $1.78 million.
- The company held $17.1 million of cash at foreign subsidiaries and said it intended to reinvest those funds abroad; repatriation for U.S. needs could result in additional taxes.
- Q3 operating expenses included $2.6 million of Clearfield fire insurance proceeds, a $0.7 million IFP tradename impairment charge, and lower amortization. The cash-flow reconciliation separately reports $1.7 million of asset impairment for the nine-month period; the filing text does not clearly reconcile these reported amounts.
- The 2018 nine-month comparison includes $4.2 million of Clearfield fire insurance proceeds; the 2017 comparison included a $2.1 million indemnification settlement. Nine-month 2018 interest expense included a $0.4 million write-off of deferred financing costs related to debt extinguishment.
- Tax rates were 18.3% for Q3 and 21.1% for the nine-month period, down from 22.5% and 24.8%, respectively, primarily reflecting U.S. tax reform. Certain tax accounting amounts remained provisional pending further analysis.
- Commitments include $17.5 million of future minimum operating-lease payments. Balchem described the Verona, Missouri Superfund site, noted seller indemnification, and said management did not expect litigation, claims, or assessments to materially affect financial condition, results, or liquidity. No material risk-factor changes from the 2017 Form 10-K were reported.
Important facts for investors to verify
- Whether sales and margin trends are sustainable, particularly the effects of pricing, raw-material costs, product mix, and dairy-market conditions.
- The extent to which reported earnings benefited from fire insurance proceeds, tax-rate reductions, and other one-time or timing-related items; also reconcile the impairment disclosures.
- Revolver utilization, variable-rate exposure, covenant headroom, and the company’s ability to fund acquisitions while maintaining liquidity.
- Potential outcomes of the remaining Tax Reform Act measurement-period analysis and any resulting tax adjustments.
- Exposure to foreign currency, raw-material prices, shale-fracking demand, and the disclosed environmental and other contingencies.