Balchem Corporation (BCPC) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; comparison is with Q1 2021. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
- Revenue: $228.9 million, up 23.3% from $185.7 million. Growth reflected higher selling prices and, to a lesser extent, volume and mix.
- Profitability: Gross margin was $71.5 million, up 21.8%; gross margin rate declined to 31.2% from 31.6%. Operating expenses rose 17.8% to $33.2 million. Operating earnings increased 25.4% to $38.3 million, and operating margin improved to 16.8% from 16.5%.
- Net earnings and EPS: Net earnings were $28.9 million, up 23.6%; diluted EPS was $0.89 versus $0.72. The effective tax rate increased to 23.1% from 21.9%.
- Cash flow: Operating cash flow was $7.0 million, compared with $40.6 million in Q1 2021. The company attributed the decline primarily to working-capital changes, including the timing of sales, inventory restocking, and supplier payments. Investing cash outflow was $10.1 million, including $10.3 million of capital expenditures and intangible asset purchases. Financing cash outflow was $34.8 million, including $20.7 million of dividends and $34.6 million of share repurchases, partly offset by $20.0 million of revolver borrowings.
- Liquidity and debt: Cash and cash equivalents were $64.5 million, down from $103.2 million at year-end 2021; working capital was $196.3 million. Revolver borrowings were $128.6 million, up from $108.6 million, with $371.4 million unused under the $500 million facility. The company was in compliance with debt covenants. $56.8 million of cash was held by foreign subsidiaries and management said it intended to reinvest those funds abroad.
- Balance sheet: Total assets were $1.195 billion and stockholders’ equity was $873.7 million at March 31, 2022. Inventories increased to $108.4 million from $91.1 million at year-end.
Business and segment performance
Balchem develops, manufactures, and sells specialty ingredients and products for nutrition, food, pharmaceutical, animal health, medical sterilization, plant nutrition, and industrial markets.
- Human Nutrition & Health: Sales increased 17.2% to $122.4 million; segment earnings increased 3.1% to $20.3 million. Growth was primarily in food and beverage. Higher input costs pressured segment gross margin.
- Animal Nutrition & Health: Sales increased 35.6% to $69.3 million; segment earnings increased 123.9% to $11.3 million. Higher sales in monogastric and ruminant markets and improved gross margin contributed to earnings growth.
- Specialty Products: Sales increased 19.0% to $33.3 million; segment earnings increased 8.0% to $7.8 million. Growth in medical-device sterilization and plant nutrition was partly offset by raw-material cost pressure.
Changes, outlook, and risks
- Management reported severe input-cost inflation, raw-material shortages, logistics disruption, and labor availability challenges, which continued into Q1 2022 and were expected to persist for some time. Raw-material inflation was the primary stated reason cost of sales rose faster than revenue.
- Management expects operations to generate sufficient cash flow for working capital and necessary capital investment, and said it is pursuing acquisition candidates. No specific earnings or revenue guidance was provided.
- The company added a risk disclosure that the Russia-Ukraine conflict could worsen supply interruptions, access to materials and energy, and costs, particularly at European manufacturing facilities.
- At its Verona, Missouri facility, the company and a former owner received an EPA Special Notice Letter in February 2022 concerning a focused remedial investigation/feasibility study, primarily regarding 1,4-dioxane. The company had responded and expected an EPA response; the filing does not provide a clear estimate of potential costs or liability. The company noted seller indemnification for certain Superfund-related liabilities.
- Other expense included a $140,000 share of the St. Gabriel joint venture’s expenses. The filing identifies no material changes to other litigation matters and states management does not expect their outcomes to materially affect financial position, results, or liquidity.
Important facts for investors to verify
- Whether pricing actions can continue to offset input-cost inflation without weakening demand or margins.
- Whether working-capital investment and supplier-payment timing normalize, supporting operating cash flow.
- How much of the reported cash is practically available for U.S. needs, given foreign cash reinvestment plans and potential repatriation taxes.
- Any further EPA developments, remediation requirements, or quantified exposure relating to the Verona site.
- How the company’s acquisition plans, share repurchases, dividends, and revolver borrowings affect liquidity and leverage.