Balchem Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; dollar amounts below are in millions unless noted.
Business context and results
Balchem develops and sells specialty ingredients for human and animal nutrition, food, pharmaceutical, medical-device sterilization, plant nutrition and industrial markets. It reports Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), and Specialty Products segments.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $244.3 | $197.9 | $709.8 | $585.9 |
| Gross profit / margin | $68.4 / 28.0% | $60.9 / 30.8% | $211.8 / 29.8% | $179.1 / 30.6% |
| Operating earnings / margin | $33.6 / 13.8% | $32.5 / 16.4% | $111.9 / 15.8% | $93.7 / 16.0% |
| Net earnings | $25.2 | $25.0 | $84.0 | $71.2 |
| Diluted EPS | $0.78 | $0.77 | $2.59 | $2.18 |
Q3 sales increased 23.4%, while net earnings rose 0.9%; nine-month sales and net earnings increased 21.2% and 18.0%, respectively. Q3 earnings growth lagged sales as gross and operating margins contracted. Management cited inflation in manufacturing inputs, particularly raw materials, acquisition-related costs and higher interest expense. Q3 operating expenses also included higher outside services and amortization.
Segments and material changes
- Q3 sales: HNH $142.7 million, up 28.3%; ANH $65.6 million, up 16.7%; Specialty Products $29.6 million, up 7.3%. HNH benefited from food and beverage and minerals/nutrients sales and acquisitions. ANH gains reflected higher sales and pricing, partly offset by lower volume/mix and foreign exchange. Specialty Products growth came mainly from performance gases.
- Pricing and volume: Q3 sales growth was primarily price-led across segments. ANH volume/mix declined 3.0% and Specialty Products volume/mix declined 6.9%; currency effects were also unfavorable.
- Nine-month segment earnings: HNH $64.6 million, ANH $26.9 million and Specialty Products $24.8 million. ANH earnings rose substantially from the prior year, partly reflecting the timing of costs associated with a prior-year flash-flood recovery.
- Q3 cost of sales rose 28.4%, faster than sales, and gross margin fell 2.8 percentage points. The prior-year comparison was also affected by the timing of insurance proceeds and flood-related costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $96.9 million, down from $116.0 million. Management attributed the decline mainly to working-capital changes, timing of increased sales, inventory restocking and supplier payments.
- Investing cash outflow was $401.5 million, including $365.8 million paid for acquisitions, net of acquired cash, and $35.8 million for capital expenditures and intangible assets.
- Financing cash inflow was $268.1 million. Cash declined to $56.5 million from $103.2 million at year-end 2021. Working capital was $226.0 million, versus $178.4 million at year-end.
- Revolving debt was $462.6 million at September 30, versus $108.6 million at December 31, 2021. The amended $550 million senior secured facility matures July 27, 2027; $87.4 million was unused. The stated interest rate was 4.214% at quarter-end. The company reported compliance with its covenants.
- Management estimated that a 100-basis-point rate change applied to quarter-end borrowings would change annual interest expense and cash flow by approximately $4.6 million. Nine-month net interest expense increased to $5.1 million from $1.9 million, reflecting acquisition borrowing and rising rates.
- Cash included $39.2 million held by foreign subsidiaries that the company intends to reinvest abroad; repatriation for U.S. needs could incur additional withholding taxes.
Acquisitions, outlook and risks
Balchem acquired Kappa Bioscience, a specialty vitamin K2 producer, in June and Bergstrom Nutrition, an MSM manufacturer, in August. The acquisitions broadened its nutrition portfolios and contributed to higher sales and expenses. Purchase-price allocations remained preliminary. The balance sheet included $30.5 million of contingent consideration liabilities, and goodwill rose to $749.0 million from $523.9 million at year-end.
The filing gives no quantified earnings or revenue guidance. Management expects operations to generate sufficient cash for working capital and necessary capital investment and said it is pursuing additional acquisition candidates. It also cited uncertainty from macroeconomic conditions, competition, customer preferences and new-product execution. Input-cost inflation, foreign-exchange movements and floating-rate debt remain relevant risks.
At a Missouri facility, the EPA issued a Special Notice Letter in February 2022 concerning a focused remedial investigation/feasibility study of contaminants, primarily 1,4-dioxane and chlorobenzene. The company and the prior owner were negotiating the scope with regulators; the filing does not provide a clear estimate of potential costs. Management said other pending legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether pricing can offset raw-material and other manufacturing-cost inflation without further margin erosion.
- Acquisition integration, expected synergies, and final fair-value allocations for Kappa and Bergstrom, including contingent payments.
- Debt reduction, interest-rate exposure, covenant headroom and available liquidity as acquisition borrowing is integrated.
- Working-capital and inventory trends, and whether operating cash flow recovers from the nine-month decline.
- Regulatory developments and potential financial exposure from the EPA investigation at the Missouri facility.