Balchem Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in thousands of dollars, except per-share data. Balchem develops and sells specialty ingredients and products across Specialty Products, Food, Pharma & Nutrition, and Animal Nutrition & Health.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Change | Nine months 2013 | Nine months 2012 | Change |
|---|---|---|---|---|---|---|
| Net sales | $87,593 | $75,116 | +16.6% | $255,540 | $230,333 | +10.9% |
| Gross margin | $24,522 | $23,398 | +4.8% | $73,639 | $67,140 | +9.7% |
| Gross margin % | 28.0% | 31.1% | −3.1 pts | 28.8% | 29.1% | −0.3 pts |
| Operating earnings | $16,976 | $16,240 | +4.5% | $49,457 | $44,740 | +10.5% |
| Operating margin | 19.4% | 21.6% | −2.2 pts | 19.4% | 19.4% | Flat |
| Net earnings | $11,657 | $10,873 | +7.2% | $34,127 | $30,113 | +13.3% |
| Diluted EPS | $0.38 | $0.36 | +5.6% | $1.11 | $0.99 | +12.1% |
| Operating cash flow | Not separately stated | Not separately stated | — | $39,872 | $44,361 | −10.1% |
Q3 sales growth was led by Animal Nutrition & Health (ANH), up 21.0%; Food, Pharma & Nutrition (FPN) rose 13.4%, while Specialty Products increased 0.8%. For the nine-month period, ANH grew 13.6%, FPN 6.3%, and Specialty Products 3.7%. Nine-month segment operating earnings were $25,885 for ANH, $8,536 for FPN, and $15,036 for Specialty Products.
Management attributed lower gross-margin rates mainly to higher raw-material costs and product mix. Q3 operating margin also fell as sales growth did not fully offset those pressures. Nine-month operating margin held steady as volume-related efficiencies helped offset cost pressure. Effective tax rates were 31.7% in Q3 2013 versus 33.0% and 31.2% for the nine months versus 32.7% in 2012.
Cash, liquidity and debt
- Cash and equivalents were $190,179 at September 30, 2013, up from $144,737 at December 31, 2012; working capital was $233,099, versus $181,675.
- Nine-month operating cash flow was $39,872, down from $44,361, principally reflecting less favorable working-capital movements, including inventories and payables/accruals.
- Investing cash outflow was $6,822, including $6,644 of capital expenditures, mainly for the Covington, Virginia manufacturing facility. Financing provided $12,282, including $6,742 of stock-option exercise proceeds and $5,715 of excess tax benefits from stock compensation. No dividends were paid in 2013’s first nine months, compared with $5,237 in 2012.
- The company reported no borrowings at September 30, 2013; interest expense was minimal. Cash included $66,000 in certificates of deposit and $50,757 in money-market funds. Foreign subsidiaries held $5,801, which management intends to reinvest abroad.
Outlook, risks and other matters
- No specific earnings or sales guidance was provided. Management expects operations to generate sufficient cash for working capital and necessary capital investment and is pursuing acquisition candidates; it may seek external financing if needed.
- Management cited continued focus on operating efficiency, product applications, domestic and international growth, and leveraging choline production capabilities. Results for the nine months are not necessarily indicative of full-year results.
- Raw-material and commodity costs, foreign-exchange movements, and demand are key exposures. The company says it manages exposures where possible through pricing and operations and has no derivatives or hedging instruments.
- Industrial applications, including products used in natural-gas fracking, were approximately 37% of ANH Q3 sales and 36% for the nine months; related industrial sales grew 26.8% and 28.2%, respectively. This represents a notable demand and end-market exposure.
- ANH growth was partly offset by lower AminoShure sales following the previously announced 2012 suspension of AminoShure-L, 52% lysine. FPN’s nine-month earnings declined 5.1%, with higher raw-material costs for human choline products cited as a factor.
- Unrecognized tax benefits were approximately $2,800, with accrued interest and penalties of approximately $900; management did not anticipate a material change in unrecognized benefits over the next 12 months. Environmental remediation matters remain under discussion or monitoring; management believes litigation, claims, and assessments will not materially affect financial position, results, or liquidity.
- Management reported effective disclosure controls and no significant change in internal control over financial reporting; the filing identified no material changes to the prior Form 10-K risk factors.
Important facts for investors to verify
- Whether raw-material inflation, product mix, and pricing affect gross margin and operating margin in subsequent periods.
- The durability of ANH growth, including choline, specialty ingredients, and fracking-related industrial demand, and the recovery or continued impact of the AminoShure-L suspension.
- Capital spending and cash-flow needs for the Covington facility, potential acquisitions, and the company’s cash and foreign-fund repatriation plans.
- Developments in tax examinations and environmental matters, including any additional remediation obligations.