Balchem Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Unless noted, financial figures are in millions of dollars. Balchem develops and sells specialty ingredients and products across Specialty Products, Food, Pharma & Nutrition, and Animal Nutrition & Health (AN&H).
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $74.4 | $63.9 | $222.1 | $185.3 |
| Gross margin | $22.6 | $20.2 | $65.2 | $56.8 |
| Gross margin percentage | 30.4% | 31.7% | 29.3% | 30.6% |
| Earnings from operations | $15.2 | $13.0 | $42.5 | $36.0 |
| Operating margin | 20.4% | 20.4% | 19.1% | 19.4% |
| Net earnings | $10.8 | $8.5 | $29.3 | $23.9 |
| Diluted EPS | $0.36 | $0.29 | $0.97 | $0.81 |
- Q3 sales increased 16.5%, operating earnings 16.6%, and net earnings 27.0% year over year. For the nine months, sales rose 19.9%, operating earnings 18.3%, and net earnings 22.7%.
- Operating cash flow was $34.1 million for the nine months, versus $29.3 million a year earlier. Capital expenditures were $4.9 million; cash increased $27.6 million to $104.9 million.
- At September 30, cash was $104.9 million, working capital $137.6 million, and total debt approximately $3.9 million. No amounts were drawn on the $6.0 million U.S. or €3.0 million European revolving facilities. The European term loan balance was reported as $3.885 million.
- Current assets were $162.9 million and current liabilities $25.3 million. Dividends paid during the nine-month period were $4.3 million.
Material changes and operating drivers
- AN&H was the largest growth contributor: nine-month sales rose 24.6% to $153.7 million, with segment earnings from operations up 18.4% to $20.4 million. Feed and industrial choline sales and derivatives increased 24.5%; industrial sales grew 51% and represented about 31.3% of AN&H sales for the period.
- Specialty Products nine-month sales increased 15.7% to $35.5 million, helped by ethylene oxide and propylene oxide, including the Aberco business. Food, Pharma & Nutrition sales rose 5.4% to $32.9 million.
- Despite higher sales and gross profit, gross margin percentages declined year over year in both comparison periods, primarily because of higher key raw-material costs. AN&H also experienced temporary operating inefficiencies at certain choline plants during the nine months.
- Nine-month operating expenses increased 8.7% to $22.6 million, including Aberco-related costs, added headcount and payroll expenses, and consulting fees related to acquisition opportunities. Expenses declined as a percentage of sales.
- Foreign sales were $77.0 million for the nine months, up from $57.1 million. The company reported $0.3 million of other income for the period, including a $0.2 million net gain on the sale of a non-core calcium carbonate product line and favorable foreign-exchange movements.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects operations to generate sufficient cash for working capital and necessary capital investment, and says it is pursuing acquisition candidates; additional borrowing or capital-market funding could be considered if needed.
- Management identifies raw-material prices, foreign-exchange movements, and interest rates as market risks. A 100-basis-point rate change on period-end borrowings would change annual interest expense and cash flow by approximately $39,000. The company says it manages exposures where possible through pricing and operating measures.
- Management cited higher petrochemical input costs and choline-plant inefficiencies as pressures on margins. Higher selling prices partly offset input cost increases in some product lines.
- Unrecognized tax benefits were $2.2 million at September 30, 2011, up approximately $1.0 million during the nine months; management did not anticipate a material change in the following 12 months.
- Environmental matters include ongoing discussions with New York regulators regarding monitoring and possible additional actions at a former drum site; historical monitoring costs were less than $5,000 annually. The company believes remediation at the Verona, Missouri Superfund site is complete and says sellers provide indemnification for potential liabilities. Management believes other litigation and claims will not materially affect financial position, results, or liquidity.
- Management reported no material changes to the risk factors in the 2010 Form 10-K, no significant change in internal control over financial reporting, and effective disclosure controls.
Important facts for investors to verify
- Whether AN&H volume growth and industrial demand, including natural-gas-fracturing applications, are sustainable and sufficiently diversified.
- Whether pricing and operating efficiencies can offset raw-material inflation, and whether the reported choline-plant inefficiencies have been resolved.
- How much future earnings growth depends on the lower effective tax rate, favorable foreign exchange, and the prior-year calcium carbonate product-line sale.
- The status and potential cost of environmental matters, tax exposures, and the renewal of revolving facilities maturing in 2012; management expected renewal in the normal course.
- Cash conversion and working-capital needs: receivables and inventories increased, contributing to operating cash use despite higher earnings.