Balchem Corporation — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019; unaudited, compared with Q1 2018. Dollar amounts are in thousands unless noted.
Business context and results
Balchem develops and sells specialty performance ingredients and products across Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), Specialty Products, and Industrial Products.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $157,029 | $161,410 | Down 2.7% |
| Gross margin | $49,095 | $51,459 | Down 4.6% |
| Gross margin rate | 31.3% | 31.9% | Down 0.6 percentage points |
| Operating earnings | $26,480 | $27,240 | Down 2.8% |
| Operating margin | 16.9% | 16.9% | Flat |
| Net earnings | $18,783 | $19,346 | Down 2.9% |
| Diluted EPS | $0.58 | $0.60 | Down $0.02 |
| Operating cash flow | $22,483 | $25,479 | Down $2,996 |
| Capital expenditures | $8,488 | $3,735 | Up $4,753 |
Segment performance and material changes
- HNH: Sales rose 2.5% to $85,149; segment earnings increased 6.0% to $13,703. Food and beverage and cereal systems gains more than offset lower human nutrition and pharma sales. Management cited mix and lower-volume-related inefficiencies as pressure on gross margin.
- ANH: Sales fell 6.0% to $43,361; segment earnings declined 29.8% to $5,256. Global feed-grade choline sales fell 11.4%, reflecting lower volumes and the absence of Q1 2018 supply disruptions from China; European monogastric competition also weighed on margins.
- Specialty Products: Sales increased 3.9% to $18,424 and segment earnings rose 33.0% to $6,697, supported by higher ethylene oxide volumes for medical-device sterilization and improved mix.
- Industrial Products: Sales declined 30.2% to $10,095 and earnings fell to $1,637, primarily due to lower choline-product volumes for shale-fracking applications.
Consolidated operating expenses decreased to $22,615 from $24,219. The company cited lower compensation-related expenses, higher insurance proceeds associated with the Clearfield fire, and lower amortization, partly offset by higher legal, R&D, outside-services, and recruiting costs. The effective tax rate increased to 24.2% from 23.2%, principally due to higher state taxes and lower excess stock-compensation tax benefits.
Financial position, liquidity, and capital resources
- At March 31, cash and cash equivalents were $39,004, down from $54,268 at year-end; $20,427 was held by foreign subsidiaries and management said it intended to reinvest those funds abroad.
- Revolving debt was $140,000, versus $156,000 at December 31. Net debt, using reported cash, was approximately $101,000. The $500,000 facility had $360,000 undrawn; the stated borrowing rate was 3.496%. The company reported compliance with its debt covenants.
- Working capital was $157,856, compared with $144,258 at year-end; the comparison includes assets and liabilities classified as held for sale.
- Operating cash flow was $22,483; investing activities used $5,780, including $8,488 of capital expenditures and $2,727 of insurance proceeds. Financing activities used $31,574, including $16,000 of revolving-loan repayments and $15,135 of dividends.
- Management expected operating cash flow to fund working capital and necessary capital investments, and said it was pursuing acquisition candidates. A 100-basis-point interest-rate change on quarter-end borrowings would change annual interest expense and cash flow by approximately $1,400.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific full-year earnings or revenue guidance; management cautioned that quarterly results are not necessarily indicative of full-year results.
- On May 2, 2019, after quarter-end, Balchem agreed to acquire Chemogas Holding NV for €95,000, subject to adjustments and customary closing conditions. The transaction was expected to be funded through the credit agreement and cash on hand; it was not completed as of the filing date.
- Negotiations were underway to sell an insignificant portion of the business. At March 31, $11,748 of assets and $757 of liabilities were classified as held for sale; no gain or loss had been recognized. Management estimated completion during 2019.
- Key operating exposures include commodity and raw-material prices, foreign exchange, floating interest rates, competition in feed-grade choline, dairy-market economics, and demand for fracking-related products. The filing reports no material change to the risk factors in the 2018 Form 10-K.
- The company described litigation and claims as not expected to materially affect its financial position, results, or liquidity. Its Verona, Missouri facility is subject to ongoing site-integrity obligations related to a Superfund site; the prior owner is responsible for further remediation and Balchem has an indemnity from the sellers.
- Balchem adopted lease accounting (ASC 842) on January 1, 2019, recording right-of-use assets and lease liabilities. It reported $8,036 of right-of-use assets and $8,026 of lease liabilities at quarter-end, excluding amounts classified as held for sale.
Important facts for investors to verify
- Whether Chemogas closes on the stated terms, and the resulting purchase price adjustments, funding, and leverage.
- Whether feed-grade choline volumes and ANH margins recover, and whether lower industrial/fracking demand persists.
- How much of the lower operating expenses and earnings comparison reflects recurring performance versus Clearfield fire insurance proceeds and other unusual items.
- Cash generation, capital spending, dividends, and debt levels, particularly given the planned acquisition and foreign cash intended for reinvestment.
- Completion and financial impact of the proposed business sale, including any gain or loss.