Balchem Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017, compared with Q1 2016; balance-sheet comparisons are with December 31, 2016. Unless stated otherwise, dollar amounts below are in millions.
Business context and results
Balchem develops and sells specialty ingredients for human and animal nutrition, food, pharmaceutical, agricultural, industrial and medical-device sterilization markets. It reports four segments: Human Nutrition & Health, Animal Nutrition & Health, Specialty Products and Industrial Products. Q1 results include Albion for the full quarter in 2017, versus only February and March in 2016.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $137.728 | $135.141 | +1.9% |
| Gross profit / margin | $44.429 / 32.3% | $42.824 / 31.7% | Margin +0.6 percentage points |
| Operating earnings / margin | $22.703 / 16.5% | $19.968 / 14.8% | +13.7% |
| Earnings before tax | $20.710 | $17.981 | +15.2% |
| Net earnings | $15.518 | $11.886 | +30.6% |
| Basic / diluted EPS | $0.49 / $0.48 | $0.38 / $0.37 | Higher year over year |
| Operating cash flow | $22.802 | $29.323 | Down $6.521 |
| Capital expenditures | $2.934 | $10.660 | Down $7.726 |
Segments and material changes
- Human Nutrition & Health: Sales $73.127 million, up 2.2%; segment earnings from operations $10.196 million, up 21.8%. Additional Albion sales and higher choline nutrient sales were partly offset by a $2.444 million decline in Powder Systems sales.
- Animal Nutrition & Health: Sales $38.078 million, down 2.9%; segment earnings $5.376 million, down 17.7%. Lower feed-grade choline prices and weaker ruminant-product volumes, including dairy-market pressure, weighed on results.
- Specialty Products: Sales $18.790 million, up 9.8%; segment earnings $6.463 million, up 22.2%. Albion’s additional month and favorable domestic weather supporting plant nutrition contributed to growth.
- Industrial Products: Sales $7.733 million, up 6.9%; segment earnings $0.722 million versus $0.234 million. Higher shale-fracturing-related sales and improved mix and cost structure helped.
- Operating expenses fell to $21.726 million from $22.856 million, mainly due to $1.107 million less in transaction and integration costs. Comparisons also reflect 2016 acquired-inventory fair-value charges, including $1.511 million in Human Nutrition & Health and $0.900 million in Specialty Products, and a favorable legal settlement in 2016.
- The effective tax rate fell to 25.1% from 33.9%. Adoption of share-based-payment guidance generated approximately $1.5 million of excess tax benefits recognized as a reduction of income-tax expense, as well as a change in cash-flow classification.
Cash, liquidity and debt
- Cash was $36.997 million at quarter-end, down from $38.643 million at year-end. Working capital was $102.164 million, up from $87.434 million. Cash held by foreign subsidiaries was $17.534 million; management said it intends to permanently reinvest those funds abroad and repatriation could incur additional U.S. taxes.
- Operating cash flow declined mainly because inventories increased and accounts payable and accrued expenses declined, partly offset by timing of tax payments. Cash used in investing was $4.250 million; cash used in financing was $20.461 million, including $12.069 million of dividends and $8.750 million of term-loan principal payments. Cash decreased by $1.646 million overall.
- Principal debt outstanding was $269.750 million: $253.750 million term debt and $16.000 million drawn on the revolving facility. The company had $84.000 million of revolver capacity undrawn. The reported interest rate was 2.48%; borrowings are variable-rate and secured by company assets. Debt matures May 7, 2019, with $208.500 million of scheduled principal payments in 2019. The company reported compliance with its quarterly covenants.
- Management expects operations to generate sufficient cash to fund working capital, capital investment and debt service, and said it continues to pursue acquisition candidates. No quantified earnings or revenue guidance was provided.
Outlook, risks and notable items
- Management identified dairy-industry economics, competitive pressure and raw-material costs as relevant to Animal Nutrition & Health; it also cited foreign-exchange and commodity-price exposure. A 100-basis-point interest-rate change applied to quarter-end borrowings would change annual interest expense and cash flow by approximately $2.698 million.
- The company acquired Chol-Mix Kft.’s Hungarian assets for €1.5 million; approximately $1.170 million had been paid by March 31, with about $0.435 million due under a related manufacturing agreement. Initial purchase accounting was incomplete at quarter-end; the company did not anticipate goodwill.
- Environmental matters include continuing discussions with New York regulators concerning a former waste-drum site, where monitoring costs had been less than $5,000 annually, and a legacy Superfund site at the Verona facility. The company believes remediation there is complete and says it has indemnification protections. Management believes other litigation, claims and assessments will not materially affect financial position, results or liquidity.
- The filing disclosed one sale of ReaShure to a U.S. intermediary for export to Iran: 765 bags for $82,238. Balchem stated the sale complied with applicable law and qualified for an exemption from U.S. sanctions.
- The company was assessing the forthcoming revenue-recognition standard and expected adoption in 2018 using the modified-retrospective method; it did not then expect a material financial-statement impact. It was evaluating the leases standard. Management reported no material changes to risk factors or internal controls.
Important facts for investors to verify
- How much of earnings growth reflects underlying performance versus the lower 2016 acquisition-related charges and the approximately $1.5 million stock-compensation tax benefit.
- Whether Animal Nutrition & Health can recover margins amid lower pricing, raw-material inflation, dairy-market weakness and competitive pressure.
- Cash conversion and working-capital trends, particularly inventory growth and lower payables/accruals, alongside the substantial 2019 debt maturity.
- Progress on Chol-Mix purchase accounting and integration, and the continuing status and potential obligations associated with environmental and other contingencies.