Balchem Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in thousands of dollars, except per-share data and percentages. Balchem develops and sells specialty ingredients for nutrition, health, food, pharmaceutical, animal health, medical and industrial markets. Its reportable segments are Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $229,948 | $244,267 | $693,740 | $709,827 |
| Gross margin | $76,544 (33.3%) | $68,430 (28.0%) | $227,063 (32.7%) | $211,812 (29.8%) |
| Operating earnings | $43,614 | $33,625 | $120,858 | $111,881 |
| Net earnings | $29,075 | $25,249 | $81,895 | $83,961 |
| Diluted EPS | $0.90 | $0.78 | $2.52 | $2.59 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $116,355 | $96,881 |
Q3 revenue fell 5.9% year over year, while gross margin dollars rose 11.9% and operating earnings rose 29.7%. For the first nine months, sales declined 2.3%, operating earnings increased 8.0%, and net earnings declined 2.5%. Higher selling prices and lower manufacturing input costs supported gross margins. Interest expense increased to $6,594 for Q3 and $17,322 year to date, primarily reflecting higher rates and acquisition-related borrowings; this limited the flow-through of operating improvement to net earnings.
Segments and material period changes
- Human Nutrition & Health: Sales increased 1.3% in Q3 to $144,455 and 4.0% year to date to $412,777. Q3 growth reflected minerals and nutrients, Bergstrom, and currency; food and beverage sales were weaker. Nine-month growth was supported by acquisitions and pricing, partly offset by lower volume and weaker markets.
- Animal Nutrition & Health: Sales decreased 17.8% in Q3 to $53,944 and 8.8% year to date to $180,162, primarily reflecting lower volumes in animal species markets.
- Specialty Products: Sales increased 1.2% in Q3 to $30,004, but decreased 4.7% year to date to $94,961. Lower year-to-date volumes in plant nutrition and performance gases were partly offset by higher prices.
- Q3 gross margin benefited from a $22,433 year-over-year decrease in cost of sales, mainly from lower manufacturing input costs. Year-to-date cost of sales decreased $31,338.
- Operating expenses rose 6.3% year to date, reflecting $7,764 of restructuring-related impairment and asset-disposal charges, acquisition expenses, and higher compensation, partly offset by lower transaction and integration costs.
Liquidity, debt and cash flows
- At September 30, 2023, cash was $76,952, current assets $341,222, current liabilities $108,038, and working capital $233,184. Cash included $65,475 held by foreign subsidiaries that the company intends to reinvest abroad.
- Revolving debt was $380,569, down from $440,569 at year-end 2022. The $550,000 revolving facility matures July 27, 2027; $169,431 was unused. The stated interest rate was 6.545%. The company reported compliance with its debt covenants.
- Operating cash flow was $116,355 for the first nine months, compared with $96,881 a year earlier; management attributed the increase primarily to working-capital changes. Investing used $22,948, including $26,317 for capital expenditures and intangible assets. Financing used $83,175, including $60,000 of net debt repayments and $22,872 of dividends.
- Management expects operating cash flow to fund working capital and necessary investment and is pursuing potential acquisitions. The filing gives no quantitative earnings or revenue guidance.
Unusual items, risks and contingencies
- Results included favorable adjustments to acquisition-related transaction costs of $3,500 in Q3 and $9,900 year to date. The cash-flow statement also reflects a $9,900 reduction related to the fair value of contingent consideration. These items are unusual and should be distinguished from ongoing operating performance.
- Restructuring-related impairment and asset-disposal charges were $1,618 in Q3 and $7,764 year to date. Management does not provide a quantified full-year restructuring outlook.
- Balchem and Syntex are conducting environmental investigation and feasibility work under an EPA agreement at the Verona, Missouri site regarding potential 1,4-dioxane and chlorobenzene contamination. The filing does not provide a clear estimate of any eventual remediation cost. A separate EPA compliance matter was assessed as probable and reasonably estimable, with a recorded contingency described as immaterial; the company reported completing the applicable requirements by June 30, 2023.
- Floating-rate debt creates interest-rate exposure: a 100-basis-point change was estimated to affect annual interest expense and cash flow by approximately $3,806. Other disclosed risks include raw-material costs, foreign exchange, supply and manufacturing disruptions, competition, cybersecurity, acquisitions, and litigation. The company reported no material changes to the risk factors in its 2022 annual report.
- Acquisitions of Kappa and Bergstrom contributed $16,568 of Q3 sales and $44,313 of nine-month sales. Acquisition-related debt and amortization remain relevant to assessing earnings and leverage.
Key investor verification points
- Assess whether improved margins can persist if input costs, selling prices, or product volumes change, particularly in Animal Nutrition & Health.
- Separate recurring operating results from favorable acquisition-cost and contingent-consideration adjustments and restructuring charges.
- Track floating-rate borrowing costs, debt repayment capacity, and the company’s covenant headroom.
- Review the eventual findings, potential remedy, and financial exposure from the Verona environmental investigation.
- Evaluate acquisition contributions and integration performance alongside amortization, earn-out obligations, and foreign-held cash availability.