Balchem Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in thousands, except per-share data.
Business context
Balchem develops and sells specialty ingredients and products across Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), and Specialty Products. The company reported that manufacturing sites were operating near normal conditions during the COVID-19 pandemic and that pandemic-related demand effects had not been material to the company.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $185.7 million | $174.4 million | +6.4% |
| Gross margin | $58.7 million; 31.6% of sales | $55.3 million; 31.7% of sales | +6.1% in dollars |
| Earnings from operations | $30.6 million; 16.5% of sales | $26.3 million; 15.1% of sales | +16.4% |
| Net earnings | $23.4 million | $19.8 million | +18.4% |
| Diluted earnings per share | $0.72 | $0.61 | +18.0% |
| Operating cash flow | $40.6 million | $22.6 million | +80.0% |
| Capital expenditures and intangible assets acquired | $6.3 million | $5.4 million | +$0.9 million |
Gross margin percentage edged down as higher raw-material and distribution costs offset favorable product mix and manufacturing efficiencies. Operating expenses declined 3.1%, reflecting lower transaction and integration costs, travel, bad-debt expense, and amortization, partly offset by higher compensation costs. Interest expense fell to $0.7 million from $1.7 million.
Segments and material changes
| Segment | Sales, Q1 2021 | Sales change | Earnings from operations, Q1 2021 | Operating earnings change |
|---|---|---|---|---|
| HNH | $104.5 million | +9.4% | $19.7 million | +62.3% |
| ANH | $51.1 million | +5.2% | $5.1 million | -37.1% |
| Specialty Products | $28.0 million | Approximately flat | $7.2 million | -10.0% |
HNH sales benefited from chelated minerals, choline nutrients, and food and beverage markets; higher sales, mix, and manufacturing efficiencies supported earnings growth. ANH sales rose in monogastric and ruminant markets, but earnings declined due to raw-material and distribution costs and unfavorable mix. Specialty Products sales growth in medical-device sterilization and favorable currency effects was offset by lower plant-nutrition sales; segment earnings declined on higher input and distribution costs. Other and unallocated sales fell 13.4%, primarily reflecting lower shale-fracking activity.
The effective tax rate increased to 21.9% from 19.3%, primarily due to reduced tax credits and higher enacted tax rates in certain U.S. states. Foreign-currency translation contributed to a $5.6 million comprehensive loss despite higher net earnings.
Cash, debt, and liquidity
At March 31, 2021, cash and cash equivalents were $88.5 million, total current assets were $281.2 million, and working capital was $192.4 million. The company had $153.6 million outstanding on its revolving credit facility, down $10.0 million from year-end, with $346.4 million available under the $500 million facility. The facility matures June 27, 2023; its stated interest rate was 1.234%. The company reported compliance with its debt covenants. Cash less revolving borrowings was approximately $65.0 million.
Operating cash flow was $40.6 million, including favorable changes in assets and liabilities and increased earnings. Investing activities used $6.2 million. Financing activities used $27.9 million, including $18.7 million of dividends and net revolving-debt repayments of $10.0 million. Cash increased $4.0 million during the quarter. Of reported cash, $56.8 million was held by foreign subsidiaries and management intended to permanently reinvest it abroad; repatriation for U.S. needs could incur additional withholding taxes.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management expected operations to generate sufficient cash to meet working-capital needs and necessary capital investments, noted it was pursuing acquisition candidates, and stated that acquisitions or other cash requirements could be funded with additional borrowing or capital-market access if needed. Management said it had stress-tested the balance sheet under downturn scenarios and considered liquidity strong, citing cash, available credit, relatively low net debt, and expected free cash flow.
- Management continued to monitor COVID-19 and served markets; it reported near-normal manufacturing operations and no material demand impact to date, while emphasizing uncertainty.
- Raw-material and distribution-cost increases pressured gross margin and segment earnings. A 100-basis-point interest-rate change applied to quarter-end borrowings would change annual interest expense and cash flow by approximately $1.536 million; part of floating-rate exposure was hedged.
- A subsidiary received an EPA General Notice Letter concerning potential liability for 1,4-dioxane contamination at the Verona, Missouri site. The company believed the contamination related to former-owner operations and was investigating site conditions. Management said litigation and claims were not expected to materially affect financial position, results, or liquidity.
- The filing reported no material changes to the risk factors in the 2020 Form 10-K. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether rising raw-material and distribution costs persist and how pricing, product mix, and manufacturing efficiencies affect margins, particularly in ANH and Specialty Products.
- Whether HNH earnings growth is sustainable and whether the weaker segment operating results recover.
- Cash-flow conversion and working-capital movements, including the effect of inventory and receivables increases.
- Use of foreign-held cash, revolver capacity, debt covenant headroom, and the facility’s floating-rate exposure and 2023 maturity.
- Developments in the EPA 1,4-dioxane matter, including potential remediation responsibilities and any effect on the company’s indemnification protections.
- Acquisition plans, capital spending, dividends, and share repurchases relative to cash generation and liquidity.