Balchem Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Balchem develops and sells specialty ingredients and products across Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), and Specialty Products.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $197.9 million | $175.1 million | $585.9 million | $522.9 million |
| Gross margin | $60.9 million; 30.8% | $56.4 million; 32.2% | $179.1 million; 30.6% | $167.1 million; 32.0% |
| Operating earnings | $32.5 million; 16.4% margin | $29.0 million; 16.6% margin | $93.7 million; 16.0% margin | $82.2 million; 15.7% margin |
| Net earnings | $25.0 million | $21.6 million | $71.2 million | $62.5 million |
| Diluted EPS | $0.77 | $0.66 | $2.18 | $1.92 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $116.0 million | $102.5 million |
For Q3, sales grew 13.0% and net earnings grew 16.0%. For the nine months, sales and net earnings rose 12.0% and 13.9%, respectively. Gross margin rates fell in both comparisons, while nine-month operating margin improved modestly.
Segment trends
- Q3 sales increased in HNH 7.3%, ANH 21.2%, and Specialty Products 20.0%. Growth reflected stronger minerals and nutrients, animal-market sales, plant nutrition, and medical-device sterilization demand.
- For the nine months, segment sales rose across the three businesses. HNH operating earnings increased 29.6% and Specialty Products rose 9.5%; ANH operating earnings declined 25.3% to $16.1 million, despite higher sales.
Financial position and liquidity
- At September 30, 2021, cash was $90.0 million, current assets $300.3 million, and current liabilities $104.9 million; reported working capital was $195.3 million.
- Revolving debt was $108.6 million, down from $163.6 million at year-end 2020. The $500 million facility had $391.4 million available; the interest rate was 1.086%, and the company reported compliance with its covenants.
- Nine-month investing cash outflow was $21.1 million, including $22.4 million of capital expenditures and intangible-asset purchases. Financing cash outflow was $86.2 million, including $55.0 million of net debt repayments, $18.7 million of dividends, and $18.8 million of treasury-stock purchases.
- Cash increased $5.4 million during the nine months. $58.9 million was held by foreign subsidiaries and management said it intended to keep those funds invested abroad; repatriation could incur additional withholding taxes.
Management commentary, outlook, and risks
- Management cited severe input-cost inflation, raw-material shortages, logistics disruptions, and labor availability issues, which intensified during 2021 and were expected to continue for some time. Higher manufacturing and distribution costs compressed gross margins; higher selling prices partly offset the pressure.
- Management expects operating cash flow to fund working capital and necessary capital investments, and said it is pursuing acquisition candidates. The filing provides no specific earnings or revenue guidance.
- Verona, Missouri flood-recovery costs affected nine-month margins and ANH earnings; an insurance recovery affected operating expenses. The prior-year period included a $1.9 million impairment charge related to a business formerly in Industrial Products.
- At the Verona facility, the EPA issued a 2020 General Notice Letter concerning potential liability for 1,4-dioxane contamination. The company said it believes contamination relates to the former owner’s operations and is studying site conditions. The company stated that other litigation and claims were not expected to materially affect financial position, results, or liquidity.
- Foreign-exchange movements reduced nine-month comprehensive income through a $8.0 million translation loss. The company uses interest-rate and cross-currency swaps for risk management and assessed the hedges as effective.
- Management reported no material changes to the risk factors in its 2020 Form 10-K; disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether pricing, mix, and operating efficiencies can offset persistent input, freight, and labor cost pressures—and how these pressures affect gross margins, especially in ANH.
- Progress, costs, and any insurance recoveries related to the Verona flood, and developments in the EPA’s 1,4-dioxane inquiry and associated indemnification.
- Use of foreign-held cash, acquisition plans, capital spending, dividends, and repurchases relative to cash generation and remaining borrowing capacity.
- Debt exposure to floating rates and the continued effectiveness and terms of the company’s hedging arrangements.