Balchem Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; compared with the corresponding 2014 periods. Dollar amounts below are in millions unless stated otherwise. Balchem develops and sells specialty ingredients and products for food, nutrition, pharmaceutical, animal health, industrial, and medical-device sterilization markets.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $140.1 | $160.5 | $419.8 | $378.7 |
| Gross margin | $43.2 | $44.5 | $128.2 | $100.0 |
| Gross margin % | 30.8% | 27.7% | 30.5% | 26.4% |
| Operating earnings | $22.9 | $25.3 | $71.7 | $55.1 |
| Operating margin | 16.4% | 15.8% | 17.1% | 14.6% |
| Net earnings | $14.0 | $15.2 | $44.1 | $33.8 |
| Diluted EPS | $0.44 | $0.49 | $1.40 | $1.09 |
| Operating cash flow | — | — | $78.9 | $49.2 |
Q3 sales declined 12.7% and net earnings declined 7.9%; higher gross and operating margins partly offset lower sales and a one-time equity-compensation charge. Nine-month sales rose 10.8% and net earnings rose 30.4%, with SensoryEffects acquisition contribution and improved margins important factors. Interest expense was $1.6 million in Q3 and $5.1 million for nine months; nine-month income tax expense was $22.4 million, with a 33.7% effective rate.
Financial position and cash flows
- At September 30, cash was $81.6 million, working capital $127.1 million, total debt $306.3 million, and stockholders’ equity $457.3 million. Cash increased from $50.3 million at December 31, 2014.
- Nine-month operating cash flow of $78.9 million funded $28.1 million of capital expenditures. Financing activities used $18.0 million, including $26.3 million of term-loan repayments and $9.3 million of dividends. Cash increased by $31.3 million overall.
- The company had $100 million undrawn under its revolving facility. Debt matures May 7, 2019, bears a floating rate that was 1.70% at quarter-end, and is secured by company assets. Balchem reported compliance with its financial covenants.
- Management said operating cash flow is expected to fund working capital, capital investment, and debt service; the company continues to pursue acquisition candidates. It may seek additional borrowing or capital-market financing as needed.
Material changes and management commentary
- Q3 sales fell mainly because Industrial Products revenue declined 54.2%, reflecting lower demand for choline derivatives used in shale-fracking applications. Animal Nutrition & Health sales fell 12.8%, amid weaker dairy economics, competition, and currency effects. SensoryEffects and Specialty Products sales grew modestly.
- For the first nine months, SensoryEffects sales increased 56.2%, substantially reflecting the May 2014 acquisition and the fact that 2014 included the acquired business for only part of the period. Industrial Products sales fell 38.7%, while Animal Nutrition & Health declined 4.3% and Specialty Products grew 2.8%.
- Margin improvement reflected favorable product mix and lower raw-material costs; nine-month 2014 results also included a $4.7 million acquired-inventory fair-value charge. Higher amortization, supply-chain costs, and a $1.5 million Q3 equity-compensation charge were offsets.
- The company adopted revised reportable segments—SensoryEffects, Animal Nutrition & Health, Specialty Products, and Industrial Products—and retrospectively revised segment comparisons without changing consolidated net income or cash flows.
Risks, contingencies, and unusual items
- Management identified exposure to foreign exchange and raw-material prices and noted that a 100-basis-point change in interest rates would change annual interest expense and cash flow by approximately $3.1 million at quarter-end borrowings. The company reported no derivative or hedging instruments.
- Management reported no material changes to the risk factors in the 2014 Form 10-K. It believes outstanding litigation and claims will not materially affect financial position, results, or liquidity.
- Environmental matters include continued discussions with New York regulators regarding monitoring or possible further action at a former drum-disposal site, and a former-owner-led Superfund remediation matter in Missouri. The company stated it believes the Missouri remediation is complete and has indemnification protections; ultimate regulatory closeout remains relevant.
- Cash held by foreign subsidiaries was $15.1 million and management intends to reinvest it abroad; repatriation could result in additional U.S. taxes. The company disclosed no specific earnings guidance.
Important facts for investors to verify
- Whether the sharp Industrial Products decline continues and how closely results track shale-fracking activity.
- Underlying SensoryEffects growth and profitability apart from acquisition-related comparisons, amortization, and other unusual charges.
- Progress and expected returns on the $28.1 million of year-to-date capital spending, including capacity expansion and agglomeration equipment.
- Debt repayment, covenant headroom, and sensitivity to floating interest rates, foreign exchange, and raw-material costs.
- Potential scope and cost of environmental monitoring or remediation, and the status of related indemnifications.