BALCHEM CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (All amounts in thousands, except share and per share data) Forward-Looking Statements This report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our expectation or belief concerning future events that involve risks and uncertainties. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "forecast," "outlook," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," or the negative thereof or variations thereon or similar expressions generally intended to identify forward-looking statements. Actions and performance could differ materially from what is contemplated by the forward-looking statements contained in this report. Factors that might cause differences from the forward-looking statements include those referred to or identified in Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2024 and other factors that may be identified elsewhere in this report. Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that may affect our forward-looking statements include, among other things: (1) our ability to manage risks associated with our sales to customers and manufacturing operations outside the United States, including changes in tariffs, sanctions, trade restrictions and trade relations, political and economic instability and geopolitical tensions; (2) supply chain disruptions due to political unrest, terrorist acts, and national and international conflicts; (3) reliability and sufficiency of our manufacturing facilities; (4) our ability to recruit and retain a highly qualified and motivated workforce; (5) our ability to effectively manage labor relations; (6) the effects of global climate change or other unexpected events, including global health crises, that may disrupt our operations; (7) our ability to manage risks related to our information technology and operational technology systems and cybersecurity; (8) our reliance on third-party vendors for many of the critical elements of our global information and operational technology infrastructure and their failure to provide effective support for such infrastructure; (9) disruption and breaches of our information systems; (10) increased competition and our ability to anticipate evolving trends in the market; (11) global economic conditions, including inflation, recession, changes in tariffs and trade relations; (12) raw material shortages or price increases; (13) currency translation and currency transaction risks; (14) interest rate risks; (15) our ability to successfully consummate and manage acquisitions, joint ventures and divestitures; (16) our ability to effectively manage and implement restructuring initiatives or other organizational changes; (17) changes in our relationships with our vendors, changes in tax or trade policy, interruptions in our operations or supply chain, political or financial instability and geopolitical tensions; (18) adverse publicity or consumer concern regarding the safety or quality of food products containing our products; (19) the outcome of any litigation, governmental investigations or proceedings; (20) product liability claims and recalls; (21) our ability to protect our brand reputation and trademarks; (22) claims of infringement of intellectual property rights by third parties; (23) risks related to corporate social responsibility and reputational matters; (24) improper conduct by any of our employees, agents or business partners; (25) changes to, or changes in interpretations of, current laws and regulations, and loss of governmental permits and approvals; and (26) regulatory requirements for ethylene oxide users that have impacted, and may continue to impact, such users’ ability to use the ethylene oxide process to sterilize medical devices, among other things. Overview We develop, manufacture, distribute and market specialty performance ingredients and products for the nutritional, food, pharmaceutical, animal health, performance gases, plant nutrition and industrial markets. Our three reportable segments are strategic businesses that offer products and services to different markets: Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated". Balchem is committed to solving today's challenges to shape a healthier tomorrow by operating responsibly and providing innovative solutions for the health and nutritional needs of the world. Sustainability is at the heart of our company's vision to make the world a healthier place and plays an important role in our strategies and in long-term value creation for our stakeholders. Our framework focuses on the sustainability topics most relevant to our business and stakeholders, and has been fully integrated into our governance structure and everyday operations . We are very proud of our significant progress relating to the Company's corporate social responsibilities and will continue to foster these fundamental principles broadly along our entire value chain, develop new ideas and technologies that help us work smarter, and help build a world that is a better place to live. 27 Table of Contents As of September 30, 2025, we employed approximately 1,355 full time employees worldwide. We continue to see improvement in the labor markets and we feel that our team has been successful in attracting and retaining skilled and experienced employees in a competitive landscape. Additionally, we continue to enhance and leverage our existing technology capabilities to further optimize productivity and performance, and explore new solutions to drive efficiencies. Recent Developments Anti-Dumping Investigation in the European Union In late June 2025, the European Commission announced that it would impose provisional duties between 95.4% and 120.8% on imports into the European Union of choline chloride originating in the People’s Republic of China, effective July 1, 2025. Further, in late September 2025, the European Commission disclosed their final findings and proposed that the definitive duties should be set between 90.0% and 115.9%. The investigation was initiated by the European Commission in late October 2024 (following a complaint lodged by Balchem Italia Srl and another complainant) and final measures are expected to be imposed by the end of 2025. Segment Results We sell products for all three segments through our own sales force, independent distributors, and sales agents. The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three and nine months ended September 30, 2025 and 2024: Business Segment Net Sales Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2025 2024 2025 2024 Human Nutrition & Health $ 174,088 $ 152,283 $ 493,318 $ 452,955 Animal Nutrition & Health 56,376 52,906 169,681 156,384 Specialty Products 35,683 33,191 106,143 99,898 Other and Unallocated (1) 1,411 1,560 4,402 4,443 Total $ 267,558 $ 239,940 $ 773,544 $ 713,680 Business Segment Earnings From Operations Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2025 2024 2025 2024 Human Nutrition & Health $ 40,831 $ 35,578 $ 117,147 $ 102,202 Animal Nutrition & Health 3,713 3,529 12,463 8,282 Specialty Products 11,534 10,516 32,388 29,943 Other and Unallocated (1) (1,499) (1,631) (4,962) (4,962) Total $ 54,579 $ 47,992 $ 157,036 $ 135,465 (1) Other and Unallocated consists of a few minor businesses which individually do not meet the quantitative thresholds for separate presentation and corporate expenses that have not been allocated to a segment. Unallocated corporate expenses consist of transaction and integration costs of $333 and $1,227 for the three and nine months ended September 30, 2025, respectively, and $223 and $795 for the three and nine months ended September 30, 2024, respectively. 28 Table of Contents Results of Operations - Three Months Ended September 30, 2025 and 2024 Net Earnings Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Net sales $ 267,558 $ 239,940 $ 27,618 11.5 % Gross margin 95,453 85,361 10,092 11.8 % Operating expenses 40,874 37,369 3,505 9.4 % Earnings from operations 54,579 47,992 6,587 13.7 % Interest and other expenses 2,535 4,099 (1,564) (38.2) % Income tax expense 11,755 10,056 1,699 16.9 % Net earnings $ 40,289 $ 33,837 $ 6,452 19.1 % Net Sales Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Human Nutrition & Health $ 174,088 $ 152,283 $ 21,805 14.3 % Animal Nutrition & Health 56,376 52,906 3,470 6.6 % Specialty Products 35,683 33,191 2,492 7.5 % Other 1,411 1,560 (149) (9.6) % Total $ 267,558 $ 239,940 $ 27,618 11.5 % • The increase in net sales within the Human Nutrition & Health segment for the third quarter of 2025 as compared to the third quarter of 2024 was driven by higher sales within both the nutrients business and the food ingredients and solutions businesses. Total sales for this segment grew 14.3%, with volume and mix contributing 7.4%, average selling prices contributing 6.2%, and the change in foreign currency exchange rates contributing 0.7%. • The increase in net sales within the Animal Nutrition & Health segment for the third quarter of 2025 compared to the third quarter of 2024 was driven by higher sales in both the ruminant and monogastric species markets. Total sales for this segment increased by 6.6%, with average selling prices contributing 7.1%, the change in foreign currency exchange rates contributing 1.4%, and volume and mix contributing -2.0%. • The increase in net sales within the Specialty Products segment for the third quarter of 2025 compared to the third quarter of 2024 was due to higher sales in both the performance gases and plant nutrition businesses. Total sales for this segment increased by 7.5%, with average selling prices contributing 4.4%, the change in foreign currency exchange rates contributing 1.8%, and volume and mix contributing 1.2%. • Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market. Gross Margin Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Gross margin $ 95,453 $ 85,361 $ 10,092 11.8 % % of net sales 35.7 % 35.6 % Gross margin dollars increased in the third quarter of 2025 compared to the third quarter of 2024 due to higher sales and a favorable mix, partially offset by certain higher manufacturing input costs. 29 Table of Contents Operating Expenses Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Operating expenses $ 40,874 $ 37,369 $ 3,505 9.4 % % of net sales 15.3 % 15.6 % The increase in operating expenses in the third quarter of 2025 compared to the third quarter of 2024 was primarily due to higher professional services of $1,517 and higher compensation-related costs of $1,452. Earnings from Operations Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Human Nutrition & Health $ 40,831 $ 35,578 $ 5,253 14.8 % Animal Nutrition & Health 3,713 3,529 184 5.2 % Specialty Products 11,534 10,516 1,018 9.7 % Other and unallocated (1,499) (1,631) 132 8.1 % Earnings from operations $ 54,579 $ 47,992 $ 6,587 13.7 % % of net sales (operating margin) 20.4 % 20.0 % • Human Nutrition & Health segment earnings from operations increased $5,253 primarily due to a gross margin contribution of $7,671. The increase in gross margin was primarily due to the aforementioned higher sales and a favorable mix, partially offset by certain higher manufacturing input costs. The increase in gross margin was partially offset by an increase in operating expenses of $2,418, primarily due to higher professional services of $736, higher compensation-related costs of $711, and higher amortization of $490. • Animal Nutrition & Health segment earnings from operations increased $184. Gross margin contribution was $1,094, which was driven by the aforementioned higher sales and a favorable mix, partially offset by certain higher manufacturing input costs. The increase in gross margin was partially offset by an increase in operating expenses of $910, primarily due to higher compensation-related costs of $818. • Specialty Products segment earnings from operations increased $1,018 primarily due to a gross margin contribution of $1,095. The increase in gross margin was mainly due to the aforementioned higher sales. Other Expenses (Income) Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Interest expense, net $ 2,629 $ 4,071 $ (1,442) (35.4) % Other (income) expense, net (94) 28 (122) (435.7) % $ 2,535 $ 4,099 $ (1,564) (38.2) % Interest expense for the three months ended September 30, 2025 and 2024 was primarily related to outstanding borrowings under the 2022 Credit Agreement. The decrease in net interest expense is primarily due to lower outstanding borrowings. Income Tax Expense Three Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Income tax expense $ 11,755 $ 10,056 $ 1,699 16.9 % Effective tax rate 22.6 % 22.9 % The lower effective tax rate was primarily due to certain lower state taxes. 30 Table of Contents Results of Operations - Nine Months Ended September 30, 2025 and 2024 Net Earnings Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Net sales $ 773,544 $ 713,680 $ 59,864 8.4 % Gross margin 276,734 249,869 26,865 10.8 % Operating expenses 119,698 114,404 5,294 4.6 % Earnings from operations 157,036 135,465 21,571 15.9 % Interest and other expenses 8,041 13,496 (5,455) (40.4) % Income tax expense 33,375 27,077 6,298 23.3 % Net earnings $ 115,620 $ 94,892 $ 20,728 21.8 % Net Sales Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Human Nutrition & Health $ 493,318 $ 452,955 $ 40,363 8.9 % Animal Nutrition & Health 169,681 156,384 13,297 8.5 % Specialty Products 106,143 99,898 6,245 6.3 % Other 4,402 4,443 (41) (0.9) % Total $ 773,544 $ 713,680 $ 59,864 8.4 % • The increase in net sales within the Human Nutrition & Health segment for the nine months ended September 30, 2025 as compared to 2024 was driven by higher sales within both the nutrients business and the food ingredients and solutions businesses. Total sales for this segment grew 8.9%, with volume and mix contributing 5.4%, average selling prices contributing 3.2%, and the change in foreign currency exchange rates contributing 0.3%. • The increase in net sales within the Animal Nutrition & Health segment for the nine months ended September 30, 2025 as compared to 2024 was driven by higher sales in both the ruminant and monogastric species markets. Total sales for this segment increased by 8.5%, with average selling prices contributing 4.5%, volume and mix contributing 3.3%, and the change in foreign currency exchange rates contributing 0.7%. • The increase in net sales within the Specialty Products segment for the nine months ended September 30, 2025 as compared to 2024 was due to higher sales in both the performance gases and plant nutrition businesses. Total sales for this segment increased by 6.3%, with average selling prices contributing 3.5%, volume and mix contributing 1.8%, and the change in foreign currency exchange rates contributing 0.9%. • Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market. Gross Margin Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Gross margin $ 276,734 $ 249,869 $ 26,865 10.8 % % of net sales 35.8 % 35.0 % Gross margin dollars increased in the nine months ended September 30, 2025 as compared to 2024 due to higher sales and a favorable mix, partially offset by certain higher manufacturing input costs. 31 Table of Contents Operating Expenses Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Operating expenses $ 119,698 $ 114,404 $ 5,294 4.6 % % of net sales 15.5 % 16.0 % The increase in operating expenses in the nine months ended September 30, 2025 as compared to 2024 was primarily due to an increase in compensation-related costs of $5,040 and higher professional services of $3,963, partially offset by lower amortization expense of $2,813. Earnings from Operations Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Human Nutrition & Health $ 117,147 $ 102,202 $ 14,945 14.6 % Animal Nutrition & Health 12,463 8,282 4,181 50.5 % Specialty Products 32,388 29,943 2,445 8.2 % Other and unallocated (4,962) (4,962) — — % Earnings from operations $ 157,036 $ 135,465 $ 21,571 15.9 % % of net sales (operating margin) 20.3 % 19.0 % • Human Nutrition & Health segment earnings from operations increased $14,945 primarily due to a gross margin contribution of $17,976. The increase in gross margin was primarily due to the aforementioned higher sales and a favorable mix, partially offset by certain higher manufacturing input costs. The increase in gross margin was partially offset by an increase in operating expenses of $3,031, primarily due to higher compensation-related costs of $4,154 and higher professional services of $2,554, partially offset by lower amortization of $2,733. • Animal Nutrition & Health segment earnings from operations increased $4,181 primarily due to a gross margin contribution of $5,527, which was driven by the aforementioned higher sales and a favorable mix, partially offset by certain higher manufacturing input costs. The increase in gross margin was partially offset by an increase in operating expenses of $1,346, primarily due to higher compensation-related costs of $973 and higher professional services of $581. • Specialty Products segment earnings from operations increased $2,445 primarily due to a gross margin contribution of $2,882, which was driven by the aforementioned higher sales. This was partially offset by an increase in operating expenses of $437, mainly due to higher professional services. Other Expenses (Income) Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Interest expense, net $ 8,319 $ 13,709 $ (5,390) (39.3) % Other (income) expense, net (278) (213) (65) (30.5) % $ 8,041 $ 13,496 $ (5,455) (40.4) % Interest expense for the nine months ended September 30, 2025 and 2024 was primarily related to outstanding borrowings under the 2022 Credit Agreement. The decrease in net interest expense is due to lower outstanding borrowings. 32 Table of Contents Income Tax Expense Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Income tax expense $ 33,375 $ 27,077 $ 6,298 23.3 % Effective tax rate 22.4 % 22.2 % The higher effective tax rate was primarily due to lower tax benefits from stock-based compensation partially offset by certain lower state taxes. Liquidity and Capital Resources During the nine months ended September 30, 2025, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2024. We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments. We are actively pursuing additional acquisition candidates. We could seek additional bank loans or access to financial markets to fund such acquisitions, our operations, working capital, necessary capital investments or other cash requirements should we deem it necessary to do so. Cash Cash and cash equivalents increased to $65,093 at September 30, 2025 from $49,515 at December 31, 2024. At September 30, 2025, the Company had $58,176 of cash and cash equivalents held by foreign subsidiaries. We presently intend to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fund U.S. operations or obligations. However, if these funds are needed for U.S. operations, we could be required to pay additional withholding taxes to repatriate these funds. Working capital was $217,346 at September 30, 2025 as compared to $156,085 at December 31, 2024, an increase of $61,261. Significant cash payments during the nine months ended September 30, 2025 included repurchases of common stock of $54,008, net repayments on the revolving loan of $36,000, income taxes paid of $29,625, the payment of the 2024 declared dividend in 2025 of $28,276, and capital expenditures and intangible assets acquired of $27,275. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2025 2024 % Change Cash flows provided by operating activities $ 149,281 $ 129,682 $ 19,599 15.1 % Cash flows used in investing activities (27,475) (22,777) (4,698) (20.6) % Cash flows used in financing activities (111,562) (98,602) (12,960) (13.1) % Operating Activities The increase in cash flows from operating activities was primarily driven by increases in net earnings and stock compensation and the impact from changes in working capital, partially offset by lower depreciation and amortization. Investing Activities We continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and intangible assets were $27,275 and $22,936 for the nine months ended September 30, 2025 and 2024, respectively. Financing Activities During 2025, we borrowed $70,000 to fund the 2024 dividend, bonus payments and share repurchases. We made total loan payments of $106,000, resulting in $396,000 available under the 2022 Credit Agreement (see Note 7, Revolving Loan ) as of September 30, 2025. 33 Table of Contents We have an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 3,475,622 shares have been repurchased. We intend to acquire shares from time to time at prevailing market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market conditions and other factors. Open market repurchases of common stock could be made pursuant to a trading plan established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. We also purchase (withhold) shares from employees in connection with the tax settlement of vested shares and/or exercised stock options, as applicable, under the Company's omnibus incentive plan. Share repurchases are funded with existing cash on hand or borrowings against the 2022 Credit Agreement. Repurchases of common stock were $54,008 and $5,376 for the nine months ended September 30, 2025 and 2024, respectively. Proceeds from stock options exercised were $6,867 and $15,084 for the nine months ended September 30, 2025 and 2024, respectively. Dividend payments were $28,276 and $25,572 for the nine months ended September 30, 2025 and 2024, respectively. Other Matters Impacting Liquidity As of September 30, 2025 and December 31, 2024, w e have a liability of $7,349 and $6,720, respectively, for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, for which we are unable to reasonably estimate the timing of settlement, if any. We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 14, Employee Benefit Plans . The liabilities recorded in "Other long-term obligations" on the condensed consolidated balance sheets as of September 30, 2025 and December 31, 2024 were $1,531 and $1,522, respectively, and the plans are not funded. Historical cash payments made under these plans have typically been less than $200 per year. We do not anticipate any changes to the payments made in the current year for the plans. Chemogas has an unfunded defined benefit plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amounts recorded for this obligation on our balance sheets as of September 30, 2025 and December 31, 2024 was $800 and $613, respectively, and was included in "Other long-term obligations" on the condensed consolidated balance sheets. We provide an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust and are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability was $12,574 as of September 30, 2025, of which $12,551 was included in "Other long-term obligations" and $23 was included in "Accrued compensation and other benefits" on our consolidated balance sheets. The deferred compensation liability was $11,470 as of December 31, 2024, of which $11,449 was included in "Other long-term obligations" and $21 was included in "Accrued compensation and other benefits" on our consolidated balance sheets. The related rabbi trust assets were $12,566 as of September 30, 2025, of which $12,543 was included in "Other non-current assets" and $23 was included in "Other current assets" on the condensed consolidated balance sheets. The rabbi trust assets were $11,465 as of December 31, 2024 and were included in "Other non-current assets" on the condensed consolidated balance sheets. Significant Accounting Policies There were no changes to our Significant Accounting Policies, as described in our December 31, 2024 Annual Report on Form 10 - K, during the nine months ended September 30, 2025. Related Party Transactions We were engaged in related party transactions with St. Gabriel CC Company, LLC during the three and nine months ended September 30, 2025. Refer to Note 17, Related Party Transactions . 34 Table of Contents