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, 2025 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. 23 Table of Contents As of March 31, 2026, we employed approximately 1,368 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 Geopolitical Conflicts We are monitoring the heightened geopolitical tensions in the Middle East, including conflicts involving Iran, which may have certain effects on our business and broader consequences, including increased energy prices, certain raw material costs, increased freight costs, and volatility in shipping patterns. All above impacts may adversely affect the global economy and may have the effect of heightening the operational risks disclosed in the "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2025. Supreme Court Tariff Ruling In February 2026, the U.S. Supreme Court issued a ruling striking down certain tariffs previously imposed under the International Emergency Economic Powers Act (“IEEPA”). While the online portal and process to submit IEEPA tariff refund requests became available on April 20, 2026, the availability, timing, and amount of any potential refunds related to these tariffs remain highly uncertain and are subject to ongoing legal, regulatory, and administrative developments. Following the ruling, the U.S. presidential administration imposed additional tariffs under other statutory authorities, resulting in a rapidly evolving tariff environment. At this time, we cannot reasonably estimate the total financial impact of these developments; however, we do not expect them to have a material effect on our future results of operations or cash flows. We will continue to monitor and evaluate new information as it becomes available. 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 months ended March 31, 2026 and 2025: Business Segment Net Sales Three Months Ended March 31, (in thousands) 2026 2025 Human Nutrition & Health $ 171,628 $ 158,457 Animal Nutrition & Health 62,189 57,277 Specialty Products 34,727 33,275 Other and Unallocated (1) 2,165 1,510 Total $ 270,709 $ 250,519 Business Segment Earnings From Operations Three Months Ended March 31, (in thousands) 2026 2025 Human Nutrition & Health $ 40,020 $ 37,974 Animal Nutrition & Health 5,692 5,236 Specialty Products 11,935 9,585 Other and Unallocated (1) (2,021) (1,780) Total $ 55,626 $ 51,015 (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 $895 and $489 for the three months ended March 31, 2026 and 2025, respectively. 24 Table of Contents Results of Operations - Three Months Ended March 31, 2026 and 2025 Net Earnings Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Net sales $ 270,709 $ 250,519 $ 20,190 8.1 % Gross margin 101,084 88,168 12,916 14.6 % Operating expenses 45,458 37,153 8,305 22.4 % Earnings from operations 55,626 51,015 4,611 9.0 % Interest and other expenses 3,104 3,075 29 0.9 % Income tax expense 12,237 10,887 1,350 12.4 % Net earnings $ 40,285 $ 37,053 $ 3,232 8.7 % Net Sales Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Human Nutrition & Health $ 171,628 $ 158,457 $ 13,171 8.3 % Animal Nutrition & Health 62,189 57,277 4,912 8.6 % Specialty Products 34,727 33,275 1,452 4.4 % Other 2,165 1,510 655 43.4 % Total $ 270,709 $ 250,519 $ 20,190 8.1 % • The increase in net sales within the Human Nutrition & Health segment for the first quarter of 2026 as compared to the first quarter of 2025 was driven by higher sales within both the nutrients business and the food ingredients and solutions businesses. Total sales for this segment grew 8.3%, with volume and mix contributing 7.1%, the change in foreign currency exchange rates contributing 1.6%, and average selling prices contributing -0.5%. • The increase in net sales within the Animal Nutrition & Health segment for the first quarter of 2026 compared to the first quarter of 2025 was driven by higher sales in both the monogastric and ruminant species markets. Total sales for this segment increased by 8.6%, with average selling prices contributing 6.5%, the change in foreign currency exchange rates contributing 2.2%, and volume and mix contributing -0.2%. • The increase in net sales within the Specialty Products segment for the first quarter of 2026 compared to the first quarter of 2025 was due to higher sales in the performance gases business. Total sales for this segment increased by 4.4%, with average selling prices contributing 4.0%, the change in foreign currency exchange rates contributing 3.3%, and volume and mix contributing -2.9%. • 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 Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Gross margin $ 101,084 $ 88,168 $ 12,916 14.6 % % of net sales 37.3 % 35.2 % Gross margin dollars increased in the first quarter of 2026 compared to the first quarter of 2025 due to the sales growth and manufacturing efficiencies, partially offset by raw material inflation. 25 Table of Contents Operating Expenses Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Operating expenses $ 45,458 $ 37,153 $ 8,305 22.4 % % of net sales 16.8 % 14.8 % The increase in operating expenses in the first quarter of 2026 compared to the first quarter of 2025 was primarily due to higher compensation-related costs of $4,901 and higher professional services of $1,403. Earnings from Operations Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Human Nutrition & Health $ 40,020 $ 37,974 $ 2,046 5.4 % Animal Nutrition & Health 5,692 5,236 456 8.7 % Specialty Products 11,935 9,585 2,350 24.5 % Other and unallocated (2,021) (1,780) (241) (13.5) % Earnings from operations $ 55,626 $ 51,015 $ 4,611 9.0 % % of net sales (operating margin) 20.5 % 20.4 % • Human Nutrition & Health segment earnings from operations increased $2,046 primarily due to a gross margin contribution of $6,782. 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 $4,736, primarily due to higher compensation-related costs of $2,281, higher professional services of $561, and higher amortization of $412. • Animal Nutrition & Health segment earnings from operations increased $456. Gross margin contribution was $2,629, which was driven by the aforementioned higher sales, partially offset by certain higher manufacturing input costs. The increase in gross margin was partially offset by an increase in operating expenses of $2,173, primarily due to higher compensation-related costs of $1,582 and higher professional services of $324. • Specialty Products segment earnings from operations increased $2,350 primarily due to a gross margin contribution of $3,174. The increase in gross margin was mainly due to the aforementioned higher sales. The increase in gross margin was partially offset by an increase in operating expenses of $824, primarily due to higher compensation-related costs of $928. Other Expenses Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Interest expense, net $ 2,213 $ 2,924 $ (711) (24.3) % Other expense, net 891 151 740 490.1 % $ 3,104 $ 3,075 $ 29 0.9 % Interest expense for the three months ended March 31, 2026 and 2025 was primarily related to outstanding borrowings under the 2022 Credit Agreement. The decrease in net interest expense is primarily due to lower outstanding borrowings and lower interest rates. The increase in net other expense for the three months ended March 31, 2026 and 2025 was primarily related to foreign currency losses. 26 Table of Contents Income Tax Expense Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Income tax expense $ 12,237 $ 10,887 $ 1,350 12.4 % Effective tax rate 23.3 % 22.7 % The higher effective tax rate was primarily due to an increase in certain state taxes. Liquidity and Capital Resources During the three months ended March 31, 2026, 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, 2025. 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 decreased to $72,873 at March 31, 2026 from $74,570 at December 31, 2025. At March 31, 2026, the Company had $66,825 of cash and cash equivalents held by foreign subsidiaries. We intend to permanently reinvest a significant portion of these foreign-held funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; however, we may also repatriate a portion of cash held by certain foreign subsidiaries to support U.S. liquidity needs and capital allocation priorities. To the extent amounts are repatriated, we could be required to pay applicable withholding taxes on such repatriations. Subsequent to March 31, 2026, we repatriated $23,460 from our Belgium subsidiary to pay down U.S. debt. Working capital was $236,401 at March 31, 2026 as compared to $189,230 at December 31, 2025, an increase of $47,171. Significant cash payments during the three months ended March 31, 2026 included the payment of dividends declared in 2025 of $30,769, repurchases of common stock of $15,690, and capital expenditures and intangible assets acquired of $6,252. Three Months Ended March 31, Increase (Decrease) (in thousands) 2026 2025 % Change Cash flows provided by operating activities $ 40,061 $ 36,457 $ 3,604 9.9 % Cash flows used in investing activities (6,292) (5,912) (380) (6.4) % Cash flows used in financing activities (34,783) (31,969) (2,814) (8.8) % Operating Activities The increase in cash flows from operating activities was primarily driven by the increases in net earnings, partially offset by the impact from the changes in working capital. 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 $6,252 and $5,559 for the three months ended March 31, 2026 and 2025, respectively. Financing Activities During the three months ended March 31, 2026, we borrowed $52,000 to fund the 2025 dividend, bonus payments, and share repurchases. We made total loan payments of $47,000, resulting in $381,000 available under the 2022 Credit Agreement (see Note 7, Revolving Loan ) as of March 31, 2026. 27 Table of Contents On December 9, 2025, the Company's Board of Directors approved a new stock repurchase program (the "December 2025 program"), which replaced the previously approved June 1999 program. The December 2025 program authorizes the repurchases of up to and including 4,000,000 shares of the Company's ordinary shares. This new stock repurchase program has no expiration date, does not oblige the Company to acquire any particular amount of the Company's ordinary shares, and may be terminated at any time. Since the inception of the December 2025 program, a total of 159,539 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 share repurchase agreement in compliance with Rule 10b-18 or 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 repurchase (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. Such repurchases of shares from employees are funded with existing cash on hand. Repurchases of common stock were $15,690 and $5,325 for the three months ended March 31, 2026 and 2025, respectively. Proceeds from stock options exercised were $6,727 and $1,668 for the three months ended March 31, 2026 and 2025, respectively. Dividend payments were $30,769 and $28,263 for the three months ended March 31, 2026 and 2025, respectively. Other Matters Impacting Liquidity As of March 31, 2026 and December 31, 2025, w e have a liability of $6,838 and $6,731, 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 March 31, 2026 and December 31, 2025 were $1,112 and $1,122, 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 March 31, 2026 and December 31, 2025 was $887 and $869, 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 $13,271 as of March 31, 2026, of which $13,248 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 $12,806 as of December 31, 2025, of which $12,781 was included in "Other long-term obligations" and $25 was included in "Accrued compensation and other benefits" on our consolidated balance sheets. The related rabbi trust assets were $13,265 as of March 31, 2026, of which $13,242 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 $12,798 as of December 31, 2025, of which $12,773 was included in "Other non-current assets" and $25 was included in "Other current assets" on the Company's condensed consolidated balance sheets. Significant Accounting Policies There were no changes to our Significant Accounting Policies, as described in our December 31, 2025 Annual Report on Form 10 - K, during the three months ended March 31, 2026. Related Party Transactions We were engaged in related party transactions with St. Gabriel CC Company, LLC during the three months ended March 31, 2026. Refer to Note 17, Related Party Transactions . 28 Table of Contents