What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-29 compared with 2021-10-29 · 73 added, 122 removed, 95 unchanged (67% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except share and per share data)

Management's Discussion and Analysis of Financial Condition and Results of Operations (All amounts in thousands, except share and per share data)

This report contains forward-looking statements, within the meaning of Section 21E of the Exchange Act, which reflect our expectation or belief concerning future events that involve risks and uncertainties.

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Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated".

As of September 30, 2021, we had approximately 1,305 full time employees worldwide.

We believe that, over time, we have been successful in attracting skilled and experienced personnel in a competitive environment and management believes that our human capital resources have been adequate to perform all business functions.

Recent macro-economic challenges have created certain labor shortages which have impacted operations in select geographies.

Management believes these impacts are transitory and that, over time, our human capital resources will be adequate to perform needed business functions.

COVID-19 Pandemic Response

The COVID-19 response effort has been a primary focus for us since early last year.

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 we proudly support the Ten Principles of the United Nations Global Compact on human rights, labor, environment and anti-corruption.

In January 2022, Balchem was named one of America’s Most Responsible Companies by Newsweek magazine for the second consecutive year.

This list, compiled by Newsweek in partnership with Statista Inc., recognizes the most responsible companies in the U.S.

across a variety of industries, and is based on publicly available environmental, social and governance (ESG) data.

Our Sustainability Framework focuses on the most critical ESG topics relevant to our business and stakeholders.

We are very proud of our ESG accomplishments to date and are pleased with the recognition by Newsweek.

Balchem 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.

As of March 31, 2022, we employed approximately 1,327 full time employees worldwide.

Although we are facing challenging labor markets, we believe that we have been successful in attracting skilled and experienced personnel in a competitive environment and that our human capital resources are adequate to perform all business functions.

In addition, we continue to enhance technology in order to optimize productivity and performance.

COVID-19 Response

The COVID-19 response effort has been a primary focus for us since early 2020.

Our focus has been on employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate.

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We are experiencing severe input cost inflation, raw material shortages, logistics disruptions, and labor availability issues.

These indirect pandemic related challenges have accelerated as 2021 has progressed and are likely to continue for some time.

These indirect pandemic related challenges accelerated as 2021 progressed, continued into the first quarter of 2022, and are likely to continue for some time.

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, 2021 and 2020:

The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three months ended March 31, 2022 and 2021:

Business Segment Net Sales Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Human Nutrition & Health $ 122,445 $ 104,516

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Other and Unallocated (1)

2,862 2,194 7,237 5,874

Total $ 228,867 $ 185,656

Business Segment Earnings From Operations Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Human Nutrition & Health $ 20,303 $ 19,690

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(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.

Unalloca ted corporate expenses consist of:

(i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling $305 and $1,005 for the three and nine months ended September 30, 2021, respectively, and $161 and $2,179 for the three and nine months ended September 30, 2020, respectively, and (ii) Unallocated amortization expens e of $604 and $1,812 for the three and nine months ended September 30, 2021, respectively, and $399 and $1,205 for the three and nine months ended September 30, 2020, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.

Unallocated corporate expenses consist of:

(i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling $304 and $234 for the first quarter of 2022 and 2021, respectively, and (ii) Unallocated amortization expense of $738 and $604 for the first quarter of 2022 and 2021, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.

RESULTS OF OPERATIONS

(In thousands, except share and per share data)

Three months ended September 30, 2021 compared to three months ended September 30, 2020.

Three Months Ended September 30, Increase

(All amounts in thousands, except share and per share data)

Three months ended March 31, 2022 compared to three months ended March 31, 2021.

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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Earnings from operations 38,336 30,575 7,761 25.4 %

Other (income) expense, net 428 1,121 (693) (61.8) %

Other expenses 706 592 114 19.3 %

Income tax expense 8,700 6,572 2,128 32.4 %

Net earnings $ 28,930 $ 23,411 $ 5,519 23.6 %

Three Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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Total $ 228,867 $ 185,656 $ 43,211 23.3 %

• The increase in net sales within the HNH segment for the three months ended September 30, 2021 as compared to 2020 was driven by strong sales growth within the minerals and nutrients business.

• The increase in net sales within the ANH segment for the three months ended September 30, 2021 compared to 2020 was the result of higher sales in both monogastric and ruminant animal markets.

• The increase in Specialty Products segment sales for the three months ended September 30, 2021 compared to 2020 was due to higher sales of products in both the plant nutrition business and the medical device sterilization market.

• Sales relating to Other increased from the prior year due to higher demand.

Three Months Ended September 30, Increase

• The increase in net sales within the Human Nutrition & Health segment for the first quarter of 2022 as compared to the first quarter of 2021 was primarily attributed to sales growth within the food and beverage markets.

Total sales for this segment grew 17.2%, with average selling prices contributing 16.2%, volume and mix contributing 1.1%, and the change in foreign currency exchange rates contributing -0.2%.

• The increase in net sales within the Animal Nutrition & Health segment for the first quarter of 2022 compared to the first quarter of 2021 was primarily the result of higher sales in both monogastric and ruminant animal markets.

Total sales for this segment grew 35.6%, with average selling prices contributing 32.1%, volume and mix contributing 5.6%, and the change in foreign currency exchange rates contributing -2.2%.

• The increase in Specialty Products segment sales for the first quarter of 2022 compared to the first quarter of 2021 was primarily due to year over year sales growth in both the medical device sterilization market and plant nutrition business.

Total sales for this segment increased 19.0%, with average selling prices contributing 15.8%, volume and mix contributing 5.1%, and the change in foreign currency exchange rates contributing -1.8%.

• Sales relating to Other increased from the prior year primarily due to higher demand.

• 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.

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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% of net sales 31.2 % 31.6 %

Gross margin as a percentage of sales decreased for the three months ended September 30, 2021 compared to 2020 primarily due to a significant increase in certain manufacturing input costs and distribution costs, partially offset by higher average selling prices.

Gross margin dollars increased in the first quarter of 2022 compared to the first quarter of 2021 due to the aforementioned higher sales of $43,211, partially offset by an increase in cost of goods sold of $30,432.

The 24.0% increase in cost of goods sold was primarily driven by the significant inflation of manufacturing input costs, primarily related to raw materials.

Operating Expenses

Three Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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% of net sales 14.5 % 15.2 %

The increase in operating expenses was primarily due to higher selling expenses, driven by an increase in compensation-related costs, and an increase in research and development, partially offset by the timing of an insurance recovery.

The increase in operating expenses was primarily due to certain higher compensation-related costs of $2,658, an increase in consulting costs and outside services of $978, and higher advertising and marketing expenses of $484, partially offset by a decrease in amortization expenses of $415.

Earnings from Operations

Three Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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% of net sales (operating margin) 16.8 % 16.5 %

• Earnings from operations for the HNH segment increased primarily due to the aforementioned higher sales, favorable mix, and the timing of an insurance recovery, partially offset by higher manufacturing input costs and distribution costs.

• ANH segment earnings from operations increased due to the aforementioned higher sales, partially offset by increases in manufacturing input costs and distribution costs.

• The increase in earnings from operations for the Specialty Products segment was primarily due to the aforementioned higher sales, partially offset by increases in manufacturing input costs and distribution costs.

• The decrease in Other and unallocated was primarily driven by an increase in transaction and integration costs and an increase in costs related to a company-wide ERP implementation.

• Earnings from operations for the Human Nutrition & Health segment increased primarily due to the aforementioned higher sales, partially offset by a 210 basis point decrease in gross margin, mainly driven by a significant increase in certain manufacturing input costs, largely related to raw materials.

Additionally, total operating expenses for this segment increased by $2,657, primarily due to higher compensation-related costs of $1,301, an increase in consulting costs and outside services of $519, and higher research and development expenses of $256.

• Animal Nutrition & Health segment earnings from operations increased primarily due to the aforementioned higher sales and a 200 basis point increase in gross margin as a percentage of sales.

Total operating expense for this segment increased by $1,210, driven by higher compensation-related costs of $683.

• The increase in earnings from operations for Specialty Products segment was primarily due to the aforementioned higher sales, partially offset by a 370 basis point decrease in gross margin as a percentage of sales, driven by a significant increase in certain manufacturing input costs, primarily related to raw materials.

Additionally, total operating expenses for this segment increased by $831, driven by higher compensation-related costs of $619.

• The increase in Other and unallocated was primarily driven by the aforementioned higher sales.

Other Expenses (Income)

Three Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

Interest expense $ 545 $ 725 $ (180) (24.8) %

Other, net (128) 168 (296) (176.2) %

$ 428 $ 1,121 $ (693) (61.8) %

Interest expense for the three months ended September 30, 2021 and 2020 was primarily related to outstanding borrowings under the Credit Agreement.

Income Tax Expense

Three Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Income tax expense $ 7,072 $ 6,339 $ 733 11.6 %

Effective tax rate 22.0 % 22.7 %

The decrease in the effective tax rate was primarily due to higher tax benefits from stock-based compensation and the prior year being negatively impacted by clarifying regulations related to tax reform.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020.

Nine Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Net sales $ 585,890 $ 522,931 $ 62,959 12.0 %

Gross margin 179,108 167,079 12,029 7.2 %

Operating expenses 85,427 84,856 571 0.7 %

Earnings from operations 93,681 82,223 11,458 13.9 %

Other (income) expense, net 161 (133) 294 (221.1) %

Income tax expense 20,932 15,909 5,023 31.6 %

Net earnings $ 71,155 $ 62,461 $ 8,694 13.9 %

Nine Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Human Nutrition & Health $ 327,187 $ 296,525 $ 30,662 10.3 %

Animal Nutrition & Health 161,821 141,339 20,482 14.5 %

Specialty Products 89,645 79,193 10,452 13.2 %

Other 7,237 5,874 1,363 23.2 %

Total $ 585,890 $ 522,931 $ 62,959 12.0 %

• The increase in net sales within the HNH segment for the nine months ended September 30, 2021 as compared to 2020 was primarily driven by strong sales growth in both the food and beverage markets and minerals and nutrients business.

• The increase in net sales within the ANH segment for the nine months ended September 30, 2021 compared to 2020 was primarily the result of higher sales in both monogastric and ruminant animal markets and a favorable impact related to changes in foreign currency exchange rates.

• The increase in Specialty Products segment sales for the nine months ended September 30, 2021 compared to 2020 was primarily due to higher sales of products in both the medical device sterilization market and plant nutrition business.

• Sales relating to Other increased from the prior year due to higher demand.

Nine Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Gross margin $ 179,108 $ 167,079 $ 12,029 7.2 %

% of net sales 30.6 % 32.0 %

Gross margin as a percentage of sales decreased for the nine months ended September 30, 2021 compared to 2020 primarily due to a significant increase in certain manufacturing input costs and distribution costs and the costs associated with the recovery from the flash flood event that we experienced at our Verona, Missouri manufacturing site, partially offset by favorable mix, overall plant efficiencies, and increased average selling prices.

Operating Expenses

Nine Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Operating expenses $ 85,427 $ 84,856 $ 571 0.7 %

% of net sales 14.6 % 16.2 %

The increase in operating expenses was primarily due to certain higher compensation-related costs, partially offset by lower transaction and integration costs, the prior year being unfavorably impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment, and the timing of an insurance recovery.

Earnings from Operations

Nine Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Human Nutrition & Health $ 58,512 $ 45,131 $ 13,381 29.6 %

Animal Nutrition & Health 16,059 21,485 (5,426) (25.3) %

Specialty Products 23,373 21,342 2,031 9.5 %

Other and unallocated (4,263) (5,735) 1,472 (25.7) %

Earnings from operations $ 93,681 $ 82,223 $ 11,458 13.9 %

% of net sales (operating margin) 16.0 % 15.7 %

• Earnings from operations for the HNH segment increased primarily due to the aforementioned higher sales and overall manufacturing efficiencies, partially offset by higher manufacturing input costs and distribution costs, and the expenses associated with the recovery from the flash flood event that we experienced at our Verona, Missouri manufacturing site.

• ANH segment earnings from operations decreased primarily due to a significant increase in manufacturing input costs and distribution costs along with the expenses associated with the recovery from the flash flood event.

• The increase in earnings from operations for the Specialty Products segment was primarily due to the aforementioned higher sales, partially offset by higher manufacturing input costs and distribution costs.

• The increase in Other and unallocated was primarily driven by the prior year being negatively impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment and a decrease in transaction and integration costs, partially offset by an increase in costs related to a company-wide ERP implementation.

Other Expenses (Income)

Nine Months Ended September 30, Increase

(in thousands) 2021 2020 % Change

Interest expense $ 1,889 $ 3,609 $ (1,720) (47.7) %

Other, net (295) 244 (539) (220.9) %

$ 706 $ 592 $ 114 19.3 %

Interest expense for the nine months ended September 30, 2021 and 2020 was primarily related to outstanding borrowings under the Credit Agreement.

Interest expense for the three months ended March 31, 2022 and 2021 was primarily related to outstanding borrowings under the Credit Agreement.

Income Tax Expense

Nine Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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Effective tax rate 23.1 % 21.9 %

The increase in the effective tax rate was primarily due to a reduction in certain tax credits, lower tax benefits from stock-based compensation, and higher enacted state tax rates.

The effective tax rate increase was primarily due to a reduction in certain tax credits and increased international income subject to higher foreign tax rates.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

(In thousands, except share and per share data)

During the nine months ended September 30, 2021, 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, 2020.

(All amounts in thousands, except share and per share data)

During the three months ended March 31, 2022, 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, 2021.

We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments.

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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 and cash equivalents increased to $90,013 at September 30, 2021 from $84,571 at December 31, 2020.

At September 30, 2021, the Company had $58,916 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;

Cash and cash equivalents decreased to $64,466 at March 31, 2022 from $103,239 at December 31, 2021.

At March 31, 2022, the Company had $56,788 of cash and cash equivalents held by foreign subsidiaries.

It is our intention 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.

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operations, we could be required to pay additional withholding taxes to repatriate these funds.

Working capital was $195,349 at September 30, 2021 as compared to $172,460 at December 31, 2020, an increase of $22,889.

Working capital reflects the payment of the 2020 declared dividend in 2021 of $18,704, net payments on the revolving debt of $55,000, and capital expenditures and intangible assets acquired of $22,391.

Nine Months Ended September 30, Increase

Working capital was $196,275 at March 31, 2022 as compared to $178,430 at December 31, 2021, an increase of $17,845.

Working capital reflects the payment of the 2021 declared dividend in 2022 of $20,703, proceeds from the revolving debt of $20,000, and capital expenditures and intangible assets acquired of $10,256.

Three Months Ended March 31, Increase

(in thousands) 2022 2021 % Change

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Operating Activities

The increase in cash flows from operating activities was primarily due to improved changes in assets and liabilities and increased earnings.

The decrease in cash flows from operating activities was primarily driven by changes in working capital and the timing of increased sales, restocking of inventory, and payments to suppliers.

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 inta ngible assets were $22,391 and $20,552 f or the nine months ended September 30, 2021 and 2020, respectively.

Total investments in property, plant and equipment and intangible assets were $10,256 and $6,312 for the three months ended March 31, 2022 and 2021, respectively.

Financing Activities

We borrowed $5,000 against the revolving loan and made total debt payments of $60,000 during the nine months ended September 30, 2021, resulting in $391,431 available under the Credit Agreement as of September 30, 2021.

We borrowed $20,000 against the revolving loan during the first quarter of 2022, resulting in $371,431 available under the Credit Agreement as of March 31, 2022.

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 2,715,595 shares have been purchased, and we had 85,272 shares remaining in treasury at September 30, 2021.

The Company repurchases shares from employees in connection with settlement of transactions under the Company's equity incentive plans.

We also 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.

Proceeds from stock options exercis ed were $6,351 and $8,179 for the nine months ended September 30, 2021 and 2020, respectively.

Dividend payments were $18,704 and $16,704 for the nine mont hs ended September 30, 2021 and 2020, respectively.

Since the inception of the program in June 1999, a total of 3,063,929 shares have been purchased.

We repurchase shares from employees in connection with settlement of transactions under our equity incentive plans.

We also 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.

Proceeds from stock options exercised were $498 and $2,402 for the three months ended March 31, 2022 and 2021, respectively.

Dividend payments were $20,703 and $18,700 for the three months ended March 31, 2022 and 2021, respectively.

Other Matters Impacting Liquidity

We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 14 – Employee Benefit Plans.

The liabil ity recorded in other long-term liabilities on the consolidated balance sheets as of September 30, 2021 and December 31, 2020 was $1,456 and $1,374, respectively, an d the plans are not funded.

The liability recorded in other long-term liabilities on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 was $1,197 and $1,293, 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.

On June 1, 2018, we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compen sated employees.

On June 1, 2018, we established 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, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company.

The deferred compensation liability as of September 30, 2021 and December 31, 2020 was $6,077 and $3,581, respectively, and was included in other long-term obligations on our balance sheet.

The related rabbi trust assets were $6,076 a nd $3,581 as of September 30, 2021 and December 31, 2020, respectively, and were included in other non-current assets on the balance sheets.

The deferred compensation liability as of March 31, 2022 and December 31, 2021 was $8,206 and $6,270, respectively, and was included in other long-term obligations on our balance sheets.

The related rabbi trust assets were $8,208 and $6,267 as of March 31, 2022 and December 31, 2021, respectively, and were included in other non-current assets on our balance sheets.

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 these obligations on our balance sheets as of September 30, 2021 and December 31, 2020 were $934 and $950, respective ly, and were included in other long-term obligations.

Critical Accounting Policies

There were no changes to the Company's Critical Accounting Policies, as described in its December 31, 2020 Annual Report on Form 10-K, during the nine months ended September 30, 2021.

The amount recorded for these obligations on our balance sheets as of March 31, 2022 and December 31, 2021 were $676 and $684, respectively, and were included in other long-term obligations.

Critical Accounting Estimates

There were no changes to the Company's Critical Accounting Estimates, as described in its December 31, 2021 Annual Report on Form 10-K, during the three months ended March 31, 2022.

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, 2021.

Gabriel CC Company, LLC during the three months ended March 31, 2022.

Refer to Note 17, "Related Party Transactions".

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis