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, 2023 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. 24 Table of Contents Factors that may affect our forward-looking statements include, among other things: (1) adverse impacts to our business operations due to pandemics, epidemics or other public health emergencies; (2) our ability to manage risks associated with our sales to customers and manufacturing operations outside the United States; (3) supply chain disruptions due to political unrest, terrorist acts, and national and international conflicts; (4) reliability and sufficiency of our manufacturing facilities; (5) our ability to recruit and retain a highly qualified and diverse workforce; (6) our ability to effectively manage labor relations; (7) the effects of global climate change or other unexpected events, including global health crises, that may disrupt our operations; (8) our ability to manage risks related to our information technology and operational technology systems and cybersecurity; (9) 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; (10) disruption and breaches of our information systems; (11) increased competition and our ability to anticipate evolving trends in the market; (12) global economic conditions, including inflation, recession, changes in tariffs and trade relations; (13) raw material shortages or price increases; (14) currency translation and currency transaction risks; (15) interest rate risks; (16) our ability to successfully consummate and manage acquisitions, joint ventures and divestitures; (17) our ability to effectively manage and implement restructuring initiatives or other organizational changes; (18) changes in our relationships with our vendors, changes in tax or trade policy, interruptions in our operations or supply chain; (19) adverse publicity or consumer concern regarding the safety or quality of food products containing our products; (20) the outcome of any litigation, governmental investigations or proceedings; (21) product liability claims and recalls; (22) our ability to protect our brand reputation and trademarks; (23) claims of infringement of intellectual property rights by third parties; (24) risks related to corporate social responsibility and reputational matters; (25) improper conduct by any of our employees, agents or business partners; (26) changes to, or changes in interpretations of, current laws and regulations, and loss of governmental permits and approvals; and (27) ability of our customers to use the ethylene oxide process to sterilize medical devices. 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 we proudly support the Ten Principles of the United Nations Global Compact on human rights, labor, environment and anti-corruption. Our Sustainability Framework focuses on the most critical Environmental, Social, and Governance topics relevant to our business and stakeholders. 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. As of September 30, 2024, we employed approximately 1,300 ful l time employees worldwide. We are seeing some modest improvement in most relevant labor markets and 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 to further optimize productivity and performance. 25 Table of Contents 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, 2024 and 2023: Business Segment Net Sales Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Human Nutrition & Health $ 152,283 $ 144,455 $ 452,955 $ 412,777 Animal Nutrition & Health 52,906 53,944 156,384 180,162 Specialty Products 33,191 30,004 99,898 94,961 Other and Unallocated (1) 1,560 1,545 4,443 5,840 Total $ 239,940 $ 229,948 $ 713,680 $ 693,740 Business Segment Earnings From Operations Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Human Nutrition & Health $ 35,578 $ 31,275 $ 102,202 $ 77,209 Animal Nutrition & Health 3,529 5,070 8,282 22,230 Specialty Products 10,516 8,740 29,943 25,984 Other and Unallocated (1) (1,631) (1,471) (4,962) (4,565) Total $ 47,992 $ 43,614 $ 135,465 $ 120,858 (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: (i) Transaction and integration costs of $223 and $795 for the three and nine months ended September 30, 2024, respectively, and $384 and $1,600 for the three and nine months ended September 30, 2023, respectively, and (ii) Unallocated amortization expense of $0 and $0 for the three and nine months ended September 30, 2024, respectively, and $0 and $312 for the three and nine months ended September 30, 2023, respectively, related to an intangible asset in connection with a company-wide ERP system implementation. Results of Operations - Three Months Ended September 30, 2024 and 2023 Net Earnings Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Net sales $ 239,940 $ 229,948 $ 9,992 4.3 % Gross margin 85,361 76,544 8,817 11.5 % Operating expenses 37,369 32,930 4,439 13.5 % Earnings from operations 47,992 43,614 4,378 10.0 % Interest and other expenses 4,099 7,139 (3,040) (42.6) % Income tax expense 10,056 7,400 2,656 35.9 % Net earnings $ 33,837 $ 29,075 $ 4,762 16.4 % 26 Table of Contents Net Sales Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Human Nutrition & Health $ 152,283 $ 144,455 $ 7,828 5.4 % Animal Nutrition & Health 52,906 53,944 (1,038) (1.9) % Specialty Products 33,191 30,004 3,187 10.6 % Other 1,560 1,545 15 1.0 % Total $ 239,940 $ 229,948 $ 9,992 4.3 % • The increase in net sales within the Human Nutrition & Health segment for the third quarter of 2024 as compared to the third quarter of 2023 was primarily driven by higher sales within both the minerals and nutrients business and the food and beverage markets. Total sales for this segment grew 5.4%, with volume and mix contributing 4.7%, average selling prices contributing 0.6%, and the change in foreign currency exchange rates contributing 0.1%. • The decrease in net sales within the Animal Nutrition & Health segment for the third quarter of 2024 compared to the third quarter of 2023 was driven by lower sales in the monogastric species markets, partially offset by higher sales in the ruminant species markets. Total sales for this segment decreased by 1.9%, with average selling prices contributing -5.3%, the change in foreign currency exchange rates contributing 0.2%, and volume and mix contributing 3.2%. • The increase in net sales within the Specialty Products segment for the third quarter of 2024 compared to the third quarter of 2023 was due to higher sales in both the performance gases business and the plant nutrition business. Total sales for this segment increased by 10.6%, with volume and mix contributing 6.5%, average selling prices contributing 3.7%, and the change in foreign currency exchange rates contributing 0.4%. • Sales relating to Other increased slightly from the prior year primarily due to higher volumes and mix, partially offset by lower average selling prices. • 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) 2024 2023 % Change Gross margin $ 85,361 $ 76,544 $ 8,817 11.5 % % of net sales 35.6 % 33.3 % Gross margin dollars increased in the third quarter of 2024 compared to the third quarter of 2023 due to higher sales and a favorable mix. Operating Expenses Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Operating expenses $ 37,369 $ 32,930 $ 4,439 13.5 % % of net sales 15.6 % 14.3 % The increase in operating expenses in the third quarter of 2024 compared to the third quarter of 2023 was primarily due to an increase in compensation-related costs of $3,836 and an increase in transaction costs of $3,339, partially offset by a decrease in amortization expense of $3,168. 27 Table of Contents Earnings from Operations Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Human Nutrition & Health $ 35,578 $ 31,275 $ 4,303 13.8 % Animal Nutrition & Health 3,529 5,070 (1,541) (30.4) % Specialty Products 10,516 8,740 1,776 20.3 % Other and unallocated (1,631) (1,471) (160) (10.9) % Earnings from operations $ 47,992 $ 43,614 $ 4,378 10.0 % % of net sales (operating margin) 20.0 % 19.0 % • Human Nutrition & Health segment earnings from operations increased $4,303 primarily due to the gross margin contribution of $5,786. The increase in gross margin was primarily due to the aforementioned higher sales and a favorable mix. This was partially offset by an increase in operating expenses of $1,484 due to the impact of favorable adjustments to transaction costs in the prior year of $2,800 and higher compensation-related costs of $1,882, partially offset by a decrease in amortization expense of $3,121. • Animal Nutrition & Health segment earnings from operations decreased $1,541 primarily due to higher operating expenses driven by the impact of favorable adjustments to transaction costs in the prior year of $700 and higher compensation-related costs of $378. • Specialty Products segment earnings from operations increased $1,776 primarily due to the gross margin contribution of $3,460. The increase in gross margin was primarily due to the aforementioned higher sales and a favorable mix. This was partially offset by higher operating expenses of $1,683 primarily due to an increase in compensation-related costs of $1,395. • The decrease in Other and unallocated was primarily driven by a decrease in gross margin. Other Expenses (Income) Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Interest expense, net $ 4,071 $ 6,594 $ (2,523) (38.3) % Other expense (income), net 28 545 (517) (94.9) % $ 4,099 $ 7,139 $ (3,040) (42.6) % Interest expense for the three months ended September 30, 2024 and 2023 was primarily related to outstanding borrowings under the 2022 Credit Agreement. The decrease in net interest expense is due to lower outstanding borrowings. Income Tax Expense Three Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Income tax expense $ 10,056 $ 7,400 $ 2,656 35.9 % Effective tax rate 22.9 % 20.3 % The higher effective tax rate was primarily due to lower tax benefits from stock-based compensation and certain higher U.S. state taxes. 28 Table of Contents Results of Operations - Nine Months Ended September 30, 2024 and 2023 Net Earnings Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Net sales $ 713,680 $ 693,740 $ 19,940 2.9 % Gross margin 249,869 227,063 22,806 10.0 % Operating expenses 114,404 106,205 8,199 7.7 % Earnings from operations 135,465 120,858 14,607 12.1 % Interest and other expenses 13,496 16,864 (3,368) (20.0) % Income tax expense 27,077 22,099 4,978 22.5 % Net earnings $ 94,892 $ 81,895 $ 12,997 15.9 % Net Sales Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Human Nutrition & Health $ 452,955 $ 412,777 $ 40,178 9.7 % Animal Nutrition & Health 156,384 180,162 (23,778) (13.2) % Specialty Products 99,898 94,961 4,937 5.2 % Other 4,443 5,840 (1,397) (23.9) % Total $ 713,680 $ 693,740 $ 19,940 2.9 % • The increase in net sales within the Human Nutrition & Health segment for the nine months ended September 30, 2024 as compared to 2023 was primarily driven by higher sales within the minerals and nutrients business. Total sales for this segment grew 9.7%, with volume and mix contributing 8.6% and average selling prices contributing 1.2%. • The decrease in net sales within the Animal Nutrition & Health segment for the nine months ended September 30, 2024 as compared to 2023 was driven by lower sales in both the monogastric and ruminant species markets. Total sales for this segment decreased by 13.2%, with average selling prices contributing -7.4% and volume and mix contributing -5.9%. • The increase in net sales within the Specialty Products segment for the nine months ended September 30, 2024 as compared to 2023 was due to higher sales in the performance gases market, partially offset by lower sales in the plant nutrition business. Total sales for this segment increased by 5.2%, with average selling prices contributing 3.7% and volume and mix contributing 1.5%. • Sales relating to Other decreased from the prior year due to lower average selling prices. • 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) 2024 2023 % Change Gross margin $ 249,869 $ 227,063 $ 22,806 10.0 % % of net sales 35.0 % 32.7 % Gross margin dollars increased in the nine months ended September 30, 2024 as compared to 2023 due to higher sales, a favorable mix and a decrease in cost of goods sold of $2,866. The 0.6% decrease in cost of goods sold was mainly driven by certain lower manufacturing input costs. 29 Table of Contents Operating Expenses Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Operating expenses $ 114,404 $ 106,205 $ 8,199 7.7 % % of net sales 16.0 % 15.3 % The increase in operating expenses for the nine months ended September 30, 2024 as compared to 2023 was primarily due to the impact of favorable adjustments to transaction costs in the prior year of $9,900, an increase in compensation-related costs of $7,353, and an increase in outside services of $1,877, partially offset by a decrease in restructuring-related impairment charges of $7,243, and a decrease in amortization expense of $5,772. Earnings from Operations Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Human Nutrition & Health $ 102,202 $ 77,209 $ 24,993 32.4 % Animal Nutrition & Health 8,282 22,230 (13,948) (62.7) % Specialty Products 29,943 25,984 3,959 15.2 % Other and unallocated (4,962) (4,565) (397) (8.7) % Earnings from operations $ 135,465 $ 120,858 $ 14,607 12.1 % % of net sales (operating margin) 19.0 % 17.4 % • Human Nutrition & Health segment earnings from operations increased $24,993 primarily due to an increase in gross margin of $29,312. The increase in gross margin was primarily due to the aforementioned higher sales, a favorable mix, and certain lower manufacturing input costs. • Animal Nutrition & Health segment earnings from operations decreased $13,948 primarily due to a decrease in gross margin of $12,313. The decrease in gross margin was primarily due to the aforementioned lower sales and unfavorable mix, partially offset by certain lower manufacturing input costs. • Specialty Products segment earnings from operations increased $3,959 primarily due to an increase in gross margin of $7,152. The increase in gross margin was primarily due to the aforementioned higher sales and certain lower manufacturing input costs. This was partially offset by an increase in operating expenses of $3,193 mainly due to higher compensation-related costs. • The decrease in Other and unallocated was primarily driven by the aforementioned lower sales, partially offset by lower unallocated corporate expenses. Other Expenses (Income) Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Interest expense, net $ 13,709 $ 17,322 $ (3,613) (20.9) % Other (income), net (213) (458) 245 (53.5) % $ 13,496 $ 16,864 $ (3,368) (20.0) % Interest expense for the nine months ended September 30, 2024 and 2023 was primarily related to outstanding borrowings under the 2022 Credit Agreement. The decrease in net interest expense is due to lower outstanding borrowings. 30 Table of Contents Income Tax Expense Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Income tax expense $ 27,077 $ 22,099 $ 4,978 22.5 % Effective tax rate 22.2 % 21.3 % The higher effective tax rate was primarily due to lower tax benefits from stock-based compensatio n and certain higher state taxes. Liquidity and Capital Resources During the nine months ended September 30, 2024, 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, 2023. 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 $73,694 at September 30, 2024 from $64,447 at December 31, 2023. At September 30, 2024, the Company had $71,878 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 $216,549 at September 30, 2024 as compared to $165,751 at December 31, 2023, an increase of $50,798. Significant cash payments during the nine months ended September 30, 2024 included net repayments on the revolving loan of $82,569, income taxes paid of $31,575, the payment of the 2023 declared dividend in 2024 of $25,572, and capital expenditures and intangible assets acquired of $22,936. Nine Months Ended September 30, Increase (Decrease) (in thousands) 2024 2023 % Change Cash flows provided by operating activities $ 129,682 $ 116,355 $ 13,327 11.5 % Cash flows used in investing activities (22,777) (22,948) 171 0.7 % Cash flows used in financing activities (98,602) (83,175) (15,427) (18.5) % Operating Activities The increase in cash flows from operating activities was primarily driven by the increase in net earnings. 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 $22,936 and $26,177 for the nine months ended September 30, 2024 and 2023, respectively. Financing Activities During 2024, we borrowed $26,000 under the 2022 Credit Agreement and made total loan payments of $108,569, resulting in $323,000 available under the 2022 Credit Agreement (see Note 7, Revolving Loan ) as of September 30, 2024. 31 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 3,140,215 shares have been purchased. 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 under the Company's omnibus incentive plan. Share repurchases are funded with existing cash on hand. Proceeds from stock options exercised were $15,084 and $3,888 for the nine months ended September 30, 2024 and 2023, respectively. Dividend payments were $25,572 and $22,872 for the nine months ended September 30, 2024 and 2023, respectively. Other Matters Impacting Liquidity As of September 30, 2024 and December 31, 2023, w e have a liability of $4,825 and $4,650, 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, 2024 and December 31, 2023 were $1,381 and $1,395, 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, 2024 and December 31, 2023 was $405 and $420, 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 as of September 30, 2024 and December 31, 2023 was $11,432 and $10,188, respectively, and was included in "Other long-term obligations" on the condensed consolidated balance sheets. The related rabbi trust assets were $11,429 and $10,188 as of September 30, 2024 and December 31, 2023, respectively, 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, 2023 Annual Report on Form 10 - K, during the nine months ended September 30, 2024. 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, 2024. Refer to Note 17, Related Party Transactions . 32 Table of Contents