Balchem Corporation: Drop in Energy Drags Down Earnings

Balchem Corporation (BCPC 0.55%) reported earnings before the market opened Tuesday and the company saw the impact of a number of macro events that have affected a lot of industrial companies this year. Low oil prices and a strong dollar have eaten into results and that should be no surprise to investors.  

Balchem Corporation results: The raw numbers

Data source: Yahoo! Finance

What happened with Balchem Corporation this quarter?
The performance in each of Balchem's businesses shows how the company is at the whims of many forces out of its control.

• Weaker demand in the oil and gas market accounted for over three-quarters of the decline in sales during the third quarter. This shouldn't be a surprise, given the rapid deterioration in energy markets over the past year.
• SensoryEffects and Specialty Products segments grew sales by 2% and 1%, respectively. This was the one bright spot for Balchem and the segment had a 33% increase in operating earnings to $11.6 million.
• Animal Nutrition & Health saw flat volume but a 13% decline in sales because of international currency translation.
• Industrial Products sales fell 53% to $15.8 million as volumes of choline and choline derivatives used in fracking fell dramatically. But the segment did report a $1.1 million operating profit, so costs were managed well in the quarter.

What management had to say
CEO Ted Harris highlighted the company's sustained profitability in the face of challenging market conditions. He doesn't think conditions for the oil and gas segment will improve meaningfully in the next year, so investors should see the current results in Industrial products as a new baseline for the company.

Growth should come from segments like SensoryEffects and Animal, Nutrition, and Health through a number of organic growth initiatives and manufacturing improvements. Acquisitions could also play a role in growth, something that could be opportunistic especially in the beaten-down industrial space.

The diverse set of end markets Balchem serves has proved to be a strength at times when one of two segments show particular weakness. Without that diversification, the quarter could have been much worse.

Looking forward
As the comparisons to year-ago quarters become easier, we could see Balchem once again return to growth. Sequentially, the company showed some progress growing revenue, even in the Industrial Products segment.

What investors should watch is the containment of costs in these downtimes, which can be leveraged when the macroeconomic environment improves. Especially in energy, I don't think oil prices near $40 are the new norm, so there will be some level of recovery and growth eventually. When that happens, it looks like Balchem will be well positioned to take advantage and leverage the low-cost structure it is developing today.