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Cost Controls Drive Earnings Jump for Balchem Corporation

By Travis Hoium – Nov 9, 2018 at 9:18AM

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Growth is slow, but leverage on the income statement is driving a big jump in earnings.

Balchem Corporation (BCPC 0.39%) continued its strong earnings growth in 2018 with a solid report for the fourth quarter. Sales into the energy sector were down, but human and animal health products continue to see steady growth, which drove overall results. 

Long-term, Balchem is generating enough cash and maintaining a strong enough balance sheet to give it a lot of flexibility in driving future growth. Here's a look at the numbers. 

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Image source: Getty Images.

Balchem Corporation: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Sales $155.0 million $150.7 million  2.9% 
Net income $19.2 million  $16.0 million  20% 
Diluted EPS $0.59  $0.50  18% 

Data source: Balchem Corporation Q3 2018 earnings release. 

What happened with Balchem Corporation this quarter? 

Balchem is split into four segments and their results often diverge. Here's a breakdown of how the overall numbers changed and how each segment performed in the quarter. 

  • Gross margin was up 3.9% to $48 million, only slightly outpacing sales growth. A $600,000 decline in operating expenses to $22.5 million was a big driver of the increased net income above. 
  • Cash provided by operating activities in the quarter came in at $79.2 million. 
  • Human nutrition and health revenue was up 5.6% to $85.9 million as volumes increased to food and beverage markets. Earnings from operations jumped 25.7% to $13.1 million. 
  • Animal nutrition and health revenue increased 6.3% to $40.4 million and earnings from operations fell slightly to $5.1 million. 
  • Specialty product revenue was up 2.1% to $17.6 million and earnings from operations increased by 2.9% to $5.8 million. 
  • Industrial product sales fell 21% to $11.1 million as sales of choline and choline derivatives declined to fracking customers. Earnings from operations were also down 17.6% to $1.7 million. 
  • Balchem acquired Bioscreen Technologies in late August, which will expand products for animal nutrition and health, but didn't significantly impact the quarter. 
  • A revolving loan facility was reduced by $32.8 million, leaving net debt at $135.3 million at the end of the quarter. 

What management had to say

Management was happy with the performance in the quarter and touted a balance sheet that gives Balchem a lot of flexibility going forward. CEO Ted Harris said, "[W]ith the current economic uncertainties, we are pleased that our strong balance sheet and revolving credit facility provide us the flexibility to capitalize on both organic and acquisition opportunities." 

Acquisitions have played a big role in Balchem's growth in the last few years, so having the financial flexibility to add companies to the portfolio could be good for long-term value. 

Looking forward

The one flaw in the quarter was the segment supplying the fracking industry, and that's long been an up-and-down business. What management can control is operating costs, which declined from $23.1 million a year ago to $22.5 million last quarter. That's why you see margin improvement and earnings growth outpacing revenue growth. As long as revenue keeps growing, Balchem's strong earnings trends should continue.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Balchem. The Motley Fool has a disclosure policy.

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