Balchem Corporation (BCPC) recently reported earnings for the first quarter of 2019, and after a few years of tailwinds, the company is now facing some challenges. One-time benefits of a Chinese supply disruption a year ago have made comparisons difficult, and acquisitions are no longer driving year-over-year growth.
When we dig a little deeper into results, investors will see that there were solid numbers in the quarter and there was only one bad segment, which was largely out of Balchem's hands. Here's what to take away from the results.
Balchem Corporation: The raw numbers
|Metric||Q1 2019||Q1 2018||Year-Over-Year Change|
|Sales||$157.0 million||$161.4 million||(2.7%)|
|Net income||$18.8 million||$19.3 million||(2.9%)|
What happened with Balchem this quarter?
The headline numbers don't look particularly good, but it's the segmented results that investors should keep an eye on, given the diverse markets Balchem serves. In the first quarter, results don't look as bad when you understand why some segments had a down year.
- Human nutrition and health segment revenue were up 2.5% to $85.1 million on higher food and beverage demand. Earnings from operations rose 6% to $13.7 million.
- Animal nutrition and health segment sales fell 6% to $43.4 million on lower demand for monogastric species in Europe. Earnings from operations for the segment were down from $7.5 million a year ago to $5.3 million. Results were also down compared with a year ago because a one-time benefit from Chinese supply disruptions did not repeat.
- Specialty products revenue increased 3.9% to $18.4 million as medical device sterilization products sold well. Earnings from operations rose from $5.0 million a year ago to $6.7 million.
- Industrial products sales fell 30.2% to $10.1 million as demand fell in fracking markets. As a result of the drop in sales, earnings from operations dropped 34% to $1.6 million.
- Late last week, Balchem announced that it had agreed to acquire Chemogas NV, a specialty gases company with 29 million euros of expected revenue in 2019 and a 30% EBITDA margin.
What management had to say
CEO Ted Harris wrapped up the quarter, saying:
Our first quarter earnings once again highlight the strength of our business model, particularly in light of the specific headwinds we faced in the quarter. We delivered sales growth in two of our four reporting segments, and when adjusting for the prior year benefit from the Chinese supply disruptions, the underlying Animal Nutrition and Health segment grew nicely. We remain cautious regarding the Industrial Products segment, although we do expect fracking activity to pick up in the later part of the year.
The industrial segment has always been reliant on the underlying demand from fracking companies, and right now the industry isn't performing as well as management had hoped.
Balchem should return to growth when the Chemogas deal closes. The acquisition will be financed with available credit and cash on the balance sheet, so it won't be dilutive to shareholders. Bolt-on acquisitions have long been an important growth strategy for Balchem while slowly expanding the core business, and with both parts of the strategy intact, the future continues to look solid for the company.