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, 2024 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.
Factors that may affect our forward-looking statements include, among other things: (1) our ability to manage risks associated with our sales to customers and manufacturing operations outside the United States, including changes in tariffs, sanctions, trade restrictions and trade relations, political and economic instability and geopolitical tensions; (2) supply chain disruptions due to political unrest, terrorist acts, and national and international conflicts; (3) reliability and sufficiency of our manufacturing facilities; (4) our ability to recruit and retain a highly qualified and motivated workforce; (5) our ability to effectively manage labor relations; (6) the effects of global climate change or other unexpected events, including global health crises, that may disrupt our operations; (7) our ability to manage risks related to our information technology and operational technology systems and cybersecurity; (8) 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; (9) disruption and breaches of our information systems; (10) increased competition and our ability to anticipate evolving trends in the market; (11) global economic conditions, including inflation, recession, changes in tariffs and trade relations; (12) raw material shortages or price increases; (13) currency translation and currency transaction risks; (14) interest rate risks; (15) our ability to successfully consummate and manage acquisitions, joint ventures and divestitures; (16) our ability to effectively manage and implement restructuring initiatives or other organizational changes; (17) changes in our relationships with our vendors, changes in tax or trade policy, interruptions in our operations or supply chain, political or financial instability and geopolitical tensions; (18) adverse publicity or consumer concern regarding the safety or quality of food products containing our products; (19) the outcome of any litigation, governmental investigations or proceedings; (20) product liability claims and recalls; (21) our ability to protect our brand reputation and trademarks; (22) claims of infringement of intellectual property rights by third parties; (23) risks related to corporate social responsibility and reputational matters; (24) improper conduct by any of our employees, agents or business partners; (25) changes to, or changes in interpretations of, current laws and regulations, and loss of governmental permits and approvals; and (26) regulatory requirements for ethylene oxide users that have impacted, and may continue to impact, such users’ ability to use the ethylene oxide process to sterilize medical devices, among other things.
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 plays an important role in our strategies and in long-term value creation for our stakeholders. Our framework focuses on the sustainability topics most relevant to our business and stakeholders, and has been fully integrated into our governance structure and everyday operations . 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 March 31, 2025, we employed approximately 1,379 full time employees worldwide. We are seeing some improvement in the labor markets and we feel that our team has been successful in attracting and retaining skilled and experienced employees in a competitive landscape. Additionally, we continue to enhance and leverage our existing technology capabilities to further optimize productivity and performance, and explore new solutions to drive efficiencies.
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 months ended March 31, 2025 and 2024:
| | | | | | | | | | | | | | |
| Business Segment Net Sales | | Three Months Ended
March 31, |
| | 2025 | | 2024 |
| Human Nutrition & Health | | $ | 158,457 | | | $ | 152,744 | |
| Animal Nutrition & Health | | 57,277 | | | 53,921 | |
| Specialty Products | | 33,275 | | | 31,613 | |
Other and Unallocated (1) | | 1,510 | | | 1,381 | |
| Total | | $ | 250,519 | | | $ | 239,659 | |
| | | | | | | | | | | | | | |
| Business Segment Earnings From Operations | | Three Months Ended
March 31, |
| | 2025 | | 2024 |
| Human Nutrition & Health | | $ | 37,974 | | | $ | 33,257 | |
| Animal Nutrition & Health | | 5,236 | | | 2,060 | |
| Specialty Products | | 9,585 | | | 8,199 | |
Other and Unallocated (1) | | (1,780) | | | (1,840) | |
| Total | | $ | 51,015 | | | $ | 41,676 | |
| | |
(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 transaction and integration costs of $489 and $440 for the three months ended March 31, 2025 and 2024, respectively. |
Results of Operations - Three Months Ended March 31, 2025 and 2024
Net Earnings | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Net sales | | $ | 250,519 | | | $ | 239,659 | | | $ | 10,860 | | | 4.5 | % |
| Gross margin | | 88,168 | | | 81,514 | | | 6,654 | | | 8.2 | % |
| Operating expenses | | 37,153 | | | 39,838 | | | (2,685) | | | (6.7) | % |
| Earnings from operations | | 51,015 | | | 41,676 | | | 9,339 | | | 22.4 | % |
| Interest and other expenses | | 3,075 | | | 4,826 | | | (1,751) | | | (36.3) | % |
| Income tax expense | | 10,887 | | | 7,864 | | | 3,023 | | | 38.4 | % |
| Net earnings | | $ | 37,053 | | | $ | 28,986 | | | $ | 8,067 | | | 27.8 | % |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Human Nutrition & Health | | $ | 158,457 | | | $ | 152,744 | | | $ | 5,713 | | | 3.7 | % |
| Animal Nutrition & Health | | 57,277 | | | 53,921 | | | 3,356 | | | 6.2 | % |
| Specialty Products | | 33,275 | | | 31,613 | | | 1,662 | | | 5.3 | % |
| Other | | 1,510 | | | 1,381 | | | 129 | | | 9.3 | % |
| Total | | $ | 250,519 | | | $ | 239,659 | | | $ | 10,860 | | | 4.5 | % |
•The increase in net sales within the Human Nutrition & Health segment for the first quarter of 2025 as compared to the first quarter of 2024 was driven by higher sales within both the food ingredients and solutions businesses and the nutrients business. Total sales for this segment grew 3.7%, with average selling prices contributing 3.6%, volume and mix contributing 0.6%, and the change in foreign currency exchange rates contributing -0.4%.
•The increase in net sales within the Animal Nutrition & Health segment for the first quarter of 2025 compared to the first quarter of 2024 was driven by higher sales in the ruminant species markets, partially offset by lower sales in the monogastric species markets. Total sales for this segment increased by 6.2%, with volume and mix contributing 4.5%, average selling prices contributing 2.3%, and the change in foreign currency exchange rates contributing -0.6%.
•The increase in net sales within the Specialty Products segment for the first quarter of 2025 compared to the first quarter of 2024 was due to higher sales in both the performance gases and plant nutrition businesses. Total sales for this segment increased by 5.3%, with volume and mix contributing 3.9%, average selling prices contributing 2.1%, and the change in foreign currency exchange rates contributing -0.7%.
•Sales relating to Other increased slightly from the prior year primarily due to higher average selling prices, partially offset by lower volumes and mix.
•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 March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Gross margin | | $ | 88,168 | | | $ | 81,514 | | | $ | 6,654 | | | 8.2 | % |
| % of net sales | | 35.2 | % | | 34.0 | % | | | | |
Gross margin dollars increased in the first quarter of 2025 compared to the first quarter of 2024 due to higher sales and a favorable mix.
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Operating expenses | | $ | 37,153 | | | $ | 39,838 | | | $ | (2,685) | | | (6.7) | % |
| % of net sales | | 14.8 | % | | 16.6 | % | | | | |
The decrease in operating expenses in the first quarter of 2025 compared to the first quarter of 2024 was primarily due to lower amortization expense of $2,287 and a decrease in compensation-related costs of $1,197, partially offset by higher professional services of $1,237.
Earnings from Operations | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Human Nutrition & Health | | $ | 37,974 | | | $ | 33,257 | | | $ | 4,717 | | | 14.2 | % |
| Animal Nutrition & Health | | 5,236 | | | 2,060 | | | 3,176 | | | 154.2 | % |
| Specialty Products | | 9,585 | | | 8,199 | | | 1,386 | | | 16.9 | % |
| Other and unallocated | | (1,780) | | | (1,840) | | | 60 | | | 3.3 | % |
| Earnings from operations | | $ | 51,015 | | | $ | 41,676 | | | $ | 9,339 | | | 22.4 | % |
| | | | | | | | |
| % of net sales (operating margin) | | 20.4 | % | | 17.4 | % | | | | |
•Human Nutrition & Health segment earnings from operations increased $4,717 primarily due to the gross margin contribution of $3,712. The increase in gross margin was primarily due to the aforementioned higher sales and a favorable mix.
•Animal Nutrition & Health segment earnings from operations increased $3,176 primarily due to the gross margin contribution of $2,674. The increase in gross margin was primarily due to the aforementioned higher sales and a favorable mix.
•Specialty Products segment earnings from operations increased $1,386 primarily due to lower operating expenses, driven by a decrease in compensation-related costs, and the aforementioned higher sales.
•The increase in Other and unallocated was primarily driven by a decrease in operating expenses.
Other Expenses (Income) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Interest expense, net | | $ | 2,924 | | | $ | 5,398 | | | $ | (2,474) | | | (45.8) | % |
| Other expense (income), net | | 151 | | | (572) | | | 723 | | | 126.4 | % |
| | $ | 3,075 | | | $ | 4,826 | | | $ | (1,751) | | | (36.3) | % |
Interest expense for the three months ended March 31, 2025 and 2024 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 March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Income tax expense | | $ | 10,887 | | | $ | 7,864 | | | $ | 3,023 | | | 38.4 | % |
| Effective tax rate | | 22.7 | % | | 21.3 | % | | | | |
The higher effective tax rate was primarily due to lower tax benefits from stock-based compensation.
Liquidity and Capital Resources
During the three months ended March 31, 2025, 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, 2024. 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 $49,901 at March 31, 2025 from $49,515 at December 31, 2024. At March 31, 2025, the Company had $44,380 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 $200,684 at March 31, 2025 as compared to $156,085 at December 31, 2024, an increase of $44,599. Significant cash payments during the three months ended March 31, 2025 included the payment of the 2024 declared dividend in 2025 of $28,263, capital expenditures and intangible assets acquired of $5,559, and repurchases of common stock of $5,325.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | |
| (in thousands) | | 2025 | | 2024 | | | % Change |
| Cash flows provided by operating activities | | $ | 36,457 | | | $ | 33,388 | | | $ | 3,069 | | | 9.2 | % |
| Cash flows used in investing activities | | (5,912) | | | (6,739) | | | 827 | | | 12.3 | % |
| Cash flows used in financing activities | | (31,969) | | | (30,023) | | | (1,946) | | | (6.5) | % |
Operating Activities
The increase in cash flows from operating activities was primarily driven by the increase in net earnings, partially offset by the decrease of depreciation and amortization and the impact from changes in working capital.
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 $5,559 and $6,910 for the three months ended March 31, 2025 and 2024, respectively.
Financing Activities
During 2025, we borrowed $29,000 to fund the 2024 dividend and bonus payments and made total loan payments of $29,000, resulting in $360,000 available under the 2022 Credit Agreement (see Note 7, Revolving Loan) as of March 31, 2025.
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 3,174,897 shares have been repurchased. 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, as applicable, under the Company's omnibus incentive plan. Share repurchases are funded with existing cash on hand.
Proceeds from stock options exercised were $1,668 and $8,791 for the three months ended March 31, 2025 and 2024, respectively. Dividend payments were $28,263 and $25,555 for the three months ended March 31, 2025 and 2024, respectively.
Other Matters Impacting Liquidity
As of March 31, 2025 and December 31, 2024, we have a liability of $6,786 and $6,720, 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 March 31, 2025 and December 31, 2024 were $1,446 and $1,522, 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 March 31, 2025 and December 31, 2024 was $690 and $613, 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 was $11,653 as of March 31, 2025, of which $11,633 was included in "Other long-term obligations" and $20 was included in "Accrued compensation and other benefits" on our consolidated balance sheets. The deferred compensation liability was $11,470 as of December 31, 2024, of which $11,449 was included in "Other long-term obligations" and $21 was included in "Accrued compensation and other benefits" on our consolidated balance sheets. The related rabbi trust assets were $11,642 as of March 31, 2025, of which $11,622 was included in "Other non-current assets" and $20 was included in "Other current assets" on the condensed consolidated balance sheets. The rabbi trust assets were $11,465 as of December 31, 2024 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, 2024 Annual Report on Form 10-K, during the three months ended March 31, 2025.
Related Party Transactions
We were engaged in related party transactions with St. Gabriel CC Company, LLC during the three months ended March 31, 2025. Refer to Note 17, Related Party Transactions.
