Balchem Corporation (NASDAQ: BCPC) reported today for the first
quarter 2020 net earnings of $19.8 million, compared to net
earnings of $18.8 million for the first quarter 2019. First quarter
adjusted net earnings(a) were $26.4 million, compared to $23.7
million in the prior year quarter and adjusted EBITDA(a) was $42.4
million compared to $39.7 million in the prior year quarter.
First Quarter 2020 Financial
Highlights:
- Net sales of $174.4 million, an
increase of $17.4 million, or 11.1%, compared to the prior year
quarter.
- Year over year sales growth in
Human Nutrition and Heath, Animal Nutrition and Health, and
Specialty Products.
- First quarter GAAP net earnings
were $19.8 million, an increase of $1.0 million, or 5.2% from the
prior year. These net earnings resulted in GAAP earnings per share
of $0.61.
- First quarter adjusted net earnings
of $26.4 million increased $2.7 million or 11.4% from the prior
year, resulting in adjusted earnings per share(a) of $0.81.
- Quarterly adjusted EBITDA was $42.4
million, an increase of $2.7 million, or 6.8%, from the prior
year.
- Quarterly cash flows from
operations were $22.6 million for the first quarter 2020, an
increase of 0.4% from the prior year, with quarterly free cash
flow(a) of $17.4 million, an increase of 24% from the prior
year.
Recent Highlights:
- In order to align with our
strategic focus on health and nutrition, effective in Q1 2020, we
have revised our presentation to three reportable segments: Human
Nutrition and Health, Animal Nutrition and Health, and Specialty
Products. We will continue to serve the Industrial Products
business as before, but it will no longer be an individual
reportable segment, and instead reported under "Other and
Unallocated." This change has no impact to our consolidated
financial statements.
Ted Harris, Chairman, CEO, and President of
Balchem said, “The Balchem team has responded extraordinarily well
to the COVID-19 pandemic, with a special caring for one another and
a strong sense of purpose. With the safety of our employees as our
top priority, we have continued to provide sterilants to the
medical device industry, choline to the infant formula
manufacturers, minerals and nutrients to the prenatal vitamin
makers, mineral micro-nutrients to the agriculture industry, vital
nutrients and minerals to the animal protein market, and food
ingredients to food manufacturers given the criticality of our
products and services to our customers in global health and
nutrition supply chains.”
Mr. Harris added, “The extraordinary efforts of
the Balchem team helped to deliver sales growth in all three of our
business segments and allowed us to deliver the strong net earnings
and free cash flow that we reported today.”
COVID-19 Response:
The COVID-19 response effort has been the
primary focus for the company since early in the first quarter. Two
of our three manufacturing facilities in Europe are in Italy, one
of the first countries to be impacted by the pandemic. The need for
an early response to the situation in Italy, prepared us well for
actions that needed to be taken in the rest of the world to respond
to the pandemic. Balchem’s Crisis Management Plan has been
effectively deployed to respond to the COVID-19 pandemic,
activating our Crisis Management Team (CMT), to manage the
day-to-day activities and to make timely decisions. Some examples
of the early decisions made by the CMT are:
- Holding a special Board of
Directors meeting to ensure Board engagement and involvement in the
response plan
- Creation of an individual response
plan for the eventuality of positive cases within our employee
base, based on the Centers for Disease Control and Prevention (CDC)
guidelines
- International and domestic travel
restrictions
- Execution of a communications
strategy to keep employees and customers informed of requirements,
decisions, and outcomes
- Site visitation restrictions to
both internal and external personnel
- Strict protocols to deal with
necessary visitors to sites (e.g. delivery drivers)
- Elimination of large group
gatherings
- Mandatory work from home for all
non-manufacturing and non-research and development employees
- Separation of employees into
smaller work groups to reduce density within work teams
- New protocols relative to Personal
Protection Equipment (PPE) including face masks and sanitation
procedures
- Key raw material and finished goods
inventory builds
- Employee responsibility guidelines
to manage individual protection measures; and
- Approval of special bonuses to
non-executive employees to recognize the hourly and salaried
workforce attendance and hard work during the pandemic
These are just some examples of the decisions
made by Balchem’s CMT in response to the pandemic. To date, all of
our manufacturing sites are operating at near normal conditions
enabling us to supply our customers with the important products and
services they need, our research and development teams are
advancing our innovation efforts, and all of our other employees
are carrying on their responsibilities and functions remotely.
We have had two employees, that we are aware of,
out of our approximately 1,400 employees, test positive for
COVID-19. Both cases were in the early stages of the pandemic and
both employees are recovering well. We managed the cases
effectively using our individual response plan, which is based on
the CDC guidelines, and believe our early adoption of exposure
mitigation actions played an important role in mitigating the
impact of these cases on other employees and the company.
While impact on demand in the first quarter was
minimal, we are watching the markets that we serve closely. We have
stress tested our balance sheet under various significant downturn
scenarios and, given our relatively low net debt position (1.1
times TTM adjusted EBITDA), cash on hand, access to our undrawn
revolving credit facility, and expected free cash flows, we are
pleased with the strength of our balance sheet going into this
uncertain market environment. Despite this relative strength, we
are taking actions to reduce capital expenditures and non-critical
cash expenses wherever possible to preserve cash.
Sales over the next few quarters will be
challenged by weaker demand in food services, the animal protein
markets including dairy protein, medical device sterilization due
to fewer elective surgeries, and lower fracking activities. We
anticipate that there will be somewhat offsetting potential
strengthening demand in grocery store food products, functional
technologies aiding food preservation needs, immunity strengthening
minerals and nutrients, and certain benefits from lower raw
material costs. While we understand the market dynamics impacting
these downsides and upsides, it is very difficult at this time to
tell the specific dimensional impact of these forces, but our
overall expectation is that we will experience sequentially lower
overall revenues in the second quarter and for the duration of the
pandemic, given the significant disruption on economic activity
across global markets. We will watch each of these markets very
closely and remain nimble, flexible, and ready to respond
accordingly.
Balchem has dedicated significant resources to
the COVID-19 response over the first quarter and we are pleased
with the results to date particularly as it relates to keeping our
employees safe and our customers supplied. In the near term, we
will have to continue to dedicate a significant amount of our
resources to further response activities. We will maintain our
focus on employee safety first, keeping our manufacturing sites
operational, satisfying customer needs, preserving cash and
ensuring strong liquidity, and responding to changes in this
dynamic market environment as appropriate.
Results for Period Ended March 31,
2020 (unaudited)(Dollars in thousands, except per share
data)
|
|
Three Months Ended March 31, |
|
|
2020 |
|
2019 |
Net sales |
|
$ |
174,436 |
|
|
$ |
157,029 |
|
Gross margin |
|
55,331 |
|
|
49,095 |
|
Operating expenses |
|
29,053 |
|
|
22,615 |
|
Earnings from operations |
|
26,278 |
|
|
26,480 |
|
Other expense |
|
1,788 |
|
|
1,687 |
|
Earnings before income tax
expense |
|
24,490 |
|
|
24,793 |
|
Income tax expense |
|
4,722 |
|
|
6,010 |
|
Net earnings |
|
$ |
19,768 |
|
|
$ |
18,783 |
|
|
|
|
|
|
Diluted net earnings per
common share |
|
$ |
0.61 |
|
|
$ |
0.58 |
|
|
|
|
|
|
Adjusted EBITDA(a) |
|
$ |
42,371 |
|
|
$ |
39,680 |
|
Adjusted net earnings(a) |
|
$ |
26,441 |
|
|
$ |
23,730 |
|
Adjusted net earnings per
common share(a) |
|
$ |
0.81 |
|
|
$ |
0.73 |
|
|
|
|
|
|
Shares used in the
calculations of diluted and adjusted net earnings per common
share |
|
32,517 |
|
|
32,509 |
|
(a) |
See “Non-GAAP Financial Information” for a reconciliation of GAAP
and non-GAAP financial measures. |
Financial Results for the First Quarter of
2020:
Previously, our four reportable segments were:
Human Nutrition and Health, Animal Nutrition and Health, Specialty
Products, and Industrial Products. However, effective in the first
quarter of 2020, in order to align with our strategic focus on
health and nutrition, allocation of resources, and evaluation of
operating performance, and given the previously reported 2019
reduction in portfolio scale of Industrial Products, we have
revised our reporting segment structure to three reportable
segments: Human Nutrition and Health, Animal Nutrition and Health,
and Specialty Products. These reportable segments are strategic
businesses that offer products and services to different markets.
Sales and production of products outside of our reportable segments
and other minor business activities are included in "Other and
Unallocated" and this realignment has been retrospectively applied.
There was no change to the Consolidated Financial Statements as a
result of the change to the reportable segments. We expect that the
new reportable segment structure will provide investors greater
understanding of and alignment with our strategic focus. In order
to ensure appropriate transparency and visibility into the
financial performance of the Company, sufficient detail will
continue to be provided relative to Other and Unallocated,
including material contributions from oil and gas and other
industrial market activities.
The Human Nutrition &
Health segment generated quarterly sales of $95.5 million,
an increase of $10.4 million or 12.2% compared to the prior year
quarter. The increase was primarily driven by higher sales within
food and beverage markets, strong sales growth of chelated minerals
and choline nutrients, and beneficial impact of the Zumbro
acquisition we closed in December 2019, partially offset by the
elimination of sales associated with the Reading, Pennsylvania
manufacturing site that we divested in 2019. Quarterly earnings
from operations for this segment of $12.1 million decreased $1.6
million or 11.4% compared to $13.7 million in the prior year
quarter, primarily due to higher operating expenses resulting from
the prior year benefiting from the timing of an insurance recovery,
partially offset by the aforementioned higher sales. Excluding the
effect of non-cash expense associated with amortization of acquired
intangible assets of $4.8 million and $5.0 million for the first
quarter of 2020 and 2019, respectively, and inventory valuation
adjustments of $0.2 million for the first quarter of 2020, adjusted
earnings from operations(a) for this segment were $17.2 million,
compared to $18.7 million in the prior year quarter.
The Animal Nutrition &
Health segment generated quarterly sales of $48.6 million,
an increase of $5.3 million or 12.2% compared to the prior year
quarter. The increase was primarily the result of higher volumes in
both the ruminant species and monogastric species markets.
Approximately 200 basis points of the growth realized in the
quarter related to certain European customers increasing their
stock due to COVID-19 uncertainties. First quarter earnings from
operations for this segment of $8.0 million were up from the prior
year comparable quarter of $5.3 million, primarily due to the
aforementioned higher sales and certain lower raw material costs.
Excluding the effect of non-cash expense associated with
amortization of acquired intangible assets of $0.2 million in the
first quarter of 2020 and 2019, adjusted earnings from operations
for this segment were $8.2 million, compared to $5.4 million in the
prior year quarter.
The Specialty Products segment
generated record quarterly sales of $28.0 million, an increase of
$9.6 million or 52.0% compared to the prior year quarter, primarily
due to higher sales of ethylene oxide for the medical device
sterilization market due to both the contribution of Chemogas and
higher legacy product sales, as well as increased volumes in the
plant nutrition business. First quarter earnings from operations
for this segment were $8.0 million, versus $6.7 million in the
prior year comparable quarter, an increase of $1.3 million or
19.2%, primarily due to the aforementioned higher sales, partially
offset by mix and higher operating expenses due to the acquisition
of Chemogas. Excluding the effect of non-cash expense associated
with amortization of acquired intangible assets for the first
quarter of 2020 and 2019 of $1.6 million and $0.7 million,
respectively, adjusted earnings from operations for this segment
were $9.6 million, compared to $7.4 million in the prior year
quarter.
Sales relating to business formerly included in
the Industrial Products segment were $2.3 million, a decrease of
77.3% or $7.8 million compared to the prior year quarter, and
earnings from operations were a loss of $0.2 million, a decrease of
$1.9 million, compared to the prior year quarter, driven primarily
by a decline in shale fracking activity.
Consolidated gross margin for the quarter ended
March 31, 2020 of $55.3 million increased by $6.2 million or 12.7%,
compared to $49.1 million for the prior year comparable period.
Gross margin as a percentage of sales was 31.7% as compared to
31.3% in the prior year period, an increase of 46 basis points. The
increase was primarily due to mix and certain lower raw material
costs. Operating expenses of $29.1 million for the quarter
increased $6.4 million from the prior year comparable quarter,
primarily due to the prior year benefiting from the timing of an
insurance recovery and incremental operating expenses related to
the Chemogas and Zumbro acquisitions. Excluding non-cash operating
expenses associated with amortization of intangible assets of $6.3
million, operating expenses were $22.8 million, or 13.1% of
sales.
Interest expense was $1.7 million in the first
quarter of 2020. Our effective tax rates for the three months ended
March 31, 2020 and 2019 were 19.3% and 24.2%, respectively. The
decrease in the effective tax rate from the prior year is primarily
due to lower enacted tax rates from several states.
For the quarter ended March 31, 2020, cash
flows provided by operating activities were $22.6 million, and free
cash flow was $17.4 million. The $199.0 million of net working
capital on March 31, 2020 included a cash balance of $74.0 million,
which reflects a first quarter 2020 dividend payment of $16.7
million, net proceeds from the revolving debt of $5.0 million, and
capital expenditures and intangible assets acquired of $5.4
million.
Ted Harris said, “I would like to thank all of
the nearly 1,400 employees of Balchem across the world for their
tremendous and compassionate response to the pandemic that we are
all living through. I could not be more proud to be part of the
Balchem team. The financial results we announced today show both
the resilience of our business model and the flexibility and
perseverance of the Balchem team.”
Mr. Harris went on to add, “While the effort and
amount of change management that has gone into responding to the
pandemic has been very significant, the impact on our demand,
production, and costs has been relatively limited to date. As we
head into the second quarter, we will need to continue to dedicate
substantial resources toward the response and we recognize that
there will be more impact on our company in the coming quarter. The
resilience of our business model combined with our strong balance
sheet, cash generation, and access to liquidity will allow us to
continue to invest in our key growth initiatives and long term
positioning of the company.”
Quarterly Conference Call
A quarterly conference call will be held on
Friday, May 1, 2020, at 11:00 AM Eastern Time (ET) to review
first quarter 2020 results. Ted Harris, Chairman of the Board, CEO
and President and Martin Bengtsson, CFO will host the call. We
invite you to listen to the conference by calling toll-free
1-877-407-8289 (local dial-in 1-201-689-8341), five minutes prior
to the scheduled start time of the conference call. The conference
call will be available for replay two hours after the conclusion of
the call through end of day Friday, May 15, 2020. To access the
replay of the conference call, dial 1-877-660-6853 (local dial-in
1-201-612-7415), and use conference ID #13702182.
Segment Information
Previously, Balchem's four reportable segments
were: Human Nutrition & Health, Animal Nutrition & Health,
Specialty Products, and Industrial Products. However, effective the
first quarter of 2020, in order to align with the Company's
strategic focus on health and nutrition, allocation of resources,
and evaluation of operating performance, Balchem revised its
presentation to three reportable segments: Human Nutrition &
Health, Animal Nutrition & Health, and Specialty Products. The
Human Nutrition & Health segment delivers customized food and
beverage ingredient systems, as well as key nutrients into a
variety of applications across the food, supplement and
pharmaceutical industries. The Animal Nutrition & Health
segment manufactures and supplies products to numerous animal
health markets. Through Specialty Products, Balchem provides
specialty-packaged chemicals for use in healthcare and other
industries, and also provides chelated minerals to the
micronutrient agricultural market. Sales and production of products
outside of our reportable segments and other minor business
activities are included in Other and Unallocated. There was no
change to the Consolidated Financial Statements.
Forward-Looking Statements
This release contains forward-looking
statements, which reflect Balchem’s expectation or belief
concerning future events that involve risks and uncertainties.
Balchem can give no assurance that the expectations reflected in
forward-looking statements will prove correct and various factors
could cause results to differ materially from Balchem’s
expectations, including risks and factors identified in Balchem’s
annual report on Form 10-K for the year ended December 31, 2019.
Forward-looking statements are qualified in their entirety by the
above cautionary statement. Balchem assumes no duty to update its
outlook or other forward-looking statements as of any future
date.
Contact: Mary Ann Brush, Balchem Corporation (Telephone:
845-326-5600)
Selected Financial Data (unaudited) ($
in 000’s)
Business Segment Net Sales:
|
|
Three Months Ended March 31, |
|
|
2020 |
|
2019 |
Human Nutrition & Health |
|
$ |
95,508 |
|
|
$ |
85,149 |
|
Animal Nutrition &
Health |
|
48,641 |
|
|
43,361 |
|
Specialty Products |
|
27,996 |
|
|
18,424 |
|
Other and Unallocated (1) |
|
2,291 |
|
|
10,095 |
|
Total |
|
$ |
174,436 |
|
|
$ |
157,029 |
|
Business Segment Earnings Before Income
Taxes:
|
|
Three Months Ended March 31, |
|
|
2020 |
|
2019 |
Human Nutrition & Health |
|
$ |
12,135 |
|
|
|
$ |
13,703 |
|
|
Animal Nutrition &
Health |
|
8,044 |
|
|
|
5,256 |
|
|
Specialty Products |
|
7,986 |
|
|
|
6,697 |
|
|
Other and Unallocated (1) |
|
(1,887 |
) |
|
|
824 |
|
|
Interest and other
expense |
|
(1,788 |
) |
|
|
(1,687 |
) |
|
Total |
|
$ |
24,490 |
|
|
|
$ |
24,793 |
|
|
|
|
|
|
|
(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, ERP implementation costs, and
unallocated legal fees totaling $1,272 and $804 for the first
quarter of 2020 and 2019, respectively. (Refer to note 5 in table 1
for descriptions of these charges), and (ii) Unallocated
amortization expense of $401 and $9 for the first quarter of 2020
and 2019, respectively, related to an intangible asset in
connection with a company-wide ERP system implementation. |
Selected Balance Sheet
Items |
|
March 31, |
|
December 31, |
|
|
2020 |
|
2019 |
Cash and Cash Equivalents |
|
$ |
73,959 |
|
|
$ |
65,672 |
|
Accounts Receivable, net |
|
105,867 |
|
|
93,444 |
|
Inventories |
|
83,196 |
|
|
83,893 |
|
Other Current Assets |
|
7,659 |
|
|
11,937 |
|
Total Current Assets |
|
270,681 |
|
|
254,946 |
|
|
|
|
|
|
Property, Plant &
Equipment, net |
|
215,279 |
|
|
216,859 |
|
Goodwill |
|
522,785 |
|
|
523,998 |
|
Intangible Assets with Finite
Lives, net |
|
136,515 |
|
|
143,924 |
|
Right of Use Assets |
|
6,912 |
|
|
7,338 |
|
Other Assets |
|
9,940 |
|
|
8,617 |
|
Total Assets |
|
$ |
1,162,112 |
|
|
$ |
1,155,682 |
|
|
|
|
|
|
Current Liabilities |
|
$ |
71,720 |
|
|
$ |
92,258 |
|
Revolving Loan |
|
253,569 |
|
|
248,569 |
|
Deferred Income Taxes |
|
57,095 |
|
|
56,431 |
|
Derivative Liabilities |
|
443 |
|
|
2,103 |
|
Long-Term Obligations |
|
13,014 |
|
|
12,654 |
|
Total Liabilities |
|
395,841 |
|
|
412,015 |
|
|
|
|
|
|
Stockholders' Equity |
|
766,271 |
|
|
743,667 |
|
|
|
|
|
|
Total Liabilities and
Stockholders' Equity |
|
$ |
1,162,112 |
|
|
$ |
1,155,682 |
|
Balchem
CorporationCondensed Consolidated Statements of
Cash Flows(Dollars in thousands)(unaudited)
|
|
Three Months Ended March 31, |
|
|
2020 |
|
2019 |
Cash flows from
operating activities: |
|
|
|
|
Net earnings |
|
$ |
19,768 |
|
|
|
$ |
18,783 |
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
|
|
|
|
Depreciation and amortization |
|
12,549 |
|
|
|
10,836 |
|
|
Stock compensation expense |
|
2,181 |
|
|
|
1,631 |
|
|
Other adjustments |
|
634 |
|
|
|
(2,432 |
) |
|
Changes in assets and liabilities |
|
(12,567 |
) |
|
|
(6,335 |
) |
|
Net cash
provided by operating activities |
|
22,565 |
|
|
|
22,483 |
|
|
|
|
|
|
|
Cash flows from
investing activities: |
|
|
|
|
Capital expenditures
and intangible assets acquired |
|
(5,394 |
) |
|
|
(8,507 |
) |
|
Proceeds from
insurance |
|
— |
|
|
|
2,727 |
|
|
Net cash used
in investing activities |
|
(5,394 |
) |
|
|
(5,780 |
) |
|
|
|
|
|
|
Cash flows from
financing activities: |
|
|
|
|
Proceeds from revolving
loan |
|
10,000 |
|
|
|
— |
|
|
Principal payments on
revolving debt |
|
(5,000 |
) |
|
|
(16,000 |
) |
|
Proceeds from stock
options exercised |
|
4,435 |
|
|
|
288 |
|
|
Dividends paid |
|
(16,704 |
) |
|
|
(15,135 |
) |
|
Purchase of treasury
stock |
|
(891 |
) |
|
|
(727 |
) |
|
Net cash used
in financing activities |
|
(8,160 |
) |
|
|
(31,574 |
) |
|
|
|
|
|
|
Effect of exchange rate
changes on cash |
|
(724 |
) |
|
|
(393 |
) |
|
|
|
|
|
|
Increase in cash and
cash equivalents |
|
8,287 |
|
|
|
(15,264 |
) |
|
|
|
|
|
|
Cash and cash
equivalents, beginning of period |
|
65,672 |
|
|
|
54,268 |
|
|
Cash and cash
equivalents, end of period |
|
$ |
73,959 |
|
|
|
$ |
39,004 |
|
|
Non-GAAP Financial Information
In addition to disclosing financial results in
accordance with United States (U.S.) generally accepted accounting
principles (GAAP), this earnings release contains non-GAAP
financial measures that we believe are helpful in understanding and
comparing our past financial performance and our future results.
The non-GAAP financial measures disclosed by the company exclude
certain business combination accounting adjustments and certain
other items related to acquisitions, certain unallocated equity
compensation, and certain one-time or unusual transactions. These
non-GAAP financial measures should not be considered a substitute
for, or superior to, financial measures calculated in accordance
with GAAP, and the financial results calculated in accordance with
GAAP and reconciliations from these results should be carefully
evaluated. Management believes that these non-GAAP measures provide
useful information about the Company's core operating results and
thus are appropriate to enhance the overall understanding of the
Company's past financial performance and its prospects for the
future. The non-GAAP financial measures in this press release
include adjusted gross margin, adjusted earnings from operations,
adjusted net earnings and the related adjusted per diluted share
amounts, EBITDA, adjusted EBITDA, adjusted income tax expense, and
free cash flow. EBITDA is defined as earnings before interest,
other expense/income, taxes, depreciation and amortization.
Adjusted EBITDA is defined as earnings before interest, other
expense/income, taxes, depreciation, amortization, stock-based
compensation, transaction and integration costs, indemnification
settlements, legal settlements, ERP implementation costs,
unallocated legal fees, the fair valuation of acquired inventory,
and restructuring costs. Adjusted income tax expense is defined as
income tax expense adjusted for the impact of ASU 2016-09. Free
cash flow is defined as net cash provided by operating activities
less capital expenditures and capitalized ERP implementation
costs.
Set forth below are reconciliations of the
non-GAAP financial measures to the most directly comparable GAAP
financial measures.
Table 1
Reconciliation of Non-GAAP Measures to
GAAP(Dollars in thousands, except per share
data)(unaudited)
|
|
Three Months Ended March 31, |
|
|
2020 |
|
2019 |
Reconciliation of
adjusted gross margin |
|
|
|
|
GAAP gross margin |
|
$ |
55,331 |
|
|
|
$ |
49,095 |
|
|
Inventory valuation adjustment
(2) |
|
208 |
|
|
|
— |
|
|
Amortization of intangible
assets (3) |
|
724 |
|
|
|
734 |
|
|
Adjusted gross margin |
|
$ |
56,263 |
|
|
|
$ |
49,829 |
|
|
|
|
|
|
|
Reconciliation of
adjusted earnings from operations |
|
|
|
|
GAAP earnings from
operations |
|
$ |
26,278 |
|
|
|
$ |
26,480 |
|
|
Inventory valuation adjustment
(2) |
|
208 |
|
|
|
— |
|
|
Amortization of intangible
assets (3) |
|
6,979 |
|
|
|
5,842 |
|
|
Transaction and integration
costs, ERP implementation costs, and unallocated legal fees
(4) |
|
1,272 |
|
|
|
804 |
|
|
Adjusted earnings from
operations |
|
$ |
34,737 |
|
|
|
$ |
33,126 |
|
|
|
|
|
|
|
Reconciliation of
adjusted net earnings |
|
|
|
|
GAAP net earnings |
|
$ |
19,768 |
|
|
|
$ |
18,783 |
|
|
Inventory valuation adjustment
(2) |
|
208 |
|
|
|
— |
|
|
Amortization of intangible
assets (3) |
|
7,049 |
|
|
|
5,913 |
|
|
Transaction and integration
costs, ERP implementation costs, and unallocated legal fees
(4) |
|
1,272 |
|
|
|
804 |
|
|
Income tax adjustment (5) |
|
(1,856 |
) |
|
|
(1,770 |
) |
|
Adjusted net earnings |
|
$ |
26,441 |
|
|
|
$ |
23,730 |
|
|
|
|
|
|
|
Adjusted net earnings per
common share - diluted |
|
$ |
0.81 |
|
|
|
$ |
0.73 |
|
|
(2)
Inventory valuation adjustment: Business combination accounting
principles require us to measure acquired inventory at fair value.
The fair value of inventory reflects the acquired company’s cost of
manufacturing plus a portion of the expected profit margin. The
non-GAAP adjustment to our cost of sales excludes the expected
profit margin component that is recorded under business combination
accounting principles. We believe the adjustment is useful to
investors as an additional means to reflect cost of sales and gross
margin trends of our business. |
|
(3)
Amortization of intangible assets: Amortization of intangible
assets consists of amortization of customer relationships,
trademarks and trade names, developed technology, regulatory
registration costs, patents and trade secrets, capitalized loan
issuance costs, and other intangibles acquired primarily in
connection with business combinations. We record expense relating
to the amortization of these intangibles in our GAAP financial
statements. Amortization expenses for our intangible assets are
inconsistent in amount and are significantly impacted by the timing
and valuation of an acquisition. Consequently, our non-GAAP
adjustments exclude these expenses to facilitate an evaluation of
our current operating performance and comparisons to our past
operating performance. |
|
(4) Transaction and integration costs, ERP implementation
costs and unallocated legal fees: Transaction and integration costs
related to acquisitions and divestitures are expensed in our GAAP
financial statements. ERP implementation costs related to a
company-wide ERP system implementation are expensed in our GAAP
financial statements. Unallocated legal fees for
transaction-related non-compete agreement disputes are expensed in
our GAAP financial statements. Management excludes these items for
the purposes of calculating Adjusted EBITDA and other non-GAAP
financial measures. We believe that excluding these items from our
non-GAAP financial measures is useful to investors because these
are items associated with each transaction and are inconsistent in
amount and frequency causing comparison of current and historical
financial results to be difficult. |
|
(5) Income tax adjustment: For purposes of calculating adjusted net
earnings and adjusted diluted earnings per share, we adjust the
provision for (benefit from) income taxes to tax effect the taxable
and deductible non-GAAP adjustments described above as they have a
significant impact on our income tax (benefit) provision.
Additionally, the income tax adjustment is adjusted for the impact
of adopting ASU 2016-09, “Improvements to Employee Share-Based
Payment Accounting” and uses our non-GAAP effective rate applied to
both our GAAP earnings before income tax expense and non-GAAP
adjustments described above. See Table 3 for the calculation of our
non-GAAP effective tax rate. |
The following table sets forth a reconciliation
of Net Income calculated using amounts determined in accordance
with GAAP to EBITDA and to Adjusted EBITDA for the three months
ended March 31, 2020 and 2019.
Table 2 (unaudited)
|
|
Three Months Ended March 31, |
|
2020 |
|
2019 |
Net income - as reported |
|
$ |
19,768 |
|
|
$ |
18,783 |
|
Add back: |
|
|
|
|
Provision for income
taxes |
|
4,722 |
|
|
6,010 |
|
Other expense |
|
1,788 |
|
|
1,687 |
|
Depreciation and
amortization |
|
12,479 |
|
|
10,765 |
|
EBITDA |
|
38,757 |
|
|
37,245 |
|
Add back certain items: |
|
|
|
|
Non-cash compensation expense
related to equity awards |
|
2,134 |
|
|
1,631 |
|
Inventory valuation
adjustment |
|
208 |
|
|
— |
|
Transaction and integration
costs, ERP implementation costs, and unallocated legal fees |
|
1,272 |
|
|
804 |
|
Adjusted EBITDA |
|
$ |
42,371 |
|
|
$ |
39,680 |
|
The following table sets forth a reconciliation
of our GAAP effective income tax rate to our non-GAAP effective
income tax rate for the three months ended March 31, 2020 and
2019.
Table 3(unaudited)
|
|
Three Months Ended March 31, |
|
2020 |
|
Effective Tax Rate |
|
2019 |
|
Effective Tax Rate |
GAAP Income Tax Expense |
|
$ |
4,722 |
|
|
19.3 |
% |
|
$ |
6,010 |
|
|
24.2 |
% |
Impact of ASU 2016-09 (6) |
|
157 |
|
|
|
|
111 |
|
|
|
Adjusted Income Tax
Expense |
|
$ |
4,879 |
|
|
19.9 |
% |
|
$ |
6,121 |
|
|
24.7 |
% |
|
|
|
|
|
|
|
|
|
(6) Impact of ASU
2016-09: The primary impact of ASU No. 2016-09, "Improvements to
Employee Share-Based Payment Accounting" ("ASU 2016-09"), was the
recognition during the three months ended March 31, 2019 and 2018,
of excess tax benefits as a reduction to the provision for income
taxes and the classification of these excess tax benefits in
operating activities in the consolidated statement of cash flows
instead of financing activities. |
|
|
|
|
|
|
|
|
|
The following table sets forth a reconciliation
of net cash provided by operating activities to free cash flow for
the three months ended March 31, 2020 and 2019.
Table 4(unaudited)
|
|
Three Months Ended March 31, |
|
|
2020 |
|
2019 |
Net cash provided by operating activities |
|
$ |
22,565 |
|
|
|
$ |
22,483 |
|
|
Capital expenditures and
capitalized ERP implementation costs |
|
(5,152 |
) |
|
|
(8,488 |
) |
|
Free cash flow |
|
$ |
17,413 |
|
|
|
$ |
13,995 |
|
|
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