BALCHEM CORP annual report, FY2013

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Balchem Corporation (10-K): FY2013

Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Balchem develops and markets specialty ingredients and products across Specialty Products, Food, Pharma & Nutrition (FPN), and Animal Nutrition & Health (ANH). Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.

Financial performance

  • Revenue: $337.2 million, up 8.6% from $310.4 million in 2012. Gross margin was $97.4 million (28.9% of sales), versus $89.5 million (28.8%).
  • Operating results and earnings: Operating income rose 9.7% to $65.6 million; operating margin improved to 19.5% from 19.3%. Net earnings increased 12.2% to $44.9 million. Diluted EPS was $1.45, up from $1.32.
  • Cash flow and investment: Operating cash flow was $55.7 million, versus $53.8 million. Capital expenditures were $8.2 million, down from $13.9 million; free cash flow, calculated as operating cash flow less capital expenditures, was approximately $47.5 million.
  • Liquidity and debt: Cash and cash equivalents reached $208.7 million, up from $144.7 million. Working capital was $242.0 million. The company had no debt at year-end. Stockholders’ equity was $331.4 million.
  • Other metrics: The company declared dividends of $0.26 per share for 2013, versus $0.22 in 2012. Total assets were $376.9 million. Approximately 32% of sales were outside the United States.

Segments and changes versus 2012

  • ANH: Sales grew 10.3% to $238.5 million; segment operating earnings increased 21.5% to $34.1 million. Growth included higher sales of ReaShure, NitroShure and chelated minerals, feed-grade choline price increases, and a 20.4% rise in industrial sales, primarily associated with natural-gas fracking. AminoShure-L sales remained suspended following the 2012 decision.
  • FPN: Sales increased 7.9% to $47.6 million, while operating earnings edged down 0.9% to $11.2 million. Food-sector volumes and VitaShure products contributed to growth; higher raw-material costs for human choline pressured margins.
  • Specialty Products: Sales increased 2.2% to $51.1 million, while operating earnings decreased 0.5% to $20.2 million. Higher propylene oxide sales and operating efficiencies were partly offset by higher expenses.
  • Consolidated sales growth and higher volumes lifted gross profit; raw-material inflation partly offset operating efficiencies. The effective tax rate declined to 31.8% from 33.2%, primarily due to timing of tax credits and deductions.
  • Fourth quarter: Sales were $81.6 million versus $80.1 million in Q4 2012; net earnings were $10.7 million versus $9.9 million, and diluted EPS was $0.35 versus $0.33.

Outlook, risks and unusual items

  • Management projected 2014 capital expenditures of $14–15 million, expected operating cash flow to fund working capital and necessary investment, and said it was pursuing acquisition candidates. No specific revenue or earnings guidance was provided.
  • Key exposures include raw-material availability and pricing, competitive and economic conditions, international currency movements, manufacturing disruptions, and customer demand—particularly dairy economics and fracking-related industrial sales.
  • EPA registration reviews for ethylene oxide and propylene oxide were underway; management expected permitted uses to continue but noted additional testing could be required. Loss or restriction of registrations could materially affect the business. The Verona, Missouri site has a legacy Superfund designation; the prior owner is responsible for further remedy, with Balchem obligated to maintain remediation caps and reporting seller indemnification.
  • AminoShure-L sales were suspended in 2012 after research indicated lower-than-expected lysine bioavailability; the filing reports no safety concern. The 2013 goodwill impairment test found no impairment.
  • 2013 financing cash flow included $9.4 million of excess tax benefits from stock compensation. No dividends were paid in 2013, although $7.9 million was declared and remained payable at year-end. Cash included $6.8 million held by foreign subsidiaries that management intended to reinvest abroad.
  • The company reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements and internal controls.

Investor verification priorities

  1. Assess whether ANH’s growth and earnings improvement are sustainable, including dependence on industrial/fracking demand, feed-grade choline pricing, and dairy-market conditions.
  2. Track input-cost pass-through, especially in FPN, where higher human-choline raw-material costs reduced segment margins.
  3. Monitor EPA review milestones, testing requirements, and any changes to ethylene oxide or propylene oxide registrations.
  4. Reconcile cash generation with working-capital movements, the $9.4 million stock-compensation tax benefit, and the declared but unpaid year-end dividend.
  5. Evaluate planned 2014 capital spending and any acquisition financing needs against the company’s cash balance and no-debt position.