Balchem Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; quarterly figures below identify the fourth quarter. Unless stated otherwise, dollar amounts are in millions. Balchem develops specialty ingredients and products for human and animal nutrition, food, medical-device sterilization, agriculture, and industrial markets. It changed from four reportable segments to three in 2020, moving residual activities and corporate items to “Other and Unallocated”; prior-year segment data was retrospectively recast, with no change to consolidated financial statements.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $703.6 | $643.7 | +9.3% |
| Gross margin | $223.9; 31.8% of sales | $211.4; 32.8% | +5.9%; margin down 1.0 percentage point |
| Operating earnings | $111.1; 15.8% of sales | $102.6; 15.9% | +8.4% |
| Net earnings | $84.6 | $79.7 | +6.2% |
| Diluted EPS | $2.60 | $2.45 | +6.1% |
| Operating cash flow | $150.5 | $124.5 | +$26.0 |
- Fourth-quarter net sales were $180.7 million versus $166.5 million; net earnings were $22.2 million versus $20.4 million, and diluted EPS was $0.68 versus $0.63.
- Cash and cash equivalents were $84.6 million, including $55.0 million held by foreign subsidiaries that Balchem intends to reinvest abroad. Working capital was $172.5 million.
- Revolving debt was $163.6 million, down from $248.6 million. Net debt was approximately $79.0 million. The $500 million credit facility had $336.4 million of unused capacity; its stated maturity is June 2023. Balchem reported compliance with its covenants.
- Capital expenditures were $32.1 million; cash outflow for capital expenditures and intangible assets was $33.8 million. Operating cash flow less that latter amount was approximately $116.7 million.
- Dividends declared were $0.58 per share versus $0.52 in 2019. The company repurchased 136,629 shares for $13.5 million during 2020.
Segment performance and changes
- Human Nutrition & Health: Sales rose 15.2% to $400.3 million; operating earnings increased 26.8% to $61.4 million. Growth reflected food and beverage, chelated minerals, choline nutrients, and Zumbro, partly offset by weaker food-service-related sales and the Reading-site divestiture.
- Animal Nutrition & Health: Sales rose 8.2% to $192.2 million; operating earnings increased 15.9% to $30.0 million. Higher volumes and favorable mix, including in ruminant, monogastric, and companion-animal markets, contributed.
- Specialty Products: Sales rose 12.3% to $103.6 million, but operating earnings fell 6.0% to $26.8 million. Chemogas and plant nutrition contributed to sales growth; lower legacy ethylene oxide sales and acquisition-related costs weighed on earnings.
- Other and Unallocated: Sales fell to $7.6 million from $26.5 million, primarily reflecting lower activity in the former Industrial Products business, including shale-fracking markets. The category also includes corporate costs.
Gross margin declined primarily because of product mix, partly offset by lower raw-material costs. Operating expenses increased 3.6%, with acquisition costs and prior-year insurance-recovery timing partly offset by lower travel-related selling costs and lower bad-debt expense. Interest expense declined 25.5%; the effective tax rate increased to 20.5% from 17.4%, mainly due to reduced tax credits. A $1.2 million goodwill impairment was recorded in the second quarter for a business formerly in Industrial Products; annual goodwill testing otherwise found no impairment.
Outlook, risks, and contingencies
- Management said COVID-19 had not materially affected overall demand to date and that manufacturing sites were operating near normal. Reduced elective procedures lowered legacy ethylene oxide sales; food-service-related markets were also weaker. Management emphasized employee safety, continuity of supply, cash preservation, and liquidity.
- No quantified earnings or revenue guidance is provided. Management projected 2021 capital expenditures of $30–$40 million, expected the $64.8 million year-end backlog to be filled during 2021, and expected full ERP conversion during 2021. It reported approximately 92% of revenue on the new ERP system at year-end.
- Ethylene oxide regulation and customer access: EPA review may bring additional mitigation measures or label changes. State and local actions had permanently shut one customer facility and temporarily closed another; other customers were installing abatement equipment or taking downtime. Further regulation or customer disruption could affect sales. The company also faces EPA registration reviews for propylene oxide, though it expected minimal label changes based on draft materials.
- Environmental matter: A subsidiary received an EPA General Notice Letter in September 2020 concerning potential liability for 1,4-dioxane contamination at the Verona, Missouri site. Balchem said it believed the contamination related to the former owner’s operations and was investigating site conditions. Management did not expect ordinary-course litigation to materially affect financial position, results, or liquidity.
- Other stated risks include COVID-19 and economic conditions, competition, raw-material price or supply changes, manufacturing and product-quality disruptions, foreign exchange and interest-rate exposure, acquisition integration, labor relations, and cyber incidents. A LIBOR-referenced credit facility and hedges may require transition or amendment as LIBOR is phased out.
- Auditors issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. Goodwill valuation was identified as a critical audit matter because it depends on forecasts, discount rates, and terminal-value assumptions.
Important facts for investors to verify
- Whether EPA decisions and customer abatement or downtime materially change ethylene oxide volumes, costs, or permitted uses.
- How much future sales and earnings growth comes from underlying demand versus acquisitions, especially Zumbro and Chemogas, and the trajectory of segment margins.
- Whether operating cash generation remains strong after planned capital investment, dividends, repurchases, and any additional acquisitions.
- Debt repayment, covenant headroom, and the transition of LIBOR-based borrowings and hedges to a replacement reference rate.
- Progress and financial impact of the Verona 1,4-dioxane inquiry, including any response from EPA and the applicability of contractual indemnities.
- Whether projected capital spending, backlog conversion, and ERP completion occur as management expected; the filing provides no specific earnings or revenue forecast.