Balchem Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Balchem develops and sells specialty ingredients for human and animal nutrition, food, agriculture, medical sterilization and industrial markets.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $553.2 million | $552.5 million |
| Gross margin | $180.9 million; 32.7% of sales | $168.1 million; 30.4% of sales |
| Earnings from operations | $90.8 million; 16.4% of sales | $94.0 million; 17.0% of sales |
| Net earnings | $56.0 million | $59.7 million |
| Diluted EPS | $1.75 | $1.89 |
| Operating cash flow | $107.6 million | $103.8 million |
| Capital expenditures | $23.0 million | $41.3 million |
Fourth quarter: Sales were $140.8 million versus $132.7 million in Q4 2015; gross profit was $46.9 million versus $39.9 million; net earnings were $15.9 million versus $15.7 million; diluted EPS was $0.50 versus $0.49.
Balance sheet and liquidity: At year-end, cash and equivalents were $38.6 million, working capital was $87.4 million, and total debt was $281.5 million, including $19.0 million drawn on the revolver. Debt declined from $296.0 million in 2015. The company had $81.0 million of undrawn revolving capacity and was in compliance with its debt covenants. Management said operating cash flow should fund working capital and necessary capital investment.
Material changes and management commentary
- FY sales were nearly flat, but gross margin improved by 2.3 percentage points. Operating earnings fell 3.3% and net earnings fell 6.3%, reflecting higher operating expenses, acquisition-related inventory valuation and costs, greater amortization, and weakness in Industrial Products.
- Balchem acquired Albion International on February 1, 2016, for approximately $116.4 million. Albion contributed $49.6 million of sales and $2.9 million of net earnings after acquisition. Its human nutrition business joined Human Nutrition & Health; its agricultural nutrition business joined Specialty Products.
- Segment sales: Human Nutrition & Health rose 6.8% to $297.1 million, including Albion; Animal Nutrition & Health declined 2.8% to $161.1 million; Specialty Products rose 29.3% to $70.1 million, including Albion; Industrial Products fell 54.2% to $24.8 million, mainly due to lower demand for fracking-related products.
- Human Nutrition & Health and Animal Nutrition & Health benefited from product mix and, in some product lines, lower raw-material costs. Management cited continued priorities of improving plant efficiency, growing core volumes and expanding product applications and markets.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management projected 2017 capital expenditures of $25–$35 million and said it was pursuing additional acquisition candidates.
- Key risks include competition and raw-material price or supply changes; dairy-market economics; continued weakness in oil-and-gas activity; foreign-exchange exposure; manufacturing interruptions; and maintaining regulatory approvals and third-party cGMP manufacturing arrangements.
- EPA registration reviews for ethylene oxide and propylene oxide are ongoing. Management believes their permitted uses will continue, but failure to retain registrations could materially affect the business. Propylene oxide testing requirements include additional studies scheduled to begin in 2017.
- Environmental matters include ongoing NYDEC discussions about monitoring at the Slate Hill site and a legacy Superfund site at Verona. Management said it believes further Verona remediation is the prior owner’s responsibility and that the company has indemnification; it considers other litigation outcomes not material.
- The company disclosed a single $46,500 sale of ReaShure to a U.S. intermediary that exported it to Iran, stating the transaction complied with applicable exemptions and laws.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether Albion’s acquired businesses deliver sustained growth and earnings sufficient to support the purchase price and goodwill; goodwill was $439.8 million at year-end.
- Whether Industrial Products stabilizes as oil-and-gas activity changes, and whether animal nutrition results improve with dairy economics and competitive conditions.
- Debt repayment, interest-rate exposure under the LIBOR-based facility, and cash generation after planned capital expenditures and any further acquisitions.
- Progress and outcomes of EPA registration reviews and required testing, along with any developments in the environmental matters and related indemnities.
- Quarterly results are unaudited; confirm their comparability and assess annual results separately from acquisition contributions and related accounting costs.