Balchem Corporation — FY 2019 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2019; the quarterly figures below are for Q4. Balchem develops and sells specialty ingredients and products across Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), Specialty Products, and Industrial Products. Amounts are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $643.7 million | $643.7 million |
| Gross margin | $211.4 million; 32.8% of sales | $204.3 million; 31.7% |
| Earnings from operations | $102.6 million; 15.9% of sales | $107.1 million; 16.6% |
| Net earnings | $79.7 million | $78.6 million |
| Diluted EPS | $2.45 | $2.42 |
| Operating cash flow | $124.5 million | $118.7 million |
| Cash and cash equivalents | $65.7 million | $54.3 million |
| Revolving debt | $248.6 million | $156.0 million |
Q4 2019 sales were $166.5 million versus $163.5 million in Q4 2018; gross profit was $54.3 million versus $51.3 million; pretax earnings were $22.4 million versus $25.3 million; and net earnings were $20.4 million versus $20.3 million. Diluted EPS was $0.63 in both quarters.
Working capital was $162.7 million, up from $144.3 million. The company had $251.4 million available on its $500 million revolving credit facility at year-end and was in compliance with its debt covenants. A 100-basis-point change in interest rates would change annual interest expense and cash flow by approximately $2.5 million, based on year-end borrowings.
Changes and operating drivers
- Consolidated sales were essentially unchanged year over year. HNH sales increased 1.8% to $347.4 million; ANH rose 1.1% to $177.6 million; Specialty Products increased 21.7% to $92.3 million; and Industrial Products fell 48.1% to $26.5 million.
- Specialty Products growth reflected Chemogas, acquired in May, and higher ethylene oxide sales for medical-device sterilization. Zumbro, acquired in December, joined HNH. Together, the two acquisitions used $141.1 million of net cash and contributed approximately 3% of 2019 consolidated sales; acquired assets represented approximately 15% of year-end assets.
- Industrial Products was hurt by lower volumes of choline derivatives used in shale-fracturing applications. Management reported that oil-and-gas downturn conditions and declining demand began in Q2 2019.
- Gross margin improved on mix and lower raw-material costs. Operating expenses rose 12.0%, including acquisition-related costs, higher bad-debt expense, outside services, restructuring, and ERP implementation costs. Operating earnings declined 4.2%.
- Interest expense declined to $6.0 million from $7.6 million. The effective tax rate fell to 17.4% from 20.7%, primarily reflecting Italy’s Patent Box tax benefit and lower U.S. state taxes, partly offset by reduced foreign tax credits.
Cash, capital allocation, and outlook
Investing cash outflow was $156.2 million, principally reflecting acquisitions; financing cash flow was positive $43.4 million, including increased revolving borrowings. Capital expenditures were $25.8 million, compared with $19.2 million in 2018. The company projected 2020 capital expenditures of $30–$35 million and expected operating cash flow to fund working capital and necessary capital investment. No specific revenue or earnings guidance is provided in the filing.
Cash dividends declared were $0.52 per share in 2019, up from $0.47 in 2018. The company repurchased 240,995 shares during 2019 at an average cost of $88.47 per share. Of year-end cash, $35.2 million was held by foreign subsidiaries and management intended to reinvest it abroad.
Risks, contingencies, and unusual items
- State and local scrutiny of ethylene oxide emissions has restricted or temporarily disrupted some customers’ sterilization operations, including one customer facility shutdown and voluntary downtime at others. Future EPA requirements or failure to maintain product registrations could materially affect Specialty Products; the company believes the industry can install abatement equipment but gives no assurance.
- Industrial Products faces exposure to continued weakness in oil-and-gas spending and related shale-fracturing demand. Raw-material price increases, supply disruption, competition, foreign exchange, manufacturing interruptions, product liability, and acquisition integration are also identified risks.
- The company recorded a $1.0 million HNH restructuring impairment charge. Bad-debt provision increased to $1.8 million from $0.04 million. Goodwill was $524.0 million; the annual impairment test found no impairment, but its valuation relies on estimates of growth, margins, and discount rates.
- Legal matters were described as arising in the ordinary course, with management not expecting a material effect. The Verona, Missouri Superfund site is subject to capped-area maintenance by Balchem; the prior owner is responsible for further remedy, and Balchem reports seller indemnification.
- Financial statements received an unqualified audit opinion, and management and the auditor reported effective internal controls. Chemogas and Zumbro, together representing approximately 15% of assets, were excluded from the 2019 internal-control assessment while integration work continued.
Important facts for investors to verify
- Whether ethylene oxide customers resume or sustain operations and how EPA and state emissions rules affect sterilization volumes and compliance costs.
- Whether Industrial Products demand stabilizes, and whether HNH and ANH growth offsets continued competitive and pricing pressure.
- Acquisition integration, final purchase-price allocations, expected synergies, and the assumptions supporting the substantial goodwill and acquired intangible balances.
- Debt reduction, interest-rate exposure, and the availability of cash held overseas for domestic needs.
- The durability of the 2019 tax-rate benefit and the effect of future tax guidance or changes to the Italian Patent Box treatment.