Balchem Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Unless stated otherwise, financial amounts are in millions of dollars.
Business context
Balchem develops and sells specialty ingredients for human and animal nutrition, food, pharmaceutical, medical sterilization, agricultural, and industrial markets. Its four reportable segments are Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), Specialty Products, and Industrial Products. The 2018 results include the immaterial Bioscreen Technologies acquisition; 2017 included the IFP acquisition, which expanded HNH capabilities.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $643.7 | $594.8 | +8.2% |
| Gross margin | $204.3 | $189.0 | +8.1% |
| Gross margin % | 31.7% | 31.8% | -0.1 percentage point |
| Operating earnings | $107.8 | $97.3 | +10.8% |
| Operating margin | 16.7% | 16.4% | +0.3 percentage point |
| Earnings before taxes | $99.0 | $88.5 | +11.9% |
| Net earnings | $78.6 | $90.1 | -12.8% |
| Diluted EPS | $2.42 | $2.79 | -13.3% |
| Cash from operations | $118.7 | $110.6 | +$8.1 |
| Capital expenditures | $19.2 | $27.5 | -$8.4 |
Net earnings fell despite higher operating earnings, primarily because 2017 included a substantial one-time tax benefit from U.S. tax reform. The effective tax rate was 20.7% in 2018 versus negative 1.8% in 2017. The company completed its tax-reform analysis in 2018 and recorded an additional $1.0 million benefit; the total tax-reform benefit recognized across 2017 and 2018 was $26.8 million.
Segment sales were HNH $341.2 million (+8.1%), ANH $175.7 million (+11.4%), Specialty Products $75.8 million (+3.3%), and Industrial Products $50.9 million (+6.2%). Segment operating earnings increased in each segment. HNH growth included IFP contributions; ANH benefited partly from temporarily lower Chinese competitive activity, especially in Europe; Industrial Products benefited from higher prices for choline products used in shale-fracturing applications.
For Q4 2018, sales were $163.5 million versus $159.3 million in Q4 2017. Net earnings were $20.3 million versus $42.0 million, and diluted EPS was $0.63 versus $1.30; the prior-year quarter benefited from the tax-reform accounting benefit.
Liquidity, debt, and capital
- Cash and cash equivalents were $54.3 million at year-end, up from $40.4 million; $19.2 million was held by foreign subsidiaries and management intended to reinvest it abroad.
- Working capital was $144.3 million, compared with $90.9 million. Current assets were $226.3 million and current liabilities $82.1 million.
- Debt totaled $156.0 million, all outstanding under a new five-year senior secured revolving credit agreement expiring June 27, 2023. The facility provides up to $500 million; $344 million remained unused. The year-end interest rate was 3.647%, and the company reported compliance with covenants.
- The annual report reports $118.7 million of operating cash flow and $19.2 million of capital expenditures. Dividends were $0.47 per share in 2018, up from $0.42 in 2017.
Changes, outlook, risks, and unusual items
- Management said operating cash flow should fund working capital and necessary investment, and it continued to pursue acquisition candidates. No earnings or revenue guidance was provided. 2019 capital spending was projected at $30–$40 million.
- HNH gross margin percentage declined, mainly due to product mix and raw-material cost increases; ANH, Specialty Products, and Industrial Products margins improved. Operating expenses included approximately $1.8 million of IFP-integration impairment charges. 2018 results also included $4.2 million of insurance proceeds associated with the Clearfield fire.
- Raw-material price and supply changes, competition, customer demand, foreign exchange, international trade and regulatory changes, and manufacturing interruptions could affect results. Industrial Products has exposure to oil-and-gas activity and shale-fracturing demand.
- EPA registration reviews for ethylene oxide and propylene oxide were ongoing. Management expected their approved uses to continue, but loss of either registration could materially harm the relevant business. The Verona, Missouri site has a legacy Superfund designation; the company says the prior owner is responsible for further remediation and the company has seller indemnification.
- Tax risks include potential U.S. tax on foreign earnings under GILTI and limits on foreign tax credits. The company recorded $5.7 million of unrecognized tax benefits; settlement timing is not reasonably estimable.
- Legal matters were described as arising in the normal course, with management not expecting a material effect. The auditor issued unqualified opinions on the financial statements and internal control; management also concluded controls were effective, excluding the recently acquired Bioscreen from its assessment.
Important facts for investors to verify
- Whether ANH’s 2018 growth benefit from temporarily reduced Chinese competition persists.
- Progress and outcomes of EPA registration reviews for ethylene oxide and propylene oxide.
- How GILTI rules, foreign tax credits, and future tax guidance affect the effective tax rate and foreign earnings.
- 2019 capital-spending plans, acquisition activity, and the company’s use of its revolving credit capacity.
- Whether raw-material costs, shale-fracturing demand, foreign exchange, and customer mix pressure margins or cash conversion.