Balchem Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also presents unaudited fourth-quarter results. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
Balchem develops and markets specialty ingredients for food, nutrition, animal health, pharmaceutical, medical sterilization and industrial markets. Its four reportable segments are SensoryEffects, Animal Nutrition & Health (ANH), Specialty Products and Industrial Products. The SensoryEffects business, acquired in May 2014, contributed for a full year in 2015. Industrial Products includes choline derivatives used in shale fracturing.
Financial and operating highlights
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $552.5 million | $541.4 million | +2.1% |
| Gross margin | $168.1 million; 30.4% | $144.2 million; 26.6% | +16.6%; +3.8 percentage points |
| Operating earnings | $94.0 million; 17.0% margin | $82.1 million; 15.2% margin | +14.4% |
| Net earnings | $59.7 million | $52.8 million | +13.1% |
| Diluted EPS | $1.89 | $1.69 | +11.8% |
| Operating cash flow | $103.8 million | $85.4 million | +21.7% |
| Capital expenditures | $41.3 million | $13.2 million | More than tripled |
Cash and cash equivalents were $84.8 million at year-end, versus $50.3 million a year earlier; working capital was $117.7 million versus $85.8 million. Year-end debt was $297.5 million, including $35.0 million current and $262.5 million long-term, with $100 million available under the revolving facility. The term loan rate was 1.73% at year-end; the company was in compliance with its loan covenants. Dividends declared were $0.34 per share, up from $0.30.
Fourth quarter: Sales were $132.7 million versus $162.7 million in Q4 2014; gross profit was $39.9 million versus $44.1 million; pretax earnings were $20.6 million versus $25.2 million; and net earnings were $15.7 million versus $19.0 million. Diluted EPS was $0.49 versus $0.61.
Material changes versus prior periods
- SensoryEffects sales rose 35.0% to $278.3 million, including a $69.8 million contribution from the acquired business; segment operating earnings increased to $38.3 million from $21.3 million.
- ANH sales declined 6.1% to $165.8 million, mainly on weaker dairy economics and lower feed-grade choline prices, partly offset by higher volume. Segment operating earnings nevertheless rose to $27.9 million, supported by mix and lower petrochemical input costs.
- Specialty Products sales were essentially flat at $54.2 million; segment operating earnings increased to $24.0 million, mainly due to lower raw material costs.
- Industrial Products sales fell 48.3% to $54.2 million as shale-fracturing demand contracted with oil-and-gas activity. Segment operating earnings decreased to $5.6 million from $16.5 million.
- Consolidated gross margin improved with lower raw material costs and favorable mix. Operating expenses rose to $74.1 million, partly reflecting acquired-business amortization, a $1.5 million one-time equity-compensation charge and $0.3 million of transaction/integration costs. FY2014 included $3.7 million of transaction/integration costs and a favorable $2.9 million net legal settlement.
Outlook, commentary, risks and unusual items
Management expected operations to generate sufficient cash for working capital and necessary investment, and projected 2016 capital expenditures of $20 million to $30 million. The filing gives no quantified revenue or earnings guidance. Management highlighted efficiency initiatives, plant-capability utilization, product-application expansion and broader domestic and international markets.
On February 1, 2016, after year-end, Balchem acquired Albion International for approximately $116.4 million. It funded $65 million through the revolving credit line and the remainder from existing cash. Albion’s human nutrition business is to join SensoryEffects and its plant nutrition business Specialty Products; purchase accounting and pro forma results were not yet complete at filing.
Key risks include reduced oil-and-gas activity, dairy-market weakness, competition, raw-material price or supply changes, foreign exchange exposure, and dependence on EPA registrations for ethylene oxide and propylene oxide. EPA registration reviews and possible additional testing remain in process; management believed permitted uses would continue. The company also disclosed environmental monitoring matters in Slate Hill, New York, and a Verona, Missouri Superfund site for which the prior owner is responsible for further remedy and Balchem has contractual indemnification. Management considered other legal proceedings not material. Foreign sales were approximately 20% of 2015 revenue. The auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Albion integration, financing and completed purchase accounting support the expected strategic and financial benefits; assess leverage after the $65 million revolver draw.
- Whether Industrial Products demand and earnings stabilize amid continued oil-and-gas market weakness.
- Whether margin gains persist after lower input costs and favorable mix, while tracking acquisition-related amortization and other unusual expenses.
- Progress, testing requirements and outcomes in EPA reviews of ethylene oxide and propylene oxide registrations, plus the status of environmental monitoring matters.
- Execution of planned 2016 capital investment and the company’s ability to sustain operating cash flow, debt repayment and dividends.