Balchem Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Amounts below are in U.S. dollars; financial figures are shown in millions unless stated otherwise. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
Balchem develops and sells specialty ingredients and products for human and animal nutrition, food, pharmaceuticals, medical-device sterilization, plant nutrition and industrial markets. Its reportable segments are Human Nutrition & Health (HNH), Animal Nutrition & Health (ANH), and Specialty Products. In 2021, 27% of net sales were outside the United States.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $799.0 | $703.6 | +13.6% |
| Gross margin | $243.2 | $223.9 | +8.6% |
| Gross margin as % of sales | 30.4% | 31.8% | −140 bps |
| Earnings from operations | $127.5 | $111.1 | +14.7% |
| Operating margin | 16.0% | 15.8% | +20 bps |
| Net earnings | $96.1 | $84.6 | +13.6% |
| Diluted EPS | $2.94 | $2.60 | +13.1% |
| Operating cash flow | $160.5 | $150.5 | +6.7% |
| Capital expenditures and acquired intangibles | $37.4 | $33.8 | +$3.6 |
Sales growth reflected higher average selling prices and, to a lesser extent, volume and mix. Cost of sales rose 15.9%, principally due to raw-material and other manufacturing input inflation; pricing increases lagged cost inflation and compressed gross margin. Operating expenses increased 2.6%, with higher compensation costs partly offset by lower consulting and outside-service costs.
Segment sales / earnings from operations: HNH sales were $442.7 million (+10.6%) and operating earnings $76.0 million (+23.8%); ANH sales were $226.8 million (+18.0%) and operating earnings $26.2 million (−12.7%); Specialty Products sales were $117.0 million (+13.0%) and operating earnings $30.0 million (+12.0%). ANH earnings fell mainly because input-cost inflation reduced its gross margin and compensation-related expenses increased.
Fourth quarter: Unaudited Q4 net sales were $213.1 million versus $180.7 million in Q4 2020; net earnings were $24.9 million versus $22.2 million, and diluted EPS was $0.76 versus $0.68.
Balance sheet and funding: Cash and cash equivalents were $103.2 million, working capital $178.4 million, and revolving debt $108.6 million at year-end. The $500 million revolving facility had $391.4 million available; the loan rate was 1.102% at year-end, and the company reported compliance with its debt covenants. Cash was $18.7 million higher than a year earlier. The company paid $18.7 million in dividends and repurchased $35.2 million of shares during 2021. A 100-basis-point interest-rate change on year-end borrowings was estimated to change annual interest expense and cash flow by approximately $1.1 million.
Changes, outlook and management commentary
- Sales increased across all three reportable segments. HNH and Specialty Products operating earnings improved; ANH operating earnings declined despite higher sales.
- Management cited severe supply-chain disruption, raw-material shortages and inflation, logistics constraints, and labor availability issues, which intensified during 2021 and were expected to persist for some time. The company said it secured most required materials and expected operations to generate sufficient cash for working capital and necessary investments.
- Management projected 2022 capital expenditures of $30 million to $40 million, including capacity, efficiency, and sustainability-related projects. The filing provides no specific 2022 revenue or earnings guidance.
- Year-end backlog was $65.7 million, compared with $64.8 million a year earlier; the company expected to fill current backlog orders during fiscal 2022.
- COVID-19 affected supply chains and reduced demand for certain products tied to elective and non-essential surgical procedures. The company’s manufacturing sites were operating near normal conditions at the time of the filing.
Risks, contingencies and unusual items
- Ethylene oxide regulation and customer facilities: EPA review could require additional mitigation or label changes. State and local scrutiny had affected some sterilization customers, including one permanent customer-site closure and temporary shutdowns at others. The company said the EPA’s proposed interim decision was anticipated in 2022; regulatory outcomes and customer impacts remain uncertain.
- Verona, Missouri environmental site: The EPA issued the operating subsidiary a General Notice Letter in 2020 and a Special Notice Letter in February 2022 concerning a focused investigation/study of contamination, including 1,4-dioxane. The company is investigating site conditions and cited seller indemnification, but the filing does not quantify potential exposure.
- Input costs and supply: Commodity price changes, shortages, freight and labor constraints may affect production and margins; selling-price adjustments may lag cost increases.
- Other exposures: Risks include COVID-19 and related demand or operating disruption, foreign-exchange and floating-rate debt exposure, competition, product quality or liability claims, and dependence on manufacturing facilities and regulatory permits. The credit agreement was due to mature in June 2023; LIBOR transition could require changes to legacy debt or hedging arrangements.
- Unusual and accounting items: The 2020 comparison included a $1.2 million goodwill impairment charge; no goodwill impairment was recorded in the 2021 annual test. Goodwill was $523.9 million at year-end, and its valuation was identified as a critical audit matter because of the sensitivity of forecasts, discount rates and terminal-value assumptions. The audit opinion was unqualified, and the auditor and management reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether pricing actions catch up with raw-material and other input-cost inflation, and whether gross margin stabilizes.
- Whether ANH profitability recovers after its 2021 margin contraction and higher operating costs.
- EPA decisions and resulting compliance costs for ethylene oxide, plus customer sterilization-site availability and demand.
- The status, scope and potential financial consequences of the Verona site investigation and related indemnities.
- Execution and returns on the $30–$40 million 2022 capital program, alongside cash generation, debt repayment and shareholder distributions.
- Goodwill impairment-test assumptions and the company’s transition from LIBOR-based debt and hedging arrangements.