BALCHEM CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in this report. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 (filed with theSEC onFebruary 19, 2021 ) for additional discussion of our financial condition and results of operations for the year endedDecember 31, 2019 , as well as our financial condition and results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Those statements in the following discussion that are not historical in nature should be considered to be forward-looking statements that are inherently uncertain. See "Cautionary Statement Regarding Forward-Looking Statements."
Overview
We develop, manufacture, distribute and market specialty performance ingredients
and products for the nutritional, food, pharmaceutical, animal health, medical
device sterilization, plant nutrition and industrial markets. Our three
reportable segments are strategic businesses that offer products and services to
different markets: Human Nutrition & Health, Animal Nutrition &
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Health, and Specialty Products, as more fully described in Note 11 of the consolidated financial statements. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated".
Balchem is committed to solving today's challenges to shape a healthier tomorrow by operating responsibly and providing innovative solutions for the health and nutritional needs of the world. Sustainability is at the heart of our company's vision to make the world a healthier place, and we proudly support the Ten Principles of the United Nations Global Compact on human rights, labor, environment and anti-corruption. InJanuary 2022 ,Balchem was named one of America's Most Responsible Companies byNewsweek magazine for the second consecutive year. This list, compiled by Newsweek in partnership withStatista Inc. , recognizes the most responsible companies in theU.S. across a variety of industries, and is based on publicly available environmental, social and governance (ESG) data. Our Sustainability Framework focuses on the most critical ESG topics relevant to our business and stakeholders. We are very proud of our ESG accomplishments to date and are pleased with the recognition by Newsweek.Balchem will continue to foster these fundamental principles broadly along our entire value chain, develop new ideas and technologies that help us work smarter, and help build a world that is a better place to live.
COVID-19 Response
The COVID-19 response effort has been a primary focus for us since early last year. Our focus has been on employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate. As a result of our broad based risk mitigation efforts of the direct impacts of the Covid-19 pandemic, our manufacturing sites have been operating at near normal conditions, our research and development teams have continued to innovate in our laboratories, and all of our other employees have been effectively carrying on their responsibilities and functions remotely or in a reduced density hybrid setting. We are increasingly focused on managing the extraordinary supply chain disruptions that are challenging the markets we operate within that are, at least in part, related to the pandemic and/or the global recovery from the pandemic. We are experiencing severe input cost inflation, raw material shortages, logistics disruptions, and labor availability issues. These indirect pandemic related challenges accelerated as 2021 progressed and are likely to continue for some time. Segment Results
We sell products for all three segments through our own sales force, independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three years endedDecember 31, 2021 , 2020 and 2019 (in thousands): 15
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Table of Contents Business SegmentNet Sales 2021 2020 2019 Human Nutrition & Health$ 442,733 $ 400,330 $ 347,433 Animal Nutrition & Health 226,776 192,191 177,557 Specialty Products 117,020 103,566 92,257 Other and Unallocated (1) 12,494 7,557 26,458 Total$ 799,023 $
703,644
Business Segment Earnings From
Operations
2021 2020 2019
Human Nutrition & Health $ 76,031 $ 61,397 $ 48,429
Animal Nutrition & Health 26,179 29,979 25,868
Specialty Products 30,020 26,801 28,513
Other and Unallocated (1) (4,728) (7,030) (257)
Total $ 127,502 $
111,147
(1) Other and Unallocated consists of a few minor businesses which individually do not meet the quantitative thresholds for separate presentation and corporate expenses that have not been allocated to a segment. Unallocated corporate expenses consist of: (i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling$1,264 ,$2,410 and$3,436 for years endedDecember 31, 2021 , 2020 and 2019, respectively, and (ii) Unallocated amortization expense of$2,510 ,$1,606 , and$551 for years endedDecember 31, 2021 , 2020, and 2019, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.
Acquisitions
OnDecember 13, 2019 , the Company completed an acquisition of Zumbro. The Company made payments of$52,403 on the acquisition date, amounting to$47,058 to the former shareholders and$5,345 to Zumbro's lenders to pay Zumbro debt. Considering the cash acquired of$686 , net payments made to the former shareholders were$46,372 . InMay 2020 , we received an adjustment for working capital acquired of$561 . Zumbro is integrated within the HNH Segment. OnMay 27, 2019 , we acquired Chemogas. We made payments of approximately €99,503 (translated to$111,324 ) on the acquisition date, amounting to approximately €88,579 (translated to$99,102 ) to the former shareholders and approximately €10,924 (translated to$12,222 ) to Chemogas' lender to pay off all Chemogas bank debt. Considering the cash acquired of €3,943 (translated to$4,412 ), net payments made to the former shareholders were €84,636 (translated to$94,690 ). Chemogas is integrated within the Specialty Products Segment. RESULTS OF OPERATIONS (All amounts in thousands, except share and per share data)
Fiscal Year 2021 compared to Fiscal Year 2020
Net Earnings
Increase
(in thousands) 2021 2020 (Decrease) % Change
Net sales $ 799,023 $ 703,644 $ 95,379 13.6 %
Gross margin 243,174 223,897 19,277 8.6 %
Operating expenses 115,672 112,750 2,922 2.6 %
Earnings from operations 127,502 111,147 16,355 14.7 %
Other expenses 2,269 4,730 (2,461) (52.0) %
Income tax expense 29,129 21,794 7,335 33.7 %
Net earnings $ 96,104 $ 84,623 $ 11,481 13.6 %
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Table of ContentsNet Sales Increase (in thousands) 2021 2020 (Decrease) % Change Human Nutrition & Health$ 442,733 $ 400,330 $ 42,403 10.6 % Animal Nutrition & Health 226,776 192,191 34,585 18.0 % Specialty Products 117,020 103,566 13,454 13.0 % Other 12,494 7,557 4,937 65.3 % Total$ 799,023 $ 703,644 $ 95,379 13.6 % •The increase in net sales within the Human Nutrition & Health segment for 2021 as compared to 2020 was primarily attributed to sales growth within food, beverage, and nutrition markets. Total sales for this segment grew 10.6%, with average selling prices contributing 9.3%, volume and mix contributing 1.2%, and the change in foreign currency exchange rates contributing 0.1%. •The increase in net sales within the ANH segment for 2021 compared to 2020 was primarily the result of higher sales in both monogastric and ruminant animal markets. Total sales for this segment grew 18.0%, with average selling prices contributing 10.6%, volume and mix contributing 6.3%, and the change in foreign currency exchange rates contributing 1.2%. •The increase in Specialty Products segment sales for 2021 compared to 2020 was primarily due to year over year sales growth in both the medical device sterilization market and plant nutrition business. Total sales for this segment increased 13.0%, with average selling prices contributing 8.6%, volume and mix contributing 3.4%, and the change in foreign currency exchange rates contributing 1.1%. •Sales relating to Other increased from the prior year due to higher demand. •Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market. Gross Margin Increase (in thousands) 2021 2020 (Decrease) % Change Gross margin$ 243,174 $ 223,897 $ 19,277 8.6 % % of net sales 30.4 % 31.8 % Gross margin dollars increased in 2021 compared to 2020 due to the aforementioned higher sales of$95,379 , partially offset by an increase in cost of goods sold of$76,102 . The 15.9% increase in cost of goods sold was primarily driven by the significant inflation of manufacturing input costs, primarily related to raw materials. Price increases lagged this inflation, leading to a 140 basis point decrease in gross margin as a percentage of sales. Operating Expenses Increase (in thousands) 2021 2020 (Decrease) % Change Operating expenses$ 115,672 $ 112,750 $ 2,922 2.6 % % of net sales 14.5 % 16.0 %
The increase in operating expenses was primarily due to certain higher
compensation-related costs of
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Earnings From Operations
Increase
(in thousands) 2021 2020 (Decrease) % Change
Human Nutrition & Health $ 76,031 $ 61,397 $ 14,634 23.8 %
Animal Nutrition & Health 26,179 29,979 (3,800) (12.7) %
Specialty Products 30,020 26,801 3,219 12.0 %
Other and unallocated (4,728) (7,030) 2,302 32.7 %
Earnings from operations $ 127,502 $ 111,147 $ 16,355 14.7 %
% of net sales (operating margin) 16.0 % 15.8 %
•Earnings from operations for the Human Nutrition & Health segment increased
primarily due to the aforementioned higher sales and a 60 basis point increase
in gross margin.
•Animal Nutrition & Health segment earnings from operations decreased primarily
due to a 430 basis point decrease in gross margin as a percentage of sales,
driven by a significant increase in certain manufacturing input costs, primarily
related to raw materials, partially offset by the aforementioned higher sales.
Additionally, total operating expenses for this segment increased by $3,240 ,
primarily due to higher compensation-related costs of $3,031 .
•The increase in earnings from operations for the Specialty Products segment was
primarily due to the aforementioned higher sales, partially offset by a 240
basis point decrease in gross margin as a percentage of sales, driven by a
significant increase in certain manufacturing input costs, primarily related to
raw materials.
•The increase in Other and unallocated was primarily driven by a decrease in
transaction and integration costs of $1,562 and the prior year being negatively
impacted by a goodwill impairment charge related to business formerly included
in the Industrial Products segment of $1,228 , partially offset by an increase in
costs related to a company-wide ERP implementation of $1,300 .
Other Expenses (Income)
Increase
(in thousands) 2021 2020 (Decrease) % Change
Interest expense, net $ 2,456 $ 4,439 $ (1,983) (44.7) %
Other, net (187) 291 (478) (164.3) %
$ 2,269 $ 4,730 $ (2,461) (52.0) %
Interest expense for 2021 and 2020 was primarily related to outstanding
borrowings under our credit facility. The decrease was due to a reduction in
borrowings during 2021.
Income Tax Expense
Increase
(in thousands) 2021 2020 (Decrease) % Change
Income tax expense (benefit) $ 29,129 $ 21,794 $ 7,335 33.7 %
Effective tax rate 23.3 % 20.5 %
Our effective tax rate for 2021 and 2020 was 23.3% and 20.5%, respectively. The increase was primarily due to a reduction in certain tax credits, lower tax benefits from stock-based compensation, and higher enacted state tax rates.
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LIQUIDITY AND CAPITAL RESOURCES
(All amounts in thousands, except share and per share data)Contractual Obligations
Our short-term purchase obligations primarily include contractual arrangements in the form of purchase orders with suppliers. As ofDecember 31, 2021 , such purchase obligations were$123,828 . For debt obligations, see Note 8, Revolving Loan, and for operating and finance lease obligations, see Note 16 Commitments and Contingencies.
The contractual obligations exclude a
We know of no current or pending demands on, or commitments for, our liquid assets that will materially affect our liquidity.
We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments. We are actively pursuing additional acquisition candidates. We could seek additional bank loans or access to financial markets to fund such acquisitions, our operations, working capital, necessary capital investments or other cash requirements should we deem it necessary to do so.
Cash
Cash and cash equivalents increased to$103,239 atDecember 31, 2021 from$84,571 atDecember 31, 2020 . AtDecember 31, 2021 , we had$52,071 of cash and cash equivalents held by our foreign subsidiaries. We presently intend to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fundU.S. operations or obligations. However, if these funds are needed forU.S. operations, we could be required to pay additional withholding taxes to repatriate these funds. Working capital was$178,430 atDecember 31, 2021 as compared to$172,460 atDecember 31, 2020 , an increase of$5,970 . Working capital reflects the payment of the 2020 declared dividend in 2021 of$18,723 , net payments on the revolving debt of$55,000 , capital expenditures and intangible assets acquired of$37,449 , and common stock repurchases of$35,239 . Increase (in thousands) 2021 2020 (Decrease) % Change Cash flows provided by operating activities$ 160,514 $ 150,494 $ 10,020 6.7 % Cash flows used in investing activities (35,300) (34,591) (709) (2.0) % Cash flows used in financing activities (102,178) (101,164) (1,014) (1.0) % Operating Activities
The increase in cash flows from operating activities was primarily due to increased earnings and improved changes in assets and liabilities.
Investing Activities
We continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and intangible assets were$37,449 and$33,828 for the years endedDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , capital expenditures are projected to range from$30,000 to$40,000 for 2022. As mentioned above, we expect that our operations will continue to generate sufficient cash flow to fund the commitments for capital expenditures. These capital expenditures are part of our continuous efforts to support our growing businesses. Financing Activities We borrowed$5,000 against the revolving loan and made total debt payments of$60,000 during 2021, resulting in$391,431 available under the Credit Agreement as ofDecember 31, 2021 . We have an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program inJune 1999 , a total of 2,818,244 shares have been purchased. We repurchase shares from employees in connection with settlement of transactions under our equity incentive plans. We also intend to acquire shares from time to time at 19
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prevailing market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market conditions and other factors.
Proceeds from stock options exercised were
Other Matters Impacting Liquidity
We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 15 - Employee Benefit Plans. The liability recorded in other long-term liabilities on the consolidated balance sheets as ofDecember 31, 2021 andDecember 31, 2020 was$1,293 and$1,374 , respectively, and the plans are not funded. Historical cash payments made under these plans have typically been less than$200 per year. We do not anticipate any changes to the payments made in the current year for the plans. OnJune 1, 2018 , we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are included in non-current assets on our balance sheet. They are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as ofDecember 31, 2021 andDecember 31, 2020 was$6,270 and$3,581 , respectively, and is included in other long-term obligations on our balance sheet. Chemogas has an unfunded defined benefit plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amount recorded for these obligations on our balance sheet as ofDecember 31, 2021 andDecember 31, 2020 was$684 and$950 , respectively, and was included in other long-term obligations.
Related Party Transactions
We were engaged in related party transactions withSt. Gabriel CC Company, LLC for the years endedDecember 31, 2021 andDecember 31, 2020 . Refer to Note 18, "Related Party Transactions".
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our management is required to make these critical accounting estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America . These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates. Our "critical accounting estimates" are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. Management considers the following to be critical accounting estimates.
The valuation methods and assumptions used in assessing the impairment of goodwill and identified intangibles, as well as determining the useful life of an intangible asset involve a significant level of estimation uncertainty. Refer to theGoodwill and Acquired Intangible Assets section in Note 1, "Business Description and Summary of Significant Accounting Policies," for details related to the valuation and impairment process of both goodwill and intangible assets. Changes in market conditions, laws and regulations, and key assumptions made in future quantitative assessments, including expected cash flows, competitive factors and discount rates, could result in the recognition of an impairment charge, and in turn could have a material impact on our financial condition or results of operations in subsequent periods.
Significant Accounting Policies and Recent Accounting Pronouncements
See Note 1 in Notes to Consolidated Financial Statements regarding significant accounting policies and recent accounting pronouncements.
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