FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2006
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
--------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 600 New Hampton, New York 10958
--------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
845-326-5600
--------------------------------------------------
Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 3, 2006 the registrant had 11,653,917 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
Assets September 30, December 31,
2006 2005
------------- -------------
Current assets:
Cash and cash equivalents $ 2,660 $ 12,996
Accounts receivable 11,283 11,521
Inventories 8,716 8,540
Prepaid income taxes -- 143
Prepaid expenses and other 716 1,790
Deferred income taxes 280 276
------------- -------------
Total current assets 23,655 35,266
Property, plant and equipment, net 30,970 24,400
Goodwill 25,152 13,327
Intangible assets with finite lives, net 7,073 2,148
------------- -------------
Total assets $ 86,850 $ 75,141
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 3,450 $ 2,562
Accrued expenses 1,449 2,601
Accrued compensation and other benefits 1,701 1,756
Customer deposits and other deferred revenue 270 1,186
Dividends payable -- 1,045
Income tax payable 983 --
------------- -------------
Total current liabilities 7,853 9,150
Deferred income taxes 6,376 4,015
Other long-term obligations 1,073 1,043
------------- -------------
Total liabilities 15,302 14,208
------------- -------------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 25,000,000 shares;
11,655,087 shares issued and 11,633,030 shares outstanding
at September 30, 2006 and 11,640,964 shares issued and
11,576,948 shares outstanding at December 31, 2005 777 776
Additional paid-in capital 8,803 8,008
Retained earnings 62,370 53,306
Treasury stock, at cost: 22,057 and 64,016 shares at
September 30, 2006 and December 31, 2005,
respectively (402) (1,157)
------------- -------------
Total stockholders' equity 71,548 60,933
------------- -------------
Total liabilities and stockholders' equity $ 86,850 $ 75,141
============= =============
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $ 25,122 $ 21,145 $ 74,819 $ 59,969
Cost of sales 16,449 13,496 49,124 38,026
-------- -------- -------- --------
Gross profit 8,673 7,649 25,695 21,943
Operating expenses:
Selling expenses 1,683 1,200 5,293 3,511
Research and development expenses 549 492 1,561 1,537
General and administrative expenses 1,460 1,226 4,521 3,854
-------- -------- -------- --------
3,692 2,918 11,375 8,902
-------- -------- -------- --------
Earnings from operations 4,981 4,731 14,320 13,041
Other expenses (income):
Interest (income) (13) (46) (102) (155)
Interest expense 16 2 186 6
Other, net -- (82) -- (82)
-------- -------- -------- --------
Earnings before income tax expense 4,978 4,857 14,236 13,272
Income tax expense 1,827 1,833 5,172 4,950
-------- -------- -------- --------
Net earnings $ 3,151 $ 3,024 $ 9,064 $ 8,322
======== ======== ======== ========
Net earnings per common share - basic $ 0.27 $ 0.26 $ 0.78 $ 0.72
======== ======== ======== ========
Net earnings per common share - diluted $ 0.26 $ 0.25 $ 0.75 $ 0.69
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Nine Months Ended
September 30,
2006 2005
-------- --------
Cash flows from operating activities:
Net earnings $ 9,064 $ 8,322
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,573 2,078
Shares issued under employee benefit plans 281 215
Deferred income taxes (11) 97
Stock compensation expense 786 --
Excess tax benefits from stock compensation -- 176
Provision for doubtful accounts 23 (32)
Gain on sale of equipment -- (82)
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable 215 (1,474)
Inventories 376 (1,717)
Prepaid expenses and other current assets 1,074 842
Income taxes 1,125 826
Customer deposits and other deferred revenue (916) (687)
Accounts payable and accrued expenses (318) 1,217
Other long-term obligations 41 46
-------- --------
Net cash provided by operating activities 14,313 9,827
-------- --------
Cash flows from investing activities:
Capital expenditures (1,235) (1,186)
Proceeds from sale of property, plant & equipment -- 389
Cash paid for intangible assets acquired (71) (102)
Acquisition of assets (22,772) (11,419)
-------- --------
Net cash used in investing activities (24,078) (12,318)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 10,000 --
Principal payments on borrowings (10,000) --
Proceeds from stock options 321 1,263
Excess tax benefits from stock compensation 163 --
Dividends paid (1,045) (685)
Purchase of treasury stock -- (88)
Other financing activities (10) (10)
-------- --------
Net cash (used in) provided by financing activities (571) 480
-------- --------
Decrease in cash and cash equivalents (10,336) (2,011)
Cash and cash equivalents beginning of period 12,996 12,734
-------- --------
Cash and cash equivalents end of period $ 2,660 $ 10,723
======== ========
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2005 consolidated financial statements, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in our Annual Report on Form 10-K for the year ended December 31, 2005.
References in this report to the "Company" mean Balchem Corporation and/or its
subsidiaries, BCP Ingredients, Inc., Balchem Minerals Corporation and Chelated
Minerals Corporation, as the context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and
therefore do not include some information and notes necessary to conform to
annual reporting requirements. The results of operations for the nine months
ended September 30, 2006 are not necessarily indicative of the operating results
expected for the full year or any interim period.
NOTE 2 - ACQUISITION OF ASSETS
------------------------------
On August 24, 2006, the Company acquired an animal feed grade aqueous choline
chloride manufacturing facility and related assets located in St. Gabriel,
Louisiana from BioAdditives, LLC, CMB Additives, LLC and CMB Realty of
Louisiana. The St. Gabriel assets are not yet in service, and it is anticipated
that manufacturing in the facility will commence in November 2006.
NOTE 3 - CMC ACQUISITION
------------------------
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation ("BMC"), completed an acquisition (the "Acquisition") of
all of the outstanding capital stock of Chelated Minerals Corporation ("CMC"), a
privately held Utah corporation, for a purchase price of $17,350, subject to
adjustment based upon CMC's actual working capital and other adjustments. On
February 6, 2006, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $10,000
(the "Term Loan"), the proceeds of which were used to fund the acquisition, in
part. The remaining balance of the purchase price of the Acquisition was funded
through the Company's cash on hand. At September 30, 2006, the Term Loan had
been repaid in full.
The CMC acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The
5
preliminary allocation of the total purchase price, including acquisition costs,
of CMC's net tangible and intangible assets was based on the estimated fair
values as of February 8, 2006. Adjustments to these estimates will be included
in the allocation of the purchase price of CMC upon settlement of any working
capital or other adjustments. The excess of the purchase price over the
identifiable intangible and net tangible assets was allocated to goodwill. The
preliminary purchase price has been allocated as follows (in thousands):
-----------------------------------------------------
Fair Value
Recorded
in Purchase
Accounting
-----------------------------------------------------
Accounts receivable $ 884
Inventory 552
Property, plant and equipment 1,980
Current liabilities (388)
Other long-term liabilities (2,368)
Goodwill 11,826
Financing costs 49
Other intangible assets 5,285
-----------------------------------------------------
Total $ 17,820
-----------------------------------------------------
The consolidated financial statements include the results of operations of the
acquired product lines from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the CMC
acquisition had occurred on January 1, 2005 and does not include cost savings
expected from the transaction. In addition to including the results of
operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the CMC acquisition had
occurred at the beginning of the periods presented and is not intended to be a
projection of future results.
--------------------------------------------------
Pro-Forma
Three months Ended
September 30,
2006 2005
--------------------------------------------------
Net sales $ 25,122 $ 22,460
Net earnings 3,151 3,111
Basic EPS .27 .27
Diluted EPS .26 .26
--------------------------------------------------
6
-------------------------------------------------
Pro-Forma
Nine months Ended
September 30,
2006 2005
-------------------------------------------------
Net sales $ 75,553 $ 64,426
Net earnings 9,078 8,716
Basic EPS .78 .76
Diluted EPS .75 .73
-------------------------------------------------
NOTE 4 - ACQUISITION OF ASSETS
------------------------------
Effective June 30, 2005, pursuant to an asset purchase agreement of same date
(the "Loders Asset Purchase Agreement"), the Company acquired certain assets of
Loders Croklaan USA, LLC ("Seller") relating to the encapsulation, agglomeration
and granulation business for a purchase price including acquisition costs of
$9,885 plus $725 for certain product inventories and $809 for certain accounts
receivable. With the exception of $985, which was paid during the quarter ended
June 30, 2005, all of such payment was made on July 1, 2005 from the Company's
cash reserves.
The Loders Asset Purchase Agreement also provides for the contingent payment by
the Company to Seller of additional consideration based upon the volume of sales
during the three year period following the acquisition associated with one
particular product acquired by the Company. Such contingent consideration, if
earned and paid, will be recorded as an additional cost of the acquired product
lines.
The Loders Croklaan acquisition has been accounted for using the purchase method
of accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The allocation of the purchase price of the acquisition
has been assigned to the long-term net assets acquired as follows:
---------------------------------------------------
Fair Value
Recorded
in Purchase
Accounting
---------------------------------------------------
Equipment $ 1,436
Customer List 1,350
Patent 140
Goodwill 6,959
---------------------------------------------------
Total $ 9,885
---------------------------------------------------
The purchase price allocations have been made on the basis of estimates made by
the Company. The financial statement amounts are subject to subsequent revision
to give effect to other pre-acquisition contingencies that may become resolved
during subsequent periods.
The consolidated financial statements include the results of operations of the
acquired product lines from the date of purchase.
7
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the Loders
Croklaan acquisition had occurred on January 1, 2005 and does not include cost
savings expected from the transaction. In addition to including the results of
operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the Loders Croklaan
acquisition had occurred at the beginning of the periods presented and is not
intended to be a projection of future results.
--------------------------------------------------
Pro-Forma
Three months
Ended
September 30,
2005
--------------------------------------------------
Net sales $ 21,145
Net earnings 3,024
Basic EPS .26
Diluted EPS .25
--------------------------------------------------
--------------------------------------------------
Pro-Forma
Nine months
Ended
September 30,
2005
--------------------------------------------------
Net sales $ 63,256
Net earnings 8,894
Basic EPS .77
Diluted EPS .74
--------------------------------------------------
NOTE 5 - STOCK INCENTIVE PLAN
-----------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based
Payment," ("SFAS 123R"). SFAS 123R establishes the accounting for transactions
in which an entity pays for employee services in share-based payment
transactions. SFAS 123R eliminates the ability to account for share-based
compensation transactions using the intrinsic value method and requires
companies to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The
fair value of employee share options and similar instruments is estimated using
option-pricing models that take into account the unique characteristics of those
instruments. That cost is recognized over the period during which an employee is
required to provide service in exchange for the award. The Company adopted SFAS
123R effective January 1, 2006, using the modified prospective transition
method. Under this method, compensation cost is recognized for awards granted
and for awards modified, repurchased or cancelled in the period after adoption.
Compensation cost is also recognized for the unvested portion of awards granted
prior to adoption over the
8
remaining requisite service period. Prior year financial statements are not
restated to reflect and do not include, the effect of SFAS 123R. The Company's
results for the three and nine months ended September 30, 2006 reflected the
following compensation cost as a result of adopting SFAS 123R and such
compensation cost had the following effects on net earnings and basic and
diluted earnings per share:
-----------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
2006 2006
-----------------------------------------------------------------------------
Cost of sales $ 27 $ 81
Operating expenses 235 705
Net earnings (206) (665)
Basic earnings per common share (0.02) (0.06)
Diluted earnings per common share $ (0.02) $ (0.05)
-----------------------------------------------------------------------------
Additionally, upon adoption of SFAS 123R, excess tax benefits related to stock
compensation are presented as a cash inflow from financing activities. This
change had the effect of decreasing cash flows from operating activities and
increasing cash flows from financing activities by $-0- and $163 for the three
and nine months ended September 30, 2006, respectively.
Prior to the adoption of SFAS 123R on January 1, 2006, the Company accounted for
stock based compensation plans under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation cost related
to stock options issued to employees was recorded only if the grant-date market
price of the underlying stock exceeded the exercise price. The following table
illustrates the effect on net earnings and earnings per share if a fair value
based method had been applied to all awards:
-----------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
2006 2006
-----------------------------------------------------------------------------------
Net earnings $ 3,024 8,322
Stock-based employee compensation expense included
in net earnings, net of related tax effects -- --
Stock-based employee compensation expense
determined under fair value based method, net of
related tax effects
259 645
-----------------------------------------------------------------------------------
Pro forma net earnings $ 2,765 7,677
-----------------------------------------------------------------------------------
Basic earnings per common share:
As reported $ 0.26 0.72
Pro forma 0.24 0.67
Diluted earnings per common share:
As reported $ 0.25 0.69
Pro forma 0.23 0.64
-----------------------------------------------------------------------------------
9
The Company's stock incentive plans allow for the granting of restricted stock
awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be
exercisable for longer than ten years after the date of grant. The shares to be
issued upon exercise of the outstanding options have been approved, reserved and
are adequate to cover all exercises. As of September 30, 2006, the plans had
726,540 shares available for future awards. Compensation expense for stock
options and restricted stock awards is recognized on a straight-line basis over
the vesting period, generally three years for stock options and seven years for
restricted stock awards. Certain awards provide for accelerated vesting if there
is a change in control (as defined in the plans) or other qualifying events.
Option activity for the nine months ended September 30, 2006 is summarized
below:
--------------------------------------------------------------------------------
Weighted
Weighted Average
Average Aggregate Remaining
Exercise Intrinsic Contractual
Shares Price Value Term
--------------------------------------------------------------------------------
Outstanding as of
December 31, 2005 1,435,465 $ 12.57 10,479
Granted 10,300 22.59
Exercised (43,048) 7.47
Expired -- --
Forfeited (14,100) 14.47
Outstanding as of
September 30, 2006 1,388,617 $ 12.79 $ 9,720 6.8
Exercisable as of
September 30, 2006 910,317 $ 10.53 $ 8,430 5.9
--------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yields of 0.4% and 0.4%; expected volatilities of 26% and
29%; risk-free interest rates of 3.8% and 3.6%; and expected lives of 4.5 and
4.9 for the nine months ended September 30, 2006 and 2005, respectively.
For the nine month periods ended September 30, 2006 and September 30, 2005, the
Company used a projected expected life for each award granted based on
historical experience of employees' exercise behavior. For the nine month
periods ended September 30, 2006 and September 30, 2005, expected volatility is
based on the Company's historical volatility levels. For the nine month periods
ended September 30, 2006 and September 30, 2005, dividend yields are based on
the Company's historical dividend yields. Risk-free interest rates are based on
the implied yields currently available on U.S. Treasury zero coupon issues with
a remaining term equal to the expected life.
Other information pertaining to option activity during the three and nine months
ended September 30, 2006 and 2005 was as follows:
10
-----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted $ N/A $ 4.50 $ 5.25 $ 4.25
Total intrinsic value of stock options exercised $ 89 $ 65 $ 613 $ 1,179
-----------------------------------------------------------------------------------------------------------
Non-vested restricted stock activity for the nine months ended September 30,
2006 is summarized below:
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Shares Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005 22,500 $ 19.83
Granted - -
Vested - -
Forfeited - -
Non-vested balance as of September 30, 2006 22,500 $ 19.83
--------------------------------------------------------------------------------
As of September 30, 2006 there was $1,625 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the plans; that cost is expected to be recognized over a weighted-average period
of 1.5 years.
NOTE 6 - INVENTORIES
--------------------
Inventories at September 30, 2006 and December 31, 2005 consisted of the
following:
-------------------------------------------------------------------------
September 30, December 31,
2006 2005
-------------------------------------------------------------------------
Raw materials $ 3,560 $ 4,809
Finished goods 5,156 3,731
-------------------------------------------------------------------------
Total inventories $ 8,716 $ 8,540
-------------------------------------------------------------------------
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at September 30, 2006 and December 31, 2005 are
summarized as follows:
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------
Land $ 650 $ 290
Building 11,614 10,509
Equipment 37,515 31,196
Construction in Progress 1,259 332
---------------------------------------------------------------------------
51,038 42,327
Less: Accumulated depreciation 20,068 17,927
---------------------------------------------------------------------------
Net property, plant and equipment $ 30,970 $ 24,400
---------------------------------------------------------------------------
11
NOTE 8 - INTANGIBLE ASSETS
--------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
accounting for a business combination and define an intangible asset. Goodwill
and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but are instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
As of December 31, 2005, the Company performed an impairment test of its
goodwill balance. As of such date, the Company's reporting units' fair values
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company will perform its impairment test next as
of December 31, 2006.
The Company had goodwill in the amount of $25,152 and $13,327 at September 30,
2006 and December 31, 2005, respectively, subject to the provisions of SFAS Nos.
141 and 142. At September 30, 2006, the balance of goodwill includes the cost in
excess of net assets acquired of both the CMC acquisition, as described in Note
3, of $11,826 and the acquired assets of the Loders Croklaan StateStateUSA, LLC
encapsulation, agglomeration and granulation business, described in Note 4, of
$6,959.
As of September 30, 2006 and December 31, 2005, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$7,789 and $2,432, respectively, less accumulated amortization of $716 and $284,
respectively. At September 30, 2006, the gross carrying amount included a
customer list, trade names and trade secrets acquired as part of the CMC
acquisition, as described in Note 3, as well as a customer list and patent
acquired as part of the acquisition of certain assets of the Loders Croklaan
USA, LLC encapsulation, agglomeration and granulation business, described in
Note 4.
Identifiable intangible assets with finite lives at September 30, 2006 and
December 31, 2005 are summarized as follows:
-----------------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization
(in years) 9/30/06 at 9/30/06 12/31/05 at 12/31/05
-----------------------------------------------------------------------------------------------------------
Customer lists 10 $ 4,888 $ 375 $ 1,350 $ 67
Regulatory re-registration
costs 10 28 -- 18 --
Patents & trade secrets 15-17 1,542 199 753 141
Trademarks & trade names 17 874 81 210 49
Other 5 457 61 101 27
-----------------------------------------------------------------------------------------------------------
$ 7,789 $ 716 $ 2,432 $ 284
-----------------------------------------------------------------------------------------------------------
12
Amortization of identifiable intangible assets was $432 for the first nine
months of 2006. Assuming no change in the gross carrying value of identifiable
intangible assets, the estimated amortization expense for the remainder of 2006
is $162, approximately $634 per annum for 2007 through 2009, $625 in 2010 and
$618 in 2011. At September 30, 2006, there were no identifiable intangible
assets with indefinite useful lives as defined by SFAS No. 142. Identifiable
intangible assets are reflected in "Intangible assets with finite lives, net" in
the Company's condensed consolidated balance sheet. There were no changes to the
useful lives of intangible assets subject to amortization during the nine months
ended September 30, 2006.
NOTE 9 - NET EARNINGS PER SHARE
-------------------------------
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
----------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2006 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 3,151 11,630,050 $ .27
Effect of dilutive securities - stock options
and restricted stock 518,985
------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 3,151 12,149,035 $ .26
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2005 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 3,024 11,591,802 $ .26
Effect of dilutive securities - stock options 551,181
------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $ 3,024 12,142,983 $ .25
----------------------------------------------------------------------------------------------------
13
----------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2006 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 9,064 11,614,311 $ .78
Effect of dilutive securities - stock options
and restricted stock 541,138
------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 9,064 12,155,449 $ .75
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2005 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 8,322 11,549,027 $ .72
Effect of dilutive securities - stock options 490,355
------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $ 8,322 12,039,382 $ .69
----------------------------------------------------------------------------------------------------
The Company had stock options covering 349,300 and 306,000 shares at September
30, 2006 and 2005, respectively, that could potentially dilute basic earnings
per share in future periods that were not included in diluted earnings per share
because their effect on the period presented was anti-dilutive.
NOTE 10 - SEGMENT INFORMATION
-----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments:
specialty products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.
Business Segment Net Sales:
------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Specialty Products $ 7,967 $ 7,352 $ 23,927 $ 22,088
Encapsulated/Nutritional
Products 10,348 8,503 30,676 23,131
BCP Ingredients 6,807 5,290 20,216 14,750
------------------------------------------------------------------------
Total $ 25,122 $ 21,145 $ 74,819 $ 59,969
------------------------------------------------------------------------
14
Business Segment Earnings:
------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Specialty Products $ 2,864 $ 2,846 $ 8,400 $ 8,377
Encapsulated/Nutritional
Products 1,027 945 3,079 2,431
BCP Ingredients 1,090 940 2,841 2,233
Interest and other income
(expense) (3) 126 (84) 231
------------------------------------------------------------------------
Earnings before income
taxes $ 4,978 $ 4,857 $ 14,236 $ 13,272
------------------------------------------------------------------------
NOTE 11- SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------
Cash paid during the nine months ended September 30, 2006 and 2005 for income
taxes and interest is as follows:
--------------------------------------------
Nine months ended
September 30,
2006 2005
--------------------------------------------
Income taxes $ 3,896 $ 3,846
Interest $ 186 $ 6
--------------------------------------------
NOTE 12- COMMON STOCK
---------------------
On December 15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2005. Such
distribution was made on January 20, 2006. Accordingly, the stock split was
recognized by reclassifying the par value of the additional shares resulting
from the split, from additional paid-in capital to common stock. All references
to number of common shares and per share amounts except shares authorized in the
accompanying condensed consolidated financial statements were retroactively
adjusted to reflect the effect of the stock split.
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury. In June 2005, the board of
directors authorized another extension to the stock repurchase program for up to
an additional 600,000 shares, that is, over and above those 514,974 shares
previously repurchased under the program. Under this extension, a total of
66,300 shares have been purchased at an average cost of $18.07, 22,057 of which
remain in treasury at September 30, 2006. During the nine months ended September
30, 2006, no additional shares have been purchased.
15
NOTE 13 - LONG TERM DEBT AND CREDIT AGREEMENTS
----------------------------------------------
On February 6, 2006, the Company and its principal bank entered into a Loan
Agreement providing for the Term Loan, the proceeds of which were used to fund
the Acquisition, as described in Note 3, in part. The remaining balance of the
purchase price of the Acquisition was funded through Balchem's cash on hand.
During the nine months ended September 30, 2006, the Company repaid in full the
$10,000 of principal under the Term Loan. The Loan Agreement also provides for
an unsecured short-term revolving credit facility of $3,000 (the "Revolving
Facility"). Borrowings under the Revolving Facility bear interest at LIBOR plus
1.00%. No amounts have been drawn on the Revolving Facility as of September 30,
2006. The Revolving Facility expires in February 2007. Management believes that
such facility will be renewed in the normal course of business.
NOTE 14 - EMPLOYEE BENEFIT PLANS
--------------------------------
The Company sponsors a 401(k) savings and profit sharing plan for eligible
employees. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees.
The Company also currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of its Verona, Missouri facility.
Net periodic benefit cost for such retirement medical plan for the nine months
ended September 30, 2006 and September 30, 2005 was as follows:
------------------------------------------------------------------
2006 2005
------------------------------------------------------------------
Service Cost $ 21 $ 24
Interest Cost 29 38
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (14) (11)
Amortization of (gain) or loss (2) --
------------------------------------------------------------------
Net periodic benefit cost $ 34 $ 51
------------------------------------------------------------------
The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.
NOTE 15 - LICENSE AGREEMENT
---------------------------
On November 7, 2005, the Company entered into a license agreement (the "License
Agreement") with Project Management and Development Co., Ltd. ("PMD"), a
corporation organized under the laws of Great Britain. The License Agreement
gives PMD the right to utilize the Company's proprietary continuous
manufacturing technology for the production of aqueous choline chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride production facility at PMD's Al-JuBail, Saudi Arabia
petrochemical facility, currently scheduled for completion in 2008.
16
The License Agreement provides PMD with the exclusive right to use Company
Technology in certain countries, as well as the non-exclusive right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License Agreement further provides that the Company will be PMD's exclusive
North American distributor for said products during the term of the agreement.
The License Agreement terminates either 10 years from the start-up of the PMD's
production facility or December 31, 2020, whichever is earlier.
Pursuant to the License Agreement, PMD will pay the Company a license fee of
$1,400 and fees of $840 for the delivery by the Company of certain preliminary
drawings, specifications, process design documents containing Company
Technology, and additional training. These fees are to be paid in installments
upon achievement of certain performance milestones set forth in the License
Agreement.
The Company will provide certain performance guarantees associated with Company
Technology. In the event that the PMD manufacturing facility, if properly
designed and constructed, fails to attain said performance guarantees,
liquidated damages may be assessed. However, such damages may not exceed 70% of
the license fee.
The Company is using the percentage of completion method to recognize revenue
and expenses related to the License Agreement and the efforts-expended method
for measuring the progress to completion. As of September 30, 2006, the Company
has recognized $790 of income and $540 in expenses since the inception of the
agreement. For the nine months ended September 30, 2006, the Company has
recognized $632 of income and $402 in expenses, which are included in net sales
and cost of sales, respectively, in the BCP Ingredients segment.
NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The new
statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This statement requires
that those items be recognized as current period charges and requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The Company has adopted the
provisions of this statement as of January 1, 2006 and does not expect this
statement to have a material effect on its financial condition or results of
operations.
In June 2006, FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109." This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
effect of this interpretation on its financial condition and results of
operations.
In September 2006, FASB issued SFAS No. 158, "Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans." The new statement amends FASB
17
Statements No. 87, 88, 106 and 132(R). This statement requires an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity. This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. This statement's requirement to initially recognize the
funded status of a defined benefit postretirement plan and to provide the
required disclosures is effective for fiscal years ending after December 15,
2006. The requirement to measure plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The Company does not
expect adoption of this statement to have a material effect on its financial
condition or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 was
issued in order to eliminate the diversity of practice surrounding how public
companies quantify financial statement misstatements. Traditionally, there have
been two widely-recognized methods for quantifying the effects of financial
statement misstatements: the "roll-over" method and the "iron curtain" method.
The roll-over method focuses primarily on the impact of a misstatement on the
income statement--including the reversing effect of prior year
misstatements--but its use can lead to the accumulation of misstatements in the
balance sheet. The iron-curtain method, on the other hand, focuses primarily on
the effect of correcting the period-end balance sheet with less emphasis on the
reversing effects of prior year errors on the income statement. We currently use
the roll-over method for quantifying identified financial statement
misstatements. In SAB 108, the SEC staff established an approach that requires
quantification of financial statement misstatements based on the effects of the
misstatements on each of the company's financial statements and the related
financial statement disclosures. This model is commonly referred to as a "dual
approach" because it requires quantification of errors under both the iron
curtain and the roll-over methods. SAB 108 permits existing public companies to
initially apply its provisions either by (i) restating prior financial
statements as if the "dual approach" had always been used or (ii) recording the
cumulative effect of initially applying the "dual approach" as adjustments to
the carrying values of assets and liabilities as of January 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained earnings. Use
of the "cumulative effect" transition method requires detailed disclosure of the
nature and amount of each individual error being corrected through the
cumulative adjustment and how and when it arose. The Company will adopt the
provisions of SAB 108 as of December 31, 2006 and does not expect this bulletin
to have a material effect on its financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to be
applied to US GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the impact of SFAS No. 157
on its consolidated financial position and results of operations.
18
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified in Item 1 of our Annual Report on Form 10-K for the
year ended December 31, 2005 and other factors that may be identified elsewhere
in this Report. Reference should be made to such factors and all forward-looking
statements are qualified in their entirety by the above cautionary statements.
Overview
--------
We develop, manufacture, distribute and market specialty performance ingredients
and products for the food, nutritional, pharmaceutical, animal health and
medical device sterilization industries. Our reportable segments are strategic
businesses that offer products and services to different markets. We presently
have three reportable segments: specialty products; encapsulated / nutritional
products; and BCP Ingredients.
Specialty Products
------------------
Our specialty products segment operates as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use
in the health care industry. It is used to sterilize a wide range of medical
devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without
negatively impacting the performance of the device being sterilized. Our 100%
ethylene oxide product is distributed in uniquely designed, recyclable
double-walled stainless steel drums to assure compliance with safety, quality
and environmental standards as outlined by the U.S. Environmental Protection
Agency (the "EPA") and the U.S. Department of Transportation. Our inventory of
these specially built drums, along with our two filling facilities, represents a
significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are our principal customers for this
product. In addition, we also sell single use canisters with 100% ethylene oxide
for use in medical device sterilization. As a fumigant, ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spices and other
seasoning materials.
We sell two other products, propylene oxide and methyl chloride, principally to
customers seeking smaller (as opposed to bulk) quantities and whose requirements
include timely delivery and safe handling. Propylene oxide is used for
fumigation in spice treatment, various chemical synthesis applications, to make
paints more durable, and for manufacturing specialty starches and textile
coatings. Methyl chloride is used as a raw material in specialty herbicides,
fertilizers, pharmaceuticals, malt and wine preservers.
19
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides microencapsulation,
granulation and agglomeration solutions to a variety of applications in food,
pharmaceutical and nutritional ingredients to enhance performance of nutritional
fortification, processing, mixing, packaging applications and shelf-life. Major
product applications are baked goods, refrigerated and frozen dough systems,
processed meats, seasoning blends, confections, nutritional supplements and
animal nutrition. We also market human grade choline nutrient products through
this segment for wellness applications. Choline is recognized to play a key role
in the structural integrity of cell membranes, processing dietary fat,
reproductive development and neural functions, such as memory and muscle
function. Our portfolio of granulated calcium carbonate products are primarily
used in, or in conjunction with, novel over-the-counter and prescription
pharmaceuticals for the treatment of osteoporosis, gastric disorders and calcium
deficiencies in the StateStateUnited States.
In the animal health industry, we market REASHURE(R) Choline, an encapsulated
choline product that boosts health and milk production in transition and early
lactation cows. Commercial sales are currently derived from the dairy industry
where REASHURE(R) delivers nutrient supplements that survive the rumen and are
biologically available, providing required nutritional levels during certain
weeks preceding and following calving, commonly referred to as the "transition
period" of the animal. Also, in animal health, we market NITROSHURETM, an
encapsulated urea supplement for lactating dairy cows that is designed to create
a slow-release nitrogen source for the rumen, allowing for greater flexibility
in feed rations for dairy nutritionists and producers, and NIASHURETM, our
microencapsulated niacin product for dairy cows. In addition, CMC manufactures,
sells and distributes chelated mineral supplements for use in animal feed
throughout the world. CMC's proprietary chelation technology provides enhanced
nutrient absorption for various species of domestic and companion animals.
BCP Ingredients
---------------
This segment manufactures and supplies raw choline chloride, an essential
nutrient for animal health, predominantly to the poultry and swine industries.
Choline plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. Choline deficiency can result in, among other
symptoms, reduced growth and perosis in poultry, and fatty liver, kidney
necrosis and general poor health condition in swine. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial
applications. Choline chloride is manufactured and sold in both an aqueous and
dry form.
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 for the three and nine months ended September 30, 2006 and
September 30, 2005:
20
Business Segment Net Sales:
-----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-----------------------------------------------------------------------------------
Specialty Products $ 7,967 $ 7,352 $ 23,927 $ 22,088
Encapsulated/Nutritional
Products 10,348 8,503 30,676 23,131
BCP Ingredients 6,807 5,290 20,216 14,750
-----------------------------------------------------------------------------------
Total $ 25,122 $ 21,145 $ 74,819 $ 59,969
-----------------------------------------------------------------------------------
Business Segment Earnings:
-----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-----------------------------------------------------------------------------------
Specialty Products $ 2,864 $ 2,846 $ 8,400 $ 8,377
Encapsulated/Nutritional
Products 1,027 945 3,079 2,431
BCP Ingredients 1,090 940 2,841 2,233
Interest and other income
(expense) (3) 126 (84) 231
-----------------------------------------------------------------------------------
Earnings before income
taxes $ 4,978 $ 4,857 $ 14,236 $ 13,272
-----------------------------------------------------------------------------------
The above results were impacted by the adoption of SFAS 123R, as described in
the following paragraph.
Effective January 1, 2006, we adopted the fair value method of accounting for
stock-based compensation under SFAS 123R, which allows public companies to
select from two alternative transition methods when adopting SFAS 123R, the
modified prospective application or the retrospective application. We have
elected to adopt the provisions of SFAS 123R using the modified prospective
application. Under the modified prospective application, the provisions of SFAS
123R are applied to new awards and awards modified, repurchased or cancelled
after the effective date. Additionally, compensation cost for the unvested
portion of awards outstanding as of January 1, 2006 will be recognized as the
requisite service is rendered after January 1, 2006. Financial statements for
periods prior to January 1, 2006 are not restated to reflect, and do not
include, the effect of SFAS 123R. Share-based compensation expense of $786 was
recognized for the first nine months of 2006 for the unvested portion of awards
outstanding as of January 1, 2006. We estimate that share-based compensation
expense for 2006 will be approximately $1,048.
21
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2006 compared to three months ended September
30, 2005
Net Sales
---------
Net sales for the three months ended September 30, 2006 were $25,122 compared
with $21,145 for the three months ended September 30, 2005, an increase of
$3,977 or 18.8%. Net sales for the specialty products segment were $7,967 for
the three months ended September 30, 2006, as compared with $7,352 for the three
months ended September 30, 2005, an increase of $615 or 8.4%. This increase was
principally due to an increase in sales volume along with modest price increases
for our ethylene oxide products for medical device sterilization. Net sales for
the encapsulated / nutritional products segment were $10,348 for the three
months ended September 30, 2006, as compared with $8,503 for the three months
ended September 30, 2005, an increase of $1,845 or 21.7%. Sales for the three
months ended September 30, 2006, includes $1,200 of sales from CMC, which we
acquired in February 2006 (see Note 3). Additional organic growth was derived
principally from strength in sales of food, nutritional and human choline
products, which grew 9.0% over the prior year comparable period. Net sales of
$6,807 were realized for the three months ended September 30, 2006 for the BCP
Ingredients (unencapsulated feed supplements) segment, as compared with $5,290
for the three months ended September 30, 2005, an increase of $1,517 or 28.7%.
This increase was due to increased volumes sold in dry and aqueous choline,
along with modest price increases in all product lines.
Gross Margin
------------
Gross margin for the three months ended September 30, 2006 increased to $8,673,
as compared to $7,649 for the three months ended September 30, 2005, an increase
of $1,024 or 13.4%, due largely to the above-noted increase in sales. Gross
margin percentage for the three months ended September 30, 2006 was 34.5%, as
compared to 36.2% for the three months ended September 30, 2005. This decrease
in gross margin percentage was primarily a result of product mix and higher raw
material and fuel costs. Gross margin dollars for the specialty products segment
increased slightly as increases in sales volume and modest sales price increases
were partially offset by higher raw material prices. Gross margin dollars in the
encapsulated/nutritional products segment increased 23.5% as margins were
favorably affected by sales volumes from the newly acquired CMC, as well as
increased volumes sold in the international food, human choline and ruminant
animal markets. Gross margin dollars for the BCP Ingredients segment increased
16.4% and was favorably affected by increased sales volumes, partially offset by
higher raw material costs and unfavorable changes in product mix.
Operating Expenses
------------------
Operating expenses for the three months ended September 30, 2006 were $3,692, as
compared to $2,918 for the three months ended September 30, 2005, an increase of
$774 or 26.5%. This increase was primarily a result of increased payroll costs
for new hires, stock based compensation expenses relating to the adoption of the
provisions of SFAS No. 123R, expenditures in support of the Company's
pharmaceutical initiative, and
22
increased amortization expense resulting from the CMC acquisition. Total
operating expenses as a percentage of sales were 14.7% for the three months
ended September 30, 2006, as compared to 13.8% for the three months ended
September 30, 2005. During the three months ended September 30, 2006 and 2005,
the Company spent $549 and $492, respectively, on research and development
programs, substantially all of which pertained to the Company's encapsulated /
nutritional products segment for both human and animal health.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for the three months
ended September 30, 2006 were $4,981, as compared to $4,731 for the three months
ended September 30, 2005.
Other expenses (income)
-----------------------
Interest income for the three months ended September 30, 2006 was $13, as
compared to $46 for the three months ended September 30, 2005. This decrease is
attributable to the decrease in the average total cash balance. Interest expense
was $16 for the three months ended September 30, 2006, as compared to $2 for the
three months ended September 30, 2005. This increase is attributable to the
increase in average current debt resulting from the CMC acquisition in February
2006. Other income for the three months ended September 30, 2006 totaled $-0-,
as compared to $82 for the three months ended September 30, 2005. This decrease
is attributable to the inclusion of a gain on the sale of equipment for the
three months ended September 30, 2005.
Income Tax Expense
------------------
Our effective tax rate for the three months ended September 30, 2006 and 2005
was 36.7% and 37.7%, respectively. This decrease in the effective tax rate is
primarily attributable to a change in allocation relating to state income taxes.
Net earnings
------------
As a result of the foregoing, net earnings were $3,151 for the three months
ended September 30, 2006 as compared with $3,024 for the three months ended
September 30, 2005, an increase of 4.2%.
23
Nine months ended September 30, 2006 compared to nine months ended September 30,
2005
Net Sales
---------
Net sales for the nine months ended September 30, 2006 were $74,819, as compared
with $59,969 for the nine months ended September 30, 2005, an increase of
$14,850 or 24.8%. Net sales for the specialty products segment were $23,927 for
the nine months ended September 30, 2006, as compared with $22,088 for the nine
months ended September 30, 2005, an increase of $1,839 or 8.3%. This increase
was principally due to an increase in sales volume along with modest price
increases for our ethylene oxide products for medical device sterilization. Net
sales for the encapsulated / nutritional products segment were $30,676 for the
nine months ended September 30, 2006, as compared with $23,131 for the nine
months ended September 30, 2005, an increase of $7,545 or 32.6%. This increase
was due principally to increased volumes sold in the human choline market,
favorable changes in product mix in the domestic and international food markets
and approximately $5,220 of incremental sales associated with the Company's
newly acquired pharmaceutical, food, and chelated minerals business lines
resulting from the Loders Croklaan asset and CMC acquisitions (see Notes 4 and
3, respectively). Net sales of the BCP Ingredients segment were $20,216 for the
nine months ended September 30, 2006 for the, as compared with $14,750 for the
nine months ended September 30, 2005, an increase of $5,466 or 37.1%. This
increase was due to increased volumes sold in dry and aqueous choline and
choline derivatives, along with modest price increases in all product lines and
revenue recognized of $632 relating to the PMD license agreement (see Note 15).
Gross Margin
------------
Gross margin for the nine months ended September 30, 2006 increased to $25,695,
as compared to $21,943 for the nine months ended September 30, 2005, an increase
of $3,752 or 17.1%, due largely to the above-noted increase in sales. Gross
margin percentage for the nine months ended September 30, 2006 was 34.3%, as
compared to 36.6% for the nine months ended September 30, 2005. This decrease in
gross margin percentage was primarily a result of product mix and higher raw
material and fuel costs. Gross margin dollars for the specialty products segment
increased due to higher sales volume, and modest increases in average selling
price. These increases were partially offset by higher raw material prices.
Gross margin dollars in the encapsulated / nutritional products segment
increased 32.0% as margins were favorably affected by increased sales volumes
from the newly acquired CMC products, increased volumes sold in the human
choline market, as well as favorable product mixes in the international food and
ruminant animal markets. These increases were partially offset by unfavorable
product mix in the pharmaceutical calcium product line. Gross margin dollars for
the BCP Ingredients segment increased 26.5% and was favorably affected by
increased sales volumes, partially offset by higher raw material and energy
costs.
Operating Expenses
------------------
Operating expenses for the nine months ended September 30, 2006 were $11,375, as
compared to $8,902 for the nine months ended September 30, 2005, an increase of
$2,473 or 27.8%. This increase was primarily a result of increased payroll costs
for new hires,
24
stock-based compensation expenses relating to the adoption of the provisions of
SFAS 123R, expenditures in support of the Company's pharmaceutical initiative,
and increased amortization expense resulting from the CMC acquisition. Total
operating expenses as a percentage of sales were 15.2% for the nine months ended
September 30, 2006 compared to 14.8% for the nine months ended September 30,
2005. During the nine months ended September 30, 2006 and 2005, the Company
spent $1,561 and $1,537, respectively, on research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both human and animal health.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for the nine months ended
September 30, 2006 were $14,320 as compared to $13,041 for the nine months ended
September 30, 2005.
Other expenses (income)
-----------------------
Interest income for the nine months ended September 30, 2006 totaled $102, as
compared to $155 for the nine months ended September 30, 2005. This decrease is
attributable to the decrease in the average total cash balance. Interest expense
was $186 for the nine months ended September 30, 2006, as compared to $6 for the
nine months ended September 30, 2005. This increase is attributable to the
increase in average current and long-term debt resulting from the CMC
acquisition in February 2006. Other income for the nine months ended September
30, 2006 totaled $-0-, as compared to $82 for the nine months ended September
30, 2005. This decrease is attributable to the inclusion of a gain on the sale
of equipment for the nine months ended September 30, 2005.
Income Tax Expense
------------------
The Company's effective tax rate for the nine months ended September 30, 2006
and 2005 was 36.3% and 37.3%, respectively. This decrease in the effective tax
rate is primarily attributable to a change in allocation relating to state
income taxes.
Net earnings
------------
As a result of the foregoing, net earnings were $9,064 for the nine months ended
September 30, 2006 as compared with $8,322 for the nine months ended September
30, 2005, an increase of 8.9%.
25
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
As part of the June 30, 2005 acquisition of certain assets relating to the
encapsulation, agglomeration and granulation business of Loders Croklaan USA,
LLC, we agreed to the contingent payment of additional consideration based upon
the volume of sales associated with one particular product acquired by the
Company during the three year period following the acquisition. Such contingent
consideration, if any is paid, will be recorded as an additional cost of the
acquired product lines. No such contingent consideration has been paid as of
September 30, 2006.
The Company's other contractual obligations and commitments principally include
obligations associated with future minimum non-cancelable operating lease
obligations (including a lease for our headquarters office space, which we
entered into in 2002).
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash flow
to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. The Company
could seek additional bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
----
Cash and cash equivalents decreased to $2,660 at September 30, 2006 from $12,996
at December 31, 2005. The $10,336 decrease resulted primarily from net cash used
in investing activities of $24,078, principally for the acquisition of all of
the outstanding capital stock of CMC on February 8, 2006, as well as for the
acquisition of the St. Gabriel, Louisiana manufacturing facility and related
assets from BioAdditives, LLC and CMB Additives, LLC on August 24, 2006. Also
contributing to the decrease in cash and cash equivalents was net cash used in
financing activities of $571. Partially offsetting these decreases was an
increase in net cash provided by operating activities of $14,313. Working
capital amounted to $15,802 at September 30, 2006 as compared to $26,116 at
December 31, 2005, a decrease of $10,314, primarily due to the aforementioned
decrease in cash.
Operating Activities
--------------------
Cash flows from operating activities provided $14,313 for the nine months ended
September 30, 2006, as compared to $9,827 for the nine months ended September
30, 2005. The increase in cash flows from operating activities was primarily due
to increases in net earnings, depreciation expense and current income taxes, as
well as a decrease in prepaid expenses. This increase was partially offset by
decreases in customer deposits and other deferred revenue and accounts payable
and accrued expenses.
26
Investing Activities
--------------------
Capital expenditures were $1,235 for the nine months ended September 30, 2006
compared to $1,186 for the nine months ended September 30, 2005 and are expected
to be approximately $2,500 for all of calendar year 2006. Cash paid for
acquisitions in 2006, including acquisition costs, net of acquisition accounts
receivable collected, was $22,772.
Financing Activities
--------------------
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury. In June 2005, the board of
directors authorized another extension to the stock repurchase program for up to
an additional 600,000 shares, that is, over and above those 514,974 shares
previously repurchased under the program. Under this extension, a total of
66,300 shares have been purchased at an average cost of $18.07, 22,057 of which
remain in treasury at September 30, 2006. During the nine months ended September
30, 2006, no additional shares have been purchased.
On February 6, 2006, the Company and its principal bank entered into the Loan
Agreement providing for the Term Loan of $10,000, the proceeds of which were
used to fund the CMC Acquisition (see Note 3), in part. The remaining balance of
the purchase price of the Acquisition was funded through Balchem's cash on hand.
The Loan Agreement also provides for a Revolving Facility of $3,000. Borrowings
under the Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have
been drawn on the Revolving Facility as of September 30, 2006. The Revolving
Facility expires in February 2007. Management believes that such facility will
be renewed in the normal course of business.
As of September 30, 2006, the Company made $10,000 in principal payments against
the Term Loan, which paid the term loan in full.
Proceeds from stock options exercised totaled $321 and $1,263 for the nine
months ended September 30, 2006 and 2005, respectively. Dividend payments were
$1,045 and $685 for the nine months ended September 30, 2006 and 2005,
respectively.
Pursuant to the Company's adoption of the provisions of SFAS 123R, the excess
tax benefits of stock options exercised of $163 for the nine months ended
September 30, 2006 is classified as a financing activity. These excess tax
benefits had previously been classified as an operating activity.
Other Matters Impacting Liquidity
---------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its StateStateVerona, StateMissouri facility. The
amount recorded on the Company's balance sheet as of September 30, 2006 for this
obligation is $1,018, and is included under "Other long-
27
term obligations". The postretirement plan is not funded. Historical cash
payments made under such plan have approximated $50 per year.
Critical Accounting Policies
----------------------------
Stock Options and Restricted Stock Awards
As discussed above, effective January 1, 2006, we account for stock-based
compensation under SFAS 123R. Prior to January 1, 2006, we applied the intrinsic
value method in measuring stock-based compensation under APB 25. Under SFAS
123R, share-based payment awards result in a cost measured at fair value on the
awards' grant dates, based on the estimated number of awards expected to vest,
and that cost is recognized through earnings over the expected vesting period.
Under APB 25, when the exercise price of the Company's stock options equaled the
market value of the underlying stock on the date of the grant, no compensation
expense was recognized.
During the nine months ended September 30, 2006, other than the adoption of SFAS
123R, there were no changes to the Company's Critical Accounting Policies, as
described in its Annual Report on Form 10-K for the year ended December 31,
2005.
Related Party Transactions
--------------------------
The Company was not engaged in related party transactions during the nine months
ended September 30, 2006.
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. The Company has no derivative financial instruments or
derivative commodity instruments, nor does the Company have any financial
instruments entered into for trading or hedging purposes. Foreign sales are
generally billed in U.S. dollars. As of September 30, 2006, the Company had no
borrowings under any loan agreements or other credit facilities. The Company
believes that its business operations are not exposed in any material respect to
market risk relating to foreign currency exchange risk or commodity price risk.
29
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated, as of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of the Company's disclosure controls and
procedures (including its internal controls and procedures).
Based upon management's evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures were effective in
identifying the information required to be disclosed in the Company's
periodic reports filed with the Securities and Exchange Commission
("SEC"), including this Quarterly Report on Form 10-Q, and ensuring that
such information is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls
During the most recent fiscal quarter, there has been no significant
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
30
Part II. Other Information
Item 1A. Risk Factors
There have been no material changes in the Risk Factors identified in
the Company's Annual Report on Form 10-K for the year ended December
31, 2005.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BALCHEM CORPORATION
-------------------
By: /s/ Dino A. Rossi
---------------------
Dino A. Rossi, President and
Chief Executive Officer
Date: November 8, 2006
31
Exhibit Index
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
32