UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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
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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, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 326-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.06-2/3 per share Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark whether the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by 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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the common stock issued and outstanding and held
by non-affiliates of the Registrant, based upon the closing price for the common
stock on the NASDAQ Global Market on June 30, 2008 was approximately
$412,781,000. For purposes of this calculation, shares of the Registrant held by
directors and officers of the Registrant and under the Registrant's
401(k)/profit sharing plan have been excluded.
The number of shares outstanding of the Registrant's common stock was 18,293,631
as of March 3, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's proxy statement for its 2009 Annual
Meeting of Stockholders (the "2009 Proxy Statement") to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after Registrant's fiscal year-end of December 31, 2008 are incorporated by
reference in Part III of this Report.
Cautionary Statement Regarding Forward-Looking Statements
---------------------------------------------------------
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not statements of historical facts, but
rather reflect our current expectations or beliefs concerning future events and
results. We generally use the words "believes," "expects," "intends," "plans,"
"anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. The risks, uncertainties and factors that could
cause our results to differ materially from our expectations and beliefs
include, but are not limited to, those factors set forth in this Annual Report
on Form 10-K under "Item 1A. - Risk Factors" below, including the following:
o changes in laws or regulations affecting our operations;
o changes in our business tactics or strategies;
o acquisitions of new or complementary operations;
o sales of any of our existing operations;
o changing market forces or contingencies that necessitate, in
our judgment, changes in our plans, strategy or tactics; and
o fluctuations in the investment markets or interest rates,
which might materially affect our operations or financial
condition.
We cannot assure you that the expectations or beliefs reflected in these
forward-looking statements will prove correct. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You are cautioned not to unduly
rely on such forward-looking statements when evaluating the information
presented in this Annual Report on Form 10-K and all subsequent written and oral
forward-looking statements made by us or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements contained
herein.
Part I
Item 1. Business
General:
Balchem Corporation ("Balchem," the "Company," "we" or "us"), incorporated
in the State of Maryland in 1967, is engaged in the development, manufacture and
marketing of specialty performance ingredients and products for the food,
nutritional, feed, pharmaceutical and medical sterilization industries.
Effective with the quarter ending March 31, 2008, we have realigned our business
segment reporting structure to appropriately reflect the internal management of
the businesses, largely due to the impact of acquisitions in 2007. We will
continue to report three segments: Specialty Products; Food, Pharma & Nutrition;
and Animal Nutrition & Health. Changes to the reporting segments are as follows:
chelated minerals and specialty nutritional products for the animal health
industry, formerly reported as a part of the encapsulated/nutritional products
segment, are now combined with the choline business (formerly BCP Ingredients)
into a consolidated Animal Nutrition & Health segment. The
encapsulated/nutritional products segment has been renamed Food, Pharma &
Nutrition, focusing on human health. There are no changes to the Specialty
Products segment. Business segment net sales and earnings from operations have
been reclassified for all periods presented to reflect the segment changes.
The Company sells its products through its own sales force, independent
distributors and sales agents. Financial information concerning the Company's
business, business segments and geographic
1
information appears in the Notes to our Consolidated Financial Statements
included under Item 8 below, which information is incorporated herein by
reference.
The Company operates four domestic subsidiaries, all of which are
wholly-owned: BCP Ingredients, Inc. ("BCP"), Balchem Minerals Corporation
("BMC"), BCP Saint Gabriel, Inc. ("BCP St. Gabriel"), each a Delaware
corporation, and Chelated Minerals Corporation ("CMC"), a Utah corporation. We
also operate three wholly-owned subsidiaries in Europe: Balchem BV and Balchem
Trading BV, both Dutch limited liability companies, and Balchem Italia Srl, an
Italian limited liability company. Unless otherwise stated to the contrary, or
unless the context otherwise requires, references to the Company in this report
includes Balchem Corporation and its subsidiaries.
Food, Pharma & Nutrition
------------------------
The Food, Pharma & Nutrition ("FP&N") 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, and nutritional supplements. We
also market human grade choline nutrient products through this segment for
wellness applications. Choline is recognized to play a key role in the
development and structural integrity of brain cell membranes in infants,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. The FP&N portfolio also includes granulated calcium
carbonate products, primarily used in, or in conjunction with, novel
over-the-counter and prescription pharmaceuticals for the treatment of
osteoporosis, gastric disorders and calcium deficiencies.
Specialty Products
------------------
Our Specialty Products segment operates as ARC Specialty Products. The
Specialty Products segment repackages and distributes the following specialty
gases: ethylene oxide, blends of ethylene oxide, propylene oxide and methyl
chloride.
We sell ethylene oxide, at the 100% level, 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 or appearance of the device being
sterilized. We distribute our 100% ethylene oxide product 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. The
Company's inventory of these custom built drums, along with the Company's three
filling facilities, represent a significant capital investment. Contract
sterilizers, medical device manufacturers, and medical gas distributors are our
principal customers for this product. In addition, ethylene oxide blends are
highly effective as a fumigant, in killing bacteria, fungi, and insects in
spices and other seasoning materials. In addition, the Company also sells small,
uniquely designed single use canisters of 100% ethylene oxide for use in medical
device sterilization.
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 and in various chemical synthesis
applications. It is also utilized in industrial 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 and
pharmaceuticals, as well as in malt and wine preservers.
Animal Nutrition & Health
-------------------------
Our Animal Nutrition & Health ("AN&H") segment provides the animal
nutrition market with nutritional products derived from our encapsulation and
chelation technologies in addition to basic choline
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chloride. Commercial sales of REASHURE(R) Choline, an encapsulated choline
product, NITROSHURETM, an encapsulated urea supplement, and NIASHURETM, our
microencapsulated niacin product for dairy cows, boosts health and milk
production in transition and lactating dairy cows, delivering nutrient
supplements that survive the rumen and are biologically available, providing
required nutritional levels. We also market chelated mineral supplements for use
in animal feed throughout the world, as our proprietary chelation technology
provides enhanced nutrient absorption for various species of production and
companion animals. In October 2008, we introduced a rumen-protected lysine for
use in dairy rations, AMINOSHURETM-L, which gives nutritionists and dairy
producers a precise and consistent source of rumen-protected lysine. AN&H also
manufactures and supplies basic choline chloride, an essential nutrient for
animal health, predominantly to the poultry and swine industries. Choline, which
is manufactured and sold on both dry and aqueous forms, plays a vital role in
the metabolism of fat. Choline deficiency can result in reduced growth and
perosis in poultry; fatty liver, kidney necrosis and general poor health
condition in swine. Certain derivatives of choline chloride are also
manufactured and sold into industrial applications. The AN&H segment also
includes the manufacture and sale of methylamines. Methylamines are a primary
building block for the manufacture of choline products and are also used in a
wide range of industrial applications.
Raw Materials:
--------------
The raw materials utilized by the Company in the manufacture of its
products are generally available from a number of commercial sources. Such raw
materials include materials derived from petrochemicals, minerals, metals and
other readily available commodities and are subject to price fluctuations due to
market conditions. The Company is not experiencing any current difficulties in
procuring such materials and does not anticipate any such problems; however, the
Company cannot assure that will always be the case.
Intellectual Property:
----------------------
The Company currently holds 17 patents in the United States and overseas
and uses certain trade-names and trademarks. It also uses know-how, trade
secrets, formulae, and manufacturing techniques that assist in maintaining
competitive positions of certain of its products. Formulae and know-how are of
particular importance in the manufacture of a number of the Company's products.
The Company believes that certain of its patents, in the aggregate, are
advantageous to its business. However, it is believed that no single patent or
related group of patents is currently so material to the Company that the
expiration or termination of any single patent or group of patents would
materially affect its business. The Company believes that its sales and
competitive position are dependent primarily upon the quality of its products,
its technical sales efforts and market conditions, rather than on any patent
protection.
Seasonality:
------------
In general, the businesses of our segments are not seasonal to any
material extent.
Backlog:
--------
At December 31, 2008, the Company had a total backlog of $6,384,000
(including $4,434,000 for the AN&H segment; $1,280,000 for the FP&N segment and
$670,000 for Specialty Products segment), as compared to a total backlog of
$7,303,000 at December 31, 2007 (including $5,226,000 for the AN&H segment;
$1,723,000 for the FP&N segment and $354,000 for Specialty Products segment). It
has generally been the Company's policy and practice to maintain an inventory of
finished products and/or component materials for its segments to enable it to
ship products within two months after receipt of a product order. All orders in
the current backlog are expected to be filled in the 2009 fiscal year.
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Competition:
------------
The Company's competitors include many large and small companies, some of
which have greater financial, research and development, production and other
resources than the Company. Competition in the encapsulation markets served by
the Company is based primarily on product performance, customer support,
quality, service and price. The development of new and improved products is
important to the Company's success. This competitive environment requires
substantial investments in product and manufacturing process research and
development. In addition, the winning and retention of customer acceptance of
the Company's food and nutrition products involve substantial expenditures for
application testing and sales efforts. The Company also engages various
universities to assist in research and provide independent third-party analysis.
In the specialty products business, the Company faces competition from
alternative sterilizing technologies and products. Competition in the animal
feed markets served by the Company is based primarily on service and price.
Research & Development:
-----------------------
During the years ended December 31, 2008, 2007 and 2006, the Company
incurred research and development expense of approximately $2.9 million, $2.5
million and $2.0 million, respectively, on Company-sponsored research and
development for new products and improvements to existing products and
manufacturing processes, principally in the FP&N and AN&H segments. During the
year ended December 31, 2008, an average of 21 employees were devoted full time
to research and development activities. The Company has historically funded its
research and development programs with funds available from current operations
with the intent of recovering those costs from profits derived from future sales
of products resulting from, or enhanced by, the research and development effort.
The Company prioritizes its product development activities in an effort to
allocate its resources to those product candidates that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and needs, status
of its proprietary rights, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market.
Acquisitions, Dispositions, and Capital Projects:
-------------------------------------------------
In 2007, we made two significant acquisitions.
In April 2007, pursuant to an asset purchase agreement dated March 30,
2007, we acquired the methylamines and choline chloride business and
manufacturing facilities of Akzo Nobel Chemicals S.p.A., located in Marano
Ticino, Italy, through our affiliate, Balchem BV. Balchem BV subsequently
assigned this asset purchase agreement to its wholly-owned subsidiary, Balchem
Italia Srl. In this Annual Report on Form 10-K, we refer to this acquisition as
the "Akzo Nobel Acquisition".
In March 2007, BCP acquired certain choline chloride business assets of
Chinook Global Limited ("Chinook"), a privately held Ontario corporation. In
this Annual Report on Form 10-K, we refer to this acquisition as the "Chinook
Acquisition".
In February 2006, we acquired all of the outstanding capital stock of CMC,
which was then privately held. CMC is a manufacturer and global marketer of
chelated mineral nutritional supplements for livestock, pet and swine feeds. In
this Annual Report on Form 10-K, we refer to this acquisition as the "CMC
Acquisition."
Excluding acquisitions, capital expenditures were approximately $5.1
million for 2008, as compared to $4.9 million in 2007. Capital expenditures are
projected to be approximately $5.0 million for 2009.
4
Environmental / Regulatory Matters:
-----------------------------------
The Federal Insecticide, Fungicide and Rodenticide Act, as amended
("FIFRA"), a health and safety statute, requires that certain products within
our specialty products segment must be registered with the EPA because they are
considered pesticides. In order to obtain a registration, an applicant typically
must demonstrate, through extensive test data, that its product will not cause
unreasonable adverse effects on the environment. We hold an EPA registration
permitting us to sell ethylene oxide as a medical device sterilant and spice
fumigant.
We are in the process of reregistering this product's use in compliance
with FIFRA re-registration requirements for pesticide products. With respect to
the treatment of spices, the EPA prohibited the use of ethylene oxide to treat
basil, effective August 1, 2007, but allows the continuing use of ethylene oxide
to treat all other spices, provided a mandated treatment method is used
beginning August 1, 2008.
Another area of the EPA's re-registration effort resulted in the April 16,
2008 issuance of the RED (Re-registration Eligibility Decision) for ethylene
oxide which permits the continued use of ethylene oxide "to sterilize medical or
laboratory equipment, pharmaceuticals, and aseptic packaging, or to reduce
microbial load on musical instruments, cosmetics, whole and ground spices and
other seasoning materials and artifacts, archival material or library objects."
Given that "the database to support re-registration is substantially complete,"
our re-registration effort is similarly substantially completed, which will
continue to authorize our ethylene oxide product sales for medical device
sterilization. While the EPA may request additional testing, we believe that the
use of ethylene oxide will continue to be permitted. The product, when used as a
sterilant for certain medical devices, has no known equally effective
substitute. Management believes absence of availability of this product could
not be easily tolerated by various medical device manufacturers and the health
care industry due to the resultant infection potential.
The State of California lists 100% ethylene oxide, when used as a
sterilant or fumigant, as a carcinogen and reproductive toxin under California's
Proposition 65 (Safe Drinking Water and Toxic Enforcement Act of 1986). As a
result, the Company is required to provide a prescribed warning to any person in
California who may be exposed to this product. Failure to provide such warning
would result in liability of up to $2,500 per day per person exposed.
The Company's facility in Verona, Missouri, while held by a prior owner,
was designated by the EPA as a Superfund site and placed on the National
Priorities List in 1983, because of dioxin contamination on portions of the
site. Remediation conducted by the prior owner under the oversight of the EPA
and the Missouri Department of Natural Resources ("MDNR") included removal of
dioxin contaminated soil and equipment, capping of areas of residual
contamination in four relatively small areas of the site separate from the
manufacturing facilities, and the installation of wells to monitor groundwater
and surface water for contamination for certain organic chemicals. No ground
water or surface water treatment has been required. In 1998, the EPA certified
the work on the contaminated soils to be complete. In February 2000, after the
conclusion of two years of monitoring groundwater and surface water, the former
owner submitted a draft third party risk assessment report to the EPA and MDNR
recommending no further action. The prior owner is awaiting the response of the
EPA and MDNR to the draft risk assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona
facility for potential liabilities associated with the Superfund site and one of
the sellers, in turn, has the benefit of certain contractual indemnification by
the prior owner that executed the above-described Superfund remedy.
In connection with normal operations at its plant facilities, the Company
is required to maintain environmental and other permits, including those
relating to the ethylene oxide operations.
The Company believes it is in compliance in all material respects with
federal, state, local and international provisions that have been enacted or
adopted regulating the discharge of materials into the
5
environment or otherwise relating to the protection of the environment. Such
compliance includes the maintenance of required permits under air pollution
regulations and compliance with requirements of the Occupational Safety and
Health Administration. The cost of such compliance has not had a material effect
upon the results of operations or financial condition of the Company. In 1982,
the Company discovered and thereafter removed a number of buried drums
containing unidentified waste material from the Company's site in Slate Hill,
New York. The Company thereafter entered into a Consent Decree to evaluate the
drum site with the New York Department of Environmental Conservation ("NYDEC")
and performed a Remedial Investigation/Feasibility Study that was approved by
NYDEC in February 1994. Based on NYDEC requirements, the Company remediated the
area and removed soil from the drum burial site. This proceeding has been
substantially completed (see Item 3).
The Channahon, Illinois manufacturing facility manufactures a calcium
carbonate line of pharmaceutical grade ingredients. This facility is registered
with the United States Food and Drug Administration ("FDA") as a drug
manufacturing facility. These products must be manufactured in conformity with
current Good Manufacturing Practice (cGMP) regulations as interpreted and
enforced by the FDA. Modifications, enhancements or changes in manufacturing
facilities or procedures of our pharmaceutical products are, in many
circumstances, subject to FDA approval, which may be subject to a lengthy
application process or which we may be unable to obtain. The Channahon, Illinois
facility, as well as those of any third-party cGMP manufacturers that we may
use, are periodically subject to inspection by the FDA and other governmental
agencies, and operations at these facilities could be interrupted or halted if
the results of these inspections are unsatisfactory.
Employees:
----------
As of March 1, 2009, the Company employed approximately 332 persons.
Approximately 73 employees at our Marano, Ticino, Italy facility are covered by
a national collective bargaining agreement, which expires in 2010. Approximately
55 employees at the Company's Verona, Missouri facility are covered by a
collective bargaining agreement, which expires in 2012.
Available Information:
----------------------
The Company's headquarters is located at 52 Sunrise Park Road, P.O. Box
600, New Hampton, NY 10958. The Company's telephone number is (845) 326-5600 and
its Internet website address is www.balchem.com. The Company makes available
through its website, free of charge, its Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to such
reports, as soon as reasonably practicable after they have been electronically
filed with the Securities and Exchange Commission. Such reports are available
via a link from the Investor Information page on the Company's website to a list
of the Company's reports on the Securities and Exchange Commission's EDGAR
website.
Item 1A. Risk Factors
Our business involves a high degree of risk and uncertainty, including the
following risks and uncertainties:
Our operating results may be adversely impacted by macro-economic
uncertainties and fears.
Recently, general worldwide economic conditions have experienced a
significant downturn due to the credit conditions impacted by factors such as
the subprime-mortgage turmoil, slower economic activity, concerns about
inflation and deflation, increased energy costs, decreased consumer confidence,
reduced corporate profits and capital spending, adverse business conditions and
liquidity and the impact of natural disasters. These conditions make it
extremely difficult for our customers, our vendors and us to accurately forecast
and plan future business activities, and they could cause U.S. and foreign
businesses to slow spending on our products which would reduce our revenues and
profitability. Furthermore, during challenging economic times our customers may
face issues gaining timely access to sufficient credit, which
6
could result in an impairment of their ability to make timely payments to us. If
that were to occur, we may be required to increase our allowance for doubtful
accounts and our days sales outstanding would be negatively impacted. We cannot
predict the timing, depth or duration of any economic slowdown or subsequent
economic recovery, worldwide, or in the markets in which we operate.
Increased competition could hurt our business and financial results.
We face competition in our markets from a number of large and small
companies, some of which have greater financial, research and development,
production and other resources than we do. Our competitive position is based
principally on performance, quality, customer support, service, breadth of
product line, manufacturing or packaging technology and the selling prices of
our products. Our competitors might be expected to improve the design and
performance of their products and to introduce new products with competitive
price and performance characteristics. We expect to do the same to maintain our
current competitive position and market share.
The loss of governmental permits and approvals would materially harm some
of our businesses.
Pursuant to applicable environmental and safety laws and regulations, we
are required to obtain and maintain certain governmental permits and approvals,
including an EPA registration for our ethylene oxide sterilant product. We
maintain an EPA registration of ethylene oxide as a medical device sterilant and
fumicide. We are in the process of re-registering this product in accordance
with FIFRA. The EPA may not allow re-registration of ethylene oxide for the uses
mentioned above. The failure of the EPA to allow re-registration of ethylene
oxide would have a material adverse effect on our business and financial
results.
The Channahon, Illinois facility manufactures a calcium carbonate line of
pharmaceutical ingredients. This facility is registered with the FDA as a drug
manufacturing facility. These products must be manufactured in conformity with
current Good Manufacturing Practice (cGMP) regulations as interpreted and
enforced by the FDA. Modifications, enhancements or changes in manufacturing
facilities or procedures of our pharmaceutical products are, in many
circumstances, subject to FDA approval, which may be subject to a lengthy
application process or which we may be unable to obtain. Our Channahon, Illinois
facility, as well as those of any third-party cGMP manufacturers that we may
use, are periodically subject to inspection by the FDA and other governmental
agencies, and operations at these facilities could be interrupted or halted if
the results of these inspections are unsatisfactory. Failure to comply with the
FDA or other governmental regulations can result in fines, unanticipated
compliance expenditures, recall or seizure of products, total or partial
suspension of production, enforcement actions, injunctions and criminal
prosecution, which could have a material adverse effect on our business and
financial results.
Permits and approvals may be subject to revocation, modification or denial
under certain circumstances. Our operations or activities (including the status
of compliance by the prior owner of the Verona, Missouri facility under
Superfund remediation) could result in administrative or private actions,
revocation of required permits or licenses, or fines, penalties or damages,
which could have an adverse effect on us. In addition, we can not predict the
extent to which any legislation or regulation may affect the market for our
products or our cost of doing business.
Raw material shortages or price increases could adversely affect our
business and financial results.
The principal raw materials that we use in the manufacture of our products
can be subject to price fluctuations due to market conditions. Such raw
materials include materials derived from petrochemicals, minerals, metals and
other commodities. While the selling prices of our products tend to increase or
decrease over time with the cost of raw materials, these changes may not occur
simultaneously or to the same degree. At times, we may be unable to pass
increases in raw material costs through to our customers due to certain
contractual obligations. Such increases in the price of raw materials, if not
offset by product price increases, or substitute raw materials, would have an
adverse impact on our profitability. We believe we have reliable sources of
supply for our raw materials under normal market conditions. We cannot,
7
however, predict the likelihood or impact of any future raw material shortages.
Any shortages could have a material adverse impact on our results of operations.
Our financial success depends in part on the reliability and sufficiency
of our manufacturing facilities.
Our revenues depend on the effective operation of our manufacturing,
packaging, and processing facilities. The operation of our facilities involves
risks, including the breakdown, failure, or substandard performance of
equipment, power outages, the improper installation or operation of equipment,
explosions, fires, natural disasters, failure to achieve or maintain safety or
quality standards, work stoppages, supply or logistical outages, and the need to
comply with environmental and other directives of governmental agencies. The
occurrence of material operational problems, including, but not limited to, the
above events, could adversely affect our profitability during the period of such
operational difficulties.
Our failure or inability to protect our intellectual property could harm
our business and financial results.
We hold 17 patents in the United States and overseas. Third parties could
seek to challenge, invalidate or circumvent our patents. Moreover, there could
be successful claims against us alleging that we infringe the intellectual
property rights of others. If we are unable to protect all of our intellectual
property rights, or if we are found to be infringing the intellectual property
rights of others, there could be an adverse effect on our business and financial
results. Our competitive position also depends on our use of unpatented trade
secrets. Competitors could independently develop substantially equivalent
proprietary information, which could hurt our business and financial results.
We face risks associated with our sales to customers and manufacturing
operations outside the United States.
For the year ended December 31, 2008, approximately 37% of our net sales
consisted of sales outside the United States, predominately to Europe, Japan and
China. In addition, we conduct a portion of our manufacturing outside the United
States. International sales are subject to inherent risks. The majority of our
foreign sales occur through our foreign sales subsidiaries and the remainder of
our foreign sales result from exports to foreign distributors, resellers and
customers. Our foreign sales and operations are subject to a number of risks,
including: longer accounts receivable collection periods; the impact of
recessions and other economic conditions in economies outside the United States;
export duties and quotas; unexpected changes in regulatory requirements;
certification requirements; environmental regulations; reduced protection for
intellectual property rights in some countries; potentially adverse tax
consequences; political and economic instability; and preference for locally
produced products. These factors could have a material adverse impact on our
ability to increase or maintain our international sales.
We may, from time to time, experience problems in our labor relations.
In North America, approximately 55 employees, or 22% of our North American
workforce, as of December 31, 2008, are represented by a union under a single
collective bargaining agreement. This agreement expires in 2012. In Europe,
approximately 73 employees are covered by a collective bargaining agreement.
This agreement expires in 2010. We believe that our present labor relations with
all of our unionized employees are satisfactory, however, our failure to renew
these agreements on reasonable terms could result in labor disruptions and
increased labor costs, which could adversely affect our financial performance.
Similarly, if our relations with the unionized portion of our workforce do not
remain positive, such employees could initiate a strike, work stoppage or
slowdown in the future. In the event of such an action, we may not be able to
adequately meet the needs of our customers using our remaining workforce and our
operations and financial condition could be adversely affected.
8
Our international operations subject us to currency translation risk and
currency transaction risk which could cause our results to fluctuate from period
to period.
The financial condition and results of operations of our foreign
subsidiaries are reported in Euros and then translated into U.S. dollars at the
applicable currency exchange rate for inclusion in our consolidated financial
statements. Exchange rates between these currencies in recent years have
fluctuated significantly and may do so in the future. In the past year, as a
result of the strength of the Euro compared to the U.S. dollar, our operating
results in U.S. dollars were positively affected upon translation. The positive
impact of a strengthening Euro may not continue in the future and may even
reverse if the Euro declines in value compared to the U.S. dollar. Furthermore,
we incur currency transaction risk whenever we enter into either a purchase or a
sales transaction using a currency different than the functional currency. Given
the volatility of exchange rates, we may not be able to effectively manage our
currency transactions and/or translation risks. Volatility in currency exchange
rates could impact our business and financial results.
Our success depends in large part on our key personnel.
Our operations significantly depend on the continued efforts of our senior
executives. The loss of the services of certain executives for an extended
period of time could have a material adverse effect on our business and
financial results.
Litigation could be costly and can adversely affect our business and
financial results.
We, like all companies involved in the food and pharmaceutical industries,
are subject to potential claims for product liability relating to our products.
Such claims, irrespective of their outcomes or merits, could be time-consuming
and expensive to defend, and could result in the diversion of management time
and attention. Any of these situations could have a material adverse effect on
our business and financial results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In February 2002, the Company entered into a ten (10) year lease for
approximately 20,000 square feet of office space in New Hampton, New York. The
office space is serving as the Company's general offices and as laboratory
facilities for the Company's encapsulated / nutritional products business.
Manufacturing facilities owned by the Company for its encapsulated
products business and a blending, drumming and terminal facility for the
Company's ethylene oxide business, are presently housed in three buildings
located in Slate Hill, New York comprising a total of approximately 51,000
square feet. The Company owns a total of approximately 16 acres of land on two
parcels in this community.
The Company owns a facility located on an approximately 24 acre parcel of
land in Green Pond, South Carolina. The site consists of a drumming facility, a
canister filling facility, a maintenance building and an office building
comprising a total of approximately 34,000 square feet. The Company uses this
site for repackaging products in its specialty products segment.
The Company's Verona, Missouri site, which is located on approximately 100
acres, consists of manufacturing facilities relating to animal feed grade
choline, human choline nutrients, a drumming facility for the Company's ethylene
oxide business, together with buildings utilized for warehousing such products.
The Verona operation buildings comprise a total of approximately 151,000 square
feet. The facility, while under prior ownership, was designated by the EPA as a
Superfund site (see Item 1 - "Business - Environmental / Regulatory Matters").
9
The Company leases production and warehouse space in Channahon, Illinois.
The Company uses this facility for production related to the Company's calcium
carbonate line of business. The initial term of the lease is effective through
September 30, 2010, subject to earlier termination by Balchem upon sixty days
notice, or by the landlord upon sixty days notice. The Company's leased space in
Channahon, Illinois totals approximately 26,000 square feet.
The Company, through CMC, owns a manufacturing facility and warehouse,
comprising approximately 16,500 square feet, located on approximately 5 acres of
land in Salt Lake City, Utah. The Company manufactures and distributes its
chelated mineral nutrients for animal feed products at this location.
The Company, through BCP, owns a manufacturing facility located upon
approximately 11 acres of leased realty in St. Gabriel, Louisiana. The Company
manufactures and distributes animal feed grade choline chloride at this
location.
The Company, through its European subsidiary, Balchem Italia Srl, owns a
facility located on an approximately 30 acre parcel of land in Marano Ticino,
Italy. The Company manufactures and distributes methylamines, animal feed grade
choline and human choline nutrients at this location.
Item 3. Legal Proceedings
In 1982 the Company discovered and thereafter removed a number of buried
drums containing unidentified waste material from the Company's site in Slate
Hill, New York. The Company thereafter entered into a Consent Decree to evaluate
the drum site with the New York Department of Environmental Conservation
("NYDEC") and performed a Remedial Investigation/Feasibility Study that was
approved by NYDEC in February 1994. Based on NYDEC requirements, the Company
remediated the area and removed soil from the drum burial site. Clean-up was
completed in 1996, and NYDEC required the Company to monitor the site through
1999. The Company continues to be involved in discussions with NYDEC to evaluate
monitoring results and determine what, if any, additional actions will be
required on the part of the Company to close out the remediation of this site.
Additional actions, if any, would likely require the Company to continue
monitoring the site. The cost of such monitoring has recently been less than
$5,000 per year.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these proceedings will not have a material effect on the Company's financial
position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
(a) Market Information.
On December 8, 2006, 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 29, 2006. Such stock
dividend was made on January 19, 2007. 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.
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 stock
dividend was made on January 20, 2006. 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.
Since December 22, 2006, the Company's common stock has traded on the
Nasdaq Global Market under the trading symbol BCPC. Prior to that, our common
stock traded on the American Stock Exchange under the trading symbol BCP. The
high and low closing prices for the common stock as recorded for each quarterly
period during the years ended December 31, 2008 and 2007 were as follows:
===============================================================
Quarterly Period High Low
---------------------------------------------------------------
Ended March 31, 2008 $ 23.34 $ 19.05
Ended June 30, 2008 26.44 22.16
Ended September 30, 2008 29.50 24.17
Ended December 31, 2008 26.86 21.16
===============================================================
===============================================================
Quarterly Period High Low
---------------------------------------------------------------
Ended March 31, 2007 $ 18.56 $ 14.09
Ended June 30, 2007 19.17 17.15
Ended September 30, 2007 21.25 15.60
Ended December 31, 2007 24.00 20.16
===============================================================
On March 3, 2009 the closing price for the common stock on the Nasdaq
Global Market was $19.25.
(b) Record Holders.
As of March 3, 2009, the approximate number of holders of record of the
Company's common stock was 192. Such number does not include stockholders who
hold their stock in street name. The total number of beneficial owners of the
Company's common stock is estimated to be approximately 12,399.
(c) Dividends.
The Company declared cash dividends of $0.11 per share on its common stock
during its fiscal years ended December 31, 2008 and 2007.
For information concerning prior stockholder approval of and other matters
relating to our equity incentive plans, see Item 12 in this Annual Report on
Form 10-K.
11
(d) Performance Graph.
The graph below sets forth the cumulative total stockholder return on the
Company's Common Stock (referred to in the table as "BCPC") for the five years
ended December 31, 2008, the overall stock market return during such period for
shares comprising the Russell 2000(R) Index (which the Company believes includes
companies with market capitalization similar to that of the Company), and the
overall stock market return during such period for shares comprising the
Standard & Poor's 500 Food Group Index, in each case assuming a comparable
initial investment of $100 on December 31, 2003 and the subsequent reinvestment
of dividends. The Russell 2000(R) Index measures the performance of the shares
of the 2000 smallest companies included in the Russell 3000(R) Index. In light
of the Company's industry segments, the Company does not believe that published
industry-specific indices are necessarily representative of stocks comparable to
the Company. Nevertheless, the Company considers the Standard & Poor's 500 Food
Group Index to be potentially useful as a peer group index with respect to the
Company in light of the Company's Food, Pharma & Nutrition segment. The
performance of the Company's Common Stock shown on the graph below is historical
only and not indicative of future performance.
Russell S&P Food
BCPC 2000(R) Index Group Index
-----------------------------------------------
12/31/03 $100.00 $100.00 $100.00
12/31/04 $152.15 $118.33 $116.18
12/31/05 $196.12 $123.72 $104.03
12/31/06 $253.42 $146.44 $118.11
12/31/07 $331.28 $145.23 $117.68
12/31/08 $368.73 $ 95.44 $ 99.90
Stock
Price Value Value
-----------------------------------------------
12/31/03 $ 6.76 $2,273.20 213.9892
12/31/04 $10.28 $2,689.86 248.6118
12/31/05 $13.25 $2,812.35 222.6220
12/31/06 $17.12 $3,328.90 252.7360
12/31/07 $22.38 $3,301.28 251.8328
12/31/08 $24.91 $2,169.65 213.7655
Item 6. Selected Financial Data
The selected statements of operations data set forth below for the three years
in the period ended December 31, 2008 and the selected balance sheet data as of
December 31, 2008 and 2007 have been derived from our Consolidated Financial
Statements included elsewhere herein. The selected financial data as of December
31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 have
been derived from audited Consolidated Financial Statements not included herein,
but which were previously filed with the SEC. The following information should
be read in conjunction with Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included elsewhere herein.
Earnings per share and dividend amounts have been adjusted for the December 2006
and 2005 three-for-two stock splits (effected by means of stock dividends).
12
(In thousands, except per share data)
=====================================================================================================================
Year ended December 31, 2008 2007 2006 2005 2004
(1)(2)(3)(4) (1)(2)(3)(4) (1)(2) (1)
---------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
----------------------------
Net sales $ 232,050 $ 176,201 $ 100,905 $ 83,095 $ 67,406
Earnings before income
tax expense 28,431 24,829 19,101 17,191 12,715
Income tax expense 9,381 8,711 6,823 6,237 4,689
Net earnings 19,050 16,118 12,278 10,954 8,026
Basic net earnings per
common share $ 1.06 $ .91 $ .70 $ .63 $ .48
Diluted net earnings per
common share $ 1.00 $ .87 $ .67 $ .61 $ .46
======================================================================================================================
At December 31, 2008 2007 2006 2005 2004
---------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
------------------
Total assets $ 154,474 $ 154,424 $ 92,333 $ 75,141 $ 60,405
Long-term debt 6,671 17,398 -- -- --
Other long-term
obligations 1,609 1,529 784 1,043 1,003
Total stockholders' equity 114,506 93,080 75,362 60,933 50,234
Dividends per common share $ .11 $ .11 $ .09 $ .06 $ .04
---------------------------------------------------------------------------------------------------------------------
(1) Includes the operating results, cash flows, and assets relating to
the Loders Croklaan Acquisition from the date of acquisition (July
1, 2005) forward.
(2) Includes the operating results, cash flows, and assets relating to
the CMC Acquisition from the date of acquisition (February 8, 2006)
forward.
(3) Includes the operating results, cash flows, and assets relating to
the Chinook Acquisition from the date of acquisition (March 19,
2007) forward.
(4) Includes the operating results, cash flows, and assets relating to
the Akzo Nobel Acquisition from the date of acquisition (May 1,
2007) forward.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
Effective with the quarter ending March 31, 2008, the Company has realigned its
business segment reporting structure to more appropriately reflect the internal
management of the businesses, largely due to the impact of acquisitions in 2007.
The Company will continue to report three segments: Specialty Products; Food,
Pharma & Nutrition; and Animal Nutrition & Health. Changes to the reporting
segments are as follows: chelated minerals and specialty nutritional products
for the animal health industry, formerly reported as a part of the
encapsulated/nutritional products segment, are now combined with the choline
business (formerly BCP Ingredients) into a consolidated Animal Nutrition &
Health segment. The encapsulated/nutritional products segment has been renamed
Food, Pharma & Nutrition, focusing on human health. There are no changes to the
Specialty Products segment. Business segment net sales and earnings from
operations have been reclassified for all periods presented to reflect the
segment changes.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with Item 6 -- "Selected
Financial Data" and our Consolidated Financial Statements and the related notes
included in this report. Those statements in the following discussion that are
not
13
historical in nature should be considered to be forward-looking statements that
are inherently uncertain. See "Cautionary Statement Regarding Forward-Looking
Statements".
Specialty Products
------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use in the health care industry to sterilize medical devices.
Contract sterilizers, medical device manufacturers and medical gas distributors
are the Company's principal customers for this product. Blends of ethylene oxide
are sold as fumigants and are highly effective in killing bacteria, fungi, and
insects in spices and other seasoning type materials. Propylene oxide and methyl
chloride are also sold, principally to customers seeking smaller (as opposed to
bulk) quantities.
Management believes that future success in this segment is highly
dependent on the Company's ability to maintain its strong reputation for
excellent quality, safety and customer service.
Food, Pharma & Nutrition
------------------------
The Food, Pharma & Nutrition ("FP&N") 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, and packaging applications and shelf-life.
Major product applications are baked goods, refrigerated and frozen dough
systems, processed meats, seasoning blends, confections, and nutritional
supplements. We also market human grade choline nutrient products through this
segment for wellness applications. Choline is recognized to play a key role in
the development and structural integrity of brain cell membranes in infants,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. The FP&N portfolio also includes granulated calcium
carbonate products, 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 United States.
Management believes this segment's key strengths are its proprietary
technology and end-product application capabilities. The success of the
Company's efforts to increase revenue in this segment is highly dependent on the
timing of marketing launches of new products in the U.S. and international food
and nutrition markets by the Company's customers and prospects. The Company,
through its innovative proprietary technology and applications expertise,
continues to develop new products designed to solve and respond to customer
problems and innovative needs.
Animal Nutrition & Health
-------------------------
Our Animal Nutrition & Health ("AN&H") segment provides the animal
nutrition market with nutritional products derived from our encapsulation and
chelation technologies in addition to basic choline chloride. Commercial sales
of REASHURE(R) Choline, an encapsulated choline product, NITROSHURETM, an
encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin
product for dairy cows, boosts health and milk production in transition and
lactating dairy cows, delivering nutrient supplements that survive the rumen and
are biologically available, providing required nutritional levels. We also
market chelated mineral supplements for use in animal feed throughout the world,
as our proprietary chelation technology provides enhanced nutrient absorption
for various species of production and companion animals. In October 2008, we
introduced the first proven rumen-protected lysine for use in dairy rations,
AMINOSHURETM-L, which gives nutritionists and dairy producers a precise and
consistent source of rumen-protected lysine. AN&H also manufactures and supplies
basic choline chloride, an essential nutrient for animal health, predominantly
to the poultry and swine industries. Choline, which is manufactured and sold on
both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline
deficiency can result in reduced growth and perosis in poultry; fatty liver,
kidney necrosis and general poor
14
health condition in swine. Certain derivatives of choline chloride are also
manufactured and sold into industrial applications. The AN&H segment also
includes the manufacture and sale of methylamines. Methylamines are a primary
building block for the manufacture of choline products and are also used in a
wide range of industrial applications.
Sales of specialty products for the animal nutrition and health industry
are highly dependent on dairy industry economics as well as the ability of the
Company to leverage the results of existing successful university research on
the animal health benefits of the Company's products. Management believes that
success in the commodity-oriented basic choline chloride marketplace is highly
dependent on the Company's ability to maintain its strong reputation for
excellent product quality and customer service. In addition, the Company must
continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete in a highly competitive global marketplace.
The Company sells products for all three segments through its 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 ended December 31,
2008, 2007 and 2006 (in thousands):
Business Segment Net Sales:
========================================================================================================
2008 2007 2006
--------------------------------------------------------------------------------------------------------
Specialty Products $ 35,835 $ 33,057 $ 32,026
Food, Pharma & Nutrition 35,702 32,052 28,702
Animal Nutrition & Health 160,513 111,092 40,177
--------------------------------------------------------------------------------------------------------
Total $ 232,050 $ 176,201 $ 100,905
========================================================================================================
Business Segment Earnings From Operations:
========================================================================================================
2008 2007 2006
--------------------------------------------------------------------------------------------------------
Specialty Products $ 12,545 $ 11,824 $ 11,315
Food, Pharma & Nutrition 5,469 4,144 2,162
Animal Nutrition & Health 11,334 9,938 5,685
--------------------------------------------------------------------------------------------------------
Total $ 29,348 $ 25,906 $ 19,162
========================================================================================================
Fiscal Year 2008 compared to Fiscal Year 2007
(All amounts in thousands, except share and per share data)
Net Sales
---------
Net sales for 2008 were $232,050, as compared with $176,201 for 2007, an
increase of $55,849 or 31.7%. Net sales for the specialty products segment were
$35,835 for 2008, as compared with $33,057 for 2007, an increase of $2,778 or
8.4%. This increase was due principally to greater sales volumes of ethylene
oxide for medical device sterilization and propylene oxide for starch
modification as well as a modest price increase adopted to help offset rising
raw material costs during 2008. Net sales for the Food, Pharma & Nutrition
segment were $35,702 for 2008, as compared with $32,052 for 2007, an increase of
$3,650 or 11.4%. This result was driven principally by increased sales of
calcium and nutritional products, as well as increased product sales in both the
domestic and international food markets. Net sales of $160,513 were realized in
2008 for the Animal Nutrition & Health segment, as compared with $111,092 for
2007, an increase of $49,421 or 44.5%. This result reflects incremental sales of
approximately $40,000 from the customer list acquisition of Chinook Group
Limited ("Chinook") and from the Akzo Nobel Acquisition, as described in Note 5.
For the twelve months ending December 31, 2008, sales of our specialty animal
nutrition and health products, targeted for ruminant production animals and
companion animals, increased 32.9% or approximately 12% of the overall AN&H
growth.
15
Operating Expenses
------------------
Operating expenses for 2008 were $23,230, as compared to $21,024 for 2007,
an increase of $2,206 or 10.5%. This increase was due primarily to $736 of
additional amortization expense, plus sales and technical personnel expense
associated with the Chinook and Akzo Nobel acquisitions, as well as higher
expenses relating to accounting, tax services, and non-cash stock-based
compensation recognition. With these increases, operating expenses were 10.0% of
sales or 1.9 percentage points less than the operating expenses as a percent of
sales incurred in 2007. During 2008 and 2007, the Company spent $2,877 and
$2,514, respectively, on research and development, substantially all of which
pertained to the Food, Pharma, Nutrition, and Animal Nutrition & Health
segments.
Business Segment Earnings From Operations
-----------------------------------------
Earnings from operations for 2008 increased to $29,348 compared to $25,906
for 2007, an increase of $3,442 or 13.3%, due largely to the above-noted
increase in sales. Earnings from operations as a percentage of sales ("operating
margin") for 2008 decreased to 12.6% compared to 14.7% for 2007, principally a
result of the previously-noted acquisition-related sales which carry a lower
profit margin than the Company's other business segments. In addition, despite
the implementation of price increases, we were not able to fully recover cost
increases in certain petro-chemical raw materials, which continued or trended up
within the year. We did begin to see a reduction in certain raw material costs
late in the third quarter 2008. The Company is continuing to focus on
implementing price increases, productivity improvements, and, most importantly,
growth through new product development which should result in improved operating
margins. Earnings from operations for the Specialty Products segment were
$12,545, an increase of $721 or 6.1%, a result of increases in sales volume and
modest sales price increases offset by higher raw material costs and the
previously-noted increased expenses relating to accounting, tax services, and
non-cash stock-based compensation recognition. Earnings from operations for
Food, Pharma & Nutrition were $5,469, an increase of $1,325 or 32.0%, due
largely to increased sales of calcium and nutritional products. Earnings from
operations for Animal Nutrition & Health, while unfavorably impacted by the
noted petro-chemical raw material cost increases, improved to $11,334, an
increase of $1,396 or 14.0%, and were favorably affected by organic growth and
the previously-noted increased sales volumes derived from the acquisitions.
Other Expenses (Income)
-----------------------
Interest income for 2008 totaled $107 as compared to $166 for 2007.
Interest expense, net of capitalized interest, was $963 for 2008 compared to
$1,562 for 2007. This decrease is primarily attributable to lower interest rates
and the decrease in average current and long-term debt resulting from both
normal recurring principal payments as well as accelerated payments of the term
loan used to fund the Chinook Acquisition. Other expense of $61 for 2008 is
primarily the result of unfavorable fluctuations in foreign currency exchange
rates between the U.S. dollar (the reporting currency) and functional foreign
currencies.
Income Tax Expense
------------------
The Company's effective tax rate 2008 and 2007 was 33.0% and 35.1%,
respectively. This decrease in the effective tax rate is primarily attributable
to a change in apportionment factors relating to state income taxes, as well as
a change in the income proportion towards jurisdictions with lower tax rates.
Net Earnings
------------
Primarily as a result of the above-noted increase in sales and the noted
raw material and operating expense increases, net earnings were $19,050 for
2008, as compared with $16,118 for 2007, an increase of 18.2%.
16
Fiscal Year 2007 compared to Fiscal Year 2006
(All amounts in thousands, except share and per share data)
Net Sales
---------
Net sales for 2007 were $176,201, as compared with $100,905 for 2006, an
increase of $75,296 or 74.6%. Net sales for the specialty products segment were
$33,057 for 2007, as compared with $32,026 for 2006, an increase of $1,031 or
3.2%. This increase was principally due to an increase in sales volume, along
with modest price increases for products in this segment. Net sales for the
Food, Pharma & Nutrition segment were $32,052 for 2007, as compared with $28,702
for 2006, an increase of $3,350 or 11.7%. This result was driven principally by
increased global sales of human nutritional and choline products, and includes
growth of $1,952 relating to the Akzo Nobel Acquisition. Net sales for the
Animal Nutrition & Health segment were $111,092 in 2007, as compared with
$40,177 for 2006, an increase of $70,915 or 176.5%. This result reflects sales
from the Chinook Acquisition and the Akzo Nobel Acquisition in 2007, which
contributed in the aggregate approximately $62,495 of the revenue in this
segment. The remaining increase was due to increased volumes sold in the core
dry and aqueous choline, as well as the specialty industrial product lines.
Sales of REASHURE(R), Niashure and chelated minerals, our specialty animal
nutrition and health products targeted for ruminant animals, and increases in
the companion animal market also contributed to this growth.
Operating Expenses
------------------
Operating expenses for 2007 increased to $21,024 from $14,844 for 2006, an
increase of $6,180 or 41.6%. This increase was due primarily to $2,300 of
additional amortization expense, plus sales and technical personnel expense
associated with the Chinook and Akzo Nobel acquisitions. We also incurred
approximately $1,224 of commercial development expenses toward our
pharmaceutical market initiatives in 2007. With these increases, operating
expenses were 11.9% of sales or 2.8 percentage points less than the operating
expenses as a percent of sales incurred in 2006. During 2007 and 2006, the
Company spent $2,514 and $2,019 respectively, on research and development,
substantially all of which pertained to the Company's encapsulated / nutritional
products for both human and animal health.
Business Segment Earnings From Operations
-----------------------------------------
As a result of the foregoing, earnings from operations for 2007 were
$25,906 as compared to $19,162 for 2006, reflecting a 35.2% increase from year
to year. Earnings from operations for the specialty products segment increased
to $11,824 in 2007 from $11,315 in 2006, an increase of $509 or 4.5%, due
largely to increases in sales volume and modest sales price increases. These
increases were partially offset by higher raw material costs. Earnings from
operations for the Food, Pharma & Nutrition segment increased to $4,144 in 2007
from $2,162 in 2006, an increase of $1,981 or 91.6%, as this segment was
favorably affected by the Akzo Nobel Acquisition and increased volumes sold
principally in the human choline markets. Earnings from operations for the
Animal Nutrition & Health segment, increased to $9,938 in 2007 from $5,684 in
2006, an increase of $4,254 or 74.8%, as a result of the previously noted
increased sales volumes and improved productivity, partially offset by certain
petro-chemical raw material cost increases.
Other Expenses (Income)
-----------------------
Interest income for 2007 totaled $166, as compared to $128 for 2006. This
increase is attributable to an increase in the Company's average cash balance
during 2007. Interest expense, net of capitalized interest, was $1,562 for 2007,
as compared to $189 for 2006. This increase is attributable to the increase in
average current and long-term debt resulting from the Chinook Acquisition and
Akzo Nobel Acquisition. Other income of $319 for 2007 is the result of favorable
fluctuations in foreign currency exchange rates between the U.S. dollar (the
reporting currency) and functional foreign currencies.
17
Income Tax Expense
------------------
The Company's effective tax rate for 2007 and 2006 was 35.1% and 35.7%,
respectively. This decrease in the effective tax rate is primarily attributable
to a domestic manufacturer's deduction and to a change in allocation relating to
state income taxes. The adoption of Interpretation No. 48, " Accounting for
Uncertainty in Income Taxes " ("FIN 48") adversely affected the 2007 income tax
expense by $220 and the effective tax rate by 0.9%.
Net Earnings
------------
Primarily as a result of the above-noted increase in sales, net earnings
were $16,118 for 2007, as compared with $12,278 for 2006, an increase of 31.3%.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
The Company's contractual obligations and debt obligations, excluding
revolver borrowings, as of December 31, 2008, are summarized in the table below:
===========================================================================================================
Payments due by period
---------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------------------------------------------------------------------------------------------
Long-term debt obligations $ 9,531 $ 2,860 $ 6,671 $ -- $ --
Operating lease obligations (1) 2,590 1,128 894 347 221
Purchase obligations (2) 8,048 8,048 -- -- --
===========================================================================================================
Total $ 20,169 $ 12,036 $ 7,565 $ 347 $ 221
===========================================================================================================
(1) Principally includes obligations associated with future minimum
non-cancelable operating lease obligations (including the headquarters
office space entered into in 2002).
(2) Principally includes open purchase orders with vendors for inventory not
yet received or recorded on our balance sheet.
The table above excludes a $581 liability for uncertain tax positions,
including the related interest and penalties, recorded in accordance with the
Financial Accounting Standards Board's Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes -- an interpretation of FAS Statement No. 109" ("FIN
48") as we are unable to reasonably estimate the timing of settlement (see Note
8 for a further discussion on FIN 48).
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.
Acquisitions and Dispositions
-----------------------------
Effective April 30, 2007, pursuant to an asset purchase agreement dated
March 30, 2007 (the "Akzo Nobel Asset Purchase Agreement"), the Company, through
its European subsidiary, Balchem B.V.,
18
completed an acquisition of the methylamines and choline chloride business and
manufacturing facilities of Akzo Nobel Chemicals S.p.A., located in Marano
Ticino, Italy (the "Akzo Nobel Acquisition") for a purchase price, including
acquisition costs, of approximately $8,000.
On March 16, 2007, the Company, through BCP, entered into an asset
purchase agreement (the "Asset Purchase Agreement") with Chinook Global Limited
("Chinook"), a privately held Ontario corporation, pursuant to which BCP
acquired certain of Chinook's choline chloride business assets (the "Chinook
Acquisition") for a purchase price, including acquisition costs, of
approximately $33,000. The Chinook Acquisition closed effective the same date.
On February 8, 2006, the Company, through its wholly owned subsidiary
Balchem Minerals Corporation, acquired all of the outstanding capital stock of
CMC, for a purchase price, including acquisition costs, of approximately
$17,900. CMC is a manufacturer and global marketer of chelated mineral
nutritional supplements for livestock, pet and swine feeds.
Cash
----
Cash and cash equivalents increased to $3,422 at December 31, 2008 from
$2,307 at December 31, 2007 primarily resulting from the information detailed
below. Working capital amounted to $29,566 at December 31, 2008 as compared to
$16,139 at December 31, 2007, an increase of $13,427.
Operating Activities
--------------------
Cash flows from operating activities provided $22,897 for 2008 compared to
$15,637 for 2007. The increase in cash flows from operating activities was
primarily due to an increase in net earnings, depreciation and amortization, and
stock compensation. The aforementioned increase in cash flows was partially
offset by an increase in inventories, accounts receivable and a reduction in
accounts payable and accrued expenses.
Investing Activities
--------------------
Capital expenditures were $5,080 for 2008 compared to $4,858 for 2007.
Assets acquired in 2007 totaled $40,744, which was principally related to the
Chinook Acquisition and the Akzo Nobel Acquisition (see Note 5).
Financing Activities
--------------------
The Company has an approved stock repurchase program. The total
authorization under this program is 2,508,692 shares. Since the inception of the
program, a total of 1,307,867 shares have been purchased, none of which remained
in treasury at December 31, 2008 or 2007. During 2008, no additional shares were
purchased. The Company intends to acquire shares from time to time at prevailing
market prices if and to the extent it deems it advisable to do so based on its
assessment of corporate cash flow, market conditions and other factors.
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to approximately $10,573 of December 31, 2008 (the
"European Term Loan"), the proceeds of which were used to fund the Akzo Nobel
Acquisition (see Note 5) and initial working capital requirements. The European
Term Loan is payable in equal monthly installments of principal, each equal to
1/84th of the principal of the European Term Loan, together with accrued
interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At December 31, 2008, this
interest rate was 4.61%. At December 31, 2008, the European Term Loan had an
outstanding balance of (euro)5,804 translated to $8,181. The European Loan
Agreement also initially provided for a short-term revolving credit facility of
(euro)2,000 (the "European Revolving Facility"). The European Revolving Facility
has been renewed for a period of one year as of May
19
1, 2008. As part of this renewal, the European Loan Agreement was amended to
increase the European Revolving Facility to (euro)3,000, translated to $4,229 as
of December 31, 2008. The European Revolving Facility is subject to a monthly
interest rate equal to EURIBOR plus 1.25%, and accrued interest is payable
monthly. The Company has drawn down (euro)1,450, or $2,044 as translated at
December 31, 2008, of the European Revolving Facility as of December 31, 2008.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the Chinook
Acquisition (see Note 5). The Term Loan is payable in equal monthly installments
of principal, each equal to 1/60th of the principal of the Term Loan, together
with accrued interest, with remaining principal and interest payable at
maturity. The Term Loan has a maturity date of March 16, 2010 and is subject to
a monthly interest rate equal to LIBOR plus 1%. At December 31, 2008, this
interest rate was 2.20%. As of December 31, 2008, the Company has prepaid
$17,500 of the Term Loan. At December 31, 2008, the Term Loan had an outstanding
balance of $1,350. The Loan Agreement also provides for a short-term revolving
credit facility of $6,000 (the "Revolving Facility"). The Revolving Facility is
subject to a monthly interest rate equal to LIBOR plus 1%, and accrued interest
is payable monthly. No amounts are outstanding on the Revolving Facility as of
the date hereof. The Revolving Facility has a maturity date of May 31, 2009.
Management believes that such facility will be renewed in the normal course of
business.
Indebtedness under the Company's loan agreements are secured by assets of
the Company.
Proceeds from stock options exercised totaled $1,050 and $1,217 for 2008
and 2007, respectively. Dividend payments were $1,975 and $1,596 for 2008 and
2007, respectively.
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 Verona, Missouri facility. The amount recorded
on the Company's balance sheet as of December 31, 2008 for this obligation is
$801. The postretirement plan is not funded. Historical cash payments made under
such plan have approximated $50 per year.
Critical Accounting Policies
----------------------------
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the 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.
The Company's "critical accounting policies" 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 accounting policies to be critical.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of
loss, and when collection is reasonably assured. The Company reports amounts
billed to customers related to shipping and handling as revenue and includes
costs incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are principally not recognized as revenue but rather they
are recorded as customer deposits and are included in current liabilities. In
addition, the Company follows the provisions
20
of the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin
(SAB) No. 104, "Revenue Recognition," which sets forth guidelines on the timing
of revenue recognition based upon factors such as passage of title,
installation, payments and customer acceptance.
Inventories
-----------
Inventories are valued at the lower of cost (first in, first out or
average) or market value and have been reduced by an allowance for excess or
obsolete inventories. Inventory reserves are generally recorded when the
inventory for a product exceeds twelve months of demand for that product and/or
when individual products have been in inventory for greater than six months. In
November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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. The provisions of this statement were applied
prospectively for inventory costs incurred beginning in our fiscal year 2006.
The adoption of this statement did not have a material impact on our results of
operations, financial position or cash flow.
Long-lived assets
-----------------
Long-lived assets, such as property, plant, and equipment and intangible
assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
Goodwill, which is not subject to amortization, is tested annually for
impairment, and more frequently if events and circumstances indicate that the
asset might be impaired. If an indicator of impairment exists, the Company
determines the amount of impairment based on a comparison of the implied fair
value of its goodwill to its carrying value.
Accounts Receivable
-------------------
We market our products to a diverse customer base, principally throughout
the United States, Europe, China and Japan. We grant credit terms in the normal
course of business to our customers. We perform on-going credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined through review of their
current credit information. We continuously monitor collections and payments
from customers and maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Estimated losses are based on historical experience and any specific customer
collection issues identified. If the financial condition of our customers were
to deteriorate resulting in an impairment of their ability to make payments,
additional allowances and related bad debt expense may be required.
21
Post-employment Benefits
------------------------
The Company provides life insurance and health care benefits for eligible
retirees and health care benefits for retirees' eligible survivors. The costs
and obligations related to these benefits reflect the Company's assumptions as
to general economic conditions and health care cost trends. The cost of
providing plan benefits also depends on demographic assumptions including
retirements, mortality, turnover, and plan participation. If actual experience
differs from these assumptions, the cost of providing these benefits could
increase or decrease.
In September 2006, the FASB issued FASB Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans." This
Statement requires an employer to recognize the over funded or under funded
status of a defined benefit post retirement 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. As a result of adopting SFAS No. 158 on December
31, 2006, we recorded $300 as a reduction to the benefit obligation and $200,
net of tax, as a one-time adjustment to accumulated other comprehensive income
in stockholders' equity.
Intangible Assets with Finite Lives
-----------------------------------
The useful life of an intangible asset is based on the Company's
assumptions regarding expected use of the asset; the relationship of the
intangible asset to another asset or group of assets; any legal, regulatory or
contractual provisions that may limit the useful life of the asset or that
enable renewal or extension of the asset's legal or contractual life without
substantial cost; the effects of obsolescence, demand, competition and other
economic factors; and the level of maintenance expenditures required to obtain
the expected future cash flows from the asset and their related impact on the
asset's useful life. If events or circumstances indicate that the life of an
intangible asset has changed, it could result in higher future amortization
charges or recognition of an impairment loss.
Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date. The Company regularly reviews its deferred tax assets for
recoverability and would establish a valuation allowance if it believed that
such assets may not be recovered, taking into consideration historical operating
results, expectations of future earnings, changes in its operations and the
expected timing of the reversals of existing temporary differences.
Beginning in fiscal 2007, we account for uncertainty in income taxes
utilizing the Financial Accounting Standards Board's Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes -- an interpretation of FAS
Statement No. 109" ("FIN 48"). This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with SFAS 109. It prescribes a recognition threshold and measurement
attribute for financial statement disclosure of tax positions taken or expected
to be taken. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and
disclosures. The application of FIN 48 requires judgment related to the
uncertainty in income taxes and could impact our effective tax rate.
22
Stock-based Compensation
Beginning in fiscal 2006, we account for stock-based compensation in
accordance with SFAS No. 123R (revised 2004), "Share-Based Payment" ("SFAS
123R") as interpreted by SEC Staff Accounting Bulletin ("SAB") No. 107. Under
the fair value recognition provisions of this statement, share-based
compensation cost is measured at the grant date based on the value of the award
and is recognized as expense over the vesting period. Determining the fair value
of share-based awards at the grant date requires judgment, including estimating
our stock price volatility, employee stock option exercise behaviors and
employee option forfeiture rates. Expected volatilities are based on historical
volatility of the Company's stock. The expected term of the options is based on
the Company's historical experience of employees' exercise behavior. As
stock-based compensation expense recognized in the Consolidated Statement of
Earnings is based on awards ultimately expected to vest, the amount of expense
has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures were estimated
based on historical experience. As a result of adopting SFAS 123R, we recorded
$900 of compensation expense, net of tax, in 2006. If factors change and we
employ different assumptions in the application of SFAS 123R, the compensation
expense that we record in future periods may differ significantly from what we
have recorded in the current period. See Note 2 to the Consolidated Financial
Statements for additional information.
New Accounting Pronouncements:
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles ("GAAP") for nongovernmental entities. Prior to the issuance of SFAS
No. 162, the GAAP hierarchy was defined in the American Institute of Certified
Public Accountants' (AICPA) Statement on Auditing Standards (SAS) No. 69, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles." SFAS No. 162 is effective November 15, 2008. The adoption of this
statement was not significant to the Company's consolidated financial
statements.
In April 2008, FASB issued FSP 142-3, "Determining the Useful Life of
Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors to be considered
in determining the useful life of intangible assets. Its intent is to improve
the consistency between the useful life of an intangible asset and the period of
expected cash flows used to measure its fair value. FSP 142-3 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect the
adoption of this statement to be significant to its consolidated financial
statements.
In March 2008, FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities -- an
amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced
disclosures regarding derivatives and hedging activities, including: (a) the
manner in which an entity uses derivative instruments; (b) the manner in which
derivative instruments and related hedged items are accounted for under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities"; and (c) the effect of derivative
instruments and related hedged items on an entity's financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. As SFAS 161 relates specifically to disclosures, the statement will
have no impact on our financial condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No.141 (revised 2007), "Business
Combinations", or SFAS 141R. The purpose of issuing the statement is to replace
current guidance in SFAS No.141 to better represent the economic value of a
business combination transaction. The changes to be effected with SFAS 141R from
the current guidance include, but are not limited to: (1) acquisition costs will
be recognized
23
separately from the acquisition; (2) known contractual contingencies at the time
of the acquisition will be considered part of the liabilities acquired measured
at their fair value; all other contingencies will be part of the liabilities
acquired measured at their fair value only if it is more likely than not that
they meet the definition of a liability; (3) contingent consideration based on
the outcome of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step acquisitions)
will need to recognize the identifiable assets and liabilities, as well as
noncontrolling interests, in the acquiree, at the full amounts of their fair
values; and (5) a bargain purchase (defined as a business combination in which
the total acquisition-date fair value of the identifiable net assets acquired
exceeds the fair value of the consideration transferred plus any noncontrolling
interest in the acquiree) will require that excess to be recognized as a gain
attributable to the acquirer. SFAS 141R will be effective for any business
combinations that occur after January 1, 2009. The Company is currently
evaluating the impact that SFAS 141R will have on its financial statements and
disclosures.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements -- an amendment of ARB No. 51", or SFAS
160. SFAS 160 was issued to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way, that is, as equity in the consolidated financial statements. Moreover,
SFAS 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. SFAS 160 will be effective January 1, 2009. The
Company does not expect the adoption of this statement to be significant to its
consolidated financial statements.
In June 2007, FASB ratified the consensus reached by the EITF on EITF
Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities" ("EITF
07-3"). EITF 07-3 addresses the diversity that exists with respect to the
accounting for the non-refundable portion of a payment made by a research and
development entity for future research and development activities. Under EITF
07-3, an entity would defer and capitalize non-refundable advance payments made
for research and development activities until the related goods are delivered or
the related services are performed. The Company has adopted the provisions of
EITF 07-3 as of January 1, 2008 and it has not had a material impact on its
financial condition or results of operations.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. Entities electing the
fair value option will report unrealized gains and losses in earnings as of each
subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis with few exceptions, as long as it is applied to
the instrument in its entirety. SFAS 159 establishes presentation and disclosure
requirements to help financial statement users understand the effect of an
entity's election on its earnings. SFAS 159 requires prospective application. If
an entity elects the fair value option for items existing as of the date of
adoption, the difference between their carrying amount and fair value should be
included in a cumulative-effect adjustment to the opening balance of retained
earnings. The provisions of SFAS 159 are effective for fiscal years beginning
after November 15, 2007. The Company has adopted the provisions of this
statement as of January 1, 2008 and it did not have a material impact on its
financial condition or results of operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. The Company has adopted the
provisions of this statement for its financial assets and liabilities as of
January 1, 2008 and it did not have a material impact on its financial condition
or results of operations. As permitted by FASB Staff Position ("FSP") No. FAS
157-2, "Effective Date of FASB Statement No. 157", the Company elected to defer
the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until January 1, 2009. Effective
January 1, 2009, we will adopt the provision for nonfinancial assets and
liabilities that are
24
not required or permitted to be measured at fair value on a recurring basis,
which include those measured at fair value in impairment testing and those
initially measured at fair value in a business combination. We do not expect the
provisions of SFAS No. 157 related to these items to have a material impact on
our consolidated financial statements. In October 2008, FASB issued FSP No.
157-3, "Determining the Fair Value of a Financial Asset When the Market for That
Asset is Not Active." FSP No. 157-3 clarifies the application of SFAS No. 157 in
a market that is not active and provides an example of key considerations in
determining the fair value of a financial asset when the market for that asset
is not active. FSP No. 157-3 was effective on October 10, 2008, including prior
periods for which financial statements have not been issued. Revisions resulting
from a change in the valuation technique or its application should be accounted
for as a change in accounting estimate following the guidance in SFAS No. 154,
"Accounting Changes and Error Corrections." The Company adopted FSP No. 157-3 on
October 10, 2008 and it did not have a material effect on its consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
The money market funds in which the Company invests are participants in the
United States Treasury Department's Temporary Guarantee Program for Money Market
Funds. This program provides coverage for amounts held in money market funds as
of the close of business on September 19, 2008. 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. As
of December 31, 2008, the Company's borrowings were under a bank term loan
bearing interest at LIBOR plus 1.00%, a second bank term loan bearing interest
at EURIBOR plus 1.00%, a revolving line of credit bearing interest at LIBOR plus
1.00% and a second revolving line of credit bearing interest at EURIBOR plus
1.25%. A 100 basis point increase or decrease in interest rates, applied to the
Company's borrowings at December 31, 2008, would result in an increase or
decrease in annual interest expense and a corresponding reduction or increase in
cash flow of approximately $115. The Company is exposed to market risks for
changes in foreign currency rates and has exposure to commodity price risks,
including prices of our primary raw materials. Our objective is to seek a
reduction in the potential negative earnings impact of changes in foreign
exchange rates and raw material pricing arising in our business activities. The
Company manages these financial exposures, where possible, through pricing and
operational means. Our practices may change as economic conditions change.
25
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data: Page
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets as of
December 31, 2008 and 2007 29
Consolidated Statements of Earnings for the
years ended December 31, 2008, 2007 and 2006 30
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2008, 2007 and 2006 31
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006 32
Notes to Consolidated Financial Statements 33
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2008, 2007 and 2006 55
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Balchem Corporation
We have audited the accompanying consolidated balance sheets of Balchem
Corporation and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2008. Our audits also
included the financial statement schedule of Balchem Corporation listed in the
Index at Item 8. We also have audited Balchem Corporation's internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Balchem Corporation's management is
responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management's Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (a) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (b)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Balchem Corporation
and Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly the information set forth
therein. Also in our opinion, Balchem Corporation maintained, in all material
respects, effective internal
27
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/s/ McGladrey & Pullen LLP
New York, New York
March 12, 2009
28
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2008 and 2007
(Dollars in thousands, except share and per share data)
Assets 2008 2007
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 3,422 $ 2,307
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at
December 31, 2008 and 2007, respectively 30,250 29,640
Inventories 16,618 15,680
Prepaid expenses 2,581 2,456
Deferred income taxes 649 515
Other current assets 1,731 1,871
----------- -----------
Total current assets 55,251 52,469
Property, plant and equipment, net 42,513 42,080
Goodwill 26,658 26,363
Intangible assets with finite lives, net 29,993 33,451
Other assets 59 61
----------- -----------
Total assets $ 154,474 $ 154,424
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 10,336 $ 11,190
Accrued expenses 3,948 7,311
Accrued compensation and other benefits 2,501 3,205
Customer deposits and other deferred revenue -- 42
Dividends payable 2,008 1,975
Income taxes payable 1,988 2,019
Current portion of long-term debt 2,860 7,379
Revolver borrowings 2,044 3,209
----------- -----------
Total current liabilities 25,685 36,330
Long-term debt 6,671 17,398
Deferred income taxes 6,003 6,087
Other long-term obligations 1,609 1,529
----------- -----------
Total liabilities 39,968 61,344
----------- -----------
Commitments and contingencies (note 11)
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 60,000,000 shares; 18,249,347
shares issued and outstanding at December 31, 2008 and 17,979,353 shares
issued and outstanding at December 31, 2007 823 804
Additional paid-in capital 18,809 14,286
Retained earnings 94,882 77,840
Accumulated other comprehensive income (loss) (8) 150
----------- -----------
Total stockholders' equity 114,506 93,080
----------- -----------
----------- -----------
Total liabilities and stockholders' equity $ 154,474 $ 154,424
=========== ===========
See accompanying notes to consolidated financial statements.
29
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)
2008 2007 2006
----------- ----------- -----------
Net sales $ 232,050 $ 176,201 $ 100,905
Cost of sales 179,472 129,271 66,899
----------- ----------- -----------
Gross margin 52,578 46,930 34,006
Operating expenses:
Selling expenses 12,560 11,930 6,907
Research and development expenses 2,877 2,514 2,019
General and administrative expenses 7,793 6,580 5,918
----------- ----------- -----------
23,230 21,024 14,844
----------- ----------- -----------
Earnings from operations 29,348 25,906 19,162
Other expenses (income):
Interest income (107) (166) (128)
Interest expense 963 1,562 189
Other, net 61 (319) --
----------- ----------- -----------
Earnings before income tax expense 28,431 24,829 19,101
Income tax expense 9,381 8,711 6,823
----------- ----------- -----------
Net earnings $ 19,050 $ 16,118 $ 12,278
=========== =========== ===========
Basic net earnings per common share $ 1.06 $ 0.91 $ 0.70
=========== =========== ===========
Diluted net earnings per common share $ 1.00 $ 0.87 $ 0.67
=========== =========== ===========
See accompanying notes to consolidated financial statements.
30
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands, except share and per share data)
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Stock Stockholders'
Shares Amount Capital Earnings Income Shares Amount Equity
---------- -------- --------- --------- ------------- ------- -------- ------------
Balance - December 31, 2005 17,461,447 $ 776 $ 8,008 $ 53,306 $ -- (96,024) $ (1,157) $ 60,933
Net earnings -- -- -- 12,278 -- -- -- 12,278
Dividends ($.09 per share) -- -- -- (1,596) -- -- -- (1,596)
Shares issued under employee benefit
plans and other 1,079 -- 70 -- -- 21,933 264 334
Shares and options issued under stock
option plans and an income tax
benefit of $878 271,323 12 2,315 -- -- 74,091 893 3,220
Adjustment to initially apply FASB
Statement No. 158, net of tax -- -- -- -- 193 -- -- 193
----------------------------------------------------------------------------------------
Balance - December 31, 2006 17,733,849 788 10,393 63,988 193 -- -- 75,362
Net earnings -- -- -- 16,118 -- -- -- 16,118
Dividends ($.11 per share) -- -- -- (1,975) -- -- -- (1,975)
Shares issued under employee benefit
plans and other 20,869 1 378 -- -- -- -- 379
Shares and options issued under stock
option plans and an income tax
benefit of $677 224,635 15 3,515 -- -- -- -- 3,530
Cumulative effect of adjustment from
adoption of FIN 48 -- -- -- (291) -- -- -- (291)
Net change in pension asset/liability,
net of taxes of $26 -- -- -- -- (43) -- -- (43)
----------------------------------------------------------------------------------------
Balance - December 31, 2007 17,979,353 804 14,286 77,840 150 -- -- 93,080
Net earnings -- -- -- 19,050 -- -- -- 19,050
Dividends ($.11 per share) -- -- -- (2,008) -- -- -- (2,008)
Shares issued under employee benefit
plans and other 17,218 1 405 -- -- -- -- 406
Shares and options issued under stock
option plans and an income tax
benefit of $672 252,776 18 4,118 -- -- -- -- 4,136
Net change in pension asset/liability,
net of taxes of $8 -- -- -- -- 48 -- -- 48
Equity adjustment from translation -- -- -- -- (206) -- -- (206)
----------------------------------------------------------------------------------------
Balance - December 31, 2008 18,249,347 $ 823 $ 18,809 $ 94,882 $ (8) -- $ -- $ 114,506
========================================================================================
See accompanying notes to consolidated financial statements.
31
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
2008 2007 2006
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 19,050 $ 16,118 $ 12,278
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 7,786 6,376 3,445
Stock compensation expense 2,414 1,636 1,097
Shares issued under employee benefit plans 406 379 343
Deferred income tax expense (238) (617) 104
Foreign currency transaction (gain) loss 31 (195) --
Other -- 15 --
Changes in assets and liabilities
Accounts receivable (1,058) (15,409) (57)
Inventories (974) 481 (827)
Prepaid expenses (17) (2,218) 36
Accounts payable and accrued expenses (4,593) 7,634 (212)
Income taxes 6 1,803 218
Customer deposits and other deferred revenue (42) (1,030) (101)
Other long-term obligations 126 664 46
----------- ----------- -----------
Net cash provided by operating activities 22,897 15,637 16,370
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (5,080) (4,858) (2,279)
Intangible assets acquired (182) (172) (81)
Acquisition of assets (296) (40,744) (22,872)
----------- ----------- -----------
Net cash used in investing activities (5,558) (45,774) (25,232)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- 38,946 10,000
Principal payments on long-term debt (14,876) (15,106) (10,000)
Proceeds from short-term obligations 3,516 3,684 --
Repayments of short-term obligations (4,507) (733) --
Proceeds from stock options exercised 1,050 1,217 1,239
Excess tax benefits from stock compensation 672 677 878
Dividends paid (1,975) (1,596) (1,045)
Other financing activities -- -- (17)
----------- ----------- -----------
Net cash provided by (used in) financing activities (16,120) 27,089 1,055
----------- ----------- -----------
Effect of exchange rate changes on cash (104) 166 --
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 1,115 (2,882) (7,807)
Cash and cash equivalents beginning of year 2,307 5,189 12,996
----------- ----------- -----------
Cash and cash equivalents end of year $ 3,422 $ 2,307 $ 5,189
=========== =========== ===========
See accompanying notes to consolidated financial statements.
32
BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------------
Business Description
--------------------
Balchem Corporation (including, unless the context otherwise requires, its
wholly-owned subsidiaries, BCP Ingredients, Inc., Balchem Minerals Corporation,
BCP St. Gabriel, Inc., Chelated Minerals Corporation, Balchem BV, Balchem
Trading BV, and Balchem Italia Srl ("Balchem" or the "Company")), incorporated
in the State of Maryland in 1967, is engaged in the development, manufacture and
marketing of specialty performance ingredients and products for the food,
nutritional, feed, pharmaceutical and medical sterilization industries.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of loss,
and when collection is reasonably assured. The Company reports amounts billed to
customers related to shipping and handling as revenue and includes costs
incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are principally not recognized as revenue but rather they
are recorded as customer deposits and are included in current liabilities. In
addition, the Company follows the provisions of the Securities and Exchange
Commission's (SEC) Staff Accounting Bulletin (SAB) No. 104, "Revenue
Recognition," which sets forth guidelines on the timing of revenue recognition
based upon factors such as passage of title, installation, payments and customer
acceptance.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
Inventories
-----------
Inventories are stated at the lower of cost or market, with cost generally
determined on a first-in, first-out basis, and have been reduced by an allowance
for excess or obsolete inventories. Cost elements include material, labor and
manufacturing overhead. In November 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("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. The provisions of
this statement were applied prospectively for inventory costs incurred beginning
in fiscal year 2006. The adoption of this statement did not have a material
impact on the Company's results of operations, financial position or cash flow.
Property, Plant and Equipment and Depreciation
----------------------------------------------
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings 15-25 years
Equipment 3-12 years
33
Expenditures for repairs and maintenance are charged to expense. Alterations and
major overhauls that extend the lives or increase the capacity of plant assets
are capitalized. When assets are retired or otherwise disposed of, the cost of
the assets and the related accumulated depreciation are removed from the
accounts and any resultant gain or loss is included in earnings. The Company
capitalized interest costs of $158, $150 and $-0- in 2008, 2007 and 2006,
respectively.
Business Concentrations
Financial instruments that subject the Company to credit risk consist primarily
of investments and accounts receivable. Investments are managed within
established guidelines to mitigate risks. Accounts receivable subject the
Company to credit risk partially due to the concentration of amounts due from
customers. The Company extends credit to its customers based upon an evaluation
of the customers' financial condition and credit histories. The majority of the
Company's customers are major national or international corporations. In 2008,
2007 and 2006, no customer accounted for more than 10% of total net sales.
Goodwill and Acquired 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" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), 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 required by SFAS No. 142, the Company performed an assessment of whether
there was an indication that goodwill was impaired at the date of adoption. In
connection therewith, the Company determined that its operations consisted of
three reporting units and determined each reporting units' fair value and
compared it to the reporting unit's net book value. Since the fair value of each
reporting unit exceeded its carrying amount, there was no indication of
impairment and no further transitional impairment testing was required. As of
December 31, 2008 and 2007, the Company also performed an impairment test of its
goodwill balance. As of such dates the Company's reporting units' fair value
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 performs its impairment test each December
31.
The Company had unamortized goodwill in the amount of $26,658 at December 31,
2008 and $26,363 at December 31, 2007, subject to the provisions of SFAS Nos.
141 and 142. Unamortized goodwill is allocated to the Company's reportable
segments as follows:
====================================================================
2008 2007
--------------------------------------------------------------------
Specialty Products $ 5,089 $ 5,089
Food, Pharma and Nutrition 8,607 8,533
Animal Nutrition and Health 12,962 12,741
--------------------------------------------------------------------
Total $ 26,658 $ 26,363
====================================================================
34
The following intangible assets with finite lives are stated at cost and are
amortized on a straight-line basis over the following estimated useful lives:
------------------------------------------------
Amortization
period
(in years)
Customer lists 10
Regulatory re-registration costs 10
Patents & trade secrets 15 - 17
Trademarks & trade names 17
Other 5 - 10
------------------------------------------------
Income Taxes
------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Use of Estimates
----------------
Management of the Company is required to make certain estimates and assumptions
during the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the 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 and revenues and expenses during the reporting
period. 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.
Fair Value of Financial Instruments
-----------------------------------
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at December 31, 2008 and 2007 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying consolidated balance sheets. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value,
and, accordingly, the estimates are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The Company's
financial instruments, principally cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments. The fair value
of the Company's obligations under its long-term debt and credit agreements
approximates their carrying value as the stated interest rates of these
instruments are variable and reflect rates which are otherwise currently
available to the Company.
Cost of Sales
-------------
Cost of sales are primarily comprised of raw materials and supplies consumed in
the manufacture of product, as well as manufacturing labor, maintenance labor,
depreciation expense, and direct overhead expense necessary to convert purchased
materials and supplies into finished product. Cost of sales also includes
inbound freight costs, outbound freight costs for shipping products to
customers, warehousing costs, quality control and obsolescence expense.
Selling, General and Administrative Expenses
--------------------------------------------
Selling expenses consist primarily of compensation and benefit costs, trade
promotions, advertising, commissions and other marketing costs. General and
administrative expenses consist primarily of payroll
35
and benefit costs, occupancy and operating costs of corporate offices,
depreciation and amortization expense on non-manufacturing assets, information
systems costs and other miscellaneous administrative costs.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Net Earnings Per Common Share
-----------------------------
Basic net earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per common share is calculated in a manner consistent with basic
net earnings per common share except that the weighted average number of common
shares outstanding also includes the dilutive effect of stock options
outstanding and unvested restricted stock (using the treasury stock method).
Stock-based Compensation
------------------------
The Company has stock-based employee compensation plans, which are described
more fully in Note 2. On January 1, 2006, the Company was required to adopt SFAS
No. 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), which requires all
share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair values. The
Company estimates the fair value of each option award on the date of grant using
a Black-Scholes based option-pricing model.
Prior to adopting SFAS 123R, the Company accounted for stock-based compensation
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation". The modified prospective method was applied in adopting SFAS 123R
and, accordingly, periods prior to adoption have not been restated.
The implementation of SFAS 123R has had no adverse effect on the Company's
balance sheet or total cash flows, but it does impact cash flows from
operations, cash flows from financing activities, cost of sales, gross profit,
operating expenses, net income and earnings per share. Because periods prior to
adoption have not been restated, comparability between periods has been
affected. Additionally, estimates of and assumptions about forfeiture rates,
terms, volatility, interest rates and dividend yields are used to calculate
stock-based compensation. A significant change to these estimates could
materially affect the Company's operating results.
Impairment of Long-lived Assets
-------------------------------
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
New Accounting Pronouncements
-----------------------------
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
("GAAP") for nongovernmental entities. Prior to the issuance of SFAS No. 162,
the GAAP hierarchy was defined in the American Institute of Certified Public
Accountants' (AICPA) Statement on Auditing Standards (SAS) No. 69, "The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles."
SFAS No. 162 is effective
36
November 15, 2008. The adoption of this statement was not significant to the
Company's consolidated financial statements.
In April 2008, FASB issued FSP 142-3, "Determining the Useful Life of Intangible
Assets" ("FSP 142-3"). FSP 142-3 amends the factors to be considered in
determining the useful life of intangible assets. Its intent is to improve the
consistency between the useful life of an intangible asset and the period of
expected cash flows used to measure its fair value. FSP 142-3 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect the
adoption of this statement to be significant to its consolidated financial
statements.
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities -- an amendment
of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures
regarding derivatives and hedging activities, including: (a) the manner in which
an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities"; and (c) the effect of derivative instruments and
related hedged items on an entity's financial position, financial performance,
and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. As SFAS 161 relates
specifically to disclosures, the statement will have no impact on our financial
condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No.141 (revised 2007), "Business
Combinations", or SFAS 141R. The purpose of issuing the statement is to replace
current guidance in SFAS No.141 to better represent the economic value of a
business combination transaction. The changes to be effected with SFAS 141R from
the current guidance include, but are not limited to: (1) acquisition costs will
be recognized separately from the acquisition; (2) known contractual
contingencies at the time of the acquisition will be considered part of the
liabilities acquired measured at their fair value; all other contingencies will
be part of the liabilities acquired measured at their fair value only if it is
more likely than not that they meet the definition of a liability; (3)
contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business
combinations achieved in stages (step acquisitions) will need to recognize the
identifiable assets and liabilities, as well as noncontrolling interests, in the
acquiree, at the full amounts of their fair values; and (5) a bargain purchase
(defined as a business combination in which the total acquisition-date fair
value of the identifiable net assets acquired exceeds the fair value of the
consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer.
SFAS 141R will be effective for any business combinations that occur after
January 1, 2009. The Company is currently evaluating the impact that SFAS 141R
will have on its financial statements and disclosures.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51", or SFAS 160.
SFAS 160 was issued to improve the relevance, comparability, and transparency of
financial information provided to investors by requiring all entities to report
noncontrolling (minority) interests in subsidiaries in the same way, that is, as
equity in the consolidated financial statements. Moreover, SFAS 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS 160 will be effective January 1, 2009. The Company does not
expect the adoption of this statement to be significant to its consolidated
financial statements.
In June 2007, FASB ratified the consensus reached by the EITF on EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities" ("EITF 07-3"). EITF 07-3
addresses the diversity that exists with respect to the accounting for the
non-refundable portion of a payment made by a research and development entity
for future research and development activities. Under EITF 07-3, an entity would
defer and capitalize non-refundable advance payments made for research and
development activities until the related goods are delivered or the related
services are performed. The Company has adopted the provisions of EITF 07-3 as
of January 1, 2008 and it has not had a material impact on its financial
condition or results of operations.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115" ("SFAS 159"). SFAS 159 permits an
37
entity to measure certain financial assets and financial liabilities at fair
value. Entities electing the fair value option will report unrealized gains and
losses in earnings as of each subsequent reporting date. The fair value option
may be elected on an instrument-by-instrument basis with few exceptions, as long
as it is applied to the instrument in its entirety. SFAS 159 establishes
presentation and disclosure requirements to help financial statement users
understand the effect of an entity's election on its earnings. SFAS 159 requires
prospective application. If an entity elects the fair value option for items
existing as of the date of adoption, the difference between their carrying
amount and fair value should be included in a cumulative-effect adjustment to
the opening balance of retained earnings. The provisions of SFAS 159 are
effective for fiscal years beginning after November 15, 2007. The Company has
adopted the provisions of this statement as of January 1, 2008 and it did not
have a material impact on its financial condition or results of operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. The Company has adopted the
provisions of this statement for its financial assets and liabilities as of
January 1, 2008 and it did not have a material impact on its financial condition
or results of operations. As permitted by FASB Staff Position ("FSP") No. FAS
157-2, "Effective Date of FASB Statement No. 157", the Company elected to defer
the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until January 1, 2009. Effective
January 1, 2009, we will adopt the provision for nonfinancial assets and
liabilities that are not required or permitted to be measured at fair value on a
recurring basis, which include those measured at fair value in impairment
testing and those initially measured at fair value in a business combination. We
do not expect the provisions of SFAS No. 157 related to these items to have a
material impact on our consolidated financial statements. In October 2008, FASB
issued FSP No. 157-3, "Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active." FSP No. 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and provides an example of key
considerations in determining the fair value of a financial asset when the
market for that asset is not active. FSP No. 157-3 was effective on October 10,
2008, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate following
the guidance in SFAS No. 154, "Accounting Changes and Error Corrections." The
Company adopted FSP No. 157-3 on October 10, 2008 and it did not have a material
effect on its consolidated financial statements.
Reclassifications
-----------------
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation with no impact on net
earnings or stockholders' equity.
NOTE 2 - STOCKHOLDERS' EQUITY
-----------------------------
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS 123R, which requires all
share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair values.
Prior to adopting SFAS 123R, the Company accounted for stock-based compensation
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("Opinion 25"), as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123"). The Company has applied the modified
prospective method in adopting SFAS 123R. Accordingly, periods prior to adoption
have not been restated. Under the modified prospective method, compensation cost
recognized in the years ended December 31, 2008, 2007 and 2006 include (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, and (b) compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
38
As required by SFAS 123R, the Company has made an estimate of expected
forfeitures, based on its historical experience, and is recognizing compensation
cost only for those stock-based compensation awards expected to vest.
Additionally, since 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 $672, $677 and $878 for the
years ended December 31, 2008, 2007 and 2006, respectively.
The Company's results for the years ended December 31, 2008, 2007 and 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:
================================================================================
Year Ended
December 31,
2008 2007 2006
--------------------------------------------------------------------------------
Cost of sales $ 273 $ 187 $ 115
Operating expenses 2,141 1,449 982
Net earnings 1,614 1,118 888
Basic EPS .09 .06 .05
Diluted EPS $ .08 $ .06 $ .05
================================================================================
On December 31, 2008, the Company had one share-based compensation plan, which
is described below (the "1999 Stock Plan").
In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan for
officers, directors, directors emeritus and employees of and consultants to the
Company and its subsidiaries. The 1999 Stock Plan is administered by the
Compensation Committee of the Board of Directors of the Company. Under the plan,
options and rights to purchase shares of the Company's common stock are granted
at prices established at the time of grant. Option grants generally become
exercisable 20% after 1 year, 60% after 2 years and 100% after 3 years from the
date of grant for employees and are fully exercisable on the date of grant for
directors. Other option grants are either fully exercisable on the date of grant
or become exercisable thereafter in such installments as the Committee may
specify. Options granted under the 1999 Stock Plan expire ten years from the
date of the grant. The 1999 Stock Plan initially reserved an aggregate of
600,000 shares (unadjusted for the stock splits) of common stock for issuance
under the Plan. In April 2003, the Board of Directors of the Company adopted and
stockholders subsequently approved, the Amended and Restated 1999 Stock Plan
(the "Amended Plan") which amended the 1999 Stock Plan by: (i) increasing the
number of shares of common stock reserved for issuance under the 1999 Stock Plan
by 600,000 shares (unadjusted for the stock splits), to a total of 1,200,000
shares (unadjusted for the stock splits) of common stock; and (ii) confirming
the right of the Company to grant awards of common stock ("Awards") in addition
to the other Stock Rights available under the 1999 Stock Plan, and providing
certain language changes relating thereto. The Amended Plan was scheduled to
expire in April, 2009. In April, 2008, the Board of Directors of the Company
adopted and stockholders subsequently approved, the adoption of an amendment and
restatement of the Amended Plan (collectively to be referred to as the "Second
Amended Plan"), which provides as follows: (i) for a termination date of April
9, 2018; (ii) to authorize 4,000,000 shares reserved for future grants under the
Second Amended Plan; (iii) for the making of grants of stock appreciation
rights, restricted stock and performance awards; (iv) for immediate acceleration
of vesting of awards issued under the plan in the event of a change in control
of the Company; and (v) for compliance with the requirements of Sections 409A
and 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code" or the "Code"). The 1999 Stock Plan replaced the Company's
incentive stock option plan (the "ISO Plan") and its non-qualified stock option
plan (the "Non-Qualified Plan"), both of which expired on June 24, 1999.
Unexercised options granted under the ISO Plan and the Non-Qualified Plan prior
to such termination remain exercisable in accordance with their terms. Options
granted under the ISO Plan generally become exercisable 20% after 1 year, 60%
after 2 years and 100% after 3 years from the date of grant, and expire ten
years from the date of grant. Options granted
39
under the Non-Qualified Plan generally vested on the date of grant, and expire
ten years from 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 December 31,
2008, the plans had 3,664,350 shares available for future awards.
The Company has Restricted Stock Purchase Agreements (the "RSP Agreements") with
its non-employee directors and certain employees of the Company to purchase the
Company's common stock pursuant to the Company's 1999 Stock Plan. Under the RSP
Agreements, certain shares have been purchased, ranging from 1,000 shares to
13,500 shares, of the Company's common stock at purchase prices ranging from
approximately $.03 per share to $.07 per share. The purchased stock is subject
to a repurchase option in favor of the Company and to restrictions on transfer
until it vests in accordance with the provisions of the Agreements.
The fair value of each option award issued under the 1999 Stock Plan is
estimated on the date of grant using a Black-Scholes based option-pricing model
that uses the assumptions noted in the following table. Expected volatilities
are based on historical volatility of the Company's stock. The expected term of
the options is based on the Company's historical experience of employees'
exercise behavior. 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.
--------------------------------------------------------------------------------
Year Ended
--------------------------------------------------------------------------------
December 31, December 31, December 31,
Weighted Average Assumptions: 2008 2007 2006
--------------------------------------------------------------------------------
Expected Volatility 32.8% 27.0% 26.4%
Expected Term (in years) 3.4 3.7 4.5
Risk-Free Interest Rate 3.7% 4.1% 3.8%
Dividend Yield 0.4% 0.3% 0.4%
--------------------------------------------------------------------------------
The value of the restricted shares is based on the intrinsic value of the award
at the date of grant.
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, four years for employee restricted stock awards, and four to
seven years for non-employee director restricted stock awards.
A summary of stock option plan activity for 2008, 2007, and 2006 for all plans
is as follows:
=========================================================================
# of
Shares Weighted Average
2008 (000s) Exercise Price
-------------------------------------------------------------------------
Outstanding at beginning of year 1,944 $ 10.66
Granted 584 23.02
Exercised (131) 7.97
Cancelled (1) 20.41
-------------------------------------------------------------------------
Outstanding at end of year 2,396 $ 13.82
-------------------------------------------------------------------------
Exercisable at end of year 1,687 $ 10.34
=========================================================================
40
=========================================================================
# of
Shares Weighted Average
2007 (000s) Exercise Price
-------------------------------------------------------------------------
Outstanding at beginning of year 2,170 $ 10.13
Granted 10 18.00
Exercised (220) 5.54
Cancelled (16) 14.34
-------------------------------------------------------------------------
Outstanding at end of year 1,944 $ 10.66
-------------------------------------------------------------------------
Exercisable at end of year 1,488 $ 9.09
=========================================================================
=========================================================================
# of
Shares Weighted Average
2006 (000s) Exercise Price
-------------------------------------------------------------------------
Outstanding at beginning of year 2,153 $ 8.38
Granted 305 17.67
Exercised (267) 4.64
Cancelled (21) 9.64
-------------------------------------------------------------------------
Outstanding at end of year 2,170 $ 10.13
-------------------------------------------------------------------------
Exercisable at end of year 1,277 $ 7.40
=========================================================================
The aggregate intrinsic value for outstanding stock options was $26,873, $22,786
and $15,357 at December 31, 2008, 2007 and 2006, respectively, with a weighted
average remaining contractual term of 6.7 years at December 31, 2008.
Exercisable stock options at December 31, 2008 had an aggregate intrinsic value
of $24,581 with a weighted average remaining contractual term of 5.6 years.
Other information pertaining to option activity during the years ended December
31, 2008, 2007 and 2006 was as follows:
=========================================================================================================
Year Ended
December 31,
2008 2007 2006
=========================================================================================================
Weighted-average fair value of options granted $ 7.48 $ 6.44 $ 4.91
Total intrinsic value of stock options exercised ($000s) $ 2,023 $ 2,721 $ 2,929
=========================================================================================================
Additional information related to stock options outstanding under all plans at
December 31, 2008 is as follows:
======================================================================================================
Options Outstanding Options Exercisable
--------------------------- --------------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Number Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000s) Term Price (000s) Price
------------------------------------------------------------------------------------------------------
$ 1.88 - $8.89 929 4.5 years $ 7.16 929 $ 7.16
9.87 - 17.81 880 7.0 years 14.71 757 14.22
18.17 - 25.92 587 9.4 years 23.00 1 18.75
------------------------------------------------------------------------------------------------------
2,396 6.7 years $13.82 1,687 $ 10.34
======================================================================================================
41
Non-vested restricted stock activity for the years ended December 31, 2008, 2007
and 2006 is summarized below:
================================================================================
Weighted
Average Grant
Date Fair
Shares (000s) Value
================================================================================
Non-vested balance as of December 31, 2007 118 $ 16.49
Granted 132 22.94
Vested (18) 17.04
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2008 232 $ 20.08
================================================================================
================================================================================
Weighted
Average Grant
Date Fair
Shares (000s) Value
================================================================================
Non-vested balance as of December 31, 2006 113 $ 16.40
Granted 5 18.61
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2007 118 $ 16.49
================================================================================
================================================================================
Weighted
Average Grant
Date Fair
Shares (000s) Value
================================================================================
Non-vested balance as of December 31, 2005 34 $ 13.22
Granted 79 17.76
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2006 113 $ 16.40
================================================================================
As of December 31, 2008, 2007 and 2006, there was $7,248, $2,586 and $4,036,
respectively, of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the plans. As of December
31, 2008, the unrecognized compensation cost is expected to be recognized over a
weighted-average period of 2 years. We estimate that share-based compensation
expense for the year ended December 31, 2009 will be approximately $3,200.
STOCK SPLITS AND REPURCHASE OF COMMON STOCK
On December 8, 2006, 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 29, 2006. Such stock
dividend was made on January 19, 2007. 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.
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 stock
dividend was made on January 20, 2006. 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.
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 1,158,692 shares at
42
an average cost of $2.74 per share, none of which remained in treasury at
December 31, 2004. In June 2005, the board of directors authorized another
extension of the stock repurchase program for up to an additional 1,350,000
shares, over and above those 1,158,692 shares previously repurchased under the
program. Under this extension, a total of 149,175 shares were purchased in 2005
at an average cost of $8.03 per share, none of which remained in treasury at
December 31, 2008 or 2007. During 2008 and 2007, no additional shares were
purchased. The Company intends to acquire shares from time to time at prevailing
market prices if and to the extent it deems it advisable to do so based on its
assessment of corporate cash flow, market conditions and other factors.
NOTE 3 - INVENTORIES
--------------------
Inventories at December 31, 2008 and 2007 consisted of the following:
===========================================================
2008 2007
-----------------------------------------------------------
Raw materials $ 5,931 $ 6,522
Work in progress 540 818
Finished goods 10,147 8,340
-----------------------------------------------------------
Total inventories $ 16,618 $ 15,680
===========================================================
On a regular basis, the Company evaluates its inventory balances for excess
quantities and obsolescence by analyzing demand, inventory on hand, sales levels
and other information. Based on these evaluations, inventory balances are
reduced, if necessary. The reserve for inventory was $94 and $174 at December
31, 2008 and 2007, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at December 31, 2008 and 2007 are summarized as
follows:
================================================================================
2008 2007
--------------------------------------------------------------------------------
Land $ 2,088 $ 2,152
Building 15,426 15,520
Equipment 50,719 45,599
Construction in progress 2,654 3,067
--------------------------------------------------------------------------------
70,887 66,338
Less: Accumulated depreciation 28,374 24,258
--------------------------------------------------------------------------------
Property, plant and equipment, net $ 42,513 $ 42,080
================================================================================
Depreciation expense was $4,144, $3,466 and $2,842 for the years ended December
31, 2008, 2007 and 2006, respectively.
NOTE 5 - ACQUISITIONS
---------------------
Akzo Nobel Acquisition
----------------------
Effective April 30, 2007, pursuant to an asset purchase agreement dated March
30, 2007, the Company, through its European subsidiary, Balchem B.V., completed
an acquisition of the methylamines and choline chloride business and
manufacturing facilities of Akzo Nobel Chemicals S.p.A., located in Marano
Ticino, Italy (the "Akzo Nobel Acquisition") for a purchase price, including
acquisition costs, of approximately $8,000. The intent of the Akzo Nobel
Acquisition was to provide a direct platform for the Company to meet the growing
market needs of methylamines, choline chloride and derivative products for
customers via improved global sourcing, regulatory support, marketing and
distribution capabilities.
The Akzo Nobel 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 at the date of
acquisition. The allocation of the total purchase price, including acquisition
costs, was based on the estimated fair values as of April 30, 2007. The purchase
price including certain working capital acquired has been allocated as follows:
43
================================================================================
Fair Value Recorded
in Purchase Accounting
--------------------------------------------------------------------------------
Property plant & equipment $ 7,994
Short-term receivable 2,462
Inventories 4,323
Goodwill 1,383
Other 83
Accounts payable and accrued expenses (8,213)
--------------------------------------------------------------------------------
Total $ 8,032
================================================================================
The consolidated financial statements include the results of operations of the
Akzo Nobel Acquisition from the date of purchase. Pro forma results for the
years ended December 31, 2007 and 2006 are not materially different from the
results reported herein.
Chinook Acquisition
-------------------
On March 16, 2007, the Company, through its wholly-owned subsidiary BCP
Ingredients, Inc. ("BCP"), entered into an asset purchase agreement with Chinook
Global Limited ("Chinook"), a privately held Ontario corporation, pursuant to
which BCP acquired certain of Chinook's choline chloride business assets (the
"Chinook Acquisition") for a purchase price, including acquisition costs, of
approximately $33,000. The acquisition closed effective the same date. The
intent of the Chinook Acquisition was to gain scale in order for the Company to
more effectively and economically produce and distribute choline chloride
worldwide.
The Chinook 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 at the date of
acquisition. The allocation of the total purchase price, including acquisition
costs, was based on the estimated fair values as of March 16, 2007. The purchase
price has been allocated as follows:
====================================================================
Fair Value Recorded
in Purchase Accounting
--------------------------------------------------------------------
Customer list $ 29,262
Inventory 1,840
Short-term receivable 1,850
Other 73
--------------------------------------------------------------------
Total $ 33,025
--------------------------------------------------------------------
The short-term receivable was included in other current assets.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
Chinook Acquisition had occurred on January 1, 2007 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 Chinook Acquisition had
occurred at the beginning of the periods presented and is not intended to be a
projection of future results.
44
=========================================================
Pro Forma
Year Ended
December 31,
2007
---------------------------------------------------------
Net sales $ 185,188
Net earnings 16,595
Basic EPS .93
Diluted EPS $ .89
=========================================================
CMC Acquisition
---------------
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation ("BMC"), completed an acquisition (the "CMC Acquisition")
of all of the outstanding capital stock of Chelated Minerals Corporation
("CMC"), a privately held Utah corporation, for a purchase price, including
acquisition costs, of approximately $17,900. The intent of the CMC Acquisition
was to provide synergies in animal markets via the addition of a key nutrient
delivery technology, chelation, to our existing encapsulation technology, as
well as a complementary portfolio of products.
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 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. The excess of the purchase price
over the identifiable intangible and net tangible assets was allocated to
goodwill. The purchase price has been allocated as follows:
=================================================================
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 11,925
Other intangible assets 5,334
-----------------------------------------------------------------
Total $ 17,919
=================================================================
The consolidated financial statements include the results of operations of CMC
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, 2006 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.
45
=========================================================
Pro Forma
Year Ended
December 31,
2006
---------------------------------------------------------
Net sales $ 101,639
Net earnings 12,284
Basic EPS .70
Diluted EPS $ .67
=========================================================
NOTE 6 - INTANGIBLE ASSETS WITH FINITE LIVES
--------------------------------------------
As of December 31, 2008 and 2007, the Company had identifiable intangible assets
as follows:
=================================================================================================================
2008 2007
Amortization Gross 2008 Gross 2007
Period Carrying Accumulated Carrying Accumulated
(In years) Amount Amortization Amount Amortization
-----------------------------------------------------------------------------------------------------------------
Customer lists 10 $34,150 $ 6,595 $34,150 $ 3,178
Regulatory re-registration
costs 10 85 3 28 --
Patents & trade secrets 15-17 1,673 406 1,621 311
Trademarks & trade names 17 904 198 884 146
Other 5-10 619 236 565 162
-----------------------------------------------------------------------------------------------------------------
$ 37,431 $ 7,438 $ 37,248 $ 3,797
=================================================================================================================
Amortization of identifiable intangible assets was approximately $3,642, $2,910
and $603 for 2008, 2007 and 2006, respectively. Assuming no change in the gross
carrying value of identifiable intangible assets, the estimated amortization
expense is approximately $3,600 per annum for 2009 through 2013. At December 31,
2008 and 2007, there were no identifiable intangible assets with indefinite
useful lives as defined by SFAS No. 142. Identifiable intangible assets are
reflected in the Company's consolidated balance sheets under Intangible assets,
net. There were no changes to the useful lives of intangible assets subject to
amortization in 2008 and 2007.
At December 31, 2007, the gross carrying amount included a customer list
acquired as part of the Chinook Acquisition, a customer list, trade name and
trade secrets acquired as part of the CMC Acquisition, as well as a customer
list and patent acquired as part of the Loders Croklaan Acquisition.
The Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA"), a
health and safety statute, requires that certain products within our specialty
products segment must be registered with the U.S. Environmental Protection
Agency ("EPA") because they are considered pesticides. Costs of such
registration are included as regulatory re-registration costs in the table
above.
NOTE 7 - LONG-TERM DEBT & CREDIT AGREEMENTS
-------------------------------------------
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to approximately $10,573 as of December 31, 2008 (the
"European Term Loan"), the proceeds of which were used to fund the Akzo Nobel
Acquisition (see Note 5) and initial working capital requirements. The European
Term Loan is payable in equal monthly installments of principal, each equal to
1/84th of the principal of the European Term Loan, together with accrued
interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At December 31, 2008, this
interest rate was 4.61%. At December 31, 2008, the European Term Loan had an
outstanding balance of (euro)5,804 translated to $8,181. The European Loan
Agreement also initially provided for a short-term revolving credit facility of
(euro)2,000 (the "European Revolving Facility"). The European Revolving Facility
has been renewed for a period of one year as of May 1, 2008. As part of this
renewal, the European Loan Agreement was amended to increase the European
Revolving Facility to (euro)3,000, translated to $4,229 as of December 31, 2008.
The European Revolving
46
Facility is subject to a monthly interest rate equal to EURIBOR plus 1.25%, and
accrued interest is payable monthly. The Company has drawn down (euro)1,450, or
$2,044 as translated at December 31, 2008, of the European Revolving Facility as
of December 31, 2008.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the Chinook
Acquisition (see Note 5). The Term Loan is payable in equal monthly installments
of principal, each equal to 1/60th of the principal of the Term Loan, together
with accrued interest, with remaining principal and interest payable at
maturity. The Term Loan has a maturity date of March 16, 2010 and is subject to
a monthly interest rate equal to LIBOR plus 1%. At December 31, 2008, this
interest rate was 2.20%. As of December 31, 2008, the Company has prepaid
$17,500 of the Term Loan. At December 31, 2008, the Term Loan had an outstanding
balance of $1,350. The Loan Agreement also provides for a short-term revolving
credit facility of $6,000 (the "Revolving Facility"). The Revolving Facility is
subject to a monthly interest rate equal to LIBOR plus 1%, and accrued interest
is payable monthly. No amounts are outstanding on the Revolving Facility as of
the date hereof. The Revolving Facility has a maturity date of May 31, 2009.
Management believes that such facility will be renewed in the normal course of
business.
At December 31, 2008, we had a total of $11,575 of debt outstanding, as compared
to a total of $27,986 debt outstanding at December 31, 2007. Indebtedness under
the Company's loan agreements are secured by assets of the Company.
The Company's debt obligations, excluding revolver borrowings, as of December
31, 2008, are summarized in the table below:
================================================================================
Payments due by period
--------------------------------------
Total Year 1 Year 2
--------------------------------------------------------------------------------
Long-term debt obligations $ 9,531 $ 2,860 $ 6,671
================================================================================
NOTE 8 - INCOME TAXES
---------------------
Income tax expense consists of the following:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Current:
Federal $ 9,757 $ 7,983 $ 6,295
State 107 1,299 534
Deferred:
Federal (442) (420) (1)
State ( 41) (151) (5)
--------------------------------------------------------------------------------
Total income tax provision $ 9,381 $ 8,711 $ 6,823
================================================================================
The provision for income taxes differs from the amount computed by applying the
Federal statutory rate of 35% to earnings before income tax expense due to the
following:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 9,951 $ 8,690 $ 6,685
State income taxes, net of
Federal income tax benefit -- 603 344
Other (570) (582) (206)
--------------------------------------------------------------------------------
Total income tax provision $ 9,381 $ 8,711 $ 6,823
================================================================================
47
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2008 and
2007 were as follows:
================================================================================
2008 2007
--------------------------------------------------------------------------------
Deferred tax assets:
Inventories $ 474 $ 388
Restricted stock and stock options 1,429 702
Other 505 389
--------------------------------------------------------------------------------
Total deferred tax assets 2,408 1,479
--------------------------------------------------------------------------------
Deferred tax liabilities:
Customer list and goodwill amortization $ 1,851 $ 1,782
Depreciation 4,430 3,886
Prepaid expense 765 525
Trade names and trademarks 199 239
Technology and trade secrets 224 269
Other 293 350
--------------------------------------------------------------------------------
Total deferred tax liabilities 7,762 7,051
--------------------------------------------------------------------------------
Net deferred tax liability $ 5,354 $ 5,572
================================================================================
There is no valuation allowance for deferred tax assets at December 31, 2008 and
2007. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of deferred tax asset realizable,
however, could change if management's estimate of future taxable income should
change.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48
clarifies whether or not to recognize assets or liabilities for tax positions
taken that may be challenged by a tax authority. Upon adoption of FIN 48, the
Company recognized approximately a $291 decrease in its retained earnings
balance. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
================================================================================
Liability for Unrecognized
Tax Benefits
--------------------------------------------------------------------------------
2008 2007
--------------------------------------------------------------------------------
Balance at beginning of period $ 733 $ 411
Increases for tax positions of prior years -- 320
Decreases for tax positions of prior years (151) (225)
Increases for tax positions related to the
current year 231 227
--------------------------------------------------------------------------------
Balance at end of period $ 813 $ 733
================================================================================
All of the Company's unrecognized tax benefits, if recognized in future periods,
would impact the Company's effective tax rate in such future periods.
The Company recognizes both interest and penalties as part of the income tax
provision. During the years ended December 31, 2008 and 2007, the Company
recognized approximately $22 and $52 in interest and penalties, respectively. As
of December 31, 2008 and 2007, accrued interest and penalties were $152 and
$130, respectively.
The Company files income tax returns in the U.S. and in various states and
foreign countries. In the major jurisdictions where the Company operates, it is
generally no longer subject to income tax examinations by
48
tax authorities for years before 2005. The Company does not anticipate any
material change in the total amount of unrecognized tax benefits to occur within
the next twelve months.
NOTE 9 - NET EARNINGS PER COMMON SHARE
--------------------------------------
The following presents a reconciliation of the numerator and denominator used in
calculating basic and diluted net earnings per common share:
==========================================================================================================
Earnings Number of Shares Per Share
2008 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 19,050 17,966,833 $1.06
Effect of dilutive securities - stock options and
restricted stock 1,047,324
-----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options
and restricted stock $ 19,050 19,014,157 $1.00
==========================================================================================================
==========================================================================================================
Earnings Number of Shares Per Share
2007 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 16,118 17,771,521 $.91
Effect of dilutive securities - stock options and
restricted stock 839,011
-----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options
and restricted stock $ 16,118 18,610,532 $.87
==========================================================================================================
==========================================================================================================
Earnings Number of Shares Per Share
2006 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 12,278 17,427,857 $.70
Effect of dilutive securities - stock options and
restricted stock 819,384
-----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options
and restricted stock $ 12,278 18,247,241 $.67
==========================================================================================================
The Company had 276,900, 9,100 and 307,875 stock options outstanding at December
31, 2008, 2007 and 2006, 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- EMPLOYEE BENEFIT PLANS
-------------------------------
The Company sponsors a 401(k) savings 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 provided for profit
sharing contributions and matching 401(k) savings plan contributions of $624 and
$406 in 2008, $503 and $379 in 2007 and $395 and $343 in 2006,
49
respectively.
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 the Verona facility. The Company uses a
December 31 measurement date for its postretirement medical plan. In accordance
with SFAS No. 158, the Company is required to recognize the over funded or under
funded status of a defined benefit post retirement 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. On December 31, 2006, as a
result of adopting SFAS No. 158, the Company recorded $0.3 million as a
reduction to the benefit obligation and $0.2 million, net of tax, as a one-time
adjustment to its stockholders' equity, recorded under accumulated other
comprehensive income.
The actuarial recorded liabilities for such unfunded postretirement benefit is
as follows:
Change in benefit obligation:
=======================================================================================
2008 2007
---------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 805 $ 729
Service cost with interest to end of year 28 29
Interest cost 40 41
Participant contributions 13 12
Benefits paid (30) (57)
Actuarial (gain) or loss (55) 51
---------------------------------------------------------------------------------------
Benefit obligation at end of year $ 801 $ 805
=======================================================================================
Change in plan assets:
=======================================================================================
2008 2007
---------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ -- $ --
Employer contributions 17 45
Participant contributions 13 12
Benefits paid (30) (57)
---------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ --
=======================================================================================
Amounts recognized in consolidated balance sheet:
=======================================================================================
2008 2007
---------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $ (801) $ (805)
Fair value of plan assets -- --
Funded status (801) (805)
Unrecognized prior service cost N/A N/A
Unrecognized net (gain)/loss N/A N/A
---------------------------------------------------------------------------------------
Net amount recognized in consolidated balance
sheet (after SFAS 158)
(included in other long-term obligations) $ 801 $ 805
---------------------------------------------------------------------------------------
Accrued postretirement benefit cost
(included in other long-term obligations) $ N/A $ N/A
=======================================================================================
Components of net periodic benefit cost:
========================================================================================================
2008 2007 2006
--------------------------------------------------------------------------------------------------------
Service cost with interest to end of year $ 28 $ 29 $ 28
Interest cost 40 41 39
Amortization of prior service cost (18) (18) (18)
Amortization of gain (6) (3) (3)
--------------------------------------------------------------------------------------------------------
Total net periodic benefit cost $ 44 $ 49 $ 46
========================================================================================================
50
Estimated future employer contributions and benefit payments are as follows:
=========================================
Year
-----------------------------------------
2009 $ 42
2010 38
2011 49
2012 40
2013 24
Years 2014-2018 266
=========================================
Assumed health care cost trend rates have been used in the valuation of
postretirement health insurance benefits. The trend rate is 10 percent in 2009
declining to 5 percent in 2014 and thereafter. A one percentage point increase
in health care cost trend rates in each year would increase the accumulated
postretirement benefit obligation as of December 31, 2008 by $97 and the net
periodic postretirement benefit cost for 2008 by $9. A one percentage point
decrease in health care cost trend rates in each year would decrease the
accumulated postretirement benefit obligation as of December 31, 2008 by $84 and
the net periodic postretirement benefit cost for 2008 by $8. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 5.50% in 2008 and 5.75% in 2007.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
In February 2006, the Company entered into a lease agreement under which the
Company leases a portion of a Channahon, Illinois facility where it conducts
manufacturing and utilizes certain warehouse space. The term of the lease runs
through September 30, 2010, subject to earlier termination.
In February 2002, the Company entered into a ten (10) year lease which is
cancelable in 2009 for approximately 20,000 square feet of office space. The
office space is now serving as the Company's general offices and as a laboratory
facility. The Company leases most of its vehicles and office equipment under
non-cancelable operating leases, which primarily expire at various times through
2013. Rent expense charged to operations under such lease agreements for 2008,
2007 and 2006 aggregated approximately $1,284, $1,047 and $595, respectively.
Aggregate future minimum rental payments required under non-cancelable operating
leases at December 31, 2008 are as follows:
=================================================
Year
-------------------------------------------------
2009 $ 1,128
2010 543
2011 351
2012 241
2013 106
Thereafter 221
-------------------------------------------------
Total minimum lease payments $ 2,590
=================================================
In 1982, the Company discovered and thereafter removed a number of buried drums
containing unidentified waste material from the Company's site in Slate Hill,
New York. The Company thereafter entered into a Consent Decree to evaluate the
drum site with the New York Department of Environmental Conservation ("NYDEC")
and performed a Remedial Investigation/Feasibility Study that was approved by
NYDEC in February 1994. Based on NYDEC requirements, the Company cleaned the
area and removed additional soil from the drum burial site, which was completed
in 1996. The Company continues to be involved in discussions with NYDEC to
evaluate test results and determine what, if any, additional actions will be
required on the part of the Company to close out the remediation of this site.
Additional actions, if any, would likely require the Company to continue
monitoring the site. The cost of such monitoring has been less than $5 per year
for the period 2004 - 2008.
The Company's Verona, Missouri facility, while held by a prior owner, was
designated by the EPA as a Superfund site and placed on the National Priorities
List in 1983, because of dioxin contamination on portions of the site.
Remediation conducted by the prior owner under the oversight of the EPA and the
51
Missouri Department of Natural Resources ("MDNR") included removal of dioxin
contaminated soil and equipment, capping of areas of residual contamination in
four relatively small areas of the site separate from the manufacturing
facilities, and the installation of wells to monitor groundwater and surface
water contamination by organic chemicals. No ground water or surface water
treatment was required. The Company believes that remediation of the site is
complete. In 1998, the EPA certified the work on the contaminated soils to be
complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party
risk assessment report to the EPA and MDNR recommending no further action. The
prior owner is awaiting the response of the EPA and MDNR to the draft risk
assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona,
Missouri facility for potential liabilities associated with the Superfund site
and one of the sellers, in turn, has the benefit of certain contractual
indemnification by the prior owner that is implementing the above-described
Superfund remedy.
From time to time, the Company is a party to various litigation, claims and
assessments. Management believes that the ultimate outcome of such matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
NOTE 12 - SEGMENT INFORMATION
-----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Effective with the quarter ending March 31,
2008, the Company has realigned its business segment reporting structure to more
appropriately reflect the internal management of the businesses, largely due to
the impact of acquisitions in 2007. The Company will continue to report three
segments: Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition &
Health. Changes to the reporting segments are as follows: chelated minerals and
specialty nutritional products for the animal health industry, formerly reported
as a part of the encapsulated/nutritional products segment, are now combined
with the choline business (formerly BCP Ingredients) into a consolidated Animal
Nutrition & Health segment. The encapsulated/nutritional products segment has
been renamed Food, Pharma & Nutrition, focusing on human health. There are no
changes to the Specialty Products segment. Business segment net sales and
earnings from operations have been reclassified for all periods presented to
reflect the segment changes.
The Specialty Products segment consists of three specialty chemicals: ethylene
oxide, propylene oxide and methyl chloride. Human choline nutrient products,
pharmaceutical products and encapsulated products are reported in the Food,
Pharma & Nutrition segment. This 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. The
Animal Nutrition & Health segment is in the business of manufacturing and
supplying choline chloride, an essential nutrient for animal health, to the
poultry and swine industries. In addition, certain derivatives of choline
chloride are also manufactured and sold into industrial applications and are
included in this segment. Chelated minerals and specialty nutritional products
for the animal health industry are also reported in this segment. The Company
sells products for all segments through its own sales force, independent
distributors, and sales agents. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
Business Segment Net Sales:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Specialty Products $ 35,835 $ 33,057 $ 32,026
Food, Pharma and Nutrition 35,702 32,052 28,702
Animal Nutrition and Health 160,513 111,092 40,177
--------------------------------------------------------------------------------
Total $ 232,050 $ 176,201 $ 100,905
================================================================================
52
Business Segment Earnings Before Income Taxes:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Specialty Products $ 12,545 $ 11,824 $ 11,315
Food, Pharma and Nutrition 5,469 4,144 2,162
Animal Nutrition and Health 11,334 9,938 5,685
Interest and other income (expense) (917) (1,077) (61)
--------------------------------------------------------------------------------
Total $ 28,431 $ 24,829 $ 19,101
================================================================================
Depreciation/Amortization:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Specialty Products $ 913 $ 876 $ 941
Food, Pharma and Nutrition 1,316 1,206 1,171
Animal Nutrition and Health 5,557 4,294 1,333
--------------------------------------------------------------------------------
Total $ 7,786 $ 6,376 $ 3,445
================================================================================
Business Segment Assets:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Specialty Products $ 21,394 $ 18,583 $ 18,446
Food, Pharma and Nutrition 22,081 22,426 20,780
Animal Nutrition and Health 105,296 108,125 45,524
Other Unallocated 5,703 5,290 7,583
--------------------------------------------------------------------------------
Total $ 154,474 $ 154,424 $ 92,333
================================================================================
Other unallocated assets consist of certain cash, receivables, prepaid expenses,
equipment and leasehold improvements, net of accumulated depreciation, and
deferred income taxes, which the Company does not allocate to its individual
business segments.
Capital Expenditures:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Specialty Products $ 612 $ 307 $ 195
Food, Pharma and Nutrition 955 776 485
Animal Nutrition and Health 3,513 3,786 1,599
--------------------------------------------------------------------------------
Total $ 5,080 $ 4,869 $ 2,279
================================================================================
Geographic Revenue Information:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
United States $ 146,753 $ 132,632 $ 91,042
Foreign Countries 85,297 43,569 9,863
--------------------------------------------------------------------------------
Total $ 232,050 $ 176,201 $ 100,905
================================================================================
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------
Cash paid during the year for:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Income taxes $ 9,379 $ 6,718 $ 5,621
Interest $ 958 $ 1,466 $ 189
================================================================================
Cash paid during the year for acquisition of assets:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Assets acquired $ 296 $ 48,957 $ 25,628
Less: liabilities assumed -- (8,213) (2,756)
--------------------------------------------------------------------------------
Cash paid for acquisitions $ 296 $ 40,744 $ 22,872
================================================================================
53
Non-cash financing activities:
================================================================================
2008 2007 2006
--------------------------------------------------------------------------------
Dividends payable $ 2,008 $ 1,975 $ 1,596
================================================================================
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
------------------------------------------------------
(In thousands, except per share data)
===================================================================================================================
2008 2007
-------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------
Net sales $56,861 $62,901 $58,235 $54,053 $27,599 $44,371 $50,498 $53,733
Gross profit 13,483 12,951 12,712 13,432 9,741 12,182 12,609 12,398
Earnings before
income taxes 7,191 7,001 6,936 7,303 5,314 6,367 6,772 6,376
Net earnings 4,641 4,724 4,793 4,892 3,441 4,065 4,457 4,155
Basic net earnings
per common share $ .26 $ .26 $ .27 $ .27 $ .19 $ .23 $ .25 $ .23
Diluted net earnings
per common share $ .25 $ .25 $ .25 $ .26 $ .19 $ .22 $ .24 $ .22
===================================================================================================================
54
Schedule II
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
Additions
-------------------------
Balance at Charges to Charges to
Beginning of Costs and Other Balance at
Description Year Expenses Accounts Deductions End of Year
----------- ------------ ----------- ---------- ---------- -----------
Year ended December 31, 2008
Allowance for doubtful accounts $ 50 $ -- $ -- $ -- $ 50
Inventory reserve 174 58 -- (138)(a) 94
Year ended December 31, 2007
Allowance for doubtful accounts $ 50 $ -- $ -- $ -- $ 50
Inventory reserve 147 20 7 -- 174
Year ended December 31, 2006
Allowance for doubtful accounts $ 50 $ -- $ -- $ -- $ 50
Inventory reserve 56 91 -- -- 147
(a) represents write-offs.
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Annual Report on Form 10-K.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
the Company's principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2008, management conducted an assessment of the
effectiveness of the Company's internal control over financial reporting based
on the framework established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management has determined that the Company's internal
control over financial reporting was effective as of December 31, 2008.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on our financial statements.
Attestation Report of Registered Public Accounting Firm
The independent registered public accounting firm of McGladrey & Pullen,
LLP, has issued an attestation report on the Company's internal control over
financial reporting, which is included herein.
56
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting
in our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers of the Registrant, and Corporate
Governance.
(a) Directors of the Company.
The required information is to be set forth in the Company's Proxy
Statement for the 2008 Annual Meeting of Stockholders (the "2009 Proxy
Statement") under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
(b) Executive Officers of the Company.
The required information is to be set forth in the 2009 Proxy Statement
under the caption "Directors and Executive Officers," which information is
hereby incorporated herein by reference.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
The required information is to be set forth in the 2009 Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is hereby incorporated herein by reference.
(d) Code of Ethics.
The Company has adopted a Code of Ethics for Senior Financial Officers
that applies to its Chief Executive Officer (principal executive officer), Chief
Financial Officer (principal financial officer and principal accounting officer)
and its Treasurer. The Company's Code of Ethics for Senior Financial Officers is
filed as Exhibit 14 to this Annual Report on Form 10-K.
(e) Corporate Governance.
The required information is to be set forth in the 2009 Proxy Statement
under the caption "Corporate Governance," which information is hereby
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is to be set forth in the 2009 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is to be set forth in the 2009 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
of Management" and the caption "Equity Compensation Plan Information," all of
which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director
Independence.
The information required by this Item is set forth in the 2009 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
57
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in the 2009 Proxy
Statement under the caption "Independent Auditor Fees," which information is
hereby incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Form 10-K:
Form 10-K
1. Financial Statements Page Number
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets as of December 31, 2008 and 2007 29
Consolidated Statements of Earnings for the
years ended December 31, 2008, 2007 and 2006 30
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2008, 2007 and 2006 31
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006 32
Notes to Consolidated Financial Statements 33
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2008, 2007 and 2006 55
3. Exhibits
2.1 Sale and Purchase Agreement dated March 30, 2007, by and between
Balchem B.V. and Akzo Nobel Chemicals S.p.A. (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K dated March 30, 2007).
2.2 Asset Purchase Agreement dated March 16, 2007, by and between BCP
Ingredients, Inc. and Chinook Global Limited (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K dated March 16, 2007).
2.3 Stock Purchase Agreement dated November 2, 2005, between Balchem
Minerals Corporation and Chelated Minerals Corporation
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated November 7, 2005).
2.4 First Amendment to Stock Purchase Agreement dated January 5,
2006, between Balchem Minerals Corporation and Chelated Minerals
Corporation (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated January 10, 2006).
3.1 Composite Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K dated March 16, 2006 for the year ended December 31,
2005).
3.2 Balchem Corporation Articles of Amendment (incorporated by
reference to Exhibit A to the Company's definitive proxy
statement on Schedule 14A filed with the Commission on April 25,
2008)
3.3 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the
58
Company's Current Report on Form 8-K dated January 2, 2008).
10.1 Tolling Agreement, dated March 16, 2007 between BCP Ingredients,
Inc. and Chinook Global Limited (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
March 16, 2007).
10.2 Non-Competition Agreement, dated March 16, 2007 between BCP
Ingredients, Inc. and Chinook Global Limited; Chinook Services,
LLC; Chinook, LLC; Dean R. Lacy; Ronald Breen, and John N.
Kennedy (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated March 16, 2007).
10.3 Loan Agreement dated March 16, 2007 by and between Bank of
America, N.A. and Balchem Corporation (incorporated by reference
to Exhibit 10.3 to the Company's Current Report on Form 8-K dated
March 16, 2007).
10.4 Promissory Note (Term Loan) dated March 16, 2007 from Balchem
Corporation to Bank of America, N.A (incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K dated
March 16, 2007).
10.5 Promissory Note (Revolving Line of Credit) dated March 16, 2007
from Balchem Corporation to Bank of America, N.A. (incorporated
by reference to Exhibit 10.5 to the Company's Current Report on
Form 8-K dated March 16, 2007).
10.6 Guaranty dated March 16, 2007 from BCP Ingredients, Inc. to Bank
of America, N.A. (incorporated by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K dated March 16, 2007).
10.7 Guaranty dated March 16, 2007 from Balchem Minerals Corporation
to Bank of America, N.A. (incorporated by reference to Exhibit
10.7 to the Company's Current Report on Form 8-K dated March 16,
2007).
10.8 Loan Agreement dated February 6, 2006 by and between Bank of
America, N.A. and Balchem Corporation, Promissory Note dated
February 6, 2006 from Balchem Corporation to Bank of America,
N.A., and Amended and Restated Promissory Note (Revolving Line of
Credit) dated February 6, 2006 from Balchem Corporation to Bank
of America, N.A. (incorporated by reference to Exhibits 10.2,
10.3 and 10.4 to the Company's Current Report on Form 8-K dated
February 9, 2006).
10.9 Amended and Restated Guaranty dated February 6, 2006 from BCP
Ingredients, Inc. to Bank of America, N.A. (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form
8-K dated February 9, 2006).
10.10 Guaranty dated February 6, 2006 from Balchem Minerals Corporation
to Bank of America, N.A. (incorporated by reference to Exhibit
10.6 to the Company's Current Report on Form 8-K dated February
9, 2006).
10.11 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-35910, dated October 25,
1996, and to Proxy Statement, dated April 22, 1998, for the
Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement")).*
10.12 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-35912, dated October 25,
1996, and to the 1998 Proxy Statement).
10.13 Balchem Corporation Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).*
59
10.14 Balchem Corporation Second Amended and Restated 1999 Stock Plan,
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-155655, dated November 25,
2008, and to Proxy Statement, dated April 25, 2008, for the
Company's 2008 Annual Meeting of Stockholders.*
10.15 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-118291, dated
August 17, 2004).*
10.16 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi (incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 10-K")). *
10.17 Lease dated as of February 8, 2002 between Sunrise Park Realty,
Inc. and Balchem Corporation (incorporated by reference to
Exhibit 10.7 to the 2001 10-K).
10.18 Form of Restricted Stock Purchase Agreement for Directors
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated December 30, 2005).
14. Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the Company's Annual Report on Form
10-K dated March 15, 2004 for the year ended December 31, 2003).
21. Subsidiaries of Registrant.
23.1 Consent of McGladrey & Pullen, LLP, Independent Registered Public
Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
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.
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.
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 12, 2009 BALCHEM CORPORATION
By:/s/ Dino A. Rossi
---------------------------------------
Dino A. Rossi, Chairman, President, and
Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Dino A. Rossi
-----------------------------------
Dino A. Rossi, Chairman, President,
Chief Executive Officer, and Director (Principal Executive Officer)
Date: March 12, 2009
/s/ Francis J. Fitzpatrick
-----------------------------------
Francis J. Fitzpatrick, Chief Financial
Officer and Treasurer (Principal Financial and Principal Accounting Officer)
Date: March 12, 2009
/s/ Edward L. McMillan
-----------------------------------
Edward L. McMillan, Director
Date: March 12, 2009
/s/ Kenneth P. Mitchell
-----------------------------------
Kenneth P. Mitchell, Director
Date: March 12, 2009
/s/ Perry W. Premdas
-----------------------------------
Perry W. Premdas, Director
Date: March 12, 2009
/s/ Dr. John Televantos
-----------------------------------
Dr. John Televantos, Director
Date: March 12, 2009
/s/ Dr. Elaine Wedral
-----------------------------------
Dr. Elaine Wedral, Director
Date: March 12, 2009
61
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Sale and Purchase Agreement dated March 30, 2007, by and between
Balchem B.V. and Akzo Nobel Chemicals S.p.A. (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K dated March 30, 2007).
2.2 Asset Purchase Agreement dated March 16, 2007, by and between
BCP Ingredients, Inc. and Chinook Global Limited (incorporated
by reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K dated March 16, 2007).
2.3 Stock Purchase Agreement dated November 2, 2005, between Balchem
Minerals Corporation and Chelated Minerals Corporation
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated November 7, 2005).
2.4 First Amendment to Stock Purchase Agreement dated January 5,
2006, between Balchem Minerals Corporation and Chelated Minerals
Corporation (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated January 10, 2006).
3.1 Composite Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K dated March 16, 2006 for the year ended December 31,
2005).
3.2 Balchem Corporation Articles of Amendment (incorporated by
reference to Exhibit A to the Company's definitive proxy
statement on Schedule 14A filed with the Commission on April 25,
2008)
3.3 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
January 2, 2008).
10.1 Tolling Agreement, dated March 16, 2007 between BCP Ingredients,
Inc. and Chinook Global Limited (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
March 16, 2007).
10.2 Non-Competition Agreement, dated March 16, 2007 between BCP
Ingredients, Inc. and Chinook Global Limited; Chinook Services,
LLC; Chinook, LLC; Dean R. Lacy; Ronald Breen, and John N.
Kennedy (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated March 16, 2007).
10.3 Loan Agreement dated March 16, 2007 by and between Bank of
America, N.A. and Balchem Corporation (incorporated by reference
to Exhibit 10.3 to the Company's Current Report on Form 8-K
dated March 16, 2007).
10.4 Promissory Note (Term Loan) dated March 16, 2007 from Balchem
Corporation to Bank of America, N.A (incorporated by reference
to Exhibit 10.4 to the Company's Current Report on Form 8-K
dated March 16, 2007).
10.5 Promissory Note (Revolving Line of Credit) dated March 16, 2007
from Balchem Corporation to Bank of America, N.A. (incorporated
by reference to Exhibit 10.5 to the Company's Current Report on
Form 8-K dated March 16, 2007).
10.6 Guaranty dated March 16, 2007 from BCP Ingredients, Inc. to Bank
of America, N.A. (incorporated by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K dated March 16, 2007).
62
10.7 Guaranty dated March 16, 2007 from Balchem Minerals Corporation
to Bank of America, N.A. (incorporated by reference to Exhibit
10.7 to the Company's Current Report on Form 8-K dated March 16,
2007).
10.8 Loan Agreement dated February 6, 2006 by and between Bank of
America, N.A. and Balchem Corporation, Promissory Note dated
February 6, 2006 from Balchem Corporation to Bank of America,
N.A., and Amended and Restated Promissory Note (Revolving Line
of Credit) dated February 6, 2006 from Balchem Corporation to
Bank of America, N.A. (incorporated by reference to Exhibits
10.2, 10.3 and 10.4 to the Company's Current Report on Form 8-K
dated February 9, 2006).
10.9 Amended and Restated Guaranty dated February 6, 2006 from BCP
Ingredients, Inc. to Bank of America, N.A. (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on
Form 8-K dated February 9, 2006).
10.10 Guaranty dated February 6, 2006 from Balchem Minerals
Corporation to Bank of America, N.A. (incorporated by reference
to Exhibit 10.6 to the Company's Current Report on Form 8-K
dated February 9, 2006).
10.11 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-35910, dated October 25,
1996, and to Proxy Statement, dated April 22, 1998, for the
Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement")).*
10.12 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-35912, dated October 25,
1996, and to the 1998 Proxy Statement).
10.13 Balchem Corporation Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).*
10.14 Balchem Corporation Second Amended and Restated 1999 Stock Plan,
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. No. 333-155655, dated November
25, 2008, and to Proxy Statement, dated April 25, 2008, for the
Company's 2008 Annual Meeting of Stockholders.*
10.15 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-118291, dated
August 17, 2004).*
10.16 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi (incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 10-K")). *
10.17 Lease dated as of February 8, 2002 between Sunrise Park Realty,
Inc. and Balchem Corporation (incorporated by reference to
Exhibit 10.7 to the 2001 10-K).
10.18 Form of Restricted Stock Purchase Agreement for Directors
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated December 30, 2005).
14. Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the Company's Annual Report on Form
10-K dated March 15, 2004 for the year ended December 31, 2003).
21. Subsidiaries of Registrant.
23.1 Consent of McGladrey & Pullen, LLP, Independent Registered
Public Accounting Firm.
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31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
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.
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.
*Each of the Exhibits noted by an asterisk is a management compensatory plan
or arrangement.
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