FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
|X| the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2007
or
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600 New Hampton, New York 10958
---------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
845-326-5600
---------------------------------------------
Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 5, 2007 the registrant had 17,965,215 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(unaudited)
Assets September 30, December 31,
2007 2006
------------- ------------
Current assets:
Cash and cash equivalents $ 5,501 $ 5,189
Accounts receivable 27,395 11,578
Inventories 14,995 9,918
Prepaid expenses and other 1,102 1,754
Deferred income taxes 459 416
Other current assets 3,607 --
------------- ------------
Total current assets 53,059 28,855
Property, plant and equipment, net 40,762 31,313
Goodwill 26,264 25,253
Intangible assets with finite lives, net 34,346 6,912
Other assets 60 --
------------- ------------
Total assets $ 154,491 $ 92,333
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 6,561 $ 3,010
Accrued expenses 11,367 3,696
Customer deposits and other deferred revenue 264 1,072
Current portion of long-term debt 7,329 --
Revolver borrowings 2,854 --
Dividends payable -- 1,596
Income tax payable 2,306 186
------------- ------------
Total current liabilities 30,681 9,560
------------- ------------
Long-term debt 26,465 --
Deferred income taxes 6,295 6,627
Other long-term obligations 1,201 784
------------- ------------
Total liabilities 64,642 16,971
------------- ------------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 25,000,000 shares;
17,916,417 shares issued and outstanding at September 30, 2007 and
17,733,849 shares issued and outstanding at December 31, 2006 800 788
Additional paid-in capital 13,199 10,393
Retained earnings 75,660 63,988
Accumulated other comprehensive income 190 193
------------- ------------
Total stockholders' equity 89,849 75,362
------------- ------------
------------- ------------
Total liabilities and stockholders' equity $ 154,491 $ 92,333
============= ============
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
----------- ----------- ----------- ------------
Net sales $ 50,498 $ 25,122 $ 122,468 $ 74,819
Cost of sales 37,889 16,449 87,936 49,124
----------- ----------- ----------- ------------
Gross profit 12,609 8,673 34,532 25,695
Operating expenses:
Selling expenses 3,176 1,683 8,498 5,293
Research and development expenses 613 549 1,797 1,561
General and administrative expenses 1,627 1,460 4,913 4,521
----------- ----------- ----------- ------------
5,416 3,692 15,208 11,375
----------- ----------- ----------- ------------
Earnings from operations 7,193 4,981 19,324 14,320
Other expenses (income):
Interest (income) (96) (13) (170) (102)
Interest expense 672 16 1,283 186
Other, net (155) -- (242) --
----------- ----------- ----------- ------------
Earnings before income tax expense 6,772 4,978 18,453 14,236
Income tax expense 2,315 1,827 6,490 5,172
----------- ----------- ----------- ------------
Net earnings $ 4,457 $ 3,151 $ 11,963 $ 9,064
=========== =========== =========== ============
Net earnings per common share - basic $ 0.25 $ 0.18 $ 0.67 $ 0.52
=========== =========== =========== ============
Net earnings per common share - diluted $ 0.24 $ 0.17 $ 0.65 $ 0.50
=========== =========== =========== ============
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Nine Months Ended
September 30,
2007 2006
---------- ----------
Cash flows from operating activities:
Net earnings $ 11,963 $ 9,064
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,615 2,573
Foreign currency transaction gain (125) --
Shares issued under employee benefit plans 306 281
Deferred income taxes (375) (11)
Stock compensation expense 1,176 786
Provision for doubtful accounts -- 23
Gain on sale of equipment (11) --
Other 20 --
Changes in assets and liabilities net of
effects of acquisitions:
Accounts receivable (13,475) 215
Inventories 1,082 376
Prepaid expenses and other current assets (135) 1,074
Income taxes 2,103 1,125
Customer deposits and other deferred revenue (808) (916)
Accounts payable and accrued expenses 1,678 (318)
Other long-term obligations 395 41
---------- ----------
Net cash provided by operating activities 8,409 14,313
---------- ----------
Cash flows from investing activities:
Capital expenditures (3,005) (1,235)
Proceeds from sale of property, plant & equipment 11 --
Cash paid for intangible assets acquired (149) (71)
Acquisition of assets (40,640) (22,772)
---------- ----------
Net cash used in investing activities (43,783) (24,078)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowings 38,946 10,000
Proceeds from short-term obligations 3,554 --
Repayment of short-term obligations (870) --
Principal payments on long-term debt (5,768) (10,000)
Proceeds from stock options exercised 752 321
Excess tax benefits from stock compensation 584 163
Dividends paid (1,596) (1,045)
Other -- (10)
---------- ----------
Net cash provided by (used in) financing activities 35,602 (571)
---------- ----------
Effect of exchange rate changes on cash 84 --
Increase (decrease) in cash and cash equivalents 312 (10,336)
Cash and cash equivalents beginning of period 5,189 12,996
---------- ----------
Cash and cash equivalents end of period $ 5,501 $ 2,660
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
-------- -------- -------- --------
Net earnings $ 4,457 $ 3,151 $ 11,963 $ 9,064
Other comprehensive income, net of tax:
Unfunded post retirement benefit plan -
prior service cost and gain amortized during period (3) -- (10) --
Equity adjustment from translation (1) -- 7 --
-------- -------- -------- --------
Comprehensive income $ 4,453 $ 3,151 $ 11,960 $ 9,064
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2006 consolidated financial statements, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in our Annual Report on Form 10-K for the year ended December 31, 2006.
References in this report to the "Company" mean either Balchem Corporation or
Balchem Corporation and its subsidiaries, including BCP Ingredients, Inc.,
Balchem Minerals Corporation, and Balchem B.V., on a consolidated basis, as the
context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and
therefore do not include some information and notes necessary to conform to
annual reporting requirements. The results of operations for the nine months
ended September 30, 2007 are not necessarily indicative of the operating results
expected for the full year or any interim period.
NOTE 2 - STOCKHOLDERS' EQUITY
-----------------------------
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share Based Payment" ("SFAS 123R"),
which requires all share-based payments, including grants of stock options, to
be recognized in the statement of earnings as an operating expense, based on
their fair values. SFAS 123R establishes the accounting for transactions in
which an entity pays for employee services in share-based payment transactions.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using the intrinsic value method and requires companies to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The fair value of
employee share options and similar instruments is estimated using option-pricing
models that take into account the unique characteristics of those instruments.
That cost is recognized over the period during which an employee is required to
provide service in exchange for the award. The Company adopted SFAS 123R
effective January 1, 2006, using the modified prospective transition method.
Under this method, compensation cost is recognized for awards granted and for
awards modified, repurchased or cancelled in the period after adoption.
Compensation cost is also recognized for the unvested portion of awards granted
prior to adoption over the remaining requisite service period. The Company's
results for the three and nine months ended September 30, 2007 and 2006
reflected the following compensation cost as a result of adopting SFAS 123R and
such
6
compensation cost had the following effects on net earnings and basic and
diluted earnings per share:
-------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30, September 30,
2007 2006
-------------------------------------------------------------------------------
Cost of sales $ 44 $ 27
Operating expenses 348 235
Net earnings (267) (206)
Basic earnings per common share (0.01) (0.01)
Diluted earnings per common share $ (0.01) $ (0.01)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2007 2006
-------------------------------------------------------------------------------
Cost of sales $ 131 $ 81
Operating expenses 1,045 705
Net earnings (801) (665)
Basic earnings per common share (0.05) (0.04)
Diluted earnings per common share $ (0.04) $ (0.04)
-------------------------------------------------------------------------------
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 $83 and $584 for the three
and nine months ended September 30, 2007, respectively, and by $-0- and $163 for
the three and nine months ended September 30, 2006, respectively.
The Company's stock incentive plans allow for the granting of restricted stock
awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be
exercisable for longer than ten years after the date of grant. The Company has
approved and reserved a number of shares to be issued upon exercise of the
outstanding options that is adequate to cover all exercises. As of September 30,
2007, the plans had 720,153 shares available for future awards. Compensation
expense for stock options and restricted stock awards is recognized on a
straight-line basis over the vesting period, generally three years for stock
options, four years for employee restricted stock awards, and seven years for
non-employee director restricted stock awards. Certain awards provide for
accelerated vesting if there is a change in control (as defined in the plans) or
other qualifying events.
7
Option activity for the nine months ended September 30, 2007 and 2006 is
summarized below:
----------------------------------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the nine months ended Exercise Value Contractual
September 30, 2007 Shares (000s) Price ($000s) Term
----------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2006 2,170 $ 10.13 $ 15,168
Granted 10 18.00
Exercised (160) 4.70
Expired -- --
Forfeited (13) 14.01
----------------------------------------------------------------------------------------------------------
Outstanding as of September 30, 2007 2,007 $ 10.58 $ 19,726 6.9
==========================================================================================================
Exercisable as of September 30, 2007 1,490 $ 8.70 $ 17,441 6.3
==========================================================================================================
----------------------------------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the nine months ended Exercise Value Contractual
September 30, 2006 Shares (000s) Price ($000s) Term
----------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2005 2,153 $ 8.38 $ 10,479
Granted 15 15.06
Exercised (64) 4.98
Expired -- --
Forfeited (21) 9.64
----------------------------------------------------------------------------------------------------------
Outstanding as of September 30, 2006 2,083 $ 8.53 $ 9,720 6.8
==========================================================================================================
Exercisable as of September 30, 2006 1,366 $ 7.02 $ 8,430 5.9
==========================================================================================================
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yields of 0.3% and 0.4%; expected volatilities of 27% and
26%; risk-free interest rates of 4.2% and 3.8%; and expected lives of 3.7 and
4.5, in each case for the nine months ended September 30, 2007 and 2006,
respectively.
The Company used a projected expected life for each award granted based on
historical experience of employees' exercise behavior. Expected volatility is
based on the Company's historical volatility levels. 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.
8
Other information pertaining to option activity during the three and nine months
ended September 30, 2007 and 2006 was as follows:
------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted $ 6.44 $ N/A $ 6.44 $ 3.50
Total intrinsic value of stock options exercised $ 424 $ 89 $ 1,936 $ 613
------------------------------------------------------------------------------------------------------
Non-vested restricted stock activity for the nine months ended September 30,
2007 and 2006 is summarized below:
--------------------------------------------------------------------------------
Weighted
Average
Grant
Date Fair
Nine Months ended September 30, 2007 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 September 30, 2007 118 $ 16.49
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Weighted
Average
Grant
Date Fair
Nine Months ended September 30, 2006 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005 34 $ 13.22
Granted -- --
Vested -- --
Forfeited -- --
Non-vested balance as of September 30, 2006 34 $ 13.22
--------------------------------------------------------------------------------
As of September 30, 2007 and 2006, there was $2,946 and $1,625, respectively, of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. As of September 30, 2007, 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, 2007 will be approximately $1,576.
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
9
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.
All references to number of common shares and per share amounts except shares
authorized in the accompanying consolidated financial statements were
retroactively adjusted to reflect the effect of the December 2006 and December
2005 stock splits.
In June 1999, the Board of Directors of the Company 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 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 at an
average cost of $8.03 per share, none of which remained in treasury at September
30, 2007. During the nine months ended September 30, 2007, no additional shares
have been 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 - ACQUISITIONS
---------------------
Akzo Nobel Acquisition
----------------------
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., 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 provisional purchase price including acquisition costs of $9,067, subject
to adjustment based on actual working capital and other adjustments.
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 preliminary allocation of the total purchase price, including
acquisition costs, was based on the estimated fair values as of April 30, 2007.
Adjustments to these estimates will be included in the allocation of the
purchase price of the Akzo Nobel Acquisition upon settlement of any working
capital or other adjustments. The preliminary purchase price has been allocated
as follows:
10
--------------------------------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
--------------------------------------------------------------------------------
Property plant & equipment $ 7,994
Short-term receivable 2,506
Inventories 4,323
Goodwill 990
Other 83
Accounts payable and accrued expenses (8,258)
--------------------------------------------------------------------------------
Total $ 7,638
================================================================================
Chinook Acquisition
-------------------
On March 16, 2007, the Company, through its wholly-owned subsidiary BCP
Ingredients, Inc. ("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 of
approximately $29,000, plus the value of certain product inventories of
approximately $1,840. The acquisition closed effective the same date.
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 preliminary allocation of the total purchase price, including
acquisition costs, was based on the estimated fair values as of March 16, 2007.
Adjustments to these estimates will be included in the allocation of the
purchase price of the Chinook Acquisition upon settlement of any working capital
or other adjustments. The preliminary 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
Short-term obligation (870)
Other 73
-----------------------------------------------------
Total $ 32,155
-----------------------------------------------------
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.
11
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.
--------------------------------------------------
Pro Forma
Nine Months Ended
September 30,
2007
--------------------------------------------------
Net sales $ 131,455
Net earnings 12,439
Basic EPS .70
Diluted EPS .67
==================================================
St. Gabriel Acquisition
-----------------------
Effective August 24, 2006, pursuant to an asset purchase agreement of the same
date, the Company, through its wholly owned subsidiaries BCP and BCP St.
Gabriel, acquired from BioAdditives, LLC, CMB Additives, LLC and CMB Realty of
Louisiana (the "St. Gabriel Sellers") an animal feed grade aqueous choline
chloride manufacturing facility and related assets located in St. Gabriel,
Louisiana (the "St. Gabriel Acquisition"). The Company also acquired the St.
Gabriel Sellers' remaining interest in a land lease (approximately 21 years)
relating to the realty upon which the acquired facility and related assets are
located. The acquisition was funded through the Company's cash reserves. In
February 2007, the facility was placed in service.
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 of $17,350,
subject to adjustment based upon CMC's actual working capital and other
adjustments. On February 6, 2006, the Company and its principal bank entered
into a Loan Agreement (the "Loan Agreement") providing for an unsecured term
loan of $10,000 (the "Term Loan"), the proceeds of which were used to fund the
CMC Acquisition, in part. The remaining balance of the purchase price of the CMC
Acquisition was funded through the Company's cash reserves. At December 31,
2006, the Term Loan had been repaid in full.
The CMC Acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The allocation of the total purchase price, including
acquisition costs, of CMC's net tangible and intangible assets was based on the
estimated fair values as of February 8, 2006. Adjustments to these estimates
have been included in the allocation of the purchase price of CMC upon
settlement of any working capital or other adjustments. The excess of the
purchase price over the identifiable intangible and net tangible assets was
allocated to goodwill. The purchase price has been allocated as follows:
12
------------------------------------------------
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
================================================
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.
----------------------------------------------------------------
Actual Pro Forma
Nine Months Nine Months
Ended Ended
September 30, September 30,
2007 2006
----------------------------------------------------------------
Net sales $ 122,468 $ 75,553
Net earnings 11,963 9,078
Basic EPS .67 .52
Diluted EPS .65 .50
================================================================
NOTE 4 - INVENTORIES
--------------------
Inventories at September 30, 2007 and December 31, 2006 consisted of the
following:
----------------------------------------------------------------
September 30, December 31,
2007 2006
----------------------------------------------------------------
Raw materials $ 6,380 $ 4,264
Work in progress 225 143
Finished goods 8,390 5,511
----------------------------------------------------------------
Total inventories $ 14,995 $ 9,918
================================================================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at September 30, 2007 and December 31, 2006 are
summarized as follows:
13
-------------------------------------------------------------------
September 30, December 31,
2007 2006
-------------------------------------------------------------------
Land $ 1,234 $ 650
Building 12,316 11,640
Equipment 45,241 38,545
Construction in progress 5,371 1,247
-------------------------------------------------------------------
64,162 52,082
Less: Accumulated depreciation 23,400 20,769
-------------------------------------------------------------------
Net property, plant and equipment $ 40,762 $ 31,313
===================================================================
NOTE 6 - INTANGIBLE ASSETS
--------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
accounting for a business combination and define an intangible asset. Goodwill
and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but are instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
As of December 31, 2006, the Company performed an impairment test of its
goodwill balance. As of such date, the Company's reporting units' fair values
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company will perform its impairment test next on
December 31, 2007.
The Company had goodwill in the amount of $26,264 and $25,253 at September 30,
2007 and December 31, 2006, respectively, subject to the provisions of SFAS Nos.
141 and 142. For the nine months ended September 30, 2007, the increase in
goodwill is primarily attributable to the cost in excess of net assets acquired
from the Akzo Nobel Acquisition, as described in Note 3.
As of September 30, 2007 and December 31, 2006, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$37,227 and $7,799, respectively, less accumulated amortization of $2,881 and
$887, respectively. For the nine months ended September 30, 2007, the increase
in the gross carrying amount is primarily attributable to the customer list
acquired as part of the Chinook Acquisition, as described in Note 3.
Identifiable intangible assets with finite lives at September 30, 2007 and
December 31, 2006 are summarized as follows:
14
-------------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization
(in years) 9/30/07 at 9/30/07 12/31/06 at 12/31/06
-------------------------------------------------------------------------------------------------------
Customer lists 10 $ 34,150 $ 2,325 $ 4,888 $ 497
Regulatory re-registration
costs 10 28 -- 28 --
Patents & trade secrets 15-17 1,616 289 1,550 221
Trademarks & trade names 17 880 134 876 94
Other 5 553 133 457 75
-------------------------------------------------------------------------------------------------------
$ 37,227 $ 2,881 $ 7,799 $ 887
=======================================================================================================
Amortization of identifiable intangible assets was $1,994 for the first nine
months of 2007. Assuming no change in the gross carrying value of identifiable
intangible assets, the estimated amortization expense for the remainder of 2007
is $912, approximately $3,614 per annum for 2008 and 2009, $3,611 in 2010,
$3,610 in 2011, and $3,573 in 2012. At September 30, 2007, there were no
identifiable intangible assets with indefinite useful lives as defined by SFAS
No. 142. Identifiable intangible assets are reflected in "Intangible assets with
finite lives, net" in the Company's condensed consolidated balance sheets. There
were no changes to the useful lives of intangible assets subject to amortization
during the nine months ended September 30, 2007.
NOTE 7 - NET EARNINGS PER SHARE
-------------------------------
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
----------------------------------------------------------------------------------------------------------
Net Earnings Number of Shares Per Share
Three months ended September 30, 2007 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 4,457 17,783,384 $.25
Effect of dilutive securities - stock options
and restricted stock 873,218
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 4,457 18,656,602 $.24
==========================================================================================================
15
----------------------------------------------------------------------------------------------------------
Net Earnings Number of Shares Per Share
Three months ended September 30, 2006 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 3,151 17,445,075 $.18
Effect of dilutive securities - stock options
and restricted stock 778,478
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 3,151 18,223,553 $.17
==========================================================================================================
----------------------------------------------------------------------------------------------------------
Net Earnings Number of Shares Per Share
Nine months ended September 30, 2007 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 11,963 17,744,182 $.67
Effect of dilutive securities - stock options
and restricted stock 799,362
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 11,963 18,543,544 $.65
==========================================================================================================
----------------------------------------------------------------------------------------------------------
Net Earnings Number of Shares Per Share
Nine months ended September 30, 2006 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 9,064 17,421,466 $.52
Effect of dilutive securities - stock options
and restricted stock 811,707
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 9,064 18,233,173 $.50
==========================================================================================================
The Company had stock options covering 294,400 and 349,300 shares at September
30, 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.
16
NOTE 8 - INCOME TAXES
---------------------
Effective January 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). This interpretation, among other
things, creates a two-step approach for evaluating uncertain tax positions.
Recognition (step one) occurs when an enterprise concludes that a tax position,
based solely on its technical merits, is more-likely-than-not to be sustained
upon examination. Measurement (step two) determines the amount of benefit that
more-likely-than-not will be realized upon settlement. De-recognition of a tax
position that was previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for de-recognition of tax positions, and it
has expanded disclosure requirements. The adoption of FIN 48 resulted in, as a
cumulative effect, a non-cash charge, net of federal tax benefits, of $291,
recorded as a reduction to beginning retained earnings. The charge before
federal tax benefits was $411. The Company includes interest expense or income
as well as potential penalties on unrecognized tax positions as a component of
income tax expense in the consolidated statement of operations. The total amount
of accrued interest and penalties related to uncertain tax positions at January
1, 2007 was $89 and is included in other long-term obligations. All of our
unrecognized tax benefits, if recognized in future periods, would impact the
Company's effective tax rate. The Company remains open for examination by the
IRS for 2003 through 2006. For most of its other significant tax jurisdictions
(U.S. states), the Company's income tax returns are also open for examination
for 2003 through 2006. There was not a significant change in our liabilities for
unrecognized tax benefits during the nine months ended September 30, 2007.
NOTE 9 - SEGMENT INFORMATION
----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments:
specialty products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.
Business Segment Net Sales:
---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------------------------------
Specialty Products $ 8,248 $ 7,966 $ 24,676 $ 23,927
Encapsulated/Nutritional Products 12,880 10,349 36,126 30,676
BCP Ingredients 29,370 6,807 61,666 20,216
---------------------------------------------------------------------------------------------------
Total $ 50,498 $ 25,122 $ 122,468 $ 74,819
===================================================================================================
17
Business Segment Earnings:
---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------------------------------
Specialty Products $ 2,935 $ 2,863 $ 8,891 $ 8,400
Encapsulated/Nutritional Products 2,186 1,028 4,642 3,079
BCP Ingredients 2,072 1,090 5,791 2,841
Other expense (421) (3) (871) (84)
----------------------------------------------------------------------------------------------------
Earnings before income taxes $ 6,772 $ 4,978 $ 18,453 $ 14,236
===================================================================================================
The following table summarizes domestic (U.S.) and foreign sales for the three
and nine months ended September 30, 2007 and September 30, 2006:
---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------------------------------
Domestic $ 31,958 $ 22,275 $ 87,433 $ 67,505
Foreign 18,540 2,847 35,035 7,314
---------------------------------------------------------------------------------------------------
Total $ 50,498 $ 25,122 $ 122,468 $ 74,819
===================================================================================================
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------
Cash paid during the nine months ended September 30, 2007 and 2006 for income
taxes and interest is as follows:
----------------------------------------------------
Nine months ended
September 30,
2007 2006
----------------------------------------------------
Income taxes $ 4,005 $ 3,896
Interest $ 1,074 $ 186
====================================================
Other supplemental non-cash transactions resulting from acquisitions are
described in Notes 3 and 11.
NOTE 11 - LONG-TERM DEBT AND 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 $10,244 (the "European Term Loan"), the proceeds of which were used to fund
the Akzo Nobel Acquisition (see Note 3) 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
18
September 30, 2007, this interest rate was 5.41%. The European Loan Agreement
also provides for a short-term revolving credit facility of (euro)2,000,
translated to $2,854 as of September 30, 2007 (the "European Revolving
Facility"). 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 the European Revolving Facility in full as of September
30, 2007. The European Revolving Facility has a maturity date of May 1, 2008.
Management believes that such facility will be renewed in the normal course of
business.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "New Loan Agreement") providing for an unsecured term loan of
$29,000 (the "New Term Loan"), the proceeds of which were used to fund the
Chinook Acquisition (see Note 3). The New Term Loan is payable in equal monthly
installments of principal, each equal to 1/60th of the principal of the New Term
Loan, together with accrued interest, with remaining principal and interest
payable at maturity. The New Term Loan has a maturity date of March 16, 2010 and
is subject to a monthly interest rate equal to LIBOR plus 1%. At September 30,
2007, this interest rate was 6.75%. As of September 30, 2007, the Company has
prepaid $2,500 of the New Term Loan. The New Loan Agreement also provides for a
short-term revolving credit facility of $6,000 (the "New Revolving Facility").
The New Revolving Facility is subject to a monthly interest rate equal to LIBOR
plus 1%, and accrued interest is payable monthly. No amounts have been drawn on
the New Revolving Facility as of the date hereof. The New Revolving Facility has
a maturity date of May 31, 2009. Management believes that such facility will be
renewed in the normal course of business.
NOTE 12 - EMPLOYEE BENEFIT PLANS
--------------------------------
The Company sponsors a 401(k) savings and profit sharing plan for eligible
employees. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees.
The Company also currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of its Verona, Missouri facility.
Net periodic benefit cost for such retirement medical plan for the nine months
ended September 30, 2007 and September 30, 2006 was as follows:
--------------------------------------------------------------
2007 2006
--------------------------------------------------------------
Service Cost $ 22 $ 21
Interest Cost 31 29
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (14) (14)
Amortization of (gain) or loss (2) (2)
--------------------------------------------------------------
Net periodic benefit cost $ 37 $ 34
==============================================================
19
The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In February, 2007 the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", including an amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair market value
measurement, which is consistent with long-term measurement objectives for
accounting for financial instruments. This statement is effective beginning in
January 2008. The Company does not expect the adoption of this statement to be
significant to its consolidated financial statements.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. This statement is
effective beginning in January 2008. The Company is evaluating whether adoption
of this statement will result in a change to its fair value measurements.
20
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified in Item 1 of our Annual Report on Form 10-K for the
year ended December 31, 2006 and other factors that may be identified elsewhere
in this Report. Reference should be made to such factors and all forward-looking
statements are qualified in their entirety by the above cautionary statements.
Overview
--------
We develop, manufacture, distribute and market specialty performance ingredients
and products for the food, nutritional, pharmaceutical, animal health and
medical device sterilization industries. Our reportable segments are strategic
businesses that offer products and services to different markets. We presently
have three reportable segments: specialty products; encapsulated / nutritional
products; and BCP Ingredients.
Specialty Products
------------------
Our specialty products segment operates as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use
in the health care industry. It is used to sterilize a wide range of medical
devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without
negatively impacting the performance of the device being sterilized. Our 100%
ethylene oxide product is distributed in uniquely designed, recyclable
double-walled stainless steel drums to assure compliance with safety, quality
and environmental standards as outlined by the U.S. Environmental Protection
Agency (the "EPA") and the U.S. Department of Transportation. Our inventory of
these specially built drums, along with our two filling facilities, represents a
significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are our principal customers for this
product. In addition, we also sell single use canisters with 100% ethylene oxide
for use in medical device sterilization. As a fumigant, ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spices and other
seasoning materials.
We sell two other products, propylene oxide and methyl chloride, principally to
customers seeking smaller (as opposed to bulk) quantities and whose requirements
include timely delivery and safe handling. Propylene oxide is used for
fumigation in spice treatment, various chemical synthesis applications, to make
paints more durable, and for manufacturing specialty starches and textile
coatings. Methyl chloride is used as a raw material in specialty herbicides,
fertilizers, pharmaceuticals, malt and wine preservers.
21
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides microencapsulation,
granulation and agglomeration solutions to a variety of applications in food,
pharmaceutical and nutritional ingredients to enhance performance of nutritional
fortification, processing, mixing, packaging applications and shelf-life. Major
product applications are baked goods, refrigerated and frozen dough systems,
processed meats, seasoning blends, confections, nutritional supplements and
animal nutrition. We also market human grade choline nutrient products through
this segment for wellness applications. Choline is recognized to play a key role
in the development and structural integrity of brain cell membranes in infants,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. Our portfolio of granulated calcium carbonate
products are primarily used in, or in conjunction with, novel over-the-counter
and prescription pharmaceuticals for the treatment of osteoporosis, gastric
disorders and calcium deficiencies in the United States.
In the animal health industry, we market REASHURE(R) Choline, an encapsulated
choline product that boosts health and milk production in transition and early
lactation cows. Commercial sales are currently derived from the dairy industry
where REASHURE(R) delivers nutrient supplements that survive the rumen and are
biologically available, providing required nutritional levels during certain
weeks preceding and following calving, commonly referred to as the "transition
period" of the animal. Also, in animal health, we market NITROSHURETM, an
encapsulated urea supplement for lactating dairy cows that is designed to create
a slow-release nitrogen source for the rumen, allowing for greater flexibility
in feed rations for dairy nutritionists and producers, and NIASHURETM, our
microencapsulated niacin product for dairy cows. In addition, CMC manufactures,
sells and distributes chelated mineral supplements for use in animal feed
throughout the world. CMC's proprietary chelation technology provides enhanced
nutrient absorption for various species of domestic and companion animals.
BCP Ingredients
---------------
This segment manufactures and supplies raw choline chloride, an essential
nutrient for animal health, predominantly to the poultry and swine industries.
Choline plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. Choline deficiency can result in, among other
symptoms, reduced growth and perosis in poultry, and fatty liver, kidney
necrosis and general poor health condition in swine. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial
applications. Choline chloride is manufactured and sold in both an aqueous and
dry form.
We sell products for all three segments through our own sales force, independent
distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings for the nine months ended September 30, 2007 and September 30,
2006:
22
Business Segment Net Sales:
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
--------------------------------------------------------------------------------
Specialty Products $ 8,248 $ 7,966 $ 24,676 $ 23,927
Encap/Nutritional Products 12,880 10,349 36,126 30,676
BCP Ingredients 29,370 6,807 61,666 20,216
--------------------------------------------------------------------------------
Total $ 50,498 $ 25,122 $122,468 $ 74,819
================================================================================
Business Segment Earnings:
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------------
Specialty Products $ 2,935 $ 2,863 $ 8,891 $ 8,400
Encap/Nutritional Products 2,186 1,028 4,642 3,079
BCP Ingredients 2,072 1,090 5,791 2,841
Other expense (421) (3) (871) (84)
-------------------------------------------------------------------------------
Earnings bef. income taxes $ 6,772 $ 4,978 $ 18,453 $ 14,236
===============================================================================
23
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2007 compared to three months ended September
30, 2006
Net Sales
---------
Net sales for the three months ended September 30, 2007 were $50,498 compared
with $25,122 for the three months ended September 30, 2006, an increase of
$25,376 or 101.0%. Net sales for the specialty products segment were $8,248 for
the three months ended September 30, 2007 compared with $7,966 for the three
months ended September 30, 2006, an increase of $282 or 3.5%. 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 encapsulated /
nutritional products segment were $12,880 for the three months ended September
30, 2007 compared with $10,349 for the three months ended September 30, 2006, an
increase of $2,531 or 24.5%. This result was driven principally by increased
global sales of human nutritional and choline products, and includes $701 from
the Akzo Nobel Acquisition, as described in Note 3. 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. Net sales of $29,370 were realized for
the three months ended September 30, 2007 for the BCP Ingredients
(unencapsulated feed supplements) segment, as compared with $6,807 for the three
months ended September 30, 2006, an increase of $22,563 or 331.5%. This result
reflects sales from the customer list acquisition of Chinook Group Limited
("Chinook"), as described in Note 3, as well as sales from the Akzo Nobel
Acquisition. The Chinook and Akzo Nobel acquisitions contributed approximately
$21,338 of the revenue increase in this segment. The remaining increase
(approximately 18.5%) was due to increased volumes sold in the core dry and
aqueous choline, as well as the specialty industrial product lines.
Gross Margin
------------
Gross margin for the three months ended September 30, 2007 increased to $12,609
compared to $8,673 for the three months ended September 30, 2006, an increase of
$3,936 or 45.4%, due largely to the above-noted increase in sales. Gross margin
percentage for the three months ended September 30, 2007 was 25.0% compared to
34.5% for the three months ended September 30, 2006. This decrease in gross
margin percentage reflects the impact of the acquisitions in the animal grade
choline business, which carry lower gross margins and was also a result of
higher raw material and fuel costs. Gross margin dollars for the specialty
products segment increased 5.3% as increases in sales volume and modest sales
price increases were partially offset by higher raw material prices. Gross
margin dollars in the encapsulated / nutritional products segment increased
39.8% as margins were favorably affected by increased volumes sold in the human
choline markets and specialty animal nutrition and health markets. Gross margin
dollars for the BCP Ingredients segment, while unfavorably impacted by certain
petro-chemical raw material cost increases, improved 194.4% and was favorably
affected by the previously noted increased sales volumes, and improved
productivity.
24
Operating Expenses
------------------
Operating expenses for the three months ended September 30, 2007 were $5,416
compared to $3,692 for the three months ended September 30, 2006, an increase of
$1,724 or 46.7%. This $1,724 increase was due primarily to $734 of additional
amortization expense, plus sales and technical personnel expense associated with
the Chinook and Akzo Nobel acquisitions. We also incurred approximately $160 of
commercial development expenses toward our pharmaceutical market initiatives in
the quarter. With these increases, operating expenses were 10.7% of sales or 4.0
percentage points less than the operating expenses as a percent of sales
incurred in last year's comparable quarter. During the three months ended
September 30, 2007 and 2006, the Company spent $613 and $549, respectively, on
research and development programs, substantially all of which pertained to the
Company's encapsulated / nutritional products segment for both human and animal
health.
Earnings From Operations
------------------------
Primarily as a result of the above-noted increase in sales, earnings from
operations for the three months ended September 30, 2007 were $7,193 as compared
to $4,981 for the three months ended September 30, 2006.
Other Expenses (Income)
-----------------------
Interest income for the three months ended September 30, 2007 totaled $96 as
compared to $13 for the three months ended September 30, 2006. Interest expense
was $672 for the three months ended September 30, 2007 compared to $16 for the
three months ended September 30, 2006. This increase is attributable to the
increase in average current and long-term debt resulting from the aforementioned
Chinook and Akzo Nobel acquisitions. Other income of $155 for the three months
ended September 30, 2007 is the result of favorable 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 for the three months ended September 30, 2007
and 2006 was 34.2% and 36.7%, 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.
Net Earnings
------------
Primarily as a result of the above-noted increase in sales, net earnings were
$4,457 for the three months ended September 30, 2007 as compared with $3,151 for
the three months ended September 30, 2006, an increase of 41.4%.
25
Nine months ended September 30, 2007 compared to Nine months ended September 30,
2006
Net Sales
---------
Net sales for the nine months ended September 30, 2007 were $122,468 compared
with $74,819 for the nine months ended September 30, 2006, an increase of
$47,649 or 63.7%. Net sales for the specialty products segment were $24,676 for
the nine months ended September 30, 2007 compared with $23,927 for the nine
months ended September 30, 2006, an increase of $749 or 3.1%. This increase was
principally due to an increase in sales volume along with modest price increases
for our ethylene oxide products for medical device sterilization partially
offset by a decline in sales of propylene oxide for starch processing. Net sales
for the encapsulated / nutritional products segment were $36,126 for the nine
months ended September 30, 2007 compared with $30,676 for the nine months ended
September 30, 2006, an increase of $5,450 or 17.8%. This increase was due
principally to increased volumes sold in the human choline markets partially
offset by slowness in sales of calcium products into the over-the-counter
pharmaceutical markets. 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. Net sales of $61,666 were realized for the nine months ended September
30, 2007 for the BCP Ingredients (unencapsulated feed supplements) segment, as
compared with $20,216 for the nine months ended September 30, 2006, an increase
of $41,450 or 205.0%. This result reflects sales from the customer list
acquisition of Chinook as well as sales from the Akzo Nobel Acquisition. This
increase was also due to increased volumes sold in the core dry and aqueous
choline product lines, and choline derivatives, along with modest price
increases in all product lines.
Gross Margin
------------
Gross margin for the nine months ended September 30, 2007 increased to $34,532
compared to $25,695 for the nine months ended September 30, 2006, an increase of
$8,837 or 34.4%, due largely to the above-noted increase in sales. Gross margin
percentage for the nine months ended September 30, 2007 was 28.2% compared to
34.3% for the nine months ended September 30, 2006. This decrease in gross
margin percentage reflects the initial impact of the acquisitions in the BCP
Ingredients business, which carry lower gross margins and was also a result of
higher raw material and fuel costs. Gross margin dollars for the specialty
products segment increased 7.1% due to improved productivity, resulting from
increases in sales volume, and modest increases in average selling price that
were initiated to offset higher raw material prices. Gross margin dollars in the
encapsulated / nutritional products segment increased 22.6% as margins were
favorably affected by increased volumes sold in the human choline markets and
specialty animal nutrition and health products, as described above. Gross margin
dollars for BCP Ingredients increased 176.3% and was favorably affected by
increased sales volumes and improved productivity.
Operating Expenses
------------------
Operating expenses for the nine months ended September 30, 2007 were $15,208
compared to $11,375 for the nine months ended September 30, 2006, an increase of
26
$3,833 or 33.7%. This $3,833 dollar increase was due primarily to additional
amortization expense, plus sales and technical personnel expense associated with
the Chinook and Akzo Nobel acquisitions. With these increases, operating
expenses were 12.4% of sales or 2.8 percentage points less than the operating
expenses as a percent of sales incurred in last year's comparable period. During
the nine months ended September 30, 2007 and 2006, the Company spent $1,797 and
$1,561, respectively, on research and development programs, substantially all of
which pertained to the Company's encapsulated / nutritional products segment for
both human and animal health.
Earnings From Operations
------------------------
Primarily as a result of the above-noted increase in sales, earnings from
operations for the nine months ended September 30, 2007 were $19,324 as compared
to $14,320 for the nine months ended September 30, 2006.
Other Expenses (Income)
-----------------------
Interest income for the nine months ended September 30, 2007 totaled $170 as
compared to $102 for the nine months ended September 30, 2006. This decrease is
attributable to the decrease in the average total cash balance. Interest expense
was $1,283 for the nine months ended September 30, 2007 compared to $186 for the
nine months ended September 30, 2006. This increase is attributable to the
increase in average current and long-term debt resulting from the aforementioned
Chinook and Akzo Nobel acquisitions. Other income of $242 for the nine months
ended September 30, 2007 is the result of favorable 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 for the nine months ended September 30, 2007
and 2006 was 35.2% and 36.3%, 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.
Net Earnings
------------
Primarily as a result of the above-noted increase in sales, net earnings were
$11,963 for the nine months ended September 30, 2007 as compared with $9,064 for
the nine months ended September 30, 2006, an increase of 32.0%.
27
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
As part of the June 30, 2005 acquisition of certain assets relating to the
encapsulation, agglomeration and granulation business of Loders Croklaan USA,
LLC, the asset purchase agreement provides for the contingent payment by the
Company of additional consideration based upon the volume of sales associated
with one particular product acquired by the Company during the three year period
following the acquisition. Such contingent consideration will be recorded as an
additional cost of the acquired product lines. No such contingent consideration
has been earned or paid in 2007.
The Company's other contractual obligations and commitments principally include
obligations associated with future minimum non-cancelable operating lease
obligations (including for the headquarters office space entered into in 2002).
As a result of the adoption of FIN 48 on January 1, 2007, we have a liability
for uncertain tax positions of $291. We are unable to reasonably estimate the
amount or timing of payments for this liability, if any. Other than the adoption
of FIN 48, there have been no significant changes to the Contractual Obligations
table, which was included in our Annual Report on Form 10-K for the year ended
December 31, 2006.
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash flow
to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. The Company
could seek additional bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
----
Cash and cash equivalents increased to $5,501 at September 30, 2007 from $5,189
at December 31, 2006. Working capital amounted to $22,379 at September 30, 2007
as compared to $19,295 at December 31, 2006, an increase of $3,084.
28
Operating Activities
--------------------
Cash flows from operating activities provided $8,409 for the nine months ended
September 30, 2007 compared to $14,313 for the nine months ended September 30,
2006. The decrease in cash flows from operating activities was primarily due to
an increase in accounts receivable resulting from our recently acquired Akzo
Nobel Methylamines and Choline business and the Chinook customer list
acquisition, which was completed in March 2007, in which we did not acquire
outstanding accounts receivable. Combined they contributed approximately $21,338
of revenue in 2007. This decrease was partially offset by an increase in net
earnings, depreciation and amortization expense.
Investing Activities
--------------------
Capital expenditures were $3,005 for the nine months ended September 30, 2007
compared to $1,235 for the nine months ended September 30, 2006. Cash paid for
the acquisition of certain business assets of Chinook Global Limited and the
Akzo Nobel Methylamines and Choline business was $40,640.
Financing Activities
--------------------
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 1,158,692 shares at 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 at an average cost of $8.03
per share, none of which remained in treasury at September 30, 2007. During the
nine months ended September 30, 2007, no additional shares have been 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 $10,244 (the "European Term Loan"), the proceeds of which were used to fund
the Akzo Nobel Acquisition (see Note 3) 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 September 30,
2007, this interest rate was 5.41%. The European Loan Agreement also provides
for a short-term revolving credit facility of (euro)2,000, translated to $2,854
as of September 30, 2007 (the "European Revolving Facility"). 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 the
European Revolving Facility in full as of September 30, 2007. The European
Revolving Facility has a maturity date of May 1, 2008. Management believes that
such facility will be renewed in the normal course of business.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "New Loan Agreement") providing for an unsecured term loan of
$29,000 (the "New
29
Term Loan"), the proceeds of which were used to fund the Chinook Acquisition
(see Note 3). The New Term Loan is payable in equal monthly installments of
principal, each equal to 1/60th of the principal of the New Term Loan, together
with accrued interest, with remaining principal and interest payable at
maturity. The New Term Loan has a maturity date of March 16, 2010 and is subject
to a monthly interest rate equal to LIBOR plus 1%. At September 30, 2007, this
interest rate was 6.75%. As of September 30, 2007, the Company has prepaid
$2,500 of the New Term Loan. The New Loan Agreement also provides for a
short-term revolving credit facility of $6,000 (the "New Revolving Facility").
The New Revolving Facility is subject to a monthly interest rate equal to LIBOR
plus 1%, and accrued interest is payable monthly. No amounts have been drawn on
the New Revolving Facility as of the date hereof. The New Revolving Facility has
a maturity date of May 31, 2009. Management believes that such facility will be
renewed in the normal course of business.
Proceeds from stock options exercised totaled $752 and $321 for the nine months
ended September 30, 2007 and 2006, respectively. Dividend payments were $1,596
and $1,045 for the nine months ended September 30, 2007 and 2006, respectively.
30
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 September 30, 2007 for this obligation is
$779. The postretirement plan is not funded. Historical cash payments made under
such plan have approximated $50 per year.
Critical Accounting Policies
----------------------------
Accounting for Uncertainty in Income Taxes
As discussed above, effective January 1 2007, the Company adopted the provisions
of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48"). This interpretation, among other things, creates a two-step approach
for evaluating uncertain tax positions. Recognition (step one) occurs when an
enterprise concludes that a tax position, based solely on its technical merits,
is more-likely-than-not to be sustained upon examination. Measurement (step two)
determines the amount of benefit that more-likely-than-not will be realized upon
settlement. De-recognition of a tax position that was previously recognized
would occur when a company subsequently determines that a tax position no longer
meets the more-likely-than-not threshold of being sustained. FIN 48 specifically
prohibits the use of a valuation allowance as a substitute for de-recognition of
tax positions, and it has expanded disclosure requirements. The adoption of FIN
48 resulted in a non-cash transition charge of $291, recorded as a reduction to
beginning retained earnings.
Other than the aforementioned adoption of FIN 48, there were no changes to the
Company's Critical Accounting Policies, as described in its December 31, 2006
Annual Report on Form 10-K, during the nine months ended September 30, 2007.
Related Party Transactions
--------------------------
The Company was not engaged in related party transactions during the nine months
ended September 30, 2007 and all transactions of the Company during such period
were at arms length.
31
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. The Company has no derivative financial instruments or
derivative commodity instruments, nor does the Company have any financial
instruments entered into for trading or hedging purposes. As of September 30,
2007, 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%, and a 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 September 30, 2007, would result in an increase or decrease in
annual interest expense and a corresponding reduction or increase in cash flow
of approximately $366. 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.
32
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated, as of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of the Company's disclosure controls and
procedures (including its internal controls and procedures.)
Based upon management's evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures were effective in
identifying the information required to be disclosed in the Company's
periodic reports filed with the Securities and Exchange Commission
("SEC"), including this Quarterly Report on Form 10-Q, and ensuring that
such information is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls
During the most recent fiscal quarter, there has been no significant
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
33
Part II. Other Information
Item 1A. Risk Factors
There have been no material changes in the Risk Factors identified in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
-------------------
By: /s/ Dino A. Rossi
----------------------------
Dino A. Rossi, President and
Chief Executive Officer
Date: November 9, 2007
34
Exhibit Index
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
35