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 March 31, 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 May 3, 2007 the registrant had 17,838,764 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
(Dollars in thousands, except per share data)
Unaudited
March 31, December 31,
Assets 2007 2006
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 3,690 $ 5,189
Accounts receivable 15,672 11,578
Inventories 12,451 9,918
Prepaid expenses 1,574 1,754
Deferred income taxes 470 416
------------ ------------
Total current assets 33,857 28,855
Property, plant and equipment, net 31,184 31,313
Goodwill 25,244 25,253
Intangible assets with finite lives, net 36,128 6,912
------------ ------------
Total assets $ 126,413 $ 92,333
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 3,138 $ 3,010
Accrued expenses 2,590 1,827
Accrued compensation and other benefits 939 1,869
Customer deposits and other deferred revenue 743 1,072
Current portion of long-term debt 5,800 --
Dividends payable -- 1,596
Income tax payable 1,759 186
Other short-term obligations 870 --
------------ ------------
Total current liabilities 15,839 9,560
Long-term debt 23,200 --
Deferred income taxes 6,513 6,627
Other long-term obligations 1,091 784
------------ ------------
Total liabilities 46,643 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; 17,832,883 shares issued
and outstanding at March 31, 2007 and 17,733,849 shares issued and outstanding at
December 31, 2006 795 788
Additional paid-in capital 11,647 10,393
Retained earnings 67,138 63,988
Accumulated other comprehensive income 190 193
------------ ------------
Total stockholders' equity 79,770 75,362
------------ ------------
Total liabilities and stockholders' equity $ 126,413 $ 92,333
============ ============
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
2007 2006
------------ ------------
Net sales $ 27,599 $ 24,597
Cost of sales 17,858 16,375
------------ ------------
Gross profit 9,741 8,222
Operating expenses:
Selling expenses 2,128 1,669
Research and development expenses 569 526
General and administrative expenses 1,702 1,558
------------ ------------
4,399 3,753
------------ ------------
Earnings from operations 5,342 4,469
Other expenses (income):
Interest (income) (45) (62)
Interest expense 84 86
Other, net (11) --
------------ ------------
Earnings before income tax expense 5,314 4,445
Income tax expense 1,873 1,587
------------ ------------
Net earnings $ 3,441 $ 2,858
============ ============
Net earnings per common share - basic $ 0.19 $ 0.16
============ ============
Net earnings per common share - diluted $ 0.19 $ 0.16
============ ============
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Three Months Ended
March 31,
2007 2006
------------ ------------
Cash flows from operating activities:
Net earnings $ 3,441 $ 2,858
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 952 787
Shares issued under employee benefit plans 130 117
Deferred income taxes (168) (8)
Stock compensation expense 392 262
Gain on sale of equipment (11) --
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (2,244) (148)
Inventories (692) 289
Prepaid expenses and other current assets 180 379
Income taxes 1,573 1,498
Customer deposits and other deferred revenue (329) (286)
Accounts payable and accrued expenses (40) (1,566)
Other long-term obligations 13 17
------------ ------------
Net cash provided by operating activities 3,197 4,199
------------ ------------
Cash flows from investing activities:
Capital expenditures (649) (263)
Proceeds from sale of property, plant & equipment 11 --
Cash paid for intangible assets acquired (116) (32)
Acquisition of assets (32,085) (17,058)
------------ ------------
Net cash used in investing activities (32,839) (17,353)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings 29,000 10,000
Principal payments on long-term debt -- (2,750)
Proceeds from stock options exercised 353 206
Excess tax benefits from stock compensation 386 96
Dividends paid (1,596) (1,045)
Other financing activities -- (3)
------------ ------------
Net cash provided by financing activities 28,143 6,504
------------ ------------
Decrease in cash and cash equivalents (1,499) (6,650)
Cash and cash equivalents beginning of period 5,189 12,996
------------ ------------
Cash and cash equivalents end of period $ 3,690 $ 6,346
============ ============
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(unaudited)
Three Months Ended
March 31,
2007 2006
------------ ------------
Net Earnings $ 3,441 $ 2,858
Other comprehensive income, net of tax:
Unfunded post retirement benefit plan - prior service cost and gain
amortized during period (3) --
------------ ------------
Comprehensive income $ 3,438 $ 2,858
============ ============
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 Balchem Corporation and/or its
subsidiaries, including BCP Ingredients, Inc., Balchem Minerals Corporation, and
Balchem B.V., 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 three months
ended March 31, 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 months ended March 31, 2007 and 2006, respectively,
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
March 31, 2007 March 31, 2006
--------------------------------------------------------------------------------
Cost of sales $ 44 $ 27
Operating expenses 348 235
Net earnings (269) (254)
Basic earnings per common share (0.02) (0.01)
Diluted earnings per common share $ (0.01) $ (0.01)
--------------------------------------------------------------------------------
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 $386 and $96 for the three
months ended March 31, 2007 and March 31, 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 shares to be
issued upon exercise of the outstanding options have been approved, reserved and
are adequate to cover all exercises. As of March 31, 2007, the plans had 725,853
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.
Option activity for the three months ended March 31, 2007 and 2006 is summarized
below:
7
--------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the three months Exercise Value Contractual
ended March 31, 2007 Shares (000s) Price ($000s) Term
--------------------------------------------------------------------------------
Outstanding as of
December 31, 2006 2,170 $ 10.13 $ 15,168
Granted -- --
Exercised (101) 3.49
Expired -- --
Forfeited (4) 13.65
--------------------------------------------------------------------------------
Outstanding as of 2,065
March 31, 2007 $ 10.45 $ 14,920 7.3
================================================================================
Exercisable as of
March 31, 2007 1,187 $ 7.77 $ 11,770 6.3
================================================================================
--------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the three months Exercise Value Contractual
ended March 31, 2006 Shares (000s) Price ($000s) Term
--------------------------------------------------------------------------------
Outstanding as of
December 31, 2005 2,153 $ 8.38 $ 10,479
Granted 15 15.06
Exercised (37) 5.58
Expired -- --
Forfeited (4) 9.24
--------------------------------------------------------------------------------
Outstanding as of
March 31, 2006 2,127 $ 8.48 $ 14,700 7.2
================================================================================
Exercisable as of
March 31, 2006 1,136 $ 6.12 $ 10,544 5.8
================================================================================
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 4.1% and 3.8%; and expected lives of 3.7 and
4.5 for the three months ended March 31, 2007 and 2006, respectively.
For the three months ended March 31, 2007 and 2006, the Company used a projected
expected life for each award granted based on historical experience of
employees' exercise behavior. For the three months ended March 31, 2007 and
2006, expected volatility is based on the Company's historical volatility
levels. For the three months ended March 31, 2007 and 2006, 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 months ended
March 31, 2007 and 2006 was as follows:
--------------------------------------------------------------------------------
Three Months Ended
March 31,
2007 2006
--------------------------------------------------------------------------------
Weighted-average fair value of options granted $ N/A $ 3.49
Total intrinsic value of stock options exercised ($000s) $ 1,201 $ 320
--------------------------------------------------------------------------------
Non-vested restricted stock activity for the three months ended March 31, 2007
and 2006 is summarized below:
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Three Months ended March 31, 2007 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2006 113 $ 16.40
Granted -- --
Vested -- --
Forfeited -- --
Non-vested balance as of March 31, 2007 113 $ 16.40
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Three Months ended March 31, 2006 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005 34 $ 13.22
Granted -- --
Vested -- --
Forfeited -- --
Non-vested balance as of March 31, 2006 34 $ 13.22
--------------------------------------------------------------------------------
As of March 31, 2007 and 2006, there was $3,619 and $2,159, respectively, of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. As of March 31, 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 2007 will be approximately $1,568.
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
9
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 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 772,461 shares at an average cost of
$4.11 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 900,000 shares, over and above those
772,461 shares previously repurchased under the program. Under this extension, a
total of 99,450 shares were purchased at an average cost of $12.05 per share,
none of which remained in treasury at March 31, 2007. During the three months
ended March 31, 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 - ACQUISITION OF CERTAIN ASSETS
--------------------------------------
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
$29,000, plus the value of certain product inventories estimated at
approximately $1,840. The acquisition closed effective the same date. On March
16, 2007, the Company and its principal bank entered into a new 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 acquisition. 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 March 31, 2007, this interest rate was 6.32%. The New
Loan Agreement also provides for a short-term revolving credit facility of $6
million (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.
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
10
settlement of any working capital or other adjustments. The preliminary purchase
price has been allocated as follows (in thousands):
------------------------------------------------------
Fair Value Recorded
in Purchase
Accounting
------------------------------------------------------
Customer list $ 29,201
Inventory 1,840
Short-term receivable 1,850
Short-term obligation (870)
Other 73
------------------------------------------------------
Total $ 32,094
------------------------------------------------------
NOTE 4 - PRIOR YEAR ACQUISITION OF ASSETS
-----------------------------------------
Effective August 24, 2006, pursuant to an asset purchase agreement of the same
date, the Company, through its wholly owned subsidiaries BCP Ingredients 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.
NOTE 5 - PRIOR YEAR ACQUISITION OF STOCK
----------------------------------------
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 preliminary allocation of the total purchase price,
including acquisition costs, of CMC's net tangible and intangible assets was
based on the estimated fair values as of February 8, 2006. Adjustments to these
estimates will be included in the allocation of the purchase price of CMC upon
settlement of any working capital or other adjustments. The excess of the
purchase price over the identifiable intangible and net tangible assets was
allocated to goodwill. The purchase price has been allocated as follows (in
thousands):
11
------------------------------------------------------
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 11,894
Other intangible assets 5,334
------------------------------------------------------
Total $ 17,888
------------------------------------------------------
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.
-----------------------------------------------------------------
Actual Pro Forma
March 31, March 31,
2007 2006
-----------------------------------------------------------------
Net sales $ 27,599 $ 25,331
Net earnings $ 3,441 $ 2,893
Basic EPS $ .19 $ .17
Diluted EPS $ .19 $ .16
-----------------------------------------------------------------
NOTE 6 - INVENTORIES
--------------------
Inventories at March 31, 2007 and December 31, 2006 consisted of the following:
----------------------------------------------------------------------
March 31, December 31,
2007 2006
----------------------------------------------------------------------
Raw materials $ 4,420 $ 4,264
Finished goods 8,031 5,654
----------------------------------------------------------------------
Total inventories $ 12,451 $ 9,918
----------------------------------------------------------------------
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at March 31, 2007 and December 31, 2006 are
summarized as follows:
12
--------------------------------------------------------------------------------
March 31, December 31,
2007 2006
--------------------------------------------------------------------------------
Land $ 650 $ 650
Building 11,640 11,640
Equipment 38,545 38,545
Construction in Progress 1,896 1,247
--------------------------------------------------------------------------------
52,731 52,082
Less: Accumulated depreciation 21,547 20,769
--------------------------------------------------------------------------------
Net property, plant and equipment $ 31,184 $ 31,313
--------------------------------------------------------------------------------
NOTE 8 - INTANGIBLE ASSETS
--------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
accounting for a business combination and define an intangible asset. Goodwill
and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but are instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
As of December 31, 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 $25,244 and $25,253 at March 31, 2007
and December 31, 2006, respectively, subject to the provisions of SFAS Nos. 141
and 142.
As of March 31, 2007 and December 31, 2006, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$37,188 and $7,799, respectively, less accumulated amortization of $1,060 and
$887, respectively. At March 31, 2007, the gross carrying amount included a
customer list acquired as part of the Chinook acquisition, as described in Note
3.
Identifiable intangible assets with finite lives at March 31, 2007 and December
31, 2006 are summarized as follows:
13
-----------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization at
(in years) 3/31/07 at 3/31/07 12/31/06 12/31/06
-----------------------------------------------------------------------------------------------------
Customer lists 10 $ 34,089 $ 619 $ 4,888 $ 497
Regulatory
re-registration costs 10 28 -- 28 --
Patents & trade secrets 15-17 1,567 244 1,550 221
Trademarks & trade names 17 876 107 876 94
Other 5 628 90 457 75
-----------------------------------------------------------------------------------------------------
$ 37,188 $ 1,060 $ 7,799 $ 887
-----------------------------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $173 for the
first three 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 $2,670, approximately $3,545 per annum for 2008 and 2009,
$3,537 per annum for 2010 and 2011 and $3,520 in 2012. At March 31, 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 consolidated balance sheets.
There were no changes to the useful lives of intangible assets subject to
amortization during the three months ended March 31, 2007.
NOTE 9 - NET EARNINGS PER SHARE
-------------------------------
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
-------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended March 31, 2007 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 3,441 17,686,624 $ .19
Effect of dilutive securities - stock options 697,908
------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $ 3,441 18,384,532 $ .19
-------------------------------------------------------------------------------------------------
14
-------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended March 31, 2006 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 2,858 17,393,940 $ .16
Effect of dilutive securities - stock options 843,838
------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $ 2,858 18,237,778 $ .16
-------------------------------------------------------------------------------------------------
The Company had stock options for 384,525 and 493,575 common shares at March 31,
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 - 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 three months ended March 31, 2007. With
each year our tax exposure rolls forward with incremental increases expected
based on continued growth and no changes are foreseen to this trend at present.
NOTE 11 - 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
15
products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.
Business Segment Net Sales:
---------------------------------------------------------------
Three Months Ended
March 31
2007 2006
---------------------------------------------------------------
Specialty Products $ 8,061 $ 7,951
Encapsulated/Nutritional Products 11,500 9,789
BCP Ingredients 8,038 6,857
---------------------------------------------------------------
Total $ 27,599 $ 24,597
---------------------------------------------------------------
Business Segment Earnings:
---------------------------------------------------------------
Three Months Ended
March 31
2007 2006
---------------------------------------------------------------
Specialty Products $ 2,903 $ 2,772
Encapsulated/Nutritional
Products 1,243 1,039
BCP Ingredients 1,196 658
Interest and other expense (28) (24)
---------------------------------------------------------------
Earnings before income
taxes $ 5,314 $ 4,445
---------------------------------------------------------------
NOTE 12- SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------
Cash paid during the three months ended March 31, 2007 and 2006 for income taxes
and interest is as follows:
---------------------------------------------------------------
Three Months Ended
March 31
2007 2006
---------------------------------------------------------------
Income taxes $ 82 $ 2
Interest $ 84 $ 86
---------------------------------------------------------------
NOTE 13 - LONG TERM DEBT AND CREDIT AGREEMENTS
----------------------------------------------
On March 16, 2007, the Company and its principal bank entered into a new 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 (the "Acquisition"), as described in 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 March 31, 2007, this interest rate was 6.32%. The New Loan
Agreement also provides for a short-term
16
revolving credit facility of $6 million (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 1, 2008.
NOTE 14 - EMPLOYEE BENEFIT PLANS
--------------------------------
The Company sponsors a 401(k) savings and profit sharing plan for eligible
employees. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees.
The Company also currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of its Verona, Missouri facility.
Net periodic benefit cost for such retirement medical plan for the three months
ended March 31, 2007 and March 31, 2006 was as follows:
------------------------------------------------------------------
2007 2006
------------------------------------------------------------------
Service Cost $ 7 $ 8
Interest Cost 10 13
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (5) (5)
Amortization of (gain) or loss (1) 1
------------------------------------------------------------------
Net periodic benefit cost $ 11 $ 17
------------------------------------------------------------------
The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.
NOTE 15 - LICENSE AGREEMENT
---------------------------
On November 7, 2005, the Company entered into a license agreement (the "License
Agreement") with Project Management and Development Co., Ltd. ("PMD"), a
corporation organized under the laws of Great Britain. The License Agreement
gives PMD the right to utilize the Company's proprietary continuous
manufacturing technology for the production of aqueous choline chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride production facility at PMD's Al-JuBail, Saudi Arabia
petrochemical facility, currently scheduled for completion in late 2009.
The License Agreement provides PMD with the exclusive right to use Company
Technology in certain countries, as well as the non-exclusive right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License Agreement further provides that the Company will be PMD's exclusive
North American distributor for said products during the term of the agreement.
The License Agreement
17
terminates either 10 years from the start-up of the PMD's production facility or
December 31, 2020, whichever is earlier.
Pursuant to the License Agreement, PMD will pay the Company a license fee of
$1,400 and fees of $840 for the delivery by the Company of certain preliminary
drawings, specifications, process design documents containing Company
Technology, and additional training. These fees are to be paid in installments
upon achievement of certain performance milestones set forth in the License
Agreement.
The Company will provide certain performance guarantees associated with Company
Technology. In the event that the PMD manufacturing facility, if properly
designed and constructed, fails to attain said performance guarantees,
liquidated damages may be assessed, but not exceeding 70% of the license fee.
The Company is using the percentage of completion method to recognize revenue
and expenses related to the License Agreement and the efforts-expended method
for measuring the progress to completion. As of March 31, 2007, the Company has
recognized $1,000 of income and $515 in expenses since the inception of the
agreement.
NOTE 16 - 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.
NOTE 17 - SUBSEQUENT EVENTS
---------------------------
On April 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 for a provisional purchase price of approximately $6,281. Such
amount is subject to adjustment after the closing based upon actual finished
goods and raw materials inventory as of the closing date, as well as
reconciliation of the other estimated constituents of the provisional purchase
price. The parties believe the final purchase price will be fully settled no
later than 90 days after closing.
18
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified in Item 1 of our Annual Report on Form 10-K for the
year ended December 31, 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.
19
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides microencapsulation,
granulation and agglomeration solutions to a variety of applications in food,
pharmaceutical and nutritional ingredients to enhance performance of nutritional
fortification, processing, mixing, packaging applications and shelf-life. Major
product applications are baked goods, refrigerated and frozen dough systems,
processed meats, seasoning blends, confections, nutritional supplements and
animal nutrition. We also market human grade choline nutrient products through
this segment for wellness applications. Choline is recognized to play a key role
in the structural integrity of cell membranes, processing dietary fat,
reproductive development and neural functions, such as memory and muscle
function. Our portfolio of granulated calcium carbonate products are primarily
used in, or in conjunction with, novel over-the-counter and prescription
pharmaceuticals for the treatment of osteoporosis, gastric disorders and calcium
deficiencies in the 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 conditions in swine. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial
applications. Choline chloride is manufactured and sold in both an aqueous and
dry form.
We sell products for all three segments through our own sales force, independent
distributors and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings for the three months ended March 31, 2007 and 2006:
20
Business Segment Net Sales:
------------------------------------------------------------------
Three Months Ended
March 31
2007 2006
------------------------------------------------------------------
Specialty Products $ 8,061 $ 7,951
Encapsulated/Nutritional Products 11,500 9,789
BCP Ingredients 8,038 6,857
------------------------------------------------------------------
Total $ 27,599 $ 24,597
------------------------------------------------------------------
Business Segment Earnings:
------------------------------------------------------------------
Three Months Ended
March 31
2007 2006
------------------------------------------------------------------
Specialty Products $ 2,903 $ 2,772
Encapsulated/Nutritional Products 1,243 1,039
BCP Ingredients 1,196 658
Interest and other expense (28) (24)
------------------------------------------------------------------
Earnings before income taxes $ 5,314 $ 4,445
------------------------------------------------------------------
21
RESULTS OF OPERATIONS
---------------------
Three months ended March 31, 2007 compared to three months ended March 31, 2006
Net Sales
---------
Net sales for the three months ended March 31, 2007 were $27,599 compared with
$24,597 for the three months ended March 31, 2006, an increase of $3,002 or
12.2%. Net sales for the specialty products segment were $8,061 for the three
months ended March 31, 2007 compared with $7,951 for the three months ended
March 31, 2006, an increase of $110 or 1.4%. This increase was principally due
to an increase in sales volume of ethylene oxide for medical device
sterilization. Net sales for the encapsulated / nutritional products segment
were $11,500 for the three months ended March 31, 2007 compared with $9,789 for
the three months ended March 31, 2006, an increase of $1,711 or 17.5%. This
increase was due principally to increased volumes sold in the human choline,
animal health and chelated mineral markets. This increase was partially offset
by decreased volumes sold in the human food and pharmaceutical markets. Net
sales of $8,038 were realized for the three months ended March 31, 2007 for the
BCP Ingredients (unencapsulated feed supplements) segment, which markets choline
for the poultry and swine industries as well as industrial choline derivative
products, as compared with $6,857 for the three months ended March 31, 2006, an
increase of $1,181 or 17.2%. This increase was due to increased volumes sold in
the dry choline, aqueous choline, and specialty industrial product lines. This
increase in sales volume was also partially a result of the Chinook acquisition,
as described in Note 3.
Gross Margin
------------
Gross margin for the three months ended March 31, 2007 increased to $9,741
compared to $8,222 for the three months ended March 31, 2006, an increase of
$1,519 or 18.5%, due largely to the above-noted increase in sales. Gross margin
percentage for the three months ended March 31, 2007 was 35.3% compared to 33.4%
for the three months ended March 31, 2006. This increase in gross margin
percentage was primarily a result of product mix, increased production volumes
and lower raw material prices. Gross margin for the specialty products segment
increased 6.3% primarily due to increased sales volume. Gross margin in the
encapsulated / nutritional products segment increased 18.7% as margins were
favorably affected by product mix as well as sales volumes, as described above.
Gross margin for BCP Ingredients increased 81.1% and was favorably affected by
increased sales volumes of choline chloride and specialty derivative products.
Operating Expenses
------------------
Operating expenses for the three months ended March 31, 2007 were $4,399
compared to $3,753 for the three months ended March 31, 2006, an increase of
$646 or 17.2%. This increase was primarily a result of increased payroll costs
for new hires. Total operating expenses as a percentage of sales were 15.9% for
the three months ended March 31, 2007 compared to 15.3% for the three months
ended March 31, 2006. During the three months ended March 31, 2007 and 2006, the
Company spent $569 and $526, respectively, on research and development programs,
substantially all of which pertained to the
22
Company's encapsulated / nutritional products segment for both food and animal
feed applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for the three months
ended March 31, 2007 were $5,342 as compared to $4,469 for the three months
ended March 31, 2006.
Other Expenses (Income)
-----------------------
Interest income for the three months ended March 31, 2007 totaled $45 as
compared to $62 for the three months ended March 31, 2006. This decrease is
attributable to a decrease in the average total cash balance on-hand during the
quarter. Interest expense was $84 for the three months ended March 31, 2006
compared to $86 for the three months ended March 31, 2006. Other income of $11
for the three months ended March 31, 2007 represents the net gain on the sale of
equipment.
Income Tax Expense
------------------
The Company's effective tax rate for the three months ended March 31, 2007 and
2006 was 35.2% and 35.7%, respectively.
Net Earnings
------------
As a result of the foregoing, net earnings were $3,441 for the three months
ended March 31, 2007 as compared with $2,858 for the three months ended March
31, 2006, an increase of 20.4%.
23
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. As of December 31, 2006, such
contingent consideration of $23 has been earned and paid. No such contingent
consideration has been earned and 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).
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash flow
to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. The Company
could seek additional bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
----
Cash and cash equivalents decreased to $3,690 at March 31, 2007 from $5,189 at
December 31, 2006. The $1,499 decrease resulted primarily from net cash used in
investing activities of $32,839, principally for the acquisition of certain
choline chloride business assets of Chinook Global Limited, offset by net cash
provided by operating activities and financing activities of $3,197 and $28,143,
respectively. Working capital amounted to $18,018 at March 31, 2007 as compared
to $19,295 at December 31, 2006, a decrease of $1,277.
Operating Activities
--------------------
Cash flows from operating activities provided $3,197 for the three months ended
March 31, 2007 compared to $4,199 for the three months ended March 31, 2006. The
decrease in cash flows from operating activities was primarily due to increases
in accounts receivable and inventories as well as a decrease in customer
deposits and deferred revenue. This decrease was partially offset by an increase
in net earnings, depreciation and amortization expense, stock compensation
expense and income taxes payable.
24
Investing Activities
--------------------
Capital expenditures were $649 for the three months ended March 31, 2007
compared to $263 for the three months ended March 31, 2006. Cash paid for the
acquisition of certain choline chloride business assets of Chinook Global
Limited was $32,094. Cash received as part of the working capital adjustment for
the 2006 acquisition of all the outstanding common stock of Chelated Minerals
Corporation was $9.
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 772,461 shares at an average cost of
$4.11 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 900,000 shares, over and above those
772,461 shares previously repurchased under the program. A total of 99,450
shares were purchased at an average cost of $12.05 per share, none of which
remained in treasury at March 31, 2007. 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 March 16, 2007, the Company and its principal bank entered into a new 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 (the "Acquisition"), as described in 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 March 31, 2007, this interest rate was 6.32%. 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 in 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.
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
(the "CMC Acquisition"), as described in Note 5, in part. The remaining balance
of the purchase price of the CMC Acquisition was funded through Balchem's cash
on hand. The Company repaid in full the $10,000 of principal under the Term Loan
in 2006.
Proceeds from stock options exercised totaled $353 and $206 for the three months
ended March 31, 2007 and 2006, respectively. Dividend payments were $1,596 and
$1,045 for the three months ended March 31, 2007 and 2006, respectively.
25
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 March 31, 2006 for this obligation is $745.
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 three months ended March 31, 2007.
Related Party Transactions
--------------------------
The Company was not engaged in related party transactions during the three
months ended March 31, 2007 and all transactions of the Company during such
period were at arms length.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. The Company has no derivative financial instruments or
derivative commodity instruments, nor does the Company have any financial
instruments entered into for trading or hedging purposes. Foreign sales are
generally billed in U.S. dollars. As of March 31, 2007, the Company's only
borrowings were under a bank term loan, which bears interest at LIBOR plus
1.00%. A 100 basis point increase or decrease in interest rates, applied to the
Company's borrowings at March 31, 2007, would result in an increase or decrease
in annual interest expense and a corresponding reduction or increase in cash
flow of approximately $290. The Company believes that its business operations
are not exposed in any material respect to market risk relating to foreign
currency exchange risk or commodity price risk.
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.
27
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 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.
Exhibit 32.3 Asset Purchase Agreement dated March 16,
2007, by and between BCP Ingredients, Inc.
and Chinook Global Limited (incorporated by
reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated March 21,
2007).
Exhibit 32.4 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 21, 2007).
Exhibit 32.5 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 21,
2007).
Exhibit 32.6 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 21, 2007).
Exhibit 32.7 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 21, 2007).
28
Exhibit 32.8 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 21, 2007).
Exhibit 32.9 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 21, 2007).
Exhibit 32.10 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 21, 2007).
Exhibit 32.11 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 to the Company's
Current Report on Form 8-K dated April 4,
2007).
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: May 10, 2007
29
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.
Exhibit 32.3 Asset Purchase Agreement dated March 16,
2007, by and between BCP Ingredients, Inc.
and Chinook Global Limited (incorporated by
reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated March 21,
2007).
Exhibit 32.4 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 21, 2007).
Exhibit 32.5 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 21,
2007).
Exhibit 32.6 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 21, 2007).
Exhibit 32.7 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 21, 2007).
Exhibit 32.8 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 21, 2007).
30
Exhibit 32.9 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 21, 2007).
Exhibit 32.10 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 21, 2007).
Exhibit 32.11 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 to the Company's
Current Report on Form 8-K dated April 4,
2007).
31