FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) |X| Quarterly Report Pursuant to Section 13 or 15 (d)15(d) of
|X| the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2005March 31, 2006
or
|_|
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
- ------------------------------------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer 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, (as
definedor a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).
YesAct. (Check
one):
Large accelerated filer |_| Accelerated filer |X| NoNon-accelerated filer |_|
IndicatedIndicate by check mark whether the registrantRegistrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of NovemberMay 8, 20052006 the registrant had 7,704,15011,611,470 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
September 30,Assets March 31, December 31,
Assets------ 2006 2005
2004
------ ------------ -------------------- --------
Current assets:
Cash and cash equivalents $ 10,7236,346 $ 12,73412,996
Accounts receivable 10,311 7,99611,754 11,521
Inventories 8,761 6,3198,803 8,540
Prepaid income taxes -- 315143
Prepaid expenses 685 1,5271,411 1,790
Deferred income taxes 351 321
------------ ------------271 276
-------- --------
Total current assets 30,831 29,21228,585 35,266
Property, plant and equipment, net 24,499 24,18825,905 24,400
Goodwill 24,850 13,327 6,368
Intangible assets with finite lives, net 2,155 637
------------ ------------7,416 2,148
-------- --------
Total assets $ 70,81286,756 $ 60,405
============ ============75,141
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 1,5572,627 $ 1,4662,562
Accrued expenses 2,174 1,2121,864 2,601
Accrued compensation and other benefits 1,656 1,492861 1,756
Customer deposits 165 852and other deferred revenue 900 1,186
Current portion of long-term debt 2,000 --
Dividends payable -- 6851,045
Income tax payable 5111,355 --
------------ -------------------- --------
Total current liabilities 6,063 5,7079,607 9,150
Long-term debt 5,250 --
Deferred income taxes 3,588 3,4616,370 4,015
Other long-term obligations 1,039 1,003
------------ ------------1,057 1,043
-------- --------
Total liabilities 10,690 10,171
------------ ------------22,284 14,208
-------- --------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 25,000,000 shares;
7,730,51711,649,645 shares issued and 7,727,21711,606,970 shares outstanding
at September 30, 2005March 31, 2006 and 7,621,15811,640,964 shares issued and
11,576,948 shares outstanding at December 31, 2004 515 5082005 776 776
Additional paid-in capital 7,976 6,3298,304 8,008
Retained earnings 51,719 43,39756,164 53,306
Treasury stock, at cost: 3,30042,675 and 064,016 shares at September 30, 2005March 31, 2006
and December 31, 2004,2005, respectively (88) --
------------ ------------(772) (1,157)
-------- --------
Total stockholders' equity 60,122 50,234
------------ ------------64,472 60,933
-------- --------
Total liabilities and stockholders' equity $ 70,81286,756 $ 60,405
============ ============75,141
======== ========
See accompanying notes to condensed consolidated financial statementsstatements.
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,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 21,145 $ 17,356 $ 59,969 $ 49,449
Cost of sales 13,496 11,137 38,026 31,594
----------- ----------- ----------- -----------
Gross profit 7,649 6,219 21,943 17,855
Operating expenses:
Selling expenses 1,200 1,252 3,511 3,612
Research and development expenses 492 383 1,537 1,252
General and administrative expenses 1,226 1,154 3,854 3,444
----------- ----------- ----------- -----------
2,918 2,789 8,902 8,308
----------- ----------- ----------- -----------
Earnings from operations 4,731 3,430 13,041 9,547
Other expenses (income):
Interest (income) (46) (22) (155) (74)
Interest expense 2 61 6 174
Other, net (82) -- (82) (12)
----------- ----------- ----------- -----------
Earnings before income tax expense 4,857 3,391 13,272 9,459
Income tax expense 1,833 1,231 4,950 3,482
----------- ----------- ----------- -----------
Net earnings $ 3,024 $ 2,160 $ 8,322 $ 5,977
=========== =========== =========== ===========
Net earnings per common share - basic $ 0.39 $ 0.29 $ 1.08 $ 0.80
=========== =========== =========== ===========
Net earnings per common share - diluted $ 0.37 $ 0.28 $ 1.04 $ 0.78
=========== =========== =========== ===========
Three Months Ended
March 31,
2006 2005
-------- --------
Net sales $ 24,597 $ 19,340
Cost of sales 16,375 12,158
-------- --------
Gross profit 8,222 7,182
Operating expenses:
Selling expenses 1,669 1,229
Research and development expenses 526 485
General and administrative expenses 1,558 1,437
-------- --------
3,753 3,151
-------- --------
Earnings from operations 4,469 4,031
Other expenses (income):
Interest (income) (62) (40)
Interest expense 86 2
-------- --------
Earnings before income tax expense 4,445 4,069
Income tax expense 1,587 1,501
-------- --------
Net earnings $ 2,858 $ 2,568
======== ========
Net earnings per common share - basic $ 0.25 $ 0.23
======== ========
Net earnings per common share - diluted $ 0.24 $ 0.21
======== ========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
NineThree Months Ended
September 30,March 31,
2006 2005
2004
----------- -----------
Unaudited
----------------- --------
Cash flows from operating activities:
Net earnings $ 8,3222,858 $ 5,9772,568
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,078 2,607787 670
Shares issued under employee benefit plans 215 207117 88
Deferred income taxes 97 185(8) 118
Stock compensation expense 262 --
Excess tax benefits from stock compensation -- 17
Provision for doubtful accounts (32) 7
Provision for income tax benefit of stock options 176 -- Gain on sale of equipment (82) (12)18
Changes in assets and liabilities net of effects of acquisition of assets:acquisition:
Accounts receivable (1,474) (457)(148) (1,399)
Inventories (1,717) (1,159)289 157
Prepaid expenses and other current assets 842 107379 487
Income taxes 826 9791,498 1,353
Customer deposits (687) --and other deferred revenue (286) (203)
Accounts payable and accrued expenses 1,217 304(1,566) (342)
Other long-term obligations 46 43
----------- -----------17 16
-------- --------
Net cash provided by operating activities 9,827 8,788
----------- -----------4,199 3,548
-------- --------
Cash flows from investing activities:
Capital expenditures (1,186) (820)
Proceeds from sale of property, plant & equipment 389 91(263) (377)
Cash paid for intangiblesintangible assets acquired (102) (76)(32) (18)
Acquisition of assets (11,419)(17,058) --
----------- ------------------- --------
Net cash used in investing activities (12,318) (805)
----------- -----------(17,353) (395)
-------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 10,000 --
Principal payments on long-term debt (2,750) -- (1,307)
Proceeds from stock options and warrants exercised 1,263 1,814206 860
Excess tax benefits from stock compensation 96 --
Dividends paid (1,045) (685) (389)
Purchase of treasury stock (88) --
Other financing activities (10) (10)
----------- -----------(3) (4)
-------- --------
Net cash provided by financing activities 480 108
----------- -----------6,504 171
-------- --------
Increase (decrease) in cash and cash equivalents (2,011) 8,091(6,650) 3,324
Cash and cash equivalents beginning of period 12,996 12,734
9,239
----------- ------------------- --------
Cash and cash equivalents end of period $ 10,7236,346 $ 17,330
=========== ===========16,058
======== ========
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 20042005 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. References in this report to "the Company"
mean Balchem and/or its subsidiarysubsidiaries, BCP Ingredients, Inc., Balchem Minerals
Corporation and Chelated Minerals Corporation, as the context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X and therefore do not include some information and
notes necessary to conform to annual reporting requirements. The results of
operations for the three and nine months ended September 30, 2005March 31, 2006 are not necessarily
indicative of the operating results expected for the full year.
NOTE 2 - CMC ACQUISITION
- ------------------------
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation ("BMC"), completed an acquisition (the "Acquisition") of
all of the outstanding capital stock of Chelated Minerals Corporation ("CMC"), a
privately held Utah corporation, for a purchase price of $17,350 subject to
adjustment based upon CMC's actual working capital and other adjustments. On
February 6, 2006, the Company and its principal bank entered into a new Loan
Agreement (the "New Loan Agreement") providing for an unsecured term loan of
$10,000 (the "Term Loan"), the proceeds of which were used to fund the
acquisition, in part. The remaining balance of the purchase price of the
Acquisition was funded through Balchem's cash on hand. The Term Loan is payable
in equal monthly installments of principal, together with accrued interest, and
has a maturity date of March 1, 2009. The Term Loan is subject to an interest
rate equal to LIBOR plus 1.00%. At March 31, 2006, this interest rate was 5.64%.
The preliminary allocation of the total purchase price, including acquisition
costs, of CMC's net tangible and intangible assets was based on their estimated
fair values as of February 8, 2006. Adjustments to these estimates will be
included in the allocation of the purchase price of CMC upon settlement of any
working capital or other adjustments. The excess of the purchase price over the
identifiable intangible and net tangible assets was allocated to goodwill. The
preliminary purchase price has been allocated as follows (in thousands):
5
- ----------------------------------------------------------------
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 11,475
Financing costs 49
Other intangible assets 5,285
- ----------------------------------------------------------------
Total $ 17,469
- ----------------------------------------------------------------
The above 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 consolidated financial statements include the
results of operations of the acquired product lines from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2005 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned acquisition
had occurred at the beginning of the periods presented and is not intended to be
a projection of future results.
- --------------------------------------------------
Pro-Forma
Three Months Ended
March 31,
2006 2005
- --------------------------------------------------
Net sales $ 25,331 $ 20,939
Net earnings 2,893 2,684
Basic EPS .25 .23
Diluted EPS .24 .23
- --------------------------------------------------
NOTE 3 - ACQUISITION OF ASSETS
- ------------------------------
Effective June 30, 2005, pursuant to an asset purchase agreement of same date
(the "Asset Purchase Agreement"), the Company acquired certain assets of Loders
Croklaan USA, LLC ("Seller") relating to the encapsulation, agglomeration and
granulation business for a purchase price including acquisition costs of $9,885
plus $725 for certain product inventories and $809 for certain accounts
receivable. With the exception of $985, which was paid during the quarter ended
June 30, 2005, all of such payment was made on July 1, 2005 from the Company's
cash reserves.
6
The Asset Purchase Agreement also provides for the contingent payment by the
Company of additional consideration to Seller 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.
The preliminary allocation of the purchase price of the acquisition has been assigned to the
long-term net assets acquired as follows:
- ----------------------------------------------------------------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
- ----------------------------------------------------------------------------------------------------------------
Equipment $ 1,436
Customer List 1,350
Patent 140
Goodwill 6,959
- ----------------------------------------------------------------------------------------------------------------
Total $ 9,885
- -----------------------------------------------------------
5
-----------------------------------------------------
The purchase price allocations have been made on the basis of estimates made by
the Company. The financial statement items and amounts are subject to subsequent
revision to give effect to reclassifications related to the allocation between
identifiable assets, intangible assets and goodwill and for other
pre-acquisition contingencies that may become resolved during subsequent
periods.
The above 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 consolidated financial statements include the
results of operations of the acquired product lines from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 20042005 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 aforementioned acquisition
had occurred at the beginning of the periods presented and is not intended to be
a projection of future results.
==================================================================- -----------------------------------------------------
Pro-Forma
Three Months Ended
September 30,March 31, 2005
2004
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 21,145 $ 18,58620,999
Net earnings 3,024 2,4643,044
Basic EPS .39 .33.27
Diluted EPS .37 .32
==================================================================
==================================================================
Pro-Forma
Nine.26
- ----------------------------------------------------
7
NOTE 4 - STOCK INCENTIVE PLAN
- -----------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based
Payment," (SFAS 123R). SFAS 123R establishes the accounting for transactions in
which an entity pays for employee services in share-based payment transactions.
SFAS 123R 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 adjusted for 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. Prior year financial
statements are not restated. The Company's results for the three months ended
September 30,
2005 2004
- ------------------------------------------------------------------
NetMarch 31, 2006 include an additional $27 in cost of sales $ 63,256 $ 53,190and $235 of operating
expenses relating to the adoption of SFAS 123R. Net earnings 8,894 6,975
Basic EPS 1.16 .93
Diluted EPS 1.11 .91
==================================================================
NOTE 3 - STOCK OPTION PLAN
- --------------------------
At September 30,were reduced by
$254, or $0.02 per basic and diluted share. Additionally, upon adoption of SFAS
123R, excess tax benefits related to stock compensation are presented as a cash
inflow from financing activities. This change had the effect of decreasing cash
flows from operating activities and increasing cash flows from financing
activities by $96.
For the three months ended March 31, 2005, the Company hasaccounted for stock based
employee compensation plans.
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB)under APB Opinion No. 25 "Accounting for Stock Issued to
Employees" andEmployees." Compensation cost related interpretations. As such, compensation
expense isto stock options issued to employees was
recorded on
6
the date of grant only if the currentgrant-date market price of the underlying stock exceedsexceeded
the exercise price. No stock based employee compensation cost is
reflected in net earnings, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The Company has adopted the disclosure standards of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure an amendment of FASB Statement 123," which require the
Company to provide pro forma net earnings and pro forma earnings per share
disclosures for employee and director stock option grants made as if the
fair-value based method of accounting for stock options as defined in SFAS No.
123 has been applied. The following table illustrates the effect on net earnings
and earnings per share amounts if the Company had applied thea fair value recognition
provisions of SFAS No. 123based method had been applied to stock based employee compensation:all
awards.
=================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,- -----------------------------------------------------------------------------------------
March 31, 2005
2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Earnings Net$ 2,568
Stock-based employee compensation expense included in net earnings, as reported $ 3,024 $ 2,160 $ 8,322 $ 5,977
Deduct: Total stock-basednet
of related tax effects --
Stock-based employee compensation expense determined under fair value
based method, net of related tax effects (154) (216) (462) (602)
--------------------------------------------------------------
Net209
- -----------------------------------------------------------------------------------------
Pro forma net earnings as adjusted $ 2,870 $ 1,944 $ 7,860 $ 5,375
==============================================================
Earnings2,359
- -----------------------------------------------------------------------------------------
Basic earnings per common share:
Basic EPS asAs reported $ .39 $ .29 $ 1.08 $ .80
Basic EPS as adjusted $ .37 $ .26 $ 1.02 $ .720.23
Pro forma 0.21
Diluted EPS asearnings per common share:
As reported $ .370.21
Pro forma 0.20
- -----------------------------------------------------------------------------------------
8
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, 2006, the plans had 716,940
shares available for future awards. Compensation expense for stock options and
restricted stock awards is recognized on a straight-line basis over the vesting
period, generally three years for stock options and seven years for restricted
stock awards. Certain awards provide for accelerated vesting if there is a
change in control or other qualifying events (as defined in the plans).
Option activity for the three months ended March 31, 2006 is summarized below:
- -----------------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Aggregate Remaining
Exercise Intrinsic Contractual
Shares Price Value Term
- -----------------------------------------------------------------------------------------------
Outstanding as of December 31, 2005
1,435,465 $ .2812.577 -- --
Granted 8,800 22.588 -- --
Exercised (23,698) 8.500 -- --
Expired -- -- -- --
Forfeited (3,000) 13.866 -- --
- -----------------------------------------------------------------------------------------------
Outstanding as of
March 31, 2006 1,417,567 $ 1.0412.700 $ .78
Diluted EPS14,700 7.2
===============================================================================================
Exercisable as adjustedof
March 31, 2006 758,547 $ .359.177 $ .25 $ .98 $ .70
=================================================================================================================10,544 5.8
===============================================================================================
The fair value of each stock option granted during the nine months ended
September 30, 2005 and 2004grant is estimated on the date of the grant using
the Black-Scholes option pricingoption-pricing model with the following weighted average
assumptions:
=========================================================================================
2005 2004
- -----------------------------------------------------------------------------------------
Expected life (years) 4 6
Expected volatility 28% 27%
Expected dividend yield .36% .32%
Risk-free interest rate 3.83% 3.64%
Weighted average fair value of options
granted $7.78 $10.06
=========================================================================================
7dividend yields of 0.4% and 0.4%; expected volatilities of 26% and
29%; risk-free interest rates of 3.8% and 3.7%; and expected lives of 4.5 and
4.9 for the three months ended March 31, 2006 and 2005, respectively.
For the three month periods ended March 31, 2006 and March 31, 2005, the Company
used a projected expected life for each award granted based on historical
experience of employees' exercise behavior. For the three month periods ended
March 31, 2006 and March 31, 2005, expected volatility is based on historical
volatility levels. For the three month periods ended March 31, 2006 and March
31, 2005, dividend yields are based on 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.
The weighted-average fair value of options granted during the three months ended
March 31, 2006 and 2005 was $5.23 and $3.59, respectively. The total intrinsic
value of options exercised during the three months ended March 31, 2006 and 2005
was $320 and $767, respectively.
9
Non-vested restricted stock activity for the three months ended March 31, 2006
is summarized below:
- -------------------------------------------------------------------------------
Weighted
Average Grant
Shares Date Fair Value
- -------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005 22,500 $ 19.83
Granted - -
Vested - -
Forfeited - -
Non-vested balance as of March 31, 2006 22,500 $ 19.83
- -------------------------------------------------------------------------------
As of March 31, 2006 there was $2,159 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plans; that cost is expected to be recognized over a weighted-average period of
two years.
NOTE 45 - INVENTORIES
- --------------------
Inventories at September 30, 2005March 31, 2006 and December 31, 2004 consist2005 consisted of the following:
============================================================================
September 30,- -----------------------------------------------------------------------------
March 31, December 31,
2006 2005
2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Raw materials $ 4,3214,168 $ 2,3054,809
Finished goods 4,440 4,0144,635 3,731
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Total inventories $ 8,7618,803 $ 6,319
============================================================================8,540
- -----------------------------------------------------------------------------
NOTE 56 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment at September 30, 2005March 31, 2006 and December 31, 20042005 are
summarized as follows:
============================================================================
September 30,- ------------------------------------------------------------------------------
March 31, December 31,
2006 2005
2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Land $ 290650 $ 290
Building 10,256 10,24111,067 10,509
Equipment 30,154 28,61932,258 31,196
Construction in Progress 1,044 387595 332
- ----------------------------------------------------------------------------
41,744 39,537------------------------------------------------------------------------------
44,570 42,327
Less: Accumulated depreciation 17,245 15,34918,665 17,927
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 24,49925,905 $ 24,188
============================================================================24,400
- ------------------------------------------------------------------------------
NOTE 67 - 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
10
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, 2004,2005, the Company performed an impairment test of its
goodwill balance. As of such date, the Company's reporting units' fair values
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company performswill perform its impairment test eachnext on
December 31.31, 2006.
The Company hashad goodwill in the amount of $24,850 and $13,327 and $6,368 at September 30,
2005March 31, 2006
and December 31, 2004,2005, respectively, subject to the provisions of SFAS Nos. 141
and 142. At September 30, 2005,March 31, 2006, the balance of goodwill includes the cost in excess
of net 8
assets acquired of both the CMC acquisition, as described in Note 2, of
$11,475 and the acquired assets of the Loders Croklaan USA, LLC encapsulation,
agglomeration and granulation business, described in note 2,Note 3, of $6,959.
As of September 30, 2005March 31, 2006 and December 31, 2004,2005, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$2,391$7,748 and $7,915,$2,432, respectively, less accumulated amortization of $236$332 and $7,278,$284,
respectively. At September 30, 2005,March 31, 2006, the gross carrying amount included a customer
list, trade names and trade secrets acquired as part of the CMC acquisition, as
described in Note 2, as well as a customer list and patent acquired as part of
the acquisition of certain assets of the Loders Croklaan USA, LLC encapsulation,
agglomeration and granulation business, described in note 2. At December 31, 2004, the gross carrying amount
and accumulated amortization included other customer lists and re-registration
costs that were fully amortized during 2004. These fully amortized customer
lists and re-registration costs were written-off on March 31, 2005 and,
therefore, were not included in the gross carrying amount and accumulated
amortization at September 30, 2005.Note 3.
Identifiable intangible assets with finite lives at September 30, 2005March 31, 2006 and December
31, 20042005 are summarized as follows:
===============================================================================================================- -------------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization at Amount at Amortization
(In(in years) 9/30/3/31/06 3/31/06 12/31/05 at 9/30/12/31/05
12/31/04 at 12/31/04
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Customer lists 10 $ 4,888 $ 101 $ 1,350 34 $ 6,760 $6,760
Re-registration67
Regulatory re-registration
costs 10 1134 -- 356 35618 --
Patents & trade secrets 15-17 746 131 538 1051,501 151 753 141
Trademarks & trade names 17 209 46 207 37868 52 210 49
Other 5 75 25 54 20457 28 101 27
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$ 2,3917,748 $ 236332 $ 7,915 $7,278
===============================================================================================================2,432 $ 284
- -------------------------------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $74$49 for the
first ninethree months of 2005.2006. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
remainder of 20052006 is $49 and$506, approximately $195$661 per annum for 20062007 through 2009.2009,
$651 in 2010 and $643 in 2011. At September 30, 2005,March 31, 2006, there were no identifiable
intangible assets with indefinite useful lives as defined by SFAS No. 142.
Identifiable intangible assets are reflected in "Intangible assets with finite
lives, net" in the Company's consolidated balance sheets.
11
There were no changes to the useful lives of intangible assets subject to
amortization during the ninethree months ended September 30, 2005.March 31, 2006.
NOTE 78 - 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:
9
==============================================================================================================- ---------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2005March 31, 2006 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $3,024 7,727,868 $.39$2,858 11,595,960 $.25
Effect of dilutive securities - stock options 367,454
---------562,559
-----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options $3,024 8,095,322 $.37
==============================================================================================================$2,858 12,158,519 $.24
- ---------------------------------------------------------------------------------------------------------
==============================================================================================================- ---------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2004March 31, 2005 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $2,160 7,534,202 $.29$2,568 11,491,070 $.23
Effect of dilutive securities - stock options 247,885
---------433,699
-----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options $2,160 7,782,087 $.28
==============================================================================================================
==============================================================================================================
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2005 (Numerator) (Denominator) Amount$2,568 11,924,769 $.21
- --------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $8,322 7,699,352 $1.08
Effect of dilutive securities - stock options 326,902
---------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $8,322 8,026,254 $1.04
==============================================================================================================
==============================================================================================================
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2004 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $5,977 7,482,472 $.80
Effect of dilutive securities - stock options 196,259
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $5,977 7,678,731 $.78
==============================================================================================================---------------------------------------------------------------------------------------------------------
10
The Company had stock options covering 204,000329,050 and 106,80076,965 shares at September
30,March 31,
2006 and 2005, and 2004, 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 89 - 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 (includes products
relating to the the afforementioned June 30, 2005 acquisition of certain assets
of the Loders Croklaan USA, LLC encapsulation, agglomeration and granulation
business) and BCP Ingredients, its
unencapsulated feed supplements segment.
12
Business Segment Net Sales:
====================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Specialty Products $ 7,352 $ 7,171 $ 22,088 $ 21,315
Encapsulated/Nutritional Products 8,503 6,504 23,131 18,527
BCP Ingredients 5,290 3,681 14,750 9,607
- --------------------------------------------------------------------------------------------------------------------
Total $ 21,145 $ 17,356 $ 59,969 $ 49,449
====================================================================================================================
- ------------------------------------------------------------------
Three Months Ended
March 31
2006 2005
- ------------------------------------------------------------------
Specialty Products $ 7,951 $ 7,133
Encapsulated/Nutritional Products 9,789 7,841
BCP Ingredients 6,857 4,366
- ------------------------------------------------------------------
Total $ 24,597 $ 19,340
- ------------------------------------------------------------------
Business Segment Earnings:
====================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Specialty Products $ 2,846 $ 2,697 $ 8,377 $ 7,795
Encapsulated/Nutritional Products 945 345 2,431 901
BCP Ingredients 940 388 2,233 851
Interest and other income (expense) 126 (39) 231 (88)
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 4,857 $ 3,391 $ 13,272 $ 9,459
====================================================================================================================
- -----------------------------------------------------------------
Three Months Ended
March 31,
2006 2005
- -----------------------------------------------------------------
Specialty Products $ 2,772 $ 2,605
Encapsulated/Nutritional Products 1,039 877
BCP Ingredients 658 549
Interest and other income (expense) (24) 38
- -----------------------------------------------------------------
Earnings before income taxes $ 4,445 $ 4,069
- -----------------------------------------------------------------
NOTE 9-10- SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------------------------------------------------
Cash paid during the ninethree months ended September 30,March 31, 2006 and 2005 and 2004 for income taxes
and interest is as follows:
============================================================
Nine- --------------------------------------------------
Three months ended
September 30,March 31,
2006 2005
2004
- --------------------------------------------------------------------------------------------------------------
Income taxes $ 3,8462 $ 2,36513
Interest $ 686 $ 174
============================================================
11
2
- --------------------------------------------------
NOTE 10 -11- COMMON STOCK
- -------------------------------------------
On December 16, 2004,15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be distributedeffected in the form of
a stock dividend to shareholders of record on December 30, 2004.2005. Such
distribution was made on January 20, 2005.2006. Accordingly, the stock split was
recognized by reclassifying the par value of the additional shares resulting
from the split, from additional paid-in capital to common stock. All references
to number of common shares and per share amounts except shares authorized in the
accompanying condensed consolidated financial statements were retroactively
adjusted to reflect the effect of the stock split.
13
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury. In June 2005, the board of
directors authorized another extension to the stock repurchase program for up to
an additional 600,000 shares, that is, over and above those 514,974 shares
previously repurchased under the program. During the three months ended
September 30, 2005,Under this extension, a total of
3,30066,300 shares have been purchased at an average cost of $26.83 per share, all$18.07, 42,675 of which
remain in treasury at September 30, 2005.March 31, 2006. During the three months ended March 31,
2006, no additional shares have been purchased.
NOTE 1112 - LONG TERM DEBT AND CREDIT AGREEMENTS
- ----------------------------------------------
There was no debt outstanding at September 30, 2005. On June 1, 2001,February 6, 2006, the Company and its principal bank entered into a loan agreementnew Loan
Agreement (the "Loan"New Loan Agreement") providing for aan unsecured term loan of
$13,500$10,000 (the "Term Loan"), the proceeds of which were used to fund the CMC
acquisition of certain assets of DCV, Inc. and
its affiliate Ducoa L.P.(the "Acquisition"), (describedas described in Note 4 of the Company's Form 10-K as of
December 31, 2004). During the quarter ended December 31, 2004, the Company
prepaid $7,839, thenote 2, in part. The remaining
balance of the Term Loan. Borrowings at September
30, 2004 included borrowings underpurchase price of the Acquisition was funded through Balchem's
cash on hand. The Term Loan bearingis payable in equal monthly installments of
principal, together with accrued interest, atand has a maturity date of March 1,
2009. The Term Loan is subject to an interest rate equal to LIBOR plus 1.25% (2.90% at September 30, 2004)1.00%. Certain provisions of the Term Loan require
maintenance of certain financial ratios, limit future borrowings, and impose
certain other requirements as contained in the agreement.
The Loan Agreement also provides for aan unsecured short-term revolving credit
facility of $3,000 (the "Revolving"New Revolving Facility"). Borrowings under the New
Revolving Facility bear interest at LIBOR plus 1.00%. At March 31, 2006, this
interest rate was 5.64%. No amounts have been drawn on the New Revolving
Facility as of September 30, 2005.the date hereof. The New Revolving Facility was extended and now expires on May
31, 2006.in February,
2007. Management believes that such facility will be renewed in the normal
course of business. IndebtednessDuring the quarter ended March 31, 2006, the Company repaid
$2,750 of principal under the New Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.Agreement.
NOTE 1213 - 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 12
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 ninethree months
ended September 30March 31, 2006 and March 31, 2005 was as follows:
=========================================================================- ------------------------------------------------------------------
2006 2005
2004
- -------------------------------------------------------------------------------------------------------------------------------------------
Service Cost $ 248 $ 238
Interest Cost 38 3713 13
Expected return on plan assets -- --- -
Amortization of transition obligation -- --- -
Amortization of prior service cost (11) (8)(5) (3)
Amortization of (gain) or loss -- --1 -
-------------------------------------------------------------------------- ------------------------------------------------------------------
Net periodic benefit cost $ 5117 $ 52
=========================================================================18
- ------------------------------------------------------------------
14
The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("the Act") was signed into law. The Act introduced a plan sponsor
subsidy based on a percentage of a beneficiary's annual prescription drug
benefits, within defined limits, and the opportunity for a retiree to obtain
prescription drug benefits under Medicare. There is no impact of the subsidy on
the postretirement benefit obligation and net periodic cost as Medicare eligible
retirees are not covered under the Company's plan.
NOTE 1314 - LICENSE AGREEMENT
- ---------------------------
On November 7, 2005, the Company entered into a license agreement (the "License
Agreement") with Project Management and Development Co., Ltd. ("PMD"), a
corporation organized under the laws of Great Britain. The License Agreement
gives PMD the right to utilize the Company's proprietary continuous
manufacturing technology for the production of aqueous choline chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride production facility at PMD's Al-JuBail, Saudi Arabia
petrochemical facility, currently scheduled for completion in 2008.
The License Agreement provides PMD with the exclusive right to use Company
Technology in certain countries, as well as the non-exclusive right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License Agreement further provides that the Company will be PMD's exclusive
North American distributor for said products during the term of the agreement.
The License Agreement terminates either 10 years from the start-up of the PMD's
production facility or December 31, 2020, whichever is earlier. Pursuant to the
License Agreement, PMD will pay the Company a license fee of $1,400 and fees of
$840 for the delivery by the Company of certain preliminary drawings,
specifications, process design documents containing Company Technology, and
additional training. These fees are to be paid in installments upon achievement
of certain performance milestones set forth in the License Agreement.
The Company will provide certain performance guarantees associated with Company
Technology. In the event that the PMD manufacturing facility, if properly
designed and constructed, fails to attain said performance guarantees,
liquidated damages may be assessed, 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, 2006, the Company has
recognized $395 of income and $344 in expenses since the inception of the
agreement. For the three months ended March 31, 2006, the Company has recognized
$237 of
15
income and $207 in expenses, which are included in net sales and cost of sales,
respectively, in the BCP Ingredients segment.
NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. This statement was
originally effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. On April 14, 2005, the SEC
adopted a new rule that amended the compliance dates of SFAS No. 123(R) to
require implementation no later than the beginning of the first fiscal year
after June 15, 2005 (the year beginning January 1, 2006 for the Company). The
Company is currently evaluating the impact of this standard on its results of
operations and financial position.
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 151, "Inventory Costs." The new statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to
clarify the
13
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This statement requires that those items be
recognized as current period charges and requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. This statement is effective for fiscal years
beginning after June 15, 2005. The Company has adopted the provisions of this
statement as of January 1, 2006 and does not expect adoption of this statement to have a
material impact on its financial condition or results of operations.
NOTE 14 - SUBSEQUENT EVENT
- --------------------------
On November 2, 2005, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation, entered into a definitive stock purchase agreement with
Chelated Minerals Corporation ("CMC"), a privately held Utah corporation, and
its shareholders to acquire all of the outstanding capital stock of CMC for a
purchase price of $17,350. CMC is a manufacturer and global marketer of mineral
nutritional supplements for livestock, pet and poultry feeds. The purchase price
is subject to adjustment based upon CMC's working capital as of the closing
date. The parties anticipate closing the transaction during the fourth quarter
of 2005. For further details of this transaction, please refer to the Company's
Form 8-K filing submitted to the U.S. Securities and Exchange Commission on
November 7, 2005.
1416
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 the
Company's expectation or belief concerning future events that involve risks and
uncertainties. The actions and performance of the Company 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 the Company's
Annual Report on Form 10-K for the year ended December 31, 20042005 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
- --------
The Company develops, manufactures, distributes and markets specialty
performance ingredients and products for the food, pharmaceutical, feed and
medical device sterilization industries. The Company's reportable segments are
strategic businesses that offer products and services to different markets. The
Company presently has three reportable segments: specialty products,products;
encapsulated / nutritional productsproducts; and BCP Ingredients.
Specialty Products
- ------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, in returnable
cylinders, primarily for use
in the health care industryindustry. It is used to sterilize a wide range of medical
devices.devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without
negatively impacting the performance or appearance of the device being
sterilized. The Company's 100% ethylene oxide product is distributed by the
Company in uniquely designed, recyclable double-walled stainless steel drums to
assure compliance with safety, quality and environmental standards as outlined
by the U.S. Environmental Protection Agency (the "EPA") and the U.S. Department
of Transportation. The Company's inventory of these specially built drums, along
with the Company's three filling facilities, represent a significant capital
investment. Contract sterilizers, medical device manufacturers, and medical gas
distributors are the Company's principal customers for this product. In
addition, the Company sells 100%As a
fumigant, ethylene oxide in single use canisters to
customers that sell medical device sterilization equipment commonly found in
hospitals or doctor's offices. Blends of ethyleneblends and propylene oxide are sold as fumigants
and are highly effective in
killing bacteria, fungi, and insects in spices and other seasoning materials. PropyleneIn
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization.
We sell two other products, propylene oxide and methyl chloride, are sold principally to
customers seeking smaller (as opposed to bulk) quantities.
Management believes that future successquantities whose requirements
include timely delivery and safe handling. Propylene oxide is used for
fumigation in this segment is highly dependent on
the Company's ability to maintain its strong reputation for excellent quality,
safetyspice treatment and customer service. The Companyin various chemical synthesis applications. It
is also requiredutilized in manufacturing operations to maintain an EPA
regulatory permit.make paints more durable, and
for manufacturing specialty starches and textile coatings. Methyl chloride is
used as a raw material in specialty herbicides, fertilizers and pharmaceuticals,
as well as in malt and wine preservers.
Our specialty products segment operates as ARC Specialty Products.
17
Encapsulated / Nutritional Products
- -----------------------------------
The encapsulated / nutritional products segment provides mircoencapsulationmicroencapsulation 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 end product
applications are baked
15
goods, refrigerated and frozen dough systems, processed
meats, seasoning blends, confections, nutritional supplementationssupplements and animal
nutrition. Management believesWe also market human grade choline nutrient products through this
segment'sindustry segment for wellness applications. Choline is recognized to play a key
strengths are its proprietary technology
and end-product application capabilities. The success of the Company's efforts
to increase revenue in this segment is highly dependent on the timing of
marketing launches of new productsrole in the U.S.structural integrity of cell membranes, processing dietary fat,
reproductive development and international food market by
the Company's customersneural functions, such as memory and prospects. The Company, through its proprietary
technologymuscle
function. Balchem's portfolio of granulated calcium carbonate products are
primarily used in, or in conjunction with, novel over-the-counter and
applications expertise, continues to develop new
microencapsulation products designed to solve and respond to customer problems
and needs. Sales of our REASHURE(TM) and NITROSHURE(TM) productsprescription pharmaceuticals for the animal
nutritiontreatment of osteoporosis, gastric
disorders and health industry are highly dependent on dairy industry economics
as well ascalcium deficiencies in the ability of the Company to leverage the results of existing
successful university research onUnited States.
In the animal health benefitsindustries, Balchem markets 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
to dairy cows during certain weeks preceding and following calving, commonly
referred to as the "transition period" of these products.the animal. Also marketed in animal
health is 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 industries throughout the world. CMC's
proprietary chelation technology provides enhanced nutrient absorption for
various species of domestic and companion animals.
BCP Ingredients
- ---------------
BCP IngredientsThis segment manufactures and supplies 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 marketedmanufactured and sold into industrial applications. Management believes that successCholine chloride is
manufactured and sold in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation for
excellent qualityboth an aqueous and customer service. In addition, the Company must continue
to realize production efficiencies in order to maintain its low-cost position to
effectively compete for market share in a highly competitive marketplace.dry form.
The Company sells products for all three segments through its own sales force,
independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings for the three and nine months ended September 30March 31 (in thousands):
18
Business Segment Net Sales:
===================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Specialty Products $ 7,352 $ 7,171 $ 22,088 $ 21,315
Encapsulated/Nutritional Products 8,503 6,504 23,131 18,527
BCP Ingredients 5,290 3,681 14,750 9,607
- -------------------------------------------------------------------------------------------------------------------
Total $ 21,145 $ 17,356 $ 59,969 $ 49,449
===================================================================================================================
16
- -----------------------------------------------------------------
Three Months Ended
March 31
2006 2005
- -----------------------------------------------------------------
Specialty Products $ 7,951 $ 7,133
Encapsulated/Nutritional Products
9,789 7,841
BCP Ingredients 6,857 4,366
- -----------------------------------------------------------------
Total $ 24,597 $ 19,340
- -----------------------------------------------------------------
Business Segment Earnings:
===================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Specialty Products $ 2,846 $ 2,697 $ 8,377 $ 7,795
Encapsulated/Nutritional Products 945 345 2,431 901
BCP Ingredients 940 388 2,233 851
Interest and other income (expense) 126 (39) 231 (88)
- -------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 4,857 $ 3,391 $ 13,272 $ 9,459
===================================================================================================================
- -----------------------------------------------------------------
Three Months Ended
March 31,
2006 2005
- -----------------------------------------------------------------
Specialty Products $ 2,772 $ 2,605
Encapsulated/Nutritional Products
1,039 877
BCP Ingredients 658 549
Interest and other income (expense)
(24) 38
- -----------------------------------------------------------------
Earnings before income taxes
$ 4,445 $ 4,069
- -----------------------------------------------------------------
Effective January 1, 2006, we adopted the fair value method of accounting for
stock-based compensation under Statement of Financial Accounting Standards No.
123 (revised 2004), Share Repurchase Program
- ------------------------
In June 1999,Based Payments ("SFAS 123R"). SFAS 123R allows public
companies to select from two alternative transition methods when adopting SFAS
123R, the boardmodified prospective application or the modified retrospective
application. We have elected to adopt the provisions of directors authorizedSFAS 123R using the
repurchasemodified prospective application. Under the modified prospective application,
the provisions of sharesSFAS 123R are applied to new awards and awards modified,
repurchased or cancelled after the effective date. Additionally, compensation
cost for the unvested portion of the
Company'sawards outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as of December 31, 2004, repurchased a total 514,974 shares at an average costJanuary 1, 2006 shall
be recognized as the requisite service is rendered after January 1, 2006.
Share-based compensation expense of $6.17 per share, none$262 was recognized in the first quarter of
which remain in treasury at December 31, 2004. In June
2005,2006 for the boardunvested portion of directors authorized another extension to the stock
repurchase programawards outstanding as of January 1, 2006. We
estimate that share-based compensation expense for up to an additional 600,000 shares, that is, over and
above those 514,974 shares previously repurchased under the program. During the
three months ended September 30, 2005, a total of 3,300 shares have been
purchased at an average cost of $26.83 per share, all of which remain in
treasury at September 30, 2005. During the month of October 2005, the company
purchased a total of 24,800 shares at an average cost of $ 26.92 per share. 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 among other factors on
its assessment of corporate cash flow and market conditions.2006 will be approximately
$1,048.
19
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2005March 31, 2006 compared to three months ended September
30, 2004March 31, 2005
Net Sales
- ---------
Net sales for the three months ended September 30, 2005March 31, 2006 were $21,145$24,597 compared with
$17,356$19,340 for the three months ended September 30, 2004,March 31, 2005, an increase of $3,789$5,257 or
21.8%27.2%. Net sales for the specialty products segment were $7,352$7,951 for the three
months ended September 30, 2005March 31, 2006 compared with $7,171$7,133 for the three months ended
September 30, 2004,March 31, 2005, an increase of $181$818 or 2.5%11.5%. This increase was principally due
to an increase in sales volume of ethylene oxide for medical device
sterilization and propylene oxide for starch modification as well as a
modest price increase adopted early in 2005 to help offset rising raw material
costs.modification. Net sales for the
encapsulated / nutritional products segment were $8,503$9,789 for the three months
ended September 30, 2005March 31, 2006 compared with $6,504$7,841 for the three months ended September 30, 2004,March 31,
2005, an increase of $1,999$1,948 or 30.7%24.8% This
17
increase was due principally to
increased volumes sold in the domestic foodhuman choline market and approximately $1,800$1,900
associated with the Company's new pharmaceutical, food, and foodchelated minerals
business lines resulting from the June 30, 2005 acquisition of certain
assets of the Loders Croklaan USA, LLC encapsulation, agglomerationasset and granulation business,CMC stock
acquisitions, as described in Note 2. The Company also experienced
volume improvements in the animal health industry relating to REASHURE(TM),
NITROSHURE(TM)Notes 3 and NIASHURE(TM), our microencapsulated niacin product for dairy
cows, and the human choline market. These increases were partially offset by a
decline in volumes sold in the international food and the nutritional supplement
product lines.2, respectively. Net sales of $5,290$6,857
were realized for the three months ended September 30, 2005March 31, 2006 for the BCP Ingredients
(unencapsulated feed supplements) segment, which markets choline additives for the poultry
and swine industries as well as industrial choline derivative products, as
compared with $3,681$4,366 for the three months ended September 30, 2004,March 31, 2005, an increase of
$1,609$2,491 or 43.7%57.1%. This increase was due to increased volumes sold in the dry
choline, aqueous choline, and specialty industrial product lines, along with
modest price increases in all three product lines.
Gross Margin
- ------------
Gross margin for the three months ended September 30, 2005March 31, 2006 increased to $7,649$8,222
compared to $6,219$7,182 for the three months ended September 30, 2004.March 31, 2005, an increase of
$1,040 or 14.5%, due largely to the above-noted increase in sales. Gross margin
percentage for the three months ended September 30, 2005March 31, 2006 was 36.2%33.4% compared to 35.8%37.1%
for the three months ended September 30, 2004. MarginsMarch 31, 2005. This decrease in gross margin
percentage was primarily a result of product mix, higher raw material and fuel
costs. Gross margin for the specialty products segment increased slightly as
increased sales volume in addition to
lower amortization expense,and sales prices were partially offset by increases in
raw material prices and distribution costs. Gross margin percentage in the encapsulated /
nutritional products segment also increased slightly23.3% as margins were favorably affected
by increased production, a result of greaterproduct mix as well as sales volumevolumes in the new product lines, as described
above. MarginsGross margin for BCP Ingredients increased 6.8%19.4% and were favorably
affected by increased productionsales volumes of choline chloride and specialty derivative
products.
Operating Expenses
- ------------------
Operating expenses for the three months ended September 30, 2005March 31, 2006 were $2,918$3,753
compared to $2,789$3,151 for the three months ended September 30, 2004,March 31, 2005, an increase of
$129$602 or 4.6%19.1%. This increase was primarily a result of increased payroll costs
charges for search feesnew hires and relocation expenses associated with new hires.relating to the adoption of the provisions of SFAS
No. 123R for stock-based compensation. Total operating expenses as a percentage
of sales were 13.8%15.3% for the
20
three months ended March 31, 2006 compared to 16.3% for the three months ended
September 30, 2005 compared to 16.1% for the three months ended September
30, 2004.March 31, 2005. During the three months ended September 30,March 31, 2006 and 2005, and 2004, the
Company spent $492$526 and $383,$484, respectively, on Company-sponsored research and development programs,
substantially all of which pertained to the 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 September 30, 2005March 31, 2006 were $4,731$4,469 as compared to $3,430$4,031 for the three months
ended September 30, 2004.
18
March 31, 2005.
Other expenses (income)
- -----------------------
Interest income for the three months ended September 30, 2005March 31, 2006 totaled $46$62 as
compared to $22$40 for the three months ended September 30, 2004.March 31, 2005. This increase is
attributable to the increase in the average total cash balance. Interest expense
was $86 for the three months ended March 31, 2006 compared to $2 for the three
months ended September 30, 2005 comparedMarch 31, 2005. This increase is attributable to $61 for the three months ended September 30, 2004. This decrease isincrease in
current and long-term debt resulting from the result of the
prepayment of the Company's outstanding loan balance in December 2004. Other
income of $82 for the three months ended September 30, 2005 represents the net
gainCMC acquisition on the sale of equipment.February 8,
2006.
Income Tax Expense
- ------------------
The Company's effective tax rate for the three months ended September 30,March 31, 2006 and
2005 was 35.7% and 2004 was 37.7% and 36.3%36.9%, respectively. This decrease in the effective tax rate
is attributable to a change in allocation relating to state income taxes. This
decrease was partially offset by the effect of recording the tax benefit
associated with the incentive stock option component of stock compensation
directly to equity, rather than in income tax expense, under SFAS 123R.
Net earnings
- ------------
As a result of the foregoing, net earnings were $3,024$2,858 for the three months
ended September 30, 2005March 31, 2006 as compared with $2,160$2,568 for the three months ended September 30, 2004,March
31, 2005, an increase of 40.0%11.3%.
Nine months ended September 30, 2005 compared to nine months ended September 30,
2004
Net Sales
- ---------
Net sales for the nine months ended September 30, 2005 were $59,969 compared
with $49,449 for the nine months ended September 30, 2004, an increase of
$10,520 or 21.3%. Net sales for the specialty products segment were $22,088 for
the nine months ended September 30, 2005 compared with $21,315 for the nine
months ended September 30, 2004, an increase of $773 or 3.6%. This increase was
due principally to greater sales volumes of ethylene oxide for medical device
sterilization and propylene oxide for starch modification as well as a modest
price increase adopted early in 2005 to help offset rising raw material costs.
This increase was partially offset by a decline in volumes sold in the ethylene
oxide blends product line and single use ethylene oxide canisters for use in
sterilization equipment. Net sales for the encapsulated / nutritional products
segment were $23,131 for the nine months ended September 30, 2005 compared with
$18,527 for the nine months ended September 30, 2004, an increase of $4,604 or
24.9%. This increase was due principally to increased volumes sold in the
domestic food market and approximately $1,800 associated with the Company's new
pharmaceutical and food business lines resulting from the June 30, 2005
acquisition of certain assets of the Loders Croklaan USA, LLC encapsulation,
agglomeration and granulation business, as described in Note 2. The Company also
experienced volume improvements in the animal health industry relating to
REASHURE(TM), NITROSHURE(TM) and NIASHURE(TM), our microencapsulated niacin
product for dairy cows, and the human choline market. These increases were
partially offset by a decline in volumes sold in the international food product
lines and the nutritional supplement product line. Net sales of $14,750 were
realized for the nine months ended September 30, 2005 in the BCP Ingredients
segment compared with $9,607 for the nine months ended September 30, 2004, an
increase of $5,143 or 53.5%. This increase was due to increased volumes sold in
the dry choline,
19
aqueous choline, and specialty industrial product lines, along with modest price
increases in all three product lines.
Gross Margin
- ------------
Gross margin for the nine months ended September 30, 2005 increased to $21,943
compared to $17,855 for the nine months ended September 30, 2004. Gross margin
percentage for the nine months ended September 30, 2005 was 36.6% as compared to
36.1% for the nine months ended September 30, 2004. Gross margin percentage for
the specialty products segment increased slightly as a result of increased sales
volume and product mix in addition to lower amortization expense, partially
offset by increases in raw material prices and distribution costs. Gross margin
percentage in the encapsulated / nutritional products segment increased 2.9% as
margins were favorably affected by increased production, a result of greater
sales volume as described above. Gross margin percentage in BCP Ingredients
increased 5.3% and was favorably affected by increased production volumes of
choline chloride and specialty derivative products.
Operating Expenses
- ------------------
Operating expenses for the nine months ended September 30, 2005 increased to
$8,902 from $8,308 for the nine months ended September 30, 2004, an increase of
$594 or 7.1%. Total operating expenses as a percentage of sales were 14.8% for
the nine months ended September 30, 2005 compared to 16.8% for the nine months
ended September 30, 2004. The increase in operating expense for the nine months
ended September 30, 2005 was principally a result of new hires, increased
charges for search fees associated with new hires and associated relocation
expenses. These increases were partially offset by a decrease in selling
expenses. During the nine months ended September 30, 2005 and 2004, the Company
spent $1,537 and $1,252, respectively, on Company-sponsored research and
development programs, substantially all of which pertained to the 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 nine months ended
September 30, 2005 were $13,041 as compared to $9,547 for the nine months ended
September 30, 2004.
Other expenses (income)
- -----------------------
Interest income for the nine months ended September 30, 2005 totaled $155 as
compared to $74 for the nine months ended September 30, 2004. This increase is
attributable to the increase in the average total cash balance. Interest expense
was $6 for the nine months ended September 30, 2005 compared to $174 for the
nine months ended September 30, 2004. This decrease is the result of the
prepayment of the Company's outstanding loan balance in December 2004. Other
income of $82 for the nine months ended September 30, 2005 represents the net
gain on the sale of equipment.
20
Income Tax Expense
- ------------------
The Company's effective tax rate for the nine months ended September 30, 2005
and 2004 was 37.3% compared to a 36.8% rate for the nine months ended September
30, 2004
Net earnings
- ------------
As a result of the foregoing, net earnings were $8,322 for the nine months ended
September 30, 2005 as compared with $5,977 for the nine months ended September
30, 2004.
21
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 as of September 30, 2005.March 31, 2006.
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. As described in
Note 14, the Company, on November 2, 2005, through its wholly owned subsidiary
Balchem Minerals Corporation, entered into a definitive stock purchase agreement
with Chelated Minerals Corporation ("CMC"), a privately held Utah corporation,
and its shareholders to acquire all of the outstanding capital stock of CMC for
a purchase price of $17,350. CMC is a manufacturer and global marketer of
mineral nutritional supplements for livestock, pet and poultry feeds. The
purchase price is subject to adjustment based upon CMC's working capital as of
the closing date. The parties anticipate closing the transaction during the
fourth quarter of 2005. 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 $10,723$6,346 at September 30, 2005March 31, 2006 from $12,734$12,996 at
December 31, 2004.2005. The $2,011$6,650 decrease resulted primarily from an increase in
net cash provided by operating activities and financing activities of $9,827$4,199 and
$480,$6,504, respectively, offset by net cash used in investing activities of
$12,318$17,353, principally for the acquisition of certain assetsall of the Loders Croklaan USA, LLC fluidized bed encapsulation and granulation businessoutstanding capital stock
of Chelated Minerals Corporation ("CMC") on June 30, 2005.February 8, 2006. Working capital
amounted to $24,768$18,978 at September 30, 2005March 31, 2006 as compared to $23,505$26,116 at December 31,
2004, an increase2005, a decrease of $1,263.
22
$7,138.
Operating Activities
- --------------------
Cash flows from operating activities provided $9,827$4,199 for the ninethree months ended
September 30, 2005March 31, 2006 compared to $8,788$3,548 for the ninethree months ended September 30,
2004.March 31, 2005. The
increase in cash flows from operating activities was primarily due to an increaseincreases
in net earnings, depreciation expense and accounts payablecurrent income taxes, and accrued expenses combined with a decrease
in prepaid expenses and prepaid income taxes.accounts receivable. This increase was partially offset by an increasedecreases in
accounts receivablepayable and inventoriesaccrued expenses as well as customer deposits and a
decrease in depreciation and amortization expense. The decrease in depreciation
and amortization resulted from the completion of amortization of a customer list
during the third quarter of 2004.other
deferred revenue.
22
Investing Activities
- --------------------
Property and equipmentCapital expenditures were $1,186$263 for the ninethree months ended September 30, 2005March 31, 2006
compared to $820$377 for the ninethree months ended September 30,
2004.March 31, 2005. Cash paid for the
acquisition of assets relating toall of the Loders Croklaan
USA, LLC fluidized bed encapsulation and granulation business,outstanding common stock of CMC, including acquisition
costs, net of acquisition accounts receivable collected, was $11,419. With the exception of $985, which was paid
during the quarter ended June 30, 2005, all of such payment was made on July 1,
2005 from the Company's cash reserves.$17,058.
Financing Activities
- --------------------
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury at December 31, 2004.treasury. In June 2005, the board of
directors authorized another extension to the stock repurchase program for up to
an additional 600,000 shares, that is, over and above those 514,974 shares
previously repurchased under the program. During the
three months ended September 30, 2005,Under this extension, a total of
3,30066,300 shares have been purchased at an average cost of $26.83 per share, all$18.07, 42,675 of which
remain in treasury at September 30, 2005.March 31, 2006. During the month of October 2005, the company
purchased a total of 24,800three months ended March 31,
2006, no additional shares at an average cost of $ 26.92 per share. 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 among other factors on
its assessment of corporate cash flow and market conditions.
There was no debt outstanding at September 30, 2005.have been purchased.
On June 1, 2001,February 6, 2006, the Company and its principal bank entered into a new Loan
Agreement (the "Loan"New Loan Agreement") providing for aan unsecured term loan of
$13,500$10,000 (the "Term Loan"), the proceeds of which were used to fund the CMC
acquisition of certain assets of DCV, Inc. and
its affiliate Ducoa L.P. During the quarter ended December 31, 2004, the Company
prepaid $7,839, the(the "Acquisition"), as described in note 2, in part. The remaining
balance of the Term Loan. Borrowings at September
30, 2004 included borrowings underpurchase price of the Acquisition was funded through Balchem's
cash on hand. The Term Loan bearingis payable in equal monthly installments of
principal, together with accrued interest, atand has a maturity date of March 1,
2009. The Term Loan is subject to an interest rate equal to LIBOR plus 1.25% (2.90% at September 30, 2004)1.00%. Certain provisions of the Term Loan require
maintenance of certain financial ratios, limit future borrowings, and impose
certain other requirements as contained in the agreement.
The Loan Agreement also provides for aan unsecured short-term revolving credit
facility of $3,000 23
(the "Revolving"New Revolving Facility"). Borrowings under the New
Revolving Facility bear interest at LIBOR plus 1.00%. At March 31, 2006, this
interest rate was 5.64%. No amounts have been drawn on the New Revolving
Facility as of September 30, 2005 and 2004.the date hereof. The New Revolving Facility was extended
and now expires on May 31, 2006.in February,
2007. Management believes that such facility will be renewed in the normal
course of business.
Indebtedness under the Loan Agreement is secured by substantially allAs of the
assets ofMarch 31, 2006, the Company other than real properties.made $2,750 in principal payments against this
term loan.
Proceeds from stock options exercised totaled $1,263$206 and $1,814$860 for the ninethree months
ended September 30,March 31, 2006 and 2005, and 2004, respectively. Dividend payments were $685$1,045 and
$389$685 for the ninethree months ended September 30,March 31, 2006 and 2005, and 2004,
respectively.
Pursuant to the Company's adoption of the provisions of SFAS No. 123R, the
excess tax benefits of stock options exercised of $96 for the three months ended
March 31, 2006 is classified as a financing activity. These excess tax benefits
had previously been classified as an operating activity.
23
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, 2005March 31, 2006 for this obligation is
$979.$1,002. The postretirement plan is not funded. Historical cash payments made
under such plan have approximated $50 per year.
Critical Accounting Policies
- ----------------------------
ThereStock Options and Restricted Stock Awards
As discussed above, effective January 1, 2006, we account for stock-based
compensation under SFAS 123R. Prior to January 1, 2006, we applied the intrinsic
value method in measuring stock-based compensation under APB 25. Under SFAS
123R, share-based payment awards result in a cost measured at fair value on the
awards' grant dates, based on the estimated number of awards expected to vest,
and that cost is recognized through earnings over the expected vesting period.
Under APB 25, when the exercise price of the Company's stock options equaled the
market value of the underlying stock on the date of the grant, no compensation
expense was recognized.
Other than the aforementioned adoption of SFAS 123R, there were no changes to
the Company's Critical Accounting Policies, as described in its December 31,
20042005 Annual Report on Form 10-K, during the ninethree months ended September 30, 2005.March 31, 2006.
Related Party Transactions
- --------------------------
The Company was not engaged in related party transactions during the three
and
nine months ended September 30, 2005March 31, 2006 and all transactions of the Company during such
period were at arms length.
24
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, 2006, the Company's only
borrowings were under a bank term loan, which bears interest at LIBOR plus
1.00%. A 100 basis point increase in interest rates, applied to the Company's
borrowings at March 31, 2006, would result in an increase in annual interest
expense and a corresponding reduction in cash flow of approximately $73. 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.
25
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), except for
the disclosure controls and procedures of the Loders Croklaan
encapsulation, agglomeration and granulation business,Chelated Minerals Corporation,
which were excluded from management's evaluation. We completed the
acquisition of this business on June 30, 2005,February 8, 2006, and are currently
conducting an assessment of the business' disclosure 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.
26
Part II. Other Information
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
-------------------
By: /s/ Dino A. Rossi
---------------------
Dino A. Rossi, President and
Chief Executive Officer
Date: November 8, 2005May 10, 2006
27
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.
28