Balchem 10Q 2015 Q3 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended September 30, 2015

☐	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 incorporation or organization)		(I.R.S. Employer Identification Number)

52 Sunrise Park Road, 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 ☑

No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑

No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

No ☑

As of October 30, 2015 the registrant had 31,521,788 shares of its Common Stock, $.06 2/3 par value, outstanding.

Part I.

Financial Information

Item 1.

Financial Statements

BALCHEM CORPORATION

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)

Assets	September 30, 2015 (unaudited)			December 31, 2014
Current assets:
Cash and cash equivalents	$	81,556		$	50,287
Accounts receivable, net of allowance for doubtful accounts of $230 and $288 at September 30, 2015 and December 31, 2014		64,220			71,982
Inventories		50,697			49,623
Prepaid expenses		2,475			4,545
Prepaid income taxes		427			-
Deferred income taxes		1,392			1,390
Other current assets		3,363			3,475
Total current assets		204,130			181,302

Property, plant and equipment, net		149,169			131,588

Goodwill		383,906			383,906
Intangible assets with finite lives, net		141,216			160,394
Other assets		4,173			4,341
Total assets	$	882,594		$	861,531

Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable	$	18,780		$	24,352
Accrued expenses		17,049			15,614
Accrued compensation and other benefits		6,222			9,137
Dividends payable		-			9,251
Income taxes payable		-			2,168
Current portion of long-term debt		35,000			35,000
Total current liabilities		77,051			95,522

Long-term debt		271,250			297,500
Deferred income taxes		70,631			70,661
Other long-term obligations		6,345			5,950
Total liabilities		425,277			469,633

Commitments and contingencies (note 14)

Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000 shares; none issued and outstanding		-			-
Common stock, $.0667 par value. Authorized 60,000,000 shares; 31,509,483 shares issued and 31,505,888 outstanding at September 30, 2015 and 30,845,586 shares issued and outstanding at December 31, 2014		2,101			2,058
Additional paid-in capital		120,571			97,289
Retained earnings		339,266			295,202
Accumulated other comprehensive loss		(4,414	)		(2,651	)
Treasury stock, at cost: 3,595 and 0 shares at September 30, 2015 and December 31, 2014, respectively		(207	)		-
Total stockholders' equity		457,317			391,898

Total liabilities and stockholders' equity	$	882,594		$	861,531

See accompanying notes to condensed consolidated financial statements.

BALCHEM CORPORATION

Condensed Consolidated Statements of Earnings

(Dollars in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014


Net sales	$	140,128		$	160,490		$	419,763		$	378,715

Cost of sales		96,954			116,003			291,592			278,678

Gross margin		43,174			44,487			128,171			100,037

Operating expenses:
Selling expenses		11,807			11,458			34,960			24,199
Research and development expenses		1,510			1,445			4,450			3,337
General and administrative expenses		6,935			6,300			17,027			17,353
		20,252			19,203			56,437			44,889

Earnings from operations		22,922			25,284			71,734			55,148

Other expenses (income):
Interest income		(3	)		(3	)		(7	)		(62	)
Interest expense		1,617			2,052			5,092			3,368
Other, net		119			26			209			(30	)

Earnings before income tax expense		21,189			23,209			66,440			51,872

Income tax expense		7,213			8,031			22,377			18,068

Net earnings	$	13,976		$	15,178		$	44,063		$	33,804

Net earnings per common share - basic	$	0.45		$	0.50		$	1.42		$	1.12

Net earnings per common share - diluted	$	0.44		$	0.49		$	1.40		$	1.09

See accompanying notes to condensed consolidated financial statements.

BALCHEM CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net earnings	$	13,976		$	15,178		$	44,063		$	33,804

Other comprehensive income (loss), net of tax:

Net foreign currency translation adjustment		375			(1,739	)		(1,754	)		(1,934	)

Net change in postretirement benefit plan, net of taxes of $1 and $1 for the three months ended September 30, 2015 and 2014, and $5 and $3 for the nine months ended September 30, 2015 and 2014.		(3	)		(2	)		(9	)		(6	)


Other comprehensive income (loss)		372			(1,741	)		(1,763	)		(1,940	)

Comprehensive income	$	14,348		$	13,437		$	42,300		$	31,864

See accompanying notes to condensed consolidated financial statements.

BALCHEM CORPORATION

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2015			2014


Cash flows from operating activities:
Net earnings	$	44,063		$	33,804

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		29,816			20,190
Stock compensation expense		5,656			3,449
Deferred income taxes		27			(3,788	)
Provision for doubtful accounts		(62	)		239
Foreign currency transaction loss		126			84
Loss on disposal of assets		186			140
Changes in assets and liabilities
Accounts receivable		7,277			(8,639	)
Inventories		(1,392	)		(1,698	)
Prepaid expenses and other current assets		2,068			1,531
Accounts payable and accrued expenses		(6,563	)		3,146
Income taxes		(2,598	)		214
Other		246			569
Net cash provided by operating activities		78,850			49,241

Cash flows from investing activities:
Capital expenditures		(28,117	)		(5,934	)
Cash paid for acquisition, net of cash acquired		-			(491,057	)
Intangible assets acquired		(693	)		(91	)
Net cash used in investing activities		(28,810	)		(497,082	)

Cash flows from financing activities:
Proceeds from long-term debt		-			350,000
Principal payments on long-term debt		(26,250	)		(8,750	)
Proceeds from revolving loan		-			50,000
Principal payments on revolving loan		-			(50,000	)
Principal payment on acquired debt		-			(75,550	)
Cash paid for financing costs		-			(2,593	)
Repayments of short-term obligations		-			(89	)
Proceeds from stock options exercised		11,901			6,608
Excess tax benefits from stock compensation		6,688			3,626
Dividends paid		(9,251	)		(7,856	)
Purchase of treasury stock		(1,131	)		(267	)
Net cash (used in) provided by financing activities		(18,043	)		265,129

Effect of exchange rate changes on cash		(728	)		(631	)

Increase (decrease) in cash and cash equivalents		31,269			(183,343	)

Cash and cash equivalents beginning of period		50,287			208,747
Cash and cash equivalents end of period	$	81,556		$	25,404

Supplemental Cash Flow Information - see Note 11

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts in thousands, except share and 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, 2014 consolidated financial statements, and should be read in conjunction with the consolidated financial statements and notes, which appear in the Annual Report on Form 10-K for the year ended December 31, 2014. References in this report to the “Company” mean either Balchem Corporation or Balchem Corporation and its subsidiaries, including BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia Srl, Performance Chemicals & Ingredients Company, SensoryEffects Powder Systems, Inc., SensoryEffects Cereal Systems, Inc., SensoryEffects Flavor Company, SensoryEffects International Sales, Inc., and SEPS Reading LLC, on a consolidated basis, as the context requires.

In the opinion of management, the unaudited condensed consolidated financial statements furnished in this Form 10-Q include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” or “GAAP”) governing interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and therefore do not include some information and notes necessary to conform to annual reporting requirements. Certain prior year amounts have been reclassified to conform to current year presentation. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the operating results expected for the full year or any interim period.

Retrospective Revision of Certain Prior Period Information

During the first quarter of fiscal year 2015, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed, and as a result, the Company changed its communication to external investors. Therefore, beginning in fiscal year 2015, we are reporting our financial performance based on our new segments described in Note 10 – Segment Information. We have retrospectively revised certain prior period amounts to conform to the way we internally manage and monitor segment performance during the current fiscal year. This change impacted Note 6 – Intangible Assets and Note 10 – Segment Information, with no impact on consolidated net income or cash flows.

During the first quarter of fiscal year 2015, the Company completed its review of the acquired tax balances associated with the SensoryEffects acquisition. As a result, the following December 31, 2014 balances were retrospectively revised as follows: goodwill and deferred income taxes were increased by $260. The revision is measured as of the acquisition date and considers adjustments that would have been recognized had the deferred taxes been recorded as of the acquisition date. There was no impact on consolidated net income or cash flows. See Note 2.

NOTE 2—ACQUISITION OF PERFORMANCE CHEMICALS & INGREDIENTS COMPANY

On May 7, 2014, the Company acquired 100 percent (the “Acquisition”) of the outstanding common shares of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects), a privately held supplier of customized food and ingredient systems, headquartered in St. Louis, Missouri. The Company made payments of approximately $569 million on the acquisition date, amounting to approximately $494 million to the former shareholders, including adjustments for working capital acquired, and approximately $75 million to SensoryEffects’ lenders to pay off all SensoryEffects bank debt. SensoryEffects is a leader in powder, solid and liquid flavor systems, creamer and specialty emulsified powders, cereal-based products and other functional ingredient food and beverage delivery systems. The Acquisition of SensoryEffects accelerates the Company’s growth into the health and wellness markets. SensoryEffects was merged with the Company’s Food, Pharma & Nutrition segment, strengthening its market leadership position, and the segment was renamed SensoryEffects.

The goodwill of $355,391 arising from the Acquisition consists largely of expected synergies, including the combined entities experience and technical problem solving capabilities, and acquired workforce. The goodwill is assigned to the SensoryEffects segment and approximately $20,466 is tax deductible for income tax purposes.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed.

Cash and cash equivalents	$	2,635
Accounts receivable		25,674
Inventories		32,000
Property, plant and equipment		75,850
Customer relationships		130,300
Trade names		31,100
Developed technology		3,200
Other assets		3,955
Indemnification asset		1,650
Trade accounts payable		(10,427	)
Accrued expenses		(6,326	)
Bank debt		(75,550	)
Deferred income taxes		(75,760	)
Goodwill		355,391
Amount paid to shareholders		493,692
SensoryEffects bank debt paid on purchase date		75,550
Total amount paid on acquisition date	$	569,242

Customer relationships are amortized over a 10-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade names and developed technology are amortized over 10 years and 5 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.

The Company is indemnified for tax liabilities prior to the Acquisition date. The indemnification asset balance increased by $11 from January 1, 2015 to September 30, 2015 to $1,933.

The following unaudited pro forma information has been prepared as if the Acquisition had occurred on January 1, 2013.

	Three Months Ended September 30,				Nine Months Ended September 30,

	Net Sales		Net Earnings		Net Sales		Net Earnings
2015 SensoryEffects actual results included in the Company’s consolidated income statement	$	59,599	$	4,344	$	168,157	$	10,037

2015 Supplemental actual consolidated financial information	$	140,128	$	13,976	$	419,763	$	44,063

Basic earnings per share			$	0.45			$	1.42
Diluted earnings per share			$	0.44			$	1.40

2014 SensoryEffects actual results included in the Company’s consolidated income statement from May 7, 2014 through September 30, 2014	$	58,884	$	3,467	$	95,278	$	3,009

2014 Supplemental pro forma combined financial information	$	160,490	$	15,502	$	462,732	$	41,985

Basic earnings per share			$	0.51			$	1.39
Diluted earnings per share			$	0.50			$	1.35

2014 supplemental pro forma earnings for the three months ended September 30, 2014 exclude $494 of acquisition-related costs incurred. 2014 supplemental pro forma earnings for the nine months ended September 30, 2014 exclude $16,706 of acquisition-related costs incurred and $4,735 of non-recurring expenses related to the fair value adjustment to acquisition-date inventory. The pro forma information presented does not purport to be indicative of the results that actually would have been attained if the SensoryEffects acquisition had occurred at the beginning of the periods presented and is not intended to be a projection of future results.

NOTE 3 – STOCKHOLDERS’ EQUITY

STOCK-BASED COMPENSATION

The Company records stock-based compensation in accordance with the provisions of ASC 718, “Compensation-Stock Compensation.” The Company’s results for the three and nine months ended September 30, 2015 and 2014 reflected the following stock-based compensation cost, and such compensation cost had the following effects on net earnings:

	Increase/(Decrease) for the Three Months Ended September 30,
	2015			2014
Cost of sales	$	214		$	141
Operating expenses		2,756			961
Net earnings		(1,904	)		(690	)

	Increase/(Decrease) for the Nine Months Ended September 30,
	2015			2014
Cost of sales	$	640		$	452
Operating expenses		5,016			2,997
Net earnings		(3,647	)		(2,189	)

As required by ASC 718, the Company has made an estimate of expected forfeitures based on its historical experience and is recognizing compensation cost only for those stock-based compensation awards expected to vest.

The Company’s stock incentive plans allow for the granting of stock awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. No option will be exercisable for longer than ten years after the date of grant. The Company has approved and reserved a number of shares to be issued upon exercise of the outstanding options that is adequate to cover all exercises. As of September 30, 2015, the plans had 3,770,007 shares available for future awards. Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally three years for stock options, four years for employee restricted stock awards, three years for employee performance share awards, and four years for non-employee director restricted stock awards. Certain awards provide for accelerated vesting if there is a change in control (as defined in the plans) or other qualifying events.

Option activity for the nine months ended September 30, 2015 and 2014 is summarized below:

For the nine months ended September 30, 2015	Shares (000s)			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term
Outstanding as of December 31, 2014		1,470		$	27.35	$	57,742
Granted		209			58.34
Exercised		(603	)		19.73
Forfeited		(12	)		50.46
Outstanding as of September 30, 2015		1,064		$	37.52	$	24,747		6.1
Exercisable as of September 30, 2015		690		$	29.23	$	21,773		4.6

For the nine months ended September 30, 2014	Shares (000s)			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term
Outstanding as of December 31, 2013		1,893		$	20.94	$	71,465
Granted		313			53.38
Exercised		(456	)		14.49
Forfeited		(126	)		56.03
Outstanding as of September 30, 2014		1,624		$	26.29	$	49,192		5.6
Exercisable as of September 30, 2014		1,220		$	20.83	$	43,583		4.6

ASC 718 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 each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yields of 0.6% and 0.5%; expected volatilities of 33% and 34%; risk-free interest rates of 1.7% and 1.8%; and expected lives of 5.5 and 5.6 years, in each case for the nine months ended September 30, 2015 and 2014, respectively.

The Company used a projected expected life for each award granted based on historical experience of employees’ exercise behavior. Expected volatility is based on the Company’s historical volatility levels. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.

Other information pertaining to option activity during the three and nine months ended September 30, 2015 and 2014 was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015		2014
Weighted-average fair value of options granted		$	18.13		$	16.38	$	18.35	$	17.36
Total intrinsic value of stock options exercised ($000s)		$	2,944		$	7,241	$	23,229	$	18,185

Non-vested restricted stock activity for the nine months ended September 30, 2015 and 2014 is summarized below:

Nine months ended September 30, 2015	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2014		134		$	38.13
Granted		76			55.77
Vested		(48	)		36.34
Forfeited		-			-
Non-vested balance as of September 30, 2015		162		$	47.01

Nine months ended September 30, 2014	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2013		172		$	33.69
Granted		25			51.03
Vested		(24	)		37.61
Forfeited		(6	)		45.32
Non-vested balance as of September 30, 2014		167		$	35.27

Non-vested performance share activity for the nine months ended September 30, 2015 and 2014 is summarized below:

Nine months ended September 30, 2015	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2014		-		$	-
Granted		29			58.77
Vested		-			-
Forfeited		(9	)		58.77
Non-vested balance as of September 30, 2015		20		$	58.77

Nine months ended September 30, 2014	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2013		-	$	-
Granted		-		-
Vested		-		-
Forfeited		-		-
Non-vested balance as of September 30, 2014		-	$	-

The performance share (“PS”) awards provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (TSR) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents established at January 1, 2015. Expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions used in the fair value determination were: risk free interest rate: 1.00%; dividend yield: 0.5%; volatility: 34% and initial TSR -6.9%. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest 100% at the end of the third year following the grant in accordance with the performance metrics set forth.

As of September 30, 2015 and 2014, there was $9,239 and $6,537, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of September 30, 2015, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2 years. The Company estimates that share-based compensation expense for the year ended December 31, 2015 will be approximately $7,000.

REPURCHASE OF COMMON STOCK

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,124,834 shares have been purchased, of which 3,595 shares remained in treasury at September 30, 2015. During the nine months ended September 30, 2015, a total of 19,603 shares have been purchased at an average cost of $57.69 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 on its assessment of corporate cash flow, market conditions and other factors.

NOTE 4 – INVENTORIES

Inventories at September 30, 2015 and December 31, 2014 consisted of the following:

	September 30, 2015		December 31, 2014
Raw materials	$	17,944	$	19,822
Work in progress		2,145		1,989
Finished goods		30,608		27,812
Total inventories	$	50,697	$	49,623

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at September 30, 2015 and December 31, 2014 are summarized as follows:

	September 30, 2015		December 31, 2014
Land	$	3,037	$	3,130
Building		31,172		31,030
Equipment		151,118		150,170
Construction in progress		33,255		10,969
		218,582		195,299
Less: accumulated depreciation		69,413		63,711
Property, plant and equipment, net	$	149,169	$	131,588

NOTE 6 – INTANGIBLE ASSETS

The Company had goodwill in the amount of $383,906 as of September 30, 2015 and December 31, 2014 subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”

As discussed in Note 10 – Segment Information, during the first quarter of fiscal year 2015, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed, and as a result, the Company changed its communication to external investors. We allocated goodwill to our new reporting units using a relative fair value approach.

	September 30, 2015		December 31, 2014
SensoryEffects	$	363,784	$	363,784
Animal Nutrition and Health		11,734		11,734
Specialty Products		7,160		7,160
Industrial Products		1,228		1,228
Total	$	383,906	$	383,906

Identifiable intangible assets with finite lives at September 30, 2015 and December 31, 2014 are summarized as follows:

	Amortization Period (in years)		Gross Carrying Amount at 9/30/15		Accumulated Amortization at 9/30/15		Gross Carrying Amount at 12/31/14		Accumulated Amortization at 12/31/14
Customer relationships & lists		10	$	167,442	$	57,993	$	167,442	$	41,238
Trademarks & trade names		17		32,014		4,914		32,014		2,540
Developed technology		5		3,200		897		3,200		420
Regulatory registration costs		5-10		2,294		803		1,704		667
Patents & trade secrets		15-17		1,739		1,000		1,665		933
Other		5-10		759		625		754		587
			$	207,448	$	66,232	$	206,779	$	46,385

Amortization of identifiable intangible assets was approximately $19,850 for the nine months ended September 30, 2015. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense for the remainder of 2015 is $6,645, approximately $24,360 for 2016, $20,400 for 2017, $18,150 for 2018, $16,335 for 2019 and $14,595 for 2020. At September 30, 2015, there were no identifiable intangible assets with indefinite useful lives as defined by ASC 350. Identifiable intangible assets are reflected in “Intangible assets with finite lives, net” in the Company’s condensed consolidated balance sheets. There were no changes to the useful lives of intangible assets subject to amortization during the nine months ended September 30, 2015.

NOTE 7 – LONG-TERM DEBT

On May 7, 2014, the Company and a bank syndicate entered into a loan agreement providing for a senior secured term loan of $350,000 and revolving loan of $100,000 (collectively referred to as the “loans”). The term loan and $50,000 of the revolving loan were used to fund the Performance Chemicals & Ingredients Company acquisition (see Note 2) and for general corporate purposes. At September 30, 2015, the Company had a total of $306,250 of debt outstanding. The term loan is payable in quarterly installments of $8,750 commencing on September 30, 2014, with the outstanding principal due on the maturity date. The Company may draw on the revolving loan at its discretion and the revolving loan does not have installments and all outstanding amounts are due on the maturity date. The loans may be voluntarily prepaid in whole or in part without premium or penalty and have a maturity date of May 7, 2019. The loans are subject to an interest rate equal to LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion; plus an applicable rate. The applicable rate is based upon the Company’s consolidated leverage ratio, as defined in the loan agreement, and the interest rate was 1.70% at September 30, 2015. The Company has $100,000 of undrawn revolving loan at September 30, 2015 that is subject to a commitment fee; which is based on the Company’s consolidated leverage ratio as defined in the loan agreement. The loan agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated fixed charge coverage ratio to exceed a certain minimum ratio. At September 30, 2015, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the company.

The following table summarizes the future minimum debt payments:

	2015		2016		2017		2018		2019
Current portion of long-term debt	$	8,750	$	26,250		-		-		-
Long-term debt		-		8,750	$	35,000	$	35,000	$	192,500
Total	$	8,750	$	35,000	$	35,000	$	35,000	$	192,500

Costs associated with the issuance of debt instruments are capitalized and amortized over the terms of the respective financing arrangements using the effective interest method. If debt is retired early, the related unamortized costs are expensed in the period the debt is retired. Capitalized costs net of accumulated amortization total $1,681 at September 30, 2015 and are included in other assets on the accompanying balance sheet. Amortization

expense pertaining to these costs totaled $144 and $193 for the three months ended September 30, 2015 and 2014 and $458 and $296 for the nine months ended September 30, 2015 and 2014, and is included in interest expense in the accompanying condensed consolidated statements of earnings.

NOTE 8 – 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:

Three months ended September 30, 2015	Net Earnings (Numerator)		Number of Shares (Denominator)		Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	13,976		31,309,710	$	.45

Effect of dilutive securities – stock options and restricted stock				408,449

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options and restricted stock	$	13,976		31,718,159	$	.44

Three months ended September 30, 2014	Net Earnings (Numerator)		Number of Shares (Denominator)		Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	15,178		30,463,188	$	.50

Effect of dilutive securities – stock options and restricted stock				783,090

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options and restricted stock	$	15,178		31,246,278	$	.49

Nine months ended September 30, 2015	Net Earnings (Numerator)		Number of Shares (Denominator)		Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	44,063		31,087,691	$	1.42

Effect of dilutive securities – stock options and restricted stock				492,701

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options and restricted stock	$	44,063		31,580,392	$	1.40

Nine months ended September 30, 2014	Net Earnings (Numerator)		Number of Shares (Denominator)		Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	33,804		30,296,753	$	1.12

Effect of dilutive securities – stock options and restricted stock				839,437

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options and restricted stock	$	33,804		31,136,190	$	1.09

The Company had stock options covering 260,872 and 184,976 shares at September 30, 2015 and 2014, 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.

The Company has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted shares and they participate on a one-for-one basis with holders of common stock. These awards have an immaterial impact as participating securities with regard to the calculation using the two-class method for determining earnings per share.

NOTE 9 – INCOME TAXES

The Company accounts for uncertainty in income taxes in accordance with ASC 740-10, “Accounting for Uncertainty in Income Taxes.” ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. All of the unrecognized tax benefits, if recognized in future periods, would impact the Company’s effective tax rate. The Company files income tax returns in the U.S. and in various states and foreign countries. As of September 30, 2015, in the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2010. During the Nine Months Ended September 30, 2015 and 2014, the increase in the amount of unrecognized tax benefits was primarily related to the aforementioned Acquisition (See Note 2) of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects). The Acquisition resulted in an assumed liability for unrecognized tax benefits based on an estimated fair value of $1,933. The Company is indemnified for this liability, and as such, has recognized a corresponding indemnification asset of $1,933. As of September 30, 2015 and December 31, 2014, the Company had approximately $5,857 and $5,200, respectively, of unrecognized tax benefits, which are included in other long-term obligations on the Company’s consolidated balance sheets. The Company includes interest expense or income as well as potential penalties on unrecognized tax positions as a component of income tax expense in the consolidated statements of earnings. The total amount of accrued interest and penalties related to uncertain tax positions at September 30, 2015 and December 31, 2014 was approximately $2,169 and $1,643, respectively, and is included in other long-term obligations.

NOTE 10 – SEGMENT INFORMATION

During the first quarter of fiscal year 2015, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed, and as a result, the Company changed its communication to external investors. Therefore, beginning in fiscal year 2015, we are reporting our financial performance based on our new segments; Specialty Products, SensoryEffects, Animal Nutrition & Health, and Industrial Products. We have retrospectively revised certain prior period amounts to conform to the way we internally manage and monitor segment performance during the current fiscal year. Our reportable segments are described below.

SensoryEffects

Our SensoryEffects segment supplies ingredients in the food and beverage industry; providing customized solutions in powder, solid and liquid flavor delivery systems, spray dried emulsified powder systems, and cereal systems. Our products include creamer systems, dairy replacers, powdered fats, nutritional beverage bases, beverages, juice & dairy bases, chocolate systems, ice cream bases & variegates, ready-to-eat cereals, grain based snacks, and cereal based ingredients. Additionally, we provide microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. We also produce and market human grade choline nutrient products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function.

Animal Nutrition & Health

Our Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from our microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, our microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. Our proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline deficiency can result in reduced growth and perosis in poultry; fatty liver, kidney necrosis and general poor health condition in swine.

Sales of specialty products for the animal nutrition and health industry are highly dependent on dairy industry economics as well as the ability of the Company to leverage the results of university and field research on the animal health benefits of the Company’s products. Management believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to increase

production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.

Specialty Products

Our Specialty Products segment operates commercially as ARC Specialty Products.

Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. Our 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the EPA and the DOT. Our inventory of these specially built drums, along with our two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. We also sell single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.

Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. We distribute our propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Our inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.

Industrial Products

Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. Our products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade Choline Bicarbonate is completely chloride free and our Choline Chloride reduces the amount of chlorides released into the environment up to 75% when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at our Italian operation and sold for a wide range of industrial applications in Europe.

Business Segment Assets:

	September 30, 2015		December 31, 2014
SensoryEffects	$	647,135	$	656,130
Animal Nutrition & Health		102,672		90,650
Specialty Products		25,616		24,913
Industrial Products		20,239		32,330
Other Unallocated		86,932		57,508
Total	$	882,594	$	861,531

Depreciation/Amortization:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
SensoryEffects	$	7,594	$	7,860	$	22,766	$	12,956
Animal Nutrition & Health		1,703		1,230		4,831		4,603
Specialty Products		288		332		929		1,045
Industrial Products		192		713		832		1,292
Total	$	9,777	$	10,135	$	29,358	$	19,896

Capital Expenditures:

	Nine Months Ended September 30,
	2015		2014
SensoryEffects	$	12,663	$	1,738
Animal Nutrition & Health		13,711		2,519
Specialty Products		750		608
Industrial Products		993		1,069
Total	$	28,117	$	5,934

Business Segment Net Sales:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
SensoryEffects	$	72,978	$	71,821	$	207,965	$	133,170
Animal Nutrition & Health		39,947		45,805		124,295		129,879
Specialty Products		13,818		13,652		41,202		40,086
Industrial Products		13,385		29,212		46,301		75,580
Total	$	140,128	$	160,490	$	419,763	$	378,715

Business Segment Earnings Before Income Taxes:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
SensoryEffects	$	11,604		$	8,743		$	28,397		$	14,218
Animal Nutrition & Health		5,625			6,953			21,603			16,622
Specialty Products		6,031			5,306			17,825			15,576
Industrial Products		1,124			4,776			5,371			12,074
Unallocated equity compensation		(1,462	)		-			(1,462	)		-
Transaction and integration costs		-			(494	)		-			(3,342	)
Interest and other income (expense)		(1,733	)		(2,075	)		(5,294	)		(3,276	)
Total	$	21,189		$	23,209		$	66,440		$	51,872

Unallocated equity compensation expense was related to the accelerated vesting of previously-granted unvested options to purchase Company common stock, and removal of the restrictions on previously-granted Restricted Stock.

Transaction and integration costs were primarily related to the definitive agreement to acquire Performance Chemicals & Ingredients Company (d/b/a SensoryEffects; see Note 2).

The following table summarizes domestic (U.S.) and foreign sales for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Domestic	$	112,859	$	124,088	$	337,638	$	278,422
Foreign		27,269		36,402		82,125		100,293
Total	$	140,128	$	160,490	$	419,763	$	378,715

NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the nine months ended September 30, 2015 and 2014 for income taxes and interest is as follows:

	Nine Months Ended September 30,
	2015		2014
Income taxes	$	16,667	$	17,920
Interest	$	4,589	$	3,006

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) were as follows:

	Three Months Ended September 30,
	2015			2014
Net foreign currency translation adjustment	$	375		$	(1,739	)
Net change in postretirement benefit plan (see Note 13 for further information)
Amortization of prior service credit		(4	)		(5	)
Amortization of loss		-			2
Total before tax		(4	)		(3	)
Tax		1			1
Net of tax		(3	)		(2	)

Total other comprehensive income (loss)	$	372		$	(1,741	)

	Nine Months Ended September 30,
	2015			2014
Net foreign currency translation adjustment	$	(1,754	)	$	(1,934	)
Net change in postretirement benefit plan (see Note 13 for further information)
Amortization of prior service credit		(14	)		(14	)
Amortization of loss		-			5
Total before tax		(14	)		(9	)
Tax		5			3
Net of tax		(9	)		(6	)

Total other comprehensive loss	$	(1,763	)	$	(1,940	)

Accumulated other comprehensive loss at September 30, 2015 consisted of the following:

	Foreign currency translation adjustment			Postretirement benefit plan			Total
Balance December 31, 2014	$	(2,702	)	$	51		$	(2,651	)
Other comprehensive loss		(1,754	)		(9	)		(1,763	)
Balance September 30, 2015	$	(4,456	)	$	42		$	(4,414	)

NOTE 13 – EMPLOYEE BENEFIT PLAN

Net periodic benefit costs for such retirement medical plan were as follows:

	Nine Months Ended September 30,
	2015			2014
Service cost	$	40		$	43
Interest cost		27			36
Amortization of prior service credit		(14	)		(14	)
Amortization of loss		-			5
Net periodic benefit cost	$	53		$	70

The amount recorded for this obligation on the Company’s balance sheet as of September 30, 2015 and December 31, 2014 is $1,179 and $1,111, respectively, and is included in other long-term obligations. The plan is unfunded and approved claims are paid from Company funds. Historical cash payments made under such plan have typically been less than $100 per year.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

In 2015, the Company entered into a six year, nine month lease in St. Louis, Missouri for approximately 9,100 square feet of office space. The office space serves as SensoryEffects’ selling and general offices.

In 2012, the Company entered into a six year lease extension for approximately 20,000 square feet of office space in New Hampton, New York. The office space serves as the Company’s general offices and as a laboratory facility. In 2013, SensoryEffects entered into a three year lease for approximately 40,000 square feet of warehouse space in St. Louis, Missouri. The Company leases most of its vehicles and office equipment under non-cancelable operating leases, which primarily expire at various times through 2029.

Rent expense charged to operations under such lease agreements for the nine months ended September 30, 2015 and 2014 aggregated approximately $1,799 and $1,114, respectively. Aggregate future minimum rental payments required under all non-cancelable operating leases at September 30, 2015 are as follows:

Year
October 1, 2015 to December 31, 2015	$	624
2016		2,030
2017		1,785
2018		1,527
2019 2020		1,142 781
Thereafter		2,915
Total minimum lease payments	$	10,804

In 1982, the Company discovered and thereafter removed a number of buried drums containing unidentified waste material from the Company’s site in Slate Hill, New York. The Company thereafter entered into a Consent Decree to evaluate the drum site with the New York Department of Environmental Conservation (“NYDEC”) and performed a Remedial Investigation/Feasibility Study that was approved by NYDEC in February 1994. Based on NYDEC requirements, the Company cleaned the area and removed soil from the drum burial site, which was completed in 1996. The Company continues to be involved in discussions with NYDEC to evaluate test results and determine what, if any, additional actions will be required on the part of the Company to close out the remediation of this site. Additional actions, if any, would likely require the Company to continue monitoring the site. The cost of such monitoring has been less than $5 per year for the period 2004 to date.

The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on portions of the site. Remediation conducted by the prior owner under the oversight of the EPA and the Missouri Department of Natural Resources (“MDNR”) included removal of dioxin contaminated soil and equipment, capping of areas of residual contamination in four relatively small areas of the site separate from the manufacturing facilities, and the installation of wells to monitor groundwater and surface water contamination by organic chemicals. No ground water or surface water treatment was required. The Company believes that remediation of the site is complete. In 1998, the EPA certified the work on the contaminated soils to be complete. In February 2000, after the conclusion of two years of monitoring groundwater and surface water, the former owner submitted a draft third party risk assessment report to the EPA and MDNR recommending no further action. The prior owner is awaiting the response of the EPA and MDNR to the draft risk assessment.

While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for potential liabilities associated with the Superfund site and one of the sellers, in turn, has the benefit of certain contractual indemnification by the prior owner that is implementing the above-described Superfund remedy.

From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity.

NOTE 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at September 30, 2015 and December 31, 2014 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the

amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable and accrued liabilities, which are carried at cost which approximates fair value due to the short-term maturity of these instruments. Cash and cash equivalents at September 30, 2015 and December 31, 2014 includes $772 in money market funds. The money market funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations (All dollar amounts in thousands)

This Report contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our expectation or belief concerning future events that involve risks and uncertainties. Our actions and performance could differ materially from what is contemplated by the forward-looking statements contained in this Report. Factors that might cause differences from the forward-looking statements include those referred to or identified in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 and other factors that may be identified elsewhere in this Report. Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements.

Overview

We develop, manufacture, distribute and market specialty performance ingredients and products for the food, nutritional, pharmaceutical, animal health, industrial and medical device sterilization industries.

During the first quarter of fiscal year 2015, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed, and as a result, the Company changed its communication to external investors. Therefore, beginning in fiscal year 2015, we are reporting our financial performance based on our new segments; Specialty Products, SensoryEffects, Animal Nutrition & Health, and Industrial Products. We have retrospectively revised certain prior period amounts to conform to the way we internally manage and monitor segment performance during the current fiscal year. Our reportable segments are described below.

Acquisition of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects) and Long-term Debt

On May 7, 2014, the Company acquired 100 percent (the “Acquisition”) of the outstanding common shares of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects) a privately held supplier of customized food and ingredient systems, headquartered in St. Louis, Missouri. The Company made payments of approximately $569 million on the purchase date, amounting to $494 million to the former shareholders, including adjustments for working capital acquired and $75 million to SensoryEffects’ lenders to pay off all SensoryEffects bank debt. SensoryEffects is a leader in powder, solid and liquid flavor systems, creamer and specialty emulsified powders, cereal-based products and other functional ingredient food and beverage delivery systems. The Acquisition of SensoryEffects accelerates the Company’s growth into health and wellness markets. SensoryEffects was merged with the Company’s Food, Pharma & Nutrition segment, strengthening its market leadership position, and the segment was renamed SensoryEffects.

SensoryEffects

Animal Nutrition & Health

Specialty Products

Our Specialty Products segment operates commercially as ARC Specialty Products.

sterilized. Our 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the EPA and the DOT. Our inventory of these specially built drums, along with our two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. We also sell single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.

Industrial Products

Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. Our products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade Choline Bicarbonate is completely chloride free and our Choline Chloride reduces the amount of chlorides released into the environment up to 75% when compared to Potassium Chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at our Italian operation and sold for a wide range of industrial applications in Europe.

The Company sells products for all four segments through its own sales force, independent distributors, and sales agents.

The following tables summarize consolidated business segment net sales and earnings from operations for the three and nine months ended September 30, 2015 and 2014:

Business Segment Net Sales:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
SensoryEffects	$	72,978	$	71,821	$	207,965	$	133,170
Animal Nutrition & Health		39,947		45,805		124,295		129,879
Specialty Products		13,818		13,652		41,202		40,086
Industrial Products		13,385		29,212		46,301		75,580
Total	$	140,128	$	160,490	$	419,763	$	378,715

Business Segment Earnings From Operations:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
SensoryEffects	$	11,604		$	8,743		$	28,397		$	14,218
Animal Nutrition & Health		5,625			6,953			21,603			16,622
Specialty Products		6,031			5,306			17,825			15,576
Industrial Products		1,124			4,776			5,371			12,074
Unallocated equity compensation		(1,462	)		-			(1,462	)		-
Transaction and integration costs		-			(494	)		-			(3,342	)
Total	$	22,922		$	25,284		$	71,734		$	55,148

RESULTS OF OPERATIONS

Three months ended September 30, 2015 compared to three months ended September 30, 2014.

Net Sales

Net sales for the three months ended September 30, 2015 were $140,128, as compared with $160,490 for the three months ended September 30, 2014, a decrease of $20,362 or 12.7%. Net sales for the SensoryEffects segment were $72,978 for the three months ended September 30, 2015, compared with $71,821 for the three months ended September 30, 2014, an increase of $1,157 or 1.6%. Cereal Systems product lines sales increased $1,344 primarily due to increased volume. Powder Systems volume was greater in the three months ended September 30, 2015 by 4.8% as compared to the three months ended September 30, 2014. This was partially offset by lower average selling price. Also contributing to the higher sales was a $457 or 10.0% increase in Choline Nutrients; primarily due to greater volume. Partially offsetting these sales increases is a decline in Flavor Systems product lines by $929 or 4.8% as a result of reduced volumes. Net sales for the Animal Nutrition & Health segment were $39,947 for the three months ended September 30, 2015, as compared with $45,805 for the three months ended September 30, 2014, a decrease of $5,858 or 12.8%. Sales of products targeted for ruminant animal feed markets decreased by $3,818 or 25.2% from the prior year comparable period. The decline was primarily the result of lower sales volumes of Aminoshure and Nitroshure products due to weaker dairy economics, particular in international markets as well as increased competition. Global feed grade choline product sales declined by $1,964 or 6.8% primarily due to the weakened Euro. Net sales for the Industrial Products segment were $13,385 for the three months ended September 30, 2015 as compared to $29,212 for the three months ended September 30, 2014, a decrease of $15,827 or 54.2%. The decrease is principally due to volume decreases experienced in various choline and choline derivatives used in shale fracking applications, consistent with the end market activity decline. Net sales for the Specialty Products segment were $13,818 for the three months ended September 30, 2015, as compared with $13,652 for the three months ended September 30, 2014, an increase of $166 or 1.2%, primarily due to product mix.

Gross Margin

For the three months ended September 30, 2015, gross margin decreased to $43,174 compared to $44,487 for the three months ended September 30, 2014. Gross margin as a percentage of sales for the three months ended September 30, 2015 increased to 30.8% from 27.7% in the prior year comparative period. Gross margins for the SensoryEffects segment increased 4.1% for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, primarily due to improved product mix and lower raw material costs. Gross margin percentage decreased for Animal Nutrition & Health by 0.4% primarily due to a more unfavorable product mix and inefficiencies driven by lower volumes, partially offset by raw material cost decreases. Industrial Products gross margins declined by 5.8% from the prior year comparative period, primarily due to lower volume, higher supply chain costs and lower average selling prices. Gross margin percentage for the Specialty Products segment increased by 3.7% compared to the three month period ended September 30, 2015 due to product mix as well as raw material cost decreases.

Operating Expenses

Operating expenses for the three months ended September 30, 2015 were $20,252 or 14.5% of net sales as compared to $19,203 or 12.0% of net sales for the three months ended September 30, 2014. The increase was primarily due to a one-time equity compensation charge of $1,462 partially offset by a reduction of outside professional services expenses. The Company incurred outside and professional services expenses of $494 in the three months ended September 30, 2014 primarily related to the Acquisition.

Earnings from Operations

Principally as a result of the above-noted details, earnings from operations for the three months ended September 30, 2015 were $22,922 as compared to $25,284 for the three months ended September 30, 2014, a decrease of $2,362 or 9.4%. Earnings from operations as a percentage of sales (“operating margin”) for the three months ended September 30, 2015 were 16.4%, increasing from 15.8% for the three months ended September 30, 2014, primarily due to the aforementioned impact of favorable product mix and lower raw material costs; partially offset by volume decreases experienced in the Industrial Products segment for various choline and choline derivatives used in shale fracking applications and the one-time equity compensation charge. Excluding the impact of amortization expenses, the one-time equity compensation charge, and transaction expenses, the earnings from operations were $29,988 or 21.4% of sales for the three months ended September 30, 2015 and $31,748 or 19.8% of sales for the three months ended September 30, 2014. Earnings from the SensoryEffects segment were $11,604, an increase of $2,861 or 32.7% primarily due to improved product mix and reduced raw material costs. Animal Nutrition and Health segment earnings from operations were $5,625, a decrease of $1,328 or 19.1%, primarily the result of lower sales, partially offset by raw material cost decreases. Earnings from operations from the Industrial Products segment of $1,124 for the quarter ended September 30, 2015 declined $3,652 compared to the quarter ended September 30, 2014; primarily due to volume decreases. Earnings from operations from the Specialty Products segment were $6,031, an increase of $725 or 13.6%, primarily the result of improved gross margins.

Other Expenses (Income)

Interest expense for the three months ended September 30, 2015 and September 30, 2014 was $1,617 and $2,052, respectively, and is primarily related to the loans entered into on May 7, 2014 to finance the Acquisition of SensoryEffects. Other expense was $119 for the three months ended September 30, 2015, and $26 for the three months ended September 30, 2014, respectively.

Income Tax Expense

The Company’s effective tax rate for the three months ended September 30, 2015 and 2014 was 34.0% and 34.6%, respectively.

Net Earnings

Principally as a result of the above-noted details, net earnings for the three months ended September 30, 2015 were $13,976 as compared with $15,178 for the three months ended September 30, 2014, a decrease of $1,202 or 7.9%.

Nine months ended September 30, 2015 compared to nine months ended September 30, 2014.

Net Sales

Net sales for the nine months ended September 30, 2015, were $419,763, as compared with $378,715 for the nine months ended September 30, 2014, an increase of $41,048 or 10.8%. Net sales for the SensoryEffects segment (formerly Food, Pharma & Nutrition) were $207,965 for the nine months ended September 30, 2015, as compared with $133,170 for the nine months ended September 30, 2014, an increase of $74,795 or 56.2%. Net sales from the recently acquired SensoryEffects business contributed $72,878 to the overall increase. The acquired Powder & Flavor Systems, and Cereal Systems product lines comprised $58,433 and $11,308 of the increase, respectively. Also contributing to the higher sales was a $2,095 or 10.1% increase in encapsulated ingredients used for baking and food preservation, due to increases in volume. Net sales for the Animal Nutrition & Health segment were $124,295 for the nine months ended September 30, 2015, as compared with $129,879 for the nine months ended September 30, 2014, a decrease of $5,584 or 4.3%. Sales of product lines targeted for ruminant animal feed markets increased by $1,661 or 4.5% from the prior year comparable period, primarily due higher overall average ruminant selling prices; partially offset by lower volumes. Global feed grade choline product sales decreased $7,132 or 8.2% primarily due to the weakened Euro. Net sales for the Industrial Products segment were $46,301 for the nine months ended September 30, 2015 as compared to $75,580 for the nine months ended September 30, 2014, a decrease of $29,279 or 38.7%. The decrease is principally due to volume reductions experienced in the second and third quarters of 2015 for various choline and choline derivatives used in shale fracking applications, in correlation with the North America decline of fracking industry. Net sales for the Specialty Products segment were $41,202 for the nine months ended September 30, 2015, as compared with $40,086 for the nine months ended September 30, 2014, an increase of $1,116 or 2.8% as volumes of

ethylene oxide products used for medical device sterilization and propylene oxide increased modestly.

Gross Margin

For the nine months ended September 30, 2015, gross margin increased to $128,171 compared to $100,037 for the nine months ended September 30, 2014. Gross margin as a percentage of sales for the nine months ended September 30, 2015 increased to 30.5% from 26.4% in the prior year comparative period. Gross margin for the SensoryEffects segment increased 4.3% for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, primarily due to the valuation of acquired inventory to fair value, which increased cost of sales by $4,735 in 2014. The acquired product lines carry a lower gross margin and partially offset the increased gross margin percentage. Gross margin percentage increased for the Animal Nutrition & Health segment by 4.8% primarily due to a favorable product mix and decreases in certain petrochemical raw material costs. Industrial products gross margins declined by 3.0% from the prior year comparative period primarily due to reduced volumes contributing to unfavorable manufacturing variances and increased supply chain costs. These increased costs were partially offset by favorable petrochemical raw material costs. Gross margin for the Specialty Products segment increased by 2.5% due to reduced raw material costs.

Operating Expenses

Operating expenses for the nine months ended September 30, 2015 were $56,437 or 13.4% of net sales as compared to $44,889 or 11.9% of net sales for the nine months ended September 30, 2014. The increase was primarily due to increased expenses associated with the acquired SensoryEffects businesses, including higher intangible asset amortization of $7,089; partially offset by a reduction of outside professional services expenses. The Company incurred outside and professional services expenses of $3,342 in nine months ended September 30, 2014. Additionally, the Company recognized a one-time equity compensation charge of $1,462 during the nine months ended September 30, 2015. Excluding the impact of amortization expenses, professional fees and the one-time equity compensation charge, operating expenses were 9.2% and 8.5% of net sales for the nine months ended 2015 and 2014; respectively.

Earnings From Operations

Principally as a result of the above-noted details, earnings from operations for the nine months ended September 30, 2015 were $71,734 as compared to $55,148 for the nine months ended September 30, 2014, an increase of $16,586 or 30.1%. Earnings from operations as percentage of sales (“operating margin”) for the nine months ended September 30, 2015 were 17.1%, increasing from 14.6% for the nine months ended September 30, 2014, primarily due to the aforementioned impact of the valuation of the acquired inventory, transaction and integration expenses, favorable product mix and lower raw material costs. Greater amortization expense, the one-time equity compensation charge and higher supply chain costs partially offset the improvement in earnings from operations. Excluding the impact of the valuation of the acquired inventory, amortization expense, transaction and integration expenses and the one-time equity compensation charge, the earnings from operations were $90,026 or 21.5% of sales for the nine months

ended September 30, 2015 as compared to $72,747 or 19.2% for the nine months ended September 30, 2014. Earnings from the SensoryEffects segments were $28,397, an increase of $14,179 or 99.7%, primarily due to increased sales from the Acquisition, partially offset by the impact of the valuation of acquired inventory and increased amortization expense. Animal Nutrition & Health segment earnings from operations were $21,603, an increase of 30.0%, primarily due to a more favorable product mix and decreases in certain petrochemical raw material costs. Earnings from operations from the Industrial Products segment of $5,371 for the nine months ended September 30, 2015 declined $6,703 compared to the nine months ended September 30, 2014; primarily due to volume decreases. Earnings from operations from the Specialty segment were $17,825, an increase of $2,249 or 14.4%, primarily from greater net sales and lower raw material costs.

Other Expenses (Income)

Interest expense for the nine months ended September 30, 2015 and 2014 was $5,092 and $3,368, and is primarily related to the loans entered into on May 7, 2014 to finance the Acquisition of SensoryEffects. Other expense was $209 for the nine months ended September 30, 2015, and other income was $30 for the nine months ended September 30, 2014.

Income Tax Expense

The Company’s effective tax rate for the nine months ended September 30, 2015 and 2014 was 33.7% and 34.8% respectively. The decrease in the effective tax rate is primarily attributable to a change in the apportionment relating to state income taxes, and a change in the income proportion towards jurisdictions with lower tax rates.

Net Earnings

Principally as a result of the above-noted details, net earnings for the nine months ended September 30, 2015 were $44,063, as compared with $33,804 for the nine months ended September 30, 2014, an increase of $10,259 or 30.4%.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

(All amounts in thousands, except share and per share data)

During the nine months ended September 30, 2015, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2014. The Company expects its operations to continue generating sufficient cash flow to fund working capital requirements, capital investments and service future debt payments. The Company continues to pursue additional acquisition candidates. The Company could seek additional bank loans or access to financial markets to fund such acquisitions, its operations, working capital, capital investments, or other cash requirements as deemed necessary.

Cash

Cash and cash equivalents increased to $81,556 at September 30, 2015 from $50,287 at December 31, 2014 primarily resulting from the activity detailed below. At September 30, 2015, the Company had $15,055 of cash and cash equivalents held by our foreign subsidiaries. It is our intention to permanently reinvest these funds in our foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fund our U.S. operations or obligations. However, if these funds are needed for our U.S. operations, we could be required to pay additional U.S. taxes to repatriate these funds. Working capital was $127,078 at September 30, 2015 as compared to $85,780 at December 31, 2014, an increase of $41,298.

Operating Activities

Cash flows from operating activities provided $78,850 for the nine months ended September 30, 2015 as compared to $49,241 for the nine months ended September 30, 2014. The increase in cash flows from operating activities was primarily due to higher net earnings and amortization and depreciation expense adjustments.

Investing Activities

The Company continues to invest in projects across all production facilities and capital expenditures were $28,117 for the nine months ended September 30, 2015. Capital expenditures of approximately $9,850 were related to expanding the Company’s Animal, Nutrition & Health capacity in our manufacturing facility located in Verona, Missouri. In addition, the Company spent approximately $4,760 towards its agglomeration production equipment initiative. As previously noted, on May 7, 2014 the Company acquired SensoryEffects for a purchase price of approximately $569,000; amounting to approximately $494,000 to the former shareholders, including adjustments for working capital acquired, and approximately $75,000 to SensoryEfects’ lenders to pay off all SensoryEffects bank debt.

Financing Activities

The Company made debt payments of $26,250 during 2015 related to the senior secured term loan and has $100,000 available under a revolving loan agreement.

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,124,834 shares have been purchased, 3,595 of which remained in treasury at September 30, 2015. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors.

Proceeds from stock options exercised were $11,901 and $6,608 for the nine months ended September 30, 2015 and 2014, respectively. Dividend payments were $9,251 and $7,856 for the nine months ended September 30, 2015 and 2014, respectively.

Other Matters Impacting Liquidity

The Company currently provides postretirement benefits in the form of a retirement medical plan under a collective bargaining agreement covering eligible retired employees of its Verona, Missouri facility. The liability recorded in other long-term liabilities on the consolidated balance sheet as of September 30, 2015 is $1,179 and the plan is not funded. Historical cash payments made under the plan have typically been less than $100 per year.

Critical Accounting Policies

During the first quarter of fiscal year 2015, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed, and as a result, the Company changed its communication to external investors. Therefore, beginning in fiscal year 2015, we are reporting our financial performance based on our new segments; Specialty Products, SensoryEffects, Animal Nutrition & Health, and Industrial Products. We have retrospectively revised certain prior period amounts to conform to the way we internally manage and monitor segment performance during the current fiscal year.

Other than segment information, there were no changes to the Company’s Critical Accounting Policies, as described in its December 31, 2014 Annual Report on Form 10-K, during the nine months ended September 30, 2015.

Related Party Transactions

The Company was not engaged in related party transactions during the nine months ended September 30, 2015.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Cash and cash equivalents are held primarily in certificates of deposit and money market investment funds. The Company has no derivative financial instruments or derivative commodity instruments, nor does the Company have any financial instruments entered into for trading or hedging purposes. As of September 30, 2015, the Company’s borrowings were under a bank term loan and revolving loan bearing interest at LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion, plus an applicable rate. The applicable rate is based upon the Company’s consolidated leverage ratio, as defined in the loan agreement. A 100 basis point increase or decrease in interest rates, applied to the Company’s borrowings at September 30, 2015, would result in an increase or decrease in annual interest expense and a corresponding reduction or increase in cash flow of approximately $3,063. The Company is exposed to market risks for changes in foreign currency rates and has exposure to commodity price risks, including prices of our primary raw materials. Our objective is to seek a reduction in the potential negative earnings impact of changes in foreign exchange rates and raw material pricing arising in our business activities. The Company manages these financial exposures, where possible, through pricing and operational means. Our practices may change as economic conditions change.

Item 4.

Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the period covered by this report on Form 10-Q. This evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management (including the chief executive officer and chief financial officer) to allow timely decisions regarding required disclosure and that our disclosure controls and procedures are effective to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

(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.

On May 7, 2014, we completed the acquisition of the Performance Chemicals & Ingredients Company (d/b/a SensoryEffects) business. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for additional information. We have integrated SensoryEffects into our internal control over financial reporting process and will include the business in our assessment of internal control over financial reporting as of December 31, 2015.

Part II.

Other Information

Item 1A.

Risk Factors

There have been no material changes in the Risk Factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4.

Reserved.

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.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

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/ Theodore L. Harris
	Theodore L. Harris, President and
	Chief Executive Officer

	By: /s/ William A. Backus
	William A. Backus, Chief Financial Officer and Treasurer

Date: November 4, 2015

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.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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Balchem (BCPC) 10-Q2015 Q3 Quarterly report

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