FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
[X] the Securities Exchange Act of 1934
For The Quarterly Period Ended June 30, 2007
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
- ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600 New Hampton, New York 10958
- ------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
845-326-5600
-------------------------------
Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of August 3, 2007 the registrant had 17,877,870 shares of its Common Stock,
$.06 2/3 par value, outstanding.
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Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(unaudited)
Assets June 30, 2007 December 31, 2006
------ --------------- -----------------
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 5,312 $ 5,189
Accounts receivable 23,629 11,578
Inventories 16,639 9,918
Prepaid expenses and other 1,554 1,754
Deferred income taxes 463 416
Other current assets 2,605 --
--------------- ---------------
Total current assets 50,202 28,855
Property, plant and equipment, net 39,986 31,313
Goodwill 26,240 25,253
Intangible assets with finite lives, net 35,250 6,912
Other assets 62 --
--------------- ---------------
Total assets $ 151,740 $ 92,333
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 8,765 $ 3,010
Accrued expenses 8,331 3,696
Customer deposits and other deferred revenue 482 1,072
Current portion of long-term debt 7,244 --
Revolver borrowings 2,695 --
Dividends payable -- 1,596
Short-term payable 966 --
Income tax payable 642 186
--------------- ---------------
Total current liabilities 29,125 9,560
Long-term debt 30,292 --
Deferred income taxes 6,510 6,627
Other long-term obligations 1,231 784
--------------- ---------------
Total liabilities 67,158 16,971
--------------- ---------------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 25,000,000 shares;
17,872,870 shares issued and outstanding at June 30, 2007
and 17,733,849 shares issued and outstanding
at December 31, 2006 797 788
Additional paid-in capital 12,388 10,393
Retained earnings 71,203 63,988
Accumulated other comprehensive income 194 193
--------------- ---------------
Total stockholders' equity 84,582 75,362
--------------- ---------------
--------------- ---------------
Total liabilities and stockholders' equity $ 151,740 $ 92,333
=============== ===============
See accompanying notes to condensed consolidated financial statements.
2
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BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
-------- -------- -------- --------
<s> <c> <c> <c> <c>
Net sales $ 44,371 $ 25,100 $ 71,970 $ 49,697
Cost of sales 32,189 16,300 50,047 32,675
-------- -------- -------- --------
Gross profit 12,182 8,800 21,923 17,022
Operating expenses:
Selling expenses 3,194 1,941 5,322 3,610
Research and development expenses 615 486 1,184 1,012
General and administrative expenses 1,584 1,503 3,286 3,061
-------- -------- -------- --------
5,393 3,930 9,792 7,683
-------- -------- -------- --------
Earnings from operations 6,789 4,870 12,131 9,339
Other expenses (income):
Interest (income) (29) (27) (74) (89)
Interest expense 527 84 611 170
Other, net (76) -- (87) --
-------- -------- -------- --------
Earnings before income tax expense 6,367 4,813 11,681 9,258
Income tax expense 2,302 1,758 4,175 3,345
-------- -------- -------- --------
Net earnings $ 4,065 $ 3,055 $ 7,506 $ 5,913
======== ======== ======== ========
Net earnings per common share - basic $ 0.23 $ 0.18 $ 0.42 $ 0.34
======== ======== ======== ========
Net earnings per common share - diluted $ 0.22 $ 0.17 $ 0.41 $ 0.32
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
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BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Six Months Ended
June 30,
2007 2006
-------- --------
<s> <c> <c>
Cash flows from operating activities:
Net earnings $ 7,506 $ 5,913
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 2,761 1,699
Shares issued under employee benefit plans 235 208
Deferred income taxes (164) (2)
Stock compensation expense 784 524
Provision for doubtful accounts -- 9
Gain on sale of equipment (11) --
Other 10 --
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (10,174) (628)
Inventories (702) (362)
Prepaid expenses and other current assets 218 317
Income taxes 458 1,042
Customer deposits and other deferred revenue (590) (652)
Accounts payable and accrued expenses 1,475 (1,486)
Other long-term obligations 436 30
-------- --------
Net cash provided by operating activities 2,242 6,612
-------- --------
Cash flows from investing activities:
Capital expenditures (1,807) (598)
Proceeds from sale of property, plant & equipment 11 --
Cash paid for intangible assets acquired (84) (76)
Acquisition of assets (40,672) (17,266)
-------- --------
Net cash used in investing activities (42,552) (17,940)
-------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 38,946 10,000
Proceeds from short-term obligations 3,554 --
Principal payments on long-term debt (1,450) (8,500)
Proceeds from stock options exercised 485 301
Excess tax benefits from stock compensation 500 163
Dividends paid (1,596) (1,045)
Other -- (7)
-------- --------
Net cash provided by financing activities 40,439 912
-------- --------
Effect of exchange rate changes on cash (6) --
Increase (decrease) in cash and cash equivalents 123 (10,416)
Cash and cash equivalents beginning of period 5,189 12,996
-------- --------
Cash and cash equivalents end of period $ 5,312 $ 2,580
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
------- ------- ------- -------
<s> <c> <c> <c> <c>
Net Earnings $ 4,065 $ 3,055 7,506 $ 5,913
Other comprehensive income, net of tax:
Unfunded post retirement benefit plan - prior service cost
and gain amortized during period (3) -- (7) --
Equity adjustment from translation 8 -- 8 --
------- ------- ------- -------
Comprehensive income $ 4,070 $ 3,055 7,507 $ 5,913
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2006 consolidated financial statements, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in our Annual Report on Form 10-K for the year ended December 31, 2006.
References in this report to "the Company" mean Balchem and/or its subsidiaries,
BCP Ingredients, Inc., Balchem Minerals Corporation, and Balchem B.V., as the
context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and
therefore do not include some information and notes necessary to conform to
annual reporting requirements. The results of operations for the six months
ended June 30, 2007 are not necessarily indicative of the operating results
expected for the full year or any interim period.
NOTE 2 - STOCKHOLDERS' EQUITY
- -----------------------------
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share Based Payment" ("SFAS 123R"),
which requires all share-based payments, including grants of stock options, to
be recognized in the statement of earnings as an operating expense, based on
their fair values. SFAS 123R establishes the accounting for transactions in
which an entity pays for employee services in share-based payment transactions.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using the intrinsic value method and requires companies to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The fair value of
employee share options and similar instruments is estimated using option-pricing
models that take into account the unique characteristics of those instruments.
That cost is recognized over the period during which an employee is required to
provide service in exchange for the award. The Company adopted SFAS 123R
effective January 1, 2006, using the modified prospective transition method.
Under this method, compensation cost is recognized for awards granted and for
awards modified, repurchased or cancelled in the period after adoption.
Compensation cost is also recognized for the unvested portion of awards granted
prior to adoption over the remaining requisite service period. The Company's
results for the three and six months ended June 30, 2007 and 2006 reflected the
following compensation cost as a result of adopting SFAS 123R and such
compensation cost had the following effects on net earnings and basic and
diluted earnings per share:
6
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- --------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, 2007 June 30, 2006
- --------------------------------------------------------------------------------
Cost of sales $ 44 $ 27
Operating expenses 348 235
Net earnings (265) (205)
Basic earnings per common share (0.01) (0.01)
Diluted earnings per common share $ (0.01) $ (0.01)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Six Months Six Months
Ended Ended
June 30, 2007 June 30, 2006
- --------------------------------------------------------------------------------
Cost of sales $ 87 $ 54
Operating expenses 697 470
Net earnings (534) (459)
Basic earnings per common share (0.03) (0.03)
Diluted earnings per common share $ (0.03) $ (0.03)
- --------------------------------------------------------------------------------
As required by SFAS 123R, the Company has made an estimate of expected
forfeitures, based on its historical experience, and is recognizing compensation
cost only for those stock-based compensation awards expected to vest.
Additionally, since adoption of SFAS 123R, excess tax benefits related to stock
compensation are presented as a cash inflow from financing activities. This
change had the effect of decreasing cash flows from operating activities and
increasing cash flows from financing activities by $114 and $500 for the three
and six months ended June 30, 2007, respectively, and by $67 and $163 for the
three and six months ended June 30, 2006, respectively.
The Company's stock incentive plans allow for the granting of restricted stock
awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be
exercisable for longer than ten years after the date of grant. The shares to be
issued upon exercise of the outstanding options have been approved, reserved and
are adequate to cover all exercises. As of June 30, 2007, the plans had 727,033
shares available for future awards. Compensation expense for stock options and
restricted stock awards is recognized on a straight-line basis over the vesting
period, generally three years for stock options, four years for employee
restricted stock awards, and seven years for non-employee director restricted
stock awards. Certain awards provide for accelerated vesting if there is a
change in control (as defined in the plans) or other qualifying events.
Option activity for the six months ended June 30, 2007 and 2006 is summarized
below:
7
<page>
- --------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the six months Exercise Value Contractual
ended June 30, 2007 Shares (000s) Price ($000s) Term
- --------------------------------------------------------------------------------
Outstanding as of
December 31, 2006 2,170 $ 10.13 $ 15,168
Granted 3 17.86
Exercised (125) 3.87
Expired -- --
Forfeited (13) 14.01
- --------------------------------------------------------------------------------
Outstanding as of
June 30, 2007 2,035 $ 10.51 $ 15,595 7.1
================================================================================
Exercisable as of
June 30, 2007 1,206 $ 7.91 $ 12,380 6.2
================================================================================
- --------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the six months Exercise Value Contractual
ended June 30, 2006 Shares (000s) Price ($000s) Term
- --------------------------------------------------------------------------------
Outstanding as of
December 31, 2005 2,153 $ 8.38 $ 10,479
Granted 15 15.06
Exercised (57) 5.30
Expired -- --
Forfeited (19) 9.37
- --------------------------------------------------------------------------------
Outstanding as of
June 30, 2006 2,092 $ 8.51 $ 13,588 7.0
================================================================================
Exercisable as of
June 30, 2006 1,142 $ 6.24 $ 10,011 5.6
================================================================================
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yields of 0.3% and 0.4%; expected volatilities of 27% and
26%; risk-free interest rates of 4.1% and 3.8%; and expected lives of 3.7 and
4.5 for the six months ended June 30, 2007 and 2006, respectively.
For the six months ended June 30, 2007 and 2006, the Company used a projected
expected life for each award granted based on historical experience of
employees' exercise behavior. For the six months ended June 30, 2007 and 2006,
expected volatility is based on the Company's historical volatility levels. For
the six months ended June 30, 2007 and 2006, dividend yields are based on the
Company's historical dividend yields. Risk-free interest rates are based on the
implied yields currently available on U.S. Treasury zero coupon issues with a
remaining term equal to the expected life.
8
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Other information pertaining to option activity during the three and six months
ended June 30, 2007 and 2006 was as follows:
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<caption>
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
- ----------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Weighted-average fair value of options granted $ 6.47 $ 3.59 $ 6.47 $ 3.50
Total intrinsic value of stock options exercised $ 312 $ 187 $ 1,513 $ 524
- ----------------------------------------------------------------------------------------
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Non-vested restricted stock activity for the six months ended June 30, 2007 and
2006 is summarized below:
- ------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Six Months ended June 30, 2007 Shares (000s) Value
- ------------------------------------------------------------------------
Non-vested balance as of December 31, 2006 113 $ 16.40
Granted 5 18.61
Vested -- --
Forfeited -- --
Non-vested balance as of June 30, 2007 118 $ 16.49
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Six Months ended June 30, 2006 Shares (000s) Value
- ------------------------------------------------------------------------
Non-vested balance as of December 31, 2005 34 $ 13.22
Granted -- --
Vested -- --
Forfeited -- --
Non-vested balance as of June 30, 2006 34 $ 13.22
- ------------------------------------------------------------------------
As of June 30, 2007 and 2006, there was $3,299 and $1,891, respectively, of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. As of June 30, 2007, the
unrecognized compensation cost is expected to be recognized over a
weighted-average period of 2 years. We estimate that share-based compensation
expense for the year ended December 31, 2007 will be approximately $1,568.
STOCK SPLITS AND REPURCHASE OF COMMON STOCK
On December 8, 2006, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 29, 2006. Such stock
dividend was made on January 19, 2007. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
9
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On December 15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2005. Such stock
dividend was made on January 20, 2006. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
All references to number of common shares and per share amounts except shares
authorized in the accompanying consolidated financial statements were
retroactively adjusted to reflect the effect of the December 2006 and December
2005 stock splits.
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 772,461 shares at an average cost of
$4.11 per share, none of which remained in treasury at December 31, 2004. In
June 2005, the board of directors authorized another extension of the stock
repurchase program for up to an additional 900,000 shares, over and above those
772,461 shares previously repurchased under the program. Under this extension, a
total of 99,450 shares were purchased at an average cost of $12.05 per share,
none of which remained in treasury at June 30, 2007. During the six months ended
June 30, 2007, no additional shares have been purchased. The Company intends to
acquire shares from time to time at prevailing market prices if and to the
extent it deems it advisable to do so based on its assessment of corporate cash
flow, market conditions and other factors.
NOTE 3 - ACQUISITIONS
- ---------------------
Effective April 30, 2007, pursuant to an asset purchase agreement dated March
30, 2007 (the "Akzo Nobel Asset Purchase Agreement"), the Company, through its
European subsidiary, Balchem B.V., completed an acquisition of the methylamines
and choline chloride business and manufacturing facilities of Akzo Nobel
Chemicals S.p.A., located in Marano Ticino, Italy (the "Akzo Nobel Acquisition")
for a provisional purchase price including acquisition costs of $9,066, subject
to adjustment based on actual working capital and other adjustments.
The Akzo Nobel Acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets at the date of
acquisition. The preliminary allocation of the total purchase price, including
acquisition costs, was based on the estimated fair values as of April 30, 2007.
Adjustments to these estimates will be included in the allocation of the
purchase price of the Akzo Nobel Acquisition upon settlement of any working
capital or other adjustments. The preliminary purchase price has been allocated
as follows (in thousands):
- -----------------------------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
- -----------------------------------------------------------------------------
Property plant & equipment $ 7,994
Short-term receivable 2,506
Inventories 4,323
Goodwill 965
Other 83
Accounts payable and accrued expenses (8,258)
- -----------------------------------------------------------------------------
Total $ 7,613
=============================================================================
10
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On March 16, 2007, the Company, through its wholly-owned subsidiary BCP
Ingredients, Inc. ("BCP"), entered into an asset purchase agreement (the "Asset
Purchase Agreement") with Chinook Global Limited ("Chinook"), a privately held
Ontario corporation, pursuant to which BCP acquired certain of Chinook's choline
chloride business assets (the "Chinook Acquisition") for a purchase price of
$29,000, plus the value of certain product inventories estimated at
approximately $1,840. The acquisition closed effective the same date.
The Chinook Acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets at the date of
acquisition. The preliminary allocation of the total purchase price, including
acquisition costs, was based on the estimated fair values as of March 16, 2007.
Adjustments to these estimates will be included in the allocation of the
purchase price of the Chinook Acquisition upon settlement of any working capital
or other adjustments. The preliminary purchase price has been allocated as
follows (in thousands):
- ----------------------------------------------------
Fair Value Recorded
in Purchase Accounting
- ----------------------------------------------------
Customer list $ 29,261
Inventory 1,840
Short-term receivable 1,850
Short-term obligation (870)
Other 73
- ----------------------------------------------------
Total $ 32,154
- ----------------------------------------------------
The short-term receivable is included in other current assets.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
Chinook Acquisition had occurred on January 1, 2007 and does not include cost
savings expected from the transaction. In addition to including the results of
operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the Chinook acquisition had
occurred at the beginning of the periods presented and is not intended to be a
projection of future results.
11
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- ---------------------------------------------------
Pro Forma
Six Months Ended
June 30,
2007
- ---------------------------------------------------
Net sales $ 80,957
Net earnings 7,978
Basic EPS .45
Diluted EPS .43
- ---------------------------------------------------
Effective August 24, 2006, pursuant to an asset purchase agreement of the same
date, the Company, through its wholly owned subsidiaries BCP Ingredients and BCP
St. Gabriel, acquired from BioAdditives, LLC, CMB Additives, LLC and CMB Realty
of Louisiana (the "St. Gabriel Sellers") an animal feed grade aqueous choline
chloride manufacturing facility and related assets located in St. Gabriel,
Louisiana (the "St. Gabriel Acquisition"). The Company also acquired the St.
Gabriel Sellers' remaining interest in a land lease (approximately 21 years)
relating to the realty upon which the acquired facility and related assets are
located. The acquisition was funded through the Company's cash reserves. In
February 2007, the facility was placed in service.
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation ("BMC"), completed an acquisition (the "CMC Acquisition")
of all of the outstanding capital stock of Chelated Minerals Corporation
("CMC"), a privately held Utah corporation, for a purchase price of $17,350,
subject to adjustment based upon CMC's actual working capital and other
adjustments. On February 6, 2006, the Company and its principal bank entered
into a Loan Agreement (the "Loan Agreement") providing for an unsecured term
loan of $10,000 (the "Term Loan"), the proceeds of which were used to fund the
CMC Acquisition, in part. The remaining balance of the purchase price of the CMC
Acquisition was funded through the Company's cash reserves. At December 31,
2006, the Term Loan had been repaid in full.
The CMC Acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The allocation of the total purchase price, including
acquisition costs, of CMC's net tangible and intangible assets was based on the
estimated fair values as of February 8, 2006. Adjustments to these estimates
have been included in the allocation of the purchase price of CMC upon
settlement of any working capital or other adjustments. The excess of the
purchase price over the identifiable intangible and net tangible assets was
allocated to goodwill. The purchase price has been allocated as follows (in
thousands):
- -----------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
- -----------------------------------------------------------
Accounts receivable $ 884
Inventory 552
Property, plant and equipment 1,980
Current liabilities (388)
Other long-term liabilities (2,368)
Goodwill 11,925
Other intangible assets 5,334
- -----------------------------------------------------------
Total $ 17,919
- -----------------------------------------------------------
12
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Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the CMC
Acquisition had occurred on January 1, 2006 and does not include cost savings
expected from the transaction. In addition to including the results of
operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the CMC acquisition had
occurred at the beginning of the periods presented and is not intended to be a
projection of future results.
- ------------------------------------------------------------------
Actual Pro Forma
June 30, 2007 June 30, 2006
- ------------------------------------------------------------------
Net sales $ 71,970 $ 50,431
Net earnings 7,506 5,960
Basic EPS .42 .34
Diluted EPS .41 .33
- ------------------------------------------------------------------
NOTE 4 - INVENTORIES
- --------------------
Inventories at June 30, 2007 and December 31, 2006 consisted of the following:
- ------------------------------------------------------------------
June 30, December 31,
2007 2006
- ------------------------------------------------------------------
Raw materials $ 5,512 $ 4,264
Finished goods 11,127 5,654
- ------------------------------------------------------------------
Total inventories $ 16,639 $ 9,918
- ------------------------------------------------------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment at June 30, 2007 and December 31, 2006 are
summarized as follows:
- ------------------------------------------------------------------
June 30, December 31,
2007 2006
- ------------------------------------------------------------------
Land $ 1,201 $ 650
Building 12,467 11,640
Equipment 44,806 38,545
Construction in progress 3,959 1,247
- ------------------------------------------------------------------
62,433 52,082
Less: Accumulated depreciation 22,447 20,769
- ------------------------------------------------------------------
Net property, plant and equipment $ 39,986 $ 31,313
- ------------------------------------------------------------------
NOTE 6 - INTANGIBLE ASSETS
- --------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
accounting for a business
13
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combination and define an intangible asset. Goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but are instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
As of December 31, 2006, the Company performed an impairment test of its
goodwill balance. As of such date, the Company's reporting units' fair values
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company will perform its impairment test next on
December 31, 2007.
The Company had goodwill in the amount of $26,240 and $25,253 at June 30, 2007
and December 31, 2006, respectively, subject to the provisions of SFAS Nos. 141
and 142. At June 30, 2007, the increase in goodwill is primarily attributable to
the cost in excess of net assets acquired of the Akzo Nobel Acquisition, as
described in Note 3.
As of June 30, 2007 and December 31, 2006, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$37,221 and $7,799, respectively, less accumulated amortization of $1,971 and
$887, respectively. At June 30, 2007, the increase in the gross carrying amount
is primarily attributable to the customer list acquired as part of the Chinook
Acquisition, as described in Note 3.
Identifiable intangible assets with finite lives at June 30, 2007 and December
31, 2006 are summarized as follows:
<table>
<caption>
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization at Amount at Amortization
(in years) 6/30/07 6/30/07 12/31/06 at 12/31/06
- ---------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Customer lists 10 $ 34,149 $ 1,472 $ 4,888 $ 497
Regulatory re-registration
costs 10 28 -- 28 --
Patents & trade secrets 15-17 1,587 266 1,550 221
Trademarks & trade names 17 878 121 876 94
Other 5 579 112 457 75
- ---------------------------------------------------------------------------------------------------------------
$ 37,221 $ 1,971 $ 7,799 $ 887
- ---------------------------------------------------------------------------------------------------------------
</table>
Amortization of identifiable intangible assets was $1,084 for the first six
months of 2007. Assuming no change in the gross carrying value of identifiable
intangible assets, the estimated amortization expense for the remainder of 2007
is $1,743, approximately $3,473 in 2008, $3,468 in 2009, $3,463 per annum for
2010 and 2011 and $3,450 in 2012. At June 30, 2007, there were no identifiable
intangible assets with indefinite useful lives as defined by SFAS No. 142.
Identifiable intangible assets are reflected in "Intangible assets with finite
lives, net" in the Company's condensed consolidated balance sheets. There were
no changes to the useful lives of intangible assets subject to amortization
during the six months ended June 30, 2007.
14
<page>
NOTE 7 - NET EARNINGS PER SHARE
- -------------------------------
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
<table>
<caption>
- ----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended June 30, 2007 (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Basic EPS - Net earnings and weighted average common
shares outstanding $ 4,065 17,752,226 $.23
Effect of dilutive securities - stock options and
restricted stock 826,959
----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and
effect of stock options
and restricted stock $ 4,065 18,579,185 $.22
- ----------------------------------------------------------------------------------------------------------
<caption>
- ----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended June 30, 2006 (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Basic EPS - Net earnings and weighted average common
shares outstanding $ 3,055 17,425,384 $.18
Effect of dilutive securities - stock options and
restricted stock 816,670
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and
effect of stock options
and restricted stock $ 3,055 18,242,054 $.17
- ----------------------------------------------------------------------------------------------------------
<caption>
- ----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Six months ended June 30, 2007 (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Basic EPS - Net earnings and weighted average common
shares outstanding $ 7,506 17,724,581 $.42
Effect of dilutive securities - stock options and
restricted stock 762,434
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and
effect of stock options
and restricted stock $ 7,506 18,487,015 $.41
- ----------------------------------------------------------------------------------------------------------
15
<page>
<caption>
- ----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Six months ended June 30, 2006 (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Basic EPS - Net earnings and weighted average common
shares outstanding $ 5,913 17,409,662 $.34
Effect of dilutive securities - stock options and
restricted stock 828,321
----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and
effect of stock options
and restricted stock $ 5,913 18,237,983 $.32
- ----------------------------------------------------------------------------------------------------------
</table>
The Company had stock options covering 286,900 and 491,325 shares at June 30,
2007 and 2006, respectively, that could potentially dilute basic earnings per
share in future periods that were not included in diluted earnings per share
because their effect on the period presented was anti-dilutive.
NOTE 8 - INCOME TAXES
- ---------------------
Effective January 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). This interpretation, among other
things, creates a two-step approach for evaluating uncertain tax positions.
Recognition (step one) occurs when an enterprise concludes that a tax position,
based solely on its technical merits, is more-likely-than-not to be sustained
upon examination. Measurement (step two) determines the amount of benefit that
more-likely-than-not will be realized upon settlement. De-recognition of a tax
position that was previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for de-recognition of tax positions, and it
has expanded disclosure requirements. The adoption of FIN 48 resulted in, as a
cumulative effect, a non-cash charge, net of federal tax benefits, of $291,
recorded as a reduction to beginning retained earnings. The charge before
federal tax benefits was $411. The Company includes interest expense or income
as well as potential penalties on unrecognized tax positions as a component of
income tax expense in the consolidated statement of operations. The total amount
of accrued interest and penalties related to uncertain tax positions at January
1, 2007 was $89 and is included in other long-term obligations. All of our
unrecognized tax benefits, if recognized in future periods, would impact the
Company's effective tax rate. The Company remains open for examination by the
IRS for 2003 through 2006. For most of its other significant tax jurisdictions
(U.S. states), the Company's income tax returns are also open for examination
for 2003 through 2006. There was not a significant change in our liabilities for
unrecognized tax benefits during the six months ended June 30, 2007.
NOTE 9 - SEGMENT INFORMATION
- ----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments:
specialty products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.
16
<page>
Business Segment Net Sales:
<table>
<caption>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Specialty Products $ 8,367 $ 8,009 $ 16,428 $ 15,960
Encapsulated/Nutritional Products 11,746 10,539 23,246 20,328
BCP Ingredients 24,258 6,552 32,296 13,409
- -------------------------------------------------------------------------------------------------------------------
Total $ 44,371 $ 25,100 $ 71,970 $ 49,697
- -------------------------------------------------------------------------------------------------------------------
<caption>
Business Segment Earnings:
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Specialty Products $ 3,053 $ 2,764 $ 5,956 $ 5,536
Encapsulated/Nutritional Products 1,213 1,013 2,456 2,052
BCP Ingredients 2,523 1,093 3,719 1,751
Other expense (422) (57) (450) (81)
- -------------------------------------------------------------------------------------------------------------------
Earnings before income taxes
$ 6,367 $ 4,813 $ 11,681 $ 9,258
- -------------------------------------------------------------------------------------------------------------------
<caption>
The following table summarizes domestic and foreign sales for the three and six
months ended June 30, 2007 and June 30, 2006:
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Domestic $ 31,348 $ 22,816 $ 55,475 $ 45,230
Foreign 13,023 2,284 16,495 4,467
- -------------------------------------------------------------------------------------------------------------------
Total $ 44,371 $ 25,100 $ 71,970 $ 49,697
- -------------------------------------------------------------------------------------------------------------------
</table>
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Cash paid during the six months ended June 30, 2007 and 2006 for income taxes
and interest is as follows:
- --------------------------------------------------------
Six months ended
June 30,
2007 2006
- --------------------------------------------------------
Income taxes $ 3,295 $ 2,142
Interest $ 458 $ 170
- --------------------------------------------------------
Other supplemental non-cash transactions resulting from acquisitions are
described in Notes 3 and 11.
17
<page>
NOTE 11 - LONG-TERM DEBT AND CREDIT AGREEMENTS
- ----------------------------------------------
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of $10,244 (the "European Term Loan"), the proceeds of which were used to fund
the Akzo Nobel Acquisition (the "Akzo Nobel Acquisition"), as described in Note
3. The European Term Loan is payable in equal monthly installments of principal,
each equal to 1/84th of the principal of the European Term Loan, together with
accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At June 30, 2007, this interest
rate was 5.12%. The European Loan Agreement also provides for a short-term
revolving credit facility of $2,732 (the "European Revolving Facility"). The
European Revolving Facility is subject to a monthly interest rate equal to
EURIBOR plus 1.25%, and accrued interest is payable monthly. The Company has
drawn down the European Revolving Facility as of June 30, 2007. The European
Revolving Facility has a maturity date of May 1, 2008. Management believes that
such facility will be renewed in the normal course of business.
On March 16, 2007, the Company and its principal bank entered into a new Loan
Agreement (the "New Loan Agreement") providing for an unsecured term loan of
$29,000 (the "New Term Loan"), the proceeds of which were used to fund the
Chinook acquisition (the "Chinook Acquisition"), as described in Note 3. The New
Term Loan is payable in equal monthly installments of principal, each equal to
1/60th of the principal of the New Term Loan, together with accrued interest,
with remaining principal and interest payable at maturity. The New Term Loan has
a maturity date of March 16, 2010 and is subject to a monthly interest rate
equal to LIBOR plus 1%. At June 30, 2007, this interest rate was 6.32%. The New
Loan Agreement also provides for a short-term revolving credit facility of
$6,000 (the "New Revolving Facility"). The New Revolving Facility is subject to
a monthly interest rate equal to LIBOR plus 1%, and accrued interest is payable
monthly. No amounts have been drawn on the New Revolving Facility as of the date
hereof. The New Revolving Facility has a maturity date of May 31, 2009.
Management believes that such facility will be renewed in the normal course of
business.
NOTE 12 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company sponsors a 401(k) savings and profit sharing plan for eligible
employees. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees.
The Company also currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of its Verona, Missouri facility.
Net periodic benefit cost for such retirement medical plan for the six months
ended June 30, 2007 and June 30, 2006 was as follows:
18
<page>
- ------------------------------------------------------------
2007 2006
- ------------------------------------------------------------
Service Cost $ 15 $ 14
Interest Cost 20 19
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (9) (9)
Amortization of (gain) or loss (2) (1)
- ------------------------------------------------------------
Net periodic benefit cost $ 24 $ 23
- ------------------------------------------------------------
The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In February, 2007 the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", including an amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair market value
measurement, which is consistent with long-term measurement objectives for
accounting for financial instruments. This statement is effective beginning in
January 2008. The Company does not expect the adoption of this statement to be
significant to its consolidated financial statements.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. This statement is
effective beginning in January 2008. The Company is evaluating whether adoption
of this statement will result in a change to its fair value measurements.
19
<page>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified in Item 1 of our Annual Report on Form 10-K for the
year ended December 31, 2006 and other factors that may be identified elsewhere
in this Report. Reference should be made to such factors and all forward-looking
statements are qualified in their entirety by the above cautionary statements.
Overview
- --------
We develop, manufacture, distribute and market specialty performance ingredients
and products for the food, nutritional, pharmaceutical, animal health and
medical device sterilization industries. Our reportable segments are strategic
businesses that offer products and services to different markets. We presently
have three reportable segments: specialty products; encapsulated / nutritional
products; and BCP Ingredients.
Specialty Products
- ------------------
Our specialty products segment operates as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use
in the health care industry. It is used to sterilize a wide range of medical
devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without
negatively impacting the performance of the device being sterilized. Our 100%
ethylene oxide product is distributed in uniquely designed, recyclable
double-walled stainless steel drums to assure compliance with safety, quality
and environmental standards as outlined by the U.S. Environmental Protection
Agency (the "EPA") and the U.S. Department of Transportation. Our inventory of
these specially built drums, along with our two filling facilities, represents a
significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are our principal customers for this
product. In addition, we also sell single use canisters with 100% ethylene oxide
for use in medical device sterilization. As a fumigant, ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spices and other
seasoning materials.
We sell two other products, propylene oxide and methyl chloride, principally to
customers seeking smaller (as opposed to bulk) quantities and whose requirements
include timely delivery and safe handling. Propylene oxide is used for
fumigation in spice treatment, various chemical synthesis applications, to make
paints more durable, and for manufacturing specialty starches and textile
coatings. Methyl chloride is used as a raw material in specialty herbicides,
fertilizers, pharmaceuticals, malt and wine preservers.
20
<page>
Encapsulated / Nutritional Products
- -----------------------------------
The encapsulated / nutritional products segment provides microencapsulation,
granulation and agglomeration solutions to a variety of applications in food,
pharmaceutical and nutritional ingredients to enhance performance of nutritional
fortification, processing, mixing, packaging applications and shelf-life. Major
product applications are baked goods, refrigerated and frozen dough systems,
processed meats, seasoning blends, confections, nutritional supplements and
animal nutrition. We also market human grade choline nutrient products through
this segment for wellness applications. Choline is recognized to play a key role
in the development and structural integrity of brain cell membranes in infants,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. Our portfolio of granulated calcium carbonate
products are primarily used in, or in conjunction with, novel over-the-counter
and prescription pharmaceuticals for the treatment of osteoporosis, gastric
disorders and calcium deficiencies in the United States.
In the animal health industry, we market REASHURE(R) Choline, an encapsulated
choline product that boosts health and milk production in transition and early
lactation cows. Commercial sales are currently derived from the dairy industry
where REASHURE(R) delivers nutrient supplements that survive the rumen and are
biologically available, providing required nutritional levels during certain
weeks preceding and following calving, commonly referred to as the "transition
period" of the animal. Also, in animal health, we market NITROSHURETM, an
encapsulated urea supplement for lactating dairy cows that is designed to create
a slow-release nitrogen source for the rumen, allowing for greater flexibility
in feed rations for dairy nutritionists and producers, and NIASHURETM, our
microencapsulated niacin product for dairy cows. In addition, CMC manufactures,
sells and distributes chelated mineral supplements for use in animal feed
throughout the world. CMC's proprietary chelation technology provides enhanced
nutrient absorption for various species of domestic and companion animals.
BCP Ingredients
- ---------------
This segment manufactures and supplies raw choline chloride, an essential
nutrient for animal health, predominantly to the poultry and swine industries.
Choline plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. Choline deficiency can result in, among other
symptoms, reduced growth and perosis in poultry, and fatty liver, kidney
necrosis and general poor health condition in swine. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial
applications. Choline chloride is manufactured and sold in both an aqueous and
dry form.
We sell products for all three segments through our own sales force, independent
distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings for the six months ended June 30, 2007 and June 30, 2006 (in
thousands):
21
<page>
Business Segment Net Sales:
- -------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
- -------------------------------------------------------------------------
Specialty Products $ 8,367 $ 8,009 $ 16,428 $ 15,960
Encap/Nutritional Products 11,746 10,539 23,246 20,328
BCP Ingredients 24,258 6,552 32,296 13,409
- -------------------------------------------------------------------------
Total $ 44,371 $ 25,100 $ 71,970 $ 49,697
- -------------------------------------------------------------------------
Business Segment Earnings:
- -------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
- -------------------------------------------------------------------------
Specialty Products $ 3,053 $ 2,764 $ 5,956 $ 5,536
Encap/Nutritional Products 1,213 1,013 2,456 2,052
BCP Ingredients 2,523 1,093 3,719 1,751
Other expense (422) (57) (450) (81)
- -------------------------------------------------------------------------
Earnings bef. income taxes $ 6,367 $ 4,813 $ 11,681 $ 9,258
- -------------------------------------------------------------------------
22
<page>
RESULTS OF OPERATIONS
---------------------
Three months ended June 30, 2007 compared to three months ended June 30, 2006
Net Sales
- ---------
Net sales for the three months ended June 30, 2007 were $44,371 compared with
$25,100 for the three months ended June 30, 2006, an increase of $19,271 or
76.8%. Net sales for the specialty products segment were $8,367 for the three
months ended June 30, 2007 compared with $8,009 for the three months ended June
30, 2006, an increase of $358 or 4.5%. This increase was principally due to an
increase in sales volume, along with modest price increases for our ethylene
oxide products for medical device sterilization. Net sales for the encapsulated
/ nutritional products segment were $11,746 for the three months ended June 30,
2007 compared with $10,539 for the three months ended June 30, 2006, an increase
of $1,207 or 11.5%. This result was driven principally by increased global sales
of human nutritional and choline products, and includes $300 from the Akzo Nobel
Acquisition, as described in Note 3. Sales of REASHURE(R) and Niashure, our
specialty animal nutrition and health products targeted for ruminant animals,
and increases in the companion animal market also contributed to this growth.
Net sales of $24,258 were realized for the three months ended June 30, 2007 for
the BCP Ingredients (unencapsulated feed supplements) segment, as compared with
$6,552 for the three months ended June 30, 2006, an increase of $17,706 or
270.2%. This result reflects sales from the customer list acquisition of Chinook
Group Limited ("Chinook"), as described in Note 3, as well as sales from the
Akzo Nobel Acquisition. The Chinook and Akzo Nobel acquisitions contributed
approximately $9,500 and $6,700 of the revenue increase in this segment,
respectively. The remaining increase was due to increased volumes sold in the
core dry choline, aqueous choline, and specialty industrial product lines.
Gross Margin
- ------------
Gross margin for the three months ended June 30, 2007 increased to $12,182
compared to $8,800 for the three months ended June 30, 2006, an increase of
$3,382 or 38.4%, due largely to the above-noted increase in sales. Gross margin
percentage for the three months ended June 30, 2007 was 27.5% compared to 35.1%
for the three months ended June 30, 2006. This decrease in gross margin
percentage reflects the initial impact of the acquisitions in the animal grade
choline business, which carry lower gross margins and was also a result of
higher raw material and fuel costs. Gross margin dollars for the specialty
products segment increased 9.7% as increases in sales volume and modest sales
price increases were partially offset by higher raw material prices. Gross
margin dollars in the encapsulated / nutritional products segment increased 10%
as margins were favorably affected by increased volumes sold in the human
choline markets and specialty animal nutrition and health products. Gross margin
dollars for BCP Ingredients increased 219% and was favorably affected by
increased sales volumes and improved productivity.
Operating Expenses
- ------------------
Operating expenses for the three months ended June 30, 2007 were $5,393 compared
to $3,930 for the three months ended June 30, 2006, an increase of $1,463 or
37.2%. This $1,463 increase was due primarily to $732 of additional amortization
expense, plus sales and technical personnel expense associated with the Chinook
and Akzo Nobel
23
<page>
acquisitions. We also incurred approximately $200 of commercial development
expenses toward our pharmaceutical market initiatives in the quarter. With these
increases, operating expenses were 12.2% of sales or 3.5 percentage points less
than the operating expenses as a percent of sales incurred in last year's
comparable quarter. During the three months ended June 30, 2007 and 2006, the
Company spent $615 and $486, respectively, on research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both human and animal health.
Earnings From Operations
- ------------------------
Primarily as a result of the above-noted increase in sales, earnings from
operations for the three months ended June 30, 2007 were $6,789 as compared to
$4,870 for the three months ended June 30, 2006.
Other expenses (income)
- -----------------------
Interest income for the three months ended June 30, 2007 totaled $29 as compared
to $27 for the three months ended June 30, 2006. Interest expense was $527 for
the three months ended June 30, 2007 compared to $84 for the three months ended
June 30, 2006. This increase is attributable to the increase in average current
and long-term debt resulting from the aforementioned Chinook and Akzo Nobel
acquisitions. Other income of $76 for the three months ended June 30, 2007 is
the result of favorable fluctuations in foreign currency exchange rates between
the U.S. dollar (the functional reporting currency) and the Canadian dollar.
Income Tax Expense
- ------------------
The Company's effective tax rate for the three months ended June 30, 2007 and
2006 was 36.2% and 36.5%, respectively. This decrease in the effective tax rate
is primarily attributable to a domestic manufacturer's deduction, partially
offset by proportionately higher earnings in jurisdictions with higher tax
rates.
Net earnings
- ------------
Primarily as a result of the above-noted increase in sales, net earnings were
$4,065 for the three months ended June 30, 2007 as compared with $3,055 for the
three months ended June 30, 2006, an increase of 33.1%.
24
<page>
Six months ended June 30, 2007 compared to six months ended June 30, 2006
Net Sales
- ---------
Net sales for the six months ended June 30, 2007 were $71,970 compared with
$49,697 for the six months ended June 30, 2006, an increase of $22,273 or 44.8%.
Net sales for the specialty products segment were $16,428 for the six months
ended June 30, 2007 compared with $15,960 for the six months ended June 30,
2006, an increase of $468 or 2.9%. This increase was principally due to an
increase in sales volume along with modest price increases for our ethylene
oxide products for medical device sterilization partially offset by a decline in
sales of propylene oxide for starch processing. Net sales for the encapsulated /
nutritional products segment were $23,246 for the six months ended June 30, 2007
compared with $20,328 for the six months ended June 30, 2006, an increase of
$2,918 or 14.4%. This increase was due principally to increased volumes sold in
the human choline markets partially offset by slowness in sales of calcium
products into the over-the-counter pharmaceutical markets. Sales of REASHURE(R),
Niashure and Chelated Minerals, our specialty animal nutrition and health
products targeted for ruminant animals, and increases in the companion animal
market also contributed to this growth. Net sales of $32,296 were realized for
the six months ended June 30, 2007 for the BCP Ingredients (unencapsulated feed
supplements) segment, as compared with $13,409 for the six months ended June 30,
2006, an increase of $18,887 or 140.9%. This result reflects sales from the
customer list acquisition of Chinook as well as sales from the Akzo Nobel
Acquisition. This increase was also due to increased volumes sold in dry and
aqueous choline, and choline derivatives, along with modest price increases in
all product lines.
Gross Margin
- ------------
Gross margin for the six months ended June 30, 2007 increased to $21,923
compared to $17,022 for the six months ended June 30, 2006, an increase of
$4,901 or 28.8%, due largely to the above-noted increase in sales. Gross margin
percentage for the six months ended June 30, 2007 was 30.5% compared to 34.3%
for the six months ended June 30, 2006. This decrease in gross margin percentage
reflects the initial impact of the acquisitions in the animal grade choline
business, which carry lower gross margins and was also a result of higher raw
material and fuel costs. Gross margin dollars for the specialty products segment
increased 8.0% due to improved productivity, resulting from increases in sales
volume, and modest increases in average selling price. These increases were
partially offset by higher raw material prices. Gross margin dollars in the
encapsulated / nutritional products segment increased 14.2% as margins were
favorably affected by increased volumes sold in the human choline markets and
specialty animal nutrition and health products, as described above. Gross margin
dollars for BCP Ingredients increased 165.3% and was favorably affected by
increased sales volumes and improved productivity.
Operating Expenses
- ------------------
Operating expenses for the six months ended June 30, 2007 were $9,792 compared
to $7,683 for the six months ended June 30, 2006, an increase of $2,109 or
27.5%. This $2,109 dollar increase was due primarily to additional amortization
expense, plus sales and technical personnel expense associated with the Chinook
and Akzo Nobel
25
<page>
acquisitions. With these increases, operating expenses were 13.6% of sales or
1.9 percentage points less than the operating expenses as a percent of sales
incurred in last year's comparable period. During the six months ended June 30,
2007 and 2006, the Company spent $1,184 and $1,012, respectively, on research
and development programs, substantially all of which pertained to the Company's
encapsulated / nutritional products segment for both human and animal health.
Earnings From Operations
- ------------------------
Primarily as a result of the above-noted increase in sales, earnings from
operations for the six months ended June 30, 2007 were $12,131 as compared to
$9,339 for the six months ended June 30, 2006.
Other expenses (income)
- -----------------------
Interest income for the six months ended June 30, 2007 totaled $74 as compared
to $89 for the six months ended June 30, 2006. This decrease is attributable to
the decrease in the average total cash balance. Interest expense was $611 for
the six months ended June 30, 2007 compared to $170 for the six months ended
June 30, 2006. This increase is attributable to the increase in average current
and long-term debt resulting from the aforementioned Chinook and Akzo Nobel
acquisitions. Other income of $76 for the six months ended June 30, 2007 is the
result of favorable fluctuations in foreign currency exchange rates between the
U.S. dollar (the functional reporting currency) and the Canadian dollar.
Income Tax Expense
- ------------------
The Company's effective tax rate for the six months ended June 30, 2007 and 2006
was 35.7% and 36.1%, respectively. This decrease in the effective tax rate is
primarily attributable to a domestic manufacturer's deduction, partially offset
by proportionately higher earnings in jurisdictions with higher tax rates.
Net earnings
- ------------
Primarily as a result of the above-noted increase in sales, net earnings were
$7,506 for the six months ended June 30, 2007 as compared with $5,913 for the
six months ended June 30, 2006, an increase of 26.9%.
26
<page>
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 and paid in 2007.
The Company's other contractual obligations and commitments principally include
obligations associated with future minimum non-cancelable operating lease
obligations (including for the headquarters office space entered into in 2002).
As a result of the adoption of FIN 48 on January 1, 2007, we have a liability
for uncertain tax positions of $291. We are unable to reasonably estimate the
amount or timing of payments for this liability, if any. Other than the adoption
of FIN 48, there have been no significant changes to the Contractual Obligations
table, which was included in our Annual Report on Form 10-K for the year ended
December 31, 2006.
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash flow
to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. The Company
could seek additional bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
- ----
Cash and cash equivalents increased to $5,312 at June 30, 2007 from $5,189 at
December 31, 2006. Working capital amounted to $21,077 at June 30, 2007 as
compared to $19,295 at December 31, 2006, an increase of $1,782.
Operating Activities
- --------------------
Cash flows from operating activities provided $2,242 for the six months ended
June 30, 2007 compared to $6,612 for the six months ended June 30, 2006. The
decrease in cash flows from operating activities was primarily due to increases
in accounts receivable and inventories, a result of our reflecting approximately
two months' activity from our recently acquired Akzo Nobel Methylamines and
Choline business, which contributed approximately $6,700 of revenue in the
second quarter, and it also reflects a full quarter of the Chinook customer list
acquisition, which was completed in March 2007 which
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contributed $9,500 in the second quarter. This decrease was partially offset by
an increase in net earnings, depreciation and amortization expense.
Investing Activities
- --------------------
Capital expenditures were $1,807 for the six months ended June 30, 2007 compared
to $598 for the six months ended June 30, 2006. Cash paid for the acquisition of
certain business assets of Chinook Global Limited and the Akzo Nobel
Methylamines and Choline business was $40,672.
Financing Activities
- --------------------
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 772,461 shares at an average cost of
$4.11 per share, none of which remained in treasury at December 31, 2004. In
June 2005, the board of directors authorized another extension of the stock
repurchase program for up to an additional 900,000 shares, over and above those
772,461 shares previously repurchased under the program. Under this extension, a
total of 99,450 shares were purchased at an average cost of $12.05 per share,
none of which remained in treasury at June 30, 2007. During the six months ended
June 30, 2007, no additional shares have been purchased. The Company intends to
acquire shares from time to time at prevailing market prices if and to the
extent it deems it advisable to do so based on its assessment of corporate cash
flow, market conditions and other factors.
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of $10,244 (the "European Term Loan"), the proceeds of which were used to fund
the Akzo Nobel Acquisition (the "Akzo Nobel Acquisition"), as described in Note
3. The European Term Loan is payable in equal monthly installments of principal,
each equal to 1/84th of the principal of the European Term Loan, together with
accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At June 30, 2007, this interest
rate was 5.12%. The European Loan Agreement also provides for a short-term
revolving credit facility of $2,732 (the "European Revolving Facility"). The
European Revolving Facility is subject to a monthly interest rate equal to
EURIBOR plus 1.25%, and accrued interest is payable monthly. The Company has
drawn down the European Revolving Facility as of June 30, 2007. The European
Revolving Facility has a maturity date of May 1, 2008. Management believes that
such facility will be renewed in the normal course of business.
On March 16, 2007, the Company and its principal bank entered into a new Loan
Agreement (the "New Loan Agreement") providing for an unsecured term loan of
$29,000 (the "New Term Loan"), the proceeds of which were used to fund the
Chinook acquisition (the "Chinook Acquisition"), as described in Note 3. The New
Term Loan is payable in equal monthly installments of principal, each equal to
1/60th of the principal of the New Term Loan, together with accrued interest,
with remaining principal and interest payable at maturity. The New Term Loan has
a maturity date of March 16, 2010 and is subject to a monthly interest rate
equal to LIBOR plus 1%. At June 30, 2007, this interest rate was 6.32%. The New
Loan Agreement also provides for a short-term
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revolving credit facility of $6,000 (the "New Revolving Facility"). The New
Revolving Facility is subject to a monthly interest rate equal to LIBOR plus 1%,
and accrued interest is payable monthly. No amounts have been drawn on the New
Revolving Facility as of the date hereof. The New Revolving Facility has a
maturity date of May 31, 2009. Management believes that such facility will be
renewed in the normal course of business.
On February 6, 2006, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $10,000
(the "Term Loan"), the proceeds of which were used to fund the CMC acquisition
(the "CMC Acquisition"), as described in Note 3, in part. The remaining balance
of the purchase price of the CMC Acquisition was funded through Balchem's cash
on hand. The Company repaid in full the $10,000 of principal under the Term Loan
in 2006.
Proceeds from stock options exercised totaled $485 and $301 for the six months
ended June 30, 2007 and 2006, respectively. Dividend payments were $1,596 and
$1,045 for the six months ended June 30, 2007 and 2006, respectively.
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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 June 30, 2007 for this obligation is $762.
The postretirement plan is not funded. Historical cash payments made under such
plan have approximated $50 per year.
Critical Accounting Policies
- ----------------------------
Accounting for Uncertainty in Income Taxes
As discussed above, effective January 1 2007, the Company adopted the provisions
of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48"). This interpretation, among other things, creates a two-step approach
for evaluating uncertain tax positions. Recognition (step one) occurs when an
enterprise concludes that a tax position, based solely on its technical merits,
is more-likely-than-not to be sustained upon examination. Measurement (step two)
determines the amount of benefit that more-likely-than-not will be realized upon
settlement. De-recognition of a tax position that was previously recognized
would occur when a company subsequently determines that a tax position no longer
meets the more-likely-than-not threshold of being sustained. FIN 48 specifically
prohibits the use of a valuation allowance as a substitute for de-recognition of
tax positions, and it has expanded disclosure requirements. The adoption of FIN
48 resulted in a non-cash transition charge of $291, recorded as a reduction to
beginning retained earnings.
Other than the aforementioned adoption of FIN 48, there were no changes to the
Company's Critical Accounting Policies, as described in its December 31, 2006
Annual Report on Form 10-K, during the six months ended June 30, 2007.
Related Party Transactions
- --------------------------
The Company was not engaged in related party transactions during the six months
ended June 30, 2007 and all transactions of the Company during such period were
at arms length.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. The Company has no derivative financial instruments or
derivative commodity instruments, nor does the Company have any financial
instruments entered into for trading or hedging purposes. As of June 30, 2007,
the Company's borrowings were under a bank term loan bearing interest at LIBOR
plus 1.00%, a second bank term loan bearing interest at EURIBOR plus 1.00%, and
a revolving line of credit bearing interest at EURIBOR plus 1.25%. A 100 basis
point increase or decrease in interest rates, applied to the Company's
borrowings at June 30, 2007, would result in an increase or decrease in annual
interest expense and a corresponding reduction or increase in cash flow of
approximately $402. 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.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated, as of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of the Company's disclosure controls and
procedures (including its internal controls and procedures.
Based upon management's evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures were effective in
identifying the information required to be disclosed in the Company's
periodic reports filed with the Securities and Exchange Commission
("SEC"), including this Quarterly Report on Form 10-Q, and ensuring that
such information is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls
During the most recent fiscal quarter, there has been no significant
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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Part II. Other Information
Item 1A. Risk Factors
There have been no material changes in the Risk Factors identified in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 15, 2007, the Company held its Annual Meeting of stockholders. The
following actions were voted upon at the meeting:
1. The following individuals were elected Class 1 directors to serve until the
annual meeting of stockholders in 2010 and until the election and qualification
of their respective successors. A total of 16,281,534 shares were represented in
person or by proxy at the Annual Meeting. The number of shares that were voted
for, and that were withheld from, each of the director nominees is as follows:
Director For Votes Withheld
Dino A. Rossi 15,874,422 407,112
Dr. Elaine R. Wedral 16,041,922 239,612
The terms of our other directors, Mr. Hoyt Ammidon, Jr., Mr. Edward L. McMillan,
Dr. John Y. Televantos and Mr. Kenneth P. Mitchell continued after the annual
meeting.
2. The shareholders approved the appointment of McGladrey & Pullen, LLP as the
Company's independent registered public accounting firm for the 2007 fiscal year
by a vote of 16,200,910 in favor, and 12,419 against, and 68,205 stockholders
abstained.
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.
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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: August 9, 2007
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Exhibit Index
Exhibit No. Description
- ----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
35