FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2008
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)
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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, 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 [X]
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 [X]
As of November 1, 2008 the registrant had 18,187,804 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
Unaudited
September 30, December 31,
2008 2007
------------- ------------
Assets
------
Current assets:
Cash and cash equivalents $ 4,207 $ 2,307
Accounts receivable, net 30,243 29,640
Inventories 17,684 15,680
Prepaid expenses 1,042 2,456
Prepaid income taxes 208 --
Deferred income taxes 636 515
Other current assets 1,756 1,871
------------- ------------
Total current assets 55,776 52,469
Property, plant and equipment, net 42,909 42,080
Goodwill 26,398 26,363
Intangible assets with finite lives, net 30,867 33,451
Other assets 60 61
------------- ------------
Total assets $ 156,010 $ 154,424
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 9,458 $ 11,190
Accrued expenses 9,079 10,516
Dividends payable -- 1,975
Customer deposits and other deferred revenue -- 42
Current portion of long-term debt 7,348 7,379
Income taxes payable 1,857 2,019
Revolver borrowings 2,529 3,209
------------- ------------
Total current liabilities 30,271 36,330
Long-term debt 7,224 17,398
Deferred income taxes 5,980 6,087
Deferred compensation 56
Other long-term obligations 1,624 1,529
------------- ------------
Total liabilities 45,155 61,344
------------- ------------
Commitments and contingencies (note 13)
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; 18,183,116 shares issued
and outstanding at September 30, 2008 and 17,979,353 shares issued and outstanding at
December 31, 2007 818 804
Additional paid-in capital 18,063 14,286
Retained earnings 91,978 77,840
Accumulated other comprehensive income (4) 150
------------- ------------
Total stockholders' equity 110,855 93,080
------------- ------------
Total liabilities and stockholders' equity $ 156,010 $ 154,424
============= ============
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See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
-------- -------- --------- ---------
Net sales $ 58,235 $ 50,498 $ 177,997 $ 122,468
Cost of sales 45,523 37,889 138,851 87,936
-------- -------- --------- ---------
Gross margin 12,712 12,609 39,146 34,532
Operating expenses:
Selling expenses 3,068 3,176 9,455 8,498
Research and development expenses 681 613 2,164 1,797
General and administrative expenses 1,737 1,627 5,657 4,913
-------- -------- --------- ---------
5,486 5,416 17,276 15,208
-------- -------- --------- ---------
Earnings from operations 7,226 7,193 21,870 19,324
Other expenses (income):
Interest income (17) (96) (66) (170)
Interest expense 222 672 792 1,283
Other, net 85 (155) 16 (242)
-------- -------- --------- ---------
Earnings before income tax expense 6,936 6,772 21,128 18,453
Income tax expense 2,143 2,315 6,970 6,490
-------- -------- --------- ---------
Net earnings $ 4,793 $ 4,457 $ 14,158 $ 11,963
======== ======== ========= =========
Net earnings per common share - basic $ 0.27 $ 0.25 $ 0.79 $ 0.67
======== ======== ========= =========
Net earnings per common share - diluted $ 0.25 $ 0.24 $ 0.75 $ 0.65
======== ======== ========= =========
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See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Nine Months Ended
September 30,
2008 2007
--------- ---------
Cash flows from operating activities:
Net earnings $ 14,158 $ 11,963
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,787 4,615
Shares issued under employee benefit plans 335 306
Deferred income taxes (558) (375)
Foreign currency transaction (gain) loss 4 (125)
Stock compensation expense 1,795 1,176
Gain on sale of equipment -- (11)
Other -- 20
Changes in assets and liabilities net of effects
of acquisition:
Accounts receivable (853) (13,475)
Inventories (1,984) 1,082
Prepaid expenses and other current assets 1,519 (135)
Income taxes (45) 2,103
Customer deposits and other deferred revenue (42) (808)
Accounts payable and accrued expenses (3,028) 1,678
Other long-term obligations 141 395
--------- ---------
Net cash provided by operating activities 17,229 8,409
--------- ---------
Cash flows from investing activities:
Capital expenditures (4,128) (3,005)
Proceeds from sale of property, plant and equipment -- 11
Intangible assets acquired (144) (149)
Acquisition of assets (39) (40,640)
--------- ---------
Net cash used in investing activities (4,311) (43,783)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings -- 38,946
Proceeds from short-term borrowings -- 3,554
Proceeds from revolver borrowings 3,135 --
Repayments of revolver borrowings (3,705) (870)
Principal payments on long-term debt (10,073) (5,768)
Proceeds from stock options & warrants exercised 1,000 752
Excess tax benefits from stock compensation 661 584
Dividends paid (1,975) (1,596)
--------- ---------
Net cash (used in) provided by financing activities (10,957) 35,602
--------- ---------
Effect of exchange rate changes on cash (61) 84
--------- ---------
Increase in cash and cash equivalents 1,900 312
Cash and cash equivalents beginning of period 2,307 5,189
--------- ---------
Cash and cash equivalents end of period $ 4,207 $ 5,501
========= =========
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See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
------- -------- ------- --------
Net earnings $ 4,793 $ 4,457 14,158 $ 11,963
Other comprehensive income, net of tax:
Unfunded postretirement benefit plan - prior service
cost and gain amortized during period (3) (3) (7) (10)
Other (169) (1) (147) 7
------- -------- ------- --------
Comprehensive income $ 4,621 $ 4,453 14,004 $ 11,960
======= ======== ======= ========
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See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2007 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, 2007.
References in this report to the "Company" mean either Balchem Corporation or
Balchem Corporation and its subsidiaries, including BCP Ingredients, Inc.,
Balchem Minerals Corporation, and Balchem B.V., on a consolidated basis, as the
context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and
therefore do not include some information and notes necessary to conform to
annual reporting requirements. Certain prior year amounts have been reclassified
to conform to current year presentation. The results of operations for the nine
months ended September 30, 2008 are not necessarily indicative of the operating
results expected for the full year or any interim period.
NOTE 2 - STOCKHOLDERS' EQUITY
STOCK-BASED COMPENSATION
The Company records stock-based compensation in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share Based Payment" ("SFAS 123R"). The Company's results for the three and
nine months ended September 30, 2008 and 2007 reflected the following
stock-based compensation cost, and such compensation cost had the following
effects on net earnings and basic and diluted earnings per share:
---------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30, September 30,
2008 2007
---------------------------------------------------------------------------
Cost of sales $ 66 $ 44
Operating expenses 485 348
Net earnings (372) (267)
Basic earnings per common share (0.02) (0.01)
Diluted earnings per common share $ (0.02) $ (0.01)
---------------------------------------------------------------------------
6
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---------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2008 2007
---------------------------------------------------------------------------
Cost of sales $ 198 $ 131
Operating expenses 1,597 1,045
Net earnings (1,194) (801)
Basic earnings per common share (0.07) (0.05)
Diluted earnings per common share $ (0.06) $ (0.04)
---------------------------------------------------------------------------
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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 $80 and $661 for the three
and nine months ended September 30, 2008 respectively, and by $83 and $584 for
the three and nine months ended September 30, 2007, respectively.
The Company's stock incentive plans allow for the granting of restricted stock
awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be
exercisable for longer than ten years after the date of grant. The Company has
approved and reserved a number of shares to be issued upon exercise of the
outstanding options that is adequate to cover all exercises. As of September 30,
2008, the plans had 3,999,500 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 four to seven
years for non-employee director restricted stock awards. Certain awards provide
for accelerated vesting if there is a change in control (as defined in the
plans) or other qualifying events.
7
Option activity for the nine months ended September 30, 2008 and 2007 is
summarized below:
-----------------------------------------------------------------------------------------
Weighted
Average
Weighted Aggregate Remaining
For the nine months ended Average Intrinsic Contractual
September 30, 2008 Shares (000s) Exercise Price Value ($000s) Term
-----------------------------------------------------------------------------------------
Outstanding as of
December 31, 2007 1,944 $ 10.66 $ 22,786
Granted 308 20.42
Exercised (127) 7.91
Expired -- --
Forfeited -- --
-----------------------------------------------------------------------------------------
Outstanding as of
September 30, 2008 2,125 $ 12.23 $ 30,684 6.5
=========================================================================================
Exercisable as of
September 30, 2008 1,578 $ 9.80 $ 26,623 5.7
=========================================================================================
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-----------------------------------------------------------------------------------------
Weighted
Average
Weighted Aggregate Remaining
For the nine months ended Average Intrinsic Contractual
September 30, 2007 Shares (000s) Exercise Price Value ($000s) Term
-----------------------------------------------------------------------------------------
Outstanding as of
December 31, 2006 2,170 $ 10.13 $ 15,168
Granted 10 18.00
Exercised (160) 4.70
Expired -- --
Forfeited (13) 14.01
-----------------------------------------------------------------------------------------
Outstanding as of
September 30, 2007 2,007 $ 10.58 $ 19,726 6.9
=========================================================================================
Exercisable as of
September 30, 2007 1,490 $ 8.70 $ 17,441 6.3
=========================================================================================
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SFAS 123R requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. The fair value of 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 0.4% and 0.3%; expected
volatilities of 33% and 27%; risk-free interest rates of 3.7% and 4.2%; and
expected lives of 3.4 and 3.7, in each case for the nine months ended September
30, 2008 and 2007, 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
8
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, 2008 and 2007 was as follows:
-------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted $ 8.31 $ 6.44 $ 6.38 $ 6.44
Total intrinsic value of stock options exercised ($000s) $ 294 $ 424 $ 1,952 $ 1,936
=================================================================================================
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Non-vested restricted stock activity for the nine months ended September 30,
2008 and 2007 is summarized below:
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Nine months ended September 30, 2008 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2007 118 $ 16.49
Granted 73 20.77
Vested (18) 17.04
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of September 30, 2008 173 $ 18.21
================================================================================
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Nine months ended September 30, 2007 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2006 113 $ 16.40
Granted 5 18.61
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of September 30, 2007 118 $ 16.49
================================================================================
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As of September 30, 2008 and 2007, there was $4,182 and $2,946, respectively, of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. As of September 30, 2008, the
unrecognized compensation cost is expected to be recognized over a
weighted-average period of 2 years. The Company estimates that share-based
compensation expense for the year ended December 31, 2008 will be approximately
$2,345.
REPURCHASE OF COMMON STOCK
In June 2005, the board of directors approved an extension of and an increased
authorization to the Company's stock repurchase program. The total authorization
under this program is 2,508,692 shares. Since the inception of the program, a
total of 1,307,867 shares have been purchased, none of which remained in
treasury at September 30, 2008 or 2007. During the nine months ended September
30, 2008, no additional shares have been purchased. The Company intends to
acquire shares from time to time at prevailing
9
market prices if and to the extent it deems it advisable to do so based on its
assessment of corporate cash flow, market conditions and other factors.
NOTE 3 - ACQUISITIONS
Akzo Nobel Acquisition
Effective April 30, 2007, pursuant to an asset purchase agreement dated March
30, 2007 (the "Akzo Nobel Asset Purchase Agreement"), the Company, through its
European subsidiary, Balchem B.V., completed an acquisition of the methylamines
and choline chloride business and manufacturing facilities of Akzo Nobel
Chemicals S.p.A., located in Marano Ticino, Italy (the "Akzo Nobel Acquisition")
for a purchase price, including acquisition costs, of approximately $7,800.
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 allocation of the total purchase price, including acquisition
costs, was based on the estimated fair values as of April 30, 2007. The purchase
price has been allocated as follows:
--------------------------------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
--------------------------------------------------------------------------------
Property plant & equipment $ 7,994
Short-term receivable 2,462
Inventories 4,323
Goodwill 1,123
Other 83
Accounts payable and accrued expenses (8,213)
--------------------------------------------------------------------------------
Total $ 7,772
================================================================================
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Chinook Acquisition
On March 16, 2007, the Company, through its wholly-owned subsidiary BCP
Ingredients, Inc. ("BCP"), entered into an asset purchase agreement (the "Asset
Purchase Agreement") with Chinook Global Limited ("Chinook"), a privately held
Ontario corporation, pursuant to which BCP acquired certain of Chinook's choline
chloride business assets (the "Chinook Acquisition") for a purchase price,
including acquisition costs, of approximately $33,000. 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 allocation of the total purchase price, including acquisition
costs, was based on the estimated fair values as of March 16, 2007. The purchase
price has been allocated as follows:
10
----------------------------------------------------------
Fair Value Recorded
in Purchase
Accounting
----------------------------------------------------------
Customer list $ 29,262
Inventory 1,840
Short-term receivable 1,850
Other 73
----------------------------------------------------------
Total $ 33,025
----------------------------------------------------------
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The short-term receivable was included in other current assets.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
Chinook Acquisition had occurred on January 1, 2007 and does not include cost
savings expected from the transaction. In addition to including the results of
operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
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 period presented and is not intended to be a
projection of future results.
----------------------------------------------------------
Pro Forma
Nine Months Ended
September 30,
2007
----------------------------------------------------------
Net sales $ 131,455
Net earnings 12,439
Basic EPS .70
Diluted EPS .67
==========================================================
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NOTE 4 - INVENTORIES
Inventories at September 30, 2008 and December 31, 2007 consisted of the
following:
---------------------------------------------------------------------
September 30, December 31,
2008 2007
---------------------------------------------------------------------
Raw materials $ 7,900 $ 6,522
Work in progress 472 818
Finished goods 9,312 8,340
---------------------------------------------------------------------
Total inventories $ 17,684 $ 15,680
=====================================================================
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NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2008 and December 31, 2007 are
summarized as follows:
11
--------------------------------------------------------------------------------
September 30, December 31,
2008 2007
--------------------------------------------------------------------------------
Land $ 2,124 $ 2,152
Building 15,517 15,520
Equipment 47,910 45,599
Construction in progress 4,650 3,067
--------------------------------------------------------------------------------
70,201 66,338
Less: accumulated depreciation 27,292 24,258
--------------------------------------------------------------------------------
Net property, plant and equipment $ 42,909 $ 42,080
================================================================================
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NOTE 6 - INTANGIBLE ASSETS
The Company had goodwill in the amount of $26,398 and $26,363 at September 30,
2008 and December 31, 2007, respectively, subject to the provisions of SFAS Nos.
141 and 142.
As of September 30, 2008 and December 31, 2007, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$37,393 and $37,248, respectively, less accumulated amortization of $6,526 and
$3,797, respectively. For the nine months ended September 30, 2008, the increase
in the gross carrying amount is primarily attributable to patent, regulatory
re-registration and trademark costs.
Identifiable intangible assets with finite lives at September 30, 2008 and
December 31, 2007 are summarized as follows:
---------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization
(in years) 9/30/08 at 9/30/08 12/31/07 at 12/31/07
---------------------------------------------------------------------------------------------------
Customer lists 10 $ 34,150 $ 5,740 $ 34,150 $ 3,178
Regulatory re-registration
costs 10 69 2 28 --
Patents & trade secrets 15-17 1,668 382 1,621 311
Trademarks & trade names 17 901 185 884 146
Other 5 605 217 565 162
---------------------------------------------------------------------------------------------------
$ 37,393 $ 6,526 $ 37,248 $ 3,797
===================================================================================================
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Amortization of identifiable intangible assets was $2,729 for the first nine
months of 2008. Assuming no change in the gross carrying value of identifiable
intangible assets, the estimated amortization expense for the remainder of 2008
is $921 and approximately $3,600 per annum for 2009 through 2013. At September
30, 2008, there were no identifiable intangible assets with indefinite useful
lives as defined by SFAS No. 142. Identifiable intangible assets are reflected
in "Intangible assets with finite lives, net" in the Company's condensed
consolidated balance sheets. There were no changes to the useful lives of
intangible assets subject to amortization during the nine months ended September
30, 2008.
12
NOTE 7 - NET EARNINGS PER SHARE
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
--------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2008 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $ 4,793 18,007,236 $.27
Effect of dilutive securities - stock options and
restricted stock 1,123,319
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 4,793 19,130,555 $.25
==================================================================================================
|
--------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2007 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $ 4,457 17,783,384 $.25
Effect of dilutive securities - stock options and
restricted stock 873,218
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 4,457 18,656,602 $.24
==================================================================================================
|
--------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2008 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $ 14,158 17,950,082 $.79
Effect of dilutive securities - stock options and
restricted stock 1,037,283
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 14,158 18,987,365 $.75
==================================================================================================
|
13
--------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2007 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $ 11,963 17,744,182 $.67
Effect of dilutive securities - stock options and
restricted stock 799,362
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 11,963 18,543,544 $.65
==================================================================================================
|
The Company had stock options covering -0- and 294,400 shares at September 30,
2008 and 2007, 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
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48
clarifies whether or not to recognize assets or liabilities for tax positions
taken that may be challenged by a tax authority. Upon adoption of FIN 48, the
Company recognized approximately a $291 decrease in its retained earnings
balance. 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 statements of
earnings. The total amount of accrued interest and penalties related to
uncertain tax positions at September 30, 2008 was approximately $130 and is
included in other long-term obligations. 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, 2008, in the major jurisdictions where
the Company operates, it is generally no longer subject to income tax
examinations by tax authorities for years before 2004. Subsequent to October 15,
2008, in the major jurisdictions where the Company operates, it is generally no
longer subject to income tax examinations by tax authorities for years before
2005. There was not a significant change in the liabilities for unrecognized tax
benefits during the nine months ended September 30, 2008.
NOTE 9 - SEGMENT INFORMATION
Effective with the quarter ending March 31, 2008, the Company realigned its
business segment reporting structure to more appropriately reflect the internal
management of the businesses, largely due to the impact of the recent
acquisitions of 2007. The Company will continue to report three segments:
Specialty Products; Food, Pharma & Nutrition;
14
and Animal Nutrition & Health. Changes to the reporting segments are as follows:
chelated minerals and specialty nutritional products for the animal health
industry, formerly reported as a part of the encapsulated/nutritional products
segment, are now combined with the choline business (formerly BCP Ingredients)
into a consolidated Animal Nutrition & Health segment. The
encapsulated/nutritional products segment has been renamed Food, Pharma &
Nutrition, focusing on human health. There are no changes to the Specialty
Products segment. Net sales and earnings before income taxes have been
reclassified for all periods presented to reflect the segment changes.
Business Segment Net Sales:
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------------
Specialty Products $ 9,298 $ 8,248 $ 26,564 $ 24,676
Food, Pharma & Nutrition 9,362 7,929 28,122 23,063
Animal Nutrition & Health 39,575 34,321 123,311 74,729
-------------------------------------------------------------------------------
Total $ 58,235 $ 50,498 $ 177,997 $ 122,468
===============================================================================
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Business Segment Earnings Before Income Taxes:
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------------
Specialty Products $ 3,391 $ 2,935 $ 8,709 $ 8,891
Food, Pharma & Nutrition 1,565 1,253 4,763 2,293
Animal Nutrition & Health 2,270 3,005 8,398 8,140
Interest and other expense (290) (421) (742) (871)
-------------------------------------------------------------------------------
Total $ 6,936 $ 6,772 $ 21,128 $ 18,453
===============================================================================
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The following table summarizes domestic (U.S.) and foreign sales for the three
and nine months ended September 30, 2008 and September 30, 2007:
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------------
Domestic $ 37,005 $ 31,958 $ 107,803 $ 87,433
Foreign 21,230 18,540 70,194 35,035
-------------------------------------------------------------------------------
Total $ 58,235 $ 50,498 $ 177,997 $ 122,468
===============================================================================
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NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the nine months ended September 30, 2008 and 2007 for income
taxes and interest, net of capitalized interest is as follows:
15
---------------------------------------------------------------
Nine months ended
September 30,
2008 2007
---------------------------------------------------------------
Income taxes $ 7,084 $ 4,005
Interest, net of capitalized interest $ 757 $ 1,124
===============================================================
|
Other supplemental non-cash transactions resulting from acquisitions are
described in Notes 3 and 11.
NOTE 11 - LONG-TERM DEBT AND CREDIT AGREEMENTS
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to approximately $10,800 as of September 30, 2008
(the "European Term Loan"), the proceeds of which were used to fund the Akzo
Nobel Acquisition (see Note 3) and initial working capital requirements. The
European Term Loan is payable in equal monthly installments of principal, each
equal to 1/84th of the principal of the European Term Loan, together with
accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At September 30, 2008, this
interest rate was 6.01%. At September 30, 2008, the European Term Loan had an
outstanding balance of (euro)6,071, translated to $8,773. The European Loan
Agreement also initially provided for a short-term revolving credit facility of
(euro)2,000 (the "European Revolving Facility"). The European Revolving Facility
has been renewed for a period of one year as of May 1, 2008. As part of this
renewal, the European Loan Agreement was amended to increase the European
Revolving Facility to (euro)3,000, translated to $4,335 as of September 30,
2008. 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 (euro)1,750, or $2,529 as translated at September 30,
2008, of the European Revolving Facility as of September 30, 2008.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the Chinook
Acquisition (see Note 3). The Term Loan is payable in equal monthly installments
of principal, each equal to 1/60th of the principal of the Term Loan, together
with accrued interest, with remaining principal and interest payable at
maturity. The Term Loan has a maturity date of March 16, 2010 and is subject to
a monthly interest rate equal to LIBOR plus 1%. At September 30, 2008, this
interest rate was 3.49%. As of September 30, 2008, the Company has prepaid
$14,500 of the Term Loan. At September 30, 2008, the Term Loan had an
outstanding balance of $5,800. The Loan Agreement also provides for a short-term
revolving credit facility of $6,000 (the "Revolving Facility"). The Revolving
Facility is subject to a monthly interest rate equal to LIBOR plus 1%, and
accrued interest is payable monthly. No amounts are outstanding on the Revolving
Facility as of the date hereof. The Revolving Facility has a maturity date of
May 31, 2009. Management believes that such facility will be renewed in the
normal course of business.
16
NOTE 12 - EMPLOYEE BENEFIT PLAN
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.
Net periodic benefit cost for such retirement medical plan for the nine months
ended September 30, 2008 and September 30, 2007 was as follows:
--------------------------------------------------------------
2008 2007
--------------------------------------------------------------
Service cost $ 21 $ 22
Interest cost 30 31
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (14) (14)
Amortization of gain (4) (2)
--------------------------------------------------------------
Net periodic benefit cost $ 33 $ 37
==============================================================
|
The amount recorded on the Company's balance sheet as of September 30, 2008 for
this obligation is $856. 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 - COMMITMENTS AND CONTINGENCIES
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 Company entered into a lease agreement with Loders under which the
Company leases a portion of Loders' Channahon, Illinois facility where it
principally conducted the manufacturing portion of the acquired business and
utilized certain warehouse space. The initial term of the lease commenced in
February, 2006 and runs through September 30, 2010, subject to earlier
termination.
In February 2002, the Company entered into a ten (10) year lease which is
cancelable in 2009 for approximately 20,000 square feet of office space. The
office space is now serving as the Company's general offices and as a laboratory
facility. The Company leases most of its vehicles, railcars and office equipment
under non-cancelable operating leases, which expire at various times through
2013. Rent expense charged to operations under such lease agreements for the
nine months ended September 30, 2008 and 2007 aggregated approximately $867 and
$639, respectively. Aggregate future minimum rental payments required under
non-cancelable operating leases at September 30, 2008 are as follows:
-----------------------------------------------------
Year
-----------------------------------------------------
October 1, 2008 to December 31, 2008 $ 293
2009 959
2010 456
2011 273
2012 170
Thereafter 306
-----------------------------------------------------
Total minimum lease payments $ 2,457
=====================================================
|
17
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 additional 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 2003 - 2007.
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 14 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
("GAAP") for nongovernmental entities. Prior to the issuance of SFAS No. 162,
the GAAP hierarchy was defined in the American Institute of Certified Public
Accountants' (AICPA) Statement on Auditing
18
Standards (SAS) No. 69, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." SFAS No. 162 is effective November
15, 2008. The Company does not expect the adoption of this statement to be
significant to its consolidated financial statements.
In April 2008, FASB issued FSP 142-3, "Determining the Useful Life of Intangible
Assets" ("FSP 142-3"). FSP 142-3 amends the factors to be considered in
determining the useful life of intangible assets. Its intent is to improve the
consistency between the useful life of an intangible asset and the period of
expected cash flows used to measure its fair value. FSP 142-3 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
assessing the impact of FSP 142-3 on its consolidated financial statements.
In June 2007, FASB ratified the consensus reached by the EITF on EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities" ("EITF 07-3"). EITF 07-3
addresses the diversity that exists with respect to the accounting for the
non-refundable portion of a payment made by a research and development entity
for future research and development activities. Under EITF 07-3, an entity would
defer and capitalize non-refundable advance payments made for research and
development activities until the related goods are delivered or the related
services are performed. The Company has adopted the provisions of EITF 07-3 as
of January 1, 2008 and it has not had a material impact on its financial
condition or results of operations.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115" ("SFAS 159"). SFAS 159 permits an entity to measure certain financial
assets and financial liabilities at fair value. Entities electing the fair value
option will report unrealized gains and losses in earnings as of each subsequent
reporting date. The fair value option may be elected on an
instrument-by-instrument basis with few exceptions, as long as it is applied to
the instrument in its entirety. SFAS 159 establishes presentation and disclosure
requirements to help financial statement users understand the effect of an
entity's election on its earnings. SFAS 159 requires prospective application. If
an entity elects the fair value option for items existing as of the date of
adoption, the difference between their carrying amount and fair value should be
included in a cumulative-effect adjustment to the opening balance of retained
earnings. The provisions of SFAS 159 are effective for fiscal years beginning
after November 15, 2007. The Company has adopted the provisions of this
statement as of January 1, 2008 and it did not have a material impact on its
financial condition or results of operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of SFAS 157 are
effective for fiscal years beginning after November 15, 2007. The Company has
adopted the provisions of this statement as of January 1, 2008 and it did not
have a material impact on its financial condition or results of operations.
19
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, 2007 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. Effective with
the quarter ending March 31, 2008, the Company has realigned its business
segment reporting structure to more appropriately reflect the internal
management of the businesses, largely due to the impact of acquisitions in 2007.
The Company will continue to report three segments: Specialty Products; Food,
Pharma & Nutrition; and Animal Nutrition & Health. Changes to the reporting
segments are as follows: chelated minerals and specialty nutritional products
for the animal health industry, formerly reported as a part of the
encapsulated/nutritional products segment, are now combined with the choline
business (formerly BCP Ingredients) into a consolidated Animal Nutrition &
Health segment. The encapsulated/nutritional products segment has been renamed
Food, Pharma & Nutrition, focusing on human health. There are no changes to the
Specialty Products segment. Business segment net sales and earnings from
operations have been reclassified for all periods presented to reflect the
segment changes.
Specialty Products
Our Specialty Products segment operates in industry 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.
20
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 uses can include
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.
Food, Pharma & Nutrition
The Food, Pharma & Nutrition ("FP&N") 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, 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 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. The FP&N portfolio also includes granulated calcium
carbonate products, 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.
Animal Nutrition & Health
Our Animal Nutrition & Health ("AN&H") segment provides the animal nutrition
market with nutritional products derived from our encapsulation and chelation
technologies in addition to basic choline chloride. Commercial sales of
REASHURE(R) Choline, an encapsulated choline product that boosts health and milk
production in transition and early lactation dairy cows, 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, we
market NITROSHURE(TM), 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 NIASHURE(TM), our microencapsulated niacin product for dairy cows
delivering niacin more efficiently and helping to fight heat stress, and
chelated mineral supplements for use in animal feed throughout the world. Our
proprietary chelation technology provides enhanced nutrient absorption for
various species of domestic and companion animals. AN&H also manufactures and
supplies basic choline chloride, an essential nutrient for animal health,
predominantly to the poultry and swine industries. Choline, which is
manufactured and sold on both dry and aqueous forms, 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. Certain derivatives of choline chloride are also manufactured and sold
into industrial applications. AN&H also manufactures and sells methylamines.
Methylamines are a primary building block for the manufacture of choline
products and are also used in a wide range of industrial applications.
21
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 from operations for the three and nine months ended September
30, 2008 and September 30, 2007:
Business Segment Net Sales:
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
--------------------------------------------------------------------------------
Specialty Products $ 9,298 $ 8,248 $ 26,564 $ 24,676
Food, Pharma & Nutrition 9,362 7,929 28,122 23,063
Animal Nutrition & Health 39,575 34,321 123,311 74,729
--------------------------------------------------------------------------------
Total $ 58,235 $ 50,498 $ 177,997 $ 122,468
================================================================================
|
Business Segment Earnings From Operations:
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
--------------------------------------------------------------------------------
Specialty Products $ 3,391 $ 2,935 $ 8,709 $ 8,891
Food, Pharma & Nutrition 1,565 1,253 4,763 2,293
Animal Nutrition & Health 2,270 3,005 8,398 8,140
--------------------------------------------------------------------------------
Total $ 7,226 $ 7,193 $ 21,870 $ 19,324
================================================================================
|
22
RESULTS OF OPERATIONS
Three months ended September 30, 2008 compared to three months ended September
30, 2007
Net Sales
Net sales for the three months ended September 30, 2008 were $58,235, as
compared with $50,498 for the three months ended September 30, 2007, an increase
of $7,737 or 15.3%. Net sales for the Specialty Products segment were $9,298 for
the three months ended September 30, 2008, as compared with $8,248 for the three
months ended September 30, 2007, an increase of $1,050 or 12.7%. This increase
was principally due to an increase in sales volume, along with modest price
increases for products in this segment. Net sales for the Food, Pharma &
Nutrition segment were $9,362 for the three months ended September 30, 2008
compared with $7,929 for the three months ended September 30, 2007, an increase
of $1,433 or 18.1%. This result was driven principally by improvement in the
domestic and international food markets and continued strong sales of
human-grade choline and calcium products. Net sales of $39,575 were realized for
the three months ended September 30, 2008 for the Animal Nutrition & Health
segment, as compared with $34,321 for the prior year comparable quarter, an
increase of $5,254 or 15.3%. Feed and industrial grade choline product sales and
derivatives increased 13.2%, or $3,877, over the prior year quarter, principally
from increases in volume and modest selling price increases of feed grade
choline. Sales of our specialty animal nutrition and health products, targeted
for ruminant production animals and companion animals, increased 27.8% in this
period or approximately 25% of the overall AN&H growth.
Operating Expenses
Operating expenses for the three months ended September 30, 2008 were $5,486, as
compared to $5,416 for the three months ended September 30, 2007, an increase of
$70 or 1.3%. This increase was due primarily to higher expenses relating to
accounting, tax services, and non-cash stock-based compensation recognition.
Operating expenses were 9.4% of sales or 1.3 percentage points less than the
operating expenses as a percent of sales incurred in last year's comparable
quarter. During the three months ended September 30, 2008 and 2007, the Company
spent $681 and $613 respectively, on research and development programs,
substantially all of which pertained to the Company's Food, Pharma & Nutrition
and Animal Nutrition & Health segments.
Business Segment Earnings From Operations
Earnings from operations for the three months ended September 30, 2008 increased
to $7,226 compared to $7,193 for the three months ended September 30, 2007, an
increase of $33 or 0.5%, due largely to the above-noted increase in sales.
Earnings from operations as a percentage of sales ("operating margin") for the
three months ended September 30, 2008 decreased to 12.4% compared to 14.2% for
the three months ended September 30, 2007, principally a result of product mix
with a weighting toward lower profit margin products in the Animal Nutrition &
Health segment. In addition, despite the implementation of price increases, we
were not able to fully recover cost increases in certain petro-chemical raw
materials, which continued or trended up during most of the
23
quarter. While there was a reduction in certain raw material costs late in the
quarter, the current raw material environment remains unpredictable. Also, the
Company temporarily shut down production during the quarter at its facility in
St. Gabriel, LA as a direct result of hurricanes Gustav and Ike. While this
plant suffered no direct damage from these hurricanes, hurricane-related utility
and supply disruptions interrupted our ability to produce products, yet
substantially all our costs remained throughout the interruption, as we
positioned for a timely restart of the operation. These noted raw material
supply interruptions also negatively impacted the operation of our Verona, MO
site, and have continued into the fourth quarter. Also in the quarter, our
results reflect the typical seasonality associated with the summer holiday
period in Europe, and were quite unfavorable from a manufacturing variance
standpoint at the Marano Ticino, Italy facility. The Company is continuing to
focus on implementing price increases, productivity improvements, and, most
importantly, growth through new product development which should result in
improved operating margins. Earnings from operations for the Specialty Products
segment were $3,391, an increase of $456 or 15.5%, primarily due to higher sales
volume and sales price increases. Earnings from operations for Food, Pharma &
Nutrition were $1,565, an increase of $312 or 24.9%, due largely to increased
sales into the domestic and international food markets, as well as higher sales
of human-grade choline and calcium products. Earnings from operations for Animal
Nutrition & Health, while favorably impacted by previously-noted increased sales
volumes, decreased to $2,270, a reduction of $735 or 24.4%, largely due to the
noted petro-chemical raw material cost increases and the plant inefficiencies.
Other Expenses (Income)
Interest income for the three months ended September 30, 2008 totaled $17 as
compared to $96 for the three months ended September 30, 2007. Interest expense
was $222 for the three months ended September 30, 2008 compared to $672 for the
three months ended September 30, 2007. This decrease is primarily attributable
to the decrease in average current and long-term debt resulting from both normal
recurring principal payments as well as accelerated payments of the term loan
used to fund the Chinook Acquisition (see Notes 3 and 11). Other expense of $85
for the three months ended September 30, 2008 is primarily the result of
unfavorable fluctuations in foreign currency exchange rates between the U.S.
dollar (the reporting currency) and functional foreign currencies.
Income Tax Expense
The Company's effective tax rate for the three months ended September 30, 2008
and 2007 was 30.9% and 34.2%, respectively. This decrease in the effective tax
rate is primarily attributable to a change in apportionment factors relating to
state income taxes.
Net Earnings
Primarily as a result of the above-noted increase in sales and lower effective
tax rate, partially offset by the noted raw material increases and
production-related expenses, net earnings were $4,793 for the three months ended
September 30, 2008, as compared with $4,457 for the three months ended September
30, 2007, an increase of 7.5%.
24
Nine months ended September 30, 2008 compared to nine months ended September 30,
2007
Net Sales
Net sales for the nine months ended September 30, 2008 were $177,997, as
compared with $122,468 for the nine months ended September 30, 2007, an increase
of $55,529 or 45.3%. Net sales for the Specialty Products segment were $26,564
for the nine months ended September 30, 2008, as compared with $24,676 for the
nine months ended September 30, 2007, an increase of $1,888 or 7.7%. This
increase was principally due to an increase in sales volume, along with modest
price increases for products in this segment. Net sales for the Food, Pharma &
Nutrition segment were $28,122 for the nine months ended September 30, 2008
compared with $23,063 for the nine months ended September 30, 2007, an increase
of $5,059 or 21.9%. This result was driven principally by increased sales of
calcium and nutritional products, as well as increased product sales in both the
domestic and international food markets. Net sales of $123,311 were realized for
the nine months ended September 30, 2008 for the Animal Nutrition & Health
segment, as compared with $74,729 for the nine months ended September 30, 2007,
an increase of $48,582 or 65.0%. This result reflects incremental sales of
approximately $41,000 from the customer list acquisition of Chinook Group
Limited ("Chinook") and from the Akzo Nobel Acquisition, as described in Note 3.
For the nine months ending September 30, 2008, sales of our specialty animal
nutrition and health products, targeted for ruminant production animals and
companion animals, increased 40.9% or approximately 10% of the overall AN&H
growth.
Operating Expenses
Operating expenses for the nine months ended September 30, 2008 were $17,276, as
compared to $15,208 for the nine months ended September 30, 2007, an increase of
$2,068 or 13.6%. This increase was due primarily to $736 of additional
amortization expense, plus sales and technical personnel expense associated with
the Chinook and Akzo Nobel acquisitions, as well as higher expenses relating to
accounting, tax services, and non-cash stock-based compensation recognition. We
also incurred approximately $493 of commercial development expenses toward our
pharmaceutical market initiatives in the nine months ending September 30, 2008.
With these increases, operating expenses were 9.7% of sales or 2.7 percentage
points less than the operating expenses as a percent of sales incurred in the
nine months ending September 30, 2007. During the nine months ended September
30, 2008 and 2007, the Company spent $2,164 and $1,797, respectively, on
research and development programs, substantially all of which pertained to the
Company's Food, Pharma & Nutrition and Animal Nutrition & Health segments.
Business Segment Earnings From Operations
Earnings from operations for the nine months ended September 30, 2008 increased
to $21,870 compared to $19,324 for the comparative nine months ended September
30, 2007, an increase of $2,546 or 13.2%, due largely to the above-noted
increase in sales. Earnings from operations as a percentage of sales ("operating
margin") for the nine months ended September 30, 2008 decreased to 12.3%
compared to 15.8% for the nine
25
months ended September 30, 2007, principally a result of the previously-noted
acquisition-related sales which carry a lower profit margin than the Company's
other business segments. In addition, despite the implementation of price
increases, we were not able to fully recover cost increases in certain
petro-chemical raw materials, which continued or trended up within the year.
While there was a reduction in certain raw material costs late in the third
quarter 2008, the current raw material environment remains unpredictable. The
Company is continuing to focus on implementing price increases, productivity
improvements, and, most importantly, growth through new product development
which should result in improved operating margins. Earnings from operations for
the Specialty Products segment were $8,709, a decrease of $183 or 2.1%, as
increases in sales volume and modest sales price increases were offset by even
higher raw material costs and the previously-noted increased expenses relating
to accounting, tax services, and non-cash stock-based compensation recognition.
Earnings from operations for Food, Pharma & Nutrition were $4,763, an increase
of $2,470 or 107.7%, due largely to increased sales of calcium and nutritional
products, as well as increased volumes sold in both the domestic and
international food markets. Earnings from operations for Animal Nutrition &
Health, while unfavorably impacted by the noted petro-chemical raw material cost
increases, improved to $8,398, an increase of $259 or 3.2%, and were favorably
affected by organic growth and the previously-noted increased sales volumes
derived from the acquisitions.
Other Expenses (Income)
Interest income for the nine months ended September 30, 2008 totaled $66 as
compared to $170 for the nine months ended September 30, 2007. Interest expense
was $792 for the nine months ended September 30, 2008 compared to $1,283 for the
nine months ended September 30, 2007. This decrease is primarily attributable to
lower interest rates and the decrease in average current and long-term debt
resulting from both normal recurring principal payments as well as accelerated
payments of the term loan used to fund the Chinook Acquisition (see Notes 3 and
11). Other expense of $16 for the nine months ended September 30, 2008 is
primarily the result of unfavorable fluctuations in foreign currency exchange
rates between the U.S. dollar (the reporting currency) and functional foreign
currencies.
Income Tax Expense
The Company's effective tax rate for the nine months ended September 30, 2008
and 2007 was 33.0% and 35.2%, respectively. This decrease in the effective tax
rate is primarily attributable to a change in apportionment factors relating to
state income taxes, as well as a change in the income proportion towards
jurisdictions with lower tax rates.
Net Earnings
Primarily as a result of the above-noted increase in sales and the noted raw
material and operating expense increases, net earnings were $14,158 for the nine
months ended September 30, 2008, as compared with $11,963 for the nine months
ended September 30, 2007, an increase of 18.3%.
26
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. No such contingent consideration has been paid in
2008.
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),
long-term debt obligations and purchase obligations principally related to open
purchase orders for inventory not yet received or recorded on our balance sheet.
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
During the nine months ended September 30, 2008, 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,
2007. 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 $4,207 at September 30, 2008 from $2,307
at December 31, 2007 primarily resulting from the information detailed below.
Working capital amounted to $25,505 at September 30, 2008 as compared to $16,139
at December 31, 2007, an increase of $9,366.
Operating Activities
Cash flows from operating activities provided $17,229 for the nine months ended
September 30, 2008 compared to $8,409 for the nine months ended September 30,
2007. The increase in cash flows from operating activities was primarily due to
an increase in net earnings, accounts receivable collections, depreciation and
amortization, and stock compensation expense combined with a decrease in prepaid
expenses. The aforementioned increase in cash flows was partially offset by an
increase in inventories and a reduction in accounts payable and accrued
expenses.
27
Investing Activities
Capital expenditures were $4,128 for the nine months ended September 30, 2008
compared to $3,005 for the nine months ended September 30, 2007. Assets acquired
during the nine months ended September 30, 2007 totaled $40,640, which was
principally related to the Chinook Acquisition and the Akzo Nobel Acquisition,
as described in Note 3.
Financing Activities
The Company has an approved stock repurchase program. The total authorization
under this program is 2,508,692 shares. Since the inception of the program, a
total of 1,307,867 shares have been purchased, none of which remained in
treasury at September 30, 2008 or 2007. During the nine months ended September
30, 2008, 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 (euro)7,500, translated to approximately $10,800 as of September 30, 2008
(the "European Term Loan"), the proceeds of which were used to fund the Akzo
Nobel Acquisition (see Note 3) and initial working capital requirements. The
European Term Loan is payable in equal monthly installments of principal, each
equal to 1/84th of the principal of the European Term Loan, together with
accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At September 30, 2008, this
interest rate was 6.01%. At September 30, 2008, the European Term Loan had an
outstanding balance of (euro)6,071, translated to $8,773. The European Loan
Agreement also initially provided for a short-term revolving credit facility of
(euro)2,000 (the "European Revolving Facility"). The European Revolving Facility
has been renewed for a period of one year as of May 1, 2008. As part of this
renewal, the European Loan Agreement was amended to increase the European
Revolving Facility to (euro)3,000, translated to $4,335 as of September 30,
2008. 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 (euro)1,750, or $2,529 as translated at September 30,
2008, of the European Revolving Facility as of September 30, 2008.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the Chinook
Acquisition (see Note 3). The Term Loan is payable in equal monthly installments
of principal, each equal to 1/60th of the principal of the Term Loan, together
with accrued interest, with remaining principal and interest payable at
maturity. The Term Loan has a maturity date of March 16, 2010 and is subject to
a monthly interest rate equal to LIBOR plus 1%. At September 30, 2008, this
interest rate was 3.49%. As of September 30, 2008, the Company has prepaid
$14,500 of the Term Loan. At September 30, 2008, the Term Loan had an
outstanding balance of $5,800. The Loan Agreement also provides for a short-term
revolving credit facility of $6,000 (the "Revolving Facility"). The Revolving
Facility is subject to a monthly interest rate equal to LIBOR plus 1%, and
accrued interest is
28
payable monthly. No amounts are outstanding on the Revolving Facility as of the
date hereof. The Revolving Facility has a maturity date of May 31, 2009.
Management believes that such facility will be renewed in the normal course of
business.
Proceeds from stock options exercised totaled $1,000 and $752 for the nine
months ended September 30, 2008 and 2007, respectively. Dividend payments were
$1,975 and $1,596 for the nine months ended September 30, 2008 and 2007,
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 amount recorded
on the Company's balance sheet as of September 30, 2008 for this obligation is
$856. The postretirement plan is not funded. Historical cash payments made under
such plan have approximated $50 per year.
Critical Accounting Policies
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2007 Annual Report on Form 10-K, during the nine
months ended September 30, 2008.
Related Party Transactions
The Company was not engaged in related party transactions during the nine months
ended September 30, 2008 and all transactions of the Company during such period
were at arms length.
29
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts. The
money market funds in which the Company invests are participants in the United
States Treasury Department's Temporary Guarantee Program for Money Market Funds.
This program provides coverage for amounts held in money market funds as of the
close of business on September 19, 2008. 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, 2008, 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%, a revolving line of credit bearing interest at LIBOR plus
1.00% and a second revolving line of credit bearing interest at EURIBOR plus
1.25%. A 100 basis point increase or decrease in interest rates, applied to the
Company's borrowings at September 30, 2008, would result in an increase or
decrease in annual interest expense and a corresponding reduction or increase in
cash flow of approximately $171. 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.
30
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.
31
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, 2007.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
By: /s/ Dino A. Rossi
---------------------
Dino A. Rossi, Chairman, President and
Chief Executive Officer
Date: November 7, 2008
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32
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.
|
33
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