UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
------------------
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _____ .
Commission file number: 1-13648
--------------------------------------
Balchem Corporation
(Exact name of Registrant as specified in its charter)
Maryland 13-2578432
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
P.O. Box 600, New Hampton, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 326-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Common Stock, par value $.06-2/3 per share registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark whether the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by 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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
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|
The aggregate market value of the common stock issued and outstanding and held
by non-affiliates of the Registrant, based upon the closing price for the common
stock on the American Stock Exchange on June 30, 2006 was approximately
$257,428,000. For purposes of this calculation, shares of the Registrant held by
directors and officers of the Registrant and under the Registrant's
401(k)/profit sharing plan have been excluded.
The number of shares outstanding of the Registrant's common stock was 17,795,446
as of March 1, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's proxy statement for its 2007 Annual
Meeting of Stockholders (the "2007 Proxy Statement") to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after Registrant's fiscal year-end of December 31, 2006 are incorporated by
reference in Part III of this Report.
Cautionary Statement Regarding Forward-Looking Statements
---------------------------------------------------------
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not statements of historical facts, but
rather reflect our current expectations or beliefs concerning future events and
results. We generally use the words "believes," "expects," "intends," "plans,"
"anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. The risks, uncertainties and factors that could
cause our results to differ materially from our expectations and beliefs
include, but are not limited to, those factors set forth in this Annual Report
on Form 10-K under "Item 1A. - Risk Factors" below, as well as the following:
o changes in laws or regulations affecting our operations;
o changes in our business tactics or strategies;
o acquisitions of new or complementary operations;
o sales of any of our existing operations;
o changing market forces or contingencies that necessitate, in
our judgment, changes in our plans, strategy or tactics; and
o fluctuations in the investment markets or interest rates,
which might materially affect our operations or financial
condition.
We cannot assure you that the expectations or beliefs reflected in these
forward-looking statements will prove correct. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You are cautioned not to unduly
rely on such forward-looking statements when evaluating the information
presented in this Annual Report on Form 10-K.
Part I
Item 1. Business
General:
Balchem Corporation ("Balchem," the "Company," "we" or "us"), incorporated
in the State of Maryland in 1967, is engaged in the development, manufacture and
marketing of specialty performance ingredients and products for the food,
nutritional, feed, pharmaceutical and medical sterilization industries. The
Company has three segments: specialty products, encapsulated / nutritional
products and the unencapsulated feed supplements segment (also referred to in
this report as "BCP Ingredients" or "BCP"). Products relating to choline animal
feed for non-ruminant animals are primarily reported in the unencapsulated feed
supplements segment. Human choline nutrient products and encapsulated products
are reported in the encapsulated / nutritional products segment. Chelated
products, nutritional products for the animal health industry, as well as
calcium carbonate products for the pharmaceutical industry are also reported in
the encapsulated / nutritional products segment.
The Company sells its products through its own sales force, independent
distributors and sales agents. Financial information concerning the Company's
business, business segments and geographic information appears in the Notes to
our Consolidated Financial Statements included under Item 8 below, which
information is incorporated herein by reference.
1
The Company operates four subsidiaries, all of which are wholly-owned: BCP
Ingredients, Inc. ("BCP"), Balchem Minerals Corporation ("BMC"), BCP St.
Gabriel, Inc. ("BCP St. Gabriel"), each a Delaware corporation, and Chelated
Minerals Corporation ("CMC"), a Utah corporation. Unless otherwise stated to the
contrary, or unless the context otherwise requires, references to the Company in
this report includes Balchem Corporation and its subsidiaries.
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides
microencapsulation, chelation and agglomeration solutions to a variety of
applications in food, pharmaceutical and nutritional ingredients to enhance
therapeutic performance, taste, processing, packaging and shelf-life. Major
product applications are baked goods, refrigerated and frozen dough systems,
processed meats, seasoning blends, confections, nutritional supplements,
pharmaceuticals and animal nutrition. We also market human grade choline
nutrient products through this industry segment for wellness applications.
Choline is recognized to play a key role in the structural integrity of cell
membranes, processing dietary fat, reproductive development and neural
functions, such as memory and muscle function. Balchem's 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 animal health industries, Balchem markets REASHURE(R) Choline, an
encapsulated choline product that improves health and production in transition
and early lactation dairy cows. REASHURE(R) delivers choline that survives the
rumen and is biologically available, providing required nutritional levels to
dairy cows 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 industries throughout the world. CMC's
proprietary chelation technology provides for enhanced nutrient absorption for
various species of production and companion animals.
Specialty Products
------------------
Our specialty products segment operates as ARC Specialty Products. The
specialty products segment repackages and distributes the following specialty
gases: ethylene oxide, blends of ethylene oxide, propylene oxide and methyl
chloride.
Balchem's sale of 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 or
appearance of the device being sterilized. The Company distributes its 100%
ethylene oxide product in uniquely designed, recyclable double-walled stainless
steel drums to assure compliance with safety, quality and environmental
standards as outlined by the U.S. Environmental Protection Agency (the "EPA")
and the U.S. Department of Transportation. The Company's inventory of these
specially built drums, along with the Company's three filling facilities,
represent a significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are the Company's principal
customers for this product. As a fumigant, ethylene oxide blends are highly
effective in killing bacteria, fungi, and insects in spices and other seasoning
materials. In addition, the Company also sells small, uniquely designed single
use canisters of 100% ethylene oxide for use in medical device sterilization.
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 and in various chemical synthesis
applications. It is also utilized in industrial applications to make paints more
durable, and for manufacturing specialty
2
starches and textile coatings. Methyl chloride is used as a raw material in
specialty herbicides, fertilizers and pharmaceuticals, as well as in malt and
wine preservers.
BCP Ingredients
---------------
This segment manufactures and supplies choline chloride, an essential
nutrient for animal health, predominantly to the poultry and swine industries.
Choline plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. A choline deficiency can result in, among other
symptoms, reduced growth and perosis in poultry; and fat deposits in the liver,
kidney necrosis and general poor health conditions in swine. In addition,
certain derivatives of choline chloride are also manufactured and sold into
industrial applications. Choline chloride is manufactured and sold in both an
aqueous and dry form and is sold through the Company's own sales force,
independent distributors and sales agents.
Raw Materials:
-------------
The raw materials utilized by the Company in the manufacture of its
products are generally available from a number of commercial sources. The
Company is not experiencing any current difficulties in procuring such materials
and does not anticipate any such problems; however, the Company cannot assure
that will always be the case.
Intellectual Property:
---------------------
The Company currently holds 15 patents in the United States and overseas
and uses certain trade-names and trademarks. It also uses know-how, trade
secrets, formulae, and manufacturing techniques that assist in maintaining
competitive positions of certain of its products. Formulae and know-how are of
particular importance in the manufacture of a number of the Company's products.
The Company believes that certain of its patents, in the aggregate, are
advantageous to its business. However, it is believed that no single patent or
related group of patents is currently so material to the Company that the
expiration or termination of any single patent or group of patents would
materially affect its business. The Company believes that its sales and
competitive position are dependent primarily upon the quality of its products,
its technical sales efforts and market conditions, rather than on any patent
protection.
Licensing:
---------
The Company entered into a license agreement with Project Management and
Development Co., Ltd., a British corporation ("PMD") in November 2005 under
which the Company granted PMD the right to utilize the Company's proprietary
continuous manufacturing technology for the production of aqueous choline
chloride in connection with PMD's construction and operation of an aqueous
choline chloride production facility at PMD's Al-Jubail, Saudi Arabia
petrochemical facility, currently scheduled for completion in late 2009. In
addition, PMD has the exclusive right to use such technology in certain
countries, as well as the non-exclusive right to market, sell and use the
products derived from such technology on a world-wide basis except that the
Company is to be PMD's exclusive North American distributor for such products.
The License Agreement terminates either 10 years from the start-up of
PMD's production facility or December 31, 2020, whichever is earlier. As of
August 2006, PMD assigned the license agreement in its entirety to its successor
in interest, Al Kayan Petrochemical Company.
Seasonality:
-----------
In general, the business of the Company's segments is not seasonal to any
material extent.
3
Backlog:
-------
At December 31, 2006, the Company had a total backlog of $2,853,000
(including $1,769,000 for the encapsulated / nutritional products segment,
$655,000 for the specialty products segment and $429,000 for BCP Ingredients),
as compared to a total backlog of $2,688,000 at December 31, 2005 (including
$1,794,000 for the encapsulated / nutritional products segment, $548,000 for the
specialty products segment and $346,000 for the BCP Ingredients segment). It has
generally been the Company's policy and practice to maintain an inventory of
finished products and / or component materials for its segments to enable it to
ship products within a short time after receipt of a product order.
Competition:
-----------
The Company's competitors include many large and small companies, some of
which have greater financial, research and development, production and other
resources than the Company. Competition in the encapsulation markets served by
the Company is based primarily on performance, customer support, quality,
service and price. The development of new and improved products is important to
the Company's success. This competitive environment requires substantial
investments in product and manufacturing process research and development. In
addition, the winning and retention of customer acceptance of the Company's
encapsulated products involve substantial expenditures for application testing
and sales efforts. The Company also engages various universities to assist in
research and provide independent third-party analysis. In the specialty products
business, the Company faces competition from alternative sterilizing
technologies and products. Competition in the animal feed markets served by the
Company is based primarily on service and price.
Research & Development:
----------------------
During the years ended December 31, 2006, 2005 and 2004, the Company
incurred research and development expense of approximately $2.0 million, $2.1
million and $1.8 million, respectively, on Company-sponsored research and
development for new products and improvements to existing products and
manufacturing processes, principally in the encapsulated / nutritional products
segment. During the year ended December 31, 2006, an average of 13 employees
were devoted full time to research and development activities. The Company has
historically funded its research and development programs with funds available
from current operations with the intent of recovering those costs from profits
derived from future sales of products resulting from, or enhanced by, the
research and development effort.
The Company prioritizes its product development activities in an effort to
allocate its resources to those product candidates that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and needs, status
of its proprietary rights, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market.
Acquisitions, Dispositions, and Capital Projects:
------------------------------------------------
In 2006, the Company made two significant acquisitions.
In August 2006, we acquired from BioAdditives, LLC, CMB Additives, LLC and
CMB Realty of Louisiana, an animal feed grade aqueous choline chloride
manufacturing facility and related assets located in St. Gabriel, Louisiana. In
connection, we also acquired from such sellers the remaining interest in a land
lease (approximately 19 years) relating to the realty upon which the acquired
facility and related assets are located. In this Annual Report on Form 10-K, we
refer to this acquisition as the "St. Gabriel Acquisition."
In February 2006, we acquired all of the outstanding capital stock of CMC,
which was then privately held. In this Annual Report on Form 10-K, we refer to
this acquisition as the "CMC Acquisition."
4
In addition, in June 2005, we acquired Loders Croklaan USA, LLC's
encapsulation, agglomeration and granulation business. In this Annual Report on
Form 10-K, we refer to this acquisition as the "Loders Crooklaan Acquisition."
Excluding our 2006 acquisitions, capital expenditures were approximately
$2.3 million for 2006, as compared to $1.8 million in 2005. Capital expenditures
are projected to be approximately $4.8 million for 2007.
Environmental / Regulatory Matters:
----------------------------------
The Federal Insecticide, Fungicide and Rodenticide Act, as amended
("FIFRA"), a health and safety statute, requires that certain products within
the Company's specialty products segment must be registered with the EPA because
they are considered pesticides. In order to obtain a registration, an applicant
typically must demonstrate through extensive test data that its product will not
cause unreasonable adverse effects on the environment. The Company holds an EPA
registration permitting it to sell ethylene oxide as a medical device sterilant
and spice fumigant. The Company is in the process of re-registering this
product's use in compliance with FIFRA re-registration requirements for all
pesticide products. In December 2004, the EPA informed the Company and the other
technical registrant under the current registration that the Agency was
beginning the 6-phase process to develop a Re-registration Eligibility Decision
(RED) for this product. This multi-phase process entered Phase 5 last year. The
EPA's Office of Pesticide Programs (OPP) had originally stated its intent to
finalize the RED by August 2006, but bifurcated the process, and dealt only with
the reassessment of spice residue tolerances mandated by the Food Quality
Protection Act of 1996. On August 9, 2006, OPP issued a Tolerance Reassessment
Progress and Risk Management Decision (TRED) relating to the use of ethylene
oxide to treat spices. This TRED prohibits the use of ethylene oxide to treat
basil, effective August 1, 2007, but allows the continuing use of ethylene oxide
to treat all other spices, provided users follow a mandated treatment method. In
the Federal Register notice announcing the TRED, the EPA stated its intent to
complete the RED process for ethylene oxide in 2007. Upon completion of the
EPA's Office of Research and Development (ORD) assessment of the carcinogenicity
of ethylene oxide, OPP will complete preparation of the RED. ORD issued a draft
"Evaluation of the Carcinogenicity of Ethylene Oxide" in a Federal Register
notice, dated September 22, 2006. This assessment is currently undergoing review
by a special panel of the Science Advisory Board. ORD indicates the assessment
will be finalized by the summer of 2007. The Company has actively participated
in the public access portions of both the ORD assessment process and the OPP's
RED process and will continue to do so until their conclusions. With regard to
the RED process, as of this date, the OPP expressed concerns about occupational
exposures to ethylene oxide. The EPA requested additional information from the
industry, which the Company is actively involved in providing. The EPA has also
indicated additional testing may be required in order to maintain the current
uses. The Company believes that the use will continue to be permitted, although
the Agency may require some additional restrictions on current uses.
Additionally, the product, when used as a medical device sterilant, has no known
equally effective substitute. Management believes absence of availability of
this product could not be easily tolerated by various medical device
manufacturers and the health care industry due to the resultant infection
potential, if the product were unavailable.
The State of California lists 100% ethylene oxide, when used as a
sterilant or fumigant, as a carcinogen and reproductive toxin under California's
Proposition 65 (Safe Drinking Water and Toxic Enforcement Act of 1986). As a
result, the Company is required to provide a prescribed warning to any person in
California who may be exposed to this product. Failure to provide such warning
would result in liability of up to $2,500 per day per person exposed.
The Company's facility in Verona, Missouri, 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 for
5
contamination for certain organic chemicals. No ground water or surface water
treatment has been required. 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
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 executed the above-described Superfund remedy.
In connection with normal operations at its plant facilities, the Company
is required to maintain environmental and other permits including those relating
to the ethylene oxide operations.
The Company believes it is in compliance in all material respects with
federal, state, and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment. Such compliance includes the maintenance
of required permits under air pollution regulations and compliance with
requirements of the Occupational Safety and Health Administration. The cost of
such compliance has not had a material effect upon the results of operations or
financial condition of the Company. 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 remediated the area and removed soil
from the drum burial site. This proceeding has been substantially completed (see
Item 3).
Our Channahon, Illinois manufacturing facility manufactures a calcium
carbonate line of pharmaceutical ingredients. This facility is registered with
the United States Food and Drug Administration ("FDA") as a drug manufacturing
facility. These products must be manufactured in conformity with current Good
Manufacturing Practice (cGMP) regulations as interpreted and enforced by the
FDA. Modifications, enhancements or changes in manufacturing facilities or
procedures of our pharmaceutical products are, in many circumstances, subject to
FDA approval, which may be subject to a lengthy application process or which we
may be unable to obtain. Our Channahon, Illinois facility, as well as those of
any third-party cGMP manufacturers that we may use, are periodically subject to
inspection by the FDA and other governmental agencies, and operations at these
facilities could be interrupted or halted if the results of these inspections
are unsatisfactory.
Employees:
---------
As of March 1, 2007, the Company employed approximately 230 persons.
Approximately 50 employees at the Company's Verona, Missouri facility are
covered by a collective bargaining agreement which expires in 2007.
Available Information:
---------------------
The Company's headquarters is located at 52 Sunrise Park Road, P.O. Box
600, New Hampton, NY 10958. The Company's telephone number is (845) 326-5600 and
its Internet website address is www.balchem.com. The Company makes available
through its website, free of charge, its Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to such
reports, as soon as reasonably practicable after they have been electronically
filed with the Securities and Exchange Commission. Such reports are available
via a link from the Investor Information page on the
6
Company's website to a list of the Company's reports on the Securities and
Exchange Commission's EDGAR website.
Item 1A. Risk Factors
Our business involves a high degree of risk and uncertainty, including the
following risks and uncertainties:
Increased competition could hurt our business and financial results.
We face competition in our markets from a number of large and small
companies, some of which have greater financial, research and development,
production and other resources than we do. Our competitive position is based
principally on performance, quality, customer support, service, breadth of
product line, manufacturing or packaging technology and the selling prices of
our products. Our competitors might be expected to improve the design and
performance of their products and to introduce new products with competitive
price and performance characteristics. We expect to do the same to maintain our
current competitive position and market share.
One of our customers accounts for about 8% of our business; the loss of
that customer could adversely impact our business and financial results.
Due to consolidation of customer businesses in the contract sterilization
industry, we have one specialty products customer, which accounted for
approximately 8% and 9% of our net sales in 2006 and 2005, respectively. This
customer accounted for 10% and 8% of our accounts receivable net balance at
December 31, 2006 and 2005, respectively. The loss of this customer could have a
material adverse effect on our business and financial results.
The loss of governmental permits and approvals would materially harm some
of our businesses.
Pursuant to applicable environmental and safety laws and regulations, we
are required to obtain and maintain certain governmental permits and approvals,
including an EPA registration for our ethylene oxide sterilant product. We
maintain an EPA registration of ethylene oxide as a medical device sterilant and
fumicide. We are in the process of re-registering this product in accordance
with FIFRA. The EPA may not allow re-registration of ethylene oxide for the uses
mentioned above. The failure of the EPA to allow re-registration of ethylene
oxide would have a material adverse effect on our business and financial
results.
Our Channahon, Illinois manufacturing facility manufactures a calcium
carbonate line of pharmaceutical ingredients. This facility is registered with
the FDA as a drug manufacturing facility. These products must be manufactured in
conformity with current Good Manufacturing Practice (cGMP) regulations as
interpreted and enforced by the FDA. Modifications, enhancements or changes in
manufacturing facilities or procedures of our pharmaceutical products are, in
many circumstances, subject to FDA approval, which may be subject to a lengthy
application process or which we may be unable to obtain. Our Channahon, Illinois
facility, as well as those of any third-party cGMP manufacturers that we may
use, are periodically subject to inspection by the FDA and other governmental
agencies, and operations at these facilities could be interrupted or halted if
the results of these inspections are unsatisfactory. Failure to comply with the
FDA or other governmental regulations can result in fines, unanticipated
compliance expenditures, recall or seizure of products, total or partial
suspension of production, enforcement actions, injunctions and criminal
prosecution, which could have a material adverse effect on our business and
financial results.
Permits and approvals may be subject to revocation, modification or denial
under certain circumstances. Our operations or activities (including the status
of compliance by the prior owner of the Verona, Missouri facility under
Superfund remediation) could result in administrative or private actions,
revocation of required permits or licenses, or fines, penalties or damages,
which could have an adverse
7
effect on us. In addition, we can not predict the extent to which any
legislation or regulation may affect the market for our products or our cost of
doing business.
Raw material shortages or price increases could adversely affect our
business and financial results.
The principal raw materials that we use in the manufacture of our products
can be subject to price fluctuations. While the selling prices of our products
tend to increase or decrease over time with the cost of raw materials, these
changes may not occur simultaneously or to the same degree. At times, we may be
unable to pass increases in raw material costs through to our customers. Such
increases in the price of raw materials, if not offset by product price
increases, or substitute raw materials, would have an adverse impact on our
profitability.
Our financial success depends in part on the reliability and sufficiency
of our manufacturing facilities.
Our revenues depend on the effective operation of our manufacturing,
packaging, and processing facilities. The operation of our facilities involves
risks, including the breakdown, failure, or substandard performance of
equipment, power outages, the improper installation, or operation of equipment,
explosions, fires, natural disasters and the need to comply with environmental
and other directives of governmental agencies. The occurrence of material
operational problems, including but not limited to the above events, could
adversely affect our profitability during the period of such operational
difficulties.
Our failure or inability to protect our intellectual property could harm
our business and financial results.
We hold 15 patents in the United States and overseas. Third parties could
seek to challenge, invalidate or circumvent our patents. Moreover, there could
be successful claims against us alleging that we infringe the intellectual
property rights of others. If we are unable to protect all of our intellectual
property rights, or if we are found to be infringing the intellectual property
rights of others, there could be an adverse effect on our business and financial
results. Our competitive position also depends on our use of unpatented trade
secrets. Competitors could independently develop substantially equivalent
proprietary information, which could hurt our business and financial results.
We face risks associated with our sales to customers outside the United
States.
For the year ended December 31, 2006, approximately 10% of our net sales
consisted of sales outside the United States, predominately to Europe, Japan and
China. Such sales are generally denominated in U.S. Dollars at a specific price
per unit. Changes in the relative values of currencies take place from time to
time and could in the future adversely affect prices foreign customers are
willing to pay for our products. In addition, international sales are subject to
other inherent risks, including possible labor unrest, political instability,
export duties and quotas. These factors could have a material adverse impact on
our ability to increase or maintain our international sales.
Our success depends in large part on our key personnel.
Our operations significantly depend on the continued efforts of our senior
executives. The loss of the services of certain executives for an extended
period of time could have a material adverse effect on our business and
financial results.
Litigation could be costly and can adversely affect our business and
financial results.
We, like all companies involved in the food and pharmaceutical industries,
are subject to potential claims for product liability relating to our products.
Such claims, irrespective of their outcomes or merits, could be time-consuming
and expensive to defend, and could result in the diversion of management time
8
and attention. Any of these situations could have a material adverse effect on
our business and financial results. It is possible that an adverse result in
Casey Liesse, et al. v. AGA AB, et al. (see Item 3 of the Report) or other legal
proceedings commenced against us could have a negative impact on our financial
condition or liquidity.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In February 2002, the Company entered into a ten (10) year lease for
approximately 20,000 square feet of office space in New Hampton, New York. The
office space is serving as the Company's general offices and as laboratory
facilities for the Company's encapsulated / nutritional products business.
Manufacturing facilities owned by the Company for its encapsulated
products segment and a blending, drumming and terminal facility for the
Company's ethylene oxide business, are presently housed in three buildings
located in Slate Hill, New York comprising a total of approximately 51,000
square feet. The Company owns a total of approximately 16 acres of land on two
parcels in this community.
The Company owns a facility located on an approximately 24 acre parcel of
land in Green Pond, South Carolina. The site consists of a drumming facility, a
canister filling facility, a maintenance building and an office building
comprising a total of approximately 34,000 square feet. The Company uses this
site for processing products in its specialty products segment.
The Company's Verona, Missouri site, which is located on approximately 100
acres, consists of manufacturing facilities relating to animal feed grade
choline, human choline nutrients, a drumming facility for the Company's ethylene
oxide business, together with buildings utilized for warehousing such products.
The Verona operation buildings comprise a total of approximately 151,000 square
feet. The facility, while under prior ownership, was designated by the EPA as a
Superfund site (see Item 1 - "Business - Environmental / Regulatory Matters").
The Company leases production and warehouse space in Channahon, Illinois
as a result of the Loders Croklaan Acquisition. The Company uses this facility
for production related to the Company's pharmaceutical line of business. The
initial term of the lease is effective through September 30, 2010, subject to
earlier termination by Balchem upon sixty days notice, or by the landlord upon
sixty days notice. The Company's leased space in Channahon, Illinois totals
approximately 26,000 square feet.
The Company, through CMC, owns a manufacturing facility and warehouse,
comprising approximately 16,500 square feet, located on approximately 5 acres of
land in Salt Lake City, Utah. The Company manufactures and distributes its
chelated mineral nutrients for animal feed products at this location.
The Company, through BCP, acquired in the St. Gabriel Acquisition a
manufacturing facility located upon approximately 11 acres of realty leased from
Taminco Higher Amines, Inc. in St. Gabriel, Louisiana. The Company manufactures
and distributes animal feed grade choline chloride at this location.
Item 3. Legal Proceedings
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
remediated the area and removed soil from the drum burial site. Clean-up was
completed in 1996, and NYDEC required the Company to
9
monitor the site through 1999. The Company continues to be involved in
discussions with NYDEC to evaluate monitoring 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
recently been less than $5,000 per year.
Casey Liesse, et al. v. AGA AB, et al., Circuit Court of Cook County,
Illinois, Case No. 02 L 000498, was commenced in 2002 against over 80
defendants, among which is the Company. The action alleges that nineteen
individual plaintiffs were exposed to ethylene oxide and other chemicals used
for sterilizing or cleaning medical instruments during their employment at a
hospital in Harvey, Illinois. As a result of the alleged exposure, the
plaintiffs claim they have suffered various physical and psychological injuries.
During the time period plaintiffs suffered their alleged injuries, the Company
was in the business of repackaging and distributing ethylene oxide, among other
products. The Company never sold any product to the hospital but has been
injoined due to the fact that it distributed ethylene oxide for medical device
sterilization to other companies that blend ethylene oxide for sales to the
hospital noted. On February 9, 2006, the trial court ruled in favor of Balchem's
Motion for Summary, dismissing all of the plaintiffs' claims of negligence,
products liability and/or conspiracy against the Company. The plaintiffs filed a
Notice of Appeal to the trial court's summary judgment order, and on October 19,
2006 the Illinois Court of Appeals dismissed the plaintiffs' appeal for failure
to file the record on appeal within the prescribed time and for want of
prosecution. The plaintiffs did not seek to appeal this ruling to the Illinois
Supreme Court, thereby precluding the right of any further appeals by the
plaintiffs of the rulings in favor of the Company. Plaintiffs continue to pursue
claims and file appeals against other defendants in the action but these have no
direct impact on the Company. Balchem may still be subject to ancillary claims
of indemnification and contribution from other defendants in the litigation, but
the Company believes that these claims are either without merit or time barred
or both.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these proceedings will not have a material effect on the Company's financial
position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
(a) Market Information.
On December 8, 2006, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 29, 2006. Such stock
dividend was made on January 19, 2007. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
On December 15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2005. Such stock
dividend was made on January 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.
On December 16, 2004, 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
10
December 30, 2004. Such stock dividend was made on January 20, 2005. 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 stock split.
Since December 22, 2006, the Company's common stock has traded on the
Nasdaq Global Market under the trading symbol BCPC. Prior to that, our common
stock traded on the American Stock Exchange under the trading symbol BCP. The
high and low closing prices for the common stock as recorded for each quarterly
period during the years ended December 31, 2006 and 2005, adjusted for the
December 2006 and 2005 three-for-two stock splits (effected by means of stock
dividends) were as follows:
================================================================
Quarterly Period High Low
----------------------------------------------------------------
Ended March 31, 2006 $ 15.99 $ 13.57
Ended June 30, 2006 15.85 13.41
Ended September 30, 2006 15.93 13.07
Ended December 31, 2006 19.25 12.80
================================================================
================================================================
Quarterly Period High Low
----------------------------------------------------------------
Ended March 31, 2005 $ 11.11 $ 9.64
Ended June 30, 2005 13.37 9.71
Ended September 30, 2005 14.42 11.69
Ended December 31, 2005 13.25 11.56
================================================================
On March 1, 2007 the closing price for the common stock on the Nasdaq
Global Market was $14.53.
(b) Record Holders.
As of March 1, 2007, the approximate number of holders of record of the
Company's common stock was 198. Such number does not include stockholders who
hold their stock in street name. The total number of beneficial owners of the
Company's common stock is estimated to be approximately 7,271.
(c) Dividends.
The Company declared cash dividends of $0.09 and $0.06 per share on its
common stock during its fiscal years ended December 31, 2006 and 2005,
respectively (after giving effect to the December 2006 and 2005 three-for-two
stock splits).
For information concerning prior stockholder approval of and other matters
relating to our equity incentive plans, see Item 12 in this Annual Report on
Form 10-K.
(d) Performance Graph.
The graph below sets forth the cumulative total stockholder return on the
Company's Common Stock (referred to in the table as "BCPC") for the five years
ended December 31, 2006, the overall stock market return during such period for
shares comprising the Russell 2000(R) Index (which the Company believes includes
companies with market capitalization similar to that of the Company), and the
overall stock market return during such period for shares comprising the
Standard & Poor's 500 Food Group Index, in each case assuming a comparable
initial investment of $100 on December 31, 2001 and the subsequent reinvestment
of dividends. The Russell 2000(R) Index measures the performance of the shares
of the 2000 smallest companies included in the Russell 3000(R) Index. In light
of the Company's industry segments, the
11
Company does not believe that published industry-specific indices are
necessarily representative of stocks comparable to the Company. Nevertheless,
the Company considers the Standard & Poor's 500 Food Group Index to be
potentially useful as a peer group index with respect to the Company in light of
the Company's encapsulated / nutritional products segment. The performance of
the Company's Common Stock shown on the graph below is historical only and not
indicative of future performance.
Russell S&P Food
BCPC 2000(R) Index Group Index
-----------------------------------------------
12/31/01 $ 100.00 $ 100.00 $ 100.00
12/31/02 $ 113.82 $ 79.52 $ 102.85
12/31/03 $ 106.79 $ 117.09 $ 89.49
12/31/04 $ 162.48 $ 138.55 $ 103.97
12/31/05 $ 209.44 $ 144.86 $ 93.10
12/31/06 $ 270.63 $ 171.47 $ 105.69
Stock Price Value Value
-----------------------------------------------
12/31/01 $ 6.33 $1,941.39 239.1297
12/31/02 $ 7.20 $1,543.73 245.9495
12/31/03 $ 6.76 $2,273.20 213.9892
12/31/04 $ 10.28 $2,689.86 248.6118
12/31/05 $ 13.25 $2,812.35 222.6220
12/31/06 $ 17.12 $3,328.90 252.7360
Item 6. Selected Financial Data
The selected statements of operations data set forth below for the three years
in the period ended December 31, 2006 and the selected balance sheet data as of
December 31, 2006 and 2005 have been derived from our Consolidated Financial
Statements included elsewhere herein. The selected financial data as of December
31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 have
been derived from audited Consolidated Financial Statements not included herein,
but which were previously filed with the SEC. The following information should
be read in conjunction with Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included elsewhere herein.
All dollar amounts are in thousands (other than per share amounts). Earnings per
share and dividend amounts have been adjusted for the December 2006, 2005 and
2004 three-for-two stock splits (effected by means of stock dividends).
(In thousands, except per share data)
=======================================================================================
Year ended December 31, 2006 2005 2004 2003 2002
(1)(2)(3) (1)
---------------------------------------------------------------------------------------
Statement of Operations Data
-----------------------------
Net sales $ 100,905 $ 83,095 $ 67,406 $ 61,875 $ 60,197
Earnings before income
tax expense 19,101 17,191 12,715 8,763 11,845
Income tax expense 6,823 6,237 4,689 3,125 4,429
Net earnings 12,278 10,954 8,026 5,638 7,416
Basic net earnings per
common share $ .70 $ .63 $ .48 $ .35 $ .46
Diluted net earnings per
common share $ .67 $ .61 $ .46 $ .33 $ .44
---------------------------------------------------------------------------------------
12
==========================================================================================
At December 31, 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------
Balance Sheet Data
------------------
Total assets $ 92,333 $ 75,141 $ 60,405 $ 56,906 $ 53,298
Long-term debt -- -- -- 7,839 9,581
Other long-term
Obligations 784 1,043 1,003 985 964
Total stockholders' equity 75,362 60,933 50,234 39,781 33,269
Dividends per common share $ .09 $ .06 $ .04 $ .023 $ .023
==========================================================================================
(1) Includes the operating results, cash flows, and assets relating to
the Loders Croklaan Acquisition from the date of acquisition (July
1, 2005) forward.
(2) Includes the operating results, cash flows, and assets relating to
the CMC Acquisition from the date of acquisition (February 8, 2006)
forward.
(3) Includes the operating results, cash flows, and assets relating to
the St. Gabriel Acquisition from the date of acquisition (August 24,
2006) forward.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
--------
The Company develops, manufactures, distributes and markets specialty
performance ingredients and products for the food, nutritional, pharmaceutical,
feed and medical sterilization industries. The Company's reportable segments are
strategic businesses that offer products and services to different markets. The
Company presently has three reportable segments: specialty products;
encapsulated / nutritional products; and BCP Ingredients.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with Item 6 -- "Selected
Financial Data" and our Consolidated Financial Statements and the related notes
included in this report. Those statements in the following discussion that are
not historical in nature should be considered to be forward-looking statements
that are inherently uncertain. See "Cautionary Statement Regarding
Forward-Looking Statements".
Specialty Products
------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use in the health care industry and used to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. Blends of
ethylene oxide are sold as fumigants and are highly effective in killing
bacteria, fungi, and insects in spices and other seasoning type materials. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride are
sold principally to customers seeking smaller (as opposed to bulk) quantities.
Management believes that future success in this segment is highly
dependent on the Company's ability to maintain its strong reputation for
excellent quality, safety and customer service.
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides
microencapsulation, chelation and agglomeration solutions to a variety of
applications in food, pharmaceutical and nutritional ingredients to enhance
therapeutic performance, taste, processing, packaging and shelf-life. Major end
product
13
applications are baked goods, refrigerated and frozen dough systems, processed
meats, seasoning blends, confections, nutritional supplementations,
pharmaceuticals and animal nutrition. We also market human grade choline
nutrient products through this industry segment for wellness applications.
Choline is recognized to play a key role in the structural integrity of cell
membranes, processing dietary fat, reproductive development and neural
functions, such as memory and muscle function. Balchem's portfolio of granulated
calcium carbonate products are primarily used in novel over-the-counter and
prescription pharmaceuticals for the treatment of osteoporosis, gastric
disorders and calcium deficiencies in the United States.
Management believes this segment's key strengths are its proprietary
technology and end-product application capabilities. The success of the
Company's efforts to increase revenue in this segment is highly dependent on the
timing of marketing launches of new products in the U.S. and international food
and nutrition markets by the Company's customers and prospects. The Company,
through its innovative proprietary technology and applications expertise,
continues to develop new products designed to solve and respond to customer
problems and innovative needs. Sales of specialty products for the animal
nutrition and health industry are highly dependent on dairy industry economics
as well as the ability of the Company to leverage the results of existing
successful university research on the animal health benefits of the Company's
products.
BCP Ingredients
---------------
BCP Ingredients manufactures and supplies choline chloride, an essential
nutrient for animal health, to the poultry and swine industries. In addition,
certain derivatives of choline chloride are also marketed into industrial
applications.
Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation for
excellent product quality and customer service. In addition, the Company must
continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete for market share in a highly competitive global
marketplace.
The Company sells products for all three segments through its own sales
force, independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and
business segment earnings before income taxes for the three years ended December
31, 2006, 2005 and 2004 (in thousands):
Business Segment Net Sales:
================================================================================
2006 2005 2004
--------------------------------------------------------------------------------
Specialty Products $ 32,026 $ 29,433 $ 28,767
Encapsulated/Nutritional Products 41,565 32,499 24,759
BCP Ingredients 27,314 21,163 13,880
--------------------------------------------------------------------------------
Total $ 100,905 $ 83,095 $ 67,406
================================================================================
Business Segment Earnings Before Income Taxes:
================================================================================
2006 2005 2004
--------------------------------------------------------------------------------
Specialty Products $ 11,315 $ 11,007 $ 10,693
Encapsulated/Nutritional Products 4,200 3,217 992
BCP Ingredients 3,647 2,679 1,112
Interest and other income (expense) (61) 288 (82)
--------------------------------------------------------------------------------
Total $ 19,101 $ 17,191 $ 12,715
================================================================================
14
Fiscal Year 2006 compared to Fiscal Year 2005
(All amounts in thousands, except share and per share data)
Net Sales
---------
Net sales for 2006 were $100,905 compared with $83,095 for 2005, an
increase of $17,810 or 21.4%. Net sales for the specialty products segment were
$32,026 for 2006, as compared with $29,433 for 2005, an increase of $2,593 or
8.8%. 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 $41,565 for 2006 compared with $32,499 for 2005, an increase of $9,066 or
27.9%. This increase was due principally to increased volumes sold in the human
choline market, favorable changes in product mix in the domestic and
international food markets and approximately $6,362 of incremental sales
associated with the Company's newly acquired pharmaceutical, food, and chelated
minerals business lines resulting from the Loders Croklaan Acquisition and the
CMC Acquisition (see Notes 7 and 6 to our Consolidated Financial Statements,
respectively). The Company also experienced volume improvements in sales of
REASHURE(R), our animal nutrition and health product targeted for dairy cows.
Net sales for the BCP Ingredients segment of $27,314 were realized for 2006
compared with $21,163 for 2005, an increase of $6,151 or 29.1%. This increase
was due to increased volumes sold in dry and aqueous choline and choline
derivatives, along with modest price increases in all product lines and revenue
recognized of $842 relating to the PMD license agreement as compared to $158 in
2005 (see Note 14 to our Consolidated Financial Statements).
Gross Margin
------------
Gross margin for 2006 increased to $34,006 compared to $28,680 for 2005,
an increase of 18.6%, due largely to the above-noted increase in sales. Gross
margin percentage for 2006 was 33.7%, as compared to 34.5% for 2005, as our
margin percentage was unfavorably affected by product mix and higher raw
material and energy costs. Gross margin percentage for the specialty products
segment decreased slightly primarily due to rising raw material costs. Gross
margin percentage in the encapsulated / nutritional products segment increased
0.6% as margins were favorably affected by increased production, a result of
greater sales volume as described above. The favorable impact of the increased
production was partially offset by higher raw material costs and an unfavorable
product mix in the pharmaceutical calcium product line. Gross margin percentage
in BCP Ingredients increased 0.6% and was favorably affected by increased
production volumes of choline chloride and specialty derivative products. This
favorable impact was partially offset by higher raw material and energy costs.
Operating Expenses
------------------
Operating expenses for 2006 increased to $14,844 from $11,777 for 2005, an
increase of $3,067 or 26.0%. Total operating expenses as a percentage of sales
were 14.7% for 2006, as compared to 14.2% for 2005. The increase in operating
expenses for 2006 was principally a result of stock-based compensation expense
of $982 relating to the adoption of the provisions of SFAS 123R, increased
payroll costs and benefits of $874 primarily due to new hires, increased
expenditures of $802 in support of the Company's continuing efforts in the
pharmaceutical industry, and higher amortization expense of $356 resulting from
the CMC Acquisition. During 2006 and 2005, the Company spent $2,019 and $2,053,
respectively, on Company-sponsored research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both food and animal feed applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for 2006 were
$19,162 as compared to $16,903 for 2005, reflecting a 13.4% increase from year
to year.
15
Other Expenses (Income)
-----------------------
Interest income for 2006 was $128 as compared to $214 for 2005. This
decrease is attributable to a decrease in the Company's average cash balance
during 2006. Interest expense was $189 for 2006 compared to $8 for 2005. This
increase is attributable to the average outstanding current and long-term debt
in 2006, resulting from the CMC Acquisition in February 2006. Other income for
2006 was $-0- as compared to $82 for 2005. This decrease is attributable to the
inclusion of a gain on the sale of equipment in 2005.
Income Tax Expense
------------------
The Company's effective tax rate for 2006 was 35.7% compared to a 36.3%
rate for 2005. This decrease in the effective tax rate is primarily attributable
to a change in allocation relating to state income taxes.
Net Earnings
------------
As a result of the foregoing, net earnings were $12,278 for 2006 as
compared with $10,954 for 2005, reflecting a 12.1% increase from 2005 to 2006.
Fiscal Year 2005 compared to Fiscal Year 2004
(All amounts in thousands, except share and per share data)
Net Sales
---------
Net sales for 2005 were $83,095 compared with $67,406 for 2004, an
increase of $15,689 or 23.3%. Net sales for the specialty products segment were
$29,433 for 2005 compared with $28,767 for 2004, an increase of $666 or 2.3%.
This increase was due principally to greater sales volumes of ethylene oxide for
medical device sterilization and propylene oxide for starch modification as well
as a modest price increase adopted early in 2005 to help offset rising raw
material costs. This increase was partially offset by a decline in volumes sold
in the ethylene oxide blends product line and single use ethylene oxide
canisters for use in sterilization equipment. Net sales for the encapsulated /
nutritional products segment were $32,499 for 2005 compared with $24,759 for
2004, an increase of $7,740 or 31.3%. This increase was due principally to
increased volumes sold in the domestic food and human choline markets and
approximately $3,300 associated with the Company's new pharmaceutical and food
business lines resulting from the June 30, 2005 Loders Croklaan Acquisition, as
described in Note 7 to our Consolidated Financial Statements. The Company also
experienced volume improvements in the animal health industry relating to
REASHURE(R), NITROSHURETM and NIASHURETM, our microencapsulated products for
dairy cows. These increases were partially offset by a decline in volumes sold
in the international food product lines and the nutritional supplement product
line. Net sales of $21,163 were realized for 2005 in the BCP Ingredients segment
compared with $13,880 for 2004, an increase of $7,283 or 52.5%. This increase
was due to increased volumes sold in the dry choline, aqueous choline, and
specialty industrial product lines, along with modest price increases in all
three product lines.
Gross Margin
------------
Gross margin for 2005 increased to $28,680 compared to $23,806 for 2004,
an increase of 20.5%, due largely to the above-noted increase in sales. Gross
margin percentage for 2005 was 34.5% as compared to 35.3% for 2004 as our margin
percentage was unfavorably affected by product mix and higher raw material and
energy costs. Gross margin percentage for the specialty products segment
decreased slightly primarily due to rising raw material costs. Gross margin
percentage in the encapsulated / nutritional products segment increased 1.8% as
margins were favorably affected by increased production, a result of greater
sales volume as described above. Gross margin percentage in BCP Ingredients
increased 3.8% and was favorably affected by increased production volumes of
choline chloride and specialty derivative products.
16
Operating Expenses
------------------
Operating expenses for 2005 increased to $11,777 from $11,009 for 2004, an
increase of $768 or 7.0%. Total operating expenses as a percentage of sales were
14.2% for 2005 compared to 16.3% for 2004. The increase in operating expenses
for 2005 was principally a result of new hires, increased charges for search
fees associated with new hires and associated relocation expenses. These
increases were partially offset by a decrease in selling expenses. During 2005
and 2004, the Company spent $2,053 and $1,752, respectively, on
Company-sponsored research and development programs, substantially all of which
pertained to the Company's encapsulated / nutritional products segment for both
food and animal feed applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for 2005 were
$16,903 as compared to $12,797 for 2004, reflecting a 32.1% increase from year
to year.
Other Expenses (Income)
-----------------------
Interest income for 2005 totaled $214 as compared to $125 for 2004. This
increase is attributable to an increase in the Company's average cash balance
during 2005. Interest expense was $8 for 2005 compared to $219 for 2004. This
decrease is the result of the prepayment of the Company's outstanding loan
balance in December 2004. Other income of $82 in 2005 represents the net gain on
the sale of equipment.
Income Tax Expense
------------------
The Company's effective tax rate for 2005 was 36.3% compared to a 36.9%
rate for 2004.
Net Earnings
------------
As a result of the foregoing, net earnings were $10,954 for 2005 as
compared with $8,026 for 2004, reflecting a 36.5% increase from 2004 to 2005.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
The Company's contractual obligations and commitments principally include
obligations associated with future minimum non-cancelable operating lease
obligations (including the headquarters office space entered into in 2002).
These aggregate commitments are as follows:
=========================================
Year
-----------------------------------------
2007 $ 672
2008 619
2009 652
2010 209
2011 79
Thereafter 59
-----------------------------------------
Total minimum lease
payments $ 2,290
=========================================
As part of the June 30, 2005 Loders Croklaan Acquisition, we agreed to
make contingent payments of additional consideration based upon the volume of
sales associated with one particular product acquired
17
by the Company during the three year period following the acquisition. Such
contingent consideration, if and when paid, is recorded as an additional cost of
the acquired product lines. As of December 31, 2006, such contingent
consideration of $23 has been earned and paid.
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.
Acquisitions and Dispositions
-----------------------------
Effective August 24, 2006, pursuant to an asset purchase agreement of same
date, the Company, through its wholly owned subsidiaries BCP and BCP St.
Gabriel, acquired an animal feed grade aqueous choline chloride manufacturing
facility and related assets located in St. Gabriel, Louisiana from BioAdditives,
LLC, CMB Additives, LLC and CMB Realty of Louisiana. On February 8, 2006, the
Company, through its wholly owned subsidiary Balchem Minerals Corporation,
acquired all of the outstanding capital stock of CMC, for a purchase price of
$17,350 before working capital and other adjustments. CMC is a manufacturer and
global marketer of chelated mineral nutritional supplements for livestock, pet
and swine feeds.
The Company is actively pursuing acquisition candidates.
Cash
----
Cash and cash equivalents decreased to $5,189 at December 31, 2006 from
$12,996 at December 31, 2005. The $7,807 decrease resulted from net cash used in
investing activities of $25,232 partially offset by net cash provided by
operating activities of $16,370 and net cash provided by financing activities of
$1,055. Working capital amounted to $19,295 at December 31, 2006 as compared to
$26,116 at December 31, 2005, a decrease of $6,821, primarily due to the
aforementioned decrease in cash.
Operating Activities
--------------------
Cash flows from operating activities provided $16,370 for 2006 as compared
with $13,698 for 2005. The increase in cash flows from operating activities was
due primarily to increases in net income and non-cash expenses including
depreciation expense and stock compensation expense of $1,097.
Investing Activities
--------------------
Capital expenditures were approximately $2,300 for 2006. Capital
expenditures are projected to be approximately $4,800 for calendar year 2007.
Cash paid for acquisitions in 2006, including acquisition costs, net of
acquisition accounts receivable collected, was $22,872.
The overall effect of the foregoing was that cash flows used in investing
activities were $25,232 in 2006, as compared to $12,943 in 2005.
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. During 2005, a total of
99,450 shares were purchased at an average cost of $12.05 per share, 96,024 of
18
which remained in treasury at December 31, 2005. During 2006, there were no
shares purchased, and no shares remained in treasury at December 31, 2006. 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.
There was no debt outstanding at December 31, 2006 or December 31, 2005.
On February 6, 2006, the Company and its principal bank entered into a
Loan Agreement (the "Loan Agreement") providing for a term loan of $10,000 (the
"Term Loan"), the proceeds of which were used to fund the CMC Acquisition, in
part. As of December 31, 2006, the Company made $10,000 in principal payments
against the Term Loan, which paid the Term Loan in full. The Loan Agreement also
provided for a short-term revolving credit facility of $3,000 (the "Revolving
Facility"). Borrowings under the Revolving Facility bear interest at LIBOR plus
1.00%. As of December 31, 2006, no amounts were drawn on the Revolving Facility.
The Revolving Facility expires in May, 2007. Management believes that such
facility will be renewed in the normal course of business.
Financing activities also included proceeds from stock options exercised
totaling $1,239 and $1,409 for 2006 and 2005, respectively, and $878 of excess
tax benefits associated with equity-based compensation for 2006. Dividend
payments were $1,045 and $685 for 2006 and 2005, respectively.
The overall effect of the foregoing was that cash flows provided by
financing activities were $1,055 in 2006, as compared to cash flows used in
financing activities of $493 in 2005.
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 the Verona, Missouri facility. The amount recorded
on the Company's balance sheet as of December 31, 2006 for this obligation is
$729. The postretirement plan is not funded. Historical cash payments made under
such plan have been less than $50 per year.
Critical Accounting Policies
----------------------------
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
The Company's "critical accounting policies" are those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and that may change in subsequent periods. Management
considers the following accounting policies to be critical.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of
loss, and when collection is reasonably assured. The Company reports amounts
billed to customers related to shipping and handling as revenue and includes
costs incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities. In addition, the
Company follows the provisions of the Securities and Exchange Commission's (SEC)
Staff Accounting Bulletin (SAB) No. 104, "Revenue
19
Recognition," which sets forth guidelines on the timing of revenue recognition
based upon factors such as passage of title, installation, payments and customer
acceptance.
Revenue related to a process and product license agreement is recognized
using the percentage of completion method and the progress to completion is
measured using the efforts-expended method. The Company follows the provisions
of the American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts." Revenue is recognized as work is performed
and costs are incurred.
Inventories
-----------
Inventories are valued at the lower of cost (first in, first out or
average) or market value and have been reduced by an allowance for excess or
obsolete inventories. Inventory reserves are generally recorded when the
inventory for a product exceeds twelve months of demand for that product and/or
when individual products have been in inventory for greater than six months. In
November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 151, "Inventory Costs." The new statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing", to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This statement requires that those items be
recognized as current period charges and requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. The provisions of this statement were applied
prospectively for inventory costs incurred beginning in our fiscal year 2006.
The adoption of this statement did not have a material impact on our results of
operations, financial position or cash flow.
Long-Lived Assets
-----------------
Long-lived assets, such as property, plant, and equipment and intangible
assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
Goodwill, which is not subject to amortization, is tested annually for
impairment, and more frequently if events and circumstances indicate that the
asset might be impaired. If an indicator of impairment exists, the Company
determines the amount of impairment based on a comparison of the implied fair
value of its goodwill to its carrying value.
Accounts Receivable
-------------------
We market our products to a diverse customer base, principally throughout
the United States, Europe, China and Japan. We grant credit terms in the normal
course of business to our customers. We perform on-going credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined through review of their
current credit information. We continuously monitor collections and payments
from customers and maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Estimated losses are based on historical experience and any specific customer
collection issues identified. If the financial condition of our customers were
to deteriorate resulting in an impairment of their ability to make payments,
additional allowances and related bad debt expense may be required.
Post-employment Benefits
------------------------
The Company provides life insurance and health care benefits for eligible
retirees and health care benefits for retirees' eligible survivors. The costs
and obligations related to these benefits reflect the
20
Company's assumptions as to general economic conditions and health care cost
trends. The cost of providing plan benefits also depends on demographic
assumptions including retirements, mortality, turnover, and plan participation.
If actual experience differs from these assumptions, the cost of providing these
benefits could increase or decrease.
In September 2006, the FASB issued FASB Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans." This
Statement requires an employer to recognize the over funded or under funded
status of a defined benefit post retirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position, and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. As a result of adopting SFAS No. 158 on December
31, 2006, we recorded $0.3 million as a reduction to the benefit obligation and
$0.2 million, net of tax, as a one-time adjustment to accumulated other
comprehensive income in stockholders' equity.
Intangible Assets with Finite Lives
-----------------------------------
The useful life of an intangible asset is based on the Company's
assumptions regarding expected use of the asset; the relationship of the
intangible asset to another asset or group of assets; any legal, regulatory or
contractual provisions that may limit the useful life of the asset or that
enable renewal or extension of the asset's legal or contractual life without
substantial cost; the effects of obsolescence, demand, competition and other
economic factors; and the level of maintenance expenditures required to obtain
the expected future cash flows from the asset and their related impact on the
asset's useful life. If events or circumstances indicate that the life of an
intangible asset has changed, it could result in higher future amortization
charges or recognition of an impairment loss.
Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date. The Company regularly reviews its deferred tax assets for
recoverability and would establish a valuation allowance if it believed that
such assets may not be recovered, taking into consideration historical operating
results, expectations of future earnings, changes in its operations and the
expected timing of the reversals of existing temporary differences.
Stock-based Compensation
------------------------
Beginning in fiscal 2006, we account for stock-based compensation in
accordance with SFAS No. 123R (revised 2004), "Share-Based Payment" ("SFAS
123R") as interpreted by SEC Staff Accounting Bulletin ("SAB") No. 107. Under
the fair value recognition provisions of this statement, share-based
compensation cost is measured at the grant date based on the value of the award
and is recognized as expense over the vesting period. Determining the fair value
of share-based awards at the grant date requires judgment, including estimating
our stock price volatility, employee stock option exercise behaviors and
employee option forfeiture rates. Expected volatilities are based on historical
volatility of the Company's stock. The expected term of the options is based on
the Company's historical experience of employees' exercise behavior. As
stock-based compensation expense recognized in the Consolidated Statement of
Earnings is based on awards ultimately expected to vest, the amount of expense
has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures were estimated
based on historical experience. As a result of adopting SFAS 123R, we recorded
$0.9 million of compensation expense, net of tax, in 2006. If factors change and
we employ different assumptions in the
21
application of SFAS 123R, the compensation expense that we record in future
periods may differ significantly from what we have recorded in the current
period. Under the accounting method we followed prior to January 1, 2006, we did
not record any stock-based compensation expense related to stock options granted
to employees and directors for the years ended December 31, 2005 and 2004. If we
had included the cost of employee stock option compensation in the financial
statements for the years ended December 31, 2005 and 2004, our net earnings
would have decreased by approximately $0.9 million and $0.8 million,
respectively, based on the fair value of the stock options granted to employees.
See Note 2 to the Consolidated Financial Statements for additional information.
New Accounting Pronouncements:
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.
In September 2006, the SEC issued SAB 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements" ("SAB 108"). SAB 108 requires analysis of misstatements
using both an income statement (rollover approach) and a balance sheet (iron
curtain) approach in assessing materiality and provides for a one-time
cumulative effect transition adjustment. SAB 108 is effective for the Company's
fiscal year 2006 annual financial statements. The adoption of this statement did
not have a material impact on our consolidated results of operations, financial
position or cash flows.
In July 2006, the FASB issued 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. Derecognition 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 derecognition of tax positions, and it
has expanded disclosure requirements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, in which the impact of adoption should be
accounted for as a cumulative-effect adjustment to the beginning balance of
retained earnings. The Company is evaluating FIN 48 and has not yet determined
the impact the adoption will have on the consolidated financial statements.
Item 7A. 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. However, interest payable under the Company's Revolving Facility
is based on LIBOR plus 1.00%, and thus could expose the Company to some interest
rate risk in connection with its bank financing. No amounts were drawn on the
Revolving Facility as of December 31, 2006. The Company has no derivative
financial instruments or derivative commodity instruments, nor does the Company
have any financial instruments entered into for trading or hedging purposes.
Foreign sales are generally billed in U.S. dollars. 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.
22
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Report of Independent Registered Public Accounting Firm 24
Consolidated Balance Sheets as of
December 31, 2006 and 2005 26
Consolidated Statements of Earnings for the
years ended December 31, 2006, 2005 and 2004 27
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2006, 2005 and 2004 28
Consolidated Statements of Cash Flows
for the years ended December 31, 2006, 2005 and 2004 29
Notes to Consolidated Financial Statements 30
Report of Independent Registered Public Accounting Firm 53
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2006, 2005 and 2004 54
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Balchem Corporation
New Hampton, New York
We have audited the accompanying consolidated balance sheets of Balchem
Corporation and Subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2006. We also have
audited management's assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that Balchem Corporation
and Subsidiaries maintained effective internal control over financial reporting
as of December 31, 2006, based on criteria established in "Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)." Balchem Corporation's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements, an
opinion on management's assessment, and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As discussed in Note 2 to the Company's Consolidated Financial Statements, on
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment", which requires all share-based
payments, including grants of stock options, to be recognized in the income
statement as an operating expense, based on their fair values.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Balchem Corporation
and Subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, management's
assessment that Balchem Corporation and Subsidiaries
24
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in "Internal Control--Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO)." Furthermore, in
our opinion, Balchem Corporation and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2006, based on criteria established in "Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)."
/s/McGladrey & Pullen, LLP
New York, New York
March 15, 2007
25
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2006 and 2005
(Dollars in thousands, except share and per share data)
2006 2005
-------- --------
Assets
------
Current assets:
Cash and cash equivalents $ 5,189 $ 12,996
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at
December 31, 2006 and 2005, respectively 11,578 11,521
Inventories 9,918 8,540
Prepaid income taxes -- 143
Prepaid expenses 1,754 1,790
Deferred income taxes 416 276
------- --------
Total current assets 28,855 35,266
Property, plant and equipment, net 31,313 24,400
Goodwill 25,253 13,327
Intangible assets with finite lives, net 6,912 2,148
-------- --------
Total assets $ 92,333 $ 75,141
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 3,010 $ 2,562
Accrued expenses 1,827 2,601
Accrued compensation and other benefits 1,869 1,756
Customer deposits and other deferred revenue 1,072 1,186
Dividends payable 1,596 1,045
Income tax payable 186 --
-------- --------
Total current liabilities 9,560 9,150
Deferred income taxes 6,627 4,015
Other long-term obligations 784 1,043
-------- --------
Total liabilities 16,971 14,208
-------- --------
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 25,000,000 shares; 17,733,849
shares issued and outstanding at December 31, 2006 and 17,461,447 shares
issued and 17,365,423 outstanding at December 31, 2005 788 776
Additional paid-in capital 10,393 8,008
Retained earnings 63,988 53,306
Accumulated other comprehensive income 193 --
Treasury stock, at cost: 0 and 96,024 shares at December 31, 2006
and 2005, respectively -- (1,157)
-------- --------
Total stockholders' equity 75,362 60,933
-------- --------
-------- --------
Total liabilities and stockholders' equity $ 92,333 $ 75,141
======== ========
See accompanying notes to consolidated financial statements.
26
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
2006 2005 2004
--------- -------- --------
Net sales $ 100,905 $ 83,095 $ 67,406
Cost of sales 66,899 54,415 43,600
--------- -------- --------
Gross margin 34,006 28,680 23,806
Operating expenses:
Selling expenses 6,907 4,739 4,815
Research and development expenses 2,019 2,053 1,752
General and administrative expenses 5,918 4,985 4,442
--------- -------- --------
14,844 11,777 11,009
--------- -------- --------
Earnings from operations 19,162 16,903 12,797
Other expenses (income):
Interest income (128) (214) (125)
Interest expense 189 8 219
Other, net -- (82) (12)
--------- -------- --------
Earnings before income tax expense 19,101 17,191 12,715
Income tax expense 6,823 6,237 4,689
--------- -------- --------
Net earnings $ 12,278 $ 10,954 $ 8,026
========= ======== ========
Basic net earnings per common share $ 0.70 $ 0.63 $ 0.48
========= ======== ========
Diluted net earnings per common share $ 0.67 $ 0.61 $ 0.46
========= ======== ========
See accompanying notes to consolidated financial statements.
27
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except share and per share data)
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income
---------- ------ ------- -------- -------------
Balance - December 31, 2003 16,548,429 $ 736 $ 3,493 $ 36,056 --
Net earnings -- -- -- 8,026 --
Dividends ($.04 per share) -- -- -- (685) --
Shares issued under employee benefit plans and other 31,635 2 254 -- --
Shares issued under stock option plans and
an income tax benefit of $293 567,543 24 2,328 -- --
---------- ------ ------- -------- ------
Balance - December 31, 2004 17,147,607 762 6,075 43,397 --
Net earnings -- -- -- 10,954 --
Dividends ($.06 per share) -- -- -- (1,045) --
Treasury shares purchased -- -- -- -- --
Shares issued under employee benefit plans and other 52,133 1 210 -- --
Shares issued under stock option plans and
an income tax benefit of $327 261,707 13 1,723 -- --
---------- ------ ------- -------- ------
Balance - December 31, 2005 17,461,447 776 8,008 53,306 --
Net earnings -- -- -- 12,278 --
Dividends ($.09 per share) -- -- -- (1,596) --
Shares issued under employee benefit plans and other 1,079 70
Shares and options issued under stock option plans and
an income tax benefit of $878 271,323 12 2,315 -- --
Adjustment to initially apply FASB Statement No. 158,
net of tax -- -- -- -- 193
---------- ------ ------- -------- ------
Balance - December 31, 2006 17,733,849 $ 788 $10,393 $ 63,988 $ 193
========== ====== ======= ======== ======
Total
Treasury Stock Stockholders'
Shares Amount Equity
-------- ------- -------------
Balance - December 31, 2003 (145,665) $ (504) $ 39,781
Net earnings -- -- 8,026
Dividends ($.04 per share) -- -- (685)
Shares issued under employee benefit plans and other -- -- 256
Shares issued under stock option plans and
an income tax benefit of $293 145,665 504 2,856
-------- ------- --------
Balance - December 31, 2004 -- -- 50,234
Net earnings -- -- 10,954
Dividends ($.06 per share) -- -- (1,045)
Treasury shares purchased (99,450) (1,198) (1,198)
Shares issued under employee benefit plans and other 3,426 41 252
Shares issued under stock option plans and
an income tax benefit of $327 -- -- 1,736
-------- ------- --------
Balance - December 31, 2005 (96,024) (1,157) 60,933
Net earnings -- -- 12,278
Dividends ($.09 per share) -- -- (1,596)
Shares issued under employee benefit plans and other 21,933 264 334
Shares and options issued under stock option plans and
an income tax benefit of $878 74,091 893 3,220
Adjustment to initially apply FASB Statement No. 158,
net of tax -- -- 193
-------- ------- --------
Balance - December 31, 2006 -- $ -- $ 75,362
======== ======= ========
See accompanying notes to consolidated financial statements.
28
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
2006 2005 2004
--------- --------- ---------
Cash flows from operating activities:
Net earnings $ 12,278 $ 10,954 $ 8,026
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,445 2,809 3,271
Stock compensation expense 1,097 -- --
Shares issued under employee benefit plans 343 257 256
Deferred income tax expense 104 599 1,388
(Recovery of) provision for doubtful accounts -- (32) (4)
Income tax benefit from stock options exercised -- 327 293
Disposition of intangible assets -- -- 53
Gain on sale of assets -- (82) (12)
Changes in assets and liabilities
Accounts receivable (57) (2,684) (759)
Inventories (827) (1,496) (358)
Prepaid expenses 36 (263) (804)
Accounts payable and accrued expenses (212) 2,749 226
Income taxes 218 172 (315)
Customer deposits and other deferred revenue (101) 334 852
Other long-term obligations 46 54 32
--------- --------- ---------
Net cash provided by operating activities 16,370 13,698 12,145
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,279) (1,769) (1,215)
Proceeds from sale of property, plant and equipment -- 389 91
Cash paid for intangible assets acquired (81) (144) (105)
Acquisitions (22,872) (11,419) --
--------- --------- ---------
Net cash used in investing activities (25,232) (12,943) (1,229)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 10,000 -- --
Principal payments on long-term debt (10,000) -- (9,581)
Proceeds from stock options exercised 1,239 1,409 2,563
Excess tax benefits from stock compensation 878 -- --
Dividends paid (1,045) (685) (389)
Purchase of treasury stock -- (1,198) --
Other financing activities (17) (19) (14)
--------- --------- ---------
Net cash provided by (used in) financing activities 1,055 (493) (7,421)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (7,807) 262 3,495
Cash and cash equivalents beginning of year 12,996 12,734 9,239
--------- --------- ---------
Cash and cash equivalents end of year $ 5,189 $ 12,996 $ 12,734
========= ========= =========
Supplemental Cash Flow information - see Note 16
See accompanying notes to consolidated financial statements.
29
BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------------
Business Description
--------------------
Balchem Corporation (including, unless the context otherwise requires, its
wholly-owned subsidiaries, BCP Ingredients, Inc., Balchem Minerals Corporation,
BCP St. Gabriel, Inc. and Chelated Minerals Corporation, "Balchem" or the
"Company"), incorporated in the State of Maryland in 1967, is engaged in the
development, manufacture and marketing of specialty performance ingredients for
the food, pharmaceutical, feed and medical sterilization industries.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of loss,
and when collection is reasonably assured. The Company reports amounts billed to
customers related to shipping and handling as revenue and includes costs
incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities. In addition, the
Company follows the provisions of the Securities and Exchange Commission's
("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which
sets forth guidelines on the timing of revenue recognition based upon factors
such as passage of title, installation, payments and customer acceptance.
Revenue related to the process and product license agreement described in Note
14 below is recognized using the percentage of completion method and the
progress to completion is measured using the efforts-expended method. The
Company follows the provisions of the Financial American Institute of Certified
Public Accountants' (AICPA) Statement of Position ("SOP") 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts." Revenue
is recognized as work is performed and costs are incurred.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents.
30
Inventories
-----------
Inventories are stated at the lower of cost or market, with cost generally
determined on a first-in, first-out basis, and have been reduced by an allowance
for excess or obsolete inventories. Cost elements include material, labor and
manufacturing overhead. In November 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 151, "Inventory
Costs." The new statement amends Accounting Research Bulletin No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material. This statement
requires that those items be recognized as current period charges and requires
that allocation of fixed production overheads to the cost of conversion be based
on the normal capacity of the production facilities. The provisions of this
statement were applied prospectively for inventory costs incurred beginning in
fiscal year 2006. The adoption of this statement did not have a material impact
on the Company's results of operations, financial position or cash flow.
Property, Plant and Equipment and Depreciation
----------------------------------------------
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings 15-25 years
Equipment 3-12 years
Expenditures for repairs and maintenance are charged to expense. Alterations and
major overhauls that extend the lives or increase the capacity of plant assets
are capitalized. When assets are retired or otherwise disposed of, the cost of
the assets and the related accumulated depreciation are removed from the
accounts and any resultant gain or loss is included in earnings.
Business Concentrations
-----------------------
A specialty products customer accounted for 8%, 9% and 11% of the Company's
consolidated net sales for 2006, 2005 and 2004, respectively. This customer
accounted for 10% and 8% of the Company's accounts receivable balance at
December 31, 2006 and 2005, respectively. Approximately 10%, 7% and 8% of the
Company's net sales for 2006, 2005 and 2004, respectively, consisted of sales
outside the United States, predominately to Europe, Japan, and China.
Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customers'
financial condition and credit histories. The majority of the Company's
customers are major national or international corporations.
Goodwill and Acquired Intangible Assets
---------------------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 141, "Business Combinations" ("SFAS 141") and
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), as of January
1, 2002. These standards require the use of the purchase method of accounting
for a business combination and define an intangible asset. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but are instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
As required by SFAS No. 142, the Company performed an assessment of whether
there was an indication that goodwill was impaired at the date of adoption. In
connection therewith, the Company determined that its operations consisted of
three reporting units and determined each reporting units' fair value and
31
compared it to the reporting unit's net book value. Since the fair value of each
reporting unit exceeded its carrying amount, there was no indication of
impairment and no further transitional impairment testing was required. As of
December 31, 2006 and 2005, the Company also performed an impairment test of its
goodwill balance. As of such dates the Company's reporting units' fair value
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 plans to perform its impairment test each
December 31.
The Company had unamortized goodwill in the amount of $25,253 at December 31,
2006 and $13,327 at December 31, 2005, subject to the provisions of SFAS Nos.
141 and 142. Unamortized goodwill is allocated to the Company's reportable
segments as follows:
================================================================================
2006 2005
--------------------------------------------------------------------------------
Specialty Products $ 5,089 $ 5,089
Encapsulated/Nutritional Products 20,164 8,238
BCP Ingredients -- --
--------------------------------------------------------------------------------
Total $25,253 $ 13,327
================================================================================
The following intangible assets with finite lives are stated at cost and are
amortized on a straight-line basis over the following estimated useful lives:
================================================
Amortization
period
(in years)
Customer lists 10
Regulatory re-registration costs 10
Patents & trade secrets 15 - 17
Trademarks & trade names 17
================================================
Income Taxes
------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Use of Estimates
----------------
Management of the Company is required to make certain estimates and assumptions
during the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at December 31, 2006 and 2005 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
32
accompanying consolidated balance sheets. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value,
and, accordingly, the estimates are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The Company's
financial instruments, principally cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Stock-based Compensation
------------------------
The Company has stock-based employee compensation plans, which are described
more fully in Note 2. On January 1, 2006, the Company was required to adopt SFAS
No. 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), which requires all
share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair values. The
Company estimates the fair value of each option award on the date of grant using
a Black-Scholes based option-pricing model.
Prior to adopting SFAS 123R, the Company accounted for stock-based compensation
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", as permitted by Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation". The modified prospective method
was applied in adopting SFAS 123R and, accordingly, periods prior to adoption
have not been restated.
The implementation of SFAS 123R has had no adverse effect on the Company's
balance sheet or total cash flows, but it does impact cash flows from
operations, cash flows from financing activities, cost of sales, gross profit,
operating expenses, net income and earnings per share. Because periods prior to
adoption have not been restated, comparability between periods has been
affected. Additionally, estimates of and assumptions about forfeiture rates,
terms, volatility, interest rates and dividend yields are used to calculate
stock-based compensation. A significant change to these estimates could
materially affect the Company's operating results.
Impairment of Long-lived Assets
-------------------------------
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
New Accounting Pronouncements
-----------------------------
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"). SFAS 158
requires an employer to recognize the over funded or under funded status of a
defined benefit post retirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position, and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. As a result of adopting SFAS 158 on December 31, 2006, the
Company recorded $0.3 million as a reduction to the benefit obligation and $0.2
33
million, net of tax, as a one-time adjustment to accumulated other comprehensive
income in stockholder's equity.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements" ("SFAS
157"), which defines fair value, establishes a framework for measuring fair
value in 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.
In September 2006, the SEC issued SAB 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 requires analysis of misstatements using both
an income statement (rollover approach) and a balance sheet (iron curtain)
approach in assessing materiality and provides for a one-time cumulative effect
transition adjustment. SAB 108 is effective for the Company's fiscal year 2006
annual financial statements. The adoption of this statement did not have a
material impact on our consolidated results of operations, financial position or
cash flows.
In July 2006, the FASB issued 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. Derecognition 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 derecognition of tax positions, and it
has expanded disclosure requirements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, in which the impact of adoption should be
accounted for as a cumulative-effect adjustment to the beginning balance of
retained earnings. The Company is evaluating FIN 48 and has not yet determined
the impact the adoption will have on the consolidated financial statements.
Beginning in fiscal 2006, the Company began accounting for stock-based
compensation in accordance with SFAS 123R as interpreted by SEC Staff Accounting
Bulletin No. 107. Under the fair value recognition provisions of this statement,
share-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the vesting period. Determining
the fair value of share-based awards at the grant date requires judgment,
including estimating the Company's stock price volatility, employee stock option
exercise behaviors and employee option forfeiture rates. Expected volatilities
are based on historical volatility of the Company's stock. The expected term of
the options is based on the Company's historical experience of employees'
exercise behavior. As stock-based compensation expense recognized in the
Consolidated Statement of Earnings is based on awards ultimately expected to
vest, the amount of expense has been reduced for estimated forfeitures. SFAS
123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical experience. If factors
change and the Company employs different assumptions in the application of SFAS
123R, the compensation expense that is recorded in future periods may differ
significantly from what has been recorded in the current period.
34
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 151, "Inventory Costs." The new statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing", to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This statement requires that those items be
recognized as current period charges and requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. The provisions of this statement were applied
prospectively for inventory costs incurred beginning in our fiscal year 2006.
The adoption of this statement did not have a material impact on our results of
operations, financial position or cash flow.
Net Earnings Per Common Share
-----------------------------
Basic net earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per common share is calculated in a manner consistent with basic
net earnings per common share except that the weighted average number of common
shares outstanding also includes the dilutive effect of stock options
outstanding and unvested restricted stock (using the treasury stock method).
NOTE 2 - STOCKHOLDERS' EQUITY
-----------------------------
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS 123R, which requires all
share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair values.
Prior to adopting SFAS 123R, the Company accounted for stock-based compensation
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("Opinion 25"), as permitted by Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"). No
stock-based compensation cost was recognized in the Statement of Earnings for
the years ended December 31, 2005 and 2004, as all options granted had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The Company has applied the modified prospective method in
adopting SFAS 123R. Accordingly, periods prior to adoption have not been
restated. Under the modified prospective method, compensation cost recognized in
the year ended December 31, 2006 includes (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R.
As a result of adopting SFAS 123R on January 1, 2006, the Company's income
before income taxes and net income for the year ended December 31, 2006, are
$1.1 million and $0.9 million lower, respectively, than if it had continued to
account for share-based compensation under Opinion 25. As required by SFAS 123R,
the Company has made an estimate of expected forfeitures and is recognizing
compensation cost only for those stock-based compensation awards expected to
vest. Basic and diluted earnings per share are each $0.05 lower for the twelve
months ended December 31, 2006, than if the Company had not adopted SFAS 123R.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. SFAS 123R requires the cash flows resulting from
the tax benefits resulting from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as
financing cash flows. The $0.9 million tax benefit from the exercise of stock
options classified as a financing cash inflow would have been classified as an
operating cash inflow if the Company had not adopted SFAS 123R.
35
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to the prior periods (in
thousands, except per share data):
=============================================================================================
Year Ended
=============================================================================================
December 31, December 31,
2005 2004
=============================================================================================
Net earnings $ 10,954 $ 8,026
Stock-based employee compensation expense included in net
earnings, net of related tax effects -- --
Stock-based employee compensation expense determined under
fair value based method, net of related tax effects 904 808
---------------------------------------------------------------------------------------------
Pro forma net earnings $ 10,050 $ 7,218
---------------------------------------------------------------------------------------------
Basic earnings per common share:
As reported $ 0.63 $ 0.48
Pro forma $ 0.58 $ 0.43
Diluted earnings per common share:
As reported $ 0.61 $ 0.46
Pro forma $ 0.55 $ 0.42
=============================================================================================
On December 31, 2006, the Company had one share-based compensation plan, which
is described below (the "1999 Stock Plan").
In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan for
officers, directors, directors emeritus and employees of and consultants to the
Company and its subsidiaries. The 1999 Stock Plan is administered by the
Compensation Committee of the Board of Directors of the Company. Under the plan,
options and rights to purchase shares of the Company's common stock are granted
at prices established at the time of grant. Option grants generally become
exercisable 20% after 1 year, 60% after 2 years and 100% after 3 years from the
date of grant for employees and are fully exercisable on the date of grant for
directors. Other option grants are either fully exercisable on the date of grant
or become exercisable thereafter in such installments as the Committee may
specify. The 1999 Stock Plan initially reserved an aggregate of 900,000 shares
(unadjusted for the stock split) of common stock for issuance under the Plan. In
April 2003, the Board of Directors of the Company adopted and stockholders
subsequently approved, the Amended and Restated 1999 Stock Plan which amended
the 1999 Stock Plan by: (i) increasing the number of shares of common stock
reserved for issuance under the 1999 Stock Plan by 900,000 shares (unadjusted
for the stock split), to a total of 1,800,000 shares (unadjusted for the stock
split) of common stock; and (ii) confirming the right of the Company to grant
awards of common stock ("Awards") in addition to the other Stock Rights
available under the 1999 Stock Plan, and providing certain language changes
relating thereto. The 1999 Stock Plan replaced the Company's incentive stock
option plan (the "ISO Plan") and its non-qualified stock option plan (the
"Non-Qualified Plan"), both of which expired on June 24, 1999. Unexercised
options granted under the ISO Plan and the Non-Qualified Plan prior to such
termination remain exercisable in accordance with their terms. Options granted
under the ISO Plan generally become exercisable 20% after 1 year, 60% after 2
years and 100% after 3 years from the date of grant, and expire ten years from
the date of grant. Options granted under the Non-Qualified Plan, generally
vested on the date of grant, and expire ten years from 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 December 31,
2006, the plans had 721,953 shares available for future awards.
On December 8, 2006, the Board of Directors of the Company authorized the
Company to enter into Restricted Stock Purchase Agreements (the "2006
Agreements") to purchase the Company's common stock with the five non-employee
directors and certain employees of the Company pursuant to the Company's
36
1999 Stock Plan. Under the 2006 Agreements, each grantee purchased certain
shares, ranging from 1,500 shares to 13,500 shares, of the Company's common
stock at the purchase price of approximately $.04 per share. The purchased stock
is subject to a repurchase option in favor of the Company and to restrictions on
transfer until it vests in accordance with the provisions of the Agreements.
On December 29, 2005, the Board of Directors of the Company authorized the
Company to enter into Restricted Stock Purchase Agreements (the "2005
Agreements") to purchase the Company's common stock with the five non-employee
directors of the Company pursuant to the Company's 1999 Stock Plan. This 2005
Agreement replaces the Stock Option Plan that non-employee directors
participated in in prior years. Under the 2005 Agreements, each non-employee
director purchased 6,750 shares of the Company's common stock at the purchase
price of approximately $.03 per share. The purchased stock is subject to a
repurchase option in favor of the Company and to restrictions on transfer until
it vests in accordance with the provisions of the Agreements.
The fair value of each option award issued under the 1999 Stock Plan is
estimated on the date of grant using a Black-Scholes based option-pricing model
that uses the assumptions noted in the following table. Expected volatilities
are based on historical volatility of the Company's stock. The expected term of
the options is based on the Company's historical experience of employees'
exercise behavior. 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.
================================================================================
Year Ended
================================================================================
December 31, December 31, December 31,
Weighted Average Assumptions: 2006 2005 2004
================================================================================
Expected Volatility 26.4% 28.9% 27.1%
Expected Term (in years) 4.5 4.8 5.2
Risk-Free Interest Rate 3.8% 3.6% 3.7%
Dividend Yield 0.4% 0.4% 0.4%
================================================================================
The value of the restricted shares is based on the intrinsic value of the award
at the date of grant.
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.
A summary of stock option plan activity for 2006, 2005, and 2004 for all plans
is as follows:
================================================================================
# of
Shares Weighted Average
2006 (000s) Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 2,153 $ 8.38
Granted 305 17.67
Exercised (267) 4.64
Cancelled (21) 9.64
--------------------------------------------------------------------------------
Outstanding at end of year 2,170 $ 10.13
--------------------------------------------------------------------------------
Exercisable at end of year 1,277 $ 7.40
================================================================================
37
================================================================================
# of
Shares Weighted Average
2005 (000s) Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 1,777 $ 6.21
Granted 657 13.04
Exercised (262) 5.38
Cancelled (19) 7.41
--------------------------------------------------------------------------------
Outstanding at end of year 2,153 $ 8.38
--------------------------------------------------------------------------------
Exercisable at end of year 1,167 $ 6.09
================================================================================
================================================================================
# of
Shares Weighted Average
2004 (000s) Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 2,027 $ 4.75
Granted 506 8.40
Exercised (713) 3.59
Cancelled (43) 6.81
--------------------------------------------------------------------------------
Outstanding at end of year 1,777 $ 6.21
--------------------------------------------------------------------------------
Exercisable at end of year 1,023 $ 5.01
================================================================================
The aggregate intrinsic value for outstanding stock options was $15,357 and
$10,479 at December 31, 2006 and 2005, respectively, with a weighted average
remaining contractual term of 7.3 years at December 31, 2006. Exercisable stock
options at December 31, 2006 had an aggregate intrinsic value of $12,413 with a
weighted average remaining contractual term of 6.2 years.
Other information pertaining to option activity during the years ended December
31, 2006 and 2005 was as follows:
================================================================================
Year Ended
December 31,
2006 2005
================================================================================
Weighted-average fair value of options granted $ 4.91 $ 2.84
Total intrinsic value of stock options exercised ($000s) $ 2,929 $ 1,466
================================================================================
Additional information related to stock options outstanding under all plans at
December 31, 2006 is as follows:
=================================================================================
Options Outstanding Options Exercisable
---------------------- -----------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Number Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000s) Term Price (000s) Price
---------------------------------------------------------------------------------
$ 1.85 - $6.83 784 5.0 years $ 5.71 784 $ 5.71
7.13 - 13.19 629 7.8 years 9.35 402 9.23
14.13 - 17.81 757 9.2 years 15.37 91 13.81
---------------------------------------------------------------------------------
2,170 7.3 years $ 10.13 1,277 $ 7.40
=================================================================================
38
Non-vested restricted stock activity for the years ended December 31, 2006 and
2005 is summarized below:
================================================================================
Weighted
Average Grant
Date Fair
Shares (000s) Value
================================================================================
Non-vested balance as of December 31, 2005 34 $ 13.22
Granted 79 17.76
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2006 113 $ 16.40
================================================================================
================================================================================
Weighted
Average Grant
Date Fair
Shares (000s) Value
================================================================================
Non-vested balance as of December 31, 2004 -- $ --
Granted 34 13.22
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005 34 $ 13.22
================================================================================
As of December 31, 2006 there was $4,036 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plans; that cost is expected to be recognized over a weighted-average period of
2.2 years.
STOCK SPLITS AND REPURCHASE OF COMMON STOCK
On December 8, 2006, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 29, 2006. Such stock
dividend was made on January 19, 2007. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
On December 15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2005. Such stock
dividend was made on January 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 stock split.
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. During 2005, a total of
99,450 shares were purchased at an average cost of $12.05 per share, 96,024 of
which remained in treasury at December 31, 2005. During 2006, there were no
shares purchased, and no
39
shares remained in treasury at December 31, 2006. 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 - INVENTORIES
--------------------
Inventories at December 31, 2006 and 2005 consisted of the following:
=====================================================
2006 2005
-----------------------------------------------------
Raw materials $ 4,264 $ 4,809
Finished goods 5,654 3,731
-----------------------------------------------------
Total inventories $ 9,918 $ 8,540
=====================================================
On a regular basis, the Company evaluates its inventory balances for excess
quantities and obsolescence by analyzing demand, inventory on hand, sales levels
and other information. Based on these evaluations, inventory balances are
reduced, if necessary. The reserve for obsolete or slow moving inventory was
$147 and $56 at December 31, 2006 and 2005, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2006 and 2005 are summarized as
follows:
=======================================================================
2006 2005
-----------------------------------------------------------------------
Land $ 650 $ 290
Building 11,640 10,509
Equipment 38,545 31,196
Construction in progress 1,247 332
-----------------------------------------------------------------------
52,082 42,327
Less: Accumulated depreciation 20,769 17,927
-----------------------------------------------------------------------
Property, plant and equipment, net $ 31,313 $ 24,400
=======================================================================
Depreciation expense was $2,842, $2,686 and $2,583 for the years ended December
31, 2006, 2005 and 2004, respectively.
NOTE 5 - ACQUISITION OF ASSETS
------------------------------
Effective August 24, 2006, pursuant to an asset purchase agreement of the same
date, the Company, through its wholly owned subsidiaries BCP Ingredients and BCP
St. Gabriel, acquired from BioAdditives, LLC, CMB Additives, LLC and CMB Realty
of Louisiana (the "St. Gabriel Sellers") an animal feed grade aqueous choline
chloride manufacturing facility and related assets located in St. Gabriel,
Louisiana (the "St. Gabriel Acquisition"). The Company also acquired the St.
Gabriel Sellers' remaining interest in a land lease (approximately 21 years)
relating to the realty upon which the acquired facility and related assets are
located. The acquisition was funded through the Company's cash reserves. At
December 31, 2006, the facility was not in service. In February 2007, the
facility was placed in to service.
NOTE 6 - ACQUISITION OF STOCK
-----------------------------
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation ("BMC"), completed an acquisition (the "CMC Acquisition")
of all of the outstanding capital stock of Chelated Minerals Corporation
("CMC"), a privately held Utah corporation, for a purchase price of $17,350,
subject to adjustment based upon CMC's actual working capital and other
adjustments. On
40
February 6, 2006, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $10,000
(the "Term Loan"), the proceeds of which were used to fund the CMC Acquisition,
in part. The remaining balance of the purchase price of the CMC Acquisition was
funded through the Company's cash reserves. At December 31, 2006, the Term Loan
had been repaid in full.
The CMC Acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The preliminary allocation of the total purchase price,
including acquisition costs, of CMC's net tangible and intangible assets was
based on the estimated fair values as of February 8, 2006. Adjustments to these
estimates will be included in the allocation of the purchase price of CMC upon
settlement of any working capital or other adjustments. The excess of the
purchase price over the identifiable intangible and net tangible assets was
allocated to goodwill. The preliminary 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 11,903
Financing costs 49
Other intangible assets 5,285
-------------------------------------------------------------
Total $ 17,897
=============================================================
The consolidated financial statements include the results of operations of CMC
from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the CMC
Acquisition had occurred on January 1, 2005 and does not include cost savings
expected from the transaction. In addition to including the results of
operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the CMC acquisition had
occurred at the beginning of the periods presented and is not intended to be a
projection of future results.
==================================================================
Pro Forma
Year Ended
December 31,
2006 2005
------------------------------------------------------------------
Net sales $ 101,639 $ 89,117
Net earnings 12,284 11,438
Basic EPS .70 .66
Diluted EPS $ .67 $ .63
==================================================================
41
NOTE 7 - PRIOR YEAR ACQUISITION OF ASSETS
-----------------------------------------
Effective June 30, 2005, pursuant to an asset purchase agreement of same date
(the "Loders Asset Purchase Agreement"), the Company acquired certain assets of
Loders Croklaan USA, LLC ("Loders Croklaan") relating to the encapsulation,
agglomeration and granulation business for a purchase price including
acquisition costs of $9,885 plus $725 for certain product inventories and $809
for certain accounts receivable (the "Loders Crooklaan Acquisition"). With the
exception of $985, which was paid during the quarter ended June 30, 2005, all of
such payment was made on July 1, 2005 from the Company's cash reserves.
The Loders Asset Purchase Agreement also provides for the contingent payment to
Loders Croklaan by the Company of additional consideration based upon the volume
of sales during the three year period following the acquisition associated with
one particular product acquired by the Company. Such contingent consideration
will be recorded as an additional cost of the acquired product lines. As of
December 31, 2006, such contingent consideration of $23 has been earned and
paid.
The allocation of the purchase price of the Loders Crooklaan Acquisition,
subject to contingencies, has been assigned to the long-term net assets acquired
as follows:
================================================================
Fair Value Recorded
in Purchase Accounting
----------------------------------------------------------------
Equipment $ 1,436
Customer List 1,350
Patent 140
Goodwill 6,982
----------------------------------------------------------------
Total $ 9,908
================================================================
The purchase price allocations have been made on the basis of estimates made by
the Company. The financial statement items and amounts are subject to subsequent
revision to give effect to reclassifications related to the allocation between
identifiable assets, intangible assets and goodwill and for other
pre-acquisition contingencies that may become resolved during subsequent
periods.
The above acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The consolidated financial statements include the
results of operations of the acquired product lines from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2004 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned acquisition
had occurred at the beginning of the periods presented and is not intended to be
a projection of future results.
42
=================================================================
Pro Forma
Year Ended
December 31,
2005 2004
-----------------------------------------------------------------
Net sales $ 86,382 $ 71,747
Net earnings 11,422 9,042
Basic EPS .66 .53
Diluted EPS $ .63 $ .52
=================================================================
NOTE 8 - INTANGIBLE ASSETS WITH FINITE LIVES
--------------------------------------------
As of December 31, 2006 and 2005, the Company had identifiable intangible assets
as follows:
=============================================================================================
2006 2005
Amortization Gross 2006 Gross 2005
Period Carrying Accumulated Carrying Accumulated
(In years) Amount Amortization Amount Amortization
---------------------------------------------------------------------------------------------
Customer lists 10 $ 4,888 $ 497 $ 1,350 $ 67
Regulatory re-registration
costs 10 28 0 18 0
Patents & trade secrets 15-17 1,550 221 753 141
Trademarks & trade names 17 876 94 210 49
Other 5 457 75 101 27
---------------------------------------------------------------------------------------------
$ 7,799 $ 887 $ 2,432 $ 284
=============================================================================================
Amortization of identifiable intangible assets was approximately $603, $123 and
$688 for 2006, 2005 and 2004, respectively. Assuming no change in the gross
carrying value of identifiable intangible assets, the estimated amortization
expense is approximately $637 per annum for 2007 through 2008, approximately
$635 per annum for 2009 and approximately $613 per annum for 2010 through 2011.
At December 31, 2006 and 2005, there were no identifiable intangible assets with
indefinite useful lives as defined by SFAS No. 142. Identifiable intangible
assets are reflected in the Company's consolidated balance sheets under
Intangible assets, net. There were no changes to the useful lives of intangible
assets subject to amortization in 2006 and 2005.
At December 31, 2006, the gross carrying amount included a customer list, trade
name and trade secrets acquired as part of the CMC Acquisition, as well as a
customer list and patent acquired as part of the Loders Croklaan Acquisition.
The Company is in the process of re-registering one of its product's use in
compliance with the Federal Insecticide, Fungicide and Rodenticide Act, as
amended ("FIFRA"), re-registration requirements for all pesticide products. In
December 2004, the U.S. Environmental Protection Agency ("EPA") informed the
Company and the other technical registrant under the current registration that
the Agency was beginning the 6-phase process to develop a Re-registration
Eligibility Decision (RED) for this product. This multi-phase process entered
Phase 5 last year. The EPA's Office of Pesticide Programs (OPP) had originally
stated its intent to finalize the RED by August 2006, but bifurcated the
process, and dealt only with the reassessment of spice residue tolerances
mandated by the Food Quality Protection Act of 1996. On August 9, 2006, OPP
issued a Tolerance Reassessment Progress and Risk Management Decision (TRED)
relating to the use of ethylene oxide to treat spices. This TRED prohibits the
use of ethylene oxide to treat basil, effective August 1, 2007, but allows the
continuing use of ethylene oxide to treat all other spices, provided users
follow a mandated treatment method. In the Federal Register notice announcing
the TRED, the EPA stated its intent to complete the RED process for ethylene
oxide in 2007. Upon completion of the EPA's Office of Research
43
and Development (ORD) assessment of the carcinogenicity of ethylene oxide, OPP
will complete preparation of the RED. ORD issued a draft "Evaluation of the
Carcinogenicity of Ethylene Oxide" in a Federal Register notice, dated September
22, 2006. This assessment is currently undergoing review by a special panel of
the Science Advisory Board. ORD indicates the assessment will be finalized by
the summer of 2007. The Company has actively participated in the public access
portions of both the ORD assessment process and the OPP's RED process and will
continue to do so until their conclusions. With regard to the RED process, as of
this date, the OPP expressed concerns about occupational exposures to ethylene
oxide. The EPA requested additional information from the industry, which the
Company is actively involved in providing. The EPA has also indicated additional
testing may be required in order to maintain the current uses. The Company
believes that the use will continue to be permitted, although the Agency may
require some additional restrictions on current uses. Additionally, the product,
when used as a medical device sterilant, has no known equally effective
substitute. Management of the Company believes absence of availability of this
product could not be easily tolerated by various medical device manufacturers
and the health care industry due to the resultant infection potential, if the
product were unavailable.
NOTE 9 - LONG-TERM DEBT & CREDIT AGREEMENTS
-------------------------------------------
There was no debt outstanding at December 31, 2006 or December 31, 2005. 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 Term Loan was payable in equal monthly installments of principal,
together with accrued interest, had a maturity date of March 1, 2009, and was
subject to an interest rate equal to LIBOR plus 1.00%. As of December 31, 2006,
the Company made $10,000 in principal payments against the Term Loan, which paid
the Term Loan in full. The Loan Agreement also provides for an unsecured
short-term revolving credit facility of $3,000 (the "Revolving Facility").
Borrowings under the Revolving Facility bear interest at LIBOR plus 1.00%.
Certain provisions of the Term Loan require maintenance of certain financial
ratios, limit future borrowings and impose certain other requirements as
contained in the Loan Agreement. As of December 31, 2006, no amounts were drawn
on the Revolving Facility. The Revolving Facility expires in May, 2007.
Management believes that such facility will be renewed in the normal course of
business.
NOTE 10 - INCOME TAXES
----------------------
Income tax expense consists of the following:
================================================================================
2006 2005 2004
--------------------------------------------------------------------------------
Current:
Federal $ 6,295 $ 4,875 $ 2,849
State 534 763 453
Deferred:
Federal (1) 541 1,244
State (5) 58 143
--------------------------------------------------------------------------------
Total income tax provision $ 6,823 $ 6,237 $ 4,689
================================================================================
The provision for income taxes differs from the amount computed by applying the
Federal statutory rate of 35% to earnings before income tax expense due to the
following:
================================================================================
2006 2005 2004
--------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 6,685 $ 6,017 $ 4,450
State income taxes, net of
Federal income tax benefit 344 534 379
Other (206) (314) (140)
--------------------------------------------------------------------------------
Total income tax provision $ 6,823 $ 6,237 $ 4,689
================================================================================
44
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2006 and
2005 were as follows:
================================================================================
2006 2005
--------------------------------------------------------------------------------
Deferred tax assets:
Customer list amortization $ -- $ 119
Inventories 371 213
Deferred compensation -- 6
Restricted stock and stock options 200 99
Other 145 231
--------------------------------------------------------------------------------
Total deferred tax assets 716 668
--------------------------------------------------------------------------------
Deferred tax liabilities:
Customer list amortization $ 1,684 $ --
Depreciation 3,873 3,712
Prepaid expense 583 695
Trade names and trademarks 239 --
Technology and trade secrets 269 --
Other 279 --
--------------------------------------------------------------------------------
Total deferred tax liabilities 6,927 4,407
--------------------------------------------------------------------------------
Net deferred tax liability $ 6,211 $ 3,739
================================================================================
There is no valuation allowance for deferred tax assets at December 31, 2006 and
2005. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of deferred tax asset realizable,
however, could change if management's estimate of future taxable income should
change.
NOTE 11 - NET EARNINGS PER COMMON SHARE
---------------------------------------
The following presents a reconciliation of the numerator and denominator used in
calculating basic and diluted net earnings per common share:
===================================================================================================
Earnings Number of Shares Per Share
2006 (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 12,278 17,427,857 $ .70
Effect of dilutive securities - stock options and
restricted stock 819,384
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $ 12,278 18,247,241 $ .67
===================================================================================================
45
====================================================================================================
Earnings Number of Shares Per Share
2005 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 10,954 17,341,133 $ .63
Effect of dilutive securities - stock options 743,739
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding nd effect of stock options $ 10,954 18,084,872 $ .61
====================================================================================================
====================================================================================================
Earnings Number of Shares Per Share
2004 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 8,026 16,896,646 $ .48
Effect of dilutive securities - stock options 571,374
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $ 8,026 17,468,020 $ .46
====================================================================================================
The Company had 307,875, 481,500 and 2,700 stock options outstanding at December
31, 2006, 2005 and 2004, respectively that could potentially dilute basic
earnings per share in future periods that were not included in diluted earnings
per share because their effect on the period presented was anti-dilutive.
NOTE 12- EMPLOYEE BENEFIT PLANS
-------------------------------
The Company sponsors a 401(k) savings 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 provided for profit
sharing contributions and matching 401(k) savings plan contributions of $395 and
$343 in 2006, $326 and $276 in 2005 and $301 and $257 in 2004, respectively.
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 the Verona facility. The Company uses a
December 31 measurement date for its postretirement medical plan. In accordance
with SFAS 158, the Company is required to recognize the over funded or under
funded status of a defined benefit post retirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position, and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. On December 31, 2006, the
Company recorded $0.3 million as a reduction to the benefit obligation and $0.2
million, net of tax, as a one-time adjustment to its stockholders' equity,
recorded under accumulated other comprehensive income.
46
The actuarial recorded liabilities for such unfunded postretirement benefit is
as follows:
Change in benefit obligation:
================================================================================
2006 2005
--------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 942 $ 867
Service cost with interest to end of year 28 32
Interest cost 39 50
Participant contributions 11 11
Plan amendments 0 0
Benefits paid (20) (25)
Actuarial (gain) or loss (271) 7
--------------------------------------------------------------------------------
Benefit obligation at end of year $ 729 $ 942
================================================================================
Change in plan assets:
================================================================================
2006 2005
--------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ -- $ --
Employer contributions 9 15
Participant contributions 11 11
Benefits paid (20) (26)
--------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ --
================================================================================
Amounts recognized in consolidated balance sheet:
================================================================================
2006 2005
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $ (729) $ (942)
Fair value of plan assets -- --
Funded status (729) (942)
Unrecognized prior service cost N/A (191)
Unrecognized net (gain)/loss N/A 146
--------------------------------------------------------------------------------
Net amount recognized in consolidated balance
sheet (after FAS 158) $ 729 $ N/A
(included in other long-term obligations)
--------------------------------------------------------------------------------
Accrued postretirement benefit cost
(included in other long-term obligations) $ N/A $ 987
================================================================================
Components of net periodic benefit cost:
============================================================================================
2006 2005 2004
--------------------------------------------------------------------------------------------
Service cost with interest to end of year $ 28 $ 32 $ 31
Interest cost 39 50 49
Amortization of prior service cost (18) (18) (10)
Amortization of (gain) or loss (3) 3 --
--------------------------------------------------------------------------------------------
Total net periodic benefit cost $ 46 $ 67 $ 70
============================================================================================
47
Estimated future employer contributions and benefit payments are as follows:
=====================================
Year
-------------------------------------
2007 $ 35
2008 41
2009 48
2010 43
2011 54
Years 2012-2016 187
=====================================
Assumed health care cost trend rates have been used in the valuation of
postretirement health insurance benefits. The trend rate is 10 percent in 2007
declining to 5 percent in 2012 and thereafter. A one percentage point increase
in health care cost trend rates in each year would increase the accumulated
postretirement benefit obligation as of December 31, 2006 by $91 and the net
periodic postretirement benefit cost for 2006 by $10. A one percentage point
decrease in health care cost trend rates in each year would decrease the
accumulated postretirement benefit obligation as of December 31, 2006 by $78 and
the net periodic postretirement benefit cost for 2006 by $8. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 5.75% in 2006 and 5.75% in 2005.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
In connection with the Loders Croklaan Acquisition, 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 addition, the Company entered into
certain short-term services and tolling agreements with Loders.
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 and office equipment under
non-cancelable operating leases, which expire at various times through 2011.
Rent expense charged to operations under such lease agreements for 2006, 2005
and 2004 aggregated approximately $595, $576 and $566, respectively. Aggregate
future minimum rental payments required under non-cancelable operating leases at
December 31, 2006 are as follows:
===========================================
Year
-------------------------------------------
2007 $ 672
2008 619
2009 652
2010 209
2011 79
Thereafter 59
-------------------------------------------
Total minimum lease payments $ 2,290
===========================================
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,
48
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 - 2006.
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 alternate outcome of such matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
NOTE 14 - LICENSE AGREEMENT
---------------------------
On November 7, 2005, the Company entered into a license agreement (the "License
Agreement") with Project Management and Development Co., Ltd. ("PMD"), a
corporation organized under the laws of Great Britain. As of August 2006, PMD
assigned the license agreement in its entirety to its successor in interest, Al
Kayan Petrochemical Company.
The License Agreement gives PMD the right to utilize the Company's proprietary
continuous manufacturing technology for the production of aqueous choline
chloride (the "Licensed Technology") in connection with PMD's construction and
operation of an aqueous choline chloride production facility at PMD's Al-Jubail,
Saudi Arabia petrochemical facility, currently scheduled for completion in late
2009. In addition, the License Agreement provides PMD with the exclusive right
to use the Licensed Technology in certain countries, as well as the
non-exclusive right to market, sell and use the products derived from the
Licensed Technology on a world-wide basis. The License Agreement further
provides that the Company will be PMD's exclusive North American distributor for
said products during the term of the agreement. The License Agreement terminates
either 10 years from the start-up of the PMD's production facility or December
31, 2020, whichever is earlier.
Pursuant to the License Agreement, PMD will pay the Company a license fee of
$1,400 and fees of $840 for the delivery by the Company of certain preliminary
drawings, specifications, process design documents containing the Licensed
Technology, and additional training. These fees are to be paid in installments
upon achievement of certain performance milestones set forth in the License
Agreement.
Under the License Agreement, the Company provides certain performance guarantees
associated with the Licensed Technology. In the event that the PMD manufacturing
facility, if properly designed and constructed, fails to attain said performance
guarantees, liquidated damages may be assessed, but not exceeding 70% of the
license fee.
49
The Company is using the percentage of completion method to recognize revenue
and expenses related to the License Agreement and the efforts-expended method
for measuring the progress to completion. The Company has recognized $842 of
revenue and $427 in expenses for 2006 and $158 of revenue and $138 in expenses
for 2005. These amounts are included in the net sales and cost of sales totals
in the BCP Ingredients segment.
NOTE 15 - SEGMENT INFORMATION
-----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. The Company presently has three segments:
specialty products, encapsulated / nutritional products and the unencapsulated
feed supplements segment (also referred to as BCP Ingredients). Products
relating to choline animal feed for non-ruminant animals are primarily reported
in the unencapsulated feed supplements segment. Human choline nutrient products,
pharmaceutical products and encapsulated products are reported in the
encapsulated / nutritional products segment. They are managed separately because
each business requires different technology and marketing strategies. The
specialty products segment consists of three specialty chemicals: ethylene
oxide, propylene oxide and methyl chloride. 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. The unencapsulated feed
supplements segment is in the business of manufacturing and supplying choline
chloride, an essential nutrient for animal health, to the poultry and swine
industries. In addition, certain derivatives of choline chloride are also
manufactured and sold into industrial applications and are included in the
unencapsulated feed supplements segment. The Company sells products for all
segments through its own sales force, independent distributors, and sales
agents. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
Business Segment Net Sales:
=========================================================================================
2006 2005 2004
-----------------------------------------------------------------------------------------
Specialty Products $ 32,026 $ 29,433 $ 28,767
Encapsulated/Nutritional Products 41,565 32,499 24,759
BCP Ingredients 27,314 21,163 13,880
-----------------------------------------------------------------------------------------
Total $ 100,905 $ 83,095 $ 67,406
=========================================================================================
Business Segment Earnings Before Income Taxes:
=========================================================================================
2006 2005 2004
-----------------------------------------------------------------------------------------
Specialty Products $ 11,315 $ 11,007 $ 10,693
Encapsulated/Nutritional Products 4,200 3,217 992
BCP Ingredients 3,647 2,679 1,112
Interest and other income (expense) (61) 288 (82)
-----------------------------------------------------------------------------------------
Total $ 19,101 $ 17,191 $ 12,715
=========================================================================================
Depreciation/Amortization:
=========================================================================================
2006 2005 2004
-----------------------------------------------------------------------------------------
Specialty Products $ 941 $ 1,027 $ 1,668
Encapsulated/Nutritional Products 1,983 1,313 1,155
BCP Ingredients 521 469 448
-----------------------------------------------------------------------------------------
Total $ 3,445 $ 2,809 $ 3,271
=========================================================================================
50
Business Segment Assets:
=========================================================================================
2006 2005 2004
-----------------------------------------------------------------------------------------
Specialty Products $ 18,446 $ 19,799 $ 18,456
Encapsulated/Nutritional Products 45,870 25,139 15,594
BCP Ingredients 20,434 14,141 11,424
Other Unallocated 7,583 16,062 14,931
-----------------------------------------------------------------------------------------
Total $ 92,333 $ 75,141 $ 60,405
=========================================================================================
Other unallocated assets consist of certain cash, prepaid expenses, leasehold
improvements, net of accumulated depreciation, and deferred income taxes, which
the Company does not allocate to its individual business segments.
Capital Expenditures:
=========================================================================================
2006 2005 2004
-----------------------------------------------------------------------------------------
Specialty Products $ 195 $ 366 $ 224
Encapsulated/Nutritional Products 595 520 470
BCP Ingredients 1,489 883 521
-----------------------------------------------------------------------------------------
Total $ 2,279 $ 1,769 $ 1,215
=========================================================================================
Geographic Revenue Information:
=========================================================================================
2006 2005 2004
-----------------------------------------------------------------------------------------
United States $ 91,042 $ 77,355 $ 61,869
Foreign Countries 9,863 5,740 5,537
-----------------------------------------------------------------------------------------
Total $ 100,905 $ 83,095 $ 67,406
=========================================================================================
The Company has no foreign-based operations. Therefore, all long-lived assets
are in the United States and revenue from foreign countries is based on customer
ship-to addresses.
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------
Cash paid during the year for:
=======================================================
2006 2005 2004
-------------------------------------------------------
Income taxes $ 5,621 $ 5,133 $ 3,421
Interest $ 189 $ 8 $ 219
=======================================================
Non-cash financing activities:
=========================================================
2006 2005 2004
---------------------------------------------------------
Dividends payable $ 1,596 $ 1,045 $ 685
=========================================================
Also see Notes 5, 6, and 7 for information regarding acquisitions of assets and
stock.
51
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
------------------------------------------------------
(In thousands, except per share data)
=========================================================================================================
2006 2005
---------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------
Net sales $24,597 $25,100 $25,122 $26,086 $19,340 $19,484 $21,145 $23,126
Gross profit 8,222 8,800 8,673 8,311 7,182 7,112 7,649 6,737
Earnings before
income taxes 4,445 4,813 4,978 4,865 4,069 4,346 4,857 3,919
Net earnings 2,858 3,055 3,151 3,214 2,568 2,730 3,024 2,632
Basic net earnings
per common share $ .17 $ .17 $ .18 $ .18 $ .15 $ .15 $ .17 $ .15
Diluted net earnings
per common share $ .16 $ .17 $ .17 $ .18 $ .14 $ .15 $ .17 $ .15
=========================================================================================================
52
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Balchem Corporation
New Hampton, NY
Our audits of the consolidated financial statements and internal control over
financial reporting referred to in our report dated March 15, 2007 (included
elsewhere in this Annual Report on Form 10-K) also included the financial
statement schedule of Balchem Corporation and Subsidiaries, listed in Item 15(a)
of this Form 10-K for the years ended December 31, 2006, 2005 and 2004. This
schedule is the responsibility of Balchem Corporation's management. Our
responsibility is to express an opinion based on our audits of the consolidated
financial statements.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/McGladrey & Pullen, LLP
New York, NY
March 15, 2007
53
Schedule II
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2006, 2005 and 2004
(In thousands)
Additions
-----------------------
Balance at Charges to Charges to
Beginning of Costs and Other Balance at
Description Year Expenses Accounts Deductions End of Year
----------- ------------ ---------- ---------- ---------- -----------
Year ended December 31, 2006
Allowance for doubtful accounts $ 50 $ -- $ -- $ -- $ 50
Inventory obsolescence reserve 56 91 -- -- 147
Year ended December 31, 2005
Allowance for doubtful accounts $ 82 $ -- $ -- $ (32) (a) $ 50
Inventory obsolescence reserve 31 25 -- -- 56
Year ended December 31, 2004
Allowance for doubtful accounts $ 86 $ -- $ -- $ (4) (a) $ 82
Inventory obsolescence reserve 76 -- -- (45) (a) 31
(a) represents write-offs.
54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Annual Report on Form 10-K.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
the Company's principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2006, management conducted an assessment of the
effectiveness of the Company's internal control over financial reporting based
on the framework established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management has determined that the Company's internal
control over financial reporting was effective as of December 31, 2006.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on our financial statements.
Attestation Report of Registered Public Accounting Firm
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006 has been audited by
McGladrey & Pullen, LLP, an independent registered public accounting firm, as
stated in their report which appears herein on pages 24 and 25.
55
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting
in our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers of the Registrant, and Corporate
Governance.
(a) Directors of the Company.
The required information is to be set forth in the Company's Proxy
Statement for the 2007 Annual Meeting of Stockholders (the "2007 Proxy
Statement") under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
(b) Executive Officers of the Company.
The required information is to be set forth in the 2007 Proxy Statement
under the caption "Directors and Executive Officers," which information is
hereby incorporated herein by reference.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
The required information is to be set forth in the 2007 Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is hereby incorporated herein by reference.
(d) Code of Ethics.
The Company has adopted a Code of Ethics for Senior Financial Officers
that applies to its Chief Executive Officer (principal executive officer), Chief
Financial Officer (principal financial officer and principal accounting officer)
and its Treasurer. The Company's Code of Ethics for Senior Financial Officers is
filed as Exhibit 14 to this Annual Report on Form 10-K.
(e) Corporate Governance.
The required information is to be set forth in the 2007 Proxy Statement
under the caption "Corporate Governance," which information is hereby
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is to be set forth in the 2007 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is to be set forth in the 2007 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
of Management" and the caption "Equity Compensation Plan Information," all of
which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director
Independence.
The information required by this Item is set forth in the 2007 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
56
Item 14. Principal Accounting Fees and Services.
The information required by this Item is set forth in the 2007 Proxy
Statement under the caption "Independent Auditor Fees," which information is
hereby incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Form 10-K:
Form 10-K
1. Financial Statements Page Number
Report of Independent Registered Public Accounting Firm 24
Consolidated Balance Sheets as of December 31, 2006 and 2005 26
Consolidated Statements of Earnings for the
years ended December 31, 2006, 2005 and 2004 27
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2006, 2005 and 2004 28
Consolidated Statements of Cash Flows
for the years ended December 31, 2006, 2005 and 2004 29
Notes to Consolidated Financial Statements 30
Report of Independent Registered Public Accounting Firm 53
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2006, 2005 and 2004 54
3. Exhibits
2.1 Asset Purchase Agreement, dated as of May 21, 2001, among BCP
Ingredients, Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and
certain related agreements (forms of which constitute Exhibits to
the Asset Purchase Agreement) as executed. (The Disclosure Schedule
identified throughout Asset Purchase Agreement, Schedule A to the
Obligations Undertaking (list of contracts assumed by BCP
Ingredients, Inc.) and the Power of Attorney and Security Agreement
(referred to in Section 2.6 of the Asset Purchase Agreement) and
Post-Closing Escrow Agreement (referred to in Sections 3.2.2 and
3.3.3 of the Asset Purchase Agreement), have been omitted. The
Company agrees to furnish a copy of these documents on a
supplemental basis to the Securities and Exchange Commission upon
request.) (incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated June, 2001(the "2001 8-K".))
3.1 Composite Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
dated March 16, 2006 for the year ended December 31, 2005).
3.2 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
February 23, 2005).
10.1 Loan Agreement dated February 6, 2006 by and between Bank of
America, N.A. and Balchem Corporation, Promissory Note dated
February 6, 2006 from Balchem Corporation to Bank of America, N.A.,
and Amended and Restated Promissory Note (Revolving Line of Credit)
dated February 6, 2006 from Balchem Corporation to Bank of
57
America, N.A. (incorporated by reference to Exhibits 10.2, 10.3 and
10.4 to the Company's Current Report on Form 8-K dated February 9,
2006).
10.2 Amended and Restated Guaranty dated February 6, 2006 from BCP
Ingredients, Inc. to Bank of America, N.A. (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form
8-K dated February 9, 2006).
10.3 Guaranty dated February 6, 2006 from Balchem Minerals Corporation to
Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K dated February 9, 2006).
10.4 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 333-35910, dated October 25, 1996, and to
Proxy Statement, dated April 22, 1998, for the Company's 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement")).*
10.5 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 333-35912, dated October 25, 1996, and to the
1998 Proxy Statement).
10.6 Balchem Corporation Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).*
10.7 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-118291, dated
August 17, 2004).*
10.8 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi (incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (the "2001 10-K")). *
10.9 Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc.
and Balchem Corporation (incorporated by reference to Exhibit 10.7
to the 2001 10-K).
10.10 Asset Purchase Agreement dated June 30, 2005, between Balchem
Corporation and Loders Croklaan USA, LLC (incorporated by reference
to Exhibit 2.1 of the Company's Current Report on Form 8-K dated
July 1, 2005).
10.11 Stock Purchase Agreement dated November 2, 2005, between Balchem
Minerals Corporation and Chelated Minerals Corporation (incorporated
by reference to Exhibit 10.1 of the Company's Current Report on Form
8-K dated November 7, 2005).
10.12 Process and Product License Agreement dated November 7, 2005,
between Balchem Corporation and Project Management and Development
Co., Ltd. (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated November 14, 2005).
10.13 Form of Restricted Stock Purchase Agreement for Directors
(incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K dated December 30, 2005).
10.14 First Amendment to Stock Purchase Agreement dated January 5, 2006,
between Balchem Minerals Corporation and Chelated Minerals
Corporation (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated January 10, 2006).
14. Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the Company's Annual Report on Form 10-K
dated March 15, 2004 for the year ended December 31, 2003).
58
21. Subsidiaries of Registrant.
23.1 Consent of McGladrey & Pullen, LLP, Independent Registered Public
Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
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.
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.
* Each of the Exhibits noted by an asterisk is a management compensatory
plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 15, 2007 BALCHEM CORPORATION
By:/s/ Dino A. Rossi
----------------------------
Dino A. Rossi, President,
Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Dino A. Rossi
-----------------------------------
Dino A. Rossi, President,
Chief Executive Officer, and Director (Principal Executive Officer)
Date: March 15, 2007
/s/ Francis J. Fitzpatrick
-----------------------------------
Francis J. Fitzpatrick, Chief Financial
Officer and Treasurer (Principal Financial and Principal Accounting Officer)
Date: March 15, 2007
/s/ Hoyt Ammidon, Jr.
-----------------------------------
Hoyt Ammidon, Jr., Director
Date: March 15, 2007
/s/ Edward McMillan
-----------------------------------
Edward McMillan, Director
Date: March 15, 2007
/s/ Kenneth P. Mitchell
-----------------------------------
Kenneth P. Mitchell, Director
Date: March 15, 2007
/s/ Dr. John Televantos
-----------------------------------
Dr. John Televantos, Director
Date: March 15, 2007
/s/ Dr. Elaine Wedral
-----------------------------------
Dr. Elaine Wedral, Director
Date: March 15, 2007
59
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement, dated as of May 21, 2001, among BCP
Ingredients, Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and
certain related agreements (forms of which constitute Exhibits to
the Asset Purchase Agreement) as executed. (The Disclosure
Schedule identified throughout Asset Purchase Agreement, Schedule
A to the Obligations Undertaking (list of contracts assumed by
BCP Ingredients, Inc.) and the Power of Attorney and Security
Agreement (referred to in Section 2.6 of the Asset Purchase
Agreement) and Post-Closing Escrow Agreement (referred to in
Sections 3.2.2 and 3.3.3 of the Asset Purchase Agreement), have
been omitted. The Company agrees to furnish a copy of these
documents on a supplemental basis to the Securities and Exchange
Commission upon request.) (incorporated by reference to exhibit
2.1 to the Company's Current Report on Form 8-K dated June,
2001(the "2001 8-K".))
3.1 Composite Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K dated March 16, 2006 for the year ended December 31,
2005).
3.2 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
February 23, 2005).
10.1 Loan Agreement dated February 6, 2006 by and between Bank of
America, N.A. and Balchem Corporation, Promissory Note dated
February 6, 2006 from Balchem Corporation to Bank of America,
N.A., and Amended and Restated Promissory Note (Revolving Line of
Credit) dated February 6, 2006 from Balchem Corporation to Bank
of America, N.A. (incorporated by reference to Exhibits 10.2,
10.3 and 10.4 to the Company's Current Report on Form 8-K dated
February 9, 2006).
10.2 Amended and Restated Guaranty dated February 6, 2006 from BCP
Ingredients, Inc. to Bank of America, N.A. (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form
8-K dated February 9, 2006).
10.3 Guaranty dated February 6, 2006 from Balchem Minerals Corporation
to Bank of America, N.A. (incorporated by reference to Exhibit
10.6 to the Company's Current Report on Form 8-K dated February
9, 2006).
10.4 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-35910, dated October 25,
1996, and to Proxy Statement, dated April 22, 1998, for the
Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement")).*
10.5 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-35912, dated October 25,
1996, and to the 1998 Proxy Statement).
10.6 Balchem Corporation Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).*
10.7 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-118291, dated
August 17, 2004).*
10.8 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi (incorporated by reference to Exhibit
10.5 to the Company's Annual Report on
60
Form 10-K for the year ended December 31, 2001 (the "2001
10-K")). *
10.9 Lease dated as of February 8, 2002 between Sunrise Park Realty,
Inc. and Balchem Corporation (incorporated by reference to
Exhibit 10.7 to the 2001 10-K).
10.10 Asset Purchase Agreement dated June 30, 2005, between Balchem
Corporation and Loders Croklaan USA, LLC (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K dated July 1, 2005).
10.11 Stock Purchase Agreement dated November 2, 2005, between Balchem
Minerals Corporation and Chelated Minerals Corporation
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated November 7, 2005).
10.12 Process and Product License Agreement dated November 7, 2005,
between Balchem Corporation and Project Management and
Development Co., Ltd. (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K dated November 14,
2005).
10.13 Form of Restricted Stock Purchase Agreement for Directors
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated December 30, 2005).
10.14 First Amendment to Stock Purchase Agreement dated January 5,
2006, between Balchem Minerals Corporation and Chelated Minerals
Corporation (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated January 10, 2006).
14. Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the Company's Annual Report on Form
10-K dated March 15, 2004 for the year ended December 31, 2003).
21. Subsidiaries of Registrant.
23.1 Consent of McGladrey & Pullen, LLP, Independent Registered Public
Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
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.
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.
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
61