Attached files
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
X the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2009
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600 New Hampton, New York 10958
------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
845-326-5600
-------------------------------
Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company|_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 1, 2009 the registrant had 18,653,765 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
Assets September 30, December 31,
------ 2009 2008
(unaudited)
------------ ----------
Current assets:
Cash and cash equivalents $ 38,778 $ 3,422
Accounts receivable, net 26,351 30,250
Inventories 14,679 16,618
Prepaid expenses 1,104 2,581
Prepaid income taxes 451 --
Deferred income taxes 855 649
Other current assets 442 1,731
-------- ---------
Total current assets 82,660 55,251
Property, plant and equipment, net 41,626 42,513
Goodwill 26,658 26,658
Intangible assets with finite lives, net 27,288 29,993
Other assets 61 59
-------- ---------
Total assets $178,293 $ 154,474
======== =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 7,850 $ 10,336
Accrued expenses 7,625 3,948
Accrued compensation and other benefits 4,040 2,501
Dividends payable -- 2,008
Income tax payable 2,920 1,988
Current portion of long-term debt 7,295 2,860
Revolver borrowings -- 2,044
-------- ---------
Total current liabilities 29,730 25,685
Long-term debt -- 6,671
Deferred income taxes 4,837 6,003
Other long-term obligations 1,752 1,609
-------- ---------
Total liabilities 36,319 39,968
-------- ---------
Commitments and contingencies (note 12)
Stockholders' equity:
Common stock, $.0667 par value. Authorized 25,000,000 shares; 18,652,077 shares
issued and outstanding at September 30, 2009 and 18,249,347 shares issued and
outstanding at
December 31, 2008 850 823
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Additional paid-in capital 26,150 18,809
Retained earnings 114,701 94,882
Accumulated other comprehensive income (loss) 273 (8)
-------- ---------
Total stockholders' equity 141,974 114,506
-------- ---------
Total liabilities and stockholders' equity $178,293 $ 154,474
======== =========
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
-------- -------- --------- ---------
Net sales $ 54,292 $ 58,235 $ 160,254 $ 177,997
Cost of sales 37,893 45,523 110,253 138,851
-------- -------- --------- ---------
Gross margin 16,399 12,712 50,001 39,146
Operating expenses:
Selling expenses 3,393 3,068 10,873 9,455
Research and development expenses 740 681 2,428 2,164
General and administrative expenses 1,963 1,737 6,802 5,657
-------- -------- --------- ---------
6,096 5,486 20,103 17,276
-------- -------- --------- ---------
Earnings from operations 10,303 7,226 29,898 21,870
Other expenses (income):
Interest income (8) (17) (38) (66)
Interest expense 27 222 142 792
Other, net ( 39) 85 2 16
-------- -------- --------- ---------
Earnings before income tax expense 10,323 6,936 29,792 21,128
Income tax expense 3,471 2,143 9,973 6,970
-------- -------- --------- ---------
Net earnings $ 6,852 $ 4,793 $ 19,819 $ 14,158
======== ======== ========= =========
Net earnings per common share - basic $ 0.37 $ 0.27 $ 1.09 $ 0.79
======== ======== ========= =========
Net earnings per common share - diluted $ 0.36 $ 0.25 $ 1.03 $ 0.75
======== ======== ========= =========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Nine Months Ended
September 30,
2009 2008
-------- --------
Cash flows from operating activities:
Net earnings $ 19,819 $ 14,158
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 6,082 5,787
Reserve for doubtful accounts 464 --
Shares issued under employee benefit plans 345 335
Deferred income taxes (1,379) (558)
Foreign currency transaction loss 34 4
Stock compensation expense 2,252 1,795
Changes in assets and liabilities:
Accounts receivable 3,658 (853)
Inventories 1,998 (1,984)
Prepaid expenses and other current assets 2,795 1,519
Income taxes 383 (45)
Accounts payable and accrued expenses 2,492 (3,070)
Other 122 141
-------- --------
Net cash provided by operating activities 39,065 17,229
-------- --------
Cash flows from investing activities:
Capital expenditures (2,141) (4,128)
Proceeds from sale of property, plant and equipment 4 --
Intangible assets acquired (85) (144)
Acquisition of assets -- (39)
-------- --------
Net cash used in investing activities (2,222) (4,311)
-------- --------
Cash flows from financing activities:
Revolver borrowings 701 3,135
Revolver repayments (2,657) (3,705)
Principal payments on long-term debt (2,448) (10,073)
Proceeds from stock options exercised 2,712 1,000
Excess tax benefits from stock compensation 2,058 661
Dividends paid (2,008) (1,975)
-------- --------
Net cash used in financing activities (1,642) (10,957)
-------- --------
Effect of exchange rate changes on cash 155 (61)
-------- --------
Increase in cash and cash equivalents 35,356 1,900
Cash and cash equivalents beginning of period 3,422 2,307
-------- --------
Cash and cash equivalents end of period $ 38,778 $ 4,207
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
------- ------- ------ --------
Net earnings $6,852 $ 4,793 19,819 $ 14,158
Other comprehensive income, net of tax:
Other 163 (172) 281 (154)
------ ------- ------ --------
Comprehensive income $7,015 $ 4,621 20,100 $ 14,004
====== ======= ====== ========
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2008 consolidated financial statements, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in the Annual Report on Form 10-K for the year ended December 31, 2008.
References in this report to the "Company" mean either Balchem Corporation or
Balchem Corporation and its subsidiaries, including BCP Ingredients, Inc.,
Balchem Minerals Corporation, and Balchem B.V., on a consolidated basis, as the
context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP" or "GAAP") governing interim financial statements and the instructions to
Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of
1934 and therefore do not include some information and notes necessary to
conform to annual reporting requirements. Certain prior year amounts have been
reclassified to conform to current year presentation. The results of operations
for the nine months ended September 30, 2009 are not necessarily indicative of
the operating results expected for the full year or any interim period.
The Company follows accounting standards set by the Financial Accounting
Standards Board, commonly referred to as the "FASB." The FASB sets U.S.
generally accepted accounting principles that the Company follows to ensure the
Company consistently reports its financial condition, results of operations, and
cash flows. References to GAAP issued by the FASB in these footnotes are to the
FASB Accounting Standards Codification, sometimes referred to as the
"Codification" or "ASC". The FASB finalized the Codification effective for
periods ending on or after September 15, 2009. FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. For further discussion of the Codification see Note 13 and
"FASB Codification Discussion" in Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") elsewhere in this report.
NOTE 2 - STOCKHOLDERS' EQUITY
-----------------------------
STOCK-BASED COMPENSATION
The Company records stock-based compensation in accordance with the provisions
of ASC 718, "Compensation-Stock Compensation" (incorporating former Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share Based
Payment"). The Company's results for the three and nine months ended September
30, 2009 and 2008 reflected the following stock-based compensation cost, and
such
6
compensation cost had the following effects on net earnings and basic and
diluted earnings per share:
---------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30, September 30,
2009 2008
---------------------------------------------------------------------------------
Cost of sales $ 88 $ 66
Operating expenses 659 485
Net earnings (522) (372)
Basic earnings per common share (0.03) (0.02)
Diluted earnings per common share $ (0.03) $ (0.02)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2009 2008
----------------------------------------------------------------------------------
Cost of sales $ 266 $ 198
Operating expenses 1,986 1,597
Net earnings (1,445) (1,194)
Basic earnings per common share (0.08) (0.07)
Diluted earnings per common share $ (0.08) $ (0.06)
----------------------------------------------------------------------------------
As required by ASC 718, the Company has made an estimate of expected forfeitures
based on its historical experience and is recognizing compensation cost only for
those stock-based compensation awards expected to vest.
The Company's stock incentive plans allow for the granting of restricted stock
awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be
exercisable for longer than ten years after the date of grant. The Company has
approved and reserved a number of shares to be issued upon exercise of the
outstanding options that is adequate to cover all exercises. As of September 30,
2009, the plans had 3,666,450 shares available for future awards. Compensation
expense for stock options and restricted stock awards is recognized on a
straight-line basis over the vesting period, generally three years for stock
options, four years for employee restricted stock awards, and four to seven
years for non-employee director restricted stock awards. Certain awards provide
for accelerated vesting if there is a change in control (as defined in the
plans) or other qualifying events.
7
Option activity for the nine months ended September 30, 2009 and 2008 is
summarized below:
-----------------------------------------------------------------------------------------------------------
Weighted
Average
Weighted Aggregate Remaining
For the Nine months ended Average Intrinsic Contractual
September 30, 2009 Shares (000s) Exercise Price Value ($000s) Term
-----------------------------------------------------------------------------------------------------------
Outstanding as of
December 31, 2008 2,396 $ 13.82 $ 26,873
Granted 1 24.86
Exercised (389) 6.98
Forfeited (10) 21.10
-----------------------------------------------------------------------------------------------------------
Outstanding as of
September 30, 2009 1,998 $ 15.11 $ 22,361 6.4
===========================================================================================================
Exercisable as of
September 30, 2009 1,369 $ 11.78 $ 19,873 5.5
===========================================================================================================
-----------------------------------------------------------------------------------------------------------
Weighted
Average
Weighted Aggregate Remaining
For the Nine months ended Average Intrinsic Contractual
September 30, 2008 Shares (000s) Exercise Price Value ($000s) Term
-----------------------------------------------------------------------------------------------------------
Outstanding as of
December 31, 2007 1,944 $ 10.66 $ 22,786
Granted 308 20.42
Exercised (127) 7.91
-----------------------------------------------------------------------------------------------------------
Outstanding as of
September 30, 2008 2,125 $ 12.23 $ 30,684 6.5
===========================================================================================================
Exercisable as of
September 30, 2008 1,578 $ 9.80 $ 26,623 5.7
===========================================================================================================
ASC 718 requires companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yields of 0.5% and 0.5%; expected
volatilities of 50% and 41%; risk-free interest rates of 1.8% and 2.7%; and
expected lives of 3.3 and 3.4, in each case for the nine months ended September
30, 2009 and 2008, respectively.
The Company used a projected expected life for each award granted based on
historical experience of employees' exercise behavior. Expected volatility is
based on the Company's historical volatility levels. Dividend yields are based
on the Company's historical dividend yields. Risk-free interest rates are based
on the implied yields currently available on U.S. Treasury zero coupon issues
with a remaining term equal to the expected life.
Other information pertaining to option activity during the three and nine months
ended September 30, 2009 and 2008 was as follows:
8
--------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
--------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted $ N/A $ 8.31 $ 8.88 $ 6.38
Total intrinsic value of stock options exercised ($000s) $ 2,010 $ 294 $ 6,845 $ 1,952
--------------------------------------------------------------------------------------------------------
Non-vested restricted stock activity for the nine months ended September 30,
2009 and 2008 is summarized below:
-----------------------------------------------------------------------------------------------------
Weighted
Average Grant
Nine months ended September 30, 2009 Shares (000s) Date Fair Value
-----------------------------------------------------------------------------------------------------
Non-vested balance as of December 31, 2008 232 $ 20.08
-----------------------------------------------------------------------------------------------------
Non-vested balance as of September 30, 2009 232 $ 20.08
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Weighted
Average Grant
Nine months ended September 30, 2008 Shares (000s) Date Fair Value
-----------------------------------------------------------------------------------------------------
Non-vested balance as of December 31, 2007 118 $ 16.49
Granted 73 20.77
Vested (18) 17.04
-----------------------------------------------------------------------------------------------------
Non-vested balance as of September 30, 2008 173 $ 18.21
-----------------------------------------------------------------------------------------------------
As of September 30, 2009 and 2008, there was $5,188 and $4,182, respectively, of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. As of September 30, 2009, the
unrecognized compensation cost is expected to be recognized over a
weighted-average period of 2 years. The Company estimates that share-based
compensation expense for the year ended December 31, 2009 will be approximately
$3,000.
REPURCHASE OF COMMON STOCK
The Company has a stock repurchase program that was approved by the board of
directors. The total authorization under this program is 2,508,692 shares. Since
the inception of the program, a total of 1,307,867 shares have been purchased,
none of which remained in treasury at September 30, 2009 or 2008. During the
nine months ended September 30, 2009, no additional shares have been purchased.
The Company intends to acquire shares from time to time at prevailing market
prices if and to the extent it deems it advisable to do so based on its
assessment of corporate cash flow, market conditions and other factors.
NOTE 3 - INVENTORIES
--------------------
Inventories at September 30, 2009 and December 31, 2008 consisted of the
following:
9
-------------------------------------------------------------------
September 30, December 31,
2009 2008
------------------------------------------------------------------
Raw materials $ 5,027 $ 5,931
Work in progress 743 540
Finished goods 8,909 10,147
------------------------------------------------------------------
Total inventories $14,679 $16,618
------------------------------------------------------------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at September 30, 2009 and December 31, 2008 are
summarized as follows:
-------------------------------------------------------------------
September 30, December 31,
2009 2008
-------------------------------------------------------------------
Land $ 2,138 $ 2,088
Building 15,638 15,426
Equipment 53,062 50,719
Construction in progress 2,559 2,654
-------------------------------------------------------------------
73,397 70,887
Less: accumulated depreciation 31,771 28,374
-------------------------------------------------------------------
Net property, plant and equipment $41,626 $42,513
-------------------------------------------------------------------
NOTE 5 - INTANGIBLE ASSETS
--------------------------
The Company had goodwill in the amount of $26,658 as of September 30, 2009 and
December 31, 2008 subject to the provisions of ASC 350, "Intangibles-Goodwill
and Other" (incorporating former SFAS No. 141, "Business Combinations"; and SFAS
No. 142, "Goodwill and Other Intangible Assets").
As of September 30, 2009 and December 31, 2008, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$37,465 and $37,431, respectively, less accumulated amortization of $10,177 and
$7,438, respectively.
Identifiable intangible assets with finite lives at September 30, 2009 and
December 31, 2008 are summarized as follows:
-------------------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization at Amount at Amortization
(in years) 9/30/09 9/30/09 12/31/08 at 12/31/08
-------------------------------------------------------------------------------------------------------------
Customer lists 10 $34,150 $ 9,159 $ 34,150 $ 6,595
Regulatory re-registration
costs 10 85 9 85 3
Patents & trade secrets 15-17 1,683 480 1,673 406
Trademarks & trade names 17 911 238 904 198
Other 5-10 636 291 619 236
-------------------------------------------------------------------------------------------------------------
$37,465 $ 10,177 $37,431 $ 7,438
-------------------------------------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $2,739 and
$2,729 for the nine months ended September 30, 2009 and 2008, respectively.
Assuming no change
10
in the gross carrying value of identifiable intangible assets, the estimated
amortization expense for the remainder of 2009 is $911 and approximately $3,600
per annum for 2010 through 2014. At September 30, 2009, there were no
identifiable intangible assets with indefinite useful lives as defined by ASC
350. Identifiable intangible assets are reflected in "Intangible assets with
finite lives, net" in the Company's condensed consolidated balance sheets. There
were no changes to the useful lives of intangible assets subject to amortization
during the nine months ended September 30, 2009.
NOTE 6 - NET EARNINGS PER SHARE
-------------------------------
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2009 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 6,852 18,385,081 $.37
Effect of dilutive securities - stock options
and restricted stock 917,835
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options
and restricted stock $ 6,852 19,302,916 $.36
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2008 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 4,793 18,007,236 $.27
Effect of dilutive securities - stock options
and restricted stock 1,123,319
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 4,793 19,130,555 $.25
----------------------------------------------------------------------------------------------------------
11
----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2009 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 19,819 18,226,296 $1.09
Effect of dilutive securities - stock options
and restricted stock 945,874
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 19,819 19,172,170 $1.03
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2008 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 14,158 17,950,082 $.79
Effect of dilutive securities - stock options
and restricted stock 1,037,283
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 14,158 18,987,365 $.75
----------------------------------------------------------------------------------------------------------
The Company had stock options covering 274,800 and -0- shares at September 30,
2009 and 2008, 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 7 - INCOME TAXES
---------------------
The Company accounts for uncertainty in income taxes in accordance with ASC
740-10 (incorporating former FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes"). ASC 740-10 clarifies whether or not to recognize
assets or liabilities for tax positions taken that may be challenged by a tax
authority. Upon adoption of ASC 740-10, the Company recognized approximately a
$291 decrease in its retained earnings balance. The charge before federal tax
benefits was $411. The Company includes interest expense or income as well as
potential penalties on unrecognized tax positions as a component of income tax
expense in the consolidated statements of earnings. The total amount of accrued
interest and penalties related to uncertain tax positions at September 30, 2009
was approximately $150 and is included in other long-term obligations. All of
the unrecognized tax benefits, if recognized in future periods, would impact the
Company's effective tax rate. The Company files income tax returns in the U.S.
and in various states and foreign countries. As of September 30, 2009, in the
major jurisdictions where the Company operates, it is generally no longer
subject to income tax examinations by tax authorities for years before 2006.
There was not a significant change in the liabilities for unrecognized tax
benefits during the nine months ended September 30, 2009.
12
NOTE 8 - SEGMENT INFORMATION
----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments:
Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition & Health.
Business Segment Net Sales:
----------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------------------
Specialty Products $ 9,119 $ 9,298 $ 27,006 $ 26,564
Food, Pharma & Nutrition 8,639 9,362 26,034 28,122
Animal Nutrition & Health 36,534 39,575 107,214 123,311
----------------------------------------------------------------------------------------
Total $54,292 $58,235 $160,254 $177,997
----------------------------------------------------------------------------------------
Business Segment Earnings Before Income Taxes:
-----------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
-----------------------------------------------------------------------------------------
Specialty Products $ 3,686 $ 3,391 $ 10,822 $ 8,709
Food, Pharma & Nutrition 1,342 1,565 3,584 4,763
Animal Nutrition & Health 5,275 2,270 15,492 8,398
Interest and other income
(expense) 20 (290) (106) (742)
-----------------------------------------------------------------------------------------
Total $10,323 $ 6,936 $ 29,792 $ 21,128
-----------------------------------------------------------------------------------------
The following table summarizes domestic (U.S.) and foreign sales for the three
and nine months ended September 30, 2009 and September 30, 2008:
-----------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
-----------------------------------------------------------------------
Domestic $35,711 $37,005 $107,711 $107,803
Foreign 18,581 21,230 52,543 70,194
-----------------------------------------------------------------------
Total $54,292 $58,235 $160,254 $177,997
-----------------------------------------------------------------------
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------
Cash paid during the nine months ended September 30, 2009 and 2008 for income
taxes and interest is as follows:
---------------------------------------------------
Nine months ended
September 30,
2009 2008
---------------------------------------------------
Income taxes $ 8,969 $ 7,084
Interest $ 189 $ 757
---------------------------------------------------
13
NOTE 10 - LONG-TERM DEBT AND CREDIT AGREEMENTS
----------------------------------------------
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to $10,943 as of September 30, 2009 (the "European
Term Loan"), the proceeds of which were used to fund the 2007 Akzo Nobel
Acquisition (described in Note 5 of the Company's Form 10-K as of December 31,
2008) and initial working capital requirements. The European Term Loan is
payable in equal monthly installments of principal, each equal to 1/84th of the
principal of the European Term Loan, together with accrued interest, with
remaining principal and interest payable at maturity. The European Term Loan has
a maturity date of May 1, 2010 and is subject to a monthly interest rate equal
to EURIBOR plus 1%. At September 30, 2009, this interest rate was 1.49%. At
September 30, 2009, the European Term Loan had an outstanding balance of
(euro)5,000, translated to $7,295. The European Loan Agreement also provides for
a short-term revolving credit facility of (euro)3,000, translated to $4,377 as
of September 30, 2009 (the "European Revolving Facility"). The European
Revolving Facility has been renewed for a period of one year as of May 1, 2009.
The current European Revolving Facility is subject to an amended monthly
interest rate equal to EURIBOR plus 1.45%, and accrued interest is payable
monthly. No amounts are outstanding on the European Revolving Facility as of the
date hereof. Management believes that such facility will be renewed in the
normal course of business.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the 2007 Chinook
Acquisition (described in Note 5 of the Company's Form 10-K as of December 31,
2008). As of September 30, 2009, the Company has paid the Term Loan in full. The
Loan Agreement also provides for a short-term revolving credit facility of
$6,000 (the "Revolving Facility"). The Revolving Facility is subject to a
monthly interest rate equal to LIBOR plus 1%, and accrued interest is payable
monthly. No amounts are outstanding on the Revolving Facility as of the date
hereof. The Revolving Facility has a maturity date of May 31, 2010. Management
believes that such facility will be renewed in the normal course of business.
NOTE 11 - EMPLOYEE BENEFIT PLAN
-------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its Verona, Missouri facility.
Net periodic benefit cost for such retirement medical plan for the nine months
ended September 30, 2009 and September 30, 2008 was as follows:
14
---------------------------------------------------------------
2009 2008
---------------------------------------------------------------
Service cost $ 24 $ 21
Interest cost 32 30
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (14) (14)
Amortization of gain (2) (4)
---------------------------------------------------------------
Net periodic benefit cost $ 40 $ 33
---------------------------------------------------------------
The amount recorded on the Company's balance sheet as of September 30, 2009 for
this obligation is $871. The plan is unfunded and approved claims are paid from
Company funds. Historical cash payments made under such plan approximated $50
per year.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
As part of the June 30, 2005 acquisition of certain assets relating to the
encapsulation, agglomeration and granulation business of Loders Croklaan USA,
LLC, the Company entered into a lease agreement with Loders under which the
Company leases a portion of Loders' Channahon, Illinois facility where it
principally conducted the manufacturing portion of the acquired business and
utilized certain warehouse space. The initial term of the lease commenced in
February, 2006 and runs through September 30, 2010, subject to earlier
termination.
In February 2002, the Company entered into a ten (10) year lease, which is
cancelable in 2009, for approximately 20,000 square feet of office space. The
office space is now serving as the Company's general offices and as a laboratory
facility. The Company leases most of its vehicles, railcars and office equipment
under non-cancelable operating leases, which primarily expire at various times
through 2015. Rent expense charged to operations under such lease agreements for
the nine months ended September 30, 2009 and 2008 aggregated approximately $909
and $867, respectively. Aggregate future minimum rental payments required under
all non-cancelable operating leases at September 30, 2009 are as follows:
-------------------------------------------------------------
Year
-------------------------------------------------------------
October 1, 2009 to December 31, 2009 $ 280
2010 990
2011 705
2012 361
2013 183
2014 120
Thereafter 216
-------------------------------------------------------------
Total minimum lease payments $ 2,855
-------------------------------------------------------------
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
15
continues to be involved in discussions with NYDEC to evaluate test results and
determine what, if any, additional actions will be required on the part of the
Company to close out the remediation of this site. Additional actions, if any,
would likely require the Company to continue monitoring the site. The cost of
such monitoring has been less than $5 per year for the period 2003 to date.
The Company's Verona, Missouri facility, while held by a prior owner, was
designated by the EPA as a Superfund site and placed on the National Priorities
List in 1983, because of dioxin contamination on portions of the site.
Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources ("MDNR") included removal of dioxin
contaminated soil and equipment, capping of areas of residual contamination in
four relatively small areas of the site separate from the manufacturing
facilities, and the installation of wells to monitor groundwater and surface
water contamination by organic chemicals. No ground water or surface water
treatment was required. The Company believes that remediation of the site is
complete. In 1998, the EPA certified the work on the contaminated soils to be
complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party
risk assessment report to the EPA and MDNR recommending no further action. The
prior owner is awaiting the response of the EPA and MDNR to the draft risk
assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona,
Missouri facility for potential liabilities associated with the Superfund site
and one of the sellers, in turn, has the benefit of certain contractual
indemnification by the prior owner that is implementing the above-described
Superfund remedy.
From time to time, the Company is a party to various litigation, claims and
assessments. Management believes that the ultimate outcome of such matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In August 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-5,
"Measuring Liabilities at Fair Value" ("ASU 2009-05"). ASU 2009-05 amends ASC
820, "Fair Value Measurements and Disclosures." Specifically, ASU 2009-05
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the following methods: 1)
a valuation technique that uses a) the quoted price of the identical liability
when traded as an asset or b) quoted prices for similar liabilities or similar
liabilities when traded as assets and/or 2) a valuation technique that is
consistent with the principles of ASC 820 (e.g. an income approach or market
approach). ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. ASU
2009-05 is effective for the Company on October 1, 2009. The Company does not
expect the adoption of this guidance to be significant to its consolidated
financial statements.
16
In June 2009, the FASB issued ASU 2009-01, "Topic 105-Generally Accepted
Accounting Principles amendments based on Statement of Financial Accounting
Standards No. 168-The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles" (incorporating former SFAS No. 168,
"The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles - a Replacement of FASB Statement No. 162"),
which establishes the FASB Accounting Standards Codification as the single
source of authoritative U.S. generally accepted accounting principles recognized
by FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. ASU 2009-01 and the Codification
were effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The Codification supersedes all existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification is nonauthoritative.
Following ASU 2009-01, FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, FASB will issue Accounting Standards Updates, which will serve only to:
(a) update the Codification; (b) provide background information about the
guidance; and (c) provide the bases for conclusions on the change(s) in the
Codification. Pursuant to the provisions of ASU 2009-01, the Company has updated
references to GAAP in its financial statements issued for the period ended
September 30, 2009. The adoption of ASU 2009-01 was not significant to the
Company's consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)" ("SFAS 167"). The amendments include: (1) the elimination of the
exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes
to when it is necessary to reassess who should consolidate a variable-interest
entity. SFAS 167 is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual
reporting period. The Company does not expect the adoption of this statement to
be significant to its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140" ("SFAS 166"). SFAS 166
eliminates the concept of a "qualifying special-purpose entity," changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity's continuing
involvement in and exposure to the risks related to transferred financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. The Company does not expect the adoption of this statement to be
significant to its consolidated financial statements.
In May 2009, FASB issued ASC 855, "Subsequent Events" (incorporating former SFAS
No. 165, "Subsequent Events"). ASC 855 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued.
Specifically, ASC 855 provides the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements; the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements;
and the
17
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. ASC 855 was effective for interim or
annual financial periods ending after June 15, 2009, and is to be applied
prospectively. The adoption of this guidance was not significant to the
Company's consolidated financial statements. The Company has evaluated the
financial statements for subsequent events through the date of the filing of
this Form 10-Q on November 6, 2009.
In April 2009, FASB issued amended guidance (incorporating former FASB Staff
Position ("FSP") FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies") incorporated
into ASC 805, "Business Combinations" (incorporating former FASB Statement No.
141 (Revised December 2007), "Business Combinations"). This amended guidance
requires assets acquired and liabilities assumed in a business combination that
arise from contingencies to be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with ASC 450, "Contingencies" (incorporating former SFAS No. 5,
"Accounting for Contingencies"; and FASB Interpretation ("FIN") No. 14,
"Reasonable Estimation of the Amount of a Loss."). Further, FASB decided to
carry forward without significant revision the subsequent accounting guidance
for assets and liabilities arising from contingencies as per SFAS No. 141,
"Business Combinations." The amended guidance also eliminates the requirement to
disclose an estimate of the range of outcomes of recognized contingencies at the
acquisition date. For unrecognized contingencies, FASB decided to require that
entities include only the disclosures required by ASC 450 and that those
disclosures be included in the business combination footnote. This amended
guidance also requires that contingent consideration arrangements of an acquiree
assumed by the acquirer in a business combination be treated as contingent
consideration of the acquirer and should be initially and subsequently measured
at fair value in accordance with ASC 805. This amended guidance is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after January 1, 2009. The Company will
apply this amended guidance prospectively to all business combinations
subsequent to the effective date.
In April 2009, FASB issued ASC 820, "Fair Value Measurements and Disclosures"
(incorporating former FSP FAS 157-4, "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly"), and ASC 825, "Financial
Instruments" (incorporating former FSP FASB 107-1 and Accounting Principles
Board 28-1, "Interim Disclosures about Fair Value of Financial Instruments").
The guidance relates to fair value measurements and related disclosures. The
FASB also issued ASC 320, "Investments-Debt and Equity Securities"
(incorporating former FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation
of Other-Than-Temporary Impairments") relating to the accounting for impaired
debt securities. This guidance is effective for interim and annual periods
ending after June 15, 2009. This guidance is not significant to the Company's
consolidated financial statements.
In April 2008, FASB issued ASC 350, "Intangibles-Goodwill and Other"
(incorporating former FSP 142-3, "Determining the Useful Life of Intangible
Assets"). ASC 350 amends the factors to be considered in determining the useful
life of intangible assets. Its intent is to improve the consistency between the
useful life of an intangible asset and
18
the period of expected cash flows used to measure its fair value. This guidance
is effective for fiscal years beginning after December 15, 2008. The adoption of
this guidance was not significant to the Company's consolidated financial
statements.
In March 2008, FASB issued ASC 815, "Derivatives and Hedging" (incorporating
former SFAS No. 161, "Disclosures about Derivative Instruments and Hedging
Activities -- an amendment of FASB Statement No. 133"). ASC 815 requires
enhanced disclosures regarding derivatives and hedging activities, including:
(a) the manner in which an entity uses derivative instruments; (b) the manner in
which derivative instruments and related hedged items are accounted for; and (c)
the effect of derivative instruments and related hedged items on an entity's
financial position, financial performance, and cash flows. ASC 815 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. The adoption of this guidance was not significant to
the Company's consolidated financial statements.
In December 2007, FASB issued ASC 805, "Business Combinations" (incorporating
former SFAS No. 141 (revised 2007), "Business Combinations"). The purpose of
issuing this new guidance was to replace current guidance in SFAS No. 141 to
better represent the economic value of a business combination transaction. The
changes to be effected with this new guidance from the current guidance include,
but are not limited to: (1) acquisition costs will be recognized separately from
the acquisition; (2) known contractual contingencies at the time of the
acquisition will be considered part of the liabilities acquired measured at
their fair value; all other contingencies will be part of the liabilities
acquired measured at their fair value only if it is more likely than not that
they meet the definition of a liability; (3) contingent consideration based on
the outcome of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step acquisitions)
will need to recognize the identifiable assets and liabilities, as well as
noncontrolling interests, in the acquiree, at the full amounts of their fair
values; and (5) a bargain purchase (defined as a business combination in which
the total acquisition-date fair value of the identifiable net assets acquired
exceeds the fair value of the consideration transferred plus any noncontrolling
interest in the acquiree) will require that excess to be recognized as a gain
attributable to the acquirer. ASC 805 is effective for any business combinations
that occur on or after January 1, 2009. The Company will apply ASC 805
prospectively to all business combinations subsequent to the effective date.
In December 2007, the FASB issued ASC 810, "Consolidation" (incorporating former
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements --
an amendment of ARB No. 51"). The guidance was issued partly to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, ASC 810 eliminates the diversity
that currently exists in accounting for transactions between an entity and
noncontrolling interests by requiring they be treated as equity transactions.
ASC 810 was effective January 1, 2009. The adoption of this guidance was not
significant to the Company's consolidated financial statements.
In September 2006, FASB issued ASC 820, "Fair Value Measurements and
Disclosures" (incorporating former SFAS No. 157, "Fair Value Measurements"). ASC
820 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures
about fair value measurements.
19
The Company adopted the provisions of this standard for its financial assets and
liabilities as of January 1, 2008 and it did not have a material impact on its
financial condition or results of operations. As permitted by additional
guidance (issued formerly as FSP No. FAS 157-2, "Effective Date of FASB
Statement No. 157"), the Company elected to defer the adoption of ASC 820 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, until January 1, 2009. Effective January 1, 2009, the Company adopted the
provision for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis, which include those
measured at fair value in impairment testing and those initially measured at
fair value in a business combination. The provisions of ASC 820 related to these
items did not have a significant impact on the Company's consolidated financial
statements. Additional guidance (issued formerly as FSP No. 157-3, "Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active") clarifies the application of ASC 820 in a market that is not active and
provides an example of key considerations in determining the fair value of a
financial asset when the market for that asset is not active. This additional
guidance was effective on October 10, 2008, including prior periods for which
financial statements have not been issued. Revisions resulting from a change in
the valuation technique or its application should be accounted for as a change
in accounting estimate following the guidance in ASC 250, "Accounting Changes
and Error Corrections" (incorporating former SFAS No. 154, "Accounting Changes
and Error Corrections"). The Company adopted the additional guidance on October
10, 2008 and it did not have a material effect on its consolidated financial
statements.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified in Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2008 and other factors that may be identified elsewhere
in this Report. Reference should be made to such factors and all forward-looking
statements are qualified in their entirety by the above cautionary statements.
FASB Codification
-----------------
We follow accounting standards set by the Financial Accounting Standards Board,
commonly referred to as the "FASB." The FASB sets U.S. generally accepted
accounting principles ("U.S. GAAP" or "GAAP") that we follow to ensure we
consistently report our financial condition, results of operations, and cash
flows. Over the years, the FASB and other designated GAAP-setting bodies, have
issued standards in the form of FASB Statements, Interpretations, FASB Staff
Positions, EITF consensuses, AICPA Statements of Position, etc.
The FASB recognized the complexity of its standard-setting process and embarked
on a revised process in 2004 that culminated in the release on July 1, 2009, of
the FASB Accounting Standards Codification, sometimes referred to as the
"Codification" or "ASC". The Codification does not change how the Company
accounts for its transactions or the nature of related disclosures made.
However, when referring to guidance issued by the FASB, the Company refers to
topics in the ASC rather than Statements, etc. The above change was made
effective by the FASB for periods ending on or after September 15, 2009. We have
updated references to GAAP in this Quarterly Report on Form 10-Q to reflect the
guidance in the Codification.
Overview
--------
We develop, manufacture, distribute and market specialty performance ingredients
and products for the food, nutritional, pharmaceutical, animal health and
medical device sterilization industries. Our reportable segments are strategic
businesses that offer products and services to different markets. We presently
have three reportable segments: Specialty Products; Food, Pharma & Nutrition;
and Animal Nutrition & Health.
Specialty Products
-------------------
Our Specialty Products segment operates in industry as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use
in the health care industry. It is used to sterilize a wide range of medical
devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without
negatively impacting the performance of the device being sterilized. Our 100%
ethylene oxide product is distributed in uniquely designed,
21
recyclable, double-walled, stainless steel drums to assure compliance with
safety, quality and environmental standards as outlined by the U.S.
Environmental Protection Agency (the "EPA") and the U.S. Department of
Transportation. Our inventory of these specially built drums, along with our two
filling facilities, represents a significant capital investment. Contract
sterilizers, medical device manufacturers, and medical gas distributors are our
principal customers for this product. In addition, we also sell single use
canisters with 100% ethylene oxide for use in medical device sterilization. As a
fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi,
and insects in spices and other seasoning materials.
We also sell propylene oxide principally to customers seeking smaller (as
opposed to bulk) quantities and whose requirements include timely delivery and
safe handling. Propylene oxide uses can include fumigation in spice treatment,
various chemical synthesis applications, to make paints more durable, and for
manufacturing specialty starches and textile coatings.
Food, Pharma & Nutrition
------------------------
The Food, Pharma & Nutrition ("FP&N") segment provides microencapsulation,
granulation and agglomeration solutions to a variety of applications in food,
pharmaceutical and nutritional ingredients to enhance performance of nutritional
fortification, processing, mixing, and packaging applications and shelf-life.
Major product applications are baked goods, refrigerated and frozen dough
systems, processed meats, seasoning blends, confections, and nutritional
supplements. We also market human grade choline nutrient products through this
segment for wellness applications. Choline is recognized to play a key role in
the development and structural integrity of brain cell membranes in infants,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. The FP&N portfolio also includes granulated calcium
carbonate products, primarily used in, or in conjunction with, novel
over-the-counter and prescription pharmaceuticals for the treatment of
osteoporosis, gastric disorders and calcium deficiencies in the United States.
Animal Nutrition & Health
-------------------------
Our Animal Nutrition & Health ("AN&H") segment provides the animal nutrition
market with nutritional products derived from our encapsulation and chelation
technologies in addition to basic choline chloride. Commercial sales of
REASHURE(R) Choline, an encapsulated choline product, NITROSHURE(TM), an
encapsulated urea supplement, and NIASHURE(TM), our microencapsulated niacin
product for dairy cows, boosts health and milk production in transition and
lactating dairy cows, delivering nutrient supplements that survive the rumen and
are biologically available, providing required nutritional levels. We also
market chelated mineral supplements for use in animal feed throughout the world,
as our proprietary chelation technology provides enhanced nutrient absorption
for various species of production and companion animals. In October 2008, we
introduced the first proven rumen-protected lysine for use in dairy rations,
AMINOSHURE(TM)-L, which gives nutritionists and dairy producers a precise and
consistent source of rumen-protected lysine. AN&H also manufactures and supplies
basic choline chloride, an essential nutrient for animal health, predominantly
to the poultry and swine industries. Choline, which is manufactured and sold in
both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline
deficiency can result in reduced growth and perosis in poultry; fatty liver,
kidney necrosis and general poor health
22
condition in swine. Certain derivatives of choline chloride are also
manufactured and sold into industrial applications. The AN&H segment also
includes the manufacture and sale of methylamines. Methylamines are a primary
building block for the manufacture of choline products and are also used in a
wide range of industrial applications.
We sell products for all three segments through our own sales force, independent
distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings from operations for the three and nine months ended September
30, 2009 and September 30, 2008:
Business Segment Net Sales:
--------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
--------------------------------------------------------------------------------------------------------
Specialty Products $ 9,119 $ 9,298 $ 27,006 $ 26,564
Food, Pharma & Nutrition 8,639 9,362 26,034 28,122
Animal Nutrition & Health 36,534 39,575 107,214 123,311
--------------------------------------------------------------------------------------------------------
Total $54,292 $58,235 $160,254 $177,997
--------------------------------------------------------------------------------------------------------
Business Segment Earnings From Operations:
------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------------------
Specialty Products $ 3,686 $3,391 $10,822 $ 8,709
Food, Pharma & Nutrition 1,342 1,565 3,584 4,763
Animal Nutrition & Health 5,275 2,270 15,492 8,398
-------------------------------------------------------------------------------------
Total $10,303 $7,226 29,898 21,870
-------------------------------------------------------------------------------------
23
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2009 compared to three months ended September
30, 2008.
Net Sales
---------
Net sales for the three months ended September 30, 2009 were $54,292, as
compared with $58,235 for the three months ended September 30, 2008, a decrease
of $3,943 or 6.8%. Net sales for the Specialty Products segment were $9,119 for
the three months ended September 30, 2009, as compared with $9,298 for the three
months ended September 30, 2008, a decrease of $179 or 1.9%. This decrease in
sales was principally a result of a decline in sales of propylene oxide in the
quarter, a result of slowness and order timing of industrial end use markets.
Net sales for the Food, Pharma & Nutrition segment were $8,639 for the three
months ended September 30, 2009 compared with $9,362 for the three months ended
September 30, 2008, a decrease of $723 or 7.7%. This result was driven
principally by aggressive inventory management by customers along with lower
sales into the international food market, and volume declines in the human-grade
choline and calcium products for the supplement market, which has been
negatively impacted by the worldwide economic downturn. These declines were
partially offset by a favorable product mix sold in the domestic food market,
including the growth of choline into new food applications as well as growth in
the tortilla and preservation markets. Also offsetting the declines were higher
sales of Vitashure(R) products for nutritional enhancement. Net sales of $36,534
were realized for the three months ended September 30, 2009 for the Animal
Nutrition & Health segment, as compared with $39,575 for the prior year
comparable quarter, a decrease of $3,041 or 7.7%. Feed and industrial grade
choline product sales and derivatives decreased 9.3% or $3,091 over the prior
year quarter, as we realized lower export sales from our North American choline
plants, largely due to the stronger U.S. dollar in 2009 versus 2008. This
currency change also negatively impacted our translated sales of Euro
denominated choline sold from our Italian operation. Sales were also lower due
to reduced pricing linked to the decline in raw material costs. Sales of
industrial derivatives (both choline and methylamines) were impacted by softness
in the industrial sector, principally caused by the general economic downturn.
Operating Expenses
------------------
Operating expenses for the three months ended September 30, 2009 were $6,096, as
compared to $5,486 for the three months ended September 30, 2008, an increase of
$610 or 11.1%. This increase was due primarily to increased payroll expenses.
Operating expenses were 11.2% of sales or 1.8 percentage points more than the
operating expenses as a percent of sales incurred in last year's comparable
quarter. During the three months ended September 30, 2009 and 2008, the Company
spent $740 and $681 respectively, on research and development programs,
substantially all of which pertained to the Company's Food, Pharma & Nutrition
and Animal Nutrition & Health segments.
Business Segment Earnings From Operations
-----------------------------------------
Earnings from operations for the three months ended September 30, 2009 increased
to $10,303 compared to $7,226 for the three months ended September 30, 2008, an
increase
24
of $3,077 or 42.6%. This increase was primarily driven by cost reductions of
certain petro-chemical raw materials over the prior year comparable quarter, a
favorable product mix, and plant and logistics efficiencies. Earnings from
operations as a percentage of sales ("operating margin") for the three months
ended September 30, 2009 increased to 19.0% compared to 12.4% for the three
months ended September 30, 2008, principally a result of the aforementioned
product mix, cost reductions of certain petro-chemical raw materials, and plant
and logistics efficiencies. Earnings from operations for the Specialty Products
segment were $3,686, an increase of $295 or 8.7%, primarily due to reductions in
the cost of certain petro-chemical raw materials and increases in average
selling prices. Earnings from operations for Food, Pharma & Nutrition were
$1,342, a decrease of $223 or 14.2%, due largely to the aforementioned
aggressive inventory management by customers, lower sales into the international
food market, and volume declines in the human-grade choline and calcium products
for the supplement market. Earnings from operations for Animal Nutrition &
Health increased by $3,005 to $5,275, a 132.4% increase from the prior
comparable quarter, resulting principally from reductions in the cost of certain
petro-chemical raw materials and improved production/supply chain efficiencies
in both the U.S. and Europe.
Other Expenses (Income)
-----------------------
Interest income for the three months ended September 30, 2009 totaled $8 as
compared to $17 for the three months ended September 30, 2008. Interest expense
was $27 for the three months ended September 30, 2009 compared to $222 for the
three months ended September 30, 2008. This decrease is primarily attributable
to the decrease in average current and long-term debt resulting from both normal
recurring principal payments as well as accelerated payments of the Term Loan
(as defined below in the Financing Activities section of Liquidity and Capital
Resources). Other income of $39 for the three months ended September 30, 2009 is
primarily the result of favorable fluctuations in foreign currency exchange
rates between the U.S. dollar (the reporting currency) and functional foreign
currencies.
Income Tax Expense
------------------
The Company's effective tax rate for the three months ended September 30, 2009
and 2008 was 33.6% and 30.9% respectively. This increase in the effective tax
rate is primarily attributable to a change in the income proportion towards
jurisdictions with higher tax rates.
Net Earnings
------------
Primarily as a result of the above-noted cost reductions of certain
petro-chemical raw materials, favorable product mix, and plant and logistics
efficiencies, net earnings were $6,852 for the three months ended September 30,
2009, as compared with $4,793 for the three months ended September 30, 2008, an
increase of 43.0%.
25
Nine months ended September 30, 2009 compared to Nine months ended September 30,
2008.
Net Sales
---------
Net sales for the nine months ended September 30, 2009 were $160,254, as
compared with $177,997 for the nine months ended September 30, 2008, a decrease
of $17,743 or 10.0%. Net sales for the Specialty Products segment were $27,006
for the nine months ended September 30, 2009, as compared with $26,564 for the
nine months ended September 30, 2008, an increase of $442 or 1.7%. This increase
in sales was derived principally from increases in the average selling prices of
certain ethylene oxide products for medical device sterilization. Net sales for
the Food, Pharma & Nutrition segment were $26,034 for the nine months ended
September 30, 2009 compared with $28,122 for the nine months ended September 30,
2008, a decrease of $2,088 or 7.4%. This result was driven principally by
aggressive inventory management by customers along with volume declines in the
human-grade choline and calcium products for the supplement market, which has
been negatively impacted by the worldwide economic downturn. These declines were
partially offset by a favorable product mix sold in the domestic food market,
including the growth of choline into new food applications as well as growth in
the bakery, tortilla and preservation markets. Also offsetting the declines was
increased sales of Vitashure(R) products for nutritional enhancement. Net sales
of $107,214 were realized for the nine months ended September 30, 2009 for the
Animal Nutrition & Health segment, as compared with $123,311 for the prior year
comparable period, a decrease of $16,097 or 13.1%. Feed and industrial grade
choline product sales and derivatives decreased 14.7% or $15,442 over the prior
year period, principally from well-publicized softness in the U.S. poultry and
swine markets. There were also lower export sales from our North American
choline plants, largely due to the stronger U.S. dollar in 2009 versus 2008 and
international political factors affecting poultry exports. This U.S. volume
decline was partially offset by increased volumes of choline products sourced
from our Italian operation into the European and international poultry markets.
This geographic mix lowered consolidated feed grade prices in the period, as did
lower pricing linked to the decline in raw material costs. Sales of industrial
derivatives (both choline and methylamines) were impacted by softness in the
industrial sector, principally caused by the general economic downturn. Sales of
our specialty animal nutrition and health products, targeted for ruminant
production animals and companion animals, decreased 3.6% or $655 from the prior
year comparable period primarily due to weak dairy economics which resulted in
lower demand for our products. Partially offsetting this decrease were new sales
generated from AminoShure(TM)-L, the Company's rumen protected lysine product.
Operating Expenses
------------------
Operating expenses for the nine months ended September 30, 2009 were $20,103 as
compared to $17,276 for the nine months ended September 30, 2008, an increase of
$2,827 or 16.4%. This increase was due primarily to increased payroll expenses
along with an increase to some accounts receivable reserves for international
accounts. Operating expenses were 12.5% of sales or 2.8 percentage points more
than the operating
26
expenses as a percent of sales incurred in last year's comparable period. During
the nine months ended September 30, 2009 and 2008, the Company spent $2,428 and
$2,164 respectively, on research and development programs, substantially all of
which pertained to the Company's Food, Pharma & Nutrition and Animal Nutrition &
Health segments.
Business Segment Earnings From Operations
-----------------------------------------
Earnings from operations for the nine months ended September 30, 2009 increased
to $29,898 compared to $21,870 for the nine months ended September 30, 2008, an
increase of $8,028 or 36.7%. This increase was primarily driven by cost
reductions of certain petro-chemical raw materials over the prior year
comparable period, a favorable product mix, and plant and logistics
efficiencies. Earnings from operations as a percentage of sales ("operating
margin") for the nine months ended September 30, 2009 increased to 18.7%
compared to 12.3% for the nine months ended September 30, 2008, principally a
result of the aforementioned cost reductions of certain petro-chemical raw
materials over the prior year comparable period, a favorable product mix, and
plant and logistics efficiencies. Earnings from operations for the Specialty
Products segment were $10,822, an increase of $2,113 or 24.3%, primarily due to
reductions in the cost of certain petro-chemical raw materials and increases in
average selling prices. Earnings from operations for Food, Pharma & Nutrition
were $3,584, a decrease of $1,179 or 24.8%, due largely to the aforementioned
aggressive inventory management by customers and volume declines in the
human-grade choline and calcium products for the supplement market. Earnings
from operations for Animal Nutrition & Health increased by $7,094 to $15,492, an
84.5% increase from the prior year, resulting principally from reductions in the
cost of certain petro-chemical raw materials and improved production/supply
chain efficiencies in both the U.S. and Europe.
Other Expenses (Income)
-----------------------
Interest income for the nine months ended September 30, 2009 totaled $38 as
compared to $66 for the nine months ended September 30, 2008. Interest expense
was $142 for the nine months ended September 30, 2009 compared to $792 for the
nine months ended September 30, 2008. This decrease is primarily attributable to
the decrease in average current and long-term debt resulting from both normal
recurring principal payments as well as accelerated payments of the Term Loan
(as defined below in the Financing Activities section of Liquidity and Capital
Resources). Other expense of $2 for the nine months ended September 30, 2009 is
primarily the result of unfavorable fluctuations in foreign currency exchange
rates between the U.S. dollar (the reporting currency) and functional foreign
currencies.
Income Tax Expense
------------------
The Company's effective tax rate for the nine months ended September 30, 2009
and 2008 was 33.5% and 33.0% respectively. This increase in the effective tax
rate is primarily attributable to a change in the income proportion towards
jurisdictions with higher tax rates.
27
Net Earnings
------------
Primarily as a result of the above-noted cost reductions of certain
petro-chemical raw materials, the favorable product mix, and plant and logistics
efficiencies, net earnings were $19,819 for the nine months ended September 30,
2009, as compared with $14,158 for the nine months ended September 30, 2008, an
increase of 40.0%.
FINANCIAL CONDITION
-------------------
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 for the headquarters office space entered into in 2002),
long-term debt obligations and purchase obligations principally related to open
purchase orders for inventory not yet received or recorded on our balance sheet.
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
During the nine months ended September 30, 2009, there were no material changes
outside the ordinary course of business in the specified contractual obligations
set forth in our Annual Report on Form 10-K for the year ended December 31,
2008. The Company expects its operations to continue generating sufficient cash
flow to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. The Company
could seek additional bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
----
Cash and cash equivalents increased to $38,778 at September 30, 2009 from $3,422
at December 31, 2008 primarily resulting from the information detailed below.
Working capital amounted to $52,930 at September 30, 2009 as compared to $29,566
at December 31, 2008, an increase of $23,364.
Operating Activities
--------------------
Cash flows from operating activities provided $39,065 for the nine months ended
September 30, 2009 compared to $17,229 for the nine months ended September 30,
2008. The increase in cash flows from operating activities was primarily due to
an increase in net earnings, lower accounts receivable, a decrease in
inventories and prepaid expenses, and increased accounts payable and accrued
expenses.
28
Investing Activities
--------------------
Capital expenditures were $2,141 for the nine months ended September 30, 2009
compared to $4,128 for the nine months ended September 30, 2008.
Financing Activities
--------------------
The Company has an approved stock repurchase program. The total authorization
under this program is 2,508,692 shares. Since the inception of the program, a
total of 1,307,867 shares have been purchased, none of which remained in
treasury at September 30, 2009 or 2008. During the nine months ended September
30, 2009, no additional shares have been purchased. The Company intends to
acquire shares from time to time at prevailing market prices if and to the
extent it deems it advisable to do so based on its assessment of corporate cash
flow, market conditions and other factors.
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to $10,943 as of September 30, 2009 (the "European
Term Loan"), the proceeds of which were used to fund the 2007 Akzo Nobel
Acquisition (described in Note 5 of the Company's Form 10-K as of December 31,
2008) and initial working capital requirements. The European Term Loan is
payable in equal monthly installments of principal, each equal to 1/84th of the
principal of the European Term Loan, together with accrued interest, with
remaining principal and interest payable at maturity. The European Term Loan has
a maturity date of May 1, 2010 and is subject to a monthly interest rate equal
to EURIBOR plus 1%. At September 30, 2009, this interest rate was 1.49%. At
September 30, 2009, the European Term Loan had an outstanding balance of
(euro)5,000, translated to $7,295. The European Loan Agreement also provides for
a short-term revolving credit facility of (euro)3,000, translated to $4,377 as
of September 30, 2009 (the "European Revolving Facility"). The European
Revolving Facility has been renewed for a period of one year as of May 1, 2009.
The current European Revolving Facility is subject to an amended monthly
interest rate equal to EURIBOR plus 1.45%, and accrued interest is payable
monthly. No amounts are outstanding on the European Revolving Facility as of the
date hereof. Management believes that such facility will be renewed in the
normal course of business.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the 2007 Chinook
Acquisition (described in Note 5 of the Company's Form 10-K as of December 31,
2008). As of September 30, 2009, the Company has paid the Term Loan in full. The
Loan Agreement also provides for a short-term revolving credit facility of
$6,000 (the "Revolving Facility"). The Revolving Facility is subject to a
monthly interest rate equal to LIBOR plus 1%, and accrued interest is payable
monthly. No amounts are outstanding on the Revolving Facility as of the date
hereof. The Revolving Facility has a maturity date of May 31, 2010. Management
believes that such facility will be renewed in the normal course of business.
29
Proceeds from stock options exercised totaled $2,712 and $1,000 for the nine
months ended September 30, 2009 and 2008, respectively. Dividend payments were
$2,008 and $1,975 for the nine months ended September 30, 2009 and 2008,
respectively.
Other Matters Impacting Liquidity
---------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its Verona, Missouri facility. The amount recorded
on the Company's balance sheet as of September 30, 2009 for this obligation is
$871. The postretirement plan is not funded. Historical cash payments made under
such plan have approximated $50 per year.
Critical Accounting Policies
----------------------------
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2008 Annual Report on Form 10-K, during the nine
months ended September 30, 2009.
Related Party Transactions
--------------------------
The Company was not engaged in related party transactions during the nine months
ended September 30, 2009.
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts. The
money market funds in which the Company invests are participants in the United
States Treasury Department's Temporary Guarantee Program for Money Market Funds.
This program provides coverage for amounts held in money market funds as of the
close of business on September 19, 2008. The Company has no derivative financial
instruments or derivative commodity instruments, nor does the Company have any
financial instruments entered into for trading or hedging purposes. As of
September 30, 2009, the Company's borrowings were under a bank term loan bearing
interest at EURIBOR plus 1.00% and a revolving line of credit bearing interest
at EURIBOR plus 1.45%. A 100 basis point increase or decrease in interest rates,
applied to the Company's borrowings at September 30, 2009, would result in an
increase or decrease in annual interest expense and a corresponding reduction or
increase in cash flow of approximately $73. The Company is exposed to market
risks for changes in foreign currency rates and has exposure to commodity price
risks, including prices of our primary raw materials. Our objective is to seek a
reduction in the potential negative earnings impact of changes in foreign
exchange rates and raw material pricing arising in our business activities. The
Company manages these financial exposures, where possible, through pricing and
operational means. Our practices may change as economic conditions change.
31
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated, as of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of the Company's disclosure controls and
procedures (including its internal controls and procedures.) Based upon
management's evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures were effective in identifying
the information required to be disclosed in the Company's periodic reports
filed with the Securities and Exchange Commission ("SEC"), including this
Quarterly Report on Form 10-Q, and ensuring that such information is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls
During the most recent fiscal quarter, there has been no significant
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
32
Part II. Other Information
Item 1A. Risk Factors
There have been no material changes in the Risk Factors identified in the
Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(b) and Section 1350
of Chapter 63 of Title 18 of the United
States Code.
Exhibit 32.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(b) and Section 1350
of Chapter 63 of Title 18 of the United
States Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BALCHEM CORPORATION
-------------------
By: /s/ Dino A. Rossi
---------------------
Dino A. Rossi, Chairman, President and
Chief Executive Officer
Date: November 6, 2009
33
Exhibit Index
Exhibit No. Description
----------- ------------
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
3