---

 FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)          

☒

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

For The Quarterly Period Ended June 30, 2016

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)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

 

Yes  ☑

No  ☐

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

 

Yes  ☑

No  ☐

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

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

 

Yes ☐

No ☑

 

As of July 29, 2016 the registrant had 31,626,497 shares of its Common Stock, $.06 2/3 par value, outstanding.

 

---

Part I.

Financial Information

Item 1.

Financial Statements

BALCHEM CORPORATION

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share and per share data)

 

See accompanying notes to condensed consolidated financial statements.

 

BALCHEM CORPORATION

Condensed Consolidated Statements of Earnings

(Dollars in thousands, except per share data)

(unaudited)

 

See accompanying notes to condensed consolidated financial statements.

 

BALCHEM CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(unaudited)

 

BALCHEM CORPORATION

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

Supplemental Cash Flow Information - see Note 12

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The condensed consolidated financial statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2015 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, 2015. References in this report to the “Company” mean either Balchem Corporation or Balchem Corporation and its subsidiaries, including SensoryEffects, Inc., SensoryEffects Cereal Systems, Inc., Albion International, Inc., BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia Srl, and Balchem LTD, 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 six months ended June 30, 2016 are not necessarily indicative of the operating results expected for the full year or any interim period.

Beginning in fiscal year 2016, the Company has renamed its SensoryEffects segment as Human Nutrition & Health, as this segment now includes encapsulates, human choline, mineral amino acid chelates, specialized mineral salts, mineral complexes, and customized food and beverage solutions (the aforementioned three mineral product lines are contributions from the Albion International, Inc. acquisition; see Note 2). The Company believes that this segment name change provides more clarity as to the segment’s core businesses and strategies.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”), which addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-to-use assets and lease liabilities for most leases in the Consolidated Balance Sheets. The guidance is effective January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance.

 

On February 1, 2016, the Company acquired 100 percent of the outstanding common shares of Albion International, Inc. (“Albion” or the “Acquisition”), a privately held manufacturer of mineral amino acid chelates, specialized mineral salts and mineral complexes, headquartered in Clearfield, Utah.  The Company made payments of approximately $116.4 million on the acquisition date, amounting to approximately $110.6 million to the former shareholders, adjustments for working capital acquired of $4.9 million, and approximately $0.9 million to Albion’s lenders to pay off all Albion bank debt.  Albion has been a world leader and innovator in the manufacture of superior organic mineral compounds for sixty years and leverages scientific expertise in the areas of human and micronutrient agricultural nutrition.  Albion’s products are renowned in the supplement industry for technologically advanced, unparalleled bioavailability.  The acquisition of Albion continues to expand the Company’s science based human health and wellness solutions and will immediately increase our product offerings in the nutritional ingredient market.  Additionally, the Company will also benefit from a broader geographic footprint and a stronger position as a technological leader in spray-drying and ingredient delivery solutions.  Albion’s human nutrition business will become a part of the Human Nutrition & Health reportable segment and the micronutrient agricultural business will become a part of the Specialty Products reportable segment.

The goodwill of $61,484 arising from the Acquisition consists largely of expected synergies, including the combined entities’ experience and technical problem solving capabilities, and acquired workforce. Goodwill of $43,980 and $17,504 is assigned to the Human Nutrition & Health and Specialty Products segments, respectively, and approximately $1,600 is tax deductible for income tax purposes.

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

 

The estimated valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions that are subject to change. In preparing our preliminary fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. The purchase price and related allocation to assets acquired and liabilities assumed is preliminary pending finalizing actual working capital acquired as of the Acquisition date. Additionally, certain intangible assets are not tax deductible and the related deferred tax liabilities are preliminary pending management’s final review.

Customer relationships are amortized over a 10-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade name, licensing agreements, and developed technology are amortized over 17 years, 8 years, and 5 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.

The Company is indemnified for tax liabilities prior to the Acquisition date. Indemnified tax liabilities will create an indemnification asset (receivable). At this time, an indemnification asset (receivable) balance has not been established.

Transaction and integration related costs included in selling, and general and administrative expenses for the six months ended June 30, 2016 are $1,430.

The following unaudited pro forma information has been prepared as if the Acquisition had occurred on January 1, 2015.

 

2016 supplemental pro forma earnings for the six months ended June 30, 2016 exclude $26,141 of acquisition-related costs incurred and $5,046 of non-recurring expenses related to the fair value adjustment to acquisition-date inventory. The pro forma information presented does not purport to be indicative of the results that actually would have been attained if the Albion acquisition had occurred at the beginning of the periods presented and is not intended to be a projection of future results.

STOCK-BASED COMPENSATION

The Company records stock-based compensation in accordance with the provisions of ASC 718, “Compensation-Stock Compensation.” The Company’s results for the three and six months ended June 30, 2016 and 2015 reflected the following stock-based compensation cost, and such compensation cost had the following effects on net earnings:

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

The Company’s stock incentive plans allow for the granting of stock awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. No option will be exercisable for longer than ten years after the date of grant. The Company has approved and reserved a number of shares to be issued upon exercise of the outstanding options that is adequate to cover all exercises. As of June 30, 2016, the plans had 3,419,191 shares available for future awards. Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally three years for stock options, four years for employee restricted stock awards, three years for employee performance share awards, and four years for non-employee director restricted stock awards. Certain awards provide for accelerated vesting if there is a change in control (as defined in the plans) or other qualifying events.

 

Option activity for the six months ended June 30, 2016 and 2015 is summarized below:

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 0.6%; expected volatilities of 34% and 33%; risk-free interest rates of 1.2% and 1.7%; and expected lives of 5.0 and 5.5 years, in each case for the six months ended June 30, 2016 and 2015, 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 six months ended June 30, 2016 and 2015 was as follows:

Non-vested restricted stock activity for the six months ended June 30, 2016 and 2015 is summarized below:

 

Non-vested performance share activity for the six months ended June 30, 2016 and 2015 is summarized below:

 

The performance share (“PS”) awards provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an (1) EBITDA performance  hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (TSR) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents. Expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions used in the fair value determination were risk free interest rates of 0.88% and 1.00%; dividend yields of 0.6% and 0.5%; volatilities of 32% and 34%; and initial TSR’s of -6.6% and -6.9%, in each case for the six months ended June 30, 2016 and 2015, respectively. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved.  The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest 100% at the end of the third year following the grant in accordance with the performance metrics set forth.

As of June 30, 2016 and 2015, there was $12,167 and $12,146, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of June 30, 2016, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2 years. The Company estimates that share-based compensation expense for the year ended December 31, 2016 will be approximately $7,300.

REPURCHASE OF COMMON STOCK

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,149,574 shares have been purchased, of which no shares remained in treasury at June 30, 2016. During the six months ended June 30, 2016, a total of 23,651 shares have been purchased at an average cost of $62.51 per share. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors.

 

Inventories at June 30, 2016 and December 31, 2015 consisted of the following:

Property, plant and equipment at June 30, 2016 and December 31, 2015 are summarized as follows:

 

The Company had goodwill in the amount of $445,390 and $383,906 as of June 30, 2016 and December 31, 2015, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”

There was a $3,722 changes in the carrying amount of goodwill during the three months ended June 30, 2016, as a result of changes to the fair value of assets acquired and liabilities assumed (See Note 2).

 

Identifiable intangible assets with finite lives at June 30, 2016 and December 31, 2015 are summarized as follows:

Amortization of identifiable intangible assets was approximately $14,695 for the six months ended June 30, 2016. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense for the remainder of 2016 is $15,127, approximately $26,175 for 2017, $23,655 for 2018, $21,620 for 2019, $19,640 for 2020 and $16,475 for 2021. At June 30, 2016, 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 six months ended June 30, 2016.

In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture (50% / 50% ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel aqueous choline chloride plant.  The Company will contribute the St. Gabriel plant and expansion will be funded by the owners. The joint venture became operational as of July 1, 2016. St. Gabriel CC Company, LLC is a Variable Interest Entity (VIE) because the total equity at risk is not sufficient to permit the joint venture to finance its own activities without additional subordinated financial support.  Additionally, voting rights are not proportionate to the owners’ obligation to absorb expected losses or receive the expected residual returns of the joint venture. The Company will receive up to 2/3 of the production offtake capacity and absorbs operating expenses approximately proportional to the actual percentage of offtake. The joint venture will be accounted for under the equity method of accounting as the Company is not the primary beneficiary as we do not have the power to direct the activities of the joint venture that most significantly impact its economic performance.  The carrying value of the joint venture at June 30, 2016 is $1,546 and is recorded in other assets.

On May 7, 2014, the Company and a bank syndicate entered into a loan agreement providing for a senior secured term loan of $350,000 and revolving loan of $100,000 (collectively referred to as the “loans”). On February 1, 2016, $65,000 of the revolving loan was used to fund the Albion International, Inc. acquisition (see Note 2). At June 30, 2016, the Company had a total of $325,000 of debt outstanding. The term loan is payable in quarterly installments of $8,750 commencing on September 30, 2014, with the outstanding principal due on the maturity date. The Company may draw on the revolving

 

loan at its discretion. The revolving loan does not have installments and all outstanding amounts are due on the maturity date. The loans may be voluntarily prepaid in whole or in part without premium or penalty and have a maturity date of May 7, 2019. The loans are subject to an interest rate equal to LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion, plus an applicable rate. The applicable rate is based upon the Company’s consolidated leverage ratio, as defined in the loan agreement, and the interest rate was 1.96% at June 30, 2016. The Company has $55,000 of undrawn revolving loan at June 30, 2016 that is subject to a commitment fee, which is based on the Company’s consolidated leverage ratio as defined in the loan agreement. The loan agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated fixed charge coverage ratio to exceed a certain minimum ratio. At June 30, 2016, the Company was in compliance with these covenants.  Indebtedness under the Company’s loan agreements are secured by assets of the company.

The following table summarizes the future minimum debt payments:

Costs associated with the issuance of debt instruments are capitalized and amortized over the terms of the respective financing arrangements using the effective interest method. If debt is retired early, the related unamortized costs are expensed in the period the debt is retired. Capitalized costs net of accumulated amortization total $1,268 at June 30, 2016 and are shown net against outstanding principle, as required by ASU 2015-03, on the accompanying balance sheet. Amortization expense pertaining to these costs totaled $268 and $310 for the six months ended June 30, 2016 and 2015, and is included in interest expense in the accompanying condensed consolidated statements of earnings.

The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per share:

 

 

The Company had stock options covering 531,132 and 259,872 shares at June 30, 2016 and 2015, respectively, that could potentially dilute basic earnings per share in future periods that were not included in diluted earnings per share because their effect on the period presented was anti-dilutive.

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

The Company accounts for uncertainty in income taxes in accordance with ASC 740-10, “Accounting for Uncertainty in Income Taxes.”  ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. All of the unrecognized tax benefits, if recognized in future periods, would impact the Company’s effective tax rate. The Company files income tax returns in the U.S. and in various states and foreign countries. As of June 30, 2016, in the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2011. During the six months ended June 30, 2016 and 2015, the increase in the amount of unrecognized tax benefits was primarily related to the acquisition of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects). The acquisition resulted in an assumed liability for unrecognized tax benefits based on an estimated fair value of $2,300. The Company is indemnified for this liability, and as such, has recognized a corresponding indemnification asset of $2,300. As of June 30, 2016 and December 31, 2015, the Company had approximately $6,690 and $6,570, respectively, of unrecognized tax benefits, which are included in other long-term obligations on the Company’s consolidated balance sheets. The Company includes interest expense or income as well as potential penalties on unrecognized tax positions as a component of income tax expense in the consolidated statements of earnings. The total amount of accrued interest and penalties related to uncertain tax positions at June 30, 2016 and December 31, 2015 was approximately $2,490 and $2,405, respectively, and is included in other long-term obligations.

 

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

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

 

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

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

Our micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops.  We have a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life.  First, we determine optimal mineral balance for plant health. We then have a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Our products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.

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

 

Business Segment Assets:

Depreciation/Amortization:

Capital Expenditures:

Business Segment Net Sales:

 

Business Segment Earnings Before Income Taxes:

Transaction and integration costs were primarily related to the definitive agreement to acquire Albion International, Inc.; see Note 2.

The following table summarizes domestic (U.S.) and foreign sales for the six months ended June 30, 2016 and 2015:

Cash paid during the six months ended June 30, 2016 and 2015 for income taxes and interest is as follows:

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

 

*See Note 14.

 

*See Note 14.

Accumulated other comprehensive loss at June 30, 2016 and December 31, 2015 consisted of the following:

 

The Company provides postretirement benefits in the form of an unfunded postretirement medical plan under a collective bargaining agreement covering eligible retired employees of the Verona facility. During 2016, the Company adopted an unfunded postretirement medical plan for Named Executive Officers.

The actuarial recorded liabilities for the unfunded postretirement benefits are as follows:

Change in benefit obligation:

Amounts recognized in consolidated balance sheet:

 

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

Estimated future employer contributions and benefit payments are as follows:

 

 

Rent expense charged to operations under lease agreements for the six months ended June 30, 2016 and 2015 aggregated approximately $1,525 and $1,271, respectively. Aggregate future minimum rental payments required under all non-cancelable operating leases at June 30, 2016 are as follows:

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

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

 

the conclusion of two years of monitoring groundwater and surface water, the former owner submitted a draft third party risk assessment report to the EPA and MDNR recommending no further action. The prior owner is awaiting the response of the EPA and MDNR to the draft risk assessment.

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

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

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 June 30, 2016 and December 31, 2015 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio.  The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximates fair value due to the short-term maturity of these instruments. Cash and cash equivalents at June 30, 2016 and December 31, 2015 includes $774 and $773 in money market funds and $762 and $0 in certificates of deposit, respectively. The money market funds and certificates of deposit are valued using level one and level two inputs, respectively, as defined by ASC 820, “Fair Value Measurement.”

 

Item 2.

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

This Report contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our expectation or belief concerning future events that involve risks and uncertainties. Our actions and performance could differ materially from what is contemplated by the forward-looking statements contained in this Report. Factors that might cause differences from the forward-looking statements include those referred to or identified in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 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.

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

Beginning in fiscal year 2016, the Company has renamed its SensoryEffects segment as Human Nutrition & Health, as this segment now includes encapsulates, human choline, mineral amino acid chelates, specialized mineral salts, mineral complexes, and customized food and beverage solutions (the aforementioned three mineral product lines are contributions from the Albion International, Inc. acquisition). The Company believes that this segment name change provides more clarity as to the segment’s core businesses and strategies.

On February 1, 2016, the Company acquired 100 percent of the outstanding common shares of Albion International, Inc. (Albion), a privately held manufacturer of mineral amino acid chelates, specialized mineral salts and mineral complexes, headquartered in Clearfield, Utah.  The Company made payments of approximately $116.4 million on the acquisition date, amounting to approximately $110.6 million to the former shareholders, adjustments for working capital acquired of $4.9 million, and approximately $0.9 million to Albion’s lenders to pay off all Albion bank debt. The Company funded $65 million from the revolving line of credit and the remaining was funded from the Company’s existing cash balances. Albion has been a world leader and innovator in the manufacture of superior organic mineral compounds for sixty years and leverages scientific expertise in the areas of human and micronutrient agricultural nutrition.  Albion’s products are renowned in the supplement industry for technologically advanced, unparalleled bioavailability.  The acquisition of Albion continues to expand the Company’s science based human health and wellness solutions and will immediately increase our product offerings in the nutritional ingredient market.  Additionally, the Company will also benefit from a broader geographic footprint and a stronger position as a technological leader in spray-drying and ingredient delivery solutions.  Albion’s human nutrition business will become a part of the Human Nutrition & Health reportable segment and the micronutrient agricultural nutrition business will become a part of the Specialty Products reportable segment.

 

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

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

Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility

 

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

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

Our plant nutrition business sells chelated minerals primarily into high value crops.  We have a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life.  First, we determine optimal mineral balance for plant health. We then have a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Our products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.

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

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

The following tables summarize consolidated business segment net sales and earnings from operations for the three and six months ended June 30, 2016 and 2015:

 

Business Segment Net Sales:

Business Segment Earnings From Operations:

Three months ended June 30, 2016 compared to three months ended June 30, 2015.

Net sales for the three months ended June 30, 2016 were $138,794, as compared with $134,773 for the three months ended June 30, 2015, an increase of $4,021 or 3.0%.  Net sales for the Human Nutrition & Health segment were $74,800 for the three months ended June 30, 2016, compared with $67,230 for the three months ended June 30, 2015, an increase of $7,570 or 11.3%.  The sales from the recently acquired Albion business contributed $9,648 to the overall increase. This increase was partially offset by Cereal sales decline of $1,768 or 23.0% due to customer mix, when compared to the three months ended June 30, 2015.  Net sales for the Animal Nutrition & Health segment were $38,412 for the three months ended June 30, 2016, as compared with $41,642 for the three months ended June 30, 2015, a decrease of $3,230 or 7.8%.  Sales of products targeted for ruminant animal feed markets decreased by $1,196 or 9.0% from the prior year comparable period.  The decline was primarily the result of lower sales volumes of Aminoshure® and Nitroshure^TM products due to weaker dairy economics, particularly in international markets as well as increased competition, partially offset by increased sales of Reashure®.  Global feed grade choline product sales declined by $2,412 or 9.1% primarily due to lower average selling prices, partially offset by higher volumes. Net sales for the Specialty Products

 

segment were $20,325 for the three months ended June 30, 2016, as compared with $13,805 for the three months ended June 30, 2015, an increase of $6,520 or 47.2%. The sales from the recently acquired Albion business contributed $5,835 to the overall increase. Net sales for the Industrial Products segment were $5,257 for the three months ended June 30, 2016 as compared to $12,096 for the three months ended June 30, 2015, a decrease of $6,839 or 56.5%.  The decrease is principally due to volume decreases experienced in various choline and choline derivatives used in shale fracking applications, consistent with the end market activity decline.

For the three months ended June 30, 2016, gross margin increased to $46,449 compared to $41,867 for the three months ended June 30, 2015.  Gross margin as a percentage of sales for the three months ended June 30, 2016 increased to 33.5% from 31.1% in the prior year comparative period.  Gross margin percentage for the Human Nutrition & Health segment increased 0.5% for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, primarily due to improved product mix and lower raw material costs. The acquired product lines within the Human Nutrition & Health segment carry a higher gross margin but were partially offset by the valuation of acquired inventory to fair value, which increased cost of goods sold by $1,703. Gross margin percentage increased for Animal Nutrition & Health by 3.0% primarily due to product mix and decreases in raw material costs.  Gross margin percentage for the Specialty Products segment decreased by 7.0% compared to the three month period ended June 30, 2015 primarily due to the valuation of acquired inventory to fair value, which increased cost of goods sold by $932. Industrial Products gross margin percentage declined by 1.3% from the prior year comparative period, primarily due to lower volume resulting in manufacturing inefficiencies and lower average selling prices.

Operating expenses for the three months ended June 30, 2016 were $23,116 or 16.7% of net sales as compared to $18,093 or 13.4% of net sales for the three months ended June 30, 2015.  The increase was primarily due to Albion’s operating expenses and transaction and integration costs of $269.

Principally as a result of the above-noted details, earnings from operations for the three months ended June 30, 2016 were $23,333 as compared to $23,774 for the three months ended June 30, 2015, a decrease of $441 or 1.9%.  Earnings from operations as a percentage of sales (“operating margin”) for the three months ended June 30, 2016 were 16.8%, decreasing from 17.6% for the three months ended June 30, 2015, primarily due to the aforementioned impact of the valuation of the acquired inventory, transaction and integration expenses and volume decrease experienced in the Industrial Products segment for various choline and choline derivatives used in shale fracking applications. These were partially offset by a favorable product mix and lower raw material costs.  Excluding the impact of amortization expenses, valuation of the acquired inventory, and transaction and integration costs, the earnings from operations were $33,693, or 24.3% of sales, for the three months ended June 30, 2016 and $30,393, or 22.6%, of sales for the three months ended June 30, 2015. Earnings from the Human Nutrition & Health segment were $9,024,

 

a decrease of $63 or 0.7%. Operating income from the recently acquired Albion business was substantially offset by the valuation of acquired inventory to fair value. Animal Nutrition & Health segment earnings from operations were $7,304, a decrease of $164 or 2.2%, primarily the result of lower sales, partially offset by raw material cost decreases. Earnings from operations from the Specialty Products segment were $7,016, an increase of $923, or 15.1%. The recently acquired Albion business contributed $579 to the overall increase. Earnings from operations from the Industrial Products segment of $258 for the quarter ended June 30, 2016 declined $868 compared to the quarter ended June 30, 2015, primarily due to volume decreases.

Interest expense for the three months ended June 30, 2016 and 2015 was $1,905 and $1,594, respectively, and is primarily related to the loans entered into on May 7, 2014.  Other expense was $47 for the three months ended June 30, 2016 and $16 for the three months ended June 30, 2015, respectively.

The Company’s effective tax rate for the three months ended June 30, 2016 and 2015 was 33.8% and 32.7%, respectively. The increase in the effective tax rate is primarily attributable to the impact of new jurisdictions, and a change in the income proportion towards jurisdictions with higher tax rates.

Principally as a result of the above-noted details, net earnings for the three months ended June 30, 2016 were $14,150 as compared with $14,916 for the three months ended June 30, 2015, a decrease of $766 or 5.1%.

Six months ended June 30, 2016 compared to six months ended June 30, 2015.

Net sales for the six months ended June 30, 2016 were $273,935, as compared with $279,635 for the six months ended June 30, 2015, a decrease of $5,700 or 2.0%.  Net sales for the Human Nutrition & Health segment were $146,355 for the six months ended June 30, 2016, compared with $134,987 for the six months ended June 30, 2015, an increase of $11,368 or 8.4%.  The sales from the recently acquired Albion business contributed $16,742 to the overall increase. This increase was partially offset by Powder & Flavor Systems’ sales decline of $3,905 or 4.3%, due to lower volume and average selling prices, when compared to the six months ended June 30, 2015.  Net sales for the Animal Nutrition & Health segment were $77,644 for the six months ended June 30, 2016, as compared with $84,348 for the six months ended June 30, 2015, a decrease of $6,704 or 7.9%.  Sales of products targeted for ruminant animal feed markets decreased by $2,802 or 10.3% from the prior year comparable period.  The decline was primarily the result of lower sales volumes of Aminoshure and Nitroshure products due to weaker dairy economics, particularly in international markets as well as increased competition, partially offset by increased sales of Reashure.  Global feed grade choline product sales declined by $4,424

 

or 8.3% primarily due to lower average selling prices, partially offset by higher volumes. Net sales for the Specialty Products segment were $37,442 for the six months ended June 30, 2016, as compared with $27,384 for the six months ended June 30, 2015, an increase of $10,058 or 36.7%. The sales from the recently acquired Albion business contributed $9,358 to the overall increase. Net sales for the Industrial Products segment were $12,494 for the six months ended June 30, 2016 as compared to $32,916 for the six months ended June 30, 2015, a decrease of $20,422 or 62.0%.  The decrease is principally due to volume decreases experienced in various choline and choline derivatives used in shale fracking applications, consistent with the end market activity decline.

For the six months ended June 30, 2016, gross margin increased to $89,273 compared to $84,997 for the six months ended June 30, 2015.  Gross margin as a percentage of sales for the six months ended June 30, 2016 increased to 32.6% from 30.4% in the prior year comparative period.  Gross margin percentage for the Human Nutrition & Health segment increased 1.5% for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015, primarily due to improved product mix and lower raw material costs. The acquired product lines within the Human Nutrition & Health segment carry a higher gross margin but were partially offset by the valuation of acquired inventory to fair value, which increased cost of goods sold by $3,214. Gross margin percentage increased for Animal Nutrition & Health by 0.6% primarily due to product mix and decreased raw material cost.  Gross margin percentage for the Specialty Products segment decreased by 5.2% compared to the six month period ended June 30, 2015 due to the valuation of acquired inventory to fair value, which increased cost of goods sold by $1,832. Industrial Products gross margin percentage declined by 5.4% from the prior year comparative period, primarily due to lower volume resulting in manufacturing inefficiencies and lower average selling prices.

Operating expenses for the six months ended June 30, 2016 were $45,972 or 16.8% of net sales as compared to $36,185 or 12.9% of net sales for the six months ended June 30, 2015.  The increase was primarily due to Albion’s operating expenses and transaction and integration costs of $1,430, partially offset by a favorable legal settlement.

Principally as a result of the above-noted details, earnings from operations for the six months ended June 30, 2016 were $43,301 as compared to $48,812 for the six months ended June 30, 2015, a decrease of $5,511 or 11.3%.  Earnings from operations as a percentage of sales (“operating margin”) for the six months ended June 30, 2016 were 15.8%, decreasing from 17.5% for the six months ended June 30, 2015, primarily due to the aforementioned impact of the valuation of the acquired inventory, transaction and integration expenses and volume decrease experienced in the Industrial Products segment for various choline and choline derivatives used in shale fracking applications. These were partially offset by a favorable product mix, lower raw material costs, and a favorable legal settlement.  Excluding the impact of amortization expenses, valuation of the acquired inventory, transaction and integration costs and the favorable legal settlement, the earnings from operations were $63,774, or 23.3% of sales, for the six months ended June 30, 2016

 

and $62,045, or 22.2%, of sales for the six months ended June 30, 2015. Earnings from the Human Nutrition & Health segment were $17,396, an increase of $603 or 3.6%, primarily due to improved product mix and reduced raw material costs. Animal Nutrition & Health segment earnings from operations were $13,839, a decrease of $2,139 or 13.4 %, primarily the result of lower sales and unfavorable product mix, partially offset by raw material cost decreases. Earnings from operations from the Specialty Products segment were $12,304, an increase of $510, or 4.3%, primarily the result of higher sales and favorable raw material costs. Operating income from the recently acquired Albion businesses were offset by the valuation of acquired inventory to fair value. Earnings from operations from the Industrial Products segment of $492 for the quarter ended June 30, 2016 declined $3,755 compared to the quarter ended June 30, 2015, primarily due to volume decreases.

Interest expense for the six months ended June 30, 2016 and 2015 was $3,748 and $3,475, respectively, and is primarily related to the loans entered into on May 7, 2014.  Other expense was $194 for the six months ended June 30, 2016 and $90 for the six months ended June 30, 2015, respectively.

The Company’s effective tax rate for the six months ended June 30, 2016 and 2015 was 33.9% and 33.5%, respectively. The increase in the effective tax rate is primarily attributable to the impact of new jurisdictions, and a change in the income proportion towards jurisdictions with higher tax rates.

Principally as a result of the above-noted details, net earnings for the six months ended June 30, 2016 were $26,036 as compared with $30,088 for the six months ended June 30, 2015, a decrease of $4,052 or 13.5%.

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

The Company’s contractual obligations and commitments are principally associated with future minimum non-cancelable operating lease obligations, long-term debt obligations and purchase orders principally with vendors for inventory not yet received or recorded on the balance sheet.

The Company's contractual obligations as of June 30, 2016, are summarized in the table below:

 

(1)	Principally includes obligations associated with future minimum non-cancelable operating lease obligations.

(2)	Principally includes open purchase orders with vendors for inventory not yet received or recorded on our balance sheet.

(3)	Consists of $280,000 senior secured term loan and $45,000 revolving loan.

The table above excludes a $6,688 liability for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, as we are unable to reasonably estimate the timing of settlement, if any.

The Company knows of no current or pending demands on, or commitments for, its liquid assets that will materially affect its liquidity.

During the six months ended June 30, 2016, other than the long-term debt and other obligations related to the acquisition of Albion International, Inc., there were no other 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, 2015.  The Company expects its operations to continue generating sufficient cash flow to fund working capital requirements, capital investments and service future debt payments.  The Company continues to pursue additional acquisition candidates.  The Company could seek additional bank loans or access to financial markets to fund such acquisitions, its operations, working capital, capital investments, or other cash requirements as deemed necessary.

Cash and cash equivalents decreased to $33,421 at June 30, 2016 from $84,795 at December 31, 2015 primarily resulting from the acquisition of Albion.  At June 30, 2016, the Company had $15,339 of cash and cash equivalents held by our foreign subsidiaries.  It is our intention to permanently reinvest these funds in our foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fund our U.S. operations or obligations. However, if these funds are needed for our U.S. operations, we could be required to pay additional U.S. taxes to repatriate these funds.  Working capital was $94,036 at June 30, 2016 as compared to $117,172 at December 31, 2015, a decrease of $23,136.

 

Cash flows from operating activities provided $55,958 for the six months ended June 30, 2016 as compared to $49,866 for the six months ended June 30, 2015.  The increase in cash flows from operating activities was primarily due to increases in accounts payable and accrued expenses balances and higher amortization and depreciation expense adjustments.

As previously noted, on February 1, 2016 the Company acquired Albion for a purchase price of approximately $111,500, amounting to approximately $110,600 to the former shareholders, including adjustments for working capital acquired, and approximately $900 to Albion’s lenders to pay off all of Albion’s bank debt. The Company continues to invest in projects across all production facilities and capital expenditures were $14,736 for the six months ended June 30, 2016. The Company spent approximately $6,365 towards its agglomeration production equipment initiative. In addition, capital expenditures of approximately $1,825 were related to expanding the Company’s Animal, Nutrition & Health capacity in our manufacturing facility located in Verona, Missouri.

As previously noted, the Company borrowed $65,000 from the available revolving loan to finance the acquisition of Albion International, Inc. The Company made debt payments of $17,500 related to the senior secured term loan and $20,000 related to the revolving loan during 2016. The Company has $55,000 available under its revolving loan agreement.

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,149,574 shares have been purchased, none of which remained in treasury at June 30, 2016.   The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors.

Proceeds from stock options exercised were $3,032 and $9,920 for the six months ended June 30, 2016 and 2015, respectively.  Dividend payments were $10,727 and $9,251 for the six months ended June 30, 2016 and 2015, respectively.

The Company currently provides postretirement benefits in the form of two retirement medical plans.  The liability recorded in other long-term liabilities on the consolidated balance sheet as of June 30, 2016 is $1,453 and the plans are not funded.  Historical cash payments made under these plans have typically been less than $100 per year. We do not anticipate any changes to the payments made in the current year for the newly adopted plan.

 

There were no changes to the Company’s Critical Accounting Policies, as described in its December 31, 2015 Annual Report on Form 10-K, during the six months ended June 30, 2016.

The Company was not engaged in related party transactions during the six months ended June 30, 2016.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Cash and cash equivalents are held primarily in certificates of deposit and money market investment funds. The Company has no derivative financial instruments or derivative commodity instruments, nor does the Company have any financial instruments entered into for trading or hedging purposes. As of June 30, 2016, the Company’s borrowings were under a bank term loan and revolving loan bearing interest at LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion, plus an applicable rate. The applicable rate is based upon the Company’s consolidated leverage ratio, as defined in the loan agreement. A 100 basis point increase or decrease in interest rates, applied to the Company’s borrowings at June 30, 2016, would result in an increase or decrease in annual interest expense and a corresponding reduction or increase in cash flow of approximately $3,250. The Company is exposed to market risks for changes in foreign currency rates and has exposure to commodity price risks, including prices of our primary raw materials. Our objective is to seek a reduction in the potential negative earnings impact of changes in foreign exchange rates and raw material pricing arising in our business activities. The Company manages these financial exposures, where possible, through pricing and operational means. Our practices may change as economic conditions change.

 

Item 4.

Controls and Procedures