UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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
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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, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 326-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value American Stock Exchange
$.06-2/3 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark whether the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated
filer |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the common stock issued and outstanding and held
by non-affiliates of the Registrant, based upon the closing price for the common
stock on the American Stock Exchange on June 30, 2005 was approximately
$228,426,000. For purposes of this calculation, shares of the Registrant held by
directors and officers of the Registrant and under the Registrant's
401(k)/profit sharing plan have been excluded.
The number of shares outstanding of the Registrant's common stock was 11,646,731
as of March 1, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's proxy statement for its 2006 Annual
Meeting of Stockholders (the "2006 Proxy Statement") are incorporated by
reference in Part III of this Report.
Part I
Item 1. Business
General:
Balchem Corporation ("Balchem" or the "Company"), incorporated in the
State of Maryland in 1967, is engaged in the development, manufacture and
marketing of specialty performance ingredients and products for the food,
nutritional, feed, pharmaceutical and medical sterilization industries. The
Company has three segments: specialty products, encapsulated / nutritional
products and the unencapsulated feed supplements segment (also referred to in
this report as "BCP Ingredients" or "BCP"). Products relating to choline animal
feed for non-ruminant animals are primarily reported in the unencapsulated feed
supplements segment. Human choline nutrient products and encapsulated products
are reported in the encapsulated / nutritional products segment. Chelated
products, nutritional products for the animal health industry, as well as
calcium carbonate products for the pharmaceutical industry are also reported in
the encapsulated / nutritional products segment.
The Company sells its products through its own sales force, independent
distributors and sales agents. Financial information concerning the Company's
business, business segments and geographic information appears in the Notes to
our Consolidated Financial Statements included under Item 8 below, which
information is incorporated herein by reference.
The Company operates three subsidiaries, all of which are wholly-owned:
BCP Ingredients, Inc., a Delaware corporation; Balchem Minerals Corporation
("BMC"), a Delaware corporation; and Chelated Minerals Corporation ("CMC"), a
Utah corporation. Unless otherwise stated to the contrary, or unless the context
otherwise requires, references to the Company in this report includes Balchem
and subsidiaries.
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides
microencapsulation and agglomeration solutions to a variety of applications in
food, pharmaceutical and nutritional ingredients to enhance performance of
nutritional fortification, processing, mixing, packaging applications and
shelf-life. Major product applications are baked goods, refrigerated and frozen
dough systems, processed meats, seasoning blends, confections, nutritional
supplements and animal nutrition. We also market human grade choline nutrient
products through this industry segment for wellness applications. Choline is
recognized to play a key role in the structural integrity of cell membranes,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. Balchem's portfolio of granulated calcium carbonate
products are primarily used in, or in conjunction with, novel over-the-counter
and prescription pharmaceuticals for the treatment of osteoporosis, gastric
disorders and calcium deficiencies in the United States.
In the animal health industries, Balchem markets REASHURE(R) Choline, an
encapsulated choline product that boosts health and milk production in
transition and early lactation cows. Commercial sales are currently derived from
the dairy industry where REASHURE(R) delivers nutrient supplements that survive
the rumen and are biologically available, providing required nutritional levels
to dairy cows during certain weeks preceding and following calving, commonly
referred to as the "transition period" of the animal. Also marketed in animal
health is NITROSHURETM, an encapsulated urea supplement for lactating dairy cows
that is designed to create a slow-release nitrogen source for the rumen,
allowing for greater flexibility in feed rations for dairy nutritionists and
producers, and NIASHURETM, our microencapsulated niacin product for dairy cows.
In addition, CMC manufactures, sells and distributes chelated mineral
supplements for use in animal feed industries throughout the world. CMC's
proprietary chelation technology provides enhanced nutrient absorption for
various species of domestic and companion animals.
1
Specialty Products
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The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily
for use in the health care industry. It is used to sterilize a wide range of
medical devices because of its versatility and effectiveness in treating hard or
soft surfaces, composites, metals, tubing and different types of plastics
without negatively impacting the performance or appearance of the device being
sterilized. The Company's 100% ethylene oxide product is distributed by the
Company in uniquely designed, recyclable double-walled stainless steel drums to
assure compliance with safety, quality and environmental standards as outlined
by the U.S. Environmental Protection Agency (the "EPA") and the U.S. Department
of Transportation. The Company's inventory of these specially built drums, along
with the Company's three filling facilities, represent a significant capital
investment. Contract sterilizers, medical device manufacturers, and medical gas
distributors are the Company's principal customers for this product. As a
fumigant, ethylene oxide blends and propylene oxide are highly effective in
killing bacteria, fungi, and insects in spices and other seasoning materials. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization.
We sell two other products, propylene oxide and methyl chloride,
principally to customers seeking smaller (as opposed to bulk) quantities whose
requirements include timely delivery and safe handling. Propylene oxide is used
for fumigation in spice treatment and in various chemical synthesis
applications. It is also utilized in manufacturing operations to make paints
more durable, and for manufacturing specialty starches and textile coatings.
Methyl chloride is used as a raw material in specialty herbicides, fertilizers
and pharmaceuticals, as well as in malt and wine preservers.
Our specialty products segment operates as ARC Specialty Products.
BCP Ingredients
---------------
This segment manufactures and supplies choline chloride, an essential
nutrient for animal health, predominantly to the poultry and swine industries.
Choline plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. Choline deficiency can result in, among other
symptoms, reduced growth and perosis in poultry, and fatty liver, kidney
necrosis and general poor health condition in swine. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial
applications. Choline chloride is manufactured and sold in both an aqueous and
dry form and is sold through the Company's own sales force, independent
distributors and sales agents.
Recent Developments
-------------------
On November 7, 2005, the Company entered into a license agreement (the
"License Agreement") with Project Management and Development Co., Ltd. ("PMD"),
a corporation organized under the laws of Great Britain. The License Agreement
gives PMD the right to utilize the Company's proprietary continuous
manufacturing technology for the production of aqueous choline chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride production facility at PMD's Al-JuBail, Saudi Arabia
petrochemical facility, currently scheduled for completion in 2008.
The License Agreement provides PMD with the exclusive right to use Company
Technology in certain countries, as well as the non-exclusive right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License Agreement further provides that the Company will be PMD's exclusive
North American distributor for said products during the term of the agreement.
The License Agreement terminates either 10 years from the start-up of the PMD's
production facility or December 31, 2020, whichever is earlier.
2
Pursuant to the License Agreement, PMD will pay the Company a license fee
of $1,400,000 and fees of $840,000 for the delivery by the Company of certain
preliminary drawings, specifications, process design documents containing
Company Technology, and additional training. These fees are to be paid in
installments upon achievement of certain performance milestones set forth in the
License Agreement.
The Company will provide certain performance guarantees associated with
Company Technology. In the event that the PMD manufacturing facility, if
properly designed and constructed, fails to attain said performance guarantees,
liquidated damages may be assessed, but not exceeding 70% of the license fee.
On February 8, 2006, the Company, through BMC, completed an acquisition of
all of the outstanding capital stock of Chelated Minerals Corporation ("CMC"), a
privately held Utah corporation, for a purchase price of $17,350,000 subject to
adjustment based upon CMC's actual working capital and other adjustments.
On February 6, 2006, the Company and its principal bank entered into a new
Loan Agreement (the "New Loan Agreement") providing for a term loan of
$10,000,000 (the "Term Loan"), the proceeds of which were used to fund the CMC
acquisition, in part. The remaining balance of the purchase price of the CMC
acquisition was funded through Balchem's cash on hand. The Term Loan is payable
in equal monthly installments of principal, together with accrued interest, and
has a maturity date of March 1, 2009. The Term Loan is subject to an interest
rate equal to LIBOR plus 1.00%. The Loan Agreement also provides for a
short-term revolving credit facility of $3,000,000 (the "New Revolving
Facility"). Borrowings under the New Revolving Facility bear interest at LIBOR
plus 1.00%. No amounts have been drawn on the New Revolving Facility as of the
date hereof. The New Revolving Facility expires in February, 2007. Management
believes that such facility will be renewed in the normal course of business.
Raw Materials:
--------------
The raw materials utilized by the Company in the manufacture of its
products are generally available from a number of commercial sources. The
Company is not experiencing any current difficulties in procuring such materials
and does not anticipate any such problems; however, the Company cannot assure
that will always be the case.
Intellectual Property:
----------------------
The Company currently holds a number of patents and uses certain
trade-names and trademarks. It also uses know-how, trade secrets, formulae, and
manufacturing techniques that assist in maintaining competitive positions of
certain of its products. Formulae and know-how are of particular importance in
the manufacture of a number of the Company's products. The Company believes that
certain of its patents, in the aggregate, are advantageous to its business.
However, it is believed that no single patent or related group of patents is
currently so material to the Company that the expiration or termination of any
single patent or group of patents would materially affect its business. The
Company believes that its sales and competitive position are dependent primarily
upon the quality of its products, its technical sales efforts and market
conditions, rather than on any patent protection.
Licensing:
----------
As discussed above under "Recent Developments", the Company entered into
the License Agreement with PMD in November 2005 under which the Company granted
to PMD the right to utilize the Company's proprietary continuous manufacturing
technology for the production of aqueous choline chloride in connection with
PMD's construction and operation of an aqueous choline chloride production
facility at PMD's Al-JuBail, Saudi Arabia petrochemical facility, currently
scheduled for completion in 2008.
As discussed below under "Environmental Matters" the Company's ability to
sell ethylene oxide is dependent upon maintaining registration with the EPA as a
medical device sterilant and spice fumigant. In
3
addition, certain of the Company's encapsulated and choline products must meet
state licensing requirements prior to sales in certain states and foreign
countries.
Seasonality:
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In general, the business of the Company's segments is not seasonal to any
material extent.
Backlog:
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At December 31, 2005, the Company had a total backlog of $2,688,000
(including $1,794,000 for the encapsulated / nutritional products segment,
$548,000 for the specialty products segment and $346,000 for BCP Ingredients),
as compared to a total backlog of $2,027,000 at December 31, 2004 (including
$807,000 for the encapsulated / nutritional products segment, $812,000 for the
specialty products segment and $408,000 for the BCP Ingredients segment). It has
generally been the Company's policy and practice to maintain an inventory of
finished products and / or component materials for its segments to enable it to
ship products within a short time after receipt of a product order.
Competition:
------------
The Company's competitors include many large and small companies, some of
which have greater financial, research and development, production and other
resources than the Company. Competition in the encapsulation markets served by
the Company is based primarily on performance, customer support, quality,
service and price. The development of new and improved products is important to
the Company's success. This competitive environment requires substantial
investments in product and manufacturing process research and development. In
addition, the winning and retention of customer acceptance of the Company's
encapsulated products involve substantial expenditures for application testing
and sales efforts. The Company also engages various universities to assist in
research and provide independent third-party analysis. In the specialty products
business, the Company faces competition from alternative sterilizing
technologies and products. Competition in the animal feed markets served by the
Company is based primarily on service and price.
Research & Development:
-----------------------
During the years ended December 31, 2005, 2004 and 2003, the Company
incurred research and development expense of approximately $2.1 million, $1.8
million and $2.1 million, respectively, on Company-sponsored research and
development for new products and improvements to existing products and
manufacturing processes, principally in the encapsulated / nutritional products
segment. During the year ended December 31, 2005, an average of 15 employees
were devoted full time to research and development activities. The Company has
historically funded its research and development programs with funds available
from current operations with the intent of recovering those costs from profits
derived from future sales of products resulting from, or enhanced by, the
research and development effort.
The Company prioritizes its product development activities in an effort to
allocate its resources to those product candidates that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and needs, status
of its proprietary rights, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market.
Capital Projects:
-----------------
Capital expenditures were approximately $1.8 million for 2005, compared to
$1.2 million in 2004. Excluding property, plant and equipment acquired in the
CMC acquisition described in Note 13 in our Consolidated Financial Statements,
capital expenditures are projected to be approximately $2.3 million for 2006.
4
Environmental / Regulatory Matters:
-----------------------------------
The Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), as
amended, a health and safety statute, requires that certain products within the
Company's specialty products segment must be registered with the EPA because
they are considered pesticides. In order to obtain a registration, an applicant
typically must demonstrate through extensive test data that its product will not
cause unreasonable adverse effects on the environment. The Company holds an EPA
registration permitting it to sell ethylene oxide as a medical device sterilant
and spice fumigant. The Company is in the process of re-registering this
product's use in compliance with FIFRA re-registration requirements for all
pesticide products. In December 2004, the EPA informed the Company and the other
technical registrant under the current registration that the Agency was
beginning the 6-phase process to develop a Re-registration Eligibility Decision
(RED) for this product. The EPA intends to finalize the RED by August 2006 in
accordance with the statutory mandate of the Food Quality Protection Act of
1996. This multi-phase process has recently entered Phase 5, and the EPA has
stated that they still intend to finalize the process by the statutory deadline.
The Company has actively participated in the RED process and will continue to do
so until its conclusion. As of this date, the EPA has expressed concerns about
dietary exposures to a reaction product, as well as occupational exposures to
the product itself. The EPA requested additional information from the industry
which the Company will be actively involved in providing. The EPA has also
indicated that additional testing may be required in order to maintain the
current uses. The Company believes that the use will continue to be permitted,
although the Agency may require some additional restrictions on the current
uses. Additionally, the product, when used as a medical device sterilant, has no
known equally effective substitute. Management believes absence of availability
of this product could not be easily tolerated by various medical device
manufacturers and the health care industry due to the resultant infection
potential, if the product were unavailable.
Under California's Proposition 65 (Safe Drinking Water and Toxic
Enforcement Act of 1986), 100% ethylene oxide, when used as a sterilant or
fumigant, is listed by the State of California as a carcinogen and reproductive
toxin. As a result, the Company is required to provide a prescribed warning to
any person in California who may be exposed to this product. Failure to provide
such warning would result in liability of up to $2,500 per day per person
exposed.
The Company's facility in Verona, Missouri, while held by a prior owner,
was designated by the EPA as a Superfund site and placed on the National
Priorities List in 1983, because of dioxin contamination on portions of the
site. Remediation conducted by the prior owner under the oversight of the EPA
and the Missouri Department of Natural Resources ("MDNR") included removal of
dioxin contaminated soil and equipment, capping of areas of residual
contamination in four relatively small areas of the site separate from the
manufacturing facilities, and the installation of wells to monitor groundwater
and surface water contamination for certain 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
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 implemented the above-described Superfund remedy.
In connection with normal operations at its plant facilities, the Company
is required to maintain environmental and other permits including those relating
to ethylene oxide operations.
5
The Company believes it is in compliance in all material respects with federal,
state, and local provisions that have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment. Such compliance includes the maintenance of
required permits under air pollution regulations and compliance with
requirements of the Occupational Safety and Health Administration. The cost of
such compliance has not had a material effect upon the results of operations or
financial condition of the Company. The New York State environmental regulatory
proceeding referred to in Item 3 below has been substantially completed.
Employees:
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As of March 1, 2006, the Company employed approximately 200 persons.
Approximately 50 employees at the Company's Verona, Missouri facility are
covered by a collective bargaining agreement which expires in 2007.
Item 1A. Risk Factors
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. We can not assure you that the expectations reflected in
forward-looking statements will prove correct. Various factors could cause
results to differ materially from our expectations, such as:
o changes in laws or regulations affecting our operations;
o changes in our business tactics or strategies;
o acquisitions of new or complementary operations;
o sales of any of our existing operations;
o changing market forces or contingencies that necessitate, in our
judgment, changes in our plans, strategy or tactics; and
o fluctuations in the investment markets or interest rates, which
might materially affect our operations or financial condition.
In addition, the following matters, and all forward-looking statements,
are qualified in their entirety by these cautionary statements:
Increased competition would hurt our business and financial results.
We face competition in our markets from a number of large and small
companies, some of which have greater financial, research and development,
production and other resources than we do. Our competitive position is based
principally on performance, quality, customer support, service, breadth of
product line, manufacturing or packaging technology and the selling prices of
our products. Our competitors can be expected to improve the design and
performance of their products and to introduce new products with competitive
price and performance characteristics. We may not have sufficient resources to
maintain our current competitive position or market share.
One of our customers accounts for about 10% of our business; the loss of
that customer could adversely impact our business and financial results.
Due to consolidation of customer businesses in the contract sterilization
industry, we have one specialty products customer, which accounted for
approximately 9% and 11% of our net sales in 2005 and 2004, respectively. This
customer accounted for 8% and 10% of our accounts receivable net balance at
December 31, 2005 and 2004, respectively. The loss of this customer could have a
material adverse effect on our business and financial results.
6
The loss of governmental permits and approvals would materially harm some
of our businesses.
Pursuant to applicable environmental and safety laws and regulations, we
are required to obtain and maintain certain governmental permits and approvals,
including an EPA registration for our ethylene oxide sterilant product. We
maintain an EPA registration of ethylene oxide as a medical device sterilant and
fumicide. We are in the process of re-registering this product in accordance
with FIFRA. There is no guaranty that the EPA will continue to allow
registration of ethylene oxide for the uses mentioned above. The failure of the
EPA to allow re-registration of ethylene oxide would have a material adverse
impact on our business.
Our Channahon, Illinois manufacturing facility manufactures our calcium
carbonate line of pharmaceutical ingredients. This facility is registered with
the United States Food and Drug Administration ("FDA") as a drug manufacturing
facility. These products also must be manufactured in conformity with current
Good Manufacturing Practice (cGMP) regulations as interpreted and enforced by
the FDA. Modifications, enhancements or changes in manufacturing facilities or
procedures of our pharmaceutical products are, in many circumstances, subject to
FDA approval, which may be subject to a lengthy application process or which we
may be unable to obtain. Our Channahon, Illinois facility, as well as those of
any third-party cGMP manufacturers that we may use, are periodically subject to
inspection by the FDA and other governmental agencies, and operations at these
facilities could be interrupted or halted if the results of these inspections
are unsatisfactory. Failure to comply with FDA or other governmental regulations
can result in fines, unanticipated compliance expenditures, recall or seizure of
products, total or partial suspension of production, enforcement actions,
injunctions and criminal prosecution.
Permits and approvals may be subject to revocation, modification or denial
under certain circumstances. Our operations or activities (including the status
of compliance by the prior owner of the Verona, Missouri facility under
Superfund remediation) could result in administrative or private actions,
revocation of required permits or licenses, or fines, penalties or damages,
which could have an adverse effect on us. In addition, we can not predict the
extent to which any legislation or regulation may affect the market for our
products or our cost of doing business.
Raw material shortages or price increases would adversely affect our
business and financial results.
The principal raw materials that we use in the manufacture of our products
can be subject to price fluctuations. While the selling prices of our products
tend to increase or decrease over time with the cost of raw materials, these
changes may not occur simultaneously or to the same degree. At times, we may be
unable to pass increases in raw material costs through to our customers in the
form of price increases. Increases in the price of raw materials, if not offset
by product price increases, would have an adverse impact on our profitability.
We are not experiencing any current difficulties in procuring raw materials and
we do not anticipate any such problems. However, we can not assure you that this
will always be the case.
Our financial success depends in part on the reliability and sufficiency
of our manufacturing facilities.
Our revenues depend on the continued operation of our manufacturing,
packaging, and processing facilities. The operation of our facilities involves
risks, including the breakdown, failure, or substandard performance of
equipment, power outages, the improper installation, or operation of equipment,
explosions, fires, natural disasters and the need to comply with environmental
and other directives of governmental agencies. The occurrence of material
operational problems, including but not limited to the above events, could
adversely affect our profitability during the period of such operational
difficulties.
7
Our failure or inability to protect our intellectual property could harm
our business and financial results.
We hold 15 patents in the United States and overseas, as well as utilize
certain unpatented trade secrets. Third parties could seek to challenge,
invalidate or circumvent our patents. Moreover, there could be successful claims
against us alleging that we infringe the intellectual property rights of others.
If we are unable to protect all of our intellectual property rights, or if we
are found to be infringing the intellectual property rights of others, there
could be an adverse effect on our business and financial results. Our
competitive position also depends on unpatented trade secrets. Competitors could
independently develop substantially equivalent proprietary information, which
could hurt our business and financial results.
We face risks associated with our sales to customers outside the United
States.
For the year ended December 31, 2005, approximately 7% of our net sales
consisted of sales outside the United States, predominately to Europe, Japan and
Mexico. Such sales are generally denominated in U.S. Dollars at a specific price
per unit. Changes in the relative values of currencies take place from time to
time and could in the future adversely affect prices foreign customers are
willing to pay for our products. In addition, international sales are subject to
other inherent risks, including possible labor unrest, political instability,
export duties and quotas. These factors could have a material adverse impact on
our ability to increase or maintain our international sales.
Our success depends in large part on our key personnel.
Our operations significantly depend on the continued efforts of our senior
executives. The loss of the services of certain executives for an extended
period of time could have a material adverse effect on our business and
financial results.
Litigation can be costly and can adversely affect our business and
financial results.
We, like all companies involved in the food and pharmaceutical industries,
are subject to potential claims for product liability relating to our products.
Such claims, irrespective of their outcomes or merits, could be time-consuming
and expensive to defend, and could result in the diversion of management time
and attention. Any of these situations could have a material adverse effect on
our business and financial results. It is possible that an adverse result in
Casey Liesse, et al. v. AGA AB, et al. (please see Item 3 of the Report) or
other legal proceedings commenced against us could have a negative impact on our
financial condition or liquidity.
If we are unable to increase sales to the pharmaceutical industry, our
future growth could be limited.
A significant part of our future growth depends on our ability to increase
the sales of our current pharmaceutical product line, as well as the development
of new products for use in the pharmaceutical industry. Our inability to execute
this strategy could have an adverse effect on our future rate of growth.
Available Information:
----------------------
The Company's Internet website address is www.balchem.com. The Company
makes available through its website, free of charge, its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to such reports, as soon as reasonably practicable after they have
been electronically filed with the Securities and Exchange Commission. Such
reports are available via a link from the Investor Information page on the
Company's website to a list of the Company's reports on the Securities and
Exchange Commission's Edgar website.
8
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In February 2002, the Company entered into a ten (10) year lease for
approximately 20,000 square feet of office space in New Hampton, New York. The
office space is serving as the Company's general offices and as laboratory
facilities for the Company's encapsulated / nutritional products business.
Manufacturing facilities owned by the Company for its encapsulated
products segment and a blending, drumming and terminal facility for the
Company's ethylene oxide business, are presently housed in three buildings
located in Slate Hill, New York comprising a total of approximately 51,000
square feet. The Company owns a total of approximately 16 acres of land on two
parcels in this community.
The Company also owns a facility located on an approximately 24 acre
parcel of land in Green Pond, South Carolina. The site consists of a drumming
facility, a canister filling facility, a maintenance building and an office
building. The Company uses this site for processing products in its specialty
products segment. The Green Pond site comprises a total of approximately 34,000
square feet.
The Verona, Missouri site, which is located on approximately 100 acres,
consists of manufacturing facilities relating to choline animal feed, human
choline nutrients, and a drumming facility for the Company's ethylene oxide
business, together with buildings utilized for warehousing such products. The
Verona site comprises a total of approximately 151,000 square feet. The
facility, while under prior ownership, was designated by the EPA as a Superfund
site as noted in the previous discussion under Item 1 "Environmental /
Regulatory Matters."
The Company leases production and warehouse space in Channahon, Illinois
as a result of the June 30, 2005 acquisition of certain assets of Loders
Croklaan USA, LLC, as described in Note 4 to our Consolidated Financial
Statements. The Company uses this facility for production related to the
Company's pharmaceutical line of business. The initial term of the lease is
effective through September 30, 2010, subject to earlier termination by Balchem
upon sixty (60) days notice, or by the landlord, upon sixty (60) days notice,
but only in the event the landlord no longer is required to maintain its Title V
Air Permit, issued by the United States Environmental Protection Agency,
applicable to the landlord's entire operation at its manufacturing facility,
adjacent to Balchem's leased facility. The Company's leased space in Channahon,
Illinois totals approximately 26,000 square feet.
The Company, through CMC, owns a manufacturing facility and warehouse
located upon approximately 5 acres of land in Salt Lake City, Utah as a result
of its acquisition of Chelated Minerals Corporation described in Note 13 to our
Consolidated Financial Statements. The Company manufactures and distributes its
chelated mineral nutrients for animal feed products at this location. The
Company's buildings in Salt Lake City, Utah comprise a total of approximately
16,500 square feet.
Item 3. Legal Proceedings
In 1982 the Company discovered and thereafter removed a number of buried
drums containing unidentified waste material from the Company's site in Slate
Hill, New York. The Company thereafter entered into a Consent Decree to evaluate
the drum site with the New York Department of Environmental Conservation
("NYDEC") and performed a Remedial Investigation/Feasibility Study that was
approved by NYDEC in February 1994. Based on NYDEC requirements, the Company
cleaned the area and removed additional soil from the drum burial site. The cost
for this clean-up and the related reports was approximately $164,000. Clean-up
was completed in 1996, but NYDEC required the Company to monitor the site
through 1999. 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 recently been less than
$5,000 per year.
9
Casey Liesse, et al. v. AGA AB, et al., Circuit Court of Cook County,
Illinois, Case No. 02 L 000498, was commenced in 2002 against over 80
defendants, among which is the Company. The action alleges that nineteen
individual plaintiffs were exposed to ethylene oxide and other chemicals used
for sterilizing or cleaning medical instruments during their employment at a
hospital in Harvey, Illinois. As a result of the alleged exposure, the
plaintiffs claim they have suffered various physical and psychological injuries.
During the time period plaintiffs suffered their alleged injuries, the Company
was in the business of repackaging and distributing ethylene oxide, among other
products. The Company never sold any product to the hospital but has been joined
due to the fact that it distributed ethylene oxide for medical device
sterilization to other companies that blend ethylene oxide for sales to the
hospital noted. On February 9, 2006 by way of Order of the aforementioned Court,
Balchem's Motion for Summary Judgment, which sought dismissal of all claims
against Balchem, was granted with respect to all claims of negligence, products
liability and/or conspiracy by Plaintiff against Balchem. While this decision is
subject to appeal, the ruling dismisses the Plaintiff's case in chief against
Balchem. Balchem is still subject to ancillary claims of indemnification and
contribution relating to certain other defendants that were not dismissed from
the matter.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these proceedings will not have a material effect on the Company's financial
position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information.
On December 15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2005. Such stock
dividend was made on January 20, 2006. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
On December 16, 2004, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2004. Such stock
dividend was made on January 20, 2005. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
All references to number of common shares and per share amounts except
shares authorized in the accompanying consolidated financial statements were
retroactively adjusted to reflect the effect of the December 2005 stock split.
The Company's common stock is traded on the American Stock Exchange under
the symbol BCP. The high and low closing prices for the common stock as recorded
in the American Stock Exchange Market Statistical Reports for 2005 and 2004, for
each quarterly period during the past two years, adjusted for the December 2005
and 2004 three-for-two stock splits (effected by means of stock dividends) were
as follows:
10
=========================================================
Quarterly Period High Low
---------------------------------------------------------
Ended March 31, 2005 $ 16.67 $ 14.47
Ended June 30, 2005 20.05 14.57
Ended September 30, 2005 21.63 17.54
Ended December 31, 2005 19.87 17.34
=========================================================
=========================================================
Quarterly Period High Low
---------------------------------------------------------
Ended March 31, 2004 $ 11.94 $ 10.00
Ended June 30, 2004 12.45 10.78
Ended September 30, 2004 13.33 11.96
Ended December 31, 2004 15.51 13.02
=========================================================
(b) Record Holders.
As of March 1, 2006, the approximate number of holders of record of the
Company's common stock was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.06-2/3 par value 194*
*An unknown number of stockholders hold stock in street name. The total
number of beneficial owners of the Company's common stock is estimated to be
approximately 5,706.
(c) Dividends.
The Company declared cash dividends of $0.09 and $0.06 per share on its
common stock during its fiscal years ended December 31, 2005 and 2004,
respectively (after giving effect to the December 2005 and 2004 three-for-two
stock splits).
For information concerning prior stockholder approval of and other matters
relating to our equity incentive plans, see Item 12 in this Annual Report on
Form 10-K.
Item 6. Selected Financial Data
All dollar amounts are in thousands (other than per share amounts). Earnings per
share and dividend amounts have been adjusted for the December 2005
three-for-two stock split (effected by means of a stock dividend).
(In thousands, except per share data)
========================================================================================
Year ended December 31, 2005(1)(2) 2004(1) 2003(1) 2002(1) 2001(1)
----------------------------------------------------------------------------------------
Statement of Operations Data
----------------------------
Net sales $ 83,095 $ 67,406 $ 61,875 $ 60,197 $ 46,142
Earnings before income
tax expense 17,191 12,715 8,763 11,845 8,369
Income tax expense 6,237 4,689 3,125 4,429 3,259
Net earnings 10,954 8,026 5,638 7,416 5,110
Basic net earnings per
common share $ .95 $ .71 $ .52 $ .69 $ .49
Diluted net earnings per
common share $ .91 $ .69 $ .50 $ .67 $ .47
----------------------------------------------------------------------------------------
11
========================================================================================
At December 31, 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------
Balance Sheet Data
------------------
Total assets $ 75,141 $ 60,405 $ 56,906 $ 53,298 $ 44,477
Long-term debt -- -- 7,839 9,581 11,323
Other long-term
obligations 1,043 1,003 985 964 994
Total stockholders' equity 60,933 50,234 39,781 33,269 25,332
Dividends per common share $ .09 $ .06 $ .035 $ .035 $ .029
========================================================================================
(1) Includes the operating results, cash flows, assets and liabilities
relating to the acquisition of certain assets and product lines of
DCV, Inc. and its affiliate DuCoa L.P. from the date of acquisition
(June 1, 2001) forward.
(2) Includes the operating results, cash flows, and assets relating to
the acquisition of certain assets and product lines of Loders
Croklaan USA, LLC from the date of acquisition (July 1, 2005)
forward.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. The actions and performance of the Company 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 above. Reference
should be made to such factors and all forward-looking statements are qualified
in their entirety by the above cautionary statements.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company develops, manufactures, distributes and markets specialty
performance ingredients and products for the food, pharmaceutical, feed and
medical sterilization industries. The Company's reportable segments are
strategic businesses that offer products and services to different markets. The
Company presently has three reportable segments: specialty products;
encapsulated / nutritional products; and BCP Ingredients.
Specialty Products
------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use in the health care industry and is used to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. Blends of
ethylene oxide are sold as fumigants and are highly effective in killing
bacteria, fungi, and insects in spices and other seasoning type materials. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride are
sold principally to customers seeking smaller (as opposed to bulk) quantities.
Management believes that future success in this segment is highly
dependent on the Company's ability to maintain its strong reputation for
excellent quality, safety and customer service.
12
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides
microencapsulation and agglomeration solutions to a variety of applications in
food, pharmaceutical and nutritional ingredients to enhance performance of
nutritional fortification, processing, mixing, packaging applications and
shelf-life. Major end product applications are baked goods, refrigerated and
frozen dough systems, processed meats, seasoning blends, confections,
nutritional supplementations and animal nutrition. We also market human grade
choline nutrient products through this industry segment for wellness
applications. Choline is recognized to play a key role in the structural
integrity of cell membranes, processing dietary fat, reproductive development
and neural functions, such as memory and muscle function. Balchem's portfolio of
granulated calcium carbonate products are primarily used in novel
over-the-counter and prescription pharmaceuticals for the treatment of
osteoporosis, gastric disorders and calcium deficiencies in the United States.
Management believes this segment's key strengths are its proprietary
technology and end-product application capabilities. The success of the
Company's efforts to increase revenue in this segment is highly dependent on the
timing of marketing launches of new products in the U.S. and international food
and nutrition markets by the Company's customers and prospects. The Company,
through its innovative proprietary technology and applications expertise,
continues to develop new products designed to solve and respond to customer
problems and needs. Sales of products for the animal nutrition and health
industry are highly dependent on dairy industry economics as well as the ability
of the Company to leverage the results of existing successful university
research on the animal health benefits of the Company's products.
BCP Ingredients
---------------
BCP Ingredients manufactures and supplies choline chloride, an essential
nutrient for animal health, to the poultry and swine industries. In addition,
certain derivatives of choline chloride are also marketed into industrial
applications.
Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation for
excellent product quality and customer service. In addition, the Company must
continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete for market share in a highly competitive
marketplace.
The Company sells products for all three segments through its own sales
force, independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and
business segment earnings (loss) for the three years ended December 31 (in
thousands):
Business Segment Net Sales:
==========================================================================================
2005 2004 2003
------------------------------------------------------------------------------------------
Specialty Products $ 29,433 $ 28,767 $ 26,163
Encapsulated/Nutritional Products 32,499 24,759 24,043
BCP Ingredients 21,163 13,880 11,669
------------------------------------------------------------------------------------------
Total $ 83,095 $ 67,406 $ 61,875
==========================================================================================
Business Segment Earnings (Loss) Before Income Taxes:
==========================================================================================
2005 2004 2003
------------------------------------------------------------------------------------------
Specialty Products $ 11,007 $ 10,693 $ 9,409
Encapsulated/Nutritional Products 3,217 992 (962)
BCP Ingredients 2,679 1,112 568
Interest and other income (expense) 288 (82) (252)
------------------------------------------------------------------------------------------
Earnings before income taxes $ 17,191 $ 12,715 $ 8,763
==========================================================================================
13
Fiscal Year 2005 compared to Fiscal Year 2004
(All amounts in thousands, except share and per share data)
Net Sales
---------
Net sales for 2005 were $83,095 compared with $67,406 for 2004, an
increase of $15,689 or 23.3%. Net sales for the specialty products segment were
$29,433 for 2005 compared with $28,767 for 2004, an increase of $666 or 2.3%.
This increase was due principally to greater sales volumes of ethylene oxide for
medical device sterilization and propylene oxide for starch modification as well
as a modest price increase adopted early in 2005 to help offset rising raw
material costs. This increase was partially offset by a decline in volumes sold
in the ethylene oxide blends product line and single use ethylene oxide
canisters for use in sterilization equipment. Net sales for the encapsulated /
nutritional products segment were $32,499 for 2005 compared with $24,759 for
2004, an increase of $7,740 or 31.3%. This increase was due principally to
increased volumes sold in the domestic food and human choline markets and
approximately $3,300 associated with the Company's new pharmaceutical and food
business lines resulting from the June 30, 2005 acquisition of certain assets of
the Loders Croklaan USA, LLC encapsulation, agglomeration and granulation
business, as described in Note 4 to our Consolidated Financial Statements. The
Company also experienced volume improvements in the animal health industry
relating to REASHURE(R), NITROSHURETM and NIASHURETM, our microencapsulated
niacin product for dairy cows. These increases were partially offset by a
decline in volumes sold in the international food product lines and the
nutritional supplement product line. Net sales of $21,163 were realized for 2005
in the BCP Ingredients segment compared with $13,880 for 2004, an increase of
$7,283 or 52.5%. This increase was due to increased volumes sold in the dry
choline, aqueous choline, and specialty industrial product lines, along with
modest price increases in all three product lines.
Gross Margin
------------
Gross margin for 2005 increased to $28,680 compared to $23,806 for 2004,
an increase of 20.5%, due largely to the above noted increase in sales. Gross
margin percentage for 2005 was 34.5% as compared to 35.3% for 2004 as our margin
percentage was unfavorably affected by product mix and higher raw material and
energy costs. Gross margin percentage for the specialty products segment
decreased slightly primarily due to rising raw material costs. Gross margin
percentage in the encapsulated / nutritional products segment increased 1.8% as
margins were favorably affected by increased production, a result of greater
sales volume as described above. Gross margin percentage in BCP Ingredients
increased 3.8% and was favorably affected by increased production volumes of
choline chloride and specialty derivative products.
Operating Expenses
------------------
Operating expenses for 2005 increased to $11,777 from $11,009 for 2004, an
increase of $768 or 7.0%. Total operating expenses as a percentage of sales were
14.2% for 2005 compared to 16.3% for 2004. The increase in operating expenses
for 2005 was principally a result of new hires, increased charges for search
fees associated with new hires and associated relocation expenses. These
increases were partially offset by a decrease in selling expenses. During 2005
and 2004, the Company spent $2,053 and $1,752, respectively, on
Company-sponsored research and development programs, substantially all of which
pertained to the Company's encapsulated / nutritional products segment for both
food and animal feed applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for 2005 were
$16,903 as compared to $12,797 for 2004, reflecting a 32.1% increase from year
to year.
14
Other Expenses (Income)
-----------------------
Interest income for 2005 totaled $214 as compared to $125 for 2004. This
increase is attributable to an increase in the Company's average cash balance
during 2005. Interest expense was $8 for 2005 compared to $219 for 2004. This
decrease is the result of the prepayment of the Company's outstanding loan
balance in December 2004. Other income of $82 in 2005 represents the net gain on
the sale of equipment.
Income Tax Expense
------------------
The Company's effective tax rate for 2005 was 36.3% compared to a 36.9%
rate for 2004.
Net Earnings
------------
As a result of the foregoing, net earnings were $10,954 for 2005 as
compared with $8,026 for 2004, reflecting a 36.5% increase from 2004 to 2005.
Fiscal Year 2004 compared to Fiscal Year 2003
(All amounts in thousands, except share and per share data)
Net Sales
---------
Net sales for 2004 were $67,406 compared with $61,875 for 2003, an
increase of $5,531 or 8.9%. Net sales for the specialty products segment were
$28,767 for 2004 compared with $26,163 for 2003, an increase of $2,604 or 10.0%.
This increase was due principally to greater sales volumes of ethylene oxide for
medical device contractor sterilization and single use ethylene oxide canisters
for use in sterilization equipment. Net sales for the encapsulated / nutritional
products segment were $24,759 for 2004 compared with $24,043 for 2003, an
increase of $716 or 3.0%, led by volume improvements in the domestic food market
as well as increasing dairy industry acceptance of NITROSHURE TM, which we
launched in the first quarter of 2004. Sales in this segment were negatively
affected by competitive pressures in the human food and nutrition markets which
resulted in lower average selling prices as compared to the prior year. Net
sales of $13,880 were realized for 2004 in the BCP Ingredients segment compared
with $11,669 for 2003, an increase of $2,211 or 18.9%. This increase was due
principally to increased volumes sold in the aqueous and dry choline product
lines, along with some very modest price increases in both product lines.
Gross Margin
------------
Gross margin for 2004 increased to $23,806 compared to $21,152 for 2003.
Gross margin as a percentage of net sales for 2004 was 35.3% compared to 34.2%
for 2003. Although sales volumes and gross margin have increased in 2004
compared to the comparable prior year period, our margins, in all three
segments, were unfavorably impacted by rising raw material and energy costs.
Gross margin percentage for the specialty products segment was 50.9% for 2004
compared to 50.1% for 2003. Margins for the specialty products segment improved
due principally to increased sales volume of packaged ethylene oxide and sales
of single use ethylene oxide canisters for use in medical device sterilization
and lower amortization expense. Gross margin percentage in the encapsulated /
nutritional products segment was 31.0% for 2004 compared to 29.6% for 2003.
Margins were favorably impacted by increased sales volume to the domestic food
market. Margins in the encapsulated / nutritional products segment in 2003 were
unfavorably affected by a designed reduction in inventory levels which
negatively impacted the Company's gross margins due to the resulting excess
plant manufacturing capacity. As noted above, during 2004, increased competition
in both the human food and nutrition markets resulted in lower average selling
prices which partially offset improvements in profit margins for this segment
during 2004. Margins for BCP Ingredients were favorably affected by increased
production volumes of choline chloride and choline derivative products in
addition to the modest price increases noted above.
15
Operating Expenses
------------------
Operating expenses for 2004 declined to $11,009 from $12,137 for 2003, a
decrease of $1,128 or 9.3%. Total operating expenses as a percentage of sales
were 16.3% for 2004 compared to 19.6% for 2003. This decrease was principally a
result of a decrease in selling, marketing and research expenses, a result of
the Company having made several organizational and business changes affecting
the encapsulated / nutritional products segment. Many of these changes were
effected late in the fourth quarter of 2003 in an effort to refocus our
commercial efforts, reduce operating expenses and improve the overall financial
performance of this segment. These decreases were partially offset by increased
charges for search fees associated with new hires and higher professional fees
including those required to comply with the Sarbanes-Oxley Act of 2002. During
2004 and 2003, the Company spent $1,752 and $2,083, respectively, on
Company-sponsored research and development programs, substantially all of which
pertained to the Company's encapsulated / nutritional products segment for both
food and animal health applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for 2004 were
$12,797 compared to $9,015 for 2003, reflecting a 42.0% increase year over year.
Other Expenses (Income)
-----------------------
Interest expense for 2004 totaled $219 compared to $272 for 2003, a
decrease of $53. This decrease is the result of lower average outstanding
borrowings during the period. Interest income for 2004 totaled $125 compared to
$20 for 2003. This increase is the result of higher average cash balances during
the period.
Income Tax Expense
------------------
The Company's effective tax rate in 2004 was 36.9% compared to a 35.7%
rate for 2003.
Net Earnings
------------
As a result of the foregoing, net earnings were $8,026 for 2004 compared
with $5,638 for 2003, reflecting a 42.4% increase from 2003 to 2004.
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 the headquarters office space entered into in 2002).
These aggregate commitments are as follows:
16
==========================================
Year
------------------------------------------
2006 $ 562
2007 521
2008 478
2009 569
2010 150
Thereafter 21
------------------------------------------
Total minimum lease payments $ 2,301
==========================================
As part of the June 30, 2005 acquisition of certain assets relating to the
encapsulation, agglomeration and granulation business of Loders Croklaan USA,
LLC, the Asset Purchase Agreement provides for the contingent payment by the
Company of additional consideration based upon the volume of sales associated
with one particular product acquired by the Company during the three year period
following the acquisition. Such contingent consideration will be recorded as an
additional cost of the acquired product lines. No such contingent consideration
has been earned or paid as of December 31, 2005.
The Company knows of no current or pending demands on, or commitments for,
its liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash
flow to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. As described in
Note 13 to our Consolidated Financial Statements, on February 8, 2006, the
Company, through its wholly owned subsidiary Balchem Minerals Corporation,
acquired all of the outstanding capital stock of Chelated Minerals Corporation
("CMC"), a privately held Utah corporation, for a purchase price of $17,350
before working capital and other adjustments. CMC is a manufacturer and global
marketer of mineral nutritional supplements for livestock, pet and poultry
feeds.
Cash
----
Cash and cash equivalents increased to $12,996 at December 31, 2005 from
$12,734 at December 31, 2004. The $262 increase resulted from an increase in net
cash provided by operating activities of $13,698 offset by net cash used in
investing activities of $12,943 and cash used in financing activities of $493.
Working capital amounted to $26,116 at December 31, 2005 as compared to $23,505
at December 31, 2004, an increase of $2,611.
Operating Activities
--------------------
Cash flows from operating activities provided $13,698 for 2005 as compared
with $12,145 for 2004. The increase in cash flows from operating activities was
due primarily to increases in net income, accounts payable and accrued expenses,
and income taxes. The foregoing was partially offset by an increase in accounts
receivable and inventories and a decrease in amortization expense.
Investing Activities
--------------------
Capital expenditures were approximately $1,800 for 2005. Excluding
property, plant and equipment acquired in the CMC acquisition described in Note
13 in our Consolidated Financial Statements, capital expenditures are projected
to be approximately $2.3 million for 2006. Cash paid for the acquisition of
assets relating to the Loders Croklaan USA, LLC fluidized bed encapsulation and
granulation business, including acquisition costs, was $11,419. With the
exception of $985, which was paid during the quarter ended June 30, 2005, all of
such payment was made on July 1, 2005 from the Company's cash reserves.
17
The overall effect of the foregoing was that cash flows used in investing
activities were $12,943 in 2005 and $1,229 in 2004.
Financing Activities
--------------------
In June 1999, the board of directors authorized the repurchase of shares
of the Company's outstanding common stock over a two-year period commencing July
2, 1999. Under this program, which was subsequently extended through 2006, the
Company had, as of December 31, 2004, repurchased a total 514,974 shares at an
average cost of $6.17 per share, none of which remained in treasury at December
31, 2004. In June 2005, the board of directors authorized another extension of
the stock repurchase program for up to an additional 600,000 shares, over and
above those 514,974 shares previously repurchased under the program. During
2005, a total of 66,300 shares have been purchased at an average cost of $18.07
per share, 64,016 of which remain in treasury at December 31, 2005. 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 among other factors on its
assessment of corporate cash flow and market conditions.
There was no debt outstanding at December 31, 2005 or 2004. In June 2001,
the Company and its principal bank entered into a Loan Agreement (the "Loan
Agreement") providing for a term loan of $13,500, which was subsequently paid in
full in December 2004. The Loan Agreement provided for a short-term revolving
credit facility of $3,000 (the "Revolving Facility"). Borrowings under the
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the Revolving Facility as of December 31, 2005 and 2004.
On February 8, 2006, the Company, through its wholly owned subsidiary BMC,
completed an acquisition of all of the outstanding capital stock of CMC, a
privately held Utah corporation, for a purchase price of $17,350 subject to
adjustment based upon CMC's actual working capital and other adjustments. On
February 6, 2006, the Company and its principal bank entered into a new Loan
Agreement (the "New Loan Agreement") providing for a term loan of $10,000 (the
"Term Loan"), the proceeds of which were used to fund the acquisition, in part.
The remaining balance of the purchase price of the acquisition was funded
through Balchem's cash on hand. The Term Loan is payable in equal monthly
installments of principal, together with accrued interest, and has a maturity
date of March 1, 2009. The Term Loan is subject to an interest rate equal to
LIBOR plus 1.00%. The New Loan Agreement also provides for a short-term
revolving credit facility of $3,000 (the "New Revolving Facility"). Borrowings
under the New Revolving Facility bear interest at LIBOR plus 1.00%. No amounts
have been drawn on the New Revolving Facility as of the date hereof. The New
Revolving Facility expires in February, 2007. Management believes that such
facility will be renewed in the normal course of business.
Proceeds from stock options exercised totaled $1,409 and $2,563 for 2005
and 2004, respectively. Dividend payments were $685 and $389 for 2005 and 2004,
respectively.
The overall effect of the foregoing was that cash flows used in financing
activities were $493 in 2005 and $7,421 in 2004.
Other Matters Impacting Liquidity
---------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona, Missouri facility. The amount recorded
on the Company's balance sheet as of December 31, 2005 for this obligation is
$987. The postretirement plan is not funded. Historical cash payments made under
such plan approximated $50 per year.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
plan sponsor subsidy based on a percentage of a beneficiary's annual
prescription drug benefits, within defined limits, and the opportunity for a
retiree to
18
obtain prescription drug benefits under Medicare. There was no impact of the
subsidy on the postretirement benefit obligation and net periodic cost in 2005
or 2004 as Medicare eligible retirees are not covered under the Company's plan.
Critical Accounting Policies
----------------------------
The Securities and Exchange Commission ("SEC") has issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, management considers the following policies to
be critical within the SEC definition.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of
loss, and when collection is reasonably assured. The Company reports amounts
billed to customers related to shipping and handling as revenue and includes
costs incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities. In addition, the
Company follows the provisions of the Securities and Exchange Commission's (SEC)
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which sets forth
guidelines on the timing of revenue recognition based upon factors such as
passage of title, installation, payments and customer acceptance.
Revenue related to a process and product license agreement is recognized
using the percentage of completion method and the progress to completion is
measured using the efforts-expended method. The Company follows the provisions
of the Financial Accounting Standards Board's (FASB) Statement of Position (SOP)
81-1, "Accounting for Performance of Construction Type and Certain Production
Type Contracts." Revenue is recognized as work is performed and costs are
incurred.
Inventories
-----------
Inventories are valued at the lower of cost (first in, first out or
average) or market value and have been reduced by an allowance for excess or
obsolete inventories. Inventory reserves are generally recorded when the
inventory for a product exceeds twelve months of demand for that product and/or
when individual products have been in inventory for greater than six months.
Long-Lived Assets
-----------------
Long-lived assets, such as property, plant, and equipment and intangible
assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge
19
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset, which is generally based on discounted cash flows.
Goodwill, which is not subject to amortization, is tested annually for
impairment, and more frequently if events and circumstances indicate that the
asset might be impaired. If an indicator of impairment exists, the Company
determines the amount of impairment based on a comparison of the implied fair
value of its goodwill to its carrying value.
Accounts Receivable
-------------------
We market our products to a diverse customer base, principally throughout
the United States, Europe, Mexico and Japan. We grant credit terms in the normal
course of business to our customers. We perform on-going credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined through review of their
current credit information. We continuously monitor collections and payments
from customers and maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Estimated losses are based on historical experience and any specific customer
collection issues identified. If the financial condition of our customers were
to deteriorate resulting in an impairment of their ability to make payments,
additional allowances and related bad debt expense may be required.
Post-employment Benefits
------------------------
The Company provides life insurance and health care benefits for eligible
retirees and health care benefits for retirees' eligible survivors. The costs
and obligations related to these benefits reflect the Company's assumptions as
to general economic conditions and health care cost trends. The cost of
providing plan benefits also depends on demographic assumptions including
retirements, mortality, turnover, and plan participation. If actual experience
differs from these assumptions, the cost of providing these benefits could
increase or decrease.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
plan sponsor subsidy based on a percentage of a beneficiary's annual
prescription drug benefits, within defined limits, and the opportunity for a
retiree to obtain prescription drug benefits under Medicare. There was no impact
of the subsidy on the postretirement benefit obligation and net periodic cost in
2005 or 2004 as Medicare eligible retirees are not covered under the Company's
plan.
Intangible Assets with Finite Lives
-----------------------------------
The useful life of an intangible asset is based on the Company's
assumptions regarding expected use of the asset; the relationship of the
intangible asset to another asset or group of assets; any legal, regulatory or
contractual provisions that may limit the useful life of the asset or that
enable renewal or extension of the asset's legal or contractual life without
substantial cost; the effects of obsolescence, demand, competition and other
economic factors; and the level of maintenance expenditures required to obtain
the expected future cash flows from the asset and their related impact on the
asset's useful life. If events or circumstances indicate that the life of an
intangible asset has changed, it could result in higher future amortization
charges or recognition of an impairment loss.
Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in
20
earnings in the period that includes the enactment date. The Company regularly
reviews its deferred tax assets for recoverability and would establish a
valuation allowance if it believed that such assets may not be recovered, taking
into consideration historical operating results, expectations of future
earnings, changes in its operations and the expected timing of the reversals of
existing temporary differences.
New Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Shared-Based
Payment which supersedes Accounting Principle Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123(R) requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based
compensation issued to employees. The requirements of SFAS 123(R) are effective
as of the beginning of the first fiscal year beginning after June 15, 2005. The
Company will be required to adopt the provisions of SFAS 123(R) as of January 1,
2006. Under FAS 123(R), the Company must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for
compensation cost, and the transition method to be used at date of adoption. The
permitted transition methods include either modified-retrospective or
modified-prospective adoption. Under the modified-retrospective option, prior
periods may be restated either as of the beginning of the year of adoption or
for all periods presented. The modified-prospective method requires that
compensation expense be recorded for all unvested stock options at the beginning
of the first quarter of adoption of FAS 123(R), while the modified-retrospective
methods would record compensation expense for all unvested stock options
beginning with the first period presented. The Company plans to adopt SFAS No.
123 (R) using the modified-prospective method. Adoption of SFAS 123(R) will have
no impact on the historical financial statements included in this Annual Report
on Form 10-K. The impact of adoption of SFAS No. 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in
the future. However, had the Company adopted SFAS No. 123(R) in prior periods,
the impact of that standard would not have been materially different from the
impact of SFAS No. 123(R) as described in the disclosure of pro forma net income
and earnings per share in Note 1 to the Consolidated Financial Statements.
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 151, "Inventory Costs." The new
statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This statement requires
that those items be recognized as current period charges and requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The Company does not expect
adoption of this statement to have a material impact on its financial condition
or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. However, interest payable under the Company's term loan and
credit line is based on LIBOR plus 1.00%, and thus exposes the Company to some
interest rate risk in connection with its bank financing. The Company has no
derivative financial instruments or derivative commodity instruments, nor does
the Company have any financial instruments entered into for trading or hedging
purposes. Foreign sales are generally billed in U.S. dollars. The Company
believes that its business operations are not exposed in any material respect to
market risk relating to foreign currency exchange risk or commodity price risk.
21
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Reports of Independent Registered Public Accounting Firms 23
Consolidated Balance Sheets as of
December 31, 2005 and 2004 26
Consolidated Statements of Earnings for the
years ended December 31, 2005, 2004 and 2003 27
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2005, 2004 and 2003 28
Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2004 and 2003 29
Notes to Consolidated Financial Statements 30
Report of Independent Registered Public Accounting Firm 48
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2005, 2004 and 2003 49
22
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Balchem Corporation
New Hampton, New York
We have audited the accompanying consolidated balance sheets of Balchem
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the years then ended. We also have audited management's assessment, included in
the accompanying Management's Report on Internal Control Over Financial
Reporting, that Balchem Corporation and Subsidiaries maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in "Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)."
Balchem Corporation's management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on these financial statements, an
opinion on management's assessment, and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Balchem Corporation
and Subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, management's assessment that Balchem Corporation and
Subsidiaries maintained effective internal control over financial reporting as
of
23
December 31, 2005, is fairly stated, in all material respects, based on criteria
established in "Internal Control--Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO)." Furthermore, in
our opinion, Balchem Corporation and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in "Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)."
/s/McGladrey & Pullen, LLP
New York, New York
March 16, 2006
24
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Balchem Corporation:
We have audited the accompanying consolidated statements of earnings,
stockholders' equity, and cash flows of Balchem Corporation and subsidiaries for
the year ended December 31, 2003. In connection with our audit of the
consolidated financial statements, we also have audited the consolidated
financial statement schedule, "Schedule II - Valuation and Qualifying Accounts,"
for the year ended December 31, 2003. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Balchem
Corporation and subsidiaries referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule for
the year ended December 31, 2003, when considered in relation to the basic
consolidated financial statements for such year taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Short Hills, New Jersey
February 6, 2004
25
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2005 and 2004
(Dollars in thousands, except share and per share data)
Assets 2005 2004
------ -------- --------
Current assets:
Cash and cash equivalents $ 12,996 $ 12,734
Accounts receivable, net of allowance for doubtful accounts of $50
and $82 at December 31, 2005 and 2004, respectively 11,521 7,996
Inventories 8,540 6,319
Prepaid income taxes 143 315
Prepaid expenses 1,790 1,527
Deferred income taxes 276 321
-------- --------
Total current assets 35,266 29,212
Property, plant and equipment, net 24,400 24,188
Goodwill 13,327 6,368
Intangible assets, net 2,148 637
-------- --------
Total assets $ 75,141 $ 60,405
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 2,562 $ 1,466
Accrued expenses 2,601 1,212
Accrued compensation and other benefits 1,756 1,492
Customer deposits and other deferred revenue 1,186 852
Dividends payable 1,045 685
-------- --------
Total current liabilities 9,150 5,707
Deferred income taxes 4,015 3,461
Other long-term obligations 1,043 1,003
-------- --------
Total liabilities 14,208 10,171
-------- --------
Commitments and contingencies (note 11)
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 25,000,000 shares; 11,640,964
shares issued and 11,576,948 outstanding at December 31, 2005 and
11,431,738 shares issued and outstanding at December 31, 2004 776 762
Additional paid-in capital 8,008 6,075
Retained earnings 53,306 43,397
Treasury stock, at cost: 64,016 and 0 shares at December 31, 2005
and 2004, respectively (1,157) --
-------- --------
Total stockholders' equity 60,933 50,234
-------- --------
-------- --------
Total liabilities and stockholders' equity $ 75,141 $ 60,405
======== ========
See accompanying notes to consolidated financial statements.
26
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2005, 2004 and 2003
(In thousands, except per share data)
2005 2004 2003
-------- -------- --------
Net sales $ 83,095 $ 67,406 $ 61,875
Cost of sales 54,415 43,600 40,723
-------- -------- --------
Gross margin 28,680 23,806 21,152
Operating expenses:
Selling expenses 4,739 4,815 5,718
Research and development expenses 2,053 1,752 2,083
General and administrative expenses 4,985 4,442 4,336
-------- -------- --------
11,777 11,009 12,137
-------- -------- --------
Earnings from operations 16,903 12,797 9,015
Other expenses (income):
Interest income (214) (125) (20)
Interest expense 8 219 272
Other, net (82) (12) --
-------- -------- --------
Earnings before income tax expense 17,191 12,715 8,763
Income tax expense 6,237 4,689 3,125
-------- -------- --------
Net earnings $ 10,954 $ 8,026 $ 5,638
======== ======== ========
Basic net earnings per common share $ 0.95 $ 0.71 $ 0.52
======== ======== ========
Diluted net earnings per common share $ 0.91 $ 0.69 $ 0.50
======== ======== ========
See accompanying notes to consolidated financial statements.
27
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands, except share and per share data)
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2002 11,032,286 $ 736 $ 3,137 $ 30,807 (286,997) $ (1,411) $ 33,269
Net earnings -- -- -- 5,638 -- -- 5,638
Dividends ($.035 per share) -- -- -- (389) -- -- (389)
Shares issued under employee
benefit plans -- -- 138 -- 29,105 135 273
Shares issued under stock
option plans and an income
tax benefit of $183 -- -- 218 -- 160,782 772 990
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2003 11,032,286 736 3,493 36,056 (97,110) (504) 39,781
Net earnings -- -- -- 8,026 -- -- 8,026
Dividends ($.06 per share) -- -- -- (685) -- -- (685)
Shares issued under employee
benefit plans and other 21,090 2 254 -- -- -- 256
Shares issued under stock
option plans and an income
tax benefit of $293 378,362 24 2,328 -- 97,110 504 2,856
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2004 11,431,738 762 6,075 43,397 -- -- 50,234
Net earnings -- -- -- 10,954 -- -- 10,954
Dividends ($.09 per share) -- -- -- (1,045) -- -- (1,045)
Treasury shares purchased -- -- -- -- (66,300) (1,198) (1,198)
Shares issued under employee
benefit plans and other 34,755 1 210 -- 2,284 41 252
Shares issued under stock
option plans and an income
tax benefit of $327 174,471 13 1,723 -- -- -- 1,736
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2005 11,640,964 776 8,008 53,306 (64,016) (1,157) 60,933
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
28
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
(In thousands, except per share data)
2005 2004 2003
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 10,954 $ 8,026 $ 5,638
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,809 3,271 3,525
Shares issued under employee benefit plans 257 256 273
Deferred income tax expense 599 1,388 598
(Recovery of) provision for doubtful accounts (32) (4) 36
Income tax benefit from stock options exercised 327 293 183
Disposition of intangible assets -- 53 --
Gain on sale of assets (82) (12) --
Changes in assets and liabilities
Accounts receivable (2,684) (759) (110)
Inventories (1,496) (358) 1,277
Prepaid expenses (263) (804) 582
Accounts payable and accrued expenses 2,749 226 (1,859)
Income taxes 172 (315) 975
Customer deposits and other deferred revenue 334 852 --
Other long-term obligations 54 32 35
-------- -------- --------
Net cash provided by operating activities 13,698 12,145 11,153
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,769) (1,215) (2,270)
Proceeds from sale of property, plant and equipment 389 91 41
Cash paid for intangible assets acquired (144) (105) (85)
Acquisition of assets (11,419) -- --
-------- -------- --------
Net cash used in investing activities (12,943) (1,229) (2,314)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt -- (9,581) (1,742)
Proceeds from stock options exercised 1,409 2,563 807
Dividends paid (685) (389) (382)
Purchase of treasury stock (1,198) -- --
Other financing activities (19) (14) (14)
-------- -------- --------
Net cash used in financing activities (493) (7,421) (1,331)
-------- -------- --------
Increase in cash and cash equivalents 262 3,495 7,508
Cash and cash equivalents beginning of year 12,734 9,239 1,731
-------- -------- --------
Cash and cash equivalents end of year $ 12,996 $ 12,734 $ 9,239
======== ======== ========
See accompanying notes to consolidated financial statements.
29
BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------------
Business Description
--------------------
Balchem Corporation (including, unless the context otherwise requires, its
wholly-owned subsidiaries: BCP Ingredients, Inc., Balchem Minerals Corporation
and Chelated Minerals Corporation, "Balchem", or the "Company"), incorporated in
the State of Maryland in 1967, is engaged in the development, manufacture and
marketing of specialty performance ingredients for the food, pharmaceutical,
feed and medical sterilization industries.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior period balances to conform with the presentation for the
current period.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of loss,
and when collection is reasonably assured. The Company reports amounts billed to
customers related to shipping and handling as revenue and includes costs
incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities. In addition, the
Company follows the provisions of the Securities and Exchange Commission's (SEC)
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which sets forth
guidelines on the timing of revenue recognition based upon factors such as
passage of title, installation, payments and customer acceptance.
Revenue related to the process and product license agreement described in Note
12 below is recognized using the percentage of completion method and the
progress to completion is measured using the efforts-expended method. The
Company follows the provisions of the Financial Accounting Standards Board's
(FASB) Statement of Position (SOP) 81-1, "Accounting for Performance of
Construction Type and Certain Production Type Contracts." Revenue is recognized
as work is performed and costs are incurred.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents.
Inventories
-----------
Inventories are stated at the lower of cost or market, with cost generally
determined on a first-in, first-out basis, and have been reduced by an allowance
for excess or obsolete inventories. Cost elements include material, labor and
manufacturing overhead.
30
Property, Plant and Equipment and Depreciation
----------------------------------------------
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings 15-25 years
Equipment 3-12 years
Expenditures for repairs and maintenance are charged to expense. Alterations and
major overhauls that extend the lives or increase the capacity of plant assets
are capitalized. When assets are retired or otherwise disposed of, the cost of
the assets and the related accumulated depreciation are removed from the
accounts and any resultant gain or loss is included in earnings.
Business Concentrations
-----------------------
A specialty products customer accounted for 9%, 11% and 10% of the Company's
consolidated net sales for 2005, 2004 and 2003, respectively. This customer
accounted for 8% and 10% of the Company's accounts receivable balance at
December 31, 2005 and 2004, respectively. Approximately 7%, 8% and 8% of the
Company's net sales for 2005, 2004 and 2003, respectively, consisted of sales
outside the United States, predominately to Europe, Japan, and Mexico.
Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customers'
financial condition and credit histories. The majority of the Company's
customers are major national or international corporations.
Goodwill and Acquired Intangible Assets
---------------------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
accounting for a business combination and define an intangible asset. Goodwill
and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but are instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
As required by SFAS No. 142, the Company performed an assessment of whether
there was an indication that goodwill was impaired at the date of adoption. In
connection therewith, the Company determined that its operations consisted of
three reporting units and determined each reporting units' fair value and
compared it to the reporting unit's net book value. Since the fair value of each
reporting unit exceeded its carrying amount, there was no indication of
impairment and no further transitional impairment testing was required. As of
December 31, 2005 and 2004, the Company also performed an impairment test of its
goodwill balance. As of such dates the Company's reporting units' fair value
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company plans to perform its impairment test each
December 31.
The Company had unamortized goodwill in the amount of $13,327 at December 31,
2005 and $6,368 at December 31, 2004, subject to the provisions of SFAS Nos. 141
and 142. Unamortized goodwill is allocated to the Company's reportable segments
as follows:
31
======================================================================
2005 2004
----------------------------------------------------------------------
Specialty Products $ 5,089 $ 5,089
Encapsulated/Nutritional Products 8,238 1,279
BCP Ingredients -- --
----------------------------------------------------------------------
Total $ 13,327 $ 6,368
======================================================================
The following intangible assets are stated at cost and are amortized on a
straight-line basis over the following estimated useful lives:
====================================================
Amortization
period
(in years)
Customer lists 10
Regulatory re-registration costs 10
Patents 17
Trademarks 17
====================================================
Income Taxes
------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Use of Estimates
----------------
Management of the Company is required to make certain estimates and assumptions
during the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at December 31, 2005 and 2004 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying consolidated balance sheets. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value,
and, accordingly, the estimates are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The Company's
financial instruments, principally cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments.
Research and Development
------------------------
Research and development costs are expensed as incurred.
32
Stock Option Plan
-----------------
The Company has stock based employee compensation plans, which are described
more fully in Note 8. The Company accounts for its stock option plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. No stock based
employee compensation cost is reflected in net earnings, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The Company has adopted the
disclosure standards of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure an amendment of FASB
Statement 123," which require the Company to provide pro forma net earnings and
pro forma earnings per share disclosures for employee and director stock option
grants made as if the fair-value based method of accounting for stock options as
defined in SFAS No. 123 had been applied. The following table illustrates the
effect on net earnings and per share amounts if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation:
===============================================================================================
Year Ended December 31,
-----------------------
2005 2004 2003
(In thousands, except per share amounts)
-----------------------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 10,954 $ 8,026 $ 5,638
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax
effects (612) (722) (731)
-----------------------------------------
Net Earnings (pro forma) $ 10,342 $ 7,304 $ 4,907
=========================================
Earnings per share:
Basic EPS as reported $ .95 $ .71 $ .52
Basic EPS (pro forma) $ .89 $ .65 $ .45
Diluted EPS as reported $ .91 $ .69 $ .50
Diluted EPS (pro forma) $ .86 $ .63 $ .43
===============================================================================================
Impairment of Long-lived Assets
-------------------------------
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
New Accounting Pronouncements
-----------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Shared-Based
Payment which supersedes Accounting Principle Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123(R) requires companies to recognize in the income
statement the
33
grant-date fair value of stock options and other equity-based compensation
issued to employees. The requirements of SFAS 123(R) are effective as of the
beginning of the first fiscal year beginning after June 15, 2005. The Company
will be required to adopt the provisions of SFAS 123(R) as of January 1, 2006.
Under FAS 123(R), the Company must determine the appropriate fair value model to
be used for valuing share-based payments, the amortization method for
compensation cost, and the transition method to be used at date of adoption. The
permitted transition methods include either modified-retrospective or
modified-prospective adoption. Under the modified-retrospective option, prior
periods may be restated either as of the beginning of the year of adoption or
for all periods presented. The modified-prospective method requires that
compensation expense be recorded for all unvested stock options at the beginning
of the first quarter of adoption of FAS 123(R), while the modified-retrospective
methods would record compensation expense for all unvested stock options
beginning with the first period presented. The Company plans to adopt SFAS No.
123(R) using the modified-prospective method. Adoption of SFAS 123(R) will have
no impact on the historical financial statements included in this Annual Report
on Form 10-K. The impact of adoption of SFAS No. 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in
the future. However, had the Company adopted SFAS No. 123(R) in prior periods,
the impact of that standard would have approximated the impact of SFAS No.
123(R) as described in the disclosure of pro forma net income and earnings per
share in Note 1 to the consolidated financial statements.
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 151, "Inventory Costs." The new statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This statement requires that those items be
recognized as current period charges and requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. This statement is effective for fiscal years
beginning after June 15, 2005. The Company does not expect adoption of this
statement to have a material impact on its financial condition or results of
operations.
Net Earnings Per Common Share
-----------------------------
Basic net earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per common share is calculated in a manner consistent with basic
net earnings per common share except that the weighted average number of common
shares outstanding also includes the dilutive effect of stock options
outstanding (using the treasury stock method).
NOTE 2 - INVENTORIES
--------------------
Inventories at December 31, 2005 and 2004 consisted of the following:
=================================================
2005 2004
-------------------------------------------------
Raw materials $ 4,809 $ 2,305
Finished goods 3,731 4,014
-------------------------------------------------
Total inventories $ 8,540 $ 6,319
=================================================
On a regular basis, the Company evaluates its inventory balances for excess
quantities and obsolescence by analyzing demand, inventory on hand, sales levels
and other information. Based on these evaluations, inventory balances are
reduced, if necessary. The reserve for obsolete or slow moving inventory was $56
and $31 at December 31, 2005 and 2004, respectively.
34
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at December 31, 2005 and 2004 are summarized as
follows:
=====================================================================
2005 2004
---------------------------------------------------------------------
Land $ 290 $ 290
Building 10,509 10,241
Equipment 31,196 28,619
Construction in Progress 332 387
---------------------------------------------------------------------
42,327 39,537
Less: Accumulated depreciation 17,927 15,349
---------------------------------------------------------------------
Property, plant and equipment, net $ 24,400 $ 24,188
=====================================================================
Depreciation expense was $2,686, $2,583 and $2,445 for the years ended December
31, 2005, 2004 and 2003, respectively.
NOTE 4 - ACQUISITION OF ASSETS
------------------------------
Effective June 30, 2005, pursuant to an asset purchase agreement of same date
(the "Asset Purchase Agreement"), the Company acquired certain assets of Loders
Croklaan USA, LLC ("Seller") relating to the encapsulation, agglomeration and
granulation business for a purchase price including acquisition costs of $9,885
plus $725 for certain product inventories and $809 for certain accounts
receivable. With the exception of $985, which was paid during the quarter ended
June 30, 2005, all of such payment was made on July 1, 2005 from the Company's
cash reserves.
The Asset Purchase Agreement also provides for the contingent payment by the
Company of additional consideration to Seller based upon the volume of sales
associated with one particular product acquired by the Company during the three
year period following the acquisition. Such contingent consideration will be
recorded as an additional cost of the acquired product lines.
The preliminary allocation of the purchase price of the acquisition has been
assigned to the long-term net assets acquired as follows:
=================================================
Fair Value Recorded
in Purchase Accounting
-------------------------------------------------
Equipment $ 1,436
Customer List 1,350
Patent 140
Goodwill 6,959
-------------------------------------------------
Total $ 9,885
=================================================
The purchase price allocations have been made on the basis of estimates made by
the Company. The financial statement items and amounts are subject to subsequent
revision to give effect to reclassifications related to the allocation between
identifiable assets, intangible assets and goodwill and for other
pre-acquisition contingencies that may become resolved during subsequent
periods.
The above acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The consolidated financial statements include the
results of operations of the acquired product lines from the date of purchase.
35
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2004 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned acquisition
had occurred at the beginning of the periods presented and is not intended to be
a projection of future results.
===========================================================
Pro Forma
Year Ended
December 31,
2005 2004
---------------------------------------------------------
Net sales $ 86,382 $ 71,747
Net earnings 11,422 9,042
Basic EPS .99 .80
Diluted EPS .95 .78
=========================================================
NOTE 5 - INTANGIBLE ASSETS WITH FINITE LIVES
--------------------------------------------
As of December 31, 2005 and 2004, the Company had identifiable intangible assets
as follows:
=======================================================================================================
2005 2004
Amortization Gross 2005 Gross 2004
Period Carrying Accumulated Carrying Accumulated
(In years) Amount Amortization Amount Amortization
-------------------------------------------------------------------------------------------------------
Customer lists 10 $ 1,350 $ 67 $ 6,760 $ 6,760
Regulatory re-registration
costs 10 18 0 356 356
Patents 17 753 141 538 105
Trademarks 17 210 49 207 37
Other 5 101 27 54 20
-------------------------------------------------------------------------------------------------------
$ 2,432 $ 284 $ 7,915 $ 7,278
========================================================================================================
Amortization of identifiable intangible assets was approximately $123, $688 and
$1,080 for 2005, 2004 and 2003, respectively. Assuming no change in the gross
carrying value of identifiable intangible assets, the estimated amortization
expense is approximately $194 per annum for 2006 through 2009 and approximately
$184 in 2010. At December 31, 2005 and 2004, there were no identifiable
intangible assets with indefinite useful lives as defined by SFAS No. 142.
Identifiable intangible assets are reflected in Intangible assets, net in the
Company's consolidated balance sheets. There were no changes to the useful lives
of intangible assets subject to amortization in 2005 and 2004.
At December 31, 2005, the gross carrying amount included a customer list and
patent acquired as part of the acquisition of certain assets of the Loders
Croklaan USA, LLC encapsulation, agglomeration and granulation business,
described in note 4.
At December 31, 2004, the gross carrying amount and accumulated amortization
included a customer list and regulatory re-registration costs that were fully
amortized during 2004. The customer list was related to the Company's 1994
purchase of certain tangible and intangible assets for one of its packaged
specialty products. The Company was required to pay additional contingent
amounts to compensate the seller for the
36
purchase of the seller's customer list in accordance with a formula based on
profits derived from sales of the specialty packaged ingredient. In 1998, the
Company elected to exercise the early payment option under the agreement and
made a final payment of $3,700 to the seller in settlement of its remaining
purchase price obligation under the terms of the agreement. Amounts allocated to
the customer list were amortized over its remaining estimated useful life on a
straight-line basis concluding in August 2004 and are included in cost of sales
in 2004. Amortization expense included in cost of sales related to this customer
list was $636 in 2004 and $997 in 2003.
These fully amortized customer lists as well as certain regulatory
re-registration costs were written-off on March 31, 2005 and, therefore, were
not included in the gross carrying amount and accumulated amortization at
December 31, 2005.
The Company is in the process of re-registering a product's use in compliance
with FIFRA re-registration requirements for all pesticide products. In December
2004, the U.S. Environmental Protection Agency ("EPA") informed the Company and
the other technical registrant under the current registration that the EPA was
beginning the 6-phase process to develop a Re-registration Eligibility Decision
(RED) for this product. The EPA intends to finalize the RED by August 2006 in
accordance with the statutory mandate of the Food Quality Protection Act of
1996. This multi-phase process has recently entered Phase 5, and the EPA has
stated that they still intend to finalize the process by the statutory deadline.
The Company has actively participated in the RED process and will continue to do
so until its conclusion. As of this date, the EPA has expressed concerns about
dietary exposures to a reaction product, as well as occupational exposures to
the product itself. The EPA requested additional information from the industry
which the Company will be actively involved in providing. The EPA has also
indicated that additional testing may be required in order to maintain the
current uses. The Company believes that the use will continue to be permitted,
although the Agency may require some additional restrictions on the current
uses. Additionally, the product, when used as a medical device sterilant, has no
known equally effective substitute. Management believes absence of availability
of this product could not be easily tolerated by various medical device
manufacturers and the health care industry due to the resultant infection
potential, if the product were unavailable.
NOTE 6 - LONG-TERM DEBT & CREDIT AGREEMENTS
-------------------------------------------
There was no debt outstanding at December 31, 2005 or 2004. In June 2001, the
Company and its principal bank entered into a Loan Agreement (the "Loan
Agreement") providing for a term loan of $13,500, which was subsequently paid in
full in December 2004. The Loan Agreement provided for a short-term revolving
credit facility of $3,000 (the "Revolving Facility"). Borrowings under the
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the Revolving Facility as of December 31, 2005 and 2004. On February 6, 2006,
the Company and its principal bank entered into a new loan agreement (the "New
Loan Agreement") providing for an unsecured term loan of $10,000 (the "Term
Loan"), the proceeds of which were used to fund an acquisition, in part, as
described in Note 13. The Term Loan is payable in equal monthly installments of
principal, together with accrued interest, and has a maturity date of March 1,
2009. The Term Loan is subject to an interest rate equal to LIBOR plus 1.00%.
The New Loan Agreement also provides for an unsecured short-term revolving
credit facility of $3,000 (the "New Revolving Facility"). Borrowings under the
New Revolving Facility bear interest at LIBOR plus 1.00%. Certain provisions of
the Term Loan require maintenance of certain financial ratios, limit future
borrowings and impose certain other requirements as contained in the New Loan
Agreement. No amounts have been drawn on the New Revolving Facility as of the
date hereof. The New Revolving Facility expires in February, 2007. Management
believes that such facility will be renewed in the normal course of business.
37
NOTE 7 - INCOME TAXES
---------------------
Income tax expense consists of the following:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Current:
Federal $ 4,875 $ 2,849 $ 2,111
State 763 453 416
Deferred:
Federal 541 1,244 557
State 58 143 41
--------------------------------------------------------------------------------
Total income tax provision $ 6,237 $ 4,689 $ 3,125
================================================================================
The provision for income taxes differs from the amount computed by applying the
Federal statutory rate of 35% to earnings before income tax expense due to the
following:
===============================================================================
2005 2004 2003
-------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 6,017 $ 4,450 $ 3,067
State income taxes, net of
Federal income tax benefit 534 379 297
Other (314) (140) (239)
-------------------------------------------------------------------------------
Total income tax provision $ 6,237 $ 4,689 $ 3,125
===============================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2005 and
2004 were as follows:
================================================================================
2005 2004
--------------------------------------------------------------------------------
Deferred tax assets:
Customer list amortization $ 119 $ 551
Inventories 213 203
Deferred compensation 6 25
Non-employee stock options 99 100
Other 231 274
--------------------------------------------------------------------------------
Total deferred tax assets 668 1,153
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 3,712 3,788
Prepaid expense 695 505
--------------------------------------------------------------------------------
Total deferred tax liabilities 4,407 4,293
--------------------------------------------------------------------------------
Net deferred tax liability $ 3,739 $ 3,140
================================================================================
There is no valuation allowance for deferred tax assets at December 31, 2005 and
2004. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of deferred tax asset realizable,
however, could change if management's estimate of future taxable income should
change.
38
NOTE 8 - STOCKHOLDERS' EQUITY
-----------------------------
On December 15, 2005, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2005. Such stock
dividend was made on January 20, 2006. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
On December 16, 2004, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2004. Such stock
dividend was made on January 20, 2005. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split,
from additional paid-in capital to common stock.
All references to number of common shares and per share amounts except shares
authorized in the accompanying consolidated financial statements were
retroactively adjusted to reflect the effect of the December 2005 stock split.
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended through 2006, the
Company had, as of December 31, 2004, repurchased a total 514,974 shares at an
average cost of $6.17 per share, none of which remained in treasury at December
31, 2004. In June 2005, the board of directors authorized another extension of
the stock repurchase program for up to an additional 600,000 shares, over and
above those 514,974 shares previously repurchased under the program. During
2005, a total of 66,300 shares have been purchased at an average cost of $18.07
per share, 64,016 of which remain in treasury at December 31, 2005. 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 among other factors on its
assessment of corporate cash flow and market conditions.
In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan (the
"1999 Stock Plan") for officers, directors, directors emeritus and employees of
and consultants to the Company and its subsidiaries. The 1999 Stock Plan is
administered by the Compensation Committee of the Board of Directors of the
Company. Under the plan, options and rights to purchase shares of the Company's
common stock are granted at prices established at the time of grant. Option
grants generally become exercisable 20% after 1 year, 60% after 2 years and 100%
after 3 years from the date of grant for employees and are fully exercisable on
the date of grant for directors. Other option grants are either fully
exercisable on the date of grant or become exercisable thereafter in such
installments as the Committee may specify. The 1999 Stock Plan initially
reserved an aggregate of 900,000 shares (unadjusted for the stock split) of
common stock for issuance under the Plan. In April 2003, the Board of Directors
of the Company adopted and stockholders subsequently approved, the Amended and
Restated 1999 Stock Plan which amended the 1999 Stock Plan by: (i) increasing
the number of shares of common stock reserved for issuance under the 1999 Stock
Plan by 900,000 shares (unadjusted for the stock split), to a total of 1,800,000
shares (unadjusted for the stock split) of common stock; and (ii) confirming the
right of the Company to grant awards of common stock ("Awards") in addition to
the other Stock Rights available under the 1999 Stock Plan, and providing
certain language changes relating thereto. The 1999 Stock Plan replaced the
Company's incentive stock option plan (the "ISO Plan") and its non-qualified
stock option plan (the "Non-Qualified Plan"), both of which expired on June 24,
1999. Unexercised options granted under the ISO Plan and the Non-Qualified Plan
prior to such termination remain exercisable in accordance with their terms.
Options granted under the ISO Plan generally become exercisable 20% after 1
year, 60% after 2 years and 100% after 3 years from the date of grant, and
expire ten years from the date of grant. Options granted under the Non-Qualified
Plan, generally vested on the date of grant, and expire ten years from the date
of grant.
On December 29, 2005, the Board of Directors of the Company authorized the
Company to enter into Restricted Stock Purchase Agreements (the "Agreements") to
purchase the Company's common stock with
39
the five non-employee directors of the Company pursuant to the Company's 1999
Stock Plan. This Agreement replaces the Stock Option Plan that non-employee
directors participated in in prior years. Under the Agreements, each
non-employee director purchased 4,500 shares of the Company's common stock at
the purchase price of $.04-44/100 per share. The purchased stock is subject to a
repurchase option in favor of the Company and to restrictions on transfer until
it vests in accordance with the provisions of the Agreements.
A summary of stock option plan activity for 2005, 2004, and 2003 for all plans
is as follows:
================================================================================
# of Weighted Average
2005 Shares Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 1,184,764 $ 9.30
Granted 438,165 19.56
Exercised (174,471) 8.07
Terminated or expired (12,993) 11.11
--------------------------------------------------------------------------------
Outstanding at end of year 1,435,465 $ 12.57
--------------------------------------------------------------------------------
Exercisable at end of year 777,715 $ 9.13
================================================================================
================================================================================
# of Weighted Average
2004 Shares Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 1,351,375 $ 7.12
Granted 337,497 12.60
Exercised (475,472) 5.39
Terminated or expired (28,636) 10.21
--------------------------------------------------------------------------------
Outstanding at end of year 1,184,764 $ 9.31
--------------------------------------------------------------------------------
Exercisable at end of year 682,209 $ 7.51
================================================================================
================================================================================
# of Weighted Average
2003 Shares Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 1,315,508 $ 6.50
Granted 281,160 9.68
Exercised (160,782) 5.03
Terminated or expired (84,511) 9.89
--------------------------------------------------------------------------------
Outstanding at end of year 1,351,375 $ 7.12
--------------------------------------------------------------------------------
Exercisable at end of year 899,620 $ 5.84
================================================================================
The fair value of each stock option granted during the year is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
===============================================================================
2005 2004 2003
-------------------------------------------------------------------------------
Expected life (years) 4 5 5
Expected volatility 28% 27% 33%
Expected dividend yield .36% .40% .40%
Risk-free interest rate 3.8% 3.7% 3.0%
Weighted average fair value of options
granted during the year $5.19 $4.05 $3.59
===============================================================================
If the fair-value method to measure compensation cost for all of the above
mentioned plans and awards had been used, the compensation cost, which is
required to be charged against income would have been $612 in 2005, $722 in 2004
and $731 in 2003. See Note 1 for the pro forma presentation.
Information related to stock options outstanding under all plans at December 31,
2005 is as follows:
40
================================================================================================
Options Outstanding Options Exercisable
---------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Shares Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
------------------------------------------------------------------------------------------------
$ 2.52 - $ 10.15 560,172 5.3 years $ 7.53 483,132 $ 7.11
10.24 - 15.42 457,378 8.1 years 12.14 220,168 11.07
16.47 - 21.38 417,915 9.6 years 19.80 74,415 16.47
------------------------------------------------------------------------------------------------
1,435,465 7.4 years $ 12.57 777,715 $ 9.13
================================================================================================
NOTE 9 - NET EARNINGS PER COMMON SHARE
--------------------------------------
The following presents a reconciliation of the numerator and denominator used in
calculating basic and diluted net earnings per common share:
==========================================================================================================
Earnings Number of Shares Per Share
2005 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 10,954 11,560,756 $.95
Effect of dilutive securities - stock options 495,825
----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options $ 10,954 12,056,581 $.91
==========================================================================================================
==========================================================================================================
Earnings Number of Shares Per Share
2004 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average
common shares outstanding $ 8,026 11,264,432 $.71
Effect of dilutive securities - stock options 380,916
----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options $ 8,026 11,645,348 $.69
==========================================================================================================
==========================================================================================================
Earnings Number of Shares Per Share
2003 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $ 5,638 10,835,739 $.52
Effect of dilutive securities - stock options 409,355
----------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options $ 5,638 11,245,094 $.50
==========================================================================================================
The Company had 321,000, 1,800 and 249,225 stock options outstanding at December
31, 2005, 2004 and 2003, 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 10 - EMPLOYEE BENEFIT PLANS
--------------------------------
The Company sponsors a 401(k) savings plan for eligible employees. The plan
allows participants to make pretax contributions and the Company matches certain
percentages of those pretax contributions with shares
41
of the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees. The Company
provided for profit sharing contributions and matching 401(k) savings plan
contributions of $326 and $276 in 2005, $301 and $257 in 2004 and $307 and $273
in 2003, respectively.
The Company also currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of the Verona facility. The Company uses a
December 31 measurement date for its postretirement medical plan.
The actuarial recorded liabilities for such unfunded postretirement benefit is
as follows:
Change in benefit obligation:
===============================================================================
2005 2004
-------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 867 $ 1,082
Service Cost with Interest to End of Year 32 31
Interest Cost 50 49
Participant contributions 11 20
Plan amendments 0 (221)
Benefits Paid (25) (55)
Actuarial (gain) or loss 7 (39)
--------------------------------------------------------------------------------
Benefit obligation at end of year $ 942 $ 867
===============================================================================
Change in plan assets:
===============================================================================
2005 2004
-------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ -- $ --
Employer contributions 15 35
Participant contributions 11 20
Benefits Paid (26) (55)
-------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ --
===============================================================================
Amounts recognized in consolidated balance sheet:
================================================================================
2005 2004
-------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation $ (942) $ (867)
Fair Value of Plan Assets -- --
Funded Status (942) (867)
Unrecognized Prior Service Cost (191) (210)
Unrecognized Net (Gain)/Loss 146 143
-------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost
(included in other long-term obligations) $ 987 $ 934
===============================================================================
Components of net periodic benefit cost:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Service Cost with Interest to End of Year $ 32 $ 31 32
Interest Cost 50 49 62
Amortization of prior service cost (18) (10) --
Amortization of (gain) or loss 3 -- 1
--------------------------------------------------------------------------------
Total net periodic benefit cost $ 67 $ 70 95
================================================================================
42
Estimated future employer contributions and benefit payments are as follows:
=====================================
Year
-------------------------------------
2006 $ 53
2007 54
2008 53
2009 62
2010 55
Years 2011-2015 253
=====================================
Assumed health care cost trend rates have been used in the valuation of
postretirement health insurance benefits. The trend rate is 11 percent in 2005
declining to 5 percent in 2012 and thereafter. A one percentage point increase
in health care cost trend rates in each year would increase the accumulated
postretirement benefit obligation as of December 31, 2005 by $108 and the net
periodic postretirement benefit cost for 2005 by $12. A one percentage point
decrease in health care cost trend rates in each year would decrease the
accumulated postretirement benefit obligation as of December 31, 2005 by $93 and
the net periodic postretirement benefit cost for 2005 by $10. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 5.75% in 2005 and 6.00% in 2004.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was signed into law. The Act introduced a plan sponsor
subsidy based on a percentage of a beneficiary's annual prescription drug
benefits, within defined limits, and the opportunity for a retiree to obtain
prescription drug benefits under Medicare. There was no impact of the subsidy on
the postretirement benefit obligation and net periodic cost in 2004 as Medicare
eligible retirees are not covered under the Company's plan.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
In connection with the aforementioned acquisition of certain assets of Loders
Croklaan USA, LLC, as described in Note 4 to the consolidated financial
statements, the Company entered into a lease agreement with seller, whereby the
Company will lease a portion of seller's Channahon, Illinois facility where
seller 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 as defined in the lease agreement. In addition, the Company entered
into certain short-term services and tolling agreements with the Seller. In
February 2002, the Company entered into a ten (10) year lease which is
cancelable in 2009 for approximately 20,000 square feet of office space. The
office space is now serving as the Company's general offices and as a laboratory
facility. The Company leases most of its vehicles and office equipment under
non-cancelable operating leases, which expire at various times through 2011.
Rent expense charged to operations under such lease agreements for 2005, 2004
and 2003 aggregated approximately $576, $566 and $564, respectively. Aggregate
future minimum rental payments required under non-cancelable operating leases at
December 31, 2005 are as follows:
==========================================
Year
------------------------------------------
2006 $ 562
2007 521
2008 478
2009 569
2010 150
Thereafter 21
------------------------------------------
Total minimum lease payments $ 2,301
==========================================
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
43
("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. The cost
for this clean-up and the related reports was approximately $164. Clean-up was
completed in 1996, but NYDEC required the Company to monitor the site through
1999. 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 recently been less than $5 per year.
The Company's Verona, Missouri facility, while held by a prior owner, was
designated by the EPA as a Superfund site and placed on the National Priorities
List in 1983, because of dioxin contamination on portions of the site.
Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources ("MDNR") included removal of dioxin
contaminated soil and equipment, capping of areas of residual contamination in
four relatively small areas of the site separate from the manufacturing
facilities, and the installation of wells to monitor groundwater and surface
water contamination by organic chemicals. No ground water or surface water
treatment was required. The Company believes that remediation of the site is
complete. In 1998, the EPA certified the work on the contaminated soils to be
complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party
risk assessment report to the EPA and MDNR recommending no further action. The
prior owner is awaiting the response of the EPA and MDNR to the draft risk
assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona,
Missouri facility for potential liabilities associated with the Superfund site
and one of the sellers, in turn, has the benefit of certain contractual
indemnification by the prior owner that is implementing the above-described
Superfund remedy.
From time to time, the Company is a party to various litigation, claims and
assessments. Management believes that the alternate outcome of such matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
NOTE 12 - LICENSE AGREEMENT
---------------------------
On November 7, 2005, the Company entered into a license agreement (the "License
Agreement") with Project Management and Development Co., Ltd. ("PMD"), a
corporation organized under the laws of Great Britain. The License Agreement
gives PMD the right to utilize the Company's proprietary continuous
manufacturing technology for the production of aqueous choline chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride production facility at PMD's Al-JuBail, Saudi Arabia
petrochemical facility, currently scheduled for completion in 2008.
The License Agreement provides PMD with the exclusive right to use Company
Technology in certain countries, as well as the non-exclusive right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License Agreement further provides that the Company will be PMD's exclusive
North American distributor for said products during the term of the agreement.
The License Agreement terminates either 10 years from the start-up of the PMD's
production facility or December 31, 2020, whichever is earlier.
Pursuant to the License Agreement, PMD will pay the Company a license fee of
$1,400 and fees of $840 for the delivery by the Company of certain preliminary
drawings, specifications, process design documents containing Company
Technology, and additional training. These fees are to be paid in installments
upon achievement of certain performance milestones set forth in the License
Agreement.
The Company will provide certain performance guarantees associated with Company
Technology. In the event that the PMD manufacturing facility, if properly
designed and constructed, fails to attain said
44
performance guarantees, liquidated damages may be assessed, but not exceeding
70% of the license fee.
The Company is using the percentage of completion method to recognize revenue
and expenses related to the License Agreement and the efforts-expended method
for measuring the progress to completion. As of December 31, 2005, the Company
has recognized $158 of income and $138 in expenses. These amounts are included
in the net sales and cost of sales totals in the BCP Ingredients segment.
NOTE 13 - SUBSEQUENT EVENTS
---------------------------
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation ("BMC"), completed an acquisition of all of the outstanding
capital stock of Chelated Minerals Corporation ("CMC"), a privately held Utah
corporation, for a purchase price of $17,350 subject to adjustment based upon
CMC's actual working capital and other adjustments. On February 6, 2006, the
Company and its principal bank entered into a new Loan Agreement (the "New Loan
Agreement") providing for an unsecured term loan of $10,000 (the "Term Loan"),
the proceeds of which were used to fund the acquisition, in part. The remaining
balance of the purchase price of the Acquisition was funded through Balchem's
cash on hand. The Term Loan is payable in equal monthly installments of
principal, together with accrued interest, and has a maturity date of March 1,
2009. The Term Loan is subject to an interest rate equal to LIBOR plus 1.00%.
The Loan Agreement also provides for an unsecured short-term revolving credit
facility of $3,000 (the "New Revolving Facility"). Borrowings under the New
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the New Revolving Facility as of the date hereof. The New Revolving Facility
expires in February, 2007. Management believes that such facility will be
renewed in the normal course of business.
NOTE 14 - SEGMENT INFORMATION
-----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. The Company presently has three segments:
specialty products, encapsulated / nutritional products and the unencapsulated
feed supplements segment (also referred to as BCP Ingredients). Products
relating to choline animal feed for non-ruminant animals are primarily reported
in the unencapsulated feed supplements segment. Human choline nutrient products,
pharmaceutical products and encapsulated products are reported in the
encapsulated / nutritional products segment. They are managed separately because
each business requires different technology and marketing strategies. The
specialty products segment consists of three specialty chemicals: ethylene
oxide, propylene oxide and methyl chloride. The encapsulated / nutritional
products segment provides microencapsulation, granulation and agglomeration
solutions to a variety of applications in food, pharmaceutical and nutritional
ingredients to enhance performance of nutritional fortification, processing,
mixing, packaging applications and shelf-life. The unencapsulated feed
supplements segment is in the business of manufacturing and supplying choline
chloride, an essential nutrient for animal health, to the poultry and swine
industries. In addition, certain derivatives of choline chloride are also
manufactured and sold into industrial applications and are included in the
unencapsulated feed supplements segment. The Company sells products for all
segments through its own sales force, independent distributors, and sales
agents. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
Business Segment Net Sales:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Specialty Products $ 29,433 $ 28,767 $ 26,163
Encapsulated/Nutritional Products 32,499 24,759 24,043
BCP Ingredients 21,163 13,880 11,669
--------------------------------------------------------------------------------
Total $ 83,095 $ 67,406 $ 61,875
================================================================================
45
Business Segment Earnings (Loss) Before Income Taxes:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Specialty Products $ 11,007 $ 10,693 $ 9,409
Encapsulated/Nutritional Products 3,217 992 (962)
BCP Ingredients 2,679 1,112 568
Interest and other income (expense) 288 (82) (252)
--------------------------------------------------------------------------------
Earnings before income taxes $ 17,191 $ 12,715 $ 8,763
================================================================================
Depreciation/Amortization:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Specialty Products $ 1,027 $ 1,668 $ 1,992
Encapsulated/Nutritional Products 1,313 1,155 1,102
BCP Ingredients 469 448 431
--------------------------------------------------------------------------------
Total $ 2,809 $ 3,271 $ 3,525
================================================================================
Business Segment Assets:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Specialty Products $ 19,799 $ 18,456 $ 19,376
Encapsulated/Nutritional Products 25,139 15,594 16,321
BCP Ingredients 14,141 11,424 10,732
Other Unallocated 16,062 14,931 10,477
--------------------------------------------------------------------------------
Total $ 75,141 $ 60,405 $ 56,906
================================================================================
Other unallocated assets consist of certain cash, prepaid expenses, deferred
income taxes and other deferred charges, which the Company does not allocate to
its individual business segments.
Capital Expenditures:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
Specialty Products $ 366 $ 224 $ 1,090
Encapsulated/Nutritional Products 520 470 661
BCP Ingredients 883 521 519
--------------------------------------------------------------------------------
Total $ 1,769 $ 1,215 $ 2,270
================================================================================
Geographic Revenue Information:
================================================================================
2005 2004 2003
--------------------------------------------------------------------------------
United States $ 77,355 $ 61,869 $ 56,727
Foreign Countries 5,740 5,537 5,148
--------------------------------------------------------------------------------
Total $ 83,095 $ 67,406 $ 61,875
================================================================================
The Company has no foreign-based operations. Therefore, all long-lived assets
are in the United States and revenue from foreign countries is based on customer
ship-to address.
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------
Cash paid during the year for:
==========================================================
2005 2004 2003
----------------------------------------------------------
Income taxes $ 5,133 $ 3,421 $ 2,110
Interest $ 8 $ 219 $ 272
==========================================================
Non-cash financing activities:
==========================================================
2005 2004 2003
----------------------------------------------------------
Dividends payable $ 1,045 $ 685 $ 389
==========================================================
46
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
------------------------------------------------------
(In thousands, except per share data)
==============================================================================================================
2005 2004
--------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------
Net sales $19,340 $19,484 $21,145 $23,126 $15,644 $16,449 $17,356 $17,957
Gross profit 7,182 7,112 7,649 6,737 5,613 6,023 6,219 5,951
Earnings before
income taxes 4,069 4,346 4,857 3,919 2,901 3,167 3,391 3,256
Net earnings 2,568 2,730 3,024 2,632 1,816 2,001 2,160 2,049
Basic net earnings
per common share $ .23 $ .23 $ .26 $ .23 $ .16 $ .18 $ .19 $ .18
Diluted net earnings
per common share $ .21 $ .23 $ .25 $ .22 $ .16 $ .17 $ .19 $ .17
==============================================================================================================
47
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Balchem Corporation
New Hampton, NY
Our audits of the consolidated financial statements and internal control over
financial reporting referred to in our report dated March 16, 2006 (included
elsewhere in this Annual Report on Form 10-K) also included the financial
statement schedule of Balchem Corporation and Subsidiaries, listed in Item 15(a)
of this Form 10-K for the years ended December 31, 2005 and 2004. This schedule
is the responsibility of Balchem Corporation's management. Our responsibility is
to express an opinion based on our audits of the consolidated financial
statements.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/McGladrey & Pullen, LLP
New York, NY
March 16, 2006
48
Schedule II
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2005, 2004 and 2003
(In thousands)
Additions
-------------------------
Balance at Charges to Charges to
Beginning of Costs and Other Balance at
Description Year Expenses Accounts Deductions End of Year
------------ ------------ ---------- ---------- ------------ -----------
Year ended December 31, 2005
Allowance for doubtful accounts $ 82 $ -- $ -- $ (32)(a) $ 50
Inventory obsolescence reserve 31 25 -- -- 56
Year ended December 31, 2004
Allowance for doubtful accounts $ 86 $ -- $ -- $ (4)(a) $ 82
Inventory obsolescence reserve 76 -- -- (45)(a) 31
Year ended December 31, 2003
Allowance for doubtful accounts $ 90 $ 36 $ -- $ (40)(a) $ 86
Inventory obsolescence reserve 192 -- -- (116)(a) 76
(a) represents write-offs.
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
KPMG LLP ("KPMG") resigned as the Company's principal accountants,
effective August 18, 2004. KPMG's audit reports on the Company's consolidated
financial statements as of and for the fiscal years ended December 31, 2002 and
2003 did not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty or audit scope. KPMG's report covering
these consolidated financial statements referred to a change in accounting for
goodwill and intangible assets effective January 1, 2002.
During the Company's fiscal years ended December 31, 2002 and 2003, and
the subsequent interim period from January 1, 2004 through August 18, 2004, the
date of KPMG's resignation, (i) there were no disagreements with KPMG on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to KPMG's
satisfaction, would have caused KPMG to make reference to the subject matter of
the disagreements in connection with its report, and (ii) there were no
"reportable events" as such term is defined in Item 304(a)(1)(v) of Regulation
S-K.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Annual Report on Form 10-K.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Management of Balchem Corporation, together with its consolidated
subsidiaries (the "Company"), is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
the Company's principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2005, management conducted an assessment of the
effectiveness of the Company's internal control over financial reporting based
on the framework established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2005 was effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on our financial statements.
Attestation Report of Registered Public Accounting Firm
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
McGladrey & Pullen, LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
50
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting
in our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B . Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Company.
The required information is to be set forth in the Company's Proxy
Statement for the 2006 Annual Meeting of Stockholders (the "2006 Proxy
Statement") under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
(b) Executive Officers of the Company.
The required information is to be set forth in the 2006 Proxy Statement
under the caption "Directors and Executive Officers," which information is
hereby incorporated herein by reference.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
The required information is to be set forth in the 2006 Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is hereby incorporated herein by reference.
(d) Code of Ethics.
The Company has adopted a Code of Ethics for Senior Financial Officers
that applies to its Chief Executive Officer (principal executive officer), Chief
Financial Officer (principal financial officer and principal accounting officer)
and its Treasurer. The Company's Code of Ethics for Senior Financial Officers is
filed as Exhibit 14 to this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The information required by this Item is to be set forth in the 2006 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is to be set forth in the 2006 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
of Management" and the caption "Equity Compensation Plan Information," all of
which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is set forth in the 2006 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in the 2006 Proxy
Statement under the caption "Independent Auditor Fees," which information is
hereby incorporated herein by reference.
51
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Form 10-K:
Form 10-K
1. Financial Statements Page Number
Reports of Independent Registered Public Accounting Firms 23
Consolidated Balance Sheets as of
December 31, 2005 and 2004 26
Consolidated Statements of Earnings for the
years ended December 31, 2005, 2004 and 2003 27
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2005, 2004 and 2003 28
Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2004 and 2003 29
Notes to Consolidated Financial Statements 30
Report of Independent Registered Public Accounting Firm 48
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2005, 2004 and 2003 49
3. Exhibits
2.1 Asset Purchase Agreement, dated as of May 21, 2001, among BCP
Ingredients, Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc.
and certain related agreements (forms of which constitute
Exhibits to the Asset Purchase Agreement) as executed. (The
Disclosure Schedule identified throughout Asset Purchase
Agreement, Schedule A to the Obligations Undertaking (list of
contracts assumed by BCP Ingredients, Inc.) and the Power of
Attorney and Security Agreement (referred to in Section 2.6 of
the Asset Purchase Agreement) and Post-Closing Escrow
Agreement (referred to in Sections 3.2.2 and 3.3.3 of the
Asset Purchase Agreement), have been omitted. The Company
agrees to furnish a copy of these documents on a supplemental
basis to the Securities and Exchange Commission upon request.)
(incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated June, 2001(the "2001 8-K".))
3.1 Composite Articles of Incorporation of the Company.
3.2 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
February 23, 2005).
4.1 Loan Agreement dated February 6, 2006 by and between Bank of
America, N.A. and Balchem Corporation, Promissory Note dated
February 6, 2006 from Balchem Corporation to Bank of America,
N.A., and Amended and Restated Promissory Note (Revolving Line
of Credit) dated February 6, 2006 from Balchem Corporation to
Bank of America, N.A. (incorporated by reference to Exhibits
10.2, 10.3 and 10.4 to the Company's Current Report on Form
8-K dated February 9, 2006).
4.2 Amended and Restated Guaranty dated February 6, 2006 from BCP
Ingredients, Inc. to Bank of America, N.A. (incorporated by
reference to Exhibit 10.5 to the Company's
52
Current Report on Form 8-K dated February 9, 2006).
4.3 Guaranty dated February 6, 2006 from Balchem Minerals
Corporation to Bank of America, N.A. (incorporated by
reference to Exhibit 10.6 to the Company's Current Report on
Form 8-K dated February 9, 2006).
10.1 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 33-35910, dated October 25,
1996, and to Proxy Statement, dated April 22, 1998, for the
Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement")).*
10.2 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 33-35912, dated October 25,
1996, and to the 1998 Proxy Statement).
10.3 Balchem Corporation Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).*
10.4 Balchem Corporation 401(k)/Profit Sharing Plan, dated January
1, 1998 (incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form S-8, File No.
333-118291, dated August 17, 2004).*
10.5 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 (the "2001 10-K")). *
10.6 Lease dated as of February 8, 2002 between Sunrise Park
Realty, Inc. and Balchem Corporation (incorporated by
reference to Exhibit 10.7 to the 2001 10-K).
10.7 Asset Purchase Agreement dated June 30, 2005, between Balchem
Corporation and Loders Croklaan USA, LLC (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K dated July 1, 2005).
10.8 Stock Purchase Agreement dated November 2, 2005, between
Balchem Minerals Corporation and Chelated Minerals Corporation
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated November 7, 2005).
10.9 Process and Product License Agreement dated November 7, 2005,
between Balchem Corporation and Project Management and
Development Co., Ltd. (incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K dated
November 14, 2005).
10.10 Form of Restricted Stock Purchase Agreement for Directors
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated December 30, 2005).
10.11 First Amendment to Stock Purchase Agreement dated January 5,
2006, between Balchem Minerals Corporation and Chelated
Minerals Corporation (incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K dated January
10, 2006).
14. Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the 2003 10-K).
21. Subsidiaries of Registrant.
23.1 Consent of McGladrey & Pullen, LLP, Independent Registered
Public Accounting Firm
23.2 Consent of KPMG LLP, Independent Registered Public Accounting
Firm
53
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 15, 2006 BALCHEM CORPORATION
By:/s/ Dino A. Rossi
-----------------------------------------
Dino A. Rossi, President,
Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Dino A. Rossi
-----------------------------------------
Dino A. Rossi, President,
Chief Executive Officer, and Director
(Principal Executive Officer)
Date: March 15, 2006
/s/ Francis J. Fitzpatrick
-----------------------------------------
Francis J. Fitzpatrick, Chief Financial
Officer
(Principal Financial and Principal
Accounting Officer)
Date: March 15, 2006
/s/ Hoyt Ammidon, Jr.
-----------------------------------------
Hoyt Ammidon, Jr., Director
Date: March 15, 2006
/s/ Edward McMillan
-----------------------------------------
Edward McMillan, Director
Date: March 15, 2006
/s/ Kenneth P. Mitchell
-----------------------------------------
Kenneth P. Mitchell, Director
Date: March 15, 2006
/s/ Dr. John Televantos
-----------------------------------------
Dr. John Televantos, Director
Date: March 15, 2006
/s/ Dr. Elaine Wedral
-----------------------------------------
Dr. Elaine Wedral, Director
Date: March 15, 2006
54
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement, dated as of May 21, 2001, among BCP
Ingredients, Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and
certain related agreements (forms of which constitute Exhibits to
the Asset Purchase Agreement) as executed. (The Disclosure Schedule
identified throughout Asset Purchase Agreement, Schedule A to the
Obligations Undertaking (list of contracts assumed by BCP
Ingredients, Inc.) and the Power of Attorney and Security Agreement
(referred to in Section 2.6 of the Asset Purchase Agreement) and
Post-Closing Escrow Agreement (referred to in Sections 3.2.2 and
3.3.3 of the Asset Purchase Agreement), have been omitted. The
Company agrees to furnish a copy of these documents on a
supplemental basis to the Securities and Exchange Commission upon
request.) (incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated June, 2001(the "2001 8-K".))
3.1 Composite Articles of Incorporation of the Company.
3.2 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
February 23, 2005).
4.1 Loan Agreement dated February 6, 2006 by and between Bank of
America, N.A. and Balchem Corporation, Promissory Note dated
February 6, 2006 from Balchem Corporation to Bank of America, N.A.,
and Amended and Restated Promissory Note (Revolving Line of Credit)
dated February 6, 2006 from Balchem Corporation to Bank of America,
N.A. (incorporated by reference to Exhibits 10.2, 10.3 and 10.4 to
the Company's Current Report on Form 8-K dated February 9, 2006).
4.2 Amended and Restated Guaranty dated February 6, 2006 from BCP
Ingredients, Inc. to Bank of America, N.A. (incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form
8-K dated February 9, 2006).
4.3 Guaranty dated February 6, 2006 from Balchem Minerals Corporation to
Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K dated February 9, 2006).
10.1 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 33-35910, dated October 25, 1996, and to Proxy
Statement, dated April 22, 1998, for the Company's 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement")).*
10.2 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 33-35912, dated October 25, 1996, and to the
1998 Proxy Statement).
10.3 Balchem Corporation Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).*
10.4 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-118291, dated
August 17, 2004).*
10.5 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi (incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (the "2001 10-K")). *
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10.6 Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc.
and Balchem Corporation (incorporated by reference to Exhibit 10.7
to the 2001 10-K).
10.7 Asset Purchase Agreement dated June 30, 2005, between Balchem
Corporation and Loders Croklaan USA, LLC (incorporated by reference
to Exhibit 2.1 of the Company's Current Report on Form 8-K dated
July 1, 2005).
10.8 Stock Purchase Agreement dated November 2, 2005, between Balchem
Minerals Corporation and Chelated Minerals Corporation (incorporated
by reference to Exhibit 10.1 of the Company's Current Report on Form
8-K dated November 7, 2005).
10.9 Process and Product License Agreement dated November 7, 2005,
between Balchem Corporation and Project Management and Development
Co., Ltd. (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated November 14, 2005).
10.10 Form of Restricted Stock Purchase Agreement for Directors
(incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K dated December 30, 2005).
10.11 First Amendment to Stock Purchase Agreement dated January 5, 2006,
between Balchem Minerals Corporation and Chelated Minerals
Corporation (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated January 10, 2006).
14. Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the 2003 10-K).
21. Subsidiaries of Registrant.
23.1 Consent of McGladrey & Pullen, LLP, Independent Registered Public
Accounting Firm
23.2 Consent of KPMG LLP, Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
*Each of the Exhibits noted by an asterisk is a management compensatory plan or
arrangement.
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