FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of
|X| the Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 2009
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600 New Hampton, New York 10958
------------------------------------ ---------------------------------------
(Address of principal executive offices) (Zip Code)
845-326-5600
-------------------------------
Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company|_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of May 1, 2009 the registrant had 18,334,897 shares of its Common Stock, $.06
2/3 par value, outstanding.
Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, December 31,
2009 2008
Assets (unaudited)
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 18,553 $ 3,422
Accounts receivable, net 25,000 30,250
Inventories 15,305 16,618
Prepaid expenses 1,809 2,581
Deferred income taxes 928 649
Other current assets 701 1,731
------------ ------------
Total current assets 62,296 55,251
Property, plant and equipment, net 41,394 42,513
Goodwill 26,658 26,658
Intangible assets with finite lives, net 29,038 29,993
Other assets 55 59
------------ ------------
Total assets $ 159,441 $ 154,474
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 7,443 $ 10,336
Accrued expenses 5,548 3,948
Accrued compensation and other benefits 2,468 2,501
Dividends payable -- 2,008
Income tax payable 5,188 1,988
Current portion of long-term debt 1,415 2,860
Revolver borrowings 1,915 2,044
------------ ------------
Total current liabilities 23,977 25,685
Long-term debt 5,896 6,671
Deferred income taxes 5,520 6,003
Other long-term obligations 1,641 1,609
------------ ------------
Total liabilities 37,034 39,968
------------ ------------
Commitments and contingencies (note 12)
Stockholders' equity:
Common stock, $.0667 par value. Authorized 25,000,000 shares; 18,333,884
shares issued and outstanding at March 31, 2009 and 18,249,347 shares
issued and outstanding at
December 31, 2008 828 823
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Additional paid-in capital 20,673 18,809
Retained earnings 100,980 94,882
Accumulated other comprehensive income (74) (8)
------------ ------------
Total stockholders' equity 122,407 114,506
------------ ------------
Total liabilities and stockholders' equity $ 159,441 $ 154,474
============ ============
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
2009 2008
---------- ----------
Net sales $ 52,986 $ 56,861
Cost of sales 36,688 43,378
---------- ----------
Gross margin 16,298 13,483
Operating expenses:
Selling expenses 3,649 3,319
Research and development expenses 808 782
General and administrative expenses 2,531 1,978
---------- ----------
6,988 6,079
---------- ----------
Earnings from operations 9,310 7,404
Other expenses (income):
Interest income (10) (25)
Interest expense 74 323
Other, net 80 (85)
---------- ----------
Earnings before income tax expense 9,166 7,191
Income tax expense 3,068 2,550
---------- ----------
Net earnings $ 6,098 $ 4,641
========== ==========
Net earnings per common share - basic $ 0.34 $ 0.26
========== ==========
Net earnings per common share - diluted $ 0.32 $ 0.25
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Three Months Ended
March 31,
2009 2008
-------- --------
Cash flows from operating activities:
Net earnings $ 6,098 $ 4,641
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,001 1,901
Reserve for doubtful accounts 373 --
Shares issued under employee benefit plans 133 140
Deferred income taxes (750) (244)
Foreign currency transaction (gain) loss 44 (88)
Stock compensation expense 758 622
Changes in assets and liabilities:
Accounts receivable 4,420 421
Inventories 1,203 (2,891)
Prepaid expenses and other current assets 1,732 1,058
Income taxes 3,230 2,364
Customer deposits and other deferred revenue (5) (42)
Accounts payable and accrued expenses (775) (673)
Other 40 23
-------- --------
Net cash provided by operating activities 18,502 7,232
-------- --------
Cash flows from investing activities:
Capital expenditures (594) (1,236)
Proceeds from sale of property, plant and equipment 3 --
Acquisition of assets (12) (31)
-------- --------
Net cash used in investing activities (603) (1,267)
-------- --------
Cash flows from financing activities:
Revolver borrowings -- 735
Revolver repayments -- (1,000)
Principal payments on long-term debt (1,700) (2,851)
Proceeds from stock options exercised 701 413
Excess tax benefits from stock compensation 278 217
Dividends paid (2,007) (1,975)
-------- --------
Net cash used in financing activities (2,728) (4,461)
-------- --------
Effect of exchange rate changes on cash (40) 111
-------- --------
Increase in cash and cash equivalents 15,131 1,615
Cash and cash equivalents beginning of period 3,422 2,307
-------- --------
Cash and cash equivalents end of period $ 18,553 $ 3,922
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(unaudited)
Three Months Ended
March 31,
2009 2008
-------- --------
Net earnings $ 6,098 $ 4,641
Other comprehensive income, net of tax:
Unfunded postretirement benefit plan (3) (5)
Other (63) 9
-------- --------
Comprehensive income $ 6,032 $ 4,645
======== ========
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2008 consolidated financial statements, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in the Annual Report on Form 10-K for the year ended December 31, 2008.
References in this report to the "Company" mean either Balchem Corporation or
Balchem Corporation and its subsidiaries, including BCP Ingredients, Inc.,
Balchem Minerals Corporation, and Balchem B.V., on a consolidated basis, as the
context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and
therefore do not include some information and notes necessary to conform to
annual reporting requirements. Certain prior year amounts have been reclassified
to conform to current year presentation. The results of operations for the three
months ended March 31, 2009 are not necessarily indicative of the operating
results expected for the full year or any interim period.
NOTE 2 - STOCKHOLDERS' EQUITY
-----------------------------
STOCK-BASED COMPENSATION
The Company records stock-based compensation in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share Based Payment" ("SFAS 123R"). The Company's results for the three months
ended March 31, 2009 and 2008 reflected the following stock-based compensation
cost, and such compensation cost had the following effects on net earnings and
basic and diluted earnings per share:
-------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, 2009 March 31, 2008
-------------------------------------------------------------------------------
Cost of sales $ 90 $ 66
Operating expenses 668 556
Net earnings (478) (412)
Basic earnings per common share (0.03) (0.02)
Diluted earnings per common share $ (0.03) $ (0.02)
-------------------------------------------------------------------------------
6
As required by SFAS 123R, the Company has made an estimate of expected
forfeitures based on its historical experience and is recognizing compensation
cost only for those stock-based compensation awards expected to vest.
The Company's stock incentive plans allow for the granting of restricted stock
awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be
exercisable for longer than ten years after the date of grant. The Company has
approved and reserved a number of shares to be issued upon exercise of the
outstanding options that is adequate to cover all exercises. As of March 31,
2009, the plans had 3,664,350 shares available for future awards. Compensation
expense for stock options and restricted stock awards is recognized on a
straight-line basis over the vesting period, generally three years for stock
options, four years for employee restricted stock awards, and four to seven
years for non-employee director restricted stock awards. Certain awards provide
for accelerated vesting if there is a change in control (as defined in the
plans) or other qualifying events.
Option activity for the three months ended March 31, 2009 and 2008 is summarized
below:
--------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the three months Exercise Value Contractual
ended March 31, 2009 Shares (000s) Price ($000s) Term
--------------------------------------------------------------------------------
Outstanding as of
December 31, 2008 2,396 $ 13.82 $ 26,873
Granted -- --
Exercised (79) 8.90
Expired -- --
Forfeited (3) 19.54
--------------------------------------------------------------------------------
Outstanding as of
March 31, 2009 2,314 $ 13.97 $ 26,037 6.5
--------------------------------------------------------------------------------
Exercisable as of
March 31, 2009 1,675 $ 10.79 $ 24,020 5.5
--------------------------------------------------------------------------------
7
--------------------------------------------------------------------------------
Weighted
Weighted Aggregate Average
Average Intrinsic Remaining
For the three months Exercise Value Contractual
ended March 31, 2008 Shares (000s) Price ($000s) Term
--------------------------------------------------------------------------------
Outstanding as of
December 31, 2007 1,944 $ 10.66 $ 22,786
Granted 307 20.41
Exercised (47) 8.78
Expired -- --
Forfeited -- --
--------------------------------------------------------------------------------
Outstanding as of
March 31, 2008 2,204 $ 12.05 $ 23,947 6.9
--------------------------------------------------------------------------------
Exercisable as of
March 31, 2008 1,456 $ 9.12 $ 20,088 6.0
--------------------------------------------------------------------------------
SFAS 123R requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. The fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the three months ended March 31, 2008: dividend
yield of 0.6%, expected volatility of 40%, risk-free interest rate of 2.8%, and
expected life of 3.5. There were no options granted during the three months
ended March 31, 2009.
The Company used a projected expected life for each award granted based on
historical experience of employees' exercise behavior. Expected volatility is
based on the Company's historical volatility levels. Dividend yields are based
on the Company's historical dividend yields. Risk-free interest rates are based
on the implied yields currently available on U.S. Treasury zero coupon issues
with a remaining term equal to the expected life.
Other information pertaining to option activity during the three months ended
March 31, 2009 and 2008 was as follows:
--------------------------------------------------------------------------------
Three Months Ended
March 31,
2009 2008
--------------------------------------------------------------------------------
Weighted-average fair value of options granted $ N/A $ 6.38
Total intrinsic value of stock options exercised ($000s) $ 1,027 $ 610
--------------------------------------------------------------------------------
8
Non-vested restricted stock activity for the three months ended March 31, 2009
and 2008 is summarized below:
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Three months ended March 31, 2009 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2008 232 $ 20.08
Granted -- --
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of March 31, 2009 232 $ 20.08
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Weighted
Average Grant
Date Fair
Three months ended March 31, 2008 Shares (000s) Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2007 118 $ 16.49
Granted 73 20.77
Vested -- --
Forfeited -- --
--------------------------------------------------------------------------------
Non-vested balance as of March 31, 2008 191 $ 18.10
--------------------------------------------------------------------------------
As of March 31, 2009 and 2008, there was $6,725 and $5,347, respectively, of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. As of March 31, 2009, the
unrecognized compensation cost is expected to be recognized over a
weighted-average period of 2 years. The Company estimates that share-based
compensation expense for the year ended December 31, 2009 will be approximately
$3,000.
REPURCHASE OF COMMON STOCK
The Company has a stock repurchase program that was approved by the board of
directors. The total authorization under this program is 2,508,692 shares. Since
the inception of the program, a total of 1,307,867 shares have been purchased,
none of which remained in treasury at March 31, 2009 or 2008. During the three
months ended March 31, 2009, no additional shares have been purchased. The
Company intends to acquire shares from time to time at prevailing market prices
if and to the extent it deems it advisable to do so based on its assessment of
corporate cash flow, market conditions and other factors.
NOTE 3 - INVENTORIES
--------------------
Inventories at March 31, 2009 and December 31, 2008 consisted of the following:
-------------------------------------------------------------------------------
March 31, December 31,
2009 2008
-------------------------------------------------------------------------------
Raw materials $ 5,544 $ 5,931
Work in progress 1,013 540
Finished goods 8,748 10,147
-------------------------------------------------------------------------------
Total inventories $ 15,305 $ 16,618
-------------------------------------------------------------------------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at March 31, 2009 and December 31, 2008 are
summarized as follows:
9
--------------------------------------------------------------------------------
March 31, December 31,
2009 2008
--------------------------------------------------------------------------------
Land $ 1,997 $ 2,088
Building 15,247 15,426
Equipment 51,568 50,719
Construction in progress 1,995 2,654
--------------------------------------------------------------------------------
70,807 70,887
Less: accumulated depreciation 29,413 28,374
--------------------------------------------------------------------------------
Net property, plant and equipment $ 41,394 $ 42,513
--------------------------------------------------------------------------------
NOTE 5 - INTANGIBLE ASSETS
--------------------------
The Company had goodwill in the amount of $26,658 at March 31, 2009 and December
31, 2008, subject to the provisions of SFAS Nos. 141 and 142.
As of March 31, 2009 and December 31, 2008, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$37,388 and $37,431, respectively, less accumulated amortization of $8,350 and
$7,438, respectively.
Identifiable intangible assets with finite lives at March 31, 2009 and December
31, 2008 are summarized as follows:
--------------------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization
(in years) 3/31/09 at 3/31/09 12/31/08 at 12/31/08
--------------------------------------------------------------------------------------------------
Customer lists 10 $34,150 $ 7,449 $34,150 $ 6,595
Regulatory re-registration
costs 10 85 5 85 3
Patents & trade secrets 15-17 1,682 431 1,673 406
Trademarks & trade names 17 908 211 904 198
Other 5-10 563 254 619 236
--------------------------------------------------------------------------------------------------
$37,388 $ 8,350 $37,431 $7,438
--------------------------------------------------------------------------------------------------
Amortization of identifiable intangible assets was $912 for the first three
months of 2009. Assuming no change in the gross carrying value of identifiable
intangible assets, the estimated amortization expense for the remainder of 2009
is $2,735 and approximately $3,600 per annum for 2010 through 2014. At March 31,
2009, there were no identifiable intangible assets with indefinite useful lives
as defined by SFAS No. 142. Identifiable intangible assets are reflected in
"Intangible assets with finite lives, net" in the Company's condensed
consolidated balance sheets. There were no changes to the useful lives of
intangible assets subject to amortization during the three months ended March
31, 2009.
10
NOTE 6 - NET EARNINGS PER SHARE
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
-------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended March 31, 2009 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 6,098 18,070,351 $.34
Effect of dilutive securities - stock options
and restricted stock 959,012
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 6,098 19,029,363 $.32
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Net Number of
Earnings Shares Per Share
Three months ended March 31, 2008 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 4,641 17,901,739 $.26
Effect of dilutive securities - stock options
and restricted stock 951,741
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock $ 4,641 18,853,480 $.25
-------------------------------------------------------------------------------------------------
The Company had stock options covering 639,150 and 315,200 shares at March 31,
2009 and 2008, respectively, that could potentially dilute basic earnings per
share in future periods that were not included in diluted earnings per share
because their effect on the period presented was anti-dilutive.
NOTE 7 - INCOME TAXES
---------------------
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48
clarifies whether or not to recognize assets or liabilities for tax positions
taken that may be challenged by a tax authority. Upon adoption of FIN 48, the
Company recognized approximately a $291 decrease in its retained earnings
balance. The charge before federal tax benefits was $411. The Company includes
interest expense or income as well as potential penalties on unrecognized tax
positions as a component of income tax expense in the consolidated statements of
earnings. The total amount of accrued interest and penalties related to
uncertain tax positions at March 31, 2009 was approximately $152 and is included
in
11
other long-term obligations. All of the unrecognized tax benefits, if recognized
in future periods, would impact the Company's effective tax rate. The Company
files income tax returns in the U.S. and in various states and foreign
countries. As of March 31, 2009, in the major jurisdictions where the Company
operates, it is generally no longer subject to income tax examinations by tax
authorities for years before 2005. There was not a significant change in the
liabilities for unrecognized tax benefits during the three months ended March
31, 2009.
NOTE 8 - SEGMENT INFORMATION
----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments:
Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition & Health.
Business Segment Net Sales:
--------------------------------------------------------------------------------
Three Months Ended
March 31,
2009 2008
--------------------------------------------------------------------------------
Specialty Products $ 8,794 $ 8,450
Food, Pharma & Nutrition 8,304 9,289
Animal Nutrition & Health 35,888 39,122
--------------------------------------------------------------------------------
Total $ 52,986 $ 56,861
--------------------------------------------------------------------------------
Business Segment Earnings Before Income Taxes:
--------------------------------------------------------------------------------
Three Months Ended
March 31,
2009 2008
--------------------------------------------------------------------------------
Specialty Products $ 3,387 $ 2,598
Food, Pharma & Nutrition 959 1,528
Animal Nutrition & Health 4,964 3,278
Interest and other expense (144) (213)
--------------------------------------------------------------------------------
Total $ 9,166 $ 7,191
--------------------------------------------------------------------------------
The following table summarizes domestic (U.S.) and foreign sales for the three
months ended March 31, 2009 and March 31, 2008:
--------------------------------------------------------------------------------
Three Months Ended
March 31,
2009 2008
--------------------------------------------------------------------------------
Domestic $ 37,040 $ 35,028
Foreign 15,946 21,833
--------------------------------------------------------------------------------
Total $ 52,986 $ 56,861
--------------------------------------------------------------------------------
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------
Cash paid during the three months ended March 31, 2009 and 2008 for income taxes
and interest is as follows:
12
--------------------------------------------------------
Three months ended
March 31,
2009 2008
--------------------------------------------------------
Income taxes $ 376 $ 296
Interest $ 109 $ 323
--------------------------------------------------------
NOTE 10 - LONG-TERM DEBT AND CREDIT AGREEMENTS
----------------------------------------------
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to $9,906 as of March 31, 2009 (the "European Term
Loan"), the proceeds of which were used to fund the 2007 Akzo Nobel Acquisition
(described in Note 5 of the Company's Form 10-K as of December 31, 2008) and
initial working capital requirements. The European Term Loan is payable in equal
monthly installments of principal, each equal to 1/84th of the principal of the
European Term Loan, together with accrued interest, with remaining principal and
interest payable at maturity. The European Term Loan has a maturity date of May
1, 2010 and is subject to a monthly interest rate equal to EURIBOR plus 1%. At
March 31, 2009, this interest rate was 2.54%. At March 31, 2009, the European
Term Loan had an outstanding balance of (euro)5,536, translated to $7,312. The
European Loan Agreement also provides for a short-term revolving credit facility
of (euro)3,000, translated to $3,962 as of March 31, 2009 (the "European
Revolving Facility"). The European Revolving Facility has been renewed for a
period of one year as of May 1, 2009. The current European Revolving Facility is
subject to an amended monthly interest rate equal to EURIBOR plus 1.45%, and
accrued interest is payable monthly. The Company has drawn down (euro)1,450, or
$1,915 as translated at March 31, 2009, of the European Revolving Facility as of
March 31, 2009. Management believes that such facility will be renewed in the
normal course of business.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the 2007 Chinook
Acquisition (described in Note 5 of the Company's Form 10-K as of December 31,
2008). During the quarter ended March 31, 2009, the Company prepaid $867, the
remaining balance of the Term Loan. The Loan Agreement also provides for a
short-term revolving credit facility of $6,000 (the "Revolving Facility"). The
Revolving Facility is subject to a monthly interest rate equal to LIBOR plus 1%,
and accrued interest is payable monthly. No amounts are outstanding on the
Revolving Facility as of the date hereof. The Revolving Facility has a maturity
date of May 31, 2010. Management believes that such facility will be renewed in
the normal course of business.
NOTE 11 - EMPLOYEE BENEFIT PLAN
-------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its Verona, Missouri facility.
Net periodic benefit cost for such retirement medical plan for the three months
ended March 31, 2009 and March 31, 2008 was as follows:
13
---------------------------------------------------------------------
2009 2008
---------------------------------------------------------------------
Service cost $ 8 $ 8
Interest cost 11 11
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (5) (4)
Amortization of gain (1) --
---------------------------------------------------------------------
Net periodic benefit cost $ 13 $ 15
---------------------------------------------------------------------
The amount recorded on the Company's balance sheet as of March 31, 2009 for this
obligation is $833. The plan is unfunded and approved claims are paid from
Company funds. Historical cash payments made under such plan approximated $50
per year.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
As part of the June 30, 2005 acquisition of certain assets relating to the
encapsulation, agglomeration and granulation business of Loders Croklaan USA,
LLC, the Company entered into a lease agreement with Loders under which the
Company leases a portion of Loders' Channahon, Illinois facility where it
principally conducted the manufacturing portion of the acquired business and
utilized certain warehouse space. The initial term of the lease commenced in
February, 2006 and runs through September 30, 2010, subject to earlier
termination.
In February 2002, the Company entered into a ten (10) year lease which is
cancelable in 2009 for approximately 20,000 square feet of office space. The
office space is now serving as the Company's general offices and as a laboratory
facility. The Company leases most of its vehicles, railcars and office equipment
under non-cancelable operating leases, which primarily expire at various times
through 2013. Rent expense charged to operations under such lease agreements for
the three months ended March 31, 2009 and 2008 aggregated approximately $286 and
$223, respectively. Aggregate future minimum rental payments required under all
non-cancelable operating leases at March 31, 2009 are as follows:
--------------------------------------------------
Year
--------------------------------------------------
April 1, 2009 to December 31, 2009 $ 734
2010 810
2011 599
2012 278
2013 103
2014 54
Thereafter 155
--------------------------------------------------
Total minimum lease payments $ 2,733
--------------------------------------------------
In 1982, the Company discovered and thereafter removed a number of buried drums
containing unidentified waste material from the Company's site in Slate Hill,
New York. The Company thereafter entered into a Consent Decree to evaluate the
drum site with the New York Department of Environmental Conservation ("NYDEC")
and performed a Remedial Investigation/Feasibility Study that was approved by
NYDEC in February 1994. Based on NYDEC requirements, the Company cleaned the
area and removed additional soil from the drum burial site, which was completed
in 1996. The Company
14
continues to be involved in discussions with NYDEC to evaluate test results and
determine what, if any, additional actions will be required on the part of the
Company to close out the remediation of this site. Additional actions, if any,
would likely require the Company to continue monitoring the site. The cost of
such monitoring has been less than $5 per year for the period 2003 - 2008.
The Company's Verona, Missouri facility, while held by a prior owner, was
designated by the EPA as a Superfund site and placed on the National Priorities
List in 1983, because of dioxin contamination on portions of the site.
Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources ("MDNR") included removal of dioxin
contaminated soil and equipment, capping of areas of residual contamination in
four relatively small areas of the site separate from the manufacturing
facilities, and the installation of wells to monitor groundwater and surface
water contamination by organic chemicals. No ground water or surface water
treatment was required. The Company believes that remediation of the site is
complete. In 1998, the EPA certified the work on the contaminated soils to be
complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party
risk assessment report to the EPA and MDNR recommending no further action. The
prior owner is awaiting the response of the EPA and MDNR to the draft risk
assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona,
Missouri facility for potential liabilities associated with the Superfund site
and one of the sellers, in turn, has the benefit of certain contractual
indemnification by the prior owner that is implementing the above-described
Superfund remedy.
From time to time, the Company is a party to various litigation, claims and
assessments. Management believes that the ultimate outcome of such matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
("GAAP") for nongovernmental entities. Prior to the issuance of SFAS No. 162,
the GAAP hierarchy was defined in the American Institute of Certified Public
Accountants' (AICPA) Statement on Auditing Standards (SAS) No. 69, "The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles."
SFAS No. 162 was effective November 15, 2008. The adoption of this statement was
not significant to the Company's consolidated financial statements.
In April 2008, FASB issued FSP 142-3, "Determining the Useful Life of Intangible
Assets" ("FSP 142-3"). FSP 142-3 amends the factors to be considered in
determining the
15
useful life of intangible assets. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. The adoption of this statement was not
significant to the Company's consolidated financial statements.
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities -- an amendment
of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures
regarding derivatives and hedging activities, including: (a) the manner in which
an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities"; and (c) the effect of derivative instruments and
related hedged items on an entity's financial position, financial performance,
and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. As SFAS 161 relates
specifically to disclosures, the adoption of this statement was not significant
to the Company's consolidated financial statements.
In December 2007, FASB issued SFAS No.141 (revised 2007), "Business
Combinations", or SFAS 141R. The purpose of issuing the statement is to replace
current guidance in SFAS No.141 to better represent the economic value of a
business combination transaction. The changes to be effected with SFAS 141R from
the current guidance include, but are not limited to: (1) acquisition costs will
be recognized separately from the acquisition; (2) known contractual
contingencies at the time of the acquisition will be considered part of the
liabilities acquired measured at their fair value; all other contingencies will
be part of the liabilities acquired measured at their fair value only if it is
more likely than not that they meet the definition of a liability; (3)
contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business
combinations achieved in stages (step acquisitions) will need to recognize the
identifiable assets and liabilities, as well as noncontrolling interests, in the
acquiree, at the full amounts of their fair values; and (5) a bargain purchase
(defined as a business combination in which the total acquisition-date fair
value of the identifiable net assets acquired exceeds the fair value of the
consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer.
SFAS 141R is effective for any business combinations that occur after January 1,
2009. The Company will apply SFAS 141R prospectively to all business
combinations subsequent to the effective date.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51", or SFAS 160.
SFAS 160 was issued to improve the relevance, comparability, and transparency of
financial information provided to investors by requiring all entities to report
noncontrolling (minority) interests in subsidiaries in the same way, that is, as
equity in the consolidated financial statements. Moreover, SFAS 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS 160 is effective January 1, 2009. The adoption of this
statement was not significant to the Company's consolidated financial
statements.
16
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. The Company adopted the provisions of
this statement for its financial assets and liabilities as of January 1, 2008
and it did not have a material impact on its financial condition or results of
operations. As permitted by FASB Staff Position ("FSP") No. FAS 157-2,
"Effective Date of FASB Statement No. 157", the Company elected to defer the
adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until January 1, 2009. Effective
January 1, 2009, we adopted the provision for nonfinancial assets and
liabilities that are not required or permitted to be measured at fair value on a
recurring basis, which include those measured at fair value in impairment
testing and those initially measured at fair value in a business combination.
The provisions of SFAS No. 157 related to these items did not have a significant
impact on the Company's consolidated financial statements. In October 2008, FASB
issued FSP No. 157-3, "Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active." FSP No. 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and provides an example of key
considerations in determining the fair value of a financial asset when the
market for that asset is not active. FSP No. 157-3 was effective on October 10,
2008, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate following
the guidance in SFAS No. 154, "Accounting Changes and Error Corrections." The
Company adopted FSP No. 157-3 on October 10, 2008 and it did not have a material
effect on its consolidated financial statements.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect our
expectation or belief concerning future events that involve risks and
uncertainties. Our actions and performance could differ materially from what is
contemplated by the forward-looking statements contained in this Report. Factors
that might cause differences from the forward-looking statements include those
referred to or identified in Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2008 and other factors that may be identified elsewhere
in this Report. Reference should be made to such factors and all forward-looking
statements are qualified in their entirety by the above cautionary statements.
Overview
--------
We develop, manufacture, distribute and market specialty performance ingredients
and products for the food, nutritional, pharmaceutical, animal health and
medical device sterilization industries. Our reportable segments are strategic
businesses that offer products and services to different markets. We presently
have three reportable segments: Specialty Products; Food, Pharma & Nutrition;
and Animal Nutrition & Health.
Specialty Products
------------------
Our Specialty Products segment operates in industry as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use
in the health care industry. It is used to sterilize a wide range of medical
devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without
negatively impacting the performance of the device being sterilized. Our 100%
ethylene oxide product is distributed in uniquely designed, recyclable,
double-walled, stainless steel drums to assure compliance with safety, quality
and environmental standards as outlined by the U.S. Environmental Protection
Agency (the "EPA") and the U.S. Department of Transportation. Our inventory of
these specially built drums, along with our two filling facilities, represents a
significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are our principal customers for this
product. In addition, we also sell single use canisters with 100% ethylene oxide
for use in medical device sterilization. As a fumigant, ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spices and other
seasoning materials.
We also sell propylene oxide principally to customers seeking smaller (as
opposed to bulk) quantities and whose requirements include timely delivery and
safe handling. Propylene oxide uses can include fumigation in spice treatment,
various chemical synthesis applications, to make paints more durable, and for
manufacturing specialty starches and textile coatings.
Food, Pharma & Nutrition
------------------------
The Food, Pharma & Nutrition ("FP&N") segment provides microencapsulation,
granulation and agglomeration solutions to a variety of applications in food,
18
pharmaceutical and nutritional ingredients to enhance performance of nutritional
fortification, processing, mixing, and packaging applications and shelf-life.
Major product applications are baked goods, refrigerated and frozen dough
systems, processed meats, seasoning blends, confections, and nutritional
supplements. We also market human grade choline nutrient products through this
segment for wellness applications. Choline is recognized to play a key role in
the development and structural integrity of brain cell membranes in infants,
processing dietary fat, reproductive development and neural functions, such as
memory and muscle function. The FP&N portfolio also includes granulated calcium
carbonate products, primarily used in, or in conjunction with, novel
over-the-counter and prescription pharmaceuticals for the treatment of
osteoporosis, gastric disorders and calcium deficiencies in the United States.
Animal Nutrition & Health
-------------------------
Our Animal Nutrition & Health ("AN&H") segment provides the animal nutrition
market with nutritional products derived from our encapsulation and chelation
technologies in addition to basic choline chloride. Commercial sales of
REASHURE(R) Choline, an encapsulated choline product, NITROSHURETM, an
encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin
product for dairy cows, boosts health and milk production in transition and
lactating dairy cows, delivering nutrient supplements that survive the rumen and
are biologically available, providing required nutritional levels. We also
market chelated mineral supplements for use in animal feed throughout the world,
as our proprietary chelation technology provides enhanced nutrient absorption
for various species of production and companion animals. In October 2008, we
introduced the first proven rumen-protected lysine for use in dairy rations,
AMINOSHURETM-L, which gives nutritionists and dairy producers a precise and
consistent source of rumen-protected lysine. AN&H also manufactures and supplies
basic choline chloride, an essential nutrient for animal health, predominantly
to the poultry and swine industries. Choline, which is manufactured and sold in
both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline
deficiency can result in reduced growth and perosis in poultry; fatty liver,
kidney necrosis and general poor health condition in swine. Certain derivatives
of choline chloride are also manufactured and sold into industrial applications.
The AN&H segment also includes the manufacture and sale of methylamines.
Methylamines are a primary building block for the manufacture of choline
products and are also used in a wide range of industrial applications.
We sell products for all three segments through our own sales force, independent
distributors, and sales agents.
19
The following tables summarize consolidated net sales by segment and business
segment earnings from operations for the three months ended March 31, 2009 and
March 31, 2008:
Business Segment Net Sales:
---------------------------------------------------------------------------
Three Months Ended
March 31,
2009 2008
----------------------------------------------------------------------------
Specialty Products $ 8,794 $ 8,450
Food, Pharma & Nutrition 8,304 9,289
Animal Nutrition & Health 35,888 39,122
----------------------------------------------------------------------------
Total $ 52,986 $ 56,861
----------------------------------------------------------------------------
Business Segment Earnings From Operations:
---------------------------------------------------------------------------
Three Months Ended
March 31,
2009 2008
---------------------------------------------------------------------------
Specialty Products $ 3,387 $ 2,598
Food, Pharma & Nutrition 959 1,528
Animal Nutrition & Health 4,964 3,278
---------------------------------------------------------------------------
Total $ 9,310 $ 7,404
---------------------------------------------------------------------------
20
RESULTS OF OPERATIONS
---------------------
Three months ended March 31, 2009 compared to three months ended March 31, 2008.
Net Sales
---------
Net sales for the three months ended March 31, 2009 were $52,986, as compared
with $56,861 for the three months ended March 31, 2008, a decrease of $3,875 or
6.8%. Net sales for the Specialty Products segment were $8,794 for the three
months ended March 31, 2009, as compared with $8,450 for the three months ended
March 31, 2008, an increase of $344 or 4.1%. This increase in sales was derived
principally from a combination of increases in volume and average selling price
of certain ethylene oxide products for medical device sterilization. Net sales
for the Food, Pharma & Nutrition segment were $8,304 for the three months ended
March 31, 2009 compared with $9,289 for the three months ended March 31, 2008, a
decrease of $985 or 10.6%. This result was driven principally by aggressive
inventory management by customers along with volume declines in the
international food market and human-grade choline and calcium products for the
supplement market, all of which have been negatively impacted by the worldwide
economic downturn. These declines were partially offset by a favorable product
mix sold in the domestic food market, including the launch of choline into new
food applications as well as growth in the bakery, tortilla and preservation
markets. Also offsetting the declines was increased volumes of Vitashure(R)
products for nutritional enhancement. Net sales of $35,888 were realized for the
three months ended March 31, 2009 for the Animal Nutrition & Health segment, as
compared with $39,122 for the prior year comparable quarter, a decrease of
$3,234 or 8.3%. Feed and industrial grade choline product sales and derivatives
decreased 10.3%, or $3,464 over the prior year quarter, principally from a
decline in volume sold into the well-publicized soft poultry industry, including
lower international sales largely related to the strengthening of the U.S dollar
in 2009 versus a weakening dollar in 2008. Sales of industrial derivatives (both
choline and methylamines) were impacted by softness in the industrial sector,
principally caused by the general economic downturn. Sales of our specialty
animal nutrition and health products, targeted for ruminant production animals
and companion animals, increased 4.1% or $230 over the prior year comparable
quarter primarily due to a favorable sales mix, including new sales generated
from AminoShureTM-L, the Company's rumen protected lysine product.
Operating Expenses
------------------
Operating expenses for the three months ended March 31, 2009 were $6,988, as
compared to $6,079 for the three months ended March 31, 2008, an increase of
$909 or 15.0%. This increase was due primarily to increased payroll expenses
along with an increase to some accounts receivable reserves for international
accounts. Operating expenses were 13.2% of sales or 2.5 percentage points more
than the operating expenses as a percent of sales incurred in last year's
comparable quarter. During the three months ended March 31, 2009 and 2008, the
Company spent $808 and $782 respectively, on research and development programs,
substantially all of which pertained to the Company's Food, Pharma & Nutrition
and Animal Nutrition & Health segments.
21
Business Segment Earnings From Operations
-----------------------------------------
Earnings from operations for the three months ended March 31, 2009 increased to
$9,310 compared to $7,404 for the three months ended March 31, 2008, an increase
of $1,906 or 25.7%. This increase was primarily driven by cost reductions of
certain petro-chemical raw materials over the prior year comparable quarter and
increases in average selling prices. Earnings from operations as a percentage of
sales ("operating margin") for the three months ended March 31, 2009 increased
to 17.6% compared to 13.0% for the three months ended March 31, 2008,
principally a result of product mix and the aforementioned cost reduction of
certain petro-chemical raw materials. The Company is continuing to focus on
implementing productivity improvements and, most importantly, growth through new
product development. Earnings from operations for the Specialty Products segment
were $3,387, an increase of $789 or 30.4%, primarily due to reductions in the
cost of certain petro-chemical raw materials and increases in average selling
prices. Earnings from operations for Food, Pharma & Nutrition were $959, a
decrease of $569 or 37.2%, due largely to the aforementioned aggressive
inventory management by customers and volume declines in the international food
market, human-grade choline and calcium products for the supplement market.
Earnings from operations for Animal Nutrition & Health increased by $1,686 to
$4,964, a 51.4% increase from the prior comparable quarter, resulting
principally from reductions in the cost of certain petro-chemical raw materials
and increases in average selling prices.
Other Expenses (Income)
-----------------------
Interest income for the three months ended March 31, 2009 totaled $10 as
compared to $25 for the three months ended March 31, 2008. Interest expense was
$74 for the three months ended March 31, 2009 compared to $323 for the three
months ended March 31, 2008. This decrease is primarily attributable to the
decrease in average current and long-term debt resulting from both normal
recurring principal payments as well as accelerated payments of the Term Loan
(as defined below in the Financing Activities section of Liquidity and Capital
Resources). Other expense of $80 for the three months ended March 31, 2009 is
primarily the result of unfavorable fluctuations in foreign currency exchange
rates between the U.S. dollar (the reporting currency) and functional foreign
currencies.
Income Tax Expense
------------------
The Company's effective tax rate for the three months ended March 31, 2009 and
2008 was 33.5% and 35.5% respectively. This decrease in the effective tax rate
is primarily attributable to a change in apportionment factors relating to state
income taxes.
Net Earnings
------------
Primarily as a result of the above-noted cost reductions of certain
petro-chemical raw materials, increases in average selling prices and the
favorable product mix, net earnings were $6,098 for the three months ended March
31, 2009, as compared with $4,641 for the three months ended March 31, 2008, an
increase of 31.4%.
22
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
The Company's contractual obligations and commitments principally include
obligations associated with future minimum non-cancelable operating lease
obligations (including for the headquarters office space entered into in 2002),
long-term debt obligations and purchase obligations principally related to open
purchase orders for inventory not yet received or recorded on our balance sheet.
The Company knows of no current or pending demands on, or commitments for, its
liquid assets that will materially affect its liquidity.
During the three months ended March 31, 2009, there were no material changes
outside the ordinary course of business in the specified contractual obligations
set forth in our Annual Report on Form 10-K for the year ended December 31,
2008. The Company expects its operations to continue generating sufficient cash
flow to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates. The Company
could seek additional bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
----
Cash and cash equivalents increased to $18,553 at March 31, 2009 from $3,422 at
December 31, 2008 primarily resulting from the information detailed below.
Working capital amounted to $38,319 at March 31, 2009 as compared to $29,566 at
December 31, 2008, an increase of $8,753.
Operating Activities
--------------------
Cash flows from operating activities provided $18,501 for the three months ended
March 31, 2009 compared to $7,232 for the three months ended March 31, 2008. The
increase in cash flows from operating activities was primarily due to an
increase in net earnings, lower accounts receivable, a decrease in inventories
and prepaid expenses, and higher income taxes.
23
Investing Activities
--------------------
Capital expenditures were $594 for the three months ended March 31, 2009
compared to $1,236 for the three months ended March 31, 2008.
Financing Activities
--------------------
The Company has an approved stock repurchase program. The total authorization
under this program is 2,508,692 shares. Since the inception of the program, a
total of 1,307,867 shares have been purchased, none of which remained in
treasury at March 31, 2009 or 2008. During the three months ended March 31,
2009, no additional shares have been purchased. The Company intends to acquire
shares from time to time at prevailing market prices if and to the extent it
deems it advisable to do so based on its assessment of corporate cash flow,
market conditions and other factors.
On April 30, 2007, the Company, and its principal bank entered into a Loan
Agreement (the "European Loan Agreement") providing for an unsecured term loan
of (euro)7,500, translated to $9,906 as of March 31, 2009 (the "European Term
Loan"), the proceeds of which were used to fund the 2007 Akzo Nobel Acquisition
(described in Note 5 to the Consolidated Financial Statements of the Company's
Form 10-K as of December 31, 2008) and initial working capital requirements. The
European Term Loan is payable in equal monthly installments of principal, each
equal to 1/84th of the principal of the European Term Loan, together with
accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a
monthly interest rate equal to EURIBOR plus 1%. At March 31, 2009, this interest
rate was 2.54%. At March 31, 2009, the European Term Loan had an outstanding
balance of (euro)5,536, translated to $7,312. The European Loan Agreement also
provides for a short-term revolving credit facility of (euro)3,000, translated
to $3,962 as of March 31, 2009 (the "European Revolving Facility"). The European
Revolving Facility has been renewed for a period of one year as of May 1, 2009.
The current European Revolving Facility is subject to an amended monthly
interest rate equal to EURIBOR plus 1.45%, and accrued interest is payable
monthly. The Company has drawn down (euro)1,450, or $1,915 as translated at
March 31, 2009, of the European Revolving Facility as of March 31, 2009.
On March 16, 2007, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for an unsecured term loan of $29,000
(the "Term Loan"), the proceeds of which were used to fund the 2007 Chinook
Acquisition (described in Note 5 to the Consolidated Financial Statements of the
Company's Form 10-K as of December 31, 2008). During the quarter ended March 31,
2009, the Company prepaid $867, the remaining balance of the Term Loan. The Loan
Agreement also provides for a short-term revolving credit facility of $6,000
(the "Revolving Facility"). The Revolving Facility is subject to a monthly
interest rate equal to LIBOR plus 1%, and accrued interest is payable monthly.
No amounts are outstanding on the Revolving Facility as of the date hereof. The
Revolving Facility has a maturity date of May 31, 2010. Management believes that
such facility will be renewed in the normal course of business.
Proceeds from stock options exercised totaled $701 and $413 for the three months
ended March 31, 2009 and 2008, respectively. Dividend payments were $2,007 and
$1,975 for the three months ended March 31, 2009 and 2008, respectively.
24
Other Matters Impacting Liquidity
---------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its Verona, Missouri facility. The amount recorded
on the Company's balance sheet as of March 31, 2009 for this obligation is $833.
The postretirement plan is not funded. Historical cash payments made under such
plan have approximated $50 per year.
Critical Accounting Policies
----------------------------
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2008 Annual Report on Form 10-K, during the three
months ended March 31, 2009.
Related Party Transactions
--------------------------
The Company was not engaged in related party transactions during the three
months ended March 31, 2009.
25
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts. The
money market funds in which the Company invests are participants in the United
States Treasury Department's Temporary Guarantee Program for Money Market Funds.
This program provides coverage for amounts held in money market funds as of the
close of business on September 19, 2008. The Company has no derivative financial
instruments or derivative commodity instruments, nor does the Company have any
financial instruments entered into for trading or hedging purposes. As of March
31, 2009, the Company's borrowings were under a bank term loan bearing interest
at EURIBOR plus 1.00% and a revolving line of credit bearing interest at EURIBOR
plus 1.25%. A 100 basis point increase or decrease in interest rates, applied to
the Company's borrowings at March 31, 2009, would result in an increase or
decrease in annual interest expense and a corresponding reduction or increase in
cash flow of approximately $92. The Company is exposed to market risks for
changes in foreign currency rates and has exposure to commodity price risks,
including prices of our primary raw materials. Our objective is to seek a
reduction in the potential negative earnings impact of changes in foreign
exchange rates and raw material pricing arising in our business activities. The
Company manages these financial exposures, where possible, through pricing and
operational means. Our practices may change as economic conditions change.
26
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated, as of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of the Company's disclosure controls and
procedures (including its internal controls and procedures.)
Based upon management's evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures were effective in
identifying the information required to be disclosed in the Company's
periodic reports filed with the Securities and Exchange Commission
("SEC"), including this Quarterly Report on Form 10-Q, and ensuring that
such information is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls
During the most recent fiscal quarter, there has been no significant
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
27
Part II. Other Information
Item 1A. Risk Factors
There have been no material changes in the Risk Factors identified in the
Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BALCHEM CORPORATION
-------------------
By: /s/ Dino A. Rossi
---------------------
Dino A. Rossi, Chairman, President and
Chief Executive Officer
Date: May 8, 2009
28
Exhibit Index
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
29