FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 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
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicated by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 8, 2005 the registrant had 7,704,150 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)
Unaudited
September 30, December 31,
Assets 2005 2004
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 10,723 $ 12,734
Accounts receivable 10,311 7,996
Inventories 8,761 6,319
Prepaid income taxes -- 315
Prepaid expenses 685 1,527
Deferred income taxes 351 321
------------ ------------
Total current assets 30,831 29,212
Property, plant and equipment, net 24,499 24,188
Goodwill 13,327 6,368
Intangible assets with finite lives, net 2,155 637
------------ ------------
Total assets $ 70,812 $ 60,405
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 1,557 $ 1,466
Accrued expenses 2,174 1,212
Accrued compensation and other benefits 1,656 1,492
Customer deposits 165 852
Dividends payable -- 685
Income tax payable 511 --
------------ ------------
Total current liabilities 6,063 5,707
Deferred income taxes 3,588 3,461
Other long-term obligations 1,039 1,003
------------ ------------
Total liabilities 10,690 10,171
------------ ------------
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; 7,730,517 shares
issued and 7,727,217 outstanding at September 30, 2005 and 7,621,158 shares
issued and outstanding at December 31, 2004 515 508
Additional paid-in capital 7,976 6,329
Retained earnings 51,719 43,397
Treasury stock, at cost: 3,300 and 0 shares at September 30, 2005 and December 31, 2004,
respectively (88) --
------------ ------------
Total stockholders' equity 60,122 50,234
------------ ------------
Total liabilities and stockholders' equity $ 70,812 $ 60,405
============ ============
See accompanying notes to condensed consolidated financial statements
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 21,145 $ 17,356 $ 59,969 $ 49,449
Cost of sales 13,496 11,137 38,026 31,594
----------- ----------- ----------- -----------
Gross profit 7,649 6,219 21,943 17,855
Operating expenses:
Selling expenses 1,200 1,252 3,511 3,612
Research and development expenses 492 383 1,537 1,252
General and administrative expenses 1,226 1,154 3,854 3,444
----------- ----------- ----------- -----------
2,918 2,789 8,902 8,308
----------- ----------- ----------- -----------
Earnings from operations 4,731 3,430 13,041 9,547
Other expenses (income):
Interest (income) (46) (22) (155) (74)
Interest expense 2 61 6 174
Other, net (82) -- (82) (12)
----------- ----------- ----------- -----------
Earnings before income tax expense 4,857 3,391 13,272 9,459
Income tax expense 1,833 1,231 4,950 3,482
----------- ----------- ----------- -----------
Net earnings $ 3,024 $ 2,160 $ 8,322 $ 5,977
=========== =========== =========== ===========
Net earnings per common share - basic $ 0.39 $ 0.29 $ 1.08 $ 0.80
=========== =========== =========== ===========
Net earnings per common share - diluted $ 0.37 $ 0.28 $ 1.04 $ 0.78
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
2005 2004
----------- -----------
Unaudited
---------
Cash flows from operating activities:
Net earnings $ 8,322 $ 5,977
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,078 2,607
Shares issued under employee benefit plans 215 207
Deferred income taxes 97 185
Provision for doubtful accounts (32) 7
Provision for income tax benefit of stock options 176 --
Gain on sale of equipment (82) (12)
Changes in assets and liabilities net of effects of acquisition of assets:
Accounts receivable (1,474) (457)
Inventories (1,717) (1,159)
Prepaid expenses and other current assets 842 107
Income taxes 826 979
Customer deposits (687) --
Accounts payable and accrued expenses 1,217 304
Other long-term obligations 46 43
----------- -----------
Net cash provided by operating activities 9,827 8,788
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,186) (820)
Proceeds from sale of property, plant & equipment 389 91
Cash paid for intangibles assets acquired (102) (76)
Acquisition of assets (11,419) --
----------- -----------
Net cash used in investing activities (12,318) (805)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt -- (1,307)
Proceeds from stock options and warrants exercised 1,263 1,814
Dividends paid (685) (389)
Purchase of treasury stock (88) --
Other financing activities (10) (10)
----------- -----------
Net cash provided by financing activities 480 108
----------- -----------
Increase in cash and cash equivalents (2,011) 8,091
Cash and cash equivalents beginning of period 12,734 9,239
----------- -----------
Cash and cash equivalents end of period $ 10,723 $ 17,330
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
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, 2004 consolidated financial statements, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in our Annual Report on Form 10-K. References in this report to "the Company"
mean Balchem and/or its subsidiary BCP Ingredients, Inc., 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 and therefore do not include some information and
notes necessary to conform to annual reporting requirements. The results of
operations for the three and nine months ended September 30, 2005 are not
necessarily indicative of the operating results expected for the full year.
NOTE 2 - 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
-----------------------------------------------------------
5
The purchase price allocations have been made on the basis of estimates made by
the Company. The financial statement items and amounts are subject to subsequent
revision to give effect to reclassifications related to the allocation between
identifiable assets, intangible assets and goodwill and for other
pre-acquisition contingencies that may become resolved during subsequent
periods.
The above acquisition has been accounted for using the purchase method of
accounting and the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The consolidated financial statements include the
results of operations of the acquired product lines from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2004 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to changes in
depreciation and amortization of tangible and intangible assets resulting from
the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned acquisition
had occurred at the beginning of the periods presented and is not intended to be
a projection of future results.
==================================================================
Pro-Forma
Three Months Ended
September 30,
2005 2004
------------------------------------------------------------------
Net sales $ 21,145 $ 18,586
Net earnings 3,024 2,464
Basic EPS .39 .33
Diluted EPS .37 .32
==================================================================
==================================================================
Pro-Forma
Nine months ended
September 30,
2005 2004
------------------------------------------------------------------
Net sales $ 63,256 $ 53,190
Net earnings 8,894 6,975
Basic EPS 1.16 .93
Diluted EPS 1.11 .91
==================================================================
NOTE 3 - STOCK OPTION PLAN
--------------------------
At September 30, 2005, the Company has stock based employee compensation plans.
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
6
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 has 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:
=================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 3,024 $ 2,160 $ 8,322 $ 5,977
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (154) (216) (462) (602)
--------------------------------------------------------------
Net earnings as adjusted $ 2,870 $ 1,944 $ 7,860 $ 5,375
==============================================================
Earnings per share:
Basic EPS as reported $ .39 $ .29 $ 1.08 $ .80
Basic EPS as adjusted $ .37 $ .26 $ 1.02 $ .72
Diluted EPS as reported $ .37 $ .28 $ 1.04 $ .78
Diluted EPS as adjusted $ .35 $ .25 $ .98 $ .70
=================================================================================================================
The fair value of each stock option granted during the nine months ended
September 30, 2005 and 2004 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
=========================================================================================
2005 2004
-----------------------------------------------------------------------------------------
Expected life (years) 4 6
Expected volatility 28% 27%
Expected dividend yield .36% .32%
Risk-free interest rate 3.83% 3.64%
Weighted average fair value of options
granted $7.78 $10.06
=========================================================================================
7
NOTE 4 - INVENTORIES
--------------------
Inventories at September 30, 2005 and December 31, 2004 consist of the
following:
============================================================================
September 30, December 31,
2005 2004
----------------------------------------------------------------------------
Raw materials $ 4,321 $ 2,305
Finished goods 4,440 4,014
----------------------------------------------------------------------------
Total inventories $ 8,761 $ 6,319
============================================================================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment at September 30, 2005 and December 31, 2004 are
summarized as follows:
============================================================================
September 30, December 31,
2005 2004
----------------------------------------------------------------------------
Land $ 290 $ 290
Building 10,256 10,241
Equipment 30,154 28,619
Construction in Progress 1,044 387
----------------------------------------------------------------------------
41,744 39,537
Less: Accumulated depreciation 17,245 15,349
----------------------------------------------------------------------------
Net property, plant and equipment $ 24,499 $ 24,188
============================================================================
NOTE 6 - 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
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 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 of December 31, 2004, the Company performed an impairment test of its
goodwill balance. As of such date, the Company's reporting units' fair values
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 performs its impairment test each December
31.
The Company has goodwill in the amount of $13,327 and $6,368 at September 30,
2005 and December 31, 2004, respectively, subject to the provisions of SFAS Nos.
141 and 142. At September 30, 2005, the balance of goodwill includes the cost in
excess of net
8
assets acquired of the acquired assets of the Loders Croklaan USA, LLC
encapsulation, agglomeration and granulation business, described in note 2, of
$6,959.
As of September 30, 2005 and December 31, 2004, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$2,391 and $7,915, respectively, less accumulated amortization of $236 and
$7,278, respectively. At September 30, 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 2. At December 31, 2004, the gross carrying amount
and accumulated amortization included other customer lists and re-registration
costs that were fully amortized during 2004. These fully amortized customer
lists and re-registration costs were written-off on March 31, 2005 and,
therefore, were not included in the gross carrying amount and accumulated
amortization at September 30, 2005.
Identifiable intangible assets with finite lives at September 30, 2005 and
December 31, 2004 are summarized as follows:
===============================================================================================================
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization
(In years) 9/30/05 at 9/30/05 12/31/04 at 12/31/04
---------------------------------------------------------------------------------------------------------------
Customer lists 10 $ 1,350 34 $ 6,760 $6,760
Re-registration costs 10 11 -- 356 356
Patents 15-17 746 131 538 105
Trademarks 17 209 46 207 37
Other 5 75 25 54 20
---------------------------------------------------------------------------------------------------------------
$ 2,391 $ 236 $ 7,915 $7,278
===============================================================================================================
Amortization of identifiable intangible assets was approximately $74 for the
first nine months of 2005. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
remainder of 2005 is $49 and approximately $195 per annum for 2006 through 2009.
At September 30, 2005, 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 consolidated balance sheets. There were no changes to the useful lives
of intangible assets subject to amortization during the nine months ended
September 30, 2005.
NOTE 7 - 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:
9
==============================================================================================================
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2005 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $3,024 7,727,868 $.39
Effect of dilutive securities - stock options 367,454
---------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $3,024 8,095,322 $.37
==============================================================================================================
==============================================================================================================
Net Number of
Earnings Shares Per Share
Three months ended September 30, 2004 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $2,160 7,534,202 $.29
Effect of dilutive securities - stock options 247,885
---------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $2,160 7,782,087 $.28
==============================================================================================================
==============================================================================================================
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2005 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $8,322 7,699,352 $1.08
Effect of dilutive securities - stock options 326,902
---------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $8,322 8,026,254 $1.04
==============================================================================================================
==============================================================================================================
Net Number of
Earnings Shares Per Share
Nine months ended September 30, 2004 (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $5,977 7,482,472 $.80
Effect of dilutive securities - stock options 196,259
----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $5,977 7,678,731 $.78
==============================================================================================================
10
The Company had stock options covering 204,000 and 106,800 shares at September
30, 2005 and 2004, respectively, that could potentially dilute basic earnings
per share in future periods that were not included in diluted earnings per share
because their effect on the period presented was anti-dilutive.
NOTE 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, encapsulated / nutritional products (includes products
relating to the the afforementioned June 30, 2005 acquisition of certain assets
of the Loders Croklaan USA, LLC encapsulation, agglomeration and granulation
business) and BCP Ingredients, its unencapsulated feed supplements segment.
Business Segment Net Sales:
====================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------------
Specialty Products $ 7,352 $ 7,171 $ 22,088 $ 21,315
Encapsulated/Nutritional Products 8,503 6,504 23,131 18,527
BCP Ingredients 5,290 3,681 14,750 9,607
--------------------------------------------------------------------------------------------------------------------
Total $ 21,145 $ 17,356 $ 59,969 $ 49,449
====================================================================================================================
Business Segment Earnings:
====================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------------
Specialty Products $ 2,846 $ 2,697 $ 8,377 $ 7,795
Encapsulated/Nutritional Products 945 345 2,431 901
BCP Ingredients 940 388 2,233 851
Interest and other income (expense) 126 (39) 231 (88)
--------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 4,857 $ 3,391 $ 13,272 $ 9,459
====================================================================================================================
NOTE 9- SUPPLEMENTAL CASH FLOW INFORMATION
------------------------------------------
Cash paid during the nine months ended September 30, 2005 and 2004 for income
taxes and interest is as follows:
============================================================
Nine months ended
September 30,
2005 2004
------------------------------------------------------------
Income taxes $ 3,846 $ 2,365
Interest $ 6 $ 174
============================================================
11
NOTE 10 - 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 distributed in the form
of a stock dividend to shareholders of record on December 30, 2004. Such
distribution was made on January 20, 2005. Accordingly, 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 stock split.
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury. In June 2005, the board of
directors authorized another extension to the stock repurchase program for up to
an additional 600,000 shares, that is, over and above those 514,974 shares
previously repurchased under the program. During the three months ended
September 30, 2005, a total of 3,300 shares have been purchased at an average
cost of $26.83 per share, all of which remain in treasury at September 30, 2005.
NOTE 11 - LONG TERM DEBT AND CREDIT AGREEMENTS
----------------------------------------------
There was no debt outstanding at September 30, 2005. On June 1, 2001, the
Company and its principal bank entered into a loan agreement (the "Loan
Agreement") providing for a term loan of $13,500 (the "Term Loan"), the proceeds
of which were used to fund the acquisition of certain assets of DCV, Inc. and
its affiliate Ducoa L.P., (described in Note 4 of the Company's Form 10-K as of
December 31, 2004). During the quarter ended December 31, 2004, the Company
prepaid $7,839, the remaining balance of the Term Loan. Borrowings at September
30, 2004 included borrowings under the Term Loan bearing interest at LIBOR plus
1.25% (2.90% at September 30, 2004). Certain provisions of the Term Loan require
maintenance of certain financial ratios, limit future borrowings, and impose
certain other requirements as contained in the agreement. The Loan Agreement
also provides 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
September 30, 2005. The Revolving Facility was extended and now expires on May
31, 2006. Management believes that such facility will be renewed in the normal
course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
NOTE 12 - EMPLOYEE BENEFIT PLANS
--------------------------------
The Company sponsors a 401(k) savings and profit sharing plan for eligible
employees. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All
12
amounts contributed to the plan are deposited into a trust fund administered by
independent trustees.
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 its Verona facility.
Net periodic benefit cost for such retirement medical plan for the nine months
ended September 30 was as follows:
=========================================================================
2005 2004
-------------------------------------------------------------------------
Service Cost $ 24 $ 23
Interest Cost 38 37
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (11) (8)
Amortization of (gain) or loss -- --
-------------------------------------------------------------------------
Net periodic benefit cost $ 51 $ 52
=========================================================================
The plan is unfunded and approved claims are paid from Company funds. 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 obtain
prescription drug benefits under Medicare. There is no impact of the subsidy on
the postretirement benefit obligation and net periodic cost as Medicare eligible
retirees are not covered under the Company's plan.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. This statement was
originally effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. On April 14, 2005, the SEC
adopted a new rule that amended the compliance dates of SFAS No. 123(R) to
require implementation no later than the beginning of the first fiscal year
after June 15, 2005 (the year beginning January 1, 2006 for the Company). The
Company is currently evaluating the impact of this standard on its results of
operations and financial position.
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
13
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.
NOTE 14 - SUBSEQUENT EVENT
--------------------------
On November 2, 2005, the Company, through its wholly owned subsidiary Balchem
Minerals Corporation, entered into a definitive stock purchase agreement with
Chelated Minerals Corporation ("CMC"), a privately held Utah corporation, and
its shareholders to acquire all of the outstanding capital stock of CMC for a
purchase price of $17,350. CMC is a manufacturer and global marketer of mineral
nutritional supplements for livestock, pet and poultry feeds. The purchase price
is subject to adjustment based upon CMC's working capital as of the closing
date. The parties anticipate closing the transaction during the fourth quarter
of 2005. For further details of this transaction, please refer to the Company's
Form 8-K filing submitted to the U.S. Securities and Exchange Commission on
November 7, 2005.
14
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
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 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 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
--------
The Company develops, manufactures and markets specialty performance ingredients
and products for the food, feed and medical device 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 sterilant gas, in returnable
cylinders, primarily for use in the health care industry to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. In
addition, the Company sells 100% ethylene oxide in single use canisters to
customers that sell medical device sterilization equipment commonly found in
hospitals or doctor's offices. Blends of ethylene oxide are sold as fumigants
and are highly effective in killing bacteria, fungi, and insects in spices and
other seasoning materials. 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. The Company is also required to maintain an EPA
regulatory permit.
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment provides mircoencapsulation 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
15
goods, refrigerated and frozen dough systems, processed meats, seasoning blends,
confections, nutritional supplementations and animal nutrition.
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 market by
the Company's customers and prospects. The Company, through its proprietary
technology and applications expertise, continues to develop new
microencapsulation products designed to solve and respond to customer problems
and needs. Sales of our REASHURE(TM) and NITROSHURE(TM) 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 these 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 quality and customer service. In addition, the Company must continue
to realize 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 segments through its own sales force,
independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings for the three and nine months ended September 30 (in
thousands):
Business Segment Net Sales:
===================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------
Specialty Products $ 7,352 $ 7,171 $ 22,088 $ 21,315
Encapsulated/Nutritional Products 8,503 6,504 23,131 18,527
BCP Ingredients 5,290 3,681 14,750 9,607
-------------------------------------------------------------------------------------------------------------------
Total $ 21,145 $ 17,356 $ 59,969 $ 49,449
===================================================================================================================
16
Business Segment Earnings:
===================================================================================================================
Three Months Ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------
Specialty Products $ 2,846 $ 2,697 $ 8,377 $ 7,795
Encapsulated/Nutritional Products 945 345 2,431 901
BCP Ingredients 940 388 2,233 851
Interest and other income (expense) 126 (39) 231 (88)
-------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 4,857 $ 3,391 $ 13,272 $ 9,459
===================================================================================================================
Share Repurchase Program
------------------------
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury at December 31, 2004. In June
2005, the board of directors authorized another extension to the stock
repurchase program for up to an additional 600,000 shares, that is, over and
above those 514,974 shares previously repurchased under the program. During the
three months ended September 30, 2005, a total of 3,300 shares have been
purchased at an average cost of $26.83 per share, all of which remain in
treasury at September 30, 2005. During the month of October 2005, the company
purchased a total of 24,800 shares at an average cost of $ 26.92 per share. The
Company intends to acquire shares from time to time at prevailing market prices
if and to the extent it deems it advisable to do so based among other factors on
its assessment of corporate cash flow and market conditions.
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2005 compared to three months ended September
30, 2004
Net Sales
---------
Net sales for the three months ended September 30, 2005 were $21,145 compared
with $17,356 for the three months ended September 30, 2004, an increase of
$3,789 or 21.8%. Net sales for the specialty products segment were $7,352 for
the three months ended September 30, 2005 compared with $7,171 for the three
months ended September 30, 2004, an increase of $181 or 2.5%. This increase was
principally due to an increase in sales volume 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. Net sales for the encapsulated / nutritional products segment were $8,503
for the three months ended September 30, 2005 compared with $6,504 for the three
months ended September 30, 2004, an increase of $1,999 or 30.7% This
17
increase was due principally to increased volumes sold in the domestic food
market and approximately $1,800 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 2. The Company also experienced
volume improvements in the animal health industry relating to REASHURE(TM),
NITROSHURE(TM) and NIASHURE(TM), our microencapsulated niacin product for dairy
cows, and the human choline market. These increases were partially offset by a
decline in volumes sold in the international food and the nutritional supplement
product lines. Net sales of $5,290 were realized for the three months ended
September 30, 2005 for the BCP Ingredients (unencapsulated feed supplements)
segment, which markets choline additives for the poultry and swine industries as
well as industrial choline derivative products, as compared with $3,681 for the
three months ended September 30, 2004, an increase of $1,609 or 43.7%. 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 the three months ended September 30, 2005 increased to $7,649
compared to $6,219 for the three months ended September 30, 2004. Gross margin
percentage for the three months ended September 30, 2005 was 36.2% compared to
35.8% for the three months ended September 30, 2004. Margins for the specialty
products segment increased slightly as increased sales volume, in addition to
lower amortization expense, were partially offset by increases in raw material
prices and distribution costs. Gross margin percentage in the encapsulated /
nutritional products segment also increased slightly as margins were favorably
affected by increased production, a result of greater sales volume as described
above. Margins for BCP Ingredients increased 6.8% and were favorably affected by
increased production volumes of choline chloride and specialty derivative
products.
Operating Expenses
------------------
Operating expenses for the three months ended September 30, 2005 were $2,918
compared to $2,789 for the three months ended September 30, 2004, an increase of
$129 or 4.6%. This increase was primarily a result of increased payroll costs,
charges for search fees and relocation expenses associated with new hires. Total
operating expenses as a percentage of sales were 13.8% for the three months
ended September 30, 2005 compared to 16.1% for the three months ended September
30, 2004. During the three months ended September 30, 2005 and 2004, the Company
spent $492 and $383, 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 the three months
ended September 30, 2005 were $4,731 as compared to $3,430 for the three months
ended September 30, 2004.
18
Other expenses (income)
-----------------------
Interest income for the three months ended September 30, 2005 totaled $46 as
compared to $22 for the three months ended September 30, 2004. This increase is
attributable to the increase in the average total cash balance. Interest expense
was $2 for the three months ended September 30, 2005 compared to $61 for the
three months ended September 30, 2004. This decrease is the result of the
prepayment of the Company's outstanding loan balance in December 2004. Other
income of $82 for the three months ended September 30, 2005 represents the net
gain on the sale of equipment.
Income Tax Expense
------------------
The Company's effective tax rate for the three months ended September 30, 2005
and 2004 was 37.7% and 36.3%, respectively.
Net earnings
------------
As a result of the foregoing, net earnings were $3,024 for the three months
ended September 30, 2005 as compared with $2,160 for the three months ended
September 30, 2004, an increase of 40.0%.
Nine months ended September 30, 2005 compared to nine months ended September 30,
2004
Net Sales
---------
Net sales for the nine months ended September 30, 2005 were $59,969 compared
with $49,449 for the nine months ended September 30, 2004, an increase of
$10,520 or 21.3%. Net sales for the specialty products segment were $22,088 for
the nine months ended September 30, 2005 compared with $21,315 for the nine
months ended September 30, 2004, an increase of $773 or 3.6%. 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 $23,131 for the nine months ended September 30, 2005 compared with
$18,527 for the nine months ended September 30, 2004, an increase of $4,604 or
24.9%. This increase was due principally to increased volumes sold in the
domestic food market and approximately $1,800 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 2. The Company also
experienced volume improvements in the animal health industry relating to
REASHURE(TM), NITROSHURE(TM) and NIASHURE(TM), our microencapsulated niacin
product for dairy cows, and the human choline market. 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 $14,750 were
realized for the nine months ended September 30, 2005 in the BCP Ingredients
segment compared with $9,607 for the nine months ended September 30, 2004, an
increase of $5,143 or 53.5%. This increase was due to increased volumes sold in
the dry choline,
19
aqueous choline, and specialty industrial product lines, along with modest price
increases in all three product lines.
Gross Margin
------------
Gross margin for the nine months ended September 30, 2005 increased to $21,943
compared to $17,855 for the nine months ended September 30, 2004. Gross margin
percentage for the nine months ended September 30, 2005 was 36.6% as compared to
36.1% for the nine months ended September 30, 2004. Gross margin percentage for
the specialty products segment increased slightly as a result of increased sales
volume and product mix in addition to lower amortization expense, partially
offset by increases in raw material prices and distribution costs. Gross margin
percentage in the encapsulated / nutritional products segment increased 2.9% as
margins were favorably affected by increased production, a result of greater
sales volume as described above. Gross margin percentage in BCP Ingredients
increased 5.3% and was favorably affected by increased production volumes of
choline chloride and specialty derivative products.
Operating Expenses
------------------
Operating expenses for the nine months ended September 30, 2005 increased to
$8,902 from $8,308 for the nine months ended September 30, 2004, an increase of
$594 or 7.1%. Total operating expenses as a percentage of sales were 14.8% for
the nine months ended September 30, 2005 compared to 16.8% for the nine months
ended September 30, 2004. The increase in operating expense for the nine months
ended September 30, 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 the nine months ended September 30, 2005 and 2004, the Company
spent $1,537 and $1,252, 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 the nine months ended
September 30, 2005 were $13,041 as compared to $9,547 for the nine months ended
September 30, 2004.
Other expenses (income)
-----------------------
Interest income for the nine months ended September 30, 2005 totaled $155 as
compared to $74 for the nine months ended September 30, 2004. This increase is
attributable to the increase in the average total cash balance. Interest expense
was $6 for the nine months ended September 30, 2005 compared to $174 for the
nine months ended September 30, 2004. This decrease is the result of the
prepayment of the Company's outstanding loan balance in December 2004. Other
income of $82 for the nine months ended September 30, 2005 represents the net
gain on the sale of equipment.
20
Income Tax Expense
------------------
The Company's effective tax rate for the nine months ended September 30, 2005
and 2004 was 37.3% compared to a 36.8% rate for the nine months ended September
30, 2004
Net earnings
------------
As a result of the foregoing, net earnings were $8,322 for the nine months ended
September 30, 2005 as compared with $5,977 for the nine months ended September
30, 2004.
21
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
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 September 30, 2005.
The Company's other 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).
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 14, the Company, on November 2, 2005, through its wholly owned subsidiary
Balchem Minerals Corporation, entered into a definitive stock purchase agreement
with Chelated Minerals Corporation ("CMC"), a privately held Utah corporation,
and its shareholders to acquire all of the outstanding capital stock of CMC for
a purchase price of $17,350. CMC is a manufacturer and global marketer of
mineral nutritional supplements for livestock, pet and poultry feeds. The
purchase price is subject to adjustment based upon CMC's working capital as of
the closing date. The parties anticipate closing the transaction during the
fourth quarter of 2005. The Company could seek 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 decreased to $10,723 at September 30, 2005 from
$12,734 at December 31, 2004. The $2,011 decrease resulted primarily from an
increase in net cash provided by operating activities and financing activities
of $9,827 and $480, respectively, offset by net cash used in investing
activities of $12,318 principally for the acquisition of certain assets of the
Loders Croklaan USA, LLC fluidized bed encapsulation and granulation business on
June 30, 2005. Working capital amounted to $24,768 at September 30, 2005 as
compared to $23,505 at December 31, 2004, an increase of $1,263.
22
Operating Activities
--------------------
Cash flows from operating activities provided $9,827 for the nine months ended
September 30, 2005 compared to $8,788 for the nine months ended September 30,
2004. The increase in cash flows from operating activities was primarily due to
an increase in earnings and accounts payable and accrued expenses combined with
a decrease in prepaid expenses and prepaid income taxes. This increase was
partially offset by an increase in accounts receivable and inventories and a
decrease in depreciation and amortization expense. The decrease in depreciation
and amortization resulted from the completion of amortization of a customer list
during the third quarter of 2004.
Investing Activities
--------------------
Property and equipment expenditures were $1,186 for the nine months ended
September 30, 2005 compared to $820 for the nine months ended September 30,
2004. 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.
Financing Activities
--------------------
In June 1999, the board of directors authorized the repurchase of shares of the
Company's outstanding common stock over a two-year period commencing July 2,
1999. Under this program, which was subsequently extended, the Company had, as
of December 31, 2004, repurchased a total 514,974 shares at an average cost of
$6.17 per share, none of which remain in treasury at December 31, 2004. In June
2005, the board of directors authorized another extension to the stock
repurchase program for up to an additional 600,000 shares, that is, over and
above those 514,974 shares previously repurchased under the program. During the
three months ended September 30, 2005, a total of 3,300 shares have been
purchased at an average cost of $26.83 per share, all of which remain in
treasury at September 30, 2005. During the month of October 2005, the company
purchased a total of 24,800 shares at an average cost of $ 26.92 per share. The
Company intends to acquire shares from time to time at prevailing market prices
if and to the extent it deems it advisable to do so based among other factors on
its assessment of corporate cash flow and market conditions.
There was no debt outstanding at September 30, 2005. On June 1, 2001, the
Company and its principal bank entered into a Loan Agreement (the "Loan
Agreement") providing for a term loan of $13,500 (the "Term Loan"), the proceeds
of which were used to fund the acquisition of certain assets of DCV, Inc. and
its affiliate Ducoa L.P. During the quarter ended December 31, 2004, the Company
prepaid $7,839, the remaining balance of the Term Loan. Borrowings at September
30, 2004 included borrowings under the Term Loan bearing interest at LIBOR plus
1.25% (2.90% at September 30, 2004). Certain provisions of the Term Loan require
maintenance of certain financial ratios, limit future borrowings, and impose
certain other requirements as contained in the agreement. The Loan Agreement
also provides for a short-term revolving credit facility of $3,000
23
(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 September 30, 2005 and 2004. The Revolving Facility was extended
and now expires on May 31, 2006. Management believes that such facility will be
renewed in the normal course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
Proceeds from stock options exercised totaled $1,263 and $1,814 for the nine
months ended September 30, 2005 and 2004, respectively. Dividend payments were
$685 and $389 for the nine months ended September 30, 2005 and 2004,
respectively.
Other Matters Impacting Liquidity
---------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its Verona facility. The amount recorded on the
Company's balance sheet as of September 30, 2005 for this obligation is $979.
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, 2004 Annual Report on Form 10-K, during the nine
months ended September 30, 2005.
Related Party Transactions
--------------------------
The Company was not engaged in related party transactions during the three and
nine months ended September 30, 2005 and all transactions of the Company during
such period were at arms length.
24
Item 3. 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. 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.
25
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), except for
the disclosure controls and procedures of the Loders Croklaan
encapsulation, agglomeration and granulation business, which were excluded
from management's evaluation. We completed the acquisition of this
business on June 30, 2005, and are currently conducting an assessment of
the business' disclosure 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.
26
Part II. Other Information
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, President and
Chief Executive Officer
Date: November 8, 2005
27
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.
28