Balchem Corporation
P.O. Box 600, 52 Sunrise Park Road, New Hampton, NY 10958
tel 845.326.5600, toll free (in U.S.) 800.431.5641, fax 845.326.5742
e-mail: bcp@balchem.com
www.balchem.com
Balchem Corporation
H u m a n N u t r i t i o n
A n i m a l N u t r i t i o n
H e a l t h c a r e
Providing state-of-the-art solutions
2006
ANNUAL
REPORT
Company Profile
Founded in 1967, Balchem Corporation provides state-of-the-art solutions and the finest quality
products for a range of industries worldwide. The Company consists primarily of three business
segments: Encapsulated/Nutritional Products, ARC Specialty Products and BCP Ingredients,
Inc. Balchem employs numerous technologies and over 200 people nationwide who are
engaged in the many diverse activities of developing our Company into a market leader.
Financial Highlights 2006
Statement of Operations Data
(In thousands, except per share data)
Year Ended December 31,
Net sales
Earnings before income tax expense
Income tax expense
Net earnings
Basic net earnings per common share*
Diluted earnings per common share*
Balance Sheet Data
(In thousands, except per share data)
At December 31,
Total assets
Long-term debt
Other long-term obligations
Total stockholders’ equity
Dividends per common share*
Quarterly Stock Prices*
2006
$100,905
19,101
6,823
12,278
$.70
$.67
2006
$ 92,333
—
784
75,362
$.09
2005
$83,095
17,191
6,237
10,954
$.63
$.61
2005
$75,141
—
1,043
60,933
$.06
2004
$67,406
12,715
4,689
8,026
$.48
$.46
2004
$60,405
—
1,003
50,234
$.04
2003
$61,875
8,763
3,125
5,638
$.35
$.33
2003
$56,906
7,839
985
39,781
$.023
2002
$60,197
11,845
4,429
7,416
$.46
$.44
2002
$53,298
9,581
964
33,269
$.023
1Q
2Q
3Q
4Q
2006
2005
2004
High
$15.99
15.85
15.93
19.25
Low
$13.57
13.41
13.07
12.80
High
$11.11
13.37
14.42
13.25
Low
$ 9.64
9.71
11.69
11.56
High
$ 7.96
8.30
8.89
10.34
Low
$6.67
7.19
7.97
8.68
*All per share information has been adjusted to reflect the December 2006, 2005 and 2004 three-for-two stock splits (effected by means of a stock dividend).
Headquarters
Balchem Corporation
52 Sunrise Park Road
P.O. Box 600
New Hampton, NY 10958
Manufacturing
Balchem operates manufacturing
facilities in Slate Hill, NY, Green
Pond, SC, Verona, MO, Channahon, IL,
Salt Lake City, UT and St. Gabriel, LA
Exchange
NASDAQ Global Market
Listed Security
BCPC Common Stock
Annual Report
For information relating to the
Annual Report please contact
Karin McCaffery at 845.326.5600.
Investor Contact
Karin McCaffery
Balchem Headquarters
845.326.5600
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Corporate Counsel
Duane Morris LLP
470 Atlantic Avenue, Suite 500
Boston, MA 02210
Independent Accountants
McGladrey & Pullen, LLP
750 Third Avenue
New York, NY 10017
Website:
www.balchem.com
CORPORATE INFORMATION
Board of Directors
Dino A. Rossi
Chairman, President and
Chief Executive Officer
Hoyt Ammidon, Jr.
Retired, Managing Director
Berkshire Capital Corporation (BCC)
Kenneth P. Mitchell
Lead Director
Retired, President and
Chief Executive Officer
Oakite Products, Inc.
Edward L. McMillan
Owns McMillan, LLC,
a transaction-consulting firm
Past President and Chief Executive
Officer of Purina Mills
Dr. John Y. Televantos
Executive Vice President
Arsenal Capital Partners
Dr. Elaine R. Wedral
Retired, President of Nestle’s
Research and Development,
Food Service Systems
Corporate Officers
Dino A. Rossi
Chairman, President and
Chief Executive Officer
Frank J. Fitzpatrick
Chief Financial Officer
Treasurer and Assistant Secretary
Matthew D. Houston
General Counsel
Secretary
David F. Ludwig
Vice President/General Manager
ARC Specialty Products
Paul H. Richardson
Vice President
Research & Development
Robert T. Miniger
Vice President
Human Resources
Net Salesdollars in millions‘0260.2‘0361.9‘0467.4‘0583.1‘06100.9Net Earningsdollars inmillions‘027.4‘035.6‘048.0‘0511.0‘0612.3Stockholders’ Equitydollars inmillions‘0233.3‘0339.8‘0450.2‘0560.9‘0675.4 Balchem Corporation AT A GLANCE
Balchem Encapsulates
Our encapsulated/nutritional products segment is actively building a premier specialty ingredient busi-
ness utilizing microencapsulation, agglomeration, granulation, and application expertise. Organic devel-
opment and acquired technology are leading to new and innovative solutions for the food, nutrition,
pharmaceutical and specialty animal health markets.
BCP Ingredients
BCP Ingredients, Inc., a wholly owned subsidiary of Balchem, manufactures and distributes choline chlo-
ride, an essential nutrient for animal health, predominantly to the poultry and swine industries. Choline
plays a vital role in metabolism and fighting perosis in poultry. Derivatives of choline chloride are also
manufactured and sold into industrial applications.
ARC Specialty Products
Through ARC Specialty Products, Balchem provides select specialty-packaged chemicals for use by con-
tract sterilizers, medical device manufacturers and others in the healthcare field. In addition to drummed
100% ethylene oxide, ARC Specialty Products ships ethylene oxide blends, propylene oxide and methyl
chloride in two-way environmentally safe containers.
To Our Shareholders, Customers and Associates:
Vision
On many fronts, 2006 was a
breakthrough year
for Balchem.
Through strategic planning, innova-
tion and acquisitions, we were able
to expand our vision as a “wellness
provider” in the human, animal nutrition and healthcare markets.
Our continuing vision as a market-driven company, with technol-
ogy as its foundation, has served us well over this past year.
Through the acquisition of Chelated Minerals Corporation
(“CMC”), Salt Lake City, UT and the BioAdditives LLC choline
chloride plant in St. Gabriel, LA, we were able to expand our
technological core competencies, and enhance our progress in
animal nutrition and health sectors. Innovatively, we developed
new delivery systems to provide critical nutritional ingredients to
people, in the convenience of package and on-the-go mode. We
have begun to see consumer awareness increase for human
grade choline, beyond infants, to adolescents and the middle
aged, both domestically and abroad. We see significant growth
potential in these market segments and will continue to pursue
similar opportunities. A strong focus on execution, increased
global market penetration and improving operating efficiencies,
all resulted in significant positive financial results for 2006.
Financial Results
Fiscal 2006 produced record sales and profits for the Com-
pany. I am proud to say that we surpassed $100 million in Net
Sales, a milestone achievement. Net Sales for the year rose to ap-
proximately $101 million, a 21% increase over $83 million in
2005. Net earnings for 2006 were a record $12 million, a
12% increase over 2005. Our diluted earnings per share, after
a year-end 3-for-2 stock split, was $0.67/share, a 10% increase
over the $0.61/share of 2005.
Balchem’s record year was further highlighted by the move to
the NASDAQ stock exchange in December. This significant event
was well received by market makers and investors, and will
provide increased visibility of our Company to current and
potential investors moving forward.
Our balance sheet remains strong, with year-end net working
capital of $19 million, and no long-term debt. The CMC acqui-
sition, which closed in February 2006, was fully integrated into
our operation by year-end. This acquisition was funded in part by
a $10 million term loan which was fully repaid from operating
cash flow by year-end. In total, the Company spent approxi-
mately $25 million in investments through short-term borrowings
and operating funds. Our unused debt capacity and positive
cash flow allows us the flexibility to pursue other investment and
acquisition opportunities as they become available.
Our continued success through this past year has resulted in
Balchem being recognized in Forbes Magazine’s “200 Best
Small Companies” of 2006, where we ranked number 116.
Membership here is based on a comprehensive set of criteria in-
cluding current and past performance, as well as the potential
for future growth. We also ranked number 225 on Baseline’s
“500 Companies That Manage Information Best” list, which an-
nually ranks the best corporate managers of information. This,
too, is based on a five-year historical performance taking into ac-
count several productivity-based metrics. We are proud to be rec-
ognized as one of the best in these elite groups, and thank
everyone within our organization whose efforts and dedication
made these achievements possible.
New Initiatives
In 2006, we completed two significant strategic and opera-
tional acquisitions. In February, we completed the purchase of
CMC, adding a new technology to our specialty animal nutrition
product line, while providing us with additional cross-selling op-
portunities and expanding our global reach. Adding the chelation
process and a portfolio of proven trace mineral products to our
existing encapsulation technology enhances our already strong
specialty animal health product line, and positions us extremely
well for the future in this sector.
WE BELIEVE A PROACTIVE APPROACH TO OPENING NEW MARKETS WILL
FORM THE BASIS FOR OUR CONTINUED SUCCESS, INJECTING GROWTH IN
THESE MARKETS BY UTILIZING CORE AND ACQUIRED TECHNOLOGIES.
2
LEVERAGING OUR COMBINED TECHNOLOGIES INTO VARIOUS POINTS OF THE FOOD
CHAIN GIVES US A UNIQUE OPPORTUNITY TO ASSIST NUMEROUS MARKETPLACES
IN CREATING NOVEL NUTRITIONAL AND FUNCTIONAL FOODS AND FEEDS.
We also strengthened our growing BCP Ingredients segment
in 2006 by acquiring the aqueous choline chloride facility of
BioAdditives, in St. Gabriel, LA. This acquisition, which is the
largest liquid choline chloride plant in North America, provided
us an immediate increase in needed production capacity.
Balchem continues to strengthen its position as a significant logis-
tical supplier of choline chloride for animal nutrition in North
America, with two production plants in the United States.
Continued Implementation of Quality Initiatives
As mentioned above, Balchem was recognized as one of the
top 500 companies for managing its information. Improving the ef-
ficiency of our operations while maintaining the highest safety stan-
dards will always be a focus of management. In 2006, we
continued the implementation of process-improving and productivity-
enhancing initiatives across all of our businesses. Through our Profit
Enhancement Program (PEP), which utilizes cross-functional teams to
identify profit-enhancing opportunities, we realized cost reductions,
which translated into bottom-line improvement. Our Lean & Six
Sigma initiatives improved quality and reduced waste at all of our
production sites. We will accelerate these programs in 2007, as
we continue to focus on process and quality improvements while
simultaneously maintaining the highest safety standards.
Research and Development
Balchem has grown its technology advantage through acqui-
sitions along with continued research and development. We will
continue to build upon our Intellectual Property base, partnering
with universities and other external researchers to develop and
introduce products based on new technologies. Since 2001,
approximately 40% of our Balchem Encapsulates’ revenue has
come from new products introduced into the marketplace. Build-
ing on these successes, we will broaden our current encapsula-
tion technologies by focusing R&D resources on developing new
proprietary granulation technologies for food, pharma and nutri-
tion. We will also concentrate our research efforts on delivery
system technology, including taste masking and controlled re-
lease technologies, where we currently have three patent appli-
cations filed. Our acquisition of cGMP technology in 2005
enhances our technology platform, to be able to compete in the
pharmaceutical space, as well as provides us access to OTC
markets. We will work with leading researchers to highlight and
promote the human health benefits of choline and continue to
pursue new products and markets through innovation, focused
R&D, and cost-effective solutions.
New Team Members
Through acquisition and defined strategic direction, our contin-
ued success as a market leader has allowed us to attract and re-
cruit highly talented individuals in all facets of our organization.
We would like to welcome to the Balchem team:
• Migue DeJong, Business Director, North America Food
Ingredients — has a background of global business devel-
opment in the area of food and nutritional ingredients which
will be critical to growing the Food Segment of Balchem’s
Encap initiatives.
• Grahame Leach, Ph.D., Quality Manager, Chelated Minerals
— whose experience in developing and optimization of the
mineral chelation processes will lead to new forms of organic
minerals as feed additives in the Animal Nutrition and Health
business segment.
• Erv Kuhlmann, Ph.D., Quality Manager R & D — with expert-
ise in the area of cGMP (Current Good Manufacturing Prac-
tice), is of extreme importance to the advancement of
Balchem’s Pharmaceutical initiatives. His experience in this
critical quality discipline adds great value to the Corporation’s
overall growth platform.
• Gideon Oenga, Ph.D., Senior Analytical Chemist R & D —
has particular experience in developing and validating ana-
lytical methods for new pharmaceutical technologies, which
is important to the conversion of Balchem’s pharmaceutical
commercial pipeline. In addition, his knowledge and experi-
ence in the area of Food and Drug Administration approval
processes is very important to Balchem’s long range plans.
• Bill Backus, Corporate Controller — with significant experi-
ence in the areas of finance and accounting, along with a well
developed knowledge base in audit and financial controls, he
is well suited to serve our ”publicly traded” requirements. Man-
aging Sarbanes-Oxley Compliance in a manner that supports
the achievement of corporate growth is a key responsibility.
3
OUR COMMITMENT TO WELLNESS TRANSCENDS FROM INFANT NUTRITION,
INTO THE EVER-GROWING FAST FOOD AND PREPARED MEAL MARKETS, ALL THE
WAY THROUGH NEEDED STERILE MEDICAL DEVICES FOR SURGICAL PROCEDURES.
The addition of these experienced and talented individuals
strengthens our commitment to research, innovation, and intellectual
capital. People/employees are our most important asset.
Leveraging our Technologies
Each of our three core businesses had successful years, achiev-
ing new records in revenue and operating earnings. The future
will continue to provide new and exciting opportunities to expand
our businesses, both organically and through acquisition.
ARC Specialty Products remains the industry leader in the
repackaging and distribution of 100% Ethylene Oxide, which is
primarily used in the sterilization of surgical and medical devices.
ARC continues to be a solid performer for Balchem, and customer
satisfaction of our products remains very high. Although growth
in the Ethylene Oxide market has slowed due to efficiencies in the
medical device area, we continue to explore new ways to meet
and exceed our customers’ needs, both domestically and interna-
tionally, through repackaging and new applications. To this end,
ARC realized 9% growth in revenues to $32 million, a new
record year.
Our Animal Nutrition business had another fantastic year.
Balchem is growing into a position of being a global supplier of
animal nutrition products. With an extensive portfolio of products
and a global territory extending from North America through Eu-
rope and into Asia, Balchem now has the ability for extensive
cross-selling as well as increased market penetration. Our ever-ex-
panding global customer base will have the benefit of working
with a company focused on developing cutting-edge technology.
The Food, Pharma and Human Nutrition division continues to
rank as a leading producer of microencapsulated ingredient so-
lutions. Our Vitashure wellness product line continues to achieve
quality and sustainable growth. With a global focus on conven-
ience and nutritional value, our Bakeshure and Confecshure
products are fueling innovative retail product introductions. Our
acquisition of cGMP technology last year has enabled us to en-
hance our encapsulation technology to successfully compete in
the pharmaceutical marketplace. Besides giving us access to
the OTC pharmaceutical markets, this patented and proprietary
technology should accelerate our expansion into additional
food and nutritional markets. With changing international trends,
new technology, and global market intelligence, we foresee con-
tinuing strong growth in this segment. Our combined specialty
Animal Nutrition and Human Encap segment achieved a new
record revenue year at $42 million, a 28% increase over 2005.
BCP Ingredients, Inc., the leading producer of non-encapsulated
Choline Chloride, targeted for monogastric animal nutrition, once
again realized strong growth in 2006. By increasing our produc-
tion capacity through the acquisition of the BioAdditives Louisiana
plant, BCP is positioned to experience an increase of sales in the
North American and overseas markets, primarily Europe and Asia.
We expect growth in this market as we continuously improve op-
erating efficiencies and expand our global reach. Without the ac-
quisition, this segment also set a new revenue record at $27
million, exceeding the prior year by 29%.
Focus on the Future
As we complete our most successful year ever, Balchem will
not be looking or reflecting back. We will continue with our pri-
mary focus as a “wellness provider,” leveraging our core tech-
nologies in both human and animal nutrition, and expanding
beyond current encapsulation applications into the pharmaceu-
tical market. Through internal innovation, collaboration with sup-
pliers and customers, and the continuing attraction and retention
of quality and productive employees, Balchem will capitalize on
growth opportunities in our expanding core businesses. As we
continue to explore and develop new opportunities, seek strate-
gic alliances, and pursue suitable acquisitions, we will remain
efficient, responsible and committed to bottom-line performance.
We thank our Board of Directors, our employees, our customers
and our shareholders for your continued loyalty and support.
Sincerely,
Dino A. Rossi
Chairman, President and Chief Executive Officer
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:59)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
(cid:134)(cid:3) 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
(State or other jurisdiction of incorporation or organization)
13-2578432
(I.R.S. Employer Identification Number)
P.O. Box 600, New Hampton, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (845) 326-5600
Title of each class
Common Stock, par value $.06-2/3 per share
Name of each exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134) No (cid:59)(cid:3)
(cid:3)
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:134) No (cid:59)(cid:3)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:59) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:59)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer (cid:134)(cid:3) Accelerated filer (cid:59)(cid:3) Non-accelerated filer (cid:134)(cid:3)
(cid:3)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:134) No (cid:59)(cid:3)
The aggregate market value of the common stock issued and outstanding and held by non-affiliates of the Registrant, based
upon the closing price for the common stock on the American Stock Exchange on June 30, 2006 was approximately
$257,428,000. For purposes of this calculation, shares of the Registrant held by directors and officers of the Registrant and
under the Registrant's 401(k)/profit sharing plan have been excluded.
The number of shares outstanding of the Registrant's common stock was 17,795,446 as of March 1, 2007.
Selected portions of the Registrant’s proxy statement for its 2007 Annual Meeting of Stockholders (the “2007 Proxy
Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after
Registrant’s fiscal year-end of December 31, 2006 are incorporated by reference in Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not
statements of historical facts, but rather reflect our current expectations or beliefs concerning future events
and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely,"
"will" and similar expressions to identify forward-looking statements. Such forward-looking statements,
including those concerning our expectations, involve risks, uncertainties and other factors, some of which
are beyond our control, which may cause our actual results, performance or achievements, or industry
results, to be materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The risks, uncertainties and factors that could cause our
results to differ materially from our expectations and beliefs include, but are not limited to, those factors set
forth in this Annual Report on Form 10-K under "Item 1A. - Risk Factors" below, as well as the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
changes in laws or regulations affecting our operations;
changes in our business tactics or strategies;
acquisitions of new or complementary operations;
sales of any of our existing operations;
changing market forces or contingencies that necessitate, in our judgment, changes in our
plans, strategy or tactics; and
fluctuations in the investment markets or interest rates, which might materially affect our
operations or financial condition.
We cannot assure you that the expectations or beliefs reflected in these forward-looking statements
will prove correct. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on
such forward-looking statements when evaluating the information presented in this Annual Report on Form
10-K.
Part I
Item 1. Business
General:
Balchem Corporation (“Balchem,” the “Company,” “we” or “us”), incorporated in the State of
Maryland in 1967, is engaged in the development, manufacture and marketing of specialty performance
ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries.
The Company has three segments: specialty products, encapsulated / nutritional products and the
unencapsulated feed supplements segment (also referred to in this report as “BCP Ingredients” or “BCP”).
Products relating to choline animal feed for non-ruminant animals are primarily reported in the
unencapsulated feed supplements segment. Human choline nutrient products and encapsulated products are
reported in the encapsulated / nutritional products segment. Chelated products, nutritional products for the
animal health industry, as well as calcium carbonate products for the pharmaceutical industry are also
reported in the encapsulated / nutritional products segment.
The Company sells its products through its own sales force, independent distributors and sales
agents. Financial information concerning the Company's business, business segments and geographic
information appears in the Notes to our Consolidated Financial Statements included under Item 8 below,
which information is incorporated herein by reference.
1
The Company operates four subsidiaries, all of which are wholly-owned: BCP Ingredients, Inc. (“BCP”),
Balchem Minerals Corporation (“BMC”), BCP St. Gabriel, Inc. (“BCP St. Gabriel”), each a Delaware
corporation, and Chelated Minerals Corporation (“CMC”), a Utah corporation. Unless otherwise stated to
the contrary, or unless the context otherwise requires, references to the Company in this report includes
Balchem Corporation and its subsidiaries.
Encapsulated / Nutritional Products
The encapsulated / nutritional products segment provides microencapsulation, chelation and
agglomeration solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to
enhance therapeutic performance, taste, processing, packaging and shelf-life. Major product applications
are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections,
nutritional supplements, pharmaceuticals and animal nutrition. We also market human grade choline
nutrient products through this industry segment for wellness applications. Choline is recognized to play a
key role in the structural integrity of cell membranes, processing dietary fat, reproductive development and
neural functions, such as memory and muscle function. Balchem’s portfolio of granulated calcium
carbonate products are primarily used in, or in conjunction with, novel over-the-counter and prescription
pharmaceuticals for the treatment of osteoporosis, gastric disorders and calcium deficiencies.
In animal health industries, Balchem markets REASHURE® Choline, an encapsulated choline
product that improves health and production in transition and early lactation dairy cows. REASHURE®
delivers choline that survives the rumen and is biologically available, providing required nutritional levels
to dairy cows during certain weeks preceding and following calving, commonly referred to as the
“transition period” of the animal. Also in animal health we market NITROSHURETM, an encapsulated urea
supplement for lactating dairy cows that is designed to create a slow-release nitrogen source for the rumen,
allowing for greater flexibility in feed rations for dairy nutritionists and producers, and NIASHURETM, our
microencapsulated niacin product for dairy cows. In addition, CMC manufactures, sells and distributes
chelated mineral supplements for use in animal feed industries throughout the world. CMC’s proprietary
chelation technology provides for enhanced nutrient absorption for various species of production and
companion animals.
Specialty Products
Our specialty products segment operates as ARC Specialty Products. The specialty products
segment repackages and distributes the following specialty gases: ethylene oxide, blends of ethylene oxide,
propylene oxide and methyl chloride.
Balchem’s sale of ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in
the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and
effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics
without negatively impacting the performance or appearance of the device being sterilized. The Company
distributes its 100% ethylene oxide product in uniquely designed, recyclable double-walled stainless steel
drums to assure compliance with safety, quality and environmental standards as outlined by the U.S.
Environmental Protection Agency (the “EPA”) and the U.S. Department of Transportation. The Company's
inventory of these specially built drums, along with the Company's three filling facilities, represent a
significant capital investment. Contract sterilizers, medical device manufacturers, and medical gas
distributors are the Company’s principal customers for this product. As a fumigant, ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials. In
addition, the Company also sells small, uniquely designed single use canisters of 100% ethylene oxide for
use in medical device sterilization.
We sell two other products, propylene oxide and methyl chloride, principally to customers seeking
smaller (as opposed to bulk) quantities and whose requirements include timely delivery and safe handling.
Propylene oxide is used for fumigation in spice treatment and in various chemical synthesis applications. It
is also utilized in industrial applications to make paints more durable, and for manufacturing specialty
2
starches and textile coatings. Methyl chloride is used as a raw material in specialty herbicides, fertilizers
and pharmaceuticals, as well as in malt and wine preservers.
BCP Ingredients
This segment manufactures and supplies choline chloride, an essential nutrient for animal health,
predominantly to the poultry and swine industries. Choline plays a vital role in the metabolism of fat and
the building and maintaining of cell structures. A choline deficiency can result in, among other symptoms,
reduced growth and perosis in poultry; and fat deposits in the liver, kidney necrosis and general poor health
conditions in swine. In addition, certain derivatives of choline chloride are also manufactured and sold into
industrial applications. Choline chloride is manufactured and sold in both an aqueous and dry form and is
sold through the Company’s own sales force, independent distributors and sales agents.
Raw Materials:
The raw materials utilized by the Company in the manufacture of its products are generally
available from a number of commercial sources. The Company is not experiencing any current difficulties
in procuring such materials and does not anticipate any such problems; however, the Company cannot
assure that will always be the case.
Intellectual Property:
The Company currently holds 15 patents in the United States and overseas and uses certain trade-
names and trademarks. It also uses know-how, trade secrets, formulae, and manufacturing techniques that
assist in maintaining competitive positions of certain of its products. Formulae and know-how are of
particular importance in the manufacture of a number of the Company’s products. The Company believes
that certain of its patents, in the aggregate, are advantageous to its business. However, it is believed that no
single patent or related group of patents is currently so material to the Company that the expiration or
termination of any single patent or group of patents would materially affect its business. The Company
believes that its sales and competitive position are dependent primarily upon the quality of its products, its
technical sales efforts and market conditions, rather than on any patent protection.
Licensing:
The Company entered into a license agreement with Project Management and Development Co.,
Ltd., a British corporation ("PMD") in November 2005 under which the Company granted PMD the right to
utilize the Company’s proprietary continuous manufacturing technology for the production of aqueous
choline chloride in connection with PMD's construction and operation of an aqueous choline chloride
production facility at PMD's Al-Jubail, Saudi Arabia petrochemical facility, currently scheduled for
completion in late 2009. In addition, PMD has the exclusive right to use such technology in certain
countries, as well as the non-exclusive right to market, sell and use the products derived from such
technology on a world-wide basis except that the Company is to be PMD's exclusive North American
distributor for such products.
The License Agreement terminates either 10 years from the start-up of PMD's production facility
or December 31, 2020, whichever is earlier. As of August 2006, PMD assigned the license agreement in its
entirety to its successor in interest, Al Kayan Petrochemical Company.
Seasonality:
In general, the business of the Company's segments is not seasonal to any material extent.
3
Backlog:
At December 31, 2006, the Company had a total backlog of $2,853,000 (including $1,769,000 for
the encapsulated / nutritional products segment, $655,000 for the specialty products segment and $429,000
for BCP Ingredients), as compared to a total backlog of $2,688,000 at December 31, 2005 (including
$1,794,000 for the encapsulated / nutritional products segment, $548,000 for the specialty products
segment and $346,000 for the BCP Ingredients segment). It has generally been the Company’s policy and
practice to maintain an inventory of finished products and / or component materials for its segments to
enable it to ship products within a short time after receipt of a product order.
Competition:
The Company’s competitors include many large and small companies, some of which have greater
financial, research and development, production and other resources than the Company. Competition in the
encapsulation markets served by the Company is based primarily on performance, customer support,
quality, service and price. The development of new and improved products is important to the Company’s
success. This competitive environment requires substantial investments in product and manufacturing
process research and development. In addition, the winning and retention of customer acceptance of the
Company’s encapsulated products involve substantial expenditures for application testing and sales efforts.
The Company also engages various universities to assist in research and provide independent third-party
analysis. In the specialty products business, the Company faces competition from alternative sterilizing
technologies and products. Competition in the animal feed markets served by the Company is based
primarily on service and price.
Research & Development:
During the years ended December 31, 2006, 2005 and 2004, the Company incurred research and
development expense of approximately $2.0 million, $2.1 million and $1.8 million, respectively, on
Company-sponsored research and development for new products and improvements to existing products
and manufacturing processes, principally in the encapsulated / nutritional products segment. During the
year ended December 31, 2006, an average of 13 employees were devoted full time to research and
development activities. The Company has historically funded its research and development programs with
funds available from current operations with the intent of recovering those costs from profits derived from
future sales of products resulting from, or enhanced by, the research and development effort.
The Company prioritizes its product development activities in an effort to allocate its resources to
those product candidates that the Company believes have the greatest commercial potential. Factors
considered by the Company in determining the products to pursue include projected markets and needs,
status of its proprietary rights, technical feasibility, expected and known product attributes, and estimated
costs to bring the product to market.
Acquisitions, Dispositions, and Capital Projects:
In 2006, the Company made two significant acquisitions.
In August 2006, we acquired from BioAdditives, LLC, CMB Additives, LLC and CMB Realty of
Louisiana, an animal feed grade aqueous choline chloride manufacturing facility and related assets located
in St. Gabriel, Louisiana. In connection, we also acquired from such sellers the remaining interest in a land
lease (approximately 19 years) relating to the realty upon which the acquired facility and related assets are
located. In this Annual Report on Form 10-K, we refer to this acquisition as the “St. Gabriel Acquisition.”
In February 2006, we acquired all of the outstanding capital stock of CMC, which was then
privately held. In this Annual Report on Form 10-K, we refer to this acquisition as the “CMC Acquisition.”
4
In addition, in June 2005, we acquired Loders Croklaan USA, LLC’s encapsulation,
agglomeration and granulation business. In this Annual Report on Form 10-K, we refer to this acquisition
as the “Loders Crooklaan Acquisition.”
Excluding our 2006 acquisitions, capital expenditures were approximately $2.3 million for 2006,
as compared to $1.8 million in 2005. Capital expenditures are projected to be approximately $4.8 million
for 2007.
Environmental / Regulatory Matters:
The Federal Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”), a health and
safety statute, requires that certain products within the Company's specialty products segment must be
registered with the EPA because they are considered pesticides. In order to obtain a registration, an
applicant typically must demonstrate through extensive test data that its product will not cause unreasonable
adverse effects on the environment. The Company holds an EPA registration permitting it to sell ethylene
oxide as a medical device sterilant and spice fumigant. The Company is in the process of re-registering this
product’s use in compliance with FIFRA re-registration requirements for all pesticide products. In
December 2004, the EPA informed the Company and the other technical registrant under the current
registration that the Agency was beginning the 6-phase process to develop a Re-registration Eligibility
Decision (RED) for this product. This multi-phase process entered Phase 5 last year. The EPA's Office of
Pesticide Programs (OPP) had originally stated its intent to finalize the RED by August 2006, but
bifurcated the process, and dealt only with the reassessment of spice residue tolerances mandated by the
Food Quality Protection Act of 1996. On August 9, 2006, OPP issued a Tolerance Reassessment Progress
and Risk Management Decision (TRED) relating to the use of ethylene oxide to treat spices. This TRED
prohibits the use of ethylene oxide to treat basil, effective August 1, 2007, but allows the continuing use of
ethylene oxide to treat all other spices, provided users follow a mandated treatment method. In the Federal
Register notice announcing the TRED, the EPA stated its intent to complete the RED process for ethylene
oxide in 2007. Upon completion of the EPA's Office of Research and Development (ORD) assessment of
the carcinogenicity of ethylene oxide, OPP will complete preparation of the RED. ORD issued a draft
"Evaluation of the Carcinogenicity of Ethylene Oxide" in a Federal Register notice, dated September 22,
2006. This assessment is currently undergoing review by a special panel of the Science Advisory Board.
ORD indicates the assessment will be finalized by the summer of 2007. The Company has actively
participated in the public access portions of both the ORD assessment process and the OPP's RED process
and will continue to do so until their conclusions. With regard to the RED process, as of this date, the OPP
expressed concerns about occupational exposures to ethylene oxide. The EPA requested additional
information from the industry, which the Company is actively involved in providing. The EPA has also
indicated additional testing may be required in order to maintain the current uses. The Company believes
that the use will continue to be permitted, although the Agency may require some additional restrictions on
current uses. Additionally, the product, when used as a medical device sterilant, has no known equally
effective substitute. Management believes absence of availability of this product could not be easily
tolerated by various medical device manufacturers and the health care industry due to the resultant infection
potential, if the product were unavailable.
The State of California lists 100% ethylene oxide, when used as a sterilant or fumigant, as a
carcinogen and reproductive toxin under California's Proposition 65 (Safe Drinking Water and Toxic
Enforcement Act of 1986). As a result, the Company is required to provide a prescribed warning to any
person in California who may be exposed to this product. Failure to provide such warning would result in
liability of up to $2,500 per day per person exposed.
The Company’s facility in Verona, Missouri, while held by a prior owner, was designated by the
EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination
on portions of the site. Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources (“MDNR”) included removal of dioxin contaminated soil and
equipment, capping of areas of residual contamination in four relatively small areas of the site separate
from the manufacturing facilities, and the installation of wells to monitor groundwater and surface water for
5
contamination for certain organic chemicals. No ground water or surface water treatment has been
required. In 1998, the EPA certified the work on the contaminated soils to be complete. In February 2000,
after the conclusion of two years of monitoring groundwater and surface water, the former owner submitted
a draft third party risk assessment report to the EPA and MDNR recommending no further action. The prior
owner is awaiting the response of the EPA and MDNR to the draft risk assessment.
While the Company must maintain the integrity of the capped areas in the remediation areas on the
site, the prior owner is responsible for completion of any further Superfund remedy. The Company is
indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the
Verona facility for potential liabilities associated with the Superfund site and one of the sellers, in turn, has
the benefit of certain contractual indemnification by the prior owner that executed the above-described
Superfund remedy.
In connection with normal operations at its plant facilities, the Company is required to maintain
environmental and other permits including those relating to the ethylene oxide operations.
The Company believes it is in compliance in all material respects with federal, state, and local
provisions that have been enacted or adopted regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Such compliance includes the maintenance of
required permits under air pollution regulations and compliance with requirements of the Occupational
Safety and Health Administration. The cost of such compliance has not had a material effect upon the
results of operations or financial condition of the Company. 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 remediated the area and removed soil from the drum burial site. This
proceeding has been substantially completed (see Item 3).
Our Channahon, Illinois manufacturing facility manufactures a calcium carbonate line of
pharmaceutical ingredients. This facility is registered with the United States Food and Drug Administration
(“FDA”) as a drug manufacturing facility. These products must be manufactured in conformity with
current Good Manufacturing Practice (cGMP) regulations as interpreted and enforced by the FDA.
Modifications, enhancements or changes in manufacturing facilities or procedures of our pharmaceutical
products are, in many circumstances, subject to FDA approval, which may be subject to a lengthy
application process or which we may be unable to obtain. Our Channahon, Illinois facility, as well as those
of any third-party cGMP manufacturers that we may use, are periodically subject to inspection by the FDA
and other governmental agencies, and operations at these facilities could be interrupted or halted if the
results of these inspections are unsatisfactory.
Employees:
As of March 1, 2007, the Company employed approximately 230 persons. Approximately 50
employees at the Company’s Verona, Missouri facility are covered by a collective bargaining agreement
which expires in 2007.
Available Information:
The Company’s headquarters is located at 52 Sunrise Park Road, P.O. Box 600, New Hampton,
NY 10958. The Company’s telephone number is (845) 326-5600 and its Internet website address is
www.balchem.com. The Company makes available through its website, free of charge, its Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to
such reports, as soon as reasonably practicable after they have been electronically filed with the Securities
and Exchange Commission. Such reports are available via a link from the Investor Information page on the
6
Company’s website to a list of the Company’s reports on the Securities and Exchange Commission’s
EDGAR website.
Item 1A. Risk Factors
Our business involves a high degree of risk and uncertainty, including the following risks and
uncertainties:
Increased competition could hurt our business and financial results.
We face competition in our markets from a number of large and small companies, some of which
have greater financial, research and development, production and other resources than we do. Our
competitive position is based principally on performance, quality, customer support, service, breadth of
product line, manufacturing or packaging technology and the selling prices of our products. Our
competitors might be expected to improve the design and performance of their products and to introduce
new products with competitive price and performance characteristics. We expect to do the same to maintain
our current competitive position and market share.
One of our customers accounts for about 8% of our business; the loss of that customer could
adversely impact our business and financial results.
Due to consolidation of customer businesses in the contract sterilization industry, we have one
specialty products customer, which accounted for approximately 8% and 9% of our net sales in 2006 and
2005, respectively. This customer accounted for 10% and 8% of our accounts receivable net balance at
December 31, 2006 and 2005, respectively. The loss of this customer could have a material adverse effect
on our business and financial results.
The loss of governmental permits and approvals would materially harm some of our businesses.
Pursuant to applicable environmental and safety laws and regulations, we are required to obtain
and maintain certain governmental permits and approvals, including an EPA registration for our ethylene
oxide sterilant product. We maintain an EPA registration of ethylene oxide as a medical device sterilant and
fumicide. We are in the process of re-registering this product in accordance with FIFRA. The EPA may not
allow re-registration of ethylene oxide for the uses mentioned above. The failure of the EPA to allow re-
registration of ethylene oxide would have a material adverse effect on our business and financial results.
Our Channahon, Illinois manufacturing facility manufactures a calcium carbonate line of
pharmaceutical ingredients. This facility is registered with the FDA as a drug manufacturing facility.
These products must be manufactured in conformity with current Good Manufacturing Practice (cGMP)
regulations as interpreted and enforced by the FDA. Modifications, enhancements or changes in
manufacturing facilities or procedures of our pharmaceutical products are, in many circumstances, subject
to FDA approval, which may be subject to a lengthy application process or which we may be unable to
obtain. Our Channahon, Illinois facility, as well as those of any third-party cGMP manufacturers that we
may use, are periodically subject to inspection by the FDA and other governmental agencies, and
operations at these facilities could be interrupted or halted if the results of these inspections are
unsatisfactory. Failure to comply with the FDA or other governmental regulations can result in fines,
unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of
production, enforcement actions, injunctions and criminal prosecution, which could have a material adverse
effect on our business and financial results.
Permits and approvals may be subject to revocation, modification or denial under certain
circumstances. Our operations or activities (including the status of compliance by the prior owner of the
Verona, Missouri facility under Superfund remediation) could result in administrative or private actions,
revocation of required permits or licenses, or fines, penalties or damages, which could have an adverse
7
effect on us. In addition, we can not predict the extent to which any legislation or regulation may affect the
market for our products or our cost of doing business.
Raw material shortages or price increases could adversely affect our business and financial
results.
The principal raw materials that we use in the manufacture of our products can be subject to price
fluctuations. While the selling prices of our products tend to increase or decrease over time with the cost of
raw materials, these changes may not occur simultaneously or to the same degree. At times, we may be
unable to pass increases in raw material costs through to our customers. Such increases in the price of raw
materials, if not offset by product price increases, or substitute raw materials, would have an adverse impact
on our profitability.
Our financial success depends in part on the reliability and sufficiency of our manufacturing
facilities.
Our revenues depend on the effective operation of our manufacturing, packaging, and processing
facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard
performance of equipment, power outages, the improper installation, or operation of equipment, explosions,
fires, natural disasters and the need to comply with environmental and other directives of governmental
agencies. The occurrence of material operational problems, including but not limited to the above events,
could adversely affect our profitability during the period of such operational difficulties.
Our failure or inability to protect our intellectual property could harm our business and financial
results.
We hold 15 patents in the United States and overseas. Third parties could seek to challenge,
invalidate or circumvent our patents. Moreover, there could be successful claims against us alleging that we
infringe the intellectual property rights of others. If we are unable to protect all of our intellectual property
rights, or if we are found to be infringing the intellectual property rights of others, there could be an adverse
effect on our business and financial results. Our competitive position also depends on our use of unpatented
trade secrets. Competitors could independently develop substantially equivalent proprietary information,
which could hurt our business and financial results.
We face risks associated with our sales to customers outside the United States.
For the year ended December 31, 2006, approximately 10% of our net sales consisted of sales
outside the United States, predominately to Europe, Japan and China. Such sales are generally denominated
in U.S. Dollars at a specific price per unit. Changes in the relative values of currencies take place from time
to time and could in the future adversely affect prices foreign customers are willing to pay for our products.
In addition, international sales are subject to other inherent risks, including possible labor unrest, political
instability, export duties and quotas. These factors could have a material adverse impact on our ability to
increase or maintain our international sales.
Our success depends in large part on our key personnel.
Our operations significantly depend on the continued efforts of our senior executives. The loss of
the services of certain executives for an extended period of time could have a material adverse effect on our
business and financial results.
Litigation could be costly and can adversely affect our business and financial results.
We, like all companies involved in the food and pharmaceutical industries, are subject to potential
claims for product liability relating to our products. Such claims, irrespective of their outcomes or merits,
could be time-consuming and expensive to defend, and could result in the diversion of management time
8
and attention. Any of these situations could have a material adverse effect on our business and financial
results. It is possible that an adverse result in Casey Liesse, et al. v. AGA AB, et al. (see Item 3 of the
Report) or other legal proceedings commenced against us could have a negative impact on our financial
condition or liquidity.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In February 2002, the Company entered into a ten (10) year lease for approximately 20,000 square
feet of office space in New Hampton, New York. The office space is serving as the Company’s general
offices and as laboratory facilities for the Company’s encapsulated / nutritional products business.
Manufacturing facilities owned by the Company for its encapsulated products segment and a
blending, drumming and terminal facility for the Company’s ethylene oxide business, are presently housed
in three buildings located in Slate Hill, New York comprising a total of approximately 51,000 square feet.
The Company owns a total of approximately 16 acres of land on two parcels in this community.
The Company owns a facility located on an approximately 24 acre parcel of land in Green Pond,
South Carolina. The site consists of a drumming facility, a canister filling facility, a maintenance building
and an office building comprising a total of approximately 34,000 square feet. The Company uses this site
for processing products in its specialty products segment.
The Company’s Verona, Missouri site, which is located on approximately 100 acres, consists of
manufacturing facilities relating to animal feed grade choline, human choline nutrients, a drumming facility
for the Company’s ethylene oxide business, together with buildings utilized for warehousing such products.
The Verona operation buildings comprise a total of approximately 151,000 square feet. The facility, while
under prior ownership, was designated by the EPA as a Superfund site (see Item 1 – “Business -
Environmental / Regulatory Matters”).
The Company leases production and warehouse space in Channahon, Illinois as a result of the
Loders Croklaan Acquisition. The Company uses this facility for production related to the Company’s
pharmaceutical line of business. The initial term of the lease is effective through September 30, 2010,
subject to earlier termination by Balchem upon sixty days notice, or by the landlord upon sixty days notice.
The Company’s leased space in Channahon, Illinois totals approximately 26,000 square feet.
The Company, through CMC, owns a manufacturing facility and warehouse, comprising
approximately 16,500 square feet, located on approximately 5 acres of land in Salt Lake City, Utah. The
Company manufactures and distributes its chelated mineral nutrients for animal feed products at this
location.
The Company, through BCP, acquired in the St. Gabriel Acquisition a manufacturing facility
located upon approximately 11 acres of realty leased from Taminco Higher Amines, Inc. in St. Gabriel,
Louisiana. The Company manufactures and distributes animal feed grade choline chloride at this location.
Item 3. Legal Proceedings
In 1982 the Company discovered and thereafter removed a number of buried drums containing
unidentified waste material from the Company’s site in Slate Hill, New York. The Company thereafter
entered into a Consent Decree to evaluate the drum site with the New York Department of Environmental
Conservation (“NYDEC”) and performed a Remedial Investigation/Feasibility Study that was approved by
NYDEC in February 1994. Based on NYDEC requirements, the Company remediated the area and
removed soil from the drum burial site. Clean-up was completed in 1996, and NYDEC required the
9
Company to monitor the site through 1999. The Company continues to be involved in discussions with
NYDEC to evaluate monitoring results and determine what, if any, additional actions will be required on
the part of the Company to close out the remediation of this site. Additional actions, if any, would likely
require the Company to continue monitoring the site. The cost of such monitoring has recently been less
than $5,000 per year.
Casey Liesse, et al. v. AGA AB, et al., Circuit Court of Cook County, Illinois, Case No. 02 L
000498, was commenced in 2002 against over 80 defendants, among which is the Company. The action
alleges that nineteen individual plaintiffs were exposed to ethylene oxide and other chemicals used for
sterilizing or cleaning medical instruments during their employment at a hospital in Harvey, Illinois. As a
result of the alleged exposure, the plaintiffs claim they have suffered various physical and psychological
injuries. During the time period plaintiffs suffered their alleged injuries, the Company was in the business
of repackaging and distributing ethylene oxide, among other products. The Company never sold any
product to the hospital but has been injoined due to the fact that it distributed ethylene oxide for medical
device sterilization to other companies that blend ethylene oxide for sales to the hospital noted. On
February 9, 2006, the trial court ruled in favor of Balchem's Motion for Summary, dismissing all of the
plaintiffs' claims of negligence, products liability and/or conspiracy against the Company. The plaintiffs
filed a Notice of Appeal to the trial court's summary judgment order, and on October 19, 2006 the Illinois
Court of Appeals dismissed the plaintiffs' appeal for failure to file the record on appeal within the
prescribed time and for want of prosecution. The plaintiffs did not seek to appeal this ruling to the Illinois
Supreme Court, thereby precluding the right of any further appeals by the plaintiffs of the rulings in favor
of the Company. Plaintiffs continue to pursue claims and file appeals against other defendants in the action
but these have no direct impact on the Company. Balchem may still be subject to ancillary claims of
indemnification and contribution from other defendants in the litigation, but the Company believes that
these claims are either without merit or time barred or both.
The Company is also involved in other legal proceedings through the normal course of business.
Management believes that any unfavorable outcome related to these proceedings will not have a material
effect on the Company’s financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
(a)
Market Information.
On December 8, 2006, the Board of Directors of the Company approved a three-for-two split of
the Company’s common stock to be effected in the form of a stock dividend to shareholders of record on
December 29, 2006. Such stock dividend was made on January 19, 2007. The stock split was recognized
by reclassifying the par value of the additional shares resulting from the split, from additional paid-in
capital to common stock.
On December 15, 2005, the Board of Directors of the Company approved a three-for-two split of
the Company’s common stock to be effected in the form of a stock dividend to shareholders of record on
December 30, 2005. Such stock dividend was made on January 20, 2006. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split, from additional paid-in capital to
common stock.
On December 16, 2004, the Board of Directors of the Company approved a three-for-two split of
the Company’s common stock to be effected in the form of a stock dividend to shareholders of record on
10
December 30, 2004. Such stock dividend was made on January 20, 2005. The stock split was recognized by
reclassifying the par value of the additional shares resulting from the split, from additional paid-in capital to
common stock.
All references to number of common shares and per share amounts except shares authorized in the
accompanying consolidated financial statements were retroactively adjusted to reflect the effect of the
December 2006 stock split.
Since December 22, 2006, the Company’s common stock has traded on the Nasdaq Global Market
under the trading symbol BCPC. Prior to that, our common stock traded on the American Stock Exchange
under the trading symbol BCP. The high and low closing prices for the common stock as recorded for each
quarterly period during the years ended December 31, 2006 and 2005, adjusted for the December 2006 and
2005 three-for-two stock splits (effected by means of stock dividends) were as follows:
Quarterly Period
Ended March 31, 2006
Ended June 30, 2006
Ended September 30, 2006
Ended December 31, 2006
Quarterly Period
Ended March 31, 2005
Ended June 30, 2005
Ended September 30, 2005
Ended December 31, 2005
$
$
High
Low
15.99 $
15.85
15.93
19.25
13.57
13.41
13.07
12.80
High
Low
11.11 $
13.37
14.42
13.25
9.64
9.71
11.69
11.56
On March 1, 2007 the closing price for the common stock on the Nasdaq Global Market was
$14.53.
(b)
Record Holders.
As of March 1, 2007, the approximate number of holders of record of the Company’s common
stock was 198. Such number does not include stockholders who hold their stock in street name. The total
number of beneficial owners of the Company's common stock is estimated to be approximately 7,271.
(c)
Dividends.
The Company declared cash dividends of $0.09 and $0.06 per share on its common stock during
its fiscal years ended December 31, 2006 and 2005, respectively (after giving effect to the December 2006
and 2005 three-for-two stock splits).
For information concerning prior stockholder approval of and other matters relating to our equity
incentive plans, see Item 12 in this Annual Report on Form 10-K.
(d)
Performance Graph.
The graph below sets forth the cumulative total stockholder return on the Company's Common
Stock (referred to in the table as "BCPC") for the five years ended December 31, 2006, the overall stock
market return during such period for shares comprising the Russell 2000® Index (which the Company
believes includes companies with market capitalization similar to that of the Company), and the overall
stock market return during such period for shares comprising the Standard & Poor's 500 Food Group Index,
in each case assuming a comparable initial investment of $100 on December 31, 2001 and the subsequent
reinvestment of dividends. The Russell 2000® Index measures the performance of the shares of the 2000
smallest companies included in the Russell 3000® Index. In light of the Company's industry segments, the
11
Company does not believe that published industry-specific indices are necessarily representative of stocks
comparable to the Company. Nevertheless, the Company considers the Standard & Poor's 500 Food Group
Index to be potentially useful as a peer group index with respect to the Company in light of the Company's
encapsulated / nutritional products segment. The performance of the Company's Common Stock shown on
the graph below is historical only and not indicative of future performance.
BCPC
Russell 2000® Index
S&P Food Group Index
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
)
$
(
S
R
A
L
L
O
D
$0
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
Item 6. Selected Financial Data
The selected statements of operations data set forth below for the three years in the period ended
December 31, 2006 and the selected balance sheet data as of December 31, 2006 and 2005 have been
derived from our Consolidated Financial Statements included elsewhere herein. The selected financial data
as of December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 have been
derived from audited Consolidated Financial Statements not included herein, but which were previously
filed with the SEC. The following information should be read in conjunction with Item 7 —
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
Consolidated Financial Statements and notes thereto included elsewhere herein.
All dollar amounts are in thousands (other than per share amounts). Earnings per share and dividend
amounts have been adjusted for the December 2006, 2005 and 2004 three-for-two stock splits (effected by
means of stock dividends).
(In thousands, except per share data)
Year ended December 31,
Statement of Operations Data
Net sales
Earnings before income
tax expense
Income tax expense
Net earnings
Basic net earnings per
common share
Diluted net earnings per
common share
2006
(1)(2)(3)
2005
(1)
2004
2003
2002
$
100,905
$
83,095
$
67,406
$
61,875
$
60,197
19,101
6,823
12,278
17,191
6,237
10,954
12,715
4,689
8,026
8,763
3,125
5,638
$
$
.70
.67
$
$
.63
.61
$
$
.48
.46
$
$
.35
.33
$
$
11,845
4,429
7,416
.46
.44
12
At December 31,
Balance Sheet Data
Total assets
Long-term debt
Other long-term
Obligations
Total stockholders’ equity
Dividends per common share
2006
2005
2004
2003
2002
$
92,333
$
75,141
$
60,405 $
56,906
$
53,298
-
-
-
7,839
9,581
784
75,362
.09
$
1,043
60,933
.06
$
1,003
50,234
.04
$
985
39,781
.023
$
964
33,269
.023
$
(1)
(2)
(3)
Includes the operating results, cash flows, and assets relating to the Loders Croklaan
Acquisition from the date of acquisition (July 1, 2005) forward.
Includes the operating results, cash flows, and assets relating to the CMC Acquisition
from the date of acquisition (February 8, 2006) forward.
Includes the operating results, cash flows, and assets relating to the St. Gabriel
Acquisition from the date of acquisition (August 24, 2006) forward.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company develops, manufactures, distributes and markets specialty performance ingredients
and products for the food, nutritional, pharmaceutical, feed and medical sterilization industries. The
Company’s reportable segments are strategic businesses that offer products and services to different
markets. The Company presently has three reportable segments: specialty products; encapsulated /
nutritional products; and BCP Ingredients.
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with Item 6 — “Selected Financial Data” and our Consolidated Financial Statements
and the related notes included in this report. Those statements in the following discussion that are not
historical in nature should be considered to be forward-looking statements that are inherently uncertain. See
“Cautionary Statement Regarding Forward-Looking Statements”.
Specialty Products
The specialty products segment repackages and distributes the following specialty gases: ethylene
oxide, blends of ethylene oxide, propylene oxide and methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas, primarily for use in the health
care industry and used to sterilize medical devices. Contract sterilizers, medical device manufacturers and
medical gas distributors are the Company’s principal customers for this product. Blends of ethylene oxide
are sold as fumigants and are highly effective in killing bacteria, fungi, and insects in spices and other
seasoning type materials. In addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride are sold principally to
customers seeking smaller (as opposed to bulk) quantities.
Management believes that future success in this segment is highly dependent on the Company’s
ability to maintain its strong reputation for excellent quality, safety and customer service.
Encapsulated / Nutritional Products
The encapsulated / nutritional products segment provides microencapsulation, chelation and
agglomeration solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to
enhance therapeutic performance, taste, processing, packaging and shelf-life. Major end product
applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends,
13
confections, nutritional supplementations, pharmaceuticals and animal nutrition. We also market human
grade choline nutrient products through this industry segment for wellness applications. Choline is
recognized to play a key role in the structural integrity of cell membranes, processing dietary fat,
reproductive development and neural functions, such as memory and muscle function. Balchem’s portfolio
of granulated calcium carbonate products are primarily used in novel over-the-counter and prescription
pharmaceuticals for the treatment of osteoporosis, gastric disorders and calcium deficiencies in the United
States.
Management believes this segment’s key strengths are its proprietary technology and end-product
application capabilities. The success of the Company’s efforts to increase revenue in this segment is highly
dependent on the timing of marketing launches of new products in the U.S. and international food and
nutrition markets by the Company’s customers and prospects. The Company, through its innovative
proprietary technology and applications expertise, continues to develop new products designed to solve and
respond to customer problems and innovative needs. Sales of specialty products for the animal nutrition and
health industry are highly dependent on dairy industry economics as well as the ability of the Company to
leverage the results of existing successful university research on the animal health benefits of the
Company’s products.
BCP Ingredients
BCP Ingredients manufactures and supplies choline chloride, an essential nutrient for animal
health, to the poultry and swine industries. In addition, certain derivatives of choline chloride are also
marketed into industrial applications.
Management believes that success in this commodity-oriented marketplace is highly dependent on
the Company’s ability to maintain its strong reputation for excellent product quality and customer service.
In addition, the Company must continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete for market share in a highly competitive global marketplace.
The Company sells products for all three segments through its own sales force, independent
distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business segment earnings
before income taxes for the three years ended December 31, 2006, 2005 and 2004 (in thousands):
Business Segment Net Sales:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Total
Business Segment Earnings Before Income Taxes:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Interest and other income (expense)
Total
2006
32,026
41,565
27,314
100,905
2006
11,315
4,200
3,647
(61)
19,101
$
$
$
$
2005
29,433
32,499
21,163
83,095
2005
11,007
3,217
2,679
288
17,191
$
$
$
$
2004
28,767
24,759
13,880
67,406
2004
10,693
992
1,112
(82)
12,715
$
$
$
$
14
Fiscal Year 2006 compared to Fiscal Year 2005
(All amounts in thousands, except share and per share data)
Net Sales
Net sales for 2006 were $100,905 compared with $83,095 for 2005, an increase of $17,810 or
21.4%. Net sales for the specialty products segment were $32,026 for 2006, as compared with $29,433 for
2005, an increase of $2,593 or 8.8%. This increase was principally due to an increase in sales volume
along with modest price increases for our ethylene oxide products for medical device sterilization. Net
sales for the encapsulated / nutritional products segment were $41,565 for 2006 compared with $32,499 for
2005, an increase of $9,066 or 27.9%. This increase was due principally to increased volumes sold in the
human choline market, favorable changes in product mix in the domestic and international food markets
and approximately $6,362 of incremental sales associated with the Company’s newly acquired
pharmaceutical, food, and chelated minerals business lines resulting from the Loders Croklaan Acquisition
and the CMC Acquisition (see Notes 7 and 6 to our Consolidated Financial Statements, respectively). The
Company also experienced volume improvements in sales of REASHURE®, our animal nutrition and health
product targeted for dairy cows. Net sales for the BCP Ingredients segment of $27,314 were realized for
2006 compared with $21,163 for 2005, an increase of $6,151 or 29.1%. This increase was due to increased
volumes sold in dry and aqueous choline and choline derivatives, along with modest price increases in all
product lines and revenue recognized of $842 relating to the PMD license agreement as compared to $158
in 2005 (see Note 14 to our Consolidated Financial Statements).
Gross Margin
Gross margin for 2006 increased to $34,006 compared to $28,680 for 2005, an increase of 18.6%,
due largely to the above-noted increase in sales. Gross margin percentage for 2006 was 33.7%, as
compared to 34.5% for 2005, as our margin percentage was unfavorably affected by product mix and
higher raw material and energy costs. Gross margin percentage for the specialty products segment
decreased slightly primarily due to rising raw material costs. Gross margin percentage in the encapsulated /
nutritional products segment increased 0.6% as margins were favorably affected by increased production, a
result of greater sales volume as described above. The favorable impact of the increased production was
partially offset by higher raw material costs and an unfavorable product mix in the pharmaceutical calcium
product line. Gross margin percentage in BCP Ingredients increased 0.6% and was favorably affected by
increased production volumes of choline chloride and specialty derivative products. This favorable impact
was partially offset by higher raw material and energy costs.
Operating Expenses
Operating expenses for 2006 increased to $14,844 from $11,777 for 2005, an increase of $3,067 or
26.0%. Total operating expenses as a percentage of sales were 14.7% for 2006, as compared to 14.2% for
2005. The increase in operating expenses for 2006 was principally a result of stock-based compensation
expense of $982 relating to the adoption of the provisions of SFAS 123R, increased payroll costs and
benefits of $874 primarily due to new hires, increased expenditures of $802 in support of the Company’s
continuing efforts in the pharmaceutical industry, and higher amortization expense of $356 resulting from
the CMC Acquisition. During 2006 and 2005, the Company spent $2,019 and $2,053, 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 2006 were $19,162 as compared to
$16,903 for 2005, reflecting a 13.4% increase from year to year.
15
Other Expenses (Income)
Interest income for 2006 was $128 as compared to $214 for 2005. This decrease is attributable to
a decrease in the Company’s average cash balance during 2006. Interest expense was $189 for 2006
compared to $8 for 2005. This increase is attributable to the average outstanding current and long-term
debt in 2006, resulting from the CMC Acquisition in February 2006. Other income for 2006 was $-0- as
compared to $82 for 2005. This decrease is attributable to the inclusion of a gain on the sale of equipment
in 2005.
Income Tax Expense
The Company’s effective tax rate for 2006 was 35.7% compared to a 36.3% rate for 2005. This
decrease in the effective tax rate is primarily attributable to a change in allocation relating to state income
taxes.
Net Earnings
As a result of the foregoing, net earnings were $12,278 for 2006 as compared with $10,954 for
2005, reflecting a 12.1% increase from 2005 to 2006.
Fiscal Year 2005 compared to Fiscal Year 2004
(All amounts in thousands, except share and per share data)
Net Sales
Net sales for 2005 were $83,095 compared with $67,406 for 2004, an increase of $15,689 or
23.3%. Net sales for the specialty products segment were $29,433 for 2005 compared with $28,767 for
2004, an increase of $666 or 2.3%. This increase was due principally to greater sales volumes of ethylene
oxide for medical device sterilization and propylene oxide for starch modification as well as a modest price
increase adopted early in 2005 to help offset rising raw material costs. This increase was partially offset by
a decline in volumes sold in the ethylene oxide blends product line and single use ethylene oxide canisters
for use in sterilization equipment. Net sales for the encapsulated / nutritional products segment were
$32,499 for 2005 compared with $24,759 for 2004, an increase of $7,740 or 31.3%. This increase was due
principally to increased volumes sold in the domestic food and human choline markets and approximately
$3,300 associated with the Company’s new pharmaceutical and food business lines resulting from the June
30, 2005 Loders Croklaan Acquisition, as described in Note 7 to our Consolidated Financial Statements.
The Company also experienced volume improvements in the animal health industry relating to
REASHURE®, NITROSHURETM and NIASHURETM, our microencapsulated products for dairy cows.
These increases were partially offset by a decline in volumes sold in the international food product lines
and the nutritional supplement product line. Net sales of $21,163 were realized for 2005 in the BCP
Ingredients segment compared with $13,880 for 2004, an increase of $7,283 or 52.5%. This increase was
due to increased volumes sold in the dry choline, aqueous choline, and specialty industrial product lines,
along with modest price increases in all three product lines.
Gross Margin
Gross margin for 2005 increased to $28,680 compared to $23,806 for 2004, an increase of 20.5%,
due largely to the above-noted increase in sales. Gross margin percentage for 2005 was 34.5% as compared
to 35.3% for 2004 as our margin percentage was unfavorably affected by product mix and higher raw
material and energy costs. Gross margin percentage for the specialty products segment decreased slightly
primarily due to rising raw material costs. Gross margin percentage in the encapsulated / nutritional
products segment increased 1.8% as margins were favorably affected by increased production, a result of
greater sales volume as described above. Gross margin percentage in BCP Ingredients increased 3.8% and
was favorably affected by increased production volumes of choline chloride and specialty derivative
products.
16
Operating Expenses
Operating expenses for 2005 increased to $11,777 from $11,009 for 2004, an increase of $768 or
7.0%. Total operating expenses as a percentage of sales were 14.2% for 2005 compared to 16.3% for 2004.
The increase in operating expenses for 2005 was principally a result of new hires, increased charges for
search fees associated with new hires and associated relocation expenses. These increases were partially
offset by a decrease in selling expenses. During 2005 and 2004, the Company spent $2,053 and $1,752,
respectively, on Company-sponsored research and development programs, substantially all of which
pertained to the Company’s encapsulated / nutritional products segment for both food and animal feed
applications.
Earnings From Operations
As a result of the foregoing, earnings from operations for 2005 were $16,903 as compared to
$12,797 for 2004, reflecting a 32.1% increase from year to year.
Other Expenses (Income)
Interest income for 2005 totaled $214 as compared to $125 for 2004. This increase is attributable
to an increase in the Company’s average cash balance during 2005. Interest expense was $8 for 2005
compared to $219 for 2004. This decrease is the result of the prepayment of the Company’s outstanding
loan balance in December 2004. Other income of $82 in 2005 represents the net gain on the sale of
equipment.
Income Tax Expense
The Company’s effective tax rate for 2005 was 36.3% compared to a 36.9% rate for 2004.
Net Earnings
As a result of the foregoing, net earnings were $10,954 for 2005 as compared with $8,026 for
2004, reflecting a 36.5% increase from 2004 to 2005.
LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations
The Company's contractual obligations and commitments principally include obligations
associated with future minimum non-cancelable operating lease obligations (including the headquarters
office space entered into in 2002). These aggregate commitments are as follows:
Year
2007
2008
2009
2010
2011
Thereafter
Total minimum lease
payments
$ 672
619
652
209
79
59
$ 2,290
As part of the June 30, 2005 Loders Croklaan Acquisition, we agreed to make contingent
payments of additional consideration based upon the volume of sales associated with one particular product
17
acquired by the Company during the three year period following the acquisition. Such contingent
consideration, if and when paid, is recorded as an additional cost of the acquired product lines. As of
December 31, 2006, such contingent consideration of $23 has been earned and paid.
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.
Acquisitions and Dispositions
Effective August 24, 2006, pursuant to an asset purchase agreement of same date, the Company,
through its wholly owned subsidiaries BCP and BCP St. Gabriel, acquired an animal feed grade aqueous
choline chloride manufacturing facility and related assets located in St. Gabriel, Louisiana from
BioAdditives, LLC, CMB Additives, LLC and CMB Realty of Louisiana. On February 8, 2006, the
Company, through its wholly owned subsidiary Balchem Minerals Corporation, acquired all of the
outstanding capital stock of CMC, for a purchase price of $17,350 before working capital and other
adjustments. CMC is a manufacturer and global marketer of chelated mineral nutritional supplements for
livestock, pet and swine feeds.
The Company is actively pursuing acquisition candidates.
Cash
Cash and cash equivalents decreased to $5,189 at December 31, 2006 from $12,996 at December
31, 2005. The $7,807 decrease resulted from net cash used in investing activities of $25,232 partially offset
by net cash provided by operating activities of $16,370 and net cash provided by financing activities of
$1,055. Working capital amounted to $19,295 at December 31, 2006 as compared to $26,116 at December
31, 2005, a decrease of $6,821, primarily due to the aforementioned decrease in cash.
Operating Activities
Cash flows from operating activities provided $16,370 for 2006 as compared with $13,698 for
2005. The increase in cash flows from operating activities was due primarily to increases in net income and
non-cash expenses including depreciation expense and stock compensation expense of $1,097.
Investing Activities
Capital expenditures were approximately $2,300 for 2006. Capital expenditures are projected to be
approximately $4,800 for calendar year 2007. Cash paid for acquisitions in 2006, including acquisition
costs, net of acquisition accounts receivable collected, was $22,872.
The overall effect of the foregoing was that cash flows used in investing activities were $25,232 in
2006, as compared to $12,943 in 2005.
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 772,461
shares at an average cost of $4.11 per share, none of which remained in treasury at December 31, 2004. In
June 2005, the board of directors authorized another extension of the stock repurchase program for up to an
additional 900,000 shares, over and above those 772,461 shares previously repurchased under the program.
During 2005, a total of 99,450 shares were purchased at an average cost of $12.05 per share, 96,024 of
18
which remained in treasury at December 31, 2005. During 2006, there were no shares purchased, and no
shares remained in treasury at December 31, 2006. 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.
There was no debt outstanding at December 31, 2006 or December 31, 2005.
On February 6, 2006, the Company and its principal bank entered into a Loan Agreement (the
“Loan Agreement”) providing for a term loan of $10,000 (the “Term Loan”), the proceeds of which were
used to fund the CMC Acquisition, in part. As of December 31, 2006, the Company made $10,000 in
principal payments against the Term Loan, which paid the Term Loan in full. The Loan Agreement also
provided for a short-term revolving credit facility of $3,000 (the “Revolving Facility”). Borrowings under
the Revolving Facility bear interest at LIBOR plus 1.00%. As of December 31, 2006, no amounts were
drawn on the Revolving Facility. The Revolving Facility expires in May, 2007. Management believes that
such facility will be renewed in the normal course of business.
Financing activities also included proceeds from stock options exercised totaling $1,239 and
$1,409 for 2006 and 2005, respectively, and $878 of excess tax benefits associated with equity-based
compensation for 2006. Dividend payments were $1,045 and $685 for 2006 and 2005, respectively.
The overall effect of the foregoing was that cash flows provided by financing activities were
$1,055 in 2006, as compared to cash flows used in financing activities of $493 in 2005.
Other Matters Impacting Liquidity
The Company currently provides postretirement benefits in the form of a retirement medical plan
under a collective bargaining agreement covering eligible retired employees of the Verona, Missouri
facility. The amount recorded on the Company’s balance sheet as of December 31, 2006 for this obligation
is $729. The postretirement plan is not funded. Historical cash payments made under such plan have been
less than $50 per year.
Critical Accounting Policies
Management of the Company is required to make certain estimates and assumptions during the
preparation of consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America. These estimates and assumptions impact the reported amount of
assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated
financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are
reflected in the consolidated financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
The Company’s "critical accounting policies" are those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and that may change in subsequent periods. Management
considers the following accounting policies to be critical.
Revenue Recognition
Revenue is recognized upon product shipment, passage of title and risk of loss, and when
collection is reasonably assured. The Company reports amounts billed to customers related to shipping and
handling as revenue and includes costs incurred for shipping and handling in cost of sales. Amounts
received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer
deposits and are included in current liabilities. In addition, the Company follows the provisions of the
Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 104, “Revenue
19
Recognition,” which sets forth guidelines on the timing of revenue recognition based upon factors such as
passage of title, installation, payments and customer acceptance.
Revenue related to a process and product license agreement is recognized using the percentage of
completion method and the progress to completion is measured using the efforts-expended method. The
Company follows the provisions of the American Institute of Certified Public Accountants’ (AICPA)
Statement of Position (SOP) 81-1, “Accounting for Performance of Construction Type and Certain
Production Type Contracts.” Revenue is recognized as work is performed and costs are incurred.
Inventories
Inventories are valued at the lower of cost (first in, first out or average) or market value and have
been reduced by an allowance for excess or obsolete inventories. Inventory reserves are generally recorded
when the inventory for a product exceeds twelve months of demand for that product and/or when individual
products have been in inventory for greater than six months. In November 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 151, “Inventory Costs.” The new
statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This
statement requires that those items be recognized as current period charges and requires that allocation of
fixed production overheads to the cost of conversion be based on the normal capacity of the production
facilities. The provisions of this statement were applied prospectively for inventory costs incurred
beginning in our fiscal year 2006. The adoption of this statement did not have a material impact on our
results of operations, financial position or cash flow.
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment and intangible assets with finite lives,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair
value of the asset, which is generally based on discounted cash flows.
Goodwill, which is not subject to amortization, is tested annually for impairment, and more
frequently if events and circumstances indicate that the asset might be impaired. If an indicator of
impairment exists, the Company determines the amount of impairment based on a comparison of the
implied fair value of its goodwill to its carrying value.
Accounts Receivable
We market our products to a diverse customer base, principally throughout the United States,
Europe, China and Japan. We grant credit terms in the normal course of business to our customers. We
perform on-going credit evaluations of our customers and adjust credit limits based upon payment history
and the customer's current credit worthiness, as determined through review of their current credit
information. We continuously monitor collections and payments from customers and maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. Estimated losses are based on historical experience and any specific customer collection issues
identified. If the financial condition of our customers were to deteriorate resulting in an impairment of their
ability to make payments, additional allowances and related bad debt expense may be required.
Post-employment Benefits
The Company provides life insurance and health care benefits for eligible retirees and health care
benefits for retirees’ eligible survivors. The costs and obligations related to these benefits reflect the
20
Company’s assumptions as to general economic conditions and health care cost trends. The cost of
providing plan benefits also depends on demographic assumptions including retirements, mortality,
turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing
these benefits could increase or decrease.
In September 2006, the FASB issued FASB Statement No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” This Statement requires an employer to
recognize the over funded or under funded status of a defined benefit post retirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes
in that funded status in the year in which the changes occur through comprehensive income. As a result of
adopting SFAS No. 158 on December 31, 2006, we recorded $0.3 million as a reduction to the benefit
obligation and $0.2 million, net of tax, as a one-time adjustment to accumulated other comprehensive
income in stockholders’ equity.
Intangible Assets with Finite Lives
The useful life of an intangible asset is based on the Company’s assumptions regarding expected
use of the asset; the relationship of the intangible asset to another asset or group of assets; any legal,
regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or
extension of the asset’s legal or contractual life without substantial cost; the effects of obsolescence,
demand, competition and other economic factors; and the level of maintenance expenditures required to
obtain the expected future cash flows from the asset and their related impact on the asset’s useful life. If
events or circumstances indicate that the life of an intangible asset has changed, it could result in higher
future amortization charges or recognition of an impairment loss.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
earnings in the period that includes the enactment date. The Company regularly reviews its deferred tax
assets for recoverability and would establish a valuation allowance if it believed that such assets may not be
recovered, taking into consideration historical operating results, expectations of future earnings, changes in
its operations and the expected timing of the reversals of existing temporary differences.
Stock-based Compensation
Beginning in fiscal 2006, we account for stock-based compensation in accordance with
SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SEC Staff
Accounting Bulletin (“SAB”) No. 107. Under the fair value recognition provisions of this statement, share-
based compensation cost is measured at the grant date based on the value of the award and is recognized as
expense over the vesting period. Determining the fair value of share-based awards at the grant date
requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors
and employee option forfeiture rates. Expected volatilities are based on historical volatility of the
Company’s stock. The expected term of the options is based on the Company’s historical experience of
employees’ exercise behavior. As stock-based compensation expense recognized in the Consolidated
Statement of Earnings is based on awards ultimately expected to vest, the amount of expense has been
reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures
were estimated based on historical experience. As a result of adopting SFAS 123R, we recorded $0.9
million of compensation expense, net of tax, in 2006. If factors change and we employ different
21
assumptions in the application of SFAS 123R, the compensation expense that we record in future periods
may differ significantly from what we have recorded in the current period. Under the accounting method
we followed prior to January 1, 2006, we did not record any stock-based compensation expense related to
stock options granted to employees and directors for the years ended December 31, 2005 and 2004. If we
had included the cost of employee stock option compensation in the financial statements for the years ended
December 31, 2005 and 2004, our net earnings would have decreased by approximately $0.9 million and
$0.8 million, respectively, based on the fair value of the stock options granted to employees. See Note 2 to
the Consolidated Financial Statements for additional information.
New Accounting Pronouncements:
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value under generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. This statement is effective beginning in January 2008. The
Company is evaluating whether adoption of this statement will result in a change to its fair value
measurements.
In September 2006, the SEC issued SAB 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires
analysis of misstatements using both an income statement (rollover approach) and a balance sheet (iron
curtain) approach in assessing materiality and provides for a one-time cumulative effect transition
adjustment. SAB 108 is effective for the Company’s fiscal year 2006 annual financial statements. The
adoption of this statement did not have a material impact on our consolidated results of operations, financial
position or cash flows.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). This interpretation, among other things, creates a two-step approach for evaluating
uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position,
based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement
(step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement.
Derecognition of a tax position that was previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN
48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions,
and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after
December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect
adjustment to the beginning balance of retained earnings. The Company is evaluating FIN 48 and has not
yet determined the impact the adoption will have on the consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents are invested primarily in money market accounts. Accordingly, we
believe we have limited exposure to market risk for changes in interest rates. However, interest payable
under the Company’s Revolving Facility is based on LIBOR plus 1.00%, and thus could expose the
Company to some interest rate risk in connection with its bank financing. No amounts were drawn on the
Revolving Facility as of December 31, 2006. 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.
22
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data:
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of
December 31, 2006 and 2005
Consolidated Statements of Earnings for the
years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows
for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Schedule II – Valuation and Qualifying
Accounts for the years ended December 31, 2006, 2005 and 2004
24
26
27
28
29
30
53
54
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Balchem Corporation
New Hampton, New York
We have audited the accompanying consolidated balance sheets of Balchem Corporation and Subsidiaries
as of December 31, 2006 and 2005, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the years in the three-year period ended December 31, 2006. We also
have audited management's assessment, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting, that Balchem Corporation and Subsidiaries maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria established in “Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO)." Balchem Corporation’s management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
these financial statements, an opinion on management's assessment, and an opinion on the effectiveness of
the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audit of financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As discussed in Note 2 to the Company’s Consolidated Financial Statements, on January 1, 2006, the
Company adopted Statement of Financial Standards No. 123 (revised 2004), “Shared-based Payment”,
which requires all share-based payments, including grants of stock options, to be recognized in the income
statements as an operating expense, based on their fair values.
24
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Balchem Corporation and Subsidiaries as of December 31, 2006 and
2005, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, management’s assessment that Balchem Corporation and Subsidiaries
maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in “Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)." Furthermore, in our
opinion, Balchem Corporation and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria established in “Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO)."
New York, New York
March 15, 2007
25
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2006 and 2005
(Dollars in thousands, except share and per share data)
Assets
2006
2005
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at
December 31, 2006 and 2005, respectively
Inventories
Prepaid income taxes
Prepaid expenses
Deferred income taxes
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets with finite lives, net
$
5,189
$
12,996
11,578
9,918
-
1,754
416
28,855
31,313
25,253
6,912
11,521
8,540
143
1,790
276
35,266
24,400
13,327
2,148
Total assets
$
92,333
$
75,141
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable
Accrued expenses
Accrued compensation and other benefits
Customer deposits and other deferred revenue
Dividends payable
Income tax payable
Total current liabilities
Deferred income taxes
Other long-term obligations
Total liabilities
Commitments and contingencies (note 13)
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; 17,733,849
shares issued and outstanding at December 31, 2006 and 17,461,447 shares
issued and 17,365,423 outstanding at December 31, 2005
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost: 0 and 96,024 shares at December 31, 2006
and 2005, respectively
Total stockholders' equity
$
3,010
1,827
1,869
1,072
1,596
186
9,560
$
2,562
2,601
1,756
1,186
1,045
-
9,150
6,627
784
16,971
-
788
10,393
63,988
193
-
75,362
4,015
1,043
14,208
-
776
8,008
53,306
-
(1,157)
60,933
Total liabilities and stockholders' equity
$
92,333
$
75,141
See accompanying notes to consolidated financial statements.
26
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
Net sales
Cost of sales
Gross margin
Operating expenses:
Selling expenses
Research and development expenses
General and administrative expenses
Earnings from operations
Other expenses (income):
Interest income
Interest expense
Other, net
Earnings before income tax expense
Income tax expense
Net earnings
2006
2005
2004
$
100,905
$
83,095
$
67,406
66,899
34,006
6,907
2,019
5,918
14,844
19,162
(128)
189
-
19,101
6,823
54,415
28,680
4,739
2,053
4,985
11,777
16,903
(214)
8
(82)
17,191
6,237
$
12,278
$
10,954
43,600
23,806
4,815
1,752
4,442
11,009
12,797
(125)
219
(12)
12,715
4,689
8,026
0.48
0.46
$
$
$
Basic net earnings per common share
$
0.70
$
0.63
Diluted net earnings per common share
$
0.67
$
0.61
See accompanying notes to consolidated financial statements.
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BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except share and per share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Retained Comprehensive
Earnings
Income
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
(145,665)
$
(504)
$
39,781
8,026
(685)
256
2,856
50,234
10,954
(1,045)
(1,198)
252
1,736
60,933
12,278
(1,596)
334
3,220
193
75,362
Balance - December 31, 2003
16,548,429
$
736
$
3,493
$
36,056
Net earnings
Dividends ($.04 per share)
Shares issued under employee benefit plans and other
Shares issued under stock option plans and
an income tax benefit of $293
-
-
31,635
567,543
Balance - December 31, 2004
17,147,607
Net earnings
Dividends ($.06 per share)
Treasury shares purchased
Shares issued under employee benefit plans and other
Shares issued under stock option plans and
an income tax benefit of $327
-
-
-
52,133
261,707
-
-
2
24
762
-
-
-
1
13
-
-
254
8,026
(685)
-
2,328
-
6,075
43,397
-
-
-
210
10,954
(1,045)
-
-
1,723
-
Balance - December 31, 2005
17,461,447
776
8,008
53,306
Net earnings
Dividends ($.09 per share)
Shares issued under employee benefit plans and other
Shares and options issued under stock option plans and
-
-
1,079
-
-
-
-
70
12,278
(1,596)
an income tax benefit of $878
271,323
12
2,315
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
145,665
-
-
-
(99,450)
3,426
-
-
-
504
-
-
-
(1,198)
41
-
-
(96,024)
(1,157)
-
-
21,933
74,091
-
-
264
893
Adjustment to initially apply FASB Statement No. 158,
net of tax
Balance - December 31, 2006
-
17,733,849
-
788
$
-
10,393
$
-
63,988
$
$
193
193
-
-
-
-
$
$
See accompanying notes to consolidated financial statements.
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BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization
Stock compensation expense
Shares issued under employee benefit plans
Deferred income tax expense
(Recovery of) provision for doubtful accounts
Income tax benefit from stock options exercised
Disposition of intangible assets
Gain on sale of assets
Changes in assets and liabilities
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued expenses
Income taxes
Customer deposits and other deferred revenue
Other long-term obligations
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of property, plant and equipment
Cash paid for intangible assets acquired
Acquisition
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Principal payments on long-term debt
Proceeds from stock options exercised
Excess tax benefits from stock compensation
Dividends paid
Purchase of treasury stock
Other financing activities
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
See accompanying notes to consolidated financial statements.
29
2006
2005
2004
$
12,278
$
10,954
$
8,026
3,445
1,097
343
104
-
-
-
-
(57)
(827)
36
(212)
218
(101)
46
16,370
(2,279)
-
(81)
(22,872)
(25,232)
10,000
(10,000)
1,239
878
(1,045)
-
(17)
1,055
(7,807)
2,809
-
257
599
(32)
327
-
(82)
(2,684)
(1,496)
(263)
2,749
172
334
54
13,698
(1,769)
389
(144)
(11,419)
(12,943)
-
-
1,409
-
(685)
(1,198)
(19)
(493)
262
3,271
-
256
1,388
(4)
293
53
(12)
(759)
(358)
(804)
226
(315)
852
32
12,145
(1,215)
91
(105)
-
(1,229)
-
(9,581)
2,563
-
(389)
-
(14)
(7,421)
3,495
12,996
5,189
$
12,734
12,996
$
9,239
12,734
$
BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business Description
Balchem Corporation (including, unless the context otherwise requires, its wholly-owned subsidiaries,
BCP Ingredients, Inc., Balchem Minerals Corporation, BCP St. Gabriel, Inc. and Chelated Minerals
Corporation, “Balchem” or the “Company”), incorporated in the State of Maryland in 1967, is engaged in
the development, manufacture and marketing of specialty performance ingredients for the food,
pharmaceutical, feed and medical sterilization industries.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized upon product shipment, passage of title and risk of loss, and when collection is
reasonably assured. The Company reports amounts billed to customers related to shipping and handling as
revenue and includes costs incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits
and are included in current liabilities. In addition, the Company follows the provisions of the Securities and
Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,”
which sets forth guidelines on the timing of revenue recognition based upon factors such as passage of
title, installation, payments and customer acceptance.
Revenue related to the process and product license agreement described in Note 14 below is recognized
using the percentage of completion method and the progress to completion is measured using the efforts-
expended method. The Company follows the provisions of the American Institute of Certified Public
Accountants’ (AICPA) Statement of Position (“SOP”) 81-1, “Accounting for Performance of Construction
Type and Certain Production Type Contracts.” Revenue is recognized as work is performed and costs are
incurred.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
30
Inventories
Inventories are stated at the lower of cost or market, with cost generally determined on a first-in, first-out
basis, and have been reduced by an allowance for excess or obsolete inventories. Cost elements include
material, labor and manufacturing overhead. In November 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 151, “Inventory Costs.” The new statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement
requires that those items be recognized as current period charges and requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity of the production facilities.
The provisions of this statement were applied prospectively for inventory costs incurred beginning in fiscal
year 2006. The adoption of this statement did not have a material impact on the Company’s results of
operations, financial position or cash flow.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. Depreciation of plant and equipment is calculated using
the straight-line method over the estimated useful lives of the assets as follows:
Buildings
Equipment
15-25 years
3-12 years
Expenditures for repairs and maintenance are charged to expense. Alterations and major overhauls that
extend the lives or increase the capacity of plant assets are capitalized. When assets are retired or otherwise
disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts
and any resultant gain or loss is included in earnings.
Business Concentrations
A specialty products customer accounted for 8%, 9% and 11% of the Company’s consolidated net sales for
2006, 2005 and 2004, respectively. This customer accounted for 10% and 8% of the Company’s accounts
receivable balance at December 31, 2006 and 2005, respectively. Approximately 10%, 7% and 8% of the
Company's net sales for 2006, 2005 and 2004, respectively, consisted of sales outside the United States,
predominately to Europe, Japan, and China.
Trade receivables potentially subject the Company to credit risk. The Company extends credit to its
customers based upon an evaluation of the customers’ financial condition and credit histories. The majority
of the Company’s customers are major national or international corporations.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company
adopted the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business
Combinations” (“SFAS 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
as of January 1, 2002. These standards require the use of the purchase method of accounting for a business
combination and define an intangible asset. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized, but are instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
As required by SFAS No. 142, the Company performed an assessment of whether there was an indication
that goodwill was impaired at the date of adoption. In connection therewith, the Company determined that
its operations consisted of three reporting units and determined each reporting units’ fair value and
31
compared it to the reporting unit’s net book value. Since the fair value of each reporting unit exceeded its
carrying amount, there was no indication of impairment and no further transitional impairment testing was
required. As of December 31, 2006 and 2005, the Company also performed an impairment test of its
goodwill balance. As of such dates the Company’s reporting units’ fair value exceeded their carrying
amounts, and therefore there was no indication that goodwill was impaired. Accordingly, the Company was
not required to perform any further impairment tests. The Company plans to perform its impairment test
each December 31.
The Company had unamortized goodwill in the amount of $25,253 at December 31, 2006 and $13,327 at
December 31, 2005, subject to the provisions of SFAS Nos. 141 and 142. Unamortized goodwill is
allocated to the Company’s reportable segments as follows:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Total
2006
5,089
20,164
-
25,253
$
$
2005
5,089
8,238
-
13,327
$
$
The following intangible assets with finite lives are stated at cost and are amortized on a straight-line basis
over the following estimated useful lives:
Amortization
period
(in years)
10
10
15 - 17
17
Customer lists
Regulatory re-registration costs
Patents & trade secrets
Trademarks & trade names
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Use of Estimates
Management of the Company is required to make certain estimates and assumptions during the preparation
of consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial
statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined to be necessary. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The Company has a number of financial instruments, none of which are held for trading purposes. The
Company estimates that the fair value of all financial instruments at December 31, 2006 and 2005 does not
differ materially from the aggregate carrying values of its financial instruments recorded in the
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accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation methodologies. Considerable
judgment is necessarily required in interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The Company’s financial instruments, principally cash equivalents, accounts
receivable, accounts payable and accrued liabilities, are carried at cost which approximates fair value due
to the short-term maturity of these instruments.
Research and Development
Research and development costs are expensed as incurred.
Stock-based Compensation
The Company has stock-based employee compensation plans, which are described more fully in Note 2.
On January 1, 2006, the Company was required to adopt SFAS No. 123R (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which requires all share-based payments, including grants of stock options, to
be recognized in the income statement as an operating expense, based on their fair values. The Company
estimates the fair value of each option award on the date of grant using a Black-Scholes based option-
pricing model.
Prior to adopting SFAS 123R, the Company accounted for stock-based compensation under Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, as permitted by Statement
of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation”. The modified
prospective method was applied in adopting SFAS 123R and, accordingly, periods prior to adoption have
not been restated.
The implementation of SFAS 123R has had no adverse effect on the Company’s balance sheet or total cash
flows, but it does impact cash flows from operations, cash flows from financing activities, cost of sales,
gross profit, operating expenses, net income and earnings per share. Because periods prior to adoption have
not been restated, comparability between periods has been affected. Additionally, estimates of and
assumptions about forfeiture rates, terms, volatility, interest rates and dividend yields are used to calculate
stock-based compensation. A significant change to these estimates could materially affect the Company’s
operating results.
Impairment of Long-lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset, which is generally based on discounted cash flows.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans” (“SFAS 158”). SFAS 158 requires an employer to recognize the over
funded or under funded status of a defined benefit post retirement plan (other than a multiemployer plan)
as an asset or liability in its statement of financial position, and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income. As a result of adopting SFAS 158
on December 31, 2006, the Company recorded $0.3 million as a reduction to the benefit obligation and
33
$0.2 million, net of tax, as a one-time adjustment to accumulated other comprehensive income in
stockholder’s equity.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy
used to classify the source of the information. This statement is effective beginning in January 2008. The
Company is evaluating whether adoption of this statement will result in a change to its fair value
measurements.
In September 2006, the SEC issued SAB 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires analysis
of misstatements using both an income statement (rollover approach) and a balance sheet (iron curtain)
approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB
108 is effective for the Company’s fiscal year 2006 annual financial statements. The adoption of this
statement did not have a material impact on our consolidated results of operations, financial position or
cash flows.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”). This interpretation, among other things, creates a two-step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on
its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two)
determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition
of a tax position that was previously recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48
specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and
it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15,
2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the
beginning balance of retained earnings. The Company is evaluating FIN 48 and has not yet determined the
impact the adoption will have on the consolidated financial statements.
Beginning in fiscal 2006, the Company began accounting for stock-based compensation in accordance with
SFAS 123R as interpreted by SEC Staff Accounting Bulletin No. 107. Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the grant date based on the
value of the award and is recognized as expense over the vesting period. Determining the fair value of
share-based awards at the grant date requires judgment, including estimating the Company’s stock price
volatility, employee stock option exercise behaviors and employee option forfeiture rates. Expected
volatilities are based on historical volatility of the Company’s stock. The expected term of the options is
based on the Company’s historical experience of employees’ exercise behavior. As stock-based
compensation expense recognized in the Consolidated Statement of Earnings is based on awards ultimately
expected to vest, the amount of expense has been reduced for estimated forfeitures. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If
factors change and the Company employs different assumptions in the application of SFAS 123R, the
compensation expense that is recorded in future periods may differ significantly from what has been
recorded in the current period.
34
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 151, “Inventory Costs.” The new statement amends Accounting Research Bulletin No. 43,
Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. This statement requires that those items be recognized as
current period charges and requires that allocation of fixed production overheads to the cost of conversion
be based on the normal capacity of the production facilities. The provisions of this statement were applied
prospectively for inventory costs incurred beginning in our fiscal year 2006. The adoption of this
statement did not have a material impact on our results of operations, financial position or cash flow.
Net Earnings Per Common Share
Basic net earnings per common share is calculated by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net earnings per common share is calculated in a
manner consistent with basic net earnings per common share except that the weighted average number of
common shares outstanding also includes the dilutive effect of stock options outstanding and unvested
restricted stock (using the treasury stock method).
NOTE 2 - STOCKHOLDERS’ EQUITY
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS 123R, which requires all share-based payments,
including grants of stock options, to be recognized in the income statement as an operating expense, based
on their fair values.
Prior to adopting SFAS 123R, the Company accounted for stock-based compensation under Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”), as
permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based
Compensation,” (“SFAS 123”). No stock-based compensation cost was recognized in the Statement of
Earnings for the years ended December 31, 2005 and 2004, as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant. The Company has applied
the modified prospective method in adopting SFAS 123R. Accordingly, periods prior to adoption have not
been restated. Under the modified prospective method, compensation cost recognized in the year ended
December 31, 2006 includes (a) compensation cost for all share-based payments granted prior to, but not
yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R.
As a result of adopting SFAS 123R on January 1, 2006, the Company’s income before income taxes and
net income for the year ended December 31, 2006, are $1.1 million and $0.9 million lower, respectively,
than if it had continued to account for share-based compensation under Opinion 25. As required by SFAS
123R, the Company has made an estimate of expected forfeitures and is recognizing compensation cost
only for those stock-based compensation awards expected to vest. Basic and diluted earnings per share are
each $0.05 lower for the twelve months ended December 31, 2006, than if the Company had not adopted
SFAS 123R.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from
the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123R requires
the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $0.9
million tax benefit from the exercise of stock options classified as a financing cash inflow would have been
classified as an operating cash inflow if the Company had not adopted SFAS 123R.
35
The following table illustrates the effect on net income and earnings per share if the fair value based
method had been applied to the prior periods (in thousands, except per share data):
Net earnings
Stock-based employee compensation expense included in net
earnings, net of related tax effects
Stock-based employee compensation expense determined under
fair value based method, net of related tax effects
Pro forma net earnings
Basic earnings per common share:
As reported
Pro forma
Diluted earnings per common share:
As reported
Pro forma
$
$
$
$
$
$
Year Ended
December 31,
2005
December 31,
2004
10,954 $
8,026
-
904
10,050 $
0.63 $
0.58 $
0.61 $
0.55 $
-
808
7,218
0.48
0.43
0.46
0.42
On December 31, 2006, the Company had one share-based compensation plan, which is described below
(the “1999 Stock Plan”).
In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan for officers, directors,
directors emeritus and employees of and consultants to the Company and its subsidiaries. The 1999 Stock
Plan is administered by the Compensation Committee of the Board of Directors of the Company. Under the
plan, options and rights to purchase shares of the Company’s common stock are granted at prices
established at the time of grant. Option grants generally become exercisable 20% after 1 year, 60% after 2
years and 100% after 3 years from the date of grant for employees and are fully exercisable on the date of
grant for directors. Other option grants are either fully exercisable on the date of grant or become
exercisable thereafter in such installments as the Committee may specify. The 1999 Stock Plan initially
reserved an aggregate of 900,000 shares (unadjusted for the stock split) of common stock for issuance
under the Plan. In April 2003, the Board of Directors of the Company adopted and stockholders
subsequently approved, the Amended and Restated 1999 Stock Plan which amended the 1999 Stock Plan
by: (i) increasing the number of shares of common stock reserved for issuance under the 1999 Stock Plan
by 900,000 shares (unadjusted for the stock split), to a total of 1,800,000 shares (unadjusted for the stock
split) of common stock; and (ii) confirming the right of the Company to grant awards of common stock
(“Awards”) in addition to the other Stock Rights available under the 1999 Stock Plan, and providing
certain language changes relating thereto. The 1999 Stock Plan replaced the Company's incentive stock
option plan (the “ISO Plan”) and its non-qualified stock option plan (the “Non-Qualified Plan”), both of
which expired on June 24, 1999. Unexercised options granted under the ISO Plan and the Non-Qualified
Plan prior to such termination remain exercisable in accordance with their terms. Options granted under the
ISO Plan generally become exercisable 20% after 1 year, 60% after 2 years and 100% after 3 years from
the date of grant, and expire ten years from the date of grant. Options granted under the Non-Qualified
Plan, generally vested on the date of grant, and expire ten years from the date of grant.
The shares to be issued upon exercise of the outstanding options have been approved, reserved and are
adequate to cover all exercises. As of December 31, 2006, the plans had 721,953 shares available for
future awards.
On December 8, 2006, the Board of Directors of the Company authorized the Company to enter into
Restricted Stock Purchase Agreements (the “2006 Agreements”) to purchase the Company’s common
stock with the five non-employee directors and certain employees of the Company pursuant to the
Company’s 1999 Stock Plan. Under the 2006 Agreements, each grantee purchased certain shares, ranging
36
from 1,500 shares to 13,500 shares, of the Company’s common stock at the purchase price of
approximately $.04 per share. The purchased stock is subject to a repurchase option in favor of the
Company and to restrictions on transfer until it vests in accordance with the provisions of the Agreements.
On December 29, 2005, the Board of Directors of the Company authorized the Company to enter into
Restricted Stock Purchase Agreements (the “2005 Agreements”) to purchase the Company’s common
stock with the five non-employee directors of the Company pursuant to the Company’s 1999 Stock Plan.
This 2005 Agreement replaces the Stock Option Plan that non-employee directors participated in in prior
years. Under the 2005 Agreements, each non-employee director purchased 6,750 shares of the Company’s
common stock at the purchase price of approximately $.03 per share. The purchased stock is subject to a
repurchase option in favor of the Company and to restrictions on transfer until it vests in accordance with
the provisions of the Agreements.
The fair value of each option award issued under the 1999 Stock Plan is estimated on the date of grant
using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table.
Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the
options is based on the Company’s historical experience of employees’ exercise behavior. 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.
Weighted Average Assumptions:
Expected Volatility
Expected Term (in years)
Risk-Free Interest Rate
Dividend Yield
December 31,
2006
Year Ended
December 31,
2005
December 31,
2004
26.4%
4.5
3.8%
0.4%
28.9%
4.8
3.6%
0.4%
27.1%
5.2
3.7%
0.4%
The value of the restricted shares is based on the intrinsic value of the award at the date of grant.
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 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.
A summary of stock option plan activity for 2006, 2005, and 2004 for all plans is as follows:
2006
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
# of
Shares
(000s)
2,153
305
(267)
(21)
2,170
1,277
Weighted Average
Exercise Price
$ 8.38
17.67
4.64
9.64
$ 10.13
$ 7.40
37
2005
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
2004
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
# of
Shares
(000s)
1,777
657
(262)
(19)
2,153
1,167
# of
Shares
(000s)
2,027
506
( 713)
(43)
1,777
1,023
Weighted Average
Exercise Price
$ 6.21
13.04
5.38
7.41
$ 8.38
$ 6.09
Weighted Average
Exercise Price
$ 4.75
8.40
3.59
6.81
$ 6.21
$ 5.01
The aggregate intrinsic value for outstanding stock options was $15,357 and $10,479 at December 31,
2006 and 2005, respectively, with a weighted average remaining contractual term of 7.3 years at December
31, 2006. Exercisable stock options at December 31, 2006 had an aggregate intrinsic value of $12,413
with a weighted average remaining contractual term of 6.2 years.
Other information pertaining to option activity during the years ended December 31, 2006 and 2005 was as
follows:
Weighted-average fair value of options granted
Total intrinsic value of stock options exercised ($000s)
Year Ended
December 31,
2006
2005
$
$
4.91 $
2,929 $
2.84
1,466
Additional information related to stock options outstanding under all plans at December 31, 2006 is as
follows:
Range of Exercise
Prices
$ 1.85 - $ 6.83
7.13 - 13.19
14.13 - 17.81
Shares
Outstanding
(000s)
784
629
757
2,170
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Term
5.0 years
7.8 years
9.2 years
7.3 years
Weighted
Average
Exercise
Price
$ 5.71
9.35
15.37
$ 10.13
Number
Exercisable
(000s)
784
402
91
1,277
Weighted
Average
Exercise
Price
$ 5.71
9.23
13.81
$ 7.40
38
Non-vested restricted stock activity for the years ended December 31, 2006 and 2005 is summarized
below:
Non-vested balance as of December 31, 2005
Granted
Vested
Forfeited
Non-vested balance as of December 31, 2006
Non-vested balance as of December 31, 2004
Granted
Vested
Forfeited
Non-vested balance as of December 31, 2005
Weighted
Average Grant
Date Fair
Value
13.22
17.76
-
-
16.40
Weighted
Average Grant
Date Fair
Value
-
13.22
-
-
13.22
$
$
$
$
Shares (000s)
34
79
-
-
113
Shares (000s)
-
34
-
-
34
As of December 31, 2006 there was $4,036 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the plans; that cost is expected to be recognized
over a weighted-average period of 2.2 years.
STOCK SPLITS AND REPURCHASE OF COMMON STOCK
On December 8, 2006, the Board of Directors of the Company approved a three-for-two split of the
Company’s common stock to be effected in the form of a stock dividend to shareholders of record on
December 29, 2006. Such stock dividend was made on January 19, 2007. The stock split was recognized
by reclassifying the par value of the additional shares resulting from the split, from additional paid-in
capital to common stock.
On December 15, 2005, the Board of Directors of the Company approved a three-for-two split of the
Company’s common stock to be effected in the form of a stock dividend to shareholders of record on
December 30, 2005. Such stock dividend was made on January 20, 2006. The stock split was recognized
by reclassifying the par value of the additional shares resulting from the split, from additional paid-in
capital to common stock.
All references to number of common shares and per share amounts except shares authorized in the
accompanying consolidated financial statements were retroactively adjusted to reflect the effect of the
December 2006 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 772,461 shares at
an average cost of $4.11 per share, none of which remained in treasury at December 31, 2004. In June
2005, the board of directors authorized another extension of the stock repurchase program for up to an
additional 900,000 shares, over and above those 772,461 shares previously repurchased under the program.
During 2005, a total of 99,450 shares were purchased at an average cost of $12.05 per share, 96,024 of
which remained in treasury at December 31, 2005. During 2006, there were no shares purchased, and no
39
shares remained in treasury at December 31, 2006. 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 December 31, 2006 and 2005 consisted of the following:
Raw materials
Finished goods
Total inventories
2006
4,264
5,654
9,918
$
$
2005
4,809
3,731
8,540
$
$
On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by
analyzing demand, inventory on hand, sales levels and other information. Based on these evaluations,
inventory balances are reduced, if necessary. The reserve for obsolete or slow moving inventory was $147
and $56 at December 31, 2006 and 2005, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2006 and 2005 are summarized as follows:
Land
Building
Equipment
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
2006
650
11,640
38,545
1,247
52,082
20,769
31,313
$
$
2005
290
10,509
31,196
332
42,327
17,927
24,400
$
$
Depreciation expense was $2,842, $2,686 and $2,583 for the years ended December 31, 2006, 2005 and
2004, respectively.
NOTE 5 - ACQUISITION OF ASSETS
Effective August 24, 2006, pursuant to an asset purchase agreement of the same date, the Company,
through its wholly owned subsidiaries BCP Ingredients and BCP St. Gabriel, acquired from BioAdditives,
LLC, CMB Additives, LLC and CMB Realty of Louisiana (the “St. Gabriel Sellers”) an animal feed grade
aqueous choline chloride manufacturing facility and related assets located in St. Gabriel, Louisiana (the
“St. Gabriel Acquisition”). The Company also acquired the St. Gabriel Sellers’ remaining interest in a land
lease (approximately 21 years) relating to the realty upon which the acquired facility and related assets are
located. The acquisition was funded through the Company’s cash reserves. At December 31, 2006, the
facility was not in service. In February 2007, the facility was placed in to service.
NOTE 6 - ACQUISITION OF STOCK
On February 8, 2006, the Company, through its wholly owned subsidiary Balchem Minerals Corporation
(“BMC”), completed an acquisition (the “CMC Acquisition”) of all of the outstanding capital stock of
Chelated Minerals Corporation (“CMC”), a privately held Utah corporation, for a purchase price of
$17,350, subject to adjustment based upon CMC’s actual working capital and other adjustments. On
February 6, 2006, the Company and its principal bank entered into a Loan Agreement (the “Loan
Agreement”) providing for an unsecured term loan of $10,000 (the “Term Loan”), the proceeds of which
40
were used to fund the CMC Acquisition, in part. The remaining balance of the purchase price of the CMC
Acquisition was funded through the Company’s cash reserves. At December 31, 2006, the Term Loan had
been repaid in full.
The CMC 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 preliminary allocation of the total purchase price, including
acquisition costs, of CMC’s net tangible and intangible assets was based on the estimated fair values as of
February 8, 2006. Adjustments to these estimates will be included in the allocation of the purchase price of
CMC upon settlement of any working capital or other adjustments. The excess of the purchase price over
the identifiable intangible and net tangible assets was allocated to goodwill. The preliminary purchase price
has been allocated as follows (in thousands):
Accounts receivable
Inventory
Property, plant and equipment
Current liabilities
Other long-term liabilities
Goodwill
Financing costs
Other intangible assets
Total
Fair Value Recorded
in Purchase Accounting
$
884
552
1,980
(388)
(2,368)
11,903
49
5,285
$ 17,897
The consolidated financial statements include the results of operations of CMC from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the CMC Acquisition had occurred
on January 1, 2005 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 CMC acquisition had occurred at the beginning of the periods presented and is not
intended to be a projection of future results.
Pro Forma
Year Ended
December 31,
Net sales
Net earnings
Basic EPS
Diluted EPS
2006
101,639
12,284
.70
.67
$
$
2005
89,117
11,438
.66
.63
$
$
41
NOTE 7 – PRIOR YEAR ACQUISITION OF ASSETS
Effective June 30, 2005, pursuant to an asset purchase agreement of same date (the “Loders Asset Purchase
Agreement”), the Company acquired certain assets of Loders Croklaan USA, LLC (“Loders Croklaan”)
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 (the “Loders Crooklaan Acquisition”). 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 Loders Asset Purchase Agreement also provides for the contingent payment to Loders Croklaan by the
Company of additional consideration based upon the volume of sales during the three year period
following the acquisition associated with one particular product acquired by the Company. Such
contingent consideration will be recorded as an additional cost of the acquired product lines. As of
December 31, 2006, such contingent consideration of $23 has been earned and paid.
The allocation of the purchase price of the Loders Crooklaan Acquisition, subject to contingencies, has
been assigned to the long-term net assets acquired as follows:
Equipment
Customer List
Patent
Goodwill
Total
Fair Value Recorded
in Purchase Accounting
$
$
1,436
1,350
140
6,982
9,908
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.
42
Net sales
Net earnings
Basic EPS
Diluted EPS
Pro Forma
Year Ended
December 31,
2005
86,382
11,422
.66
.63
$
$
2004
71,747
9,042
.53
.52
$
$
NOTE 8 - INTANGIBLE ASSETS WITH FINITE LIVES
As of December 31, 2006 and 2005, the Company had identifiable intangible assets as follows:
Customer lists
Regulatory re-registration
costs
Patents & trade secrets
Trademarks & trade names
Other
Amortization
Period
(In years)
10
10
15-17
17
5
2006
Gross
Carrying
Amount
$ 4,888
28
1,550
876
457
$ 7,799
2006
Accumulated
Amortization
$ 497
0
221
94
75
$ 887
2005
Gross
Carrying
Amount
$ 1,350
18
753
210
101
$ 2,432
2005
Accumulated
Amortization
$ 67
0
141
49
27
$ 284
Amortization of identifiable intangible assets was approximately $603, $123 and $688 for 2006, 2005 and
2004, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the
estimated amortization expense is approximately $637 per annum for 2007 through 2008, approximately
$635 per annum for 2009 and approximately $613 per annum for 2010 through 2011. At December 31,
2006 and 2005, there were no identifiable intangible assets with indefinite useful lives as defined by SFAS
No. 142. Identifiable intangible assets are reflected in the Company’s consolidated balance sheets under
Intangible assets, net. There were no changes to the useful lives of intangible assets subject to amortization
in 2006 and 2005.
At December 31, 2006, the gross carrying amount included a customer list, trade name and trade secrets
acquired as part of the CMC Acquisition, as well as a customer list and patent acquired as part of the
Loders Croklaan Acquisition.
The Company is in the process of re-registering one of its product’s use in compliance with the Federal
Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”), re-registration requirements for all
pesticide products. In December 2004, the U.S. Environmental Protection Agency (“EPA”) informed the
Company and the other technical registrant under the current registration that the Agency was beginning
the 6-phase process to develop a Re-registration Eligibility Decision (RED) for this product. This multi-
phase process entered Phase 5 last year. The EPA's Office of Pesticide Programs (OPP) had originally
stated its intent to finalize the RED by August 2006, but bifurcated the process, and dealt only with
the reassessment of spice residue tolerances mandated by the Food Quality Protection Act of 1996. On
August 9, 2006, OPP issued a Tolerance Reassessment Progress and Risk Management Decision (TRED)
relating to the use of ethylene oxide to treat spices. This TRED prohibits the use of ethylene oxide to treat
basil, effective August 1, 2007, but allows the continuing use of ethylene oxide to treat all other spices,
provided users follow a mandated treatment method. In the Federal Register notice announcing the TRED,
the EPA stated its intent to complete the RED process for ethylene oxide in 2007. Upon completion of the
EPA's Office of Research and Development (ORD) assessment of the carcinogenicity of ethylene oxide,
43
OPP will complete preparation of the RED. ORD issued a draft "Evaluation of the Carcinogenicity of
Ethylene Oxide" in a Federal Register notice, dated September 22, 2006. This assessment is currently
undergoing review by a special panel of the Science Advisory Board. ORD indicates the assessment will
be finalized by the summer of 2007. The Company has actively participated in the public access portions of
both the ORD assessment process and the OPP's RED process and will continue to do so until their
conclusions. With regard to the RED process, as of this date, the OPP expressed concerns about
occupational exposures to ethylene oxide. The EPA requested additional information from the industry,
which the Company is actively involved in providing. The EPA has also indicated additional testing may
be required in order to maintain the current uses. The Company believes that the use will continue to be
permitted, although the Agency may require some additional restrictions on current uses. Additionally, the
product, when used as a medical device sterilant, has no known equally effective substitute. Management
of the Company believes absence of availability of this product could not be easily tolerated by various
medical device manufacturers and the health care industry due to the resultant infection potential, if the
product were unavailable.
NOTE 9 - LONG-TERM DEBT & CREDIT AGREEMENTS
There was no debt outstanding at December 31, 2006 or December 31, 2005. On February 6, 2006, the
Company and its principal bank entered into a loan agreement (the “Loan Agreement”) providing for an
unsecured term loan of $10,000 (the “Term Loan”), the proceeds of which were used to fund the CMC
Acquisition, in part. The Term Loan was payable in equal monthly installments of principal, together with
accrued interest, had a maturity date of March 1, 2009, and was subject to an interest rate equal to LIBOR
plus 1.00%. As of December 31, 2006, the Company made $10,000 in principal payments against the Term
Loan, which paid the Term Loan in full. The Loan Agreement also provides for an unsecured short-term
revolving credit facility of $3,000 (the “Revolving Facility”). Borrowings under the Revolving Facility
bear interest at LIBOR plus 1.00%. Certain provisions of the Term Loan require maintenance of certain
financial ratios, limit future borrowings and impose certain other requirements as contained in the Loan
Agreement. As of December 31, 2006, no amounts were drawn on the Revolving Facility. The Revolving
Facility expires in May, 2007. Management believes that such facility will be renewed in the normal course
of business.
NOTE 10 - INCOME TAXES
Income tax expense consists of the following:
Current:
Federal
State
Deferred:
Federal
State
Total income tax provision
2006
6,295
534
(1)
(5)
6,823
$
$
2005
4,875
763
541
58
6,237
$
$
2004
2,849
453
1,244
143
4,689
$
$
The provision for income taxes differs from the amount computed by applying the Federal statutory rate of
35% to earnings before income tax expense due to the following:
Income tax at Federal
statutory rate
State income taxes, net of
Federal income tax benefit
Other
Total income tax provision
2006
2005
2004
$
6,685
$
6,017
$
4,450
534
(314)
6,237
379
(140)
4,689
$
344
(206)
6,823
$
$
44
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2006 and 2005 were as follows:
Deferred tax assets:
Customer list amortization
Inventories
Deferred compensation
Restricted stock and stock options
Other
Total deferred tax assets
Deferred tax liabilities:
Customer list amortization
Depreciation
Prepaid expense
Trade names and trademarks
Technology and trade secrets
Other
Total deferred tax liabilities
Net deferred tax liability
2006
2005
-
371
-
200
145
716
1,684
3,873
583
239
269
279
6,927
6,211
$
$
$
119
213
6
99
231
668
-
3,712
695
-
-
-
4,407
3,739
$
$
$
There is no valuation allowance for deferred tax assets at December 31, 2006 and 2005. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than not the Company will realize
the benefits of these deductible differences. The amount of deferred tax asset realizable, however, could
change if management’s estimate of future taxable income should change.
NOTE 11 - NET EARNINGS PER COMMON SHARE
The following presents a reconciliation of the numerator and denominator used in calculating basic and
diluted net earnings per common share:
2006
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 12,278
17,427,857
$.70
Effect of dilutive securities – stock options and
restricted stock
819,384
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options
$ 12,278
18,247,241
$.67
45
2005
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 10,954
17,341,133
$.63
Effect of dilutive securities – stock options
743,739
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options
$ 10,954
18,084,872
$.61
2004
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 8,026
16,896,646
$.48
Effect of dilutive securities – stock options
571,374
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options
$ 8,026
17,468,020
$.46
The Company had 307,875, 481,500 and 2,700 stock options outstanding at December 31, 2006, 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 12- EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for eligible employees. The plan allows participants to make
pretax contributions and the Company matches certain percentages of those pretax contributions with
shares of the Company’s common stock. The profit sharing portion of the plan is discretionary and non-
contributory. All amounts contributed to the plan are deposited into a trust fund administered by
independent trustees. The Company provided for profit sharing contributions and matching 401(k) savings
plan contributions of $395 and $343 in 2006, $326 and $276 in 2005 and $301 and $257 in 2004,
respectively.
The Company also currently provides postretirement benefits in the form of an unfunded retirement
medical plan under a collective bargaining agreement covering eligible retired employees of the Verona
facility. The Company uses a December 31 measurement date for its postretirement medical plan. In
accordance with SFAS 158, the Company is required to recognize the over funded or under funded status
of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its
statement of financial position, and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. On December 31, 2006, the Company recorded $0.3
million as a reduction to the benefit obligation and $0.2 million, net of tax, as a one-time adjustment to its
stockholders’ equity, recorded under accumulated other comprehensive income.
46
The actuarial recorded liabilities for such unfunded postretirement benefit is as follows:
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost with interest to end of year
Interest cost
Participant contributions
Plan amendments
Benefits paid
Actuarial (gain) or loss
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Participant contributions
Benefits paid
Fair value of plan assets at end of year
Amounts recognized in consolidated balance sheet:
Accumulated postretirement benefit obligation
Fair value of plan assets
Funded status
Unrecognized prior service cost
Unrecognized net (gain)/loss
Net amount recognized in consolidated balance
sheet (after FAS 158)
(included in other long-term obligations)
Accrued postretirement benefit cost
(included in other long-term obligations)
Components of net periodic benefit cost:
Service cost with interest to end of year
Interest cost
Amortization of prior service cost
Amortization of (gain) or loss
Total net periodic benefit cost
2006
942
28
39
11
0
(20)
(271)
729
2006
-
9
11
(20)
-
2006
(729)
-
(729)
N/A
N/A
729
N/A
2006
28
39
(18)
(3)
46
2005
867
32
50
11
0
(25)
7
942
2005
-
15
11
(26)
-
2005
(942)
-
(942)
(191)
146
N/A
987
2005
32
50
(18)
3
67
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
47
2004
31
49
(10)
-
70
$
$
Estimated future employer contributions and benefit payments are as follows:
Year
2007
2008
2009
2010
2011
Years 2012-2016
$
35
41
48
43
54
187
Assumed health care cost trend rates have been used in the valuation of postretirement health insurance
benefits. The trend rate is 10 percent in 2007 declining to 5 percent in 2012 and thereafter. A one
percentage point increase in health care cost trend rates in each year would increase the accumulated
postretirement benefit obligation as of December 31, 2006 by $91 and the net periodic postretirement
benefit cost for 2006 by $10. A one percentage point decrease in health care cost trend rates in each year
would decrease the accumulated postretirement benefit obligation as of December 31, 2006 by $78 and the
net periodic postretirement benefit cost for 2006 by $8. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 5.75% in 2006 and 5.75% in 2005.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In connection with the Loders Croklaan Acquisition, 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 addition, the Company entered into certain short-term services and tolling
agreements with Loders.
In February 2002, the Company entered into a ten (10) year lease which is cancelable in 2009 for
approximately 20,000 square feet of office space. The office space is now serving as the Company’s
general offices and as a laboratory facility. The Company leases most of its vehicles and office equipment
under non-cancelable operating leases, which expire at various times through 2011. Rent expense charged
to operations under such lease agreements for 2006, 2005 and 2004 aggregated approximately $595, $576
and $566, respectively. Aggregate future minimum rental payments required under non-cancelable
operating leases at December 31, 2006 are as follows:
Year
2007
2008
2009
2010
2011
Thereafter
Total minimum lease payments
$ 672
619
652
209
79
59
$ 2,290
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 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
48
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 - 2006.
The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a
Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on
portions of the site. Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources (“MDNR”) included removal of dioxin contaminated soil and
equipment, capping of areas of residual contamination in four relatively small areas of the site separate
from the manufacturing facilities, and the installation of wells to monitor groundwater and surface water
contamination by organic chemicals. No ground water or surface water treatment was required. The
Company believes that remediation of the site is complete. In 1998, the EPA certified the work on the
contaminated soils to be complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party risk assessment report to the
EPA and MDNR recommending no further action. The prior owner is awaiting the response of the EPA
and MDNR to the draft risk assessment.
While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the
prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified
by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona,
Missouri facility for potential liabilities associated with the Superfund site and one of the sellers, in turn,
has the benefit of certain contractual indemnification by the prior owner that is implementing the above-
described Superfund remedy.
From time to time, the Company is a party to various litigation, claims and assessments. Management
believes that the alternate outcome of such matters will not have a material effect on the Company’s
consolidated financial position, results of operations, or liquidity.
NOTE 14 - LICENSE AGREEMENT
On November 7, 2005, the Company entered into a license agreement (the "License Agreement") with
Project Management and Development Co., Ltd. ("PMD"), a corporation organized under the laws of Great
Britain. As of August 2006, PMD assigned the license agreement in its entirety to its successor in interest,
Al Kayan Petrochemical Company.
The License Agreement gives PMD the right to utilize the Company’s proprietary continuous
manufacturing technology for the production of aqueous choline chloride (the “Licensed Technology") in
connection with PMD's construction and operation of an aqueous choline chloride production facility at
PMD's Al-Jubail, Saudi Arabia petrochemical facility, currently scheduled for completion in late 2009. In
addition, the License Agreement provides PMD with the exclusive right to use the Licensed Technology in
certain countries, as well as the non-exclusive right to market, sell and use the products derived from the
Licensed Technology on a world-wide basis. The License Agreement further provides that the Company
will be PMD's exclusive North American distributor for said products during the term of the agreement.
The License Agreement terminates either 10 years from the start-up of the PMD's production facility or
December 31, 2020, whichever is earlier.
Pursuant to the License Agreement, PMD will pay the Company a license fee of $1,400 and fees of $840
for the delivery by the Company of certain preliminary drawings, specifications, process design documents
containing the Licensed Technology, and additional training. These fees are to be paid in installments
upon achievement of certain performance milestones set forth in the License Agreement.
Under the License Agreement, the Company provides certain performance guarantees associated with the
Licensed Technology. In the event that the PMD manufacturing facility, if properly designed and
constructed, fails to attain said performance guarantees, liquidated damages may be assessed, but not
exceeding 70% of the license fee.
49
The Company is using the percentage of completion method to recognize revenue and expenses related to
the License Agreement and the efforts-expended method for measuring the progress to completion. The
Company has recognized $842 of revenue and $427 in expenses for 2006 and $158 of revenue and $138 in
expenses for 2005. These amounts are included in the net sales and cost of sales totals in the BCP
Ingredients segment.
NOTE 15 - SEGMENT INFORMATION
The Company’s reportable segments are strategic businesses that offer products and services to different
markets. The Company presently has three segments: specialty products, encapsulated / nutritional
products and the unencapsulated feed supplements segment (also referred to as BCP Ingredients). Products
relating to choline animal feed for non-ruminant animals are primarily reported in the unencapsulated feed
supplements segment. Human choline nutrient products, pharmaceutical products and encapsulated
products are reported in the encapsulated / nutritional products segment. They are managed separately
because each business requires different technology and marketing strategies. The specialty products
segment consists of three specialty chemicals: ethylene oxide, propylene oxide and methyl chloride. The
encapsulated / nutritional products segment provides microencapsulation, granulation and agglomeration
solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance
performance of nutritional fortification, processing, mixing, packaging applications and shelf-life. The
unencapsulated feed supplements segment is in the business of manufacturing and supplying choline
chloride, an essential nutrient for animal health, to the poultry and swine industries. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial applications and are included
in the unencapsulated feed supplements segment. The Company sells products for all segments through its
own sales force, independent distributors, and sales agents. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
2005
29,433
32,499
21,163
83,095
2005
11,007
3,217
2,679
288
17,191
2004
28,767
24,759
13,880
67,406
2004
10,693
992
1,112
(82)
12,715
$
$
$
$
2005
1,027
1,313
469
2,809
2004
1,668
1,155
448
3,271
$
$
$
$
$
$
$
$
Business Segment Net Sales:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Total
2006
32,026
41,565
27,314
100,905
$
$
Business Segment Earnings Before Income Taxes:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Interest and other income (expense)
Total
Depreciation/Amortization:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Total
2006
11,315
4,200
3,647
(61)
19,101
2006
941
1,983
521
3,445
$
$
$
$
50
Business Segment Assets:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Other Unallocated
Total
2006
18,446
45,870
20,434
7,583
92,333
2005
19,799
25,139
14,141
16,062
75,141
$
$
$
$
2004
18,456
15,594
11,424
14,931
60,405
$
$
Other unallocated assets consist of certain cash, prepaid expenses, leasehold improvements, net of
accumulated depreciation, and deferred income taxes, which the Company does not allocate to its
individual business segments.
Capital Expenditures:
Specialty Products
Encapsulated/Nutritional Products
BCP Ingredients
Total
Geographic Revenue Information:
United States
Foreign Countries
Total
2006
195
595
1,489
2,279
$
$
2005
366
520
883
1,769
$
$
2004
224
470
521
1,215
$
$
2006
91,042
9,863
100,905
$
$
2005
77,355
5,740
83,095
$
$
2004
61,869
5,537
67,406
$
$
The Company has no foreign-based operations. Therefore, all long-lived assets are in the United States and
revenue from foreign countries is based on customer ship-to addresses.
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income
taxes
Interest
$
$
2006
5,621 $
2005
5,133 $
2004
3,421
189 $
8 $
219
Non-cash financing activities:
Dividends payable
$
2006
1,596 $
2005
1,045 $
2004
685
Also see Note 5, 6 and 7 for information regarding acquisitions of assets and stock.
51
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except per share data)
Net sales
Gross profit
Earnings before
income taxes
Net earnings
Basic net earnings
per common share
Diluted net earnings
per common share
2006
2005
First
Quarter
$24,597
8,222
Second
Quarter
$25,100
8,800
Third
Quarter
$25,122
8,673
Fourth
Quarter
$26,086
8,311
First
Quarter
$19,340
7,182
Second
Quarter
$19,484
7,112
Third
Quarter
$21,145
7,649
Fourth
Quarter
$23,126
6,737
4,445
2,858
4,813
3,055
4,978
3,151
4,865
3,214
4,069
2,568
4,346
2,730
4,857
3,024
3,919
2,632
$ .17
$ .17
$ .18
$ .18
$ .15
$ .15
$ .17
$ .15
$ .16
$ .17
$ .17
$ .18
$ .14
$ .15
$ .17
$ .15
52
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Balchem Corporation
New Hampton, NY
Our audits of the consolidated financial statements and internal control over financial reporting referred to
in our report dated March 15, 2007 (included elsewhere in this Annual Report on Form 10-K) also
included the financial statement schedule of Balchem Corporation and Subsidiaries, listed in Item 15(a) of
this Form 10-K for the years ended December 31, 2006, 2005 and 2004. This schedule is the responsibility
of Balchem Corporation’s management. Our responsibility is to express an opinion based on our audits of
the consolidated financial statements.
In our opinion, the financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
New York, New York
March 15, 2007
53
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2006, 2005 and 2004
(In thousands)
Schedule II
Balance at
Beginning of
Year
Additions
Charges to
Costs and
Expenses
Charges to
Other
Accounts
Deductions
Balance at
End of Year
$
50
56
$
-
$
82
31
$
-
91
25
-
$
-
-
$
-
$
50
147
-
$
-
(32)
$
-
(a)
$
50
56
$
86
76
-
$
-
-
$
-
$
(4)
(45)
(a)
(a)
$
82
31
Description
Year ended December 31, 2006
Allowance for doubtful accounts
Inventory obsolescence reserve
Year ended December 31, 2005
Allowance for doubtful accounts
Inventory obsolescence reserve
Year ended December 31, 2004
Allowance for doubtful accounts
Inventory obsolescence reserve
(a) represents write-offs.
54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of such period, the Company's disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial reporting is a process
designed under the supervision of the Company's principal executive and principal financial officers to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles.
As of December 31, 2006, management conducted an assessment of the effectiveness of the
Company's internal control over financial reporting based on the framework established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the Company's internal
control over financial reporting was effective as of December 31, 2006.
Our internal control over financial reporting includes policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions
of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures are being made only in accordance with authorizations of management and the directors
of the Company; and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on
our financial statements.
Attestation Report of Registered Public Accounting Firm
Management's assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2006 has been audited by McGladrey & Pullen, LLP, an independent
registered public accounting firm, as stated in their report which appears herein on pages 24 and 25.
55
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting in our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B . Other Information
None.
PART III
Item 10. Directors, Executive Officers of the Registrant, and Corporate Governance.
(a)
Directors of the Company.
The required information is to be set forth in the Company's Proxy Statement for the 2007 Annual
Meeting of Stockholders (the “2007 Proxy Statement”) under the caption "Directors and Executive Officers,”
which information is hereby incorporated herein by reference.
(b)
Executive Officers of the Company.
The required information is to be set forth in the 2007 Proxy Statement under the caption
"Directors and Executive Officers," which information is hereby incorporated herein by reference.
(c)
Section 16(a) Beneficial Ownership Reporting Compliance.
The required information is to be set forth in the 2007 Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance," which information is hereby incorporated herein by
reference.
(d)
Code of Ethics.
The Company has adopted a Code of Ethics for Senior Financial Officers that applies to its Chief
Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer and
principal accounting officer) and its Treasurer. The Company’s Code of Ethics for Senior Financial
Officers is filed as Exhibit 14 to this Annual Report on Form 10-K.
(e)
Corporate Governance.
The required information is to be set forth in the 2007 Proxy Statement under the caption
“Corporate Governance,” which information is hereby incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is to be set forth in the 2007 Proxy Statement under the
caption "Directors and Executive Officers," which information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information required by this Item is to be set forth in the 2007 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and of Management” and the caption “Equity
Compensation Plan Information,” all of which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by this Item is set forth in the 2007 Proxy Statement under the caption
"Directors and Executive Officers," which information is hereby incorporated herein by reference.
56
Item 14. Principal Accounting Fees and Services.
The information required by this Item is set forth in the 2007 Proxy Statement under the caption
“Independent Auditor Fees,” which information is hereby incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Form 10-K:
1. Financial Statements
Form 10-K
Page Number
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Earnings for the
years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows
for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules
Schedule II – Valuation and Qualifying
Accounts for the years ended December 31, 2006, 2005 and 2004
3. Exhibits
24
26
27
28
29
30
53
54
2.1
3.1
3.2
10.1
Asset Purchase Agreement, dated as of May 21, 2001, among BCP Ingredients, Inc. and
DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and certain related agreements (forms of
which constitute Exhibits to the Asset Purchase Agreement) as executed. (The Disclosure
Schedule identified throughout Asset Purchase Agreement, Schedule A to the
Obligations Undertaking (list of contracts assumed by BCP Ingredients, Inc.) and the
Power of Attorney and Security Agreement (referred to in Section 2.6 of the Asset
Purchase Agreement) and Post-Closing Escrow Agreement (referred to in Sections 3.2.2
and 3.3.3 of the Asset Purchase Agreement), have been omitted. The Company agrees to
furnish a copy of these documents on a supplemental basis to the Securities and
Exchange Commission upon request.) (incorporated by reference to exhibit 2.1 to the
Company’s Current Report on Form 8-K dated June, 2001(the “2001 8-K”.))
Composite Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 16, 2006 for
the year ended December 31, 2005).
Composite By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K dated February 23, 2005).
Loan Agreement dated February 6, 2006 by and between Bank of America, N.A. and
Balchem Corporation, Promissory Note dated February 6, 2006 from Balchem
Corporation to Bank of America, N.A., and Amended and Restated Promissory Note
(Revolving Line of Credit) dated February 6, 2006 from Balchem Corporation to Bank of
America, N.A. (incorporated by reference to Exhibits 10.2, 10.3 and 10.4 to the
57
Company’s Current Report on Form 8-K dated February 9, 2006).
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Guaranty dated February 6, 2006 from BCP Ingredients, Inc. to
Bank of America, N.A. (incorporated by reference to Exhibit 10.5 to the Company’s
Current Report on Form 8-K dated February 9, 2006).
Guaranty dated February 6, 2006 from Balchem Minerals Corporation to Bank of
America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current
Report on Form 8-K dated February 9, 2006).
Incentive Stock Option Plan of the Company, as amended, (incorporated by reference to
the Company’s Registration Statement on Form S-8, File No. 333-35910, dated October
25, 1996, and to Proxy Statement, dated April 22, 1998, for the Company's 1998 Annual
Meeting of Stockholders (the “1998 Proxy Statement”)).*
Stock Option Plan for Directors of the Company, as amended (incorporated by reference
to the Company’s Registration Statement on Form S-8, File No. 333-35912, dated
October 25, 1996, and to the 1998 Proxy Statement).
Balchem Corporation Amended and Restated 1999 Stock Plan (incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).*
Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No.
333-118291, dated August 17, 2004).*
Employment Agreement, dated as of January 1, 2001, between the Company and Dino
A. Rossi (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2001 (the “2001 10-K”)). *
10.9
Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc. and Balchem
Corporation (incorporated by reference to Exhibit 10.7 to the 2001 10-K).
10.10 Asset Purchase Agreement dated June 30, 2005, between Balchem Corporation and
Loders Croklaan USA, LLC (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K dated July 1, 2005).
10.11 Stock Purchase Agreement dated November 2, 2005, between Balchem Minerals
Corporation and Chelated Minerals Corporation (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K dated November 7, 2005).
10.12 Process and Product License Agreement dated November 7, 2005, between Balchem
Corporation and Project Management and Development Co., Ltd. (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated November
14, 2005).
10.13 Form of Restricted Stock Purchase Agreement for Directors (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December 30, 2005).
10.14 First Amendment to Stock Purchase Agreement dated January 5, 2006, between Balchem
Minerals Corporation and Chelated Minerals Corporation (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 10, 2006).
14.
Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 to
the Company’s Annual Report on Form 10-K dated March 15, 2004 for the year ended
December 31, 2003).
21.
Subsidiaries of Registrant.
58
23.1
Consent of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1
32.2
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.
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.
*
arrangement.
Each of the Exhibits noted by an asterisk is a management compensatory plan or
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 15, 2007
BALCHEM CORPORATION
By:/s/ Dino A. Rossi
Dino A. Rossi, President,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES
/s/ Dino A. Rossi
Dino A. Rossi, President,
Chief Executive Officer, and Director (Principal Executive Officer)
Date: March 15, 2007
/s/ Francis J. Fitzpatrick
Francis J. Fitzpatrick, Chief Financial
Officer and Treasurer (Principal Financial and Principal Accounting Officer)
Date: March 15, 2007
/s/ Hoyt Ammidon, Jr.
Hoyt Ammidon, Jr., Director
Date: March 15, 2007
/s/ Edward McMillan
Edward McMillan, Director
Date: March 15, 2007
/s/ Kenneth P. Mitchell
Kenneth P. Mitchell, Director
Date: March 15, 2007
/s/ Dr. John Televantos
Dr. John Televantos, Director
Date: March 15, 2007
/s/ Dr. Elaine Wedral
Dr. Elaine Wedral, Director
Date: March 15, 2007
59
Exhibit
Number Description
EXHIBIT INDEX
2.1
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Asset Purchase Agreement, dated as of May 21, 2001, among BCP Ingredients, Inc. and
DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and certain related agreements (forms of
which constitute Exhibits to the Asset Purchase Agreement) as executed. (The Disclosure
Schedule identified throughout Asset Purchase Agreement, Schedule A to the
Obligations Undertaking (list of contracts assumed by BCP Ingredients, Inc.) and the
Power of Attorney and Security Agreement (referred to in Section 2.6 of the Asset
Purchase Agreement) and Post-Closing Escrow Agreement (referred to in Sections 3.2.2
and 3.3.3 of the Asset Purchase Agreement), have been omitted. The Company agrees to
furnish a copy of these documents on a supplemental basis to the Securities and
Exchange Commission upon request.) (incorporated by reference to exhibit 2.1 to the
Company’s Current Report on Form 8-K dated June, 2001(the “2001 8-K”.))
Composite Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 16, 2006 for
the year ended December 31, 2005).
Composite By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K dated February 23, 2005).
Loan Agreement dated February 6, 2006 by and between Bank of America, N.A. and
Balchem Corporation, Promissory Note dated February 6, 2006 from Balchem
Corporation to Bank of America, N.A., and Amended and Restated Promissory Note
(Revolving Line of Credit) dated February 6, 2006 from Balchem Corporation to Bank of
America, N.A. (incorporated by reference to Exhibits 10.2, 10.3 and 10.4 to the
Company’s Current Report on Form 8-K dated February 9, 2006).
Amended and Restated Guaranty dated February 6, 2006 from BCP Ingredients, Inc. to
Bank of America, N.A. (incorporated by reference to Exhibit 10.5 to the Company’s
Current Report on Form 8-K dated February 9, 2006).
Guaranty dated February 6, 2006 from Balchem Minerals Corporation to Bank of
America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current
Report on Form 8-K dated February 9, 2006).
Incentive Stock Option Plan of the Company, as amended, (incorporated by reference to
the Company’s Registration Statement on Form S-8, File No. 333-35910, dated October
25, 1996, and to Proxy Statement, dated April 22, 1998, for the Company's 1998 Annual
Meeting of Stockholders (the “1998 Proxy Statement”)).*
Stock Option Plan for Directors of the Company, as amended (incorporated by reference
to the Company’s Registration Statement on Form S-8, File No. 333-35912, dated
October 25, 1996, and to the 1998 Proxy Statement).
Balchem Corporation Amended and Restated 1999 Stock Plan (incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).*
Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No.
333-118291, dated August 17, 2004).*
Employment Agreement, dated as of January 1, 2001, between the Company and Dino
A. Rossi (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2001 (the “2001 10-K”)). *
60
10.9
Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc. and Balchem
Corporation (incorporated by reference to Exhibit 10.7 to the 2001 10-K).
10.10 Asset Purchase Agreement dated June 30, 2005, between Balchem Corporation and
Loders Croklaan USA, LLC (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K dated July 1, 2005).
10.11 Stock Purchase Agreement dated November 2, 2005, between Balchem Minerals
Corporation and Chelated Minerals Corporation (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K dated November 7, 2005).
10.12 Process and Product License Agreement dated November 7, 2005, between Balchem
Corporation and Project Management and Development Co., Ltd. (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated November
14, 2005).
10.13 Form of Restricted Stock Purchase Agreement for Directors (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December 30, 2005).
10.14 First Amendment to Stock Purchase Agreement dated January 5, 2006, between Balchem
Minerals Corporation and Chelated Minerals Corporation (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 10, 2006).
14.
Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 to
the Company’s Annual Report on Form 10-K dated March 15, 2004 for the year ended
December 31, 2003).
21.
Subsidiaries of Registrant.
23.1
Consent of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1
32.2
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.
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.
*
arrangement.
Each of the Exhibits noted by an asterisk is a management compensatory plan or
61
Exhibit 21
Subsidiary of the Registrant
Jurisdiction of Organization
LIST OF SUBSIDIARIES
BCP Ingredients, Inc.
Balchem Minerals Corporation
Chelated Minerals Corporation
BCP Saint Gabriel, Inc.
Delaware
Delaware
Utah
Delaware
62
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements (Nos. 333-118292, 333-
118291, 333-78355, 333-44489, 333-5912 and 333-5910) on Form S-8 of Balchem Corporation and
subsidiaries of our report dated March 15, 2007 relating to our audit of the consolidated financial
statements, financial schedules and internal control over financial reporting, which appear in this Annual
Report on Form 10-K of Balchem Corporation for the year ended December 31, 2006.
Exhibit 23.1
New York, New York
March 15, 2007
63
CERTIFICATIONS
Exhibit 31.1
I, Dino A. Rossi, certify that:
1.
I have reviewed this annual report on Form 10-K of Balchem Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2007
/s/ Dino A. Rossi
Dino A. Rossi, President,
Chief Executive Officer
(Principal Executive Officer)
64
I, Francis J. Fitzpatrick, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of Balchem Corporation;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2007
/s/ Francis J. Fitzpatrick
Francis J. Fitzpatrick,
Chief Financial Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)
65
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Balchem Corporation (the “Company”) on Form 10-K
for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Dino A. Rossi, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Dino A. Rossi
Dino A. Rossi
President, Chief Executive Officer
(Principal Executive Officer)
March 15, 2007
This certification accompanies the above-described Report on Form 10-K pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed
filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Balchem Corporation (the "Company") on Form 10-K for the
period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Francis J. Fitzpatrick, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and result of operations of the Company.
/s/ Francis J. Fitzpatrick
Francis J. Fitzpatrick
Chief Financial Officer and Treasurer
(Principal Financial and Principal Accounting
Officer)
March 15, 2007
This certification accompanies the above-described Report on Form 10-K pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
66
Company Profile
Founded in 1967, Balchem Corporation provides state-of-the-art solutions and the finest quality
products for a range of industries worldwide. The Company consists primarily of three business
segments: Encapsulated/Nutritional Products, ARC Specialty Products and BCP Ingredients,
Inc. Balchem employs numerous technologies and over 200 people nationwide who are
engaged in the many diverse activities of developing our Company into a market leader.
Financial Highlights 2006
Statement of Operations Data
(In thousands, except per share data)
Year Ended December 31,
Net sales
Earnings before income tax expense
Income tax expense
Net earnings
Basic net earnings per common share*
Diluted earnings per common share*
Balance Sheet Data
(In thousands, except per share data)
At December 31,
Total assets
Long-term debt
Other long-term obligations
Total stockholders’ equity
Dividends per common share*
Quarterly Stock Prices*
2006
$100,905
19,101
6,823
12,278
$.70
$.67
2006
$ 92,333
—
784
75,362
$.09
2005
$83,095
17,191
6,237
10,954
$.63
$.61
2005
$75,141
—
1,043
60,933
$.06
2004
$67,406
12,715
4,689
8,026
$.48
$.46
2004
$60,405
—
1,003
50,234
$.04
2003
$61,875
8,763
3,125
5,638
$.35
$.33
2003
$56,906
7,839
985
39,781
$.023
2002
$60,197
11,845
4,429
7,416
$.46
$.44
2002
$53,298
9,581
964
33,269
$.023
1Q
2Q
3Q
4Q
2006
2005
2004
High
$15.99
15.85
15.93
19.25
Low
$13.57
13.41
13.07
12.80
High
$11.11
13.37
14.42
13.25
Low
$ 9.64
9.71
11.69
11.56
High
$ 7.96
8.30
8.89
10.34
Low
$6.67
7.19
7.97
8.68
*All per share information has been adjusted to reflect the December 2006, 2005 and 2004 three-for-two stock splits (effected by means of a stock dividend).
Headquarters
Balchem Corporation
52 Sunrise Park Road
P.O. Box 600
New Hampton, NY 10958
Manufacturing
Balchem operates manufacturing
facilities in Slate Hill, NY, Green
Pond, SC, Verona, MO, Channahon, IL,
Salt Lake City, UT and St. Gabriel, LA
Exchange
NASDAQ Global Market
Listed Security
BCPC Common Stock
Annual Report
For information relating to the
Annual Report please contact
Karin McCaffery at 845.326.5600.
Investor Contact
Karin McCaffery
Balchem Headquarters
845.326.5600
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Corporate Counsel
Duane Morris LLP
470 Atlantic Avenue, Suite 500
Boston, MA 02210
Independent Accountants
McGladrey & Pullen, LLP
750 Third Avenue
New York, NY 10017
Website:
www.balchem.com
CORPORATE INFORMATION
Board of Directors
Dino A. Rossi
Chairman, President and
Chief Executive Officer
Hoyt Ammidon, Jr.
Retired, Managing Director
Berkshire Capital Corporation (BCC)
Kenneth P. Mitchell
Lead Director
Retired, President and
Chief Executive Officer
Oakite Products, Inc.
Edward L. McMillan
Owns McMillan, LLC,
a transaction-consulting firm
Past President and Chief Executive
Officer of Purina Mills
Dr. John Y. Televantos
Executive Vice President
Arsenal Capital Partners
Dr. Elaine R. Wedral
Retired, President of Nestle’s
Research and Development,
Food Service Systems
Corporate Officers
Dino A. Rossi
Chairman, President and
Chief Executive Officer
Frank J. Fitzpatrick
Chief Financial Officer
Treasurer and Assistant Secretary
Matthew D. Houston
General Counsel
Secretary
David F. Ludwig
Vice President/General Manager
ARC Specialty Products
Paul H. Richardson
Vice President
Research & Development
Robert T. Miniger
Vice President
Human Resources
Net Salesdollars in millions‘0260.2‘0361.9‘0467.4‘0583.1‘06100.9Net Earningsdollars inmillions‘027.4‘035.6‘048.0‘0511.0‘0612.3Stockholders’ Equitydollars inmillions‘0233.3‘0339.8‘0450.2‘0560.9‘0675.4 Balchem Corporation
P.O. Box 600, 52 Sunrise Park Road, New Hampton, NY 10958
tel 845.326.5600, toll free (in U.S.) 800.431.5641, fax 845.326.5742
e-mail: bcp@balchem.com
www.balchem.com
Balchem Corporation
H u m a n N u t r i t i o n
A n i m a l N u t r i t i o n
H e a l t h c a r e
Providing state-of-the-art solutions
2006
ANNUAL
REPORT