Balchem_08ar_v10_CVR:Balchem_ar07_V4_6oh 4/16/09 4:43 PM Page 01
Balchem Corporation
2008 Annual Report
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
Building on a Solid Foundation
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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: Food, Pharma and Nutrition; ARC Specialty Products;
and Animal Nutrition and Health. Balchem employs numerous technologies and over 300 people worldwide who are engaged
in the many diverse activities of developing the Company into a global market leader.
Corporate Information
Financial Highlights 2008
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
Debt
Other long-term obligations
Total stockholders’ equity
Dividend per common share
Quarterly Stock Prices
2008
$232,050
28,431
9,381
19,050
$1.06
$1.00
2008
$154,474
11,575
1,609
114,506
$.11
2007
$176,201
24,829
8,711
16,118
$.91
$.87
2007
$154,424
27,986
1,529
93,080
$.11
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
1Q
2Q
3Q
4Q
2008
2007
2006
High
$23.34
26.44
29.50
26.86
Low
$19.05
22.16
24.17
21.16
High
$18.56
19.17
21.25
24.00
Low
$14.09
17.15
15.60
20.16
High
$15.99
15.85
15.93
19.25
2004
$67,406
12,715
4,689
8,026
$.48
$.46
2004
$60,405
—
1,003
50,234
$.04
Low
$13.57
13.41
13.07
12.80
Net Sales
dollars in millions
Net Earnings
dollars in millions
Stockholders’ Equity
dollars in millions
232.1
176.2
100.9
83.1
67.4
19.1
16.1
12.3
11.0
8.0
114.5
93.1
75.4
60.9
50.2
‘04
‘05
‘06
‘07
‘08
‘04
‘05
‘06
‘07
‘08
‘04
‘05
‘06
‘07
‘08
Board of Directors
Corporate Officers
Dino A. Rossi
Chairman, President and
Chief Executive Officer
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
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
Perry W. Premdas
Retired, Chief Financial Officer
of Celanese AG
Paul H. Richardson
Vice President
Research & Development
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
Headquarters
Balchem Corporation
52 Sunrise Park Road
P.O. Box 600
New Hampton, NY 10958
Manufacturing Locations
Slate Hill, NY; Green Pond, SC;
Verona, MO; Channahon, IL;
Salt Lake City, UT; St. Gabriel, LA;
and Marano Ticino, Italy
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 Relations
Jackie Powell
Virtual Business Solutions
864.486.8065
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
1185 Avenue of the Americas, 6th Fl.
New York, NY 10036
Website:
www.balchem.com
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Balchem Corporation At A Glance
Foo d , P ha rma a nd Nu trit ion
The F,P&N segment is one of the world’s leading providers of
microencapsulated, granulated and agglomerated ingredient
solutions. Broadly applied across a spectrum of food, nutritional
and pharmaceutical markets, our technology is bringing solutions
that differentiate products for a variety of applications.
An im al Nutriti on a nd Health
Our ANH segment provides the animal nutrition
market with specialty nutritional products derived
from our encapsulation and chelation technologies,
predominantly for dairy cows, to boost health and milk
production. It also manufactures and markets basic
choline chloride–an essential nutrient for the poultry
and swine industries. Derivatives of choline chloride
are also manufactured and sold into numerous
industrial applications.
ARC Spe cialty P rod ucts
Through ARC Specialty Products, Balchem provides select
specialty-packaged chemicals for use by contract sterilizers of
medical devices in the healthcare industry. In addition to drummed
100% ethylene oxide, ARC markets ethylene oxide blends and propylene
oxide in two-way environmentally safe containers.
1
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To Our Shareholders, Customers and Associates:
Reflecting on 2008, we are extremely
pleased to have completed another suc-
cessful, record-setting year despite a num-
ber of difficult business and global
economic challenges. We realized the full-
year effects of our 2007 acquisitions, in-
creasing our global presence while
contributing nicely to our bottom-line
growth. As we continue to leverage the
knowledge and intellectual capital from these acqui-
sitions, in combination with our core technologies, we
are discovering new applications for our current prod-
ucts and derivative products across our business
lines. Our focus as a wellness provider has opened
up new markets for us, including the development of
encapsulation technology supporting the food indus-
try label-friendly requirements. As awareness to the
health benefits of human grade choline grows, we
have launched new product applications both do-
mestically and abroad. Our animal nutrition and health
business is progressively a global
leader, fueled by
strong growth in our chelated minerals, encapsulated
specialty product applications, and choline chloride.
In 2008, through technology, integration and an ex-
panding knowledge base, we were able to develop
new markets and applications, including development
work for the specialized delivery of certain industrial
gases and pharmaceuticals. We also improved our
strong financial position by aggressively managing
working capital and reducing our long-term debt.
Financial Results
In spite of the well publicized economic issues and
truly unexpected bumps (hurricanes, significant raw
material cost escalation, etc.), we were able to
achieve record sales and profit results. For fiscal
2008, sales were $232.1 million, up 31.7% over 2007
sales of $176.2 million. Net earnings were a record
$19.1 million in 2008, an 18.2% increase over 2007
earnings of $16.1 million. Our diluted earnings per
share was $1.00/share, a 14.9% increase over
$0.87/share in 2007.
Our balance sheet ratios and cash flow remain
strong. We have aggressively paid down the debt
used to fund the Chinook and Akzo acquisitions of
early 2007; hence at December 31, 2008, our out-
standing borrowings were $11.6 million, reflecting ac-
celerated payments of $17.5 million. Given our quality
accounts receivable and reduced inventory levels, we
are well positioned to continue to aggressively reduce
our debt in 2009.
Although we did not complete a major acquisition in
2008, we did experience significant integration bene-
fits in the production and distribution of our choline
products from our most recent acquisitions. Along
with the increased manufacturing capacity of liquid
choline in our St. Gabriel, LA plant, the Marano, Italy
operation has helped solidify us as the global leader
of choline products. The improved cross business in-
tegration of our core business and technology, in
combination with these prior year strategic acquisi-
tions, has allowed us to grow within our existing cus-
tomer base, while also facilitating our expansion and
penetration into international markets.
Quality and Safety at the Forefront
Our quality and safety programs continued to flour-
ish in 2008. Last year marked the fourth year of our
Lean, Six Sigma and Profit Enhancement Program
(PEP), as we saw tangible benefits across all our do-
mestic and overseas plants. We continue to drive ed-
ucation and thought processes across functional
lines, positively impacting cost structures, quality and
efficiency. Our two largest and multi-product facilities,
in Verona, Missouri and Marano, Italy, underwent
modernization focused on achieving operational effi-
ciencies and increasing return on investment. We also
developed more environmentally friendly manufactur-
ing processes, which in the long run will provide us
with a more favorable cost structure. Safety contin-
ues to be paramount in all our operations, and 2008
extended our multi-year run of safety improvements.
Through awareness, training and formal audits, our
significant incident rate fell to a world-class level. We
We have, once again, been recognized throughout the business community for our achievements. We were ranked number 31
on Forbes’ list of the 200 Best Small Companies. Membership here is based on a comprehensive set of criteria, including cur-
rent and past performance. Fortune Magazine has also recognized us on its list of 100 Fastest Growing Companies, where
we were ranked number 60. This ranking is based on a three-year history of revenue, earnings and stock performance. We are
proud to be included in these prestigious rankings as one of the best, and we owe this recognition to the dedication, commitment
and hard work of everyone within our organization.
2
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are very proud of this accomplishment, and we will
remain focused on reducing operating costs while
maintaining the highest level of safety.
Expanding our Technology
In 2008, we continued to see the benefits of our
strong commitment to research and development. Our
innovative efforts and intellectual capital, further en-
hanced by recent acquisitions, have allowed us to cre-
atively build improved technologies for new and existing
market applications. Infusing knowledge into the dairy
production market, we launched AminoShure™-L,
which utilizes a proprietary rumen bypass technology
to deliver nutrients to cows. AminoShure was launched
late last year, and has already generated great interest
and new sales. We now expect to expand this im-
proved rumen bypass technology to other nutrients.
As we continue to promote wellness, we are being suc-
cessful
in creating an encapsulation technology for
clean label technology, allowing us to develop new
products in our Food, Pharma and Nutrition segment.
In our human nutrition sector, we now utilize encapsu-
lation technology to incorporate choline in pre-natal vi-
tamins, further enhancing the health benefits of choline.
We have also developed a sustained release powder
technology that can be applied to many nutritional and
pharma products. Finally, we are actively seeking new
industrial applications for our technology. Going forward,
we will leverage our technology and knowledge base
to develop new, innovative and “greener” products,
effecting unique and novel changes in the future.
Broadening our Scope
The strong performance across all of Balchem’s op-
erational units reflects the value in our diversified base
of business. We continue to build on our technology,
sales and marketing efforts to maintain an aggressive
organic growth strategy, pursuing new product and
market applications.
ARC Specialty Products had another solid year, grow-
ing 8% over 2007, as we strengthened our position as
the industry leader in the repackaging and distribution
of 100% Ethylene Oxide. We increased both revenue
and earnings over 2007, despite significant volatility of
raw materials throughout the year. We expect Ethelyne
Oxide, used primarily for the sterilization of medical de-
vices, to generate steadily growing results, with an
aging demographic as the key driver. We are also de-
veloping a new technology for packaging of another
gas to be used for fruit ripening.
Our Animal Nutrition and Health segment grew an
acquisition-aided 44% over the prior year, to approxi-
mately $160 million, complimentarily fueled by solid or-
ganic growth within the feed grade choline sector.
Strong domestic sales of our specialty encapsulated
and chelated mineral products, along with initial market
penetration in Europe, further solidified our position as
a global leader in animal health. Reashure, an encap-
sulated choline product, and Nitroshure, a nutritional
supplement, are both now mainstream products in the
dairy industry. AminoShure, a break-through encapsu-
lated lysine to strengthen amino acid ration balancing,
was launched late last year, further broadening this
segment portfolio. We continue research to further val-
idate our existing specialty ANH products, while simul-
technology platform to
taneously leveraging our
explore and develop new market opportunities.
We have established long-term
partnerships with key animal health
customers in the United States and Europe,
as we look for new opportunities and more
international markets for our choline products.
3
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drinks, and cereal products. We have also seen an
increase internationally in the use of human choline,
including use in “growing up” (adolescent) formulas in
Asia. Finally, we will build on our success in develop-
ing “clean” label coating technology, as we look to
transition more of our business into label-friendly ap-
plications. We will execute our current strategy of fo-
cusing on wellness, perpetuating improvements to
increase market share with existing clients, expanding
domestically and internationally.
Maintaining our Discipline
As we complete another successful year, we are
confident that Balchem will meet the challenges of
an uncertain global economy in 2009. Our focus on
innovation and technology, along with our increased
global presence, will allow us to broaden product ap-
plications and increase market penetration. We con-
tinue to implement lean programs, de-bottleneck
production capabilities, and leverage our existing
business and research infrastructure, expecting sales
and earnings to grow. We will monitor the develop-
ment of desired innovative activities of our customers
as we seek to expand our portfolio of products.
Our healthy financial situation has positioned us to
capitalize on acquisition opportunities that could
likely arise in the current economic environment.
I would like to thank our Board of Directors, our em-
ployees, our customers and our shareholders for
their continued loyalty and support.
Sincerely,
Dino A. Rossi
Chairman, President and Chief Executive Officer
The strong performance across all of Balchem’s operational
units reflects the value in our diversified base of business.
We continue to build on our technology, sales and marketing
efforts to maintain an aggressive organic growth strategy,
pursuing new product and market applications.
Balchem remains the leading supplier of choline
chloride products around the world, in part due to
the successful
integration of the choline business
from recent acquisitions. We are now realizing
greater production efficiencies, new global market
opportunities, and increased manufacturing capac-
ity. We have established long-term partnerships
with key animal health customers in the United
States and Europe, as we look for new opportuni-
ties and more international markets for our choline
products. As we continue to capitalize on economies
of scale, cross-integration, and superior technology,
focus on new opportunities and growth
we will
areas, while maintaining profitability and cash flow
in our existing operations.
Our Food, Pharma and Nutrition business experi-
enced an 11% year-over-year increase in sales. We
remain focused as a wellness provider, using our de-
veloped and acquired technologies to provide innova-
tive solutions for our customers. We have collaborated
with various consumer product manufacturers to in-
crease the health benefits of their products, using our
granulation, agglomeration, and encapsulation tech-
nologies in the food and nutrition sectors. We have
developed and applied our sustained release tech-
nologies to nutritional products, as we realize in-
creasing awareness of the human benefits of choline.
Our human grade choline is now included in main-
line food products, such as energy and nutrition
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:59) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
(cid:134) 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)
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)
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, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
(Check one):
Non-accelerated filer
Large accelerated filer (cid:134)
(cid:134)
Accelerated filer
(cid:59)
Smaller reporting company (cid:134)
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)
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 NASDAQ Global Market on June 30, 2008 was approximately
$412,781,000. 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 18,293,631 as of March 3, 2009.
Selected portions of the Registrant’s proxy statement for its 2009 Annual Meeting of Stockholders (the “2009 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, 2008 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, including the following:
•
•
•
•
•
•
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 and all subsequent written and oral forward-looking statements made by us or
persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained
herein.
Item 1. Business
General:
Part I
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.
Effective with the quarter ending March 31, 2008, we have realigned our business segment reporting
structure to appropriately reflect the internal management of the businesses, largely due to the impact of
acquisitions in 2007. We will continue to report three segments: Specialty Products; Food, Pharma &
Nutrition; and Animal Nutrition & Health. Changes to the reporting segments are as follows: chelated
minerals and specialty nutritional products for the animal health industry, formerly reported as a part of the
encapsulated/nutritional products segment, are now combined with the choline business (formerly BCP
Ingredients) into a consolidated Animal Nutrition & Health segment. The encapsulated/nutritional products
segment has been renamed Food, Pharma & Nutrition, focusing on human health. There are no changes to
the Specialty Products segment. Business segment net sales and earnings from operations have been
reclassified for all periods presented to reflect the segment changes.
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
1
information appears in the Notes to our Consolidated Financial Statements included under Item 8 below,
which information is incorporated herein by reference.
The Company operates four domestic subsidiaries, all of which are wholly-owned: BCP
Ingredients, Inc. (“BCP”), Balchem Minerals Corporation (“BMC”), BCP Saint Gabriel, Inc. (“BCP St.
Gabriel”), each a Delaware corporation, and Chelated Minerals Corporation (“CMC”), a Utah corporation.
We also operate three wholly-owned subsidiaries in Europe: Balchem BV and Balchem Trading BV, both
Dutch limited liability companies, and Balchem Italia Srl, an Italian limited liability company. 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.
Food, Pharma & Nutrition
The Food, Pharma & Nutrition (“FP&N”) 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.
Major product applications are baked goods, refrigerated and frozen dough systems, processed meats,
seasoning blends, confections, and nutritional supplements. We also market human grade choline nutrient
products through this segment for wellness applications. Choline is recognized to play a key role in the
development and structural integrity of brain cell membranes in infants, processing dietary fat,
reproductive development and neural functions, such as memory and muscle function. The FP&N portfolio
also includes granulated calcium carbonate products, primarily used in, or in conjunction with, novel over-
the-counter and prescription pharmaceuticals for the treatment of osteoporosis, gastric disorders and
calcium deficiencies.
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.
We sell ethylene oxide, at the 100% level, 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. We distribute our 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 custom 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 our principal customers for this
product. In addition, ethylene oxide blends are highly effective as a fumigant, 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
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.
Animal Nutrition & Health
Our Animal Nutrition & Health (“AN&H”) segment provides the animal nutrition market with
nutritional products derived from our encapsulation and chelation technologies in addition to basic choline
2
Commercial sales of REASHURE® Choline, an encapsulated choline product,
chloride.
NITROSHURETM, an encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin
product for dairy cows, boosts health and milk production in transition and lactating dairy cows, delivering
nutrient supplements that survive the rumen and are biologically available, providing required nutritional
levels. We also market chelated mineral supplements for use in animal feed throughout the world, as our
proprietary chelation technology provides enhanced nutrient absorption for various species of production
and companion animals. In October 2008, we introduced a rumen-protected lysine for use in dairy rations,
AMINOSHURETM-L, which gives nutritionists and dairy producers a precise and consistent source of
rumen-protected lysine. AN&H also manufactures and supplies basic choline chloride, an essential nutrient
for animal health, predominantly to the poultry and swine industries. Choline, which is manufactured and
sold on both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline deficiency can
result in reduced growth and perosis in poultry; fatty liver, kidney necrosis and general poor health
condition in swine. Certain derivatives of choline chloride are also manufactured and sold into industrial
applications. The AN&H segment also includes the manufacture and sale of methylamines. Methylamines
are a primary building block for the manufacture of choline products and are also used in a wide range of
industrial applications.
Raw Materials:
The raw materials utilized by the Company in the manufacture of its products are generally
available from a number of commercial sources. Such raw materials include materials derived from
petrochemicals, minerals, metals and other readily available commodities and are subject to price
fluctuations due to market conditions. 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 17 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.
Seasonality:
In general, the businesses of our segments are not seasonal to any material extent.
Backlog:
At December 31, 2008, the Company had a total backlog of $6,384,000 (including $4,434,000 for
the AN&H segment; $1,280,000 for the FP&N segment and $670,000 for Specialty Products segment), as
compared to a total backlog of $7,303,000 at December 31, 2007 (including $5,226,000 for the AN&H
segment; $1,723,000 for the FP&N segment and $354,000 for Specialty Products 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 two months after receipt of a
product order. All orders in the current backlog are expected to be filled in the 2009 fiscal year.
3
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 product 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 food and nutrition 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, 2008, 2007 and 2006, the Company incurred research and
development expense of approximately $2.9 million, $2.5 million and $2.0 million, respectively, on
Company-sponsored research and development for new products and improvements to existing products
and manufacturing processes, principally in the FP&N and AN&H segments. During the year ended
December 31, 2008, an average of 21 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 2007, we made two significant acquisitions.
In April 2007, pursuant to an asset purchase agreement dated March 30, 2007, we acquired the
methylamines and choline chloride business and manufacturing facilities of Akzo Nobel Chemicals S.p.A.,
located in Marano Ticino, Italy, through our affiliate, Balchem BV. Balchem BV subsequently assigned
this asset purchase agreement to its wholly-owned subsidiary, Balchem Italia Srl. In this Annual Report on
Form 10-K, we refer to this acquisition as the “Akzo Nobel Acquisition”.
In March 2007, BCP acquired certain choline chloride business assets of Chinook Global Limited
("Chinook"), a privately held Ontario corporation. In this Annual Report on Form 10-K, we refer to this
acquisition as the “Chinook Acquisition”.
In February 2006, we acquired all of the outstanding capital stock of CMC, which was then
privately held. CMC is a manufacturer and global marketer of chelated mineral nutritional supplements for
livestock, pet and swine feeds. In this Annual Report on Form 10-K, we refer to this acquisition as the
“CMC Acquisition.”
Excluding acquisitions, capital expenditures were approximately $5.1 million for 2008, as
compared to $4.9 million in 2007. Capital expenditures are projected to be approximately $5.0 million for
2009.
4
Environmental / Regulatory Matters:
The Federal Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”), a health and
safety statute, requires that certain products within our 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. We hold an EPA registration permitting us to sell ethylene oxide as a medical device
sterilant and spice fumigant.
We are in the process of reregistering this product’s use in compliance with FIFRA re-registration
requirements for pesticide products. With respect to the treatment of spices, the EPA prohibited 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 a mandated treatment method is used beginning August 1, 2008.
Another area of the EPA’s re-registration effort resulted in the April 16, 2008 issuance of the
RED (Re-registration Eligibility Decision) for ethylene oxide which permits the continued use of ethylene
oxide “to sterilize medical or laboratory equipment, pharmaceuticals, and aseptic packaging, or to reduce
microbial load on musical instruments, cosmetics, whole and ground spices and other seasoning materials
and artifacts, archival material or library objects.” Given that “the database to support re-registration is
substantially complete,” our re-registration effort is similarly substantially completed, which will continue
to authorize our ethylene oxide product sales for medical device sterilization. While the EPA may request
additional testing, we believe that the use of ethylene oxide will continue to be permitted. The product,
when used as a sterilant for certain medical devices, 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.
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 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.
5
The Company believes it is in compliance in all material respects with federal, state, local and
international 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).
The Channahon, Illinois manufacturing facility manufactures a calcium carbonate line of
pharmaceutical grade 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. The 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, 2009, the Company employed approximately 332 persons. Approximately 73
employees at our Marano, Ticino, Italy facility are covered by a national collective bargaining agreement,
which expires in 2010. Approximately 55 employees at the Company’s Verona, Missouri facility are
covered by a collective bargaining agreement, which expires in 2012.
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 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:
Our operating results may be adversely impacted by macro-economic uncertainties and fears.
Recently, general worldwide economic conditions have experienced a significant downturn due to
the credit conditions impacted by factors such as the subprime-mortgage turmoil, slower economic activity,
concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced
corporate profits and capital spending, adverse business conditions and liquidity and the impact of natural
disasters. These conditions make it extremely difficult for our customers, our vendors and us to accurately
forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow
6
spending on our products which would reduce our revenues and profitability. Furthermore, during
challenging economic times our customers may face issues gaining timely access to sufficient credit, which
could result in an impairment of their ability to make timely payments to us. If that were to occur, we may
be required to increase our allowance for doubtful accounts and our days sales outstanding would be
negatively impacted. We cannot predict the timing, depth or duration of any economic slowdown or
subsequent economic recovery, worldwide, or in the markets in which we operate.
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.
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.
The Channahon, Illinois 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
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 due to market conditions. Such raw materials include materials derived from petrochemicals,
minerals, metals and other commodities. 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
7
due to certain contractual obligations. 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. We believe
we have reliable sources of supply for our raw materials under normal market conditions. We cannot,
however, predict the likelihood or impact of any future raw material shortages. Any shortages could have a
material adverse impact on our results of operations.
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, failure to achieve or maintain safety or quality standards, work stoppages, supply or
logistical outages, 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 17 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 and manufacturing operations outside the
United States.
For the year ended December 31, 2008, approximately 37% of our net sales consisted of sales
outside the United States, predominately to Europe, Japan and China. In addition, we conduct a portion of
our manufacturing outside the United States. International sales are subject to inherent risks. The majority
of our foreign sales occur through our foreign sales subsidiaries and the remainder of our foreign sales
result from exports to foreign distributors, resellers and customers. Our foreign sales and operations are
subject to a number of risks, including: longer accounts receivable collection periods; the impact of
recessions and other economic conditions in economies outside the United States; export duties and quotas;
unexpected changes in regulatory requirements; certification requirements; environmental regulations;
reduced protection for intellectual property rights in some countries; potentially adverse tax consequences;
political and economic instability; and preference for locally produced products. These factors could have a
material adverse impact on our ability to increase or maintain our international sales.
We may, from time to time, experience problems in our labor relations.
In North America, approximately 55 employees, or 22% of our North American workforce, as of
December 31, 2008, are represented by a union under a single collective bargaining agreement. This
agreement expires in 2012. In Europe, approximately 73 employees are covered by a collective bargaining
agreement. This agreement expires in 2010. We believe that our present labor relations with all of our
unionized employees are satisfactory, however, our failure to renew these agreements on reasonable terms
could result in labor disruptions and increased labor costs, which could adversely affect our financial
performance. Similarly, if our relations with the unionized portion of our workforce do not remain
positive, such employees could initiate a strike, work stoppage or slowdown in the future. In the event of
such an action, we may not be able to adequately meet the needs of our customers using our remaining
workforce and our operations and financial condition could be adversely affected.
8
Our international operations subject us to currency translation risk and currency transaction risk
which could cause our results to fluctuate from period to period.
The financial condition and results of operations of our foreign subsidiaries are reported in Euros
and then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our
consolidated financial statements. Exchange rates between these currencies in recent years have fluctuated
significantly and may do so in the future. In the past year, as a result of the strength of the Euro compared
to the U.S. dollar, our operating results in U.S. dollars were positively affected upon translation. The
positive impact of a strengthening Euro may not continue in the future and may even reverse if the Euro
declines in value compared to the U.S. dollar. Furthermore, we incur currency transaction risk whenever
we enter into either a purchase or a sales transaction using a currency different than the functional
currency. Given the volatility of exchange rates, we may not be able to effectively manage our currency
transactions and/or translation risks. Volatility in currency exchange rates could impact our business and
financial results.
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
and attention. Any of these situations could have a material adverse effect on our business and financial
results.
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 business 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 repackaging 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
9
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. The Company uses
this facility for production related to the Company’s calcium carbonate 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, owns a manufacturing facility located upon approximately 11 acres
of leased realty in St. Gabriel, Louisiana. The Company manufactures and distributes animal feed grade
choline chloride at this location.
The Company, through its European subsidiary, Balchem Italia Srl, owns a facility located on an
approximately 30 acre parcel of land in Marano Ticino, Italy. The Company manufactures and distributes
methylamines, animal feed grade choline and human choline nutrients 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
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.
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.
10
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.
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, 2008 and 2007 were as follows:
Quarterly Period
Ended March 31, 2008
Ended June 30, 2008
Ended September 30, 2008
Ended December 31, 2008
Quarterly Period
Ended March 31, 2007
Ended June 30, 2007
Ended September 30, 2007
Ended December 31, 2007
$
$
High
Low
23.34 $
26.44
29.50
26.86
19.05
22.16
24.17
21.16
High
Low
18.56 $
19.17
21.25
24.00
14.09
17.15
15.60
20.16
On March 3, 2009 the closing price for the common stock on the Nasdaq Global Market was
$19.25.
(b)
Record Holders.
As of March 3, 2009, the approximate number of holders of record of the Company’s common
stock was 192. 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 12,399.
(c)
Dividends.
The Company declared cash dividends of $0.11 per share on its common stock during its fiscal
years ended December 31, 2008 and 2007.
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.
11
(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, 2008, 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, 2003 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 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 Food, Pharma & Nutrition 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
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Item 6. Selected Financial Data
The selected statements of operations data set forth below for the three years in the period ended
December 31, 2008 and the selected balance sheet data as of December 31, 2008 and 2007 have been
derived from our Consolidated Financial Statements included elsewhere herein. The selected financial data
as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 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.
Earnings per share and dividend amounts have been adjusted for the December 2006 and 2005 three-for-
two stock splits (effected by means of stock dividends).
12
(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
At December 31,
Balance Sheet Data
Total assets
Long-term debt
Other long-term
obligations
Total stockholders’ equity
Dividends per common share
2008
(1)(2)(3)(4)
2007
(1)(2)(3)(4)
2006
(1)(2)
2005
(1)
2004
$
232,050
$
176,201
$
100,905
$
83,095
$
67,406
28,431
9,381
19,050
1.06
1.00
2008
154,474
6,671
1,609
114,506
.11
$
$
$
$
24,829
8,711
16,118
.91
.87
2007
154,424
17,398
1,529
93,080
.11
$
$
$
$
$
$
$
$
19,101
6,823
12,278
.70
.67
2006
92,333
-
784
75,362
.09
$
$
$
$
17,191
6,237
10,954
.63
.61
2005
75,141
-
1,043
60,933
.06
$
$
$
$
12,715
4,689
8,026
.48
.46
2004
60,405
-
1,003
50,234
.04
(1)
(2)
(3)
(4)
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 Chinook Acquisition
from the date of acquisition (March 19, 2007) forward.
Includes the operating results, cash flows, and assets relating to the Akzo Nobel
Acquisition from the date of acquisition (May 1, 2007) forward.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We develop, manufacture, distribute and market specialty performance ingredients and products
for the food, nutritional, pharmaceutical, animal health and medical device sterilization industries. Our
reportable segments are strategic businesses that offer products and services to different markets. Effective
with the quarter ending March 31, 2008, the Company has realigned its business segment reporting
structure to more appropriately reflect the internal management of the businesses, largely due to the impact
of acquisitions in 2007. The Company will continue to report three segments: Specialty Products; Food,
Pharma & Nutrition; and Animal Nutrition & Health. Changes to the reporting segments are as follows:
chelated minerals and specialty nutritional products for the animal health industry, formerly reported as a
part of the encapsulated/nutritional products segment, are now combined with the choline business
(formerly BCP
into a consolidated Animal Nutrition & Health segment. The
encapsulated/nutritional products segment has been renamed Food, Pharma & Nutrition, focusing on
human health. There are no changes to the Specialty Products segment. Business segment net sales and
earnings from operations have been reclassified for all periods presented to reflect the segment changes.
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
13
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 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. Propylene oxide and methyl chloride are also 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.
Food, Pharma & Nutrition
The Food, Pharma & Nutrition (“FP&N”) 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, and packaging applications and shelf-
life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats,
seasoning blends, confections, and nutritional supplements. We also market human grade choline nutrient
products through this segment for wellness applications. Choline is recognized to play a key role in the
development and structural integrity of brain cell membranes in infants, processing dietary fat,
reproductive development and neural functions, such as memory and muscle function. The FP&N portfolio
also includes granulated calcium carbonate products, primarily used in, or in conjunction with, novel over-
the-counter and prescription pharmaceuticals for the treatment of osteoporosis, gastric disorders and
calcium deficiencies in the United States.
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.
Animal Nutrition & Health
Our Animal Nutrition & Health (“AN&H”) segment provides the animal nutrition market with
nutritional products derived from our encapsulation and chelation technologies in addition to basic choline
Commercial sales of REASHURE® Choline, an encapsulated choline product,
chloride.
NITROSHURETM, an encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin
product for dairy cows, boosts health and milk production in transition and lactating dairy cows, delivering
nutrient supplements that survive the rumen and are biologically available, providing required nutritional
levels. We also market chelated mineral supplements for use in animal feed throughout the world, as our
proprietary chelation technology provides enhanced nutrient absorption for various species of production
and companion animals. In October 2008, we introduced the first proven rumen-protected lysine for use in
dairy rations, AMINOSHURETM-L, which gives nutritionists and dairy producers a precise and consistent
source of rumen-protected lysine. AN&H also manufactures and supplies basic choline chloride, an
essential nutrient for animal health, predominantly to the poultry and swine industries. Choline, which is
manufactured and sold on both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline
deficiency can result in reduced growth and perosis in poultry; fatty liver, kidney necrosis and general poor
14
health condition in swine. Certain derivatives of choline chloride are also manufactured and sold into
industrial applications. The AN&H segment also includes the manufacture and sale of methylamines.
Methylamines are a primary building block for the manufacture of choline products and are also used in a
wide range of industrial applications.
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. Management believes that
success in the commodity-oriented basic choline chloride marketplace is highly dependent on the
Company’s ability to maintain its strong reputation for excellent product quality and customer service. In
addition, the Company must continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete 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
from operations for the three years ended December 31, 2008, 2007 and 2006 (in thousands):
Business Segment Net Sales:
Specialty Products
Food, Pharma & Nutrition
Animal Nutrition & Health
Total
Business Segment Earnings From Operations:
Specialty Products
Food, Pharma & Nutrition
Animal Nutrition & Health
Total
2008
35,835
35,702
160,513
232,050
2007
33,057
32,052
111,092
176,201
$
$
2008
12,545
5,469
11,334
29,348
2007
11,824
4,144
9,938
25,906
$
$
$
$
$
$
2006
32,026
28,702
40,177
100,905
2006
11,315
2,162
5,685
19,162
$
$
$
$
Fiscal Year 2008 compared to Fiscal Year 2007
(All amounts in thousands, except share and per share data)
Net Sales
Net sales for 2008 were $232,050, as compared with $176,201 for 2007, an increase of $55,849 or
31.7%. Net sales for the specialty products segment were $35,835 for 2008, as compared with $33,057 for
2007, an increase of $2,778 or 8.4%. 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 to help offset rising raw material costs during 2008. Net sales for the Food, Pharma &
Nutrition segment were $35,702 for 2008, as compared with $32,052 for 2007, an increase of $3,650 or
11.4%. This result was driven principally by increased sales of calcium and nutritional products, as well as
increased product sales in both the domestic and international food markets. Net sales of $160,513 were
realized in 2008 for the Animal Nutrition & Health segment, as compared with $111,092 for 2007, an
increase of $49,421 or 44.5%. This result reflects incremental sales of approximately $40,000 from the
customer list acquisition of Chinook Group Limited (“Chinook”) and from the Akzo Nobel Acquisition, as
described in Note 5. For the twelve months ending December 31, 2008, sales of our specialty animal
nutrition and health products, targeted for ruminant production animals and companion animals, increased
32.9% or approximately 12% of the overall AN&H growth.
15
Operating Expenses
Operating expenses for 2008 were $23,230, as compared to $21,024 for 2007, an increase of
$2,206 or 10.5%. This increase was due primarily to $736 of additional amortization expense, plus sales
and technical personnel expense associated with the Chinook and Akzo Nobel acquisitions, as well as
higher expenses relating to accounting, tax services, and non-cash stock-based compensation recognition.
With these increases, operating expenses were 10.0% of sales or 1.9 percentage points less than the
operating expenses as a percent of sales incurred in 2007. During 2008 and 2007, the Company spent
$2,877 and $2,514, respectively, on research and development, substantially all of which pertained to the
Food, Pharma, Nutrition, and Animal Nutrition & Health segments.
Business Segment Earnings From Operations
Earnings from operations for 2008 increased to $29,348 compared to $25,906 for 2007, an
increase of $3,442 or 13.3%, due largely to the above-noted increase in sales. Earnings from operations as
a percentage of sales (“operating margin”) for 2008 decreased to 12.6% compared to 14.7% for 2007,
principally a result of the previously-noted acquisition-related sales which carry a lower profit margin than
the Company’s other business segments. In addition, despite the implementation of price increases, we
were not able to fully recover cost increases in certain petro-chemical raw materials, which continued or
trended up within the year. We did begin to see a reduction in certain raw material costs late in the third
quarter 2008. The Company is continuing to focus on implementing price increases, productivity
improvements, and, most importantly, growth through new product development which should result in
improved operating margins. Earnings from operations for the Specialty Products segment were $12,545,
an increase of $721 or 6.1%, a result of increases in sales volume and modest sales price increases offset
by higher raw material costs and the previously-noted increased expenses relating to accounting, tax
services, and non-cash stock-based compensation recognition. Earnings from operations for Food, Pharma
& Nutrition were $5,469, an increase of $1,325 or 32.0%, due largely to increased sales of calcium and
nutritional products. Earnings from operations for Animal Nutrition & Health, while unfavorably impacted
by the noted petro-chemical raw material cost increases, improved to $11,334, an increase of $1,396 or
14.0%, and were favorably affected by organic growth and the previously-noted increased sales volumes
derived from the acquisitions.
Other Expenses (Income)
Interest income for 2008 totaled $107 as compared to $166 for 2007. Interest expense, net of
capitalized interest, was $963 for 2008 compared to $1,562 for 2007. This decrease is primarily
attributable to lower interest rates and the decrease in average current and long-term debt resulting from
both normal recurring principal payments as well as accelerated payments of the term loan used to fund the
Chinook Acquisition. Other expense of $61 for 2008 is primarily the result of unfavorable fluctuations in
foreign currency exchange rates between the U.S. dollar (the reporting currency) and functional foreign
currencies.
Income Tax Expense
The Company’s effective tax rate 2008 and 2007 was 33.0% and 35.1%, respectively. This
decrease in the effective tax rate is primarily attributable to a change in apportionment factors relating to
state income taxes, as well as a change in the income proportion towards jurisdictions with lower tax rates.
Net Earnings
Primarily as a result of the above-noted increase in sales and the noted raw material and operating
expense increases, net earnings were $19,050 for 2008, as compared with $16,118 for 2007, an increase of
18.2%.
16
Fiscal Year 2007 compared to Fiscal Year 2006
(All amounts in thousands, except share and per share data)
Net Sales
Net sales for 2007 were $176,201, as compared with $100,905 for 2006, an increase of $75,296 or
74.6%. Net sales for the specialty products segment were $33,057 for 2007, as compared with $32,026 for
2006, an increase of $1,031 or 3.2%. This increase was principally due to an increase in sales volume,
along with modest price increases for products in this segment. Net sales for the Food, Pharma & Nutrition
segment were $32,052 for 2007, as compared with $28,702 for 2006, an increase of $3,350 or 11.7%. This
result was driven principally by increased global sales of human nutritional and choline products, and
includes growth of $1,952 relating to the Akzo Nobel Acquisition. Net sales for the Animal Nutrition &
Health segment were $111,092 in 2007, as compared with $40,177 for 2006, an increase of $70,915 or
176.5%. This result reflects sales from the Chinook Acquisition and the Akzo Nobel Acquisition in 2007,
which contributed in the aggregate approximately $62,495 of the revenue in this segment. The remaining
increase was due to increased volumes sold in the core dry and aqueous choline, as well as the specialty
industrial product lines. Sales of REASHURE®, Niashure and chelated minerals, our specialty animal
nutrition and health products targeted for ruminant animals, and increases in the companion animal market
also contributed to this growth.
Operating Expenses
Operating expenses for 2007 increased to $21,024 from $14,844 for 2006, an increase of $6,180
or 41.6%. This increase was due primarily to $2,300 of additional amortization expense, plus sales and
technical personnel expense associated with the Chinook and Akzo Nobel acquisitions. We also incurred
approximately $1,224 of commercial development expenses toward our pharmaceutical market initiatives
in 2007. With these increases, operating expenses were 11.9% of sales or 2.8 percentage points less than
the operating expenses as a percent of sales incurred in 2006. During 2007 and 2006, the Company spent
$2,514 and $2,019 respectively, on research and development, substantially all of which pertained to the
Company’s encapsulated / nutritional products for both human and animal health.
Business Segment Earnings From Operations
As a result of the foregoing, earnings from operations for 2007 were $25,906 as compared to
$19,162 for 2006, reflecting a 35.2% increase from year to year. Earnings from operations for the specialty
products segment increased to $11,824 in 2007 from $11,315 in 2006, an increase of $509 or 4.5%, due
largely to increases in sales volume and modest sales price increases. These increases were partially offset
by higher raw material costs. Earnings from operations for the Food, Pharma & Nutrition segment
increased to $4,144 in 2007 from $2,162 in 2006, an increase of $1,981 or 91.6%, as this segment was
favorably affected by the Akzo Nobel Acquisition and increased volumes sold principally in the human
choline markets. Earnings from operations for the Animal Nutrition & Health segment, increased to $9,938
in 2007 from $5,684 in 2006, an increase of $4,254 or 74.8%, as a result of the previously noted increased
sales volumes and improved productivity, partially offset by certain petro-chemical raw material cost
increases.
Other Expenses (Income)
Interest income for 2007 totaled $166, as compared to $128 for 2006. This increase is attributable
to an increase in the Company’s average cash balance during 2007. Interest expense, net of capitalized
interest, was $1,562 for 2007, as compared to $189 for 2006. This increase is attributable to the increase in
average current and long-term debt resulting from the Chinook Acquisition and Akzo Nobel Acquisition.
Other income of $319 for 2007 is the result of favorable fluctuations in foreign currency exchange rates
between the U.S. dollar (the reporting currency) and functional foreign currencies.
17
Income Tax Expense
The Company’s effective tax rate for 2007 and 2006 was 35.1% and 35.7%, respectively. This
decrease in the effective tax rate is primarily attributable to a domestic manufacturer's deduction and to a
change in allocation relating to state income taxes. The adoption of Interpretation No. 48, “ Accounting for
Uncertainty in Income Taxes ” (“FIN 48”) adversely affected the 2007 income tax expense by $220 and
the effective tax rate by 0.9%.
Net Earnings
Primarily as a result of the above-noted increase in sales, net earnings were $16,118 for 2007, as
compared with $12,278 for 2006, an increase of 31.3%.
LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations
The Company's contractual obligations and debt obligations, excluding revolver borrowings, as of
December 31, 2008, are summarized in the table below:
doirep yb eud stnemyaP
Contractual Obligations
Long-term debt obligations
Operating lease obligations (1)
Purchase obligations (2)
latoT
Less than
1 year
$ 2,860
1,128
8,048
630,21 $ 961,02 $
Total
$ 9,531
2,590
8,048
1-3 years
$ 6,671
894
-
More than
5 years
$ -
221
-
122 $ 743 $ 565,7 $
3-5 years
$ -
347
-
(1)
Principally includes obligations associated with future minimum non-cancelable operating lease
obligations (including the headquarters office space entered into in 2002).
(2)
Principally includes open purchase orders with vendors for inventory not yet received or recorded on
our balance sheet.
The table above excludes a $581 liability for uncertain tax positions, including the related interest
and penalties, recorded in accordance with the Financial Accounting Standards Board’s Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FAS Statement No. 109”
(“FIN 48”) as we are unable to reasonably estimate the timing of settlement (see Note 8 for a further
discussion on FIN 48).
The Company knows of no current or pending demands on, or commitments for, its liquid assets
that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash flow to fund working
capital requirements and necessary capital investments. The Company is actively pursuing additional
acquisition candidates. The Company could seek additional bank loans or access to financial markets to
fund such acquisitions, its operations, working capital, necessary capital investments or other cash
requirements should it deem it necessary to do so.
Acquisitions and Dispositions
Effective April 30, 2007, pursuant to an asset purchase agreement dated March 30, 2007 (the
“Akzo Nobel Asset Purchase Agreement”), the Company, through its European subsidiary, Balchem B.V.,
18
completed an acquisition of the methylamines and choline chloride business and manufacturing facilities of
Akzo Nobel Chemicals S.p.A., located in Marano Ticino, Italy (the “Akzo Nobel Acquisition”) for a
purchase price, including acquisition costs, of approximately $8,000.
On March 16, 2007, the Company, through BCP, entered into an asset purchase agreement (the
"Asset Purchase Agreement") with Chinook Global Limited ("Chinook"), a privately held Ontario
corporation, pursuant to which BCP acquired certain of Chinook's choline chloride business assets (the
“Chinook Acquisition”) for a purchase price, including acquisition costs, of approximately $33,000. The
Chinook Acquisition closed effective the same date.
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, including
acquisition costs, of approximately $17,900. CMC is a manufacturer and global marketer of chelated
mineral nutritional supplements for livestock, pet and swine feeds.
Cash
Cash and cash equivalents increased to $3,422 at December 31, 2008 from $2,307 at December
31, 2007 primarily resulting from the information detailed below. Working capital amounted to $29,566 at
December 31, 2008 as compared to $16,139 at December 31, 2007, an increase of $13,427.
Operating Activities
Cash flows from operating activities provided $22,897 for 2008 compared to $15,637 for 2007.
The increase in cash flows from operating activities was primarily due to an increase in net earnings,
depreciation and amortization, and stock compensation. The aforementioned increase in cash flows was
partially offset by an increase in inventories, accounts receivable and a reduction in accounts payable and
accrued expenses.
Investing Activities
Capital expenditures were $5,080 for 2008 compared to $4,858 for 2007. Assets acquired in 2007
totaled $40,744, which was principally related to the Chinook Acquisition and the Akzo Nobel Acquisition
(see Note 5).
Financing Activities
The Company has an approved stock repurchase program. The total authorization under this
program is 2,508,692 shares. Since the inception of the program, a total of 1,307,867 shares have been
purchased, none of which remained in treasury at December 31, 2008 or 2007. During 2008, no additional
shares were purchased. The Company intends to acquire shares from time to time at prevailing market
prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow,
market conditions and other factors.
On April 30, 2007, the Company, and its principal bank entered into a Loan Agreement (the
“European Loan Agreement”) providing for an unsecured term loan of €7,500, translated to approximately
$10,573 of December 31, 2008 (the “European Term Loan”), the proceeds of which were used to fund the
Akzo Nobel Acquisition (see Note 5) and initial working capital requirements. The European Term Loan is
payable in equal monthly installments of principal, each equal to 1/84th of the principal of the European
Term Loan, together with accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a monthly interest rate equal to
EURIBOR plus 1%. At December 31, 2008, this interest rate was 4.61%. At December 31, 2008, the
European Term Loan had an outstanding balance of €5,804 translated to $8,181. The European Loan
Agreement also initially provided for a short-term revolving credit facility of €2,000 (the "European
Revolving Facility"). The European Revolving Facility has been renewed for a period of one year as of
19
May 1, 2008. As part of this renewal, the European Loan Agreement was amended to increase the
European Revolving Facility to €3,000, translated to $4,229 as of December 31, 2008. The European
Revolving Facility is subject to a monthly interest rate equal to EURIBOR plus 1.25%, and accrued interest
is payable monthly. The Company has drawn down €1,450, or $2,044 as translated at December 31, 2008,
of the European Revolving Facility as of December 31, 2008.
On March 16, 2007, the Company and its principal bank entered into a Loan Agreement (the
“Loan Agreement”) providing for an unsecured term loan of $29,000 (the “Term Loan”), the proceeds of
which were used to fund the Chinook Acquisition (see Note 5). The Term Loan is payable in equal
monthly installments of principal, each equal to 1/60th of the principal of the Term Loan, together with
accrued interest, with remaining principal and interest payable at maturity. The Term Loan has a maturity
date of March 16, 2010 and is subject to a monthly interest rate equal to LIBOR plus 1%. At December 31,
2008, this interest rate was 2.20%. As of December 31, 2008, the Company has prepaid $17,500 of the
Term Loan. At December 31, 2008, the Term Loan had an outstanding balance of $1,350. The Loan
Agreement also provides for a short-term revolving credit facility of $6,000 (the "Revolving Facility"). The
Revolving Facility is subject to a monthly interest rate equal to LIBOR plus 1%, and accrued interest is
payable monthly. No amounts are outstanding on the Revolving Facility as of the date hereof. The
Revolving Facility has a maturity date of May 31, 2009. Management believes that such facility will be
renewed in the normal course of business.
Indebtedness under the Company’s loan agreements are secured by assets of the Company.
Proceeds from stock options exercised totaled $1,050 and $1,217 for 2008 and 2007, respectively.
Dividend payments were $1,975 and $1,596 for 2008 and 2007, respectively.
Other Matters Impacting Liquidity
The Company currently provides postretirement benefits in the form of a retirement medical plan
under a collective bargaining agreement covering eligible retired employees of its Verona, Missouri
facility. The amount recorded on the Company’s balance sheet as of December 31, 2008 for this obligation
is $801. The postretirement plan is not funded. Historical cash payments made under such plan have
approximated $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 principally not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities. In addition, the Company follows the
20
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.
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.
21
Post-employment Benefits
The Company provides life insurance and health care benefits for eligible retirees and health care
benefits for retirees’ eligible survivors. The costs and obligations related to these benefits reflect the
Company’s assumptions as to general economic conditions and health care cost trends. The cost of
providing plan benefits also depends on demographic assumptions including retirements, mortality,
turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing
these benefits could increase or decrease.
In 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 $300 as a reduction to the benefit obligation
and $200, 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.
Beginning in fiscal 2007, we account for uncertainty in income taxes utilizing the Financial
Accounting Standards Board’s Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FAS Statement No. 109” (“FIN 48”). This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109. It
prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax
positions taken or expected to be taken. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and disclosures. The application of
FIN 48 requires judgment related to the uncertainty in income taxes and could impact our effective tax rate.
22
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 $900 of
compensation expense, net of tax, in 2006. If factors change and we employ different 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. See Note 2 to the Consolidated Financial
Statements for additional information.
New Accounting Pronouncements:
In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for
nongovernmental entities. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the
American Institute of Certified Public Accountants' (AICPA) Statement on Auditing Standards (SAS) No.
69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”
SFAS No. 162 is effective November 15, 2008. The adoption of this statement was not significant to the
Company’s consolidated financial statements.
In April 2008, FASB issued FSP 142-3, “Determining the Useful Life of Intangible Assets” ("FSP
142-3"). FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets.
Its intent is to improve the consistency between the useful life of an intangible asset and the period of
expected cash flows used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of this statement to be significant to its
consolidated financial statements.
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures
about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 requires enhanced disclosures regarding derivatives and hedging activities,
including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which
derivative instruments and related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (c) the effect of
derivative instruments and related hedged items on an entity’s financial position, financial performance,
and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. As SFAS 161 relates specifically to disclosures, the statement will
have no impact on our financial condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No.141 (revised 2007), “Business Combinations”, or
SFAS 141R. The purpose of issuing the statement is to replace current guidance in SFAS No.141 to better
represent the economic value of a business combination transaction. The changes to be effected with SFAS
141R from the current guidance include, but are not limited to: (1) acquisition costs will be recognized
23
separately from the acquisition; (2) known contractual contingencies at the time of the acquisition will be
considered part of the liabilities acquired measured at their fair value; all other contingencies will be part of
the liabilities acquired measured at their fair value only if it is more likely than not that they meet the
definition of a liability; (3) contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as well as noncontrolling
interests, in the acquiree, at the full amounts of their fair values; and (5) a bargain purchase (defined as a
business combination in which the total acquisition-date fair value of the identifiable net assets acquired
exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer. SFAS 141R will be effective for
any business combinations that occur after January 1, 2009. The Company is currently evaluating the
impact that SFAS 141R will have on its financial statements and disclosures.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51”, or SFAS 160. SFAS 160 was issued to improve
the relevance, comparability, and transparency of financial information provided to investors by requiring
all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in
the consolidated financial statements. Moreover, SFAS 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by requiring they be treated as
equity transactions. SFAS 160 will be effective January 1, 2009. The Company does not expect the
adoption of this statement to be significant to its consolidated financial statements.
In June 2007, FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3,
"Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities" ("EITF 07-3"). EITF 07-3 addresses the diversity that exists with respect to
the accounting for the non-refundable portion of a payment made by a research and development entity for
future research and development activities. Under EITF 07-3, an entity would defer and capitalize non-
refundable advance payments made for research and development activities until the related goods are
delivered or the related services are performed. The Company has adopted the provisions of EITF 07-3 as
of January 1, 2008 and it has not had a material impact on its financial condition or results of operations.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159
permits an entity to measure certain financial assets and financial liabilities at fair value. Entities electing
the fair value option will report unrealized gains and losses in earnings as of each subsequent reporting
date. The fair value option may be elected on an instrument-by-instrument basis with few exceptions, as
long as it is applied to the instrument in its entirety. SFAS 159 establishes presentation and disclosure
requirements to help financial statement users understand the effect of an entity’s election on its earnings.
SFAS 159 requires prospective application. If an entity elects the fair value option for items existing as of
the date of adoption, the difference between their carrying amount and fair value should be included in a
cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS 159
are effective for fiscal years beginning after November 15, 2007. The Company has adopted the
provisions of this statement as of January 1, 2008 and it did not have a material impact on its financial
condition or results of operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair value measurements. The
Company has adopted the provisions of this statement for its financial assets and liabilities as of January 1,
2008 and it did not have a material impact on its financial condition or results of operations. As permitted
by FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”, the
Company elected to defer the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis, until January 1, 2009. Effective January 1, 2009, we will adopt the provision for
nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a
24
recurring basis, which include those measured at fair value in impairment testing and those initially
measured at fair value in a business combination. We do not expect the provisions of SFAS No. 157
related to these items to have a material impact on our consolidated financial statements. In October 2008,
FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset is Not Active.” FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not
active and provides an example of key considerations in determining the fair value of a financial asset
when the market for that asset is not active. FSP No. 157-3 was effective on October 10, 2008, including
prior periods for which financial statements have not been issued. Revisions resulting from a change in the
valuation technique or its application should be accounted for as a change in accounting estimate following
the guidance in SFAS No. 154, "Accounting Changes and Error Corrections." The Company adopted FSP
No. 157-3 on October 10, 2008 and it did not have a material effect on its consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents are invested primarily in money market accounts. The money market
funds in which the Company invests are participants in the United States Treasury Department’s
Temporary Guarantee Program for Money Market Funds. This program provides coverage for amounts
held in money market funds as of the close of business on September 19, 2008. The Company has no
derivative financial instruments or derivative commodity instruments, nor does the Company have any
financial instruments entered into for trading or hedging purposes. As of December 31, 2008, the
Company’s borrowings were under a bank term loan bearing interest at LIBOR plus 1.00%, a second bank
term loan bearing interest at EURIBOR plus 1.00%, a revolving line of credit bearing interest at LIBOR
plus 1.00% and a second revolving line of credit bearing interest at EURIBOR plus 1.25%. A 100 basis
point increase or decrease in interest rates, applied to the Company’s borrowings at December 31, 2008,
would result in an increase or decrease in annual interest expense and a corresponding reduction or
increase in cash flow of approximately $115. The Company is exposed to market risks for changes in
foreign currency rates and has exposure to commodity price risks, including prices of our primary raw
materials. Our objective is to seek a reduction in the potential negative earnings impact of changes in
foreign exchange rates and raw material pricing arising in our business activities. The Company manages
these financial exposures, where possible, through pricing and operational means. Our practices may
change as economic conditions change.
25
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data:
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of
December 31, 2008 and 2007
Consolidated Statements of Earnings for the
years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying
Accounts for the years ended December 31, 2008, 2007 and 2006
27
29
30
31
32
33
55
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Balchem Corporation
We have audited the accompanying consolidated balance sheets of Balchem Corporation and Subsidiaries
as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also
included the financial statement schedule of Balchem Corporation listed in the Index at Item 8. We also
have audited Balchem Corporation’s internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Balchem Corporation's management is
responsible for these financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these financial statements and an
opinion on 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 audits of the 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,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included 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 (a) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (b) 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 (c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Balchem Corporation and Subsidiaries as of December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly the information set forth
therein. Also in our opinion, Balchem Corporation maintained, in all material respects, effective internal
27
control over financial reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ McGladrey & Pullen LLP
New York, New York
March 12, 2009
28
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2008 and 2007
(Dollars in thousands, except share and per share data)
Assets
2008
2007
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at
December 31, 2008 and 2007, respectively
Inventories
Prepaid expenses
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets with finite lives, net
Other assets
Total assets
Current liabilities:
Liabilities and Stockholders' Equity
Trade accounts payable
Accrued expenses
Accrued compensation and other benefits
Customer deposits and other deferred revenue
Dividends payable
Income taxes payable
Current portion of long-term debt
Revolver borrowings
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term obligations
Total liabilities
Commitments and contingencies (note 11)
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding
Common stock, $.0667 par value. Authorized 60,000,000 shares; 18,249,347
shares issued and outstanding at December 31, 2008 and 17,979,353 shares
issued and outstanding at December 31, 2007
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
$
3,422
$
2,307
30,250
16,618
2,581
649
1,731
55,251
42,513
29,640
15,680
2,456
515
1,871
52,469
42,080
26,658
29,993
59
154,474
$
26,363
33,451
61
154,424
$
$
10,336
3,948
2,501
-
2,008
1,988
2,860
2,044
25,685
$
11,190
7,311
3,205
42
1,975
2,019
7,379
3,209
36,330
6,671
6,003
1,609
39,968
-
823
18,809
94,882
(8)
114,506
17,398
6,087
1,529
61,344
-
804
14,286
77,840
150
93,080
Total liabilities and stockholders' equity
$
154,474
$
154,424
See accompanying notes to consolidated financial statements.
29
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2008, 2007 and 2006
(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
2008
2007
2006
$
232,050
$
176,201
$
100,905
179,472
129,271
52,578
46,930
12,560
2,877
7,793
23,230
29,348
(107)
963
61
28,431
9,381
11,930
2,514
6,580
21,024
25,906
(166)
1,562
(319)
24,829
8,711
66,899
34,006
6,907
2,019
5,918
14,844
19,162
(128)
189
-
19,101
6,823
$
19,050
$
16,118
$
12,278
Basic net earnings per common share
$
1.06
$
0.91
$
0.70
Diluted net earnings per common share
$
1.00
$
0.87
$
0.67
See accompanying notes to consolidated financial statements.
30
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2008, 2007 and 2006
(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
Balance - December 31, 2005
17,461,447
$
776
$
8,008
$
53,306
$
-
(96,024)
$
(1,157)
$
60,933
-
-
21,933
74,091
-
-
264
893
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,278
(1,596)
334
3,220
193
75,362
16,118
(1,975)
379
3,530
(291)
(43)
93,080
19,050
(2,008)
406
4,136
48
(206)
$
-
$
114,506
Net earnings
Dividends ($.09 per share)
Shares issued under employee benefit plans and other
Shares and options issued under stock option plans and
an income tax benefit of $878
Adjustment to initially apply FASB Statement No. 158,
net of tax
-
-
1,079
271,323
-
Balance - December 31, 2006
17,733,849
Net earnings
Dividends ($.11 per share)
Shares issued under employee benefit plans and other
Shares and options issued under stock option plans and
an income tax benefit of $677
Cumulative effect of adjustment from adoption of FIN 48
Net change in pension asset/liability, net of taxes of $26
-
-
20,869
224,635
-
-
-
-
-
12
-
788
-
-
1
15
-
-
-
-
70
2,315
-
12,278
(1,596)
-
-
-
10,393
63,988
-
-
378
3,515
-
-
16,118
(1,975)
-
-
(291)
-
-
-
-
-
193
193
-
-
-
-
-
(43)
Balance - December 31, 2007
17,979,353
804
14,286
77,840
150
Net earnings
Dividends ($.11 per share)
Shares issued under employee benefit plans and other
Shares and options issued under stock option plans and
an income tax benefit of $672
Net change in pension asset/liability, net of taxes of $8
Equity adjustment from translation
-
-
17,218
252,776
-
-
-
-
1
18
-
-
-
-
405
4,118
-
-
19,050
(2,008)
-
-
-
-
-
-
-
-
48
(206)
Balance - December 31, 2008
18,249,347
$
823
$
18,809
$
94,882
$
(8)
See accompanying notes to consolidated financial statements.
31
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
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
Foreign currency transaction (gain) loss
Other
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
Intangible assets acquired
Acquisition of assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Principal payments on long-term debt
Proceeds from short-term obligations
Repayments of short-term obligations
Proceeds from stock options exercised
Excess tax benefits from stock compensation
Dividends paid
Other financing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
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.
32
2008
2007
2006
$
19,050
$
16,118
$
12,278
7,786
2,414
406
(238)
31
-
(1,058)
(974)
(17)
(4,593)
6
(42)
126
22,897
(5,080)
(182)
(296)
(5,558)
-
(14,876)
3,516
(4,507)
1,050
672
(1,975)
-
(16,120)
(104)
1,115
6,376
1,636
379
(617)
(195)
15
(15,409)
481
(2,218)
7,634
1,803
(1,030)
664
15,637
(4,858)
(172)
(40,744)
(45,774)
38,946
(15,106)
3,684
(733)
1,217
677
(1,596)
-
27,089
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
166
-
(2,882)
(7,807)
2,307
3,422
$
5,189
2,307
$
12,996
5,189
$
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., Chelated Minerals
Corporation, Balchem BV, Balchem Trading BV, and Balchem Italia Srl (“Balchem” or the “Company”)),
incorporated in the State of Maryland in 1967, is engaged in the development, manufacture and marketing
of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical and
medical sterilization industries.
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 principally 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost generally determined on a first-in, first-out
basis, and have been reduced by an allowance for excess or obsolete inventories. Cost elements include
material, labor and manufacturing overhead. In November 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (“SFAS”) 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
33
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. The Company capitalized interest costs of $158, $150
and $-0- in 2008, 2007 and 2006, respectively.
Business Concentrations
Financial instruments that subject the Company to credit risk consist primarily of investments and accounts
receivable. Investments are managed within established guidelines to mitigate risks. Accounts receivable
subject the Company to credit risk partially due to the concentration of amounts due from customers. 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. In 2008, 2007 and 2006, no customer accounted for more than 10% of total net sales.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company
adopted the provisions of SFAS No. 141, “Business Combinations” (“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
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, 2008 and 2007, 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 performs its impairment test each
December 31.
The Company had unamortized goodwill in the amount of $26,658 at December 31, 2008 and $26,363 at
December 31, 2007, subject to the provisions of SFAS Nos. 141 and 142. Unamortized goodwill is
allocated to the Company’s reportable segments as follows:
Specialty Products
Food, Pharma and Nutrition
Animal Nutrition and Health
Total
2008
5,089
8,607
12,962
26,658
$
$
2007
5,089
8,533
12,741
26,363
$
$
34
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
5 - 10
Customer lists
Regulatory re-registration costs
Patents & trade secrets
Trademarks & trade names
Other
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 and revenues and expenses during the reporting period. 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, 2008 and 2007 does
not differ materially from the aggregate carrying values of its financial instruments recorded in the
accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation methodologies. Considerable
judgment is necessarily required in interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The Company’s financial instruments, principally cash equivalents, accounts
receivable, accounts payable and accrued liabilities, are carried at cost which approximates fair value due
to the short-term maturity of these instruments. The fair value of the Company’s obligations under its long-
term debt and credit agreements approximates their carrying value as the stated interest rates of these
instruments are variable and reflect rates which are otherwise currently available to the Company.
Cost of Sales
Cost of sales are primarily comprised of raw materials and supplies consumed in the manufacture of
product, as well as manufacturing labor, maintenance labor, depreciation expense, and direct overhead
expense necessary to convert purchased materials and supplies into finished product. Cost of sales also
includes inbound freight costs, outbound freight costs for shipping products to customers, warehousing
costs, quality control and obsolescence expense.
35
Selling, General and Administrative Expenses
Selling expenses consist primarily of compensation and benefit costs, trade promotions, advertising,
commissions and other marketing costs. General and administrative expenses consist primarily of payroll
and benefit costs, occupancy and operating costs of corporate offices, depreciation and amortization
expense on non-manufacturing assets, information systems costs and other miscellaneous administrative
costs.
Research and Development
Research and development costs are expensed as incurred.
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).
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 SFAS
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 May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing financial statements that are
36
in conformity with U.S. generally accepted accounting principles
presented
for
nongovernmental entities. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the
American Institute of Certified Public Accountants' (AICPA) Statement on Auditing Standards (SAS) No.
69, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” SFAS
No. 162 is effective November 15, 2008. The adoption of this statement was not significant to the
Company’s consolidated financial statements.
(“GAAP”)
In April 2008, FASB issued FSP 142-3, “Determining the Useful Life of Intangible Assets” ("FSP 142-3").
FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The Company does not expect the adoption of this statement to be significant to its consolidated
financial statements.
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS
161”). SFAS 161 requires enhanced disclosures regarding derivatives and hedging activities, including:
(a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (c) the effect of derivative
instruments and related hedged items on an entity’s financial position, financial performance, and cash
flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. As SFAS 161 relates specifically to disclosures, the statement will have no
impact on our financial condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No.141 (revised 2007), “Business Combinations”, or SFAS
141R. The purpose of issuing the statement is to replace current guidance in SFAS No.141 to better
represent the economic value of a business combination transaction. The changes to be effected with SFAS
141R from the current guidance include, but are not limited to: (1) acquisition costs will be recognized
separately from the acquisition; (2) known contractual contingencies at the time of the acquisition will be
considered part of the liabilities acquired measured at their fair value; all other contingencies will be part of
the liabilities acquired measured at their fair value only if it is more likely than not that they meet the
definition of a liability; (3) contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as well as noncontrolling
interests, in the acquiree, at the full amounts of their fair values; and (5) a bargain purchase (defined as a
business combination in which the total acquisition-date fair value of the identifiable net assets acquired
exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer. SFAS 141R will be effective for
any business combinations that occur after January 1, 2009. The Company is currently evaluating the
impact that SFAS 141R will have on its financial statements and disclosures.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51”, or SFAS 160. SFAS 160 was issued to improve the
relevance, comparability, and transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, SFAS 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by requiring they be treated as
equity transactions. SFAS 160 will be effective January 1, 2009. The Company does not expect the
adoption of this statement to be significant to its consolidated financial statements.
In June 2007, FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3, "Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities" ("EITF 07-3"). EITF 07-3 addresses the diversity that exists with respect to the accounting for
the non-refundable portion of a payment made by a research and development entity for future research
and development activities. Under EITF 07-3, an entity would defer and capitalize non-refundable advance
payments made for research and development activities until the related goods are delivered or the related
services are performed. The Company has adopted the provisions of EITF 07-3 as of January 1, 2008 and it
has not had a material impact on its financial condition or results of operations.
37
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits an
entity to measure certain financial assets and financial liabilities at fair value. Entities electing the fair value
option will report unrealized gains and losses in earnings as of each subsequent reporting date. The fair
value option may be elected on an instrument-by-instrument basis with few exceptions, as long as it is
applied to the instrument in its entirety. SFAS 159 establishes presentation and disclosure requirements to
help financial statement users understand the effect of an entity’s election on its earnings. SFAS 159
requires prospective application. If an entity elects the fair value option for items existing as of the date of
adoption, the difference between their carrying amount and fair value should be included in a cumulative-
effect adjustment to the opening balance of retained earnings. The provisions of SFAS 159 are effective
for fiscal years beginning after November 15, 2007. The Company has adopted the provisions of this
statement as of January 1, 2008 and it did not have a material impact on its financial condition or results of
operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157
defines fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements. The Company has adopted
the provisions of this statement for its financial assets and liabilities as of January 1, 2008 and it did not
have a material impact on its financial condition or results of operations. As permitted by FASB Staff
Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”, the Company elected to
defer the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis, until
January 1, 2009. Effective January 1, 2009, we will adopt the provision for nonfinancial assets and
liabilities that are not required or permitted to be measured at fair value on a recurring basis, which include
those measured at fair value in impairment testing and those initially measured at fair value in a business
combination. We do not expect the provisions of SFAS No. 157 related to these items to have a material
impact on our consolidated financial statements. In October 2008, FASB issued FSP No. 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” FSP
No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example
of key considerations in determining the fair value of a financial asset when the market for that asset is not
active. FSP No. 157-3 was effective on October 10, 2008, including prior periods for which financial
statements have not been issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate following the guidance in SFAS
No. 154, "Accounting Changes and Error Corrections." The Company adopted FSP No. 157-3 on October
10, 2008 and it did not have a material effect on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements to conform to the current
year’s presentation with no impact on net earnings or stockholders’ equity.
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 SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”). 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 years ended December 31, 2008, 2007 and 2006 include (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-
38
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 required by SFAS 123R, the Company has made an estimate of expected forfeitures, based on its
historical experience, and is recognizing compensation cost only for those stock-based compensation
awards expected to vest.
Additionally, since adoption of SFAS 123R, excess tax benefits related to stock compensation are
presented as a cash inflow from financing activities. This change had the effect of decreasing cash flows
from operating activities and increasing cash flows from financing activities by $672, $677 and $878 for
the years ended December 31, 2008, 2007 and 2006, respectively.
The Company’s results for the years ended December 31, 2008, 2007 and 2006 reflected the following
compensation cost as a result of adopting SFAS 123R and such compensation cost had the following
effects on net earnings and basic and diluted earnings per share:
Cost of sales
Operating expenses
Net earnings
Basic EPS
Diluted EPS
$
$
Year Ended
December 31,
2007
2006
187 $
1,449
1,118
.06
.06 $
115
982
888
.05
.05
2008
273 $
2,141
1,614
.09
.08 $
On December 31, 2008, 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. Options granted under the 1999
Stock Plan expire ten years from the date of the grant. The 1999 Stock Plan initially reserved an aggregate
of 600,000 shares (unadjusted for the stock splits) 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 (the “Amended 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
600,000 shares (unadjusted for the stock splits), to a total of 1,200,000 shares (unadjusted for the stock
splits) 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 Amended Plan was scheduled to expire in April, 2009. In
April, 2008, the Board of Directors of the Company adopted and stockholders subsequently approved, the
adoption of an amendment and restatement of the Amended Plan (collectively to be referred to as the
“Second Amended Plan”), which provides as follows: (i) for a termination date of April 9, 2018; (ii) to
authorize 4,000,000 shares reserved for future grants under the Second Amended Plan; (iii) for the making
of grants of stock appreciation rights, restricted stock and performance awards; (iv) for immediate
acceleration of vesting of awards issued under the plan in the event of a change in control of the Company;
and (v) for compliance with the requirements of Sections 409A and 162(m) of the Internal Revenue Code
of 1986, as amended (the “Internal Revenue Code” or the “Code”). 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.
39
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, 2008, the plans had 3,664,350 shares available for
future awards.
The Company has Restricted Stock Purchase Agreements (the “RSP Agreements”) with its non-employee
directors and certain employees of the Company to purchase the Company’s common stock pursuant to the
Company’s 1999 Stock Plan. Under the RSP Agreements, certain shares have been purchased, ranging
from 1,000 shares to 13,500 shares, of the Company’s common stock at purchase prices ranging from
approximately $.03 per share to $.07 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,
2008
Year Ended
December 31,
2007
December 31,
2006
32.8%
3.4
3.7%
0.4%
27.0%
3.7
4.1%
0.3%
26.4%
4.5
3.8%
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 four to seven years for non-employee director restricted stock awards.
A summary of stock option plan activity for 2008, 2007, and 2006 for all plans is as follows:
2008
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
# of
Shares
(000s)
1,944
584
(131)
(1)
2,396
1,687
Weighted Average
Exercise Price
$ 10.66
23.02
7.97
20.41
$ 13.82
$ 10.34
40
2007
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
2006
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
# of
Shares
(000s)
2,170
10
(220)
(16)
1,944
1,488
# of
Shares
(000s)
2,153
305
(267)
(21)
2,170
1,277
Weighted Average
Exercise Price
$ 10.13
18.00
5.54
14.34
$ 10.66
$ 9.09
Weighted Average
Exercise Price
$ 8.38
17.67
4.64
9.64
$ 10.13
$ 7.40
The aggregate intrinsic value for outstanding stock options was $26,873, $22,786 and $15,357 at
December 31, 2008, 2007 and 2006, respectively, with a weighted average remaining contractual term of
6.7 years at December 31, 2008. Exercisable stock options at December 31, 2008 had an aggregate
intrinsic value of $24,581 with a weighted average remaining contractual term of 5.6 years.
Other information pertaining to option activity during the years ended December 31, 2008, 2007 and 2006
was as follows:
Weighted-average fair value of options granted
Total intrinsic value of stock options exercised ($000s)
Year Ended
December 31,
2007
2006
2008
$
$
7.48 $
2,023 $
6.44 $
2,721 $
4.91
2,929
Additional information related to stock options outstanding under all plans at December 31, 2008 is as
follows:
Range of Exercise
Prices
$ 1.88 - $ 8.89
9.87 - 17.81
18.17 - 25.92
Shares
Outstanding
(000s)
929
880
587
2,396
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Term
4.5 years
7.0 years
9.4 years
6.7 years
Weighted
Average
Exercise
Price
$ 7.16
14.71
23.00
$ 13.82
Number
Exercisable
(000s)
929
757
1
1,687
Weighted
Average
Exercise
Price
$ 7.16
14.22
18.75
$ 10.34
41
Non-vested restricted stock activity for the years ended December 31, 2008, 2007 and 2006 is summarized
below:
Non-vested balance as of December 31, 2007
Granted
Vested
Forfeited
Non-vested balance as of December 31, 2008
Non-vested balance as of December 31, 2006
Granted
Vested
Forfeited
Non-vested balance as of December 31, 2007
Non-vested balance as of December 31, 2005
Granted
Vested
Forfeited
Non-vested balance as of December 31, 2006
Weighted
Average Grant
Date Fair
Value
16.49
22.94
17.04
-
20.08
Weighted
Average Grant
Date Fair
Value
16.40
18.61
-
-
16.49
Weighted
Average Grant
Date Fair
Value
13.22
17.76
-
-
16.40
$
$
$
$
$
$
Shares (000s)
118
132
(18)
-
232
Shares (000s)
113
5
-
-
118
Shares (000s)
34
79
-
-
113
As of December 31, 2008, 2007 and 2006, there was $7,248, $2,586 and $4,036, respectively, of total
unrecognized compensation cost related to non-vested share-based compensation arrangements granted
under the plans. As of December 31, 2008, the unrecognized compensation cost is expected to be
recognized over a weighted-average period of 2 years. We estimate that share-based compensation expense
for the year ended December 31, 2009 will be approximately $3,200.
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.
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 1,158,692 shares
42
at an average cost of $2.74 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 1,350,000 shares, over and above those 1,158,692 shares previously repurchased under the
program. Under this extension, a total of 149,175 shares were purchased in 2005 at an average cost of
$8.03 per share, none of which remained in treasury at December 31, 2008 or 2007. During 2008 and
2007, no additional shares were purchased. The Company intends to acquire shares from time to time at
prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of
corporate cash flow, market conditions and other factors.
NOTE 3 - INVENTORIES
Inventories at December 31, 2008 and 2007 consisted of the following:
Raw materials
Work in progress
Finished goods
Total inventories
2008
5,931
540
10,147
16,618
$
$
2007
6,522
818
8,340
15,680
$
$
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 inventory was $94 and $174 at December 31,
2008 and 2007, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2008 and 2007 are summarized as follows:
Land
Building
Equipment
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
2008
2,088
15,426
50,719
2,654
70,887
28,374
42,513
$
$
2007
2,152
15,520
45,599
3,067
66,338
24,258
42,080
$
$
Depreciation expense was $4,144, $3,466 and $2,842 for the years ended December 31, 2008, 2007 and
2006, respectively.
NOTE 5 - ACQUISITIONS
Akzo Nobel Acquisition
Effective April 30, 2007, pursuant to an asset purchase agreement dated March 30, 2007, the Company,
through its European subsidiary, Balchem B.V., completed an acquisition of the methylamines and choline
chloride business and manufacturing facilities of Akzo Nobel Chemicals S.p.A., located in Marano Ticino,
Italy (the “Akzo Nobel Acquisition”) for a purchase price, including acquisition costs, of approximately
$8,000. The intent of the Akzo Nobel Acquisition was to provide a direct platform for the Company to
meet the growing market needs of methylamines, choline chloride and derivative products for customers
via improved global sourcing, regulatory support, marketing and distribution capabilities.
The Akzo Nobel 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 at the date of acquisition. The allocation of the total purchase price, including acquisition costs,
was based on the estimated fair values as of April 30, 2007. The purchase price including certain working
capital acquired has been allocated as follows:
43
Property plant & equipment
Short-term receivable
Inventories
Goodwill
Other
Accounts payable and accrued expenses
Total
Fair Value Recorded
in Purchase Accounting
$
7,994
2,462
4,323
1,383
83
(8,213)
8,032
$
The consolidated financial statements include the results of operations of the Akzo Nobel Acquisition from
the date of purchase. Pro forma results for the years ended December 31, 2007 and 2006 are not materially
different from the results reported herein.
Chinook Acquisition
On March 16, 2007, the Company, through its wholly-owned subsidiary BCP Ingredients, Inc. ("BCP"),
entered into an asset purchase agreement with Chinook Global Limited ("Chinook"), a privately held
Ontario corporation, pursuant to which BCP acquired certain of Chinook's choline chloride business assets
(the “Chinook Acquisition”) for a purchase price, including acquisition costs, of approximately $33,000.
The acquisition closed effective the same date. The intent of the Chinook Acquisition was to gain scale in
order for the Company to more effectively and economically produce and distribute choline chloride
worldwide.
The Chinook 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 at the date of acquisition. The allocation of the total purchase price, including acquisition costs,
was based on the estimated fair values as of March 16, 2007. The purchase price has been allocated as
follows:
Customer list
Inventory
Short-term receivable
Other
Total
Fair Value Recorded
in Purchase Accounting
29,262
$
1,840
1,850
73
33,025
$
The short-term receivable was included in other current assets.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the Chinook Acquisition had
occurred on January 1, 2007 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 Chinook Acquisition had occurred at the beginning of the periods presented and is
not intended to be a projection of future results.
44
Pro Forma
Year Ended
December 31,
2007
$
$
185,188
16,595
.93
.89
Net sales
Net earnings
Basic EPS
Diluted EPS
CMC Acquisition
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, including
acquisition costs, of approximately $17,900. The intent of the CMC Acquisition was to provide synergies
in animal markets via the addition of a key nutrient delivery technology, chelation, to our existing
encapsulation technology, as well as a complementary portfolio of products.
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 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. The excess of the purchase price over the identifiable intangible and net tangible assets was allocated
to goodwill. The purchase price has been allocated as follows:
Accounts receivable
Inventory
Property, plant and equipment
Current liabilities
Other long-term liabilities
Goodwill
Other intangible assets
Total
Fair Value Recorded
in Purchase Accounting
$
884
552
1,980
(388)
(2,368)
11,925
5,334
$ 17,919
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, 2006 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.
45
Net sales
Net earnings
Basic EPS
Diluted EPS
Pro Forma
Year Ended
December 31,
2006
$
$
101,639
12,284
.70
.67
NOTE 6 - INTANGIBLE ASSETS WITH FINITE LIVES
As of December 31, 2008 and 2007, 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
5-10
2008
Gross
Carrying
Amount
$ 34,150
85
1,673
904
619
$ 37,431
2008
Accumulated
Amortization
$ 6,595
3
406
198
236
$ 7,438
2007
Gross
Carrying
Amount
$ 34,150
28
1,621
884
565
$ 37,248
2007
Accumulated
Amortization
$ 3,178
-
311
146
162
$ 3,797
Amortization of identifiable intangible assets was approximately $3,642, $2,910 and $603 for 2008, 2007
and 2006, respectively. Assuming no change in the gross carrying value of identifiable intangible assets,
the estimated amortization expense is approximately $3,600 per annum for 2009 through 2013. At
December 31, 2008 and 2007, 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 2008 and 2007.
At December 31, 2007, the gross carrying amount included a customer list acquired as part of the Chinook
Acquisition, 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 Federal Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”), a health and safety
statute, requires that certain products within our specialty products segment must be registered with the
U.S. Environmental Protection Agency (“EPA”) because they are considered pesticides. Costs of such
registration are included as regulatory re-registration costs in the table above.
NOTE 7 - LONG-TERM DEBT & CREDIT AGREEMENTS
On April 30, 2007, the Company, and its principal bank entered into a Loan Agreement (the “European
Loan Agreement”) providing for an unsecured term loan of €7,500, translated to approximately $10,573 as
of December 31, 2008 (the “European Term Loan”), the proceeds of which were used to fund the Akzo
Nobel Acquisition (see Note 5) and initial working capital requirements. The European Term Loan is
payable in equal monthly installments of principal, each equal to 1/84th of the principal of the European
Term Loan, together with accrued interest, with remaining principal and interest payable at maturity. The
European Term Loan has a maturity date of May 1, 2010 and is subject to a monthly interest rate equal to
EURIBOR plus 1%. At December 31, 2008, this interest rate was 4.61%. At December 31, 2008, the
European Term Loan had an outstanding balance of €5,804 translated to $8,181. The European Loan
Agreement also initially provided for a short-term revolving credit facility of €2,000 (the "European
Revolving Facility"). The European Revolving Facility has been renewed for a period of one year as of
May 1, 2008. As part of this renewal, the European Loan Agreement was amended to increase the
European Revolving Facility to €3,000, translated to $4,229 as of December 31, 2008. The European
46
Revolving Facility is subject to a monthly interest rate equal to EURIBOR plus 1.25%, and accrued interest
is payable monthly. The Company has drawn down €1,450, or $2,044 as translated at December 31, 2008,
of the European Revolving Facility as of December 31, 2008.
On March 16, 2007, the Company and its principal bank entered into a Loan Agreement (the “Loan
Agreement”) providing for an unsecured term loan of $29,000 (the “Term Loan”), the proceeds of which
were used to fund the Chinook Acquisition (see Note 5). The Term Loan is payable in equal monthly
installments of principal, each equal to 1/60th of the principal of the Term Loan, together with accrued
interest, with remaining principal and interest payable at maturity. The Term Loan has a maturity date of
March 16, 2010 and is subject to a monthly interest rate equal to LIBOR plus 1%. At December 31, 2008,
this interest rate was 2.20%. As of December 31, 2008, the Company has prepaid $17,500 of the Term
Loan. At December 31, 2008, the Term Loan had an outstanding balance of $1,350. The Loan Agreement
also provides for a short-term revolving credit facility of $6,000 (the "Revolving Facility"). The Revolving
Facility is subject to a monthly interest rate equal to LIBOR plus 1%, and accrued interest is payable
monthly. No amounts are outstanding on the Revolving Facility as of the date hereof. The Revolving
Facility has a maturity date of May 31, 2009. Management believes that such facility will be renewed in
the normal course of business.
At December 31, 2008, we had a total of $11,575 of debt outstanding, as compared to a total of $27,986
debt outstanding at December 31, 2007. Indebtedness under the Company’s loan agreements are secured
by assets of the Company.
The Company's debt obligations, excluding revolver borrowings, as of December 31, 2008, are
summarized in the table below:
Payments due by period
Total
$ 9,531
Year 1
$ 2,860
Year 2
$ 6,671
Long-term debt obligations
NOTE 8 - INCOME TAXES
Income tax expense consists of the following:
Current:
Federal
State
Deferred:
Federal
State
Total income tax provision
2008
9,757
107
(442)
( 41)
9,381
$
$
2007
7,983
1,299
(420)
(151)
8,711
$
$
2006
6,295
534
(1)
(5)
6,823
$
$
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
2008
2007
2006
$
9,951
$
8,690
$
6,685
-
(570)
9,381
$
603
(582)
8,711
$
344
(206)
6,823
$
47
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2008 and 2007 were as follows:
Deferred tax assets:
Inventories
Restricted stock and stock options
Other
Total deferred tax assets
Deferred tax liabilities:
Customer list and goodwill amortization
Depreciation
Prepaid expense
Trade names and trademarks
Technology and trade secrets
Other
Total deferred tax liabilities
Net deferred tax liability
2008
2007
$
$
$
474
1,429
505
2,408
1,851
4,430
765
199
224
293
7,762
5,354
$
$
$
388
702
389
1,479
1,782
3,886
525
239
269
350
7,051
5,572
There is no valuation allowance for deferred tax assets at December 31, 2008 and 2007. 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.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, or FIN 48, on January 1, 2007. FIN 48 clarifies whether or not to recognize assets or
liabilities for tax positions taken that may be challenged by a tax authority. Upon adoption of FIN 48, the
Company recognized approximately a $291 decrease in its retained earnings balance. A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as follows:
Liability for Unrecognized
Tax Benefits
2008
2007
Balance at beginning of period
Increases for tax positions of prior years
Decreases for tax positions of prior years
Increases for tax positions related to the
current year
Balance at end of period
$
$
733
-
(151)
231
813
$
$
411
320
(225)
227
733
All of the Company’s unrecognized tax benefits, if recognized in future periods, would impact the
Company’s effective tax rate in such future periods.
The Company recognizes both interest and penalties as part of the income tax provision. During the years
ended December 31, 2008 and 2007, the Company recognized approximately $22 and $52 in interest and
penalties, respectively. As of December 31, 2008 and 2007, accrued interest and penalties were $152 and
$130, respectively.
The Company files income tax returns in the U.S. and in various states and foreign countries. In the major
jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by
48
tax authorities for years before 2005. The Company does not anticipate any material change in the total
amount of unrecognized tax benefits to occur within the next twelve months.
NOTE 9 - NET EARNINGS PER COMMON SHARE
The following presents a reconciliation of the numerator and denominator used in calculating basic and
diluted net earnings per common share:
2008
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 19,050
17,966,833
$1.06
Effect of dilutive securities – stock options and
restricted stock
1,047,324
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options and restricted stock
$ 19,050
19,014,157
$1.00
2007
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 16,118
17,771,521
$.91
Effect of dilutive securities – stock options and
restricted stock
839,011
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options and restricted stock
$ 16,118
18,610,532
$.87
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 and restricted stock
$ 12,278
18,247,241
$.67
The Company had 276,900, 9,100 and 307,875 stock options outstanding at December 31, 2008, 2007 and
2006, respectively that could potentially dilute basic earnings per share in future periods that were not
included in diluted earnings per share because their effect on the period presented was anti-dilutive.
NOTE 10- EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for eligible employees. The plan allows participants to make
pretax contributions and the Company matches certain percentages of those pretax contributions with
shares 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 $624 and $406 in 2008, $503 and $379 in 2007 and $395 and $343 in 2006,
respectively.
49
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 No. 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, as a result of adopting SFAS No.
158, 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.
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
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 SFAS 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
Total net periodic benefit cost
2007
729
29
41
12
(57)
51
805
2007
-
45
12
(57)
-
2007
(805)
-
(805)
N/A
N/A
805
N/A
2007
29
41
(18)
(3)
49
$
$
$
$
$
$
$
$
$
2008
805
28
40
13
(30)
(55)
801
2008
-
17
13
(30)
-
2008
(801)
-
(801)
N/A
N/A
801
N/A
2008
28
40
(18)
(6)
44
$
$
$
$
$
$
$
$
$
50
2006
28
39
(18)
(3)
46
$
$
Estimated future employer contributions and benefit payments are as follows:
Year
2009
2010
2011
2012
2013
Years 2014-2018
$
42
38
49
40
24
266
Assumed health care cost trend rates have been used in the valuation of postretirement health insurance
benefits. The trend rate is 10 percent in 2009 declining to 5 percent in 2014 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, 2008 by $97 and the net periodic postretirement
benefit cost for 2008 by $9. 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, 2008 by $84 and the
net periodic postretirement benefit cost for 2008 by $8. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 5.50% in 2008 and 5.75% in 2007.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In February 2006, the Company entered into a lease agreement under which the Company leases a portion
of a Channahon, Illinois facility where it conducts manufacturing and utilizes certain warehouse space. The
term of the lease runs through September 30, 2010, subject to earlier termination.
In February 2002, the Company entered into a ten (10) year lease which is cancelable in 2009 for
approximately 20,000 square feet of office space. The office space is now serving as the Company’s
general offices and as a laboratory facility. The Company leases most of its vehicles and office equipment
under non-cancelable operating leases, which primarily expire at various times through 2013. Rent expense
charged to operations under such lease agreements for 2008, 2007 and 2006 aggregated approximately
$1,284, $1,047 and $595, respectively. Aggregate future minimum rental payments required under non-
cancelable operating leases at December 31, 2008 are as follows:
Year
2009
2010
2011
2012
2013
Thereafter
Total minimum lease payments
$ 1,128
543
351
241
106
221
$ 2,590
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
any, would likely require the Company to continue monitoring the site. The cost of such monitoring has
been less than $5 per year for the period 2004 – 2008.
The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a
Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on
portions of the site. Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources (“MDNR”) included removal of dioxin contaminated soil and
51
equipment, capping of areas of residual contamination in four relatively small areas of the site separate
from the manufacturing facilities, and the installation of wells to monitor groundwater and surface water
contamination by organic chemicals. No ground water or surface water treatment was required. The
Company believes that remediation of the site is complete. In 1998, the EPA certified the work on the
contaminated soils to be complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party risk assessment report to the
EPA and MDNR recommending no further action. The prior owner is awaiting the response of the EPA
and MDNR to the draft risk assessment.
While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the
prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified
by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona,
Missouri facility for potential liabilities associated with the Superfund site and one of the sellers, in turn,
has the benefit of certain contractual indemnification by the prior owner that is implementing the above-
described Superfund remedy.
From time to time, the Company is a party to various litigation, claims and assessments. Management
believes that the ultimate outcome of such matters will not have a material effect on the Company’s
consolidated financial position, results of operations, or liquidity.
NOTE 12 - SEGMENT INFORMATION
The Company’s reportable segments are strategic businesses that offer products and services to different
markets. Effective with the quarter ending March 31, 2008, the Company has realigned its business
segment reporting structure to more appropriately reflect the internal management of the businesses,
largely due to the impact of acquisitions in 2007. The Company will continue to report three segments:
Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition & Health. Changes to the reporting
segments are as follows: chelated minerals and specialty nutritional products for the animal health industry,
formerly reported as a part of the encapsulated/nutritional products segment, are now combined with the
choline business (formerly BCP Ingredients) into a consolidated Animal Nutrition & Health segment. The
encapsulated/nutritional products segment has been renamed Food, Pharma & Nutrition, focusing on
human health. There are no changes to the Specialty Products segment. Business segment net sales and
earnings from operations have been reclassified for all periods presented to reflect the segment changes.
The Specialty Products segment consists of three specialty chemicals: ethylene oxide, propylene oxide and
methyl chloride. Human choline nutrient products, pharmaceutical products and encapsulated products are
reported in the Food, Pharma & Nutrition segment. This 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 Animal Nutrition & Health 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 this segment. Chelated minerals and specialty nutritional products for the animal health industry are also
reported in this segment. The Company sells products for all segments through its own sales force,
independent distributors, and sales agents. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Business Segment Net Sales:
Specialty Products
Food, Pharma and Nutrition
Animal Nutrition and Health
Total
2008
35,835
35,702
160,513
232,050
$
$
2007
33,057
32,052
111,092
176,201
$
$
2006
32,026
28,702
40,177
100,905
$
$
52
Business Segment Earnings Before Income Taxes:
Specialty Products
Food, Pharma and Nutrition
Animal Nutrition and Health
Interest and other income (expense)
Total
Depreciation/Amortization:
Specialty Products
Food, Pharma and Nutrition
Animal Nutrition and Health
Total
Business Segment Assets:
Specialty Products
Food, Pharma and Nutrition
Animal Nutrition and Health
Other Unallocated
Total
2008
12,545
5,469
11,334
(917)
28,431
2008
913
1,316
5,557
7,786
2008
21,394
22,081
105,296
5,703
154,474
$
$
$
$
$
$
$
$
$
$
$
$
2007
11,824
4,144
9,938
(1,077)
24,829
2006
11,315
2,162
5,685
(61)
19,101
$
$
2007
876
1,206
4,294
6,376
2007
18,583
22,426
108,125
5,290
154,424
2006
941
1,171
1,333
3,445
2006
18,446
20,780
45,524
7,583
92,333
$
$
$
$
Other unallocated assets consist of certain cash, receivables, prepaid expenses, equipment and 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
Food, Pharma and Nutrition
Animal Nutrition and Health
Total
Geographic Revenue Information:
United States
Foreign Countries
Total
2008
612
955
3,513
5,080
$
$
2007
307
776
3,786
4,869
$
$
2006
195
485
1,599
2,279
$
$
2008
146,753
85,297
232,050
$
$
2007
132,632
43,569
176,201
$
$
2006
91,042
9,863
100,905
$
$
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes
Interest
2008
2007
$
$
9,379 $
958 $
6,718 $
1,466 $
2006
5,621
189
Cash paid during the year for acquisition of assets:
Assets acquired
Less: liabilities assumed
Cash paid for acquisitions
2008
296
-
296
2007
48,957
(8,213)
40,744
$
$
2006
25,628
(2,756)
22,872
$
$
$
$
53
Non-cash financing activities:
Dividends payable
2008
2,008
$
2007
1,975 $
$
2006
1,596
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except per share data)
2008
2007
Net sales
Gross profit
Earnings before
income taxes
Net earnings
Basic net earnings
per common share
Diluted net earnings
per common share
Second
Quarter
First
Quarter
$56,861 $ 62,901
12,951
13,483
Third
Quarter
$58,235
12,712
Fourth
Quarter
$54,053
13,432
Second
Quarter
First
Quarter
$27,599 $ 44,371
12,182
9,741
Third
Quarter
$50,498
12,609
Fourth
Quarter
$53,733
12,398
7,191
4,641
7,001
4,724
6,936
4,793
7,303
4,892
5,314
3,441
6,367
4,065
6,772
4,457
6,376
4,155
$ .26
$ .26
$ .27
$ .27
$ .19
$ .23
$ .25
$ .23
$ .25
$ .25
$ .25
$ .26
$ .19
$ .22
$ .24
$ .22
54
Description
Year ended December 31, 2008
Allowance for doubtful accounts
Inventory reserve
Year ended December 31, 2007
Allowance for doubtful accounts
Inventory reserve
Year ended December 31, 2006
Allowance for doubtful accounts
Inventory reserve
(a) represents write-offs.
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2008, 2007 and 2006
(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
174
$
-
58
-
$
-
-
$
(138)
(a)
$
50
94
$
50
147
$
-
$
-
-
$
-
7
$
50
174
-
$
-
-
$
-
$
50
147
20
91
$
50
56
$
-
55
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, 2008, 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, 2008.
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
The independent registered public accounting firm of McGladrey & Pullen, LLP, has issued an
attestation report on the Company’s internal control over financial reporting, which is included herein.
56
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 2008 Annual
Meeting of Stockholders (the “2009 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 2009 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 2009 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 2009 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 2009 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 2009 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 2009 Proxy Statement under the caption
"Directors and Executive Officers," which information is hereby incorporated herein by reference.
57
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in the 2009 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
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Earnings for the
years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II – Valuation and Qualifying
Accounts for the years ended December 31, 2008, 2007 and 2006
3. Exhibits
Form 10-K
Page Number
27
29
30
31
32
33
55
2.1
2.2
Sale and Purchase Agreement dated March 30, 2007, by and between Balchem B.V. and
Akzo Nobel Chemicals S.p.A. (incorporated by reference to Exhibit 2.1 of the
Company’s Current Report on Form 8-K dated March 30, 2007).
Asset Purchase Agreement dated March 16, 2007, by and between BCP Ingredients, Inc.
and Chinook Global Limited (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K dated March 16, 2007).
2.3 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).
2.4
3.1
3.2
3.3
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).
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).
Balchem Corporation Articles of Amendment (incorporated by reference to Exhibit A to
the Company’s definitive proxy statement on Schedule 14A filed with the Commission
on April 25, 2008)
Composite By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K dated January 2, 2008).
58
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Tolling Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and Chinook
Global Limited (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated March 16, 2007).
Non-Competition Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and
Chinook Global Limited; Chinook Services, LLC; Chinook, LLC; Dean R. Lacy; Ronald
Breen, and John N. Kennedy (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated March 16, 2007).
Loan Agreement dated March 16, 2007 by and between Bank of America, N.A. and
Balchem Corporation (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K dated March 16, 2007).
Promissory Note (Term Loan) dated March 16, 2007 from Balchem Corporation to Bank
of America, N.A (incorporated by reference to Exhibit 10.4 to the Company’s Current
Report on Form 8-K dated March 16, 2007).
Promissory Note (Revolving Line of Credit) dated March 16, 2007 from Balchem
Corporation to Bank of America, N.A. (incorporated by reference to Exhibit 10.5 to the
Company’s Current Report on Form 8-K dated March 16, 2007).
Guaranty dated March 16, 2007 from BCP Ingredients, Inc. to Bank of America, N.A.
(incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-
K dated March 16, 2007).
Guaranty dated March 16, 2007 from Balchem Minerals Corporation to Bank of
America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current
Report on Form 8-K dated March 16, 2007).
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).
10.9
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).
10.10 Guaranty dated February 6, 2006 from Balchem Minerals Corporation to Bank of
America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current
Report on Form 8-K dated February 9, 2006).
10.11
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”)).*
10.12 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).
10.13 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).*
59
10.14 Balchem Corporation Second Amended and Restated 1999 Stock Plan, (incorporated by
reference to the Company’s Registration Statement on Form S-8, File No. 333-155655,
dated November 25, 2008, and to Proxy Statement, dated April 25, 2008, for the
Company's 2008 Annual Meeting of Stockholders.*
10.15 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No.
333-118291, dated August 17, 2004).*
10.16 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”)). *
10.17 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).
10.18 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).
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
60
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 12, 2009
BALCHEM CORPORATION
By:/s/ Dino A. Rossi
Dino A. Rossi, Chairman, President, and
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, Chairman, President,
Chief Executive Officer, and Director (Principal Executive Officer)
Date: March 12, 2009
/s/ Francis J. Fitzpatrick
Francis J. Fitzpatrick, Chief Financial
Officer and Treasurer (Principal Financial and Principal Accounting Officer)
Date: March 12, 2009
/s/ Edward L. McMillan
Edward L. McMillan, Director
Date: March 12, 2009
/s/ Kenneth P. Mitchell
Kenneth P. Mitchell, Director
Date: March 12, 2009
/s/ Perry W. Premdas
Perry W. Premdas, Director
Date: March 12, 2009
/s/ Dr. John Televantos
Dr. John Televantos, Director
Date: March 12, 2009
/s/ Dr. Elaine Wedral
Dr. Elaine Wedral, Director
Date: March 12, 2009
61
Exhibit
Number Description
EXHIBIT INDEX
2.1
2.2
Sale and Purchase Agreement dated March 30, 2007, by and between Balchem B.V. and
Akzo Nobel Chemicals S.p.A. (incorporated by reference to Exhibit 2.1 of the
Company’s Current Report on Form 8-K dated March 30, 2007).
Asset Purchase Agreement dated March 16, 2007, by and between BCP Ingredients, Inc.
and Chinook Global Limited (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K dated March 16, 2007).
2.3 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).
2.4
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
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).
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).
Balchem Corporation Articles of Amendment (incorporated by reference to Exhibit A to
the Company’s definitive proxy statement on Schedule 14A filed with the Commission
on April 25, 2008)
Composite By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K dated January 2, 2008).
Tolling Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and Chinook
Global Limited (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated March 16, 2007).
Non-Competition Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and
Chinook Global Limited; Chinook Services, LLC; Chinook, LLC; Dean R. Lacy; Ronald
Breen, and John N. Kennedy (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated March 16, 2007).
Loan Agreement dated March 16, 2007 by and between Bank of America, N.A. and
Balchem Corporation (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K dated March 16, 2007).
Promissory Note (Term Loan) dated March 16, 2007 from Balchem Corporation to Bank
of America, N.A (incorporated by reference to Exhibit 10.4 to the Company’s Current
Report on Form 8-K dated March 16, 2007).
Promissory Note (Revolving Line of Credit) dated March 16, 2007 from Balchem
Corporation to Bank of America, N.A. (incorporated by reference to Exhibit 10.5 to the
Company’s Current Report on Form 8-K dated March 16, 2007).
Guaranty dated March 16, 2007 from BCP Ingredients, Inc. to Bank of America, N.A.
(incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-
K dated March 16, 2007).
62
10.7
10.8
Guaranty dated March 16, 2007 from Balchem Minerals Corporation to Bank of
America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current
Report on Form 8-K dated March 16, 2007).
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).
10.9
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).
10.10 Guaranty dated February 6, 2006 from Balchem Minerals Corporation to Bank of
America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current
Report on Form 8-K dated February 9, 2006).
10.11
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”)).*
10.12 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).
10.13 Balchem Corporation Amended and Restated 1999 Stock Plan (incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).*
10.14 Balchem Corporation Second Amended and Restated 1999 Stock Plan, (incorporated by
reference to the Company’s Registration Statement on Form S-8, File No. No. 333-
155655, dated November 25, 2008, and to Proxy Statement, dated April 25, 2008, for the
Company's 2008 Annual Meeting of Stockholders.*
10.15 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No.
333-118291, dated August 17, 2004).*
10.16 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”)). *
10.17 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).
10.18 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).
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.
63
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
64
LIST OF SUBSIDIARIES
Exhibit 21
Subsidiaries of the Registrant
Jurisdiction of Organization
BCP Ingredients, Inc.
Balchem Minerals Corporation
Chelated Minerals Corporation
BCP Saint Gabriel, Inc.
Balchem BV
Balchem Trading BV
Balchem Italia Srl
Balchem Ltd.
Delaware
Delaware
Utah
Delaware
Netherlands
Netherlands
Italy
Canada
65
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements (Nos. 333-155655, 333-
118292, 333-118291, 333-78355, 333-44489, 333-5912 and 333-5910) on Form S-8 of Balchem
Corporation and subsidiaries of our reports dated March 12, 2009 relating to our audit of the consolidated
financial statements, the financial statement schedule 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,
2008.
/s/McGladrey & Pullen, LLP
New York, New York
March 12, 2009
66
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 12, 2009
/s/ Dino A. Rossi
Dino A. Rossi, Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
67
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 12, 2009
/s/ Francis J. Fitzpatrick
Francis J. Fitzpatrick,
Chief Financial Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)
68
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, 2008 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Dino A. Rossi, Chairman, 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
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
March 12, 2009
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.
69
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, 2008 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 12, 2009
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.
70
Balchem_08ar_v10_CVR:Balchem_ar07_V4_6oh 4/16/09 4:43 PM Page 02
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: Food, Pharma and Nutrition; ARC Specialty Products;
and Animal Nutrition and Health. Balchem employs numerous technologies and over 300 people worldwide who are engaged
in the many diverse activities of developing the Company into a global market leader.
Corporate Information
Financial Highlights 2008
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
Debt
Other long-term obligations
Total stockholders’ equity
Dividend per common share
Quarterly Stock Prices
2008
$232,050
28,431
9,381
19,050
$1.06
$1.00
2008
$154,474
11,575
1,609
114,506
$.11
2007
$176,201
24,829
8,711
16,118
$.91
$.87
2007
$154,424
27,986
1,529
93,080
$.11
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
1Q
2Q
3Q
4Q
2008
2007
2006
High
$23.34
26.44
29.50
26.86
Low
$19.05
22.16
24.17
21.16
High
$18.56
19.17
21.25
24.00
Low
$14.09
17.15
15.60
20.16
High
$15.99
15.85
15.93
19.25
2004
$67,406
12,715
4,689
8,026
$.48
$.46
2004
$60,405
—
1,003
50,234
$.04
Low
$13.57
13.41
13.07
12.80
Net Sales
dollars in millions
Net Earnings
dollars in millions
Stockholders’ Equity
dollars in millions
232.1
176.2
100.9
83.1
67.4
19.1
16.1
12.3
11.0
8.0
114.5
93.1
75.4
60.9
50.2
‘04
‘05
‘06
‘07
‘08
‘04
‘05
‘06
‘07
‘08
‘04
‘05
‘06
‘07
‘08
Board of Directors
Corporate Officers
Dino A. Rossi
Chairman, President and
Chief Executive Officer
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
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
Perry W. Premdas
Retired, Chief Financial Officer
of Celanese AG
Paul H. Richardson
Vice President
Research & Development
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
Headquarters
Balchem Corporation
52 Sunrise Park Road
P.O. Box 600
New Hampton, NY 10958
Manufacturing Locations
Slate Hill, NY; Green Pond, SC;
Verona, MO; Channahon, IL;
Salt Lake City, UT; St. Gabriel, LA;
and Marano Ticino, Italy
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 Relations
Jackie Powell
Virtual Business Solutions
864.486.8065
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
1185 Avenue of the Americas, 6th Fl.
New York, NY 10036
Website:
www.balchem.com
Balchem_08ar_v10_CVR:Balchem_ar07_V4_6oh 4/16/09 4:43 PM Page 01
Balchem Corporation
2008 Annual Report
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
Building on a Solid Foundation