2009 Annual Report
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
C O M P A N Y P R O F I L E
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.
F I N A N C I A L H I G H L I G H T S 2 0 0 9
Statement of Operations Data
(In thousands, except per share data)
Year Ended December 31, 2009 2008 2007 2006 2005
Net sales $219,438 $232,050 $176,201 $100,905 $83,095
Earnings before income tax expense 40,602 28,431 24,829 19,101 17,191
Income tax expense 13,817 9,381 8,711 6,823 6,237
Net earnings 26,785 19,050 16,118 12,278 10,954
Basic net earnings per common share* $.98 $.71 $.61 $.47 $.42
Diluted net earnings per common share* $.93 $.67 $.58 $.45 $.41
Balance Sheet Data
(In thousands, except per share data)
At December 31, 2009 2008 2007 2006 2005
Total assets $187,813 $154,474 $154,424 $ 92,333 $75,141
Long-term debt (including current portion) 6,783 9,531 24,777 — —
Other long-term obligations 1,825 1,609 1,529 784 1,043
Total stockholders’ equity 147,143 114,506 93,080 75,362 60,933
Dividends per common share* $.11 $.07 $.07 $.06 $.04
Quarterly Stock Prices
2009 2008 2007
High Low High Low High Low
1Q $16.75 $12.60 $15.56 $12.70 $12.37
2Q 16.95 15.36 17.63 14.77 12.78
3Q 18.50 15.67 19.67 16.11 14.17
4Q 22.86 17.57 17.91 14.11 16.00
$ 9.39
11.43
10.40
13.44
*Earnings per share and dividend amounts have been adjusted for the December 2009, 2006 and 2005 three-for-two stock splits (effected by means of stock dividends).
Net Sales
dollars in millions
232.1
219.4
176.2
100.9
83.1
Net Earnings
dollars in millions
Stockholders’ Equity
dollars in millions
26.8
147.1
19.1
16.1
12.3
11.0
114.5
93.1
75.4
60.9
’05
’06
’07
’08
’09
’05
’06
’07
’08
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’08
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C O M P A N Y P R O F I L E
Board of Directors
Corporate Officers
Dino A. Rossi
Chairman, President and
Chief Executive Officer
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
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
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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Food, Pharma and Nutrition
The F,P&N segment is one of
the world’s leading providers of
microencapsulated, granulated
and agglomerated ingredient solu-
tions. Broadly applied across a
spectrum of food, nutritional and
pharmaceutical markets, our tech-
nology is bringing solutions that
differentiate products for a variety
of applications.
Animal Nutrition and Health
Our ANH segment provides the
animal nutrition market with spe-
cialty nutritional products derived
from our encapsulation and chela-
tion technologies, predominantly
for dairy cows, to boost health and
milk production. It also manufac-
tures 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.
A R C S p e c i a l t y P r o d u c t s
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% eth-
ylene oxide, ARC markets ethyl-
ene oxide blends and propylene
oxide in two-way environmentally
safe containers.
1
T O O U R S H A R E H O L D E R S , C U S T O M E R S A N D A S S O C I AT E S :
2009 was another successful
year for Balchem. Despite
a very soft worldwide economy, we were
able to improve profitability, increase cash
flow, and produce record earnings. We
remained focused on strategy and exe-
cution, both domestically and abroad. We
increased penetration in several global
markets, through domestic exports and
our European-based operations. The re-
sult was that international sales increased
to 34% of our total revenue in 2009. Prior
years’ investments in our global manufac-
turing facilities, along with aggressive
supply-chain management and the de-
cline of certain raw material costs, posi-
tively impacted our bottom line and
enabled us to develop lower-cost solu-
tions for our customers. Leveraging our
cross-platform technical expertise, we
continue to develop innovative products.
The development of new industrial appli-
cations for choline derivatives has allowed
us to enter new markets, while utilizing
existing manufacturing facilities. Although
our Animal Nutrition and Health segment
was negatively impacted by softness in
the U.S. dairy, swine and poultry markets,
we did see increases in the sales of our
chelated mineral and amino acid encap-
sulated products. Our global food busi-
ness also performed well, as the use
of choline in food fortification grew
through increased penetration into major
consumer brands. Finally, we expanded
our label-friendly technology within our
food group, strengthening our role as a
wellness provider. We continue to drive
operating efficiencies and leverage our
technology base to develop new and inno-
vative products for customers worldwide.
Financial Results
Net earnings reached a record level for
2009, despite a slight decrease from
record-setting sales in 2008. For fiscal
2009, sales were $219.4 million, down
5.4% from 2008 sales of $232.1 million.
Net earnings were a record $26.8 million,
up 40.6% from earnings of $19.1 million
in 2008. Diluted earnings per share was
$.93/share, an increase of 38.8% over
$.67/share in 2008. Earnings per share
and dividend amounts have been
adjusted for the December 2009 three-
for-two stock split (effected by means of
a stock dividend).
Our balance sheet ratios and cash flow
remain excellent. Free cash flow in-
creased significantly, from $18 million in
2008 to $45 million in 2009. Cash on
hand increased to $46.4 million and
total debt was reduced to $6.8 million.
Although we did not complete any
deals in 2009, acquisition continues to
be an integral part of our growth strat-
egy. Our strong balance sheet positions
us well to aggressively pursue new
strategic op-
p o r t u n i t i e s
that will com-
plement our
existing busi-
nesses and
technologies, and create synergies with
existing operations to drive sustainable
g ro w t h w i t h n e w a n d i n n o v a t i v e
products in new markets.
Sharpening our Strategy
We continually look for ways to refine our
business strategy, which includes staying
focused on improving our manufacturing
and supply-chain capabilities. Over the
past several years, capital investments in
infrastructure at all of our plants have
helped increase efficiencies across prod-
uct lines. Further capital investment in
next-generation product lines will provide
added technology to our current portfo-
lio. This will increase ROI, positively im-
pacting bottom-line results. We will
continue to benchmark comparative pro-
duction facilities as we are always fo-
cused on continuous improvement. Our
LEAN/Six Sigma initiatives, started sev-
eral years ago, are truly becoming in-
grained in our culture, resulting in
significant cost reductions and operating
efficiencies. Supply-chain management
has also become a priority, as dictated
by fluctuations in raw material costs and
currency exchange rates. Finally, safety
I n 2009, the business community once again recognized us for our achievements and continued success.
We ranked number 62 on Fortune Magazine’s 100 Fastest Growing Companies. this ranking is based
on sales and earnings growth over the past three years. We also ranked number 64 on Forbes’ list of the
200 Best Small Companies, where membership is based on current and past performance, as well as the
potential for future growth. We are very proud to be included in these prestigious listings, as these are a
direct result of the dedication, commitment and hard work of everyone in our organization.
2
continues to be at the forefront of our op-
erational philosophy, as once again our
Total Recordable Case Rate (TRCR) re-
mained at world-class levels.
Collaborative Efforts to
Speed Innovation
In 2009, we increased our commitment
to research and development by 15%
over 2008 levels. Our emphasis on
strong and innovative R&D has made us
the market leader in the industries we
serve. The combined efforts of our U.S.
and European teams have produced
new and innovative breakthrough appli-
cations and technologies, positioning us
for further commercial success in new
and existing markets. In our Animal
Nutrition and Health business, the
positive response to the launch of
AminoShure™-L, last year, has fueled the
development of new amino acid encap-
sulates for ruminant production in dairy
cows. In our Food, Pharma and Nutri-
tion business, we continue to develop
new and innovative uses for choline,
specifically in food fortification and new
products for preservation, flavoring and
sodium reduction. We have further
leveraged our proprietary smooth dis-
solve granulation technology into new
products, supported by multiple patent
filings in 2009. Our encapsulation "clean
label" technology, along with food forti-
fication solutions, has strengthened our
position as a wellness provider. Further-
more, as a market leader providing high-
quality products, we have continually
upgraded our quality systems, support-
ing our customers to be compliant with
new FDA dietary supplement guide-
lines. We are committed to continue de-
veloping new concepts and products for
both human and animal nutrition, im-
proving operational efficiencies to pro-
vide
innovative and cost-effective
solutions for our customers.
Expanding our Global Reach
As Balchem grows its markets and oper-
ations globally, we also seek to broaden
the scope of our enhanced technology
applications. By leveraging proprietary
technologies, collaborative R&D efforts,
and our overseas manufacturing and
marketing operations, we continue to
drive new and organic growth through in-
novative products and low-cost solutions
for our customers.
ARC Specialty Products performed well
the past year, with increased earnings on
relatively flat sales compared to the prior
year. As the North American leader in the
repackaging and distribution of Ethylene
Oxide, used primarily in the sterilization of
medical devices, this business continues
to operate on sound fundamentals. An
aging demographic helped offset nega-
tive economic conditions, and we feel the
maturing baby boomer population will
positively impact future growth. We are
also conducting trials with major fruit and
grocery companies, examining the use of
a new technology for controlled delivery
of ethylene used for fruit ripening. Lever-
aging our knowledge of the packaging
and delivery of gasses, combined with li-
cencing innovative release technology, this
new application could improve quality and
reduce handling costs in the transit of
fresh fruit to market.
Total revenue in our Animal Nutrition and
Health segment declined slightly in 2009.
This was primarily due to lower demand
as a result of soft economic conditions,
specifically in the dairy and swine end-use
markets. However, lower raw material
costs and improved production efficien-
cies enabled this segment to reach
record levels of profitability. Sales of spe-
cialty encapsulated and chelated mineral
products, buoyed by the first full year of
AminoShure, were up 3% from last year.
We continue to focus on specialty prod-
ucts and technologies to drive profitable
and sustainable growth, while further
strengthening our position as a global
leader in animal health.
The economic downturn impacted the
global choline market, as sales of our
choline chloride products declined,
both domestically and overseas, from
We continue to drive
operating efficiencies and
leverage our technology
base to develop new and
innovative products for
customers worldwide.
3
previous year levels. Sales of industrial
choline derivative products did rebound
at the end of the year, primarily due to
the development of specialized indus-
trial applications and our ability to pen-
etrate new international markets. We
have benefited from internal bench-
marking of our production facilities in
North America and Italy, and continue
to look for ways to increase production
and drive efficiencies.
Sales in our Food, Pharma and Nutrition
segment were basically flat in 2009, pri-
marily due to the worldwide economy
and particular softness in the supple-
ment and OTC markets, which impacted
sales of calcium and choline products.
Despite flatness in this segment as a
whole, the Food sector had an excellent
year, delivering double-digit growth and
exceeding budget expectations. We saw
solid growth in our food preservation
products, adding value through ex-
tended shelf life and optimizing manu-
facturing efficiencies. Our human-grade
choline continues to play an important
role in food fortification, and we made
significant penetration
into mainline
consumer food brands. Through the
addition of two European distributors,
we leveraged our successful domestic
food business and gained market share
in Europe. Our Vitashure nutritional en-
hancement products saw double-digit
growth, due to their ability to meet con-
sumer demand for label-friendly, trans
fat-free products. We remain committed
to pursuing pharma applications for our
products and technology, and last year,
a customer began a clinical trial to con-
firm if their product, utilizing our propri-
etary encapsulation technology, would
be effective as a treatment for certain
symptoms of autism. We will remain fo-
cused, as a wellness provider, leveraging
new and existing technologies to de-
velop new applications for our products
in order to gain market share.
Building on our Strengths
Last year, we encountered many chal-
lenges, and we expect uncertainty in the
global economy to continue in 2010.
However, we are well positioned as a
company to meet these challenges
head-on. Infrastructure capital invest-
ments, the benchmarking of production
facilities, ongoing quality initiatives, and
aggressive supply-chain management all
have helped to increase efficiencies
within our organization. We will continue
to successfully execute our core busi-
ness strategy, drive sustainable long-
term growth through innovation, and
maintain constant focus on operating
margins. New product development, as
well as new applications and markets for
these products, will drive organic growth
in the years ahead. We will focus on
growing markets abroad, as these areas
represent significant opportunity for fu-
ture growth. Finally, our strong financial
position will allow us to pursue strategic
acquisitions, focusing on complementary
businesses, technologies and operating
synergies. I would like to thank our Board
of Directors, employees, customers and
shareholders for all their hard work,
dedication and support.
Sincerely,
Dino A. Rossi
Chairman, President and
Chief Executive Officer
over the past several years, capital
investments in infrastructure at all
of our plants have helped increase
efficiencies across product lines.
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
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)
52 Sunrise Park Road, 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 No
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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
Accelerated filer
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
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, 2009 was approximately
$443,346,000. 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 28,174,224 as of March 3, 2010.
Selected portions of the Registrant’s proxy statement for its 2010 Annual Meeting of Stockholders (the “2010 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, 2009 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.
PART I
Item 1. Business
General:
Balchem Corporation (“Balchem,” the “Company,” “we” or “us”), incorporated in the State of
Maryland in 1967, is engaged in the development, manufacture and marketing of specialty performance
ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries.
Our reportable segments are strategic businesses that offer products and services to different markets. We
presently have three reportable segments: Specialty Products; Food, Pharma & Nutrition; and Animal
Nutrition & Health.
The Company sells its products through its own sales force, independent distributors and sales
agents. Financial information concerning the Company's business, business segments and geographic
information appears in the Notes to our Consolidated Financial Statements included under Item 8 below,
which information is incorporated herein by reference.
The Company operates 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
1
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, 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.
Specialty Products
Our Specialty Products segment operates in industry as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care
industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in
treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively
impacting the performance of the device being sterilized. Our 100% ethylene oxide product is distributed in
uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety,
quality and environmental standards as outlined by the U.S. Environmental Protection Agency (the "EPA")
and the U.S. Department of Transportation. Our inventory of these specially built drums, along with our
two filling facilities, represents a significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are our principal customers for this product. In addition, we
also sell single use canisters with 100% ethylene oxide for use in medical device sterilization. As a
fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and
other seasoning materials.
We also sell propylene oxide principally to customers seeking smaller (as opposed to bulk)
quantities and whose requirements include timely delivery and safe handling. Propylene oxide uses can
include fumigation in spice treatment, various chemical synthesis applications, to make paints more
durable, and for manufacturing specialty starches and textile coatings.
Animal Nutrition & Health
Our Animal Nutrition & Health (“AN&H”) segment provides the animal nutrition market with
nutritional products derived from our encapsulation and chelation technologies in addition to basic choline
chloride. Commercial sales of REASHURE® Choline, an encapsulated choline product, NITROSHURETM,
an encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin product for dairy
cows, boosts health and milk production in transition and lactating dairy cows, delivering nutrient
supplements that survive the rumen and are biologically available, providing required nutritional levels. We
also market chelated mineral supplements for use in animal feed throughout the world, as our proprietary
chelation technology provides enhanced nutrient absorption for various species of production and
companion animals. In 2008, we introduced the first proven rumen-protected lysine for use in dairy
rations, AMINOSHURETM-L, which gives nutritionists and dairy producers a precise and consistent source
of rumen-protected lysine. AN&H also manufactures and supplies basic choline chloride, an essential
nutrient for animal health, predominantly to the poultry and swine industries. Choline, which is
manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline
deficiency can result in reduced growth and perosis in poultry; fatty liver, kidney necrosis and general poor
2
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. Our U.S. patents
will expire between 2011 and 2024. 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, 2009, the Company had a total backlog of $6,525,000 (including $4,100,000 for
the AN&H segment; $1,622,000 for the FP&N segment and $803,000 for Specialty Products segment), as
compared to a total backlog of $6,384,000 at December 31, 2008 (including $4,434,000 for the AN&H
segment; $1,280,000 for the FP&N segment and $670,000 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 2010 fiscal year.
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. Our competition in this market includes a variety of ingredient and
nutritional supplement companies many of which are privately-held. Therefore, we are unable to assess the
size of all of our competitors or where we rank in comparison to such privately-held competitors.
3
In the specialty products business, the Company faces competition from alternative sterilizing
technologies and products. Competition in this marketplace is based primarily on product performance,
customer support, quality, service and price. Our competition in this market includes sterilization
companies a number of which are privately-held. Therefore, we are unable to assess the size of all of our
competitors or where we rank in comparison to such privately-held competitors.
Competition in the animal feed markets served by the Company is based primarily on service and
price. The markets for our products are subject to competitive risks because these markets are highly price
competitive. Our global competitors have competed in the past by lowering prices on certain products. If
they do so again, we may be forced to respond by lowering our prices. This would reduce sales and
possibly profits. Our competition in this market includes a variety of animal nutrition and health ingredient
and nutritional companies many of which are privately-held. Therefore, we are unable to assess the size of
all of our competitors or where we rank in comparison to such privately-held competitors.
Research & Development
During the years ended December 31, 2009, 2008 and 2007, the Company incurred research and
development expense of approximately $3.3 million, $2.9 million and $2.5 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, 2009, an average of 17 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”.
Capital expenditures were approximately $3.4 million for 2009, as compared to $5.1 million in
2008. Capital expenditures are projected to range from $7.5 million to $8.5 million for 2010.
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.
4
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. During
2009, the EPA mandated that a toxicity study be performed on ethylene chlorohydrins, which is a “residue
of concern”, according to the EPA. This study is being financed by an industry trade association of which
we are a member. The study is not expected to be completed until late 2011 or 2012. At this time, we do
not anticipate there will be a further impact on the use of ethylene oxide to treat spices.
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.
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
5
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, 2010, the Company employed approximately 337 persons. Approximately 75
employees at our Marano, Ticino, Italy facility are covered by a national collective bargaining agreement,
which expires in 2010. Approximately 51 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, 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, 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 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.
6
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 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 cannot 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
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.
7
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 business exposes us to potential product liability claims and recalls, which could adversely
impact our financial condition and performance.
Our development, manufacture and sales of food ingredient, pharmaceutical and nutritional
supplement products involve an inherent risk of exposure to product liability claims, product recalls,
product seizures and related adverse publicity. A product liability judgment against us could also result in
substantial and unexpected expenditures, affect consumer confidence in our products, and divert
management’s attention from other responsibilities. Although we maintain product liability insurance
coverage in amounts customary within the industry, there can be no assurance that this level of coverage is
adequate or that we will be able to continue to maintain our existing insurance or obtain comparable
insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment
against us could have a material adverse effect on results of operations and financial condition.
We face risks associated with our sales to customers and manufacturing operations outside the
United States.
For the year ended December 31, 2009, approximately 34% of our net sales consisted of sales
outside the United States. 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 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 51 employees, or 20% of our North American workforce, as of
December 31, 2009, are represented by a union under a single collective bargaining agreement. This
agreement expires in 2012. In Europe, approximately 75 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.
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 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.
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.
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.
9
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. Reserved.
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 11, 2009, 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, 2009. Such stock dividend was made on January 20, 2010. 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. The stock split was applied retroactively to all periods presented.
The high and low closing prices for the common stock as recorded for each quarterly period
during the years ended December 31, 2009 and 2008 were as follows:
Quarterly Period
Ended March 31, 2009
Ended June 30, 2009
Ended September 30, 2009
Ended December 31, 2009
Quarterly Period
Ended March 31, 2008
Ended June 30, 2008
Ended September 30, 2008
Ended December 31, 2008
$
$
High
Low
16.75 $
16.95
18.50
22.86
12.60
15.36
15.67
17.57
High
Low
15.56 $
17.63
19.67
17.91
12.70
14.77
16.11
14.11
On March 3, 2010 the closing price for the common stock on the Nasdaq Global Market was
$22.98.
10
(b)
Record Holders.
As of March 3, 2010, the approximate number of holders of record of the Company’s common
stock was 175. Such number does not include stockholders who hold their stock in street name. As of
March 3, 2010, the total number of beneficial owners of the Company's common stock is estimated to be
approximately 13,700.
(c)
Dividends.
The Company declared cash dividends of $0.11 and $0.07 per share on its common stock during
its fiscal years ended December 31, 2009 and 2008, respectively (after giving effect to the December 2009
three-for-two stock split).
(d)
Securities Authorized for Issuance Under Equity Compensation Plans.
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.
(e)
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, 2009, 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, 2004 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
$0
)
$
(
S
R
A
L
L
O
D
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
11
Item 6. Selected Financial Data
The selected statements of operations data set forth below for the three years in the period ended
December 31, 2009 and the selected balance sheet data as of December 31, 2009 and 2008 have been
derived from our Consolidated Financial Statements included elsewhere herein. The selected financial data
as of December 31, 2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005 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 2009, 2006 and 2005 three-
for-two stock splits (effected by means of stock dividends).
(In thousands, except per share data)
Year ended December 31,
Statement of Operations Data
Net sales
Earnings before income
tax expense
Income tax expense
Net earnings
Basic net earnings per
common share
Diluted net earnings per
common share
At December 31,
Balance Sheet Data
Total assets
Long-term debt (including
current portion)
Other long-term
obligations
Total stockholders’ equity
Dividends per common share
2009
(1)(2)(3)(4)
2008
(1)(2)(3)(4)
2007
(1)(2)(3)(4)
2006
(1)(2)
2005
(1)
$
219,438
$
232,050
$
176,201
$
100,905
$
83,095
40,602
13,817
26,785
28,431
9,381
19,050
24,829
8,711
16,118
19,101
6,823
12,278
$
$
.98
.93
$
$
.71
.67
$
$
.61
.58
$
$
.47
.45
$
$
17,191
6,237
10,954
.42
.41
2009
2008
2007
2006
2005
$
187,813
$
154,474
$
154,424
$
92,333
$
75,141
6,783
9,531
24,777
-
-
1,825
147,143
.11
$
1,609
114,506
.07
$
1,529
93,080
.07
$
784
75,362
.06
$
1,043
60,933
.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
FASB Codification
We follow accounting standards set by the Financial Accounting Standards Board, commonly
referred to as the “FASB.” The FASB sets U.S. generally accepted accounting principles (“U.S. GAAP” or
“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and
cash flows. Over the years, the FASB and other designated GAAP-setting bodies, have issued standards in
12
the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA
Statements of Position, etc.
The FASB recognized the complexity of its standard-setting process and embarked on a revised
process in 2004 that culminated in the release on July 1, 2009, of the FASB Accounting Standards
Codification, sometimes referred to as the “Codification” or “ASC”. The Codification does not change how
the Company accounts for its transactions or the nature of related disclosures made. However, when
referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than Statements,
etc. The above change was made effective by the FASB for periods ending on or after September 15, 2009.
We have updated references to GAAP in this Annual Report on Form 10-K to reflect the guidance in the
Codification.
Overview
We develop, manufacture, distribute and market specialty performance ingredients and products
for the food, nutritional, pharmaceutical, animal health and medical device sterilization industries. Our
reportable segments are strategic businesses that offer products and services to different markets. We
presently have three reportable segments: Specialty Products; Food, Pharma & Nutrition; and Animal
Nutrition & Health.
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with Item 6 — “Selected Financial Data” and our Consolidated Financial Statements
and the related notes included in this report. Those statements in the following discussion that are not
historical in nature should be considered to be forward-looking statements that are inherently uncertain. See
“Cautionary Statement Regarding Forward-Looking Statements”.
Specialty Products
Our Specialty Products segment operates in industry as ARC Specialty Products.
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care
industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in
treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively
impacting the performance of the device being sterilized. Our 100% ethylene oxide product is distributed in
uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety,
quality and environmental standards as outlined by the U.S. Environmental Protection Agency (the "EPA")
and the U.S. Department of Transportation. Our inventory of these specially built drums, along with our
two filling facilities, represents a significant capital investment. Contract sterilizers, medical device
manufacturers, and medical gas distributors are our principal customers for this product. In addition, we
also sell single use canisters with 100% ethylene oxide for use in medical device sterilization. As a
fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and
other seasoning materials.
We also sell propylene oxide principally to customers seeking smaller (as opposed to bulk)
quantities and whose requirements include timely delivery and safe handling. Propylene oxide uses can
include fumigation in spice treatment, various chemical synthesis applications, making paints more durable,
and for manufacturing specialty starches and textile coatings.
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-
13
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
chloride.
Commercial sales of REASHURE® Choline, an encapsulated choline product,
NITROSHURETM, an encapsulated urea supplement, and NIASHURETM, our microencapsulated niacin
product for dairy cows, boosts health and milk production in transition and lactating dairy cows, delivering
nutrient supplements that survive the rumen and are biologically available, providing required nutritional
levels. We also market chelated mineral supplements for use in animal feed throughout the world, as our
proprietary chelation technology provides enhanced nutrient absorption for various species of production
and companion animals. In October 2008, we introduced the first proven rumen-protected lysine for use in
dairy rations, AMINOSHURETM-L, which gives nutritionists and dairy producers a precise and consistent
source of rumen-protected lysine. AN&H also manufactures and supplies basic choline chloride, an
essential nutrient for animal health, predominantly to the poultry and swine industries. Choline, which is
manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. Choline
deficiency can result in reduced growth and perosis in poultry; fatty liver, kidney necrosis and general poor
health condition in swine. Certain derivatives of choline chloride are also manufactured and sold into
industrial applications. The AN&H segment also includes the manufacture and sale of methylamines.
Methylamines are a primary building block for the manufacture of choline products and are also used in a
wide range of industrial applications.
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.
14
The following tables summarize consolidated net sales by segment and business segment earnings
from operations for the three years ended December 31, 2009, 2008 and 2007 (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
2009
36,368
35,407
147,663
219,438
2009
14,250
5,029
21,380
40,659
$
$
$
$
2008
35,835
35,702
160,513
232,050
2008
12,545
5,469
11,334
29,348
$
$
$
$
2007
33,057
32,052
111,092
176,201
2007
11,824
4,144
9,938
25,906
$
$
$
$
Fiscal Year 2009 compared to Fiscal Year 2008
(All amounts in thousands, except share and per share data)
Net Sales
Net sales for 2009 were $219,438, as compared with $232,050 for 2008, a decrease of $12,612 or
5.4%. Net sales for the specialty products segment were $36,368 for 2009, as compared with $35,835 for
2008, an increase of $533 or 1.5%. This increase in sales was derived principally from increases in the
average selling prices of certain ethylene oxide products for medical device sterilization adopted to help
offset rising raw material costs during 2008. This increase was partially offset by a decline in volumes sold
of propylene oxide for starch modification. Net sales for the Food, Pharma & Nutrition segment were
$35,407 for 2009, as compared with $35,702 for 2008, a decrease of $295 or 0.8%. This result was driven
principally by aggressive inventory management by customers along with volume declines in the human-
grade choline and calcium products for the supplement market, which has been negatively impacted by the
worldwide economic downturn. These declines were partially offset by a favorable product mix sold in the
domestic food market, including the growth of choline into new food applications as well as growth in the
bakery, tortilla and preservation markets. Also offsetting the declines were increased sales of Vitashure®
products for nutritional enhancement. Net sales of $147,663 were realized in 2009 for the Animal Nutrition
& Health segment, as compared with $160,513 for 2008, a decrease of $12,850 or 8.0%. Feed and
industrial grade choline product sales and derivatives decreased 10% or $13,628 over the prior year period,
principally from well-publicized softness in the U.S. poultry and swine markets. There were also lower
export sales from our North American choline plants, largely due to the stronger U.S. dollar in 2009 versus
2008 and international political factors affecting poultry exports. This U.S. volume decline was partially
offset by increased volumes of choline products sourced from our Italian operation into the European and
international poultry markets. This geographic mix lowered consolidated feed grade prices in the period, as
did lower pricing linked to the decline in raw material costs. Sales of industrial derivatives (both choline
and methylamines) were impacted by softness in the industrial sector, principally caused by the general
economic downturn. Sales of our specialty animal nutrition and health products, targeted for ruminant
production animals and companion animals, increased 3.3% or $778 from the prior year comparable period
as some late year improvement in dairy economics created greater demand for certain products, particularly
chelates and rumen protected lysine. Partially offsetting this increase were declines in certain other
specialty animal nutrition and health products, targeted for ruminant production animals and companion
animals largely due to due to weak dairy economics in 2009 which resulted in lower demand for these
products.
15
Gross Margin
Gross margin for 2009 increased to $66,958 compared to $52,578 for 2008, an increase of 27.3%.
Gross margin percentage for 2009 was 30.5%, as compared to 22.7%, for 2008, as our margin percentage
was favorably affected by product mix, lower raw material and energy costs and price increases
implemented in early 2009. Gross margin percentage for the specialty products segment increased by 6.7%
primarily due to price increases implemented in early 2009. Gross margin percentage in the encapsulated /
nutritional products segment decreased 3.2% as margins were unfavorably affected by the aforementioned
aggressive inventory management by customers and volume declines in the human-grade choline and
calcium products for the supplement market. Gross margin percentage in Animal Nutrition and Health
increased 9.9% principally from reductions in the cost of certain petro-chemical raw materials and
improved production/supply chain efficiencies in both the U.S. and Europe.
Operating Expenses
Operating expenses for 2009 were $26,299, as compared to $23,230 for 2008, an increase of
$3,069 or 13.2%. This increase was due primarily to increased payroll expenses, an increase to some
accounts receivable reserves for
international accounts and non-cash stock-based compensation
recognition. With these increases, operating expenses were 12.0% of sales or 2.0 percentage points greater
than the operating expenses as a percent of sales incurred in 2008. During 2009 and 2008, the Company
spent $3,298 and $2,877, 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 2009 increased to $40,659 compared to $29,348 for 2008, an
increase of $11,311 or 38.5%. This increase was primarily driven by cost reductions of certain petro-
chemical raw materials over the prior year, a favorable product mix, and plant and logistics efficiencies.
Earnings from operations as a percentage of sales (“operating margin”) for 2009 increased to 18.5%
compared to 12.6% for 2008, principally a result of the aforementioned cost reductions of certain petro-
chemical raw materials over the prior year comparable period, a favorable product mix, and plant and
logistics efficiencies. Earnings from operations for the Specialty Products segment were $14,250, an
increase of $1,705 or 13.6%, primarily due to reductions in the cost of certain petro-chemical raw materials
and increases in average selling prices. Earnings from operations for Food, Pharma & Nutrition were
$5,029, a decrease of $440 or 8.0%, due largely to the aforementioned aggressive inventory management
by customers and volume declines in the human-grade choline and calcium products for the supplement
market. Earnings from operations for Animal Nutrition & Health increased by $10,046 to $21,380, an
88.6% increase from the prior year, resulting principally from reductions in the cost of certain petro-
chemical raw materials and improved production/supply chain efficiencies in both the U.S. and Europe.
Other Expenses (Income)
Interest income totaled $107 in each of 2009 and 2008. Interest expense, net of capitalized
interest, was $209 for 2009 compared to $963 for 2008. This decrease is primarily attributable to the
decrease in average current and long-term debt resulting from both normal recurring principal payments as
well as accelerated payments of the Term Loan (as defined below in the Financing Activities section of
Liquidity and Capital Resources). Other income of $45 for 2009 is primarily the result of favorable
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 in 2009 and 2008 was 34.0% and 33.0%, respectively. This
increase in the effective tax rate is primarily attributable to a change in apportionment relating to state
income taxes, as well as a change in the income proportion towards jurisdictions with higher tax rates.
16
Net Earnings
Primarily as a result of the above-noted cost reductions of certain petro-chemical raw materials,
the favorable product mix, and plant and logistics efficiencies, net earnings were $26,785 for 2009, as
compared with $19,050 for 2008, an increase of 40.6%.
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.
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.
Gross Margin
Gross margin for 2008 increased to $52,578 compared to $46,930 for 2007, an increase of 12.0%,
due largely to the above-noted increase in sales. Gross margin percentage for 2008 was 22.7%, as
compared to 26.6% for 2007, as our margin percentage was unfavorably affected by product mix and
higher raw material and energy costs. Gross margin percentage for the specialty products segment
decreased slightly primarily due to rising raw material costs. Gross margin percentage in the encapsulated /
nutritional products segment increased 0.3% as margins were favorably affected by increased production, a
result of greater sales volume as described above. Gross margin percentage in Animal Nutrition and Health
increased 15.3% and was favorably affected by increased production volumes of choline chloride and
specialty derivative products. This favorable impact was partially offset by higher raw material and energy
costs.
Operating Expenses
Operating expenses for 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
17
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 of 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 in 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 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%.
LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations
The Company's contractual obligations and debt obligations, excluding revolver borrowings, as of
December 31, 2009, are summarized in the table below:
Payments due by period
Contractual Obligations
Long-term debt obligations
Interest payment obligations (1)
Operating lease obligations (2)
Purchase obligations (3)
Total
Less than
1 year
$ 6,783
89
988
9,671
$ 19,318 $ 17,531
Total
$ 6,783
224
2,640
9,671
1-3 years
$ -
111
1,045
-
More than
5 years
$ -
-
306
-
$ 1,156 $ 325 $ 306
3-5 years
$ -
24
301
-
(1)
Includes interest payments on long-term debt obligations based on interest and foreign currency rates at
December 31, 2009. It is assumed that the European Term Loan (as defined in Financing Activities
18
below) will be refinanced with similar terms and that there will be no prepayments of principal.
(2)
Principally includes obligations associated with future minimum non-cancelable operating lease
obligations (including the headquarters office space entered into in 2002).
(3)
Principally includes open purchase orders with vendors for inventory not yet received or recorded on our
balance sheet.
The table above excludes a $726 liability for uncertain tax positions, including the related interest
and penalties, recorded in accordance with ASC 740-10 (incorporating former FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FAS Statement No. 109”) as we are
unable to reasonably estimate the timing of settlement, if any.
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.,
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.
Cash
Cash and cash equivalents increased to $46,432 at December 31, 2009 from $3,422 at December
31, 2008 primarily resulting from the activity detailed below. Working capital amounted to $59,197 at
December 31, 2009 as compared to $29,566 at December 31, 2008, an increase of $29,631.
Operating Activities
Cash flows from operating activities provided $48,072 for 2009 compared to $22,897 for 2008.
The increase in cash flows from operating activities was primarily due to an increase in net earnings,
depreciation and amortization, stock compensation, accounts payable and accrued expenses and decreases
in inventories, accounts receivable and a reduction in prepaid expenses and other current assets. The
aforementioned increase in cash flows was partially offset by a decrease in deferred income tax.
Investing Activities
Capital expenditures were $3,429 for 2009 compared $5,080 for 2008. Assets acquired in 2007
totaled $40,744, which was principally related to the Chinook Acquisition and the Akzo Nobel Acquisition.
19
Financing Activities
The Company has an approved stock repurchase program. The total authorization under this
program is 3,763,038 shares. Since the inception of the program, a total of 1,961,800 shares have been
purchased, none of which remained in treasury at December 31, 2009 or 2008. During 2009, 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
$10,750 as of December 31, 2009 (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, 2009, this interest rate was 1.47%. At December 31,
2009, the European Term Loan had an outstanding balance of €4,732 translated to $6,783. The European
Loan Agreement also provides for a short-term revolving credit facility of €3,000, translated to $4,300 as of
December 31, 2009 (the "European Revolving Facility"). The European Revolving Facility has been
renewed for a period of one year as of May 1, 2009. The current European Revolving Facility is subject to
an amended monthly interest rate equal to EURIBOR plus 1.45%, and accrued interest is payable monthly.
No amounts are outstanding on the European Revolving Facility as of the date hereof. Management
believes that such facility will be renewed in the normal course of business.
On March 16, 2007, the Company and its principal bank entered into a Loan Agreement (the
“Loan Agreement”) providing for an unsecured term loan of $29,000 (the “Term Loan”), the proceeds of
which were used to fund the Chinook Acquisition (see Note 5). As of December 31, 2009, the Company
had paid the Term Loan in full. The Loan Agreement also provides for a short-term revolving credit facility
of $6,000 (the "Revolving Facility"). The Revolving Facility is subject to a monthly interest rate equal to
LIBOR plus 1%, and accrued interest is payable monthly. No amounts are outstanding on the Revolving
Facility as of the date hereof. The Revolving Facility has a maturity date of May 31, 2010. Management
believes that such facility will be renewed in the normal course of business.
At December 31, 2009, the Company had a total of $6,783 of debt outstanding, as compared to a
total of $11,575 debt outstanding at December 31, 2008. Indebtedness under the Company’s loan
agreements are secured by assets of the Company.
Significant financial covenants in our loan agreements include maintaining at certain levels our
Current Ratio, Funded Debt Ratio, and a Fixed Charge Coverage Ratio. We were in compliance with all
material covenants related to our loan agreements as of December 31, 2009 and we expect to be in
compliance with all material covenants during fiscal 2010. Our loan agreements require compliance with
all of the covenants defined in the agreement. If we were out of compliance with any debt covenant
required by our loan agreements following the applicable cure period, our lender could terminate its
commitment, unless we successfully negotiate a covenant waiver.
Proceeds from stock options exercised totaled $2,988 and $1,050 for 2009 and 2008, respectively.
Dividend payments were $2,008 and $1,975 for 2009 and 2008, respectively.
20
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, 2009 for this obligation
is $888. 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 provisions
of ASC Topic 605, “Revenue Recognition” (incorporating 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.
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.
21
Accounts Receivable
We market our products to a diverse customer base, principally throughout the United States,
Europe, China and Japan. We grant credit terms in the normal course of business to our customers. We
perform on-going credit evaluations of our customers and adjust credit limits based upon payment history
and the customer's current credit worthiness, as determined through review of their current credit
information. We continuously monitor collections and payments from customers and maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. Estimated losses are based on historical experience and any specific customer collection issues
identified. If the financial condition of our customers were to deteriorate resulting in an impairment of their
ability to make payments, additional allowances and related bad debt expense may be required.
Post-employment Benefits
The Company provides life insurance and health care benefits for eligible retirees and health care
benefits for retirees’ eligible survivors. The costs and obligations related to these benefits reflect the
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 accordance with ASC 715, “Compensation—Retirement Benefits” (incorporating former SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”), 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.
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 ASC 740-10
(incorporating former FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FAS Statement No. 109”). ASC 740-10 clarifies whether or not to recognize assets or
liabilities for tax positions taken that may be challenged by a tax authority. It prescribes a recognition
22
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 ASC 740-10 requires judgment related to
the uncertainty in income taxes and could impact our effective tax rate.
Stock-based Compensation
We account for stock-based compensation in accordance with the provisions of ASC 718,
“Compensation-Stock Compensation” (incorporating former Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004), “Share Based Payment”). 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. ASC 718 requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on historical experience. If factors change and we employ different
assumptions in the application of ASC 718, 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 February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09,
“Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements”
("ASU 2010-09"). ASU 2010-09 amends disclosure requirements within Subtopic 855-10. An entity that is
an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This
change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-09 is
effective for interim and annual periods ending after June 15, 2010. The Company does not expect the
adoption of this ASU to be significant to its consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force.”
This ASU provides amendments to the criteria for separating consideration in multiple-deliverable
arrangements. The amendments in this ASU replace the term "fair value" in the revenue allocation
guidance with "selling price" to clarify that the allocation of revenue is based on entity-specific
assumptions rather than assumptions of a marketplace participant, and they establish a selling price
hierarchy for determining the selling price of a deliverable. The amendments in this ASU will eliminate the
residual method of allocation and require that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method, and they significantly expand the
required disclosures related to multiple-deliverable revenue arrangements. The amendments in this ASU
will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning after June 15, 2010. The Company does not expect the adoption of this ASU to be significant to
its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-5, “Measuring Liabilities at Fair Value” (“ASU
2009-05”). ASU 2009-05 amends ASC 820, “Fair Value Measurements and Disclosures.” Specifically,
ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for
the identical liability is not available, a reporting entity is required to measure fair value using one or more
of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability
when traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets
and/or 2) a valuation technique that is consistent with the principles of ASC 820 (e.g. an income approach
or market approach). ASU 2009-05 also clarifies that when estimating the fair value of a liability, a
23
reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on
that liability. ASU 2009-05 was effective for the Company on October 1, 2009. The adoption of this
guidance was not significant to the Company’s consolidated financial statements.
In June 2009, the FASB issued ASU 2009-01, “Topic 105-Generally Accepted Accounting
Principles amendments based on Statement of Financial Accounting Standards No. 168-The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”
(incorporating former SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles – a Replacement of FASB Statement No. 162”), which
establishes the FASB Accounting Standards Codification as the single source of authoritative U.S.
generally accepted accounting principles recognized by FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. ASU 2009-01 and the Codification were effective for
financial statements issued for interim and annual periods ending after September 15, 2009. The
Codification supersedes all existing non-SEC accounting and
reporting standards. No other
nongrandfathered non-SEC accounting literature not included in the Codification is authoritative.
Following ASU 2009-01, FASB will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, FASB will issue Accounting Standards
Updates, which will serve only to: (a) update the Codification; (b) provide background information about
the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. Pursuant to the
provisions of ASU 2009-01, the Company has updated references to GAAP in its financial statements
issued beginning with the period ended September 30, 2009. The adoption of ASU 2009-01 was not
significant to the Company’s consolidated financial statements.
In June 2009, the FASB issued amended guidance (incorporating former SFAS No. 167,
“Amendments to FASB Interpretation No. 46(R)”) incorporated into ASC 810, “Consolidation”. The
amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new
approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This amended guidance is effective
for the first annual reporting period beginning after November 15, 2009 and for interim periods within that
first annual reporting period. The Company does not expect the adoption of this guidance to be significant
to its consolidated financial statements.
In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (incorporating former SFAS
No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”.) This guidance
eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures in order to enhance information reported to users of
financial statements by providing greater transparency about transfers of financial assets, including
securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets. This guidance is effective for fiscal years beginning after November 15,
2009. The Company does not expect the adoption of this guidance to be significant to its consolidated
financial statements.
In May 2009, the FASB issued ASC 855, “Subsequent Events” (incorporating former SFAS No.
165, “Subsequent Events”). ASC 855 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are available to
be issued. Specifically, ASC 855 provides the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements; and the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date. ASC 855 was
effective for interim or annual financial periods ending after June 15, 2009, and is to be applied
prospectively. The adoption of this guidance was not significant to the Company’s consolidated financial
statements.
24
In April 2009, the FASB issued amended guidance (incorporating former FASB Staff Position
(“FSP”) FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”) incorporated into ASC 805, “Business Combinations”
(incorporating former FASB Statement No. 141 (Revised December 2007), “Business Combinations”).
This amended guidance requires assets acquired and liabilities assumed in a business combination that arise
from contingencies to be recognized at fair value if fair value can be reasonably estimated. If fair value of
such an asset or liability cannot be reasonably estimated, the asset or liability would generally be
recognized in accordance with ASC 450, “Contingencies” (incorporating former SFAS No. 5, “Accounting
for Contingencies”; and FASB Interpretation (“FIN”) No. 14, “Reasonable Estimation of the Amount of a
Loss.”). Further, FASB decided to carry forward without significant revision the subsequent accounting
guidance for assets and liabilities arising from contingencies as per SFAS No. 141, “Business
Combinations.” The amended guidance also eliminates the requirement to disclose an estimate of the range
of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, FASB
decided to require that entities include only the disclosures required by ASC 450 and that those disclosures
be included in the business combination footnote. This amended guidance also requires that contingent
consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as
contingent consideration of the acquirer and should be initially and subsequently measured at fair value in
accordance with ASC 805. This amended guidance is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The
Company will apply this amended guidance prospectively to all business combinations subsequent to the
effective date.
In April 2009, the FASB issued ASC 820, “Fair Value Measurements and Disclosures”
(incorporating former FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”), and ASC 825, “Financial Instruments” (incorporating former FSP FASB 107-1 and Accounting
Principles Board 28-1, “Interim Disclosures about Fair Value of Financial Instruments”). The guidance
relates to fair value measurements and related disclosures. The FASB also issued ASC 320, “Investments-
Debt and Equity Securities” (incorporating former FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments”) relating to the accounting for impaired debt
securities. This guidance was effective for interim and annual periods ending after June 15, 2009. The
adoption of this guidance was not significant to the Company’s consolidated financial statements.
In April 2008, the FASB issued ASC 350, “Intangibles-Goodwill and Other” (incorporating
former FSP 142-3, “Determining the Useful Life of Intangible Assets”). ASC 350 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. This guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this
guidance was not significant to the Company’s consolidated financial statements.
In March 2008, the FASB issued ASC 815, “Derivatives and Hedging” (incorporating former
SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of
FASB Statement No. 133”). ASC 815 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; and (c) the effect of derivative
instruments and related hedged items on an entity’s financial position, financial performance, and cash
flows. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. The adoption of this guidance was not significant to the Company’s consolidated
financial statements.
In December 2007, the FASB issued ASC 805, “Business Combinations” (incorporating former
SFAS No. 141 (revised 2007), “Business Combinations”). The purpose of issuing this new guidance was 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 this new guidance 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
25
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. ASC 805 is effective for any business combinations that occur on or after
January 1, 2009. The Company will apply ASC 805 prospectively to all business combinations subsequent
to the effective date.
In December 2007, the FASB issued ASC 810, “Consolidation” (incorporating former
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB
No. 51”). The guidance was issued partly 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, ASC 810 eliminates the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity transactions. ASC 810 was
effective January 1, 2009. The adoption of this guidance was not significant to the Company’s consolidated
financial statements.
In September 2006, the FASB issued ASC 820, "Fair Value Measurements and Disclosures"
(incorporating former SFAS No. 157, "Fair Value Measurements”). ASC 820 defines fair value, establishes
a framework for measuring fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. The Company adopted the provisions of this standard
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 additional guidance (issued formerly as FSP
No. FAS 157-2, “Effective Date of FASB Statement No. 157”), the Company elected to defer the adoption
of ASC 820 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, the Company adopted the provision for nonfinancial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis, which include those measured at fair
value in impairment testing and those initially measured at fair value in a business combination. The
provisions of ASC 820 related to these items did not have a significant impact on the Company’s
consolidated financial statements. Additional guidance (issued formerly as FSP No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not Active”) clarifies the application
of ASC 820 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. This additional guidance 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 ASC 250, "Accounting Changes and Error
Corrections" (incorporating former SFAS No. 154, "Accounting Changes and Error Corrections"). The
Company adopted the additional guidance 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 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, 2009, the
Company’s borrowings were under a bank term loan bearing interest at EURIBOR plus 1.00% and a
revolving line of credit bearing interest at EURIBOR plus 1.45%. A 100 basis point increase or decrease in
interest rates, applied to the Company’s borrowings at December 31, 2009, would result in an increase or
decrease in annual interest expense and a corresponding reduction or increase in cash flow of
approximately $68. The Company is exposed to market risks for changes in foreign currency rates and has
26
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.
27
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, 2009 and 2008
Consolidated Statements of Earnings for the
years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows
for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying
Accounts for the years ended December 31, 2009, 2008 and 2007
29
31
32
33
34
35
56
28
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, 2009 and 2008, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2009. 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, 2009,
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 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, 2009 and
2008, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009, 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
control over financial reporting as of December 31, 2009, based on criteria established in Internal
29
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ McGladrey & Pullen LLP
New York, New York
March 12, 2010
30
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2009 and 2008
(Dollars in thousands, except share and per share data)
Assets
2009
2008
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $357 and $50 at
December 31, 2009 and 2008, 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
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable
Accrued expenses
Accrued compensation and other benefits
Accrued compensation and other benefits
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; 28,097,279
shares issued and outstanding at December 31, 2009 and 27,374,020 shares
issued and outstanding at December 31, 2008
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
$
46,432
$
3,422
29,149
13,965
2,046
891
529
93,012
41,579
30,250
16,618
2,581
649
1,731
55,251
42,513
26,658
26,504
60
187,813
$
26,658
29,993
59
154,474
$
$
10,876
5,613
4 399
4,399
3,091
3,053
6,783
-
33,815
-
5,030
1,825
40,670
$
10,336
3,948
2 501
2,501
2,008
1,988
2,860
2,044
25,685
6,671
6,003
1,609
39,968
-
-
1,873
26,541
118,576
153
147,143
1,824
17,808
94,882
(8)
114,506
Total liabilities and stockholders' equity
$
187,813
$
154,474
See accompanying notes to consolidated financial statements.
31
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2009, 2008 and 2007
(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
2009
2008
2007
$
219,438
$
232,050
$
176,201
152,480
179,472
129,271
66,958
52,578
46,930
14,350
3,298
8,651
26,299
40,659
(107)
209
(45)
40,602
13,817
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
$
26,785
$
19,050
$
16,118
Basic net earnings per common share
$
0.98
$
0.71
$
0.61
Diluted net earnings per common share
$
0.93
$
0.67
$
0.58
See accompanying notes to consolidated financial statements.
32
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except share and per share data)
Total
Stockholders'
Equity
Accumulated
Other
Comprehensive
Income
Retained Comprehensive
Earnings
Income
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Balance - December 31, 2006
$
75,362
$
63,988
$
193
26,600,773
$
1,773
$
9,408
Comprehensive Income:
Net earnings
Other comprehensive income, net of tax:
Net change in pension asset/liability, net of taxes of $26
Other Comprehensive Income (Loss)
Comprehensive Income
Dividends ($.07 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
Balance - December 31, 2007
Comprehensive Income:
Net earnings
Other comprehensive income, net of tax:
Net change in pension asset/liability, net of taxes of $8
Translation adjustments
Other Comprehensive Income (Loss)
Comprehensive Income
Dividends ($.07 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
Balance - December 31, 2008
Comprehensive Income:
Net earnings
Other comprehensive income, net of tax:
Net change in pension asset/liability, net of taxes of $6
Translation adjustments
Other Comprehensive Income (Loss)
Comprehensive Income
Dividends ($.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 $2,289
77,840
150
26,969,029
1,797
13,293
19,050
$
19,050
19,050
-
16,118
$
16,118
16,118
(43)
(43)
16,075
$
(43)
-
-
(1,975)
379
3,530
(291)
93,080
-
-
-
(1,975)
-
-
(291)
48
(206)
(158)
18,892
$
48
(206)
-
-
(2,008)
406
4,136
,
114,506
-
-
-
-
(2,008)
-
-
94,882
26,785
$
26,785
26,785
(15)
176
161
26,946
$
(15)
176
-
-
(3,091)
430
8,352
-
-
-
-
(3,091)
-
-
-
-
(43)
-
-
-
-
-
-
-
-
-
-
31,304
336,952
-
-
-
-
-
-
2
22
-
-
-
-
-
-
377
3,508
-
-
-
-
-
-
-
25,827
379,164
,
-
-
-
-
-
-
2
25
-
-
-
-
-
-
404
4,111
,
(8)
27,374,020
1,824
17,808
-
-
-
-
-
-
24,413
698,846
-
-
-
-
-
-
2
47
-
-
-
-
-
-
428
8,305
-
-
(158)
-
-
-
-
-
-
-
161
-
-
-
-
Balance - December 31, 2009
$
147,143
$
118,576
$
153
28,097,279
$
1,873
$
26,541
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
33
33
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(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
Provision for doubtful accounts
Foreign currency transaction (gain) loss
Other
Changes in assets and liabilities
Accounts receivable
Inventories
Prepaid expenses and other current assets
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
q
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 and restricted share purchases
Excess tax benefits from stock compensation
Dividends paid
Net cash (used in) provided by 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.
34
2009
2008
2007
$
26,785
$
19,050
$
16,118
8,130
3,076
430
(1,216)
305
36
(8)
862
2,656
1,776
4,037
1,009
-
194
48,072
(3,429)
(215)
-
(3,644)
-
(2,844)
701
(2,657)
2,988
2,289
(2,008)
(1,531)
113
43,010
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
166
(2,882)
3,422
46,432
$
2,307
3,422
$
5,189
2,307
$
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 ASC
Topic 605, “Revenue Recognition” (incorporating 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.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. Depreciation of plant and equipment is calculated using
the straight-line method over the estimated useful lives of the assets as follows:
Buildings
Equipment
15-25 years
3-12 years
Expenditures for repairs and maintenance are charged to expense. Alterations and major overhauls that
extend the lives or increase the capacity of plant assets are capitalized. When assets are retired or otherwise
disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts
and any resultant gain or loss is included in earnings. The Company capitalized interest costs of $17, $158
and $150 in 2009, 2008 and 2007, respectively.
35
Business Concentrations
Financial instruments that subject the Company to credit risk consist primarily of money market
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 2009, 2008 and 2007, 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 ASC 350, “Intangibles-Goodwill and Other” (incorporating former SFAS No.
141, “Business Combinations”; and SFAS No. 142, “Goodwill and Other Intangible Assets”), as of
January 1, 2002. This standard requires the use of the purchase method of accounting for a business
combination and defines 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 ASC 350. ASC 350 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.
As required by ASC 350, 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, 2009 and 2008, 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, 2009 and 2008, subject
to the provisions of ASC 350. Unamortized goodwill is allocated to the Company’s reportable segments as
follows:
Specialty Products
Food, Pharma and Nutrition
Animal Nutrition and Health
Total
2009
5,089
8,607
12,962
26,658
$
$
2008
5,089
8,607
12,962
26,658
$
$
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
36
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, 2009 and 2008 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.
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).
37
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 ASC 718, “Compensation-Stock Compensation”
(incorporating former Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share Based Payment”), 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 ASC 718, 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 ASC 718 and, accordingly, periods prior to adoption have not been restated.
The implementation of ASC 718 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 February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent
Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements” ("ASU 2010-09").
ASU 2010-09 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not
required to disclose the date through which subsequent events have been evaluated. This change alleviates
potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-09 is effective for
interim and annual periods ending after June 15, 2010. The Company does not expect the adoption of this
ASU to be significant to its consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB
Emerging Issues Task Force.” This ASU provides amendments to the criteria for separating consideration
in multiple-deliverable arrangements. The amendments in this ASU replace the term "fair value" in the
revenue allocation guidance with "selling price" to clarify that the allocation of revenue is based on entity-
specific assumptions rather than assumptions of a marketplace participant, and they establish a selling price
hierarchy for determining the selling price of a deliverable. The amendments in this ASU will eliminate the
residual method of allocation and require that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method, and they significantly expand the
required disclosures related to multiple-deliverable revenue arrangements. The amendments in this ASU
will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning after June 15, 2010. The Company does not expect the adoption of this ASU to be significant to
its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-5, “Measuring Liabilities at Fair Value” (“ASU 2009-
05”). ASU 2009-05 amends ASC 820, “Fair Value Measurements and Disclosures.” Specifically, ASU
38
2009-05 provides clarification that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value using one or more of
the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when
traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets and/or
2) a valuation technique that is consistent with the principles of ASC 820 (e.g. an income approach or
market approach). ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that
liability. ASU 2009-05 was effective for the Company on October 1, 2009. The adoption of this guidance
was not significant to the Company’s consolidated financial statements.
In June 2009, the FASB issued ASU 2009-01, “Topic 105-Generally Accepted Accounting Principles
amendments based on Statement of Financial Accounting Standards No. 168-The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (incorporating
former SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles – a Replacement of FASB Statement No. 162”), which establishes the
FASB Accounting Standards Codification as the single source of authoritative U.S. generally accepted
accounting principles recognized by FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. ASU 2009-01 and the Codification were effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all
existing non-SEC accounting and reporting standards. No other nongrandfathered non-SEC accounting
literature not included in the Codification is authoritative. Following ASU 2009-01, FASB will not issue
new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, FASB will issue Accounting Standards Updates, which will serve only to: (a) update the
Codification; (b) provide background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. Pursuant to the provisions of ASU 2009-01, the Company
has updated references to GAAP in its financial statements issued beginning with the period ended
September 30, 2009. The adoption of ASU 2009-01 was not significant to the Company’s consolidated
financial statements.
In June 2009, the FASB issued amended guidance (incorporating former SFAS No. 167, “Amendments to
FASB Interpretation No. 46(R)”) incorporated into ASC 810, “Consolidation”. The amendments include:
(1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to
reassess who should consolidate a variable-interest entity. This amended guidance is effective for the first
annual reporting period beginning after November 15, 2009 and for interim periods within that first annual
reporting period. The Company does not expect the adoption of this guidance to be significant to its
consolidated financial statements.
In June 2009, the FASB issued ASC 860, “Transfers and Servicing” (incorporating former SFAS No. 166,
“Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”.) This guidance
eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures in order to enhance information reported to users of
financial statements by providing greater transparency about transfers of financial assets, including
securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets. This guidance is effective for fiscal years beginning after November 15,
2009. The Company does not expect the adoption of this guidance to be significant to its consolidated
financial statements.
In May 2009, the FASB issued ASC 855, “Subsequent Events” (incorporating former SFAS No. 165,
“Subsequent Events”). ASC 855 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available to be
issued. Specifically, ASC 855 provides the period after the balance sheet date during which management of
a reporting entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements; and the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date. ASC 855 was
effective for interim or annual financial periods ending after June 15, 2009, and is to be applied
prospectively. The adoption of this guidance was not significant to the Company’s consolidated financial
statements.
39
In April 2009, the FASB issued amended guidance (incorporating former FASB Staff Position (“FSP”)
FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That
Arise from Contingencies”) incorporated into ASC 805, “Business Combinations” (incorporating former
FASB Statement No. 141 (Revised December 2007), “Business Combinations”). This amended guidance
requires assets acquired and liabilities assumed in a business combination that arise from contingencies to
be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or
liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance
with ASC 450, “Contingencies” (incorporating former SFAS No. 5, “Accounting for Contingencies”; and
FASB Interpretation (“FIN”) No. 14, “Reasonable Estimation of the Amount of a Loss.”). Further, FASB
decided to carry forward without significant revision the subsequent accounting guidance for assets and
liabilities arising from contingencies as per SFAS No. 141, “Business Combinations.” The amended
guidance also eliminates the requirement to disclose an estimate of the range of outcomes of recognized
contingencies at the acquisition date. For unrecognized contingencies, FASB decided to require that entities
include only the disclosures required by ASC 450 and that those disclosures be included in the business
combination footnote. This amended guidance also requires that contingent consideration arrangements of
an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the
acquirer and should be initially and subsequently measured at fair value in accordance with ASC 805. This
amended guidance is effective for assets or liabilities arising from contingencies in business combinations
for which the acquisition date is on or after January 1, 2009. The Company will apply this amended
guidance prospectively to all business combinations subsequent to the effective date.
In April 2009, the FASB issued ASC 820, “Fair Value Measurements and Disclosures” (incorporating
former FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”), and ASC
825, “Financial Instruments” (incorporating former FSP FASB 107-1 and Accounting Principles Board 28-
1, “Interim Disclosures about Fair Value of Financial Instruments”). The guidance relates to fair value
measurements and related disclosures. The FASB also issued ASC 320, “Investments-Debt and Equity
Securities” (incorporating former FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-
Than-Temporary Impairments”) relating to the accounting for impaired debt securities. This guidance was
effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance was not
significant to the Company’s consolidated financial statements.
In April 2008, the FASB issued ASC 350, “Intangibles-Goodwill and Other” (incorporating former FSP
142-3, “Determining the Useful Life of Intangible Assets”). ASC 350 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. This
guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this guidance
was not significant to the Company’s consolidated financial statements.
In March 2008, the FASB issued ASC 815, “Derivatives and Hedging” (incorporating former SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB
Statement No. 133”). ASC 815 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; and (c) the effect of derivative instruments and
related hedged items on an entity’s financial position, financial performance, and cash flows. ASC 815 was
effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008. The adoption of this guidance was not significant to the Company’s consolidated financial
statements.
In December 2007, the FASB issued ASC 805, “Business Combinations” (incorporating former SFAS No.
141 (revised 2007), “Business Combinations”). The purpose of issuing this new guidance was 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 this new guidance 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
40
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. ASC 805 is effective for any business combinations that occur on or after
January 1, 2009. The Company will apply ASC 805 prospectively to all business combinations subsequent
to the effective date.
In December 2007, the FASB issued ASC 810, “Consolidation” (incorporating former SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”). The
guidance was issued partly 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, ASC 810
eliminates the diversity that currently exists in accounting for transactions between an entity and
noncontrolling interests by requiring they be treated as equity transactions. ASC 810 was effective January
1, 2009. The adoption of this guidance was not significant to the Company’s consolidated financial
statements.
In September 2006, the FASB issued ASC 820, "Fair Value Measurements and Disclosures" (incorporating
former SFAS No. 157, "Fair Value Measurements”). ASC 820 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. The Company adopted the provisions of this standard 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 additional guidance (issued formerly as FSP No. FAS
157-2, “Effective Date of FASB Statement No. 157”), the Company elected to defer the adoption of ASC
820 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,
the Company adopted the provision for nonfinancial assets and liabilities that are not required or permitted
to be measured at fair value on a recurring basis, which include those measured at fair value in impairment
testing and those initially measured at fair value in a business combination. The provisions of ASC 820
related to these items did not have a significant impact on the Company’s consolidated financial statements.
Additional guidance (issued formerly as FSP No. 157-3, “Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active”) clarifies the application of ASC 820 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. This additional guidance 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 ASC 250, "Accounting Changes and Error Corrections" (incorporating
former SFAS No. 154, "Accounting Changes and Error Corrections"). The Company adopted the additional
guidance 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 ASC 718, 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 ASC 718, 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”. The Company has applied the
modified prospective method in adopting ASC 718. Accordingly, periods prior to adoption have not been
restated. Under the modified prospective method, compensation cost recognized in the years ended
December 31, 2009, 2008 and 2007 include (a) compensation cost for all share-based payments granted
41
prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of ASC 718.
As required by ASC 718, 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 ASC 718, 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 $2,289, $672 and $677 for the years ended
December 31, 2009, 2008 and 2007, respectively.
The Company’s results for the years ended December 31, 2009, 2008 and 2007 reflected the following
compensation cost as a result of adopting ASC 718 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,
2008
273 $
2,141
1,614
.06
.06 $
2009
365 $
2,711
1,963
.07
.07 $
2007
187
1,449
1,118
.04
.04
On December 31, 2009, 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 6,000,000 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.
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
42
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, 2009, the plans had 5,091,180 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 20,250 shares, of the Company’s common stock at purchase prices ranging from
approximately $.02 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,
2009
Year Ended
December 31,
2008
December 31,
2007
46.9%
3.8
1.8%
0.5%
44.5%
3.3
2.0%
0.6%
35.2%
4.5
4.7%
0.4%
The value of the restricted shares is based on the intrinsic value of the award at the date of grant.
Compensation expense for stock options and restricted stock awards is recognized on a straight-line basis
over the vesting period, generally three years for stock options, four years for employee restricted stock
awards, and four to seven years for non-employee director restricted stock awards.
A summary of stock option plan activity for 2009, 2008, and 2007 for all plans is as follows:
2009
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
2008
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
# of
Shares
(000s)
3,594
339
(628)
(19)
3,286
2,255
# of
Shares
(000s)
2,916
876
(196)
(2)
3,594
2,530
43
Weighted Average
Exercise Price
$ 9.21
21.38
4.79
14.10
$ 11.28
$ 8.52
Weighted Average
Exercise Price
$ 7.10
15.35
5.31
13.61
$ 9.21
$ 6.89
2007
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
# of
Shares
(000s)
3,255
14
(329)
(24)
2,916
2,232
Weighted Average
Exercise Price
$ 6.76
12.00
3.70
9.56
$ 7.10
$ 6.06
The aggregate intrinsic value for outstanding stock options was $36,342, $26,873 and $22,786 at December
31, 2009, 2008 and 2007, respectively, with a weighted average remaining contractual term of 6.6 years at
December 31, 2009. Exercisable stock options at December 31, 2009 had an aggregate intrinsic value of
$31,179 with a weighted average remaining contractual term of 5.5 years.
Other information pertaining to option activity during the years ended December 31, 2009, 2008 and 2007
was as follows:
Weighted-average fair value of options granted
Total intrinsic value of stock options exercised ($000s)
Year Ended
December 31,
2008
2007
2009
$
$
7.74 $
7,425 $
4.98 $
2,023 $
4.30
2,721
Additional information related to stock options outstanding under all plans at December 31, 2009 is as
follows:
Range of Exercise
Prices
$ 2.20 - $ 8.79
9.21 - 13.71
16.57 - 21.39
Shares
Outstanding
(000s)
1,025
1,512
749
3,286
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Term
4.3 years
6.8 years
9.4 years
6.6 years
Weighted
Average
Exercise
Price
$ 5.54
11.28
19.14
$ 11.28
Number
Exercisable
(000s)
1,025
1,148
82
2,255
Weighted
Average
Exercise
Price
$ 5.54
10.55
17.28
$ 8.52
Non-vested restricted stock activity for the years ended December 31, 2009, 2008 and 2007 is summarized
below:
Non-vested balance as of December 31, 2008
Granted
Vested
Forfeited
Non-vested balance as of December 31, 2009
Weighted
Average Grant
Date Fair
Value
13.39
21.34
-
-
14.56
$
$
Shares (000s)
347
71
-
-
418
44
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
Weighted
Average Grant
Date Fair
Value
11.00
15.29
11.36
-
13.39
Weighted
Average Grant
Date Fair
Value
10.93
12.41
-
-
11.00
$
$
$
$
Shares (000s)
176
198
(27)
-
347
Shares (000s)
169
7
-
-
176
As of December 31, 2009, 2008 and 2007, there was $8,291, $7,248 and $2,586, respectively, of total
unrecognized compensation cost related to non-vested share-based compensation arrangements granted
under the plans. As of December 31, 2009, 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, 2010 will be approximately $3,900.
STOCK SPLITS AND REPURCHASE OF COMMON STOCK
On December 11, 2009, 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, 2009. Such stock dividend was made on January 20, 2010. 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. The stock split was applied retroactively to all periods presented.
The Company has an approved stock repurchase program. The total authorization under this program is
3,763,038 shares. Since the inception of the program, a total of 1,961,800 shares have been purchased, none
of which remained in treasury at December 31, 2009 or 2008. During 2009, 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, 2009 and 2008 consisted of the following:
Raw materials
Work in progress
Finished goods
Total inventories
2009
5,799
793
7,373
13,965
2008
5,931
540
10,147
16,618
$
$
$
$
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 $799 and $94 at December 31,
2009 and 2008, respectively.
45
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2009 and 2008 are summarized as follows:
Land
Building
Equipment
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
2009
2,112
15,593
54,068
2,676
74,449
32,870
41,579
$
$
2008
2,088
15,426
50,719
2,654
70,887
28,374
42,513
$
$
Depreciation expense was $4,480, $4,144 and $3,466 for the years ended December 31, 2009, 2008 and
2007, 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:
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.
46
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
Inventories
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.
Net sales
Net earnings
Basic EPS
Diluted EPS
Pro Forma
Year Ended
December 31,
2007
$
$
185,188
16,595
.62
.59
NOTE 6 - INTANGIBLE ASSETS WITH FINITE LIVES
As of December 31, 2009 and 2008, 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
2009
Gross
Carrying
Amount
$ 34,150
93
1,683
911
755
$ 37,592
2009
Accumulated
Amortization
$ 10,011
11
504
251
311
$ 11,088
2008
Gross
Carrying
Amount
$ 34,150
85
1,673
904
619
$ 37,431
2008
Accumulated
Amortization
$ 6,595
3
406
198
236
$ 7,438
Amortization of identifiable intangible assets was approximately $3,650, $3,642 and $2,910 for 2009, 2008
and 2007, respectively. Assuming no change in the gross carrying value of identifiable intangible assets,
the estimated amortization expense is approximately $3,600 per annum for 2010 through 2014. At
December 31, 2009 and 2008, there were no identifiable intangible assets with indefinite useful lives as
defined by ASC 350, “Intangibles-Goodwill and Other” (incorporating former SFAS No. 141, “Business
Combinations”; and SFAS No. 142, “Goodwill and Other Intangible Assets”). 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 2009 and 2008.
47
At December 31, 2009, the gross carrying amount included a customer list acquired as part of the Chinook
Acquisition in 2007, a customer list, trade name and trade secrets acquired as part of the CMC Acquisition
in 2006, as well as a customer list and patent acquired as part of the Loders Croklaan Acquisition in 2005.
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 $10,750 as
of December 31, 2009 (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, 2009, this interest rate was 1.47%. At December 31, 2009, the
European Term Loan had an outstanding balance of €4,732 translated to $6,783. The European Loan
Agreement also provides for a short-term revolving credit facility of €3,000, translated to $4,300 as of
December 31, 2009 (the "European Revolving Facility"). The European Revolving Facility has been
renewed for a period of one year as of May 1, 2009. The current European Revolving Facility is subject to
an amended monthly interest rate equal to EURIBOR plus 1.45%, and accrued interest is payable monthly.
No amounts are outstanding on the European Revolving Facility as of the date hereof. Management
believes that such facility will be renewed in the normal course of business.
On March 16, 2007, the Company and its principal bank entered into a Loan Agreement (the “Loan
Agreement”) providing for an unsecured term loan of $29,000 (the “Term Loan”), the proceeds of which
were used to fund the Chinook Acquisition (see Note 5). As of December 31, 2009, the Company has paid
the Term Loan in full. The Loan Agreement also provides for a short-term revolving credit facility of
$6,000 (the "Revolving Facility"). The Revolving Facility is subject to a monthly interest rate equal to
LIBOR plus 1%, and accrued interest is payable monthly. No amounts are outstanding on the Revolving
Facility as of the date hereof. The Revolving Facility has a maturity date of May 31, 2010. Management
believes that such facility will be renewed in the normal course of business.
At December 31, 2009, we had a total of $6,783 of debt outstanding, as compared to a total of $11,575 debt
outstanding at December 31, 2008. 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, 2009, are summarized
in the table below:
Long-term debt obligations
Payments due by period
Total
$ 6,783
Year 1
$ 6,783
48
NOTE 8 - INCOME TAXES
Income tax expense consists of the following:
Current:
Federal
Foreign
State
Deferred:
Federal
Foreign
State
Total income tax provision
2009
11,922
1,700
1,425
(1,181)
53
( 102)
13,817
$
$
2008
8,849
908
107
(473)
31
( 41)
9,381
$
$
2007
7,688
295
1,299
(320)
(100)
(151)
8,711
$
$
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
2009
2008
2007
$
14,211
$
9,951
$
8,690
766
(1,160)
13,817
$
-
(570)
9,381
$
603
(582)
8,711
$
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2009 and 2008 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
2009
2008
$
$
$
721
2,525
683
3,929
1,783
4,866
618
199
224
378
8,068
4,139
$
$
$
474
1,429
505
2,408
1,851
4,430
765
199
224
293
7,762
5,354
There is no valuation allowance for deferred tax assets at December 31, 2009 and 2008. 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 ASC 740-10 (incorporating former FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FAS Statement No. 109”) on January
1, 2007. FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be
49
challenged by a tax authority. Upon adoption of ASC 740-10, 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:
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 current year
Balance at end of period
$
2009
813
73
(131)
217
972
$
$
2008
733
-
(151)
231
813
2007
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, 2009 and 2008, the Company recognized approximately $110 and $22 in interest and
penalties, respectively. As of December 31, 2009 and 2008, accrued interest and penalties were $262 and
$152, 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
tax authorities for years before 2006. 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:
2009
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 26,785
27,420,091
$.98
Effect of dilutive securities – stock options and
restricted stock
1,454,303
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options and restricted stock
$ 26,785
28,874,394
$.93
2008
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 19,050
26,950,249
$.71
Effect of dilutive securities – stock options and
restricted stock
1,570,986
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options and restricted stock
$ 19,050
28,521,235
$.67
50
2007
Basic EPS – Net earnings and weighted average
common shares outstanding
Earnings
(Numerator)
Number of Shares
(Denominator)
Per Share
Amount
$ 16,118
26,657,281
$.61
Effect of dilutive securities – stock options and
restricted stock
1,258,517
Diluted EPS – Net earnings and weighted average
common shares outstanding and effect of stock
options and restricted stock
$ 16,118
27,915,798
$.58
The Company had 338,400, 415,350 and 13,650 stock options outstanding at December 31, 2009, 2008 and
2007, 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 $745 and $430 in 2009, $624 and $406 in 2008 and $503 and $379 in 2007,
respectively.
The Company also currently provides postretirement benefits in the form of an unfunded retirement
medical plan under a collective bargaining agreement covering eligible retired employees of the Verona
facility. The Company uses a December 31 measurement date for its postretirement medical plan. In
accordance with ASC 715, “Compensation—Retirement Benefits” (incorporating former SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”), 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.
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
2009
801
33
43
14
(45)
42
888
2009
-
31
14
(45)
-
2008
805
28
40
13
(30)
(55)
801
2008
-
17
13
(30)
-
$
$
$
$
$
$
$
$
51
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 ASC 715)
(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
2009
(888)
-
(888)
N/A
N/A
888
N/A
2009
33
43
(19)
(3)
54
$
$
$
$
$
2008
(801)
-
(801)
N/A
N/A
801
N/A
2008
28
40
(18)
(6)
44
$
$
$
$
$
Estimated future employer contributions and benefit payments are as follows:
2007
29
41
(18)
(3)
49
$
$
Year
2010
2011
2012
2013
2014
Years 2015-2019
$
34
45
38
23
26
370
Assumed health care cost trend rates have been used in the valuation of postretirement health insurance
benefits. The trend rate is 10 percent in 2010 declining to 4.5 percent in 2027 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, 2009 by $116 and the net periodic postretirement
benefit cost for 2009 by $11. 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, 2009 by $101 and
the net periodic postretirement benefit cost for 2009 by $9. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 5.45% in 2009 and 5.50% in 2008.
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 became 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 2009, 2008 and 2007 aggregated approximately
$1,183, $1,284 and $1,047, respectively. Aggregate future minimum rental payments required under non-
cancelable operating leases at December 31, 2009 are as follows:
52
Year
2010
2011
2012
2013
2014
Thereafter
Total minimum lease payments
$ 988
684
361
182
119
306
$ 2,640
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 – 2009.
The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a
Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on
portions of the site. Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources (“MDNR”) included removal of dioxin contaminated soil and
equipment, capping of areas of residual contamination in four relatively small areas of the site separate
from the manufacturing facilities, and the installation of wells to monitor groundwater and surface water
contamination by organic chemicals. No ground water or surface water treatment was required. The
Company believes that remediation of the site is complete. In 1998, the EPA certified the work on the
contaminated soils to be complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party risk assessment report to the
EPA and MDNR recommending no further action. The prior owner is awaiting the response of the EPA
and MDNR to the draft risk assessment.
While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the
prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified
by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri
facility for potential liabilities associated with the Superfund site and one of the sellers, in turn, has the
benefit of certain contractual indemnification by the prior owner that is implementing the above-described
Superfund remedy.
From time to time, the Company is a party to various litigation, claims and assessments. Management
believes that the ultimate outcome of such matters will not have a material effect on the Company’s
consolidated financial position, results of operations, or liquidity.
NOTE 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 continues 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
53
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 & Nutrition
Animal Nutrition & Health
Total
2009
36,368
35,407
147,663
219,438
$
$
Business Segment Earnings Before Income Taxes:
Specialty Products
Food, Pharma & Nutrition
Animal Nutrition & Health
Interest and other income (expense)
Total
Depreciation/Amortization:
Specialty Products
Food, Pharma & Nutrition
Animal Nutrition & Health
Total
Business Segment Assets:
Specialty Products
Food, Pharma & Nutrition
Animal Nutrition & Health
Other Unallocated
Total
2009
14,250
5,029
21,380
(57)
40,602
2009
826
1,489
5,815
8,130
2009
19,235
22,156
98,784
47,638
187,813
$
$
$
$
$
$
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
(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
$
$
2007
876
1,206
4,294
6,376
2007
18,583
22,426
108,125
5,290
154,424
$
$
$
$
$
$
$
$
$
$
$
$
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 & Nutrition
Animal Nutrition & Health
Total
Geographic Revenue Information:
United States
Foreign Countries
Total
2009
286
639
2,504
3,429
$
$
2008
612
955
3,513
5,080
$
$
2007
307
776
3,786
4,869
$
$
2009
145,226
74,212
219,438
$
$
2008
146,753
85,297
232,050
$
$
2007
132,632
43,569
176,201
$
$
54
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes
Interest
2009
12,001 $
214 $
2008
9,379 $
958 $
2007
6,718
1,466
$
$
Cash paid during the year for acquisition of assets:
Assets acquired
Less: liabilities assumed
Cash paid for acquisitions
Non-cash financing activities:
Dividends payable
2009
-
-
-
$
$
2008
296
-
296
2007
48,957
(8,213)
40,744
$
$
$
$
2009
3,091
$
2008
2,008 $
2007
1,975
$
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except per share data)
2009
2008
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
$52,986 $ 52,976
17,304
16,298
Third
Quarter
$54,292
16,399
Fourth
Quarter
$59,184
16,957
Second
Quarter
First
Quarter
$56,861 $ 62,901
12,951
13,483
Third
Quarter
$58,235
12,712
Fourth
Quarter
$54,053
13,432
9,166
6,098
10,303
6,869
10.323
6,852
10,810
6,966
7,191
4,641
7,001
4,724
6,936
4,793
7,303
4,892
$ .23
$ .25
$ .25
$ .25
$ .17
$ .18
$ .18
$ .18
$ .21
$ .24
$ .24
$ .24
$ .16
$ .17
$ .17
$ .17
55
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2009, 2008 and 2007
(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
94
$
313
924
-
$
-
$
(6)
(219)
(a)
(a)
$
357
799
$
50
174
$
-
58
-
$
-
-
$
(138)
(a)
$
50
94
$
50
147
$
-
$
-
20
-
$
-
7
$
50
174
Description
Year ended December 31, 2009
Allowance for doubtful accounts
Inventory reserve
Year ended December 31, 2008
Allowance for doubtful accounts
Inventory reserve
Year ended December 31, 2007
Allowance for doubtful accounts
Inventory reserve
(a) represents write-offs.
56
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.
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.
A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation
of internal control over financial reporting can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have
been detected. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. Management does not expect
that the Company’s disclosure controls and procedures or its internal control over financial reporting will
prevent or detect all errors and all fraud.
These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by
the individual acts of some persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or procedures.
As of December 31, 2009, 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, 2009.
57
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.
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 2009 Annual
Meeting of Stockholders (the “2010 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 2010 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 2010 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 2010 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 2010 Proxy Statement under the
caption "Directors and Executive Officers," which information is hereby incorporated herein by reference.
58
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 2010 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 2010 Proxy Statement under the caption
"Directors and Executive Officers," which information is hereby incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in the 2010 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, 2009 and 2008
Consolidated Statements of Earnings for the
years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows
for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II – Valuation and Qualifying
Accounts for the years ended December 31, 2009, 2008 and 2007
Form 10-K
Page Number
29
31
32
33
34
35
56
3. Exhibits
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
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).
59
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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).
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”)).*
60
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. 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
61
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, 2010
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, 2010
/s/ Francis J. Fitzpatrick
Francis J. Fitzpatrick, Chief Financial
Officer and Treasurer (Principal Financial and Principal Accounting Officer)
Date: March 12, 2010
/s/ Edward L. McMillan
Edward L. McMillan, Director
Date: March 12, 2010
/s/ Kenneth P. Mitchell
Kenneth P. Mitchell, Director
Date: March 12, 2010
/s/ Perry W. Premdas
Perry W. Premdas, Director
Date: March 12, 2010
/s/ Dr. John Televantos
Dr. John Televantos, Director
Date: March 12, 2010
/s/ Dr. Elaine Wedral
Dr. Elaine Wedral, Director
Date: March 12, 2010
62
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
10.7
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).
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).
63
10.8
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.
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).
64
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
65
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
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
To the Board of Directors and Stockholders
Balchem Corporation
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 report dated March 12, 2010 relating to our audits 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,
2009.
/s/McGladrey & Pullen, LLP
New York, New York
March 12, 2010
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, 2010
/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, 2010
/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, 2009 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, 2010
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, 2009 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, 2010
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
C O M P A N Y P R O F I L E
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.
F I N A N C I A L H I G H L I G H T S 2 0 0 9
Statement of Operations Data
(In thousands, except per share data)
Year Ended December 31, 2009 2008 2007 2006 2005
Net sales $219,438 $232,050 $176,201 $100,905 $83,095
Earnings before income tax expense 40,602 28,431 24,829 19,101 17,191
Income tax expense 13,817 9,381 8,711 6,823 6,237
Net earnings 26,785 19,050 16,118 12,278 10,954
Basic net earnings per common share* $.98 $.71 $.61 $.47 $.42
Diluted net earnings per common share* $.93 $.67 $.58 $.45 $.41
Balance Sheet Data
(In thousands, except per share data)
At December 31, 2009 2008 2007 2006 2005
Total assets $187,813 $154,474 $154,424 $ 92,333 $75,141
Long-term debt (including current portion) 6,783 9,531 24,777 — —
Other long-term obligations 1,825 1,609 1,529 784 1,043
Total stockholders’ equity 147,143 114,506 93,080 75,362 60,933
Dividends per common share* $.11 $.07 $.07 $.06 $.04
Quarterly Stock Prices
2009 2008 2007
High Low High Low High Low
1Q $16.75 $12.60 $15.56 $12.70 $12.37
2Q 16.95 15.36 17.63 14.77 12.78
3Q 18.50 15.67 19.67 16.11 14.17
4Q 22.86 17.57 17.91 14.11 16.00
$ 9.39
11.43
10.40
13.44
*Earnings per share and dividend amounts have been adjusted for the December 2009, 2006 and 2005 three-for-two stock splits (effected by means of stock dividends).
Net Sales
dollars in millions
232.1
219.4
176.2
100.9
83.1
Net Earnings
dollars in millions
Stockholders’ Equity
dollars in millions
26.8
147.1
19.1
16.1
12.3
11.0
114.5
93.1
75.4
60.9
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D
C O M P A N Y P R O F I L E
Board of Directors
Corporate Officers
Dino A. Rossi
Chairman, President and
Chief Executive Officer
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
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
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
2009 Annual Report
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