NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share and per share data)
NOTE 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2016 consolidated financial statements, and should be read in conjunction with the consolidated financial statements and notes, which appear in the Annual Report on Form 10-K for the year ended December 31, 2016. References in this report to the “Company” mean either Balchem Corporation or Balchem Corporation and its subsidiaries, including SensoryEffects, Inc., SensoryEffects Cereal Systems, Inc., Albion Laboratories, Inc. (formerly known as Albion International, Inc.), BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia Srl, Innovative Food Processors, Inc., and Balchem LTD, on a consolidated basis, as the context requires.
In the opinion of management, the unaudited condensed consolidated financial statements furnished in this Form 10-Q include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP” or “GAAP”)
governing interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934 and therefore do not include some information and notes necessary to conform to annual reporting requirements. Certain prior year amounts have been reclassified to conform to current year presentation. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the operating results expected for the full year or any interim period.
Recent Accounting Pronouncements
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), with amendments issued in 2016, which addresses revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. This standard is effective, with either a full retrospective approach or a modified retrospective approach, for annual and interim periods beginning after December 15, 2017. We are assessing the impact of the guidance on our current accounting practices to identify differences that would result from applying the new requirements to our revenue contracts. We continue to make significant progress on our contract reviews and are also still in the process of evaluating the impact, if any, on changes to our business processes, systems, and controls to support recognition and disclosure under the new guidance. Based on our findings so far, we do not currently expect this guidance to have a material impact on our financial statements. We are continuing our implementation plan and currently expect to adopt the new guidance beginning in 2018 using the modified retrospective approach.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-to-use assets and lease liabilities for most leases in the Consolidated Balance Sheets. The guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which addresses the definition of what constitutes a business by providing clarification of the three elements that constitute a business. The guidance is effective for annual and interim periods beginning after December 15, 2017. Although, early adoption is permitted, the Company has elected not to adopt early as this ASU will not have a significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Although, early adoption is permitted, the Company has elected not to adopt early as this ASU will not have a significant impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”), which requires inventory to be measured at the lower of cost and net realizable value. The Company adopted ASU 2015-11 on January 1, 2017 prospectively (prior periods have not been restated). There was no impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), to simplify the presentation of deferred income taxes. The ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted ASU 2015-17 on January 1, 2017 prospectively (prior periods have not been restated). There was no significant impact to the consolidated financial statements other than the decrease of current assets and long-term liabilities.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which addresses the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The Company adopted ASU 2016-09 on January 1, 2017 prospectively (prior periods have not been restated). The primary impact of adoption was the recognition during the three and six months ended June 30, 2017, of excess tax benefits of approximately $240 and $1,740, respectively, as a reduction to the provision for income taxes and the classification of these excess tax benefits in operating activities in the consolidated statement of cash flows instead of financing activities.
The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in the consolidated statement of cash flows, since such cash flows have historically been
presented in financing activities. The Company also elected to continue estimating forfeitures when determining the amount of stock-based compensation costs to be recognized in each period. No other provisions of ASU 2016-09 had a material impact on the Company’s financial statements or disclosures.
NOTE 2—ACQUISITIONS
Acquisition of Albion Laboratories, Inc. (formerly known as Albion International, Inc.)
,
On February 1, 2016, the Company acquired 100 percent of the outstanding common shares of Albion Laboratories, Inc. (formerly known as Albion International, Inc.), (“Albion” or the “Albion Acquisition”), a privately held manufacturer of mineral amino acid chelates, specialized mineral salts and mineral complexes, headquartered in Clearfield, Utah. The Company made payments of approximately $116,400 on the acquisition date, amounting to approximately $110,600 to the former shareholders, adjustments for working capital acquired of $4,900, and approximately $900 to Albion’s lenders to pay off all Albion bank debt. Albion has been a world leader and innovator in the manufacture of superior organic mineral compounds for over sixty years and leverages scientific expertise in the areas of human and micronutrient agricultural nutrition. Albion’s products are renowned in the supplement industry for technologically advanced, unparalleled bioavailability. The acquisition of Albion continues to expand the Company’s science based human health and wellness solutions and immediately increased our product offerings in the nutritional ingredient market. Additionally, the Company benefits from a broader geographic footprint and a stronger position as a technological leader in spray-drying and ingredient delivery solutions. Albion’s human nutrition business has become a part of the Human Nutrition & Health reportable segment and the micronutrient agricultural business has become a part of the Specialty Products reportable segment.
The following table summarizes the fair values of the assets acquired and liabilities assumed.
Cash and cash equivalents
|
|
$
|
4,949
|
|
Accounts receivable
|
|
|
7,671
|
|
Inventories
|
|
|
15,989
|
|
Property, plant and equipment
|
|
|
7,217
|
|
Customer relationships
|
|
|
18,443
|
|
Developed technology
|
|
|
9,060
|
|
Trade name
|
|
|
7,224
|
|
Licensing agreements
|
|
|
6,658
|
|
Other assets
|
|
|
1,200
|
|
Trade accounts payable
|
|
|
(1,104
|
)
|
Accrued expenses
|
|
|
(2,788
|
)
|
Bank debt
|
|
|
(884
|
)
|
Deferred income taxes
|
|
|
(13,990
|
)
|
Goodwill
|
|
|
55,905
|
|
Amount paid to shareholders
|
|
|
115,550
|
|
Albion bank debt paid on purchase date
|
|
|
884
|
Total amount paid on acquisition date
|
|
$
|
116,434
|
|
The goodwill of $55,905 arising from the Albion Acquisition consists largely of expected synergies, including the combined entities’ experience and technical problem solving capabilities, and acquired workforce. Goodwill of $40,403 and $15,502 is assigned to the Human Nutrition & Health and Specialty Products segments, respectively, and approximately $2,020 is tax deductible for income tax purposes.
The valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. In preparing our fair value of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor.
Customer relationships are amortized over a 10-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade name, licensing agreements, and developed technology are amortized over 17 years, 8 years, and 5 years, respectively, utilizing the straight-line method, as the consumption pattern of the related economic benefits cannot be reliably determined.
Transaction and integration related costs included in general and administrative expenses for the six months ended June 30, 2017 and 2016 are $(127) and $1,430, respectively.
The following unaudited pro forma information has been prepared as if the Albion Acquisition had occurred on January 1, 2015.
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Net Earnings
|
|
|
Net Sales
|
|
|
Net Earnings
|
|
2017 Albion actual results included in the Company’s consolidated income statement
|
|
$
|
16,742
|
|
|
$
|
3,189
|
|
|
$
|
32,233
|
|
|
$
|
5,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Supplemental pro forma combined financial information
|
|
$
|
147,082
|
|
|
$
|
16,536
|
|
|
$
|
284,810
|
|
|
$
|
31,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
$
|
0.52
|
|
|
|
|
|
|
$
|
1.01
|
|
Diluted earnings per share
|
|
|
|
|
|
$
|
0.51
|
|
|
|
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Albion actual results included in the Company’s consolidated income statement from February 1, 2016 through June 30, 2016
|
|
$
|
15,488
|
|
|
$
|
682
|
|
|
$
|
26,099
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Supplemental pro forma combined financial information
|
|
$
|
138,794
|
|
|
$
|
16,103
|
|
|
$
|
278,515
|
|
|
$
|
30,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
$
|
0.51
|
|
|
|
|
|
|
$
|
0.97
|
|
Diluted earnings per share
|
|
|
|
|
|
$
|
0.51
|
|
|
|
|
|
|
$
|
0.96
|
|
2017 supplemental pro forma earnings for the six months ended June 30, 2017 exclude a working capital adjustment refund of $162 and acquisition-related costs incurred of $35. 2016 supplemental pro forma earnings for the six months ended June 30, 2016 exclude $26,141 of acquisition-related costs incurred and $5,046 of non-recurring expenses related to the fair value adjustment to acquisition-date inventory. The pro forma information presented does not purport to be indicative of the results that actually would have been attained if the Albion acquisition had occurred at the beginning of the periods presented and is not intended to be a projection of future results.
Acquisition of Chol-Mix Kft
On March 24, 2017, the Company, through its European subsidiary Balchem Italia SRL, entered into an agreement to purchase the assets of Chol-Mix Kft, a privately held manufacturer of dry choline chloride, with knowledge and technical know-how supporting the application of liquids on carriers, located in Hungary, for a purchase price of €1,500. As of June 30, 2017, approximately €1,150, translated to approximately $1,230, has been paid to Chol-Mix Kft with the remaining balance of approximately €350, translated to approximately $400, due at the end of a related manufacturing agreement. The acquisition of Chol-Mix’s assets will provide our Animal Nutrition & Health segment with additional dry choline chloride capacity in Europe, geographical expansion opportunities in Eastern Europe, and technical knowledge supporting the application of liquids on carriers.
Management has completed its initial accounting for the acquisition. As a result, the estimated fair values of the assets acquired have been determined and estimated goodwill of $404 has been recorded.
Transaction related costs included in general and administrative expenses for the six months ended June 30, 2017 are $55.
Acquisition of Innovative Food Processors, Inc.
On June 1, 2017, the Company acquired 100 percent of the outstanding common shares of Innovative Food Processors, Inc. (“IFP”), a privately held manufacturer of agglomerated and microencapsulated food and nutrition ingredients, headquartered in Faribault, Minnesota. The Company made payments of approximately $22,975 on the acquisition date, amounting to approximately $15,526 to the former shareholders, adjustments for working capital acquired of $5,065, and $2,384 to IFP’s lenders to pay off all IFP bank debt. The acquisition of IFP expands the Company’s Human Nutrition & Health segment’s processing technology and market reach, while bringing innovative and value-added systems to food, beverage, and nutrition customers.
Management has completed its preliminary initial accounting for the acquisition. As a result, the estimated fair values of the assets acquired and liabilities assumed have been determined and no estimated goodwill has been recorded.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed.
Cash and cash equivalents
|
|
$
|
5,065
|
|
Accounts receivable
|
|
|
2,860
|
|
Inventories
|
|
|
2,537
|
|
Prepaid expenses
|
|
|
186
|
|
Property, plant and equipment
|
|
|
13,631
|
|
Customer relationships
|
|
|
2,653
|
|
Developed technology
|
|
|
1,078
|
|
Trademark & trade name
|
|
|
1,388
|
|
Trade accounts payable
|
|
|
(844
|
)
|
Accrued expenses
|
|
|
(1,416
|
)
|
Bank debt
|
|
|
(2,384
|
)
|
Deferred income taxes
|
|
|
(4,163
|
)
|
Amount paid to shareholders
|
|
|
20,591
|
|
IFP bank debt paid on purchase date
|
|
|
2,384
|
|
Total amount paid on acquisition date
|
|
$
|
22,975
|
|
The estimated valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions that are subject to change. In preparing our preliminary fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. The purchase price and related allocation to assets acquired and liabilities assumed is preliminary pending finalizing actual working capital acquired as of the acquisition date. Additionally, certain intangible assets are not tax deductible and the related deferred tax liabilities are preliminary pending management’s final review.
Customer relationships are amortized over a 10-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trademark & trade name and developed technology are amortized over 17 years and 5 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.
The Company is indemnified for tax liabilities prior to the acquisition date. Indemnified tax liabilities will create an indemnification asset (receivable). At this time, an indemnification asset (receivable) balance has not been established.
Transaction related costs included in general and administrative expenses for the three and six months ended June 30, 2017 are $1,963.
The Company has elected not to show pro forma information as this acquisition was immaterial to the overall financial results of the Company.
NOTE 3 – STOCKHOLDERS’ EQUITY
STOCK-BASED COMPENSATION
The Company’s results for the three and six months ended June 30, 2017 and 2016 reflected the following stock-based compensation cost, and such compensation cost had the following effects on net earnings:
|
|
Increase/(Decrease) for the
Three Months Ended June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Cost of sales
|
|
$
|
(167
|
)
|
|
$
|
260
|
|
Operating expenses
|
|
|
1,210
|
|
|
|
1,494
|
|
Net earnings
|
|
|
(663
|
)
|
|
|
(1,080
|
)
|
|
|
Increase/(Decrease) for the
Six Months Ended June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Cost of sales
|
|
$
|
144
|
|
|
$
|
520
|
|
Operating expenses
|
|
|
2,740
|
|
|
|
3,431
|
|
Net earnings
|
|
|
(1,830
|
)
|
|
|
(2,473
|
)
|
As allowed 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.
The Company’s stock incentive plans allow for the granting of stock awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. No option will be exercisable for longer than ten years after the date of grant. The Company has approved and reserved a number of shares to be issued upon exercise of the outstanding options that is adequate to cover all exercises. As of June 30, 2017, the plans had 3,285,763 shares available for future awards. Compensation expense for stock options and 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, three years for employee performance share awards, and four years for non-employee director restricted stock awards. Certain awards provide for accelerated vesting if there is a change in control (as defined in the plans) or other qualifying events.
Option activity for the six months ended June 30, 2017 and 2016 is summarized below
:
For the six months ended June 30, 2017
|
|
Shares (000s)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding as of December 31, 2016
|
|
|
1,066
|
|
|
$
|
45.32
|
|
|
$
|
41,161
|
|
|
|
|
Granted
|
|
|
220
|
|
|
|
85.23
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(150
|
)
|
|
|
32.54
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(39
|
)
|
|
|
70.57
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(19
|
)
|
|
|
58.61
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
|
1,078
|
|
|
$
|
54.10
|
|
|
$
|
27,001
|
|
|
|
6.6
|
|
Exercisable as of June 30, 2017
|
|
|
603
|
|
|
$
|
40.83
|
|
|
$
|
22,249
|
|
|
|
4.7
|
|
For the six months ended June 30, 2016
|
|
Shares (000s)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding as of December 31, 2015
|
|
|
1,017
|
|
|
$
|
37.29
|
|
|
$
|
23,927
|
|
|
|
|
Granted
|
|
|
338
|
|
|
|
60.78
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(86
|
)
|
|
|
34.93
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2016
|
|
|
1,269
|
|
|
$
|
43.71
|
|
|
$
|
20,626
|
|
|
|
6.6
|
|
Exercisable as of June 30, 2016
|
|
|
742
|
|
|
$
|
33.03
|
|
|
$
|
19,769
|
|
|
|
4.9
|
|
ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yields of 0.5% and 0.5%; expected volatilities of 30% and 34%; risk-free interest rates of 1.8% and 1.2%; and expected lives of 4.6 and 5.0 years, in each case for the six months ended June 30, 2017 and 2016, respectively.
The Company used a projected expected life for each award granted based on historical experience of employees’ exercise behavior. Expected volatility is based on the Company’s historical volatility levels. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.
Other information pertaining to option activity during the three and six months ended June 30, 2017 and 2016 was as follows:
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted-average fair value of options granted
|
|
$
|
20.54
|
|
|
$
|
17.80
|
|
|
$
|
23.21
|
|
|
$
|
18.45
|
|
Total intrinsic value of stock options exercised ($000s)
|
|
$
|
2,375
|
|
|
$
|
1,242
|
|
|
$
|
7,596
|
|
|
$
|
2,257
|
|
Non-vested restricted stock activity for the six months ended June 30, 2017 and 2016 is summarized below:
Six months ended June 30, 2017
|
|
Shares (000s)
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Non-vested balance as of December 31, 2016
|
|
|
102
|
|
|
$
|
54.18
|
|
Granted
|
|
|
9
|
|
|
|
85.40
|
|
Vested
|
|
|
(41
|
)
|
|
|
50.07
|
|
Forfeited
|
|
|
(4
|
)
|
|
|
55.45
|
|
Non-vested balance as of June 30, 2017
|
|
|
66
|
|
|
$
|
61.05
|
|
Six months ended June 30, 2016
|
|
Shares (000s)
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Non-vested balance as of December 31, 2015
|
|
|
150
|
|
|
$
|
47.46
|
|
Granted
|
|
|
18
|
|
|
|
60.85
|
|
Vested
|
|
|
(52
|
)
|
|
|
42.36
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested balance as of June 30, 2016
|
|
|
116
|
|
|
$
|
51.83
|
|
Non-vested performance share activity for the six months ended June 30, 2017 and 2016 is summarized below:
Six months ended June 30, 2017
|
|
Shares (000s)
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Non-vested balance as of December 31, 2016
|
|
|
34
|
|
|
$
|
61.06
|
|
Granted
|
|
|
16
|
|
|
|
93.85
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
69.18
|
|
Non-vested balance as of June 30, 2017
|
|
|
43
|
|
|
$
|
72.26
|
|
Six months ended June 30, 2016
|
|
Shares (000s)
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Non-vested balance as of December 31, 2015
|
|
|
20
|
|
|
$
|
58.77
|
|
Granted
|
|
|
21
|
|
|
|
63.15
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(4
|
)
|
|
|
60.87
|
|
Non-vested balance as of June 30, 2016
|
|
|
37
|
|
|
$
|
61.04
|
|
The performance share (“PS”) awards provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (TSR) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents. Expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions used in the fair value determination were risk free interest rates of 1.5% and 0.88%; dividend yields of 0.6% and 0.6%; volatilities of 32% and 32%; and initial TSR’s of 8.2% and -6.6%, in each case for the six months ended June 30, 2017 and 2016, respectively. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest 100% at the end of the third year following the grant in accordance with the performance metrics set forth.
As of June 30, 2017 and 2016, there was $10,754 and $12,167, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of June 30, 2017, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.5 years. The Company estimates that share-based compensation expense for the year ended December 31, 2017 will be approximately $6,200.
REPURCHASE OF COMMON STOCK
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 in June 1999, a total of 2,171,934 shares have been purchased, of which no shares remained in treasury at June 30, 2017. During the six months ended June 30, 2017 and 2016, a total of 21,099 and 23,651 shares, respectively, have been purchased at an average cost of $82.53 and $62.51 per share, respectively. 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 4 – INVENTORIES
Inventories at June 30, 2017 and December 31, 2016 consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
21,622
|
|
|
$
|
20,751
|
|
Work in progress
|
|
|
3,159
|
|
|
|
3,225
|
|
Finished goods
|
|
|
37,348
|
|
|
|
33,269
|
|
Total inventories
|
|
$
|
62,129
|
|
|
$
|
57,245
|
|
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2017 and December 31, 2016 are summarized as follows:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
7,199
|
|
|
$
|
4,208
|
|
Building
|
|
|
55,260
|
|
|
|
45,735
|
|
Equipment
|
|
|
189,265
|
|
|
|
177,841
|
|
Construction in progress
|
|
|
18,906
|
|
|
|
17,357
|
|
|
|
|
270,630
|
|
|
|
245,141
|
|
Less: accumulated depreciation
|
|
|
87,909
|
|
|
|
79,387
|
|
Property, plant and equipment, net
|
|
$
|
182,721
|
|
|
$
|
165,754
|
|
NOTE 6 – INTANGIBLE ASSETS
The Company had goodwill in the amount of $440,215 and $439,811 as of June 30, 2017 and December 31, 2016, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
Goodwill at January 1, 2017
|
|
$
|
439,811
|
|
Goodwill as a result of the Acquisition of Chol-Mix Kft – see Note 2
|
|
|
404
|
|
Goodwill at June 30, 2017
|
|
$
|
440,215
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Human Nutrition & Health
|
|
$
|
404,187
|
|
|
$
|
404,187
|
|
Animal Nutrition & Health
|
|
|
12,138
|
|
|
|
11,734
|
|
Specialty Products
|
|
|
22,662
|
|
|
|
22,662
|
|
Industrial Products
|
|
|
1,228
|
|
|
|
1,228
|
|
Total
|
|
$
|
440,215
|
|
|
$
|
439,811
|
|
Identifiable intangible assets with finite lives at June 30, 2017 and December 31, 2016 are summarized as follows:
|
|
Amortization
Period
(in years)
|
|
|
Gross
Carrying
Amount at
6/30/17
|
|
|
Accumulated
Amortization
at 6/30/17
|
|
|
Gross
Carrying
Amount at
12/31/16
|
|
|
Accumulated
Amortization
at 12/31/16
|
|
Customer relationships & lists
|
|
|
10
|
|
|
$
|
189,715
|
|
|
$
|
96,176
|
|
|
$
|
185,885
|
|
|
$
|
86,338
|
|
Trademarks & trade names
|
|
|
17
|
|
|
|
40,630
|
|
|
|
11,060
|
|
|
|
39,241
|
|
|
|
9,260
|
|
Developed technology
|
|
|
5
|
|
|
|
13,338
|
|
|
|
4,602
|
|
|
|
12,260
|
|
|
|
3,358
|
|
Other
|
|
|
5-17
|
|
|
|
13,065
|
|
|
|
4,333
|
|
|
|
12,713
|
|
|
|
3,659
|
|
|
|
|
|
|
|
$
|
256,748
|
|
|
$
|
116,171
|
|
|
$
|
250,099
|
|
|
$
|
102,615
|
|
Amortization of identifiable intangible assets was approximately $13,545 for the six months ended June 30, 2017. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense for the remainder of 2017 is $13,190, approximately $24,485 for 2018, $22,375 for 2019, $20,370 for 2020, $17,180 for 2021 and $15,300 for 2022. At June 30, 2017, there were no identifiable intangible assets with indefinite useful lives as defined by ASC 350. Identifiable intangible assets are reflected in “Intangible assets with finite lives, net” in the Company’s condensed consolidated balance sheets. There were no changes to the useful lives of intangible assets subject to amortization during the six months ended June 30, 2017.
NOTE 7 – EQUITY-METHOD INVESTMENT
In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture (66.66% / 33.34% ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel aqueous choline chloride plant. The Company contributed the St. Gabriel plant, at cost, and expansion will be funded by the owners. The joint venture became operational as of July 1, 2016. St. Gabriel CC Company, LLC is a Variable Interest Entity (VIE) because the total equity at risk is not sufficient to permit the joint venture to finance its own activities without additional subordinated financial support. Additionally, voting rights (2 votes each) are not proportionate to the owners’ obligation to absorb expected losses or receive the expected residual returns of the joint venture. The Company will receive up to 2/3 of the production offtake capacity and absorbs operating expenses approximately proportional to the actual percentage of offtake. The joint venture is accounted for under the equity method of accounting since the Company is not the primary beneficiary as we do not have the power to direct the activities of the joint venture that most significantly impact its economic performance. The Company recognized a loss of $136 and $0 for the three months ended June 30, 2017 and 2016, respectively, and a loss of $270 and $0 for the six months ended June 30, 2017 and 2016, respectively, relating to its portion of the joint venture’s expenses in other expense. The carrying value of the joint venture at June 30, 2017 and December 31, 2016 is $5,080 and $4,553, respectively, and is recorded in other assets.
NOTE 8 – LONG-TERM DEBT
On May 7, 2014, the Company and a bank syndicate entered into a loan agreement providing for a senior secured term loan of $350,000 and revolving loan of $100,000 (collectively referred to as the “loans”). On February 1, 2016, $65,000 of the revolving loan was used to fund the Albion International, Inc. acquisition (see Note 2). In addition, on June 1, 2017, $20,000 of the revolving loan was used to fund the Innovative Food
Processors, Inc. acquisition (see Note 2). At June 30, 2017, the Company had a total of $276,500 of debt outstanding. The term loan is payable in quarterly installments of $8,750 commencing on September 30, 2014, with the outstanding principal due on the maturity date. The Company may draw on the revolving loan at its discretion. The revolving loan does not have installments and all outstanding amounts are due on the maturity date. The loans may be voluntarily prepaid in whole or in part without premium or penalty and have a maturity date of May 7, 2019. The loans are subject to an interest rate equal to LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion, plus an applicable rate. The applicable rate is based upon the Company’s consolidated leverage ratio, as defined in the loan agreement, and the interest rate was 2.73% at June 30, 2017. The Company has $68,500 of undrawn revolving loan at June 30, 2017 that is subject to a commitment fee, which is based on the Company’s consolidated leverage ratio as defined in the loan agreement. The loan agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated fixed charge coverage ratio to exceed a certain minimum ratio. At June 30, 2017, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the company.
The following table summarizes the future minimum debt payments:
Year
|
|
Term loan
|
|
|
Revolving
loan
|
|
|
Total
|
|
July 1, 2017 to December 31, 2017
|
|
$
|
17,500
|
|
|
$
|
-
|
|
|
$
|
17,500
|
|
2018
|
|
|
35,000
|
|
|
|
-
|
|
|
|
35,000
|
|
2019
|
|
|
192,500
|
|
|
|
31,500
|
|
|
|
224,000
|
|
Future principal payments
|
|
|
245,000
|
|
|
|
31,500
|
|
|
|
276,500
|
|
Less unamortized debt financing costs
|
|
|
766
|
|
|
|
-
|
|
|
|
766
|
|
Less current portion of long-term debt
|
|
|
35,000
|
|
|
|
-
|
|
|
|
35,000
|
|
Total long-term debt
|
|
$
|
209,234
|
|
|
$
|
31,500
|
|
|
$
|
240,734
|
|
Costs associated with the issuance of debt instruments are capitalized as debt discount and amortized over the terms of the respective financing arrangements using the effective interest method. If debt is retired early, the related unamortized costs are expensed in the period the debt is retired. Capitalized costs net of accumulated amortization total $766 at June 30, 2017 and are shown net against outstanding principal, as required by ASU 2015-03, on the accompanying balance sheet. Amortization expense pertaining to these costs totaled $120 and $132 for the three months ended June 30, 2017 and 2016 and $244 and $268 for the six months ended June 30, 2017 and 2016, and is included in interest expense in the accompanying condensed consolidated statements of earnings.
NOTE 9 – NET EARNINGS PER SHARE
The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per share:
Three months ended June 30, 2017
|
|
Net
Earnings
(Numerator)
|
|
|
Number of
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
16,536
|
|
|
|
31,798,773
|
|
|
$
|
.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
|
|
|
403,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
16,536
|
|
|
|
32,202,555
|
|
|
$
|
.51
|
|
Three months ended June 30, 2016
|
|
Net
Earnings
(Numerator)
|
|
|
Number of
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
14,150
|
|
|
|
31,476,298
|
|
|
$
|
.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
|
|
|
398,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
14,150
|
|
|
|
31,875,184
|
|
|
$
|
.44
|
|
Six months ended June 30, 2017
|
|
Net
Earnings
(Numerator)
|
|
|
Number of
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
32,053
|
|
|
|
31,752,489
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
|
|
|
442,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
32,053
|
|
|
|
32,195,052
|
|
|
$
|
1.00
|
|
Six months ended June 30, 2016
|
|
Net
Earnings
(Numerator)
|
|
|
Number of
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
26,036
|
|
|
|
31,441,545
|
|
|
$
|
.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
|
|
|
401,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
26,036
|
|
|
|
31,842,597
|
|
|
$
|
.82
|
|
The Company had stock options covering 230,108 and 531,132 shares at June 30, 2017 and 2016, 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.
The Company has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted shares and they participate on a one-for-one basis with holders of common stock. These awards have an immaterial impact as participating securities with regard to the calculation using the two-class method for determining earnings per share.
NOTE 10 – INCOME TAXES
The Company accounts for uncertainty in income taxes in accordance with ASC 740-10, “Accounting for Uncertainty in Income Taxes.” ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority.
All of the unrecognized tax benefits, if recognized in future periods, would impact the Company’s effective tax rate. The Company files income tax returns in the U.S. and in various states and foreign countries. As of June 30, 2017, in the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2012. As of June 30, 2017 and December 31, 2016, the Company had approximately $4,421 and $6,637, respectively, of unrecognized tax benefits, which are included in other long-term obligations on the Company’s consolidated balance sheets. During the six months ended June 30, 2017 the decrease in the amount of unrecognized tax benefits was related to certain statute of limitations expiring, and the filing of certain voluntary disclosures. During the six months ended June 30, 2016, the increase in the amount of unrecognized tax benefits was primarily related to the acquisition of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects). The Company includes interest expense or income as well as potential penalties on unrecognized tax positions as a component of income tax expense in the consolidated statements of earnings. The total amount of accrued interest and penalties related to uncertain tax positions at June 30, 2017 and December 31, 2016 was approximately $1,705 and $2,486, respectively, and is included in other long-term obligations.
The Company’s effective tax rate for the three months ended June 30, 2017 and 2016 was 26.7% and 33.8%, respectively and 25.9% and 33.9%, respectively, for the six months
ended June 30, 2017 and 2016. The company’s effective tax rate for the three and six months ended June 30, 2017 is lower primarily due to excess tax benefits from stock-based compensation being recognized as a reduction to the provision for income taxes, resulting from the adoption of ASU 2016-09, a purchase price reduction related to the SensoryEffects acquisition, along with reduced taxes and reduced tax rates in certain jurisdictions.
NOTE 11
–
SEGMENT INFORMATION
Human Nutrition & Health
Our Human Nutrition & Health segment supplies ingredients in the food and beverage industry, providing customized solutions in powder, solid and liquid flavor delivery systems, spray dried emulsified powder systems, and cereal systems. Our products include creamer systems, dairy replacers, powdered fats, nutritional beverage bases, beverages, juice & dairy bases, chocolate systems, ice cream bases & variegates, ready-to-eat cereals, grain based snacks, and cereal based ingredients. Additionally, we provide microencapsulation 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 produce and market human grade choline nutrients and mineral amino acid chelated 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. Our mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Science and patented technology have been combined to create an organic molecule in a form the body can readily assimilate.
Animal Nutrition & Health
Our Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from our microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, our microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. Our proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet 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, and fatty liver, kidney necrosis and general poor health condition in swine.
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 university and field 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. The Company continues to increase production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
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 EPA and the DOT. Our inventory of these specially built drums, along with our two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. We also sell single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.
Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. We distribute our propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Our inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.
Our micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. We have a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, we determine optimal mineral balance for plant health. We then have a
foliar
applied
Metalosate product range
, utilizing patented amino acid chelate technology. Our products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.
Industrial Products
Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. Our products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade choline bicarbonate is completely chloride free and our choline chloride reduces the amount of chlorides released into the
environment up to 75% when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at our Italian operation and sold for a wide range of industrial applications in Europe.
Business Segment Assets:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Human Nutrition & Health
|
|
$
|
726,293
|
|
|
$
|
709,337
|
|
Animal Nutrition & Health
|
|
|
113,562
|
|
|
|
121,860
|
|
Specialty Products
|
|
|
63,786
|
|
|
|
64,030
|
|
Industrial Products
|
|
|
14,263
|
|
|
|
10,477
|
|
Other Unallocated
|
|
|
52,775
|
|
|
|
42,922
|
|
Total
|
|
$
|
970,679
|
|
|
$
|
948,626
|
|
Depreciation/Amortization:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Human Nutrition & Health
|
|
$
|
8,196
|
|
|
$
|
8,513
|
|
|
$
|
16,311
|
|
|
$
|
16,594
|
|
Animal Nutrition & Health
|
|
|
1,145
|
|
|
|
1,872
|
|
|
|
3,034
|
|
|
|
3,678
|
|
Specialty Products
|
|
|
1,023
|
|
|
|
973
|
|
|
|
2,039
|
|
|
|
1,795
|
|
Industrial Products
|
|
|
264
|
|
|
|
164
|
|
|
|
453
|
|
|
|
335
|
|
Total
|
|
$
|
10,628
|
|
|
$
|
11,522
|
|
|
$
|
21,837
|
|
|
$
|
22,402
|
|
Capital Expenditures:
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Human Nutrition & Health
|
|
$
|
8,594
|
|
|
$
|
9,717
|
|
Animal Nutrition & Health
|
|
|
1,403
|
|
|
|
4,151
|
|
Specialty Products
|
|
|
411
|
|
|
|
565
|
|
Industrial Products
|
|
|
411
|
|
|
|
303
|
|
Total
|
|
$
|
10,819
|
|
|
$
|
14,736
|
|
Business Segment Net Sales:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Human Nutrition & Health
|
|
$
|
78,031
|
|
|
$
|
74,800
|
|
|
$
|
151,158
|
|
|
$
|
146,355
|
|
Animal Nutrition & Health
|
|
|
37,048
|
|
|
|
38,412
|
|
|
|
75,126
|
|
|
|
77,644
|
|
Specialty Products
|
|
|
20,759
|
|
|
|
20,325
|
|
|
|
39,549
|
|
|
|
37,442
|
|
Industrial Products
|
|
|
11,244
|
|
|
|
5,257
|
|
|
|
18,977
|
|
|
|
12,494
|
|
Total
|
|
$
|
147,082
|
|
|
$
|
138,794
|
|
|
$
|
284,810
|
|
|
$
|
273,935
|
|
Business Segment Earnings Before Income Taxes:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Human Nutrition & Health
|
|
$
|
11,320
|
|
|
$
|
9,024
|
|
|
$
|
21,516
|
|
|
$
|
17,396
|
|
Animal Nutrition & Health
|
|
|
3,689
|
|
|
|
7,304
|
|
|
|
9,065
|
|
|
|
13,839
|
|
Specialty Products
|
|
|
8,055
|
|
|
|
7,016
|
|
|
|
14,518
|
|
|
|
12,304
|
|
Industrial Products
|
|
|
1,579
|
|
|
|
258
|
|
|
|
2,301
|
|
|
|
492
|
|
Transaction, integration costs, and legal settlement
|
|
|
(1,899
|
)
|
|
|
(269
|
)
|
|
|
(1,953
|
)
|
|
|
(730
|
)
|
Indemnification settlement
|
|
|
2,087
|
|
|
|
-
|
|
|
|
2,087
|
|
|
|
-
|
|
Interest and other income (expense)
|
|
|
(2,271
|
)
|
|
|
(1,950
|
)
|
|
|
(4,265
|
)
|
|
|
(3,937
|
)
|
Total
|
|
$
|
22,560
|
|
|
$
|
21,383
|
|
|
$
|
43,269
|
|
|
$
|
39,364
|
|
Transaction and integration costs were primarily related to the aforementioned definitive agreements (see Note 2).
Indemnification settlement is related to the acquisition of Performance Chemicals & Ingredients Company (d/b/a SensoryEffects).
The following table summarizes domestic (U.S.) and foreign sales for the three and six months ended June 30, 2017 and 2016:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
113,227
|
|
|
$
|
105,379
|
|
|
$
|
219,527
|
|
|
$
|
209,550
|
|
Foreign
|
|
|
33,855
|
|
|
|
33,415
|
|
|
|
65,283
|
|
|
|
64,385
|
|
Total
|
|
$
|
147,082
|
|
|
$
|
138,794
|
|
|
$
|
284,810
|
|
|
$
|
273,935
|
|
NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the six months ended June 30, 2017 and 2016 for income taxes and interest is as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Income taxes
|
|
$
|
14,508
|
|
|
$
|
17,014
|
|
Interest
|
|
$
|
3,436
|
|
|
$
|
3,457
|
|
NOTE 13 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) were as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net foreign currency translation adjustment
|
|
$
|
2,697
|
|
|
$
|
(707
|
)
|
Net change in postretirement benefit plan
(see Note 14 for further information)
|
|
|
|
|
|
|
|
|
Initial adoption of new plan
|
|
|
-
|
|
|
|
(444
|
)
|
Amortization of prior service cost
|
|
|
19
|
|
|
|
26
|
|
Amortization of gain
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Total before tax
|
|
|
15
|
|
|
|
(420
|
)
|
Tax
|
|
|
(4
|
)
|
|
|
(6
|
)
|
Net of tax
|
|
|
11
|
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
2,708
|
|
|
$
|
(1,133
|
)
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net foreign currency translation adjustment
|
|
$
|
3,238
|
|
|
$
|
548
|
|
Net change in postretirement benefit plan
(see Note 14 for further information)
|
|
|
|
|
|
|
|
|
Initial adoption of new plan
|
|
|
-
|
|
|
|
(444
|
)
|
Amortization of prior service cost
|
|
|
38
|
|
|
|
24
|
|
Amortization of gain
|
|
|
(8
|
)
|
|
|
(5
|
)
|
Total before tax
|
|
|
30
|
|
|
|
(425
|
)
|
Tax
|
|
|
(9
|
)
|
|
|
(5
|
)
|
Net of tax
|
|
|
21
|
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
3,259
|
|
|
$
|
118
|
|
Accumulated other comprehensive loss at June 30, 2017 and December 31, 2016 consisted of the following:
|
|
Foreign currency
translation
adjustment
|
|
|
Postretirement
benefit plan
|
|
|
Total
|
|
Balance December 31, 2016
|
|
$
|
(6,707
|
)
|
|
$
|
(142
|
)
|
|
$
|
(6,849
|
)
|
Other comprehensive income/(loss)
|
|
|
3,238
|
|
|
|
21
|
|
|
|
3,259
|
|
Balance June 30, 2017
|
|
$
|
(3,469
|
)
|
|
$
|
(121
|
)
|
|
$
|
(3,590
|
)
|
NOTE 14 – EMPLOYEE BENEFIT PLAN
The Company provides postretirement benefits in the form of two unfunded postretirement medical plans; one that under a collective bargaining agreement covers eligible retired employees of the Verona facility and a plan for Named Executive Officers.
Net periodic benefit costs for such retirement medical plans were as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
34
|
|
|
$
|
31
|
|
Interest cost
|
|
|
23
|
|
|
|
20
|
|
Amortization of prior service cost
|
|
|
37
|
|
|
|
24
|
|
Amortization of gain
|
|
|
(7
|
)
|
|
|
(5
|
)
|
Net periodic benefit cost
|
|
$
|
87
|
|
|
$
|
70
|
|
The amount recorded for these obligations on the Company’s balance sheet as of June 30, 2017 and December 31, 2016 is $1,468 and $1,411, respectively, and is included in other long-term obligations. These plans are unfunded and approved claims are paid from Company funds. Historical cash payments made under such plans have typically been less than $100 per year.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Rent expense charged to operations under lease agreements for the six months ended June 30, 2017 and 2016 aggregated approximately $1,613 and $1,525, respectively. Aggregate future minimum rental payments required under all non-cancelable operating leases at June 30, 2017 are as follows:
Year
|
|
|
|
July 1, 2017 to December 31, 2017
|
|
$
|
2,025
|
|
2018
|
|
|
2,036
|
|
2019
|
|
|
1,654
|
|
2020
|
|
|
1,313
|
|
2021
|
|
|
1,169
|
|
2022
|
|
|
863
|
|
Thereafter
|
|
|
5,962
|
|
Total minimum lease payments
|
|
$
|
15,022
|
|
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 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 to date.
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 16 – 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 June 30, 2017 and December 31, 2016 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed 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 carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio.
The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximates fair value due to the short-term maturity of these instruments. Cash and cash equivalents at June 30, 2017 and December 31, 2016 includes $779 and $776 in money market funds, respectively. The money market funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”
NOTE 17 – RELATED PARTY TRANSACTIONS
The Company provides services on a contractual agreement to St. Gabriel CC Company, LLC. These services include accounting, information technology, quality control, and
purchasing services, as well as operation of the St. Gabriel CC Company, LLC plant. The Company also sells raw materials to St. Gabriel CC Company, LLC. In return, St. Gabriel CC Company, LLC provides choline chloride finished goods. The services the Company provided and raw materials sold amounted to $844 and $5,533, respectively, for the three months ended June 30, 2017, and $1,722 and $9,882, respectively for the six months ended June 30, 2017. These services and raw materials are primarily recorded in cost of goods sold net of the finished goods received from St. Gabriel CC Company, LLC of $4,498 and $9,182 for the three and six months ended June 30, 2017, respectively. At June 30, 2017, the Company had a receivable of $2,100, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold and a payable of $1,492 for finished goods received recorded in accrued expenses. In addition, the Company had a payable in the amount of $166 related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accrued expenses.