FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15 (d) of
[X] The Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
- ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 175 Slate Hill, New York 10973
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
845-355-5300
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Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 2002 the registrant had 4,769,397 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part I. Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
September 30, December 31,
2002 2001
------- -------
Unaudited
Current assets:
Cash and cash equivalents $ 3,395 $ 3,120
Accounts receivable 7,569 7,130
Inventories 5,815 5,575
Prepaid expenses 423 985
Deferred income taxes 223 214
------- -------
Total current assets 17,425 17,024
------- -------
Property, plant and equipment, net 23,732 17,904
Goodwill 6,397 6,397
Intangibles and other assets, net 2,458 3,152
------- -------
Total assets $50,012 $44,477
======= =======
See accompanying notes to unaudited condensed consolidated financial statements
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
September 30, December 31,
2002 2001
-------- --------
Unaudited
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,745 $ 1,745
Trade accounts payable and other accrued expenses 3,559 2,885
Accrued compensation and other benefits 1,470 1,542
Dividends payable -- 305
-------- --------
Total current liabilities 6,774 6,477
-------- --------
Long-term debt 10,013 11,323
Deferred income taxes 451 351
Other long-term obligations 970 994
-------- --------
Total liabilities 18,208 19,145
-------- --------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000 -- --
shares; none issued and outstanding
Common stock, $.0667 par value. Authorized 10,000,000 shares; 4,903,238
shares issued and 4,768,133 shares outstanding at September 30, 2002 and
4,903,238 shares issued and 4,699,166 shares outstanding at December 31, 2001 327 327
Additional paid-in capital 3,394 3,387
Retained earnings 29,570 23,773
Treasury stock, at cost: 135,105 and 204,072 shares at September 30, 2002 and
December 31, 2001, respectively (1,487) (2,155)
-------- --------
Total stockholders' equity 31,804 25,332
-------- --------
Total liabilities and stockholders' equity $ 50,012 $ 44,477
======== ========
See accompanying notes to unaudited condensed consolidated financial statements
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 15,784 $ 13,849 $ 45,842 $ 32,062
Cost of sales 9,786 8,917 27,986 19,423
-------- -------- -------- --------
Gross profit 5,998 4,932 17,856 12,639
Operating expenses:
Selling expenses 1,341 1,211 4,147 3,221
Research and development expenses 437 459 1,446 1,237
General and administrative expenses 816 1,077 2,769 2,736
-------- -------- -------- --------
2,594 2,747 8,362 7,194
-------- -------- -------- --------
Earnings from operations 3,404 2,185 9,494 5,445
Other expenses (income):
Interest (income) (5) (7) (31) (88)
Interest expense 96 180 301 256
Other (income) expense - net -- (167) -- (491)
-------- -------- -------- --------
Earnings before income tax expense 3,313 2,179 9,224 5,768
Income tax expense 1,159 871 3,427 2,199
-------- -------- -------- --------
Net earnings $ 2,154 $ 1,308 $ 5,797 $ 3,569
======== ======== ======== ========
Net earnings per common share - basic $ 0.45 $ 0.28 $ 1.22 $ 0.77
======== ======== ======== ========
Net earnings per common share - diluted $ 0.43 $ 0.27 $ 1.17 $ 0.74
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
2002 2001
-------- --------
Unaudited
---------
Cash flows from operating activities:
Net earnings $ 5,797 $ 3,569
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,084 1,842
Shares issued under employee benefit plans 201 162
Deferred income taxes 91 (99)
Provision for doubtful accounts 40 --
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (479) (2,315)
Inventories (240) (2,022)
Prepaid expenses 562 347
Accounts payable and accrued expenses 602 (75)
Income taxes payable -- 45
Other long-term obligations (24) (15)
-------- --------
Net cash provided by operating activities 8,634 1,439
-------- --------
Cash flows from investing activities:
Capital expenditures (7,337) (1,194)
Proceeds from sale of property, plant & equipment 239 --
Cash paid for product lines acquired -- (14,512)
Cash paid for intangibles assets acquired (120) (92)
-------- --------
Net cash used in investing activities (7,218) (15,798)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 13,500
Principal payments on long-term debt (1,310) --
Proceeds from stock options and warrants exercised 474 480
Dividends paid (305) (277)
Purchase of treasury stock -- --
Other financing activities -- (108)
-------- --------
Net cash (used in) provided by financing activities (1,141) 13,595
-------- --------
Increase (decrease) in cash and cash equivalents 275 (764)
Cash and cash equivalents beginning of period 3,120 3,068
-------- --------
Cash and cash equivalents end of period $ 3,395 $ 2,304
======== ========
See accompanying notes to unaudited condensed consolidated financial statements
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
The unaudited condensed consolidated financial statements presented herein have
been prepared by the Company in accordance with the accounting policies
described in its December 31, 2001 Annual Report on Form 10-K, and should be
read in conjunction with the consolidated financial statements and notes, which
appear in that report. References in this Report to the Company mean Balchem
and/or its subsidiary BCP Ingredients, Inc., as the context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include some information and notes necessary to conform with annual reporting
requirements. The results of operations for the three and nine months ended
September 30, 2002 are not necessarily indicative of the operating results
expected for the full year.
NOTE 2 - PRIOR YEAR ACQUISITION
- -------------------------------
As previously reported in June, 2001, effective as of June 1, 2001, pursuant to
a certain Asset Purchase Agreement, dated as of May 21, 2001 (the "Asset
Purchase Agreement"), BCP Ingredients, Inc. ("Buyer"), a wholly owned subsidiary
of Balchem Corporation, acquired certain assets of DCV, Inc. and its affiliate,
DuCoa L.P. The results of operations of the product lines acquired have been
included in the accompanying consolidated financial statements of the Company
from the date of acquisition. The Asset Purchase Agreement provides for the
payment of up to an additional $2,750 based upon the sales of specified product
lines achieving certain gross margin levels (in excess of specified thresholds)
over the three year period following the closing, with no more than $1,000
payable for any particular yearly period. Such contingent consideration will be
recorded as an additional cost of the acquired product lines. No such contingent
consideration has been earned or paid as of September 30, 2002.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2001 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 interest on
borrowings to finance the acquisition and changes in depreciation and
amortization of tangible and intangible assets resulting from the acquisition.
6
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned
acquisition, and related financing transactions, had occurred at the beginning
of the periods presented and is not intended to be a projection of future
results.
- --------------------------------------------------------------------------
Pro-Forma
Nine Months Ended
September 30, 2001
- --------------------------------------------------------------------------
Net sales $ 40,786
Net earnings 3,283
Basic EPS .71
Diluted EPS .68
- --------------------------------------------------------------------------
NOTE 3 - INVENTORIES
- --------------------
Inventories at September 30, 2002 and December 31, 2001 consist of the
following:
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Raw materials $ 2,025 $ 2,152
Finished goods 3,790 3,423
- --------------------------------------------------------------------------------
Total inventories $ 5,815 $ 5,575
- --------------------------------------------------------------------------------
NOTE 4 - NET EARNINGS PER SHARE
- -------------------------------
The following presents a reconciliation of the earnings and shares used in
calculating basic and diluted net earnings per share:
- -------------------------------------------------------------------------------------------------------------
Number of Shares
Income Per Share
Three months ended September 30, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $2,154 4,766,662 $.45
Effect of dilutive securities - stock options 204,197
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $2,154 4,970,859 $.43
- -------------------------------------------------------------------------------------------------------------
7
- -------------------------------------------------------------------------------------------------------------
Number of Shares
Income Per Share
Three months ended September 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $1,308 4,676,670 $.28
Effect of dilutive securities - stock options 201,070
---------
Diluted EPS - Net earnings and
weighted average common shares outstanding and
effect of stock options $1,308 4,877,740 $.27
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Number of Shares
Income Per Share
Nine months ended September 30, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $5,797 4,743,559 $1.22
Effect of dilutive securities - stock options 204,202
---------
Diluted EPS - Net earnings and
weighted average common shares outstanding and
effect of stock options $5,797 4,947,761 $1.17
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Number of Shares
Income Per Share
Nine months ended September 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $3,569 4,648,636 $.77
Effect of dilutive securities - stock options 177,822
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $3,569 4,826,458 $.74
- -------------------------------------------------------------------------------------------------------------
At September 30, 2002, the Company had no stock options outstanding 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 5 - SEGMENT INFORMATION
- ----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments,
specialty products, encapsulated/nutritional products and the unencapsulated
feed supplements segment, a result of the aforementioned acquisition of certain
assets of DCV, Inc. and its affiliate, DuCoa L.P. Products relating to choline
animal feed for non-ruminant animals
8
are primarily reported in this segment. Human choline nutrient products (also
relating to the aforementioned acquisition) and encapsulated products are
reported in the encapsulated/nutritional products segment.
Business Segment Net Sales:
- ------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------
Specialty Products $ 5,468 $ 5,275 $16,287 $15,885
Encapsulated/Nutritional
Products 7,668 5,534 21,781 12,353
Unencapsulated Feed
Supplements 2,648 3,040 7,774 3,824
- ------------------------------------------------------------------------------------------
Total $15,784 $13,849 $45,842 $32,062
- ------------------------------------------------------------------------------------------
Business Segment Earnings (Loss):
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------
Specialty Products $ 1,676 $ 1,589 $ 5,299 $ 4,717
Encapsulated/Nutritional Products 1,776 620 4,452 765
Unencapsulated Feed
Supplements (48) (24) (257) (37)
Interest and other income
(expense) (91) (6) (270) 323
------- ------- ------- -------
Earnings before income taxes
$ 3,313 $ 2,179 $ 9,224 $ 5,768
------- ------- ------- -------
NOTE 6- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the nine months ended September 30, 2002 and 2001 for income
taxes and interest is as follows:
- -----------------------------------------------------
Nine Months Ended
September 30,
2002 2001
- -----------------------------------------------------
Income taxes $ 3,287 $ 2,238
Interest $ 290 $ 254
- -----------------------------------------------------
NOTE 7 - COMMON STOCK
- ---------------------
In September 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999 which was subsequently extended through June
2002. Through September 30, 2002, the Company has repurchased 343,316 shares
9
at an average cost of $9.26 per share of which 135,105 remain in treasury at
September 30, 2002. In June 2002, the board of directors authorized an extension
to the stock repurchase program for up to an additional 600,000 shares through
June 30, 2003.
NOTE 8 - OTHER INCOME
- ---------------------
During the nine months ended September 30, 2001, the Company received proceeds
of approximately $491 from the settlement of a class-action claim related to
vitamin product antitrust litigation.
NOTE 9 - LONG TERM DEBT
- -----------------------
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, and has a maturity date of
May 31, 2009. Borrowing under the Term Loan bears interest at LIBOR plus 1.25%
(3.07% and 4.83% at September 30, 2002 and 2001, respectively). Certain
provisions of the Term Loan require maintenance of certain financial ratios,
limit future borrowings and impose certain other requirements as contained in
the agreement. At September 30, 2002, the Company was in compliance with all
restrictive covenants contained in the Loan Agreement. The Loan Agreement also
provides for a short-term revolving credit facility of $3,000 (the "Revolving
Facility"). Borrowings under the Revolving Facility bear interest at LIBOR plus
1.00% (2.82% and 4.58% at September 30, 2002 and 2001, respectively). No amounts
have been drawn on the Revolving Facility as of the date hereof. The Revolving
Facility expires on May 31, 2003. The Company intends to seek renewal of such
facility.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Under the provisions of
SFAS No. 142, goodwill and intangible assets with indefinite lives are not
amortized, but tested for impairment annually, or whenever there is an
impairment indicator. In addition, upon adoption of SFAS 142, all goodwill must
be assigned to reporting units for purposes of impairment testing and is no
longer subject to amortization.
The Company adopted SFAS No. 142 as of January 1, 2002. As required by SFAS
142, the Company performed an assessment of whether there was an indication that
goodwill was impaired at the date of adoption. In connection therewith, the
Company determined that its operations consisted of three reporting units and
determined each
10
reporting units' fair value and compared it to the reporting unit's net book
value. As of June 30, 2002, the Company completed its initial impairment test of
its goodwill balances. As of such date 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 transitional impairment tests. The Company plans to perform its
impairment test each December 31 in the future.
The Company had unamortized goodwill in the amount of $6,397 at September
30, 2002 and December 31, 2001, respectively, subject to the provisions of SFAS
Nos. 141 and 142.
The following table sets forth the reconciliation of basic and diluted
earnings per common share computations for the three and nine months ended
September 30, 2001 as if SFAS No. 142 was adopted as of January 1, 2001.
Pro-Forma
---------
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
-------------------- --------------------
Net earnings as reported $ 1,308 $ 3,569
Add Back: Goodwill Amortization,
Net of tax 59 59
--------------- ---------------
Net earnings as adjusted $ 1,367 $ 3,628
Basic EPS as reported .28 .77
Basic EPS as adjusted .29 .78
Diluted EPS as reported .27 .74
Diluted EPS as adjusted .28 .75
As of September 30, 2002 and December 31, 2001 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,740, and
$7,930, respectively, less accumulated amortization of $5,282 and $4,778,
respectively. Intangible assets at September 30, 2002 consist of the following:
- --------------------------------------------------------------------------------
Gross
Amortization period Carrying Accumulated
(in years) Amount Amortization
- --------------------------------------------------------------------------------
Customer lists 10 $ 6,760 $ 4,878
Re-registration costs 10 356 293
Patents 17 381 84
Trademarks 17 178 12
Other 5 65 15
- --------------------------------------------------------------------------------
$ 7,740 $ 5,282
- --------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $814 for the
first nine months of 2002. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
twelve months ended
11
December 31, 2002 and the next succeeding year is approximately $1,100 per year,
approximately $683 in the third succeeding year and approximately $33 in the
fourth succeeding year. At September 30, 2002, there were no identifiable
intangible assets with indefinite useful lives as defined by SFAS No. 142.
Identifiable intangible assets are reflected in "Intangibles and other assets"
in the Company's consolidated balance sheets. There were no changes to the
useful lives of intangible assets subject to amortization during the nine months
ended September 30, 2002.
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This Statement requires that long-lived assets be 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 future net 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. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company adopted SFAS No. 144 on January 1, 2002 and such adoption had
no effect on the Company's consolidated financial statements for the nine months
ended September 30, 2002.
12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. The actions and performance of the Company could differ
materially from what is contemplated by the forward-looking statements contained
in this Report. Factors that might cause differences from the forward-looking
statements include those referred to or identified in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 and other
factors that may be identified elsewhere in this Report. Reference should be
made to such factors and all forward-looking statements are qualified in their
entirety by the above cautionary statements.
The Company is engaged in the development, manufacture and marketing of
specialty performance ingredients and products for the food, feed and medical
sterilization industries. Presently, the Company has three segments, specialty
products, encapsulated/nutritional products and the unencapsulated feed
supplements segment, a result of the June 1, 2001 acquisition of certain assets
of DCV, Inc. and its affiliate, DuCoa L.P described in item 1 of this report.
Products relating to choline animal feed for non-ruminant animals are primarily
reported in this segment. Human choline nutrient products and encapsulated
products are reported in the encapsulated / nutritional products segment.
Results of Operations:
Three months ended September 30, 2002 as compared with three months ended
- --------------------------------------------------------------------------------
September 30, 2001
- ------------------
Net sales for the three months ended September 30, 2002 were $15,784 as
compared with $13,849 for the three months ended September 30, 2001, an increase
of $1,935 or 14.0%. Net sales for the specialty products segment were $5,468 for
the three months ended September 30, 2002 as compared with $5,275 for the three
months ended September 30, 2001, an increase of $193 or 3.7%. This increase was
due principally to greater sales volumes of ethylene oxide products and
propylene oxide products during the quarter ended September 30, 2002 and a
slightly higher average sales price. Net sales for the encapsulated /
nutritional products segment were $7,668 for the three months ended September
30, 2002 as compared with $5,534 for the three months ended September 30, 2001,
an increase of $2,134 or 38.6%. Sales in the encapsulates segment increased
primarily due to growth in the domestic food, international food and industrial
application markets. The growth in sales to the domestic food and international
food markets is principally the result of increased volumes sold which can be
attributed principally to new products and new applications to both existing and
new customers. Net sales of $2,648 were realized for the three months ended
September 30, 2002 in the unencapsulated feed supplements segment, which markets
choline additives for the poultry and swine industries as well as industrial
choline derivative products as compared with $3,040 for the three months ended
September 30, 2001, a decline of $392 or 12.8%.
13
This decline is primarily attributable to 2001 sales of a discontinued product
sold under a contract manufacturing agreement that terminated during 2001.
Gross margin percentage for the three months ended September 30, 2002 was
38.0% as compared to 35.6% for the three months ended September 30, 2001.
Margins in the encapsulated / nutritional products segment were favorably
affected by increased production and the mix of products sold. Margins for the
specialty products segment were unfavorably affected by relocation costs, a
result of the Company's decision to move its 100% ethylene oxide repackaging
facility from Slate Hill, NY to Verona, MO. Additionally, margins were
unfavorably affected by increased sales of lower margin feed products to the
poultry and swine markets in the unencapsulated feed supplements segment.
Operating expenses for the three months ended September 30, 2002 decreased
to $2,594 from $2,747 for the three months ended September 30, 2001, a decrease
of $153 or 5.6%. Total operating expenses as a percentage of sales were 16.4%
for the three months ended September 30, 2002 as compared to 19.8% for the three
months ended September 30, 2001. The decrease in general and administrative
expenses was primarily the result of a decrease in recruiting and relocation
expense for the three months ended September 30, 2002 as compared to September
30, 2001. This decrease was partially offset by increased advertising expense
and increased personnel in the area of sales and marketing, and research for the
encapsulated / nutritional products segment. Total payroll expenses related to
these and other administrative areas increased approximately $80 for the three
months ended September 30, 2002 as compared to the three months ended September
30, 2001. In particular, additional sales personnel were added to support the
animal nutrition business and additional research and development personnel were
added to support the encapsulated / nutritional products segment for both food
and animal feed applications. During the three months ended September 30, 2002
and the three months ended September 30, 2001, the Company spent $437 and $459,
respectively, on Company-sponsored research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both food and animal feed applications.
As a result of the foregoing, earnings from operations for the three months
ended September 30, 2002 were $3,404 as compared to $2,185 for the three months
ended September 30, 2001. Earnings from operations for the specialty products
segment for the three months ended September 30, 2002 were $1,676 as compared to
$1,589 for the three months ended September 30, 2001. Earnings from operations
for the encapsulated / nutritional products segment for the three months ended
September 30, 2002 were $1,776 as compared to $620 for the three months ended
September 30, 2001. The unencapsulated feed supplements segment incurred a loss
from operations for the three months ended September 30, 2002 of $48 as compared
to a loss of $24 for the three months ended September 30, 2001.
Interest income for the three months ended September 30, 2002 totaled $5 as
compared to $7 for the three months ended September 30, 2001. Interest expense
for the three months ended September 30, 2002 totaled $96 as compared to $180
for the three months ended September 30, 2001, a decrease of $84. This decrease
is the result of lower outstanding borrowings during the period combined with
lower average interest rates.
14
The Company records its interim tax provision based upon its estimated
effective tax rate for the year, which is presently expected to be approximately
37.2%.
As a result of the foregoing, net earnings were $2,154 for the three months
ended September 30, 2002 as compared with $1,308 for the three months ended
September 30, 2001.
Nine months ended September 30, 2002 as compared with nine months ended
- --------------------------------------------------------------------------------
September 30, 2001
- ------------------
Net sales for the nine months ended September 30, 2002 were $45,842 as
compared with $32,062 for the nine months ended September 30, 2001, an increase
of $13,780 or 43.0%. Net sales for the specialty products segment were $16,287
for the nine months ended September 30, 2002 as compared with $15,885 for the
nine months ended September 30, 2001, an increase of $402 or 2.5%. Net sales for
the encapsulated / nutritional products segment were $21,781 for the nine months
ended September 30, 2002 as compared with $12,353 for the nine months ended
September 30, 2001, an increase of $9,428 or 76.3%. Sales of the core
encapsulates business (before giving effect to the June 1, 2001 acquisition),
increased 62.8% based on growth in the domestic food, animal nutrition and
industrial application markets. When combined with sales of human choline
products (the latter product line having been derived from the 2001
acquisition), growth of 76.3% for the entire encapsulated/nutritional products
segment was achieved. The growth in sales to the domestic food market is
principally the result of increased volumes sold which can be attributed
principally to new products and new applications to both existing and new
customers. Sales of Reashure(TM) strengthened through growth from existing
customers and from the addition of new customers and added distribution channels
globally. Net sales of $7,774 were realized in the unencapsulated feed
supplements segment for the nine months ended September 30, 2002, which markets
choline additives for the poultry and swine industries as well as industrial
choline derivative products as compared with $3,824 for the nine months ended
September 30, 2001 which only reflected sales after June 1, 2001.
Gross margin percentage for the nine months ended September 30, 2002 was
39.0% as compared to 39.4% for the nine months ended September 30, 2001. Margins
were unfavorably affected principally by increased sales of lower margin feed
products to the poultry and swine markets in the unencapsulated feed supplements
segment. Margins in the encapsulated / nutritional products segment were
favorably affected by increased production and the mix of products sold. Margins
for the specialty products segment were favorably affected by increased
production volumes of the Company's products utilizing ethylene oxide in their
respective production processes.
Operating expenses for the nine months ended September 30, 2002 increased
to $8,362 from $7,194 for the nine months ended September 30, 2001, an increase
of $1,168 or 16.2%. However, total operating expenses as a percentage of sales
were 18.2% for the nine months ended September 30, 2002 as compared to 22.4% for
the nine months ended September 30, 2001. The increase in operating expenses was
primarily the result of increased advertising expense and increased personnel in
the area of sales and marketing, for the encapsulated / nutritional products
segment. Total payroll expenses related to these and other administrative areas
increased approximately $533 for the nine months
15
ended September 30, 2002 as compared to the nine months ended September 30,
2001. In particular, additional sales personnel were added to support the animal
nutrition business, additional research and application personnel have been
added to support a more expansive research and development program for both
human and animal markets and additional selling expenses were incurred as a
result of the June 1, 2001 acquisition. During the nine months ended September
30, 2002 and the nine months ended September 30, 2001, the Company spent $1,446
and $1,237, respectively, on Company-sponsored research and development
programs, substantially all of which pertained to the Company's encapsulated /
nutritional products segment for both food and animal feed applications. General
and administrative expenses increased primarily due to an increase in payroll
related costs associated with the addition of support personnel and an increase
in professional fees.
As a result of the foregoing, earnings from operations for the nine months
ended September 30, 2002 were $9,494 as compared to $5,445 for the nine months
ended September 30, 2001. Earnings from operations for the specialty products
segment for the nine months ended September 30, 2002 were $5,299 as compared to
$4,717 for the nine months ended September 30, 2001. Earnings from operations
for the encapsulated / nutritional products segment for the nine months ended
September 30, 2002 were $4,452 as compared to $765 for the nine months ended
September 30, 2001. The unencapsulated feed supplements segment incurred a loss
from operations for the nine months ended September 30, 2002 of $257 as compared
to a loss of $37 for the nine months ended September 30, 2001 which only
reflected operations after June 1, 2001.
Interest income for the nine months ended September 30, 2002 totaled $31 as
compared to $88 for the nine months ended September 30, 2001. Interest expense
for the nine months ended September 30, 2002 totaled $301 as compared to $256
for the nine months ended September 30, 2001, an increase of $45. This increase
is the result of the Company not having any borrowings outstanding during the
first five months of 2001. This increase has been partially offset by lower
average interest rates for the nine months ended September 30, 2002.
The Company records its interim tax provision based upon its estimated
effective tax rate for the year, which is presently expected to be approximately
37.2%.
As a result of the foregoing, net earnings were $5,797 for the nine months
ended September 30, 2002 as compared with $3,569 for the nine months ended
September 30, 2001.
Liquidity and Capital Resources
Working capital amounted to $10,651 at September 30, 2002 as compared to
$10,547 at December 31, 2001, an increase of $104. Cash flows from operating
activities provided $8,634 for the nine months ended September 30, 2002 as
compared with $1,439 for the nine months ended September 30, 2001. The increase
in cash flows from operating activities was due primarily to increases in net
earnings, depreciation, prepaid expenses, accounts payable and accrued expenses,
and deferred income taxes. The foregoing was partially offset by an increase in
accounts receivable and an increase in inventory. The larger increases in
accounts receivable and inventory balances for the nine months ended September
30, 2001 were a result of the Company having to invest working capital in its
2001 acquired business.
16
Capital expenditures were $7,337 for the nine months ended September 30,
2002. Capital expenditures are projected to be approximately $10,000 for all of
calendar year 2002. The Company is in the process of expanding the
manufacturing, processing and distribution facilities at its Verona, Missouri
facility to enable it to handle operations for its encapsulated choline products
business. The Company has recently completed and placed into service a
repackaging facility for its specialty products business also at its Verona,
Missouri location. In addition, the Company has entered into a ten (10) year
lease for approximately 20,000 square feet of office space in New Hampton, NY.
The office space is now serving as the Company's general offices and as a
laboratory facility. The costs of certain leasehold improvements to the
Company's office space, totaling $630, were funded by the landlord.
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999 which was subsequently extended through June
2002. As of September 30, 2002, 343,316 shares had been repurchased under the
program at a total cost of $3,179 of which 208,211 shares have been issued by
the Company under employee benefit plans and for the exercise of stock options.
In June 2002, the board of directors authorized an extension to the stock
repurchase program for up to an additional 600,000 shares through September 30,
2003. The Company intends to acquire shares from time to time at prevailing
market prices if and to the extent it deems it advisable to do so based among
other factors on its assessment of corporate cash flow and market conditions.
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, had an outstanding principal
balance of $11,758 as of September 30, 2002 and has a maturity date of May 31,
2009. Borrowing under the Term Loan bears interest at LIBOR plus 1.25% (3.07%
and 4.83% at September 30, 2002 and 2001, respectively). Certain provisions of
the Term Loan require maintenance of certain financial ratios, limit future
borrowings and impose certain other requirements as contained in the agreement.
At September 30, 2002, the Company was in compliance with all restrictive
covenants contained in the Loan Agreement. The Loan Agreement also provides for
a short-term revolving credit facility of $3,000 (the "Revolving Facility").
Borrowings under the Revolving Facility bear interest at LIBOR plus 1.00% (2.82%
and 4.58% at September 30, 2002 and 2001, respectively). The Company can borrow
under the facility up to $3,000 reduced by any outstanding letters of credit
(none at September 30, 2002). No amounts have been drawn on the Revolving
Facility as of the date hereof. The Revolving Facility expires on May 31, 2003.
The Company intends to seek renewal of such facility.
Indebtedness under the Loan Agreement is secured by substantially all of
the assets of the Company other than real properties.
As part of the June 1, 2001 acquisition of certain assets relating to the
choline animal feed, human choline nutrient, and encapsulated product lines of
DCV, Inc. and its affiliate, DuCoa L.P., the asset purchase agreement calls for
the payment of up to an additional $2,750 based upon the sales of specified
product lines achieving certain gross margin levels (in excess of specified
thresholds) over the three year period following the
17
closing, with no more than $1,000 payable for any particular yearly period. No
such contingent consideration has been earned or paid as of September 30, 2002.
The Company also currently provides postretirement benefits in the form of
a retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona facility. The amount recorded on the
Company's balance sheet as of September 30, 2002 for this obligation is $861.
The postretirement plan is not funded.
The Company's aggregate commitments under its Loan Agreement and
noncancelable operating lease agreements as of September 30, 2002 are as
follows:
- --------------------------------------------------------------------------------
Loan Operating Total
Agreement Leases Commitment
- --------------------------------------------------------------------------------
2002 (balance of year) $ 435 $ 183 $ 618
2003 1,742 392 2,134
2004 1,742 319 2,061
2005 1,742 245 1,987
2006 1,742 245 1,987
Thereafter 4,355 852 5,207
- --------------------------------------------------------------------------------
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, necessary capital investments and the
current portion of debt obligations; however, the Company would seek further
bank loans or access to financial markets to fund operations, working capital,
necessary capital investments or other cash requirements should it deem it
necessary to do so.
Recently Issued Statements of Financial Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. The Company also records a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt SFAS No. 143 on January 1, 2003. The Company does not expect that the
adoption of SFAS 143 will have a material effect on the Company's financial
position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145")
was issued. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses
from
18
extinguishment of debt to be classified as extraordinary items. SFAS 145 also
rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are
complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain
sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented shall be
reclassified. The Company does not expect that the adoption of SFAS 145 will
have a material effect on the Company's financial position or results of
operations.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (FAS 146) and nullifies EITF Issue
No. 94-3. SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, whereas EITF
No 94-3 had recognized the liability at the commitment date to an exit plan. The
Company is required to adopt the provisions of SFAS 146 effective for exit or
disposal activities initiated after December 31, 2002. This statement has no
effect on the Company as it is now constituted.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as 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 may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of
the December 31, 2001 Annual Report on Form 10-K. There were no changes to the
Company's critical accounting policies during the nine-months ended September
30, 2002. Not all of these significant accounting policies require management to
make difficult, subjective or complex judgments or estimates. However, the
following policies could be deemed to be critical within the SEC definition.
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.
Significant estimates underlying the accompanying consolidated financial
statements include inventory valuation, allowance for doubtful accounts, useful
lives of tangible and intangibles assets and various other operating allowances
and accruals.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates. Market risk is defined for these
purposes as the potential change in the fair value of debt instruments resulting
from an adverse movement in interest rates. As of September 30, 2002, the
Company's only outstanding borrowings were under a bank term loan, which bears
interest at LIBOR plus 1.25%. A 100 basis point increase in interest rates,
applied to the Company's borrowings at September 30, 2002, would result in an
increase in annual interest expense and a corresponding reduction in cash flow
of approximately $118. The Company believes that its exposure to market risk
relating to interest rate risk is not material.
The Company has no derivative financial instruments or derivative commodity
instruments, nor does the Company have any financial instruments entered into
for trading or hedging purposes. Foreign sales are generally billed in U.S.
dollars. The Company believes that its business operations are not exposed in
any material respect to market risk relating to foreign currency exchange risk
or commodity price risk.
Item 4. Controls and Procedures
(a) Based upon an evaluation by the Company's Chief Executive Officer and
Principal Financial Officer and its Corporate Controller within 90 days
prior to the filing date of this Quarterly Report on Form 10-Q, they have
concluded that the Company's disclosure controls and procedures as defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended,
are effective for gathering, analyzing and disclosing information the
Company is required to disclose in its periodic reports filed under such
Act.
(b) Since the date of the most recent evaluation of the Company's internal
controls, there have been no significant changes in such internal controls
or in other factors that could significantly affect these controls nor were
there any corrective actions with regard to significant deficiencies and
material weaknesses.
20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
No Reports on Form 8-K were filed during the quarter ended
September 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
/s/ Dino A. Rossi
---------------------------
Dino A. Rossi, President,
Chief Executive Officer and
Principal Financial Officer
Date: November 13, 2002
22
CERTIFICATIONS
I, Dino A. Rossi, President, Chief Executive Officer and Principal Financial
Officer of Balchem Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Balchem Corporation ;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function) :
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Dino A. Rossi
---------------------------
Dino A. Rossi, President,
Chief Executive Officer and
Principal Financial Officer
23
I, Francis J. Fitzpatrick, Corporate Controller of Balchem Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Balchem;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Francis J. Fitzpatrick
--------------------------
Francis J. Fitzpatrick
Corporate Controller
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 Quarterly Report of Balchem Corporation (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dino A.
Rossi, President, Chief Executive Officer and Principal Financial Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Dino A. Rossi
- -----------------------
Dino A. Rossi
President, Chief Executive Officer and Principal Financial Officer
November 13, 2002
This certification accompanies the above-described Report on Form 10-Q 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.
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 Quarterly Report of Balchem Corporation (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Francis
J. Fitzpatrick, Corporate Controller 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
Corporate Controller
November 13, 2002
This certification accompanies the above-described Report on Form 10-Q 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.