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 March 31, 2003
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
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600 New Hampton, New York 10958
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(Address of principal executive offices) (Zip Code)
845-326-5600
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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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [_]
As of May 1, 2003 the registrant had 4,796,447 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)
March 31, 2003 December 31, 2002
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Unaudited
Current assets:
Cash and cash equivalents $ 1,812 $ 1,731
Accounts receivable 7,295 7,159
Inventories 6,997 7,238
Prepaid expenses and other current assets 1,060 2,280
Deferred income taxes 413 403
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Total current assets 17,577 18,811
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Property, plant and equipment, net 26,144 25,852
Excess of cost over net assets acquired 6,368 6,398
Intangibles and other assets, net 2,013 2,237
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Total assets $52,102 $53,298
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3
See accompanying notes to unaudited condensed consolidated financial statement.
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
March 31, December 31,
2003 2002
-------- --------
Unaudited
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,742 $ 1,742
Trade accounts payable and other accrued expenses 2,913 4,049
Accrued compensation and other benefits 535 1,754
Dividends payable -- 382
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Total current liabilities 5,190 7,927
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Long-term debt 9,145 9,581
Deferred income taxes 1,613 1,557
Other long-term obligations 970 964
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Total liabilities 16,918 20,029
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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 4,794,987 shares outstanding at March 31, 2003 and
4,903,238 shares issued and 4,775,684 shares outstanding at December 31, 2002 327 327
Additional paid-in capital 3,581 3,546
Retained earnings 32,490 30,807
Treasury stock, at cost: 108,251 and 127,554 shares at March 31, 2003 and
December 31, 2002, respectively (1,214) (1,411)
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Total stockholders' equity 35,184 33,269
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Total liabilities and stockholders' equity $ 52,102 $ 53,298
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3
See accompanying notes to consolidated financial statements
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
Net sales $ 14,816 $ 14,389
Cost of sales 9,165 9,095
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Gross profit 5,651 5,294
Operating expenses:
Selling expenses 1,405 1,406
Research and development expenses 525 494
General and administrative expenses 964 968
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2,894 2,868
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Earnings from operations 2,757 2,426
Other expenses (income):
Interest (income) (1) (19)
Interest expense 74 105
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Earnings before income tax expense 2,684 2,340
Income tax expense 1,001 902
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Net earnings $ 1,683 $ 1,438
======== ========
Net earnings per common share - basic $ 0.35 $ 0.31
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Net earnings per common share - diluted $ 0.34 $ 0.29
======== ========
4
See accompanying notes to consolidated financial statements
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
2003 2002
---- ----
Unaudited
Cash flows from operating activities:
Net earnings $ 1,683 1,438
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 830 678
Shares issued under employee benefit plans 104 90
Deferred income taxes 46 57
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (136) (258)
Inventories 241 626
Prepaid expenses 1,220 352
Accounts payable and accrued expenses (2,355) (977)
Income taxes payable -- 685
Other long-term obligations 9 (15)
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Net cash provided by operating activities 1,642 2,676
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Cash flows from investing activities:
Capital expenditures (895) (830)
Proceeds from sale of property, plant & equipment 41 194
Cash paid for intangibles assets acquired (14) (13)
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Net cash used in investing activities (868) (649)
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Cash flows from financing activities:
Principal payments on long-term debt (436) (435)
Proceeds from stock options and warrants exercised 128 158
Dividends paid (382) (305)
Other financing activities (3) --
------- -------
Net cash used in financing activities (693) (582)
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Increase in cash and cash equivalents 81 1,445
Cash and cash equivalents beginning of period 1,731 3,120
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Cash and cash equivalents end of period $ 1,812 4,565
======= =======
5
See accompanying notes to consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except 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, 2002 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 months ended March 31,
2003 are not necessarily indicative of the operating results expected for the
full year.
NOTE 2 - STOCK OPTION PLAN
- --------------------------
At March 31, 2003, the Company has stock based employee compensation plans. The
Company accounts for its stock option plans in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. No stock based employee compensation cost is
reflected in net earnings, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The Company has adopted the disclosure standards of Statement of
Financial Accounts Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which requires the Company to provide pro forma net earnings and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value based method of accounting for
stock options as defined in SFAS No. 123 has been applied. The following table
illustrates the effect on net earnings and per share amounts if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock based
employee compensation:
6
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Three Months Ended March 31
------------------------------------------
2003 2002
Net Earnings
Net earnings, as reported $ 1,683 $ 1,438
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects (150) (113)
--------------------------------------------------
Net earnings as adjusted $ 1,533 $ 1,325
==================================================
Earnings per share:
Basic EPS as reported $ .35 $ .31
Basic EPS as adjusted $ .32 $ .28
Diluted EPS as reported $ .34 $ .29
Diluted EPS as adjusted $ .31 $ .27
- ---------------------------------------------------------------------------------------------------------
The fair value of each stock option granted during the year is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
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2003 2002
- ---------------------------------------------------------------------------------------------------------
Expected life (years) 3 5
Expected volatility 30% 32%
Expected dividend yield .38% .40%
Risk-free interest rate 1.9% 3.7%
Weighted average fair value of options
granted during the year $3.06 $9.47
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There were no option grants during the first quarter of 2002.
NOTE 3 - 2001 ACQUISITION
- -------------------------
As previously reported in June, 2001, pursuant to a certain Asset Purchase
Agreement, dated as of May 21, 2001, BCP Ingredients, Inc. ("Buyer"), a wholly
owned subsidiary of Balchem Corporation, acquired certain assets of DCV, Inc.
and its affiliate, DuCoa L.P.. The agreement provided 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. Additionally, in certain circumstances, as defined in
the agreement, a reimbursement of a part of the purchase price could be due the
Buyer in the first year of such calculation. Based upon the results of the gross
margin calculation as defined above for the first one year period, a
reimbursement of $30 was received as of March 31, 2003. Such reimbursement was
recorded as a reduction of the cost of the acquired product lines. As of March
31, 2003, the Company could potentially pay $2,000 for the remaining two years
of calculations under the agreement. Any future contingent consideration will be
recorded as an additional cost of the acquired product lines.
7
NOTE 4 - INVENTORIES
- --------------------
Inventories at March 31, 2003 and December 31, 2002 consist of the following:
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March 31, December 31,
2003 2002
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Raw materials $ 1,763 $ 2,042
Finished goods 5,234 5,196
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Total inventories $ 6,997 $ 7,238
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NOTE 5 - INTANGIBLE ASSETS
- --------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
business combination and define an intangible asset. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. All of the Company's goodwill arose
from the June 2001 acquisition described in Note 3.
As required by SFAS No. 142, the Company performed an assessment of whether
there was an indication that goodwill was impaired at the date of adoption. In
connection therewith, the Company determined that its operations consisted of
three reporting units and determined each reporting units' fair value and
compared it to the reporting unit's net book value. Since the fair value of each
reporting unit exceeded its carrying amount, there was no indication of
impairment and no further transitional impairment testing was required. As of
December 31, 2002, the Company also performed an 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
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 $6,368 and $6,398 at March
31, 2003 and December 31, 2002, respectively, subject to the provisions of SFAS
Nos. 141 and 142.
As of March 31, 2003 and December 31, 2002 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,794, and
$7,751, respectively, less accumulated amortization of $5,781 and $5,514,
respectively. Intangible assets at March 31, 2003 consist of the following:
8
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Gross
Amortization period Carrying Accumulated
(in years) Amount Amortization
- --------------------------------------------------------------------------------
Customer lists 10 $6,760 $5,377
Re-registration costs 10 356 314
Patents 17 429 64
Trademarks 17 195 17
Other 5 54 9
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$ 7,794 $5,781
- --------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $270 for the
first three months of 2003. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
twelve months ended December 31, 2003 is approximately $1,079, approximately
$683 in the second succeeding year, and approximately $36 in each of the third
and fourth succeeding years. At March 31, 2003, 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 three
months ended March 31, 2003.
NOTE 6 - NET EARNINGS PER SHARE
- -------------------------------
The following presents a reconciliation of the earnings and shares used in
calculating basic and diluted net earnings per share:
- -------------------------------------------------------------------------------------------------------------
Income Number of Shares Per Share
Three months ended March 31, 2003 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $1,683 4,792,690 $.35
Effect of dilutive securities - stock options 175,820
Diluted EPS - Net earnings and weighted average
common shares outstanding and
effect of stock options $1,683 4,968,510 $.34
- -------------------------------------------------------------------------------------------------------------
9
- -------------------------------------------------------------------------------------------------------------
Income Number of Shares Per Share
Three months ended March 31, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $1,438 4,714,418 $.31
Effect of dilutive securities - stock options 198,547
Diluted EPS - Net earnings and weighted average
common shares outstanding and
effect of stock options $1,438 4,912,965 $.29
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10
At March 31, 2003, the Company had 202,200 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 7 - 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 unencapsulated feed
supplements.
Business Segment Net Sales:
- ----------------------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
- ----------------------------------------------------------------------------
Specialty Products $ 5,938 $ 5,345
Encapsulated/Nutritional Products 6,143 6,363
Unencapsulated Feed Supplements 2,735 2,681
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Total $ 14,816 $ 14,389
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10
Business Segment Earnings (Loss):
- ----------------------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
- ----------------------------------------------------------------------------
Specialty Products $ 2,048 $ 1,718
Encapsulated/Nutritional Products 550 906
Unencapsulated Feed Supplements 159 (198)
Interest and other income (expense) (73) (86)
- ----------------------------------------------------------------------------
Earnings before income taxes $ 2,684 $ 2,340
- ----------------------------------------------------------------------------
NOTE 8- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the three months ended March 31, 2003 and 2002 for income taxes
and interest is as follows:
- ------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
- ------------------------------------------------------------
Income taxes $ 152 $ 39
Interest $ 74 $ 105
- ------------------------------------------------------------
NOTE 9 - COMMON STOCK
- ---------------------
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. 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. Through March 31, 2003, the Company has
repurchased 343,316 shares at an average cost of $9.26 per share of which
108,251 remain in treasury at March 31, 2003.
NOTE 10 - 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%
(2.59% and 3.08% at March 31, 2003 and 2002, respectively). Certain provisions
of the term loan require maintenance of certain financial ratios, limit future
borrowings and impose certain other requirements as
11
contained in the agreement. At March 31, 2003, 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% (2.34% and 2.83% at March 31, 2003 and 2002,
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 11 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
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 was required
to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not
have a material effect on the Company's financial position or results of
operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 is different from EITF Issue No. 94-3 in that
Statement No. 146 requires that a liability be recognized for a cost associated
with an exit or disposal activity only when the liability is incurred, that is
when it meets the definition of a liability in the FASB's conceptual framework.
Statement No. 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. In contrast,
under EITF Issue 94-3, a company recognized a liability for an exit cost when it
committed to an exit plan. Statement No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of Statement
No. 146 can be expected to impact the timing of liability recognition associated
with any future exit activities.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others." This interpretation elaborates
on the disclosures to be made by a guarantor in interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The Company was
required to adopt FIN 45 on December 31, 2002. The adoption of FIN 45 did not
have a material effect on the Company's financial position or results of
operations.
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, 2002 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.
Results of Operations:
Three months ended March 31, 2003 as compared with three months ended March 31,
- --------------------------------------------------------------------------------
2002
- ----
Net sales for the three months ended March 31, 2003 were $14,816 as
compared with $14,389 for the three months ended March 31, 2002, an increase of
$427 or 2.9%. Net sales for the specialty products segment were $5,938 for the
three months ended March 31, 2003 as compared with $5,345 for the three months
ended March 31, 2002, an increase of $593 or 11.1%. This increase was due
principally to greater sales volumes (9.4% over the prior comparable quarter) of
ethylene oxide products and propylene oxide products during the quarter ended
March 31, 2003. Net sales for the encapsulated / nutritional products segment
were $6,143 for the three months ended March 31, 2003 as compared with $6,363
for the three months ended March 31, 2002, a decrease of $220 or 3.5%. The
decrease was primarily a result of a volume decline (13.5% less than the prior
comparable quarter) in sales to the domestic food market. This decline was
partially offset by an increase in sales to the international food market. Net
sales of $2,735 were realized for the three months ended March 31, 2003 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 $2,681 for the three months ended March 31, 2002, an increase
of $54 or 2.0%. The increase was primarily a result of increased volumes sold
(11.2% over the prior comparable quarter) in the aqueous choline, dry choline,
and specialty markets.
Gross margin percentage for the three months ended March 31, 2003 was 38.1%
as compared to 36.8% for the three months ended March 31, 2002. Margins for the
specialty products segment were favorably affected by increased production
volumes of the Company's products utilizing ethylene oxide. Margins in the
encapsulated /
13
nutritional products segment were unfavorably affected by a decline in sales
volume which resulted in decreased production volumes. Margins for the
unencapsulated feed supplements segment were favorably affected by increased
production volumes of aqueous choline, dry choline, and specialty products.
Operating expenses for the three months ended March 31, 2003 increased to
$2,894 from $2,868 for the three months ended March 31, 2002, an increase of $26
or 1.0%. Total operating expenses as a percentage of sales were 19.5% for the
three months ended March 31, 2003 as compared to 19.9% for the three months
ended March 31, 2002. During the three months ended March 31, 2003 and the three
months ended March 31, 2002, the Company spent $525 and $494, 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 March 31, 2003 were $2,757 as compared to $2,426 for the three months
ended March 31, 2002. Earnings from operations for the specialty products
segment for the three months ended March 31, 2003 were $2,048 as compared to
$1,718 for the three months ended March 31, 2002. Earnings from operations for
the encapsulated / nutritional products segment for the three months ended March
31, 2003 were $550 as compared to $906 for the three months ended March 31,
2002. Earnings from the unencapsulated feed supplements segment for the three
months ended March 31, 2003 were $159 compared to a loss of $198 for the three
months ended March 31, 2002.
Interest income for the three months ended March 31, 2003 totaled $1 as
compared to $19 for the three months ended March 31, 2002. Interest expense for
the three months ended March 31, 2003 totaled $74 as compared to $105 for the
three months ended March 31, 2002, a decrease of $31. This decrease is the
result of lower average outstanding borrowings during the period combined with
lower average interest rates.
The Company records its interim tax provision based upon its estimated
effective tax rate for the year, which is presently expected to be approximately
37.3%.
As a result of the foregoing, net earnings were $1,683 for the three months
ended March 31, 2003 as compared with $1,438 for the three months ended March
31, 2002.
Liquidity and Capital Resources
Working capital amounted to $12,387 at March 31, 2003 as compared to
$10,884 at December 31, 2002, an increase of $1,503. Cash flows from operating
activities provided $1,642 for the three months ended March 31, 2003 as compared
with $2,676 for the three months ended March 31, 2002. The decrease in cash
flows from operating activities was primarily due to decreases in accounts
payable and accrued expenses and an increase in account receivable. The
foregoing was partially offset by an increase in net earnings and a decrease in
inventory.
14
Capital expenditures were $895 for the three months ended March 31, 2003.
Capital expenditures are projected to be approximately $2,400 for all of
calendar year 2003. In 2002, the Company expanded the manufacturing, processing
and distribution facilities at its Verona, Missouri facility to enable it to
handle operations for its specialty products and encapsulated choline products
businesses. In addition, the Company entered into a ten (10) year lease for
approximately 20,000 square feet of office space, which serves as the Company's
general offices and as a laboratory facility. The costs of certain leasehold
improvements to the Company's office space, up to $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. 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. As of March 31, 2003, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 235,065 shares
have been issued by the Company under employee benefit plans and for the
exercise of stock options. 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 Total Loan Operating for a term loan
of Commitment Agreement Leases $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, 2002 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% (2.59% and
3.08% at March 31, 2003 and 2002, 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 March
31, 2003, 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% (2.34% and 2.83% at
March 31, 2003 and 2002, 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.
As part of the June 1, 2002 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 closing, with no more than
$1,000 payable for any particular yearly period. Additionally, in certain
circumstances, as defined in the agreement, a reimbursement of a part of the
purchase price could be due the buyer in the first year of such calculation.
Based upon the
15
results of the gross margin calculation as defined above for the first one year
period, a reimbursement of $30 was received as of March 31, 2003. Such
reimbursement was recorded as a reduction of the cost of the acquired product
lines. There were no other changes to goodwill during the first quarter of 2003.
As of March 31, 2003, the Company could potentially pay $2,000 for the remaining
two years of calculations under the agreement. Any future contingent
consideration will be recorded as an additional cost of the acquired product
lines
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 March 31, 2003 for this obligation is $859. The
postretirement plan is not funded.
The Company's aggregate commitments under its Loan Agreement and
noncancelable operating lease agreements (including the office space lease
entered into in 2003 as described above) are as follows:
Loan Operating Total
Agreement Leases Commitment
- --------------------------------------------------------------------------------
2003 $ 1,307 $ 314 $ 1,621
2003 1,742 351 2,093
2004 1,742 275 2,017
2005 1,742 245 1,987
2006 1,742 245 1,987
Thereafter 2,612 608 3,220
- --------------------------------------------------------------------------------
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.
Critical Accounting Policies
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2002 Annual Report on Form 10-K, during the three
months ended March 31, 2003.
Related Party Transactions
The Company is not engaged and has not engaged in related party
transactions during the three months ended March 31, 2003. Transactions of the
Company during this period were at arms length.
16
New Accounting Pronouncements
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 was required
to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not
have a material effect on the Company's financial position or results of
operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 is different from EITF Issue No. 94-3 in that
Statement No. 146 requires that a liability be recognized for a cost associated
with an exit or disposal activity only when the liability is incurred, that is
when it meets the definition of a liability in the FASB's conceptual framework.
Statement No. 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. In contrast,
under EITF Issue 94-3, a company recognized a liability for an exit cost when it
committed to an exit plan. Statement No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of Statement
No. 146 can be expected to impact the timing of liability recognition associated
with any future exit activities.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others." This interpretation elaborates
on the disclosures to be made by a guarantor in interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The Company was
required to adopt FIN 45 on December 31, 2002. The adoption of FIN 45 did not
have a material effect on the Company's financial position or results of
operations.
17
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 March 31, 2003, the Company's
only 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 March 31, 2003, would result in an increase in annual interest
expense and a corresponding reduction in cash flow of approximately $109,000.
The Company's short-term working capital borrowings have historically borne
interest based on the prime rate. 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.
18
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 March
31, 2003.
19
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
By: /s/ Dino A. Rossi
---------------------------
Dino A. Rossi, President,
Chief Executive Officer and
Principal Financial Officer
Date: May 14, 2003
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: May 14, 2003 /s/ Dino A. Rossi
---------------------------
Dino A. Rossi, President,
Chief Executive Officer and
Principal Financial Officer
21
I, Francis J. Fitzpatrick, Corporate Controller 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: May 14, 2003 /s/Francis J. Fitzpatrick
-------------------------
Francis J. Fitzpatrick
Corporate Controller
22
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 March 31, 2003 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
May 14, 2003
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.
23
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 March 31, 2003 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
May 14, 2003
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.
24