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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 June 30, 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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 600 New Hampton, New York 10958
(Address of principal executive offices) (Zip Code)
845-326-5600
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 August 11, 2003 the registrant had 4,817,364 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)
June 30, 2003 December 31, 2002
------------- -----------------
Unaudited
Current assets:
Cash and cash equivalents $ 2,467 $ 1,731
Accounts receivable 6,829 7,159
Inventories 7,561 7,238
Prepaid expenses and other current assets 1,264 2,280
Deferred income taxes 396 403
------------- -----------------
Total current assets 18,517 18,811
------------- -----------------
Property, plant and equipment, net 25,980 25,852
Excess of cost over net assets acquired 6,368 6,398
Intangibles and other assets, net 1,783 2,237
------------- -----------------
Total assets $52,648 $53,298
============= =================
2
See accompanying notes to condensed consolidated financial statements.
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
June 30, 2003 December 31, 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 2,002 4,049
Accrued compensation and other benefits 407 1,754
Dividends payable -- 382
----------- ----------
Total current liabilities 4,151 7,927
----------- ----------
Long-term debt 8,710 9,581
Deferred income taxes 1,669 1,557
Other long-term obligations 966 964
----------- ----------
Total liabilities 15,496 20,029
----------- ----------
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 4,809,452 shares outstanding at
June 30, 2003 and 4,903,238 shares issued and 4,775,684
shares outstanding at December 31, 2002 327 327
Additional paid-in capital 3,710 3,546
Retained earnings 34,181 30,807
Treasury stock, at cost: 93,786 and 127,554 shares at
June 30, 2003 and December 31, 2002, respectively (1,066) (1,411)
----------- ----------
Total stockholders' equity 37,152 33,269
----------- ----------
Total liabilities and stockholders' equity $ 52,648 $ 53,298
=========== ==========
3
See accompanying notes to condensed consolidated financial statements.
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 14,860 $ 15,668 $ 29,676 $ 30,057
Cost of sales 9,372 9,104 18,537 18,199
-------- -------- -------- --------
Gross profit 5,488 6,564 11,139 11,858
Operating expenses:
Selling expenses 1,312 1,400 2,717 2,806
Research and development expenses 500 515 1,025 1,009
General and administrative expenses 913 985 1,877 1,953
-------- -------- -------- --------
2,725 2,900 5,619 5,768
-------- -------- -------- --------
Earnings from operations 2,763 3,664 5,520 6,090
Other expenses (income):
Interest (income) (1) (7) (2) (26)
Interest expense 72 100 146 205
-------- -------- -------- --------
Earnings before income tax expense 2,692 3,571 5,376 5,911
Income tax expense 1,001 1,366 2,002 2,268
-------- -------- -------- --------
Net earnings $ 1,691 $ 2,205 $ 3,374 $ 3,643
======== ======== ======== ========
Net earnings per common share - basic $ 0.35 $ 0.46 $ 0.70 $ 0.77
======== ======== ======== ========
Net earnings per common share - diluted $ 0.34 $ 0.45 $ 0.68 $ 0.74
======== ======== ======== ========
4
See accompanying notes to condensed consolidated financial statements.
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
2003 2002
------- -------
Unaudited
---------
Cash flows from operating activities:
Net earnings $ 3,374 $ 3,643
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,704 1,375
Shares issued under employee benefit plans 165 143
Deferred income taxes 119 104
Provision for doubtful accounts 40 40
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable 290 (1,216)
Inventories (323) 338
Prepaid expenses 1,016 558
Accounts payable and accrued expenses (3,394) (168)
Other long-term obligations 9 (19)
------- -------
Net cash provided by operating activities 3,000 4,798
------- -------
Cash flows from investing activities:
Capital expenditures (1,332) (4,306)
Proceeds from sale of property, plant & equipment 41 209
Cash paid for intangibles assets acquired (57) (81)
------- -------
Net cash used in investing activities (1,348) (4,178)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt (871) (871)
Proceeds from stock options and warrants exercised 344 284
Dividends paid (382) (305)
Other financing activities (7) 0
------- -------
Net cash used in financing activities (916) (892)
------- -------
Increase (Decrease) in cash and cash equivalents 736 (272)
Cash and cash equivalents beginning of period 1,731 3,120
------- -------
Cash and cash equivalents end of period $ 2,467 $ 2,848
======= =======
5
See accompanying notes to condensed 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 and six months ended June
30, 2003 are not necessarily indicative of the operating results expected for
the full year.
NOTE 2 - STOCK OPTION PLAN
At June 30, 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
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------- ---------------------------
Net Earnings
Net earnings, as reported $ 1,691 $ 2,205 $ 3,374 $ 3,643
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (183) (113) (333) (226)
--------- --------- --------- ---------
Net earnings as adjusted $ 1,508 $ 2,092 $ 3,041 $ 3,417
========= ========= ========= =========
Earnings per share:
Basic EPS as reported $ .35 $ .46 $ .70 $ .77
Basic EPS as adjusted $ .31 $ .44 $ .63 $ .72
Diluted EPS as reported $ .34 $ .45 $ .68 $ .74
Diluted EPS as adjusted $ .30 $ .42 $ .61 $ .69
- ---------------------------------------------------------------------------------------------------------------------
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:
================================================================================
2003 2002
- --------------------------------------------------------------------------------
Expected life (years) 3 5
Expected volatility 32% 32%
Expected dividend yield .38% .40%
Risk-free interest rate 1.9% 3.7%
Weighted average fair value of options
granted during the year $3.33 $9.47
- --------------------------------------------------------------------------------
NOTE 3 - INVENTORIES
Inventories at June 30, 2003 and December 31, 2002 consist of the following:
================================================================================
June 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Raw materials $ 1,627 $ 2,042
Finished goods 5,934 5,196
- --------------------------------------------------------------------------------
Total inventories $ 7,561 $ 7,238
================================================================================
NOTE 4 - 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
7
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 10.
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 June
30, 2003 and December 31, 2002, respectively, subject to the provisions of SFAS
Nos. 141 and 142.
As of June 30, 2003 and December 31, 2002 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,834, and
$7,751, respectively, less accumulated amortization of $6,051 and $5,514,
respectively. Intangible assets at June 30, 2003 consist of the following:
================================================================================
Amortization Gross
period Carrying Accumulated
(in years) Amount Amortization
- --------------------------------------------------------------------------------
Customer lists 10 $6,760 $5,626
Re-registration costs 10 356 325
Patents 17 463 70
Trademarks 17 201 20
Other 5 54 10
- --------------------------------------------------------------------------------
$7,834 $6,051
================================================================================
Amortization of identifiable intangible assets was approximately $541 for the
first six 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 $1,082, approximately
$687 in the second succeeding year, and approximately $41 in each of the third
and fourth succeeding years. At June 30, 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 six months
ended June 30, 2003.
8
NOTE 5 - 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 June 30, 2003 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $1,691 4,801,710 $.35
Effect of dilutive securities - stock options 183,270
------------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $1,691 4,984,980 $.34
=============================================================================================================
=============================================================================================================
Income Number of Shares Per Share
Three months ended June 30, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $2,205 4,744,512 $.46
Effect of dilutive securities - stock options 209,864
------------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $2,205 4,954,376 $.45
=============================================================================================================
=============================================================================================================
Income Number of Shares Per Share
Six months ended June 30, 2003 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $3,374 4,797,200 $.70
Effect of dilutive securities - stock options 179,545
-----------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $3,374 4,976,745 $.68
=============================================================================================================
9
=============================================================================================================
Income Number of Shares Per Share
Six months ended June 30, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $3,643 4,732,007 $.77
Effect of dilutive securities - stock options 204,205
------------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $3,643 4,936,212 $.74
=============================================================================================================
At June 30, 2003, the Company had 103,150 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 6 - 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Specialty Products $ 6,384 $ 5,474 $ 12,322 $ 10,819
Encapsulated/Nutritional Products 5,761 7,750 11,904 14,113
Unencapsulated Feed Supplements 2,715 2,444 5,450 5,125
- ----------------------------------------------------------------------------------------------------------------------
Total $ 14,860 $ 15,668 $ 29,676 $ 30,057
======================================================================================================================
Business Segment Earnings (Loss):
======================================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Specialty Products $ 2,399 $ 1,905 $ 4,448 $ 3,623
Encapsulated/Nutritional Products 227 1,770 776 2,676
Unencapsulated Feed Supplements 137 (11) 296 (209)
Interest and other income (expense) (71) (93) (144) (179)
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 2,692 $ 3,571 $ 5,376 $ 5,911
======================================================================================================================
10
NOTE 7- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the six months ended June 30, 2003 and 2002 for income taxes
and interest is as follows:
=============================================================
Six Months Ended
June 30,
2003 2002
- -------------------------------------------------------------
Income taxes $ 1,158 $ 1,805
Interest $ 146 $ 205
- -------------------------------------------------------------
NOTE 8 - 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, which was subsequently extended. Through June
30, 2003, the Company has repurchased 343,316 shares at an average cost of $9.26
per share of which 93,786 remain in treasury at June 30, 2003. In June 2003, the
board of directors authorized an extension to the stock repurchase program for
up to an additional 600,000 shares that is, over and above those repurchased to
date under the program, through June 30, 2004.
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%
(2.57% and 3.09% at June 30, 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 June 30, 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% (2.32%
and 2.84% at June 30, 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, 2004. 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 - COMMITMENTS & CONTINGENCIES
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 of contingent
11
purchase price based upon the sales of specified product lines achieving certain
gross margin levels (in excess of specified thresholds) over the three year
period ending June 2004, 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
Company for the first year of such calculation. Based upon the results of the
calculation for the first one year period ended June 2002, a reimbursement of
$30 was received by the Company in 2003. Such reimbursement was recorded as a
reduction of the cost of the acquired product lines. The Company could
potentially pay $2,000 of remaining contingent purchase price for the remaining
two years of calculations under the terms of the agreement. No contingent
consideration has been earned or paid for the second one year period. Any future
contingent consideration will be recorded as an additional cost of the acquired
product lines.
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
12
did not have a material effect on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS 150 will not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
13
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 unencapsulated feed
supplements.
Results of Operations:
Three months ended June 30, 2003 as compared with three months ended June 30,
2002
Net sales for the three months ended June 30, 2003 were $14,860 as
compared with $15,668 for the three months ended June 30, 2002, a decrease of
$808 or 5.2%. Net sales for the specialty products segment were $6,384 for the
three months ended June 30, 2003 as compared with $5,474 for the three months
ended June 30, 2002, an increase of $910 or 16.6%. This increase was due
principally to greater sales volumes (12.0% over the prior comparable quarter)
of ethylene oxide products during the quarter ended June 30, 2003. Net sales for
the encapsulated / nutritional products segment were $5,761 for the three months
ended June 30, 2003 as compared with $7,750 for the three months ended June 30,
2002, a decrease of $1,989 or 25.7%. The decrease was primarily a result of a
volume decline (31.1% less than the prior comparable quarter) in sales to the
domestic food and animal health and nutrition markets. The U.S. dairy industry
continued to operate at very low milk prices. Sales of our Reashure product for
the animal health and nutrition industry felt the effect of this poor economic
environment, posting a decline from the prior year comparable quarter. This
decline was partially offset by an increase in sales to the international food
market. Net sales of $2,715 were realized for the three months ended June 30,
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 $2,444 for the three months ended June 30,
2002, an increase of $271 or 11.1%. The increase was primarily a result of
increased volumes sold (13.0% over the prior comparable quarter) in the aqueous
choline, dry choline, and specialty markets.
14
Gross margin percentage for the three months ended June 30, 2003 was 36.9%
as compared to 41.9% for the three months ended June 30, 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 / nutritional products segment were unfavorably affected by a
decline in sales volume. During 2002, the Company expanded the manufacturing,
processing and distribution facilities at its Verona, Missouri facility to
enable it to handle operations for its encapsulated choline products business.
As noted above, sales volume declined during the quarter resulting in the
Company manufacturing less than expected volumes of Reashure and products for
the domestic food markets. As a result, the Company realized unfavorable
manufacturing variances in the quarter, which contributed to the gross margin
decline. Unfavorable product mix also negatively impacted margins for the
encapsulated / nutritional products segment for the three months ended June 30,
2003. 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 June 30, 2003 decreased to
$2,725 from $2,900 for the three months ended June 30, 2002, a decrease of $175
or 6.0%. Total operating expenses as a percentage of sales were 18.3% for the
three months ended June 30, 2003 as compared to 18.5% for the three months ended
June 30, 2002. During the three months ended June 30, 2003 and the three months
ended June 30, 2002, the Company spent $500 and $515, 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 June 30, 2003 were $2,763 as compared to $3,664 for the three
months ended June 30, 2002. Earnings from operations for the specialty products
segment for the three months ended June 30, 2003 were $2,399 as compared to
$1,905 for the three months ended June 30, 2002. Earnings from operations for
the encapsulated / nutritional products segment for the three months ended June
30, 2003 were $227 as compared to $1,770 for the three months ended June 30,
2002. Earnings from the unencapsulated feed supplements segment for the three
months ended June 30, 2003 were $137 compared to a loss of $11 for the three
months ended June 30, 2002.
Interest income for the three months ended June 30, 2003 totaled $1 as
compared to $7 for the three months ended June 30, 2002. Interest expense for
the three months ended June 30, 2003 totaled $72 as compared to $100 for the
three months ended June 30, 2002, a decrease of $28. 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
37.2%.
As a result of the foregoing, net earnings were $1,691 for the three
months ended June 30, 2003 as compared with $2,205 for the three months ended
June 30, 2002.
15
Six months ended June 30, 2003 as compared with six months ended June 30, 2002
Net sales for the six months ended June 30, 2003 were $29,676 as compared
with $30,057 for the six months ended June 30, 2002, a decrease of $381 or
1.3%. Net sales for the specialty products segment were $12,322 for the six
months ended June 30, 2003 as compared with $10,819 for the six months ended
June 30, 2002, an increase of $1,503 or 13.9%. This increase was due principally
to greater sales volumes (10.2% over the prior comparable period) of ethylene
oxide products and propylene oxide products during the six months ended June 30,
2003. Net sales for the encapsulated / nutritional products segment were $11,904
for the six months ended June 30, 2003 as compared with $14,113 for the six
months ended June 30, 2002, a decrease of $2,209 or 15.7%. The decrease was
primarily a result of a volume decline (23.8% less than the prior comparable
period) in sales to the domestic food market and animal health and nutrition
markets. This decline was partially offset by an increase in sales to the
international food market. Net sales of $5,450 were realized for the six months
ended June 30, 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 $5,125 for the six
months ended June 30, 2002, an increase of $325 or 6.3%. The increase was
primarily a result of increased volumes sold (12.1% over the prior comparable
period) in the aqueous choline, dry choline, and specialty markets.
Gross margin percentage for the six months ended June 30, 2003 was 37.5%
as compared to 39.5% for the six months ended June 30, 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 / nutritional products segment were unfavorably affected by a
decline in sales volume. During 2002, the Company expanded the manufacturing,
processing and distribution facilities at its Verona, Missouri facility to
enable it to handle operations for its encapsulated choline products business.
As noted above, sales volume declined during the period resulting in the Company
manufacturing less than expected volumes of Reashure and products for the
domestic food markets. As a result, the Company realized unfavorable
manufacturing variances in the period, which contributed to the gross margin
decline. Unfavorable product mix also negatively impacted margins for the
encapsulated / nutritional products segment for the six months ended June 30,
2003. 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 six months ended June 30, 2003 decreased to
$5,619 from $5,768 for the six months ended June 30, 2002, a decrease of $149 or
2.6%. Total operating expenses as a percentage of sales were 18.9% for the six
months ended June 30, 2003 as compared to 19.2% for the six months ended June
30, 2002. During the six months ended June 30, 2003 and the six months ended
June 30, 2002, the Company spent $1,025 and $1,009, 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 six months
ended June 30, 2003 were $5,520 as compared to $6,090 for the six months ended
June 30, 2002. Earnings from operations for the specialty products segment for
the six months ended June 30, 2003 were $4,448 as compared to $3,623 for the six
months ended June 30, 2002. Earnings from operations for the encapsulated /
nutritional products segment
16
for the six months ended June 30, 2003 were $776 as compared to $2,676 for the
six months ended June 30, 2002. Earnings from the unencapsulated feed
supplements segment for the six months ended June 30, 2003 were $296 compared to
a loss of $209 for the six months ended June 30, 2002.
Interest income for the six months ended June 30, 2003 totaled $2 as
compared to $26 for the six months ended June 30, 2002. Interest expense for the
six months ended June 30, 2003 totaled $146 as compared to $205 for the six
months ended June 30, 2002, a decrease of $59. 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
37.2%.
As a result of the foregoing, net earnings were $3,374 for the six months
ended June 30, 2003 as compared with $3,643 for the six months ended June 30,
2002.
Liquidity and Capital Resources
Working capital amounted to $14,366 at June 30, 2003 as compared to
$10,884 at December 31, 2002, an increase of $3,482. Cash flows from operating
activities provided $3,000 for the six months ended June 30, 2003 as compared
with $4,798 for the six months ended June 30, 2002. The decrease in cash flows
from operating activities was due primarily to a decrease in net earnings and
accounts payable and accrued expenses and an increase in inventory. The
foregoing was partially offset by an increase in depreciation and a decrease in
accounts receivable and prepaid expenses.
Capital expenditures were $1,332 for the six months ended June 30, 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 2003, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2004. As of June 30, 2003, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 249,530 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.
17
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, 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%
(2.57% and 3.09% at June 30, 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 June 30, 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% (2.32%
and 2.84% at June 30, 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, 2004. 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 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 of contingent purchase price based upon the sales of
specified product lines achieving certain gross margin levels (in excess of
specified thresholds) over the three year period ending June 2004, 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 Company for the first year of such calculation.
Based upon the results of the calculation for the first one year period ended
June 2002, a reimbursement of $30 was received by the Company in 2003. Such
reimbursement was recorded as a reduction of the cost of the acquired product
lines. The Company could potentially pay $2,000 of remaining contingent purchase
price for the remaining two years of calculations under the terms of the
agreement. No contingent consideration has been earned or paid for the second
one year period. 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 June 30, 2003 for this obligation is $869. 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:
18
================================================================================
Loan Operating Total
Agreement Leases Commitment
- --------------------------------------------------------------------------------
2003 $ 871 $ 208 $ 1,079
2003 1,742 356 2,098
2004 1,742 280 2,022
2005 1,742 248 1,990
2006 1,742 245 1,987
Thereafter 2,613 608 3,221
- --------------------------------------------------------------------------------
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 six
months ended June 30, 2003.
Related Party Transactions
The Company is not engaged and has not engaged in related party
transactions during the six months ended June 30, 2003. Transactions of the
Company during this period were at arms length.
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.
19
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.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS 150 will not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
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 June 30, 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 June 30, 2003, would result in an increase in annual interest
expense and a corresponding reduction in cash flow of approximately $105. 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. Disclosure Controls and Procedures
(a) The Company's management has evaluated, with the participation of the
Company's Chief Executive Officer and Principal Financial Officer and its
Corporate Controller and Treasurer, the effectiveness of the design and
operation of the Company's
20
disclosure controls and procedures , and have concluded that, as of the end
of the period covered by this Quarterly Report, the Company's disclosure
controls and procedures as defined in Rule 13a-14(e) 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) During the most recent fiscal quarter, there has been no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
21
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of stockholders was held on June 20, 2003. The following
directors were re-elected to serve until the annual meeting of stockholders in
2006 and until the election and qualification of their respective successors:
Director For Withheld
Kenneth P. Mitchell 3,768,427 113,274
Edward L. McMillan 3,717,839 163,862
The stockholders of the Company also voted to approve the amendments to the 1999
Stock Plan in accordance with the following vote:
Broker
For Against Abstain Non-Vote
1,733,889 321,292 49,962 1,776,558
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.3 Balchem 1999 Stock Plan, as amended
Exhibit 31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a).
Exhibit 31.2 Certification of Corporate Controller pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(b) and Section 1350 of Chapter 63
of Title 18 of the United States Code.
Exhibit 32.2 Certification of Corporate Controller pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
(b) Reports on Form 8-K
On April 29, 2003, the Company furnished a Current Report on Form 8-K
announcing its financial results for the quarter ended March 31, 2003.
22
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: August 14, 2003
23
Exhibit Index
Exhibit No. Description
- ----------- -----------
Exhibit 10.3 Balchem 1999 Stock Plan, as amended
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
Exhibit 31.2 Certification of Corporate Controller pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
Exhibit 32.2 Certification of Corporate Contoller pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18
of the United States Code.
24