FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15 (d) of
X The Securities Exchange Act of 1934
----
For The Quarterly Period Ended September 30, 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
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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
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As of November 11, 2003 the registrant had 4,846,260 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part I. Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
September 30, December 31,
2003 2002
------------- ------------
Unaudited
Current assets:
Cash and cash equivalents $ 4,624 $ 1,731
Accounts receivable 7,211 7,159
Inventories 6,688 7,238
Prepaid expenses and other current assets 1,814 2,280
Deferred income taxes 410 403
------------- ------------
Total current assets 20,747 18,811
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Property, plant and equipment, net 25,906 25,852
Excess of cost over net assets acquired 6,368 6,398
Intangibles and other assets, net 1,534 2,237
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Total assets $ 54,555 $ 53,298
============= ============
See accompanying notes to consolidated financial statements
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
September 30, 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 2,612 4,049
Accrued compensation and other benefits 705 1,754
Dividends payable - 382
------------- --------------
Total current liabilities 5,059 7,927
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Long-term debt 8,274 9,581
Deferred income taxes 2,074 1,557
Other long-term obligations 977 964
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Total liabilities 16,384 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 4,821,129 shares outstanding at September 30, 2003 and
4,903,238 shares issued and 4,775,684 shares outstanding at December 31, 2002 327 327
Additional paid-in capital 3,743 3,546
Retained earnings 35,048 30,807
Treasury stock, at cost: 82,109 and 127,554 shares at September 30, 2003 and
December 31, 2002, respectively (947) (1,411)
------------- --------------
Total stockholders' equity 38,171 33,269
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Total liabilities and stockholders' equity $ 54,555 $ 53,298
============= ==============
See accompanying notes to consolidated financial statements
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- --------- ----------- ----------
Net sales $ 15,791 $ 15,784 $ 45,467 $ 45,842
Cost of sales 11,134 9,786 29,671 27,986
-------- --------- ----------- ----------
Gross profit 4,657 5,998 15,796 17,856
Operating expenses:
Selling expenses 1,633 1,341 4,350 4,147
Research and development expenses 611 437 1,636 1,446
General and administrative expenses 1,016 816 2,893 2,769
-------- --------- ----------- ----------
3,260 2,594 8,879 8,362
-------- --------- ----------- ----------
Earnings from operations 1,397 3,404 6,917 9,494
Other expenses (income):
Interest (income) (1) (5) (3) (31)
Interest expense 63 96 209 301
-------- --------- ----------- ----------
Earnings before income tax expense 1,335 3,313 6,711 9,224
Income tax expense 468 1,159 2,470 3,427
-------- --------- ----------- ----------
Net earnings $ 867 $ 2,154 $ 4,241 $ 5,797
======== ========= =========== ==========
Net earnings per common share - basic $ 0.18 $ 0.45 $ 0.88 $ 1.22
======== ========= ========== ==========
Net earnings per common share - diluted $ 0.17 $ 0.43 $ 0.85 $ 1.17
======== ========= ========== ==========
See accompanying notes to consolidated financial statements
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
2003 2002
--------- ----------
Unaudited
Cash flows from operating activities:
Net earnings $ 4,241 $ 5,797
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,617 2,084
Shares issued under employee benefit plans 230 201
Deferred income taxes 510 91
Provision for doubtful accounts 40 40
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (92) (479)
Inventories 550 (240)
Prepaid expenses and other current assets 466 562
Accounts payable and accrued expenses (2,486) 602
Other long-term obligations 13 (24)
--------- ------------
Net cash provided by operating activities 6,089 8,634
--------- ------------
Cash flows from investing activities:
Capital expenditures (1,901) (7,337)
Proceeds from sale of property, plant & equipment 41 239
Cash paid for intangibles assets acquired (78) (120)
--------- ------------
Net cash used in investing activities (1,938) (7,218)
--------- ------------
Cash flows from financing activities:
Principal payments on long-term debt (1,307) (1,310)
Proceeds from stock options and warrants exercised 431 474
Dividends paid (382) (305)
--------- ------------
Net cash used in financing activities (1,258) (1,141)
--------- ------------
Increase in cash and cash equivalents 2,893 275
Cash and cash equivalents beginning of period 1,731 3,120
--------- ------------
Cash and cash equivalents end of period $ 4,624 $ 3,395
========= ============
See accompanying notes to consolidated financial statements
5
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 nine months ended
September 30, 2003 are not necessarily indicative of the operating results
expected for the full year.
NOTE 2 - STOCK OPTION PLAN
- --------------------------
At September 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 867 $2,154 $ 4,241 $ 5,797
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects
(198) (113) (531) (339)
----------------- ------------------
Net earnings as adjusted $ 669 $2,041 $ 3,710 $ 5,458
================= ==================
Earnings per share:
Basic EPS as reported $ .18 $ .45 $ .88 $ 1.22
Basic EPS as adjusted $ .14 $ .43 $ .77 $ 1.15
Diluted EPS as reported $ .17 $ .43 $ .85 $ 1.17
Diluted EPS as adjusted $ .13 $ .41 $ .74 $ 1.10
- --------------------------------------------------------------------------------
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 33% 32%
Expected dividend yield .34% .40%
Risk-free interest rate 1.9% 3.7%
Weighted average fair value of options
granted during the year $ 5.47 $ 9.47
================================================================================
NOTE 3 - INVENTORIES
- --------------------
Inventories at September 30, 2003 and December 31, 2002 consist of the
following:
===============================================================
September 30, December 31,
2003 2002
- ---------------------------------------------------------------
Raw materials $ 1,790 $ 2,042
Finished goods 4,898 5,196
- ---------------------------------------------------------------
Total inventories $ 6,688 $ 7,238
===============================================================
7
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 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
September 30, 2003 and December 31, 2002, respectively, subject to the
provisions of SFAS Nos. 141 and 142. This decrease was a result of a
reimbursement of part of the purchase price of the June 2001 acquisition of
certain assets of DCV, Inc. and its affiliate, DuCoa L.P., as described in Note
10.
As of September 30, 2003 and December 31, 2002 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,854, and
$7,751, respectively, less accumulated amortization of $6,320 and $5,514,
respectively. Intangible assets at September 30, 2003 consist of the following:
================================================================================
Amortization period Gross Carrying Accumulated
(in years) Amount Amortization
- --------------------------------------------------------------------------------
Customer lists 10 $ 6,760 $ 5,875
Re-registration costs 10 356 336
Patents 17 481 75
Trademarks 17 203 22
Other 5 54 12
- --------------------------------------------------------------------------------
$ 7,854 $ 6,320
================================================================================
Amortization of identifiable intangible assets was approximately $811 for the
first nine 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 $1,080, approximately
$687 in the second succeeding year, and approximately $41 in each of the third
and fourth succeeding years. At September 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 nine months
ended September 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:
=========================================================================================
Number of
Income Shares Per Share
Three months ended September 30, 2003 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 867 4,818,004 $.18
Effect of dilutive securities - stock options 201,635
---------
Diluted EPS-Net earnings and weighted
average common shares outstanding and
effect of stock options $ 867 5,019,639 $.17
=========================================================================================
=========================================================================================
Number of
Income Shares Per Share
Three months ended September 30, 2002 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $2,154 4,766,662 $.45
Effect of dilutive securities - stock options 204,197
---------
Diluted EPS-Net earnings and weighted
average common shares outstanding and
effect of stock options $2,154 4,970,859 $.43
=========================================================================================
=========================================================================================
Number of
Income Shares Per Share
Nine months ended September 30, 2003 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $4,241 4,804,134 $.88
Effect of dilutive securities - stock options 186,908
---------
Diluted EPS-Net earnings and weighted
average common shares outstanding and
effect of stock options $4,241 4,991,042 $.85
=========================================================================================
9
=========================================================================================
Number of
Income Shares Per Share
Nine months ended September 30, 2002 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $5,797 4,743,559 $1.22
Effect of dilutive securities - stock options 204,202
---------
Diluted EPS-Net earnings and weighted
average common shares outstanding and
effect of stock options $5,797 4,947,761 $1.17
=========================================================================================
At September 30, 2003, the Company had 1,000 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Specialty Products $ 6,682 $ 5,468 $ 19,004 $ 16,287
Encapsulated/Nutritional
Products 6,039 7,668 17,943 21,781
Unencapsulated Feed Supplements 3,070 2,648 8,520 7,774
- --------------------------------------------------------------------------------
Total $ 15,791 $ 15,784 $ 45,467 $ 45,842
================================================================================
Business Segment Earnings (Loss):
================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Specialty Products $ 2,294 $ 1,676 $ 6,743 $ 5,299
Encapsulated/Nutritional
Products (1,066) 1,776 (291) 4,452
Unencapsulated Feed Supplements 169 (48) 465 (257)
Interest and other income (expense) (62) (91) (206) (270)
- --------------------------------------------------------------------------------
Earnings before income taxes $ 1,335 $ 3,313 $ 6,711 $ 9,224
================================================================================
10
NOTE 7- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the nine months ended September 30, 2003 and 2002 for income
taxes and interest is as follows:
=========================================
Nine Months Ended
September 30,
2003 2002
- -----------------------------------------
Income taxes $ 2,110 $ 3,287
Interest $ 209 $ 290
=========================================
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
September 30, 2003, the Company has repurchased 343,316 shares at an average
cost of $9.26 per share of which 82,109 remain in treasury at September 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 acquisition of certain
assets of DCV, Inc. and its affiliate Ducoa L.P. (as described in Note 10). 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% (2.37% and 3.07% at September 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 September 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% (2.12% and 2.82% at September 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 purchase price based upon the sales of
11
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, pursuant to
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. No contingent consideration
has been earned or paid for the second one year period ended June 2003. The
Company could potentially owe $1,000 of remaining contingent purchase price for
the remaining year of the calculation under the terms of the agreement. 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 did not
have a material effect on the Company's financial position or results of
operations.
12
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 did 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 September 30, 2003 as compared with three months ended
- --------------------------------------------------------------------------------
September 30, 2002
- ------------------
Net sales for the three months ended September 30, 2003 were $15,791 as
compared with $15,784 for the three months ended September 30, 2002. Net sales
for the specialty products segment were $6,682 for the three months ended
September 30, 2003 as compared with $5,468 for the three months ended September
30, 2002, an increase of $1,214 or 22.2%. This increase was due principally to
greater sales volumes (8.2% over the prior comparable quarter) of ethylene oxide
products during the quarter ended September 30, 2003. Net sales for the
encapsulated / nutritional products segment were $6,039 for the three months
ended September 30, 2003 as compared with $7,668 for the three months ended
September 30, 2002, a decrease of $1,629 or 21.2%. Of particular significance,
the prior year comparable quarter included substantial sales to a single
domestic food customer in support of a new product launch. While this customer's
product continues to be in distribution, the Company has not realized any
additional sales to this customer since 2002. This accounted for approximately
80% of the sales shortfall. The remaining decrease was primarily a result of
unfavorable product mix and a volume decline in sales to the domestic food
market. The Company continues to experience conservative customer purchasing
patterns and delayed new product launches by customers in the United States. Net
sales of $3,070 were realized for the three months ended September 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 $2,648 for the three months ended September 30, 2002,
an increase of $422 or 15.9%. The increase was primarily a result of increased
volumes sold (27.0% over the prior comparable quarter) in the choline chloride
and specialty derivative markets.
14
Gross margin percentage for the three months ended September 30, 2003 was
29.5% as compared to 38.0% for the three months ended September 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
the decline in sales volume as described above. These lower sales levels,
coupled with a designed reduction in inventory levels in this segment,
negatively impacted the Company's gross margins due to the resulting reduced
utilization of plant manufacturing capacity. Unfavorable product mix also
negatively impacted margins for the encapsulated / nutritional products segment.
Margins for the unencapsulated feed supplements segment were favorably affected
by increased production volumes of choline chloride and specialty derivative
products. The decision to reduce inventory levels in the encapsulated /
nutritional products segment, while generating unfavorable manufacturing
variances, did however contribute greatly toward an improved cash balance at
September 30, 2003. Increases in employee medical claims under the Company's
self-insurance program, as well as increases in the Company's general business
insurance premiums, had a negative impact on margins for all segments.
Operating expenses for the three months ended September 30, 2003 increased
to $3,260 from $2,594 for the three months ended September 30, 2002, an increase
of $666 or 25.7%. Total operating expenses as a percentage of sales were 20.6%
for the three months ended September 30, 2003 as compared to 16.4% for the three
months ended September 30, 2002. Increases in insurance costs as described
above, in addition to increased advertising costs for the encapsulated /
nutritional products segment, were largely responsible for the increase in
operating expenses. During the three months ended September 30, 2003 and the
three months ended September 30, 2002, the Company spent $611 and $437,
respectively, on Company-sponsored research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both food and animal feed applications.
As a result of the foregoing, earnings from operations for the three months
ended September 30, 2003 were $1,397 as compared to $3,404 for the three months
ended September 30, 2002. Earnings from operations for the specialty products
segment for the three months ended September 30, 2003 were $2,294 as compared to
$1,676 for the three months ended September 30, 2002. Loss from operations for
the encapsulated / nutritional products segment for the three months ended
September 30, 2003 was $1,066 as compared to earnings of $1,776 for the three
months ended September 30, 2002. Earnings from the unencapsulated feed
supplements segment for the three months ended September 30, 2003 were $169
compared to a loss of $48 for the three months ended September 30, 2002.
Interest income for the three months ended September 30, 2003 totaled $1 as
compared to $5 for the three months ended September 30, 2002. Interest expense
for the three months ended September 30, 2003 totaled $63 as compared to $96 for
the three months ended September 30, 2002, a decrease of $33. This decrease is
the result of lower average outstanding borrowings during the period combined
with lower average interest rates.
15
The Company records its interim tax provision based upon its estimated
effective tax rate for the year, which is presently expected to be approximately
36.8%.
As a result of the foregoing, net earnings were $867 for the three months
ended September 30, 2003 as compared with $2,154 for the three months ended
September 30, 2002.
Nine months ended September 30, 2003 as compared with nine months ended
- --------------------------------------------------------------------------------
September 30, 2002
- ------------------
Net sales for the nine months ended September 30, 2003 were $45,467 as
compared with $45,842 for the nine months ended September 30, 2002, a decrease
of $375. Net sales for the specialty products segment were $19,004 for the nine
months ended September 30, 2003 as compared with $16,287 for the nine months
ended September 30, 2002, an increase of $2,717 or 16.7%. This increase was due
principally to greater sales volumes (10.9% over the prior comparable period) of
ethylene oxide products and propylene oxide products during the nine months
ended September 30, 2003. Net sales for the encapsulated / nutritional products
segment were $17,943 for the nine months ended September 30, 2003 as compared
with $21,781 for the nine months ended September 30, 2002, a decrease of $3,838
or 17.6%. Of particular significance, the prior year comparable period included
substantial sales to a single domestic food customer in support of a new product
launch. While this customer's product continues to be in distribution, the
Company has not realized any additional sales to this customer since 2002. The
remaining decrease was primarily a result of unfavorable product mix and a
volume decline in sales to the domestic food market. The Company continues to
experience conservative customer purchasing patterns and delayed new product
launches by customers in the United States. Net sales of $8,520 were realized
for the nine months ended September 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
$7,774 for the nine months ended September 30, 2002, an increase of $746 or
9.6%. The increase was primarily a result of increased volumes sold (11.5% over
the prior comparable period) in the choline chloride and specialty derivative
markets.
Gross margin percentage for the nine months ended September 30, 2003 was
34.7% as compared to 39.0% for the nine months ended September 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
the decline in sales volume as described above. These lower sales levels,
coupled with a designed reduction in inventory levels in this segment,
negatively impacted the Company's gross margins due to the resulting reduced
utilization of plant manufacturing capacity. Unfavorable product mix also
negatively impacted margins for the encapsulated / nutritional products segment.
Margins for the unencapsulated feed supplements segment were favorably affected
by increased production volumes of choline chloride and specialty derivative
products. The decision to reduce inventory levels in the encapsulated /
nutritional products segment, while generating unfavorable manufacturing
variances, did however contribute greatly toward an improved cash balance at
September 30, 2003. Increases in employee medical claims under our
self-insurance program, as well as increases in the Company's general business
insurance premiums, had a negative impact on margins for all segments.
16
Operating expenses for the nine months ended September 30, 2003 increased
to $8,879 from $8,362 for the nine months ended September 30, 2002, an increase
of $517 or 6.2%. Total operating expenses as a percentage of sales were 19.5%
for the nine months ended September 30, 2003 as compared to 18.2% for the nine
months ended September 30, 2002. Increases in insurance costs as described
above, in addition to increased advertising costs for the encapsulated /
nutritional products segment, were largely responsible for the increase in
operating expenses. During the nine months ended September 30, 2003 and the nine
months ended September 30, 2002, the Company spent $1,636 and $1,446,
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 nine months
ended September 30, 2003 were $6,917 as compared to $9,494 for the nine months
ended September 30, 2002. Earnings from operations for the specialty products
segment for the nine months ended September 30, 2003 were $6,743 as compared to
$5,299 for the nine months ended September 30, 2002. Loss from operations for
the encapsulated / nutritional products segment for the nine months ended
September 30, 2003 was $291 as compared to earnings of $4,452 for the nine
months ended September 30, 2002. Earnings from the unencapsulated feed
supplements segment for the nine months ended September 30, 2003 were $465
compared to a loss of $257 for the nine months ended September 30, 2002.
Interest income for the nine months ended September 30, 2003 totaled $3 as
compared to $31 for the nine months ended September 30, 2002. Interest expense
for the nine months ended September 30, 2003 totaled $209 as compared to $301
for the nine months ended September 30, 2002, a decrease of $92. 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
36.8%.
As a result of the foregoing, net earnings were $4,241 for the nine months
ended September 30, 2003 as compared with $5,797 for the nine months ended
September 30, 2002. Liquidity and Capital Resources
17
Working capital amounted to $15,688 at September 30, 2003 as compared to
$10,884 at December 31, 2002, an increase of $4,804. Cash flows from operating
activities provided $6,089 for the nine months ended September 30, 2003 as
compared with $8,634 for the nine months ended September 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. The foregoing was partially
offset by decreases in inventory and prepaid expenses and increases in
depreciation and deferred income taxes.
Capital expenditures were $1,901 for the nine months ended September 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 September 30, 2003, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 261,207 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 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, as described in Note
10. 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% (2.37% and 3.07% at September 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 September 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% (2.12% and 2.82% at September 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.
18
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, pursuant to 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. No contingent consideration
has been earned or paid for the second one year period ended June 2003. The
Company could potentially owe $1,000 of remaining contingent purchase price for
the remaining year of the calculation under the terms of 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 September 30, 2003 for this obligation is $882.
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 $ 435 $ 101 $ 536
2003 1,742 362 2,104
2004 1,742 286 2,028
2005 1,742 251 1,993
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.
19
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 nine
months ended September 30, 2003.
Related Party Transactions
The Company is not engaged and has not engaged in related party
transactions during the nine months ended September 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.
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.
20
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 did 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 September 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 September 30, 2003, would result in an increase in
annual interest expense and a corresponding reduction in cash flow of
approximately $100. 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 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
---------
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 July 28, 2003, the Company furnished a Current Report on Form 8-K
announcing its financial results for the quarter ended June 30, 2003.
On September 18, 2003, the Company furnished a Current Report on Form
8-K revising its business outlook for the quarter ended September 30,
2003.
On October 28, 2003, the Company furnished a Current Report on Form
8-K announcing its financial results for the quarter ended September
30, 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: November 14, 2003
23
Exhibit Index
Exhibit No. Description
----------- -----------
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