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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, 2004
or
___ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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 Exchange Act).
Yes X No
---------- ________________
As of August 1, 2004 the registrant had 5,020,082 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)
Unaudited
June 30, December 31,
2004 2003
------------- ----------
Current assets:
Cash and cash equivalents $ 13,563 $ 9,239
Accounts receivable 7,517 7,233
Inventories 6,993 5,961
Prepaid expenses and other current assets 1,035 723
Deferred income taxes 435 474
-------- --------
Total current assets 29,543 23,630
-------- --------
Property, plant and equipment, net 24,818 25,636
Excess of cost over net assets acquired 6,368 6,368
Intangibles assets, net 788 1,272
Total assets -------- --------
$ 61,517 $ 56,906
======== ========
See accompanying notes to consolidated financial statements
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
Unaudited
June 30, December 31,
2004 2003
----------- ---------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 1,792 $ 1,254
Accrued expenses 1,268 1,508
Accrued compensation and other benefits 1,153 1,182
Dividends payable -- 389
Current portion of long-term debt 1,742 1,742
Total current liabilities --------- ---------
5,955 6,075
--------- ---------
Long-term debt 6,968 7,839
Deferred income taxes 2,216 2,226
Other long-term obligations 1,007 985
Total liabilities --------- ---------
16,146 17,125
--------- ---------
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; 5,009,462
shares issued and outstanding at June 30, 2004 and 4,903,238 shares
issued and 4,860,078 shares outstanding at December 31, 2003 334 327
Additional paid-in capital 5,164 3,902
Retained earnings 39,873 36,056
Treasury stock, at cost: 0 shares at June 30, 2004 and 43,160 shares at
December 31, 2003 -- (504)
Total stockholders' equity --------- ---------
45,371 39,781
--------- ---------
Total liabilities and stockholders' equity $ 61,517 $ 56,906
========= =========
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- --------- -------- ----------
Net sales $ 16,449 $ 14,860 $ 32,093 $ 29,676
Cost of sales 10,426 9,372 20,457 18,537
--------- --------- -------- ----------
Gross profit 6,023 5,488 11,636 11,139
Operating expenses:
Selling expenses 1,178 1,312 2,360 2,717
Research and development expenses 447 500 869 1,025
General and administrative expenses 1,209 913 2,290 1,877
-------- --------- -------- ----------
2,834 2,725 5,519 5,619
-------- --------- -------- ----------
Earnings from operations 3,189 2,763 6,117 5,520
Other expenses (income):
Interest (income) (33) (1) (52) (2)
Interest expense 55 72 113 146
Other, net -- -- (12) -
--------- --------- --------- ---------
Earnings before income tax expense 3,167 2,692 6,068 5,376
Income tax expense 1,166 1,001 2,251 2,002
--------- --------- --------- ---------
Net earnings $ 2,001 $ 1,691 $ 3,817 $ 3,374
========= ========= ========== =========
Net earnings per common share - basic $ 0.40 $ 0.35 $ 0.77 $ 0.70
========= ========= ========== =========
Net earnings per common share - diluted $ 0.39 $ 0.34 $ 0.74 $ 0.68
========= ========= ========== =========
See accompanying notes to consolidated financial statements
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
2004 2003
-------- ---------
Unaudited
---------
Cash flows from operating activities:
Net earnings $ 3,817 $ 3,374
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,817 1,704
Shares issued under employee benefit plans 142 165
Deferred income taxes 29 119
Provision for doubtful accounts - 40
Loss on sale of equipment (12) -
Changes in assets and liabilities:
Accounts receivable (284) 290
Inventories (1,032) (323)
Prepaid expenses and other current assets (312) 1,016
Accounts payable and accrued expenses 269 (3,394)
Other long-term obligations 30 9
-------- --------
Net cash provided by operating activities 4,464 3,000
-------- --------
Cash flows from investing activities:
Capital expenditures (547) (1,332)
Proceeds from sale of property, plant & equipment 90 41
Cash paid for intangibles assets acquired (46) (57)
-------- --------
Net cash used in investing activities (503) (1,348)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (871) (871)
Proceeds from stock options and warrants exercised 1,631 344
Dividends paid (389) (382)
Other financing activities (8) (7)
-------- --------
Net cash provided by (used in) financing activities 363 (916)
-------- --------
Increase in cash and cash equivalents 4,324 736
Cash and cash equivalents beginning of period 9,239 1,731
-------- --------
Cash and cash equivalents end of period $ 13,563 $ 2,467
======== =======
See accompanying notes to condensed 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, 2003 consolidated financial statements, and should be read
in conjunction with the consolidated financial statements and notes, which
appear in our Annual Report on Form 10-K. 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 U.S. generally accepted accounting principles
governing interim financial statements and the instructions to Form 10-Q and
Article 10 of Regulation S-X and therefore do not include some information and
notes necessary to conform to annual reporting requirements. The results of
operations for the three and six months ended June 30, 2004 are not
necessarily indicative of the operating results expected for the full year.
NOTE 2 - STOCK OPTION PLAN
- --------------------------
At June 30, 2004, 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 Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure an amendment of FASB Statement
123," which requires the Company to provide pro forma net earnings and pro
forma earnings per share disclosures for employee and director stock option
grants made 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,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Earnings
Net earnings, as reported $ 2,001 $ 1,691 $ 3,817 $ 3,374
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method, net
of related tax effects (191) (183) (386) (333)
---------- ---------- ---------- ----------
Net earnings as adjusted $ 1,810 $ 1,508 $ 3,431 $ 3,041
========== ========== ========== ==========
Earnings per share:
Basic EPS as reported $ .40 $ .35 $ .77 $ .70
Basic EPS as adjusted $ .36 $ .31 $ .69 $ .63
Diluted EPS as reported $ .39 $ .34 $ .74 $ .68
Diluted EPS as adjusted $ .35 $ .30 $ .67 $ .61
========== ========== ========== =========
The fair value of each stock option granted during the six months ended June
30, 2004 and 2003 is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
2004 2003
------- -------
Expected life (years) 3 3
Expected volatility 27% 30%
Expected dividend yield .34% .38%
Risk-free interest rate 2.88% 1.9%
Weighted average fair value of options
granted $ 6.74 $ 3.06
NOTE 3 - INVENTORIES
- --------------------
Inventories at June 30, 2004 and December 31, 2003 consist of the following:
June 30, December 31,
2004 2003
-------- -----------
Raw materials $ 2,088 $ 1,914
Finished goods 4,905 4,047
------- -----------
Total inventories $ 6,993 $ 5,961
NOTE 4 - INTANGIBLE ASSETS
- --------------------------
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. 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. Intangible assets with estimable useful
lives are 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
11.
7
As of December 31, 2003, the Company performed its annual impairment test of
its goodwill balance. 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. There have been indications of
impairment since that date. The Company plans to perform its impairment test
each December 31 in the future.
As of June 30, 2004 and December 31, 2003 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,908 and
$7,862, respectively, less accumulated amortization of $7,120 and $6,590,
respectively. Intangible assets at June 30, 2004 consist of the following:
Gross
Amortization period Carrying Accumulated
(in years) Amount Amortization
------------------- ----------- --------------
Customer lists 10 $ 6,760 $ 6,623
Re-registration costs 10 356 356
Patents 17 528 93
Trademarks 17 210 31
Other 5 54 17
------------------- ---------- -------------
$ 7,908 $ 7,120
Amortization of identifiable intangible assets was approximately $530 for the
first six months of 2004. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
twelve months ended December 31, 2004 is approximately $685, approximately $41
in the second succeeding year, and approximately $41 in each of the third and
fourth succeeding years. At December 31, 2003 and June 30, 2004, there were no
identifiable intangible assets with indefinite useful lives as defined by SFAS
No. 142. There were no changes to the useful lives of intangible assets
subject to amortization during the three and six months ended June 30, 2004.
NOTE 5 - NET EARNINGS PER SHARE
- -------------------------------
The following presents a reconciliation of the net earnings and shares used in
calculating basic and diluted net earnings per share:
8
Net Number of
Earnings Shares Per Share
Three months ended June 30, 2004 (Numerator) (Denominator) Amount
- --------------------------------- ----------- ------------- ----------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 2,001 4,986,026 $ .40
Effect of dilutive securities - stock options 168,649
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding
and effect of stock options $ 2,001 5,154,675 $ .39
Net Number of
Earnings Shares Per Share
Three months ended June 30, 2004 (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
Net Number of
Earnings Shares Per Share
Six months ended June 30, 2004 (Numerator) (Denominator) Amount
- --------------------------------- ----------- ------------- ----------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 3,817 4,971,071 $ .77
Effect of dilutive securities - stock options 163,081
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $ 3,817 5,134,152 $ .74
Net Number of
Earnings Shares Per Share
Six months ended June 30, 2004 (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
The Company had stock options covering 15,000 and 103,150 shares at June 30,
2004 and 2003, respectively, that could potentially dilute basic earnings per
share in future periods that were not included in diluted earnings per share
because their effect on the period presented was anti-dilutive.
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 BCP Ingredients,
its unencapsulated feed supplements segment.
Business Segment Net Sales:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- --------- --------- ---------
Specialty Products $ 7,116 $ 6,384 $ 14,144 $ 12,322
Encapsulated/Nutritional
Products 6,377 5,761 12,023 11,904
BCP Ingredients 2,956 2,715 5,926 5,450
-------- --------- --------- ---------
Total $ 16,449 $ 14,860 $ 32,093 $ 29,676
Business Segment Earnings (Loss):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- --------- --------- ---------
Specialty Products $ 2,522 $ 2,399 $ 5,098 $ 4,448
Encapsulated/Nutritional
Products 472 227 556 776
BCP Ingredients 195 137 463 296
Other (22) (71) (49) (144)
-------- -------- -------- --------
Earnings before income
taxes $ 3,167 $ 2,692 $ 6,068 $ 5,376
NOTE 7- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the six months ended June 30, 2004 and 2003 for income taxes
and interest is as follows:
10
Six Months Ended
June 30,
2004 2003
-------- --------
Income taxes $ 2,316 $ 1,158
Interest $ 113 $ 146
NOTE 8 - COMMON STOCK
- ---------------------
In June 1999, the board of directors authorized the repurchase of shares of
the Company's outstanding common stock over a two-year period commencing July
2, 1999, which was subsequently extended. Through June 30, 2004, the Company
has repurchased 343,316 shares at an average cost of $9.26 per share of which
no shares remain in treasury at June 30, 2004. In June 2004, 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 343,316 shares
repurchased to date under the program, through June 30, 2005.
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
11). 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% (2.36% and 2.57% at June 30, 2004 and
2003, 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, 2004, 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% (2.11% and 2.32% at June 30, 2004 and 2003,
respectively). No amounts have been drawn on the Revolving Facility as of the
date hereof. The Revolving Facility expires on May 31, 2005. Management
believes that such facility will be renewed in the normal course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
NOTE 10 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of its Verona facility.
Net periodic benefit cost for the six months ended June 30 was as follows:
11
2004 2003
----- -----
Service Cost $ 16 $ 16
Interest Cost 25 32
Expected return on plan assets - -
Amortization of transition obligation - -
Amortization of prior service cost (2) -
Amortization of (gain) or loss - -
----- -----
Net periodic benefit cost $ 39 $ 48
The plan is unfunded and approved claims are paid from Company funds.
Historical cash payments made under such plan approximated $50 per year.
In May 2004, the FASB issued FSP SFAS No. 106-2 "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("the Act"). FSP SFAS No. 106-2 superseded FSP SFAS
No. 106-1 and provides disclosure and accounting guidance for the federal
subsidy that will be given to health care plan sponsors who provide specified
levels of postretirement healthcare prescription benefits. As a result and as
allowed under FSP SFAS No. 106-2, neither our accumulated plan benefit
obligation nor our net periodic postretirement benefit cost includes the impact
of the potential subsidy as of June 30, 2004. FSP SFAS No. 106-2 is effective
for the first interim period beginning after June 15, 2004. FSP SFAS No 106-2 is
not expected to have a material impact on the Company's consolidated financial
statements.
NOTE 11 - 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
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 and third one
year periods ended June 2003 and 2004.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51." This interpretation addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means
other than voting rights and accordingly should consolidate the entity. FIN
46R requires that calendar year-end public companies apply the unmodified or
revised provisions of FIN 46 to entities previously considered special purpose
entities in the reporting period ended December 31, 2003. The interpretation
is applicable to all other entities not previously considered special purpose
12
entities in the quarter ended March 31, 2004. The aforementioned matters had no
effect on the Company's consolidated financial statements.
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,
2003 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.
RESULTS OF OPERATIONS
---------------------
Overview
- --------
The Company develops, manufactures and markets specialty performance
ingredients and products for the food, feed and medical sterilization
industries. The Company's reportable segments are strategic businesses that
offer products and services to different markets. The Company presently has
three reportable segments, specialty products, encapsulated / nutritional
products and BCP Ingredients.
Specialty Products Segment
- --------------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use in the health care industry and is used to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. Blends of
ethylene oxide are sold as fumigants and are highly effective in killing
bacteria, fungi, and insects in spices and other seasoning materials. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride
are sold principally to customers seeking smaller (as opposed to bulk)
quantities.
Management believes that future success in this segment is highly dependent on
the Company's ability to maintain its strong reputation for excellent quality,
safety and customer service. The Company is also required to maintain its EPA
regulatory permit.
Encapsulated / Nutritional Products
- -----------------------------------
The encapsulated / nutritional products segment predominantly encapsulates
food and nutritional ingredients for use throughout the food and animal health
industries to enhance performance of nutritional fortification, processing,
mixing, packaging applications and shelf-life improvement. Major end product
applications are baked goods, refrigerated and frozen dough systems, processed
meats, seasoning blends, confections and animal nutrition.
14
Management believes this segment's key strengths are its proprietary
technology and end-product application capabilities. The success of the
Company's efforts to increase revenue in this segment is highly dependent on
the timing of marketing launches of new products in the U.S. and International
food market by the Company's customers and prospects. Increased competition,
economic slowness and less than expected market launches and/or acceptance of
end-products in both the Domestic and International food markets has, during
the past year, resulted in lower volumes sold and lower average selling prices
which have had an impact on profit margins. To counter this, the Company,
through its proprietary technology and applications expertise, continues to
develop new microencapsulation products designed to solve and respond to
customer problems and needs. Sales of our Reashure(R) product for the animal
nutrition and health industry are highly dependent on dairy industry economics
as well as the ability of the Company to leverage the results of existing
successful university research on the animal health benefits of this product.
BCP Ingredients
- ---------------
BCP Ingredients manufactures and supplies choline chloride, an essential
nutrient for animal health, to the poultry and swine industries. In addition,
certain derivatives of choline chloride are also marketed into industrial
applications.
Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation
for excellent quality and customer service. In addition, the Company must
continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete for market share in a highly competitive
marketplace.
The Company sells products for all segments through its own sales force,
independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings (loss) for the three and six months ended June 30, (in
thousands):
Business Segment Net Sales:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Specialty Products $ 7,116 $ 6,384 $ 14,144 $ 12,322
Encapsulated/Nutritional
Products 6,377 5,761 12,023 11,904
BCP Ingredients 2,956 2,715 5,926 5,450
--------- --------- --------- ---------
Total $ 16,449 $ 14,860 $ 32,093 $ 29,676
15
Business Segment Earnings (Loss):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------- ---------- --------- ---------
Specialty Products $ 2,522 $ 2,399 $ 5,098 $ 4,448
Encapsulated/Nutritional
Products 472 227 556 776
BCP Ingredients 195 137 463 296
Other (22) (71) (49) (144)
--------- ---------- -------- ---------
Earnings before income
taxes $ 3,167 $ 2,692 $ 6,068 $ 5,376
Three months ended June 30, 2004 compared to three months ended June 30, 2003
Net Sales
- ---------
Net sales for the three months ended June 30, 2004 were $16,449 as compared
with $14,860 for the three months ended June 30, 2003, an increase of $1,589
or 10.7%. Net sales for the specialty products segment were $7,116 for the
three months ended June 30, 2004 as compared with $6,384 for the three months
ended June 30, 2003, an increase of $732 or 11.5%. This increase was due
principally to greater sales volumes of ethylene oxide for medical device
sterilization and single use ethylene oxide canisters for use in sterilization
equipment. Net sales for the encapsulated / nutritional products segment were
$6,377 for the three months ended June 30, 2004 as compared with $5,761 for
the three months ended June 30, 2003, an increase of $616 or 10.7%, led by
volume improvements in the domestic and international food markets as well as
increasing dairy industry acceptance of Nitroshure, which we launched in the
first quarter of 2004. Net sales of $2,956 were realized for the three months
ended June 30, 2004 for the BCP Ingredients (unencapsulated feed supplements)
segment, which markets choline additives for the poultry and swine industries
as well as industrial choline derivative products, as compared with $2,715 for
the three months ended June 30, 2003, an increase of $241 or 8.9%. This
increase was due to increased volumes sold in the dry choline product lines,
along with modest price increases in both the liquid and dry choline product
lines.
Gross Margin
- ------------
Gross margin for the three months ended June 30, 2004 increased to $6,023 as
compared to $5,488 for the three months ended June 30, 2003. Gross margin
percentage for the three months ended June 30, 2004 was 36.6% as compared to
36.9% for the three months ended June 30, 2003. Margins for the specialty
products segment fell by one percentage point due principally to unfavorable
product mix. Gross margin percentage in the encapsulated / nutritional
products segment also declined by one percentage point as margins were
unfavorably affected by product mix in the human food and nutrition markets
during the most recent second quarter. Margins for BCP Ingredients were
favorably affected by increased production volumes of choline chloride and
specialty derivative products.
16
Operating Expenses
- ------------------
Operating expenses for the three months ended June 30, 2004 increased to $2,834
from $2,725 for the three months ended June 30, 2003, an increase of $109 or
4.0%. Total operating expenses as a percentage of sales were 17.2% for the three
months ended June 30, 2004 as compared to 18.3% for the three months ended June
30, 2003. The increase in operating expense for the three months ended June 30,
2004 was principally a result of increased charges for search fees associated
with new hires, increased legal fees, continued high medical insurance claims,
and higher professional fees including those required to comply with the
Sarbanes Oxley Act. These increases were partially offset by a decrease in
selling expense, a result of the Company having made several organizational and
business model changes affecting the Encapsulated/Nutritional Products segment.
Many of these changes were effected late in the fourth quarter of 2003 in an
effort to refocus our commercial efforts, reduce operating expenses and improve
the overall financial performance of this segment. During the three months ended
June 30, 2004 and the three months ended June 30, 2003, the Company spent $447
and $500, 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.
Earnings From Operations
- ------------------------
As a result of the foregoing, earnings from operations for the three months
ended June 30, 2004 were $3,189 as compared to $2,763 for the three months
ended June 30, 2003.
Other Expenses (Income)
- -----------------------
Interest expense for the three months ended June 30, 2004 totaled $55 as
compared to $72 for the three months ended June 30, 2003, a decrease of $17.
This decrease is the result of lower average outstanding borrowings during the
period combined with lower average interest rates.
Income Tax Expense
- ------------------
The Company's effective tax rate for the three months ended June 30, 2004 and
2003 was 37.2%.
Net Earnings
- ------------
As a result of the foregoing, net earnings were $2,001 for the three months
ended June 30, 2004 as compared with $1,691 for the three months ended June
30, 2003.
17
Six months ended June 30, 2004 compared to six months ended June 30, 2003
Net Sales
- ---------
Net sales for the six months ended June 30, 2004 were $32,093 as compared with
$29,676 for the six months ended June 30, 2003, an increase of $2,417 or 8.1%.
Net sales for the specialty products segment were $14,144 for the six months
ended June 30, 2004 as compared with $12,322 for the six months ended June 30,
2003, an increase of $1,822 or 14.8%. This increase was due principally to
greater sales volumes of ethylene oxide for medical device sterilization and
single use ethylene oxide canisters for use in sterilization equipment. Net
sales for the encapsulated / nutritional products segment were $12,023 for the
six months ended June 30, 2004 as compared with $11,904 for the six months
ended June 30, 2003, an increase of $119 or 1%, led by volume improvements in
the domestic and international food markets as well as increasing dairy
industry acceptance of Nitroshure, which we launched in the first quarter of
2004. Sales in this segment were negatively affected by competitive pressures
in the human food and nutrition markets which resulted in lower average
selling prices. Net sales of $5,926 were realized for the six months ended
June 30, 2004 in the BCP Ingredients segment as compared with $5,450 for the
six months ended June 30, 2003, an increase of $476 or 8.7%. This increase was
due to increased volumes sold in the dry choline product lines, along with
some very modest price increases in both the liquid and dry choline product
lines.
Gross Margin
- ------------
Gross margin for the six months ended June 30, 2004 increased to $11,636 as
compared to $11,139 for the six months ended June 30, 2003. Gross margin
percentage for the six months ended June 30, 2004 was 36.3% as compared to 37.5%
for the six months ended June 30, 2003. Gross margin percentage for the
specialty products segment were equivalent for the six months ended June 30,
2004 and 2003 respectively. Gross margin percentage in the encapsulated /
nutritional products segment declined as margins were unfavorably affected by
product mix and competitive pressures in the human food and nutrition markets
which resulted in lower average selling prices. This sales decline was favorably
offset by increased volumes sold resulting in an overall increase in sales as
described above. Margins for BCP Ingredients were favorably affected by
increased production volumes of choline chloride and specialty derivative
products.
Operating Expenses
- ------------------
Operating expenses for the six months ended June 30, 2004 declined to $5,519
from $5,619 for the six months ended June 30, 2003, a decrease of $100 or 1.8%.
Total operating expenses as a percentage of sales were 17.2% for the six months
ended June 30, 2004 as compared to 18.9% for the six months ended June 30, 2003.
The increase in operating expense for the six months ended June 30, 2004 was
principally a result of increased charges for search fees associated with new
hires, increased legal fees, continued high medical insurance claims, and higher
professional fees including those required to comply with the Sarbanes Oxley
Act. These increases were partially offset by a decrease in selling expense, a
result of the Company having made several organizational and business model
changes affecting the Encapsulated/Nutritional Products segment. Many of these
changes were effected late in the fourth quarter of 2003 in an effort to refocus
our commercial efforts, reduce operating expenses and improve the overall
financial performance of this segment. During the six months ended June 30, 2004
and the six months ended June 30, 2003, the Company spent $869 and $1,025,
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.
18
Earnings From Operations
- ------------------------
As a result of the foregoing, earnings from operations for the six months
ended June 30, 2004 were $6,117 as compared to $5,520 for the six months ended
June 30, 2003.
Other Expenses (Income)
- -----------------------
Interest expense for the six months ended June 30, 2004 totaled $113 as
compared to $146 for the six months ended June 30, 2003, a decrease of $33.
This decrease is the result of lower average outstanding borrowings during the
period combined with lower average interest rates.
Income Tax Expense
- ------------------
The Company's effective tax rate for the six months ended June 30, 2004 and
2003 was 37.2%.
Net earnings
- ------------
As a result of the foregoing, net earnings were $3,817 for the six months
ended June 30, 2004 as compared with $3,374 for the six months ended June 30,
2003.
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
- -----------------------
The Company's contractual obligations and commitments principally include
obligations associated with its outstanding indebtedness under its Loan
Agreement and future minimum noncancelable operating lease obligations. These
aggregate commitments are as follows at June 30, 2004:
Loan Operating Total
Agreement Leases Commitment
---------- ---------- -----------
2004 $ 871 $ 304 $ 1,175
2005 1,742 473 2,215
2006 1,742 406 2,148
2007 1,742 354 2,096
2008 1,742 324 2,066
Thereafter 871 473 1,344
Balances for 2004 represent commitments for the period July through December,
2004.
19
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 could 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.
Cash
- ----
Cash and cash equivalents increased to $13,563 at June 30, 2004 from $9,239 at
December 31, 2003. The $4,324 increase resulted primarily from an increase in
net cash provided by operating activities and financing activities of $4,464
and $363, respectively, offset partially by net cash used in investing
activities of $503 principally for capital expenditures. Working capital
amounted to $23,588 at June 30, 2004 as compared to $17,555 at December 31,
2003, an increase of $6,033.
Operating Activities
- --------------------
Cash flows from operating activities provided $4,464 for the six months ended
June 30, 2004 as compared to $3,000 for the six months ended June 30, 2003.
The increase in cash flows from operating activities was due primarily to an
increase in earnings, accounts payable and accrued expenses and increases in
depreciation. Increased depreciation expense is the result of 2003 capital
expenditures currently being included in the depreciation calculation. The
foregoing was partially offset by an increase in prepaid expenses and
inventory balances, due to the timing of receipt of certain raw materials and
an increase in the balance of choline chloride on hand as the Company prepared
for a potential work stoppage at its Verona Missouri plant due to a union
contract expiring. The Company did successfully negotiate a new three year
agreement with the union without a work stoppage. Increased prepaid expense is
principally the result of a temporary change in the timing of payments related
to the Company's insurance program.
Investing Activities
- --------------------
Capital expenditures were $547 for the six months ended June 30, 2004. The
capital expenditure in 2003 of $1,332 includes construction costs associated
with the completion of a 10,000 square foot, state-of-the-art canister filling
operation at its Green Pond, South Carolina plant site. Capital expenditures
are expected to be approximately $1,650 for all of calendar year 2004.
Financing Activities
- --------------------
In June 1999, the board of directors authorized the repurchase of shares of
the Company's outstanding common stock over a two-year period commencing July
2, 1999, which was subsequently extended. Through June 30, 2004, the Company
has repurchased 343,316 shares at an average cost of $9.26 per share of which
no shares remain in treasury at June 30, 2004. In June 2004, 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 343,316 shares
repurchased to date under the program, through June 30, 2005. 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.
20
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
11). 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% (2.36% and 2.57% at June 30, 2004 and
2003, 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, 2004, 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% (2.11% and 2.32% at June 30, 2004 and 2003,
respectively). No amounts have been drawn on the Revolving Facility as of the
date hereof. The Revolving Facility expires on May 31, 2005. Management
believes that such facility will be renewed in the normal course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
Proceeds from stock options and warrants exercised totaled $1,631 and $344 for
the six months ended June 30, 2004 and 2003, respectively. Dividend payments
were $389 and $382 for the six months ended June 30, 2004 and 2003,
respectively.
The overall effect of the foregoing was that cash flows provided by financing
activities were $363 for the six months ended June 30, 2004 as compared to
cash flows used in financing activities of $916 for the six months ended June
30, 2003.
Other Matters Impacting Liquidity
- ---------------------------------
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 and third one
year periods ended June 2003 and 2004.
21
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of its Verona facility. The amount recorded on the
Company's balance sheet as of June 30, 2004 for this obligation is $930. The
postretirement plan is not funded. Historical cash payments made under such
plan approximated $50 per year.
Critical Accounting Policies
- ----------------------------
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2003 Annual Report on Form 10-K, during the
three and six months ended June 30, 2004.
Related Party Transactions
- --------------------------
The Company is not engaged and has not engaged in related party transactions
during the three and six months ended June 30, 2004. Transactions of the
Company during this period were at arms length.
New Accounting Pronouncements
In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
This interpretation addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46R requires
that calendar year-end public companies apply the unmodified or revised
provisions of FIN 46 to entities previously considered special purpose entities
in the reporting period ended December 31, 2003. The interpretation is
applicable to all other entities not previously considered special purpose
entities in the quarter ended March 31, 2004. The aformentioned matters had no
effect on the Company's consolidated financial statements.
In May 2004, the FASB issued FSP SFAS No. 106-2 "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("the Act"). FSP SFAS No. 106-2 superseded FSP SFAS
No. 106-1 and provides disclosure and accounting guidance for the federal
subsidy that will be given to health care plan sponsors who provide specified
levels of postretirement healthcare prescription benefits. As a result and as
allowed under FSP SFAS No. 106-2, neither our accumulated plan benefit
obligation nor our net periodic postretirement benefit cost includes the impact
of the potential subsidy as of June 30, 2004. FSP SFAS No. 106-2 is effective
for the first interim period beginning after June 15, 2004. FSP SFAS No. 106-2
is not expected to have a material impact on the Company's consolidated
financial statements.
22
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, 2004, 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, 2004, would result in an increase in annual
interest expense and a corresponding reduction in cash flow of approximately
$87. 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.
23
Item 4. Controls and Procedures
(a) Based upon an evaluation, under the supervision and with the
participation of the Company's Principal Executive Officer and
Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form 10-Q,
they have concluded that the Company's disclosure controls and
procedures as defined in Rule 13a-15(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 have been no
significant changes 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.
24
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
On June 18, 2004, the Company held its annual meeting of stockholders,
at which two Class I directors were elected. The following directors were
elected to serve until the annual meeting of stockholders in 2007 and until
the election and qualification of their respective successors.:
Director For Votes Withheld
-------------- ---------- --------------
Dino A. Rossi 3,605,756 802,755
---------- --------------
Elaine R. Wedral 4,146,920 261,591
---------- --------------
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 Chief Financial Officer 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 Chief Financial Officer 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 27, 2004, the Company furnished a Current Report on Form
8-K announcing under Items 12 and 7 its financial results for the
quarter ended March 31, 2004.
On July 27, 2004, the Company furnished a Current Report on Form
8-K announcing under items 12 and 7 its financial results for the
quarter ended June 30, 2004.
25
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
Date: August 6, 2004
26