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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 2005
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 May 5, 2005 the registrant had 7,698,174 shares of its Common Stock, $.06
2/3 par value, outstanding.
Part 1 - Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
Unaudited
March 31, December 31,
Assets 2005 2004
------ --------- ------------
Current assets:
Cash and cash equivalents $16,058 $12,734
Accounts receivable 9,377 7,996
Inventories 6,162 6,319
Prepaid income taxes -- 315
Prepaid expenses 1,040 1,527
Deferred income taxes 343 321
------- -------
Total current assets 32,980 29,212
Property, plant and equipment, net 23,908 24,188
Goodwill 6,368 6,368
Intangible assets with finite lives, net 642 637
------- -------
Total assets $63,898 $60,405
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 1,942 $ 1,466
Accrued expenses 947 1,212
Accrued compensation and other benefits 939 1,492
Customer deposits 649 852
Dividends payable -- 685
Income tax payable 1,038 --
------- -------
Total current liabilities 5,515 5,707
Deferred income taxes 3,601 3,461
Other long-term obligations 1,015 1,003
------- -------
Total liabilities 10,131 10,171
------- -------
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; 7,697,312
shares issued and outstanding at March 31, 2005 and 7,621,158 shares
issued and outstanding at December 31, 2004 513 508
Additional paid-in capital 7,289 6,329
Retained earnings 45,965 43,397
------- -------
Total stockholders' equity 53,767 50,234
------- -------
------- -------
Total liabilities and stockholders' equity $63,898 $60,405
======= =======
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
2005 2004
-------- --------
Net sales $ 19,340 $ 15,644
Cost of sales 12,158 10,031
-------- --------
Gross profit 7,182 5,613
Operating expenses:
Selling expenses 1,229 1,182
Research and development expenses 485 422
General and administrative expenses 1,437 1,081
-------- --------
3,151 2,685
-------- --------
Earnings from operations 4,031 2,928
Other expenses (income):
Interest (income) (40) (12)
Interest expense 2 39
-------- --------
Earnings before income tax expense 4,069 2,901
Income tax expense 1,501 1,085
-------- --------
Net earnings $ 2,568 $ 1,816
======== ========
Net earnings per common share - basic $ 0.34 $ 0.25
======== ========
Net earnings per common share - diluted $ 0.32 $ 0.24
======== ========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
2005 2004
-------- --------
Unaudited
---------
Cash flows from operating activities:
Net earnings $ 2,568 $ 1,816
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 670 914
Shares issued under employee benefit plans 88 82
Deferred income taxes 118 10
Tax benefit from stock options 17 --
Provision for doubtful accounts 18 --
Gain on sale of assets -- (12)
Changes in assets and liabilities:
Accounts receivable (1,399) 797
Inventories 157 (393)
Prepaid expenses and other current assets 487 (323)
Accounts payable and accrued expenses (342) (861)
Income taxes 1,353 1,092
Customer deposits (203) --
Other long-term obligations 16 15
-------- --------
Net cash provided by operating activities 3,548 3,137
-------- --------
Cash flows from investing activities:
Capital expenditures (377) (296)
Proceeds from sale of property, plant & equipment -- 90
Cash paid for intangibles assets acquired (18) (18)
-------- --------
Net cash used in investing activities (395) (224)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt -- (436)
Proceeds from stock options and warrants exercised 860 1,334
Dividends paid (685) (389)
Other financing activities (4) (3)
-------- --------
Net cash provided by financing activities 171 506
-------- --------
Increase in cash and cash equivalents 3,324 3,419
Cash and cash equivalents beginning of period 12,734 9,239
-------- --------
Cash and cash equivalents end of period $ 16,058 $ 12,658
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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, 2004 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 months ended March 31, 2005 are not necessarily
indicative of the operating results expected for the full year.
NOTE 2 - STOCK PLANS
- --------------------
At March 31, 2005, 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 require 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:
5
===============================================================================
Three Months Ended
March 31,
2005 2004
- -------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $2,568 $1,816
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method, net
of related tax effects (154) (194)
-------------------
Net earnings as adjusted $2,414 $1,622
===================
Earnings per share:
Basic EPS as reported $ .34 $ .25
Basic EPS as adjusted $ .32 $ .22
Diluted EPS as reported $ .32 $ .24
Diluted EPS as adjusted $ .30 $ .21
- ------------------------------------------------------------===================
The fair value of each stock option granted during the three months ended March
31, 2005 and 2004 is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
===============================================================================
2005 2004
- -------------------------------------------------------------------------------
Expected life (years) 3 3
Expected volatility 27% 32%
Expected dividend yield .39% .35%
Risk-free interest rate 3.39% 1.65%
Weighted average fair value of options granted $5.46 $4.78
===============================================================================
NOTE 3 - INVENTORIES
- --------------------
Inventories at March 31, 2005 and December 31, 2004 consist of the following:
================================================================================
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Raw materials $2,381 $2,305
Finished goods 3,781 4,014
- --------------------------------------------------------------------------------
Total inventories $6,162 $6,319
================================================================================
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment at March 31, 2005 and December 31, 2004 are
summarized as follows:
6
================================================================================
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Land $ 290 $ 290
Building 10,241 10,241
Equipment 28,636 28,619
Construction in Progress 732 387
- --------------------------------------------------------------------------------
39,899 39,537
Less: Accumulated depreciation 15,991 15,349
- --------------------------------------------------------------------------------
Net property, plant and equipment $23,908 $24,188
================================================================================
NOTE 5 - INTANGIBLE ASSETS
- --------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
business combination and define an intangible asset. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
As of December 31, 2004, the Company performed an impairment test of its
goodwill balance. As of such date, the Company's reporting units' fair values
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 performs its impairment test each December
31.
The Company has goodwill in the amount of $6,368 at both March 31, 2005 and
December 31, 2004 subject to the provisions of SFAS Nos. 141 and 142.
As of March 31, 2005 and December 31, 2004, the Company had identifiable
intangible assets with finite lives with a gross carrying value of approximately
$817, and $7,915, respectively, less accumulated amortization of $175 and
$7,278, respectively. At December 31, 2004, the gross carrying amount and
accumulated amortization included customer lists and re-registration costs that
were fully amortized during 2004. These fully amortized customer lists and
re-registration costs were written-off on March 31, 2005 and, therefore, were
not included in the gross carrying amount and accumulated amortization at March
31, 2005.
Identifiable intangible assets with finite lives at March 31, 2005 and December
31, 2004 are summarized as follows:
7
========================================================================================================
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount at Amortization Amount at Amortization
(In years) 3/31/05 at 3/31/05 12/31/04 at 12/31/04
- --------------------------------------------------------------------------------------------------------
Customer lists 10 -- -- $6,760 $6,760
Re-registration costs 10 -- -- 356 356
Patents 17 554 112 538 105
Trademarks 17 208 40 207 37
Other 5 55 23 54 20
- --------------------------------------------------------------------------------------------------------
$ 817 $ 175 $7,915 $7,278
========================================================================================================
Amortization of identifiable intangible assets was approximately $13 for the
first three months of 2005. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense is
approximately $50 per annum for 2005 through 2009. At March 31, 2005, there were
no identifiable intangible assets with indefinite useful lives as defined by
SFAS No. 142. Identifiable intangible assets are reflected in "Intangible assets
with finite lives, net" in the Company's consolidated balance sheets. There were
no changes to the useful lives of intangible assets subject to amortization
during the three months ended March 31, 2005.
NOTE 6 - 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:
=====================================================================================================
Net Number of
Earnings Shares Per Share
Three months ended March 31, 2005 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $ 2,568 7,660,713 $ .34
Effect of dilutive securities - stock options 289,133
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $ 2,568 7,949,846 $ .32
=====================================================================================================
=====================================================================================================
Net Number of
Earnings Shares Per Share
Three months ended March 31, 2004 (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $ 1,816 7,434,176 $ .25
Effect of dilutive securities - stock options 236,163
---------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $ 1,816 7,670,339 $ .24
=====================================================================================================
8
The Company had stock options covering 51,310 and 1,000 shares at March 31, 2005
and 2004, 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 7 - SEGMENT INFORMATION
- ----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments:
specialty products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.
Business Segment Net Sales:
===============================================================================
Three Months Ended
March 31,
2005 2004
- -------------------------------------------------------------------------------
Specialty Products $ 7,133 $ 7,028
Encapsulated / Nutritional Products 7,841 5,646
BCP Ingredients 4,366 2,970
- -------------------------------------------------------------------------------
Total $ 19,340 $ 15,644
===============================================================================
Business Segment Earnings (Loss):
===============================================================================
Three Months Ended
March 31,
2005 2004
- -------------------------------------------------------------------------------
Specialty Products $ 2,605 $ 2,576
Encapsulated / Nutritional Products 877 84
BCP Ingredients 549 268
Other 38 (27)
- -------------------------------------------------------------------------------
Earnings before income taxes $ 4,069 $ 2,901
===============================================================================
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
Cash paid during the three months ended March 31, 2005 and 2004 for income taxes
and interest is as follows:
================================================================================
Three months ended
March 31,
2005 2004
- --------------------------------------------------------------------------------
Income taxes $ 13 $ --
Interest $ 2 $ 58
================================================================================
9
NOTE 9 - COMMON STOCK
- ---------------------
On December 16, 2004, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be distributed in the form
of a stock dividend to shareholders of record on December 30, 2004. Such
distribution was made on January 20, 2005. Accordingly, the stock split was
recognized by reclassifying the par value of the additional shares resulting
from the split, from additional paid-in capital to common stock. All references
to number of common shares and per share amounts except shares authorized in the
accompanying consolidated financial statements were retroactively adjusted to
reflect the effect of the stock split.
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 March 31, 2005, the Company has
repurchased 514,974 shares at an average cost of $6.17 per share of which no
shares remain in treasury at March 31, 2005. 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 514,974 shares
repurchased to date under the program, through June 30, 2005.
NOTE 10 - LONG TERM DEBT AND CREDIT AGREEMENTS
- ----------------------------------------------
There was no debt outstanding at March 31, 2005. 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., (described in Note 4 of the Company's Form 10-K as of
December 31, 2004). During the quarter ended December 31, 2004, the Company
prepaid $7,839, the remaining balance of the Term Loan. Borrowings at March 31,
2004 included borrowings under the Term Loan bearing interest at LIBOR plus
1.25% (2.35% at March 31, 2004). 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. 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%. No amounts have been drawn on the Revolving Facility as of
March 31, 2005 and 2004. The Revolving Facility was extended and now expires on
May 30, 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 11 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company sponsors a 401(k) savings and profit sharing plan for eligible
employees. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees.
10
The Company also 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 such retirement medical plan for the three months
ended March 31 was as follows:
================================================================================
2005 2004
- --------------------------------------------------------------------------------
Service Cost $ 8 $ 9
Interest Cost 13 18
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost (3) --
Amortization of (gain) or loss -- --
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 18 $ 27
================================================================================
The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("the Act") was signed into law. The Act introduced a plan sponsor
subsidy based on a percentage of a beneficiary's annual prescription drug
benefits, within defined limits, and the opportunity for a retiree to obtain
prescription drug benefits under Medicare. There is no impact of the subsidy on
the postretirement benefit obligation and net periodic cost as Medicare eligible
retirees are not covered under the Company's plan.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. This statement was
originally effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. On April 14, 2005, the SEC
adopted a new rule that amended the compliance dates of SFAS No. 123R to require
implementation no later than the beginning of the first fiscal year after June
15, 2005 (the year beginning January 1, 2006 for the Company). The Company is
currently evaluating the impact of this standard on its results of operations
and financial position.
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 151, "Inventory Costs." The new statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This statement requires that those items be
recognized as current period charges and requires that allocation of fixed
production overheads to the cost of
11
conversion be based on the normal capacity of the production facilities. This
statement is effective for fiscal years beginning after June 15, 2005. The
Company does not expect adoption of this statement to have a material impact on
its financial condition or results of operations.
12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, which reflect the
Company's expectation or belief concerning future events that involve risks and
uncertainties. The actions and performance of the Company could differ
materially from what is contemplated by the forward-looking statements contained
in this Report. Factors that might cause differences from the forward-looking
statements include those referred to or identified in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 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 device 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 sterilant gas, in returnable
cylinders, primarily for use in the health care industry to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. In
addition, the Company sells 100% ethylene oxide in single use canisters to
customers that sell medical device sterilization equipment commonly found in
hospitals or doctor's offices. Blends of ethylene oxide are sold as fumigants
and are highly effective in killing bacteria, fungi, and insects in spices and
other seasoning materials. 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. Major end product applications
are baked goods, refrigerated
13
and frozen dough systems, processed meats, seasoning blends, confections,
nutritional supplementations and animal nutrition.
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. 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 NITROSHURE(TM) and REASHURE(TM) products 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 these products.
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 realize 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 for the three months ended March 31 (in thousands):
Business Segment Net Sales:
===============================================================================
Three Months Ended
March 31,
2005 2004
- -------------------------------------------------------------------------------
Specialty Products $ 7,133 $ 7,028
Encapsulated / Nutritional Products 7,841 5,646
BCP Ingredients 4,366 2,970
- -------------------------------------------------------------------------------
Total $ 19,340 $ 15,644
===============================================================================
14
Business Segment Earnings (Loss):
===============================================================================
Three Months Ended
March 31,
2005 2004
- -------------------------------------------------------------------------------
Specialty Products $ 2,605 $ 2,576
Encapsulated / Nutritional Products 877 84
BCP Ingredients 549 268
Other 38 (27)
- -------------------------------------------------------------------------------
Earnings before income taxes $ 4,069 $ 2,901
===============================================================================
Three months ended March 31, 2005 compared to three months ended March 31, 2004
Net Sales
- ---------
Net sales for the three months ended March 31, 2005 were $19,340 compared with
$15,644 for the three months ended March 31, 2004, an increase of $3,696 or
23.6%. Net sales for the specialty products segment were $7,133 for the three
months ended March 31, 2005, compared with $7,028 for the three months ended
March 31, 2004, an increase of $105 or 1.5%. This increase was due principally
to a slight increase in sales volume of ethylene oxide for medical device
sterilization as well as a modest price increase adopted to help offset rising
raw material costs. This increase was partially offset by a decline in volumes
sold in the ethylene oxide blends and EO Canister product lines. Net sales for
the encapsulated / nutritional products segment were $7,841 for the three months
ended March 31, 2005, compared with $5,646 for the three months ended March 31,
2004, an increase of $2,195 or 38.9%. This increase was principally due to
improvements in the domestic and international food markets as well as sales in
the animal health industry of REASHURE (TM) as well as NITROSHURE (TM), which
was launched in the first quarter of 2004. Net sales of $4,366 were realized for
the three months ended March 31, 2005 for the BCP Ingredients (unencapsulated
feed supplements) segment, which markets Choline into the poultry and swine
industries as well as industrial choline derivative products, compared with
$2,970 for the three months ended March 31, 2004, an increase of $1,396 or 47%.
This increase was due to increased volumes sold in the aqueous and dry choline
product lines, along with modest price increases in both the aqueous and dry
choline products.
Gross Margin
- ------------
Gross margin for the three months ended March 31, 2005 increased to $7,182
compared to $5,613 for the three months ended March 31, 2004. Gross margin
percentage for the three months ended March 31, 2005 was 37.1% compared to 35.9%
for the three months ended March 31, 2004. Margins for the specialty products
segment improved due principally to lower amortization expense. This improvement
was partially offset by increased raw material costs. Gross margin percentage in
the encapsulated / nutritional products segment improved by six percentage
points as margins were favorably affected by increased production, a result of
greater sales volume as described above. Margins for
15
BCP Ingredients were also favorably affected by increased production volumes of
choline chloride and specialty derivative products, due to the greater sales
volumes as noted above.
Operating Expenses
- ------------------
Operating expenses for the three months ended March 31, 2005 increased to $3,151
from $2,685 for the three months ended March 31, 2004, an increase of $466 or
17.4%. This increase was principally a result of increased charges for search
fees associated with new hires, continued high medical insurance costs, and
higher professional fees including those required to comply with the
Sarbanes-Oxley Act of 2002. Total operating expenses for this period as a
percentage of sales were 16.3% compared to 17.2% for the comparative three
months ended March 31, 2004. In this comparable period of 2005 and 2004, the
Company spent $484 and $422, 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 health
applications.
Earnings From Operations
- ------------------------
As a result of the foregoing, earnings from operations for the quarter ended
March 31, 2005 were $4,031, compared to $2,928 in the prior year comparable
quarter.
Other expenses (income)
- -----------------------
Interest income for the three months ended March 31, 2005 totaled $40 as
compared to $12 for the three months ended March 31, 2004. This increase is
attributable to the increase in the average total cash balance. Interest expense
was $2 for the three months ended March 31, 2005 compared to $39 for the three
months ended March 31, 2004. This decrease is the result of the prepayment of
the Company's outstanding loan balance in December 2004.
Income Tax Expense
- ------------------
The Company's effective tax rate for the three months ended March 31, 2005 was
36.9% compared to a 37.4% rate for the three months ended March 31, 2004.
Net earnings
- ------------
As a result of the foregoing, net earnings were $2,568 for the quarter ended
March 31, 2005 compared with $1,816 for the prior year comparable period.
16
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
- -----------------------
The Company's contractual obligations and commitments principally include
obligations associated with future minimum non-cancelable operating lease
obligations (including for the headquarters office space entered into in 2002).
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 and necessary capital investments. The
Company is actively pursuing acquisition candidates. While at the present time
it has no agreements or understandings to enter into any such transactions, the
Company could seek bank loans or access to financial markets to fund such
acquisitions, its 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 $16,058 at March 31, 2005 from $12,734 at
December 31, 2004. The $3,324 increase resulted primarily from an increase in
net cash provided by operating activities of $3,548 and financing activities of
$171, offset partially by net cash used in investing activities of $395,
principally for capital expenditures. Working capital amounted to $27,465 at
March 31, 2005 compared to $23,505 at December 31, 2004, an increase of $3,960.
Operating Activities
- --------------------
Cash flows from operating activities provided $3,548 for the three months ended
March 31, 2005 compared to $3,137 for the three months ended March 31, 2004. The
increase in cash flows from operating activities was due primarily to an
increase in earnings and income taxes payable and a decrease in inventories and
prepaid expenses. The foregoing was partially offset by an increase in accounts
receivable and a decrease in accounts payable and accrued expenses and customer
deposits.
Investing Activities
- --------------------
Capital expenditures were $377 for the three months ended March 31, 2005,
compared to $296 for the three months ended March 31, 2004. Capital expenditures
are expected to be approximately $2,400 for all of calendar year 2005.
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,
17
which was subsequently extended. Through March 31, 2005, the Company has
repurchased 514,974 shares at an average cost of $6.17 per share of which no
shares remain in treasury at March 31, 2005. 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 514,974 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.
There was no debt outstanding at March 31, 2005. 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. During the quarter ended December 31, 2004, the Company
prepaid $7,839, the remaining balance of the Term Loan. Borrowings at March 31,
2004 included borrowings under the Term Loan bearing interest at LIBOR plus
1.25% (2.35% at March 31, 2004). Certain provisions of the Term Loan require
maintenance of certain financial ratios, limit future borrowings, and impose
certain other requirements as contained in the agreement. At March 31, 2005 and
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%. No amounts have been drawn
on the Revolving Facility as of March 31, 2005 and 2004. The Revolving Facility
was extended and now expires on May 30, 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 exercised totaled $860 and $1,334 for the three
months ended March 31, 2005 and 2004, respectively. Dividend payments were $685
and $389 for the three months ended March 31, 2005 and 2004, respectively. The
overall effect of the foregoing was that cash flows provided by financing
activities were $171 for the three months ended March 31, 2005 as compared to
$506 for the three months ended March 31, 2004.
Other Matters Impacting Liquidity
- ---------------------------------
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 March 31, 2005 for this obligation is $949. The
postretirement plan is not funded. Historical cash payments made under such plan
have approximated $50 per year.
Critical Accounting Policies
- ----------------------------
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2004 Annual Report on Form 10-K, during the three
months ended March 31, 2005.
18
Related Party Transactions
- --------------------------
The Company was not engaged in related party transactions during the three
months ended March 31, 2005 and all transactions of the Company were at arms
length.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. 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.
19
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated, as of the end of the period covered by this Quarterly Report on
Form 10-Q, the effectiveness of the Company's disclosure controls and
procedures, including its internal controls and procedures. Based upon
that evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures were effective in identifying the
information required to be disclosed in the Company's periodic reports
filed with the Security and Exchange Commission ("SEC"), including this
Quarterly Report on Form 10-Q, and ensuring that such information is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls
During the most recent fiscal quarter, there has been no significant
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.
20
Part II. Other Information
Item 6. 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.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
By: /s/ Dino A. Rossi
---------------------
Dino A. Rossi, President,
Chief Executive Officer
By: /s/ Francis J. Fitzpatrick
------------------------------
Francis J. Fitzpatrick,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: May 9, 2005
22
Exhibit Index
Exhibit No. Description
- ----------- -----------
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.
23