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 September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number 1-13648
BALCHEM CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
- ---------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 175 Slate Hill, New York 10973
- ---------------------------------------- -----------
(Address of principal executive offices)
(Zip Code)
845-355-5300
--------------------------------
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 [ ]
As of November 8, 2001 the registrant had 4,696,758 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Part I. Financial Information
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
September 30, 2001 December 31,
Unaudited 2000
------- -------
Current assets:
Cash and cash equivalents $ 2,304 $ 3,068
Accounts receivable 7,359 5,044
Inventories 4,576 2,554
Prepaid expenses 155 502
Deferred income taxes 188 200
------- -------
Total current assets 14,582 11,368
------- -------
Property, plant and equipment, net 19,232 7,765
Intangibles and other assets, net 8,484 4,089
------- -------
Total assets $42,298 $23,222
======= =======
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
September 30,
2001 December 31,
Unaudited 2000
----------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable and other accrued expenses $ 2,738 $ 1,624
Accrued compensation and other benefits 977 1,135
Dividends payable -- 277
Income taxes payable 253 208
Current portion of long-term debt 1,687 --
Current portion of other long-term obligations 12 36
-------- --------
Total current liabilities 5,667 3,280
-------- --------
Long-term debt 11,813 --
Deferred income taxes 114 225
Deferred compensation 76 91
Other long-term obligations 837 46
-------- --------
Total liabilities 18,507 3,642
-------- --------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding
Common stock, $.0667 par value. Authorized 10,000,000 shares; 4,903,238 shares
issued and 4,692,722 shares outstanding at September 30, 2001 and
4,903,238 shares issued and 4,616,170 shares outstanding at December 31, 2000 327 327
Additional paid-in capital 3,129 3,082
Retained earnings 22,537 18,968
Treasury stock, at cost: 210,516 and 287,068 shares at September 30, 2001 and
December 31, 2000, respectively (2,202) (2,797)
-------- --------
Total stockholders' equity 23,791 19,580
-------- --------
Total liabilities and stockholders' equity $ 42,298 $ 23,222
======== ========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 13,849 $ 8,450 $ 32,062 $ 24,050
Cost of sales 8,917 4,876 19,423 14,106
-------- -------- -------- --------
Gross profit 4,932 3,574 12,639 9,944
Operating expenses:
Selling expenses 1,211 1,097 3,221 2,859
Research and development expenses 459 266 1,237 766
General and administrative expenses 1,077 707 2,736 2,156
-------- -------- -------- --------
Earnings from operations 2,185 1,504 5,445 4,163
Other income (expense):
Interest income (expense) - net (173) 13 (168) 26
Other income - net 167 -- 491 --
-------- -------- -------- --------
Earnings before income tax expense 2,179 1,517 5,768 4,189
Income tax expense 871 533 2,199 1,549
-------- -------- -------- --------
Net earnings $ 1,308 $ 984 $ 3,569 $ 2,640
======== ======== ======== ========
Net earnings per common share - basic $ 0.28 $ 0.21 $ 0.77 $ 0.56
======== ======== ======== ========
Net earnings per common share - diluted $ 0.27 $ 0.21 $ 0.74 $ 0.55
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
2001 2000
-------- --------
Unaudited
Cash flows from operating activities:
Net earnings $ 3,569 $ 2,640
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 1,842 1,522
Income tax benefit from stock options exercised -- 33
Shares issued under employee benefit plans 162 143
Deferred income taxes (99) (123)
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (2,315) (408)
Inventories (2,022) 516
Prepaid expenses 347 261
Accounts payable and accrued expenses (75) (251)
Income taxes payable 45 (122)
Deferred compensation (15) (13)
-------- --------
Net cash provided by operating activities 1,439 4,198
-------- --------
Cash flows from investing activities:
Capital expenditures (1,194) (625)
Product lines acquired (14,512) --
Increase in intangibles assets (92) (90)
-------- --------
Net cash used in investing activities (15,798) (715)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 13,500 --
Principal payments on long-term debt -- (1,250)
Proceeds from stock options and warrants exercised 480 115
Dividends paid (277) (245)
Purchase of treasury stock -- (2,236)
Other financing activities (108) (54)
-------- --------
Net cash provided by (used in) financing activities 13,595 (3,670)
-------- --------
Net decrease in cash and cash equivalents (764) (187)
Cash and cash equivalents beginning of period 3,068 1,699
-------- --------
Cash and cash equivalents end of period $ 2,304 $ 1,512
======== ========
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2000 Annual Report on Form 10-K, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in that report.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include some information and notes necessary to conform with annual reporting
requirements. The results of operations for the nine months ended September 30,
2001 are not necessarily indicative of the operating results expected for the
full year.
NOTE 2 - ACQUISITION OF ASSETS
- ------------------------------
Effective as of June 1, 2001, pursuant to a certain Asset Purchase Agreement,
dated as of May 21, 2001 (the "Asset Purchase Agreement"), BCP Ingredients, Inc.
("Buyer"), a wholly owned subsidiary of Balchem Corporation (the "Company"),
acquired certain assets, excluding accounts receivable and inventories, relating
to the choline animal feed, human choline nutrient and encapsulated product
lines of DCV, Inc. and its affiliate, DuCoa L.P., including DuCoa's
manufacturing facility in Verona, Missouri, for a purchase price, including
acquisition costs, of approximately $15,500, of which approximately $14,500 was
paid in cash, with the balance reflecting the assumption by the Buyer of certain
liabilities. The Buyer also assumed certain obligations of DuCoa for retiree
medical benefits under the collective bargaining agreement covering various
employees at the Verona facility. The acquisition was financed with a $13,500
term loan and approximately $1,012 in existing cash. The Asset Purchase
Agreement also called for the payment of up to an additional $3,000 based upon
the Verona, Missouri operations of specified product lines achieving certain
gross margin levels (in excess of specified thresholds) over the three year
period following the closing, with no more than $1,000 payable for any
particular yearly period. Cost in excess of net assets acquired of approximately
$5,100 is being amortized over 20 years and is included in intangible assets.
The preliminary allocation of the purchase price of the acquisition has been
assigned to the net assets acquired as follows:
- ----------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
- ----------------------------------------------------------
Property, plant and equipment $ 11,181
Retiree Medical Obligation (821)
Patents 80
Goodwill 5,103
- ----------------------------------------------------------
Total $ 15,543
- ----------------------------------------------------------
6
The above acquisition has been accounted for using the purchase method of
accounting and, the purchase price of the acquisition has, on a preliminary
basis, been assigned to the net assets acquired based on the fair value of such
assets and liabilities at the date of acquisition. The allocation of the
purchase price is preliminary, and will be finalized upon final appraisals of
certain assets and the resolution of certain other matters. The consolidated
financial statements include the results of operations of the acquired product
lines from the date of purchase.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2000 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to interest on
borrowings to finance the acquisition and changes in depreciation and
amortization of tangible and intangible assets resulting from the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned
acquisition, and related financing transactions had occurred at the beginning of
the periods presented and is not intended to be a projection of future results.
- --------------------------------------------------------------------------
Pro-Forma
Nine Months Ended
September 30,
2001 2000
- --------------------------------------------------------------------------
Net sales $ 40,786 $ 38,153
Net earnings 3,283 2,022
Basic EPS .71 .43
Diluted EPS .68 .42
==========================================================================
NOTE 3 - INVENTORIES
Inventories at September 30, 2001 and December 31, 2000 consist of the
following:
- ------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------
Raw materials $ 1,470 $ 1,147
Finished goods 3,106 1,407
- ------------------------------------------------------------------------------
Total inventories $ 4,576 $ 2,554
==============================================================================
7
NOTE 4 - NET EARNINGS PER SHARE
The following presents a reconciliation of the earnings and shares used in
calculating basic and diluted net earnings per share:
- -------------------------------------------------------------------------------------------------------
Number of
Income Shares Per Share
Three months ended September 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $1,308 4,676,670 $.28
Effect of dilutive securities - stock options 201,070
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options
$1,308 4,877,740 $.27
=======================================================================================================
- -------------------------------------------------------------------------------------------------------
Number of
Income Shares Per Share
Three months ended September 30, 2000 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $984 4,622,636 $.21
Effect of dilutive securities - stock options 100,728
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $984 4,723,364 $.21
=======================================================================================================
- -------------------------------------------------------------------------------------------------------
Number of
Income Shares Per Share
Nine months ended September 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $3,569 4,648,636 $.77
Effect of dilutive securities - stock options 177,822
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $3,569 4,826,458 $.74
=======================================================================================================
8
- -------------------------------------------------------------------------------------------------------
Number of
Income Shares Per Share
Nine months ended September 30, 2000 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $2,640 4,706,107 $.56
Effect of dilutive securities - stock options 79,607
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and $2,640 4,785,714 $.55
effect of stock options
=======================================================================================================
NOTE 5 - 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, the unencapsulated
feed supplements segment, a result of the aforementioned acquisition of certain
assets of DCV, Inc. and its affiiliate, DuCoa L.P. Products relating to choline
animal feed for non-ruminant animals are primarily reported in this segment.
Human choline nutrient products and all encapsulated products are reported in
the encapsulated / nutritional products segment.
Business Segment Net Revenues:
======================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
Specialty Products $ 5,275 $ 4,912 $15,885 $15,092
Encapsulated/Nutritional Products
5,534 3,538 12,353 8,958
Unencapsulated Feed Supplements
3,040 -- 3,824 --
- ------------------------------------------------------------------------------------------------------
Total $13,849 $ 8,450 $32,062 $24,050
======================================================================================================
9
Business Segment Profit (Loss):
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------------------------------------------------------------------------
Specialty Products $ 1,589 $ 1,298 $ 4,717 $ 4,235
Encapsulated/Nutritional
Products 620 206 765 (72)
Unencapsulated Feed Supplements (24) -- (37) --
Interest and other income (expense) (6) 13 323 26
- --------------------------------------------------------------------------------------------
Earnings before income taxes $ 2,179 $ 1,517 $ 5,768 $ 4,189
============================================================================================
NOTE 6- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the nine months ended September 30, 2001 and 2000 for income
taxes and interest is as follows:
- ----------------------------------------------------------------------------
Nine Months Ended
September 30,
- ----------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------
Income taxes $ 2,238 $ 1,760
Interest $ 254 $ 26
============================================================================
NOTE 7 - COMMON STOCK
- ---------------------
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. In June 2001, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2002. Through September 30, 2001, the Company has
repurchased 343,316 shares at an average cost of $9.26 per share of which
210,516 remain in treasury at September 30, 2001.
NOTE 8 - OTHER INCOME
- ---------------------
During the nine months ended September 30, 2001, the Company received proceeds
of approximately $491 from the settlement of a class-action claim related to
vitamin product antitrust litigation.
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
10
proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001
totaling 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% (4.83% at September 30, 2001). Certain provisions of the term loan require
maintenance of certain financial ratios, limit future borrowings and impose
certain other conditions 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 the date
hereof. The revolving credit facility expires on May 31, 2002.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company and BCP Ingredients, Inc., other than real properties,
pursuant to Security Agreements between each of the Company and BCP Ingredients,
Inc. respectively, and the Bank. BCP Ingredients, Inc. is a guarantor of the
Company's obligations under the Loan Agreement.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. This statement
requires the recognition of derivative financial instruments on the balance
sheet as assets or liabilities, at fair value. Gains or losses resulting from
changes in the value of derivatives are accounted for depending on the intended
use of the derivative and whether it qualifies for hedge accounting. The
implementation of this standard did not have a material effect on the Company's
consolidated financial statements because the Company did not have any financial
instruments entered into for trading or hedging purposes during the nine-months
ended September 30, 2001, nor does the Company currently have any derivative
financial instruments or derivative commodity instruments outstanding at
September 30, 2001.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
11
The Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require, upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $4,802 and unamortized identifiable intangible assets in the
amount of $3,368, all of which will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $95 for the
nine months ended September 30, 2001. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
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, 2000
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.
Balchem Corporation is engaged in the development, manufacture and marketing of
specialty performance ingredients and products for the food, feed and medical
sterilization industries. Presently, the Company has three segments, specialty
products, encapsulated / nutritional products and the unencapsulated feed
supplements segment, a result of the acquisition of certain assets of DCV, Inc.
and its affiliate, DuCoa L.P described in item 1 of this report. Products
relating to choline animal feed for non-ruminant animals are primarily reported
in this segment. Human choline nutrient products and all encapsulated products
are reported in the encapsulated / nutritional products segment.
Results of Operations:
Three months ended September 30, 2001 as compared with three months ended
- -------------------------------------------------------------------------
September 30, 2000
- ------------------
Net sales for the three months ended September 30, 2001 were
$13,849 as compared with $8,450 for the three months ended September 30, 2000,
an increase of $5,399 or 64%. Net sales for the specialty products segment were
$5,275 for the three months ended September 30, 2001 as compared with $4,912 for
the three months ended September 30, 2000, an increase of $363 or 7%. This
increase was due principally to greater volume sales of ethylene oxide related
products during the quarter ended September 30, 2001. Net sales for the
encapsulated / nutritional products segment were $5,534 for the three months
ended September 30, 2001 as compared with $3,538 for the three months ended
September 30, 2000, an increase of $1,996 or 56%. This increase was due
principally to greater sales to the animal nutrition and domestic food markets.
The growth in sales to the domestic food market is the result of increased
volumes sold which can be attributed principally to new products and new
applications. Sales of Reashure(TM), animal nutrition, continued to strengthen
in the quarter through growth from existing customers and from the addition of
new customers and added distribution channels, primarily in the West and
Midwest. The increases noted above were partially offset by a softness in sales
to the pet food and specialty industrial markets. In addition to the above noted
increases, sales pertaining to the June 1, 2001 acquisition of certain assets
relating to the choline animal feed, human choline nutrient, and encapsulated
product lines of DCV, Inc. and its affiliate, DuCoa L.P., also contributed
toward the increases in both the
13
encapsulated / nutritional products segment and the unencapsulated feed
supplements segment. Net sales from choline feed and choline derivative
industrial products were $3,040 for the three months ended September 30, 2001.
Gross margin percentage for the three months ended September 30,
2001 was 36% as compared to 42% for the three months ended September 30, 2000.
Margins were unfavorably affected by increased sales of lower margin feed
products to the poultry and swine markets in the unencapsulated feed supplements
segment. Margins for the specialty products segment were favorably affected by
increased volumes sold of ethylene oxide products. Margins in the encapsulated /
nutritional products segment were not materially different as a percentage of
sales for the three months ended September 30, 2001 as compared with the three
months ended September 30, 2000.
Operating expenses for the three months ended September 30, 2001
increased to $2,747 from $2,070 for the three months ended September 30, 2000,
an increase of $677 or 33%. Total operating expenses as a percentage of sales
were 20% for the three months ended September 30, 2001 as compared to 24% for
the three months ended September 30, 2000. The increase in operating expenses
was primarily the result of increased personnel in the area of sales, marketing
and research and development for the encapsulated / nutritional products
segment. In particular, additional sales personnel were added to support the
animal nutrition business and additional research and application personnel have
been added to support a more expansive research and development program for both
human and animal markets. Additional selling expenses were also incurred as a
result of the June 1, 2001 acquisition described above. During the three months
ended September 30, 2001 and the three months ended September 30, 2000, the
Company spent $459 and $266, 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. General and administrative expenses increased primarily due to an
increase in costs associated with the Company's medical plan, recruiting and
relocation expense.
As a result of the foregoing, earnings from operations for the
three months ended September 30, 2001 was $2,185 as compared to $1,504 for the
three months ended September 30, 2000. Earnings from operations for the
specialty products segment for the three months ended September 30, 2001 was
$1,589 as compared to $1,298 for the three months ended September 30, 2000.
Earnings from operations for the encapsulated / nutritional products segment for
the three months ended September 30, 2001 was $620 as compared to $206 for the
three months ended September 30, 2000. Earnings from operations for the
unencapsulated feed supplements segment for the three months ended September 30,
2001 was a loss of $24.
Interest income (expense) - net for the three months ended
September 30, 2001 totaled expense of $173 as compared to income of $13 for the
three months ended September 30, 2000. Long-term debt, including the current
portion, totaled $13,500 at September 30, 2001 as compared to no long-term debt
at September 30, 2000.
14
Other income of $167 for the three months ended September 30,
2001 represents additional proceeds received from the settlement of a
class-action claim related to vitamin product antitrust litigation.
The Company records its interim tax provision based upon its
estimated effective tax rate for the year, which is presently expected to be
approximately 38%.
As a result of the foregoing, net earnings were $1,308 for the
three months ended September 30, 2001 as compared with $984 for the three months
ended September 30, 2000.
Nine months ended September 30, 2001 as compared with nine months ended
- -----------------------------------------------------------------------
September 30, 2000
- ------------------
Net sales for the nine months ended September 30, 2001 were
$32,062 as compared with $24,050 for the nine months ended September 30, 2000,
an increase of $8,012 or 33%. Net sales for the specialty products segment were
$15,885 for the nine months ended September 30, 2001 as compared with $15,092
for the nine months ended September 30, 2000, an increase of $793 or 5%. Such
increase is partly the result of increased volumes sold of ethylene oxide
related products and the mix of other products sold during the nine months ended
September 30, 2001. Net sales for the encapsulated / nutritional products
segment were $12,353 for the nine months ended September 30, 2001 as compared
with $8,958 for the nine months ended September 30, 2000, an increase of $3,395
or 38%. This increase was due principally to greater sales to the animal
nutrition and domestic food markets. The domestic food growth is the result of
increased volumes sold of which can be attributed principally to new products
and new applications. Sales of Reashure(TM) continued to strengthen through
growth from existing customers and from the addition of new customers and added
distribution channels globally. The increases noted above were partially offset
by a decline in sales to the specialty industrial market. In addition to the
above noted increases, sales pertaining to the June 1, 2001 acquisition of
certain assets relating to the choline animal feed, human choline nutrient, and
encapsulated product lines of DCV, Inc. and its affiliate, DuCoa L.P also
contributed to the increases in both the encapsulated / nutritional products
segment and the unencapsulated feed supplements segment. Net sales from choline
feed and choline derivative industrial products were $3,824 for the nine months
ended September 30, 2001.
Gross margin percentage for the nine months ended September 30,
2001 was 39% as compared to 41% for the nine months ended September 30, 2000.
Margins were affected by increased sales of lower margin feed products to the
poultry and swine markets in the unencapsulated feed supplements segment.
Margins for the specialty products segment were favorably affected by increased
volumes sold and improved production efficiencies of blended ethylene oxide
products which the Company now sells for non-medical sterilization. Margins
improved in the encapsulated / nutritional products segment, a result of
efficiencies realized from increased production and the mix of products sold
during the nine months ended September 30, 2001.
Operating expenses for the nine months ended September 30, 2001
increased to $7,194 from $5,781 for the nine months ended September 30, 2000, an
increase of $1,413
15
or 24%. Total operating expenses as a percentage of sales were 22% for the nine
months ended September 30, 2001 as compared to 24% for the nine months ended
September 30, 2000.The increase in operating expenses was primarily the result
of increased personnel in the area of sales, marketing and research and
development for the encapsulated / nutritional products segment. In particular,
additional sales personnel were added to support the animal nutrition business
and additional research and application personnel have been added to support a
more expansive research and development program for both human and animal
markets. Additional selling expenses were also incurred as a result of the
September 1, 2001 acquisition described above. During the nine months ended
September 30, 2001 and the nine months ended September 30, 2000, the Company
spent $1,237 and $766, respectively, on Company-sponsored research and
development programs, substantially all of which pertained to the Company's
encapsulated products segment for both food and animal feed applications.
General and administrative expenses increased primarily due to an increase in
costs associated with the Company's medical plan, recruiting and relocation
expense.
As a result of the foregoing, earnings from operations for the
nine months ended September 30, 2001 were $5,445 as compared to $4,163 for the
nine months ended September 30, 2000. Earnings from operations for the specialty
products segment for the nine months ended September 30, 2001 were $4,717 as
compared to $4,235 for the nine months ended September 30, 2000. Earnings from
operations for the encapsulated / nutritional products segment for the nine
months ended September 30, 2001 were $765 as compared to a loss of $72 for the
nine months ended September 30, 2000. Earnings from operations of the
unencapsulated feed supplements segment for the nine months ended September 30,
2001 was a loss of $37.
Interest income (expense) - net for the nine months ended
September 30, 2001 totaled expense of $168 as compared to income of $26 for the
nine months ended September 30, 2000. Long-term debt, including the current
portion, totaled $13,500 at September 30, 2001 as compared to no long-term debt
at September 30, 2000.
Other income of $491 for the nine months ended September 30, 2001
represents proceeds received from the settlement of a class-action claim related
to vitamin product antitrust litigation.
The Company records its interim tax provision based upon its
estimated effective tax rate for the year, which is presently expected to be
approximately 38%.
As a result of the foregoing, net earnings were $3,569 for the
nine months ended September 30, 2001 as compared with $2,640 for the nine months
ended September 30, 2000.
Liquidity and Capital Resources
Cash flows from operating activities provided $1,439 for the nine
months ended September 30, 2001 as compared with $4,198 for the nine months
ended September 30, 2000. The decrease in cash flows from operating activities
was due primarily to increased accounts receivable and increased inventory
balances, a result of the Company having to
16
invest working capital in its recently acquired business as more fully described
above. The foregoing was partially offset by increased net earnings.
Capital expenditures were $1,194 for the nine months ended
September 30, 2001. Capital expenditures are budgeted to be approximately $1,800
for all of calendar year 2001.
In June 1999, the board of directors authorized the repurchase of
up to 1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. In June 2001, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2002. As of September 30, 2001, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 132,800 shares
have been issued by the Company under employee benefit plans and for the
exercise of stock options. The Company intends to acquire shares from time to
time at prevailing market prices if and to the extent it deems it advisable to
do so based among other factors on its assessment of corporate cash flow and
market conditions.
On June 1, 2001, the Company and its principal bank entered into
a Loan Agreement providing for a term loan of $13,500, the proceeds of which
were used to fund the acquisition of certain assets of DCV, Inc. The term loan
is payable in equal monthly installments beginning October 1, 2001 of principal
totaling 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% (4.83% at September 30, 2001). Certain provisions of the term loan require
maintenance of certain financial ratios, limit future borrowings and impose
certain other conditions 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 the date
hereof. The revolving credit facility expires on May 31, 2002.
Indebtedness under the Loan Agreement is secured by substantially
all of the assets of the Company and BCP Ingredients, Inc., other than real
properties, pursuant to Security Agreements between each of the Company and BCP
Ingredients, Inc. respectively, and the Bank. BCP Ingredients, Inc. is a
guarantor of the Company's obligations under the Loan Agreement.
The Company knows of no current or pending demands on or
commitments for its liquid assets that will materially affect its liquidity.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In July 2001, the FASB issued Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement 141 also
specifies the criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with
17
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require, upon adoption of Statement 142, that
the Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment
evaluation, Statement 142 will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of earnings.
18
As of the date of adoption, the Company expects to have
unamortized goodwill in the amount of $4,802 and unamortized identifiable
intangible assets in the amount of $3,368, all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $95 for the nine months ended September 30, 2001. Because of the
extensive effort needed to comply with adopting Statements 141 and 142, it is
not practicable to reasonably estimate the impact of adopting these Statements
on the Company's financial statements at the date of this report, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, the Company is exposed to
market risks arising from adverse changes in interest rates. Market risk is
defined for these purposes as the potential change in the fair value of debt
instruments resulting from an adverse movement in interest rates. As of
September 30, 2001, the Company's only borrowings were under a bank term loan,
which bears interest at LIBOR plus 1.25%. A 100 basis point increase in interest
rates, applied to the Company's borrowings at September 30, 2001, would result
in an increase in annual interest expense and a corresponding reduction in cash
flow of approximately $135. 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.
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Part II. Other Information
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
The registrant filed an amendment on Form 8-K/A, dated August 14,
2001, to its Current Report on Form 8-K dated June 14, 2001, providing financial
statements and pro-forma financial information under Item 7 thereof with respect
to the acquisition of certain assets of DCV, Inc. and DuCoa L.P described under
item 2 of such Current Report on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
By: /s/ Dino A. Rossi
------------------------
Dino A. Rossi, President,
Chief Executive Officer and
Principal Financial Officer
Date: November 14, 2001
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