FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15 (d) of
[ X ] The Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 2002
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 May 6, 2002 the registrant had 4,738,355 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)
March 31,
2002 December 31,
Unaudited 2001
--------- ------------
Current assets:
Cash and cash equivalents $ 4,565 $ 3,120
Accounts receivable 7,388 7,130
Inventories 4,949 5,575
Prepaid expenses 633 985
Deferred income taxes 219 214
------- -------
Total current assets 17,754 17,024
------- -------
Property, plant and equipment, net 18,136 17,904
Goodwill 6,397 6,397
Intangibles and other assets, net 2,891 3,152
------- -------
Total assets $45,178 $44,477
======= =======
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
March 31,
2002 December 31,
Unaudited 2001
--------- ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable and other accrued expenses $ 2,533 $ 2,885
Accrued compensation and other benefits 917 1,542
Dividends payable -- 305
Income taxes payable 685 --
Current portion of long-term debt 1,745 1,745
-------- --------
Total current liabilities 5,880 6,477
-------- --------
Long-term debt 10,888 11,323
Deferred income taxes 413 351
Other long-term obligations 979 994
-------- --------
Total liabilities 18,160 19,145
-------- --------
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 4,723,249 shares outstanding at March 31, 2002 and
4,903,238 shares issued and 4,699,166 shares outstanding at December 31, 2001 327 327
Additional paid-in capital 3,424 3,387
Retained earnings 25,211 23,773
Treasury stock, at cost: 179,989 and 204,072 shares at March 31, 2002 and
December 31, 2001, respectively (1,944) (2,155)
-------- --------
Total stockholders' equity 27,018 25,332
-------- --------
Total liabilities and stockholders' equity $ 45,178 $ 44,477
======== ========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except earnings per share data)
(unaudited)
Three Months Ended
March 31,
2002 2001
-------- --------
Net sales $ 14,389 $ 8,024
Cost of sales 9,095 4,482
-------- --------
Gross profit 5,294 3,542
Operating expenses:
Selling expenses 1,406 988
Research and development expenses 494 386
General and administrative expenses 968 751
-------- --------
2,868 2,125
-------- --------
Earnings from operations 2,426 1,417
Other expenses (income):
Interest (income) (19) (47)
Interest expense 105 8
Other (income) expense - net -- (324)
-------- --------
Earnings before income tax expense 2,340 1,780
Income tax expense 902 667
-------- --------
Net earnings $ 1,438 $ 1,113
======== ========
Net earnings per common share - basic $ 0.31 $ 0.24
======== ========
Net earnings per common share - diluted $ 0.29 $ 0.23
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
2002 2001
------- -------
Unaudited
---------
Cash flows from operating activities:
Net earnings $ 1,438 1,113
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 678 492
Shares issued under employee benefit plans 90 70
Deferred income taxes 57 (28)
Changes in assets and liabilities:
Accounts receivable (258) 780
Inventories 626 (262)
Prepaid expenses 352 125
Accounts payable and accrued expenses (977) (374)
Income taxes payable 685 478
Other long-term obligations (15) (23)
------- -------
Net cash provided by operating activities 2,676 2,371
------- -------
Cash flows from investing activities:
Capital expenditures (830) (443)
Proceeds from sale of property, plant & equipment 194 --
Cash paid for intangibles assets acquired (13) (29)
------- -------
Net cash used in investing activities (649) (472)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt (435) --
Proceeds from stock options and warrants exercised 158 32
Dividends paid (305) (277)
------- -------
Net cash used in financing activities (582) (245)
------- -------
Increase in cash and cash equivalents 1,445 1,654
Cash and cash equivalents beginning of period 3,120 3,068
------- -------
Cash and cash equivalents end of period $ 4,565 $ 4,722
======= =======
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, 2001 Annual Report on Form 10-K, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in that report. References in this Report to the Company mean Balchem and/or its
subsidiary BCP Ingredients, Inc., as the context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include some information and notes necessary to conform with annual reporting
requirements. The results of operations for the three months ended March 31,
2002 are not necessarily indicative of the operating results expected for the
full year.
NOTE 2 - PRIOR YEAR ACQUISITION
- -------------------------------
As previously reported in June, 2001, 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, acquired certain assets of DCV, Inc. and its affiliate,
DuCoa L.P. The results of operations of the product lines acquired have been
included in the accompanying consolidated financial statements of the Company
from the date of acquisition. The Asset Purchase Agreement provides for the
payment of up to an additional $2,750 based upon the sales 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. Such contingent consideration will be
recorded as an additional cost of the acquired product lines. No such contingent
consideration has been earned or paid as of March 31, 2002.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2001 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.
6
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
Three Months Ended
March 31, 2001
- -----------------------------------------------------
Net sales $ 13,505
Net earnings 1,008
Basic EPS .22
Diluted EPS .21
- -----------------------------------------------------
NOTE 3 - INVENTORIES
- --------------------
Inventories at March 31, 2002 and December 31, 2001 consist of the following:
- -----------------------------------------------------------------------
March 31, December 31,
2002 2001
- -----------------------------------------------------------------------
Raw materials $ 1,586 $ 2,152
Finished goods 3,363 3,423
- -----------------------------------------------------------------------
Total inventories $ 4,949 $ 5,575
- -----------------------------------------------------------------------
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 Shares
Income (Denominator) Per Share
Three months ended March 31, 2002 (Numerator) Amount
- ------------------------------------------------------- ----------------- -------------------- --------------
Basic EPS - Net earnings and weighted average common
shares outstanding $1,438 4,714,418 $.31
Effect of dilutive securities - stock options 198,547
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $1,438 4,912,965 $.29
- ------------------------------------------------------- ----------------- -------------------- --------------
7
- --------------------------------------------------------------------------------------------------------------
Number of Shares
Income Per Share
Three months ended March 31, 2001 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $1,113 4,621,518 $.24
Effect of dilutive securities - stock options 154,244
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options
$1,113 4,775,762 $.23
- ------------------------------------------------------- ----------------- -------------------- ---------------
At March 31, 2002, the Company had 110,062 stock options outstanding that could
potentially dilute basic earnings per share in future periods that were not
included in diluted earnings per share because their effect on the period
presented was anti-dilutive.
NOTE 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 (also relating to the aforementioned
acquisition) and encapsulated products are reported in the encapsulated /
nutritional products segment.
Business Segment Net Sales:
- ------------------------------------- -------------------------------------
Three Months Ended
March 31,
2002 2001
- ---------------------------------------------------------------------------
Specialty Products $ 5,345 $ 5,182
Encapsulated/Nutritional Products 6,363 2,842
Unencapsulated Feed Supplements 2,681 --
- ---------------------------------------------------------------------------
Total $ 14,389 $ 8,024
- ---------------------------------------------------------------------------
Business Segment Earnings (Loss):
- ---------------------------------------------------------------------------
Three Months Ended
March 31,
2002 2001
- ---------------------------------------------------------------------------
Specialty Products $ 1,718 $ 1,481
Encapsulated/Nutritional
Products 906 (64)
Unencapsulated Feed
Supplements (198) --
Interest and other income
(expense) (86) 363
- ---------------------------------------------------------------------------
Earnings before income taxes $ 2,340 $ 1,780
- ---------------------------------------------------------------------------
8
NOTE 6- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the three months ended March 31, 2002 and 2001 for income taxes
and interest is as follows:
- ---------------------------------------------------
Three Months Ended
March 31,
2002 2001
- ---------------------------------------------------
Income taxes $ 39 $ 223
Interest $ 105 $ 8
- ---------------------------------------------------
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 March 31, 2002, the Company has
repurchased 343,316 shares at an average cost of $9.26 per share of which
179,989 remain in treasury at March 31, 2002.
NOTE 8 - OTHER INCOME
- ---------------------
During the quarter ended March 31, 2001, the Company received proceeds of
approximately $324 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 proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, and has a maturity date of
May 31, 2009. Borrowing under the Term Loan bears interest at LIBOR plus 1.25%
(3.08% at March 31, 2002). 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, 2002, the
Company was in compliance with all restrictive covenants contained in the Loan
Agreement. The Loan Agreement also provides for a short-term revolving credit
facility of $3,000 (the "Revolving Facility"). Borrowings under the Revolving
Facility bear interest at LIBOR plus 1.00% (2.83% at March 31, 2002). No amounts
have been drawn on the Revolving Facility as of the date hereof. The revolving
credit facility expires on May 31, 2002. The Company intends to seek renewal of
such facility.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
9
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 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. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. This new standard also requires 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. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets".
The Company adopted the provisions of SFAS No. 141 immediately and adopted SFAS
No. 142 effective January 1, 2002. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 were amortized through the
end of 2001.
In connection with the transitional impairment evaluation, SFAS No. 142 requires
the Company to perform an assessment of whether goodwill and other intangible
assets were impaired as of January 1, 2002. Because of the uncertainty,
necessitated by the extensive effort needed to comply with the adoption of SFAS
No. 142, further evaluation is needed to complete the transitional goodwill
impairment test provisions of SFAS No. 142. However, the Company believes, based
on its preliminary evaluation, that adoption of the new standard should not
result in a material transitional impairment charge to the consolidated
statement of earnings. The Company is required by this standard to complete the
assessment process no later than June 30, 2002 and to record any impairment loss
as soon as possible but no later than the end of 2002. Transitional impairment
losses, if any, will be recognized as a cumulative effect of a change in
accounting principle in the Company's statement of earnings. The Company expects
to complete this process as required.
The Company had unamortized goodwill in the amount of $6,397 at March 31, 2002
and December 31, 2001, respectively, which will be subject to the transition
provisions of SFAS Nos. 141 and 142. Substantially all of the unamortized
goodwill is a result of the aforementioned acquisition of certain assets of DCV,
Inc. and its affiliate, Ducoa L.P. and accordingly, there was no amortization
expense related to goodwill for the first three months of 2001. Beginning
January 1, 2002, in accordance with SFAS No. 142, the Company is no longer
recording amortization expense related to goodwill.
As of March 31, 2002 and December 31, 2001 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,943, and
$7,930, respectively, less accumulated amortization of $5,052 and $4,778,
respectively. Intangible assets at March 31, 2002 and December 31, 2001 consist
of the following:
10
- ------------------------------------------------------------ -----------------------------
Amortization period
(in years) March 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------
Customer lists 10 $ 6,760 $ 6,760
Re-registration costs 10 356 356
Covenants not to compete 5 295 295
Patents 17 306 293
Trademarks 17 148 148
Other 5 78 78
- ------------------------------------------------------------------------------------------
7,943 7,930
- ------------------------------------------------------------------------------------------
Less: Accumulated amortization 5,052 4,778
- ------------------------------------------------------------------------------------------
Net intangible assets $ 2,891 $ 3,152
- ------------------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $274 for the
first three months of 2002. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization for the twelve months
ended December 31, 2002 and the next two succeeding years is approximately
$1,100 per year, approximately $671 in the third succeeding year and
approximately $26 in the fourth succeeding year. At March 31, 2002, there were
no identifiable intangible assets with indefinite useful lives as defined by
SFAS No. 142. Identifiable intangible assets are reflected in "Intangibles and
other assets" in the Company's consolidated balance sheets. There were no
changes to the useful lives of intangible assets subject to amortization during
the three months ended March 31, 2002.
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company adopted SFAS No. 144 on January 1, 2002 and such adoption had
no effect on the Company's consolidated financial statements for the quarter
ended March 31, 2002.
11
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, 2001 and other
factors that may be identified elsewhere in this Report. Reference should be
made to such factors and all forward-looking statements are qualified in their
entirety by the above cautionary statements.
The Company is engaged in the development, manufacture and marketing of
specialty performance ingredients and products for the food, feed and medical
sterilization industries. Presently, the Company has three segments, specialty
products, encapsulated / nutritional products and the unencapsulated feed
supplements segment, a result of the June 1, 2001 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 encapsulated
products are reported in the encapsulated / nutritional products segment.
Results of Operations:
Three months ended March 31, 2002 as compared with three months ended March 31,
- -------------------------------------------------------------------------------
2001
- ----
Net sales for the three months ended March 31, 2002 were $14,389 as
compared with $8,024 for the three months ended March 31, 2001, an increase of
$6,365 or 79%. Net sales for the specialty products segment were $5,345 for the
three months ended March 31, 2002 as compared with $5,182 for the three months
ended March 31, 2001, an increase of $163 or 3%. This increase was due
principally to greater sales volumes of ethylene oxide products and propylene
oxide products during the quarter ended March 31, 2002. Net sales for the
encapsulated / nutritional products segment were $6,363 for the three months
ended March 31, 2002 as compared with $2,842 for the three months ended March
31, 2001, an increase of $3,521 or 124%. Sales of the core encapsulates business
(before giving effect to the June 1, 2001 acquisition), increased 70.9% based on
growth in the domestic food, animal nutrition and industrial application
markets. When combined with sales of human choline products (the latter product
line having been derived from the 2001 acquisition), growth of 124% for the
entire encapsulated/nutritional products segment was achieved. 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 to both
existing and new customers. Sales of Reashure(TM) continued to strengthen
through growth from existing customers and from the addition of new customers
and added distribution channels globally. Net sales of $2,681 were realized in
the unencapsulated feed supplements segment, which markets choline additives for
12
the poultry and swine industries as well as industrial choline derivative
products.
Gross margin percentage for the three months ended March 31, 2002 was 37%
as compared to 44% for the three months ended March 31, 2001. 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 related products and a more favorable mix of
ethylene oxide and propylene oxide products sold. Margins were unfavorably
affected by the mix of products sold in the encapsulated / nutritional products
segment.
Operating expenses for the three months ended March 31, 2002 increased to
$2,868 from $2,125 for the three months ended March 31, 2001, an increase of
$743 or 35%. Total operating expenses as a percentage of sales were 20% for the
three months ended March 31, 2002 as compared to 27% for the three months ended
March 31, 2001. 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. Total payroll
expenses related to these and other administrative areas increased approximately
$436 for the three months ended March 31, 2002 as compared to the three months
ended March 31, 2001. In particular, additional sales personnel were added to
support the animal nutrition business, additional research and application
personnel have been added to support a more expansive research and development
program for both human and animal markets and additional selling expenses were
incurred as a result of the June 1, 2001 acquisition. During the three months
ended March 31, 2002 and the three months ended March 31, 2001, the Company
spent $494 and $386, 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 payroll
related costs associated with the addition of support personnel and an increase
in costs associated with the Company's medical plan. Effective January 1, 2002,
the Company adopted Financial Accounting Standard ("FAS") No. 142, which
required companies to discontinue the amortization of goodwill and other
intangible assets with indefinite useful lives. The adoption of this standard
did not have an effect on the comparability of the first quarter 2002 operating
results when compared to the first quarter of 2001.
As a result of the foregoing, earnings from operations for the three months
ended March 31, 2002 were $2,426 as compared to $1,417 for the three months
ended March 31, 2001. Earnings from operations for the specialty products
segment for the three months ended March 31, 2002 were $1,718 as compared to
$1,481 for the three months ended March 31, 2001. Earnings from operations for
the encapsulated / nutritional products segment for the three months ended March
31, 2002 were $906 as compared to a loss of $64 for the three months ended March
31, 2001. The unencapsulated feed supplements segment incurred a loss from
operations for the three months ended March 31, 2002 of $198.
Interest income for the three months ended March 31, 2002 totaled $19 as
compared to $47 for the three months ended March 31, 2001. Interest expense for
the three months ended March 31, 2002 totaled $105 as compared to $8 for the
three months ended March 31, 2001, an increase of $97. Long-term debt, including
13
the current portion, totaled $12,630 at March 31, 2002 as compared to no
long-term debt at March 31, 2001, resulting in greater interest expense.
Other income of $324 for the three months ended March 31, 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
38.5%. The increased rate from 37.5% for the three months ended March 31, 2001,
to 38.5% for the three months ended March 31, 2002, was primarily due to
additional state tax associated with the Verona, Missouri based acquisition of
certain assets and product lines.
As a result of the foregoing, net earnings were $1,438 for the three months
ended March 31, 2002 as compared with $1,113 for the three months ended March
31, 2001.
Liquidity and Capital Resources
Cash flows from operating activities provided $2,676 for the three months
ended March 31, 2002 as compared with $2,371 for the three months ended March
31, 2001. The increase in cash flows from operating activities was due primarily
to increased net earnings, decreased inventory balances and increased income
taxes payable. The foregoing was partially offset by an increase in accounts
receivable and a decrease in accounts payable and accrued expenses.
Capital expenditures were $830 for the three months ended March 31, 2002.
Capital expenditures are projected to be approximately $8,000 for all of
calendar year 2002. The Company is in the process of expanding the
manufacturing, processing and distribution facilities at its recently acquired
Verona, Missouri facility to enable it to handle operations for its specialty
products and encapsulated choline products businesses. In addition, the Company
has recently entered into a ten (10) year lease for approximately 20,000 square
feet of office space. Following completion of construction, the office space is
expected to serve as the Company's general offices and as a laboratory facility.
The costs of certain leasehold improvements to the Company's office space, up to
$630, are to be funded by the landlord.
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. In June 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 March 31, 2002, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 163,327 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.
14
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, and has a maturity date of
May 31, 2009. Borrowing under the Term Loan bears interest at LIBOR plus 1.25%
(3.08% at March 31, 2002). 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, 2002, the
Company was in compliance with all restrictive covenants contained in the Loan
Agreement. The Loan Agreement also provides for a short-term revolving credit
facility of $3,000 (the "Revolving Facility"). Borrowings under the Revolving
Facility bear interest at LIBOR plus 1.00% (2.83% at March 31, 2002). No amounts
have been drawn on the Revolving Facility as of the date hereof. The revolving
credit facility expires on May 31, 2002. The Company intends to seek renewal of
such facility.
Indebtedness under the Loan Agreement is secured by substantially all of
the assets of the Company other than real properties.
As part of 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., the asset purchase agreement calls for
the payment of up to an additional $2,750 based upon the sales 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. No such contingent
consideration has been earned or paid as of March 31, 2002. The first period to
which such contingent consideration could be applicable is the twelve month
period ending June 30, 2002.
The Company also currently provides postretirement benefits in the form of
a retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona facility. The amount recorded on the
Company's balance sheet as of March 31, 2002 for this obligation is $861. The
postretirement plan is not funded.
The Company's aggregate commitments under its Loan Agreement and
noncancelable operating lease agreements (including the office space lease
entered into in 2002 as described above) are as follows:
- ---------------------------------------------------------------------
Loan Operating Total
Agreement Leases Commitment
- ---------------------------------------------------------------------
2002 $ 1,307 $ 292 $ 1,599
2003 1,742 392 2,134
2004 1,742 319 2,061
2005 1,742 245 1,987
2006 1,742 245 1,987
Thereafter 4,355 852 5,207
- ---------------------------------------------------------------------
15
The Company knows of no current or pending demands on or commitments for
its liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash
flow to fund working capital requirements, necessary capital investments and the
current portion of debt obligations; however, the Company would seek further
bank loans or access to financial markets to fund operations, working capital,
necessary capital investments or other cash requirements should it deem it
necessary to do so.
Recently Issued Statements of Financial Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. The Company also records a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt SFAS No. 143 on January 1, 2003.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of
the December 31, 2001 Annual Report on Form 10-K. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, the following policies could be deemed to be
critical within the SEC definition.
Use of Estimates:
-----------------
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include inventory valuation, allowance for doubtful accounts, useful
lives of tangible and intangibles assets and various other operating allowances
and accruals.
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 March 31, 2002, the Company's
only outstanding 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 March 31, 2002, would result in an increase in annual
interest expense and a corresponding reduction in cash flow of approximately
$126. 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.
17
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
-------------------
No Reports on Form 8-K were filed during the quarter ended
March 31, 2002.
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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: May 15, 2002
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