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, 2004
or
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 1, 2004 the registrant had 4,973,143 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, December 31,
2004 2003
--------- ------------
Unaudited
Current assets:
Cash and cash equivalents $12,658 $ 9,239
Accounts receivable 6,436 7,233
Inventories 6,354 5,961
Prepaid expenses and other current assets 1,046 723
Deferred income taxes 459 474
------- -------
Total current assets 26,953 23,630
------- -------
Property, plant and equipment, net 25,210 25,636
Excess of cost over net assets acquired 6,368 6,368
Intangibles assets, net 1,020 1,272
------- -------
Total assets $59,551 $56,906
======= =======
See accompanying notes to consolidated financial statements
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
March 31, December 31,
2004 2003
--------- ------------
Unaudited
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,357 $ 1,254
Accrued expenses 1,305 1,508
Accrued compensation and other benefits 421 1,182
Dividends payable -- 389
Current portion of long-term debt 1,742 1,742
Income taxes payable 1,092 --
------- --------
Total current liabilities 5,917 6,075
------- --------
Long-term debt 7,403 7,839
Deferred income taxes 2,221 2,226
Other long-term obligations 997 985
------- --------
Total liabilities 16,538 17,125
------- --------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 10,000,000 shares; 4,972,623
shares issued and outstanding at March 31, 2004 and 4,903,238 shares
issued and 4,860,078 shares outstanding at December 31, 2003 331 327
Additional paid-in capital 4,809 3,902
Retained earnings 37,873 36,056
Treasury stock, at cost: 0 shares at March 31, 2004 and 43,160 shares at
December 31, 2003 -- (504)
------- --------
Total stockholders' equity 43,013 39,781
------- --------
Total liabilities and stockholders' equity $59,551 $ 56,906
======= ========
See accompanying notes to consolidated financial statements
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
2004 2003
-------- --------
Net sales $ 15,644 $ 14,816
Cost of sales 10,031 9,165
-------- --------
Gross profit 5,613 5,651
Operating expenses:
Selling expenses 1,182 1,405
Research and development expenses 422 525
General and administrative expenses 1,081 964
-------- --------
2,685 2,894
-------- --------
Earnings from operations 2,928 2,757
Other expenses (income):
Interest (income) (12) (1)
Interest expense 39 74
-------- --------
Earnings before income tax expense 2,901 2,684
Income tax expense 1,085 1,001
-------- --------
Net earnings $ 1,816 $ 1,683
======== ========
Net earnings per common share - basic $ 0.37 $ 0.35
======== ========
Net earnings per common share - diluted $ 0.36 $ 0.34
======== ========
See accompanying notes to consolidated financial statements
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
2004 2003
-------- -------
Unaudited
Cash flows from operating activities:
Net earnings $ 1,816 $ 1,683
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 914 830
Shares issued under employee benefit plans 82 104
Deferred income taxes 10 46
Gain on sale of assets (12) --
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable 797 (136)
Inventories (393) 241
Prepaid expenses and other current assets (323) 1,220
Accounts payable and accrued expenses (861) (2,355)
Other long-term obligations 15 9
-------- -------
Net cash provided by operating activities 3,137 1,642
-------- -------
Cash flows from investing activities:
Capital expenditures (296) (895)
Proceeds from sale of property, plant & equipment 90 41
Cash paid for intangibles assets acquired (18) (14)
-------- -------
Net cash used in investing activities (224) (868)
-------- -------
Cash flows from financing activities:
Principal payments on long-term debt (436) (436)
Proceeds from stock options and warrants exercised 1,334 128
Dividends paid (389) (382)
Other financing activities (3) (3)
-------- -------
Net cash provided by (used in) financing activities 506 (693)
-------- -------
Increase in cash and cash equivalents 3,419 81
Cash and cash equivalents beginning of period 9,239 1,731
-------- -------
Cash and cash equivalents end of period $ 12,658 $ 1,812
======== =======
See accompanying notes to consolidated financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2003 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 to annual reporting
requirements. The results of operations for the three months ended March 31,
2004 are not necessarily indicative of the operating results expected for the
full year.
NOTE 2 - STOCK OPTION PLAN
At March 31, 2004, the Company has stock based employee compensation plans. The
Company accounts for its stock option plans in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. No stock based employee compensation cost is
reflected in net earnings, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The Company has adopted the disclosure standards of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure an amendment of FASB Statement 123," which requires
the Company to provide pro forma net earnings and pro forma earnings per share
disclosures for employee and director stock option grants made as if the
fair-value based method of accounting for stock options as defined in SFAS No.
123 has been applied. The following table illustrates the effect on net earnings
and per share amounts if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock based employee compensation:
6
=============================================================================
Three Months Ended
March 31,
2004 2003
- -----------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 1,816 $ 1,683
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (194) (150)
----------- -----------
Net earnings as adjusted $ 1,622 $ 1,533
=========== ===========
Earnings per share:
Basic EPS as reported $ .37 $ $ .35
Basic EPS as adjusted $ .33 $ $ .32
Diluted EPS as reported $ .36 $ $ .34
Diluted EPS as adjusted $ .32 $ $ .31
- -----------------------------------------------------------------------------
The fair value of each stock option granted during the three months ended March
31, 2004 and 2003 is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
=============================================================================
2004 2003
- -----------------------------------------------------------------------------
Expected life (years) 3 3
Expected volatility 32% 30%
Expected dividend yield .35% .38%
Risk-free interest rate 1.65% 1.9%
Weighted average fair value of options
granted $7.17 $3.06
=============================================================================
NOTE 3 - INVENTORIES
Inventories at March 31, 2004 and December 31, 2003 consist of the following:
=============================================================================
March 31, December 31,
2004 2003
- -----------------------------------------------------------------------------
Raw materials $ 1,819 $ 1,914
Finished goods 4,535 4,047
- -----------------------------------------------------------------------------
Total inventories $ 6,354 $ 5,961
=============================================================================
7
NOTE 4 - INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. All of the Company's
goodwill arose from the June 2001 acquisition described in Note 11.
As of December 31, 2003, the Company performed its annual impairment test of its
goodwill balance. As of such date the Company's reporting units' fair value
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company plans to perform its impairment test each
December 31 in the future.
The Company had unamortized goodwill in the amount of $6,368 at March 31, 2004
and December 31, 2003.
As of March 31, 2004 and December 31, 2003 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,880, and
$7,862, respectively, less accumulated amortization of $6,860 and $6,590,
respectively. Intangible assets at March 31, 2004 consist of the following:
===============================================================================
Gross
Amortization period Carrying Accumulated
(in years) Amount Amortization
- -------------------------------------------------------------------------------
Customer lists 10 $ 6,760 $ 6,374
Re-registration costs 10 356 356
Patents 17 503 87
Trademarks 17 207 28
Other 5 54 15
- -------------------------------------------------------------------------------
$ 7,880 $ 6,860
===============================================================================
Amortization of identifiable intangible assets was approximately $270 for the
first three months of 2004. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
twelve months ended December 31, 2004 is approximately $685, approximately $41
in the second succeeding year, and approximately $41 in each of the third and
fourth succeeding years. At March 31, 2004, there were no identifiable
intangible assets with indefinite useful lives as defined by SFAS No. 142.
Identifiable intangible assets are reflected in "Intangibles assets, 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, 2004.
8
NOTE 5 - NET EARNINGS PER SHARE
The following presents a reconciliation of the earnings and shares used in
calculating basic and diluted net earnings per share:
=============================================================================================================
Number of
Income Shares Per Share
Three months ended March 31, 2004 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $1,816 4,956,117 $.37
Effect of dilutive securities - stock options 157,442
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $1,816 5,113,559 $.36
=============================================================================================================
=============================================================================================================
Number of
Income Shares Per Share
Three months ended March 31, 2003 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $1,683 4,792,690 $.35
Effect of dilutive securities - stock options 175,820
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options
$1,683 4,968,510 $.34
=============================================================================================================
At March 31, 2004, the Company had stock options covering 1,000 shares that
could potentially dilute basic earnings per share in future periods that were
not included in diluted earnings per share because their effect on the period
presented was anti-dilutive.
NOTE 6 - SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments,
specialty products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.
9
Business Segment Net Sales:
=========================================================================
Three Months Ended
March 31,
2004 2003
- -------------------------------------------------------------------------
Specialty Products $ 7,028 $ 5,938
Encapsulated/Nutritional Products 5,646 6,143
BCP Ingredients 2,970 2,735
- -------------------------------------------------------------------------
Total $ 15,644 $ 14,816
=========================================================================
Business Segment Earnings:
=========================================================================
Three Months Ended
March 31,
2004 2003
- -------------------------------------------------------------------------
Specialty Products $ 2,576 $ 2,048
Encapsulated/Nutritional Products 84 550
BCP Ingredients 268 159
Interest and other expense (27) (73)
- -------------------------------------------------------------------------
Earnings before income taxes $ 2,901 $ 2,684
=========================================================================
NOTE 7- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the three months ended March 31, 2004 and 2003 for income taxes
and interest is as follows:
===========================================================
Three Months Ended
March 31,
2004 2003
- -----------------------------------------------------------
Income taxes $ -- $ 152
Interest $ 58 $ 74
===========================================================
NOTE 8 - COMMON STOCK
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999, which was subsequently extended. Through March
31, 2004, the Company has repurchased 343,316 shares at an average cost of $9.26
per share of which no shares remain in treasury at March 31, 2004. In June 2003,
the board of directors authorized an extension to the stock repurchase program
for up to an additional 600,000 shares, that is, over and above those
repurchased to date under the program, through June 30, 2004.
10
NOTE 9 - LONG TERM DEBT
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the acquisition of certain
assets of DCV, Inc. and its affiliate Ducoa L.P. (as described in Note 11). The
Term Loan is payable in equal monthly installments of principal beginning
October 1, 2001 of approximately $145, together with accrued interest, and has a
maturity date of May 31, 2009. Borrowing under the Term Loan bears interest at
LIBOR plus 1.25% (2.35% and 2.59% at March 31, 2004 and 2003, respectively).
Certain provisions of the term loan require maintenance of certain financial
ratios, limit future borrowings and impose certain other requirements as
contained in the agreement. At March 31, 2004, the Company was in compliance
with all restrictive covenants contained in the Loan Agreement. The Loan
Agreement also provides for a short-term revolving credit facility of $3,000
(the "Revolving Facility"). Borrowings under the Revolving Facility bear
interest at LIBOR plus 1.00% (2.10% and 2.34% at March 31, 2004 and 2003,
respectively). No amounts have been drawn on the Revolving Facility as of the
date hereof. The Revolving Facility expires on May 31, 2004. Management believes
that such facility will be renewed in the normal course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company currently provides postretirement benefits in the form of an
unfunded retirement medical plan under a collective bargaining agreement
covering eligible retired employees of its Verona facility.
Net periodic benefit cost for the three months ended March 31 was as follows:
=========================================================================
2004 2003
- -------------------------------------------------------------------------
Service Cost 9 8
Interest Cost 18 16
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost -- --
Amortization of (gain) or loss -- --
- -------------------------------------------------------------------------
Net periodic benefit cost $ 27 $ 24
=========================================================================
The plan is unfunded and approved claims are paid from Company funds.
Historical cash payments made under such plan appoximated $50 per year.
The Company has elected to defer accounting for the economic effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).
In accordance with FSP FAS 106-1, any measures of the accumulated postretirement
plan benefit obligation or net periodic postretirement plan benefit cost in the
consolidated financial statements or accompanying notes do not reflect the
effects of the Act on the plan. Specific authoritative guidance on the
accounting for the federal subsidy is pending and
11
that guidance, when issued, could require the Company to change previously
reported information.
NOTE 11 - COMMITMENTS & CONTINGENCIES
As previously reported, in June, 2001, pursuant to a certain Asset Purchase
Agreement, dated as of May 21, 2001, BCP Ingredients, Inc. ("Buyer"), a wholly
owned subsidiary of Balchem Corporation, acquired certain assets of DCV, Inc.
and its affiliate, DuCoa L.P.. The agreement provided for the payment of up to
an additional $2,750 of contingent purchase price based upon the sales of
specified product lines achieving certain gross margin levels (in excess of
specified thresholds) over the three year period ending June 2004, with no more
than $1,000 payable for any particular yearly period. Additionally, pursuant to
the agreement, a reimbursement of a part of the purchase price could be due the
Company for the first year of such calculation. Based upon the results of the
calculation for the first one year period ended June 2002, a reimbursement of
$30 was received by the Company in 2003. Such reimbursement was recorded as a
reduction of the cost of the acquired product lines. No contingent consideration
has been earned or paid for the second one year period ended June 2003. Any
future contingent consideration would be recorded as an additional cost of the
acquired product lines.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
On December 24, 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R), which addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the
entity. The Interpretation replaces Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which was issued on January 17, 2003. The
effective date of FIN 46R depends on whether the reporting enterprise is a
public or nonpublic company and on the nature of the entity in which the
reporting entity has a variable interest. The initial adoption of this
accounting pronouncement will not have a material effect on the Company's
consolidated financial statements.
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, 2003 and other
factors that may be identified elsewhere in this Report. Reference should be
made to such factors and all forward-looking statements are qualified in their
entirety by the above cautionary statements.
RESULTS OF OPERATIONS
Overview
The Company develops, manufactures and markets specialty performance ingredients
and products for the food, feed and medical sterilization industries. The
Company's reportable segments are strategic businesses that offer products and
services to different markets. The Company presently has three reportable
segments, specialty products, encapsulated / nutritional products and BCP
Ingredients.
Specialty Products Segment
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use in the health care industry and is used to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. Blends of
ethylene oxide are sold as fumigants and are highly effective in killing
bacteria, fungi, and insects in spices and other seasoning materials. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride,
are sold principally to customers seeking smaller (as opposed to bulk)
quantities.
Management believes that future success in this segment is highly dependent on
the Company's ability to maintain its EPA regulatory permit and strong
reputation for excellent quality, safety and customer service.
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
13
improvement. Major end product applications are baked goods, refrigerated and
frozen dough systems, processed meats, seasoning blends, confections 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. Increased competition, economic slowness
and less than expected market launches and or acceptance of end-products in both
the Domestic and International food markets has, during the past year, resulted
in lower volumes sold and lower average selling prices which have had an impact
on profit margins. To counter this, the Company, through its innovative
proprietary technology and applications expertise, continues to develop new
microencapsulation products designed to solve and respond to customer problems
and needs. Sales of our Reashure(TM) product for the animal nutrition and health
industry are highly dependent on dairy industry economics as well as the ability
of the Company to leverage the results of existing successful university
research on the animal health benefits of this product.
BCP Ingredients
BCP Ingredients manufactures and supplies choline chloride, an essential
nutrient for animal health, to the poultry and swine industries. In addition,
certain derivatives of choline chloride are also marketed into industrial
applications.
Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation for
excellent quality and customer service. In addition, the Company must continue
to increase production efficiencies in order to maintain its low-cost position
to effectively compete for market share in a highly competitive marketplace.
The Company sells products for all segments through its own sales force,
independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business
segment earnings (loss) for the three months ended March 31, (in thousands):
Business Segment Net Sales:
==========================================================================
Three Months Ended
March 31,
2004 2003
- --------------------------------------------------------------------------
Specialty Products $ 7,028 $ 5,938
Encapsulated/Nutritional
Products 5,646 6,143
BCP Ingredients 2,970 2,735
- --------------------------------------------------------------------------
Total $ 15,644 $ 14,816
==========================================================================
14
Business Segment Earnings:
============================================================================
Three Months Ended
March 31,
2004 2003
- ----------------------------------------------------------------------------
Specialty Products $ 2,576 $ 2,048
Encapsulated/Nutritional
Products 84 550
BCP Ingredients 268 159
Interest and other income
(expense) (27) (73)
- ----------------------------------------------------------------------------
Earnings before income
taxes $ 2,901 $ 2,684
============================================================================
Three months ended March 31, 2004 compared to three months ended March 31, 2003
Net Sales
Net sales for the three months ended March 31, 2004 were $15,644 as compared
with $14,816 for the three months ended March 31, 2003, an increase of $828 or
5.6%. Net sales for the specialty products segment were $7,028 for the three
months ended March 31, 2004 as compared with $5,938 for the three months ended
March 31, 2003, an increase of $1,090 or 18.4%. This increase was due
principally to greater sales volumes (6.7% over the prior comparable period) of
ethylene oxide for medical device sterilization and single use ethylene oxide
canisters for use in sterilization equipment. Net sales for the encapsulated /
nutritional products segment were $5,646 for the three months ended March 31,
2004 as compared with $6,143 for the three months ended March 31, 2003, a
decrease of $497 or 8.1%. Particular weakness was experienced in the
International food market and the unencapsulated human choline product line.
International sales declined $326 and the unencapsulated human choline product
line declined $235 largely due to purchasing patterns. These declines were
partially offset by increased sales in the Domestic food market and of
feed-stable Reashure(TM) . Reashure(TM) sales volume increased 30% over the
prior year first quarter. Net sales of $2,970 were realized for the three months
ended March 31, 2004 in the BCP Ingredients (unencapsulated feed supplements)
segment, which markets choline additives for the poultry and swine industries as
well as industrial choline derivative products, as compared with $2,735 for the
three months ended March 31, 2003, an increase of $235 or 8.6%. This increase
was due to increased volumes sold in the dry choline product lines, along with
some very modest price increases in both the liquid and dry choline product
lines.
Gross Margin
Gross margin percentage for the three months ended March 31, 2004 was 35.9% as
compared to 38.1% for the three months ended March 31, 2003. Margins for the
specialty products segment were favorably affected by increased production
volumes of the Company's products utilizing ethylene oxide. Margins in the
encapsulated / nutritional
15
products segment were unfavorably affected by the decline in sales volume as
described above. In addition, increased competition in both the Domestic and
International food markets during the first quarter resulted in lower average
selling prices and, in the case of the International food market, lower volumes
sold which contributed to the decline in profit margins for this segment.
Margins for BCP Ingredients were favorably affected by increased production
volumes of choline chloride and specialty derivative products.
Operating Expenses
Operating expenses for the three months ended March 31, 2004 declined to $2,685
from $2,894 for the three months ended March 31, 2003, a decrease of $209 or
7.2%. Total operating expenses as a percentage of sales were 17.2% for the three
months ended March 31, 2004 as compared to 19.5% for the three months ended
March 31, 2003. This decline is a result of the Company having made several
organizational and business model changes affecting the Encapsulated/Nutritional
Products segment. Many of these changes were effected late in the fourth quarter
of 2003 in an effort to refocus our commercial efforts, reduce operating
expenses and improve the overall financial performance of this segment. During
the three months ended March 31, 2004 and the three months ended March 31, 2003,
the Company spent $422 and $525, respectively, on Company-sponsored research and
development programs, substantially all of which pertained to the Company's
encapsulated / nutritional products segment for both food and animal feed
applications.
Earnings From Operations
As a result of the foregoing, earnings from operations for the three months
ended March 31, 2004 were $2,928 as compared to $2,757 for the three months
ended March 31, 2003. Earnings from operations for the specialty products
segment for the three months ended March 31, 2004 were $2,576 as compared to
$2,048 for the three months ended March 31, 2003. Earnings from operations for
the encapsulated / nutritional products segment for the three months ended March
31, 2004 was $84 as compared to earnings of $550 for the three months ended
March 31, 2003. Earnings from operations from BCP Ingredients for the three
months ended March 31, 2004 were $268 compared to a $159 for the three months
ended March 31, 2003.
Other expenses (income)
Interest expense for the three months ended March 31, 2004 totaled $39 as
compared to $74 for the three months ended March 31, 2003, a decrease of $35.
This decrease is the result of lower average outstanding borrowings during the
period combined with lower average interest rates.
16
Income Tax Expense
The Company's effective tax rate for the three months ended March 31, 2004 was
37.4% compared to 37.3% in the three months ended March 31, 2003.
Net earnings
As a result of the foregoing, net earnings were $1,816 for the three months
ended March 31, 2004 as compared with $1,683 for the three months ended March
31, 2003.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations
The Company's contractual obligations and commitments principally include
obligations associated with its outstanding indebtedness under its Loan
Agreement and future minimum noncancelable operating lease obligations These
aggregate commitments are as follows:
===============================================================================
Loan Operating Total
Agreement Leases Commitment
- -------------------------------------------------------------------------------
2004 1,306 346 1,652
2005 1,742 449 2,191
2006 1,742 392 2,134
2007 1,742 351 2,093
2008 1,742 324 2,066
Thereafter 871 473 1,344
===============================================================================
The Company knows of no current or pending demands on or commitments for its
liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash flow
to fund working capital requirements, necessary capital investments and the
current portion of debt obligations; however, the Company could seek further
bank loans or access to financial markets to fund operations, working capital,
necessary capital investments or other cash requirements should it deem it
necessary to do so.
17
Cash
Cash and cash equivalents increased to $12,658 at March 31, 2004 from $9,239 at
December 31, 2003. The $3,419 increase resulted primarily from an increase in
net cash provided by operating activities and financing activities of $3,137 and
$506, respectively, offset partially by net cash used in capital expenditure
investing activities of $224. Working capital amounted to $21,036 at March 31,
2004 as compared to $17,555 at December 31, 2003, an increase of $3,481.
Operating Activities
Cash flows from operating activities provided $3,137 for the three months ended
March 31, 2004 as compared to $1,642 for the three months ended March 31, 2003.
The increase in cash flows from operating activities was due primarily to an
increase in earnings, decreases in prepaid expenses and increases in
depreciation. Reduction in prepaid expense is the result of a temporary change
in the timing of payments related to the Company's insurance program. Increased
depreciation expense is the result of 2003 capital expenditures currently being
included in the depreciation calculation. The foregoing was partially offset by
an increase in inventory balances.
Investing Activities
Capital expenditures were $296 for the three months ended March 31, 2004. In
2003, the Company completed construction of a 10,000 square foot,
state-of-the-art canister filling operation at its Green Pond, South Carolina
plant site. Capital expenditures are expected to be approximately $1,650 for all
of calendar year 2004.
Financing Activities
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. In June 2003, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2004. As of March 31, 2004, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 343,316 shares
have been issued by the Company under employee benefit plans and for the
exercise of stock options. The Company intends to acquire shares from time to
time at prevailing market prices if and to the extent it deems it advisable to
do so based among other factors on its assessment of corporate cash flow and
market conditions.
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the acquisition of certain
assets of DCV, Inc. and its affiliate Ducoa L.P. (as described in Note 11). The
Term Loan is payable in equal monthly installments of principal beginning
October 1, 2001 of approximately $145, together with accrued interest, and has a
maturity date of May 31, 2009. Borrowing under the Term Loan bears interest at
LIBOR plus 1.25% (2.35% and 2.59% at March 31, 2004 and 2003, respectively).
Certain provisions of the term loan require maintenance of certain financial
ratios, limit future borrowings and impose certain other requirements as
contained in the agreement. At March 31, 2004, the Company was in compliance
with all
18
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% (2.10% and 2.34% at March 31, 2004 and 2003, respectively). No amounts
have been drawn on the Revolving Facility as of the date hereof. The Revolving
Facility expires on May 31, 2004. The Company intends to seek renewal of such
facility. Management bellieves that such facility will be renewed in the normal
course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
Proceeds from stock options and warrants exercised totaled $1,334 and $128 for
the three months ended March 31, 2004 and 2003, respectively. Dividend payments
were $389 and $382 for the three months ended March 31, 2004 and 2003,
respectively.
The overall effect of the foregoing was that cash flows provided by financing
activities were $506 for the three months ended March 31, 2004 as compared to
cash flows used in financing activities of $693 for the three months ended March
31, 2003.
Other Matters Impacting Liquidity
As previously reported in June, 2001, pursuant to a certain Asset Purchase
Agreement, dated as of May 21, 2001, BCP Ingredients, Inc. ("Buyer"), a wholly
owned subsidiary of Balchem Corporation, acquired certain assets of DCV, Inc.
and its affiliate, DuCoa L.P. The agreement provided for the payment of up to an
additional $2,750 of contingent purchase price based upon the sales of specified
product lines achieving certain gross margin levels (in excess of specified
thresholds) over the three year period ending June 2004, with no more than
$1,000 payable for any particular yearly period. Additionally, pursuant to the
agreement, a reimbursement of a part of the purchase price could be due the
Company for the first year of such calculation. Based upon the results of the
calculation for the first one year period ended June 2002, a reimbursement of
$30 was received by the Company in 2003. Such reimbursement was recorded as a
reduction of the cost of the acquired product lines. No contingent consideration
has been earned or paid for the second one year period ended June 2003. Any
future contingent consideration would be recorded as an additional cost of the
acquired product lines.
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, 2004 for this obligation is $915. The
postretirement plan is not funded. Historical cash payments made under such plan
approximated $50 per year.
The Company has elected to defer accounting for the economic effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).
In accordance with FSP FAS 106-1, any measures of the accumulated postretirement
plan benefit obligation or net periodic postretirement plan benefit cost in the
consolidated financial statements or accompanying notes do not reflect the
effects of the Act on the plan. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could require the Company to change previously reported information.
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Critical Accounting Policies
There were no changes to the Company's Critical Accounting Policies, as
described in its December 31, 2003 Annual Report on Form 10-K, during the three
months ended March 31, 2004.
Related Party Transactions
The Company is not engaged and has not engaged in related party transactions
during the three months ended March 31, 2004. Transactions of the Company during
this period were at arms length.
New Accounting Pronouncements
On December 24, 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R), which addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the
entity. The Interpretation replaces Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which was issued on January 17, 2003. The
effective date of FIN 46R depends on whether the reporting enterprise is a
public or nonpublic company and on the nature of the entity in which the
reporting entity has a variable interest. The initial adoption of this
accounting pronouncement will not have a material effect on the Company's
consolidated financial statements.
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, 2004, the Company's
only borrowings were under a bank term loan, which bears interest at LIBOR plus
1.25%. A 100 basis point increase in interest rates, applied to the Company's
borrowings at March 31, 2004, would result in an increase in annual interest
expense and a corresponding reduction in cash flow of approximately $91. 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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Item 4. Controls and Procedures
(a) Based upon an evaluation, under the supervision and with the
participation of the Company's Principal Executive Officer and
Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form 10-Q,
they have concluded that the Company's disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, are effective for gathering,
analyzing and disclosing information the Company is required to
disclose in its periodic reports filed under such Act.
(b) During the most recent fiscal quarter, there have been no
significant changes in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.2 Composite By-laws of the Company.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
(b) Reports on Form 8-K
On February 12, 2004, the Company furnished a report on Form 8-K
announcing financial results for the quarter ended December 31,
2003.
On April 27, 2004, the Company furnished a Current Report on Form
8-K announcing its financial results for the quarter ended March 31,
2004.
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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
Date: May 10, 2004
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Exhibit Index
Exhibit No. Description
- ----------- -----------
Exhibit 3.2 Composite By-laws of the Company.
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.
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