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 September 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission File Number 1-13648 BALCHEM CORPORATION (Exact name of registrant as specified in its charter) Maryland 13-2578432 - ------------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) P.O. Box 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 2, 2000 the registrant had 4,613,712 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 (In thousands, except share and per share data) September 30, December 31, 2000 1999 Unaudited ----------- ----------- Current assets: Cash and cash equivalents $ 1,512 $ 1,699 Accounts receivable 4,389 3,981 Inventories 2,232 2,748 Prepaid expenses 240 501 Deferred income taxes 188 188 ------- ------- Total current assets 8,561 9,117 ------- ------- Property, plant and equipment, net 7,724 7,786 Investments in intangibles and other assets, net 4,382 5,127 ------- ------- Total assets $20,667 $22,030 ======= ======= (continued) 2
BALCHEM CORPORATION Condensed Consolidated Balance Sheets, continued (In thousands, except share and per share data) <TABLE> <CAPTION> September 30, December 31, Liabilities and Stockholders' Equity 2000 1999 ------------------------------------- Unaudited --------- -------- <S> <C> <C> Current liabilities: Trade accounts payable $ 436 $ 565 Accrued compensation and other benefits 620 829 Other accrued expenses 516 429 Dividends payable -- 245 Income taxes payable 9 131 Current portion of long-term debt -- 600 Current portion of other long-term obligations 36 36 -------- -------- Total current liabilities 1,617 2,835 -------- -------- Long-term debt -- 650 Deferred income taxes 258 381 Other long-term obligations 158 225 -------- -------- Total liabilities 2,033 4,091 -------- -------- Stockholders' equity: Preferred stock, $25 par value. Authorized 2,000,000 shares; none issued and outstanding -- -- Common stock, $.06 2/3 par value. Authorized 10,000,000 shares; 4,903,238 shares issued and 4,604,310 shares outstanding at September 30, 2000 and 4,903,238 shares issued and 4,781,358 shares outstanding at December 31, 1999 327 327 Additional paid-in capital 3,028 2,994 Retained earnings 18,156 15,516 Treasury stock, at cost: 298,928 and 121,880 shares, respectively (2,877) (898) -------- -------- Total stockholders' equity 18,634 17,939 -------- -------- -------- -------- Total liabilities and stockholders' equity $ 20,667 $ 22,030 ======== ======== </TABLE> See accompanying notes to consolidated financial statements 3
BALCHEM CORPORATION Condensed Consolidated Statements of Earnings (In thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, Unaudited Unaudited --------- --------- 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $ 8,450 $ 7,229 $ 24,050 $ 21,545 Cost of sales 4,876 4,235 14,106 12,771 -------- -------- -------- -------- Gross margin 3,574 2,994 9,944 8,774 Operating expenses: Selling expenses 1,097 869 2,859 2,160 Research and development expenses 266 343 766 992 General and administrative expenses 707 698 2,156 2,130 -------- -------- -------- -------- 2,070 1,910 5,781 5,282 -------- -------- -------- -------- Earnings from operations 1,504 1,084 4,163 3,492 Interest (income) expense - net (13) 21 (26) 91 -------- -------- -------- -------- Earnings before income tax expense 1,517 1,063 4,189 3,401 Income tax expense 533 402 1,549 1,235 -------- -------- -------- -------- Net earnings $ 984 $ 661 $ 2,640 $ 2,166 ======== ======== ======== ======== Basic net earnings per common share $ 0.21 $ 0.14 $ 0.56 $ 0.44 ======== ======== ======== ======== Diluted net earnings per common share $ 0.21 $ 0.14 $ 0.55 $ 0.44 ======== ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements 4
BALCHEM CORPORATION Condensed Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> Nine Months Ended September 30, Unaudited ---------- 2000 1999 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 2,640 $ 2,166 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,522 1,524 Non-employee stock compensation -- 60 Income tax benefit from stock options exercised 33 -- Shares issued under employee benefit plans 143 122 Deferred income tax benefit (123) (107) Changes in assets and liabilities: Accounts receivable (408) (311) Inventories 516 324 Prepaid expenses 261 253 Accounts payable and accrued expenses (251) (208) Income taxes payable (122) 128 Other long-term obligations (13) (23) ------- ------- Net cash flows provided by operating activities 4,198 3,928 ------- ------- Cash flows from investing activities: Capital expenditures (625) (429) Investments in intangibles and other assets (90) (71) ------- ------- Net cash flows used in investing activities (715) (500) ------- ------- Cash flows from financing activities: Principal payments on long-term debt (1,250) (2,000) Proceeds from stock options and warrants exercised 115 6 Dividends paid (245) (160) Purchase of treasury stock (2,236) (409) Other financing activities (54) (53) ------- ------- Net cash flows used in financing activities (3,670) (2,616) Net (decrease) increase in cash and cash equivalents (187) 812 Cash and cash equivalents, beginning of year 1,699 1,348 ------- ------- Cash and cash equivalents, end of period $ 1,512 $ 2,160 ======= ======= </TABLE> See accompanying notes to consolidated financial statements 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share and 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, 1999 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 three and nine months ended September 30, 2000 are not necessarily indicative of the operating results expected for the full year. NOTE 2 - INVENTORIES Inventories at September 30, 2000 and December 31, 1999 consist of the following: - -------------------------------------------------------------------------------- September 30, December 31, 2000 1999 - -------------------------------------------------------------------------------- Raw materials $ 1,047 $ 1,340 Finished goods 1,185 1,408 - -------------------------------------------------------------------------------- Total inventories $ 2,232 $ 2,748 - -------------------------------------------------------------------------------- NOTE 3 - NET EARNINGS PER SHARE Net earnings per share are calculated in accordance with Statement of Financial Accounting Standards No.128, "Earnings Per Share." The following presents a reconciliation of the earnings and shares used in calculating basic and diluted net earnings per share: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------- Number of Income Shares Per Share Three months ended September 30, 2000 (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 - ---------------------------------------------------------------------------------------------- </TABLE> 6
<TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- Number of Income Shares Per Share Three months ended September 30, 1999 (Numerator) (Denominator) Amount - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS - Net earnings and weighted average common shares outstanding $661 4,845,164 $.14 Effect of dilutive securities - stock options 29,973 Diluted EPS - Net earnings and weighted average common shares outstanding and effect of stock options $661 4,875,137 $.14 - ----------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- Number of Income Shares Per Share Nine months ended September 30, 2000 (Numerator) (Denominator) Amount - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 effect of stock options $2,640 4,785,714 $.55 - ----------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- Number of Income Shares Per Share Nine months ended September 30, 1999 (Numerator) (Denominator) Amount - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS - Net earnings and weighted average common shares outstanding $2,166 4,872,204 $.44 Effect of dilutive securities - stock options 24,219 --------- Diluted EPS - Net earnings and weighted average common shares outstanding and effect of stock options $2,166 4,896,423 $.44 - ----------------------------------------------------------------------------------------------------------- </TABLE> NOTE 4 - SEGMENT INFORMATION The Company's reportable segments are strategic businesses that offer different products and services. Presently, the Company has two reportable segments, specialty products and encapsulated products. 7
Business Segment Net Revenues: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Specialty Products $ 4,912 $ 4,954 $ 15,092 $ 14,793 Encapsulated Products 3,538 2,275 8,958 6,752 - --------------------------------------------------------------------------------------------------------------- Total $ 8,450 $ 7,229 $ 24,050 $ 21,545 - --------------------------------------------------------------------------------------------------------------- </TABLE> Business Segment Profit (Loss): <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Specialty Products $ 1,298 $ 1,349 $ 4,235 $ 4,083 Encapsulated Products 206 (265) (72) (591) Interest (income) expense - net (13) 21 (26) 91 - --------------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 1,517 $ 1,063 $ 4,189 $ 3,401 - --------------------------------------------------------------------------------------------------------------- </TABLE> NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the nine months ended September 30, 2000 and 1999 for income taxes and interest is as follows: - ---------------------------------------------------------------- Nine Months Ended September 30, 2000 1999 - ---------------------------------------------------------------- Income taxes $ 1,760 $ 1,172 Interest $ 26 $ 134 - ---------------------------------------------------------------- NOTE 6 - 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. Through September 30, 2000, the Company has repurchased 343,316 shares at an average cost of $9.26 per share.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 1999 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. The Company operates in two business segments, the micro-encapsulation of performance ingredients (the "encapsulated products" segment) and the repackaging and marketing of high quality specialty gases (the "specialty products" segment). (All dollar amounts in thousands) Results of Operations: Three months ended September 30, 2000 as compared with three months ended September 30, 1999 Net sales for the three months ended September 30, 2000 were $8,450 as compared with $7,229 for the three months ended September 30, 1999, an increase of $1,221 or 17%. Net sales for the specialty products segment were $4,912 for the three months ended September 30, 2000 as compared with $4,954 for the three months ended September 30, 1999, a slight decrease of $42 or 1%. Volumes sold of ethylene oxide products declined slightly in the quarter as the business continues to see minor seasonal fluctuations in the third quarter due to fewer surgical operations in the summer months, requiring slightly less sterilized medical devices. Net sales for the encapsulated products segment were $3,538 for the three months ended September 30, 2000 as compared with $2,275 for the three months ended September 30, 1999, an increase of $1,263 or 56%. This increase was due principally to greater sales to the animal nutrition and domestic food markets. These increases were partially offset by a decline in sales to the specialty industrial markets in the current quarter, a result of the timing of shipments made throughout the year. The growth in sales to the food market is the result of increased volumes sold of higher margin products which can be attributed principally to new products and new applications, combined with additional sales representation. In late 1999, the Company's animal nutrition staff launched Reashure(TM), its encapsulated choline for ruminant animals having successfully completed university and field trials. Commercial sales are currently targeted to the dairy industry where Reashure(TM), delivers nutrient supplements through the rumen delivering required levels to dairy cows during certain weeks preceding and following 9
calving, commonly referred to as the "transition period" of the animal. Sales of Reashure(TM) continued to strengthen in the third quarter through growth from existing customers and from the addition of new customers primarily in the East and Midwest. Sales of Reashure(TM) are beginning to favorably impact overall sales of the encapsulated products segment. Cost of sales as a percent of sales for the three months ended September 30, 2000 improved by approximately 1% as compared to the three months ended September 30, 1999. Margins for the specialty products segment were favorably affected primarily by improved production efficiencies of blended ethylene oxide products, a result of the Company's selling additional blended products for non-medical sterilization. Margins improved in the encapsulated products division, a result of efficiencies realized from increased production and the mix of products sold during the three months ended September 30, 2000. Operating expenses for the three months ended September 30, 2000 increased to $2,070 from $1,910 for the three months ended September 30, 1999, an increase of $160 or 8%. The increase in operating expenses was primarily the result of increased advertising expense and increased payroll expense in the area of sales and marketing for the encapsulated products segment. In particular, additional sales personnel have been added to support the animal nutrition business. During the three months ended September 30, 2000 and the three months ended September 30, 1999, the Company spent $266 and $343, 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. The decline in these research and development expenses is a result of the Company having completed in 1999 the gathering of data for Reashure(TM) from university studies, commercial field trials and veterinarians. Income from operations for the three months ended September 30, 2000 was $1,504 as compared with $1,084 for the three months ended September 30, 1999. Income from operations for the specialty products segment for the three months ended September 30, 2000 was $1,298 as compared with $1,349 for the three months ended September 30, 1999. Income from operations for the encapsulated products segment was $206 for the three months ended September 30, 2000 as compared with a loss of $265 for the three months ended September 30, 1999. This improvement was primarily a result of increased sales partially offset by increased selling and marketing costs as described above. Interest (income) expense - net for the three months ended September 30, 2000 totaled income of $13 as compared to expense of $21 for the three months ended September 30, 1999. Long-term debt, including the current portion, was eliminated during the quarter ended June 30, 2000. Net earnings were $984 for the three months ended September 30, 2000 as compared with $661 for the three months ended September 30, 1999. Nine months ended September 30, 2000 as compared with nine months ended September 30, 1999 Net sales for the nine months ended September 30, 2000 were $24,050 as compared with $21,545 for the nine months ended September 30, 1999, an increase of $2,505 or 12%. Net sales for the specialty products segment were $15,092 for 10
the nine months ended September 30, 2000 as compared with $14,793 for the nine months ended September 30, 1999, an increase of $299 or 2%. This increase was attributable primarily to increased volumes sold of ethylene oxide related products. Net sales for the encapsulated products segment were $8,958 for the nine months ended September 30, 2000 as compared with $6,752 for the nine months ended September 30, 1999 an increase of $2,206 or 33%. This increase was due principally to greater sales to the animal nutrition, specialty industrial and domestic food markets. The growth in sales to the food market is the result of increased volumes sold of higher margin products which can be attributed principally to new products and new applications, combined with additional sales representation. As described above, in late 1999, the Company's animal nutrition staff launched Reashure(TM), its encapsulated choline for ruminant animals. Sales of Reashure(TM) have continued to develop through growth from existing customers and with the addition of new customers primarily in the East and Midwest. Sales of Reashure(TM) are beginning to favorably impact overall sales of the encapsulated products segment. Cost of sales as a percent of sales for the nine months ended September 30, 2000 improved slightly as compared with the nine months ended September 30, 1999. Margins for the specialty products segment were favorably affected primarily by increased volumes sold and improved production efficiencies of blended ethylene oxide products where the Company now sells additional blended products for non-medical sterilization. Margins improved in the encapsulated products division, a result of efficiencies realized from increased production and the mix of products sold during the nine months ended September 30, 2000. Operating expenses for the nine months ended September 30, 2000 increased to $5,781 from $5,282 for the nine months ended September 30, 1999, an increase of $499 or 9%. The increase in operating expenses was primarily the result of increased advertising expense and travel expenses and increased payroll expense in the area of sales and marketing for the encapsulated products segment. In particular, additional sales personnel have been added to support the animal nutrition business. During the nine months ended September 30, 2000 and the nine months ended September 30, 1999, the Company expended $766 and $992, 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. The decline in these research and development expenses is a result of the Company having completed in 1999 the gathering of data for Reashure(TM) from university studies, commercial field trials and veterinarians. Income from operations for the nine months ended September 30, 2000 was $4,163 as compared with $3,492 for the nine months ended September 30, 1999. Income from operations for the specialty products segment for the nine months ended September 30, 2000 was $4,235 as compared with $4,083 for the nine months ended September 30, 1999. Loss from operations for the encapsulated products segment declined to $72 for the nine months ended September 30, 2000 as compared with a loss of $591 for the nine months ended September 30, 1999, primarily a result of increased sales partially offset by increased selling and marketing costs, as described above. 11
Interest (income) expense - net for the nine months ended September 30, 2000 totaled income of $26 as compared to expense of $91 for the nine months ended September 30, 1999, due to a reduction in the amount of debt outstanding. The Company's effective income tax rate was 38% for the nine months ended September 30, 2000 as compared with 36% for the nine months ended September 30, 1999 due principally to the effects of the Company's utilization of net operating loss carry-forwards for state income tax purposes in the second quarter of 1999. Net earnings were $2,640 for the nine months ended September 30, 2000 as compared with $2,166 for the nine months ended September 30, 1999. Liquidity and Capital Resources Cash flows from operating activities provided $4,198 for the nine months ended September 30, 2000 as compared with $3,928 for the nine months ended September 30, 1999. The increase in cash flows from operating activities was due primarily to increased net earnings, reduced inventory levels partially offset by a reduction in accounts payable, income taxes payable and other accrued expense balances in 2000, a result of timing of payments made to vendors and other service providers and an increase in accounts receivable. Capital expenditures were $625 for the nine months ended September 30, 2000. Capital expenditures are budgeted to be approximately $840 for all of calendar year 2000. 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. As of September 30, 2000, 343,316 shares had been repurchased under the program at a total cost of $3,179 of which 44,388 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. During the nine months ended September 30, 2000, the Company paid off $1,250 in long term debt. There was no long-term debt outstanding at September 30, 2000. The Company knows of no current or pending demands on or commitments for its liquid assets that will materially affect its liquidity. The Company currently has approval for a $2,000 line of credit from its principal bank. There were no outstanding borrowings under this line of credit on September 30, 2000. Impact of Recent Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities." It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters 12
of fiscal years beginning after June 15, 2000. Adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations in the year of adoption. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of APB Opinion No. 25. The Interpretation is generally effective for new stock awards or transactions entered into on or after July 1, 2000. The Company does not anticipate that the adoption of the new Interpretation will have a significant effect on earnings or the financial position of the Company. 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. 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. 13
Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 27 Financial Data Schedule. (b) Reports on Form 8-K No Reports on Form 8-K were filed during the quarter ended September 30, 2000. 3.2 Composite By-laws of the Company. 14
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 10, 2000 15