Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
OBCI > SEC Filings for OBCI > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for OCEAN BIO CHEM INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for OCEAN BIO CHEM INC


1-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements contained herein as Item 8.

Overview:

We are principally engaged in the manufacturing, marketing and distribution of a broad line of appearance, performance, and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite® and other trademarks within the United States of America and Canada. In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products. We sell our products through national retailers and to national and regional distributors who, in turn, sell our products to specialized retail outlets.

Critical accounting estimates:

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.

Revenue recognition and collectability of accounts receivable

Revenue from product sales is recognized when persuasive evidence of a contract exists, the sales price is fixed and determinable, the title of goods pass to the customer, and collectability of the related receivable is probable. With respect to a customer for whom the Company manages the inventory at the customer's location, revenue is recognized when the products are sold to a third party. In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms. In an effort to reduce our credit risk, we perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and customers' creditworthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience, specific customer collection issues and reviews of agings of trade receivables based on contractual terms. We generally do not require collateral on trade accounts receivable. We maintain an allowance for doubtful accounts based on our historical collection experience and expected collectability of the accounts receivable, considering the period an account is outstanding, the financial position of the customer and information provided by credit rating services. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. Our allowance for doubtful accounts was approximately $73,000 and $75,000 at December 31, 2012 and 2011, respectively, which was approximately 2.4% and 2.8%, respectively, of gross accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or if unexpected events or significant future changes in trends were to occur, additional allowances may be required, resulting in increased bad debt expense.

Inventories

Inventories primarily are composed of raw materials and finished goods and are stated at the lower of cost or market, using the first-in, first-out method. We maintain a reserve for slow moving and obsolete inventory to reduce the carrying value of our inventories to reflect the diminution of value resulting from product obsolescence, damage or other issues affecting marketability by an amount equal to the difference between the cost of the inventory and its estimated market value. The adequacy of this reserve is reviewed each reporting period and adjusted as necessary. We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage. A complete physical count of the inventory is conducted annually.


Our slow moving and obsolete inventory reserve was $271,994 and $276,703 at December 31, 2012 and December 31, 2011, respectively.

Income taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized to reflect the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. The temporary differences are attributable to differing methods of financial statement and income tax depreciation and reserves for trade accounts receivable and inventories.

The likelihood of a material change in the Company's expected realization of deferred tax assets is dependent on, among other factors, future taxable income and settlements with tax authorities. While management believes that its judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may require future adjustments to our tax assets and liabilities, which could be material.

We are also required to assess the realizability of our deferred tax assets. We evaluate positive and negative evidence and use judgments regarding past and future events, including operating results and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, we determine when it is more likely than not that all or some portion of our deferred tax assets may not be realized, in which case we would be required to apply a valuation allowance to offset our deferred tax assets in an amount equal to future tax benefits that may not be realized. We currently do not apply a valuation allowance to our deferred tax assets. However, if facts and circumstances change in the future, valuation allowances may be required.

Significant judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, we and our subsidiaries are examined by various federal and state tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We adjust the income tax provision, the current tax liability and deferred taxes in any period in which facts that give rise to an adjustment become known. The ultimate outcomes of the examinations of our income tax returns could result in increases or decreases to our recorded tax liabilities, which could affect our financial results.

Trademarks, trade names and patents - We acquired the rights to the Star brite® trademark and related products for the United States and Canada in conjunction with our initial public offering during March 1981 for $880,000. The cost of these intangible assets was amortized on a straight-line basis over an estimated useful life of 40 years through December 31, 2001. Effective January 1, 2002 and pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (now codified in Financial Accounting Standards Board Accounting Standards Codification Topic 350, "Intangibles - Goodwill and Other"), we determined that these intangible assets have indefinite lives and therefore, we no longer recognize amortization expense. In addition, our 50% owned joint venture, OdorStar Technology, LLC, owns patents we use in our business. The Company amortizes these patents over their remaining life on a straight line basis. We review the carrying values of the trademarks and patents periodically for possible impairment. Our impairment review is based on a discounted cash flow approach that requires significant judgment with respect to unit volume, revenue and expense growth rates, and the selection of an appropriate discount rate. Management uses estimates based on expected trends in making these assumptions. All impairment charges would be recorded for the difference between the carrying value and the net present value of estimated future cash flows, which represents the estimated fair value of the asset. Management uses its judgment in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected adverse economic factors, unanticipated technological change, distribution losses, competitive activities and acts by governments and courts may indicate that an asset has become impaired.


Results of Operations:

Net sales were approximately $31,039,000 in 2012 compared to $31,681,000 in 2011, a decrease of $642,000 or 2.0%. The sales decrease reflects a decline in sales to one of our largest customers, which engaged in an inventory reduction program in 2012. The customers' inventory reduction program is not expected to continue in 2013. This sales decrease was partially offset by sales to new customers and increased sales to other established customers. Net sales also reflected continued growth of our enzyme fuel treatment product, Star Tron®, into the retail markets to which our products are directed.

Cost of goods sold and gross profit - Cost of goods sold during 2012 decreased approximately $585,000 or 2.8%, to approximately $20,412,000 from approximately $20,997,000 in 2011. The decrease was principally due to the decrease in sales.

Our gross profit percentage (gross profit as a percentage of net sales) increased approximately 0.5%, from 33.7% in 2011 to 34.2% in 2012. This increase primarily was a result of improved product sales mix and a reduction of cost of goods sold. The $57,000 decrease in gross profit reflects lower net sales, somewhat mitigated by the increase in gross profit percentage.

Advertising and promotion expense was approximately $2,418,000 in 2012, an increase of approximately $438,000 or 22.1% from approximately $1,980,000 in 2011. As a percentage of net sales, advertising and promotion expense increased from 6.2% in 2011 to 7.8% in 2012. The increase in advertising expenditures was designed to support the expansion of Star Tron® products into new markets, including automotive, power sports, motorcycle, small engine and outdoor power equipment markets . We sponsored several television programs targeted to potential customers for our products and purchased print advertisements in several national magazines targeted to automotive, boating and engine maintenance and repair enthusiasts, as well as in specific industry magazines. In addition, we increased expenditures for customer cooperative advertising allowances to promote our Star Tron® and Star brite® products in catalogs and sales promotion flyers.

Selling and administrative expenses increased by about $136,000 or 2.7%, from approximately $4,990,000 in 2011 to approximately $5,126,000 in 2012. The increase is principally due to an increase in sales-related expenses mainly increased staffing and related expenses including travel and entertainment expenses. As a percentage of net sales, selling and administrative expenses increased from 15.8% in 2011 to 16.5% in 2012.

Interest expense decreased approximately $52,000 to $98,000 in 2012, compared to $150,000 in 2011. The decrease principally reflects the reduction in our short-term and long-term indebtedness during 2012. In addition, the reduction reflects reduced financing costs resulting from the July 2011 refinancing of both our short term borrowing and long term debt at lower interest rates.

Operating income - As a result of the foregoing, operating income decreased to approximately $3,082,000 in 2012, compared to approximately $3,714,000 in 2011, a decrease of $632,000 or 17.0%.

Income taxes - We had a tax expense of approximately $1,055,000 in 2012 or 35.3% of pretax income, compared to $1,280,000 in 2011 or 35.4% of pretax income. For additional information, see Note 7 to the consolidated financial statements.

Net Income and Net income attributable to Ocean Bio-Chem, Inc. As a result of the items described above, net income decreased approximately 17.2% or approximately $401,000 to $1,934,000 from $2,335,000 in 2011. Net income attributable to Ocean Bio-Chem, Inc. (excluding the loss attributable to non-controlling interests) was approximately $1,962,000 in 2012, a decrease of approximately $431,000 or 18% from approximately $2,393,000 in 2011.

Liquidity and Capital Resources:

Our cash balance was approximately $1,508,000 at December 31, 2012 compared to approximately $585,000 at December 31, 2011. At December 31, 2012 there were no borrowings under our revolving line of credit compared to $850,000 outstanding at December 31, 2011.

Cash provided by operating activities for the year ended December 31, 2012 was approximately $2,775,000 compared to about $621,000 for the year ended December 31, 2011. The increase in cash provided from operations is primarily due to the reduction in inventories of approximately $376,000 in 2012 as compared to the increase in inventories of approximately $1,849,000 in 2011. In 2011, management increased inventory levels of petroleum based products in anticipation of rising oil prices in early 2012.

Cash used in investing activities for the year ended December 31, 2012 was approximately $771,000 compared to $435,000 in 2011. In 2012 we continued to upgrade and replace older less efficient equipment in our Kinpak manufacturing facility and made capital improvements to our principal executive offices.


Cash used in financing activities for the year ended December 31, 2012 was approximately $1,081,000 compared to $215,000 for the year ended December 31, 2011. The increase in cash used in financing activities in 2012 is due to net repayments on our line of credit of $850,000 in 2012 compared to net borrowings of $850,000 in 2011. In addition, in 2011 we paid the entire balance of approximately $472,000 on a related party note held by our Chairman, President and Chief Executive Officer, as described in Note 8 to the consolidated financial statements included in this report. These increases were partially offset by the lower net reduction of approximately $400,000 in long-term debt in 2012 compared to the net reduction of approximately $658,000 in 2011. We also received approximately $169,000 from the exercise of stock options in 2012 compared to approximately $65,000 in 2011.

Net trade accounts receivable aggregated approximately $2,931,000 at December 31, 2012 and $2,563,000 at December 31, 2011, an increase of 14.4%. This increase in accounts receivable is due to increased sales in December 2012.

Inventories were approximately $9,257,000 and $9,628,000 at December 31, 2012 and 2011, respectively, representing a decrease of approximately $371,000 or 3.9% in 2012. The higher levels of 2011 inventories compared to 2012 levels reflect management's 2011 decision to increase inventory levels of petroleum-based products in anticipation of rising oil prices.

On July 6, 2011, we, together with our subsidiary, Kinpak Inc. ("Kinpak"), entered into a Credit Agreement with Regions Bank (and, pursuant to an Equipment Finance Addendum to the Credit Agreement, Regions Equipment Finance Corporation ("REFCO")) under which (a) our revolving line of credit with Regions Bank was renewed, and (b) REFCO provided a new term loan in the amount of $2,430,000, the proceeds of which were used to pay the Kinpak's remaining lease obligations in connection with the previously outstanding 2002 Series of Industrial Development Revenue Bonds issued by the City of Montgomery, Alabama (the "2002 Bonds"). The 2002 Bonds were used to fund the expansion of Kinpak's facilities and acquisition of related equipment.

Under the term loan, we pay principal, together with interest at the fixed rate of 3.54% per annum, in 72 consecutive monthly payments of $37,511 over the six year period beginning on August 6, 2011, with the final payment due on July 6, 2017. In the event our debt service coverage ratio falls below 2.0 to 1, interest on the term loan will increase by 1.01% per annum. For the year ended December 31, 2012, our debt service coverage ratio exceeded 6.0 to 1.

The Credit Agreement defines "debt service coverage ratio" as meaning net profit plus taxes, interest, depreciation, amortization and rent expense divided by debt service plus interest and lease/rent expense. The Credit Agreement contains various covenants, including financial covenants requiring a minimum debt coverage ratio of 1.75 to 1.00, tested on a rolling four-quarter basis, and a maximum debt to capitalization ratio (funded debt divided by the sum of total net worth and funded debt) of 0.75 to 1, tested quarterly. At December 31, 2012, we were in compliance with these covenants.

Under the renewed revolving line of credit, we may borrow up to the lesser of
(i) $6 million and (ii) a borrowing base equal to 80% of eligible accounts receivable plus 50% of eligible inventory. Interest on the revolving line of credit is payable at the 30 day LIBOR rate plus 1.74% per annum (unless our debt service coverage ratio falls below 2.0 to 1, in which case the additional percentage will be 2.75% per annum). In no event will the interest rate be less than 2.0% per annum. Outstanding amounts under the revolving line of credit are payable on demand. If no demand is made, we may repay and reborrow funds from time to time. Interest payments are made in monthly installments on outstanding average balances with all outstanding principal and interest payable on July 6, 2014. At December 31, 2012 there were no borrowings under our revolving line of credit.

Our obligations under the Credit Agreement are secured by our accounts receivable and inventory, as well as real property and equipment at the Kinpak's Montgomery, Alabama facility.

In addition to the revolving line of credit and term loan, we have obtained financing through capital leases for both manufacturing and office equipment, totaling approximately $37,600 and $62,400 at December 31, 2012 and December 31, 2011, respectively.

Our sales in the Canadian market are subject to currency fluctuations relating to the Canadian dollar. We do not engage in currency hedging and address currency risk as a pricing issue. In the year ended December 31, 2012, we recorded approximately $6,000 in foreign currency translation adjustments (increasing shareholders equity by $6,000).

During the past few years, we have introduced a number of new products. At times, new product introductions have required us to increase our overall inventory and have resulted in lower inventory turnover rates. The effects of reduced inventory turnover have not been material to our overall operations. We believe that all required capital to maintain such increases will continue to be provided by operations and our current financing arrangements.

Many of the raw materials that we use in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The nature of our business does not enable us to pass through the price increases to our national retailers and distributors, as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.


At December 31, 2012 and through the date of this report, we did not and do not have any material commitments for capital expenditures, nor do we have any other present commitment that is likely to result in our liquidity increasing or decreasing in any material way.

We believe that funds provided through operations and our existing sources of financing will be sufficient to satisfy our cash requirements over at least the next twelve months.

  Add OBCI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for OBCI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.