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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)   Quarterly Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934		  
    |X|    

For The Quarterly Period Ended September 30, 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 November 3, 2004 the registrant had 5,048,809 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)
Unaudited

September 30,
2004
December 31,
2003
Current assets:            
   Cash and cash equivalents     $ 17,330   $ 9,239  
   Accounts receivable       7,683     7,233  
   Inventories       7,120     5,961  
   Prepaid expenses and other current assets       616     723  
   Deferred income taxes       398     474  
      Total current assets       33,147     23,630  
                 
Property, plant and equipment, net       24,444     25,636  
                 
Excess of cost over net assets acquired       6,368     6,368  
Intangibles assets, net       674     1,272  
   
       Total assets     $ 64,633   $ 56,906  

(continued)

2

See accompanying notes to consolidated financial statements


BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
Unaudited

September 30,
2004
December 31,
2003
                         Liabilities and Stockholders’ Equity            
Current liabilities:    
     Trade accounts payable     $ 1,591   $ 1,254  
     Accrued expenses       1,309     1,491  
     Accrued compensation and other benefits       1,331     1,182  
     Dividends payable       —     389  
     Income taxes payable       996     17  
     Current portion of long-term debt       1,742     1,742  
         Total current liabilities       6,969     6,075  
                 
 Long-term debt       6,532     7,839  
 Deferred income taxes       2,335     2,226  
 Postretirement benefit obligations       945     900  
 Other long-term obligations       73     85  
              Total liabilities       16,854     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; 5,024,577    
    shares issued and outstanding at September 30, 2004 and 4,903,238 shares    
    issued and 4,860,078 shares outstanding at December 31, 2003       335     327  
  Additional paid-in capital       5,411     3,902  
  Retained earnings       42,033     36,056  
  Treasury stock, at cost: 0 shares at September 30, 2004 and 43,160 shares at    
    December 31, 2003       —     (504 )
       Total stockholders’ equity       47,779     39,781  
   
               Total liabilities and stockholders’ equity     $ 64,633   $ 56,906  

3

See accompanying notes to consolidated financial statements


BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)

  Three Months Ended
September 30, 		Nine Months Ended
September 30,
2004
2003
2004
2003
Net sales     $ 17,356   $ 15,791   $ 49,449   $ 45,467  
                             
Cost of sales       11,137     11,134     31,594     29,671  
                             
Gross profit       6,219     4,657     17,855     15,796  
     
Operating expenses:    
        Selling expenses       1,252     1,633     3,612     4,350  
        Research and development expenses       383     611     1,252     1,636  
        General and administrative expenses       1,154     1,016     3,444     2,893  
        2,789     3,260     8,308     8,879  
                             
Earnings from operations       3,430     1,397     9,547     6,917  
     
Other expenses (income):    
       Interest (income)       (22 )   (1 )   (74 )   (3 )
       Interest expense       61     63     174     209  
       Other, net       —     —     (12 )   —  
                             
Earnings before income tax expense       3,391     1,335     9,459     6,711  
                             
        Income tax expense       1,231     468     3,482     2,470  
                             
Net earnings     $ 2,160   $ 867   $ 5,977   $ 4,241  
                             
Net earnings per common share - basic     $ 0.43   $ 0.18   $ 1.20   $ 0.88  
                             
Net earnings per common share - diluted     $ 0.42   $ 0.17   $ 1.17   $ 0.85  

4

See accompanying notes to consolidated financial statements


BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)

Nine Months Ended
September 30,
2004
      2003
          Unaudited  
Cash flows from operating activities:    
   Net earnings     $ 5,977   $ 4,241  
     
   Adjustments to reconcile net earnings to    
   net cash provided by operating activities:    
        Depreciation and amortization       2,607     2,617  
        Shares issued under employee benefit plans       207     230  
        Deferred income taxes       185     510  
        Provision for doubtful accounts       7     40  
        Loss on sale of equipment       (12 )   —  
             Changes in assets and liabilities:    
                 Accounts receivable       (457 )   (92 )
                 Inventories       (1,159 )   550  
                 Prepaid expenses and other current assets       107     466  
                 Accounts payable and accrued expenses       304     (2,486 )
                 Income Taxes       979     —  
                 Other long-term obligations       43     13  
                     Net cash provided by operating activities       8,788     6,089  
     
Cash flows from investing activities:    
         Capital expenditures       (820 )   (1,901 )
         Proceeds from sale of property, plant & equipment       91     41  
         Cash paid for intangibles assets acquired       (76 )   (78 )
                     Net cash used in investing activities       (805 )   (1,938 )
     
Cash flows from financing activities:    
        Principal payments on long-term debt       (1,307 )   (1,307 )
        Proceeds from stock options and warrants exercised       1,814     431  
        Dividends paid       (389 )   (382 )
        Other financing activities       (10 )   —  
                     Net cash provided by (used in) financing activities       108     (1,258 )
                 
Increase in cash and cash equivalents       8,091     2,893  
                 
Cash and cash equivalents beginning of period       9,239     1,731  
Cash and cash equivalents end of period     $ 17,330   $ 4,624  

5

See accompanying notes to consolidated financial statements


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 consolidated financial statements, and should be read in conjunction with the consolidated financial statements and notes, which appear in our Annual Report on Form 10-K. 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 U.S. generally accepted accounting principles governing interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include some information and notes necessary to conform to annual reporting requirements. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the operating results expected for the full year.

NOTE 2 – STOCK OPTION PLAN

At September 30, 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:


  Three Months Ended
September 30, 		Nine months ended
September 30,
2004 2003 2004 2003
Net Earnings                    
         Net earnings, as reported     $ 2,160   $ 867   $ 5,977   $ 4,241  
         Deduct: Total stock-based employee    
         compensation expense determined    
         under fair value based method, net    
          of related tax effects       (216 )   (198 )   (602 )   (531 )
Net earnings as adjusted     $ 1,944   $ 669   $ 5,375   $ 3,710  
Earnings per share:    
         Basic EPS as reported     $ .43   $ .18   $ 1.20   $ .88  
         Basic EPS as adjusted     $ .39   $ .14   $ 1.08   $ .77  
         Diluted EPS as reported     $ .42   $ .17   $ 1.17   $ .85  
         Diluted EPS as adjusted     $ .37   $ .13   $ 1.05   $ .74  

The fair value of each stock option granted during the nine months ended September 30, 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)       6     3  
Expected volatility       27 %   33 %
Expected dividend yield       .32 %   .34 %
Risk-free interest rate       3.64 %   1.9 %
Weighted average fair value of options granted     $ 10.06   $ 5.47  

NOTE 3 – INVENTORIES

Inventories at September 30, 2004 and December 31, 2003 consist of the following:

      September 30,     December 31,  
         2004     2003  
Raw materials     $ 2,306   $ 1,914