Notes to Financial Statements
December 31, 2018 and 2017
Note 1 - Description of the Plan
The following description of the Balchem Corporation 401(k) (the “Plan”) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.
General
The Plan is principally a participant directed, defined contribution plan, and is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
The 401(k) portion and Safe Harbor Matching of the Plan covers all active employees of Balchem Corporation (the “Company”) who have completed two months of service, as defined, and are 18 years of age or older, except those who are currently covered by a collective bargaining agreement. Employees may enroll in the Plan on the first day of the month after they become eligible to participate.
The Company non-elective contribution portion of the Plan covers all active employees who have completed 1,000 hours of service, as defined, are 18 years of age or older, and are active employees of the Company at December 31.
Plan Mergers and Transfers
For the Plan year ended December 31, 2018, the Company transferred assets and merged Innovative Food Processors, Inc. Retirement Plan into the Plan. Transfers from participants were $5,287,443, which included $59,737 of promissory notes receivable from participants.
Administrative Expenses
The Company pays administrative and record keeping fees for the Plan. Plan participants are required to pay fees for participant loans and certain brokerage fees for transactions pertaining to investments in Balchem Corporation common stock.
Contributions
Participants are allowed to contribute annually, in pre-tax dollars, a percentage of compensation as defined by the Plan, up to the maximum of the lesser of 75% of their eligible compensation or the annual limit allowed by the Internal Revenue Code (“IRC”) ($18,500 in 2018). Participants 50 years and older may opt to contribute additional catch-up contributions up to $6,000 for the years ended December 31, 2018 and 2017. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. For the year ended December 31, 2018, $1,505,547 of rollover contributions were included in participant contributions. Participants direct the investment of their contributions into various investment options offered by the Plan. Matching contributions are subject to the vesting schedule described below. To maintain “safe harbor” status, the employer will make a safe harbor matching contribution equal to 100% of the elective deferrals that do not exceed 6% of compensation, and the safe harbor matching contribution is 100% vested. Employer matching contributions are made in cash which is then used to purchase Balchem Corporation common stock. Included in employer’s contribution receivable as of December 31, 2018 and 2017 were discretionary Company profit sharing contributions totaling $595,967 and $530,483 respectively. There were no Company Safe Harbor contributions, included in employer's contribution receivable as of December 31, 2018 and 2017.
Participant Accounts
Each participant’s account is credited with the participant’s contribution and allocations of the Company’s matching contributions and plan earnings or losses. Allocations are based on participant account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
Vesting
Participants are 100% vested in their contributions (including rollovers) and safe harbor contributions, plus actual earnings or losses thereon. Vesting in the Company non-elective contribution portion of their accounts plus actual earnings or losses thereon is based on years of continuous service, as defined. A participant becomes 100% vested after three years of service, except for employees hired as part of certain acquisitions, whose prior credited service is used in determining the vested portion of such matching contributions. The vested percentage for certain employer contributions is based on vesting years of service. Participants employed as of January 1, 2015 are 100% vested in matching contributions received prior to January 1, 2015 and participants hired prior to that date will remain subject to 100% vesting in all non-elective contributions, prior and ongoing.
Investment Options
Upon enrollment in the Plan, participants may direct employee contributions to the various investment options administered by Prudential Retirement Insurance and Annuity Company (“PRIAC”) and a maximum of 10% of a participant’s contribution to Balchem Corporation Common Stock Fund. Employer matching contributions are made in cash which is then used to purchase Balchem Corporation common stock. Discretionary contributions are made from the Company’s cash reserves.
Promissory Notes Receivable from Participants
Promissory notes receivable from participants represent loans that are recorded at their unpaid principal balance plus any accrued but unpaid interest. Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balances. Loan terms extend up to five years or between five and ten years for the purchase of a primary residence. The loans are secured by the balance in the participants’ accounts and bear interest at a fixed rate based on the prime rate plus 2% at the time of loan origination and range from 4.25% to 7.25% at December 31, 2018. Principal and interest are paid ratably through payroll deductions. No allowance for credit losses has been recorded at December 31, 2018 or 2017. In the event of default, such loans are reportable to Plan participants as taxable income but remain outstanding and continue to accrue interest until repaid by the Plan participant or the participant becomes eligible to receive a distribution under the terms of the Plan.
Payment of Benefits
On termination of service, a participant may receive a lump sum amount equal to the vested value of his or her account, or upon death, disability or retirement, the participant may elect to receive annual installments over a period not to exceed the participant’s lifetime, or the joint lifetime of the participant and the participant’s spouse, or an annuity contract.
Income (Loss) Allocations
Investment income (loss) for an accounting period shall be allocated to participants’ accounts in proportion to the total of their respective account balances at the beginning of such accounting period plus any contributions or loan repayments credited to the account, less any loans issued or other deductions during the period.
Forfeited Accounts
Forfeited balances of terminated participants’ non-vested accounts must first be used to pay Plan expenses and then allocated subsequent to the Plan year end to all active participant accounts employed at the Plan year end who completed at least 1,000 hours of service during the Plan year. Forfeited non-vested accounts at December 31, 2018 and 2017 totaled $453 and $91,404, respectively.
Plan Amendment
Effective January 1, 2018, the plan was amended to include Innovative Food Processors, Inc. Retirement Plan.
Note 2 - Summary of Accounting Policies
Basis of Accounting
The financial statements of the Plan are presented on the accrual basis of accounting.
Risks and Uncertainties
The assets of the Plan at December 31, 2018 and 2017 are primarily financial instruments which are monetary in nature. The Plan invests in funds managed by third-parties, Balchem Corporation common stock and an investment contract. These investments are subject to risk conditions of the individual investments’ objectives, the stock market, interest rates, economic conditions, world affairs and, in the case of the Balchem Corporation common stock, the results of operations and other risks specific to Balchem Corporation. Due to the level of risk associated with certain investment changes in the value of investment securities, it is at least reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statement of Net Assets Available for Plan Benefits and the Statement of Changes in Net Assets Available for Plan Benefits.
Investment Contracts
The Guaranteed Income Fund is recorded at contract value. The Guaranteed Income Fund invests in fully benefit-responsive Synthetic Guaranteed Investment Contracts (GIC). Synthetic GIC’s are comprised of (a) individual assets or investments placed in a trust and (b) wrapper contracts that guarantee that participant transactions will be executed at contract value. The investment portfolio of a Synthetic GIC, when coupled with a wrapper contract, attempts to replicate the investment characteristics of a traditional GIC, which provides a specified rate of return for a specified period of time. Contract value represents contributions and reinvested income, less any withdrawals plus accrued interest, because these investments have fully benefit-responsive features. For example, participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value. There are no reserves against contract values for credit risk of contract issues or otherwise. There are no events that limit the ability of the Plan to transact at contract value with PRIAC (see definition earlier). The Guaranteed Income Fund does not have a maturity date and there are no instances that allow Prudential to terminate the agreement (contract). The contract value of the Guaranteed Income Fund was
$20,036,529
and
$16,263,094
as of December 31, 2018 and 2017, respectively.
Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Guaranteed Income Fund is stated at contract value. Common stocks and Registered Investment Companies are valued based upon quoted market prices.
Purchases and sales of securities are recorded on a trade date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Payment of Benefits
Benefits are recorded when paid.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Plan Administrator to make estimates and assumptions that could affect the reported amounts of net assets at the date of the financial statements and the reported amounts of changes in net assets available for benefits and disclosure of contingent assets and liabilities during the reporting period. Actual results could differ from those estimates.
Subsequent Events
The Plan has evaluated subsequent events through
June 18, 2019
, the date the financial statements were available to be issued.
Note 3 - Fair Value Measurements
Fair Value Measurements
The Plan accounts for its investments in accordance with ASC 820, “Fair Value Measurements and Disclosures.” The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described below:
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Level 1
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Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access.
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Level 2
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Inputs to the valuation methodology include:
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- Quoted prices for similar assets or liabilities in active markets;
- Quoted prices for identical or similar assets or liabilities in inactive markets;
- Inputs other than quoted prices that are observable for the asset or liability;
- Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
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Level 3
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Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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Market data or assumptions about risk and the risks inherent in the inputs are used in the valuation technique. These inputs can be readily observable, market corroborated or generally observable. Primarily the market approach for recurring fair value measurements is applied and also endeavors to utilize the best available information. Accordingly, the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs are utilized. Fair value balances have been classified based on the observance of those inputs into the fair value hierarchy levels as set forth in the fair value accounting guidance.
The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy:
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•
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Balchem Corporation Common Stock: Valued at the closing price as quoted on the Nasdaq Global Market and is classified as a Level 1 investment.
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•
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Registered Investment Companies: Valued at the quoted closing market price and are classified as Level 1 investments.
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The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
There have been no changes in the methodologies used at December 31, 2018 and 2017.
The following tables sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 2018 and 2017:
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Assets at Fair Value as of December 31, 2018
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Quoted Prices In Active Markets for Identical Assets (Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Total
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Common Stock of Balchem Corporation
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$
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17,386,016
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$
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—
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$
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—
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$
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17,386,016
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Registered Investment Companies
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50,654,180
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—
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—
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50,654,180
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Total Investments
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$
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68,040,196
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$
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—
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$
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—
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$
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68,040,196
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Assets at Fair Value as of December 31, 2017
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Quoted Prices In Active Markets for Identical Assets (Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Total
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Common Stock of Balchem Corporation
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$
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21,094,899
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$
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—
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$
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—
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$
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21,094,899
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Registered Investment Companies
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49,917,460
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—
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—
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49,917,460
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Total Investments
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$
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71,012,359
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$
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—
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$
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—
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$
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71,012,359
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The Company evaluates the significance of various inputs to assess the appropriate classification of the Plan’s investments within the fair value hierarchy. Changes in economic conditions or valuation techniques may require the transfer of investments from one fair value level to another. Transfers between levels are evaluated for their significance based upon the nature of the investments and size of the transfer relative to the net assets available for benefits. The Plan's policy is to recognize transfers in and/or out of fair value hierarchy levels as of the beginning of the reporting period in which the event or change in circumstances causing the transfer occurred.
For the years ended December 31, 2018 and 2017, there were no transfers between fair value hierarchy levels for investments measured at fair value.
Note 4 - Nonparticipant-Directed Investments
Information about the net assets and the significant components of the changes in net assets relating to the nonparticipant-directed investments are as follows:
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Balchem Corporation Capital Stock:
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Year Ended
December 31, 2018
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Year Ended
December 31, 2017
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Change in net assets:
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Contributions
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$
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3,017,743
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$
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2,494,079
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Dividends and interest
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111,569
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96,570
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Net depreciation
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(52,012
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)
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(845,621
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)
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Benefits paid to participants
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(2,193,574
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)
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(1,383,452
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)
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Transfers to participant-directed investments
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(3,933,067
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)
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(471,929
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)
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Net decrease
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(3,049,341
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)
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(110,353
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)
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Net assets at beginning of year
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19,493,039
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19,603,392
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Net assets at end of year
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$
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16,443,698
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$
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19,493,039
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Note 5 - Parties-In-Interest
As of December 31, 2018 and 2017, the Plan held 221,902 and 261,723 shares of Balchem Corporation common stock, respectively, with a market value of $17,386,016 and $21,094,899 at December 31, 2018 and 2017, respectively. Certain Plan investments are shares of various funds managed by PRIAC. PRIAC is the trustee of the Plan and, therefore, these transactions are considered party-in-interest transactions. Promissory Notes Receivable from Participants are also considered to be party-in-interest transactions.
Note 6 - Plan Termination
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.
Note 7 - Income Tax Status
The Plan has received a favorable determination letter dated March 31, 2008 from the Internal Revenue Service ruling that it is a qualified plan pursuant to the appropriate section of the IRC and, accordingly, the earnings of the underlying trust of the Plan are
not subject to tax under present income tax law. Once qualified, the Plan is required to operate in conformity with the IRC to maintain its qualifications. Although the Plan has been amended since receiving the determination letter, the Plan Administrator and the Plan’s tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC.
The Plan accounts for uncertainty in income taxes utilizing ASC 740-10. Management evaluated the Plan’s tax positions and concluded that the Plan had maintained its tax exempt status and had taken no uncertain tax positions that require adjustment to the financial statements. Therefore, no provision or liability for income taxes has been included in the financial statements.
Note 8 - Reconciliation to Form 5500
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2018
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2017
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Net assets available for benefits per the financial statements:
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$
|
89,898,739
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$
|
88,866,494
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Differences in:
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Investments
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1,226,047
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1,060,558
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Promissory notes receivable from participants
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(1,226,047
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)
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(1,060,558
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)
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Net assets available for benefits per Form 5500
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$
|
89,898,739
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$
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88,866,494
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Form 5500 includes the participant loans in the investment classification, while they are classified separately as promissory notes receivable from participants on the financial statements.