Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Balchem Corporation (including, unless the context otherwise requires, its wholly-owned subsidiaries, SensoryEffects, Inc., SensoryEffects Cereal Systems, Inc., Albion Laboratories, Inc. (formerly known as Albion International, Inc.), BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia Srl, Bioscreen Technologies Srl, Innovative Food Processors, Inc., and Balchem LTD (“Balchem” or the “Company”)), incorporated in the State of Maryland in 1967, is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical, agricultural, and medical sterilization industries.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue for each of the Company’s business segments is recognized when control of the promised goods is transferred to our customers, in an amount tht reflects the consideration we expect to realize in exchange for those goods. The Company reports amounts billed to customers related to shipping and handling as revenue and includes costs incurred for shipping and handling in cost of sales. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities. In instances of shipments made on consignment, revenue is recognized when control is transferred to the customer. The Company does not charge its customers rental fees on cylinders or drums used to ship its products.
The new accounting standard for the recognition of revenue, Accounting Standards Codification ("ASC") 606,
Revenue from Contracts with Customers
, was adopted for the fiscal year beginning on January 1, 2018. Per the new standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The new standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Overall, the adoption of the new standard did not significantly alter our methodology for recognition of revenue.
The Company adopted ASC 606 using the modified retrospective method applied to those contracts that were in progress as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 605. The impact to revenues as a result of applying ASC 606 was an increase of
$338
for the year ended December 31, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. The Company has funds in its cash accounts that are with third party financial institutions, primarily in certificates of deposit and money market funds. The Company’s U.S. and Italy cash balances at these financial institutions exceed the Federal Deposit Insurance Corporation (“FDIC”) and Fondo Interbancario di Tutela dei Depositi (“FITD”) insurance limits.
Accounts Receivable
Credit terms are granted in the normal course of business to the Company’s customers. On-going credit evaluations are performed on the Company’s customers and credit limits are adjusted based upon payment history and the customer's current credit worthiness,
as determined through review of their current credit information. Collections and payments from customers are continuously monitored and allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments are maintained. Estimated losses are based on historical experience and any specific customer collection issues identified.
Inventories
Inventories are valued at the lower of cost (first in, first out or average) or net realizable value and have been reduced by an allowance for excess or obsolete inventories. Cost elements include material, labor and manufacturing overhead.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost.
Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
Buildings
|
15-25 years
|
Equipment
|
2-28 years
|
Expenditures for repairs and maintenance are charged to expense. Alterations and major overhauls that extend the lives or increase the capacity of plant assets are capitalized. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts and any resultant gain or loss is included in earnings.
For the year ended December 31, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration.
Business Concentrations
Financial instruments that subject the Company to credit risk consist primarily of accounts receivable and money market investments. Investments are managed within established guidelines to mitigate risks. Accounts receivable subject the Company to credit risk partially due to the concentration of amounts due from customers. The Company extends credit to its customers based upon an evaluation of the customers’ financial condition and credit histories. The majority of the Company’s customers are major national or international corporations. In
2018
,
2017
and
2016
, no customer accounted for more than 10% of total net sales.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC 350, “Intangibles-Goodwill and Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the provisions of ASC 350. The Company performs its annual test as of October 1. ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment if events and circumstances indicate that the asset might be impaired.
In accordance with ASC 350, the Company first assesses qualitative factors to determine whether it is “more likely than not” (i.e. a likelihood of more than 50%) that the fair values of its reporting units are less than their respective carrying amounts, including goodwill, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The Company has an unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test.
As of October 1, 2018 and 2017, the Company opted to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. As of October 1, 2018, it assessed the fair values of its reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for its conclusions. As of October 1, 2017, the Company assessed the fair values of its reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for its conclusions, as well as market approaches for certain reporting units. The Company’s estimates of future cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions. The Company’s assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units is not considered impaired. The Company may resume performing the qualitative assessment in subsequent periods.
The Company had goodwill in the amount of
$447,995
and
$441,361
as of
December 31, 2018
and
December 31, 2017
, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
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|
|
|
|
|
Goodwill at December 31, 2016
|
|
$
|
439,811
|
|
Goodwill as a result of the Acquisitions - see Note 2
|
|
1,550
|
|
Goodwill at December 31, 2017
|
|
441,361
|
|
Goodwill as a result of the Acquisitions – see Note 2
|
|
6,838
|
|
Impact due to change in foreign exchange rates
|
|
(204
|
)
|
Goodwill at December 31, 2018
|
|
$
|
447,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Human Nutrition & Health
|
|
$
|
405,527
|
|
|
$
|
405,334
|
|
Animal Nutrition & Health
|
|
18,578
|
|
|
12,137
|
|
Specialty Products
|
|
22,662
|
|
|
22,662
|
|
Industrial Products
|
|
1,228
|
|
|
1,228
|
|
Total
|
|
$
|
447,995
|
|
|
$
|
441,361
|
|
The following intangible assets with finite lives are stated at cost and are amortized either on an accelerated basis or on a straight-line basis over the following estimated useful lives:
|
|
|
|
|
|
Amortization Period
(in years)
|
Customer relationships and lists
|
|
10
|
Trademarks & trade names
|
|
5 - 17
|
Developed technology
|
|
5
|
Regulatory registration costs
|
|
5 - 10
|
Patents & trade secrets
|
|
15 - 17
|
Other
|
|
3 - 18
|
For the year ended December 31, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation allowances would be established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision.
Use of Estimates
Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and revenues and expenses during the reporting period. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at
December 31, 2018
and
2017
does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable and accrued liabilities, and are carried at cost which approximates fair value due to the short-term maturity of these instruments.
Cost of Sales
Cost of sales are primarily comprised of raw materials and supplies consumed in the manufacture of product, as well as manufacturing labor, maintenance labor, depreciation expense, and direct overhead expense necessary to convert purchased materials and supplies into finished product. Cost of sales also includes inbound freight costs, outbound freight costs for shipping products to customers, warehousing costs, quality control and obsolescence expense.
Selling, General and Administrative Expenses
Selling expenses consist primarily of compensation and benefit costs, amortization of customer relationships and lists, trade promotions, advertising, commissions and other marketing costs. General and administrative expenses consist primarily of payroll and benefit costs, occupancy and operating costs of corporate offices, depreciation and amortization expense on non-manufacturing assets, information systems costs and other miscellaneous administrative costs.
Research and Development
Research and development costs are expensed as incurred.
Net Earnings Per Common Share
Basic net earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share is calculated in a manner consistent with basic net earnings per common share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding, unvested restricted stock, and unvested performance shares (using the treasury stock method).
Stock-based Compensation
The Company has stock-based employee compensation plans, which are described more fully in Note 3. The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation,” which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes based option-pricing model. Estimates of and assumptions about forfeiture rates, terms, volatility, interest rates and dividend yields are used to calculate stock-based compensation. A significant change to these estimates could materially affect the Company’s operating results.
Impairment of Long-lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year ended December 31, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration.
New Accounting Pronouncements
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The guidance requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, and the standard may be adopted either using the prospective or retrospective transition approach. The Company is currently evaluating the impact of this pronouncement on the Company’s consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans”, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This update should be applied on a retrospective basis to all periods presented and is effective for fiscal years ending after December 31, 2020. Early adoption is permitted. The Company expects this new guidance will have minimal impact on its financial reporting.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted; however, the Company has elected not to adopt early as this ASU will not have a significant impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which was further clarified by ASU 2018-11 and addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-of-use assets ("ROU") and lease liabilities for most leases in the Consolidated Balance Sheets. The guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The standard can be applied using the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. Entities may also elect the optional transition method provided under ASU 2018-11, “Leases, Topic 842: Targeted Improvement”, issued in July 2018, allowing for application of the standard at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will adopt the new standard on January 1, 2019 and has elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption. The new standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. The Company is substantially complete with its evaluation of the effect that the adoption of this ASU will have on the financial statements. While the Company continues to assess all of the effects of adoption, it currently believes the most significant effects will be related to (1) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its operating leases, and (2) providing significant new disclosures about its leasing activities. In connection with the adoption of this standard, the Company expects to recognize additional operating liabilities of approximately
$12,900
with corresponding ROU assets of approximately
$12,700
based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The Company does not anticipate any material impact to the Consolidated Statements of Earnings when compared to reporting under historical guidance and does not expect any impact to cash flows from or used in operating, financing, or investing on our Consolidated Statements of Cash Flows. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify, which means for those leases that qualify, the Company will not recognize ROU assets or lease liabilities. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its leases.
In May 2014, the FASB issued a comprehensive new revenue recognition standard that superseded existing revenue recognition guidance under U.S. GAAP. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for several transition methods: (a) a full retrospective adoption in which the standard is applied to all of the periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements with a cumulative-effect
adjustment reflected in retained earnings. The standard also requires expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This new revenue recognition standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company performed a detailed review of its contract portfolio representative of its different businesses and compared historical accounting policies and practices to the new standard. Because the standard impacts its business processes, systems and controls, the Company also developed a comprehensive change management project plan to guide the implementation. Over the course of 2017, the Company conducted training sessions for those in its global organization that are impacted by the new standard. The Company’s primary business is the sale of products, and the adoption of the new revenue recognition standard did not have a material impact on its financial statements. The Company adopted the new standard effective January 1, 2018 utilizing the modified retrospective method. The cumulative-effect adjustment to retained earnings upon adoption was not material.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which addresses the definition of what constitutes a business by providing clarification of the three elements that constitute a business. The guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted ASU 2017-01 on January 1, 2018 prospectively (prior periods have not been restated). There was no significant impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). The standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset when the transfer occurs as opposed to when the asset is transferred to an outside party as required under current U.S. GAAP. The standard does not apply to intra-entity transfers of inventory, which will continue to follow current U.S. GAAP. The guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted ASU 2016-16 on January 1, 2018 utilizing the modified retrospective method. There was no impact on the Company’s consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, “Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”), which clarifies the income tax accounting implications of the Tax Cuts and Jobs Act. The guidance is effective immediately. In the 4
th
quarter of 2018, the company completed its analysis of the impact of U.S. Tax Reform.
NOTE 2 – SIGNIFICANT ACQUISITIONS
Acquisition of Innovative Food Processors, Inc.
On June 1, 2017, the Company acquired
100 percent
of the outstanding common shares of Innovative Food Processors, Inc. (“IFP”), a privately held manufacturer of agglomerated and microencapsulated food and nutrition ingredients, headquartered in Faribault, Minnesota. The Company made payments of approximately
$22,975
on the acquisition date and
$635
in September to true-up working capital, amounting to approximately
$16,161
to the former shareholders, adjustments for working capital acquired of
$5,065
, and
$2,384
to IFP’s lenders to pay off all IFP bank debt. The acquisition of IFP expands the Company’s Human Nutrition & Health segment’s processing technology and market reach, while bringing innovative and value-added systems to food, beverage, and nutrition customers.
Management has completed its accounting for the acquisition. As a result, the fair values of the assets acquired and liabilities assumed have been determined and
$1,340
of estimated goodwill has been recorded.
The following table summarizes the fair values of the assets acquired and liabilities assumed:
|
|
|
|
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Cash and cash equivalents
|
|
$
|
5,065
|
|
Accounts receivable
|
|
2,860
|
|
Inventories
|
|
2,537
|
|
Prepaid expenses
|
|
186
|
|
Property, plant and equipment
|
|
12,219
|
|
Customer relationships
|
|
2,942
|
|
Developed technology
|
|
1,078
|
|
Trademark & trade name
|
|
1,388
|
|
Covenant not to compete
|
|
126
|
|
Goodwill
|
|
1,340
|
|
Trade accounts payable
|
|
(844
|
)
|
Accrued expenses
|
|
(1,416
|
)
|
Bank debt
|
|
(2,384
|
)
|
Deferred income taxes
|
|
(3,871
|
)
|
Amount paid to shareholders
|
|
21,226
|
|
IFP bank debt paid on purchase date
|
|
2,384
|
|
Total amount paid
|
|
$
|
23,610
|
|
The goodwill of
$1,340
arising from the IFP Acquisition consists largely of expected synergies, including the combined entities’ experience and technical problem solving capabilities, and acquired workforce. The goodwill is assigned to the Human Nutrition & Health segment, and is not tax deductible for income tax purposes.
The valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. In preparing the Company's fair value of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Additionally, certain intangible assets are not tax deductible.
Customer relationships are amortized over a
10
-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trademark, trade name, covenant not to compete, and developed technology are amortized over
10 years
,
5 years
,
3 years
, and
5 years
, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.
The Company is indemnified for tax liabilities prior to the acquisition date. Indemnified tax liabilities will create an indemnification asset (receivable). At this time, an indemnification asset (receivable) balance has not been established.
The Company also completed one immaterial acquisition in 2017, Chol-Mix Kft, and another immaterial acquisition in 2018, Bioscreen Technologies Srl.
Transaction and integration costs related to recent acquisitions are included in general and administrative expenses and amounted to
$1,786
and
$2,163
for the years ended December 31, 2018 and 2017, respectively.
NOTE 3 - STOCKHOLDERS’ EQUITY
STOCK-BASED COMPENSATION
All share-based payments, including grants of stock options, are recognized in the income statement as an operating expense, based on their fair values.
The Company has made an estimate of expected forfeitures, based on its historical experience, and is recognizing compensation cost only for those stock-based compensation awards expected to vest.
The Company’s results for the years ended
December 31, 2018
,
2017
and
2016
reflected the following compensation cost and such compensation cost had the following effects on net earnings:
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|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) for the
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Cost of sales
|
|
$
|
973
|
|
|
$
|
524
|
|
|
$
|
1,040
|
|
Operating expenses
|
|
5,440
|
|
|
5,736
|
|
|
5,984
|
|
Net earnings
|
|
(4,965
|
)
|
|
(3,990
|
)
|
|
(4,473
|
)
|
On
December 31, 2018
, the Company had
one
share-based compensation plan under which awards may be granted, which is described below (the “2017 Plan”).
In June 2017, the Company adopted the Balchem Corporation 2017 Omnibus Incentive Plan (“2017 Plan”) for officers, employees and directors of the Company and its subsidiaries. The 2017 Plan replaced the 1999 Stock Plan and amendments and restatements thereto (collectively to be referred to as the “1999 Plan’), which expired on April 9, 2018. No further awards will be made under the 1999 Plan, and the shares that remained available for grant under the 1999 Plan will only be used to settle outstanding awards granted under the 1999 Plan and will not become available under the 2017 Plan. The 2017 Plan is administered by the Compensation Committee of the Board of Directors of the Company. The 2017 Plan provides as follows: i) for a termination date of June 13, 2027; (ii) to authorize
1,600,000
shares reserved for future grants, a reduction from the
6,000,000
shares authorized for grant under the 1999 Plan; (iii) for the making of grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards, as well as for the making of cash performance awards; (iv) except as provided in an employment agreement as in effect on the effective date of the 2017 Plan, no automatic acceleration of outstanding awards upon the occurrence of a change in control of the Company; (v) certain annual limits on the number of shares and amount of cash that may be granted; (vii) for dividends or dividend equivalents otherwise payable on an unvested award to accrue and be paid only at such time as the vesting conditions applicable to the underlying award have been satisfied; (vii) for certain discretionary compensation recovery if the Company is required to prepare an accounting restatement of its financial statements due to the Company’s material noncompliance with any financial reporting requirements under the securities laws; and (viii) for compliance with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code” or the “Code”). No option will be exercisable for longer than
ten years
after the date of grant.
The shares to be issued upon exercise of the outstanding options have been approved, reserved and are adequate to cover all exercises. As of
December 31, 2018
, the 2017 Plan had
1,377,544
shares available for future awards.
The Company has Restricted Stock Grant Agreements with the Company's non–employee directors and certain employees. Under the Restricted Stock Grant Agreements, certain shares of the Company’s Common Stock have been granted, ranging from
70
shares to
54,000
shares, to its non-employee directors and certain employees, subject to time-based vesting requirements.
The Company also has performance share (“PS”) awards, which provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (“TSR”) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents.
The fair value of each option award issued under the Company’s stock plans is estimated on the date of grant using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical experience of employees’ exercise behavior. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Weighted Average Assumptions:
|
|
2018
|
|
2017
|
|
2016
|
Expected Volatility
|
|
26.8
|
%
|
|
30.1
|
%
|
|
34.4
|
%
|
Expected Term (in years)
|
|
4.4
|
|
|
4.6
|
|
|
5.0
|
|
Risk-Free Interest Rate
|
|
2.6
|
%
|
|
1.8
|
%
|
|
1.2
|
%
|
Dividend Yield
|
|
0.6
|
%
|
|
0.5
|
%
|
|
0.5
|
%
|
The value of the restricted shares is based on the fair value of the award at the date of grant.
PS expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions
used in the fair value determination were risk free interest rates of
2.4%
,
1.5%
, and
0.88%
; dividend yields of
0.5%
,
0.6%
, and
0.6%
; volatilities of
27%
,
32%
,
32%
; and initial TSR’s of
-10.5%
,
8.2%
, and
-6.6%
in each case for the years ended
December 31, 2018
,
2017
, and 2016, respectively. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest
100%
at the end of the third year following the grant in accordance with the performance metrics set forth.
Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally
three years
for stock options,
three
to
four years
for employee restricted stock awards,
three years
for employee performance share awards, and
four years
for non-employee director restricted stock awards.
A summary of stock option plan activity for
2018
,
2017
, and
2016
for all plans is as follows:
|
|
|
|
|
|
|
|
|
2018
|
|
# of
Shares
(000s)
|
|
Weighted Average
Exercise Price
|
Outstanding at beginning of year
|
|
946
|
|
|
$
|
55.44
|
|
Granted
|
|
148
|
|
|
74.57
|
|
Exercised
|
|
(198
|
)
|
|
41.71
|
|
Forfeited
|
|
(6
|
)
|
|
74.90
|
|
Cancelled
|
|
(3
|
)
|
|
48.54
|
|
Outstanding at end of year
|
|
887
|
|
|
$
|
61.59
|
|
Exercisable at end of year
|
|
490
|
|
|
$
|
50.50
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
# of
Shares
(000s)
|
|
Weighted Average
Exercise Price
|
Outstanding at beginning of year
|
|
1,066
|
|
|
$
|
45.32
|
|
Granted
|
|
222
|
|
|
85.22
|
|
Exercised
|
|
(268
|
)
|
|
36.36
|
|
Forfeited
|
|
(52
|
)
|
|
72.29
|
|
Cancelled
|
|
(22
|
)
|
|
57.48
|
|
Outstanding at end of year
|
|
946
|
|
|
$
|
55.44
|
|
Exercisable at end of year
|
|
493
|
|
|
$
|
41.01
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
# of
Shares
(000s)
|
|
Weighted Average
Exercise Price
|
Outstanding at beginning of year
|
|
1,017
|
|
|
$
|
37.29
|
|
Granted
|
|
341
|
|
|
60.92
|
|
Exercised
|
|
(236
|
)
|
|
30.44
|
|
Forfeited
|
|
(56
|
)
|
|
58.23
|
|
Outstanding at end of year
|
|
1,066
|
|
|
$
|
45.32
|
|
Exercisable at end of year
|
|
604
|
|
|
$
|
34.77
|
|
The aggregate intrinsic value for outstanding stock options was
$16,192
,
$24,714
and
$41,161
at
December 31, 2018
,
2017
and
2016
, respectively, with a weighted average remaining contractual term of
6.3 years
at
December 31, 2018
. Exercisable stock options at
December 31, 2018
had an aggregate intrinsic value of
$13,887
with a weighted average remaining contractual term of
5.0 years
.
Other information pertaining to option activity during the years ended
December 31, 2018
,
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average fair value of options granted
|
|
$
|
18.62
|
|
|
$
|
23.20
|
|
|
$
|
18.48
|
|
Total intrinsic value of stock options exercised ($000s)
|
|
$
|
10,456
|
|
|
$
|
11,900
|
|
|
$
|
8,609
|
|
Additional information related to stock options outstanding under all plans at
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Shares
Outstanding
(000s)
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
(000s)
|
|
Weighted
Average
Exercise
Price
|
$13.61 - $34.81
|
|
134
|
|
|
2.0 years
|
|
$
|
28.03
|
|
|
134
|
|
|
$
|
28.03
|
|
$38.10 - $59.95
|
|
195
|
|
|
5.2 years
|
|
52.51
|
|
|
191
|
|
|
52.39
|
|
$60.01 - $85.40
|
|
558
|
|
|
7.7 years
|
|
72.82
|
|
|
165
|
|
|
66.61
|
|
|
|
887
|
|
|
6.3 years
|
|
$
|
61.59
|
|
|
490
|
|
|
$
|
50.50
|
|
Non-vested restricted stock activity for the years ended
December 31, 2018
,
2017
and
2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2017
|
|
66
|
|
|
$
|
65.66
|
|
Granted
|
|
42
|
|
|
77.50
|
|
Vested
|
|
(27
|
)
|
|
62.74
|
|
Forfeited
|
|
(2
|
)
|
|
74.57
|
|
Non-vested balance as of December 31, 2018
|
|
79
|
|
|
$
|
72.75
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2016
|
|
102
|
|
|
$
|
54.18
|
|
Granted
|
|
21
|
|
|
83.43
|
|
Vested
|
|
(53
|
)
|
|
51.39
|
|
Forfeited
|
|
(4
|
)
|
|
55.45
|
|
Non-vested balance as of December 31, 2017
|
|
66
|
|
|
$
|
65.66
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2015
|
|
150
|
|
|
$
|
47.46
|
|
Granted
|
|
19
|
|
|
61.22
|
|
Vested
|
|
(66
|
)
|
|
40.96
|
|
Forfeited
|
|
(1
|
)
|
|
56.77
|
|
Non-vested balance as of December 31, 2016
|
|
102
|
|
|
$
|
54.18
|
|
Non-vested performance share activity for the years ended
December 31, 2018
,
2017
and
2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2017
|
|
39
|
|
|
$
|
72.62
|
|
Granted
|
|
32
|
|
|
71.27
|
|
Vested
|
|
(15
|
)
|
|
58.78
|
|
Forfeited
|
|
(3
|
)
|
|
72.55
|
|
Non-vested balance as of December 31, 2018
|
|
53
|
|
|
$
|
75.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2016
|
|
34
|
|
|
$
|
61.06
|
|
Granted
|
|
16
|
|
|
93.85
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(11
|
)
|
|
69.25
|
|
Non-vested balance as of December 31, 2017
|
|
39
|
|
|
$
|
72.62
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested as of December 31, 2015
|
|
20
|
|
|
$
|
58.77
|
|
Granted
|
|
22
|
|
|
63.15
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(8
|
)
|
|
60.88
|
|
Non-vested as of December 31, 2016
|
|
34
|
|
|
$
|
61.06
|
|
As of
December 31, 2018
,
2017
and
2016
, there was
$8,565
,
$7,742
and
$8,260
, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of
December 31, 2018
, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately
1.6 years
. We estimate that share-based compensation expense for the year ended December 31, 2019 will be approximately
$7,700
.
REPURCHASE OF COMMON STOCK
The Company has an approved stock repurchase program. The total authorization under this program is
3,763,038
shares. Since the inception of the program in June 1999, a total of
2,190,772
shares have been purchased, of which
706
shares remained in treasury at
December 31, 2018
.
No
shares remained in treasury at December 31,
2017
. During
2018
and
2017
, a total of
16,755
and
23,182
shares, respectively, have been purchased at an average cost of
$83.08
and
$82.19
per share, respectively. 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 on its assessment of corporate cash flow, market conditions and other factors. The Company also repurchases shares from employees in connection with settlement of transactions under the Company’s equity incentive plans.
NOTE 4 - INVENTORIES
Inventories at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
23,661
|
|
|
$
|
20,520
|
|
Work in progress
|
|
4,649
|
|
|
6,308
|
|
Finished goods
|
|
38,877
|
|
|
33,868
|
|
Total inventories
|
|
$
|
67,187
|
|
|
$
|
60,696
|
|
On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by analyzing demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reserved, if necessary. The reserve for inventory was
$2,575
and
$2,315
at
December 31, 2018
and
2017
, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at
December 31, 2018
and
2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Land
|
|
$
|
7,965
|
|
|
$
|
7,262
|
|
Building
|
|
67,702
|
|
|
63,224
|
|
Equipment
|
|
213,909
|
|
|
201,341
|
|
Construction in progress
|
|
18,170
|
|
|
13,860
|
|
|
|
307,746
|
|
|
285,687
|
|
Less: Accumulated depreciation
|
|
113,407
|
|
|
95,894
|
|
Property, plant and equipment, net
|
|
$
|
194,339
|
|
|
$
|
189,793
|
|
Geographic Area Data - Long-Lived Assets (excluding intangible assets):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
North America
|
|
$
|
170,830
|
|
|
$
|
175,027
|
|
Europe
|
|
23,509
|
|
|
14,766
|
|
Total
|
|
194,339
|
|
|
189,793
|
|
Depreciation expense was
$18,998
,
$17,121
and
$15,907
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
For the year ended December 31, 2018, the Company recorded certain immaterial impairment charges in connection with the IFP integration.
NOTE 6 - INTANGIBLE ASSETS
The Company had goodwill in the amount of
$447,995
and
$441,361
as of
December 31, 2018
and
2017
subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
As of
December 31, 2018
and
2017
, the Company had identifiable intangible assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Period
(In years)
|
|
2018
Gross
Carrying
Amount
|
|
2018
Accumulated
Amortization
|
|
2017
Gross
Carrying
Amount
|
|
2017
Accumulated
Amortization
|
Customer relationships & lists
|
|
10
|
|
$
|
192,185
|
|
|
$
|
122,545
|
|
|
$
|
190,061
|
|
|
$
|
105,573
|
|
Trademarks & trade names
|
|
5-17
|
|
39,934
|
|
|
16,755
|
|
|
40,630
|
|
|
12,895
|
|
Developed technology
|
|
5
|
|
13,338
|
|
|
8,604
|
|
|
13,338
|
|
|
5,936
|
|
Other
|
|
3-18
|
|
14,913
|
|
|
6,481
|
|
|
13,466
|
|
|
5,018
|
|
|
|
|
|
$
|
260,370
|
|
|
$
|
154,385
|
|
|
$
|
257,495
|
|
|
$
|
129,422
|
|
Amortization of identifiable intangible assets was
$24,988
,
$26,784
and
$29,768
for
2018
,
2017
and
2016
, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is approximately
$22,928
in 2019,
$20,870
in 2020,
$17,639
in 2021,
$16,156
in 2022, and
$14,861
in 2023. At
December 31, 2018
and
2017
, there were no identifiable intangible assets with indefinite useful lives as defined by ASC 350, “Intangibles-Goodwill and Other.” Identifiable intangible assets are reflected in the Company’s consolidated balance sheets under Intangible assets with finite lives, net. There were no changes to the useful lives of intangible assets subject to amortization in
2018
and
2017
. For the year ended December 31, 2018, the Company recorded certain immaterial impairment charges in connection with the IFP integration.
The Federal Insecticide, Fungicide and Rodenticide Act, (“FIFRA”), a health and safety statute, requires that certain products within our specialty products segment must be registered with the U.S. Environmental Protection Agency ("EPA") because they are considered pesticides. Costs of such registrations are included as other in the table above.
NOTE 7 – EQUITY-METHOD INVESTMENT
In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture (
66.66%
/
33.34%
ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel aqueous choline chloride plant. The Company contributed the St. Gabriel plant, at cost, and expansion will be funded by the owners. The joint venture became operational as of July 1, 2016. St. Gabriel CC Company, LLC is a Variable Interest Entity (VIE) because the total equity at risk is not sufficient to permit the joint venture to finance its own activities without additional subordinated financial support. Additionally, voting rights (
2
votes each) are not proportionate to the owners’ obligation to absorb expected losses or receive the expected residual returns of the joint venture. The Company will receive up to 2/3 of the production offtake capacity and absorbs operating expenses approximately proportional to the actual percentage of offtake. The joint venture is accounted for under the equity method of accounting since the Company is not the primary beneficiary, because it does not have the power to direct the activities of the joint venture that most significantly impact its economic performance. The Company recognized a loss of
$569
,
$546
, and
$293
for the years ended
December 31, 2018
,
2017
, and 2016, respectively, relating to its portion of the joint venture’s expenses in other expense. The carrying value of the joint venture at
December 31, 2018
and
2017
is
$4,902
and
$4,804
, respectively, and is recorded in other assets.
NOTE 8 – REVOLVING LOAN
On June 27, 2018, the Company and a bank syndicate entered into a
five
-year senior secured revolving credit agreement (“Credit Agreement”), which replaced the existing credit facility that had provided for a senior secured term loan A of
$350,000
and a revolving loan of
$100,000
. The Credit Agreement, which expires on June 27, 2023, provides for revolving loans up to
$500,000
(collectively referred to as the “loans”). The loans may be used for working capital, letters of credit, and other corporate purposes and may be drawn upon at the Company’s discretion. The initial proceeds from the Credit Agreement were used to repay the outstanding balance of
$210,750
on its senior secured term loan A, which was due May 2019. There are
no
installment payments required on the revolving loans; they may be voluntarily prepaid in whole or in part without premium or penalty, and all outstanding amounts are due on the maturity date. As of December 31, 2018, the balance outstanding amounted to
$156,000
.
Amounts outstanding under the Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the Credit Agreement, and the interest rate was
3.647%
at December 31, 2018. The Company is also required to pay a commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as defined in the Credit Agreement and ranges from
0.15%
to
0.275%
(
0.175%
at December 31, 2018). The unused portion of the revolving loan amounted to
$344,000
at December 31, 2018. The Company is also required to pay, as applicable, letter of credit fees, administrative agent fees, and other fees to the arrangers and lenders.
Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the Credit Agreement. Costs associated with the issuance of the extinguished debt instrument were capitalized and amortized over the term of the respective financing arrangement using the effective interest method. Capitalized costs net of accumulated amortization totaled
$1,268
at December 31, 2018 and are included in other assets on the balance sheet. Capitalized costs net of accumulated amortization totaled
$536
at December 31, 2017 and are recorded as a reduction of long-term debt on the balance sheet. Amortization expense pertaining to these costs totaled
$680
,
$474
, and
$526
for the years ended December 31, 2018, 2017 and 2016, respectively, and is included in interest expense in the accompanying condensed consolidated statements of earnings. In 2018, such interest expense included the write off
$363
of deferred financing costs in connection with the extinguished debt in the second quarter of 2018.
The Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At December 31, 2018, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the Company.
NOTE 9 - NET EARNINGS PER COMMON SHARE
The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Earnings
(Numerator)
|
|
Number of Shares
(Denominator)
|
|
Per Share
Amount
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
78,573
|
|
|
32,093,037
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
351,858
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
78,573
|
|
|
32,444,895
|
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Earnings
(Numerator)
|
|
Number of Shares
(Denominator)
|
|
Per Share
Amount
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
90,071
|
|
|
31,838,641
|
|
|
$
|
2.83
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
391,165
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
90,071
|
|
|
32,229,806
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Earnings
(Numerator)
|
|
Number of Shares
(Denominator)
|
|
Per Share
Amount
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
55,972
|
|
|
31,521,667
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
400,971
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
55,972
|
|
|
31,922,638
|
|
|
$
|
1.75
|
|
The Company had
188,470
,
199,010
, and
2,500
stock options outstanding at
December 31, 2018
,
2017
and
2016
, respectively 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.
The Company has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted shares and they participate on a one-for-one basis with holders of Common Stock. These awards have an immaterial impact as participating securities with regard to the calculation using the two-class method for determining earnings per share.
NOTE 10 - INCOME TAXES
The Company’s effective tax rate for 2018 and 2017 was
20.7%
and
(1.8)%
respectively. The 2017 effective tax rate was significantly affected by recording the impact of the Tax Cuts and Jobs Act (the “U.S. Tax Reform” or "TCJA"), enacted on December 22, 2017.
U.S. Tax Reform made broad and complex changes to the U.S. tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a
territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. In addition, the Internal Revenue Service (“IRS”) issued guidance, regulations, and interpretations of U.S. Tax Reform during 2018. This guidance impacted various sections of the tax code relating to the use of foreign tax credits. Prior to enactment of U.S. Tax Reform, foreign income taxes paid by Balchem’s foreign subsidiaries were generally available to mitigate additional U.S. tax on foreign earnings. Proposed regulations relating to foreign tax credits released in November 2018 clarified that deemed paid foreign tax credits related to Global Intangible Low-Taxed Income, or GILTI, would generally only be available to offset a portion of the foreign income taxes paid. Pending revisions or changes to the proposed regulations, foreign income taxes deemed paid are not expected to fully offset potential additional U.S. tax liability on earnings of foreign subsidiaries. Balchem accrued
$4,185
of current foreign income tax expense in foreign jurisdictions in 2018. Of this amount only
$1,136
is expected to be allowable under the currently proposed regulations as a foreign tax credit in the U.S. Future potential U.S. tax liability related to GILTI may not be fully offset by foreign tax credits.
U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. However, in March 2018, the FASB issued ASU No. 2018-05, “Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”), which clarifies the income tax accounting implications of the Tax Reform Act. Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act.
In the fourth quarter of 2018, the company completed its analysis of the impact of U.S. Tax Reform. In total, the company recorded a tax benefit of
$26,761
related to U.S. Tax Reform. This benefit is comprised of a provisional estimate of
$25,791
recorded in the fourth quarter of 2017, and an additional
$970
benefit recorded in the fourth quarter of 2018.
In accordance with SAB 118, the U.S. Tax Reform-related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed. The provisional amounts were also affected by guidance issued subsequent to the passage of U.S. Tax Reform. This guidance included regulations and interpretations issued by the IRS, changes in accounting standards, and federal and state legislation. Although the analysis for the impact of U.S. Tax Reform under the requirements of SAB 118 are complete, the IRS has issued and will continue to issue regulations related to U.S. Tax Reform. Due to the complexity and breadth of new tax law, implementation of the regulations may have an impact on the Company’s income tax.
Per SAB 118, the following U.S. Tax Reform-related impacts were recorded in the company’s financial statements:
|
|
•
|
In the fourth quarter of 2017, an estimated current tax expense of
$1,389
was recorded for the deemed repatriation under Section 965, net of available foreign tax credits. In August of 2018, the IRS issued proposed regulations that clarified the computation of the deemed repatriation. In the fourth quarter of 2018, the company recorded a reduction to the tax of
$970
related to the regulations, adjustments to foreign tax credit calculations, and the interaction of those calculation with other aspects of the tax code. The total amount recorded for the deemed repatriation tax was
$419
.
|
|
|
•
|
In the fourth quarter of 2017, an estimated deferred tax benefit of
$27,255
was recorded to revalue the company’s net deferred tax liabilities from the 35% previous federal tax rate to the 21% federal tax rate in affect as of January 1, 2018. This was a non-cash benefit recorded to deferred tax expense. The rate impact of temporary item true-ups for amounts filed on tax returns was considered insignificant. The total amount recorded for the revaluation of deferred tax amounts to 21% was a benefit of
$27,255
.
|
|
|
•
|
In the fourth quarter of 2017, an estimated tax expense of
$75
was recorded to reduce deferred tax assets associated with historic GAAP expensing of stock options issued to covered employees for purposes of the
$1 million
cap on wage deductibility under Section 162(m). The DTA was reduced to its expected realizable amount, after anticipation of the 162(m) limit in future years. This estimate was not subsequently adjusted.
|
|
|
•
|
The company did not estimate any deferred taxes related to the Global Intangible Low-Taxed Income, or GILTI, in the fourth quarter of 2017, as an analysis of the GILTI provisions were still underway. Additional guidance from the IRS on the computation of GILTI was issued in September and November of 2018, with more guidance still anticipated. The FASB noted that companies should make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year incurred. As of the fourth quarter 2018, the company has elected to include GILTI as tax expense in the period incurred. This resulted in no adjustment, since no deferred tax impact was recorded in the fourth quarter of 2017.
|
The company analyzed any potential Base Erosion and Anti-Abuse Tax (“BEAT”) on related-party transactions and determined they met the gross receipts test but did not meet the level of base erosion payments that would subject the company to BEAT in 2018.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of
those subsidiary earnings. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.
On June 21, 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. (“Wayfair”) overturning the previous ruling of Quill Corp. v. North Dakota which required physical presence in a state before the collection and remittance of sales and use taxes would be required. As a result of this ruling, numerous states have undertaken the process to reevaluate their nexus requirements in order to capture increased revenue through both sales and use taxes and income taxes. Many states are still evaluating the application and effects of Wayfair and many are expected to issue changes to their nexus rules in the coming months. These changes may require us to increase the number of state jurisdictions in which we file, and we continue to evaluate the impact of these changes as they come into effect for each state.
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
18,296
|
|
|
$
|
20,102
|
|
|
$
|
28,765
|
|
Foreign
|
|
4,060
|
|
|
3,015
|
|
|
2,670
|
|
State
|
|
3,880
|
|
|
2,790
|
|
|
2,483
|
|
Deemed Repatriation
|
|
(970
|
)
|
|
1,389
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(3,788
|
)
|
|
(1,302
|
)
|
|
(7,114
|
)
|
Foreign
|
|
(69
|
)
|
|
62
|
|
|
52
|
|
State
|
|
(952
|
)
|
|
(384
|
)
|
|
106
|
|
Federal Rate Change
|
|
—
|
|
|
(27,255
|
)
|
|
—
|
|
Total income tax provision
|
|
$
|
20,457
|
|
|
$
|
(1,583
|
)
|
|
$
|
26,962
|
|
The provision for income taxes differs from the amount computed by applying the Federal statutory rate of
21%
for 2018 and
35%
for 2017 and 2016 to earnings before income tax expense due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Income tax at Federal statutory rate
|
|
$
|
20,796
|
|
|
$
|
30,971
|
|
|
29,027
|
|
State income taxes, net of Federal income taxes
|
|
2,742
|
|
|
708
|
|
|
1,510
|
|
Federal Rate Change
|
|
—
|
|
|
(27,255
|
)
|
|
—
|
|
Stock Options
|
|
(1,293
|
)
|
|
(2,927
|
)
|
|
—
|
|
GILTI & FDII
|
|
1,027
|
|
|
—
|
|
|
—
|
|
Deemed Repatriation
|
|
(970
|
)
|
|
1,389
|
|
|
—
|
|
Foreign Tax Credits
|
|
(1,136
|
)
|
|
—
|
|
|
—
|
|
Domestic production activities deduction
|
|
—
|
|
|
(2,382
|
)
|
|
(3,299
|
)
|
Other
|
|
(709
|
)
|
|
(2,087
|
)
|
|
(276
|
)
|
Total income tax provision
|
|
$
|
20,457
|
|
|
$
|
(1,583
|
)
|
|
26,962
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Inventories
|
|
$
|
1,260
|
|
|
$
|
1,297
|
|
Restricted stock and stock options
|
|
3,567
|
|
|
3,248
|
|
Other
|
|
2,885
|
|
|
1,764
|
|
Total deferred tax assets
|
|
7,712
|
|
|
6,309
|
|
Deferred tax liabilities:
|
|
|
|
|
Amortization
|
|
$
|
27,080
|
|
|
$
|
31,311
|
|
Depreciation
|
|
23,837
|
|
|
22,172
|
|
Other
|
|
1,104
|
|
|
1,374
|
|
Total deferred tax liabilities
|
|
52,021
|
|
|
54,857
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
44,309
|
|
|
$
|
48,548
|
|
There is no valuation allowance for deferred tax assets at
December 31, 2018
and
2017
. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of deferred tax asset realizable, however, could change if management’s estimate of future taxable income should change.
As of December 31, 2018, we have state income tax net operating loss (NOL) carryforwards of
$10,114
, which will expire in 2031. We believe that the benefit from the state NOL carryforwards will be realized. Therefore, a valuation allowance is not required to be established.
Provisions of ASC 740-10 clarify whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is included in other long-term obligations on the Company’s consolidated balance sheets, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
4,781
|
|
|
$
|
6,637
|
|
|
$
|
6,570
|
|
Increases for tax positions of prior years
|
|
1,366
|
|
|
393
|
|
|
332
|
|
Decreases for tax positions of prior years
|
|
(1,185
|
)
|
|
(2,711
|
)
|
|
(406
|
)
|
Increases for tax positions related to current year
|
|
747
|
|
|
462
|
|
|
141
|
|
Balance at end of period
|
|
$
|
5,709
|
|
|
$
|
4,781
|
|
|
$
|
6,637
|
|
All of the Company’s unrecognized tax benefits, if recognized in future periods, would impact the Company’s effective tax rate in such future periods.
The Company recognizes both interest and penalties as part of the income tax provision. During the years ended
December 31, 2018
,
2017
and
2016
, the Company recognized approximately
$207
,
$94
and
$94
in interest and penalties, respectively. As of
December 31, 2018
and
2017
, accrued interest and penalties were
$1,839
and
$1,882
, respectively.
The Company files income tax returns in the U.S. and in various states and foreign countries. In the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2014. The Company does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.
NOTE 11 - SEGMENT INFORMATION
Human Nutrition & Health
The Company's Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customer perceptions of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation. This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. The Company partners with our customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company's expertise in trends analysis and product development, combined with manufacturing capabilities in customized spray dried and emulsified powders, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates makes the Company a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. The Company also creates cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients.
Animal Nutrition & Health
The Company’s Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, the Company’s microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity.
Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
Specialty Products
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. The Company’s 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the EPA and the DOT. The Company’s inventory of these specially built drums, along with its
two
filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.
Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. The Company distributes its propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Its inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization
in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.
The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. The Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.
Industrial Products
Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. The Company’s products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade choline bicarbonate is completely chloride free and the Company's choline chloride reduces the amount of chlorides released into the environment up to
75%
when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at its Italian operation and sold for a wide range of industrial applications in Europe.
Business Segment Assets:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Human Nutrition & Health
|
|
$
|
702,692
|
|
|
$
|
719,010
|
|
Animal Nutrition & Health
|
|
136,810
|
|
|
118,418
|
|
Specialty Products
|
|
59,558
|
|
|
63,141
|
|
Industrial Products
|
|
22,822
|
|
|
18,471
|
|
Other Unallocated
|
|
59,473
|
|
|
44,596
|
|
Total
|
|
$
|
981,355
|
|
|
$
|
963,636
|
|
Other unallocated assets consist of certain cash, receivables, prepaid expenses, equipment and leasehold improvements, net of accumulated depreciation, and deferred income taxes, which the Company does not allocate to its individual business segments.
Business Segment Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Human Nutrition & Health
|
|
$
|
341,237
|
|
|
$
|
315,796
|
|
|
$
|
297,134
|
|
Animal Nutrition & Health
|
|
175,693
|
|
|
157,688
|
|
|
161,119
|
|
Specialty Products
|
|
75,808
|
|
|
73,355
|
|
|
70,126
|
|
Industrial Products
|
|
50,941
|
|
|
47,951
|
|
|
24,825
|
|
Total
|
|
$
|
643,679
|
|
|
$
|
594,790
|
|
|
$
|
553,204
|
|
Business Segment Earnings Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Human Nutrition & Health
|
|
$
|
48,490
|
|
|
$
|
44,010
|
|
|
$
|
38,156
|
|
Animal Nutrition & Health
|
|
26,673
|
|
|
22,292
|
|
|
28,686
|
|
Specialty Products
|
|
25,361
|
|
|
24,949
|
|
|
22,862
|
|
Industrial Products
|
|
9,013
|
|
|
6,413
|
|
|
1,949
|
|
Transaction and integration costs
|
|
(1,786
|
)
|
|
(2,496
|
)
|
|
(815
|
)
|
Indemnification settlement
|
|
—
|
|
|
2,087
|
|
|
—
|
|
Interest and other income, net
|
|
(8,721
|
)
|
|
(8,767
|
)
|
|
(7,904
|
)
|
Total
|
|
$
|
99,030
|
|
|
$
|
88,488
|
|
|
$
|
82,934
|
|
Transaction and integration costs were primarily related to the aforementioned definitive agreement (see Note 2), one immaterial acquisition completed in each of 2018 and 2017, and the acquisition of Albion International, Inc. in 2016.
Depreciation/Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Human Nutrition & Health
|
|
$
|
33,594
|
|
|
$
|
33,384
|
|
|
$
|
33,796
|
|
Animal Nutrition & Health
|
|
5,606
|
|
|
5,618
|
|
|
7,243
|
|
Specialty Products
|
|
4,092
|
|
|
4,097
|
|
|
3,787
|
|
Industrial Products
|
|
694
|
|
|
806
|
|
|
850
|
|
Total
|
|
$
|
43,986
|
|
|
$
|
43,905
|
|
|
$
|
45,676
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Human Nutrition & Health
|
|
$
|
8,881
|
|
|
$
|
20,580
|
|
|
$
|
14,470
|
|
Animal Nutrition & Health
|
|
6,021
|
|
|
4,424
|
|
|
6,577
|
|
Specialty Products
|
|
2,356
|
|
|
1,306
|
|
|
1,286
|
|
Industrial Products
|
|
1,912
|
|
|
1,216
|
|
|
701
|
|
Total
|
|
$
|
19,170
|
|
|
$
|
27,526
|
|
|
$
|
23,034
|
|
NOTE 12 - REVENUE
Revenue Recognition
Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration we expect to realize in exchange for those goods.
The following table presents revenues disaggregated by revenue source (in thousands). Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Product Sales
|
|
$
|
590,790
|
|
|
$
|
542,065
|
|
|
$
|
505,174
|
|
Co-manufacturing
|
|
41,348
|
|
|
41,658
|
|
|
39,396
|
|
Bill and Hold
|
|
4,612
|
|
|
4,094
|
|
|
3,061
|
|
Consignment
|
|
2,442
|
|
|
2,333
|
|
|
2,170
|
|
Product Sales Revenue
|
|
639,192
|
|
|
590,150
|
|
|
549,801
|
|
|
|
|
|
|
|
|
Royalty Revenue
|
|
4,487
|
|
|
4,640
|
|
|
3,403
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
643,679
|
|
|
$
|
594,790
|
|
|
$
|
553,204
|
|
The following table presents revenues disaggregated by geography, based on the billing addresses of customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
United States
|
|
$
|
482,691
|
|
|
$
|
460,599
|
|
|
$
|
420,821
|
|
Foreign Countries
|
|
160,988
|
|
|
134,191
|
|
|
132,383
|
|
Total
|
|
$
|
643,679
|
|
|
$
|
594,790
|
|
|
$
|
553,204
|
|
Product Sales Revenues
The Company’s primary operation is the manufacturing and sale of health and wellness ingredient products, in which the Company receives an order from a customer and fulfills that order. The Company’s product sales have
four
sub-streams of revenue: product sales, co-manufacturing, bill and hold, and consignment.
Under the co-manufacturing agreements, the Company is responsible for the manufacture of a finished good where the customer provides some or all of the raw materials. The Company controls the manufacturing process and the ultimate end-product before it is shipped to the customer. Based on these factors, the Company has determined that it is the principal in these agreements and therefore revenue is recognized in the gross amount of consideration the Company expects to be entitled for the goods provided.
Royalty Revenues
Royalty revenue consists of agreements with customers to use the Company’s intellectual property in exchange for a sales-based royalty. Royalty revenue is recorded as part of the Human Nutrition & Health segment.
Contract Liabilities
The Company records contract liabilities when cash payments are received or due in advance of performance, including amounts which are refundable.
The Company’s payment terms vary by the type and location of customers and the products offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products are delivered to the customer.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for products shipped.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Income taxes
|
|
$
|
20,593
|
|
|
$
|
25,845
|
|
|
$
|
30,741
|
|
Interest
|
|
$
|
6,940
|
|
|
$
|
7,021
|
|
|
$
|
6,669
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Dividends payable
|
|
$
|
15,220
|
|
|
$
|
13,484
|
|
|
$
|
12,088
|
|
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net foreign currency translation adjustment
|
|
$
|
(2,982
|
)
|
|
$
|
5,404
|
|
|
$
|
(1,390
|
)
|
|
|
|
|
|
|
|
Net change in postretirement benefit plan
(see Note 15 for further information)
|
|
|
|
|
|
|
Initial adoption of new plan
|
|
—
|
|
|
—
|
|
|
(444
|
)
|
Net gain/(loss) arising during the period
|
|
522
|
|
|
(49
|
)
|
|
101
|
|
Amortization of prior service credit/(cost)
|
|
74
|
|
|
74
|
|
|
57
|
|
Amortization of (gain)/loss
|
|
(8
|
)
|
|
(15
|
)
|
|
(10
|
)
|
Total before tax
|
|
588
|
|
|
10
|
|
|
(296
|
)
|
Tax
|
|
434
|
|
|
(207
|
)
|
|
(49
|
)
|
Net of tax
|
|
1,022
|
|
|
(197
|
)
|
|
(345
|
)
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
(1,960
|
)
|
|
$
|
5,207
|
|
|
$
|
(1,735
|
)
|
Accumulated other comprehensive income/(loss) at
December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustment
|
|
Postretirement
benefit plan
|
|
Total
|
Balance December 31, 2017
|
|
$
|
(1,303
|
)
|
|
$
|
(339
|
)
|
|
$
|
(1,642
|
)
|
Other comprehensive (loss)/gain
|
|
(2,982
|
)
|
|
1,022
|
|
|
(1,960
|
)
|
Balance December 31, 2018
|
|
$
|
(4,285
|
)
|
|
$
|
683
|
|
|
$
|
(3,602
|
)
|
NOTE 15 - EMPLOYEE BENEFIT PLANS
During 2017, the Company sponsored
two
401(k) savings plans for eligible employees. The plans allow participants to make pretax contributions and the Company matches certain percentages of those pretax contributions. The plans have a discretionary profit sharing portion and one of the plans matches 401(k) contributions with shares of the Company’s Common Stock. All amounts contributed to the plans are deposited into a trust fund administered by independent trustees. These plans were merged in January 2018. The merged plan allows participants to make pretax contributions and the Company matches certain percentages of those contributions which is made with shares of the Company’s stock. Additionally, this plan has a discretionary profit sharing portion. The Company provided for profit sharing contributions and matching 401(k) savings plan contributions of
$825
and
$3,153
in
2018
,
$395
and
$2,594
in
2017
, and
$712
and
$2,248
in
2016
, respectively.
On June 1, 2018, the Company established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as of December 31, 2018 was
$265
and is included in Other long-term obligations on the Company's balance sheet.
The Company also provides postretirement benefits in the form of an unfunded retirement medical plan under a collective bargaining agreement covering eligible retired employees of the Verona facility. The Company uses a
December 31
measurement date for its postretirement medical plan. In accordance with ASC 715, “Compensation—Retirement Benefits,” the Company is required to recognize the over funded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, during 2016 the Company adopted an unfunded postretirement medical plan for Named Executive Officers.
The actuarial recorded liabilities for such unfunded postretirement benefits are as follows:
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Benefit obligation at beginning of year
|
|
$
|
1,573
|
|
|
$
|
1,411
|
|
Initial adoption of new plan
|
|
—
|
|
|
—
|
|
Service cost with interest to end of year
|
|
78
|
|
|
67
|
|
Interest cost
|
|
44
|
|
|
46
|
|
Participant contributions
|
|
40
|
|
|
28
|
|
Benefits paid
|
|
(136
|
)
|
|
(58
|
)
|
Actuarial (gain)/loss
|
|
(425
|
)
|
|
79
|
|
Benefit obligation at end of year
|
|
$
|
1,174
|
|
|
$
|
1,573
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer (reimbursement)/contributions
|
|
96
|
|
|
30
|
|
Participant contributions
|
|
40
|
|
|
28
|
|
Benefits paid
|
|
(136
|
)
|
|
(58
|
)
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Amounts recognized in consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Accumulated postretirement benefit obligation
|
|
$
|
(1,174
|
)
|
|
$
|
(1,573
|
)
|
Fair value of plan assets
|
|
—
|
|
|
—
|
|
Funded status
|
|
(1,174
|
)
|
|
(1,573
|
)
|
Unrecognized prior service cost
|
|
N/A
|
|
|
N/A
|
|
Unrecognized net (gain)/loss
|
|
N/A
|
|
|
N/A
|
|
Net amount recognized in consolidated balance sheet (after ASC 715) (included in other long-term obligations)
|
|
$
|
1,174
|
|
|
$
|
1,573
|
|
Accrued postretirement benefit cost (included in other long-term obligations)
|
|
N/A
|
|
|
N/A
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Service cost with interest to end of year
|
|
$
|
78
|
|
|
$
|
67
|
|
|
$
|
66
|
|
Interest cost
|
|
44
|
|
|
46
|
|
|
48
|
|
Amortization of prior service credit/(cost)
|
|
74
|
|
|
74
|
|
|
57
|
|
Amortization of (gain)/loss
|
|
(8
|
)
|
|
(15
|
)
|
|
(10
|
)
|
Total net periodic benefit cost
|
|
$
|
188
|
|
|
$
|
172
|
|
|
$
|
161
|
|
Estimated future employer contributions and benefit payments are as follows:
|
|
|
|
|
|
Year
|
|
|
2019
|
|
$
|
127
|
|
2020
|
|
89
|
|
2021
|
|
73
|
|
2022
|
|
90
|
|
2023
|
|
88
|
|
Years 2024-2028
|
|
497
|
|
Assumed health care cost trend rates have been used in the valuation of postretirement health insurance benefits. The trend rate is
6.26%
in 2019 declining to
4.50%
in
2038
and thereafter. A one percentage point increase in health care cost trend rates in each year would increase the accumulated postretirement benefit obligation as of
December 31, 2018
by
$100
and the net periodic postretirement benefit cost for
2018
by
$19
. A one percentage point decrease in health care cost trend rates in each year would decrease the accumulated postretirement benefit obligation as of
December 31, 2018
by
$86
and the net periodic postretirement benefit cost for
2018
by
$16
. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was
3.50%
in
2018
and
2.90%
in
2017
.
The Company contributes to one multiemployer defined benefit plan under the terms of a collective-bargaining agreement covering its union-represented employees of the Verona facility. The risks of participation in this multiemployer plan are different from single-employer plans in the following aspects: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (c) if the Company chooses to stop participating in its multiemployer plan, the Company will be required to pay that plan an amount based on the underfunded status of the plan, referred to as the withdrawal liability.
The Company’s participation in this plan for the annual period ended
December 31, 2018
is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN). The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than
65 percent
funded, plans in the yellow zone are less than
80 percent
funded, and plans in the green zone are at least
80 percent
funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. Finally, the period-to-period comparability of the contributions for
2018
and
2017
was affected by a
4.0%
increase in the
2018
contribution rate. There have been no other significant changes that affect the comparability of
2018
and
2017
contributions. The Company does not represent more than
5%
of the contributions to this pension fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Fund
|
|
EIN/Pension
Plan
Number
|
|
Pension Plan Protection Act Zone Status
|
|
FIP/RP Status
Pending/ Implemented
|
|
Contributions of Balchem Corporation
|
|
Surcharge
Imposed
|
|
Expiration Date of Collective-
Bargaining
Agreement
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
2016
|
|
Central States,
Southeast and
Southwest Areas
Pension Fund
|
|
36-6044243
|
|
Red as of 1/1/18
|
|
Red as of 1/1/17
|
|
Implemented
|
|
$614
|
|
$594
|
|
$576
|
|
No
|
|
7/11/2020
|
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In 2018, the Company entered into a two (2) year lease extension for approximately
20,000
square feet of office space, which serves as the Company’s corporate headquarters and as a laboratory facility. During 2018, the Company also entered into a two year and three month lease for
7,952
square feet of additional office space, which serves as an expansion of the corporate headquarters. The Company leases various other office, warehousing, and production space under non-cancelable operating leases, which expire at various times through 2031. The Company also leases most of its vehicles and office equipment under non-cancelable operating leases, which expire at various times through 2025. Rent expense charged to operations under such lease agreements for
2018
,
2017
and
2016
aggregated approximately
$3,917
,
$3,417
and
$3,134
, respectively.
Aggregate future minimum rental payments required under non-cancelable operating leases at
December 31, 2018
are as follows:
|
|
|
|
|
|
Year
|
|
|
2019
|
|
$
|
3,445
|
|
2020
|
|
2,911
|
|
2021
|
|
2,002
|
|
2022
|
|
1,401
|
|
2023
|
|
1,182
|
|
Thereafter
|
|
5,687
|
|
Total minimum lease payments
|
|
$
|
16,628
|
|
The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on portions of the site. Remediation was conducted by the prior owner under the oversight of the EPA and the Missouri Department of Natural Resources (“MDNR”). While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for potential liabilities associated with the Superfund site.
From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity.
NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at
December 31, 2018
and
December 31, 2017
does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximate fair value due to the short-term maturity of these instruments. Cash and cash equivalents at
December 31, 2018
and
2017
includes
$793
and
$782
in money market funds. The money market funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”
NOTE 18 – RELATED PARTY TRANSACTIONS
The Company provides services on a contractual agreement to St. Gabriel CC Company, LLC. These services include accounting, information technology, quality control, and purchasing services, as well as operation of the St. Gabriel CC Company, LLC plant. The Company also sells raw materials to St. Gabriel CC Company, LLC. These raw materials are used in the production of finished goods that are, in turn, sold by Saint Gabriel CC Company, LLC to the Company for resale to unrelated parties. As such, the sale of these raw materials to St. Gabriel CC Company, LLC in this scenario lacks economic substance and therefore the Company does not include them in net sales within the consolidated statement of earnings.
The services the Company provided amounted to
$3,694
and
$3,445
, respectively, for the years ended
December 31, 2018
and
2017
. The raw materials sold amounted to
$31,107
and
$23,459
, respectively, for the years ended
December 31, 2018
and
2017
. These services and raw materials are primarily recorded in cost of goods sold net of the finished goods received from St. Gabriel CC Company, LLC of
$22,540
and
$20,827
, respectively for the years ended
December 31, 2018
and
2017
. At
December 31, 2018
and 2017, the Company had receivables of
$3,210
and
$6,190
, respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold and payables of
$1,943
and
$4,112
, respectively, for finished goods received recorded in accrued expenses. In addition, the Company had payables in the amount of
$314
and
$363
related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accrued expenses as of December 31, 2018 and 2017, respectively.
NOTE 19 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Net sales
|
|
$
|
161,410
|
|
|
$
|
163,687
|
|
|
$
|
155,043
|
|
|
$
|
163,539
|
|
|
$
|
137,728
|
|
|
$
|
147,082
|
|
|
$
|
150,716
|
|
|
$
|
159,264
|
|
Gross profit
|
|
51,459
|
|
|
53,466
|
|
|
48,002
|
|
|
51,325
|
|
|
44,429
|
|
|
46,761
|
|
|
46,181
|
|
|
51,638
|
|
Earnings before income taxes
|
|
25,177
|
|
|
25,061
|
|
|
23,529
|
|
|
25,263
|
|
|
20,710
|
|
|
22,560
|
|
|
20,697
|
|
|
24,522
|
|
Net earnings
|
|
19,346
|
|
|
19,679
|
|
|
19,214
|
|
|
20,334
|
|
|
15,518
|
|
|
16,536
|
|
|
16,043
|
|
|
41,975
|
|
Basic net earnings per common share
|
|
$
|
.60
|
|
|
$
|
.61
|
|
|
$
|
.60
|
|
|
$
|
.63
|
|
|
$
|
.49
|
|
|
$
|
.52
|
|
|
$
|
.50
|
|
|
$
|
1.31
|
|
Diluted net earnings per common share
|
|
$
|
.60
|
|
|
$
|
.61
|
|
|
$
|
.59
|
|
|
$
|
.63
|
|
|
$
|
.48
|
|
|
$
|
.51
|
|
|
$
|
.50
|
|
|
$
|
1.30
|
|
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2018, 2017 and 2016
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at Beginning of Year
|
|
Additions
Charged
(Credited) to Costs and Expenses
|
|
Adjustments/Deductions
|
|
|
|
Balance at
End of Year
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
431
|
|
|
$
|
43
|
|
|
$
|
136
|
|
|
(a)
|
|
$
|
610
|
|
Inventory reserve
|
|
2,315
|
|
|
898
|
|
|
(638
|
)
|
|
(a)
|
|
2,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
489
|
|
|
$
|
126
|
|
|
$
|
(184
|
)
|
|
(a)
|
|
$
|
431
|
|
Inventory reserve
|
|
2,546
|
|
|
538
|
|
|
(769
|
)
|
|
(a)
|
|
2,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
235
|
|
|
$
|
417
|
|
|
$
|
(163
|
)
|
|
(a)
|
|
$
|
489
|
|
Inventory reserve
|
|
1,823
|
|
|
905
|
|
|
(182
|
)
|
|
(a)
|
|
2,546
|
|
|
|
(a)
|
represents write-offs and other adjustments
|