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., BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia 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 our business segments is recognized upon product shipment, passage of title and risk of loss, and when collection is reasonably assured. 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 deferred until a customer indicates to the Company that it has used the Company’s products. The Company does not charge its customers rental fees on cylinders or drums used to ship its products.
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 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 our customers. On-going credit evaluations are performed on our 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 our 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.
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 2017, 2016 and 2015, 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 our 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, 2017 and 2016, the Company opted to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. We assessed the fair values of our reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for our conclusions, as well as market approaches for certain reporting units. Our 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. Our 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 $441,361 and $439,811 as of December 31, 2017 and December 31, 2016, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
|
|
Goodwill at January 1, 2017
|
|
$
|
439,811
|
|
|
|
Goodwill as a result of the Acquisitions – see Note 2
|
|
|
1,550
|
|
|
|
Goodwill at December 31, 2017
|
|
$
|
441,361
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Human Nutrition & Health
|
|
$
|
405,334
|
|
|
$
|
404,187
|
|
|
|
Animal Nutrition & Health
|
|
|
12,137
|
|
|
|
11,734
|
|
|
|
Specialty Products
|
|
|
22,662
|
|
|
|
22,662
|
|
|
|
Industrial Products
|
|
|
1,228
|
|
|
|
1,228
|
|
|
|
Total
|
|
$
|
441,361
|
|
|
$
|
439,811
|
|
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, 2017, there were no triggering events which required intangible asset impairment reviews.
Income Taxes
The Tax Reform Act was enacted on December 22, 2017. The Tax Reform Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed the accounting for the tax effects of enactment of the Tax Reform Act, however, as described below, we have made a reasonable estimate of the effects on existing deferred tax balances and transition tax on the mandatory deemed repatriation of foreign earnings.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US 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 Act. In accordance with SAB 118, we have determined that the $27.3 million of the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1.4 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax during the measurement period of up to one year following the December 2017 enactment of the Tax Reform Act.
The FASB Staff also provided additional guidance to address the accounting for the effects of the Tax Reform Act provisions related to the taxation of Global Intangible Low-Taxed Income ("GILTI"), noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year it is incurred. We have not completed our analysis of the effects
of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided for under SAB 118.
The Tax Reform Act also changed the individuals whose compensation is subject to a $1 million cap on deductibility under Section 162(m) and includes performance-based compensation such as stock options and stock appreciation rights in the calculation. The provision generally applies to taxable years beginning after December 31, 2017 and provides a transition for compensation paid pursuant to a written binding contract that is in effect on November 2, 2017. The Company will need to carefully review the terms of its compensation plans and agreements to assess whether such plans and agreements are considered to be written binding contracts in effect on November 2, 2017. Due to the complexity of applying this new provision and the limited time to consider tax reform, the Company has not yet completed its analysis of these new provisions and will finalize its analysis during the measurement period provided under SAB 118.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and would establish a valuation allowance if it believed that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.
We account for uncertainty in income taxes utilizing ASC 740-10. ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosures. The application of
ASC 740-10
requires judgment related to the uncertainty in income taxes and could impact our effective tax rate.
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, 2017 and 2016 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.
New Accounting Pronouncements
Recently Issued Accounting Standards
In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede 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 will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
We performed a detailed review of our contract portfolio representative of our different businesses and compared historical accounting policies and practices to the new standard. Because the standard will impact our business processes, systems and controls, we also developed a comprehensive change management project plan to guide the implementation. Over the course of 2017, we have conducted training sessions for those in our global organization that will be impacted by the new standard. Our primary business is the sale of products, and the adoption of the new revenue recognition standard will not have a material impact on our financial statements. We adopted the new standard effective January 1, 2018 utilizing the modified retrospective method. The cumulative-effect adjustment to retained earnings upon adoption is not material.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-to-use assets 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 Company is currently evaluating the impact of the new guidance.
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 constitutes a business. The guidance is effective for annual and interim periods beginning after December 15, 2017. Although, early adoption is permitted, 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 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. Although, early adoption is permitted, the Company has elected not to adopt early as this ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”), which requires inventory to be measured at the lower of cost and net realizable value. The Company adopted ASU 2015-11 on January 1, 2017 prospectively (prior periods have not been restated). There was no significant impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), to simplify the presentation of deferred income taxes. The ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted ASU 2015-17 on January 1, 2017 prospectively (prior periods have not been restated). There was no significant impact to the consolidated financial statements other than the decrease of current assets and long-term liabilities.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which addresses the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The Company adopted ASU 2016-09 on January 1, 2017 prospectively (prior periods have not been restated). The primary impact of adoption was the recognition during the year ended December 31, 2017, of excess tax benefits of approximately $2,589 as a reduction to the provision for income taxes and the classification of these excess tax benefits in operating activities in the consolidated statement of cash flows instead of financing activities. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in the consolidated statement of cash flows, since such cash flows have historically been presented in financing activities. The Company also elected to continue estimating forfeitures when determining the amount of stock-based compensation costs to be recognized in each period. No other provisions of ASU 2016-09 had a significant impact on the Company’s financial statements or disclosures.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), to address the application of ASC 740 to certain provisions of the new tax reform legislation commonly known as Tax Cuts and Jobs Act (the “Tax Act”). ASC 740 requires the effect of a change in tax rates on deferred assets and liabilities be included in income from continuing operations in the reporting period that contains the enactment date of the change. The guidance applies even in situations in which the tax effects were initially recognized directly in other comprehensive income at the previous rate, resulting in a stranded amount in accumulated other comprehensive income (loss) (AOCI) related to the income tax rate differential. ASU 2018-02 requires the Company to reclassify the amount of stranded taxes in AOCI to retained earnings. This update is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted. The Company has elected the early adoption of this ASU as there was not a material impact to the financial statements.
NOTE 2 – ACQUISITIONS
Acquisition of Albion International, Inc.
On February 1, 2016, the Company acquired 100 percent of the outstanding common shares of Albion International, Inc. (“Albion” or the “Acquisition”), a privately held manufacturer of mineral amino acid chelates, specialized mineral salts and mineral complexes, headquartered in Clearfield, Utah. The Company made payments of approximately $116,400 on the acquisition date, amounting to approximately $110,600 to the former shareholders, adjustments for working capital acquired of $4,900, and approximately $900 to Albion’s lenders to pay off all Albion bank debt. Albion has been a world leader and innovator in the manufacture of superior organic mineral compounds for sixty years and leverages scientific expertise in the areas of human and micronutrient agricultural nutrition. Albion’s products are renowned in the supplement industry for technologically advanced, unparalleled bioavailability. The acquisition of Albion continues to expand the Company’s science based human health and wellness solutions and will immediately increase our product offerings in the nutritional ingredient market. Additionally, the Company will also benefit from a broader geographic footprint and a stronger position as a technological leader in spray-drying and ingredient delivery solutions. Albion’s human nutrition business has become a part of the Human Nutrition & Health reportable segment and the micronutrient agricultural business has become a part of the Specialty Products reportable segment.
The following table summarizes the fair values of the assets acquired and liabilities assumed.
|
Cash and cash equivalents
|
|
$
|
$ 4,949
|
|
|
Accounts receivable
|
|
|
7,671
|
|
|
Inventories
|
|
|
15,989
|
|
|
Property, plant and equipment
|
|
|
7,217
|
|
|
Customer relationships
|
|
|
18,443
|
|
|
Developed technology
|
|
|
9,060
|
|
|
Trade name
|
|
|
7,224
|
|
|
Licensing agreements
|
|
|
6,658
|
|
|
Other assets
|
|
|
1,200
|
|
|
Trade accounts payable
|
|
|
(1,104
|
)
|
|
Accrued expenses
|
|
|
(2,788
|
)
|
|
Bank debt
|
|
|
(884
|
)
|
|
Deferred income taxes
|
|
|
(13,990
|
)
|
|
Goodwill
|
|
|
55,905
|
|
|
Amount paid to shareholders
|
|
|
115,550
|
|
|
Albion bank debt paid on purchase date
|
|
|
884
|
|
|
Total amount paid on acquisition date
|
|
$
|
$ 116,434
|
|
The goodwill of $55,905 arising from the Acquisition consists largely of expected synergies, including the combined entities’ experience and technical problem solving capabilities, and acquired workforce. Goodwill of $40,403 and $15,502 is assigned to the Human Nutrition & Health and Specialty Products segments, respectively, and approximately $2,020 is 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 our fair value of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor.
Customer relationships are amortized over a 10-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade name, licensing agreements, and developed technology are amortized over 17 years, 8 years, and 5 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.
Transaction and integration related costs included in selling, and general and administrative expenses for the years ended December 31, 2017 and 2016 are $8 and $1,499, respectively.
The following unaudited pro forma information has been prepared as if the Acquisition had occurred on January 1, 2015.
|
|
|
Year Ended
December 31, 2017
|
|
|
Year Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Net Earnings
|
|
|
Net Sales
|
|
|
Net Earnings
|
|
|
Albion’s actual results included in the Company’s consolidated income statement
|
|
$
|
$57,494
|
|
|
$
|
$ 11,648
|
|
|
$
|
$49,608
|
|
|
$
|
$ 2,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental pro forma combined financial information
|
|
$
|
$594,790
|
|
|
$
|
$ 90,080
|
|
|
$
|
$557,784
|
|
|
$
|
$ 60,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
$
|
$ 2.83
|
|
|
|
|
|
|
$
|
$ 1.93
|
|
|
Diluted earnings per share
|
|
|
|
|
|
$
|
$ 2.79
|
|
|
|
|
|
|
$
|
$ 1.91
|
|
2017 supplemental pro forma earnings for the year ended December 31, 2017 exclude a working capital adjustment refund of $162 and acquisition-related costs incurred of $170. 2016 supplemental pro forma earnings for the year ended December 31, 2016 exclude $26,210 of acquisition-related costs incurred and $5,363 of non-recurring expenses related to the fair value adjustment to acquisition-date inventory. The pro forma information presented does not purport to be indicative of the results that actually would have been attained if the Albion acquisition had occurred at the beginning of the periods presented and is not intended to be a projection of future results.
Acquisition of Chol-Mix Kft
On March 24, 2017, the Company, through its European subsidiary Balchem Italia SRL, entered into an agreement to purchase certain assets of Chol-Mix Kft (“Chol-Mix), a privately held manufacturer of dry choline chloride, with knowledge and technical know-how supporting the application of liquids on carriers, located in Hungary, for a purchase price of €1,500. As of December 31, 2017, approximately €1,150, translated to approximately $1,230, has been paid to Chol-Mix Kft with the remaining balance of approximately €350, translated to approximately $419, due at the end of a related manufacturing agreement. The acquisition of Chol-Mix’s assets will provide our Animal Nutrition & Health segment with additional dry choline chloride capacity in Europe, geographical expansion opportunities in Eastern Europe, and technical knowledge supporting the application of liquids on carriers.
Management has completed its accounting for the acquisition. As a result, the fair values of the assets acquired have been determined and goodwill of $404 has been recorded.
Transaction related costs included in general and administrative expenses for the year ended December 31, 2017 are $78.
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 preliminary accounting for the acquisition. As a result, the estimated fair values of the assets acquired and liabilities assumed have been determined and $1,146 of estimated goodwill has been recorded.
The following table summarizes the fair values of the assets acquired and liabilities assumed.
|
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
|
|
|
1,146
|
|
|
Trade accounts payable
|
|
|
(844
|
)
|
|
Accrued expenses
|
|
|
(1,416
|
)
|
|
Bank debt
|
|
|
(2,384
|
)
|
|
Deferred income taxes
|
|
|
(3,677
|
)
|
|
Amount paid to shareholders
|
|
|
21,226
|
|
|
IFP bank debt paid on purchase date
|
|
|
2,384
|
|
|
Total amount paid on acquisition date
|
|
$
|
23,610
|
|
The goodwill of $1,146 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 our 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 and the related deferred tax liabilities are preliminary pending management’s final review.
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.
Transaction related costs included in general and administrative expenses for the year ended December 31, 2017 are $2,163.
The Company has elected not to show pro forma information as this acquisition was immaterial to the overall financial results of the Company.
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, 2017, 2016 and 2015 reflected the following compensation cost and such compensation cost had the following effects on net earnings:
|
|
|
Increase/(Decrease) for the
Years Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Cost of sales
|
|
$
|
524
|
|
|
$
|
1,040
|
|
|
$
|
854
|
|
|
Operating expenses
|
|
|
5,736
|
|
|
|
5,984
|
|
|
|
5,975
|
|
|
Net earnings
|
|
|
(3,990
|
)
|
|
|
(4,473
|
)
|
|
|
(4,395
|
)
|
On December 31, 2017, 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 expires 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, 2017, the 2017 Plan had 1,586,500 shares available for future awards.
The Company had Restricted Stock Purchase Agreements (the “RSP Agreements”) with its non-employee directors and certain employees of the Company to purchase the Company’s Common Stock pursuant to the Company’s 1999 Stock Plan. Under the RSP Agreements, certain shares were purchased, ranging from 1,000 shares to 20,250 shares, of the Company’s Common Stock at purchase prices ranging from approximately $.02 per share to $.07 per share. The purchased stock was subject to a repurchase option in favor of the Company and to restrictions on transfer until it vested in accordance with the provisions of the RSP Agreements. In 2011, the Company discontinued the use of RSP Agreements and replaced them with Restricted Stock Grant Agreements for 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 500 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.
|
|
|
Years Ended
|
|
|
Weighted Average Assumptions:
|
|
2017
|
|
|
December 31,
2016
|
|
|
2015
|
|
|
Expected Volatility
|
|
|
30.1
|
%
|
|
|
34.4
|
%
|
|
|
33.2
|
%
|
|
Expected Term (in years)
|
|
|
4.6
|
|
|
|
5.0
|
|
|
|
5.5
|
|
|
Risk-Free Interest Rate
|
|
|
1.8
|
%
|
|
|
1.2
|
%
|
|
|
1.7
|
%
|
|
Dividend Yield
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
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 1.5% and 0.88% dividend yields of 0.6% and 0.6%; volatilities of 32% and 32%; and initial TSR’s of 8.2% and -6.6% in each case for the years ended December 31, 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, 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 2017, 2016, and 2015 for all plans is as follows:
|
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
|
|
|
2015
|
|
# of
Shares
(000s)
|
|
|
Weighted Average
Exercise Price
|
|
|
Outstanding at beginning of year
|
|
|
1,470
|
|
|
$
|
27.35
|
|
|
Granted
|
|
|
209
|
|
|
|
58.34
|
|
|
Exercised
|
|
|
(627
|
)
|
|
|
20.16
|
|
|
Forfeited
|
|
|
(35
|
)
|
|
|
52.97
|
|
|
Outstanding at end of year
|
|
|
1,017
|
|
|
$
|
37.29
|
|
|
Exercisable at end of year
|
|
|
667
|
|
|
$
|
29.19
|
|
The aggregate intrinsic value for outstanding stock options was $24,714, $41,161and $23,927 at December 31, 2017, 2016 and 2015, respectively, with a weighted average remaining contractual term of 6.3 years at December 31, 2017. Exercisable stock options at December 31, 2017 had an aggregate intrinsic value of $19,534 with a weighted average remaining contractual term of 4.6 years.
Other information pertaining to option activity during the years ended December 31, 2017, 2016 and 2015 was as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Weighted-average fair value of options granted
|
|
$
|
23.20
|
|
|
$
|
18.48
|
|
|
$
|
18.35
|
|
|
Total intrinsic value of stock options exercised ($000s)
|
|
$
|
11,900
|
|
|
$
|
8,609
|
|
|
$
|
24,047
|
|
Additional information related to stock options outstanding under all plans at December 31, 2017 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
|
|
|
|
209
|
|
2.6 years
|
|
$
|
25.79
|
|
|
|
208
|
|
|
$
|
25.79
|
|
|
|
38.10 - 59.95
|
|
|
|
278
|
|
5.6 years
|
|
|
51.34
|
|
|
|
219
|
|
|
|
49.47
|
|
|
|
60.01 - 85.40
|
|
|
|
459
|
|
8.0 years
|
|
|
71.37
|
|
|
|
66
|
|
|
|
60.99
|
|
|
|
|
|
|
|
946
|
|
6.3 years
|
|
$
|
55.44
|
|
|
|
493
|
|
|
$
|
41.01
|
|
Non-vested restricted stock activity for the years ended December 31, 2017, 2016 and 2015 is summarized below:
|
|
|
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
|
|
|
|
|
Shares (000s)
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
|
Non-vested balance as of December 31, 2014
|
|
|
134
|
|
|
$
|
38.13
|
|
|
Granted
|
|
|
77
|
|
|
|
55.77
|
|
|
Vested
|
|
|
(61
|
)
|
|
|
37.35
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Non-vested balance as of December 31, 2015
|
|
|
150
|
|
|
$
|
47.46
|
|
Non-vested performance share activity for the years ended December 31, 2017, 2016 and 2015 is summarized below:
|
|
|
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 balance as of December 31, 2015
|
|
|
20
|
|
|
$
|
58.77
|
|
|
Granted
|
|
|
22
|
|
|
|
63.15
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(8
|
)
|
|
|
60.88
|
|
|
Non-vested balance as of December 31, 2016
|
|
|
34
|
|
|
$
|
61.06
|
|
|
|
|
Shares (000s)
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
|
Non-vested balance as of December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
29
|
|
|
|
58.77
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(9
|
)
|
|
|
58.77
|
|
|
Non-vested balance as of December 31, 2015
|
|
|
20
|
|
|
$
|
58.77
|
|
As of December 31, 2017, 2016 and 2015, there was $7,742, $8,260 and $7,705, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31, 2017, 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, 2018 will be approximately $7,300.
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 2,174,017 shares have been purchased, of which none remained in treasury at December 31, 2017 or 2016. During 2017 and 2016, a total of 23,182 and 24,912 shares, respectively, have been purchased at an average cost of $82.19 and $63.76 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, 2017 and 2016 consisted of the following:
|
|
|
2017
|
|
|
2016
|
|
|
Raw materials
|
|
$
|
20,520
|
|
|
$
|
20,751
|
|
|
Work in progress
|
|
|
6,308
|
|
|
|
3,225
|
|
|
Finished goods
|
|
|
33,868
|
|
|
|
33,269
|
|
|
Total inventories
|
|
$
|
60,696
|
|
|
$
|
57,245
|
|
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 reduced, if necessary. The reserve for inventory was $2,315 and $2,546 at December 31, 2017 and 2016, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2017 and 2016 are summarized as follows:
|
|
|
2017
|
|
|
2016
|
|
|
Land
|
|
$
|
7,262
|
|
|
$
|
4,208
|
|
|
Building
|
|
|
63,224
|
|
|
|
45,735
|
|
|
Equipment
|
|
|
201,341
|
|
|
|
177,841
|
|
|
Construction in progress
|
|
|
13,860
|
|
|
|
17,357
|
|
|
|
|
|
285,687
|
|
|
|
245,141
|
|
|
Less: Accumulated depreciation
|
|
|
95,894
|
|
|
|
79,387
|
|
|
Property, plant and equipment, net
|
|
$
|
189,793
|
|
|
$
|
165,754
|
|
Depreciation expense was $17,121, $15,907 and $12,895 for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 6 - INTANGIBLE ASSETS
The Company had goodwill in the amount of $441,361 and $439,811 as of December 31, 2017 and 2016 subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
As of December 31, 2017 and 2016, the Company had identifiable intangible assets as follows:
|
|
|
Amortization
Period
(In years)
|
|
|
2017
Gross
Carrying
Amount
|
|
|
2017
Accumulated
Amortization
|
|
|
2016
Gross
Carrying
Amount
|
|
|
2016
Accumulated
Amortization
|
|
|
Customer relationships & lists
|
|
|
10
|
|
|
$
|
190,061
|
|
|
$
|
105,573
|
|
|
$
|
185,885
|
|
|
$
|
86,338
|
|
|
Trademarks & trade names
|
|
|
5-17
|
|
|
|
40,630
|
|
|
|
12,895
|
|
|
|
39,241
|
|
|
|
9,260
|
|
|
Developed technology
|
|
|
5
|
|
|
|
13,338
|
|
|
|
5,936
|
|
|
|
12,260
|
|
|
|
3,358
|
|
|
Other
|
|
|
3-18
|
|
|
|
13,466
|
|
|
|
5,018
|
|
|
|
12,713
|
|
|
|
3,659
|
|
|
|
|
|
|
|
|
$
|
257,495
|
|
|
$
|
129,422
|
|
|
$
|
250,099
|
|
|
$
|
102,615
|
|
Amortization of identifiable intangible assets was $26,784, $29,768 and $26,467 for 2017, 2016 and 2015, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is approximately $24,593 in 2018, $22,479 in 2019, $20,442 in 2020, $17,234 in 2021, and $15,776 in 2022. At December 31, 2017 and 2016, 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 2017 and 2016.
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 registration 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 $546 and $293 for the years ended December 31, 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, 2017 and 2016 is $4,804 and $4,553, respectively, and is recorded in other assets.
NOTE 8 – LONG TERM DEBT
On May 7, 2014, the Company and a bank syndicate entered into a loan agreement providing for a senior secured term loan of $350,000 and revolving loan of $100,000 (collectively referred to as the “loans”). On February 1, 2016, $65,000 of the revolving loan was used to fund the Albion International, Inc. acquisition (see Note 2). In addition, on June 1, 2017, $20,000 of the revolving loan was used to fund the Innovative Food Processors, Inc. acquisition (see Note 2). At December 31, 2017, the Company had a total of $219,500 of debt outstanding. The term loan is payable in quarterly installments of $8,750 which commenced on September 30, 2014, with the outstanding principal due on the maturity date. The Company may draw on the revolving loan at its discretion. The revolving loan does not have installments and all outstanding amounts are due on the maturity date. The loans may be voluntarily prepaid in whole or in part without premium or penalty and have a maturity date of May 7, 2019. The loans are subject to an interest rate equal to LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion, plus an applicable rate. The applicable rate is based upon the Company’s consolidated leverage ratio, as defined in the loan agreement, and the interest rate was 3.07% at December 31, 2017. The Company has $100,000 of undrawn revolving loan at December 31, 2017 that is subject to a commitment fee, which is based on the Company’s consolidated leverage ratio as defined in the loan agreement. The loan agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated fixed charge coverage ratio to exceed a certain minimum ratio. At December 31, 2017, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the company.
The following table summarizes the future minimum debt payments as of December 31, 2017:
|
Year
|
|
Term loan
|
|
|
Revolving
loan
|
|
|
Total
|
|
|
2018
|
|
$
|
35,000
|
|
|
$
|
-
|
|
|
$
|
35,000
|
|
|
2019
|
|
|
184,500
|
|
|
|
-
|
|
|
|
184,500
|
|
|
Future principle payments
|
|
|
219,500
|
|
|
|
-
|
|
|
|
219,500
|
|
|
Less unamortized debt financing costs
|
|
|
536
|
|
|
|
-
|
|
|
|
536
|
|
|
Less current portion of long-term debt
|
|
|
35,000
|
|
|
|
-
|
|
|
|
35,000
|
|
|
Total long-term debt
|
|
$
|
183,964
|
|
|
$
|
-
|
|
|
$
|
183,964
|
|
Costs associated with the issuance of debt instruments are capitalized as debt discount and amortized over the terms of the respective financing arrangements using the effective interest method. If debt is retired early, the related unamortized costs are expensed in the period the debt is retired. Capitalized costs net of accumulated amortization total $536 at December 31, 2017 and are shown net against outstanding principle on the accompanying balance sheet. Amortization expense pertaining to these costs totaled $474 and $526 for the years ended December 31, 2017 and 2016, respectively, and is included in interest expense in the accompanying condensed consolidated statements of earnings.
NOTE 9 - INCOME TAXES
On December 22, 2017, the Tax Reform Act was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax regime by 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. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
The FASB Staff also provided additional guidance to address the accounting for the effects of the Tax Reform Act provisions related to the taxation of GILTI, noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year it is incurred. We have not completed our analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided for under SAB 118.
The Tax Reform Act also changed the individuals whose compensation is subject to a $1 million cap on deductibility under Section 162(m) and includes performance-based compensation such as stock options and stock appreciation rights in the calculation. The provision generally applies to taxable years beginning after December 31, 2017 and provides a transition for compensation paid pursuant to a written binding contract that is in effect on November 2, 2017. The Company will need to carefully review the terms of its compensation plans and agreements to assess whether such plans and agreements are considered to be written binding contracts in effect on November 2, 2017. Due to the complexity of applying this new provision and the limited time to consider tax reform, the Company has not yet completed its analysis of these new provisions and will finalize its analysis during the measurement period provided under SAB 118.
Income tax expense consists of the following:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
20,102
|
|
|
$
|
28,765
|
|
|
$
|
29,638
|
|
|
Foreign
|
|
|
3,015
|
|
|
|
2,670
|
|
|
|
3,021
|
|
|
State
|
|
|
2,790
|
|
|
|
2,483
|
|
|
|
2,982
|
|
|
Deemed Repatriation
|
|
|
1,389
|
|
|
|
-
|
|
|
|
-
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,302
|
)
|
|
|
(7,114
|
)
|
|
|
(6,815
|
)
|
|
Foreign
|
|
|
62
|
|
|
|
52
|
|
|
|
58
|
|
|
State
|
|
|
(384
|
)
|
|
|
106
|
|
|
|
(1,543
|
)
|
|
Federal Rate Change
|
|
|
(27,255
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Total income tax provision
|
|
$
|
(1,583
|
)
|
|
$
|
26,962
|
|
|
$
|
27,341
|
|
The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 35% to earnings before income tax expense due to the following:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Income tax at Federal statutory rate
|
|
$
|
30,971
|
|
|
$
|
29,027
|
|
|
|
30,471
|
|
|
State income taxes, net of Federal income taxes
|
|
|
708
|
|
|
|
1,510
|
|
|
|
556
|
|
|
Federal Rate Change
|
|
|
(27,255
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Stock Options
|
|
|
(2,927
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Deemed Repatriation
|
|
|
1,389
|
|
|
|
-
|
|
|
|
-
|
|
|
Domestic production activities deduction
|
|
|
(2,382
|
)
|
|
|
(3,299
|
)
|
|
|
(2,709
|
)
|
|
Other
|
|
|
(2,087
|
)
|
|
|
(276
|
)
|
|
|
(977
|
)
|
|
Total income tax provision
|
|
$
|
(1,583
|
)
|
|
$
|
26,962
|
|
|
|
27,341
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 were as follows:
|
|
|
2017
|
|
|
2016
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,297
|
|
|
$
|
2,378
|
|
|
Restricted stock and stock options
|
|
|
3,248
|
|
|
|
5,100
|
|
|
Other
|
|
|
1,764
|
|
|
|
2,629
|
|
|
Total deferred tax assets
|
|
|
6,309
|
|
|
|
10,107
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
31,311
|
|
|
$
|
56,111
|
|
|
Depreciation
|
|
|
22,172
|
|
|
|
27,435
|
|
|
Other
|
|
|
1,374
|
|
|
|
48
|
|
|
Total deferred tax liabilities
|
|
|
54,857
|
|
|
|
83,594
|
|
|
Net deferred tax liability
|
|
$
|
48,548
|
|
|
$
|
73,487
|
|
There is no valuation allowance for deferred tax assets at December 31, 2017 and 2016. 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.
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:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Balance at beginning of period
|
|
$
|
6,637
|
|
|
$
|
6,570
|
|
|
$
|
5,205
|
|
|
Increases for tax positions of prior years
|
|
|
393
|
|
|
|
332
|
|
|
|
943
|
|
|
Decreases for tax positions of prior years
|
|
|
(2,711
|
)
|
|
|
(406
|
)
|
|
|
(120
|
)
|
|
Increases for tax positions related to current year
|
|
|
462
|
|
|
|
141
|
|
|
|
542
|
|
|
Balance at end of period
|
|
$
|
4,781
|
|
|
$
|
6,637
|
|
|
$
|
6,570
|
|
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, 2017, 2016 and 2015, the Company recognized approximately $94, $94 and $138 in interest and penalties, respectively. As of December 31, 2017 and 2016, accrued interest and penalties were $1,882 and $2,486, 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 2013. The Company does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.
NOTE 10 - 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:
|
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 and restricted stock
|
|
$
|
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 and restricted stock
|
|
$
|
55,972
|
|
|
|
31,922,638
|
|
|
$
|
1.75
|
|
|
2015
|
|
Earnings
(Numerator)
|
|
|
Number of Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
59,722
|
|
|
|
31,158,142
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
|
|
|
477,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options and restricted stock
|
|
$
|
59,722
|
|
|
|
31,635,638
|
|
|
$
|
1.89
|
|
The Company had 199,010, 2,500, and 194,372 stock options outstanding at December 31, 2017, 2016 and 2015, 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 11 - 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 401k 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 $395 and $2,594 in 2017, $712 and $2,248 in 2016, and $738 and $1,886 in 2015, respectively.
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:
|
|
|
2017
|
|
|
2016
|
|
|
Benefit obligation at beginning of year
|
|
$
|
1,411
|
|
|
$
|
958
|
|
|
Initial adoption of new plan
|
|
|
-
|
|
|
|
444
|
|
|
Service cost with interest to end of year
|
|
|
67
|
|
|
|
66
|
|
|
Interest cost
|
|
|
46
|
|
|
|
48
|
|
|
Participant contributions
|
|
|
28
|
|
|
|
5
|
|
|
Benefits paid
|
|
|
(58
|
)
|
|
|
(9
|
)
|
|
Actuarial (gain)/loss
|
|
|
78
|
|
|
|
(101
|
)
|
|
Benefit obligation at end of year
|
|
$
|
1,573
|
|
|
$
|
1,411
|
|
Change in plan assets:
|
|
|
2017
|
|
|
2016
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Employer (reimbursement)/contributions
|
|
|
30
|
|
|
|
4
|
|
|
Participant contributions
|
|
|
28
|
|
|
|
5
|
|
|
Benefits paid
|
|
|
(58
|
)
|
|
|
(9
|
)
|
|
Fair value of plan assets at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
Amounts recognized in consolidated balance sheet:
|
|
|
2017
|
|
|
2016
|
|
|
Accumulated postretirement benefit obligation
|
|
$
|
(1,573
|
)
|
|
$
|
(1,411
|
)
|
|
Fair value of plan assets
|
|
|
-
|
|
|
|
-
|
|
|
Funded status
|
|
|
(1,573
|
)
|
|
|
(1,411
|
)
|
|
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)
|
|
$
|
1,573
|
|
|
$
|
1,411
|
|
|
Accrued postretirement benefit cost (included in other long-term obligations)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Components of net periodic benefit cost:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Service cost with interest to end of year
|
|
$
|
67
|
|
|
$
|
66
|
|
|
$
|
54
|
|
|
Interest cost
|
|
|
46
|
|
|
|
48
|
|
|
|
36
|
|
|
Amortization of prior service credit/(cost)
|
|
|
74
|
|
|
|
57
|
|
|
|
(18
|
)
|
|
Amortization of (gain)/loss
|
|
|
(15
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
Total net periodic benefit cost
|
|
$
|
172
|
|
|
$
|
161
|
|
|
$
|
72
|
|
Estimated future employer contributions and benefit payments are as follows:
|
Year
|
|
|
|
|
2018
|
|
$
|
132
|
|
|
2019
|
|
|
139
|
|
|
2020
|
|
|
93
|
|
|
2021
|
|
|
91
|
|
|
2022
|
|
|
109
|
|
|
Years 2023-2027
|
|
|
559
|
|
Assumed health care cost trend rates have been used in the valuation of postretirement health insurance benefits. The trend rate is 6.53% in 2018 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, 2017 by $143 and the net periodic postretirement benefit cost for 2017 by $16. 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, 2017 by $125 and the net periodic postretirement benefit cost for 2017 by $13. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 2.90% in 2017 and 3.40% in 2016.
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, 2017 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 2017 and 2016 was affected by a 4.0% increase in the 2017 contribution rate. There have been no other significant changes that affect the comparability of 2017 and 2016 contributions. The Company does not represent more than 5% of the contributions to this pension fund.
|
Pension
Fund
|
EIN/Pension
Plan
Number
|
|
|
FIP/RP Status
Pending/
Implemented
|
|
|
|
Surcharge
Imposed
|
Expiration Date
of Collective-
Bargaining
Agreement
|
|
Pension Plan Protection Act Zone Status
|
Contributions of Balchem Corporation
|
|
2017
|
2016
|
2017
|
2016
|
2015
|
|
Central States,
Southeast and
Southwest Areas
Pension Fund
|
36-6044243
|
Red as of 1/1/2017
|
Red as of 1/1/2016
|
Implemented
|
$594
|
$576
|
$515
|
No
|
7/11/2020
|
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In 2012, the Company entered into a six (6) year lease extension for approximately 20,000 square feet of office space. The office space serves as the Company’s general offices and as a laboratory facility. The Company leases most of its vehicles and office equipment under non-cancelable operating leases, which expire at various times through 2029. Rent expense charged to operations under such lease agreements for 2017, 2016 and 2015 aggregated approximately $3,417, $3,134 and $2,414, respectively. Aggregate future minimum rental payments required under non-cancelable operating leases at December 31, 2017 are as follows:
|
Year
|
|
|
|
|
2018
|
|
$
|
3,277
|
|
|
2019
|
|
|
2,193
|
|
|
2020
|
|
|
1,842
|
|
|
2021
|
|
|
1,257
|
|
|
2022
|
|
|
1,350
|
|
|
Thereafter
|
|
|
8,358
|
|
|
Total minimum lease payments
|
|
$
|
18,277
|
|
In 1982, the Company discovered and thereafter removed a number of buried drums containing unidentified waste material from the Company’s site in Slate Hill, New York. The Company thereafter entered into a Consent Decree to evaluate the drum site with the New York Department of Environmental Conservation (“NYDEC”). Based on NYDEC requirements, the Company cleaned the area and removed soil from the drum burial site. The Company continues to be involved in discussions with NYDEC to evaluate test results and determine what, if any, additional actions will be required on the part of the Company to close out the remediation of this site. Additional actions, if any, would likely require the Company to continue monitoring the site. The cost of such monitoring has been less than $5 per year for the period 2004 to date.
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 and one of the sellers, in turn, has the benefit of certain contractual indemnification by the prior owner that is implementing the above-described Superfund remedy.
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 13 – 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, 2017 and December 31, 2016 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 approximates fair value due to the short-term maturity of these instruments. Cash and cash equivalents at December 31, 2017 and 2016 includes $782 and $776 in money market funds. The money market funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income (loss) were as follows:
|
|
|
Years Ended
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Net foreign currency translation adjustment
|
|
$
|
5,404
|
|
|
$
|
(1,390
|
)
|
|
$
|
(2,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in postretirement benefit plan (see Note 10 for further information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial adoption of new plan
|
|
|
-
|
|
|
|
(444
|
)
|
|
|
-
|
|
|
Net gain/(loss) arising during the period
|
|
|
(49
|
)
|
|
|
101
|
|
|
|
242
|
|
|
Amortization of prior service credit/(cost)
|
|
|
74
|
|
|
|
57
|
|
|
|
(18
|
)
|
|
Amortization of (gain)/loss
|
|
|
(15
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
Total before tax
|
|
|
10
|
|
|
|
(296
|
)
|
|
|
224
|
|
|
Tax
|
|
|
(207
|
)
|
|
|
(49
|
)
|
|
|
(72
|
)
|
|
Net of tax
|
|
|
(197
|
)
|
|
|
(345
|
)
|
|
|
152
|
|
|
Total other comprehensive income (loss)
|
|
$
|
5,207
|
|
|
$
|
(1,735
|
)
|
|
$
|
(2,463
|
)
|
Accumulated other comprehensive income/(loss) at December 31, 2017 consisted of the following:
|
|
|
Foreign currency
translation
adjustment
|
|
|
Postretirement
benefit plan
|
|
|
Total
|
|
|
Balance December 31, 2016
|
|
$
|
(6,707
|
)
|
|
$
|
(142
|
)
|
|
$
|
(6,849
|
)
|
|
Other comprehensive (loss)/gain
|
|
|
5,404
|
|
|
|
(197
|
)
|
|
|
5,207
|
|
|
Balance December 31, 2017
|
|
$
|
(1,303
|
)
|
|
$
|
(339
|
)
|
|
$
|
(1,642
|
)
|
NOTE 15 - SEGMENT INFORMATION
Human Nutrition & Health
Our Human Nutrition & Health segment supplies ingredients in the food and beverage industry, providing customized solutions in powder, solid and liquid flavor delivery systems, spray dried emulsified powder systems, and cereal systems. Our products include creamer systems, dairy replacers, powdered fats, nutritional beverage bases, beverages, juice & dairy bases, chocolate systems, ice cream bases & variegates, ready-to-eat cereals, grain based snacks, and cereal based ingredients. Additionally, we provide
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. We also produce and market 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. Our mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Science and patented technology have been combined to create an organic molecule in a form the body can readily assimilate.
Animal Nutrition & Health
Our Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from our microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, our microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. Our 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. Choline deficiency can result in reduced growth and perosis in poultry, and fatty liver, kidney necrosis and general poor health condition in swine.
Sales of specialty products for the animal nutrition and health industry are highly dependent on dairy industry economics as well as the ability of the Company to leverage the results of university and field research on the animal health benefits of the Company’s 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 increase 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. Our 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. Our inventory of these specially built drums, along with our two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. We also sell 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. We distribute our propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Our 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.
Our micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. We have a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, we determine optimal mineral balance for plant health. We then have a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Our 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. Our products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade choline bicarbonate is completely chloride free and our 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 our Italian operation and sold for a wide range of industrial applications in Europe.
Business Segment Net Sales:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Human Nutrition & Health
|
|
$
|
315,796
|
|
|
$
|
297,134
|
|
|
$
|
278,288
|
|
|
Animal Nutrition & Health
|
|
|
157,688
|
|
|
|
161,119
|
|
|
|
165,763
|
|
|
Specialty Products
|
|
|
73,355
|
|
|
|
70,126
|
|
|
|
54,236
|
|
|
Industrial Products
|
|
|
47,951
|
|
|
|
24,825
|
|
|
|
54,205
|
|
|
Total
|
|
$
|
594,790
|
|
|
$
|
553,204
|
|
|
$
|
552,492
|
|
Business Segment Earnings Before Income Taxes:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Human Nutrition & Health
|
|
$
|
44,010
|
|
|
$
|
38,156
|
|
|
$
|
38,302
|
|
|
Animal Nutrition & Health
|
|
|
22,292
|
|
|
|
28,686
|
|
|
|
27,851
|
|
|
Specialty Products
|
|
|
24,949
|
|
|
|
22,862
|
|
|
|
23,995
|
|
|
Industrial Products
|
|
|
6,413
|
|
|
|
1,949
|
|
|
|
5,594
|
|
|
Unallocated equity compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,462
|
)
|
|
Transaction costs, integration costs and legal settlement
|
|
|
(409
|
)
|
|
|
(815
|
)
|
|
|
(324
|
)
|
|
Interest and other income, net
|
|
|
(8,767
|
)
|
|
|
(7,904
|
)
|
|
|
(6,893
|
)
|
|
Total
|
|
$
|
88,488
|
|
|
$
|
82,934
|
|
|
$
|
87,063
|
|
Unallocated equity compensation expense was related to the accelerated vesting of previously-granted unvested options to purchase Company common stock, and removal of the restrictions on previously-granted Restricted Stock.
Transaction and integration costs were primarily related to the aforementioned definitive agreements (see Note 2).
Depreciation/Amortization:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Human Nutrition & Health
|
|
$
|
33,384
|
|
|
$
|
33,796
|
|
|
$
|
30,537
|
|
|
Animal Nutrition & Health
|
|
|
5,618
|
|
|
|
7,243
|
|
|
|
6,573
|
|
|
Specialty Products
|
|
|
4,097
|
|
|
|
3,787
|
|
|
|
1,225
|
|
|
Industrial Products
|
|
|
806
|
|
|
|
850
|
|
|
|
1,027
|
|
|
Total
|
|
$
|
43,905
|
|
|
$
|
45,676
|
|
|
$
|
39,362
|
|
Business Segment Assets:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Human Nutrition & Health
|
|
$
|
719,010
|
|
|
$
|
709,337
|
|
|
$
|
642,929
|
|
|
Animal Nutrition & Health
|
|
|
118,418
|
|
|
|
121,860
|
|
|
|
107,459
|
|
|
Specialty Products
|
|
|
63,141
|
|
|
|
64,030
|
|
|
|
24,769
|
|
|
Industrial Products
|
|
|
18,471
|
|
|
|
10,477
|
|
|
|
16,191
|
|
|
Other Unallocated
|
|
|
44,596
|
|
|
|
42,922
|
|
|
|
88,338
|
|
|
Total
|
|
$
|
963,636
|
|
|
$
|
948,626
|
|
|
$
|
879,686
|
|
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.
Capital Expenditures:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Human Nutrition & Health
|
|
$
|
20,580
|
|
|
$
|
14,470
|
|
|
$
|
21,361
|
|
|
Animal Nutrition & Health
|
|
|
4,424
|
|
|
|
6,577
|
|
|
|
17,854
|
|
|
Specialty Products
|
|
|
1,306
|
|
|
|
1,286
|
|
|
|
940
|
|
|
Industrial Products
|
|
|
1,216
|
|
|
|
701
|
|
|
|
1,145
|
|
|
Total
|
|
$
|
27,526
|
|
|
$
|
23,034
|
|
|
$
|
41,300
|
|
Geographic Revenue Information:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
United States
|
|
$
|
460,599
|
|
|
$
|
420,821
|
|
|
$
|
441,664
|
|
|
Foreign Countries
|
|
|
134,191
|
|
|
|
132,383
|
|
|
|
110,828
|
|
|
Total
|
|
$
|
594,790
|
|
|
$
|
553,204
|
|
|
$
|
552,492
|
|
Geographic Area Data – Long-Lived Assets (excluding intangible assets):
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
North America
|
|
$
|
175,027
|
|
|
$
|
154,007
|
|
|
$
|
148,209
|
|
|
Europe
|
|
|
14,766
|
|
|
|
11,747
|
|
|
|
10,306
|
|
|
Total
|
|
$
|
189,793
|
|
|
$
|
165,754
|
|
|
$
|
158,515
|
|
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Income taxes
|
|
$
|
25,845
|
|
|
$
|
30,741
|
|
|
$
|
19,551
|
|
|
Interest
|
|
$
|
7,021
|
|
|
$
|
6,669
|
|
|
$
|
5,987
|
|
Non-cash financing activities:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Dividends payable
|
|
$
|
13,484
|
|
|
$
|
12,088
|
|
|
$
|
10,727
|
|
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Net sales
|
|
$
|
137,728
|
|
|
$
|
147,082
|
|
|
$
|
150,716
|
|
|
$
|
159,264
|
|
|
$
|
135,141
|
|
|
$
|
138,794
|
|
|
$
|
138,509
|
|
|
$
|
140,760
|
|
|
Gross profit
|
|
|
44,429
|
|
|
|
46,761
|
|
|
|
46,181
|
|
|
|
51,638
|
|
|
|
42,824
|
|
|
|
46,449
|
|
|
|
44,656
|
|
|
|
46,932
|
|
|
Earnings before income taxes
|
|
|
20,710
|
|
|
|
22,560
|
|
|
|
20,697
|
|
|
|
24,522
|
|
|
|
17,981
|
|
|
|
21,383
|
|
|
|
20,771
|
|
|
|
22,799
|
|
|
Net earnings
|
|
|
15,518
|
|
|
|
16,536
|
|
|
|
16,043
|
|
|
|
41,975
|
|
|
|
11,886
|
|
|
|
14,150
|
|
|
|
14,012
|
|
|
|
15,924
|
|
|
Basic net earnings per common share
|
|
$
|
.49
|
|
|
$
|
.52
|
|
|
$
|
.50
|
|
|
$
|
1.31
|
|
|
$
|
.38
|
|
|
$
|
.45
|
|
|
$
|
.44
|
|
|
$
|
.51
|
|
|
Diluted net earnings per common share
|
|
$
|
.48
|
|
|
$
|
.51
|
|
|
$
|
.50
|
|
|
$
|
1.30
|
|
|
$
|
.37
|
|
|
$
|
.44
|
|
|
$
|
.44
|
|
|
$
|
.50
|
|
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 sold raw materials to St. Gabriel CC Company, LLC. In return, St. Gabriel CC Company, LLC provides choline chloride finished goods. The services the Company provided amounted to $3,445 and $1,837, respectively, for the years ended December 31, 2017 and 2016. The raw materials sold amounted to $23,459 and $7,480, respectively, for the years ended December 31, 2017 and 2016. These services and raw materials are primarily recorded, net of the finished goods received from St. Gabriel CC Company, LLC of $20,827 and $8,619, respectively for the years ended December 31, 2017 and 2016, in cost of goods sold. At December 31, 2017, the Company had a receivable of $6,190, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold and a payable of $4,112 for finished goods received. In addition, the Company had a payable in the amount of $363 related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accrued expenses.
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2017, 2016 and 2015
(In thousands)
|
Description
|
|
Balance at
Beginning of
Year
|
|
|
Additions
Charged
(Credited) to Costs
and Expenses
|
|
|
Deductions
|
|
|
|
Balance at
End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
288
|
|
|
$
|
(1
|
)
|
|
$
|
(52
|
)
|
(a)
|
|
$
|
235
|
|
|
Inventory reserve
|
|
|
1,682
|
|
|
|
369
|
|
|
|
(228
|
)
|
(a)
|
|
|
1,823
|
|
(a) represents write-offs.