UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
| For the fiscal year ended December 31, 2023 |
| OR |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _____ to _____ |
For the transition period from _______ to _____ .
Commission file number: 1-13648
Balchem Corporation
(Exact name of Registrant as specified in its charter)
| | | | | | | | |
| Maryland | | 13-2578432 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
52 Sunrise Park Road, New Hampton, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (845) 326-5600
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| 5 Paragon Drive, Montvale, NJ 07645 |
| (Address of principal executive offices) (Zip Code) |
| Registrant’s telephone number, including area code: (845) 326-5600 |
|
| Securities registered pursuant to Section 12(b) of the Act: |
| | |
| Title of each class | Trading symbol | Name of each exchange on which registered |
| Common Stock, par value $.06-2/3 per share | BCPC | The Nasdaq GlobalStock Market LLC |
| | |
| Securities registered pursuant to Section 12(g) of the Act: None |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☑ No ☐
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company,. or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| (Check one): | Large accelerated filer ☑ | Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company☐ | Emerging growth company☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The aggregate market value of the common stock, par value $.06-2/3 per share (the “Common Stock”), issued and outstanding and held by non-affiliates of the Registrant, based upon the closing price for the Common Stock on the NASDAQ GlobalStock Market LLC on June 30, 20172023 was approximately $2,455,000,000.$4,321,000,000. For purposes of this calculation, shares of the Registrant held by directors and officers of the Registrant and under the Registrant’s 401(k)/profit sharing plan have been excluded.
The number of shares outstanding of the Registrant’s Common Stock was 32,036,48532,266,941 as of February 21, 2018.
2, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant’s proxy statement for its 20182024 Annual Meeting of StockholdersShareholders (the “2018“2024 Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after Registrant’s fiscal year-end of December 31, 20172023 are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated therein.
Cautionary Statement Regarding Forward-Looking Statements
ThisCertain statements in this Annual Report on Form 10-K, containsother than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations or beliefs concerning future events and results. We generally use the words “believes,“believe,” “expects,“expect,” “intends,“intend,” “plans,“plan,” “anticipates,“anticipate,” “likely,” “will,” “estimates,“would,” “project” and“will be,” “will continue,” “will likely result,” “estimate,” “project,” “forecast,” “outlook,” “strategy,” “future,” “opportunity,” “may,” “should,” or the negative thereof or variations thereon or similar expressions generally intended to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The risks, uncertainties and factors that could cause our results to differ materially from our expectations and beliefs include, but are not limited to, those factors set forth in this Annual Report on Form 10-K under “Item 1A. - Risk Factors” below.
We cannot assure youFactors.” You should read that the expectations or beliefs reflectedinformation in these forward-looking statements will prove correct.conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report and our Consolidated Financial Statements and related notes in Item 8 of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form
BALCHEM CORPORATION
ANNUAL REPORT ON FORM 10-K and all subsequent written and oral forward-looking statements made by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.
PART I
Item 1. Business (All amounts in thousands, except share and per share data)
General:
General
Balchem Corporation (“Balchem,” the “Company,” “we” or “us”), was incorporated in the State of Maryland in 1967, is engaged in the development,1967. We develop, manufacture, distribute and marketing ofmarket specialty performance ingredients and products for the nutritional, food, nutritional, feed, pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets. Our three reportable segments are strategic businesses that offer products and services to different markets. We presently have four reportable segments:markets: Human Nutrition &and Health, (formerly SensoryEffects); Animal Nutrition & Health;and Health, and Specialty Products;Products. Sales and Industrial Products.production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated".
The Company sells itsWe sell our products through itsour own sales force, independent distributors and sales agents. Financial information concerning the Company’sour business, business segments and geographic information appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 below and in the Notes to our Consolidated Financial Statements included under Item 8 below, which information is incorporated herein by reference.
Human Nutrition and Health
The Company operates six wholly-owned domestic subsidiaries: SensoryEffects, Inc. (“SE”Human Nutrition and Health ("HNH"), segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for nutrition and health applications. Choline is recognized to play a Delaware corporation, SensoryEffects Cereal Systems, Inc. (“SECS”),key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products; proprietary technologies have been combined to create an organic molecule in a Delaware corporation, Albion Laboratories, Inc. (formerly known as Albion International, Inc.) (“Albion”), a Nevada corporation, BCP Ingredients, Inc. (“BCP”), a Delaware corporation, Aberco, Inc. (“Aberco”), a Maryland corporation,form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and Innovative Food Processors, Inc. (“IFP”), a Delaware corporation. We operate two wholly-owned subsidiaries in Europe: Balchem BV, a Dutch limited liability company and Balchem Italia Srl, an Italian limited liability company. We also operate one wholly-owned subsidiary in Canada: Balchem LTD, a Canadian corporation. Unless otherwise stated to the contrary, or unless the context otherwise requires, references tocustomers' appreciation of brand value. Consequently, the Company makes investments in this report includes Balchem Corporationsuch activities for long-term value differentiation. This segment also manufactures specialty vitamin K2, which plays a crucial role in the human body for bone health, heart health and its subsidiaries.
Human Nutrition & Health
Our Human Nutrition & Healthimmunity, and methylsulfonylmethane ("MSM"), which is a widely used nutritional ingredient that helps provide benefits for joint health, sports nutrition, skin and beauty, and healthy aging. This segment supplies ingredients inalso serves the food and beverage industry providingfor beverage, bakery, dairy, confectionary, and savory manufacturers. The Company partners with its customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company has expertise in trends analysis and product development. With its strong manufacturing capabilities in customized solutions in powder, solidspray dried and emulsified powders, extrusion and agglomeration, blended lipid systems, liquid flavor delivery systems, spray dried emulsified powder
systems,juice and cereal systems. Our products include creamer systems, dairy replacers, powdered fats, nutritional beverage bases, beverages, juice & dairy bases, chocolate systems, ice cream bases &and variegates, ready-to-eat cereals, grain based snacks,the Company is a one-stop solutions provider for beverage and cereal based ingredients.dairy product development needs. Additionally, we providethis segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, sports and protein bars, dietary plans, and nutritional supplements. WeThe Company also producecreates cereal systems for ready-to-eat cereals, grain-based snacks, 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. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate.cereal based ingredients.
Animal Nutrition &and Health
OurThe Company’s Animal Nutrition &and Health (“ANH”("ANH") segment provides nutritional products derived from ourits microencapsulation and chelation technologies in addition to basicthe essential nutrient choline chloride. For ruminant animals, ourthe Company’s microencapsulated products boost health and milk production by delivering nutrient supplements that are biologically available, providing required nutritional levels. OurThe Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. CholineIn poultry, choline deficiency can result in reduced growth rates and perosis in poultry,young birds, while in swine production choline is a necessary and fattyrequired component of gestating and lactating sow diets for both liver kidney necrosishealth and general poor health condition in swine.prevention of leg deformity. This segment also manufactures MSM, which is a widely used nutritional ingredient that provides benefits for pet health.
Sales of specialtyvalue-added encapsulated products for the animal nutrition and health industry are highly dependent on dairyoverall industry economics as well as the Company's ability of the Company to leverage the results of university and field research on the animal health and production benefits of the Company’sour 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 increasedrive production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
Specialty Products
The Company re-packages and distributes a number of performance gases and chemicals for various uses by its customers, notably ethylene oxide, propylene oxide, and ammonia. 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 United States Environmental Protection Agency (“EPA”) and the United States Department of Transportation (“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; andspoilage, to reduce bacterial and mold contamination in certain shellshelled 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 EPAprunes, 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 for various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings. Ammonia is used primarily as a refrigerant, for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and cylinder packaging approved for use in the countries these products are shipped to.
The Company’s performance gases and chemicals are distributed worldwide in specially designed, reusable and recyclable drum and cylinder packaging, to assure compliance with safety, quality and environmental standards as outlined by the applicable regulatory agencies in the countries our products are shipped to. The Company’s inventory of these specially built drums and cylinders, along with its five filling facilities, represents a significant capital investment. The Company also sells single use canisters for use in sterilizing re-usable devices typically processed in autoclave units in hospitals.
OurThe Company’s micronutrient agricultural nutrition business sells chelated minerals primarily intoto producers of high value crops. We haveThe Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, we determinethe Company determines optimal mineral balance for plant health. WeThe Company then havehas a foliar applied Metalosate®Metalosate® product range, utilizing patented amino acid chelate technology. OurIts 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.
Acquisitions
Industrial ProductsOn August 30, 2022, the Company's wholly-owned subsidiary Albion Laboratories, Inc. ("Albion") entered into a Stock Purchase Agreement, and closed on such transaction with Cardinal Associates Inc. ("Cardinal"), a corporation organized under the laws of the State of Washington, pursuant to which Albion acquired Cardinal and its Bergstrom Nutrition business (collectively, "Bergstrom"). Bergstrom is a leading science-based manufacturer of MSM, based in Vancouver, Washington. Details related to the Bergstrom acquisition are disclosed in Note 2, Significant Acquisitions. The addition of OptiMSM®, Bergstrom Nutrition's MSM brand, to the Company's portfolio within the Human Nutrition and Health and Animal Nutrition and Health segments provides a synergistic scientific advantage in Balchem's key strategic therapeutic focus areas such as longevity and performance and is a strong fit with Balchem's specialty, science-backed mineral products.
Certain derivativesOn June 21, 2022, the Company and its wholly-owned subsidiary, Balchem B.V., completed the acquisition of choline chloride are manufacturedKechu BidCo AS and sold into industrial applications predominately asits subsidiary companies, including Kappa Bioscience AS, a component for hydraulic fracturingleading science-based manufacturer 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 blockspecialty vitamin K2 for the manufacture of choline products andhuman nutrition industry, headquartered in Oslo, Norway (all acquired companies collectively referred to as “Kappa”). Details related to the Kappa acquisition are produced at our Italian operation and sold for a wide range of industrial applicationsdisclosed in Europe.
Acquisition of Chol-Mix Kft
On March 24, 2017,Note 2, Significant Acquisitions. The acquisition strengthens 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 knowledgeCompany's scientific and technical know-how supportingexpertise, geographic reach, and marketplace leadership, which should ultimately lead to accelerated growth for the application of liquids on carriers, located in Hungary, for a purchase price of €1,500,000 As of December 31, 2017, approximately €1,150,000 translated to approximately $1,230,000 has been paid to Chol-Mix Kft withCompany's portfolios within the remaining balance of approximately €350,000 translated to approximately $419,000 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.
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 $22,975,000 on the acquisition date and $635,000 in September to true-up working capital, amounting to approximately $16,161,000 to the former shareholders, adjustments for working capital acquired of $5,065,000, and $2,384,000 to IFP’s lenders to pay off all IFP bank debt. The acquisition of IFP expands the Company’s Human Nutrition &and Health segment’s processing technology and market reach, while bringing innovative and value-added systems to food, beverage, and nutrition customers.segment.
Raw Materials
The raw materials utilized by the Companyus in the manufacture of itsour products are sourced from suppliers both domestically and internationally. Such raw materials include materials derived from petrochemicals, minerals, metals, agricultural commodities and other readily available commodities and are subject to price fluctuations due to market conditions. The Company is not experiencing any currentIn 2023, supply reliability improved due to a weaker macroeconomic (demand) environment though we experienced some difficulties in procuring
certain materials due to the challenging geopolitical environment impacting some supply lanes. In a year of mixed inflationary and
suchdeflationary trends across key categories we source, we were able to secure most necessary materials from our suppliers and does not anticipate any such problems; however, we cannot assure that will always be the case.continued to strive to ensure a sustainable supply chain to support our growing business operations.
Intellectual Property
The CompanyWe currently holds 71hold over 130 patents and over 400 trademarks in the United States and overseas and uses certain trade-names and trademarks. Itoverseas. We also usesuse know-how, trade secrets, formulae, and manufacturing techniques that assist in maintaining competitive positions of certain of itsour products. Formulae and know-how are of particular importance in the manufacture of a number of the Company’sour proprietary products. The Company believesWe believe that certain of itsour patents, in the aggregate, are advantageous to itsour business. However, it is believed that no singlewe do not believe we are materially dependent on any particular patent or relatedany particular group of patents is currently so material to the Companypatents. We believe that the expiration or termination of any single patent or group of patents would materially affect its business. Our U.S. patents expire between 2018 and 2034. The Company believes that itsour sales and competitive position are dependent primarily upon the quality of itsour products, technical sales efforts and market conditions, rather than on patent protection.
Seasonality
Seasonality
InWhile in general, the businesses of our segments are not seasonal to any material extent.extent, the plant nutrition business within Specialty Products is a seasonal business with the vast majority of sales occurring in the first half of the year, based on the planting season in the northern hemisphere.
Backlog
At December 31, 2017, the Company2023, we had a total backlog of $41,270,000 (including $27,098,000$42,957 (comprised of $32,418 for the HNH segment; $11,041,000$7,639 for the ANH segment; $573,000$2,678 for the Specialty Products segment, and $2,558,000$222 for the Industrial Products segment)other), as compared to a total backlog of $26,203,000$47,022 at December 31, 2016 (including $18,496,0002022 (comprised of $31,550 for the HNH segment; $6,120,000$11,983 for the ANH segment; $1,066,000$2,980 for the Specialty Products segment and $521,000$509 for the Industrial Products segment)other). It has generally been the Company’sour policy and practice to maintain an inventory of finished products and/or component materials for itsour segments to enable itus to ship products within two months after receipt of a product order. All orders in the current backlog are expected to be filled in the 20182024 fiscal year.
Our competitors include many large and small companies, some of which have greater financial, research and development, production and other resources than the Company.us. Competition in the supplement, food and ingredientbeverage markets served by the Company iswe serve are based primarily on product performance, customer support, quality, service and price. The development of new and improved products is important to the Company’sour success. This competitive environment requires substantial investments in product and manufacturing process research and development. In addition, the winning and retention of customer acceptance of the Company’sour food and nutrition products involve substantial expenditures for application testing, either internally or at customer/prospect sites, and sales efforts. Our competition in this market includes a variety of ingredient and nutritional supplement companies, many of which are privately-held. Therefore, it is difficult to assess the size of all of our segment competitors or where we rank in comparison to such privately-held competitors.
Competition in the animal feed and industrial markets served by the Companywe serve is based primarily on product performance, customer support, quality, service and price. The markets for our products are subject to competitive risks because these markets are highly price competitive. Our competition in this market includes a variety of animal nutrition and health ingredient companies, along with certain industrial companies, many of which are privately-held. Therefore, we are unable to assess the size of all of our competitors or where we rank in comparison to such privately-held competitors.
competitors.
In the Specialty Products segment, the Company’s products face competition from alternative sterilizing technologies and products. Competition in this marketplacewithin Performance Gases is based primarily on medical device compositions,service, reliability, quality, and price. Our competitors in this market vary globally, many of which are regional privately-held companies. We also face competition from alternate technologies or substitute products. In our plant nutrition business, competition is based primarily on product performance, customer support, quality, service and price. The development of new and improved products is also important to our ability to compete. Our competition in this market is primarily regional privately-held companies.
market includes sterilization companies, a number of which are privately-held. Therefore, we are unable to assess the size of all of our competitors or where we rank in comparison to such privately-held competitors. We are focused on the North American market due to EPA, United States FoodResearch and Drug Administration (“FDA”) and DOT regulations that are not yet required globally.
Research & Development
During the years ended December 31, 2017, 20162023, 2022 and 2015, the Company2021, we incurred research and development expenses of approximately $9.3 million, $7.3 million,$15,049, $12,191, and $6.0 million,$13,524, respectively, on Company-sponsored research and development for new products, and improvements to existing products, and manufacturing processes. At December 31, 2017, approximately 47 employees were devoted full time to research and development activities. The Company hasWe have historically funded itsour research and development programs with
funds available from current operations with the intent of recovering those costs from profits derived from future sales of products resulting from, or enhanced by, the research and development effort.
The Company prioritizes itsWe prioritize our product development activities in an effort to allocate resources to those product candidates that, the Company believes,we believe, have the greatest commercial potential. Factors considered by the Companywe consider in determining the products to pursue include projected markets and needs, status of itsour proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market.
Capital Projects
The Company continuesWe continue to invest in projects across all production facilities and capital expenditures were approximately $27.5 million, $23.0 million,$37,274, $49,086, and $41.3 million$36,142 for 2017, 20162023, 2022 and 2015,2021, respectively. In 2017, the Company spent approximately $13.2 million2023, we invested $20,720 on projects expected to expand manufacturing capacity at our AMT facility in Utah to accommodate production previously manufactured in Clearfield, UT prior to the site fire. In 2016 and 2015, respectively, capital expenditures of $1.8 million and $11.5 million were related to expanding the Company’s Animal Nutrition & Healthprovide favorable returns on investment, including expanded capacity in key product lines in the manufacturing facility locatedHNH segment. In addition, we invested $6,900 for environmental, health, safety, and security upgrades to our facilities. In 2022, we invested $29,759 on projects expected to provide favorable returns on investment, including expanded capacity in Verona, Missouri. Additionally,key product lines in the CompanyHNH segment. In addition, we invested $6.8 million$6,020 for environmental, health, safety, and $10.4 millionsecurity upgrades to our facilities and $3,024 in agglomeration production equipment during 2016automation projects that improved quality and 2015, respectively.efficiency of our operations. In 2021, we invested $20,544 on projects expected to provide favorable returns on investment, including expanded capacity in key product lines in the HNH segment. In addition, we invested $3,138 for environmental, health, safety, and security upgrades to our facilities, $2,330 in automation projects that improved quality and efficiency of our operations, and $2,222 in research and development projects. Capital expenditures are projected to range from $20.0 million$35,000 to $30.0 million$40,000 for 2018.2024, including our continued efforts to invest in energy and water saving projects, while exploring additional renewable energy opportunities in support of the company's sustainability efforts.
Environmental /and Regulatory Matters
The Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”), a health and safety statute, requires that certain products within our specialty productsSpecialty Products segment must be registered with the EPAU.S. Environmental Protection Agency ("EPA") because they are considered pesticides. In orderAs part of the registration review process, the EPA assesses a wide variety of studies to obtain a registration, an applicant typically must demonstrate, through extensive test data, that its product will not cause unreasonable adverse effects ondetermine the likelihood of risk to human health orand the environment.environment from exposure associated with use of the product. We hold EPA registrations permitting us to sell ethylene oxide as a medical device sterilant and spice fumigant and propylene oxide as a fumigant of nuts and spices.
With respect to the treatment of spices with ethylene oxide, the EPA allows the use of EO on the vast majority of spices. However, EPA prohibited its use for the treatment of basil, effective August 1, 2007, but allows the continuing use of ethylene oxide to treat all other spices, provided specific treatment parameters are used. During 2009, the EPA mandated that a toxicity study be performed on ethylene chlorohydrin, which is a “residue of concern”, according to the EPA. This study was financed by an industry trade association of which we are a member, and was submitted to the EPA in March 2012. In October 2016, the EPA issued a Data Evaluation Record accepting the ethylene chlorohydrin study.
In April 2008, the EPA issued a RED (“ReregistrationRe-registration Eligibility Decision”) for ethylene oxide which permitted the continued use of ethylene oxide “to sterilize medical or laboratory equipment, pharmaceuticals, and aseptic packaging, or to reduce microbial load on musical instruments, cosmetics, whole and ground spices and other seasoning materials and artifacts, archival material or library objects”. Currently,In 2013, the EPA
has initiated a new registration review of ethylene oxide, in line with and as part of the registration review scheduled for a large number of other pesticides. AWhen the Final Work Plan was issued in March 2014. The2014, the EPA anticipatesanticipated that this registration review process willwould take approximately seven years. In December 2016, the EPA issued its Integrated Risk Information System (“IRIS”) assessment of EO,ethylene oxide (the "IRIS Assessment"), another aspect of the EPA’s safety review of EO. To date, we have no indication thatethylene oxide. In November 2020, the EPA issued a Draft Human Health Risk Assessment for Ethylene Oxide (“Draft HHRA”). In this Draft HHRA, the EPA presented multiple perspectives on risk extrapolation, including the IRIS assessment will have any discernable impactAssessment. While acknowledging the necessity of maintaining the critical uses of ethylene oxide, based on the registration review process.range of unit risk provided in this qualitative assessment, the EPA stated that there should be further mitigation measures implemented. In addition,April 2023, the EPA has identified several potential additional testing requirements. The EPAreleased a Proposed Interim Decision and the registrants are in discussions regarding the additional testing. While some additional testing will be necessary, weDraft Human Health Risk Assessment addendum which included certain proposed mitigation measures. We believe that the use ofEPA intends to reregister ethylene oxide will continue to be permitted.for the sterilization of medical or laboratory equipment, pharmaceuticals, aseptic packaging, and the reduction of microbes on spices/seasonings, with the proposed mitigation measures potentially impacting such users, including our customers. The product, when used as a sterilant for certain medical devices, has no known equally effective substitute. In October 2019, the U.S. Food and Drug Administration in a public statement said, "Although medical devices can be sterilized by several methods, ethylene oxide is the most common method of sterilization of medical devices in the U.S. and is a well-established and scientifically-proven method of preventing harmful microorganisms from reproducing and causing infections." Management believes the lack of availability of this product could not be easilyreasonably tolerated by various medical device manufacturers or the health care industry due to the resultant infection potential.
Similarly, the EPA issued a RED for propylene oxide in August 2006. At that time, the EPA “determined that products containing the active ingredient PPO [propylene oxide]propylene oxide ("PPO") are eligible for reregistrationre-registration provided that…risk mitigation measures…are adopted.” Our product label was amended as required to reflect these mitigation measures and also to show that propylene oxide has been reclassified as a restricted use pesticide. Currently,In 2013, the EPA has initiated a new registration review of propylene oxide, in line with and as part of the registration review scheduled for a large number of other pesticides. A Final Work Plan was issued in March 2014. The2014, and the EPA anticipatesanticipated that this review process willwould take approximately seven years. As part of the process,In October 2020, the EPA has identified several potential additional testing requirements. The Company has completed twoissued both the Proposed Interim
Decision and they have been submitted toDraft Risk Assessment for propylene oxide. In July 2021, the EPA for evaluation. Another study has been completed andissued the final report is expected to be ready for submission to EPA shortly. The Company has committed to conducting two additional studies, which are scheduled to begin during the first quarter of 2017. The Company is currently in discussions with the EPA regarding other studies. While it is possible that we will be required to perform additional testing, we believe thatInterim Decision. Based on these documents, the use of propylene oxide to treat nuts and spices will continue to be permitted.permitted with minimal changes to the current approved usage. We submitted those changes and expect the EPA to review and approve them in the coming months during 2024.
The Company’sOur facility in Verona, Missouri facility, while held by a prior owner, Syntex Agribusiness, Inc. (“Syntex”), 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 ownerSyntex 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 isResources. We are indemnified by the sellers under itsour May 2001 asset purchase agreement covering itsour 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 Syntex in relation to the prior owner that executedimplementation of the above-described Superfund remedy. In June 2023, in response to a Special Notice Letter received from the EPA in 2022, BCP Ingredients, Inc. ("BCP"), the Company's subsidiary that operates the site, Syntex, EPA, and the State of Missouri entered into an Administrative Settlement Agreement and Order on Consent (“ASAOC”) for a focused remedial investigation/feasibility study ("RI/FS") under which (a) BCP will conduct a source investigation of potential source(s) of releases of 1,4-dioxane and chlorobenzene at a portion of the site and (b) BCP and Syntex will complete a RI/FS to determine a potential remedy, if any is required. Activities under the ASAOC are underway and are expected to continue for some period of time.
In connection with normal operations at itsour plant facilities, the Company iswe are required to maintain environmental and other permits, including those relating to the use of ethylene oxide operations.oxide. From time to time, our manufacturing sites may be subject to inspections by the EPA and other agencies. To the extent any consent orders or other agreements are entered into as a result of findings from such inspections, the Company is committed to ensuring compliance with such orders or agreements. For a further discussion of our potential environmental liabilities, see Note 16, Commitments and Contingencies, to our Consolidated Financial Statements.
The Company believes it isWe believe we are in compliance in all material respects with federal, state, localapplicable laws and international provisionsregulations that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Such compliance includes the maintenance of required permits under air pollution regulations and compliance with requirements of the Occupational Safety and Health Administration. The cost of such compliance has not had a material effect upon the results of our operations or our financial condition of the Company. 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”) and performed a Remedial Investigation/Feasibility Study that was approved by NYDEC in February 1994. Based on NYDEC requirements, the Company remediated the area and removed soil from the drum burial site. This proceeding has been substantially completed (see Item 3).condition.
In June 2011, we terminated our lease and ceased operations at a manufacturing facility in Channahon, Illinois, which had previously served as our pharmaceutical grade ingredient manufacturing facility, which was registered with the FDA as a drug manufacturing facility. We will continue to produce products which are required to be manufactured in conformity with current Good Manufacturing Practice (“cGMP”) regulations as interpreted and enforced by the FDA, but will do so through third party contract arrangement. Modifications, enhancements or changes in contracted manufacturing facilities or procedures relating to our pharmaceutical products are, in many circumstances, subject to FDA approval, which may be subject to a lengthy application process or which we may be unable to obtain. Any contracted manufacturing facilities that manufacture our pharmaceutical products are periodically subject to inspection by the FDA and other governmental agencies, and operations at these facilities could be interrupted or halted if the results of these inspections are unsatisfactory.
Human Capital
Employees
Our employees are our most valued asset and fundamental to our success. As of JanuaryDecember 31, 2018,2023, we employed approximately 1,302 full-time employees worldwide, with approximately 18% covered by collective bargaining agreements. We are seeing some modest improvement in most relevant labor markets and we believe that we have been successful in attracting skilled and experienced personnel in a competitive environment and that our human capital resources are adequate to perform all business functions. In addition, we continue to enhance technology to further optimize productivity and performance.
Health and Safety
Protecting the workplace environment and the health and safety of our employees, contractors, visitors, and neighbors is our top priority. Our recordable injury rate, which is defined as recordable injuries per 200,000 hours worked, was 1.39 and 1.17 in 2023 and 2022, respectively. The injuries were primarily the result of manual material handling and cultural/behavioral factors that influence outcome. We are adjusting our 2024 environmental, health, safety, and security management system to include an even greater emphasis on hazard identification/correction and cultural/behavioral aspects of personal safety. In addition, we continually upgrade our facilities to reduce health and safety risks and establish procedures with appropriate personnel protection for the safety of our employees.
Diversity and Inclusion
We recognize that our best performance is achieved when our teams are diverse, and accordingly, diversity and inclusion are important elements of Balchem's Human Resources strategy. We strive to promote inclusion through the implementation of inclusive leadership training across the Company employed approximately 1,165 persons. Approximately 100and are committed to increasing representation of minorities throughout the organization. In 2023, our total workforce consisted of 74% male and 26% female among all employees and 47% male and 53%
female when excluding supply chain and operations functions. In 2022, our total workforce consisted of 75% male and 25% female among all employees and 50% male and 50% female when excluding supply chain and operations functions. With the support of our Board of Directors, we continue to explore additional diversity and inclusion initiatives.
Training and Well-Being Programs
We strive to develop employee skills and knowledge, which includes training for job-specific technical knowledge, regulatory requirements, and company policies, through our internal learning and development platform. The topics of trainings include the Company's Code of Conduct, anti-harassment and discrimination, foreign corrupt practices, antitrust, cyber security, and various other compliance subjects. Our sponsored employee continuing learning program offers a broad base of assistance for employees, including learning and development courses. We also deployed unconscious bias and inclusive leadership training to our management team. Employees have access to healthy lifestyle discounts through our Wellness Center, as well as debt, legal, and financial counseling. Leadership programs, peak performance training and multiple online services and courses enable our employees to choose their own learning paths and work towards achieving their goals for education, finances, and overall well-being.
Performance Review, Compensation and Benefits
Our annual performance review process is an important, objective-based dialogue to foster continuous growth and development by providing an opportunity to establish goals and deliver feedback relative to each employee's performance. Balchem's annual review process is closely aligned with a formal succession planning and talent review process designed to identify and develop the next generation of leaders.
We are dedicated to providing full-time employees with a competitive compensation package that includes medical, dental, vision, and prescription benefits in addition to a 401(k) matching program. Balchem also provides financial support for health and wellness programs such as online financial wellness content, sponsored weight loss programs and subsidized gym memberships. We also provide generous time off and leave benefits, which are important to help ensure employees can enjoy a healthy balance between work and family time.
For the years ended December 31, 2023 and 2022, our turnover rate was 11% and 15%, respectively, for salaried employees with an average length of service of over 9 years for both years. For the years ended December 31, 2023 and 2022, our turnover rate was 29% and 36%, respectively, for hourly employees with an average length of service of about 7 years for both years. We are continuing to improve employee retention with effective employment engagement efforts, a productive performance review process, and competitive compensation.
Sustainability
We operate as strong stewards of our shareholders, customers, suppliers, employees, and the communities in which we operate. We are working to make our workforce more inclusive, our business more sustainable, and our communities more engaged by maintaining strong environmental, social and governance practices.
In 2023, we published our 2022 Sustainability Report. This report provides detailed information regarding our Corporate Responsibility strategy, focus areas and governance structure. We are committed to reducing our greenhouse gas emissions by implementing new technologies, improving operational efficiencies, and expanding green energy usages. In addition, we are committed to reducing our global water use by reducing and recycling water usage and investing new technologies to improve water efficiency. For more information on our approach to sustainability management, refer to our 2022 Sustainability Report, which is available on our website at our Marano, Ticino, Italy facility are covered by a national collective bargaining agreement, which expires in 2018. Approximately 75 employees athttps://balchem.com/our-company/corporate-social-responsibility/sustainability. The information contained on, or that may be accessed through, the Company’s Verona, Missouri facilitywebsite is not incorporated by reference into, and is not part of, this Annual Report on Form 10-K.
In December 2023, Balchem was named on Newsweek's 2024 list of America's Most Responsible Companies and has earned a ranking amongst this prestigious list of companies for the fourth consecutive year. This prestigious list, compiled by Newsweek in partnership with Statista Inc., recognizes the most responsible companies in the U.S. across a variety of industries, and is based on their assessment of publicly available corporate responsibility data. We are coveredpleased to be recognized by a collective bargaining agreement, which expiresNewsweek and Statista for our leadership in 2020.corporate responsibility.
Available Information
The Company’sOur headquarters is located at 52 Sunrise Park Road, New Hampton, NY 10958. The Company’s5 Paragon Drive, Montvale, NJ 07645. Our telephone number is (845) 326-5600 and itsour Internet website address is www.balchem.com. The Company makesWe make available through itsour website, free of charge, itsour Annual Reports on Form 10-K,10-
K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable after they have been electronically filed with the Securities and Exchange Commission.Commission (the "SEC"). Such reports are available via a link from the Investor Relations page on the Company’sour website to a list of the Company’sour reports on the Securities and Exchange Commission’sSEC’s EDGAR website. The address of the SEC's website is www.sec.gov.
Item 1A. | Item 1A. Risk Factors |
OurWe discuss our expectations regarding future performance, events and outcomes in this Form 10-K, quarterly and annual reports, press releases and other written and oral communications. All statements except for historical and present factual information are “forward-looking statements” and are based on financial data and business is subject to a high degreeplans available only as of the time the statements are made, which may become outdated or incomplete. Forward-looking statements are inherently uncertain, and investors must recognize that events could significantly differ from our expectations. You should carefully consider the risk factors discussed below, together with all the other information included in this Form 10-K, in evaluating us and uncertainty, includingour ordinary shares. If any of the following risks and uncertainties, which could adversely affectbelow actually occurs, our business, financial condition, results of operation,operations and cash flows could be materially and adversely affected. Any such adverse effect may cause the trading price of our Common Stock:ordinary shares to decline, and as a result, you could lose all or part of your investment in us. Our business may also be adversely affected by risks and uncertainties not known to us or risks that we currently believe to be immaterial. We assume no obligation to update any forward-looking statements as a result of new information, future events or other factors.
Operational Risks
We face risks associated with our sales to customers and manufacturing operations outside the United States.
Our net sales consist of sales both within and outside the United States. In addition, we conduct a portion of our manufacturing outside the United States. The majority of our foreign sales occur through our foreign subsidiaries and the remainder of our foreign sales result from exports to foreign distributors, resellers and customers. Our foreign sales and operations are subject to a number of risks, including: longer accounts receivable collection periods; the impact of recessions and other economic conditions in economies outside the United States; export duties and quotas; imposition of, or changes in, tariffs, sanctions, trade restrictions, and trade relations including but not limited to those associated with the United States-Mexico-Canada Agreement ("USMCA") which replaced the North American Free Trade Agreement ("NAFTA"), other free trade agreements, and the exit of the United Kingdom from the European Union; unexpected changes in regulatory requirements; certification requirements; environmental regulations; reduced protection for intellectual property rights in some countries; potentially adverse tax consequences; political and economic instability; and preference for locally produced products. These factors could have a material adverse impact on our ability to increase or maintain our international sales.
Our sales and operations may be adversely affected by supply chain disruptions due to political unrest, terrorist acts, and national and international conflicts.
Our sales and operations are subject to a number of risks, including political and economic instability, which could have a material adverse impact on our ability to increase or maintain our international sales and operations. National and international conflicts such as war, border closures, civil disturbances and terrorist acts, including Russia's invasion of Ukraine and the ongoing conflict between Israel and Hamas, may increase the likelihood of already strained supply interruptions and further hinder our ability to access the materials and energy we need to manufacture our products. Additional supply chain disruptions will make it harder for us to find favorable pricing and reliable sources for the materials we need. As a result, such disruptions will put upward pressure on our costs and increase the risk that we may be unable to acquire the materials and services we need to continue to make certain products, in particular at our manufacturing facilities in Europe.
Our financial success depends in part on the reliability and sufficiency of our manufacturing facilities.
Our revenues depend on the effective operation of our manufacturing, packaging, and processing facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard performance of equipment, power outages, the improper installation or operation of equipment, explosions, fires, natural disasters, failure to achieve or maintain safety or quality standards, work stoppages, supply or logistical outages, and the need to comply with environmental and other directives of governmental agencies. The occurrence of material operational problems, including, but not limited to, the above events, could adversely affect our profitability during the period of such operational difficulties.
Our ability to successfully grow and expand our business depends on our ability to recruit and retain a highly qualified and diverse workforce.
Our ability to successfully grow and expand our business is dependent upon our ability to recruit and retain a workforce with the skills necessary to develop, manufacture and deliver the products and services desired by our customers. We need highly skilled and qualified personnel in multiple areas, including research and development, engineering, sales, manufacturing, information technology, cybersecurity, accounting, regulatory, and management. We must therefore continue to effectively recruit, retain and motivate highly qualified, skilled and diverse personnel to maintain our current business and support our projected growth. A shortage of these employees for various reasons, including intense competition for skilled employees, labor shortages, increased labor costs, candidates’ preference to work remotely, changes in laws and policies regarding immigration and work authorizations in jurisdictions where we have operations, or any government mandates that may result in workforce attrition and difficulty with recruiting, may jeopardize our ability to grow and expand our business.
We may, from time to time, experience problems in our labor relations.
A portion of our North American workforce is represented by a union under a single collective bargaining agreement. In Europe, employees at our Marano, Ticino, Italy facility and Bertinoro, Italy facility are covered by a national collective bargaining agreement, respectively. We believe that our present labor relations with all our union employees are satisfactory, however, our failure to renew these agreements on reasonable terms could result in labor disruptions and increased labor costs, which could adversely affect our financial performance. Similarly, if our relations with the union portion of our workforce do not remain positive, such employees could initiate a strike, work stoppage or slowdown in the future. In the event of such an action, we may not be able to adequately meet the needs of our customers using our remaining workforce and our operations and financial condition could be adversely affected. Additionally, other portions of our workforce could become subject to union campaigns.
The effects of global climate change or other unexpected events, including global health crises, may disrupt our operations and have a negative impact on our business.
The effects of global climate change, such as extreme weather conditions and natural disasters occurring more frequently or with more intense effects, or the occurrence of unexpected events including wildfires, tornadoes, hurricanes, earthquakes, floods, tsunamis and other severe hazards or global health crises, such as the outbreak of Ebola or the global COVID-19 pandemic, or other actual or threatened epidemic, pandemic, outbreak and spread of a communicable disease or virus, in the countries where we operate or sell products and provide services, could adversely affect our operations and financial performance. Extreme weather, natural disasters, power outages, global health crises or other unexpected events could disrupt our operations by impacting the availability and cost of materials needed for manufacturing, causing physical damage and partial or complete closure of our manufacturing sites or distribution centers, loss of human capital, temporary or long-term disruption in the manufacturing and supply of products and services and disruption in our ability to deliver products and services to customers. These events and disruptions could also adversely affect our customers’ and suppliers’ financial condition or ability to operate, resulting in reduced customer demand, delays in payments received or supply chain disruptions. Further, these events and disruptions could increase insurance and other operating costs, including impacting our decisions regarding construction of new facilities to select areas less prone to climate change risks and natural disasters, which could result in indirect financial risks passed through the supply chain or other price modifications to our products and services.
We may be subject to risks relating to our information technology and operational technology systems.
We rely extensively on information technology and operational technology systems, networks and services including hardware, software, firmware and technological applications and platforms (collectively, "IT Systems") to manage and operate our business from end-to-end, including ordering and managing materials from suppliers, design and development, manufacturing, marketing, selling and shipping to customers, invoicing and billing, managing our banking and cash liquidity systems, managing our enterprise resource planning and other accounting and financial systems and complying with regulatory, legal and tax requirements. We have invested and will continue to invest in improving our IT Systems. Some of these investments are significant and impact many important operational processes and procedures. There is no assurance that newly implemented IT Systems will improve our current systems, improve our operations or yield the expected returns on the investments. In addition, the implementation of new IT Systems may be more difficult, costly or time consuming than expected and cause disruptions in our operations and, if not properly implemented and maintained, negatively impact our business. If our IT Systems cease to function properly or if these systems do not provide the anticipated benefits, our ability to manage our operations could be impaired.
We currently rely on third-party service providers for many of the critical elements of our global information and operational technology infrastructure and their failure to provide effective support for such infrastructure could negatively impact our business and financial results.
We have outsourced many of the critical elements of our global information and operational technology infrastructure to third-party service providers in order to achieve efficiencies. If such service providers do not perform or do not perform effectively, we may not be able to achieve the expected efficiencies and may have to incur additional costs to address failures in providing service
by the service providers. Depending on the function involved, such non-performance, ineffective performance or failures of service may lead to business disruptions, processing inefficiencies or security breaches.
Disruptions or breaches of our information systems could adversely affect us.
Despite our implementation of cybersecurity measures which have focused on prevention (including a robust cybersecurity employee education program to train our employees on email and password security, recognizing phishing and related topics on a regular basis), mitigation, resilience and recovery, our network and products, including access solutions, may be vulnerable to cybersecurity attacks, computer viruses, malicious codes, malware, ransomware, phishing, social engineering, denial of service, hacking, break-ins and similar disruptions, including through use of new artificial intelligence tools or methods. Cybersecurity attacks and intrusion efforts are continuous and evolving, and in certain cases they have been successful at the most robust institutions. The scope and severity of risks that cyber threats present have increased dramatically and include, but are not limited to, malicious software, attempts to gain unauthorized access to data or premises, exploiting weaknesses related to vendors or other third parties that could be exploited to attack our systems, denials of service and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, operating results and financial condition, as we face regulatory, reputational and litigation risks resulting from potential cyber incidents, as well as the potential of incurring significant remediation costs. Further, while we maintain insurance coverage that may, subject to policy terms and exclusions, cover certain aspects of our cyber risks, such insurance coverage may be insufficient to cover our losses or all types of claims that may arise in the continually evolving area of cyber risk.
We also face increasing and evolving disclosure obligations related to cybersecurity events. Despite rigorous processes, we may not adequately meet all our existing or future disclosure obligations and/or having our disclosures misinterpreted. Determining whether a cybersecurity incident is notifiable or reportable may not be straightforward and any such mandatory disclosures could lead to negative publicity, loss of customer confidence in the effectiveness of our security measures, diversion of management's attention and governmental investigations.
Our daily business operations also require us to collect and/or retain sensitive data such as intellectual property, proprietary business information and data related to customers, employees, suppliers and business partners within our networking infrastructure including data from individuals subject to the European Union's General Data Protection Regulation, that is subject to privacy and security laws, regulations and/or customer-imposed controls. Despite our efforts to protect such data, the loss or breach of such data due to various causes including material security breaches, catastrophic events, extreme weather, natural disasters, power outages, system failures, computer viruses, improper data handling, programming errors, unauthorized access and employee error or malfeasance could result in wide reaching negative impacts to our business, and as such, the ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals.
Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee error or malfeasance or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information and data related to our customers, suppliers and business partners. To the extent that such disruptions occur and our business continuity plans do not effectively address these disruptions in a timely manner, they may cause delays in the manufacture or shipment of our products and the cancellation of customer orders and, as a result, our business, operating results and financial condition could be materially and adversely affected, resulting in a possible loss of business or brand reputation.
Business and Financial Risks
Increased competition could adversely affect our business and financial results.
We face competition in our markets from a number of large and small companies, some of which have greater financial, research and development, production and other resources than we do. Our competitive position is based principally on performance, quality, customer support, service, breadth of product line, manufacturing or packaging technology and the selling prices of our products. We may be unable to effectively compete on all these bases. Further, our competitors may improve the design and performance of their products and introduce new products with competitive price and performance characteristics. While we expect to do the same to maintain our current competitive position and market share, if we are unable to anticipate evolving trends in the market or the timing and scale of our competitors’ activities and initiatives, the demand for our products and services could be negatively impacted.
Global economic conditions may adversely affect our business, operating results and financial condition.
Unfavorable changes in economic conditions, including inflation, recession, changes in tariffs and trade relations amongst international trading partners, or other changes in economic conditions, may adversely impact the markets in which we operate.
These conditions may make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products which would reduce our revenues and profitability. If inflation in costs such as raw materials, packaging, freight, labor and energy prices increase beyond our ability to control for them through measures such as implementing operating efficiencies, we may not be able to increase prices to sufficiently offset the effect of various costs increases without negatively impacting customer demand, thereby negatively impacting our margin performance and results of operations.
Furthermore, during challenging economic times our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and cash flow would be negatively impacted. We cannot predict the timing, depth or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the markets in which we operate. Also, at any point in time we have funds in our cash accounts that are with third party financial institutions. These balances in the U.S. and Italyother countries could exceed the Federal Deposit Insurance Corporation (“FDIC”) and Fondo Interbancario di Tutela dei Depositi (“FITD”)other relevant insurance limits, respectively. While we monitor the cash balances in our accounts, these balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets.
Increased competition Additionally, our future results of operations could hurt our business and financial results.
We face competitionbe adversely affected by changes in our markets from a number of large and small companies, some of which have greater financial, research and development, production and other resources than we do. Our competitive position is based principally on performance, quality, customer support, service, breadth of product line, manufacturing or packaging technology and the selling prices of our products. Our competitors may improve the design and performance of their products and introduce new products with competitive price and performance characteristics. We expect to do the same to maintain our current competitive position and market share.
The loss of governmental permits and approvals would materially harm some of our businesses.
Pursuant to applicable environmental and safety laws and regulations, we are required to obtain and maintain certain governmental permits and approvals, including EPA registrations under FIFRA for two of our products. We maintain EPA FIFRA registrations for ethylene oxideeffective tax rate as a medical device sterilant and spice fumigant and for propylene oxide asresult of a fumigant of nuts and spices. The EPA has issued Reregistration Eligibility Decisions for both products in recent years and these uses have been approved for the time being. The EPA may re-examine the registrationschange in the futuremix of earnings in accordancejurisdictions with the provisions of FIFRA. Any future failure of the EPA to allow reregistration of ethylene oxide or propylene oxide would have a material adverse effect on our businessdiffering statutory tax rates, changes in tax laws, regulations and financial results.
Commercial supply of pharmaceutical products that we may develop, subject to cGMP manufacturing regulations, will be performed by third-party cGMP manufacturers. Modifications, enhancementsjudicial rulings or changes in third-party manufacturing facilities or procedures of our pharmaceutical products are, in many circumstances, subject to FDA approval, which may be subject to a lengthy application process or which we may be unable to obtain. Any third-party cGMP manufacturers that we may use are periodically subject to inspection by the FDA and other governmental agencies, and operations at these facilities could be interrupted or halted if the results of these inspections are unsatisfactory. Failure to comply with the FDA or other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production, enforcement actions, injunctions and criminal prosecution, which could have a material adverse effect on our business and financial results.interpretation thereof.
Permits and approvals may be subject to revocation, modification or denial under certain circumstances. Our operations or activities (including the status of compliance by the prior owner of the Verona, Missouri facility under Superfund remediation) could result in administrative or private actions, revocation of required permits or licenses, or fines, penalties or damages, which could have an adverse effect on us. In addition, we cannot predict the extent to which any legislation or regulation may affect the market for our products or our cost of doing business.
Raw material shortages or price increases could adversely affect our business and financial results.
The principal raw materials that we use in the manufacture of our products can be subject to price fluctuations due to market conditions.conditions and factors beyond our control, including the COVID-19 pandemic and inflationary pressures, both of which have impacted our business over the past several years and are likely to continue for some time. Such raw materials include materials derived from petrochemicals, minerals, metals, agricultural commodities and other commodities. While the selling prices of our products tend to increase or decrease over time with the cost of raw materials, these changes may not occur simultaneously or to the same degree. At times, including during periods of rapidly increasing raw material prices, we may be unable to pass increases in raw material costs through to our customers due to certain contractual obligations. Such increases in the price of raw materials, if not offset by product price increases, or substitute raw materials, would have an adverse impact on our profitability. We believe we have reliable sources of supply for our raw materials under normal market conditions. We cannot, however, predict the likelihood or impact of any future raw material shortages. Any shortages or unforeseen price increases could have a material adverse impact on our results of operations.
Our financial success depends in part on the reliability and sufficiency of our manufacturing facilities.
Our revenues depend on the effective operation of our manufacturing, packaging, and processing facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard performance of equipment, power outages, the improper installation or operation of equipment, explosions, fires, natural disasters, failure to achieve or maintain safety or quality standards, work stoppages, supply or logistical outages, and the need to comply with environmental and other directives of governmental agencies. The occurrence of material operational problems, including, but not limited to, the above events, could adversely affect our profitability during the period of such operational difficulties.
Our business exposes us to potential product liability claims and recalls, which could adversely impact our financial condition and performance.
Our development, manufacture and sales of food ingredient, pharmaceutical and nutritional supplement products involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability judgment against us could also result in substantial and unexpected expenditures, affect consumer confidence in our products, and divert management’s attention from other responsibilities. Although we maintain product liability insurance coverage in amounts we believe are customary within the industry, there can be no assurance that this level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on results of operations and financial condition.
We face risks associated with our sales to customers and manufacturing operations outside the United States.
For the year ended December 31, 2017, approximately 22% of our net sales consisted of sales outside the United States. In addition, we conduct a portion of our manufacturing outside the United States. International sales are subject to inherent risks. The majority of our foreign sales occur through our foreign subsidiaries and the remainder of our foreign sales result from exports to foreign distributors, resellers and customers. Our foreign sales and operations are subject to a number of risks, including: longer accounts receivable collection periods; the impact of recessions and other economic conditions in economies outside the United States; export duties and quotas; unexpected changes in regulatory requirements; certification requirements; environmental regulations; reduced protection for intellectual property rights in some countries; potentially adverse tax consequences; political and economic instability; and preference for locally produced products. These factors could have a material adverse impact on our ability to increase or maintain our international sales.
We may, from time to time, experience problems in our labor relations.
In North America, approximately 75 employees, or 7% of our North American workforce, as of December 31, 2017, are represented by a union under a single collective bargaining agreement, which was re-negotiated and is effective as of November 14, 2017. It will expire in 2020. In Europe, approximately 100 employees are covered by a collective bargaining agreement that will also expire in 2018. We believe that our present labor relations with all of our union employees are satisfactory, however, our failure to renew these agreements on reasonable terms could result in labor disruptions and increased labor costs, which could adversely affect our financial performance. Similarly, if our relations with the union portion of our workforce do not remain positive, such employees could initiate a strike, work stoppage or slowdown in the future. In the event of such an action, we may not be able to adequately meet the needs of our customers using our remaining workforce and our operations and financial condition could be adversely affected.
Our international operations subject us to currency translation risk and currency transaction risk which could cause our results to fluctuate from period to period.
The financial condition and results of operations of our foreign subsidiaries are reported in Euros and Canadian Dollarslocal currencies and then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Exchange rates between these currencies in recent years have fluctuated and may do so in the future. Furthermore, we incur currency transaction risk whenever we enter into either a purchase or a sales transaction using a currency different than the functional currency. Given the volatility of exchange rates, we may not be able to effectively manage our currency transactions and/or translation risks. Volatility in currency exchange rates could impact our business and financial results.
Although we utilize risk management tools, such as derivative instruments, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect revenue, expenses and results of operations and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated.
Our debt instruments are subject to interest rate risks and impose operating and financial restrictions which could have an adverse impact on our business and results of operations.
Our incurrence of indebtedness could have negative consequences to us, including the following:
limiting our ability to borrow additional monies for our working capital, capital expenditures, acquisitions;acquisitions, debt service requirements or other general corporate purposes;
limiting our flexibility in planning for, or reacting to, changes in our operations, our business or the industries in which we compete;
our leverage may place us at a competitive disadvantage by limiting our ability to invest in the business or in further research and development;
making us more vulnerable to downturns in our business or the economy; and
there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.
Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without any such
financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances.
Interest payable in accordance with our five-year senior secured revolving credit agreement (the "Credit Agreement") is based on LIBOR.a fluctuating rate. In light of potential fluctuations, including interest rate increases which may continue, we are exposed to risk resulting from adverse changes in interest rates.
Further, due to the cessation of the London Interbank Offered Rate (“LIBOR”), we have entered into financial transactions such as credit agreements that use the Secured Overnight Financing Rate (“SOFR”) as interest rate benchmarks. SOFR is calculated differently from LIBOR and has inherent differences which could give rise to uncertainties, including the limited historical data and volatility in the benchmark rates. The full effects of the transition to SOFR or other rates remain uncertain.
We may not be able to successfully consummate and manage acquisition, joint venture and divestiture activities which could have an impact on our results.
From time to time, we may acquire other businesses, enter into joint ventures and, based on an evaluation of our business portfolio, divest existing businesses. These acquisitions, joint ventures and divestitures may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses, difficulties in realizing synergies expected to result from acquisitions, potential loss of key employees, key contractual relationships or key customers of acquired companies or of us, difficulties in integrating financial reporting systems and implementing controls, procedures and policies, including disclosure controls and procedures and internal control over financial reporting, appropriate for public companies of our size at companies that, prior to the acquisition, had lacked such controls, procedures and policies, assumption of unknown liabilities and indemnities, and potential disputes with the buyers or sellers. In addition, we may be required to incur asset impairment charges (including charges related to tangible assets, goodwill and other intangible assets) in connection with acquired businesses which may reduce our profitability. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Additionally, joint ventures inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks.
We may not be able to effectively manage and implement restructuring initiatives or other organizational changes.
We may, from time to time, restructure or make other adjustments to our workforce and manufacturing footprint in response to market or product changes, performance issues, changes in strategy, acquisitions and/or other internal and external considerations. These restructuring activities and other organizational changes may result in increased restructuring costs, diversion of management’s time and attention from daily operations and temporarily reduced productivity. If we are unable to successfully manage and implement restructuring and other organizational changes, we may not achieve or sustain the expected growth or cost savings benefits of these activities or do so within the expected timeframe. These effects could recur in connection with future acquisitions and other organizational changes and our results of operations could be negatively affected.
Changes in our relationships with our vendors, changes in tax or trade policy, interruptions in our operations or supply chain or increased commodity or supply chain costs could adversely affect our results of operations.
We are dependent on our vendors, including common carriers, to supply raw materials to our manufacturing facilities. As we continue to add capabilities to quickly move the appropriate amount of inventory at optimal operational costs through our entire supply chain, operating our fulfillment network becomes more complex and challenging. If our fulfillment network does not operate properly, if a vendor fails to deliver on its commitments, or if common carriers have difficulty providing capacity to meet demands for their services, we could experience inventory shortages, delivery delays or increased delivery costs, which could lead to lost sales and decreased guest confidence, and adversely affect our results of operations.
A large portion of our raw materials are sourced, directly or indirectly, from outside the U.S. Any major changes in tax or trade policy, such as the imposition of additional tariffs or duties on imported products, between the U.S. and countries from which we source raw materials could require us to take certain actions, including for example raising prices on products we sell and seeking alternative sources of supply from vendors in other countries with whom we have less familiarity, which could adversely affect our reputation, sales, and our results of operations.
Political or financial instability, currency fluctuations, the outbreak of pandemics or other illnesses (such as the COVID-19 pandemic), labor unrest, transport capacity and costs, port security, weather conditions, natural disasters, or other events that could alter or suspend our operations, slow or disrupt port activities, or affect foreign trade are beyond our control and could materially disrupt our supply of raw materials, increase our costs, and/or adversely affect our results of operations. There have been periodic labor disputes impacting the U.S. ports that have caused us to make alternative arrangements to continue the flow of
inventory, and if these types of disputes recur, worsen, or occur in other countries through which we source products, it may have a material impact on our costs or inventory supply. Changes in the costs of procuring commodities used in our products or the costs related to our supply chain, could adversely affect our results of operations.
Adverse publicity or consumer concern regarding the safety or quality of food products containing our products, or health concerns, whether with our products, products in the same general class as our products or for food products containing our products, may result in the loss of sales. Also, consumer preferences for products containing our products may change.
We are dependent upon consumers’ perception of the safety, quality and possible dietary benefits of products containing our food ingredient products. As a result, substantial negative publicity concerning our products or other foods and beverages in which our products are used could lead to a loss of consumer confidence in those products, removal of those products from retailers’ shelves and reduced sales and prices of our products. Product quality issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could hurt the image of our products or of brands of products containing our products, and cause consumers to choose other products. Further, any product recall, whether our own or by a third party, whether due to real or unfounded allegations, could impact demand on food products containing our products or even our products. Any of these events could have a material adverse effect on our business, results of operations and financial condition. Consumer preferences, as well as trends, within the food industries change often and our failure to anticipate, identify or react to changes in these preferences and trends could, among other things, lead to reduced demand and price reductions, and could have an adverse effect on our business, results of operations and financial condition. While we continue to diversify our product offerings, developing new products entails risks and we cannot be certain that demand for our products and products containing our products will continue at current levels or increase in the future.
10Legal, Regulatory and Compliance Risks
DemandMaterial adverse legal judgments, fines, penalties or settlements could adversely affect our business.
We may from time to time become involved in legal proceedings and disputes incidental to the operation of our business. Our business may be adversely affected by the outcome of these proceedings and other contingencies (including, without limitation, product liability, tort, environmental, intellectual property, antitrust, data protection, privacy, and labor and employment matters) that cannot be predicted with certainty. As required by GAAP, if applicable, we establish reserves based on our assessment of contingencies. Subsequent developments in legal proceedings and other contingencies may affect our assessment and estimates of the loss contingency recorded as a reserve, and we may be required to make additional material payments.
Our business exposes us to potential product liability claims and recalls, which could adversely impact our financial condition and performance.
Our development, manufacture and sales of food ingredient, pharmaceutical and nutritional supplement products involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability judgment against us could also result in substantial and unexpected expenditures, affect consumer confidence in our products, and divert management’s attention from other responsibilities. Although we maintain product liability insurance coverage in amounts we believe are customary within the industry, there can be no assurance that this level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on results of operations and financial condition.
Our brands are important assets of our businesses, and violation of our trademark rights by imitators could negatively impact revenues and brand reputation.
Our brands and trademarks enjoy a reputation for certainquality and value and are important to our success and competitive position. Unauthorized use of our trademarks may not only erode sales of our products but may also cause significant damage to our brand name and reputation, interfere with relationships with our customers and increase litigation costs. There can be no assurance that our on-going effort to protect our brand and trademark rights will prevent all violations.
Allegations that we have infringed the intellectual property rights of third parties could negatively affect us.
We may be subject to claims of infringement of intellectual property rights by third parties. In general, if it is dependentdetermined that one or more of our technologies, products or services infringes the intellectual property rights owned by others, we may be required to cease marketing those products or services, to obtain licenses from the holders of the intellectual property at a material cost or to take other actions to avoid infringing such intellectual property rights. The litigation process is costly and subject to inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position. Adverse intellectual property
litigation or claims of infringement against us may become extremely disruptive if the plaintiffs succeed in blocking the trade of our products and services and may have a material adverse effect on our business.
We are subject to risks related to corporate social responsibility and reputational matters.
Our reputation and the levelsreputation of productivityour brands, including the perception held by our customers, end-users, business partners, investors, other key stakeholders and the communities in which we do business are influenced by various factors. There is an increased focus from our stakeholders on Environmental, Social and Governance (“ESG”) practices and disclosure – and if we fail, or are perceived to have failed, in any number of ESG matters, such as environmental stewardship, goals regarding our intended reduction of carbon emissions and water usage, inclusion and diversity, workplace conduct and support for local communities, or to effectively respond to changes in, or new, legal or regulatory requirements concerning climate change or other sustainability concerns, our reputation or the reputation of our brands may suffer. Such damage to our reputation and the reputation of our brands may negatively impact our business, financial condition and results of operations. Further, there are an increasing number of anti-ESG legislative initiatives that may conflict with other regulatory requirements or our stakeholders' expectations.
In addition, negative or inaccurate postings or comments on social media or networking websites about the Company or our brands could generate adverse publicity that could damage our reputation or the reputation of our brands. If we are unable to effectively manage real or perceived issues, including concerns about product quality, safety, corporate social responsibility or other matters, sentiments toward the Company or our products could be negatively impacted, and our financial results could suffer.
Our reputation, ability to do business and results of operations could be impaired by adverse publicity or improper conduct by any of our employees, agents or business partners.
We are subject to regulation under a variety of U.S. federal and state and non-U.S. laws, regulations and policies including laws related to anti-corruption, export and import compliance, anti-trust and money laundering due to our global operations. We cannot provide assurance that our internal controls will always protect us from the improper conduct of our employees, agents and business partners. Any improper conduct could damage our reputation and subject us to, among other things, civil and criminal penalties, material fines, equitable remedies (including profit disgorgement and injunctions on future conduct), securities litigation and a general loss of investor confidence.
Our operations are subject to regulatory risks and the loss of governmental permits and approvals would materially and adversely affectsome of our businesses.
Our U.S. and non-U.S. operations are subject to a number of laws and regulations, including environmental, health and safety standards. We have incurred, and will be required to continue to incur, significant expenditures to comply with these laws and regulations. Changes to, or changes in interpretations of, current laws and regulations, including climate change legislation or other environmental mandates, could require us to increase our compliance expenditures, cause us to significantly alter or discontinue offering existing products and services or cause us to develop new products and services. Altering current products and services or developing new products and services to comply with changes in the applicable laws and regulations could require significant research and development investments, increase the cost of providing the products and services and adversely affect the demand for our products and services, including shifting demand to competitors in countries where laws and regulations may be less stringent.
In the event a regulatory authority concludes that we are not or have not at all times been in full compliance with these laws or regulations, we could be fined, criminally charged or otherwise sanctioned. Certain environmental laws assess liability on current or previous owners of real property or operators of manufacturing facilities for the costs of investigation, removal or remediation of hazardous substances or materials at such properties or at properties at which parties have disposed of hazardous substances. Liability for investigative, removal and remedial costs under certain U.S. federal and state laws and certain non-U.S. laws are retroactive, strict and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. For more information, see "Item 1. Business – Environmental and Regulatory Matters" of this report.
While we have planned for future capital and operating expenditures to maintain compliance with environmental laws, our costs of compliance may exceed our estimates. We may also be subject to environmental claims for personal injury, liabilities arising from past, present or future releases of, or exposures to, hazardous substances, or cost recovery actions for remediation of facilities in the future based on our past, present or future business activities.
Further, pursuant to applicable environmental and safety laws and regulations, we are required to obtain and maintain certain governmental permits and approvals, including EPA registrations under FIFRA for some of our products. We maintain EPA
FIFRA registrations for ethylene oxide as a medical device sterilant and spice fumigant and for propylene oxide as a fumigant of nuts and spices. These products are progressing through a multi-year FIFRA re-registration review process. Recent draft documents indicate that the EPA intends to continue the registrations for both ethylene oxide and propylene oxide with certain additional mitigation measures. The EPA may re-examine the registrations in the future in accordance with the provisions of FIFRA. Any future determination by the oilEPA to discontinue permitted use of ethylene oxide or propylene oxide would have a material adverse effect on our business and gas industry, particularly as it relatesfinancial results.
Commercial supply of pharmaceutical products that we may develop, subject to shale gas fracturing. A substantialcGMP manufacturing regulations, would be performed by third-party cGMP manufacturers. Modifications, enhancements or an extended declinechanges in oilthird-party manufacturing facilities or procedures of our pharmaceutical products are, in many circumstances, subject to FDA approval, which may be subject to a lengthy application process or which we may be unable to obtain. Any third-party cGMP manufacturers that we may use are periodically subject to inspection by the FDA and gas pricesother governmental agencies, and operations at these facilities could be interrupted or halted if the results of these inspections are unsatisfactory. Failure to comply with the FDA or other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production, enforcement actions, injunctions and criminal prosecution, which could have a material adverse effect on our business and financial results.
Permits and approvals may be subject to revocation, modification or denial under certain circumstances. Our operations or activities could result in lower expenditures by the oil and gas industry,administrative or private actions, revocation of required permits or licenses, or fines, penalties or damages, which could have an adverse effect on us. In addition, we cannot predict the extent to which any legislation or regulation may affect the market for our products or our cost of doing business.
Concerns about ethylene oxide emissions have resulted in certain state actions against certain of our customers that are currently impacting these customers’ ability to use the ethylene oxide process to sterilize medical devices, which may, in turn, affect sales to these customers.
There is increased focus on the use and emissions of ethylene oxide by the EPA and state environmental agencies. Certain of the Company’s customers who use ethylene oxide in the U.S. for the sterilization of medical devices have received ongoing state and local scrutiny for environmental concerns at their facilities. This scrutiny is associated with the IRIS Assessment described in “Item 1. Business – Environmental and Regulatory Matters” of this report, which deemed exposure to ethylene oxide as unsafe at levels far below those found in the environment. The EPA began using the IRIS Assessment in 2020 to regulate change to existing permissible emissions limits at facilities that produce or use ethylene oxide in non-sterilization processes, and subsequently proposed rules for ethylene oxide sterilization facilities as well. These rules have yet to be finalized. Additionally, some state and local regulators have drawn their own conclusions from the IRIS Assessment, which has resulted in certain state actions against our customers that continue to impact these customers’ ability to use the ethylene oxide process to sterilize medical devices. Due to these regulatory actions, many customers have taken or are expected to take some voluntary downtime to install new abatement equipment. The installation of the new abatement equipment is being done ahead of what is expected to be changes in the EPA regulations. The Company remains confident that the sterilization industry will be able to install abatement equipment to satisfy the new forthcoming EPA requirements. The Company is working with various stakeholders to ensure the EPA considers all available assessments to appropriately quantify ethylene oxide's risks. While the Company believes that EPA will, as it has in the past, ultimately regulate to lower emissions levels based on a combined consideration of the various assessments available and that industry will then adopt practices and procedures to ensure compliance with these new regulations, there is no assurance that this will be the case. Further, additional regulatory requirements associated with the use and emission of ethylene oxide may be imposed in the future, both within and outside of the U.S. Such increased regulation could require our customers and/or the Company to temporarily suspend operations to install additional fugitive emissions control technology, limit the use of ethylene oxide or take other actions which could impact our business, financial condition or results of operations.
The oil and gas industry historically experiences periodic downturns. Demand for certain of our products depends on the level of expenditures by the oil and gas industry for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on the industry’s view of future oil and natural gas prices and are sensitive to the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. Declines in oil and gas prices could result in significant downturn in the oil and gas industry and thereby result in a reduction in demand for oilfield services and related products, which could lead to reduced demand for our products and downward pressure on the prices we charge. These effects could have an adverse effect on our results of operations and cash flows.
We may not be able to successfully consummate and manage acquisition, joint venture and divestiture activities which could have an impact on our results.
From time to time, we may acquire other businesses, enter into joint ventures and, based on an evaluation of our business portfolio, divest existing businesses. These acquisitions, joint ventures and divestitures may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities and indemnities, and potential disputes with the buyers or sellers. In addition, we may be required to incur asset impairment charges (including charges related to tangible assets, goodwill and other intangible assets) in connection with acquired businesses which may reduce our profitability. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Additionally, joint ventures inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks.
Technology failures or cyber security breaches could have an adverse effect on the Company’s operations.
The Company relies on information technology systems to process, transmit, store, and protect electronic information. For example, a significant portion of the communications between the Company’s personnel, customers, and suppliers depends on information technology. Information technology systems of the Company may be vulnerable to a variety of interruptions due to events beyond its control including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues. The Company has technology and information security processes and disaster recovery plans in place to mitigate its risk to these vulnerabilities; however, these measures may not be adequate to ensure that its operations will not be disrupted, should such an event occur.
Item 1B. | Item 1B. Unresolved Staff Comments |
None.
Item 1C. Cybersecurity
Cybersecurity is a critical part of our enterprise risk management. The Board, through its Audit Committee, oversees enterprise risk management, including cybersecurity. To more effectively address cybersecurity threats, we have numerous security layers within our least privilege network approach which is managed by our Information Technology Department. Our cybersecurity programs align with numerous standards and continues to grow and develop as new technologies emerge. Further, we have regular user awareness testing and trainings in place which helps keep all end users and executive leadership up-to-date on the most current threats. The global head of Information Security, possessing credentials in both information technology (“IT”) and cybersecurity, provides regular updates to senior management. Additionally, they provide at least an annual update, or more frequently if necessary, to both the Audit Committee and the full Board regarding the current threat landscape at Balchem, cybersecurity technologies, mitigation strategies, industry trends and best practices that we follow, major cybersecurity incidents (if any), and other areas of importance. The global head of Information Security has responsibility over cybersecurity management globally and reports directly to the Chief Financial Officer. Additional activities to maintain and enhance information security are discussed below.
•Reliable, Scalable Systems and Infrastructure
Our information security systems, infrastructure, and processes are built on and follow the U.S. National Institute of Standards and Technology ("NIST") framework for information security, which is a set of guidelines, accepted standards, and best practices for mitigating organization cybersecurity risks published by NIST. We continue to make significant investments in industry-leading and advanced technologies as part of our strategy to strengthen our security posture, business continuity capabilities, and ability to protect and safeguard systems and stakeholder data. Our Information Security Program and systems are tested and assessed annually by an independent third party.
•Automation and Artificial Intelligence
We have implemented automated systems to proactively test attack vectors by emulating inside and outside threats resulting in the validation of our ability to detect and defend against a cyber attack. Artificial intelligence is used as part of early warning systems designed to detect, alert, and respond to potential cyber threats.
•Training
Recognizing that information security, stakeholder data, and privacy principles involve more than just systems and infrastructure, we provide semi-annual cybersecurity education and training to all users with access to IT systems, devices, or applications. Internal social engineering phishing campaigns are conducted regularly with the goal of building a culture of cybersecurity, as well as raising awareness and reinforcing best practices across the organization.
Third parties also play a role in our cybersecurity. We engage third-party services to conduct evaluations of our security controls, whether through penetration testing, independent audits or consulting on best practices to address new challenges. These evaluations include testing both the design and operational effectiveness of security controls.
We apply a risk-based approach to mitigate cybersecurity risks associated with our use of third-party service providers and cybersecurity considerations affect the selection and oversight of these third-party service providers. We perform due diligence on third parties that have access to our most critical systems, data or facilities that house such systems or data.
While we have experienced cybersecurity threats in the past in the normal course of business and expect to continue to experience such threats from time to time, to date, none have had a material adverse effect on our business, financial condition, results of operations or cash flows. Even with the extensive approach we take to cybersecurity, we may not be successful in preventing or mitigating a cybersecurity incident that could have a material adverse effect on us. See Item 1A. “Risk Factors - Operational Risks - Disruptions or breaches of our information systems could adversely affect us” for a discussion of cybersecurity risks.
In the event of a possible cybersecurity incident, we would immediately implement our crisis management plan, which includes the following steps:
(1) Internal reporting and review of the incident or development
(2) Gathering and assessing information
(3) Developing and implementing a communications strategy
(4) Monitoring and evaluating a response
(5) Debrief and recovery
As part of the gathering and assessment of information in step 2, we will consider various factors to make a materiality determination of the incident, including business impact, potential costs, impacted data, scope of the incident, possible litigation or regulatory implications, and reputational damage.
Item 2. | Item 2. Properties |
WeOur corporate headquarters is located in Montvale, New Jersey. Our operations are conducted at our owned and our affiliates own or lease several manufacturingleased facilities and sales offices throughout the United States,U.S. and we ownother foreign countries. These facilities house manufacturing and warehousing operations, as well as administrative offices. We have a singletotal of 38 locations across the world and some of these manufacturing facility in each of Europe and Canada. warehousing locations serve multiple segments.
The following table sets forthis a listsummary of our principal offices,properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Location | | Administrative | | Manufacturing | | Warehousing |
| Corporate | | 5 U.S. cities | | 5 | | — | | — |
| HNH | | 17 U.S. cities and 6 foreign countries | | 1 | | 16 | | 6 |
| ANH | | 9 U.S. cities and 3 foreign countries | | — | | 10 | | 2 |
| Specialty Products | | 6 U.S. cities and 6 foreign countries | | 2 | | 8 | | 2 |
| Other | | 2 U.S. cities and 1 foreign country | | — | | 3 | | — |
We believe that our production facilities and other facilities throughout the world as of December 31, 2017.related machinery and equipment are well maintained, suitable for their purpose, and adequate to support our businesses.
Site | | Leased/Owned | | Sq. Footage | | Products/Functions |
Corporate Offices | | | | | | |
New Hampton, NY | | Leased | | 20,000 | | Corporate headquarters |
St. Louis, MO | | Leased (SensoryEffects) | | 9,161 | | Administrative offices SensoryEffects |
Layton, UT | | Leased (Albion) | | 10,472 | | Administrative offices Albion |
Manufacturing Facilities |
Verona, MO | | Owned (BCP) | | 151,000 | | aqueous and dry choline chloride, animal feed products, human choline nutrients, repackaging for Specialty Products, and warehousing
|
Slate Hill, NY | | Owned | | 51,000 | | encapsulated products, blending and repackaging for Specialty Products, and warehousing |
Green Pond, SC | | Owned | | 34,000 | | repackaging for Specialty Products and warehousing |
Salt Lake City, UT | | Owned | | 16,500 | | chelated mineral nutrients and warehousing |
Covington, VA | | Owned | | 70,000 | | encapsulated animal feed products and warehousing |
Marano Ticino, Italy | | Owned (Balchem Italia) | | 342,734 | | methylamines, metam sodium, animal, human and industrial grade choline, and warehousing |
Sleepy Eye, MN | | Owned (SensoryEffects) | | 32,000 | | spray drying of dairy creamers and cocoa blends, and warehousing |
Bridgeton, MO | | Owned (SensoryEffects) | | 84,000 | | creamer products, cocoa powders, liquid and solid flavor inclusions, and warehousing |
Marshfield, WI | | Owned (SensoryEffects) | | 70,000 | | spray drying of lipid based powders, blending, and warehousing |
Reading, PA | | Owned (SensoryEffects) | | 39,750 | | spray drying of human nutritional products and warehousing |
Defiance, OH | | Owned (SensoryEffects) | | 140,700 | | spray drying of creamer products, solid flavor inclusions for baking, blending and warehousing |
Lincoln, NE | | Leased (SensoryEffects) | | 87,650 | | cereal products and warehousing |
Morrisburg, Canada | | Owned (Balchem LTD) | | 4,500 | | dry choline chloride and warehousing |
Roy, UT | | Leased (Albion) | | 6,510 | | quality control lab |
Ogden, UT | | Leased (Albion) | | 25,515 | | human mineral spray drying and packaging |
Ogden, UT | | Leased (Albion) | | 38,274 | | warehousing |
Ogden, UT | | Leased (Albion) | | 16,434 | | warehousing |
Ogden, UT | | Owned (Albion) | | 13,744 | | plant mineral liquid production and packaging |
Whittemore, IA | | Leased (Albion) | | 45,288 | | plant and animal spray drying and packaging |
Fairbault, MN | | Owned (IFP) | | 108,000 | | manufacturing and processing of powdered products for the food and nutrition industries |
Hayfield, MN | | Owned (IFP) | | 39,000 | | manufacturing and processing of powdered products for the food and nutrition industries |
Item 3. | Item 3. Legal Proceedings |
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 remediated the area and removed soil from the drum burial site. The Company continues to be involved in discussions with NYDEC to evaluate monitoring 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 recently been less than $5,000 per year.
The Company is also involved in other legal proceedings through the normal course of business. Management believes thatbusiness, we are involved in a variety of lawsuits, claims and legal proceedings, from time to time, including commercial and contract disputes, labor and employment matters, product liability claims, environmental liabilities, trade regulation matters, intellectual property disputes and tax-related matters. Further, in connection with normal operations at our plant facilities, our manufacturing sites may, from time to time, be subject to inspections or inquiries by the EPA and other agencies. To the extent any unfavorable outcome relatedconsent orders or other agreements are entered into as a result of findings from such inspections or inquiries, the Company is committed to theseensuring compliance with such orders or agreements.
Information with respect to certain legal proceedings willis included in Note 16, Commitments and Contingencies, to our Consolidated Financial Statements for the year ended December 31, 2023 contained in this Annual Report on Form 10-K, and is incorporated herein by reference.
In our opinion, we do not expect pending legal matters to have a material adverse effect on the Company’sour consolidated financial position, results of operations, liquidity or liquidity.cash flows.
Item 4. | Item 4. Mine Safety Disclosures |
Not applicable.
None.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a list of executive officers of the Company as of February 16, 2024.
Theodore L. Harris, age 58, has served as our Chairman, President and Chief Executive Officer since 2017.
C. Martin Bengtsson, age 46, has served as our Executive Vice President and Chief Financial Officer since February 2019.
Hatsuki Miyata, age 48, has served as our Executive Vice President, General Counsel and Secretary since July 2022. Ms. Miyata previously served as Deputy General Counsel and Corporate Secretary at Allegion plc, a global manufacturing company in seamless access and security products, from October 2018 to July 2022.
Frederic Boned, age 46, has served as our Senior Vice President and General Manager, Human Nutrition and Health, since November 2022. Prior to that, he served as Regional Vice President, Health Nutrition and Care – North America from January 2022 to November 2022, and Vice President, Human Nutrition and Health – North America from September 2018 to January 2022, each at DSM, a Dutch multinational corporation in the fields of health and nutrition.
Jonathan H. Griffin, age 48, has served as our Senior Vice President and General Manager, Animal Nutrition and Health, since September 2022. Prior to that, he led that business segment as our Vice President and General Manager, Animal Nutrition and Health from 2016 to September 2022.
Martin L. Reid, age 57, has served as our Senior Vice President and Chief Supply Chain Officer since September 2022. Prior to that, he served as Vice President and Chief Supply Chain Officer from January 2021 to September 2022. Mr. Reid served as Chief Supply Chain Officer at Godiva Chocolate from May 2019 to December 2020, and as Vice President, Supply Chain – North America Manufacturing at The Estee Lauder Companies, Inc., a multinational cosmetics company, prior to that.
Michael R. Sestrick, Ph.D., age 60, has served as our Senior Vice President and Chief Technology Officer since September 2022. Prior to that he served as our Vice President and Chief Technology officer from April 2017 to September 2022.
M. Brent Tignor, age 46, has served as our Senior Vice President and Chief Human Resources Officer since September 2022. Prior to that, he led the Human Resources department as our Vice President and Chief Human Resources Officer from February 2022 to September 2022 and as our Vice President, Human Resources from 2016 to February 2022.
Job L. van Gunsteren, age 48, has served as our Senior Vice President and General Manager, Specialty Products, since September 2022. Prior to that, he served as our Vice President and General Manager, Special Products from August 2019 to September 2022 and as our Director for Animal Nutrition and Health – EMEA from 2013 to 2019.
William A. Backus, age 57, has served as our Vice President and Chief Accounting Officer since October 2017. He also served as interim Chief Financial Officer from October 2018 to February 2019.
All above-listed officers except for Ms. Miyata, Mr. Boned, and Mr. Reid have been employed by the Company for more than the past five years. No family relationship exists between any of the above-listed executive officers of the Company. All officers are elected to hold office for one year or until their successors are elected and qualified or their earlier death, resignation or removal from office by the Board of Directors of the Company.
PART II
Item 5. | Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
OurThe Common Stock is listed on the Nasdaq GlobalStock Market LLC under the symbol “BCPC.”
The high and low closing prices for the Common Stock as recorded for each quarterly period during the years ended December 31, 2017 and 2016 were as follows:
| Quarterly Period | | High | | | Low | |
| Ended March 31, 2017 | | $ | 89.23 | | | $ | 81.00 | |
| Ended June 30, 2017 | | | 83.77 | | | | 75.59 | |
| Ended September 30, 2017 | | | 81.91 | | | | 73.12 | |
| Ended December 31, 2017 | | | 87.71 | | | | 79.39 | |
| Quarterly Period | | High | | | Low | |
| Ended March 31, 2016 | | $ | 65.07 | | | $ | 53.34 | |
| Ended June 30, 2016 | | | 64.35 | | | | 57.31 | |
| Ended September 30, 2016 | | | 77.53 | | | | 59.54 | |
| Ended December 31, 2016 | | | 87.56 | | | | 68.53 | |
On February 21, 2018,2, 2024, the closing price for the Common Stock on the Nasdaq GlobalStock Market LLC was $74.85.$143.14.
Record Holders
As of February 21, 2018,2, 2024, the approximate number of holders of record of the Company’s Common Stock was 87.64. Such number does not include stockholders who hold their stock in street name. As
The Company declared cash dividends of $0.42 and $0.38 per share on its Common Stock during its fiscal years ended December 31, 2017 and 2016, respectively.
| (d) | Issuer Purchase of Equity Securities |
The following table summarizes the share repurchase activity for the three months ended December 31, 2017:
| | | Total Number of Shares Purchased(1) | | | Average Price Paid Per Share(2) | | | Total Number of Shares Purchased as Part of Publicly Announced Programs(1) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Progams | |
| October 1 – 31, 2017 | | | - | | | $ | - | | | | - | | | $ | 130,069,964 | |
| November 1 – 30, 2017 | | | - | | | $ | - | | | | - | | | $ | 130,069,964 | |
| December 1 – 31, 2017 | | | 882 | | | $ | 81.81 | | | | 882 | | | $ | 129,997,808 | |
| | | | 882 | | | | | | | | 882 | | | | | |
(1) 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 no shares remained in treasury at December 31, 2017. There is no expiration for this program.
| (e) | Securities Authorized for Issuance Under Equity Compensation Plans. |
For information concerning prior stockholder approval of and other matters relating to our equity incentive plans, see Item 12 in this Annual Report on Form 10-K.
Performance Graph
The graph below sets forth the cumulative total stockholder return on the Company’s Common Stock (referred to in the table as “BCPC”) for the five years ended December 31, 2017,2023, the overall stock market return during such period for shares comprising the Russell 2000® Index (which the Company believeswe believe includes companies with market capitalization similar to that of the Company)us), and the overall stock market return during such period for shares comprising the Dow Jones U.S. Specialty Chemicals Index, in each case assuming a comparable initial investment of $100 on December 31, 20122018 and the subsequent reinvestment of dividends. The Russell 2000® Index measures the performance of the shares of the 2000 smallest companies included in the Russell 3000® Index. In light of the Company’sour industry segments, the Company doeswe do not believe that published industry-specific indices are necessarily representative of stocks comparable to the Company.us. Nevertheless, the Company considerswe consider the Dow Jones U.S. Specialty Chemicals Index to be potentially useful as a peer group index with respect to the Company.us. The performance of the Company’s Common Stock shown on the graph below is historical only and not necessarily indicative of future performance.
Item 6. | Selected Financial Data |
Issuer Purchase of Equity Securities
The selected statements of operations data set forth belowfollowing table summarizes the share repurchase activity for the yearsyear ended December 31, 2017, 2016, and 2015 and the selected balance sheet data as2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs(2) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2)(3) |
| January 1-31, 2023 | | 1,343 | | | $ | 130.96 | | | 1,343 | | | $ | 90,512,611 | |
| February 1-28, 2023 | | 26,766 | | | $ | 137.24 | | | 26,766 | | | $ | 91,178,224 | |
| March 1-31, 2023 | | — | | | $ | — | | | — | | | $ | 91,178,224 | |
| First Quarter | | 28,109 | | | | | 28,109 | | | |
| | | | | | | | |
| April 1-30, 2023 | | — | | | $ | — | | | — | | | $ | 91,178,224 | |
| May 1-31, 2023 | | 504 | | | $ | 132.26 | | | 504 | | | $ | 87,807,402 | |
| June 1-30, 2023 | | 63 | | | $ | 134.81 | | | 63 | | | $ | 89,488,765 | |
| Second Quarter | | 567 | | | | | 567 | | | |
| | | | | | | | |
| July 1-31, 2023 | | 482 | | | $ | 128.54 | | | 482 | | | $ | 85,264,695 | |
| August 1-31, 2023 | | — | | | $ | — | | | — | | | $ | 85,264,695 | |
| September 1-30, 2023 | | 293 | | | $ | 134.00 | | | 293 | | | $ | 88,847,226 | |
| Third Quarter | | 775 | | | | | 775 | | | |
| | | | | | | | |
| October 1-31, 2023 | | — | | | $ | — | | | — | | | $ | 88,847,226 | |
| November 1-30, 2023 | | 241 | | | $ | 119.51 | | | 241 | | | $ | 79,211,236 | |
| December 1-31, 2023 | | 2,866 | | | $ | 144.94 | | | 2,866 | | | $ | 95,651,484 | |
| Fourth Quarter | | 3,107 | | | | | 3,107 | | | |
| | | | | | | | | |
| Total | | 32,558 | | | | | 32,558 | | | |
| | | | | | | | | |
(1) The Company repurchased (withheld) shares from employees solely in connection with the tax settlement of vested shares and/or exercised stock options under the Company's omnibus incentive plan. |
(2) Our Board of Directors has approved a 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 3,103,106 shares have been repurchased. Other than shares withheld for tax purposes, as described in footnote 1 above, no share repurchases were made under the Company's stock repurchase program during the year ended December 31, 2023. There is no expiration for this program. |
(3) Dollar amounts in this column equal the number of shares remaining available for repurchase under the stock repurchase program as of the last date of the applicable month multiplied by the monthly average price paid per share. |
Item 6. [Reserved]
(In thousands, except per share data)
| Year ended December 31, | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Statement of Operations Data | | | | | | | | | | | | | | | |
| Net sales | | $ | 594,790 | | | $ | 553,204 | | | $ | 552,492 | | | $ | 541,383 | | | $ | 337,173 | |
| Earnings before income tax expense | | | 88,488 | | | | 82,934 | | | | 87,063 | | | | 77,052 | | | | 65,818 | |
| Income tax expense | | | (1,583 | ) | | | 26,962 | | | | 27,341 | | | | 24,226 | | | | 20,944 | |
| Net earnings | | | 90,071 | | | | 55,972 | | | | 59,722 | | | | 52,826 | | | | 44,874 | |
| Basic net earnings per common share | | $ | 2.83 | | | $ | 1.78 | | | $ | 1.92 | | | $ | 1.74 | | | $ | 1.51 | |
| Diluted net earnings per common share | | $ | 2.79 | | | $ | 1.75 | | | $ | 1.89 | �� | | $ | 1.69 | | | $ | 1.45 | |
| At December 31, | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Balance Sheet Data | | | | | | | | | | | | | | | |
| Total assets | | $ | 963,636 | | | $ | 948,626 | | | $ | 879,686 | | | $ | 861,531 | | | $ | 376,872 | |
| Long-term debt (including current portion) | | | 218,964 | | | | 280,490 | | | | 295,963 | | | | 332,500 | | | | - | |
| Other long-term obligations | | | 5,847 | | | | 6,896 | | | | 6,683 | | | | 5,950 | | | | 3,877 | |
| Total stockholders’ equity | | | 616,881 | | | | 521,033 | | | | 463,705 | | | | 391,898 | | | | 331,358 | |
| Dividends per common share | | $ | .42 | | | $ | .38 | | | $ | .34 | | | $ | .30 | | | $ | .26 | |
Item 7. | Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
(All amounts in thousands, except share and per share data)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 — “Selected Financial Data” and our Consolidated Financial Statements and the related notes included in this report. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (filed with the SEC on February 24, 2023) for additional discussion of our financial condition and results of operations for the year ended December 31, 2021. In addition, discussion of year-to-year comparisons between 2022 and 2021 are not included in this Annual Report on Form 10-K, and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Those statements in the following discussion that are not historical in nature should be considered to be forward-looking statements that are inherently uncertain. See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
Overview
We develop, manufacture, distribute and market specialty performance ingredients and products for the nutritional, food, nutritional, pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets. Our fourthree reportable segments are strategic businesses that offer products and services to different markets: Human Nutrition &and Health, Animal Nutrition &and Health, and Specialty Products, and Industrial Products.
Acquisition of Albion Laboratories, Inc. (formerly known as Albion International, Inc.)more fully described in Note 11, Segment Information,
On February 1, 2016, the Company acquired 100 percent of the outstanding common sharesconsolidated financial statements. Sales and production of Albion Laboratories, Inc. (formerly known as Albion International, Inc.), (Albion), a privately held manufacturerproducts outside of mineral amino acid chelates, specialized mineral salts and mineral complexes, headquartered in Clearfield, Utah. The Company made payments of approximately $116,400,00 on the acquisition date, amounting to approximately $110,600,000 to the former shareholders, adjustments for working capital acquired of $4,900,000 and approximately $900,000 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 plant 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.
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, 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 €1,500,000. As of December 31, 2017, approximately €1,150,000 translated to approximately $1,230,000 has been paid to Chol-Mix Kft with the remaining balance of approximately €350,000 translated to approximately $419,000 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.
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 $22,975,000 on the acquisition date and subsequently $635,000 in September to true-up the opening balance of working capital, amounting to approximately $16,161,000 to the former shareholders, adjustments for working capital acquired of $5,065,000 and $2,384,000 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.
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. Proprietary technology has 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 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 spicessegments and other seasoning materials.minor business activities are included in "Other and Unallocated".
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. Segment Results
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.
The Company sellssell products for all fourthree segments through itsour own sales force, independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three years ended December 31, 2017, 20162023, 2022 and 20152021 (in thousands):
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 Net Sales | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Human Nutrition and Health | | $ | 550,751 | | | $ | 527,131 | | | $ | 442,733 | |
| Animal Nutrition and Health | | 238,326 | | | 262,297 | | | 226,776 | |
| Specialty Products | | 125,965 | | | 131,438 | | | 117,020 | |
Other and Unallocated (1) | | 7,397 | | | 21,492 | | | 12,494 | |
| Total | | $ | 922,439 | | | $ | 942,358 | | | $ | 799,023 | |
| | | | | | |
| Business Segment Earnings From Operations | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Human Nutrition and Health | | $ | 102,419 | | | $ | 82,125 | | | $ | 76,031 | |
| Animal Nutrition and Health | | 27,576 | | | 36,056 | | | 26,179 | |
| Specialty Products | | 34,579 | | | 32,789 | | | 30,020 | |
Other and Unallocated (1) | | (5,381) | | | (5,784) | | | (4,728) | |
| Total | | $ | 159,193 | | | $ | 145,186 | | | $ | 127,502 | |
| | | | | | |
(1) Other and Unallocated consists of a few minor businesses which individually do not meet the quantitative thresholds for separate presentation and corporate expenses that have not been allocated to a segment. Unallocated corporate expenses consist of: (i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling $1,617, $3,581 and $1,264 for years ended December 31, 2023, 2022 and 2021, respectively, and (ii) Unallocated amortization expense of $312, $2,951, and $2,510 for years ended December 31, 2023, 2022, and 2021, respectively, related to an intangible asset in connection with a company-wide ERP system implementation. |
Business Segment Earnings From Operations:
| | | | 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 | |
| | Total | | $ | 97,664 | | | $ | 91,653 | | | $ | 95,742 | |
Acquisitions
On August 30, 2022, we completed the acquisition of Bergstrom, a leading science-based manufacturer of MSM, based in Vancouver, Washington, and on June 21, 2022, we completed the acquisition of Kappa, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway. Details related to both acquisitions are disclosed in Note 2, Significant Acquisitions, and the "Acquisitions" section in Item 1. Business.
Results of Operations - Fiscal Year 20172023 compared to Fiscal Year 20162022
Summary of Consolidated Statements of Earnings
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Net sales | | $ | 922,439 | | | $ | 942,358 | | | $ | (19,919) | | | (2.1) | % |
| Gross margin | | 302,056 | | | 280,451 | | | 21,605 | | | 7.7 | % |
| Operating expenses | | 142,863 | | | 135,265 | | | 7,598 | | | 5.6 | % |
| Earnings from operations | | 159,193 | | | 145,186 | | | 14,007 | | | 9.6 | % |
| Interest and other expenses | | 21,932 | | | 11,437 | | | 10,495 | | | 91.8 | % |
| Income tax expense | | 28,718 | | | 28,382 | | | 336 | | | 1.2 | % |
| Net earnings | | $ | 108,543 | | | $ | 105,367 | | | $ | 3,176 | | | 3.0 | % |
Management's discussion and analysis of the Consolidated Statements of Earnings is included below:
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase
(Decrease) | | |
| (in thousands) | | 2023 | | 2022 | | | % Change |
| Human Nutrition and Health | | $ | 550,751 | | | $ | 527,131 | | | $ | 23,620 | | | 4.5 | % |
| Animal Nutrition and Health | | 238,326 | | | 262,297 | | | (23,971) | | | (9.1) | % |
| Specialty Products | | 125,965 | | | 131,438 | | | (5,473) | | | (4.2) | % |
| Other | | 7,397 | | | 21,492 | | | (14,095) | | | (65.6) | % |
| Total | | $ | 922,439 | | | $ | 942,358 | | | $ | (19,919) | | | (2.1) | % |
•The increase in net sales within the Human Nutrition and Health segment for 2023 compared to 2022 was primarily driven by the contribution from recent acquisitions, higher sales within the minerals and nutrients business, and a favorable impact related to changes in foreign currency rates, partially offset by lower sales within food and beverage markets. Total sales for this segment grew 4.5%, with average selling prices contributing 2.6%, volume and mix contributing 1.6%, and the change in foreign currency exchange rates contributing 0.3%.
•The decrease in net sales within the Animal Nutrition and Health segment for 2023 compared to 2022 was primarily driven by lower sales in both the monogastric and ruminant species markets, partially offset by incremental sales related to the Bergstrom acquisition, and a favorable impact related to changes in foreign currency exchange rates. Total sales for this segment decreased by 9.1%, with volume and mix contributing -6.3%, average selling prices contributing -3.5%, and the change in foreign currency exchange rates contributing 0.7%.
•The decrease in Specialty Products segment sales for 2023 compared to 2022 was primarily due to lower sales in both the plant nutrition and performance gases businesses, partially offset by a favorable impact related to changes in foreign currency exchange rates. Total sales for this segment decreased by 4.2%, with volume and mix contributing -9.4%, the change in foreign currency exchange rates contributing 0.7%, and average selling prices contributing 4.5%.
•Sales relating to Other decreased from the prior year primarily due to lower demand.
•Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market.
Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Gross margin | | $ | 302,056 | | | $ | 280,451 | | | $ | 21,605 | | | 7.7 | % |
| % of net sales | | 32.7 | % | | 29.8 | % | | | | |
Gross margin dollars increased for 2023 compared to 2022 due to a decrease in cost of goods sold of $41,524. The 6.3% decrease in cost of goods sold was mainly driven by lower sales and certain lower manufacturing input costs.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Operating expenses | | $ | 142,863 | | | $ | 135,265 | | | $ | 7,598 | | | 5.6 | % |
| % of net sales | | 15.5 | % | | 14.4 | % | | | | |
The increase in operating expenses was primarily due to restructuring-related impairment and asset disposal charges of $7,764, incremental operating expenses related to the Kappa and Bergstrom acquisitions of $7,699, and higher compensation-related expenses of $2,323, partially offset by favorable adjustments to transaction costs of $10,828.
Earnings From Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Human Nutrition and Health | | $ | 102,419 | | | $ | 82,125 | | | $ | 20,294 | | | 24.7 | % |
| Animal Nutrition and Health | | 27,576 | | | 36,056 | | | (8,480) | | | (23.5) | % |
| Specialty Products | | 34,579 | | | 32,789 | | | 1,790 | | | 5.5 | % |
| Other and unallocated | | (5,381) | | | (5,784) | | | 403 | | | 7.0 | % |
| Earnings from operations | | $ | 159,193 | | | $ | 145,186 | | | $ | 14,007 | | | 9.6 | % |
| | | | | | | | |
| % of net sales (operating margin) | | 17.3 | % | | 15.4 | % | | | | |
•Human Nutrition & Health segment earnings from operations increased $20,294 and the gross margin contribution was $30,144. This was partially offset by an increase in operating expenses of $9,850, primarily due to the incremental operating expenses related to the Kappa and Bergstrom acquisitions of $7,502, restructuring-related impairment and asset disposal charges of $6,031, and an increase in amortization of $2,435, partially offset by favorable adjustments to transaction costs of $7,855.
•Animal Nutrition & Health segment earnings from operations decreased $8,480. Gross margin decreased $7,547 primarily due to aforementioned lower sales.
•Specialty Products segment earnings from operations increased $1,790, which was primarily driven by a 410 basis point increase in gross margin as a percent of sales. The increase in gross margin was due to higher average selling prices and decreases in certain manufacturing input costs. The increase was partially offset by an increase in operating expenses of $897, primarily driven by higher compensation-related expenses of $1,586.
•The increase in Other and unallocated was primarily driven by decreases of unallocated corporate expenses, partially offset by the aforementioned lower sales.
Other Expenses (Income)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Interest expense, net | | $ | 22,613 | | | $ | 10,268 | | | $ | 12,345 | | | 120.2 | % |
| Other, net | | (681) | | | 1,169 | | | (1,850) | | | (158.3) | % |
| | $ | 21,932 | | | $ | 11,437 | | | $ | 10,495 | | | 91.8 | % |
Interest expense for 2023 and 2022 was primarily related to outstanding borrowings under the 2022 Credit Agreement. The increase in interest expense is due to the additional borrowings in connection with the acquisitions and higher interest rates.
Income Tax Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Income tax expense | | $ | 28,718 | | | $ | 28,382 | | | $ | 336 | | | 1.2 | % |
| Effective tax rate | | 20.9 | % | | 21.2 | % | | | | |
The decrease in the effective tax rate was primarily due to an increase in certain tax credits.
Liquidity and Capital Resources
(All amounts in thousands, except share and per share data)
Contractual Obligations
Net Sales
Net sales for 2017 were $594,790 as compared with $553,204 for 2016, an increase of $41,586 or 7.5%. Net sales for the Human Nutrition & Health segment were $315,796, compared with $297,134, for the year ended December 31, 2016, an increase of $18,662 or 6.3%. Sales from Powder Systems were up $10,427 or 9.5% and Encapsulates’ sales were up $5,113 or 17.3%, with the acquired IFP business contributing to both product lines’ increases. The sales from the acquired Albion business contributed $4,269 to the overall increase, as a result of having one additional month in 2017. Net sales for the Animal Nutrition & Health segment were $157,688 for 2017 compared with $161,119 for the prior year, a decrease of $3,431 or 2.1%. Sales of products targeted for ruminant animal feed markets decreased 12.3% or $6,619 from the prior period. The decline wasOur short-term purchase obligations primarily the result of lower sales volumes of rumen-protected products and chelated minerals. Global feed grade choline product sales increased $2,517 or 2.6% primarily due to higher average selling prices. Specialty Products segment sales for 2017 were $73,355 compared to sales of $70,126 for 2016, an increase of $3,229 or 4.6%. Plant nutrition sales increased 23.9% through strong volumes into both the domestic and international markets, while the sales from the additional month of the acquired Albion business contributed $775 to the overall increase. Net sales for the Industrial Products segment were $47,951 for the year ended December 31, 2017, an increase of $23,126 or 93.2%. The increase is principally due to higher sales of various choline and choline derivatives used in shale fracking applications, partially offset by the prior year including sales to our St. Gabriel CC Company, LLC partner, in advance of the joint venture becoming operational.
Gross Margin
Gross margin for 2017 increased to $189,009 compared to $180,861 for 2016, an increase of $8,148 or 4.5%. Gross margin as a percentage of sales for 2017 decreased to 31.8% from 32.7%include contractual arrangements in the prior year comparative period. Gross margin percentage for the Human Nutrition & Health segment increased 0.7% in 2017 as compared to 2016, primarily due to the valuationform of acquired Albion inventory to fair value in 2016, which increased cost of goods sold by $3,214, as it was sold during the year ended December 31, 2016. Gross margin percentage for the Animal Nutrition & Health segment decreased 4.1% compared to 2016, due to decreased volumes of products targeting ruminant species animals, increases in raw material costs, and increased competition in monogastric species products. Gross margin percentage for the Specialty Products segment increased 0.7%, primarily due to the valuation of acquired Albion inventory to fair value in 2016, which increased cost of goods sold by $2,149, as it was sold during the year ended December 31, 2016. This was partially offset by increases in raw material prices for sterilization gases and an unfavorable mix. Gross margin percentage for the Industrial Products segment increased 3.9% from the prior year comparative period, primarily due a more favorable customer mix, improved cost structure, and increased volumes.
Operating Expenses
Operating expenses for 2017 were $91,754 or 15.4% of net sales as compared to $90,023 or 16.7% of net sales for 2016. The increase was primarily due to increased expenses relating to research and development efforts in 2017 of $1,980, inclusion of IFP expenses of $1,876, increased transaction costs of $981 when
compared to 2016, and a favorable legal settlement in 2016. These increases were partially offset by an indemnification settlement of $2,087 in 2017, which was a favorable settlement received relating to the SensoryEffects acquisition and lower amortization costs.
Earnings From Operations
Principally as a result of the above-noted details, earnings from operations for 2017 were $97,255 as compared to $90,838 for 2016, an increase of $6,417 or 7.1%. Earnings from operations as a percentage of sales (“operating margin”) for both 2017 and 2016 was 16.4%. The Company is continuing to focus on leveraging its plant capabilities, driving efficiencies from core volume growth, and broadening product applications of human and animal health specialty ingredients into both the domestic and international markets. Earnings from operations for the Human Nutrition & Health segment were $44,010, an increase of $5,854 or 15.3% primarily due to higher sales, the contribution of IFP, the aforementioned impact of valuation of the acquired Albion inventory to fair value in 2016 and higher sales. Animal Nutrition & Health segment earnings from operations were $22,292, a decrease of $6,394 or 22.3%, primarily due to an unfavorable product mix and increases in certain petrochemical raw material costs. Earnings from operations for the Specialty Products segment were $24,949, an increase of $2,087 or 9.1%, primarily the result of aforementioned valuation of the acquired Albion inventory to fair value in 2016 and increases in sales of chelated minerals for plant nutrition, partially offset by raw material increases related to sterilization gases and an unfavorable mix. Earnings from operations from the Industrial Products segment of $6,413 increased $4,464, primarily due to the aforementioned higher sales and stronger gross margins due to a more favorable customer mix and improved cost structure.
Other Expenses (Income)
Interest expense for 2017 and 2016 was $7,544 and $7,265, respectively, and is primarily related to the loans entered into on May 7, 2014. Other expense was $1,235 and $648 for 2017 and 2016, respectively.
Income Tax Expense
The Company’s effective tax rate for 2017 and 2016 was (1.8)% and 32.5% respectively. The effective tax rate was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Reform Act”), enacted on December 22, 2017 by the U.S. government.
The Tax Reform Act makes broad and complex changes to the U.S. tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.purchase orders with suppliers. As a result of the Tax Reform Act, the Company recorded a tax benefit of $27.3 million due to remeasurement of deferred tax assets and liabilities and a tax charge of $1.4 million due to the transition tax on deemed repatriation. 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. The provisional amounts are subject to adjustment 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 provision in the Tax Reform Act related to the taxation of Global Intangible Low-Taxed Income (“GILTI”). Because of the complexity of the GILTI tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of
an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. 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, restricted shares, and performance shares 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.
Net Earnings
Principally as a result of the above-noted details, net earnings were $90,071 for 2017, as compared with $55,972 for 2016, an increase of 60.9%.
Fiscal Year 2016 compared to Fiscal Year 2015
(All amounts in thousands, except share and per share data)
Net Sales
Net sales for 2016 were $553,204 as compared with $552,492 for 2015, an increase of $712 or 0.1%. Net sales for the Human Nutrition & Health segment were $297,134, compared with $278,288, for the year ended December 31, 2015, an increase of $18,846 or 6.8%. Net sales from the acquired Albion business contributed $34,484 to the overall increase. This increase was partially offset by the Powder & Flavor Systems and Cereal Systems product lines decreases of $12,128 and $1,668, respectively. Net sales for the Animal Nutrition & Health segment were $161,119 for 2016 compared with $165,763 for the prior year, a decrease of $4,644 or 2.8%. Sales of products targeted for ruminant animal feed markets realized a sales increase of 5.6% or $2,848 from the prior period. The increase was primarily the result of higher sales volumes of Reashure®, partially offset by decreased sales of Aminoshure® and NitroshureTM products due to weaker dairy economics, particularly in international markets as well as increased competition. Global feed grade choline product sales decreased $9,025 or 8.4% primarily due to lower average selling prices and the weakened Euro, which was partially offset by higher sales volumes of 4.0%. Specialty Products segment sales for 2016 were $70,126 compared to sales of $54,236 for 2015, an increase of $15,890 or 29.3%. Net sales from the acquired Albion business contributed $15,124 to the overall increase. The Company experienced Industrial Product segment sales decline of $29,380 or 54.2% over the prior year predominately due to volume decreases of various choline and choline derivatives used in shale fracking applications, consistent with the end market activity decline.
Gross Margin
Gross margin for 2016 increased to $180,861 compared to $168,097 for 2015, an increase of $12,764 or 7.6% and was principally a result of the acquired Albion product lines being partially offset by lower volumes. Gross margin as a percentage of sales for 2016 increased to 32.7% from 30.4% in the prior year comparative period. Gross margin percentage for the Human Nutrition & Health segment increased 1.0% in 2016 as compared to 2015, due to the acquired Albion product lines having a higher gross margin, as well as reduced raw material costs in 2016, being partially offset by valuation of acquired inventory to fair value. Gross margin percentage for the Animal Nutrition & Health segment increased 2.2% compared to 2015, due to a
favorable product mix and decreases in certain petrochemical raw material costs. Gross margin percentage for the Specialty Products segment decreased 5.4% due primarily to acquisition accounting around the fair value of acquired inventory and amortization of intangibles. Gross margins for the Industrial Products segment were flat primarily due to reduced volumes contributing to unfavorable manufacturing efficiencies, along with lower average selling prices, being offset by favorable petrochemical raw material costs.
Operating Expenses
Operating expenses for 2016 were $90,023 or 16.3% of net sales as compared to $74,141 or 13.4% of net sales for 2015. The increase was primarily due to increased expenses associated with the acquired Albion business, including higher intangible asset amortization of $3,736. The Company incurred transaction and integration costs of $1,515 and $324, in 2016 and 2015, respectively. Additionally, the Company recognized a one-time equity compensation charge of $1,462 during 2015. During 2016 and 2015, the Company spent $7,325 and $5,990 respectively, on research and development programs, most of which pertained to the Company’s Human Nutrition & Health and Animal Nutrition & Health segments.
Earnings From Operations
Principally as a result of the above-noted details, earnings from operations for 2016 were $90,838 as compared to $93,956 for 2015, a decrease of $3,118 or 3.3%. Earnings from operations as a percentage of sales (“operating margin”) for 2016 was 16.4% decreasing from 17.0% in 2015 primarily due to the aforementioned impact of the valuation of the acquired inventory, transaction and integration expenses, greater amortization expense, and lower volumes. This decrease was partially offset by a favorable product mix, lower raw material costs, a favorable legal settlement, and the one-time equity compensation charge in 2015. The Company is continuing to focus on leveraging its plant capabilities, driving efficiencies from core volume growth, and broadening product applications of human and animal health specialty ingredients into both the domestic and international markets. Earnings from operations for the Human Nutrition & Health segment were $38,156, a decrease of $146 or 0.4% primarily due to the addition of Albion product lines being offset by the valuation of acquired inventory to fair value and lower sales volumes of Powder & Flavor systems. Animal Nutrition & Health segment earnings from operations were $28,686, an increase of $835 or 3.0%, primarily due to a more favorable product mix and decreases in certain petrochemical raw material costs. Earnings from operations for the Specialty Products segment were $22,862, a decrease of $1,133 or 4.7%, primarily the result of valuation of acquired inventory to fair value and certain higher operating expenses, partially offset by the addition of Albion product lines. Industrial Products segment earnings from operations declined $3,645 or 65.2%; primarily due to volume decreases.
Other Expenses (Income)
Interest expense for 2016 and 2015 was $7,265 and $6,593, respectively, and is primarily related to the loans entered into on May 7, 2014. Interest income was $9 for 2016 and 2015. The Company has invested available cash primarily in money market investments that have been classified as cash equivalents due to the short maturities of these investments. Other expense was $648 and $309 for 2016 and 2015, respectively.
Income Tax Expense
The Company’s effective tax rate for 2016 and 2015 was 32.5% and 31.4%, respectively. The increase is primarily related to discreet events.
Net Earnings
Principally as a result of the above-noted details, net earnings were $55,972 for 2016, as compared with $59,722 for 2015, a decrease of 6.3%.
LIQUIDITY AND CAPITAL RESOURCES
(All amounts in thousands, except share and per share data)
Contractual Obligations
The Company’s contractual obligations as of December 31, 2017, are summarized in the table below:2023, such purchase obligations were $72,958. For debt obligations, see Note 8, Revolving Loan, and for operating and finance lease obligations, see Note 19, Leases.
| | | | Payments due by period | |
| | Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| | Operating lease obligations (1) | | $ | 17,862 | | | $ | 2,862 | | | $ | 4,035 | | | $ | 2,607 | | | $ | 8,358 | |
| | Purchase obligations (2) | | | 26,168 | | | | 26,168 | | | | - | | | | - | | | | - | |
| | Debt obligations (3) | | | 219,500 | | | | 35,000 | | | | 184,500 | | | | - | | | | - | |
| | Interest payment obligations (4) | | | 8,307 | | | | 6,336 | | | | 1,971 | | | | - | | | | - | |
| | Total | | $ | 271,837 | | | $ | 70,366 | | | $ | 190,506 | | | $ | 2,607 | | | $ | 8,358 | |
(1) | Principally includes obligations associated with future minimum non-cancelable operating lease obligations. |
(2) | Principally includes open purchase orders with vendors for inventory not yet received or recorded on our balance sheet. |
(3) | Consists of $219,500 senior secured term loan. This loan matures on May 7, 2019 and the Contractual Obligations table reflects this maturity date and related current contractual obligations. The Company plans to refinance prior to maturity, which would change the contractual obligations as currently presented. |
(4) | Includes interest payments on debt obligations based on interest rates at December 31, 2017, and it is assumed that there will be no prepayments of principal. This interest is related to the senior secured term loan that matures on May 7, 2019, and the Contractual Obligations table reflects this maturity date and related current contractual obligations. The Company plans to refinance prior to maturity, which would change the contractual obligations as currently presented. |
The table above excludes a $4,781 liability for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, as we are unable to reasonably estimate the timing of settlement, if any.
The Company knowsWe know of no current or pending demands on, or commitments for, itsour liquid assets that will materially affect itsour liquidity.
There were no material changes during the year ended December 31, 2023 outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2022 other than the reduction of the contingent consideration liabilities to $100.
The Company expects itsWe expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments. The Company isWe are actively pursuing additional acquisition candidates. The CompanyWe could seek additional bank loans or access to financial markets to fund such acquisitions, itsour operations, working capital, necessary capital investments or other cash requirements should itwe deem it necessary to do so.
Cash
Cash
Cash and cash equivalents increaseddecreased to $40,416$64,447 at December 31, 20172023 from $38,643$66,560 at December 31, 2016.2022. At December 31, 2017, the Company2023, we had $25,489$53,152 of cash and cash equivalents held by our foreign subsidiaries. It is our intentionWe presently intend to permanently reinvest these funds in our foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fund our U.S. operations or obligations.
However, if these funds are needed for our U.S. operations, we could be required to pay additional withholding taxes to repatriate these funds. Due to prevailing economic conditions of increased interest rates and subsequent borrowing costs, we remitted approximately $18,000 from our Belgium subsidiary to pay down U.S. debt, resulting in income tax expense of $20. The remittance was used to pay down U.S. debt. Working capital was $90,940$165,751 at December 31, 20172023 as compared to $87,434$195,761 at December 31, 2016, an increase2022, a decrease of $3,506.$30,010. Significant cash payments during the year included net payments on the revolving loan of $131,000, capital expenditures and intangible assets acquired of $37,892, and the payment of the 2022 declared dividend in 2023 of $22,872.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 | | Increase
(Decrease) | | % Change |
| Cash flows provided by operating activities | | $ | 183,761 | | | $ | 138,536 | | | $ | 45,225 | | | 32.6 | % |
| Cash flows used in investing activities | | (34,813) | | | (416,014) | | | 381,201 | | | 91.6 | % |
| Cash flows (used in) provided by financing activities | | (153,321) | | | 246,679 | | | (400,000) | | | (162.2) | % |
Operating Activities
Cash flows from operating activities provided $110,618 as of December 31, 2017 as compared $107,612 as of December 31, 2016. The increase in cash flows from operating activities was primarily due to higher net earnings and improved accounts receivable, partially offsetdriven by the impact from changes to deferred income taxes as a result of the Tax Reform Act.
Investing Activities
As previously noted, 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, 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. Additionally, on June 1, 2017, the Company acquired Innovative Food Processors, Inc. (“IFP”), for a purchase price of $17,910, amounting to approximately $15,526 to former shareholders, including adjustments for working capital acquired, and approximately $2,384 to IFP’s lenders to pay off all of IFP’s bank debt. Subsequently, $635 was paid to the former shareholders in September to true-up the opening balance of working capital.
Investing Activities
The Company continuesWe continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and intangible assets were $37,892 and $49,945 for the years ended December 31, 2023 and 2022, respectively. Capital expenditures are projected to be approximately $35,000 to $40,000 for 2024. As mentioned above, we expect that our operations will continue to generate sufficient cash flow to fund the commitments for capital expenditures. These capital expenditures were $27,526are part of our continuous efforts to support our growing businesses.
In 2022, we completed the acquisitions of Kappa and $23,034Bergstrom. Cash paid for 2017these acquisitions, net of cash acquired, amounted to $1,252 and 2016,$365,780, for years ended December 31, 2023 and 2022, respectively. In 2017, the Company spent approximately $13,225 to expand manufacturing capacity at our AMT facility in Utah to accommodate production previously manufactured in Clearfield, UT prior to the site fire. In 2016, the Company spent approximately $6,800 towards its agglomeration production equipment initiative, as well as approximately $1,825 related to expanding the Company’s Animal Nutrition & Health capacity in our manufacturing facility located in Verona, Missouri.
Financing Activities
As previously noted,In 2023, we borrowed $18,000 to fund the Company borrowed $20,000 frompayment of the available revolving2022 dividend and made total loan to finance the acquisition of Innovative Food Processors, Inc. The Company made debt payments of $43,000 related to the senior secured term loan and net payments of $19,000 related to the revolving loan during 2017. The Company has $100,000$149,000, resulting in $240,431 available under its revolving loan agreement.the 2022 Credit Agreement (see Note 8, Revolving Loan) as of December 31, 2023.
The Company hasWe have 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 2,174,0173,103,106 shares have been purchased, none of which remained in treasury at December 31, 2017. The Company intendsrepurchased. We intend to acquire shares from time to time at prevailing market prices if and to the extent we deem it deems itis advisable to do so based on itsour assessment of corporate cash flow, market conditions and other factors. Open market repurchases of common stock could be made pursuant to a trading plan established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. We also purchase (withhold) shares from employees in connection with the tax settlement of vested shares and/or exercised stock options under the Company's omnibus incentive plan. Share repurchases are funded with existing cash on hand.
Proceeds from stock options exercised were $9,732$5,242 and $7,192 as of$3,212 for the years ended December 31, 20172023 and 2016,2022, respectively. Dividend payments were $12,069$22,872 and $10,720 as of December 31, 2017$20,713 during 2023 and 2016,2022, respectively.
Other Matters Impacting Liquidity
We have a liability of $4,650 for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, for which we are unable to reasonably estimate the timing of settlement, if any.
The CompanyWe currently providesprovide postretirement benefits in the form of two retirement medical plans.plans, as discussed in Note 15, Employee Benefit Plans. The liability recorded in other long-term liabilities on the consolidated balance sheetsheets as of December 31, 2017 is
$1,5242023 and December 31, 2022 was $1,395 and $1,465, respectively, and the plans are not funded. Historical cash payments made under these plans have typically been less than $100$200 per year. We do not anticipate any changes to the payments made in the current year for the plans.
Balchem NV ("Chemogas") has an unfunded defined benefit plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amount recorded for these obligations on our balance sheet as of December 31, 2023 and December 31, 2022 was $420 and $393, respectively, and was included in other long-term obligations.
We provide an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are included in "Other non-current assets" on the consolidated balance sheet. They are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as of December 31, 2023 and December 31, 2022 was $10,188 and $8,543, respectively, and is included in "Other long-term obligations" on the consolidated balance sheets. The related rabbi trust assets
were $10,188 and $8,547 as of December 31, 2023 and December 31, 2022, respectively, and were included in "Other non-current assets" on the consolidated balance sheets.
Related Party Transactions
The Company wasWe were engaged in related party transactions with St. Gabriel CC Company, LLC as offor the years ended December 31, 2017. See2023 and December 31, 2022. Refer to Note 18.18, Related Party Transactions.
Critical Accounting PoliciesEstimates
ManagementCritical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of the Companyestimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our management is required to make certainthese critical accounting 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. 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.
The Company’s “criticalOur critical accounting policies”estimates are those that require application of management’smanagement's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. Management considers the following accounting policies to be critical.critical accounting estimates.
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.
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. The write-down of potentially obsolete or slow-moving inventory is recorded based on management’s assumptions about future demand and market conditions.
Long-lived assets
Long-lived assets, such as property, plant, and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year ended December 31, 2017, there were no triggering events which required asset impairment reviews.
Goodwill representsand Intangible Assets
The valuation methods and assumptions used in valuing goodwill and identified intangibles and assessing 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 performed 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 ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), 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, 2016 and 2015, 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 the market approach and cost approach. 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 was not considered impaired. The Company may perform the qualitative assessment in subsequent periods.
Accounts Receivable
We market our products worldwide to a diverse customer base, principally throughout the Americas, Europe, and Asia. We grant credit terms in the normal course of business to our customers. We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined through review of their current credit information. We continuously monitor collections and payments from customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimated losses are based on historical experience and any specific customer collection issues identified. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowancesgoodwill and related bad debt expense may be required.
Post-employment Benefits
The Company provides life insurance and health care benefits for certain eligible retirees and health care benefits for certain retirees’ eligible survivors. The costs and obligations related to these benefits reflectidentified intangibles involves a significant level of estimation uncertainty. In addition, the Company’s assumptions as to general economic conditions and health care cost trends. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions,used in determining the cost of providing these benefits could increase or decrease.
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.
Intangible Assets with Finite Lives
The useful life of an intangible asset is based on the Company’s assumptions regarding expected use of the asset; the relationship of the intangible asset to another asset or group of assets; any legal, regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or extension of the asset’s legal or contractual life without substantial cost; the effects of obsolescence, demand, competition and other economic factors; and theinvolves a significant level of maintenance expenditures requiredestimation uncertainty. Refer to obtain the Goodwill and Acquired Intangible Assets section in Note 1, Business Description and Summary of Significant Accounting Policies, for details related to the valuation and impairment process of both goodwill and intangible assets. Changes in market conditions, laws and regulations, and key assumptions made in future quantitative assessments, including expected future cash flows, from the assetcompetitive factors and their related impact on the asset’s useful life. If events or circumstances indicate that the life of an intangible asset has changed, itdiscount rates, could result in higher future amortization charges orthe recognition of an impairment loss.charge, and in turn could have a material impact on our financial condition or results of operations in subsequent periods.
Income TaxesContingent Consideration Liabilities
In connection with recent acquisitions (see Note 2, Significant Acquisitions), the sellers of each of the acquired entities had an opportunity to receive an additional payment if certain financial performance targets and other metrics were met, thereby requiring us to record contingent consideration liabilities on our balance sheet. The Tax Reform Act was enacted on December 22, 2017. The Tax Reform Act reducesvaluation methods and assumptions used in assessing the U.S. federal corporate tax rate from 35% to 21%, requires companies to paycontingent consideration liabilities involve a one-time transition tax on earningssignificant level of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Asestimation uncertainty, however, as of December 31, 2017, we have not completed2023, the accounting forearn-out periods concluded and the tax effectsCompany recorded a contingent consideration liability 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$100.
Income Taxes
The valuation methods 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 GAAPassumptions used 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 certaincalculating 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 certaintaxes, deferred tax assets and liabilities, and the $1.4 millionvaluation allowances involve a significant level 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 relatedestimation uncertainty. Refer to the taxationIncome Taxes in Note 1, Business Description and Summary of GILTI, noting that companies should make an accounting policy election to recognize deferred taxesSignificant Accounting Policies, for temporary basis differences expected to reverse as GILTI in future years or to include the tax expensedetails. Changes 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 compensationassumptions 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 termsour forecast 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 tomarket growth, forecasted earnings, future taxable income, in the years in which those temporary differences are expected to be recovered or settled. The effect on deferredand prudent and feasible 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 uncertaintyplanning strategies could result in income taxes utilizing ASC 740-10. ASC 740-10 clarifies whetheradjustments, and in turn could have a material impact on our financial condition 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 disclosureresults 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.
Stock-based Compensation
We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation-Stock Compensation.” Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. 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. As stock-based compensation expense recognized in the Consolidated Statements of Earnings is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. ASC 718 allows for forfeitures to be estimated at the time of grant and revised, if necessary,operations in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors changeperiods.
Significant Accounting Policies and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period. See Note 3 in Notes to Consolidated Financial Statements for additional information.
NewRecent Accounting Pronouncements
See Note 1,Business Description and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements regarding significant accounting policies and recent accounting pronouncements.
Item 7A. | Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
CashOur cash and cash equivalents are held primarily in checking accounts, certificates of deposit, and money market investment funds. The Company has no derivative financial instruments or derivative commodity instruments, nor does the Company have any financial instrumentsIn 2019, we entered into an interest rate swap and cross-currency swap for trading or hedging purposes. AsThese derivatives settled on their maturity date of June 27, 2023. Refer to details noted below (see Note 20, Derivative Instruments and Hedging Activities). Additionally, as of December 31, 2017,2023, our borrowings were under a revolving loan bearing interest at a fluctuating rate as defined by the Company had2022 Credit Agreement plus an applicable rate (see Note 8, Revolving Loan). The applicable rate is based upon our consolidated net leverage ratio, as defined in the 2022 Credit Agreement. A 100 basis point increase or decrease in interest rates, applied to our borrowings at December 31, 2023, would result in an increase or decrease in annual interest expense and a corresponding reduction or increase in cash flow of $219,500. The Company isapproximately $3,096. We are exposed to market risks for changes in foreign currency rates and has exposure to commodity price risks, including prices of our primary raw materials. Our objective is to seek a reduction in the potential negative earnings impact of changes in foreign exchange rates and raw material pricing arising in our business activities. The Company managesWe manage these financial exposures, where possible, through pricing and operational means. Our practices may change as economic conditions change.
Interest Rate Risk
We have exposure to market risk for changes in interest rates, including the interest rate relating to the 2022 Credit Agreement. In the second quarter of 2019, we began to manage our interest rate exposure through the use of derivative instruments. These derivatives were utilized for risk management purposes, and were not used for trading or speculative purposes. We hedged a portion of our floating interest rate exposure using an interest rate swap (see Note 20, Derivative Instruments and Hedging Activities). This derivative settled on its maturity date of June 27, 2023.
Foreign Currency Exchange Risk
The financial condition and results of operations of our foreign subsidiaries are reported in local currencies and then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Therefore, we are exposed to foreign currency exchange risk related to these currencies. In 2019, we entered into a cross-currency swap, with a notional amount of $108,569, which we designated as a hedge of our net investment in Chemogas (see Note 20, Derivative Instruments and Hedging Activities). This derivative settled on its maturity date of June 27, 2023.
Item 8. Financial Statements and Supplementary Data
| Item 8. | Financial Statements and Supplementary Data | | | | | | |
| Index to Financial Statements and Supplementary Data: | | Page Numbers |
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| | | 34 |
| | |
| | | 35 |
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| | | 36 |
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| | | 37 |
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| Accounts for the years ended December 31, 2017, 20162023, 2022 and 20152021 | | 64 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Balchem Corporation
Opinions on the Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated balance sheets of Balchem Corporation and Subsidiariesits subsidiaries (the "Company")Company) as of December 31, 20172023 and 2016,2022, and the related consolidated statements of earnings, comprehensive income, stockholders’stockholders' equity and cash flows for each of the three years in the three-year period ended December 31, 2017,2023, and the related notes and the financial statement schedule of Balchem Corporation listed at Item 8 (collectively, referred to as the "financial statements")financial statements). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of itstheir operations and itstheir cash flows for each of the three years in the three-year period ended December 31, 20172023, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinions
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the company'sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Reporting Units for Goodwill Impairment Testing
As described in Notes 1 and 6 to the financial statements, the Company’s goodwill balance was $779 million as of December 31, 2023. The Company performed an annual goodwill impairment test as of October 1, 2023 using a quantitative evaluation for each of its reporting units. The Company determines the fair value of its reporting units using the income approach, based on a discounted cash flow valuation model. To test for goodwill impairment, the Company compares the fair value of each reporting unit to its carrying value. When determining the fair value of each reporting unit, management makes significant estimates and assumptions related to a number of factors. The Company considers the impact of factors that are specific to each of the reporting units such as industry and economic changes as well as projected sales and expense growth rates based upon annual budgets and longer-range strategic plans, which are highly sensitive to changes in domestic and foreign economic conditions, and the selection of appropriate discount rates.
Given the significant estimates and assumptions management makes to determine the fair value of the reporting units and the sensitivity of the operations to changes in U.S. and foreign economic conditions, we identified management’s assumptions related to the sales and expense growth rates, the discount rates, and the terminal value calculation utilized in the valuation of the reporting units within the Company’s goodwill impairment tests as a critical audit matter. Auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
Our audit procedures related to sales and expense growth rates, discount rates, and the terminal value calculation utilized in the valuation of the Company’s reporting units included the following, among others:
•We obtained an understanding of the relevant controls related to the valuation of the Company’s reporting units and tested such controls for design and operating effectiveness, including management review controls related to sales and expense growth rates and the selection of appropriate discount rates.
•We evaluated the reasonableness of management’s forecasts of sales and expense growth rates by comparing the forecasts to (1) the historical results, (2) internal communications to management and the Board of Directors, and (3) external communications made by management to analysts and investors, as applicable.
•We evaluated changes in the regulatory environment using industry reports containing analysis of the Company’s markets and assessed whether these changes were reflected in management’s forecasts of sales and expense growth rates.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates and tested the relevance and reliability of source information underlying the determination of the discount rates, tested the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management.
•With the assistance of our fair value specialists, we evaluated the reasonableness and tested the mathematical accuracy of the terminal value calculations.
/s/ RSM US LLP
We have served as the Company's auditor since 2004.
| | |
| New York, New York |
| February 16, 2024 |
March 1, 2018
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 20172023 and 20162022
(Dollars in thousands, except share and per share data) | | | | | | | | | | | |
| 2023 | | 2022 |
| Current assets: | | | |
| Cash and cash equivalents | $ | 64,447 | | | $ | 66,560 | |
Accounts receivable, net of allowance for doubtful accounts of $908 and $1,226 at December 31, 2023 and 2022, respectively | 125,284 | | | 131,578 | |
| Inventories, net | 109,521 | | | 119,668 | |
| Prepaid expenses | 7,798 | | | 4,903 | |
| Derivative assets | — | | | 5,993 | |
| Other current assets | 7,192 | | | 7,101 | |
| Total current assets | 314,242 | | | 335,803 | |
| Property, plant and equipment, net | 276,039 | | | 271,355 | |
| Goodwill | 778,907 | | | 769,509 | |
| Intangible assets with finite lives, net | 191,212 | | | 213,295 | |
| Right of use assets - operating leases | 17,763 | | | 17,094 | |
| Right of use assets - finance lease | 2,101 | | | 2,338 | |
| Other non-current assets | 16,947 | | | 15,118 | |
| Total assets | $ | 1,597,211 | | | $ | 1,624,512 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Trade accounts payable | $ | 55,503 | | | $ | 57,322 | |
| Accrued expenses | 40,855 | | | 36,745 | |
| Accrued compensation and other benefits | 17,228 | | | 16,544 | |
| Dividends payable | 25,717 | | | 23,129 | |
| Income tax payable | 4,967 | | | 2,280 | |
| Operating lease liabilities - current | 3,949 | | | 3,796 | |
| Finance lease liabilities - current | 272 | | | 226 | |
| Total current liabilities | 148,491 | | | 140,042 | |
| Revolving loan | 309,569 | | | 440,569 | |
| Deferred income taxes | 52,046 | | | 62,784 | |
| Operating lease liabilities - non-current | 14,601 | | | 13,806 | |
| Finance lease liabilities - non-current | 1,943 | | | 2,213 | |
| Other long-term obligations | 16,577 | | | 26,814 | |
| Total liabilities | 543,227 | | | 686,228 | |
| Commitments and contingencies (Note 16) | | | |
| Stockholders’ equity: | | | |
| Preferred stock, $25 par value. Authorized 2,000,000 shares; none issued and outstanding | — | | | — | |
| Common stock, $.0667 par value. Authorized 120,000,000 shares; 32,254,728 shares issued and outstanding at December 31, 2023 and 32,152,787 shares issued and outstanding at December 31, 2022, respectively | 2,152 | | | 2,145 | |
| Additional paid-in capital | 145,653 | | | 128,806 | |
| Retained earnings | 897,488 | | | 814,487 | |
| Accumulated other comprehensive income (loss) | 8,691 | | | (7,154) | |
| Total stockholders’ equity | 1,053,984 | | | 938,284 | |
| Total liabilities and stockholders’ equity | $ | 1,597,211 | | | $ | 1,624,512 | |
| | | 2017 | | | 2016 | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 40,416 | | | $ | 38,643 | |
| Accounts receivable, net of allowance for doubtful accounts of $431 and $489 at December 31, 2017 and 2016, respectively | | | 91,226 | | | | 83,252 | |
| Inventories | | | 60,696 | | | | 57,245 | |
| Prepaid expenses | | | 4,774 | | | | 4,110 | |
| Deferred income taxes | | | - | | | | 712 | |
| Other current assets | | | 2,224 | | | | 4,480 | |
| Total current assets | | | 199,336 | | | | 188,442 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 189,793 | | | | 165,754 | |
| | | | | | | | | |
| Goodwill | | | 441,361 | | | | 439,811 | |
| Intangible assets with finite lives, net | | | 128,073 | | | | 147,484 | |
| Other assets | | | 5,073 | | | | 7,135 | |
| Total assets | | $ | 963,636 | | | $ | 948,626 | |
| | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Trade accounts payable | | $ | 28,451 | | | $ | 32,514 | |
| Accrued expenses | | | 22,930 | | | | 14,758 | |
| Accrued compensation and other benefits | | | 8,531 | | | | 6,648 | |
| Dividends payable | | | 13,484 | | | | 12,088 | |
| Current portion of long-term debt | | | 35,000 | | | | 35,000 | |
| Total current liabilities | | | 108,396 | | | | 101,008 | |
| | | | | | | | | |
| Long-term debt | | | 183,964 | | | | 226,490 | |
| Revolver loan - long-term | | | - | | | | 19,000 | |
| Deferred income taxes | | | 48,548 | | | | 74,199 | |
| Other long-term obligations | | | 5,847 | | | | 6,896 | |
| Total liabilities | | | 346,755 | | | | 427,593 | |
| | | | | | | | | |
| Commitments and contingencies (note 12) | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, $25 par value. Authorized 2,000,000 shares; none issued and outstanding | | | - | | | | - | |
| Common stock, $.0667 par value. Authorized 120,000,000 shares; 32,019,605 shares issued and outstanding at December 31, 2017 and 31,757,861 shares issued and outstanding at December 31, 2016 | | | 2,135 | | | | 2,117 | |
| Additional paid-in capital | | | 151,749 | | | | 137,676 | |
| Retained earnings | | | 464,639 | | | | 388,089 | |
| Accumulated other comprehensive loss | | | (1,642 | ) | | | (6,849 | ) |
| Total stockholders’ equity | | | 616,881 | | | | 521,033 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 963,636 | | | $ | 948,626 | |
See accompanying notes to consolidated financial statements.
32
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2017, 20162023, 2022 and 20152021
(In thousands, except per share data) | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| | | | | |
| Net sales | $ | 922,439 | | | $ | 942,358 | | | $ | 799,023 | |
| | | | | |
| Cost of sales | 620,383 | | | 661,907 | | | 555,849 | |
| | | | | |
| Gross margin | 302,056 | | | 280,451 | | | 243,174 | |
| | | | | |
| Operating expenses: | | | | | |
| Selling expenses | 74,397 | | | 67,409 | | | 60,413 | |
| Research and development expenses | 15,049 | | | 12,191 | | | 13,524 | |
| General and administrative expenses | 53,417 | | | 55,665 | | | 41,735 | |
| 142,863 | | | 135,265 | | | 115,672 | |
| | | | | |
| Earnings from operations | 159,193 | | | 145,186 | | | 127,502 | |
| | | | | |
| Other expenses: | | | | | |
| | | | | |
| Interest expense, net | 22,613 | | | 10,268 | | | 2,456 | |
| Other (income) expense, net | (681) | | | 1,169 | | | (187) | |
| 21,932 | | | 11,437 | | | 2,269 | |
| | | | | |
| Earnings before income tax expense | 137,261 | | | 133,749 | | | 125,233 | |
| | | | | |
| Income tax expense | 28,718 | | | 28,382 | | | 29,129 | |
| | | | | |
| Net earnings | $ | 108,543 | | | $ | 105,367 | | | $ | 96,104 | |
| | | | | |
| Basic net earnings per common share | $ | 3.38 | | | $ | 3.29 | | | $ | 2.98 | |
| | | | | |
| Diluted net earnings per common share | $ | 3.35 | | | $ | 3.25 | | | $ | 2.94 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Net sales | | $ | 594,790 | | | $ | 553,204 | | | $ | 552,492 | |
| | | | | | | | | | | | | |
| Cost of sales | | | 405,781 | | | | 372,343 | | | | 384,395 | |
| | | | | | | | | | | | | |
| Gross margin | | | 189,009 | | | | 180,861 | | | | 168,097 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Selling expenses | | | 54,720 | | | | 55,172 | | | | 46,255 | |
| Research and development expenses | | | 9,305 | | | | 7,325 | | | | 5,990 | |
| General and administrative expenses | | | 27,729 | | | | 27,526 | | | | 21,896 | |
| | | | 91,754 | | | | 90,023 | | | | 74,141 | |
| | | | | | | | | | | | | |
| Earnings from operations | | | 97,255 | | | | 90,838 | | | | 93,956 | |
| | | | | | | | | | | | | |
| Other expenses (income): | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest income | | | (12 | ) | | | (9 | ) | | | (9 | ) |
| Interest expense | | | 7,544 | | | | 7,265 | | | | 6,593 | |
| Other, net | | | 1,235 | | | | 648 | | | | 309 | |
| | | | | | | | | | | | | |
| Earnings before income tax expense | | | 88,488 | | | | 82,934 | | | | 87,063 | |
| | | | | | | | | | | | | |
| Income tax (benefit)/expense | | | (1,583 | ) | | | 26,962 | | | | 27,341 | |
| | | | | | | | | | | | | |
| Net earnings | | $ | 90,071 | | | $ | 55,972 | | | $ | 59,722 | |
| | | | | | | | | | | | | |
| Basic net earnings per common share | | $ | 2.83 | | | $ | 1.78 | | | $ | 1.92 | |
| | | | | | | | | | | | | |
| Diluted net earnings per common share | | $ | 2.79 | | | $ | 1.75 | | | $ | 1.89 | |
BALCHEM CORPORATION
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2017, 20162023, 2022 and 20152021
(In thousands) | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | | | | | |
| Net earnings | | $ | 108,543 | | | $ | 105,367 | | | $ | 96,104 | |
| | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Net foreign currency translation adjustment | | 16,809 | | | (4,799) | | | (11,255) | |
Unrealized (loss) gain on cash flow hedge, net of taxes of $341, $868, and $654 at December 31, 2023, 2022, and 2021, respectively | | (1,065) | | | 2,696 | | | 2,053 | |
| Net change in postretirement benefit plan, net of taxes of $39, $24, and $13 at December 31, 2023, 2022 and 2021, respectively | | 101 | | | (58) | | | 36 | |
| Other comprehensive income (loss), net of tax | | 15,845 | | | (2,161) | | | (9,166) | |
| | | | | | |
| Comprehensive income | | $ | 124,388 | | | $ | 103,206 | | | $ | 86,938 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Net earnings | | $ | 90,071 | | | $ | 55,972 | | | $ | 59,722 | |
| | | | | | | | | | | | | |
| Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net foreign currency translation adjustment | | | 5,404 | | | | (1,390 | ) | | | (2,615 | ) |
| | | | | | | | | | | | | |
| Net change in postretirement benefit plan, net of taxes of $ 207, $49, and $72 at December 31, 2017, 2016, and 2015, respectively | | | (197 | ) | | | (345 | ) | | | 152 | |
| | | | | | | | | | | | | |
| Other comprehensive income/(loss) | | | 5,207 | | | | (1,735 | ) | | | (2,463 | ) |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 95,278 | | | $ | 54,237 | | | $ | 57,259 | |
See accompanying notes to consolidated financial statements.
34
BALCHEM CORPORATION
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2017, 20162023, 2022 and 20152021
(Dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total
Stockholders'
Equity | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Common Stock | | Additional
Paid-in
Capital |
| Shares | | Amount |
| Balance - December 31, 2020 | $ | 828,233 | | | $ | 656,740 | | | $ | 4,173 | | | 32,372,621 | | | $ | 2,160 | | | $ | 165,160 | |
| | | | | | | | | | | |
| Net earnings | 96,104 | | | 96,104 | | | — | | | — | | | — | | | — | |
| Other comprehensive loss | (9,166) | | | — | | | (9,166) | | | — | | | — | | | — | |
| Dividends ($.64 per share) | (20,706) | | | (20,706) | | | — | | | — | | | — | | | — | |
| Repurchases of common stock | (35,239) | | | — | | | — | | | (249,848) | | | (17) | | | (35,222) | |
| Shares and options issued under stock plans | 17,789 | | | — | | | — | | | 164,377 | | | 11 | | | 17,778 | |
| | | | | | | | | | | |
| Balance - December 31, 2021 | 877,015 | | | 732,138 | | | (4,993) | | | 32,287,150 | | | 2,154 | | | 147,716 | |
| | | | | | | | | | | |
| Net earnings | 105,367 | | | 105,367 | | | — | | | — | | | — | | | — | |
| Other comprehensive loss | (2,161) | | | — | | | (2,161) | | | — | | | — | | | — | |
| Dividends ($.71 per share) | (23,018) | | | (23,018) | | | — | | | — | | | — | | | — | |
| Repurchases of common stock | (35,423) | | | — | | | — | | | (252,304) | | | (16) | | | (35,407) | |
| Shares and options issued under stock plans | 16,504 | | | — | | | — | | | 117,941 | | | 7 | | | 16,497 | |
| | | | | | | | | | | |
| Balance - December 31, 2022 | 938,284 | | | 814,487 | | | (7,154) | | | 32,152,787 | | | 2,145 | | | 128,806 | |
| | | | | | | | | | | |
| Net earnings | 108,543 | | | 108,543 | | | — | | | — | | | — | | | — | |
| Other comprehensive income | 15,845 | | | — | | | 15,845 | | | — | | | — | | | — | |
| Dividends ($.79 per share) | (25,542) | | | (25,542) | | | — | | | — | | | — | | | — | |
| Repurchases of common stock, including excise tax * | (4,514) | | | — | | | — | | | (32,558) | | | (2) | | | (4,512) | |
| Shares and options issued under stock plans | 21,368 | | | — | | | — | | | 134,499 | | | 9 | | | 21,359 | |
| | | | | | | | | | | |
| Balance - December 31, 2023 | $ | 1,053,984 | | | $ | 897,488 | | | $ | 8,691 | | | 32,254,728 | | | $ | 2,152 | | | $ | 145,653 | |
| | | | | | | | | | | |
| * On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (the "IRA") into law. The IRA imposes a 1% excise tax on share repurchases, which is effective for repurchases completed after December 31, 2022. The excise tax is recorded within equity as part of the repurchase of the common stock. |
| | | | | | | | | Accumulated | | | | | | | | | | | | | | | | |
| | | Total | | | | | | Other | | | | | | | | | | | | | | | Additional | |
| | | Stockholders' | | | Retained | | | Comprehensive | | | Common Stock | | | Treasury Stock | | | Paid-in | |
| | | Equity | | | Earnings | | | Income (Loss) | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance - December 31, 2014 | | $ | 391,898 | | | $ | 295,202 | | | $ | (2,651 | ) | | | 30,845,586 | | | $ | 2,058 | | | | - | | | | - | | | $ | 97,289 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | | 59,722 | | | | 59,722 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Other comprehensive loss | | | (2,463 | ) | | | - | | | | (2,463 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
| Dividends ($.34 per share) | | | (10,727 | ) | | | (10,727 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Treasury shares purchased | | | (1,205 | ) | | | - | | | | - | | | | - | | | | - | | | | (20,692 | ) | | | (1,205 | ) | | | - | |
Shares and options issued under stock plans and an income tax benefit of $7,009 | | | 26,480 | | | | - | | | | - | | | | 682,863 | | | | 44 | | | | 19,603 | | | | 1,131 | | | | 25,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance - December 31, 2015 | | | 463,705 | | | | 344,197 | | | | (5,114 | ) | | | 31,528,449 | | | | 2,102 | | | | (1,089 | ) | | | (74 | ) | | | 122,594 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | | 55,972 | | | | 55,972 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Other comprehensive loss | | | (1,735 | ) | | | - | | | | (1,735 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
| Dividends ($.38 per share) | | | (12,080 | ) | | | (12,080 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Treasury shares purchased | | | (1,588 | ) | | | - | | | | - | | | | - | | | | - | | | | (24,912 | ) | | | (1,588 | ) | | | - | |
Shares and options issued under stock plans and an income tax benefit of $2,546 | | | 16,759 | | | | - | | | | - | | | | 229,412 | | | | 15 | | | | 26,001 | | | | 1,662 | | | | 15,082 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance - December 31, 2016 | | | 521,033 | | | | 388,089 | | | | (6,849 | ) | | | 31,757,861 | | | | 2,117 | | | | - | | | | - | | | | 137,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | | 90,071 | | | | 90,071 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Other comprehensive income, net of cumulative effect of accounting change | | | 5,150 | | | | (57 | ) | | | 5,207 | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Dividends ($.42 per share) | | | (13,464 | ) | | | (13,464 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Treasury shares purchased | | | (1,905 | ) | | | - | | | | - | | | | - | | | | - | | | | (23,182 | ) | | | (1,905 | ) | | | - | |
| Shares and options issued under stock plans | | | 15,996 | | | | - | | | | - | | | | 261,744 | | | | 18 | | | | 23,182 | | | | 1,905 | | | | 14,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance - December 31, 2017 | | $ | 616,881 | | | $ | 464,639 | | | $ | (1,642 | ) | | | 32,019,605 | | | $ | 2,135 | | | | - | | | $ | - | | | $ | 151,749 | |
See accompanying notes to consolidated financial statements.
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2017, 20162023, 2022 and 20152021
(In thousands) | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | |
| Net earnings | $ | 108,543 | | | $ | 105,367 | | | $ | 96,104 | |
| | | | | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 54,935 | | | 51,848 | | | 48,879 | |
| Stock compensation expense | 16,052 | | | 13,224 | | | 10,802 | |
| Deferred income taxes | (10,814) | | | (8,362) | | | (5,944) | |
| Provision for doubtful accounts | 37 | | | 401 | | | 180 | |
| Unrealized (gain) loss on foreign currency transactions and deferred compensation | (733) | | | 914 | | | (384) | |
| Asset impairment charge and (gain) loss on disposal of assets | 7,031 | | | 366 | | | (53) | |
| Change in fair value of contingent consideration liability | (11,300) | | | — | | | — | |
| Changes in assets and liabilities, net of acquired balances | | | | | |
| Accounts receivable | 6,969 | | | (3,618) | | | (20,700) | |
| Inventories | 10,530 | | | (7,804) | | | (21,023) | |
| Prepaid expenses and other current assets | (3,540) | | | 1,870 | | | (881) | |
| Accounts payable and accrued expenses | 3,552 | | | (15,543) | | | 47,067 | |
| Income taxes | 2,194 | | | 296 | | | 4,787 | |
| Other | 305 | | | (423) | | | 1,680 | |
| Net cash provided by operating activities | 183,761 | | | 138,536 | | | 160,514 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Cash paid for acquisitions, net of cash acquired | (1,252) | | | (365,780) | | | — | |
| Capital expenditures and intangible assets acquired | (37,892) | | | (49,945) | | | (37,363) | |
| Proceeds from sale of assets | 1,881 | | | 206 | | | 318 | |
| Proceeds from settlement of net investment hedge | 2,740 | | | — | | | — | |
| Proceeds from insurance | — | | | — | | | 1,831 | |
| Investment in affiliates | (290) | | | (495) | | | (86) | |
| Net cash used in investing activities | (34,813) | | | (416,014) | | | (35,300) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from revolving loan | 18,000 | | | 435,000 | | | 5,000 | |
| Principal payments on revolving debt | (149,000) | | | (103,000) | | | (60,000) | |
| Principal payment on acquired debt | — | | | (30,988) | | | — | |
| Cash paid for financing costs | — | | | (1,232) | | | — | |
| Principal payments on finance lease | (222) | | | (177) | | | (159) | |
| Proceeds from stock options exercised | 5,242 | | | 3,212 | | | 6,943 | |
| Dividends paid | (22,872) | | | (20,713) | | | (18,723) | |
| Repurchases of common stock | (4,469) | | | (35,423) | | | (35,239) | |
| Net cash (used in) provided by financing activities | (153,321) | | | 246,679 | | | (102,178) | |
| | | | | |
| Effect of exchange rate changes on cash | 2,260 | | | (5,880) | | | (4,368) | |
| | | | | |
| (Decrease) increase in cash and cash equivalents | (2,113) | | | (36,679) | | | 18,668 | |
| | | | | |
| Cash and cash equivalents beginning of period | 66,560 | | | 103,239 | | | 84,571 | |
| Cash and cash equivalents end of period | $ | 64,447 | | | $ | 66,560 | | | $ | 103,239 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | |
| Net earnings | | $ | 90,071 | | | $ | 55,972 | | | $ | 59,722 | |
| | | | | | | | | | | | | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 44,379 | | | | 46,202 | | | | 39,964 | |
| Stock compensation expense | | | 6,264 | | | | 7,024 | | | | 6,829 | |
| Deferred income taxes | | | (28,777 | ) | | | (6,881 | ) | | | (2,857 | ) |
| Provision for doubtful accounts | | | 69 | | | | 258 | | | | (53 | ) |
| Foreign currency transaction loss | | | 340 | | | | (16 | ) | | | 25 | |
| Loss on disposal of assets | | | 254 | | | | 320 | | | | 301 | |
| Changes in assets and liabilities, net of acquired balances | | | | | | | | | | | | |
| Accounts receivable | | | (3,906 | ) | | | (15,659 | ) | | | 10,809 | |
| Inventories | | | (319 | ) | | | 4,745 | | | | 3,126 | |
| Prepaid expenses and other current assets | | | (439 | ) | | | 240 | | | | 1,233 | |
| Accounts payable and accrued expenses | | | 1,511 | | | | 17,841 | | | | (15,718 | ) |
| Income taxes | | | 449 | | | | (2,765 | ) | | | 633 | |
| Other | | | 722 | | | | 331 | | | | (188 | ) |
| Net cash provided by operating activities | | | 110,618 | | | | 107,612 | | | | 103,826 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Capital expenditures | | | (27,526 | ) | | | (23,034 | ) | | | (41,300 | ) |
| Cash paid for acquisitions, net of cash acquired | | | (17,393 | ) | | | (110,601 | ) | | | - | |
| Proceeds from sale of property, plant and equipment | | | 22 | | | | 4 | | | | 34 | |
| Proceeds from insurance | | | 2,792 | | | | 1,000 | | | | - | |
| Intangible assets acquired | | | (591 | ) | | | (963 | ) | | | (1,011 | ) |
| Net cash used in investing activities | | | (42,696 | ) | | | (133,594 | ) | | | (42,277 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Principal payments on long-term debt | | | (43,000 | ) | | | (35,000 | ) | | | (35,000 | ) |
| Proceeds from revolving loan | | | 25,000 | | | | 72,500 | | | | - | |
| Principal payments on revolving loan | | | (44,000 | ) | | | (53,500 | ) | | | - | |
| Principal payment on acquired debt | | | (2,384 | ) | | | (884 | ) | | | - | |
| Proceeds from stock options exercised | | | 9,732 | | | | 7,192 | | | | 12,605 | |
| Excess tax benefits from stock compensation | | | - | | | | 2,546 | | | | 7,009 | |
| Dividends paid | | | (12,069 | ) | | | (10,720 | ) | | | (9,251 | ) |
| Purchase of treasury stock | | | (1,905 | ) | | | (1,588 | ) | | | (1,205 | ) |
| Net cash used in by financing activities | | | (68,626 | ) | | | (19,454 | ) | | | (25,842 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | 2,477 | | | | (716 | ) | | | (1,199 | ) |
| | | | | | | | | | | | | |
| Increase/(Decrease) in cash and cash equivalents | | | 1,773 | | | | (46,152 | ) | | | 34,508 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents beginning of period | | | 38,643 | | | | 84,795 | | | | 50,287 | |
| Cash and cash equivalents end of period | | $ | 40,416 | | | $ | 38,643 | | | $ | 84,795 | |
Supplemental Cash Flow Information - see Note 16
13
See accompanying notes to consolidated financial statements.
36
BALCHEM CORPORATION
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,(“Balchem” or the “Company”), 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. Certain reclassifications have been made to prior period amounts to conform with the current period's presentation.
Revenue Recognition
Revenue for each of ourthe Company’s business segments is recognized upon product shipment, passagewhen control of title and risk of loss, and when collectionthe promised goods is reasonably assured.transferred to our customers, in an amount that reflects the consideration we expect to realize in exchange for those goods. The Company reports amounts billed to customers related to shipping and handling as revenue and includes costs incurred for shipping and handling in cost of sales. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities. In instances of shipments made on consignment, revenue is deferred until a customer indicatesrecognized when control is transferred to the Companycustomer.
In accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has useda present right to payment, (ii) the Company’s products.customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. The Company does not charge its customers rental feesassesses collectability based primarily on cylinders or drums used to ship its products.the customer’s payment history and on the creditworthiness of the customer.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. The Company has funds in its cash accounts that are with third party financial institutions, primarily in certificates of deposit and money market funds. The Company’sCompany's balances of cash and cash equivalents in the U.S. and Italy cash balances at these financial institutionsother countries exceed the insurance limits of the Federal Deposit Insurance Corporation (“FDIC”) and Fondo Interbancario di Tutela dei Depositi (“FITD”)other relevant insurance limits.limits in other countries.
Accounts Receivable
Credit terms are granted in the normal course of business to our customers. On-goingthe Company’s customers and on-going credit evaluations are performed on our customers andthe Company’s customers. In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires that credit losses be reported based on expected losses instead of the incurred loss model. Based on this ASU, customers' credit limits are adjusted based upon payment history and the customer’s currenttheir reasonably expected credit worthiness aswhich is determined through review of their payment history, their current credit information.information, and any foreseeable future events. Collections and payments from customers are continuously monitored and allowances for doubtful accounts for estimated losses resulting from the inability of ourthe Company’s customers to make required payments are maintained. Estimated losses are based on historical experience, and any specific customer collection issues identified.identified, and any reasonably expected future adverse events. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances and related bad debt expense may be required.
Inventories
Inventories are valued at the lower of cost (first in, first out or average)out) 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.earnings from operations.
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, 20162023, 2022 and 2015,2021, no customer accounted for more than 10% of total net sales.sales or accounts receivable.
Post-employment Benefits
We provide life insurance, health care benefits, and defined benefit pension plan payments for certain eligible retirees and health care benefits for certain retirees’ eligible survivors. The costs and obligations related to these benefits reflect our assumptions as to health care cost trends and key economic conditions including discount rates, expected rate of return on plan assets, and expected salary increases. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease.
In accordance with ASC 715, “Compensation-Retirement Benefits,” we are required to recognize the overfunded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in our statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of costspurchase price over the fair value of net assets of businesses acquired.acquired in accordance with ASC 350, “Intangibles-Goodwill and Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset.805, "Business Combinations". Goodwill and intangible assets acquired in a business combination and determined tothat have an indefinite useful lifelives are not amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the assetassets might be impaired, in accordance with the provisions of ASC 350.350, "Intangibles-Goodwill and Other". The Company performsperformed 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 assetassets might be impaired.
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. 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 ofthis update, a goodwill impairment loss totest will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized (if any). The Company has an unconditional option to bypassfor the qualitative assessment and proceed directly to performingamount by which the first stepcarrying amount exceeds the reporting unit’s fair value.
As of October 1, 20172023 and 2016,2022, the Company opted to bypass the qualitative assessment and proceeded directly to performing the first step of thequantitative goodwill impairment test. WeThe Company assessed the fair values of ourits 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. Ourits conclusions. The Company's estimates of future cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions. OurThe Company's assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units iswas not considered impaired.impaired as of October 1, 2023 and 2022. The Company may resume performing the qualitative assessment in subsequent periods.
The Company had goodwill in the amount of $441,361$778,907 and $439,811$769,509 as of December 31, 20172023 and December 31, 2016,2022, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
| | | | | | | | |
| Goodwill at December 31, 2021 | | $ | 523,949 | |
| Goodwill as a result of the Kappa acquisition | | 216,295 | |
| Goodwill as a result of the Bergstrom acquisition | | 31,209 | |
| Impact due to change in foreign exchange rates | | (1,944) | |
| Goodwill at December 31, 2022 | | 769,509 | |
| Goodwill as a result of the Bergstrom acquisition | | 341 | |
| Impact due to change in foreign exchange rates | | 9,057 | |
| Goodwill at December 31, 2023 | | $ | 778,907 | |
| | 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 | |
| | | | | | | | | | | | | | |
| | | December 31, 2023 | | December 31, 2022 |
| HNH | | $ | 673,207 | | | $ | 665,804 | |
| ANH | | 24,469 | | | 24,218 | |
| Specialty Products | | 81,175 | | | 79,429 | |
| Other and Unallocated | | 56 | | | 58 | |
| Total | | $ | 778,907 | | | $ | 769,509 | |
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 | - 20 |
| Trademarks &and trade names | | 2 - 17 |
| Developed technology | | 5 - 17 | 12 |
| Developed technology | | | 5 | |
| Regulatory registration costs | | | 5 - 10 | |
| Patents &and trade secrets | | | 15 - 17 | |
| Other | | Other | | 32 - 18 | |
Intangible assets with finite lives 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. The useful life of an intangible asset is based on our assumptions regarding expected use of the asset; the relationship of the intangible asset to another asset or group of assets; any legal, regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or extension of the asset’s legal or contractual life without substantial cost; the effects of obsolescence, demand, competition and other economic factors; and the level of maintenance expenditures required to obtain the expected future cash flows from the asset and their related impact on the asset’s useful life. If events or circumstances indicate that the life of an intangible asset has changed, it could result in higher future amortization charges or recognition of an impairment loss. For the year ended December 31, 2017,2023, 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 effect for the yearsfiscal year in which those temporary differences are expected to be recovered or settled. The effect onValuation allowances are established when necessary to reduce deferred tax assets and liabilities of a change in tax rates is recognized in income into the period that includes the enactment date. The Company regularly reviews itsamount expected to be realized. In evaluating our ability to recover our deferred tax assets, for recoverabilityin full or in part, we consider all available positive and would establish a valuation allowance if it believed that such assets may not be recovered, taking into consideration historicalnegative evidence, including our past operating results, expectationsour forecast of future market growth, forecasted earnings, changesfuture taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in its operationsdetermining future taxable income require judgment and are consistent with the expected timing ofplans and estimates we are using to manage the reversals of existing temporary differences.underlying businesses.
We account for uncertainty inrecognize uncertain income taxes utilizing ASC 740-10. ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken on income tax returns at the largest amount 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 expectedis more likely than not to be taken. This interpretation also provides guidance on derecognition, classification,sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a fifty percent likelihood of being sustained.
Our policy for recording interest and penalties accounting in interim periods, and disclosures. The applicationassociated with uncertain tax positions is to record such items as a component of ASC 740-10 requires judgment related to the uncertainty inour income taxes and could impact our effective tax rate.provision.
Use of Estimates
Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 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.
In addition, non-current assets includes rabbi trust funds related to the Company's deferred compensation plan. The money market and rabbi trust funds are valued using level one inputs, as defined by ASC 820, "Fair Value Measurement."
40The Company also had derivative financial instruments, consisting of a cross-currency swap and an interest rate swap, which were included in derivative assets and derivative liabilities, in the consolidated balance sheets (see Note 20, Derivative Instruments and Hedging Activities). The fair values of these derivative instruments were determined based on Level 2 inputs, using significant inputs that were observable either directly or indirectly, including interest rate curves and implied volatilities. These derivatives were settled on their maturity date on June 27, 2023 and there were no other derivatives outstanding as of December 31, 2023.
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 associated directly with the Company's efforts to develop, design, and enhance its products, services, technologies, or processes. Such costs are expensed as incurred.
Net Earnings Per Common Share
Basic net earnings per common share is calculated by dividing net incomeearnings 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 3.3, Stockholders' Equity. 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 of earnings 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 aeither the Black-Scholes based option-pricing model.model or the Binomial model, whichever is deemed to be most appropriate. 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 group 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 PronouncementsDerivative Instruments and Hedging Activities
The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In May 2019, the Company entered into an interest rate swap with JP Morgan Chase, N.A. (the "Swap Counterparty") and a cross-currency swap with JP Morgan Chase, N.A. (the "Bank Counterparty"). The Company's primary objective for holding derivative financial instruments was to manage interest rate risk and foreign currency risk. The Company does not enter into derivative financial instruments for trading or speculative purposes.
The derivative instruments were with the above single counterparty and were subject to a contractual agreement that provided for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. As such, the derivative instruments were categorized as a master netting arrangement and presented as a net derivative asset or derivative liability on the consolidated balance sheet as of December 31, 2022. The Company settled its derivative instruments on their maturity date of June 27, 2023 and had no other derivatives outstanding as of December 31, 2023.
On a quarterly basis through their maturity, we assessed the effectiveness of the hedging relationships for the interest rate swap and cross-currency swap by reviewing the critical terms indicated in the applicable agreement. The hedging relationships were determined to be highly effective. As such, the net change in fair values of the interest rate swap, that qualified as a cash flow hedge, was recorded in accumulated other comprehensive income/(loss) and subsequently reclassified into interest expense as interest payments were made on our debt. For the cross-currency swap, the amounts that have not yet been recognized in earnings remain in the cumulative translation adjustment section of accumulated other comprehensive income until the hedged net investment is sold or liquidated in accordance with paragraphs 815-35-35-5A, "Derivatives and Hedging - Net Investment Hedges", and 830-30-40-1 through 40-1A, "Foreign Currency Matters - Derecognition". Refer to Note 20, Derivative Instruments and Hedging Activities, for detailed information about our derivative financial instruments.
Recently Issued Accounting Standards
Pronouncements
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 2016,2023, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which addresses the recognition of assets and liabilities that arise from all leases.2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures." The guidance requires lessees to recognize right-to-use assets and lease liabilities for most leases in the Consolidated Balance Sheets. Thenew guidance is effective for annualintended to enhance the transparency and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impactdecision usefulness 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,disclosures by requiring disaggregated information about a reporting entity's effective tax rate reconciliation and classificationinformation 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.paid. 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 updateamendment is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and2024, with early adoption ispermitted. The amendment in this Update should be applied on a prospective basis, with retrospective application permitted. The Company has electedis in the earlyprocess of evaluating the impact that the adoption of ASU 2023-09 will have to the financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures." The ASU expands reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment's profit or loss. The ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment's profit or loss in assessing segment performance and deciding how to allocate resources. Additionally, ASU 2023-07 requires all segment profit or loss and assets disclosures to be provided on an annual and interim basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning December 15, 2024. Early adoption is permitted and the amendments must be applied retrospectively to all prior periods presented. The adoption of this guidance will not affect the Company's consolidated results of operations, financial position or cash flows. The Company is currently evaluating the effect the guidance will have on its disclosures.
In August 2023, the FASB issued ASU as there was not a material impact2023-05, "Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement." The new guidance applies to the formation of a joint venture and requires a joint venture to initially measure all contributions received upon its formation at fair value. The guidance is intended to reduce diversity in practice and is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis. While ASU 2023-05 is not currently applicable to Balchem, the Company will apply this guidance in future reporting periods after the guidance is effective to any future arrangements meeting the definition of a joint venture.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", and in December 2022 subsequently issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” These ASU’s provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The Standards Updates provide optional expedients and exceptions for applying accounting principles generally accepted in the United States to contract modifications and hedging relationships that reference LIBOR or another reference rate that are expected to be discontinued. The Standards Updates were effective upon issuance and can generally be applied through December 31, 2024. Due to the discontinuation of LIBOR and under the relief provided by Topic 848, during the third quarter of 2022, the Company modified its interest rate swap and replaced LIBOR with 1-month CME Term SOFR. The modification of the agreement did not have a significant impact on the Company's consolidated financial statements.statements and disclosures. The interest rate swap matured on June 27, 2023.
NOTE 2 – SIGNIFICANT ACQUISITIONS
Cardinal Associates Inc. ("Bergstrom")
Acquisition ofOn August 30, 2022, the Company's wholly-owned subsidiary Albion International,Laboratories, Inc.
On February 1, 2016, ("Albion") entered into a Stock Purchase Agreement, and closed on such transaction with Cardinal Associates Inc. ("Cardinal"), a corporation organized under the Company acquired 100 percentlaws of the outstanding common sharesState of Washington, pursuant to which Albion International, Inc. (“Albion” or the “Acquisition”acquired Cardinal and its Bergstrom Nutrition business (collectively, "Bergstrom"),. Bergstrom Nutrition is a privately heldleading science-based manufacturer of MSM, based in Vancouver, Washington. MSM is a widely used nutritional ingredient with strong scientific evidence supporting its benefits for joint health, sports nutrition, skin and beauty, healthy aging, and pet health. The addition of OptiMSM®, Bergstrom Nutrition's MSM brand, to the Company's portfolio within the Human Nutrition and Health and Animal Nutrition and Health segments provides a synergistic scientific advantage in Balchem's key strategic therapeutic focus areas such as longevity and performance and is a strong fit with Balchem's specialty, science-backed mineral amino acid chelates, specialized mineral salts and mineral complexes, headquartered in Clearfield, Utah. products.
The Company made payments of approximately $116,400$72,143 for the acquisition, amounting to $71,937 to the former shareholders or on behalf of the former shareholders and $206 to pay off Bergstrom's bank debt. Net of cash acquired of $773, total payments made to the former shareholders or on behalf of the former shareholders of Bergstrom were $71,164. The acquisition was primarily financed through the 2022 Credit Agreement (see Note 8, Revolving Loan). In connection with this transaction, the former shareholders of Bergstrom had an opportunity to receive an additional payment in 2024 if certain financial performance targets and other metrics were met. As of December 31, 2023, the earn-out periods concluded and the Company recorded a contingent consideration liability of $100 which was included in "Accrued expenses" on the consolidated balance sheets. The Company also made an additional post-closing payment of $910 in the third quarter of 2023 that was negotiated as a deduction of the cash consideration at closing. As a result, total payments related to the transaction are expected to be $72,243, comprised of the upfront cash
consideration of $70,892, a working capital adjustment of $341, an additional post-closing payment of $910, and the fair value of the earn-out payment of $100.
The goodwill of $31,550 that arose on the acquisition date amountingconsists largely of expected synergies, including the combined entities' experience and technical problem-solving capabilities, and acquired workforce. 80% of the goodwill is assigned 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 &and Health reportablebusiness segment and the micronutrient agricultural business has become a part20% of the Specialty Products reportablegoodwill is assigned to the Animal Nutrition and Health business segment.
For tax purposes, a joint election under 338(h)(10) was made to treat the stock acquisition as a deemed asset acquisition, therefore generating tax amortizable goodwill.
The following table summarizes the fair values of the assets acquired and liabilities assumed.assumed:
| | | | | | | | |
| Cash and cash equivalents | | $ | $773 | | $ 4,949 |
| Accounts receivable | | 4,699 | | 7,671 | |
| Inventories | | 3,972 | | 15,989 | |
| Property, plant and equipment | | 2,243 | | 7,217 | |
| Right of use assets | | 866 | |
| Customer relationships | | 29,900 | | 18,443 | |
| Developed technology | | 4,600 | | 9,060 | |
Trade nameTrademarks | | 2,300 | | 7,224 | |
Licensing agreementsOther assets | | 197 | | 6,658 | |
Other assetsAccounts payable | | (699) | | 1,200 | |
Trade accounts payableBank debt | | (206) | | (1,104 | ) |
Accrued expensesLease liabilities | | (871) | | (2,788 | ) |
Bank debtOther liabilities | | (462) | | (884 | ) |
Deferred income taxesGoodwill | | 31,550 | | (13,990 | ) |
Goodwill | | | 55,905 | |
Amount paid to shareholders | | | 115,550 | |
Albion bank debt paid on purchase date | | | 884 | |
Total amount paidconsideration on acquisition date and working capital adjustment | | 78,862 | | $
| Net decrease to contingent consideration liability and other post-closing payments | | $ 116,434(6,825) | |
| Total expected consideration | | 72,037 | |
| To pay off bank debt | | 206 | |
| Total expected payments | | $ | 72,243 | |
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 areis based on management’s estimates and assumptions. In preparing our fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor.
Valuation methods utilized include net realizable value for inventory, multi-period excess earnings method for customer relationships, the relief from royalty method for other intangible assets, and a scenario-based approach for the contingent consideration.
Customer relationships are amortized over a 10-year15-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade name, licensing agreements,a percentage of excess earnings over economic life method. The corporate trademark and product trademarks are amortized over 2 years and 10 years, respectively, and developed technology areis amortized over 1712 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 costs related coststo the Bergstrom acquisition are included in selling, and general and administrative expenses and were $(10,614) and $4,604 for the years ended December 31, 20172023 and 2016 are $8 and $1,499,2022, 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 There were no such amounts related to this acquisition for the year ended December 31, 2017 exclude a working capital adjustment refund2021. These amounts included favorable adjustments to transaction costs of $162 and acquisition-related costs incurred of $170. 2016 supplemental pro forma earnings$11,300 for the year ended December 31, 2016 exclude $26,2102023 and an unfavorable adjustment to transaction costs of $3,565 for the year ended December 31, 2022.
Kechu BidCo AS and Its Subsidiary Companies ("Kappa")
On June 21, 2022, Balchem Corporation and its wholly-owned subsidiary, Balchem B.V., completed the acquisition of Kechu BidCo AS and its subsidiary companies, including Kappa Bioscience AS, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway (all acquired companies collectively referred to as “Kappa”). Kappa manufactures specialty vitamin K2, which plays a crucial role in the human body for bone health, heart health and immunity. Primarily, vitamin K2 supports the transport and distribution of calcium in the body. Vitamin K2 is important at all life stages, from pregnancy and early life to healthy aging. The acquisition strengthens the Company's scientific and technical expertise, geographic reach, and marketplace leadership, which should ultimately lead to accelerated growth for the Company's portfolios within the Human Nutrition and Health segment.
The Company made payments of approximately kr3,305,653 ("kr" indicates the Norwegian krone), amounting to approximately kr3,001,981 to the former shareholders and approximately kr303,672 to Kappa's lenders to pay off all Kappa bank debt. Net of cash acquired of kr63,064, total payments to the former shareholders were kr2,938,917. Net of gains on foreign currency forward contracts of $512 (see Note 20, Derivative Instruments and Hedging Activities), these payments translated to approximately $333,112, amounting to approximately $302,464 paid to the former shareholders and approximately $30,648 to Kappa's lenders. Net of cash acquired of $6,365, total payments made to the former shareholders of Kappa were approximately $296,099. The acquisition was primarily financed through the 2018 Credit Agreement (see Note 8, Revolving Loan). In connection with this transaction, the former shareholders of Kappa had an opportunity to receive an additional payment in 2024 if certain financial performance targets and other metrics were met. There was no contingent consideration liability recorded as of December 31, 2023.
The goodwill of $216,383 that arose on the acquisition date 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 and Health business segment and is not deductible for income tax purposes.
The following table summarizes the fair values of the assets acquired and liabilities assumed. The transactions were completed in Norwegian kroner ("NOK") and the amounts were translated to U.S. dollars ("USD") using the foreign currency exchange rate as of June 21, 2022.
| | | | | | | | |
| Cash and cash equivalents | | $ | 6,365 | |
| Accounts receivable | | 8,036 | |
| Inventories | | 17,600 | |
| Property, plant and equipment | | 9,854 | |
| Right of use assets | | 3,349 | |
| Customer relationships | | 88,813 | |
| Developed technology | | 15,643 | |
| Trademarks | | 5,046 | |
| Other assets | | 2,399 | |
| Accounts payable | | (3,301) | |
| Bank debt | | (30,648) | |
| Lease liabilities | | (3,349) | |
| Other liabilities | | (4,461) | |
| Deferred income taxes, net | | (24,716) | |
| Goodwill | | 216,383 | |
| Total consideration on acquisition date | | 307,013 | |
| Decrease to contingent consideration liability | | (4,037) | |
| Net gain on foreign currency exchange forward contracts | | (512) | |
| Total expected consideration | | 302,464 | |
| Kappa bank debt paid on acquisition date | | 30,648 | |
| Total expected payments | | $ | 333,112 | |
The fair value of tangible and intangible assets acquired and liabilities assumed is based on management’s estimates and assumptions. In preparing our fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Valuation methods utilized include net realizable value for inventory, multi-period excess earnings method for customer relationships, the relief from royalty method for other intangible assets, and a scenario-based approach for the contingent consideration.
Customer relationships are amortized over a 15-year period utilizing a percentage of excess earnings over economic life method. The corporate trademark and product trademarks are amortized over 2 years and 10 years, respectively, and developed technology is amortized over 12 years, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.
Transaction and integration costs related to the Kappa acquisition are included in general and administrative expenses and were $533 and $(2,306) for the years ended December 31, 2023 and 2022, respectively. There were no such amounts related to this acquisition for the year ended December 31, 2021. The amount included a favorable adjustment to transaction costs of $4,037 for the year ended December 31, 2022.
The following selected unaudited pro forma information presents the consolidated results of operations as if the business combinations in 2022 had occurred as of January 1, 2021.
| | | | | | | | | | | | | | |
| | Twelve Months ended December 31, |
| | Net Sales | | Net Earnings |
| Kappa & Bergstrom actual results included in the Company's consolidated income statement in 2023 | | $ | 59,532 | | | $ | 5,487 | |
| | | | |
| Kappa & Bergstrom actual results included in the Company's consolidated income statement in 2022 | | $ | 22,158 | | | $ | (5,359) | |
| | | | |
| 2023 Supplemental pro forma combined financial | | $ | 922,439 | | | $ | 116,317 | |
| | | | |
| 2022 Supplemental pro forma combined financial | | $ | 982,021 | | | $ | 110,181 | |
| | | | |
| 2021 Supplemental pro forma combined financial | | $ | 859,252 | | | $ | 90,672 | |
The above selected unaudited pro forma information includes the following acquisition-related costs incurredadjustments: (1) additional amortization of intangible assets and $5,363depreciation of non-recurring expensesfixed assets; (2) adjustments related to the fair value adjustmentof the acquired inventory, (3) adjustments to acquisition-date inventory. interest expense on borrowings at rates in effect during the related period, factoring in estimated payments based on free cash flow, and (4) other one-time adjustments.
The pro forma information presented does not purport to be indicative of the results that actually would have been attained if the Albion acquisitionthese acquisitions 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 COMPENSATIONStock-Based Compensation
All share-based payments, including grants of stock options, are recognized in the income statementstatements of earnings as an operating expense,expenses, 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, 20162023, 2022 and 20152021 reflected the following compensation cost and such compensation cost had the following effects on net earnings:
| | | | | | | | | | | | | | | | | | | | |
| | | Increase/(Decrease) for the
Year Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Cost of sales | | $ | 1,900 | | | $ | 1,302 | | | $ | 845 | |
| Operating expenses | | 14,152 | | | 11,922 | | | 9,957 | |
| Net earnings | | (12,375) | | | (10,214) | | | (8,370) | |
| | | 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, 2017,2023, the Company had one share-based compensation plan under which awards may be granted, which is described below (the “2017 Plan”).below.
In June 2017, the Company adoptedCompany’s shareholders approved 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’Plan"), which expires onexpired in 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. On June 22, 2023, the Company’s shareholders approved an amendment and restatement of the 2017 Plan (the “Amended 2017 Plan”). The Amended 2017 Plan is administered by the Compensation Committee of the Board of Directors of the Company. The Amended 2017 Plan provides as follows: i)(i) for a termination date of June 13, 2027;22, 2033; (ii) to authorize 1,600,000the authorization of 2,400,000 shares reserved for future grants a reduction(which represents an increase of 800,000 shares from the 6,000,000 shares authorized for grantamount approved under the 1999 Plan;2017 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 by the Compensation Committee or in an employment agreement as in effect on the effective date of the Amended 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)(vi) 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 discretionaryincentive compensation recovery if the Company is required to prepare an accounting restatement of its financial statements, in accordance with any compensation recovery policy adopted by the Company, applicable law, government regulations or national securities exchange requirements, or in the discretion of the Compensation Committee in the event of a restatement 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, 2017,2023, the Amended 2017 Plan had 1,586,5001,034,260 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 withhas Restricted Stock Grant Agreements forwith the Company’s non-employeeCompany'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 50070 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 stockCommon 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”) market condition where vesting is dependent upon the Company’s TSR performance over the performance period (typically three years) 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 aeither the Black-Scholes based option-pricing model thator the Binomial model, whichever is deemed to be most appropriate. For the years ended December 31, 2023, 2022, and 2021, the fair value of each option grant 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 | |
| | Year Ended December 31, | | | | Year Ended December 31, |
Weighted Average Assumptions: | | 2017 | | | December 31, 2016 | | | 2015 | | Weighted Average Assumptions: | | 2023 | | 2022 | | 2021 |
| Expected Volatility | | | 30.1 | % | | | 34.4 | % | | | 33.2 | % | Expected Volatility | | 28.1 | % | | 30.3 | % | | 32.9 | % |
| Expected Term (in years) | | | 4.6 | | | | 5.0 | | | | 5.5 | | Expected Term (in years) | | 4.8 | | 7.3 | | 4.9 |
| Risk-Free Interest Rate | | | 1.8 | % | | | 1.2 | % | | | 1.7 | % | Risk-Free Interest Rate | | 3.9 | % | | 2.8 | % | | 0.5 | % |
| Dividend Yield | | | 0.5 | % | | | 0.5 | % | | | 0.6 | % | Dividend Yield | | 0.5 | % | | 0.5 | % | | 0.5 | % |
The value of the restricted shares is based on the fair value of the award at the date of grant.
PSPerformance Share 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 PSPerformance Share vests. The assumptions used in the fair value determination were risk free interest rates of 1.5%4.2%, 1.8%, and 0.88%0.2%; dividend yields of 0.6%0.5%, 0.5%, and 0.6%; volatilities of 32%, 32%, and 32%33%; and initial TSR’s of 8.2%4.2%, -15.7%, and -6.6%11.7% in each case for the years ended December 31, 20172023, 2022, and 2016,2021, 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 PSPerformance Shares 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 to five years for stock options, fourthree years for employee restricted stock awards, three
years for employee performance share awards, and fourthree years for non-employee director restricted stock awards.
A summary of stock option plan activity for 2017, 2016,2023, 2022, and 20152021 for all plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | # of
Shares
(000s) | | Weighted Average
Exercise Price | | # of
Shares
(000s) | | Weighted Average
Exercise Price | | # of
Shares
(000s) | | Weighted Average
Exercise Price |
| Outstanding at beginning of year | | 1,045 | | | $ | 99.82 | | | 867 | | | $ | 88.19 | | | 858 | | | $ | 80.58 | |
| Granted | | 109 | | | 138.09 | | | 239 | | | 139.04 | | | 129 | | | 119.12 | |
| Exercised | | (64) | | | 81.98 | | | (44) | | | 73.58 | | | (109) | | | 63.42 | |
| Forfeited | | (11) | | | 131.79 | | | (17) | | | 124.89 | | | (10) | | | 106.93 | |
| Cancelled | | (1) | | | 138.07 | | | — | | | — | | | (1) | | | 74.57 | |
| Outstanding at end of year | | 1,078 | | | $ | 104.38 | | | 1,045 | | | $ | 99.82 | | | 867 | | | $ | 88.19 | |
| | | | | | | | | | | | |
| Exercisable at end of year | | 720 | | | $ | 88.49 | | | 654 | | | $ | 81.95 | | | 538 | | | $ | 75.51 | |
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$47,889, $27,221 and $69,711 at December 31, 2017, 20162023, 2022 and 2015,2021, respectively, with a weighted average remaining contractual term of 6.35.7 years at December 31, 2017.2023. Exercisable stock options at December 31, 20172023 had an aggregate intrinsic value of $19,534$43,364 with a weighted average remaining contractual term of 4.64.4 years.
Other information pertaining to option activity during the years ended December 31, 2017, 20162023, 2022 and 2015 was2021 is as follows:
| | | Years Ended December 31, | | | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | | | 2023 | | 2022 | | 2021 |
| 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, 20172023 is as follows:
48 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 |
| $54.87 - $85.33 | | 387 | | | 3.5 | | $ | 72.41 | | | 387 | | | $ | 72.41 | |
| $85.40 - $118.60 | | 250 | | | 4.9 | | 101.84 | | | 248 | | | 101.71 | |
| $118.96 - $150.85 | | 441 | | | 8.1 | | 133.93 | | | 85 | | | 123.47 | |
| | | 1,078 | | | 5.7 | | $ | 104.38 | | | 720 | | | $ | 88.49 | |
| | | | | | 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, 20162023, 2022 and 20152021 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | | Shares (000s) | | Weighted
Average Grant
Date Fair
Value | | Shares (000s) | | Weighted
Average Grant
Date Fair
Value | | Shares (000s) | | Weighted
Average Grant
Date Fair
Value |
| Non-vested balance at beginning of year | | 122 | | | $ | 124.42 | | | 166 | | | $ | 99.7 | | | 159 | | | $ | 90.71 | |
| Granted | | 40 | | | 137.20 | | | 46 | | | 137.17 | | | 42 | | | 123.58 | |
| Vested | | (42) | | | 112.30 | | | (82) | | | 82.15 | | | (24) | | | 85.83 | |
| Forfeited | | (4) | | | 128.06 | | | (8) | | | 118.07 | | | (11) | | | 90.49 | |
| Non-vested balance at end of year | | 116 | | | $ | 133.06 | | | 122 | | | $ | 124.42 | | | 166 | | | $ | 99.7 | |
| | | 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, 20162023, 2022 and 20152021 is summarized below:
49 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | | Shares (000s) | | Weighted
Average Grant
Date Fair
Value | | Shares (000s) | | Weighted
Average Grant
Date Fair
Value | | Shares (000s) | | Weighted
Average Grant
Date Fair
Value |
| Non-vested balance at beginning of year | | 70 | | | $ | 127.69 | | | 69 | | | $ | 110.72 | | | 71 | | | $ | 91.99 | |
| Granted | | 42 | | | 139.66 | | | 39 | | | 114.22 | | | 36 | | | 108.74 | |
| Vested | | (36) | | | 98.84 | | | (35) | | | 53.17 | | | (24) | | | 70.64 | |
| Forfeited | | — | | | — | | | (3) | | | 84.09 | | | (14) | | | 81.03 | |
| Non-vested balance at end of year | | 76 | | | $ | 135.25 | | | 70 | | | $ | 127.69 | | | 69 | | | $ | 110.72 | |
| | | 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, 20162023, 2022 and 2015,2021, there was $7,742, $8,260$18,817, $20,791 and $7,705,$13,980, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31, 2017,2023, 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, 20182024 will be approximately $7,300.$14,800.
REPURCHASE OF COMMON STOCK
Repurchase of Common Stock
The CompanyCompany's Board of Directors has an approved a 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 2,174,0173,103,106 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.purchased. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it is advisable to do so based on its assessment of corporate cash flow, market conditions and other factors. Open market repurchases of common stock could be made pursuant to trading plan established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that the Company might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The Company also repurchases (withholds) shares from employees in connection with the tax settlement of transactionsvested shares and/or exercised stock options under the Company’s equityCompany's omnibus incentive plans.plan. Such repurchases of shares from employees are funded with existing cash on hand. During 2023, 2022, and 2021, the Company purchased 32,558, 252,304, and 249,848 shares, respectively, from open market purchases and from employees on a net-settlement basis to provide cash to employees to cover the associated employee payroll taxes. These shares were purchased at an average cost of $137.29, $140.40, and $141.04 per share, respectively.
NOTE 4 - INVENTORIES
Inventories, net of reserves at December 31, 20172023 and 20162022 consisted of the following:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Raw materials | | $ | 39,517 | | | $ | 44,477 | |
| Work in progress | | 3,960 | | | 3,143 | |
| Finished goods | | 66,044 | | | 72,048 | |
| Total inventories | | $ | 109,521 | | | $ | 119,668 | |
| | | 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,reserved, if necessary. The reserve for inventory was $2,315$2,463 and $2,546$2,640 at December 31, 20172023 and 2016,2022, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 20172023 and 20162022 are summarized as follows:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Land | | $ | 11,787 | | | $ | 11,415 | |
| Building | | 104,363 | | | 90,644 | |
| Equipment | | 312,704 | | | 278,851 | |
| Construction in progress | | 59,981 | | | 79,928 | |
| | | 488,835 | | | 460,838 | |
| Less: Accumulated depreciation | | 212,796 | | | 189,483 | |
| Property, plant and equipment, net | | $ | 276,039 | | | $ | 271,355 | |
| | | 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 | |
Geographic Area Data - Long-Lived Assets (excluding intangible assets): | | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| United States | | $ | 203,692 | | | $ | 211,588 | |
| Foreign Countries | | 72,347 | | | 59,767 | |
| Total | | $ | 276,039 | | | $ | 271,355 | |
Depreciation expense was $17,121, $15,907$26,373, $24,033 and $12,895$23,295 for the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively.
In accordance with Topic 360, the Company reviews long-lived assets for impairment on an annual basis and also whenever events indicate that the carrying amount of the assets may not be fully recoverable. 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. Included in “General and administrative expenses” were restructuring-related impairment and asset disposal charges of $7,764 related to building, equipment, and construction in progress mainly in the Human Nutrition and Health and the Animal Nutrition and Health segments, for the year ended December 31, 2023. Such expenses for the year ended December 31, 2022 were not material.
NOTE 6 - INTANGIBLE ASSETS
The Company had goodwill in the amount of $441,361$778,907 and $439,811$769,509 as of December 31, 20172023 and 20162022, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.” The increase in goodwill is primarily due to foreign currency translation adjustments.
As of December 31, 20172023 and 2016,2022, the Company had identifiable intangible assets as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2023 | | 2022 |
| | | Amortization
Period
(In years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Gross
Carrying
Amount | |
Accumulated
Amortization |
| Customer relationships and lists | | 10-20 | | $ | 362,032 | | | $ | 209,651 | | | $ | 357,131 | | | $ | 190,576 | |
| Trademarks and trade names | | 2-17 | | 50,286 | | | 37,773 | | | 50,058 | | | 33,416 | |
| Developed technology | | 5-12 | | 41,184 | | | 17,516 | | | 40,473 | | | 16,171 | |
| Other | | 2-18 | | 25,733 | | | 23,083 | | | 25,041 | | | 19,245 | |
| | | | | $ | 479,235 | | | $ | 288,023 | | | $ | 472,703 | | | $ | 259,408 | |
| | | 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$28,035, $27,271 and $26,467$25,092 for 2017, 20162023, 2022 and 2015,2021, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is approximately $24,593$18,971 in 2018, $22,4792024, $15,509 in 2019, $20,4422025, $15,308 in 2020, $17,2342026, $14,784 in 2021,2027, and $15,776$14,387 in 2022.2028. At December 31, 20172023 and 2016,2022, 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 20172023 and 2016.2022.
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”(the "EPA") because they are considered pesticides. Costs of such registrationregistrations 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 all continued expansion will beand improvements are 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)("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 itas the Company 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$509, $559, and $293$557 for the years ended December 31, 20172023, 2022, and 2016,2021, respectively, relating to its portion of the joint venture’s expenses in other expense. The Company made capital contributions to the investment totaling $290, $355, and $85 for the years ended December 31, 2023, 2022, and 2021 respectively. The carrying value of the joint venture at December 31, 20172023 and 2016 is $4,8042022 was $4,076 and $4,553,$4,295, respectively, and is recorded in other assets."Other non-current assets" on the consolidated balance sheets.
NOTE 8 – LONG TERM DEBTREVOLVING LOAN
On May 7, 2014,June 27, 2018, the Company and a bank syndicate entered into a loancredit agreement providing(the "2018 Credit Agreement"), which provided for revolving loans up to $500,000, due on June 27, 2023. During the second quarter of 2022, the Company borrowed $345,000 under the 2018 Credit Agreement to fund the Kappa acquisition (see Note 2, Significant Acquisitions). On July 27, 2022, the Company entered into an Amended and Restated Credit Agreement (the "2022 Credit Agreement") with certain lenders in the form of a senior secured term loanrevolving credit facility, due on July 27, 2027. The 2022 Credit Agreement allows for up to $550,000 of $350,000borrowing. The loans may be used for working capital, letters of credit, and revolving loanother corporate purposes and may be drawn upon at the Company’s discretion. The Company used initial proceeds from the 2022 Credit Agreement to repay the outstanding balance of $100,000 (collectively referred to as$433,569 due in June 2023 under the “loans”). On February 1, 2016, $65,0002018 Credit Agreement. During the third quarter of 2022, the revolving loan was usedCompany borrowed another $70,000 to fund the Albion International, Inc.Bergstrom acquisition (see Note 2)2, Significant Acquisitions). In addition, on June 1, 2017, $20,000As of the revolving loan was used to fund the Innovative Food Processors, Inc. acquisition (see Note 2). At December 31, 2017,2023 and 2022, 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 thebalance outstanding principal due on the maturity date. The Company may draw2022 Credit Agreement amounted to $309,569 and $440,569, respectively. There are no installment payments required 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 loansloans; they may be voluntarily prepaid in whole or in part without premium or penalty, and have aall outstanding amounts are due on the maturity date of May 7, 2019. The loansdate.
Amounts outstanding under the 2022 Credit Agreement are subject to an interest rate equal to LIBOR or a fluctuating rate as defined by the loan agreement, at the Company’s discretion,2022 Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the loan agreement,2022 Credit Agreement, and the interest rate was 3.07%6.580% at December 31, 2017.2023. The Company has $100,000 of undrawn revolving loan at December 31, 2017 that is subjectalso required to pay a commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as defined in the 2022 Credit Agreement and ranges from 0.150% to 0.225% (0.175% at December 31, 2023). The unused portion of the revolving loan agreement.amounted to $240,431 at December 31, 2023. The loan agreementCompany is also required to pay, as applicable, letter of credit fees, administrative agent fees, and other fees to the arrangers and lenders.
Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the 2022 Credit Agreement. Capitalized costs net of accumulated amortization totaled $1,030 and $1,317 at December 31, 2023 and 2022, respectively, and are included in "Other non-current assets" on the consolidated balance sheets. Amortization expense pertaining to these costs totaled $287, $335, and $282 for the years ended December 31, 2023, 2022, and 2021, respectively, and are included in "Interest expense" in the accompanying consolidated statements of earnings.
The 2022 Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated fixed chargeinterest coverage ratio to exceed a certain minimum ratio. At December 31, 2017,2023, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements areis secured by assets of the company.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 109 - 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 | |
55
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Net Earnings - Basic and Diluted | | $ | 108,543 | | | $ | 105,367 | | | $ | 96,104 | |
| | | | | | |
| Share (000s) | | | | | | |
| Weighted Average Common Shares - Basic | | 32,108 | | | 32,019 | | | 32,215 | |
| Effect of Dilutive Securities – Stock Options, Restricted Stock, and Performance Shares | | 340 | | | 374 | | | 457 | |
| Weighted Average Common Shares - Diluted | | 32,448 | | | 32,393 | | | 32,672 | |
| | | | | | |
| Net Earnings Per Share - Basic | | $ | 3.38 | | | $ | 3.29 | | | $ | 2.98 | |
| Net Earnings Per Share - Diluted | | $ | 3.35 | | | $ | 3.25 | | | $ | 2.94 | |
The Company had 199,010, 2,500,number of anti-dilutive shares were 354,619, 371,513, and 194,372 stock options outstanding at December 31, 2017, 2016155,294 for 2023, 2022, and 2015, respectively that2021. Anti-dilutive shares could potentially dilute basic earnings per share in future periods thatand therefore, were not included in diluted earnings per share becauseshare.
NOTE 10 - INCOME TAXES
The Company’s effective tax rate for 2023, 2022 and 2021 was 20.9%, 21.2%, and 23.3%, respectively. The decrease from 2022 to 2023 is primarily due to an increase in certain tax credits.
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 presented was anti-dilutive.
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.
The Company considers the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. However, due to prevailing economic conditions of increased interest rates and subsequent borrowing costs, the Company remitted approximately $18,000 from its Belgium subsidiary and has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted sharesincurred an income tax expense of approximately $20. The remittance was used to pay down U.S. debt. The Company had unremitted foreign earnings of approximately $109,000 and they participate$94,000 for the years ended December 31, 2023 and 2022, respectively. The determination of the unrecognized deferred tax liability on a one-for-one basis with holdersthose undistributed earnings is not practicable due to its legal entity structure and the complexity of Common Stock. These awards have an immaterial impact as participating securities with regardU.S. and local country tax laws. If the Company decides to change its assertion on its remaining undistributed foreign earnings, it will need to recognize the income tax effects in the period it changes its assertion.
Income tax expense consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Current: | | | | | | |
| Federal | | $ | 27,306 | | | $ | 26,423 | | | $ | 25,019 | |
| Foreign | | 7,634 | | | 7,103 | | | 7,553 | |
| State | | 4,403 | | | 3,964 | | | 3,664 | |
| Deferred: | | | | | | |
| Federal | | (7,737) | | | (7,532) | | | (3,709) | |
| Foreign | | (2,285) | | | (215) | | | (3,038) | |
| State | | (603) | | | (1,361) | | | (360) | |
| Total income tax provision | | $ | 28,718 | | | $ | 28,382 | | | $ | 29,129 | |
The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 21% for 2023, 2022, and 2021 to earnings before income tax expense due to the calculation usingfollowing:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Income tax at Federal statutory rate | | $ | 28,825 | | | $ | 28,087 | | | $ | 26,299 | |
| State income taxes, net of Federal income taxes | | 2,513 | | | 1,862 | | | 2,406 | |
| Stock Options | | (1,004) | | | (676) | | | (924) | |
| Foreign-derived intangible income (FDII) | | (1,752) | | | (1,778) | | | (1,540) | |
| Foreign rate differential | | 946 | | | 2,066 | | | 1,188 | |
| Other | | (810) | | | (1,179) | | | 1,700 | |
| Total income tax provision | | $ | 28,718 | | | $ | 28,382 | | | $ | 29,129 | |
The tax effects of temporary differences that give rise to significant portions of the two-class methoddeferred tax assets and deferred tax liabilities at December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Deferred tax assets: | | | | |
| Inventories | | $ | 1,049 | | | $ | 1,038 | |
| Restricted stock and stock options | | 5,565 | | | 3,932 | |
| Lease liabilities | | 4,812 | | | 5,439 | |
| Research and development | | 12,653 | | | 4,134 | |
| Other | | 3,874 | | | 3,717 | |
| Total deferred tax assets | | 27,953 | | | 18,260 | |
| Deferred tax liabilities: | | | | |
| Amortization | | $ | (42,351) | | | $ | (46,688) | |
| Depreciation | | (28,937) | | | (25,097) | |
| Prepaid expenses | | (421) | | | (462) | |
| Foreign currency and interest rate swaps | | (647) | | | (1,456) | |
| Right of use assets | | (4,574) | | | (5,324) | |
| Other | | (3,047) | | | (1,995) | |
| Total deferred tax liabilities | | (79,977) | | | (81,022) | |
| | | | |
| Valuation allowance | | (22) | | | (22) | |
| | | | |
| Net deferred tax liability | | $ | (52,046) | | | $ | (62,784) | |
As of December 31, 2023, the Company has state income tax net operating loss (NOL) carryforwards of $348. The state NOL carryforwards will expire between 2026 and 2035. The Company believes that the benefit from the state NOL carryforwards will not be realized, therefore, a valuation allowance has been established in the amount of $22.
Provisions of ASC 740-10 clarify whether or not to recognize assets or liabilities for determining earnings per share.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:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Balance at beginning of period | | $ | 5,815 | | | $ | 5,881 | | | $ | 5,335 | |
| Increases for tax positions of prior years | | 1,353 | | | 2,194 | | | 806 | |
| Decreases for tax positions of prior years | | (2,518) | | | (2,260) | | | (260) | |
| Balance at end of period | | $ | 4,650 | | | $ | 5,815 | | | $ | 5,881 | |
All of Balchem'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, 2023 and 2022, these amounts were reduced by $322 and $371, respectively. During the year ended December 31, 2021, this amounted to $262. As of December 31, 2023 and 2022, accrued interest and penalties were $1,413 and $1,735, respectively.
Balchem 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 2019 and management does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.
The European Union (“EU”) member states formally adopted the EU’s Pillar Two Directive, which was established by the Organization for Economic Co-operation and Development. Pillar Two generally provides for a 15 percent minimum effective tax rate for the jurisdictions where multinational enterprises operate. While the Company does not anticipate that this will have a
material impact on its tax provision or effective tax rate, the Company continues to monitor evolving tax legislation in the jurisdictions in which it operates.
NOTE 11 - EMPLOYEE BENEFIT PLANSSEGMENT INFORMATION
Balchem Corporation reports three reportable segments: Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated."
During 2017,
Human Nutrition and Health
The Human Nutrition and Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for nutrition and health applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products; proprietary technologies have been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customers' appreciation of brand value. Consequently, the Company sponsored two 401(k) savings plansmakes investments in such activities for eligible employees.long-term value differentiation. This segment also manufactures specialty vitamin K2, which plays a crucial role in the human body for bone health, heart health and immunity, and methylsulfonylmethane ("MSM"), which is a widely used nutritional ingredient that helps provide benefits for joint health, sports nutrition, skin and beauty, and healthy aging. This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. The plans allow participantsCompany partners with its customers from ideation through commercialization to make pretax contributionsbring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company has expertise in trends analysis and product development. With its strong manufacturing capabilities in customized spray dried and emulsified powders, extrusion and agglomeration, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, ice cream bases and variegates, the Company matches certain percentagesis a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of those pretax contributions.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, sports and protein bars, dietary plans, and nutritional supplements. The plans have a discretionary profit sharing portionCompany also creates cereal systems for ready-to-eat cereals, grain-based snacks, and one ofcereal based ingredients.
Animal Nutrition and Health
The Company’s Animal Nutrition and Health ("ANH") segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to the plans matches 401k contributions with shares ofessential nutrient choline chloride. For ruminant animals, the Company’s Common Stock. All amounts contributedmicroencapsulated products boost health and milk production by delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the 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 contributionspoultry, pet and the Company matches certain percentages of those contributionsswine industries. Choline, which is made with sharesmanufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity. This segment also manufactures MSM, which is a widely used nutritional ingredient that provides benefits for pet health.
Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented choline chloride marketplace is highly dependent on the Company’s stock. Additionally, this plan has a discretionary profit sharing portion.ability to maintain its strong reputation for excellent product quality and customer service. The Company provided for profit sharing contributions and matching 401(k) savings plan contributions of $395 and $2,594continues to drive production efficiencies in 2017, $712 and $2,248order to maintain its competitive-cost position to effectively compete in 2016, and $738 and $1,886 in 2015, respectively.a competitive global marketplace.
Specialty Products
The Company also provides postretirement benefitsre-packages and distributes a number of performance gases and chemicals for various uses by its customers, notably ethylene oxide, propylene oxide, and ammonia. Ethylene oxide is sold as a sterilant gas, primarily for use in the formhealth
care industry. It is used to sterilize a wide range of medical plan under a collective bargaining agreement covering eligible retired employeesdevices 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 Verona facility.device being sterilized. Contract sterilizers and medical device manufacturers are principal customers for this product. Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage, to reduce bacterial and mold contamination in certain shelled and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes, and for various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings. Ammonia is used primarily as a refrigerant, for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and cylinder packaging approved for use in the countries these products are shipped to.
The Company’s performance gases and chemicals are distributed worldwide in specially designed, reusable and recyclable drum and cylinder packaging, to assure compliance with safety, quality and environmental standards as outlined by the applicable regulatory agencies in the countries our products are shipped to. The Company’s inventory of these specially built drums and cylinders, along with its five filling facilities, represents a significant capital investment. The Company usesalso sells single use canisters for use in sterilizing re-usable devices typically processed in autoclave units in hospitals.
The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily to producers of high value crops. The Company has a December 31 measurement date for its postretirement medical plan. In accordance with ASC 715, “Compensation—Retirement Benefits,”unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate® product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.
The segment information is requiredsummarized as follows:
Business Segment Assets | | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Human Nutrition and Health | | $ | 1,180,527 | | | $ | 1,170,238 | |
| Animal Nutrition and Health | | 166,994 | | | 175,972 | |
| Specialty Products | | 168,307 | | | 177,187 | |
Other and Unallocated (1) | | 81,383 | | | 101,115 | |
| Total | | $ | 1,597,211 | | | $ | 1,624,512 | |
Business Segment Net Sales
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Human Nutrition and Health | | $ | 550,751 | | | $ | 527,131 | | | $ | 442,733 | |
| Animal Nutrition and Health | | 238,326 | | | 262,297 | | | 226,776 | |
| Specialty Products | | 125,965 | | | 131,438 | | | 117,020 | |
Other and Unallocated (2) | | 7,397 | | | 21,492 | | | 12,494 | |
| Total | | $ | 922,439 | | | $ | 942,358 | | | $ | 799,023 | |
Business Segment Earnings Before Income Taxes
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Human Nutrition and Health | | $ | 102,419 | | | $ | 82,125 | | | $ | 76,031 | |
| Animal Nutrition and Health | | 27,576 | | | 36,056 | | | 26,179 | |
| Specialty Products | | 34,579 | | | 32,789 | | | 30,020 | |
Other and Unallocated (2) | | (5,381) | | | (5,784) | | | (4,728) | |
| Interest and other expense | | (21,932) | | | (11,437) | | | (2,269) | |
| Total | | $ | 137,261 | | | $ | 133,749 | | | $ | 125,233 | |
Depreciation/Amortization | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Human Nutrition and Health | | $ | 38,568 | | | $ | 33,728 | | | $ | 30,012 | |
| Animal Nutrition and Health | | 7,876 | | | 6,685 | | | 7,414 | |
| Specialty Products | | 7,278 | | | 7,507 | | | 8,332 | |
Other and Unallocated (2) | | 1,213 | | | 3,928 | | | 3,121 | |
| Total | | $ | 54,935 | | | $ | 51,848 | | | $ | 48,879 | |
| | | | | | |
Capital Expenditures
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Human Nutrition and Health | | $ | 26,415 | | | $ | 33,668 | | | $ | 23,714 | |
| Animal Nutrition and Health | | 6,993 | | | 10,809 | | | 8,100 | |
| Specialty Products | | 3,535 | | | 4,004 | | | 3,804 | |
Other and Unallocated (2) | | 331 | | | 605 | | | 524 | |
| Total | | $ | 37,274 | | | $ | 49,086 | | | $ | 36,142 | |
| | |
(1) Other and Unallocated assets consist of certain cash, capitalized loan issuance costs, other assets, investments, and income taxes, which the Company does not allocate to its individual business segments. It also includes assets associated with a few minor businesses which individually do not meet the quantitative thresholds for separate presentation. |
(2) Other and Unallocated consists of a few minor businesses which individually do not meet the quantitative thresholds for separate presentation and corporate expenses that have not been allocated to a segment. Unallocated corporate expenses consist of: (i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling $1,617, $3,581 and $1,264 for years ended December 31, 2023, 2022 and 2021, respectively, and (ii) Unallocated amortization expense of $312, $2,951, and $2,510 for years ended December 31, 2023, 2022, and 2021, respectively, related to an intangible asset in connection with a company-wide ERP system implementation. |
NOTE 12 - REVENUE
Revenue Recognition
Revenues are recognized when control of the promised goods is transferred to recognizecustomers, in an amount that reflects the over funded or underfunded statusconsideration we expect to realize in exchange for those goods.
The following table presents revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Product Sales Revenue | | $ | 919,951 | | | $ | 939,166 | | | $ | 794,518 | |
| Royalty Revenue | | 2,488 | | | 3,192 | | | 4,505 | |
| Total Revenue | | $ | 922,439 | | | $ | 942,358 | | | $ | 799,023 | |
The following table presents revenues disaggregated by geography, based on customers' delivery addresses:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| United States | | $ | 689,601 | | | $ | 682,238 | | | $ | 584,661 | |
| Foreign Countries | | 232,838 | | | 260,120 | | | 214,362 | |
| Total | | $ | 922,439 | | | $ | 942,358 | | | $ | 799,023 | |
Product Sales Revenues
The Company’s primary operation is the manufacturing and sale of financial position,health and to recognize changes in that funded status in the yearwellness ingredient products, in which the changes occur through comprehensive income. In addition, during 2016Company receives an order from a customer and fulfills that order. The Company’s product sales are considered point-in-time revenue.
Royalty Revenues
Royalty revenue consists of agreements with customers to use the Company adopted an unfunded postretirement medical planCompany’s intellectual property in exchange for Named Executive Officers.
The actuariala sales-based royalty. Royalties are considered over time revenue and are 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.HNH segment.
Contract Liabilities
The Company contributes to one multiemployer defined benefit plan under the termsrecords contract liabilities when cash payments are received or due in advance of a collective-bargaining agreement covering its union-represented employees of the Verona facility. The risks of participation in this multiemployer planperformance, including amounts which 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.refundable.
The Company’s participation in this plan forpayment terms vary by the annual period ended December 31, 2017type and location of customers and the products offered. The term between invoicing and when payment is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN). The zone statusdue is based on information thatnot significant. For certain products or services and customer types, the Company received fromrequires payment before the planproducts are delivered to the customer.
Practical Expedients and is certified byExemptions
The Company generally expenses sales commissions when incurred because 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. Thereamortization period would have been no other significant changes that affect the comparability of 2017one year or less. These costs are recorded within selling and 2016 contributions. marketing expenses.
The Company does not represent more than 5%disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the contributionsCompany recognizes revenue at the amount to this pension fund.which it has the right to invoice for products shipped.
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 1213 - COMMITMENTS AND CONTINGENCIESSUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
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 | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Income taxes | | $ | 35,725 | | | $ | 33,016 | | | $ | 25,355 | |
| Interest | | $ | 25,933 | | | $ | 11,879 | | | $ | 4,547 | |
Non-cash financing 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:investing activities:
| 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Dividends payable | | $ | 25,717 | | | $ | 23,129 | | | $ | 20,886 | |
| Contingent consideration liability | | $ | — | | | $ | 11,872 | | | $ | — | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Net foreign currency translation adjustment | | $ | 16,809 | | | $ | (4,799) | | | $ | (11,255) | |
| | | | | | |
| Net change of cash flow hedge (see Note 20 for further information) | | | | | | |
| Unrealized (loss) gain on cash flow hedge | | (1,406) | | | 3,564 | | | 2,707 | |
| Tax | | 341 | | | (868) | | | (654) | |
| Net of tax | | (1,065) | | | 2,696 | | | 2,053 | |
| | | | | | |
| Net change in postretirement benefit plan (see Note 15 for further information) | | | | | | |
| Prior service loss (gain) arising during the period | | 132 | | | (41) | | | (4) | |
| Amortization of prior service gain | | — | | | 9 | | | 74 | |
| Amortization of loss (gain) | | 8 | | | (2) | | | (21) | |
| Total before tax | | 140 | | | (34) | | | 49 | |
| Tax | | (39) | | | (24) | | | (13) | |
| Net of tax | | 101 | | | (58) | | | 36 | |
| | | | | | |
| Total other comprehensive income/(loss) | | $ | 15,845 | | | $ | (2,161) | | | $ | (9,166) | |
Included in "Net foreign currency translation adjustment" was loss of $1,455 related to a net investment hedge, which was net of tax benefit of $471 for the year ended December 31, 2023, and gains of $3,851, and $4,766, related to a net investment hedge, net of tax expenses of $1,236, and $1,527, for the years ended December 31, 2022 and 2021, respectively. See Note 20, Derivative Instruments and Hedging Activities.
Accumulated other comprehensive income/(loss)loss at December 31, 20172023 and 2022 consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Foreign currency
translation
adjustment | | Cash flow hedge | | Postretirement benefit plan | | Total |
| Balance December 31, 2022 | | $ | (8,401) | | | $ | 1,065 | | | $ | 182 | | | $ | (7,154) | |
| Other comprehensive income (loss) | | 16,809 | | | (1,065) | | | 101 | | | 15,845 | |
| Balance December 31, 2023 | | $ | 8,408 | | | $ | — | | | $ | 283 | | | $ | 8,691 | |
| | | 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 INFORMATIONEMPLOYEE BENEFIT PLANS
Defined Contribution Plans
Human Nutrition & HealthThe Company sponsors one 401(k) savings plan for eligible employees, which allows participants to make pretax or after tax contributions and the Company matches certain percentages of those contributions. The plan also has a discretionary profit sharing portion and matches 401(k) contributions with shares of the Company’s Common Stock. All amounts contributed to the plan are deposited into a trust fund administered by independent trustees. On June 21, 2022, the Company completed the acquisition of Kappa, which sponsors one defined contribution plan for its employees. In addition, on August 30, 2022, the Company completed the acquisition of Bergstrom, which sponsored one defined contribution plan for its employees. The Bergstrom plan merged into the Company sponsored 401(k) savings plan on January 1, 2023. The Company provided for matching 401(k) savings plan contributions of $4,381, $4,363, and $4,142 in 2023, 2022 and 2021, respectively. Profit sharing contributions in 2023, 2022, and 2021 were not material.
Our Human Nutrition & Health segment supplies ingredientsPostretirement Medical Plans
The Company provides postretirement benefits in the foodform of two unfunded postretirement medical plans; one that is under a collective bargaining agreement and beverage industry, providing customized solutions in powder, solidcovers eligible retired employees of the Verona, Missouri facility 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 segmentplan 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 abilityexecutive officers of the Company who meet eligibility requirements as set forth in the Company's Officer Retiree Program. The Company uses a December 31 measurement date for its postretirement medical plans. In accordance with ASC 715, “Compensation—Retirement Benefits,” the Company is required to leveragerecognize the resultsover funded or underfunded status of universitya defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and field researchto recognize changes in that funded status in the year in which the changes occur through comprehensive income.
The actuarial recorded liabilities for such unfunded postretirement benefits are as follows:
Change in benefit obligation:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Benefit obligation at beginning of year | | $ | 1,465 | | | $ | 1,293 | |
| Service cost with interest to end of year | | 108 | | | 79 | |
| Interest cost | | 62 | | | 26 | |
| Participant contributions | | 23 | | | 27 | |
| Benefits paid | | (30) | | | (69) | |
| Actuarial (gain) loss | | (233) | | | 109 | |
| Benefit obligation at end of year | | $ | 1,395 | | | $ | 1,465 | |
Change in plan assets:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Fair value of plan assets at beginning of year | | $ | — | | | $ | — | |
| Employer contributions | | 7 | | | 42 | |
| Participant contributions | | 23 | | | 27 | |
| Benefits paid | | (30) | | | (69) | |
| Fair value of plan assets at end of year | | $ | — | | | $ | — | |
Amounts recognized in consolidated balance sheet:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Accumulated postretirement benefit obligation | | $ | (1,395) | | | $ | (1,465) | |
| Fair value of plan assets | | — | | | — | |
| Funded status | | (1,395) | | | (1,465) | |
| Unrecognized prior service cost | | 9 | | | 74 | |
| Unrecognized net loss (gain) | | (2) | | | (24) | |
| Net amount recognized in consolidated balance sheet (after ASC 715) (included in "Other long-term obligations") | | $ | (1,395) | | | $ | (1,465) | |
| Accrued postretirement benefit cost (included in "Other long-term obligations") | | N/A | | N/A |
Components of net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Service cost with interest to end of year | | $ | 108 | | | $ | 79 | | | $ | 87 | |
| Interest cost | | 62 | | | 26 | | | 23 | |
| Amortization of prior service cost | | — | | | 9 | | | 74 | |
| Amortization of loss (gain) | | 8 | | | (2) | | | (24) | |
| Total net periodic benefit cost | | $ | 178 | | | $ | 112 | | | $ | 160 | |
Estimated future employer contributions and benefit payments are as follows:
| | | | | | | | |
| Year | | |
| 2024 | | $ | 131 | |
| 2025 | | 132 | |
| 2026 | | 99 | |
| 2027 | | 101 | |
| 2028 | | 85 | |
| Years 2029-2033 | | 615 | |
Assumptions to determine benefit obligations:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Discount rate | | 4.15 | % | | 4.40 | % |
Assumptions to determine net cost:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Discount rate | | 4.40 | % | | 2.10 | % | | 1.75 | % |
Defined Benefit Pension Plans
The Company contributes to one multi-employer defined benefit plan under the terms of a collective-bargaining agreement covering its union-represented employees of the Verona, Missouri 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 was to stop participating in its multiemployer plan, the Company would be required to pay that plan an amount based on the animal health benefitsunderfunded status of the plan, referred to as the withdrawal liability.
The Company’s products. Management believes that successparticipation in this plan for the annual period ended December 31, 2023 is outlined in the commodity-oriented basic choline chloride marketplacetable below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN). The zone status is highly dependentbased on information that the Company’s ability to maintain its strong reputation for excellent product qualityCompany received from the plan 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, atis certified by the 100% level, is sold as a sterilant gas, primarily for useplan’s actuary. Among other factors, plans in the health care industry. Itred zone or critical and declining 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 used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hardeither pending or soft surfaces, composites, metals, tubing and different types of plastics without negatively impactinghas been implemented. The last column lists the performanceexpiration date of the device being sterilized. Our 100% ethylene oxide productcollective-bargaining agreement to which the plan is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, qualitysubject. Finally, the period-to-period comparability of the contributions for 2023 and environmental standards as outlined2022 was affected 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 aid4.0% increase in the control2023 contribution rate. There have been no other significant changes that affect the comparability of insects2023 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.2022 contributions. 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 allocaterepresent more than 5% of the contributions to its individual business segments.this pension fund.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pension
Fund | | EIN/Pension
Plan
Number | | Pension Plan Protection Act Zone Status | | FIP/RP Status
Pending/ Implemented | | Contributions of Balchem Corporation | | Surcharge
Imposed | | Expiration Date of Collective-
Bargaining
Agreement |
| 2023 | | 2022 | | | 2023 | | 2022 | | 2021 | |
Central States,
Southeast and
Southwest Areas
Pension Fund | | 36-6044243 | | Critical & Declining as of 1/1/23 | | Critical & Declining as of 1/1/22 | | Implemented | | $1,020 | | $939 | | $816 | | No | | 7/12/2025 |
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 | |
The Company provides an unfunded defined benefit pension plan for employees working in Belgium. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees.
Geographic Area Data – Long-Lived
The actuarial recorded liabilities for such unfunded defined benefit pension plan are as follows:
Change in benefit obligation:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Benefit obligation at beginning of year | | $ | 1,589 | | | $ | 1,859 | |
| Service cost with interest to end of year | | 65 | | | 44 | |
| Interest cost | | 65 | | | 17 | |
| Participant contributions | | — | | | 27 | |
| Benefits paid | | (188) | | | (60) | |
| Actuarial loss (gain) | | 80 | | | (194) | |
| Exchange rate changes | | 49 | | | (104) | |
| Benefit obligation at end of year | | $ | 1,660 | | | $ | 1,589 | |
Change in plan assets:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Fair value of plan assets at beginning of year | | $ | 1,196 | | | $ | 1,175 | |
| Actual return on plan assets | | 56 | | | 26 | |
| Employer contributions | | 138 | | | 94 | |
| Participant contributions | | — | | | 27 | |
| Benefits paid | | (188) | | | (60) | |
| Exchange rate changes | | 38 | | | (66) | |
| Fair value of plan assets at end of year | | $ | 1,240 | | | $ | 1,196 | |
Amounts recognized in consolidated balance sheet:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Benefit obligation | | $ | (1,660) | | | $ | (1,589) | |
| Fair value of plan assets | | 1,240 | | | 1,196 | |
| Funded status | | (420) | | | (393) | |
| 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) | | $ | (420) | | | $ | (393) | |
| Accrued postretirement benefit cost (included in other long-term obligations) | | N/A | | N/A |
Components of net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Service cost with interest to end of year | | $ | 65 | | | $ | 44 | | | $ | 67 | |
| Interest cost | | 65 | | | 17 | | | 14 | |
| Expected return on plan assets | | (42) | | | (37) | | | (34) | |
| Amortization of net loss | | — | | | — | | | 3 | |
| Total net periodic benefit cost | | $ | 88 | | | $ | 24 | | | $ | 50 | |
Estimated future benefit payments are as follows:
| | | | | | | | |
| Year | | |
| 2024 | | $ | 1 | |
| 2025 | | 52 | |
| 2026 | | 1 | |
| 2027 | | 1 | |
| 2028 | | 1 | |
| Years 2029-2033 | | 1,096 | |
Assumptions to determine benefit obligations:
| | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| Discount rate | | 3.45 | % | | 4.00 | % |
Assumptions to determine net cost:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Discount rate | | 4.00 | % | | 1.00 | % | | 0.75 | % |
| Expected return on assets | | 3.25 | % | | 3.25 | % | | 3.25 | % |
Deferred Compensation Plan
The Company maintains an unfunded, non-qualified deferred compensation plan for the benefit of a select group of management or highly compensated employees. Assets (excluding intangible assets):of the plan are held in a rabbi trust, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as of December 31, 2023 and 2022 was $10,188 and $8,543, respectively, and was included in "Other long-term obligations" on the Company's balance sheet. The related rabbi trust assets were $10,188 and $8,547 as of December 31, 2023 and 2022, respectively, and were included in "Other non-current assets" on the Company's consolidated balance sheets.
| | | 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 INFORMATIONCOMMITMENTS AND CONTINGENCIES
The Company is obligated to make rental payments under non-cancelable operating and finance leases. Aggregate future minimum rental payments required under these leases at December 31, 2023 are disclosed in Note 19, Leases.
Cash paid duringThe Company’s Verona, Missouri facility, while held by a prior owner, Syntex Agribusiness, Inc. (“Syntex”), was designated by the year for:
| | | 2017 | | | 2016 | | | 2015 | |
| Income taxes | | $ | 25,845 | | | $ | 30,741 | | | $ | 19,551 | |
| Interest | | $ | 7,021 | | | $ | 6,669 | | | $ | 5,987 | |
U.S. Environmental Protection Agency (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 Syntex under the oversight of the EPA and the Missouri Department of Natural Resources. 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. One of the sellers, in turn, has the benefit of certain contractual indemnification by Syntex in relation to the implementation of the above-described Superfund remedy. In June 2023, in response to a Special Notice Letter received from the EPA in 2022, BCP Ingredients, Inc. ("BCP"), the Company's subsidiary that operates the site, Syntex, EPA, and the State of Missouri entered into an Administrative Settlement Agreement and Order on Consent (“ASAOC”) for a focused remedial investigation/feasibility study ("RI/FS") under which (a) BCP will conduct a source investigation of potential source(s) of releases of 1,4-dioxane and chlorobenzene at a portion of the site and (b) BCP and Syntex will complete a RI/FS to determine a potential remedy, if any is required. Activities under the ASAOC are underway and are expected to continue for some period of time.
Non-cash financing activities:
| | | 2017 | | | 2016 | | | 2015 | |
| Dividends payable | | $ | 13,484 | | | $ | 12,088 | | | $ | 10,727 | |
Separately, in June 2022, the EPA conducted an inspection of BCP’s Verona, Missouri facility (“2022 EPA Inspection”) which was followed by BCP entering into an Administrative Order for Compliance on Consent (“AOC”) with the EPA in relation to its risk management program at the Verona facility. Further, in January 2023, BCP entered into an Amended AOC with the EPA
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)whereby the parties agreed to the extension of certain timelines. BCP timely completed all requirements under the Amended AOC. In November 2023, BCP received a notice from the Environment and Natural Resources Division of the U.S Department of Justice (“DOJ”) primarily related to the 2022 EPA Inspection, which extended the opportunity to discuss alleged violations of Sections 112(r)(7) of the Clean Air Act and regulations in 40 C.F.R. Part 68, commonly known as the Risk Management Plan Rule (“RMP Rule”). BCP intends to participate in such discussions in 2024. In connection with the 2022 EPA Inspection, the Company believes that a loss contingency in this matter is probable and reasonably estimable and has recorded a loss contingency in an amount that is not material to its financial performance or operations.
(In thousands, except per share data)addition to the above, from time to time, the Company is a party to various legal proceedings, litigation, claims and assessments. While it is not possible to predict the ultimate disposition of each of these matters, 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, liquidity or cash flows.
| | | 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 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2023 and 2022 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, which are carried at cost and approximate fair value due to the short-term maturity of these instruments. Cash and cash equivalents at December 31, 2023 and 2022 included $959 and $934 in money market funds and other interest-bearing deposit accounts, respectively.
Non-current assets at December 31, 2023 and 2022 included $10,188 and $8,547, respectively, of rabbi trust funds related to the Company's deferred compensation plan. The money market and rabbi trust funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”
The contingent consideration liabilities included on the balance sheet at of December 31, 2023 and 2022 amount to $100 and $11,400, respectively, and were valued using level three inputs, as defined by ASC 820, "Fair Value Measurement".
The Company also had derivative financial instruments, consisting of a cross-currency swap and an interest rate swap, which were included in "Derivative assets" in the Company's consolidated balance sheets. The fair values of these derivative instruments were determined based on Level 2 inputs, using significant inputs that are observable either directly or indirectly, including interest rate curves and implied volatilities. The Company settled its cross-currency swap and interest rate swap on June 27, 2023 and had no other derivatives outstanding as of December 31, 2023. The derivative assets related to the cross-currency swap and the interest rate swap were $4,587 and $1,406 at December 31, 2022, respectively.
NOTE 18 – RELATED PARTY TRANSACTIONS
The Company provides services onunder 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 soldsells raw materials to St. Gabriel CC Company, LLC. In return,These raw materials are used in the production of finished goods that are, in turn, sold by Saint Gabriel CC Company, LLC to the Company for resale to unrelated parties. As such, the sale of these raw materials to St. Gabriel CC Company, LLC provides choline chloride finished goods. Thein this scenario lacks economic substance and therefore the Company does not include them in net sales within the consolidated statements of earnings.
Payments for the services the Company provided amounted to $3,445$4,363, $4,213, and $1,837,$3,637, respectively, for the years ended December 31, 20172023, 2022, and 2016.2021. The raw materials purchased and subsequently sold amounted to $23,459$34,219, $39,853, and $7,480,$27,915, respectively, for the years ended December 31, 20172023, 2022, and 2016.2021. These services and raw materials are primarily recorded in cost of goods sold, net of the finished goods received from St. Gabriel CC Company, LLC of $20,827$28,099, $29,062, and $8,619,$22,043, respectively, for the years ended December 31, 20172023, 2022, and 2016, in cost of goods sold.2021. At December 31, 2017,2023 and 2022, the Company had a receivablereceivables of $6,190,$8,314 and $8,820, respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials soldsold. At December 31, 2023 and a2022, the Company had payables of $6,050 and $5,224,
respectively, recorded in accounts payable of $4,112 for finished goods received.received from St. Gabriel CC Company, LLC. In addition, the Company had a payablepayables in the amount of $363$329 and $296, respectively, related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accrued expenses.accounts payable as of December 31, 2023 and 2022.
NOTE 19 – LEASES
The Company has both real estate leases and equipment leases. The main types of equipment leases include forklifts, trailers, printers and copiers, railcars, and trucks. Leases are categorized as both operating leases and finance leases. As a result of electing the practical expedient within ASU 2016-02, variable lease payments are combined and recognized on the balance sheet in the event that those charges and any related increases are explicitly stated in the lease. Such payments include common area maintenance charges, property taxes, and insurance charges and are recorded in the right of use asset and corresponding liability when the payments are stated in the lease with (a) fixed or in-substance fixed amounts, or (b) a variable payment based on an index or rate. Due to the acquisitive nature of the Company and the potential for synergies upon integration of acquired entities, the Company determined that the reasonably certain criterion could not be met for any renewal periods beginning two years from December 31, 2023. In addition, the Company has historically not been exercising purchase options under the equipment leases as it does not make economic sense to buy the equipment. Instead, the Company has historically replaced the equipment with new leases. Therefore, the Company determined that the reasonably certain criterion could not be met as it relates to purchase options. The Company has no residual value guarantees in lease transactions.
The Company did not identify any embedded leases. As indicated above, the Company elected the practical expedient to combine lease and non-lease components and recognizes the combined amount on the consolidated balance sheet. Management determined that since the Company has a centralized treasury function, the parent company would either fund or guarantee a subsidiary's loan for borrowing over a similar term. As such, the Company's management determined it is appropriate to utilize a corporate based borrowing rate for all locations. The Company developed four tranches of leases based on lease terms and these tranches reflect the composition of the current lease portfolio. The Company's borrowing history shows that interest rates of a term loan or a line of credit depend on the duration of the loan rather than the nature of the assets purchased by those funds. Based on this understanding, the Company elected to use a portfolio approach to discount rates, applying corporate rates to the tranches of leases based on lease terms. Based on the Company's risk rating, the company applied the following discount rates for new leases entered into during 2023: (1) 1-2 years, 5.45%-6.72% (2) 3-4 years, 6.04%-7.31% (3) 5-9 years, 6.38%-7.65% and (4) 10+ years, 7.10%-8.37%.
Right of use assets and lease liabilities at December 31, 2023 and 2022 are summarized as follows:
| | | | | | | | | | | | | | |
| Right of use assets | | 2023 | | 2022 |
| Operating leases | | $ | 17,763 | | | $ | 17,094 | |
| Finance lease | | 2,101 | | | 2,338 | |
| Total | | $ | 19,864 | | | $ | 19,432 | |
| | | | | | | | | | | | | | |
| Lease liabilities - current | | 2023 | | 2022 |
| Operating leases | | $ | 3,949 | | | $ | 3,796 | |
| Finance lease | | 272 | | | 226 | |
| Total | | $ | 4,221 | | | $ | 4,022 | |
| | | | | | | | | | | | | | |
| Lease liabilities - non-current | | 2023 | | 2022 |
| Operating leases | | $ | 14,601 | | | $ | 13,806 | |
| Finance lease | | 1,943 | | | 2,213 | |
| Total | | $ | 16,544 | | | $ | 16,019 | |
For the years ended December 31, 2023, 2022, and 2021, the Company's total lease costs were as follows, which included both amounts recognized in profits or losses during the period and amounts capitalized on the balance sheet, and the cash flows arising from lease transactions:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Lease Cost | | | | | | |
| Operating lease cost | | $ | 5,307 | | | $ | 4,478 | | | $ | 3,143 | |
| | | | | | |
| Finance Lease cost | | | | | | |
| Amortization of ROU asset | | 242 | | | 210 | | | 210 | |
| Interest on lease liabilities | | 115 | | | 125 | | | 129 | |
| Total finance lease | | 357 | | | 335 | | | 339 | |
| | | | | | |
| Total lease cost | | $ | 5,664 | | | $ | 4,813 | | | $ | 3,482 | |
| | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash flows from operating leases | | $ | 4,757 | | | $ | 4,269 | | | $ | 3,097 | |
| Operating cash flows from finance leases | | 115 | | | 125 | | | 129 | |
| Financing cash flows from finance leases | | 222 | | | 177 | | | 159 | |
| | $ | 5,094 | | | $ | 4,571 | | | $ | 3,385 | |
| | | | | | |
| ROU assets obtained in exchange for new operating lease liabilities, net of ROU asset disposals | | $ | 6,365 | | | $ | 11,488 | | | $ | 3,804 | |
| | | | | | |
| Weighted-average remaining lease term - operating leases | | 9.33 years | | 5.63 years | | 4.21 years |
| Weighted-average remaining lease term - finance leases | | 9.07 years | | 9.95 years | | 11.41 years |
| | | | | | |
| Weighted-average discount rate - operating leases | | 7.4 | % | | 2.7 | % | | 3.5 | % |
| Weighted-average discount rate - finance leases | | 5.0 | % | | 5.0 | % | | 5.1 | % |
Rent expense charged to operations under operating lease agreements for 2023, 2022, and 2021 aggregated approximately $5,307, $4,478, and $3,143, respectively.
Aggregate future minimum rental payments required under non-cancelable operating and finance leases at December 31, 2023 are as follows:
| | | | | | | | |
| Year | | |
| 2024 | | $ | 5,407 | |
| 2025 | | 4,219 | |
| 2026 | | 3,638 | |
| 2027 | | 2,736 | |
| 2028 | | 2,219 | |
| Thereafter | | 7,717 | |
| Total minimum lease payments | | $ | 25,936 | |
NOTE 20 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On May 28, 2019, the Company entered into a pay-fixed (2.05%), receive-floating interest rate swap with a notional amount of $108,569 and a maturity date of June 27, 2023, which was designated as cash flow hedge. The net interest income related to the interest rate swap contract were $1,518 and $400 for the years ended December 31, 2023 and 2022, respectively. The net interest expense related to the interest rate swap contract was $2,144 for the year ended December 31, 2021. The net interest income and expense were recorded in the consolidated statements of earnings under "Interest expense, net."
On May 28, 2019, the Company also entered into a pay-fixed (0.00%), receive-fixed (2.05%) cross-currency swap to manage foreign exchange risk related to the Company's net investment in Chemogas, which was designated as net investment hedge. The derivative has a notional amount of $108,569, an effective date of May 28, 2019, and a maturity date of June 27, 2023. The interest income related to the cross-currency swap contract was $1,119, $2,250, and $2,257 for the years ended December 31, 2023, 2022, and 2021, respectively. The interest income was recorded in the consolidated statements of earnings under "Interest expense, net."
The Company settled its derivative instruments on their maturity date of June 27, 2023 and had no other derivatives outstanding as of December 31, 2023. The proceeds from the settlement of the cross-currency swap in the amount of $2,740 were classified as investing activities in the Consolidated Statements of Cash Flows.
As of December 31, 2022, the fair value of the derivative instruments is presented as follows in the Company's consolidated balance sheets:
| | | | | | | | |
| Derivative assets | | December 31, 2022 |
| Interest rate swap | | $ | 1,406 | |
| Cross-currency swap | | 4,587 | |
| Derivative assets | | $ | 5,993 | |
Gains and losses on our hedging instruments were recognized in accumulated other comprehensive income (loss) and categorized as follows for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location within Statements of Comprehensive Income | | Year ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Cash flow hedge (interest rate swap), net of tax | | Unrealized (loss) gain on cash flow hedge, net | | $ | (1,065) | | | $ | 2,696 | | | $ | 2,053 | |
| Net investment hedge (cross-currency swap), net of tax | | Net foreign currency translation adjustment | | (1,455) | | | 3,851 | | | 4,766 | |
| | | | $ | (2,520) | | | $ | 6,547 | | | $ | 6,819 | |
In connection with the Kappa acquisition (see Note 2, Significant Acquisitions), the Company entered into four short-term foreign currency exchange forward contracts to manage fluctuations in foreign currency exchange rates. The Company did not designate these contracts as hedged transactions under the applicable sections of ASC Topic 815, "Derivatives and Hedging". For the year ended December 31, 2022, the net gains on these forward contracts of $512 were recorded in other income or loss in the consolidated statements of earnings. As of December 31, 2023, the Company did not maintain any open foreign currency exchange forward contracts as all four contracts expired during 2022.
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Net sales | | $ | 232,540 | | | $ | 231,252 | | | $ | 229,948 | | | $ | 228,699 | | | $ | 228,867 | | | $ | 236,693 | | | $ | 244,267 | | | $ | 232,531 | |
| Gross margin | | 73,170 | | | 77,349 | | | 76,544 | | | 74,993 | | | 71,506 | | | 71,876 | | | 68,430 | | | 68,639 | |
| Earnings before income taxes | | 29,119 | | | 38,400 | | | 36,475 | | | 33,267 | | | 37,630 | | | 39,258 | | | 31,085 | | | 25,776 | |
| Net earnings | | 22,710 | | | 30,110 | | | 29,075 | | | 26,648 | | | 28,930 | | | 29,782 | | | 25,249 | | | 21,406 | |
| Basic net earnings per common share | | $ | 0.71 | | | $ | 0.94 | | | $ | 0.91 | | | $ | 0.83 | | | $ | 0.90 | | | $ | 0.93 | | | $ | 0.79 | | | $ | 0.67 | |
| Diluted net earnings per common share | | $ | 0.70 | | | $ | 0.93 | | | $ | 0.90 | | | $ | 0.82 | | | $ | 0.89 | | | $ | 0.92 | | | $ | 0.78 | | | $ | 0.66 | |
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2017, 20162023, 2022 and 20152021
(In thousands)
| | | | | | | | | | | | | | |
| | Allowance
for Doubtful Accounts | | Inventory
Reserve |
| Balance - December 31, 2020 | | $ | 2,092 | | | $ | 2,782 | |
| Additions charged to costs and expenses | | 180 | | | 7,312 | |
Adjustments/deductions (a) | | (1,344) | | | (8,669) | |
| | | | |
| Balance - December 31, 2021 | | 928 | | | 1,425 | |
| Additions charged to costs and expenses | | 401 | | | 6,786 | |
Adjustments/deductions (a) | | (103) | | | (5,571) | |
| | | | |
| Balance - December 31, 2022 | | 1,226 | | | 2,640 | |
| Additions charged to costs and expenses | | 37 | | | 2,450 | |
Adjustments/deductions (a) | | (355) | | | (2,627) | |
| | | | |
| Balance - December 31, 2023 | | $ | 908 | | | $ | 2,463 | |
| | | | |
(a) Represents write-offs and other adjustments |
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.
67
64
Item 9. | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Item 9A. Controls and Procedures |
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017.2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management of the CompanyOur management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’sOur internal control over financial reporting is a process designed under the supervision of the Company’sour principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’sour financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and the directors of the Company;our directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sour assets that could have a material effect on our financial statements.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of theits inherent limitations, in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud willmay not occur or that all control issues and instances of fraud, if any, within our Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management does not expect that the Company’s disclosure controls and procedures or its internal control over financial reporting will prevent or detect all errors and all fraud.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projectionsmisstatements. In addition, projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time,the risk that controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
As of December 31, 2017,2023, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control—IntegratedControl-Integrated Framework (New Framework)(New Framework) to conduct an assessment of the effectiveness of the Company’sour internal control over financial reporting. Based on this assessment, management has determined that the Company’sour internal control over financial reporting was effective as of December 31, 2017.
2023.
Attestation Report of Registered Public Accounting Firm
The independent registered public accounting firm of RSM US LLP has issued an attestation report on the Company’sour internal control over financial reporting, which is included herein.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, thereThere has been no significant change in the Company’sour internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting. As of December 31, 2023, management's assessment of and conclusion of the effectiveness of our internal controls over financial reporting of both Kappa and Bergstrom have been
completed. Therefore, management's assessment of and conclusion of the effectiveness of our internal control over financial reporting also includes the internal controls over financial reporting of Kappa and Bergstrom.
Item 9B. | Item 9B. Other Information |
Pursuant to Section 219 ofNo directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement during the Iran Threat Reduction and Syria Human Rights Act of 2012, companies are required, among other things, to disclose certain activities, transactions or dealings with the Government of Iran or entities controlled directly or indirectly by the Government of Iran. Disclosure is generally required even where such activities, transactions or dealings are de minimis. During the year endingfiscal quarter ended December 31, 2017, we sold, in a single sales transaction, 765 twenty-five kilogram bags2023.
Table of ReaShure® encapsulated choline, at a sales price of $82,238 to Imex Gulf, Inc., a privately held US corporation headquartered in Plano, Texas. Imex Gulf, Inc. exported this product to Pishgaman Taghzieh DTI Co.in Tehran, Iran, for subsequent sale and distribution in Iran. We conducted this product sale in compliance with applicable laws. The sale of ReaShure®, an animal feed ingredient, is permissible pursuant to certain statutory and regulatory exemptions from U.S. sanctions applicable to food products.Contents
PART III
Item 10. | Item 10. Directors, Executive Officers of the Registrant, and Corporate Governance. |
(a) | Directors of the Company. |
The information regarding our executive officers is included in Part I of this report under the heading “Information about our Executive Officers.”
The other information required by this item is incorporated by reference to the information is to be set forthcontained under the headings “Proposal 1. Election of Directors”, “Delinquent Section 16(a) Reports,” and “Corporate Governance” in the Company’sour Proxy Statement for the 20182024 Annual Meeting of StockholdersShareholders which will be filed no later than 120 days after December 31, 2023 (the “2018“2024 Proxy Statement”) under the caption “Directors and Executive Officers,” which information is hereby incorporated herein by reference..
(b) | Executive Officers of the Company. |
The required information is to be set forth in the 2018 Proxy Statement under the caption “Directors and Executive Officers,” which information is hereby incorporated herein by reference.
(c) | Section 16(a) Beneficial Ownership Reporting Compliance. |
The required information is to be set forth in the 2018 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is hereby incorporated herein by reference.
The required information is to be set forth in the 2018 Proxy Statement under the caption “Code of Business Conduct and Ethics,” which information is hereby incorporated herein by reference. The Company’s Code of Ethics for Senior Financial Officers is available on the Corporate Governance page in the Investor Relations section of the Company’s website, www.balchem.com.
The required information is to be set forth in the 2018 Proxy Statement under the caption “Nomination of Directors,” and “Committees of the Board of Directors,” which information is hereby incorporated herein by reference.
Item 11. | Item 11. Executive Compensation. |
The information required by this Itemitem is incorporated by reference to be set forth in the 2018 Proxy Statementinformation contained under the captionheadings “Executive Compensation,” “Compensation Committee Report,” and “Compensation Committee Interlocks and Insider Participation,” which information is hereby incorporated herein by reference.Participation” in our 2024 Proxy Statement.
Item 12. | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this Itemitem is incorporated by reference to be set forth in the 2018 Proxy Statementinformation contained under the captionheadings “Security Ownership of Certain Beneficial Owners and of Management” and the caption “EquityEquity Compensation Plan Information,” all of which information is hereby incorporated herein by reference.Information” in our 2024 Proxy Statement.
Item 13. | Item 13. Certain Relationships and Related Transactions and Director Independence. |
The information required by this Itemitem is set forth inincorporated by reference to the 2018 Proxy Statementinformation contained under the captionheadings “Related Party Transactions,”Transactions” and “Director Independence,” which information is hereby incorporated herein by reference.Independence” in our 2024 Proxy Statement.
Item 14. | Item 14. Principal Accountant Fees and Services. |
The information required by this Itemitem is set forth inincorporated by reference to the 2018 Proxy Statementinformation contained under the caption “Proposal No. 2 –heading “Information Relating to Proposal 2. Ratification of Appointment of Independent Registered Public Accounting Firm,” which information is hereby incorporated herein by reference.Firm” of our 2024 Proxy Statement.
PART IV
Item 15. | Item 15. Exhibits and Financial Statement Schedules. |
The following documents are filed as part of this Form 10-K:
| | | | | | | | | | | |
| 1. | | Financial Statements | Form 10-K
Page Number |
| | | | | |
| | | 30 |
| | | | | |
| | | 32 |
| | | | | |
| | | 33 |
| | | |
| | | 34 |
| | | |
| | | 35 |
| | | |
| | | 36 |
| | | | | |
| | | 37 |
| | | | | |
| 2. | | Financial Statement Schedules | |
| | | | | |
| | | 64 |
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| 3. | | Exhibits | |
| | | |
| 2.1 | | |
| 3. | | |
| 3.1 | | Exhibits | |
| 3.1 | |
| | | |
| 3.2 | | 3.2 |
| | | |
| 3.3 | | 3.3 |
| | | |
| 3.4 | | 3.4 |
| | | |
| 4.1 | | |
| | | |
| 10.1 | | |
| | | |
| 10.2 | | 10.1Incentive Stock Option Plan of the Company, as amended, (incorporated by reference to the Company’s Registration Statement on Form S-8, File No. 333-35910, dated October 25, 1996, and to Proxy Statement, dated April 22, 1998, for the Company’s 1998 Annual Meeting of Stockholders (the “1998 Proxy Statement”)).* |
| | |
| 10.2 | Stock Option Plan for Directors of the Company, as amended (incorporated by reference to the Company’s Registration Statement on Form S-8, File No. 333-35912, dated October 25, 1996, and to the 1998 Proxy Statement). |
| | |
| 10.3 | |
| | | |
| | | |
| 10.6 | | 10.5 |
| | | |
| 10.7 | | |
| | | |
| 10.8 | | |
| | | |
| 10.9 | | |
| | | |
| 10.10 | | |
| | | |
| 10.11 | | |
| | | |
| 10.12 | | |
| | | |
| 10.13 | | 10.6Form of Restricted Stock Grant Agreement |
| | |
| 10.7 | Stock Purchase Agreement, dated as of February 1, 2016, among Albion International, Inc., a Nevada Corporation, and certain equity owners thereof, (incorporated by reference to the Company’sCompany's Current Report on Form 8-K datedfiled on February 4, 2016)2019). (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the Stock Purchase Agreement have been omitted and the Company agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request).* |
| | | |
| 10.14 | | 10.8Theodore L. Harris Stock PurchaseOption Grant Agreement, dated as of March 31, 2014, among Performance Chemicals & Ingredients Company (d/b/a SensoryEffects), a Delaware corporation, certain equity owners thereof, the Company and, solely for the limited purposes described therein, Highlander Partners, L.P. (incorporated by reference to the Company’s Current Report on Form 8-K dated April 1, 2014). (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the Stock Purchase Agreement have been omitted and the Company agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request). |
| | |
| 10.9 | Credit Agreement dated May 7, 2014 among the Company, certain guarantors, lenders and Bank of America, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 13, 2014). |
| | |
| 10.10 | Security and Pledge Agreement dated May 7, 2014 among the Company, certain guarantors and Bank of America, N.A. (incorporated by reference to Exhibit 4.12 to the Company’s Current Report on Form 8-K dated May 13, 2014). |
| | |
| 10.11 | 2017 Omnibus Incentive Plan of the Company (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A, filed April 27, 2017). |
| | |
| 10.12 | Offer Letter, dated as of October 3, 2017, between the Company and Mary Theresa CoelhoSeptember 15, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s CurrentQuarterly Report on Form 8-K10-Q dated October 12, 2017)November 4, 2022).* |
| | | |
| 21.1 | | |
| | | | 21.Subsidiaries of Registrant. |
| 23.1 | | |
| 23.1 | |
| | | | |
| 31.1 | | 31.1 |
| | | | |
| 31.2 | | 31.2 |
| | | | |
| 32.1 | | 32.1 |
| | | | |
| 32.2 | | 32.2 |
| | | |
| 97.1 | | |
| | | |
| 101.INS | | 101.INSXBRL Instance Document | |
| | | | |
| 101.SCH | | 101.SCHXBRL Taxonomy Extension Schema Document | |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | |
| | | | |
| 101.DEF | | 101.DEFXBRL Taxonomy Extension Definition Linkbase Document | |
| | | | | | | | | | | |
| | | | |
| 101.LAB | | 101.LABXBRL Taxonomy Extension Label Linkbase Document | |
| | | | |
| 101.PRE | | 101.PREXBRL Taxonomy Extension Presentation Linkbase Document | |
| | | |
| 104 | | *Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| | | |
| * Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement. | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| Date: February 16, 2024 | Date: March 1, 2018 | BALCHEM CORPORATION | |
| | By:/s/ Theodore L. Harris | |
| | Theodore L. Harris, Chairman, President and | |
| | and Chief Executive Officer | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | |
| /s/ Theodore L. Harris | |
| Theodore L. Harris, Chairman, President and |
| Chief Executive Officer (Chairman) |
| Date: February 16, 2024 | | Date: March 1, 2018
| |
| /s/ C. Martin Bengtsson | |
| C. Martin Bengtsson, Executive Vice President and |
| | |
| /s/ Mary Theresa Coelho | |
| Mary Theresa Coelho, Chief Financial Officer |
| Date: February 16, 2024 | | and Treasurer (Principal Financial Officer)
| | Date: March 1, 2018
| | |
| /s/ William A. Backus | |
| William A. Backus, Vice President and |
| Chief Accounting Officer |
| Date: February 16, 2024 | | (Principal Accounting Officer)
| | Date: March 1, 2018
| | |
| /s/ Paul D. Coombs | |
| Paul D. Coombs, Director |
| Date: March 1, 2018 |
| | |
| /s/ David B. Fischer | |
| David B. Fischer, Director |
| Date: February 16, 2024 | | Date: March 1, 2018
| |
| /s/ Kathleen B. Fish | |
| Kathleen B. Fish, Director |
| Date: February 16, 2024 | |
| |
| /s/ Daniel E. Knutson | |
| /s/ Edward L. McMillan | Daniel E. Knutson, Director |
| Date: February 16, 2024 | | Edward L. McMillan,
| |
| /s/ Joyce J. Lee | |
| Joyce J. Lee, Director |
| Date: February 16, 2024 | | Date: March 1, 2018
| |
| /s/ Olivier Rigaud | |
| Olivier Rigaud, Director |
| Date: February 16, 2024 | |
| |
| /s/ Monica Vicente | |
| Monica Vicente, Director |
| Date: February 16, 2024 | | /s/ Perry W. Premdas |
| | Perry W. Premdas, Director
| Date: March 1, 2018 |
| | |
| /s/ Dr. John Televantos | |
| Dr. John Televantos, Director |
| Date: March 1, 2018 |
| | |
| /s/ Matthew D. Wineinger | |
| Matthew D. Wineinger, Director |
| Date: February 16, 2024 | | Date: March 1, 2018
EXHIBIT INDEX
Exhibit | |
Number
| Description
|
| |
| Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 16, 2006 for the year ended December 31, 2005). |
| |
| Balchem Corporation Articles of Amendment (incorporated by reference to Exhibit A to the Company’s definitive proxy statement on Schedule 14A filed with the Commission on April 25, 2008). |
| |
| Balchem Corporation Articles of Amendment (incorporated by reference to Exhibit A to the Company’s definitive proxy statement on Schedule 14A filed with the Commission on April 28, 2011). |
| |
| By-laws of the Company, as amended and restated as of February 21, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated February 22, 2017), as amended by the amendment thereto effective December 13, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated December 19, 2017). |
| |
| Incentive Stock Option Plan of the Company, as amended, (incorporated by reference to the Company’s Registration Statement on Form S-8, File No. 333-35910, dated October 25, 1996, and to Proxy Statement, dated April 22, 1998, for the Company’s 1998 Annual Meeting of Stockholders (the “1998 Proxy Statement”)).* |
| |
| Stock Option Plan for Directors of the Company, as amended (incorporated by reference to the Company’s Registration Statement on Form S-8, File No. 333-35912, dated October 25, 1996, and to the 1998 Proxy Statement). |
| |
| Balchem Corporation Second Amended and Restated 1999 Stock Plan, (incorporated by reference to the Company’s Registration Statement on Form S-8, File No. No. 333-155655, dated November 25, 2008, and to Proxy Statement, dated April 25, 2008, for the Company’s 2008 Annual Meeting of Stockholders).* |
| |
| Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8, File No. 333-118291, dated August 17, 2004).* |
| |
| Employment Agreement, dated as of April 22, 2016, between the Company and Theodore L. Harris (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the For the Quarterly Period Ended June 30, 2016)).* |
| |
| Form of Restricted Stock Grant Agreement and Stock Option Agreement (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2011 10-K”)). |
| |
| Stock Purchase Agreement, dated as of February 1, 2016, among Albion International, Inc., a Nevada Corporation, and certain equity owners thereof, (incorporated by reference to the Company’s Current Report on Form 8-K dated February 4, 2016). (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the Stock Purchase Agreement have been omitted and the Company agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request). |
| Stock Purchase Agreement, dated as of March 31, 2014, among Performance Chemicals & Ingredients Company (d/b/a SensoryEffects), a Delaware corporation, certain equity owners thereof, the Company and, solely for the limited purposes described therein, Highlander Partners, L.P. (incorporated by reference to the Company’s Current Report on Form 8-K dated April 1, 2014). (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the Stock Purchase Agreement have been omitted and the Company agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request). |
| |
| Credit Agreement dated May 7, 2014 among the Company, certain guarantors, lenders and Bank of America, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 13, 2014). |
| |
| Security and Pledge Agreement dated May 7, 2014 among the Company, certain guarantors and Bank of America, N.A. (incorporated by reference to Exhibit 4.12 to the Company’s Current Report on Form 8-K dated May 13, 2014). |
| |
| 2017 Omnibus Incentive Plan of the Company (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A, filed April 27, 2017). |
| |
| Offer Letter, dated as of October 3, 2017, between the Company and Mary Theresa Coelho (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 12, 2017). |
| |
| Subsidiaries of Registrant. |
| |
| Consent of RSM US LLP, Independent Registered Public Accounting Firm. |
| |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
| |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
| |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| |
101.INS | XBRL Instance Document |
| |
101.SCH | XBRL Taxonomy Extension Schema Document |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| |
* | Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement. |
