A N N U A L R E P O R T 2 0 2 0
BALCHEM CORPORATION – Company Profile
Balchem is committed to making the world a healthier place by delivering trusted, innovative, and
science-based solutions for the health and nutritional needs of the world. We provide the service,
quality, and technology that enables our customers to win with their customers. We have built a
reputation for delivering results to all of our stakeholders.
Founded in 1967, Balchem became a publicly-traded company in 1970 and is listed on NASDAQ under the symbol “BCPC.”
Our corporate headquarters is located in New Hampton, New York, and we have a broad network of sales offices,
manufacturing sites, and R&D centers, primarily located in the U.S. and Europe.
The company consists of three business segments: Human Nutrition and Health, Animal Nutrition and Health, and
Specialty Products. Balchem employs approximately 1,400 people worldwide who are engaged in diverse activities,
committed to developing for each of our business segments, global market leadership positions across the Company.
BALCHEM SOLVES TODAY, SHAPES TOMORROW.
Human Nutrition and Health
Balchem Human Nutrition and Health is a global leader in choline, chelated minerals, and
microencapsulation technologies with strong positions in powder, flavor and cereal system
formulation. Food or beverage, supplement or pharmaceutical, our Human Nutrition and
Health business segment provides ready-made and custom nutrients, ingredients, systems,
and products that enable our customers to create better finished goods that improve all
aspects of life. As the human nutrition space continues to evolve, our capabilities grow,
allowing us to deliver scientifically proven health benefits and fantastic taste in applications
from infant formulas to performance shakes and functional foods.
Animal Nutrition and Health
Balchem Animal Nutrition and Health is a global leader in choline production, nutrient
encapsulation, chelated minerals, and functional ingredients. With a growing portfolio
of products and a dedication to innovation and industry sustainability, Balchem Animal
Nutrition and Health is leading the charge to meet the nutritional needs of ruminants,
swine, poultry, and companion animals.
Specialty Products
Our Specialty Products business segment specializes in re-packaging and worldwide
distribution of select sterilants and fumigants, especially for the sterilization of medical
devices and spice and nutmeat fumigation. We have the packaging and distribution
know-how to ensure the safe delivery of these products in returnable, reusable,
environmentally safe containers. Our Plant Nutrition business unit, included in
Specialty Products, provides chelated minerals under the trade name Metalosate® to
the agricultural market.
Solve Today. Shape Tomorrow.
Dear Fellow Shareholders:
As I reflect on 2020, Balchem truly had a remarkable year in what was an unprecedented and
extraordinary time. Maneuvering our way through the challenges and uncertainties of the
COVID-19 pandemic was our primary focus throughout the year. One of our five core values is
“Playing to Win,” and we certainly played to win in 2020! The Balchem team stepped up to face
these challenges head-on with creativity, determination, and resilience. I could not be more
pleased with our response to the pandemic, and ultimately our ability to deliver record financial
results, significantly improved year over year safety performance, solid progress on our key
strategic growth platforms, and meaningful improvements with our Environmental, Social, and
Governance (ESG) initiatives. None of these accomplishments would have been possible without the incredible team of
employees we have at Balchem. I would like to thank each and every one of our employees for all of their contributions
in 2020, as well as our board of directors who could not have been more helpful and assuring throughout this unusual
year, and our customers, suppliers, partners and shareholders, for their continued commitment and support. Thank you
all very much!
We delivered record financial results in 2020. We achieved record sales of $703.6 million, up 9.3% over the prior year,
with record sales in all three of our business segments; Human Nutrition and Health, Animal Nutrition and Health, and
Specialty Products. We also delivered record Adjusted Net Earnings of $107.8 million compared to $103.7 million for the
prior year, an increase of $4.1 million or 4.0 percent, resulting in Adjusted Earnings Per Share of $3.32. Adjusted EBITDA
of $174.2 million, an increase of $14.2 million or 8.9 percent from the prior year, was also a record. In addition, we
generated strong record Free Cash Flow of $117.7 million in 2020 which also reflects investing $32.8 million in capital
projects to support our continued growth. We are particularly proud of the fact that 2020 was our 10th consecutive year
of sales and Adjusted EPS growth!
In 2020, we significantly improved our safety performance. Despite the distractions associated with the pandemic,
Balchem achieved a new safety milestone with a full year Total Recordable Injury Rate of 1.04, a 21% improvement over
the prior year. We have embraced a Zero Incident Culture and will not be satisfied until we become injury free, but
we are very pleased with our continued progress toward that ultimate goal. Over the course of 2020, we increased
participation and engagement in our behavior-based safety program; Stop Taking Avoidable Risks (STAR), while
accelerating our investments in automation and reducing our dependency on manual tasks. We also continued to shift
our focus to injury prevention by increasingly looking proactively at near misses, while emphasizing leadership and
management accountability for employee safety.
In 2020, we also continued to make solid progress on our key strategic growth initiatives. Within our Human Nutrition
and Health business segment, we continued to advance the science around the nutritional and health benefits of our
existing and future products. A number of outside academic research projects initiated and supported by Balchem were
completed in 2020 and were in various stages of data analysis, manuscript preparation or submission for publication. This
research explores the benefits of prenatal choline in neurological development and cognition, the positive relationship
between choline and DHA, and the possibilities of establishing a biomarker for choline in the National Institutes of Health
(NIH) funded study, all in support of our VitaCholine® brand. In 2020, we also completed GRAS, or generally recognized
as safe, self-affirmations for chelated Magnesium, Zinc and Calcium sold under the Albion® brand, further advancing
our leading position in this area and opening new applications for our products. We also strengthened our marketing
capabilities to accelerate awareness around existing science and to better showcase to our customers how they can
incorporate and benefit from our products.
Within our Animal Nutrition and Health business segment, our scientists have continued to pursue the expanded
application of our innovative products, across both the ruminant and monogastric sectors, in areas such as mature cow
and calf immunity, neonatal in-utero programming through choline supplementation, and greatly improved formulations
for swine and poultry diets with better analysis and formulation for natural levels of choline within common feedstuffs.
We successfully continued to drive penetration of ReaShure®, our market leading microencapsulated rumen protected
Solve Today. Shape Tomorrow.
Choline, and in 2020 our efforts once again drove double digit growth for this product, helping to push our North
American market penetration higher by several hundred basis points. We also had great success with Aminoshure® XM,
our micro-encapsulated rumen protected Methionine, that continues to capture market share by offering a superior
value proposition to our customers. Within our companion animal portfolio of products and solutions, we captured
significant growth for our PetShure® line of products, leveraging our microencapsulation and inclusion technologies, and
enabling our customers to further innovate in the pet food space. We also strengthened our marketing capabilities within
the Animal Nutrition and Health segment, launching enhanced e-learning podcasts and webinars focused on important
animal nutrition topics. Our educational and science-based webinars were hugely successful, attracting high attendance
and enabling us to effectively reach and interact with an expanded target audience despite the pandemic.
Within our Specialty Products business segment, our plant nutrition business returned to healthy growth levels,
benefiting from a good growing season in North America, but also new crop applications, geographic expansion, and very
significant growth achieved from our organic line of products that we had recently bolstered by the addition of a new
organic potassium sold under the Metalosate® brand.
Within the year, we also completed the integration of our two 2019 acquisitions, Chemogas and Zumbro River Brand,
which are now fully integrated both from a business and functional perspective. We have delivered the targeted
synergies that we were hoping to achieve, and we are very pleased having them be part of the Balchem family. In 2020,
we also made a small investment in the emerging area of precision nutrition with an investment in a leading start-up
gene guided nutrition company, called SNP Therapeutics. Balchem is a strategic investor with SNP and we have secured
a commercial agreement for our minerals and nutrients portfolio for when the company ultimately commercializes its
personalized solutions.
Over the course of the last year or so, we significantly progressed our Environmental, Social, and Governance (ESG)
initiatives as well. We have remained true to our higher purpose of; making the world a healthier place while
maintaining focus on our two primary objectives; providing innovative solutions for the health and nutritional needs of
the world and operating with excellence as strong stewards of our stakeholders. To that end, we implemented actions
to advance our Sustainability efforts while improving transparency through continuous development of our Sustainability
reporting, including the announcement of our 2030 goals for both energy and water usage reduction. We also
Committed to the United Nations Global Compact and signed the CEO Action for Diversity & Inclusion™ pledge. We
invested in the education of Balchem’s leadership team and Board of Directors through eCornell’s Diversity and Inclusion
Training Certificate Program, which enhanced our organization’s ability to further develop a culture that values diversity
and embraces inclusion by increasing our awareness of behaviors that encourage engagement with those across a variety
of backgrounds and perspectives. Additionally, we launched Balchem Helping Hands, a new initiative that consists of
philanthropic partnerships, a matching donation program, and employee volunteer efforts. Additionally, we updated our
various public disclosures to increase transparency, particularly with regard to human capital and diversity metrics.
As you can see, 2020 was indeed a truly remarkable year for Balchem! Thank you again to all of our employees for your
incredible contributions over the last year and to all of our stakeholders for your continued support of Balchem. I wish
everyone good health in the year ahead.
Sincerely,
Theodore (Ted) L. Harris
Chairman and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-13648
_______________________________________________________________________________________________________________
Balchem Corporation
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
13-2578432
(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:
Title of each class
Common Stock, par value $.06-2/3 per share
Trading symbol
BCPC
Name of each exchange on which registered
Nasdaq Global Market
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 every Interactive Data File required to be submitted
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 such files).
Yes ☑ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting 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.
Large accelerated filer ☑
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
(Check one):
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. ☑
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 Global Market
on June 30, 2020 was approximately $3,046,000,000. 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 Common Stock was 32,392,805 as of February 11, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant’s proxy statement for its 2021 Annual Meeting of Stockholders (the “2021 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, 2020 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
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of 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,” “expects,”
“intends,” “plans,” “anticipates,” “likely,” “will,” “estimates,” “project” and similar expressions 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 you that the expectations or beliefs reflected in these forward-looking statements will prove correct. 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 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.
BALCHEM CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page Numbers
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement schedules
SIGNATURE PAGE
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PART I
Item 1.
Business (All amounts in thousands, except share and per share data)
General:
Balchem Corporation (“Balchem,” the “Company,” “we” or “us”), was incorporated in the State of Maryland in 1967. We
develop, manufacture, distribute and market specialty performance ingredients and products for the nutritional, food,
pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets. Previously, our four reportable
segments were: Human Nutrition and Health, Animal Nutrition and Health, Specialty Products, and Industrial Products. However,
effective in the first quarter of 2020, in order to align with our strategic focus on health and nutrition, allocation of resources, and
evaluation of operating performance, and given the 2019 reduction in portfolio scale of Industrial Products, we have revised our
reporting segment structure to three reportable segments: Human Nutrition and Health, Animal Nutrition and Health, and
Specialty Products. These reportable segments are strategic businesses that offer products and services to different markets. This
realignment has been retrospectively applied. Sales and production of products outside of our reportable segments and other
minor business activities are included in "Other and Unallocated" and applied retroactively to 2019 and 2018. There was no
change to the Consolidated Financial Statements as a result of the change to the reportable segments. We expect that the new
reportable segment structure will provide investors greater understanding of and alignment with our strategic focus. In order to
ensure appropriate transparency and visibility into the financial performance of the Company, sufficient detail will continue to be
provided relative to Other and Unallocated, including material contributions from oil and gas and other industrial market
activities.
We sell our products through our own sales force, independent distributors and sales agents. Financial information concerning our
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 & Health
The Human Nutrition & 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 technology has been
combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications
is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customers'
appreciation of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation.
This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers.
The Company partners with 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. When
combined 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, as well as ice
cream bases and variegates, the Company is a one-stop solutions provider for beverage and dairy product development needs.
Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and
nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and
shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends,
confections, sports and protein bars, dietary plans, and nutritional supplements. The Company also creates cereal systems for
ready-to-eat cereals, grain-based snacks, and cereal based ingredients.
Animal Nutrition & Health
The Company’s Animal Nutrition & Health ("ANH") segment provides nutritional products derived from its microencapsulation
and chelation technologies in addition to basic choline chloride. For ruminant animals, the Company’s microencapsulated
products boost health and milk production, delivering nutrient supplements that are biologically available, providing required
nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of
production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and
supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine
industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In
poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a
necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity.
1
Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability
to leverage the results of university and field research on the animal health and production benefits of our products. Management
believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability
to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production
efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
Specialty Products
Ethylene oxide, at the 100% level and blended with carbon dioxide, is sold as a sterilant gas, primarily for use in the health care
industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device
being sterilized. The Company’s 100% ethylene oxide product and blends 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. Contract
sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters
with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a
fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.
The Company also distributes a number of other gases for various uses, most notably propylene oxide and ammonia. Propylene
oxide is marketed and sold in the U.S. as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce
bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins,
figs and prunes. The Company distributes its propylene oxide product in the U.S. primarily in recyclable, single-walled, carbon
steel cylinders according to standards outlined by the EPA and the DOT. Propylene oxide is also sold worldwide to customers in
approved reusable and recyclable drum and cylinder packaging for various chemical synthesis applications, such as increasing
paint durability and manufacturing specialty starches and textile coatings. Ammonia is used primarily as a refrigerant, and also
for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and
cylinder drum and cylinder packaging approved for use in the countries these products are shipped to. The Company's inventory
of cylinders for these products also represents a significant capital investment.
The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. The
Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-
life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate®
product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As
a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the
consumer with extended shelf life for produce being shipped long distances.
Acquisitions
On December 13, 2019, we completed an acquisition of Zumbro River Brand, Inc. ("Zumbro"), headquartered in Albert Lea,
Minnesota. We made payments of $52,403 on the acquisition date, amounting to $47,058 to the former shareholders and $5,345
to Zumbro's lenders to pay Zumbro debt. Considering the cash acquired of $686, net payments made to the former shareholders
equaled $46,372. In May 2020, we received an adjustment for working capital acquired of $561. The acquisition was primarily
financed through the Company's Credit Agreement (Refer to Note 8, "Revolving Loan"). Zumbro specializes in developing,
marketing, and manufacturing agglomerated and extruded products for the food and beverage industry and is a market leader in
high protein and specialty extruded snacks, cereals, and crisps, marketed under the brands Z-Crisps®, Whey-Os™, Whey-Vs™, and
Z-Texx Complete™. Zumbro is integrated within Balchem's HNH Segment.
On May 27, 2019, we acquired 100 percent of the outstanding common shares of Chemogas Holding NV, a privately held
specialty gases company headquartered in Grimbergen, Belgium ("Chemogas"). We made payments of approximately €99,503
(translated to $111,324) on the acquisition date, amounting to approximately €88,579 (translated to $99,102) to the former
shareholders and approximately €10,924 (translated to $12,222) to Chemogas' lender to pay off all Chemogas bank debt.
Considering the cash acquired of €3,943 (translated to $4,412), net payments made to the former shareholders were €84,636
(translated to $94,690). The acquisition was primarily financed through our Credit Agreement (Refer to Note 8, "Revolving
Loan"). Chemogas, through its subsidiary companies, has been a leader in the packaging and distribution of a wide variety of
specialty gases, most notably ethylene oxide, primarily in the European and Asian markets, for medical device sterilization.
Through its operational and logistical excellence, Chemogas supports its customers' needs across more than 70 countries. With
the acquisition, we significantly expand our geographic presence in the packaged ethylene oxide market, enabling us to offer
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worldwide service and support to its medical device sterilization customers within the Specialty Products segment. The
Chemogas sites in Europe and Asia, along with Balchem's sites in the United States form a global network of facilities.
Raw Materials
The raw materials utilized by us in the manufacture of our 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. We are not experiencing any
current difficulties in procuring such materials and do not anticipate any such problems; however, we cannot assure that will
always be the case.
Intellectual Property
We currently hold 99 patents in the United States and overseas and use certain trade-names and trademarks. We also use know-
how, trade secrets, formulae, and manufacturing techniques that assist in maintaining competitive positions of certain of our
products. Formulae and know-how are of particular importance in the manufacture of a number of our proprietary products. We
believe that certain of our patents, in the aggregate, are advantageous to our business. However, it is believed that no single patent
or related group of patents is currently so material to us that the expiration or termination of any single patent or group of patents
would materially affect our business. Our U.S. patents expire between 2021 and 2034. We believe that our sales and competitive
position are dependent primarily upon the quality of our products, technical sales efforts and market conditions, rather than on
patent protection.
Seasonality
While in general, the businesses of our segments are not seasonal to any material 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
planning season in the northern hemisphere.
Backlog
At December 31, 2020, we had a total backlog of $64,811 (comprised of $52,293 for the HNH segment; $8,620 for the ANH
segment; $3,557 for the Specialty Products segment, and $341 for other), as compared to a total backlog of $46,841 at
December 31, 2019 (comprised of $36,996 for the HNH segment; $6,161 for the ANH segment; $2,752 for the Specialty Products
segment and $932 for other). It has generally been our policy and practice to maintain an inventory of finished products and/or
component materials for our segments to enable us 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 2021 fiscal year.
Competition
Our competitors include many large and small companies, some of which have greater financial, research and development,
production and other resources than us. Competition in the supplement, food and beverage markets we serve are based primarily
on product performance, customer support, quality, service and price. The development of new and improved products is
important to our 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 our 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 we serve are 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.
In the Specialty Products segment, our products face competition from alternative sterilizing technologies and products.
Competition in this marketplace is based primarily on medical device compositions, product performance, customer support,
quality, service and price. Our competition in this market includes sterilization companies, a number of which are privately-held.
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Research & Development
During the years ended December 31, 2020, 2019 and 2018, we incurred research and development expenses of approximately
$10,332, $11,377, and $11,592, respectively, on Company-sponsored research and development for new products, improvements
to existing products, and manufacturing processes. We have historically funded our 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.
We prioritize our product development activities in an effort to allocate resources to those product candidates that, we believe,
have the greatest commercial potential. Factors we consider in determining the products to pursue include projected markets and
needs, status of our proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring
the product to market.
Capital Projects
We continue to invest in projects across all production facilities and capital expenditures were approximately $32,080, $25,790,
and $19,170 for 2020, 2019 and 2018, respectively. In 2020, we invested $16,856 on projects expected to provide favorable
returns on investment, including expanded capacity in key product lines in the HNH segment. In addition, we invested $3,297 for
environmental, health, safety, and security upgrades to our facilities as well as $3,252 in automation projects that improved safety
and quality of our operations. In 2019, we invested $6,437 to expand capacity in key product lines in the HNH segment and to
invest in several other large projects including a new quality and research and development lab. In addition, we invested $3,739
for environmental, health, safety, and security upgrades to our facilities. In 2018, we invested $5,662 to expand capacity in key
product lines in the HNH segment along with upgrading automation systems in our manufacturing sites to drive efficiencies. In
addition, we invested $3,137 for environmental, health, safety, and security upgrades to our facilities. Capital expenditures are
projected to range from $30,000 to $40,000 for 2021.
Environmental / Regulatory Matters
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 EPA because they are considered pesticides. In order to obtain
a registration, an applicant typically must demonstrate, through extensive test data, that its product will not cause unreasonable
adverse effects on human health or the environment. 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.
In April 2008, the EPA issued a RED (“Reregistration 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”. In 2013, the EPA has initiated a new registration review of ethylene oxide, in line with and part of the registration
review scheduled for a large number of other pesticides. When the Final Work Plan was issued in March 2014, the EPA
anticipated that this registration review process would take approximately seven years. In December 2016, the EPA issued its
Integrated Risk Information System (“IRIS”) assessment of ethylene oxide (the "IRIS Assessment"), another aspect of EPA’s
safety review of ethylene 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. While acknowledging the necessity of maintaining the critical uses of ethylene oxide, based on the range of unit risk
provided in this qualitative assessment, the EPA has stated that there should be further mitigation measures implemented which
will likely require some label changes. Several mitigation measures are under consideration and the EPA anticipates issuance of a
Proposed Interim Decision (PID) later this year. We believe that EPA intends to reregister ethylene oxide for the uses stated
above with the mitigation measures potentially impacting certain users, including Balchem and its 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 easily 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] are eligible for reregistration 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. In 2013, the EPA initiated a new registration review of propylene oxide, in line with and
part of the registration review scheduled for a large number of other pesticides. A Final Work Plan was issued in March 2014, and
4
EPA anticipated that this review process would take approximately seven years. In October 2020, the EPA issued both the
Proposed Interim Registration Review Decision (PID) and Draft Risk Assessment (DRA) for Propylene Oxide (PPO). Based on
these documents we believe that the use of propylene oxide to treat nuts and spices will continue to be permitted with minimal
changes to the current approved label and, to date, it appears that significant additional mitigation measures will not be required.
Our facility in Verona, Missouri, 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 we 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. We are indemnified by the sellers under our May 2001 asset purchase agreement covering our 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 executed the above-described Superfund remedy. In
September 2020, BCP Ingredients, Inc. (“BCP”), the Company subsidiary that operates the site received a General Notice Letter
from the EPA regarding BCP’s potential liability for 1,4 dioxane contamination at the site. We currently believe that the 1,4
dioxane contamination is associated with the former owner’s operations and have engaged experts to study site conditions and
hydrogeology in connection with preparing our response to the notice.
In connection with normal operations at our plant facilities, we are required to maintain environmental and other permits,
including those relating to the ethylene oxide operations.
We believe we are in compliance in all material respects with federal, state, local and international provisions 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.
We produce products which are required to be manufactured in conformity with current Good Manufacturing Practice (“cGMP”)
regulations as interpreted and enforced by the FDA, 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
Our employees are our most valued asset and fundamental to our success. As of December 31, 2020, we employed approximately
1,342 full-time employees worldwide, with approximately 18% covered by collective bargaining agreements. 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.
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 was defined by recordable injuries per 200,000 hours worked, was 1.04 in 2020. We
continually upgrade our facilities to reduce risks and establish procedures with appropriate personnel protection for the safety of
our employees. Our safety program is structured around five pillars: process safety, personal safety, industrial hygiene,
transportation safety and environmental safety, and focuses on driving higher ownership and engagement from employees and
contractors.
In response to the COVID-19 pandemic, we effectively deployed our Crisis Management Plan and activated our Crisis
Management Team (CMT), to manage the day-to-day activities and make timely decisions related to the safety of our employees,
customers, and the communities in which we operate. We implemented significant changes which comply with government
orders and Centers for Disease Control and Prevention (CDC) guidelines. These changes include instituting travel restrictions, a
mandatory work from home policy for all of our office employees, and additional safety measures for all of our manufacturing
and research and development employees.
5
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 and are committed to increasing representation of minorities throughout the
organization. In 2020, our total workforce consisted of 77% male and 23% female among all employees and 48% male and 52%
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, such as the Company's Code of Conduct, anti-harassment and discrimination, foreign corrupt
practices, antitrust, and various other compliance topics. Our sponsored employee Continuing Learning program offers a broad
base of assistance for employees, including learning and development courses. 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 year ended December 31, 2020, our turnover rate was 7% for salaried employees with an average length of service of over
9 years. We are continuing to improve employee retention with effective employment engagement efforts, a productive
performance review process, and competitive compensation.
Available Information
Our headquarters is located at 52 Sunrise Park Road, New Hampton, NY 10958. Our telephone number is (845) 326-5600 and our
Internet website address is www.balchem.com. All reports we file with the SEC such as our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to such reports, are available free of charge
via EDGAR through the SEC's website at www.sec.gov.
Item 1A.
Risk Factors
Our business is subject to a high degree of risk and uncertainty, including the following risks and uncertainties, which could
adversely affect our business, financial condition, results of operation, cash flows and the trading price of our Common Stock:
Our business, results of operations, financial condition, cash flows and stock price can be adversely affected by pandemics,
epidemics or other public health emergencies, such as COVID-19.
Our business, results of operations, financial condition, cash flows and stock price can be adversely affected by pandemics,
epidemics or other public health emergencies, such as COVID-19. The COVID-19 outbreak has resulted in governments around
the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in
place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. In addition,
government and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the
impacts of COVID-19.
Our businesses have been deemed "essential" under the orders issued by federal, state and local governments. Although we have
continued to operate our facilities to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19
or similar viruses and any preventive or protective actions taken by governmental authorities may have a material adverse effect
6
on our operations, supply chain, customers, and transportation networks, including business shutdowns or disruptions. The extent
to which viruses such as COVID-19 may adversely impact our business depends on future developments, which are highly
uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken
globally to contain or mitigate their effects. Any resulting financial impact cannot be estimated reasonably at this time, but may
materially adversely affect our business, results of operations, financial condition and cash flows. Additionally, concerns over the
economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue
to adversely impact our stock price and may affect our ability to access capital markets. To the extent the COVID-19 pandemic
adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described
within this report. We will continue to implement mitigation strategies as needed to protect the long-term sustainability of our
company.
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. 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., Italy, Belgium, Malaysia, Australia, Philippines, and Singapore could exceed the Federal Deposit Insurance
Corporation (“FDIC”), Fondo Interbancario di Tutela dei Depositi (“FITD”), Financial Services and Markets Authority
("FSMA"), Perbadanan Insurans Deposit Malaysia ("PIDM"), Australian Prudential Regulation Authority ("APRA"), Philippine
Deposit Insurance Corporation ("PDIC"), and Singapore Deposit Insurance Corporation ("SDIC") 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. Additionally, our future results of operations could be
adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in jurisdictions with differing
statutory tax rates, changes in tax laws, regulations and judicial rulings or changes in the interpretation thereof.
Increased competition could hurt 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. 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 oxide as a medical device sterilant and spice fumigant and for propylene oxide as a fumigant of nuts and
spices. The registrations for both products are in the final stages of a FIFRA registration review process begun in 2013. 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 failure of the EPA to allow reregistration of ethylene oxide or propylene oxide would have a material
adverse effect on our business 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, enhancements 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.
7
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. 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, 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.
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.
Certain of the Company’s customers who use ethylene oxide in the USA 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 the “Environmental / Regulatory Matters” Section above, 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 certain non-sterilization ethylene oxide users and producers, and is expected to finalize
rules during 2021 or 2022 that will regulate sterilization users. 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 are currently
impacting, or have impacted at some point, these customers’ ability to use the ethylene oxide process to sterilize medical devices.
Because of these actions, one customer facility has been shut down permanently, another was shut down for a period of months
and has since restarted, and other customers have taken or are expected to take 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.
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.
8
We face risks associated with our sales to customers and manufacturing operations outside the United States.
For the year ended December 31, 2020, approximately 27% of our net sales consisted of sales 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; changes in
tariffs and trade relations including but not limited to those associated with the North American Free Trade Agreement 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.
We may, from time to time, experience problems in our labor relations.
In North America, approximately 92 employees, or 8% of our North American workforce, as of December 31, 2020, are
represented by a union under a single collective bargaining agreement, which was re-negotiated and is effective as of July 12,
2020. It will expire in 2025. In Europe, approximately 122 employees at our Marano, Ticino, Italy facility are covered by a
national collective bargaining agreement, which expires in 2022. Approximately 23 employees at our Bertinoro, Italy facility are
also covered by a national collective bargaining agreement, which expired in 2019 and is currently under negotiation. 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.
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, Canadian Dollars, Malaysian
Ringgits, Singapore Dollars, Australian Dollars, and Philippine Pesos 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.
On May 28, 2019, we entered into a cross-currency swap to manage foreign exchange risk related to our investment in Chemogas.
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 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 limiting our ability to borrow additional
monies for our working capital, capital expenditures, 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.
9
Interest payable in accordance with our five-year senior secured revolving credit agreement (the "Credit Agreement") is based on
a fluctuating rate. In light of potential fluctuations, we are exposed to risk resulting from adverse changes in interest rates.
On May 28, 2019, we entered into an interest rate swap to protect us against adverse fluctuations in interest rates by reducing its
exposure to variability in cash flows relating to interest payments on a portion of our outstanding debt. We use LIBOR ("the
London interbank offered rate") as a reference rate in the derivative agreements. LIBOR is the basic rate of interest used in
lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans
globally. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced that
it intends to phase out LIBOR by the end of 2021. FCA further announced that it has commitments from panel banks to continue
to contribute to LIBOR through the end of calendar 2021, but that the FCA will not use its powers to compel contributions
beyond that date. While we expect that reasonable alternatives to LIBOR will be implemented prior to the 2021 target date or that
the 2021 cessation date may be extended, we cannot predict the consequences and timing of these developments and the impact to
our business. In preparation for the potential phase out of LIBOR, we may need to renegotiate our financial obligations and
derivative instruments that utilize LIBOR. However, these efforts may not be successful in mitigating the legal and financial risk
from changing the reference rate in our legacy agreements. Furthermore, the discontinuation of LIBOR may adversely impact our
ability to manage and hedge exposures to fluctuations in interest rates using derivative instruments.
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.
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.
We rely on information technology systems to process, transmit, store, and protect electronic information. For example, a
significant portion of the communications between our personnel, customers, and suppliers depend on information technology.
Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control including,
but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security
issues. We have technology and information security processes and disaster recovery plans in place to mitigate our risk to these
vulnerabilities; however, these measures may not be adequate to ensure that our operations will not be disrupted, should such an
event occur.
10
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters is located in New Hampton, New York. Our operations are conducted at our owned and leased
facilities throughout the U.S. and other foreign countries. These facilities house manufacturing and warehousing operations, as
well as administrative offices. We have total 32 locations across the world and some of these locations serve multiple segments.
The following is a summary of our principal properties:
Segment
Location
Corporate
HNH
ANH
4 U.S. cities
14 U.S. cities and 3 foreign countries
5 U.S. cities and 4 foreign countries
Specialty Products
5 U.S. cities and 7 foreign countries
Other
1 U.S. city and 1 foreign country
Administrative Manufacturing Warehousing
-
4
-
2
1
2
-
12
8
9
2
3
-
1
-
We believe that our production facilities and related machinery and equipment, are well maintained, suitable for their purpose,
and adequate to support our businesses.
Item 3.
Legal Proceedings
We are involved in legal proceedings through the normal course of business. Management believes that any unfavorable outcome
related to these proceedings will not have a material effect on our financial position, results of operations or liquidity.
Item 4.
Mine Safety Disclosures
None.
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
The Common Stock is listed on the Nasdaq Global Market under the symbol “BCPC.”
On February 11, 2021 the closing price for the Common Stock on the Nasdaq Global Market was $119.13.
Record Holders
As of February 11, 2021, the approximate number of holders of record of Common Stock was 69. Such number does not include
stockholders who hold their stock in street name.
Dividends
We declared cash dividends of $0.58 and $0.52 per share on Common Stock during our fiscal years ended December 31, 2020
and 2019, respectively.
11
Performance Graph
The graph below sets forth the cumulative total stockholder return on the Common Stock (referred to in the table as “BCPC”) for
the five years ended December 31, 2020, the overall stock market return during such period for shares comprising the Russell
2000® Index (which we believe includes companies with market capitalization similar to that of 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 $100 on December 31, 2015 and the subsequent reinvestment of dividends. The Russell 2000®
Index measures the performance of the shares of the 2000 smallest companies included in the Russell 3000® Index. In light of our
industry segments, we do not believe that published industry-specific indices are necessarily representative of stocks comparable
to us. Nevertheless, we consider the Dow Jones U.S. Specialty Chemicals Index to be potentially useful as a peer group index
with respect to us. The performance of the Common Stock shown on the graph below is historical only and not necessarily
indicative of future performance.
12
DOLLARS ($)Balchem Corp (BCPC)Russell 2000 Index (RTY)Dow Jones US Specialty Chemical index (DJUSCX)12/31/201512/31/201612/31/201712/31/201812/31/201912/31/202075100125150175200225 Issuer Purchase of Equity Securities
The following table summarizes the share repurchase activity for the year ended December 31, 2020:
Total Number of
Shares
Purchased (1)
Average Price Paid Per
Share
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 Programs
578 $
7,646 $
— $
8,224
131 $
13,947 $
10,203 $
24,281
— $
— $
31,224 $
31,224
— $
69,467 $
3,433 $
72,900
106.82
108.39
—
99.85
86.39
89.79
—
—
94.72
—
102.60
103.02
578 $
7,646 $
— $
8,224
131 $
13,947 $
10,203 $
24,281
— $
— $
31,224 $
31,224
— $
69,467 $
3,433 $
72,900
142,144,718
143,400,590
143,400,590
132,093,163
113,085,173
116,619,193
116,619,193
116,619,193
120,063,231
120,063,231
122,917,453
123,071,229
January 1-31, 2020
February 1-29, 2020
March 1-31, 2020
First Quarter
April 1-30, 2020
May 1-31, 2020
June 1-30, 2020
Second Quarter
July 1-31, 2020
August 1-31, 2020
September 1-30, 2020
Third Quarter
October 1-31, 2020
November 1-30, 2020
December 1-31, 2020
Fourth Quarter
Total
136,629
136,629
(1) We 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 2,568,396 shares have been purchased, of which 76,084 shares remained in
treasury at December 31, 2020. There is no expiration for this program.
Item 6.
Selected Financial Data
The selected statements of operations data set forth below for the years ended December 31, 2020, 2019 and 2018 and the selected
balance sheet data as of December 31, 2020 and 2019 have been derived from our Consolidated Financial Statements included
elsewhere herein. The selected financial data for the years ended December 31, 2017 and 2016 and as of December 31, 2018,
2017 and 2016 have been derived from audited Consolidated Financial Statements not included herein, but which were previously
filed with the SEC. The following information should be read in conjunction with Item 7 — “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto included
elsewhere herein.
13
(In thousands, except per share data)
Year ended December 31,
Statement of Operations Data
Net sales
Earnings before income tax expense
Income tax expense (benefit)
Net earnings
2020
2019
2018
2017
2016
$
703,644 $
643,705 $
643,679 $
594,790 $
553,204
106,417
21,794
84,623
96,478
16,807
79,671
99,030
20,457
78,573
88,488
(1,583)
90,071
2.83 $
2.79 $
82,934
26,962
55,972
1.78
1.75
Basic net earnings per common share
Diluted net earnings per common share
$
$
2.63 $
2.60 $
2.48 $
2.45 $
2.45 $
2.42 $
At December 31,
Balance Sheet Data
Total assets
Long-term debt (including current portion)
Other long-term obligations
Total Stockholders' equity
Dividends per common share
2020
2019
2018
2017
2016
$ 1,165,843 $ 1,155,682 $
981,355 $
963,636 $
948,626
163,569
10,517
828,233
248,569
7,827
743,667
156,000
7,372
691,618
218,964
5,847
616,881
280,490
6,896
521,033
$
0.58 $
0.52 $
0.47 $
0.42 $
0.38
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 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, 2019 (filed with the SEC on February 21, 2020) for additional discussion of
our financial condition and results of operations for the year ended December 31, 2018, as well as our financial condition and
results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018. 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
We develop, manufacture, distribute and market specialty performance ingredients and products for the nutritional, food,
pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets. Previously, our four reportable
segments were: Human Nutrition and Health, Animal Nutrition and Health, Specialty Products, and Industrial Products. However,
effective in the first quarter of 2020, in order to align with our strategic focus on health and nutrition, allocation of resources, and
evaluation of operating performance, and given the 2019 reduction in portfolio scale of Industrial Products, we have revised our
reporting segment structure to three reportable segments: Human Nutrition and Health, Animal Nutrition and Health, and
Specialty Products. These reportable segments are strategic businesses that offer products and services to different markets. This
realignment has been retrospectively applied. Sales and production of products outside of our reportable segments and other
minor business activities are included in "Other and Unallocated" and applied retroactively to 2019 and 2018. There was no
change to the Consolidated Financial Statements as a result of the change to the reportable segments. We expect that the new
reportable segment structure will provide investors greater understanding of and alignment with our strategic focus. In order to
ensure appropriate transparency and visibility into the financial performance of the Company, sufficient detail will continue to be
provided relative to Other and Unallocated, including material contributions from oil and gas and other industrial market
activities.
COVID-19 Response
The COVID-19 response effort has been a primary focus for us since early in the first quarter. Our focus has been on employee
safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity,
and responding to changes in this dynamic market environment as appropriate. To date, all of our manufacturing sites are
operating at near normal conditions enabling us to supply our customers with the important products and services they need, our
14
research and development teams are advancing our innovation efforts, and all of our other employees are effectively carrying on
their responsibilities and functions remotely.
While impact on demand has not been material to our Company, we are continuing to watch the markets that we serve closely.
We have stress tested our balance sheet under various significant downturn scenarios and, given our relatively low net debt
position, cash on hand, access to our undrawn revolving credit facility, and expected free cash flows, we are satisfied with the
strength of our balance sheet as we continue through this uncertain market environment.
After a short pause in implementation of our new ERP system across the company due to the pandemic in the second quarter, we
successfully resumed our implementation efforts during the second half of 2020, adding a total of five additional sites onto the
new system since the pause. We now have approximately 92% of our revenue on the new system and expect full conversion by
2021.
Segment Results
We sell products for all three segments through our 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, 2020, 2019 and 2018 (in thousands):
Business Segment Net Sales
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (1)
Total
Business Segment Earnings From Operations
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (1)
Total
2020
2019
2018
400,330 $
347,433 $
192,191
103,566
7,557
703,644 $
177,557
92,257
26,458
643,705 $
2020
2019
2018
61,397 $
48,429 $
29,979
26,801
(7,030)
111,147 $
25,868
28,513
(257)
102,553 $
341,237
175,693
75,808
50,941
643,679
48,037
26,607
25,254
7,202
107,100
$
$
$
$
(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 $2,410, $3,436 and
$1,786 for years ended December 31, 2020, 2019 and 2018, respectively, and (ii) Unallocated amortization expense of $1,606,
$551, and $0 for years ended December 31, 2020, 2019, and 2018, respectively, related to an intangible asset in connection with
a company-wide ERP system implementation.
Acquisitions
On December 13, 2019, the Company completed an acquisition of Zumbro. The Company made payments of $52,403 on the
acquisition date, amounting to $47,058 to the former shareholders and $5,345 to Zumbro's lenders to pay Zumbro debt.
Considering the cash acquired of $686, net payments made to the former shareholders were $46,372. In May 2020, we received
an adjustment for working capital acquired of $561. Zumbro is integrated within the HNH Segment.
On May 27, 2019, we acquired Chemogas. We made payments of approximately €99,503 (translated to $111,324) on the
acquisition date, amounting to approximately €88,579 (translated to $99,102) to the former shareholders and approximately
€10,924 (translated to $12,222) to Chemogas' lender to pay off all Chemogas bank debt. Considering the cash acquired of €3,943
(translated to $4,412), net payments made to the former shareholders were €84,636 (translated to $94,690). Chemogas is
integrated within the Specialty Products Segment.
15
RESULTS OF OPERATIONS
(All amounts in thousands, except share and per share data)
Fiscal Year 2020 compared to Fiscal Year 2019
Net Earnings
(in thousands)
Net sales
Gross margin
Operating expenses
Earnings from operations
Other expenses
Income tax expense
Net earnings
Net Sales
(in thousands)
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other
Total
2020
2019
$
703,644 $
643,705 $
223,897
112,750
111,147
4,730
21,794
211,367
108,814
102,553
6,075
16,807
$
84,623 $
79,671 $
Increase
(Decrease)
% Change
59,939
12,530
3,936
8,594
(1,345)
4,987
4,952
9.3 %
5.9 %
3.6 %
8.4 %
(22.1) %
29.7 %
6.2 %
2020
2019
$
400,330 $
347,433 $
192,191
103,566
7,557
177,557
92,257
26,458
$
703,644 $
643,705 $
Increase
(Decrease)
% Change
52,897
14,634
11,309
(18,901)
59,939
15.2 %
8.2 %
12.3 %
(71.4) %
9.3 %
•
•
•
•
The increase in net sales within the HNH segment for 2020 as compared to 2019 was primarily driven by higher sales within
food and beverage markets, strong sales growth of chelated minerals and choline nutrients, and beneficial impact from the
Zumbro acquisition we closed in December 2019, partially offset by lower sales to food service-related markets and the
elimination of sales associated with the Reading, Pennsylvania manufacturing site that we divested in 2019.
The increase in net sales within the ANH segment for 2020 compared to 2019 was primarily the result of higher volumes in
both the ruminant species and monogastric species, including companion animal, markets and a favorable mix.
The increase in Specialty Products segment sales for 2020 compared to 2019 was primarily due to the incremental
contribution of Chemogas and higher plant nutrition sales, partially offset by lower legacy ethylene oxide sales, which were
negatively impacted by reduced elective surgical procedures during the pandemic.
Sales relating to business formerly included in the Industrial Products segment decreased from the prior year due to a decline
in shale fracking activity.
Gross Margin
(in thousands)
Gross margin
% of net sales
2020
2019
Increase
(Decrease)
% Change
$
223,897
$
211,367
$
12,530
5.9 %
31.8 %
32.8 %
Gross margin as a percentage of sales decreased in 2020 compared to 2019 primarily due to mix, partially offset by certain lower
raw material costs.
16
Operating Expenses
(in thousands)
Operating expenses
% of net sales
2020
2019
Increase
(Decrease)
% Change
$
112,750
$
108,814
$
3,936
3.6 %
16.0 %
16.9 %
The increase in operating expenses was primarily due to incremental operating expenses related to the Chemogas and Zumbro
acquisitions and the prior year benefiting from the timing of an insurance recovery. These increases were partially offset by lower
selling expenses driven by reduced travel and lower bad debt expenses.
Earnings From Operations
(in thousands)
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and unallocated
2020
2019
$
61,397
$
48,429
$
29,979
26,801
(7,030)
25,868
28,513
(257)
Earnings from operations
$
111,147
$
102,553
$
% of net sales (operating margin)
15.8 %
15.9 %
Increase
(Decrease)
% Change
12,968
4,111
(1,712)
(6,773)
8,594
26.8 %
15.9 %
(6.0) %
2635.4 %
8.4 %
•
•
•
•
Earnings from operations for the HNH segment increased primarily due to the aforementioned higher sales and lower selling
expenses as a result of reduced travel and lower bad debt expenses.
ANH segment earnings from operations increased primarily due to the aforementioned higher sales, certain lower raw
material costs, and lower selling expenses due to reduced travel, partially offset by an increase in certain compensation-
related costs.
The decrease in earnings from operations for the Specialty Products segment was primarily due to lower legacy ethylene
oxide sales, mix, and higher operating expenses primarily related to the acquisition of Chemogas.
The decrease in other and unallocated was driven primarily by lower earnings from the business formerly reported in the
Industrial Products segment, as well as increased unallocated amortization related to a company-wide ERP implementation.
Other Expenses (Income)
(in thousands)
Interest expense, net
Other, net
2020
2019
Increase
(Decrease)
% Change
$
$
4,439 $
291
4,730 $
5,959 $
116
6,075 $
(1,520)
175
(1,345)
(25.5) %
150.9 %
(22.1) %
Interest expense for 2020 and 2019 was primarily related to outstanding borrowings under our credit facility.
Income Tax Expense
(in thousands)
2020
2019
Increase
(Decrease)
% Change
Income tax expense (benefit)
$
21,794
$
16,807
$
4,987
29.7 %
Effective tax rate
20.5 %
17.4 %
17
Our effective tax rate for 2020 and 2019 was 20.5% and 17.4%, respectively. The increase was primarily due to a reduction in
certain tax credits.
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, 2020, are summarized in the table below:
Payments due by period
Contractual Obligations
Total
2021
2022-2023
2024-2025
Thereafter
Operating lease obligations (1)
Purchase obligations (2)
Debt obligations (3)
Interest payment obligations (4)
Total
$
$
11,602 $
50,716
163,569
5,098
230,985 $
3,258 $
50,716
—
2,238
56,212 $
4,120 $
—
163,569
2,860
170,549 $
1,541 $
—
—
—
1,541 $
2,683
—
—
—
2,683
(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 contractual obligations under the Credit Agreement, which was effective on June 27, 2018 and expires on June
27, 2023.
(4) Includes interest payments on debt obligations based on interest rates at December 31, 2020, and the assumption that there
will be no prepayments of principal. This interest is related to the Credit Agreement that expires on June 27, 2023, and the
Contractual Obligations table reflects this expiration date and related current contractual obligations.
The table above excludes a $5,335 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.
We know of no current or pending demands on, or commitments for, our liquid assets that will materially affect our liquidity.
We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital
investments. We are actively pursuing additional acquisition candidates. We could seek additional bank loans or access to
financial markets to fund such acquisitions, our operations, working capital, necessary capital investments or other cash
requirements should we deem it necessary to do so.
Cash
Cash and cash equivalents increased to $84,571 at December 31, 2020 from $65,672 at December 31, 2019. At December 31,
2020, we had $55,036 of cash and cash equivalents held by our foreign subsidiaries. It is our intention to permanently reinvest
these funds in 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 to fund U.S. operations or obligations. However, if
these funds are needed for U.S. operations, we could be required to pay additional withholding taxes to repatriate them. Working
capital was $172,460 at December 31, 2020 as compared to $162,688 at December 31, 2019, an increase of $9,772. Working
capital reflects the payment of the 2019 declared dividend in 2020 of $16,705, net payments on the revolving debt of $85,000,
capital expenditures and intangible assets acquired of $33,828, and the purchase of treasury stock for the amount of $13,463.
(in thousands)
Cash flows provided by operating
activities
Cash flows used in investing activities
Cash flows (used in) provided by
financing activities
2020
2019
Increase
(Decrease)
% Change
$
150,494 $
(34,591)
124,461 $
(156,225)
26,033
121,634
20.9 %
77.9 %
(101,164)
43,385
(144,549)
333.2 %
18
Operating Activities
The increase in cash flows from operating activities was primarily due to beneficial changes in assets and liabilities, increased
earnings, and higher depreciation and amortization.
Investing Activities
We 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 $33,828 and $28,413 for the years ended December 31,
2020 and 2019, respectively.
Financing Activities
We borrowed $10,000 against the revolving loan and made total debt payments of $95,000 during 2020, resulting in $336,431
available under the Credit Agreement as of December 31, 2020.
We 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 2,568,396 shares have been purchased, of which 76,084 shares and 203,879
shares remained in treasury at December 31, 2020, and 2019, respectively. We repurchase shares from employees in connection
with settlement of transactions under our equity incentive plans. We also intend to acquire shares from time to time at prevailing
market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market
conditions and other factors.
Proceeds from stock options exercised were $14,155 and $4,839 for the years ended December 31, 2020 and 2019, respectively.
Dividend payments were $16,705 and $15,135 during 2020 and 2019, respectively.
Other Matters Impacting Liquidity
We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 15 – Employee
Benefit Plans. The liability recorded in other long-term liabilities on the consolidated balance sheets as of December 31, 2020
and December 31, 2019 was $1,374 and $1,076, respectively, and the plans are not funded. Historical cash payments made under
these plans have typically been less than $100 per year. We do not anticipate any changes to the payments made in the current
year for the plans.
On June 1, 2018, we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select
group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are included in non-
current assets on our 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, 2020 and December 31, 2019 was $3,581 and $1,982,
respectively, and is included in other long-term obligations on our balance sheet.
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, 2020
and December 31, 2019 was $950 and $596, respectively, and was included in other long-term obligations.
Related Party Transactions
We were engaged in related party transactions with St. Gabriel CC Company, LLC for the years ended December 31, 2020 and
December 31, 2019. Refer to Note 18, "Related Party Transactions".
Critical Accounting Policies
Our management 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. 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.
19
Our “critical accounting policies” are those that require application of management'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.
Revenue Recognition
Revenue for each of our business segments is recognized when control of the promised goods is transferred to our customers, in
an amount that reflects the consideration we expect to realize in exchange for those goods. We report amounts billed to customers
related to shipping and handling as revenue and include costs incurred for shipping and handling in cost of sales. Amounts
received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are
included in current liabilities. In instances of shipments made on consignment, revenue is recognized when control is transferred
to the customer.
ASC 606, Revenue from Contracts with Customers, was adopted for the fiscal year beginning on January 1, 2018. Per the
standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to
those performance obligations, and criteria for satisfaction of a performance obligation. The standard allows for recognition of
revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a
customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit
from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control
of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following
criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession,
(iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. We assess
collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.
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, 2019, we incurred impairment charges of
$1,026 in connection with a restructuring in the HNH segment.
Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC 350, “Intangibles-Goodwill and
Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset.
Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not
amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset
might be impaired, in accordance with the provisions of ASC 350. We performed our 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 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. A goodwill impairment test will
now be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be
recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance is effective for
annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We adopted the new standard
on January 1, 2020. This ASU did not have a significant impact on our consolidated financial statements.
As of October 1, 2020 and 2019, we opted to bypass the qualitative assessment and proceeded directly to performing the
quantitative 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. Our estimates of future cash flows included
20
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 as of October
1, 2020. However, during the second quarter of 2020, we recorded a goodwill impairment charge of $1,228 related to business
formerly included in the Industrial Products segment. Refer to Note 6, "Intangible Assets". We may resume performing 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 and perform on-going credit evaluations of our customers. In June
2016, the FASB issued 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 their reasonably expected credit worthiness which is
determined through review of their payment history, their current credit 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 the Company’s customers to make required payments are maintained. Estimated losses are based
on historical experience, any specific customer collection issues 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.
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.
Intangible Assets with Finite Lives
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, 2020, there were no triggering events which required intangible asset
impairment reviews.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation
allowances would be established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating
our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including
our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and
feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and
are consistent with the plans and estimates we are using to manage the underlying businesses.
21
We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a
50% likelihood of being sustained.
Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of
our income tax provision.
As of December 31, 2020, we have federal and state income tax net operating loss (NOL) carryforwards of $2,367 and $1,026,
respectively. The federal NOL will not expire. The state NOL will expire between 2025 to 2034. We believe that the benefit
from the state NOL carryforwards will be realized, therefore a valuation allowance is not required to be established on these
assets. However, we also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas. These
NOLs are not expected to be realized and therefore a valuation allowance on these items was established.
We consider 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 and our
specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for
working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed
earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to
repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our
assertion on indefinite reinvestment.
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 our stock. The expected term of the
options is based on our 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, in
subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If
factors change 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.
New Accounting Pronouncements
See Note 1 in Notes to Consolidated Financial Statements regarding recent accounting pronouncements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents are held primarily in certificates of deposit and money market investment funds. In the second
quarter of 2019, we entered into an interest rate swap and cross-currency swap for hedging purposes. Refer to details noted below
(see Note 20). Additionally, as of December 31, 2020, our borrowings were under a revolving loan bearing interest at a
fluctuating rate as defined by the Credit Agreement plus an applicable rate. The applicable rate is based upon our consolidated
net leverage ratio, as defined in the Credit Agreement. A 100 basis point increase or decrease in interest rates, applied to our
borrowings at December 31, 2020, would result in an increase or decrease in annual interest expense and a corresponding
reduction or increase in cash flow of approximately $1,636. We are exposed 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 raw material pricing
arising in our business activities. We 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 our credit agreement dated
June 27, 2018. In the second quarter of 2019, we began to manage our interest rate exposure through the use of derivative
instruments. All of our derivative instruments are utilized for risk management purposes, and are not used for trading or
22
speculative purposes. We have hedged a portion of our floating interest rate exposure using an interest rate swap (see Note 20 to
our consolidated financial statements). As of December 31, 2020, the notional amount of our outstanding interest rate swap was
$108,569.
Foreign Currency Exchange Risk
The financial condition and results of operations of our foreign subsidiaries are reported in Euros, Canadian Dollars, Malaysian
Ringgits, Singapore Dollars, Australian Dollars, and Philippine Pesos 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. Specifically, we are exposed to changes in exchange rates between the U.S. dollar and
Euro. In the second quarter of 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.
23
Item 8.
Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2020, 2019 and 2018
Page Numbers
25
27
28
29
30
31
32
62
24
To the Stockholders and the Board of Directors of Balchem Corporation
Report of Independent Registered Public Accounting Firm
Opinions on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Balchem Corporation and subsidiaries (the Company) as of
December 31, 2020 and 2019, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity
and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule listed at
Item 8 (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of
December 31, 2020, 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, 2020 and 2019, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2020, 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, 2020, 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’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) and are
required to be independent with respect to the Company in accordance with 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
audits 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.
25
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated 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 consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate
opinions 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 Note 1 and 6 to the financial statements, the Company’s goodwill balance was $529 million as of December 31,
2020. The Company performed an annual goodwill impairment test as of October 1, 2020 using a quantitative evaluation for each
of their 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 fair value of each reporting unit
to its carrying value. When estimating 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 revenue 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 estimate 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 revenue and expense growth rates, the discount rates, and the terminal value calculation utilized in the valuation of the
reporting units utilized in 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 revenue 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 revenue and
expense growth rates and the selection of appropriate discount rates.
• We evaluated the reasonableness of management’s forecasted revenue and expense growth rates by comparing actual
•
results to management’s historical forecasts.
Due to the uncertain U.S and foreign economic growth, we evaluated the reasonableness of management’s forecasts of
revenue 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.
• 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 revenue 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 calculation.
/s/ RSM US LLP
We have served as the Company's auditor since 2004.
New York, New York
February 19, 2021
26
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2020 and 2019
(Dollars in thousands, except share and per share data)
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $2,092 and $2,080 at
December 31, 2020 and 2019, respectively
Inventories, net
Prepaid expenses
Prepaid income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets with finite lives, net
Right of use assets
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable
Accrued expenses
Accrued compensation and other benefits
Dividends payable
Lease liabilities - current
Total current liabilities
Revolving loan
Deferred income taxes
Lease liabilities - non-current
Derivative liabilities
Other long-term obligations
Total liabilities
Commitments and contingencies (note 16)
Stockholders’ equity:
2020
2019
$
84,571 $
65,672
98,214
70,620
6,598
3,447
3,438
266,888
93,444
83,893
4,385
5,098
2,454
254,946
228,096
216,859
529,463
121,660
8,410
11,326
523,998
143,924
7,338
8,617
$ 1,165,843 $ 1,155,682
$
23,742 $
29,655
19,753
18,941
2,337
94,428
163,569
51,359
6,079
11,658
10,517
337,610
37,267
24,604
11,057
16,855
2,475
92,258
248,569
56,431
4,827
2,103
7,827
412,015
Preferred stock, $25 par value. Authorized 2,000,000 shares; none issued and outstanding
—
—
Common stock, $.0667 par value. Authorized 120,000,000 shares; 32,448,705 shares issued and
32,372,621 outstanding at December 31, 2020 and 32,405,796 shares issued and 32,201,917
shares outstanding at December 31, 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income/(loss)
2,164
173,029
656,740
4,173
Treasury stock, at cost: 76,084 and 203,879 shares at December 31, 2020 and 2019, respectively
(7,873)
Total stockholders’ equity
828,233
2,161
174,218
590,921
(5,564)
(18,069)
743,667
Total liabilities and stockholders’ equity
$ 1,165,843 $ 1,155,682
See accompanying notes to consolidated financial statements.
27
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except per share data)
Net sales
Cost of sales
Gross margin
Operating expenses:
Selling expenses
Research and development expenses
General and administrative expenses
2020
2019
2018
$
703,644 $
643,705 $
643,679
479,747
432,338
439,427
223,897
211,367
204,252
58,630
10,332
43,788
112,750
60,932
11,377
36,505
108,814
57,219
11,592
28,341
97,152
Earnings from operations
111,147
102,553
107,100
Other expenses:
Interest expense, net
Other, net
4,439
291
4,730
5,959
116
6,075
7,611
459
8,070
Earnings before income tax expense
106,417
96,478
99,030
Income tax expense
Net earnings
Basic net earnings per common share
Diluted net earnings per common share
21,794
16,807
20,457
84,623 $
79,671 $
78,573
2.63 $
2.48 $
2.45
2.60 $
2.45 $
2.42
$
$
$
See accompanying notes to consolidated financial statements.
28
BALCHEM CORPORATION
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
2020
2019
2018
Net earnings
$
84,623 $
79,671 $
78,573
Other comprehensive income/(loss), net of tax:
Net foreign currency translation adjustment
Unrealized loss on cash flow hedge, net of taxes of $809 and $372 at
December 31, 2020 and 2019, respectively
Net change in postretirement benefit plan, net of taxes of $127, $101, and
$434 at December 31, 2020, 2019 and 2018, respectively
Other comprehensive income/(loss), net of tax
12,829
(891)
(2,982)
(2,285)
(1,399)
—
(807)
9,737
328
(1,962)
1,022
(1,960)
Comprehensive income
$
94,360 $
77,709 $
76,613
See accompanying notes to consolidated financial statements.
29
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S
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization
Stock compensation expense
Deferred income taxes
Provision for doubtful accounts
Unrealized loss/(gain) on foreign currency transactions and deferred
compensation
Asset impairment charge
Loss/(Gain) on disposal of assets
Changes in assets and liabilities, net of acquired balances
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Income taxes
Other
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures and intangible assets acquired
Cash paid for acquisitions, net of cash acquired
Proceeds from sale of business and assets
Proceeds from insurance
Purchase of convertible notes
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from revolving loan
Principal payments on revolving loan
Principal payments on finance lease
Principal payments on long-term debt
Principal payment on acquired debt
Cash paid for financing costs
Proceeds from stock options exercised
Dividends paid
Purchase of treasury stock
Net cash (used in) provided by financing activities
2020
2019
2018
$
84,623 $
79,671 $
78,573
51,281
8,303
(4,627)
140
173
1,915
153
(3,599)
13,923
(2,856)
(992)
1,859
198
150,494
(33,828)
—
87
—
(850)
(34,591)
10,000
(95,000)
(151)
—
—
—
14,155
(16,705)
(13,463)
(101,164)
45,862
7,596
(3,563)
1,776
72
1,140
(3,134)
11,623
(11,401)
477
1,134
(5,664)
(1,128)
124,461
(28,413)
(141,062)
11,523
2,727
(1,000)
(156,225)
168,569
(76,000)
—
—
(17,567)
—
4,839
(15,135)
(21,321)
43,385
44,666
6,413
(5,403)
43
(141)
1,801
(3,244)
(7,773)
(6,016)
1,517
5,988
1,121
1,152
118,697
(19,723)
(17,399)
966
4,165
—
(31,991)
210,750
(54,750)
—
(219,500)
(19)
(1,374)
8,272
(13,432)
(1,394)
(71,447)
Effect of exchange rate changes on cash
4,160
(217)
(1,407)
Increase in cash and cash equivalents
18,899
11,404
13,852
Cash and cash equivalents beginning of period
Cash and cash equivalents end of period
65,672
84,571 $
54,268
65,672 $
40,416
54,268
$
Supplemental Cash Flow Information - see Note 13
See accompanying notes to consolidated financial statements.
31
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 (“Balchem” or the “Company”), including, unless the context otherwise requires, its wholly-owned
subsidiaries, 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 the Company’s business segments is recognized when control of the promised goods is 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 recognized when
control is transferred to the customer.
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, was adopted for the fiscal year
beginning on January 1, 2018. Per the standard, revenue-generating contracts are assessed to identify distinct performance
obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance
obligation. The standard allows for recognition of revenue only when we have satisfied a performance obligation through
transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other
entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must
determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance
obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the
customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of
ownership and (v) the customer has accepted the asset. The Company assesses collectability based primarily on the customer’s
payment history and on the creditworthiness of the customer. The impact to revenues as a result of applying ASC 606 was an
increase of $338 for the year ended December 31, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. The
Company has funds in its cash accounts that are with third party financial institutions, primarily in certificates of deposit and
money market funds. The Company's balances of cash and cash equivalents in the U.S., Italy, Belgium, Malaysia, Australia,
Philippines, and Singapore exceed the Federal Deposit Insurance Corporation (“FDIC”), Fondo Interbancario di Tutela dei
Depositi (“FITD”), Financial Services and Markets Authority ("FSMA"), Perbadanan Insurans Deposit Malaysia ("PIDM"),
Australian Prudential Regulation Authority ("APRA"), Philippine Deposit Insurance Corporation ("PDIC"), and Singapore
Deposit Insurance Corporation ("SDIC") insurance limits, respectively.
Accounts Receivable
Credit terms are granted in the normal course of business to the Company’s customers and on-going credit evaluations are
performed on the Company’s customers. In June 2016, the FASB issued 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 their
reasonably expected credit worthiness which is determined through review of their payment history, their current credit
information, and any foreseeable future events. Collections and payments from customers are continuously monitored and
32
allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required
payments are maintained. Estimated losses are based on historical experience, any specific customer collection issues 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) 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
Equipment
15-25 years
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 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. In 2020, 2019 and 2018, no customer
accounted for more than 10% of total net sales or accounts receivable.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC 350, “Intangibles-Goodwill and
Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset.
Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not
amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset
might be impaired, in accordance with the provisions of ASC 350. The Company 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 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. A goodwill impairment test will
now be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be
recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance is effective for
annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted the new
standard on January 1, 2020.
As of October 1, 2020 and 2019, the Company opted to bypass the qualitative assessment and proceeded directly to performing
the quantitative goodwill impairment test. The Company assessed the fair values of its reporting units by utilizing the income
approach, based on a discounted cash flow valuation model as the basis for its conclusions. The Company's estimates of future
cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates,
estimated terminal values and future economic and market conditions. The Company's assessment concluded that the fair values
of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units was
not considered impaired as of October 1, 2020. However, during the second quarter of 2020, the Company recorded a goodwill
impairment charge of $1,228 related to business formerly included in the Industrial Products segment. Refer to Note 6,
"Intangible Assets". The Company may resume performing the qualitative assessment in subsequent periods.
33
The Company had goodwill in the amount of $529,463 and $523,998 as of December 31, 2020 and December 31, 2019,
respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”
Goodwill at December 31, 2018
Goodwill as a result of the Acquisitions - see Note 2
Impact due to change in foreign exchange rates
Goodwill at December 31, 2019
Goodwill as a result of the Acquisitions – see Note 2
Goodwill impairment - see Note 6
Impact due to change in foreign exchange rates
Goodwill at December 31, 2020
HNH
ANH
Specialty Products
Other and Unallocated
Total
$
$
447,995
77,392
(1,389)
523,998
432
(1,228)
6,261
529,463
December 31,
2020
December 31,
2019
$
424,051 $
423,600
17,824
87,539
49
17,189
81,981
1,228
$
529,463 $
523,998
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:
Customer relationships and lists
Trademarks & trade names
Developed technology
Regulatory registration costs
Patents & trade secrets
Other
Income Taxes
Amortization Period
(in years)
10 - 20
2 - 17
5 - 12
5 - 10
15 - 17
3 - 18
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation
allowances would be established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating
our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including
our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and
feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and
are consistent with the plans and estimates we are using to manage the underlying businesses.
We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a
fifty percent likelihood of being sustained.
Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of
our income tax provision.
Use of Estimates
Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated
financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates
and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements and revenues and expenses during the reporting period. Estimates and assumptions
34
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 estimated fair value
amounts have been determined by the Company using available market information and appropriate valuation methodologies.
Considerable judgment is 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."
The Company also has derivative financial instruments, consisting of a cross-currency swap and an interest rate swap, which are
included in either derivative asset or derivative liability, in the consolidated balance sheets (see Note 20, "Derivative Instruments
and Hedging Activities"). The fair values of these derivative instruments are determined based on Level 2 inputs, using significant
inputs that are observable either directly or indirectly, including interest rate curves and implied volatilities.
Cost of Sales
Cost of sales are primarily comprised of raw materials and supplies consumed in the manufacture of product, as well as
manufacturing labor, maintenance labor, depreciation expense, and direct overhead expense necessary to convert purchased
materials and supplies into finished product. Cost of sales also includes inbound freight costs, outbound freight costs for shipping
products to customers, warehousing costs, quality control and obsolescence expense.
Selling, General and Administrative Expenses
Selling expenses consist primarily of compensation and benefit costs, amortization of customer relationships and lists, trade
promotions, advertising, commissions and other marketing costs. General and administrative expenses consist primarily of payroll
and benefit costs, occupancy and operating costs of corporate offices, depreciation and amortization expense on non-
manufacturing assets, information systems costs and other miscellaneous administrative costs.
Research and Development
Research and development costs are expensed as incurred.
Net Earnings Per Common Share
Basic net earnings per common share is calculated by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted net earnings per common share is calculated in a manner consistent with basic net earnings
per common share except that the weighted average number of common shares outstanding also includes the dilutive effect of
stock options outstanding, unvested restricted stock, and unvested performance shares (using the treasury stock method).
Stock-based Compensation
The Company has stock-based employee compensation plans, which are described more fully in Note 3. The Company accounts
for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation,” which requires all share-based
payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair
values. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes based option-
pricing model. Estimates of and assumptions about forfeiture rates, terms, volatility, interest rates and dividend yields are used to
calculate stock-based compensation. A significant change to these estimates could materially affect the Company’s operating
results.
Impairment of Long-lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
35
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, 2019, we incurred
impairment charges of $1,026 in connection with a restructuring in the HNH segment.
Derivative 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 is to manage interest rate risk and foreign currency risk. The Company does not enter into derivative financial
instruments for trading or speculative purposes.
On May 28, 2019, the Company entered into a pay-fixed, receive-floating interest rate swap with a notional amount of $108,569
and a maturity date of June 27, 2023. The Company's risk management objective and strategy with respect to the interest rate
swap is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows
relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective since changes in the cash
flows of the interest rate swap are expected to exactly offset the changes in the cash flows attributable to fluctuations in the
contractually specified interest rate on the interest payments associated with the Credit Agreement.
At the same time, the Company also entered into a cross-currency swap to manage foreign exchange risk related to the Company's
net investment in Chemogas. This derivative has a notional amount of $108,569, an effective date of May 28, 2019, and a
maturity date of June 27, 2023.
The derivative instruments are with the above single counterparty and are subject to a contractual agreement that provides 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 are categorized as a master netting arrangement and presented as a net derivative
asset or derivative liability on the consolidated balance sheet.
On a quarterly basis, we assess 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. As of December 31, 2020, we assessed the hedging
relationships and determined them to be highly effective. As such, the net change in fair values of the interest rate swap, that
qualify as cash flow hedge, was recorded in accumulated other comprehensive income/(loss) and is subsequently reclassified into
interest expense as interest payments are made on our debt. For the cross-currency swap, the amounts that have not yet been
recognized in earnings remained 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.
New Accounting Pronouncements
Recently Issued Accounting Standards
In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides temporary optional guidance to
ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions
for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting
certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help
stakeholders during the global market-wide reference rate transition period. Therefore, this standards update is in effect from
March 12, 2020 through December 31, 2022. In January 2021, the FASB issued Accounting Standards Update ("ASU") 2021-01,
"Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for
contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also
amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to
tailor the existing guidance to derivative instruments affected by the discounting transition. The Company is currently evaluating
the impact of this pronouncement on the consolidated financial statements and disclosures.
In December 2019, the FASB issued Accounting Standards Update ("ASU") 2019-12, "Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes." The amendments in this Update simplify the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP
36
for other areas of Topic 740 by clarifying and amending existing guidance. The effective date of this Update is for fiscal years
beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Standard may
be adopted either using the prospective or retrospective transition approach and could also be applied on a modified retrospective
basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company
is currently evaluating the impact of this pronouncement on the Company’s consolidated financial statements and disclosures.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement that is a Service Contract.” The guidance requires implementation costs incurred by customers in cloud
computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional
renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is
controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years. The standard may be adopted either using the prospective or retrospective
transition approach. The Company adopted the new standard on January 1, 2020. The standard update did not have a significant
impact on the Company’s consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework-Changes to the Disclosure Requirements for Defined
Benefit Plans,” which modifies the disclosure requirements for employers that sponsor defined benefit pension or other
postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific
requirements of disclosures and adds disclosure requirements identified as relevant. This update should be applied on a
retrospective basis to all periods presented and is effective for fiscal years ending after December 15, 2020. Early adoption is
permitted. The Company adopted the new standard on January 1, 2020. The standard update did not have a significant impact on
the Company's consolidated financial statements and disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. The guidance was issued with the objective of improving the financial reporting of hedging
relationships to better portray the economic results of companies' risk management activities in its financial statements, as well as
simplifying the application of hedge accounting guidance especially in the area of assessment of effectiveness of the hedge. In
April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 815, Derivative and Hedging", which further
clarified ASU 2017-12. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. The Company adopted the new standards in the second quarter of 2019, upon entering into derivative
transactions. Refer to Note 20, "Derivative Instruments and Hedging Activities."
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. The Company adopted the new
standard on January 1, 2020. This ASU did not have a significant impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued 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. The update made several consequential amendments to the codification which requires the accounting for available-
for-sale debt securities to be individually assessed for credit losses when fair value is less than the amortized cost basis. The
FASB subsequently issued ASU 2019-04, ASU 2019-05, and ASU 2019-11, all of which further clarified ASU 2016-13. The
Company adopted the new standard and related updates on January 1, 2020. The adoption did not have a significant impact on
the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which was clarified by ASU 2018-11 and
addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-of-use
("ROU") assets and lease liabilities for most leases in the Consolidated Balance Sheets and is effective for annual and interim
periods beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019 and elected the optional
transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption. The
new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical
expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease
classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land
easements, the latter not being applicable to the Company. The new standard also provides practical expedients for an entity’s
ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, which means for
those leases that qualify, the Company will not recognize ROU assets or lease liabilities. The Company also elected the practical
expedient to not separate lease and non-lease components for all of its leases. In March 2019, the FASB issued ASU 2019-01,
37
"Leases (Topic 842): Codification Improvements," which further clarifies the determination of fair value of leases and modifies
transition disclosure requirements for changes in accounting principles. The effective date of the amendments is for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal years. The ASU was adopted by the Company on
January 1, 2020 and did not have a significant impact on its consolidated financial statements and disclosures. Refer to Note 19,
"Leases."
NOTE 2 – SIGNIFICANT ACQUISITIONS AND DIVESTITURES
Acquisitions
On December 13, 2019, the Company completed the acquisition of Zumbro. The Company made payments of $52,403 on the
acquisition date, amounting to $47,058 to the former shareholders and $5,345 to Zumbro's lenders to pay Zumbro debt.
Considering the cash acquired of $686, net payments made to the former shareholders were $46,372. In May 2020, the Company
received an adjustment for working capital acquired of $561.
The estimated goodwill of $18,505 arising from the acquisition consists largely of expected synergies, including the combined
entities' experience and technical problem-solving capabilities, and acquired workforce. The goodwill is assigned to Human
Nutrition & Health ("HNH") and $4,723 is deductible for income taxes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid & other current assets
Property, plant and equipment
Right of use assets
Customer relationships
Developed technology
Trade name
Other non-current assets
Accounts payable & accrued expenses
Lease liabilities
Debt
Deferred income taxes
Goodwill
Amount paid to shareholders
Zumbro debt paid on purchase date
Total amount paid on acquisition date
$
$
686
3,314
4,052
521
15,245
3,181
8,200
4,400
2,300
10
(1,651)
(3,181)
(5,345)
(3,740)
18,505
46,497
5,345
51,842
The estimated valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on
management's estimates and assumptions that are subject to change. 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 included cost and market approaches for property, plant and equipment, excess earnings method for customer
relationships and the relief from royalty method for other intangible assets.
Customer relationships are amortized over a 15-year period utilizing an accelerated method based on the estimated average
customer attrition rate. Trade name and developed technology are amortized over 10 years and 12 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). An indemnification asset balance has not been established.
38
On May 27, 2019, the Company acquired 100 percent of the outstanding common shares of Chemogas. The Company made
payments of approximately €99,503 (translated to $111,324) on the acquisition date, amounting to approximately €88,579
(translated to $99,102) to the former shareholders and approximately €10,924 (translated to $12,222) to Chemogas' lender to pay
Chemogas bank debt. Considering the cash acquired of €3,943 (translated to $4,412), net payments made to the former
shareholders were €84,636 (translated to $94,690).
The goodwill of $59,319 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 Specialty Products
segment and is not tax deductible for income tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Cash and cash equivalents
Accounts receivable
Inventories
Property, plant and equipment
Customer relationships
Developed technology
Trade name
Other assets
Accounts payable
Bank debt
Other liabilities
Pension obligation (net)
Deferred income taxes
Goodwill
Amount paid to shareholders
Chemogas bank debt paid on purchase date
Total amount paid on acquisition date
$
$
4,412
4,176
957
15,972
39,158
2,461
1,119
1,491
(3,261)
(12,222)
(1,030)
(594)
(12,856)
59,319
99,102
12,222
111,324
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 estimates of the intangible assets and certain tangible assets acquired,
management, among other things, consulted an independent advisor. Valuation methods utilized included cost and market
approaches for property, plant and equipment, excess earnings method for customer relationships and the relief from royalty
method for other intangible assets.
Customer relationships are amortized over a 20-year period utilizing an accelerated method based on the estimated average
customer attrition rate. Trade name and developed technology are amortized over 2 years and 10 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 balance has not been established.
In connection with Chemogas and Zumbro acquisitions, the Company incurred transaction and integration costs of $1,480 and
$1,947 for the year ended December 31, 2020 and 2019, respectively.
In 2018, the Company, through its subsidiary, Balchem Italia, completed one immaterial acquisition, Bioscreen Technologies Srl.
Total transaction and integration costs related to recent acquisitions, including the Chemogas and Zumbro acquisitions described
above, are recorded in general and administrative expenses. These costs amounted to $2,011, $2,273, and $1,786 for the years
ended December 31, 2020, 2019 and 2018, respectively.
39
Divestiture
On September 6, 2019, the Company sold an insignificant portion of its business. As a result of the transaction, the Company
recorded a gain on sale, which was immaterial to the consolidated financial statements and included in general and administrative
expenses. Operating results for the portion of the business sold were insignificant relative to the Company’s consolidated
financial results for year ended December 31, 2019.
NOTE 3 - STOCKHOLDERS’ EQUITY
STOCK-BASED COMPENSATION
All share-based payments, including grants of stock options, are recognized in the statements of earnings as operating 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, 2020, 2019 and 2018 reflected the following compensation cost and
such compensation cost had the following effects on net earnings:
Cost of sales
Operating expenses
Net earnings
Increase/(Decrease) for the
Year Ended, December 31
2019
2018
2020
$
1,115 $
7,188
(6,332)
1,147 $
6,449
(5,884)
973
5,440
(4,965)
On December 31, 2020, the Company had one share-based compensation plan under which awards may be granted, which is
described below.
In June 2017, the Company adopted the Balchem Corporation 2017 Omnibus Incentive Plan (“2017 Plan”) for officers,
employees and directors of the Company and its subsidiaries. The 2017 Plan replaced the 1999 Stock Plan and amendments and
restatements thereto (collectively to be referred to as the “1999 Plan"), which expired on April 9, 2018. No further awards will be
made under the 1999 Plan, and the shares that remained available for grant under the 1999 Plan will only be used to settle
outstanding awards granted under the 1999 Plan and will not become available under the 2017 Plan. The 2017 Plan is
administered by the Compensation Committee of the Board of Directors of the Company. The 2017 Plan provides as follows: (i)
for a termination date of June 13, 2027; (ii) the authorization of 1,600,000 shares for future grants (which represents a reduction
from the 6,000,000 shares authorized for grant under the 1999 Plan); (iii) for the making of grants of stock options, stock
appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards, as well as for the making of cash
performance awards; (iv) except as provided in an employment agreement as in effect on the effective date of the 2017 Plan, no
automatic acceleration of outstanding awards upon the occurrence of a change in control of the Company; (v) certain annual limits
on the number of shares and amount of cash that may be granted; (vii) for dividends or dividend equivalents otherwise payable on
an unvested award to accrue and be paid only at such time as the vesting conditions applicable to the underlying award have been
satisfied; (vii) for certain discretionary compensation recovery if the Company is required to prepare an accounting restatement of
its financial statements due to the Company’s material noncompliance with any financial reporting requirements under the
securities laws; and (viii) for compliance with the requirements of Section 409A of the Internal Revenue Code of 1986, as
amended (the “Internal Revenue Code” or the “Code”). No option will be exercisable for longer than ten years after the date of
grant.
The shares to be issued upon exercise of the outstanding options have been approved, reserved and are adequate to cover all
exercises. As of December 31, 2020, the 2017 Plan had 873,256 shares available for future awards.
The Company has Restricted Stock Grant Agreements with the Company's non–employee directors and certain employees.
Under the Restricted Stock Grant Agreements, certain shares of the Common Stock have been granted, ranging from 70 shares to
54,000 shares, to its non-employee directors and certain employees, subject to time-based vesting requirements.
The Company also has performance share (“PS”) awards, which provide the recipients the right to receive a certain number of
shares of the Common Stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the
Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return
40
(“TSR”) 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 a Black-
Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on
historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical experience of
employees’ exercise behavior. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are
based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected
life.
Weighted Average Assumptions:
Expected Volatility
Expected Term (in years)
Risk-Free Interest Rate
Dividend Yield
Year Ended December 31,
2019
2018
2020
26.9 %
3.9
1.3 %
0.5 %
24.0 %
4.0
2.5 %
0.6 %
26.8 %
4.4
2.6 %
0.6 %
The value of the restricted shares is based on the fair value of the award at the date of grant.
Performance 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 Performance Share vests. The assumptions used in the fair value determination were risk free interest rates of 1.4%, 2.5%, and
2.4%; dividend yields of 0.5%, 0.5%, and 0.5%; volatilities of 24%, 24%, and 27%; and initial TSR’s of 10.9%, -5.9%, and
-10.5% in each case for the years ended December 31, 2020, 2019, and 2018, 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 Performance 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 years for stock options, three to four years for employee restricted stock awards, three years for employee performance share
awards, and three to four years for non-employee director restricted stock awards.
A summary of stock option plan activity for 2020, 2019, and 2018 for all plans is as follows:
2020
2019
2018
# of
Shares
(000s)
Weighted
Average
Exercise
Price
# of
Shares
(000s)
Weighted
Average
Exercise
Price
# of
Shares
(000s)
Weighted
Average
Exercise
Price
951 $
174
(256)
(11)
—
858 $
68.18
111.75
55.26
92.94
—
80.58
887 $
197
(112)
(17)
(4)
951 $
61.59
85.13
43.67
80.88
70.90
68.18
946 $
148
(198)
(6)
(3)
887 $
55.44
74.57
41.71
74.90
48.54
61.59
Outstanding at beginning of year
Granted
Exercised
Forfeited
Cancelled
Outstanding at end of year
Exercisable at end of year
494 $
69.04
581 $
59.29
490 $
50.50
The aggregate intrinsic value for outstanding stock options was $29,735, $31,814 and $16,192 at December 31, 2020, 2019 and
2018, respectively, with a weighted average remaining contractual term of 6.7 at December 31, 2020. Exercisable stock options
at December 31, 2020 had an aggregate intrinsic value of 22,805 with a weighted average remaining contractual term of 5.4.
41
Other information pertaining to option activity during the years ended December 31, 2020, 2019 and 2018 is as follows:
Weighted-average fair value of options granted
Total intrinsic value of stock options exercised ($000s)
$
$
24.36 $
12,698 $
18.51 $
6,135 $
18.62
10,456
Additional information related to stock options outstanding under all plans at December 31, 2020 is as follows:
Years Ended December 31,
2019
2020
2018
Range of Exercise
Prices
Options Outstanding
Options Exercisable
Shares
Outstanding
(000s)
Weighted
Average
Remaining
Contractual
Term
Weighted
Average
Exercise
Price
Number
Exercisable
(000s)
Weighted
Average
Exercise
Price
$29.06 - $57.17
$58.52 - $85.33
$85.40 - $113.24
53
488
317
858
2.5 $
6.5
7.7
6.7 $
43.01
71.96
100.11
80.58
53 $
304
137
494 $
43.01
66.10
85.61
69.04
Non-vested restricted stock activity for the years ended December 31, 2020, 2019 and 2018 is summarized below:
2020
2019
2018
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Grant
Date Fair
Value
Shares
(000s)
Shares
(000s)
Shares
(000s)
Non-vested balance at beginning
of year
Granted
Vested
Forfeited
Non-vested balance at end of year
138 $
46
(21)
(4)
159 $
80.03
110.53
67.60
91.91
90.71
79 $
73
(8)
(6)
138 $
72.75
85.69
58.52
84.65
80.03
66 $
42
(27)
(2)
79 $
65.66
77.50
62.74
74.57
72.75
Non-vested performance share activity for the years ended December 31, 2020, 2019 and 2018 is summarized below:
2020
2019
2018
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Grant
Date Fair
Value
Shares
(000s)
Shares
(000s)
Shares
(000s)
Non-vested balance at beginning
of year
Granted
Vested
Forfeited
Non-vested balance at end of year
70 $
20
(8)
(11)
71 $
81.26
126.46
104.15
82.71
91.99
53 $
33
(9)
(7)
70 $
75.61
81.79
65.54
60.85
81.26
39 $
32
(15)
(3)
53 $
72.62
71.27
58.78
72.55
75.61
As of December 31, 2020, 2019 and 2018, there was $14,154, $11,643 and $8,565, respectively, of total unrecognized
compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31,
2020, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.4
years. We estimate that share-based compensation expense for the year ended December 31, 2021 will be approximately $10,900.
42
REPURCHASE OF COMMON STOCK
The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since
the inception of the program in June 1999, a total of 2,568,396 shares have been purchased, of which 76,084 shares and 203,879
shares remained in treasury at December 31, 2020, and 2019, respectively. The Company repurchases shares from employees in
connection with settlement of transactions under the Company's equity incentive plans. The Company also 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. During 2020, 2019, and 2018, the Company purchased 136,629,
240,995, and 16,755 shares, respectively, from employees on a net-settlement basis to provide cash to employees to cover the
associated employee payroll taxes and from open market purchases. These shares were purchased at an average cost of $98.54,
$88.47, and $83.08 per share, respectively.
NOTE 4 - INVENTORIES
Inventories, net of reserves at December 31, 2020 and 2019 consisted of the following:
Raw materials
Work in progress
Finished goods
Total inventories
2020
2019
24,536 $
3,050
43,034
70,620 $
27,439
2,102
54,352
83,893
$
$
On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by analyzing demand,
inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reserved, if necessary.
The reserve for inventory was $2,782 and $4,281 at December 31, 2020 and 2019, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2020 and 2019 are summarized as follows:
Land
Building
Equipment
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
Geographic Area Data - Long-Lived Assets (excluding intangible assets):
United States
Foreign Countries
Total
2020
2019
12,215 $
86,873
247,884
31,240
378,212
150,116
228,096 $
11,588
79,261
237,898
14,594
343,341
126,482
216,859
2020
2019
187,719 $
40,377
228,096 $
178,895
37,964
216,859
$
$
$
$
Depreciation expense was $22,990, $19,791 and $18,998 for the years ended December 31, 2020, 2019 and 2018, respectively.
NOTE 6 - INTANGIBLE ASSETS
The Company had goodwill in the amount of $529,463 and $523,998 as of December 31, 2020 and 2019, respectively, subject to
the provisions of ASC 350, “Intangibles-Goodwill and Other.” The increase in goodwill is primarily due to foreign exchange
translation adjustments and an adjustment related to the Zumbro acquisition, partially offset by an impairment of $1,228 related to
business formerly included in the Industrial Products segment.
43
As of December 31, 2020 and 2019, the Company had identifiable intangible assets as follows:
2020
2019
Amortization
Period
(In years)
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Customer relationships & lists
Trademarks & trade names
Developed technology
Other
10-20 $
2-17
5-12
3-18
$
243,557 $
43,208
21,674
21,624
330,063 $
158,051 $
24,974
13,693
11,685
208,403 $
Accumulated
Amortization
139,863
20,477
11,008
8,576
179,924
239,578 $
43,102
20,206
20,962
323,848 $
Amortization of identifiable intangible assets was $27,811, $25,789 and $24,988 for 2020, 2019 and 2018, respectively.
Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is
approximately $24,392 in 2021, $22,430 in 2022, $19,501 in 2023, $10,800 in 2024, and $6,540 in 2025. At December 31, 2020
and 2019, 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 2020 and 2019.
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 (the "EPA") because
they are considered pesticides. Costs of such registrations are included as other in the table above.
NOTE 7 – EQUITY-METHOD INVESTMENT
In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture (66.66% /
33.34% ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel
aqueous choline chloride plant. The Company contributed the St. Gabriel plant, at cost, and all continued expansion and
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) 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 as 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 $575, $388, and $569 for the years ended December 31,
2020, 2019, and 2018, respectively, relating to its portion of the joint venture’s expenses in other expense. The carrying value of
the joint venture at December 31, 2020 and 2019 is $4,971 and $4,513, respectively, and is recorded in other assets.
NOTE 8 – REVOLVING LOAN
On June 27, 2018, the Company and a bank syndicate entered into the Credit Agreement, which replaced the existing credit
facility that had provided for a senior secured term loan of $350,000 and a revolving loan of $100,000. The Credit Agreement,
which expires on June 27, 2023, provides for revolving loans up to $500,000 (collectively referred to as the “loans”). The loans
may be used for working capital, letters of credit, and other corporate purposes and may be drawn upon at the Company’s
discretion. The initial proceeds from the Credit Agreement were used to repay the outstanding balance of $210,750 on its senior
secured term loan, which was due May 2019. On May 23, 2019, the Company drew down $108,569 to fund the Chemogas
acquisition (see Note 2, "Significant Acquisitions and Divestitures"). In connection with these additional borrowings, the
Company entered into an interest rate swap to protect against adverse fluctuations in interest rates (see Note 20, "Derivative
Instruments and Hedging Activities"). On December 13, 2019, the Company drew down $45,000 to fund the Zumbro acquisition
(see Note 2, "Significant Acquisitions and Divestitures"). As of December 31, 2020, the total balance outstanding on the Credit
Agreement amounted to $163,569. There are no installment payments required on the revolving loans; they may be voluntarily
prepaid in whole or in part without premium or penalty, and all outstanding amounts are due on the maturity date.
Amounts outstanding under the Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the Credit
Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in
the Credit Agreement, and the interest rate was 1.273% at December 31, 2020. The Company is also required to pay a
44
commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as
defined in the Credit Agreement and ranges from 0.15% to 0.275% (0.175% at December 31, 2020). The unused portion of the
revolving loan amounted to $336,431 at December 31, 2020. The Company is also required to pay, as applicable, letter of credit
fees, administrative agent fees, and other fees to the arrangers and lenders.
Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the
Credit Agreement. Costs associated with the issuance of the extinguished debt instrument were capitalized and amortized over
the term of the respective financing arrangement using the effective interest method. Capitalized costs net of accumulated
amortization totaled $703 and $986 at December 31, 2020 and 2019, respectively, and are included in other assets on the
consolidated balance sheets. Amortization expense pertaining to these costs totaled $282 for each of the years ended December
31, 2020 and 2019 and $680 for the year ended December 31, 2018, and is included in interest expense in the accompanying
consolidated statements of earnings. In 2018, such interest expense included a write off $363 of deferred financing costs in
connection with the extinguished debt in the second quarter of 2018.
The Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum
ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At December 31, 2020, the Company was in
compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the Company.
NOTE 9 - NET EARNINGS PER COMMON SHARE
The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per
common share:
Year Ended December 31,
2019
2018
2020
Net Earnings - Basic and Diluted
$
84,623 $
79,671 $
78,573
Share (000s)
Weighted Average Common Shares - Basic
Effect of Dilutive Securities – Stock Options, Restricted Stock, and
Performance Shares
Weighted Average Common Shares - Diluted
32,176
327
32,503
32,136
369
32,505
Net Earnings Per Share - Basic
Net Earnings Per Share - Diluted
$
$
2.63 $
2.60 $
2.48 $
2.45 $
32,093
352
32,445
2.45
2.42
The number of anti-dilutive shares were 204,672, 12,250, and 188,470 for 2020, 2019, and 2018. Anti-dilutive shares could
potentially dilute basic earnings per share in future periods and therefore, were not included in diluted earnings per share.
The Company has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted shares
and they participate on a one-for-one basis with holders of Common Stock. These awards have an immaterial impact as
participating securities with regard to the calculation using the two-class method for determining earnings per share.
NOTE 10 - INCOME TAXES
The Company’s effective tax rate for 2020, 2019 and 2018 was 20.5%, 17.4%, and 20.7%, respectively. The increase from 2019
to 2020 is primarily due to a reduction in certain tax credits.
On March 27, 2020 Congress passed the Coronavirus Aid, Relief, and Economic Security Act, and on December 31, 2020
Congress passed an additional round of COVID relief legislation as part of the Bipartisan-Bicameral Omnibus COVID Relief
Deal. The Company has reviewed the change in law and determined that it does not have a significant impact on the Company’s
tax provision or financial statements. In addition, Balchem will continue to evaluate and analyze the impact of the U.S. Tax Cuts
and Jobs Act that was enacted on December 22, 2017 and the additional guidance that has been issued, and may be issued, by the
U.S. Department of Treasury, the SEC, and/or the Financial Accounting Standards Board ("FASB") regarding this act.
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
45
and the Company's specific plans for reinvestment of those subsidiary earnings. The Company projects that its foreign earnings
will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax
liability on those undistributed earnings is not practicable due to its legal entity structure and the complexity of U.S. and local
country tax laws. If the Company decides to repatriate the undistributed foreign earnings, it will need to recognize the income tax
effects in the period it changes its assertion on indefinite reinvestment.
Income tax expense consists of the following:
Current:
Federal
Foreign
State
Deemed Repatriation
Deferred:
Federal
Foreign
State
Total income tax provision
2020
2019
2018
$
$
19,249 $
3,399
3,590
—
(3,017)
167
(1,594)
21,794 $
17,757 $
1,609
818
—
(3,707)
67
263
16,807 $
18,296
4,060
3,880
(970)
(3,788)
(69)
(952)
20,457
The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 21% for 2020, 2019,
and 2018 to earnings before income tax expense due to the following:
Income tax at Federal statutory rate
State income taxes, net of Federal income taxes
Stock Options
GILTI
FDII
Deemed Repatriation
Patent Box Decree (related to prior years)
Foreign Tax Credits
Other
Total income tax provision
2020
2019
2018
22,348 $
2,288
(1,529)
—
(1,400)
—
—
—
87
21,794 $
20,260 $
(244)
(222)
2,507
(1,922)
—
(1,948)
(1,125)
(499)
16,807 $
20,796
2,742
(1,293)
1,027
—
(970)
—
(1,136)
(709)
20,457
$
$
46
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2020 and 2019 were as follows:
Deferred tax assets:
Inventories
Restricted stock and stock options
Lease liabilities
Currency and interest rate swap
Other
Total deferred tax assets
Deferred tax liabilities:
Amortization
Depreciation
Prepaid expenses
Right of use assets
Other
Total deferred tax liabilities
Valuation allowance
$
$
2020
2019
1,470 $
3,862
1,641
2,831
3,308
13,112
32,872 $
27,897
915
1,926
731
64,341
1,844
4,097
1,456
442
3,935
11,774
28,589
37,075
465
1,461
584
68,174
130
31
Net deferred tax liability
$
51,359 $
56,431
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 not realize the benefits of
these deductible differences. The amount of deferred tax asset realizable, however, could change if management’s estimate of
future taxable income should change.
As of December 31, 2020, the Company has federal and state income tax net operating loss (NOL) carryforwards of $2,367 and
$1,026, respectively, The federal NOL will not expire. The state NOL carryforwards will expire between 2025 and 2034. The
Company believes that the benefit from the state NOL carryforwards will be realized, therefore a valuation allowance is not
required to be established on these assets. However, the Company also acquired an insignificant amount of NOL carryforwards
with the acquisition of Chemogas. These NOLs are not expected to be realized and therefore a valuation allowance on these items
was established.
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
and specific plans for reinvestment of those subsidiary earnings. The Company projects that foreign earnings will be utilized
offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those
undistributed earnings is not practicable due to the Company's legal entity structure and the complexity of U.S. and local country
tax laws. If Balchem decides to repatriate the undistributed foreign earnings, the income tax effects will need to be recognized in
the period the Company changes its assertion on indefinite reinvestment.
47
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:
Balance at beginning of period
Increases for tax positions of prior years
Decreases for tax positions of prior years
Increases for tax positions related to current year
Balance at end of period
2020
2019
2018
4,762 $
267
(391)
697
5,335 $
5,709 $
431
(1,978)
600
4,762 $
4,781
1,366
(1,185)
747
5,709
$
$
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,
2020, 2019 and 2018, these amounted to approximately $232, $132 and $207, respectively. As of December 31, 2020 and 2019,
accrued interest and penalties were $1,845 and $1,612, 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 2016 and
management does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next
twelve months.
NOTE 11 - SEGMENT INFORMATION
Previously, the Company's four reportable segments were: Human Nutrition and Health, Animal Nutrition and Health, Specialty
Products, and Industrial Products. However, effective in the first quarter of 2020, in order to align with the Company's strategic
focus on health and nutrition, allocation of resources, and evaluation of operating performance, and given the 2019 reduction in
portfolio scale of Industrial Products, the Company has revised its reporting segment structure to three reportable segments:
Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. These reportable segments are strategic
businesses that offer products and services to different markets. This realignment has been retrospectively applied. Sales and
production of products outside of our reportable segments and other minor business activities are included in "Other and
Unallocated" and applied retroactively to 2019 and 2018. There was no change to the Consolidated Financial Statements as a
result of the change to the reportable segments. The Company expects that the new reportable segment structure will provide
investors greater understanding of and alignment with the Company’s strategic focus. In order to ensure appropriate transparency
and visibility into the financial performance of the Company, sufficient detail will continue to be provided relative to Other and
Unallocated, including material contributions from oil and gas and other industrial market activities.
Human Nutrition & Health
The Human Nutrition & 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 technology has been
combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications
is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customers'
appreciation of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation.
This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers.
The Company partners with 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. When
combined 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, as well as ice
cream bases and variegates, the Company is a one-stop solutions provider for beverage and dairy product development needs.
Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and
nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and
shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends,
48
confections, sports and protein bars, dietary plans, and nutritional supplements. The Company also creates cereal systems for
ready-to-eat cereals, grain-based snacks, and cereal based ingredients.
Animal Nutrition & Health
The Company’s Animal Nutrition & Health ("ANH") segment provides nutritional products derived from its microencapsulation
and chelation technologies in addition to basic choline chloride. For ruminant animals, the Company’s microencapsulated
products boost health and milk production, delivering nutrient supplements that are biologically available, providing required
nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of
production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and
supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine
industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In
poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a
necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity.
Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability
to leverage the results of university and field research on the animal health and production benefits of our products. Management
believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability
to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production
efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
Specialty Products
Ethylene oxide, at the 100% level and blended with carbon dioxide, is sold as a sterilant gas, primarily for use in the health care
industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft
surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device
being sterilized. The Company’s 100% ethylene oxide product and blends 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. Contract
sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters
with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a
fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.
The Company also distributes a number of other gases for various uses, most notably propylene oxide and ammonia. Propylene
oxide is marketed and sold in the U.S. as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce
bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins,
figs and prunes. The Company distributes its propylene oxide product in the U.S. primarily in recyclable, single-walled, carbon
steel cylinders according to standards outlined by the EPA and the DOT. Propylene oxide is also sold worldwide to customers in
approved reusable and recyclable drum and cylinder packaging for various chemical synthesis applications, such as increasing
paint durability and manufacturing specialty starches and textile coatings. Ammonia is used primarily as a refrigerant, and also
for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and
cylinder drum and cylinder packaging approved for use in the countries these products are shipped to. The Company's inventory
of cylinders for these products also represents a significant capital investment.
The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. The
Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-
life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate®
product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As
a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the
consumer with extended shelf life for produce being shipped long distances.
49
The segment information is summarized as follows:
Business Segment Assets
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (1)
Total
Business Segment Net Sales
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (2)
Total
Business Segment Earnings Before Income Taxes
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (2)
Interest and other expense
Total
Depreciation/Amortization
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (2)
Total
Capital Expenditures
Human Nutrition & Health
Animal Nutrition & Health
Specialty Products
Other and Unallocated (2)
Total
2020
2019
717,232 $
157,454
190,449
100,708
1,165,843 $
731,963
144,524
189,750
89,445
1,155,682
$
$
2020
2019
2018
$
400,330 $
347,433 $
192,191
103,566
7,557
177,557
92,257
26,458
$
703,644 $
643,705 $
341,237
175,693
75,808
50,941
643,679
2020
2019
2018
$
61,397 $
48,429 $
29,979
26,801
(7,030)
(4,730)
25,868
28,513
(257)
(6,075)
$
106,417 $
96,478 $
48,037
26,607
25,254
7,202
(8,070)
99,030
2020
2019
2018
32,117 $
7,187
9,699
2,278
51,281 $
30,558 $
6,552
7,401
1,351
45,862 $
33,594
5,606
4,092
1,374
44,666
2020
2019
2018
22,758 $
6,039
2,860
423
32,080 $
18,159 $
3,921
3,003
707
25,790 $
8,881
6,021
2,356
1,912
19,170
$
$
$
$
50
(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 $2,410, $3,436 and
$1,786 for years ended December 31, 2020, 2019 and 2018, respectively, and (ii) Unallocated amortization expense of $1,888,
$833, and $680 for years ended December 31, 2020, 2019, and 2018, respectively, related to an intangible asset in connection
with a company-wide ERP system implementation and capitalized loan issuance costs that was included in interest expense in
Company's consolidated statement of earnings.
NOTE 12 - REVENUE
Revenue Recognition
Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the
consideration we expect to realize in exchange for those goods.
The following table presents revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues.
Product Sales
Co-manufacturing
Bill and Hold
Consignment
Product Sales Revenue
Royalty Revenue
Total Revenue
2020
2019
2018
666,193 $
29,063
1,158
2,939
699,353
4,291
703,644 $
609,741 $
24,087
3,218
2,299
639,345
4,360
643,705 $
607,879
24,259
4,612
2,442
639,192
4,487
643,679
$
$
The following table presents revenues disaggregated by geography, based on the billing addresses of customers:
United States
Foreign Countries
Total
Product Sales Revenues
2020
2019
2018
$
$
516,347 $
187,297
703,644 $
475,033 $
168,672
643,705 $
482,691
160,988
643,679
The Company’s primary operation is the manufacturing and sale of health and wellness ingredient products, in which the
Company receives an order from a customer and fulfills that order. The Company’s product sales are considered point-in-time
revenue and consist of four sub-streams: product sales, co-manufacturing, bill and hold, and consignment.
Under the co-manufacturing agreements, the Company is responsible for the manufacture of a finished good where the customer
provides the majority of the raw materials. The Company controls the manufacturing process and the ultimate end-product before
it is shipped to the customer. Based on these factors, the Company has determined that it is the principal in these agreements and
therefore revenue is recognized in the gross amount of consideration the Company expects to be entitled for the goods provided.
Royalty Revenues
Royalty revenue consists of agreements with customers to use the Company’s intellectual property in exchange for a sales-based
royalty. Royalties are considered over time revenue and are recorded in the HNH segment.
Contract Liabilities
The Company records contract liabilities when cash payments are received or due in advance of performance, including amounts
which are refundable.
51
The Company’s payment terms vary by the type and location of customers and the products offered. The term between invoicing
and when payment is due is not significant. For certain products or services and customer types, the Company requires payment
before the products are delivered to the customer.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or
less. These costs are recorded within selling and marketing expenses.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length
of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice
for products shipped.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes
Interest
Non-cash financing activities:
Dividends payable
2020
2019
2018
22,637 $
4,666 $
21,771 $
5,674 $
20,593
6,940
2020
2019
2018
18,941 $
16,855 $
15,220
$
$
$
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income (loss) were as follows:
Net foreign currency translation adjustment
$
12,829 $
(891) $
(2,982)
Years Ended December 31,
2019
2020
2018
Net change of cash flow hedge (see Note 20 for further
information)
Unrealized loss on cash flow hedge
Tax
Net of tax
Net change in postretirement benefit plan (see Note 15 for further
information)
Prior service (credit)/cost and (gain)/loss arising during the
period
Amortization of prior service credit/(cost)
Amortization of gain/(loss)
Total before tax
Tax
Adjustment (1)
Net of tax
(3,094)
809
(2,285)
(1,771)
372
(1,399)
(503)
74
(50)
(479)
127
(455)
(807)
199
74
(46)
227
101
—
328
—
—
—
522
74
(8)
588
434
—
1,022
Total other comprehensive income/(loss)
$
9,737 $
(1,962) $
(1,960)
(1) One-time adjustment to the postretirement account.
52
Included in "Net foreign currency translation adjustment" were $4,882 and $262 of losses related to a net investment hedge, net of
taxes of $1,579 and $70 for the years ended December 31, 2020 and 2019, respectively. There were no hedging activities during
the year ended December 31, 2018. See Note 20, "Derivative Instruments and Hedging Activities."
Accumulated other comprehensive income/(loss) at December 31, 2020 consisted of the following:
Foreign currency
translation
adjustment
Cash flow hedge
Postretirement
benefit plan
Total
Balance December 31, 2019
Other comprehensive gain/(loss)
Balance December 31, 2020
$
$
(5,176) $
12,829
7,653 $
(1,399) $
(2,285)
(3,684) $
1,011
(807)
204
(5,564)
9,737
4,173
NOTE 15 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
During 2020, the Company sponsored two 401(k) savings plans for eligible employees. The plans allow participants to make
pretax contributions and the Company matches certain percentages of those pretax contributions. One of the plans has a
discretionary profit sharing portion and matches 401(k) contributions with shares of the Company’s Common Stock. All amounts
contributed to the plans are deposited into a trust fund administered by independent trustees. The Company provided for profit
sharing contributions and matching 401(k) savings plan contributions of $1,022 and $3,751 in 2020, $592 and $3,451 in 2019,
and $825 and $3,153 in 2018, respectively.
Postretirement Medical Plans
The Company provides postretirement benefits in the form of two unfunded postretirement medical plans; one that is under a
collective bargaining agreement and covers eligible retired employees of the Verona, Missouri facility and a plan for those named
as executive officers in the Company’s proxy statement. 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
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.
The actuarial recorded liabilities for such unfunded postretirement benefits are as follows:
Change in benefit obligation:
Benefit obligation at beginning of year
Initial adoption of new plan
Service cost with interest to end of year
Interest cost
Participant contributions
Benefits paid
Actuarial gain
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer (reimbursement)/contributions
Participant contributions
Benefits paid
Fair value of plan assets at end of year
53
2020
2019
1,076 $
—
68
26
23
(27)
208
1,374 $
2020
2019
— $
4
23
(27)
— $
1,174
—
63
39
35
(162)
(73)
1,076
—
127
35
(162)
—
$
$
$
$
Amounts recognized in consolidated balance sheet:
2020
2019
Accumulated postretirement benefit obligation
Fair value of plan assets
Funded status
Unrecognized prior service cost
Unrecognized net (gain)/loss
Net amount recognized in consolidated balance sheet (after ASC 715) (included in
other long-term obligations)
Accrued postretirement benefit cost (included in other long-term obligations)
$
$
(1,374) $
—
(1,374)
N/A
N/A
1,374 $
N/A
Components of net periodic benefit cost:
Service cost with interest to end of year
Interest cost
Amortization of prior service credit
Amortization of gain
Total net periodic benefit cost
Estimated future employer contributions and benefit payments are as follows:
Year
2021
2022
2023
2024
2025
Years 2026-2030
Defined Benefit Pension Plans
2020
2019
2018
$
$
68 $
26
74
(50)
118 $
63 $
39
74
(46)
130 $
$
(1,076)
—
(1,076)
N/A
N/A
1,076
N/A
78
44
74
(8)
188
99
98
81
100
93
495
The Company contributes to one multiemployer defined benefit plan under the terms of a collective-bargaining agreement
covering its union-represented employees of the Verona, 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 underfunded status of the plan, referred to as the withdrawal liability.
The Company’s participation in this plan for the annual period ended December 31, 2020 is outlined in the table below. The
“EIN/Pension Plan Number” column provides the Employee Identification Number (EIN). The zone status is based on
information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red
zone 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 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 2020 and 2019 was affected by a 4.0% increase in the 2020 contribution rate. There
have been no other significant changes that affect the comparability of 2020 and 2019 contributions. The Company does not
represent more than 5% of the contributions to this pension fund.
54
EIN/
Pension
Plan
Number
Pension Plan Protection
Act Zone Status
2020
2019
FIP/RP
Status
Pending/
Implemented
Contributions of
Balchem Corporation
2020
2019
2018
Surcharge
Imposed
Expiration
Date of
Collective-
Bargaining
Agreement
Critical &
Declining
as of
1/1/20
Critical &
Declining
as of
1/1/19
36-6044243
Implemented
$774
$676
$614
No
7/12/2025
Pension
Fund
Central States,
Southeast and
Southwest
Areas
Pension Fund
On May 27, 2019, the Company acquired Chemogas, which has an unfunded defined benefit pension 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 the Company's balance sheet as of December 31, 2020 and 2019 was $950 and $596, respectively, and was
included in other long-term obligations.
The actuarial recorded liabilities for such unfunded defined benefit pension plan are as follows:
Change in benefit obligation:
Benefit obligation at beginning of year
Acquisitions
Service cost with interest to end of year
Interest cost
Participant contributions
Benefits paid
Actuarial gain
Exchange rate changes
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Acquisitions
Actual return on plan assets
Employer (reimbursement)/contributions
Participant contributions
Benefits paid
Exchange rate changes
Fair value of plan assets at end of year
Amounts recognized in consolidated balance sheet:
Benefit obligation
Fair value of plan assets
Funded status
Unrecognized prior service cost
Unrecognized net (gain)/loss
Net amount recognized in consolidated balance sheet (after ASC 715) (included in
other long-term obligations)
Accrued postretirement benefit cost (included in other long-term obligations)
55
$
$
$
$
$
$
2020
2019
1,738 $
—
104
20
21
(11)
18
163
2,053 $
2020
2019
895 $
—
57
57
21
(11)
84
1,103 $
2020
2019
(2,053) $
1,103
(950)
N/A
N/A
950 $
N/A
—
1,738
—
—
—
—
—
—
1,738
—
895
—
—
—
—
—
895
(1,738)
895
(843)
N/A
247
596
N/A
Components of net periodic benefit cost:
Service cost with interest to end of year
Interest cost
Expected return on plan assets
Amortization of prior service credit
Amortization of gain
Total net periodic benefit cost
Estimated employer contributions to the plan in 2021 are $59.
Estimated future benefit payments are as follows:
Year
2021
2022
2023
2024
2025
Years 2026-2030
Assumptions to determine benefit obligations:
Discount rate
Assumptions to determine net cost:
Discount rate
Expected return on assets
Deferred Compensation Plan
2020
2019
$
$
104 $
20
(14)
—
—
110 $
$
—
—
—
—
—
—
2
—
—
—
—
25
2020
2019
0.75 %
1.00 %
2020
2019
1.00 %
1.00 %
N/A
N/A
On June 1, 2018, the Company established an unfunded, non-qualified deferred compensation plan maintained for the benefit of a
select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are subject to
additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as of
December 31, 2020 and 2019 was $3,581 and $1,982, respectively, and was included in other long-term obligations on the
Company's balance sheet.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Aggregate future minimum rental payments required under non-cancelable operating leases at December 31, 2020 are as follows:
Year
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
$
$
3,258
2,323
1,797
1,002
539
2,683
11,602
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
56
prior owner under the oversight of the EPA and the Missouri Department of Natural Resources. 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. In September 2020, BCP
Ingredients, Inc. "(BCP"), the Company subsidiary that operates the site received a General Notice Letter from the EPA regarding
BCP's potential liability for 1,4 dioxane contamination at the site. BCP currently believes that the 1,4 dioxane contamination is
associated with the former owner’s operations and has engaged experts to study site conditions and hydrogeology in connection
with preparing its response to the notice.
From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate
outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or
liquidity.
NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that
the fair value of all financial instruments at December 31, 2020 and 2019 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, 2020 and 2019 included $817 and $808 in money market funds, respectively.
Non-current assets at December 31, 2020 and December 31, 2019 included $3,582 and $1,982, 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 Company also has derivative financial instruments, consisting of a cross-currency swap and an interest rate swap, which are
included in derivative assets or derivative liabilities, in the consolidated balance sheets (see Note 20, "Derivative Instruments and
Hedging Activities"). The fair values of these derivative instruments are determined based on Level 2 inputs, using significant
inputs that are observable either directly or indirectly, including interest rate curves and implied volatilities. The derivative
liability related to the cross-currency swap was $6,793 and $332 at December 31, 2020 and December 31, 2019, respectively.
The derivative liability related to the interest rate swap was $4,865 and $1,771 at December 31, 2020 and December 31, 2019,
respectively.
NOTE 18 – RELATED PARTY TRANSACTIONS
The Company provides services on a contractual agreement to St. Gabriel CC Company, LLC. These services include accounting,
information technology, quality control, and purchasing services, as well as operation of the St. Gabriel CC Company, LLC plant.
The Company also sells raw materials to St. Gabriel CC Company, LLC. These raw materials are used in the production of
finished goods that are, in turn, sold by Saint Gabriel CC Company, LLC to the Company for resale to unrelated parties. As such,
the sale of these raw materials to St. Gabriel CC Company, LLC in this scenario lacks economic substance and therefore the
Company does not include them in net sales within the consolidated statements of earnings.
The services the Company provided amounted to $3,396, $3,883, and $3,694, respectively, for the years ended December 31,
2020, 2019, and 2018. The raw materials purchased and subsequently sold amounted to $13,495, $24,786, and $31,107,
respectively, for the years ended December 31, 2020, 2019, and 2018. 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 $12,190, $18,598, and $22,540,
respectively for the years ended December 31, 2020, 2019, and 2018. At December 31, 2020 and 2019, the Company had
receivables of $2,809 and $4,840, respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services
rendered and raw materials sold and payables of $2,239 and $3,230, respectively, for finished goods received recorded in
accounts payable in 2020 and accrued expenses in 2019. In addition, the Company had receivables in the amount of $72, related
to non-contractual monies owed from St. Gabriel CC Company, LLC, recorded in receivables as of December 31, 2020. There
was no such receivable as of December 31, 2019. The Company had payables in the amount of $296 and $366 related to non-
57
contractual monies owed to St. Gabriel CC Company, LLC, recorded in accounts payable as of December 31, 2020 and accrued
expenses as of December 31, 2019.
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 ROU 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, 2020. In addition, the Company has historically not been exercising purchase options with equipment leases as it
does not make economic sense to buy the equipment. Instead, the Company has historically replaced the equipment with a new
lease. 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 2020: (1) 1-2 years, 3.45% (2) 3-4 years, 4.04% (3) 5-9 years, 4.38% and (4) 10+ years, 5.10%.
In connection with the acquisition of Zumbro, the Company assumed a finance lease commitment for a warehouse, with an
expiration date of March 31, 2033. The warehouse can be purchased at a pre-determined price beginning in 2023. At
December 31, 2020, the Company had a finance lease liability of $2,631, which was recorded under lease liabilities (current and
non-current) in the consolidated balance sheet.
Right of use assets and lease liabilities at December 31, 2020 and 2019 are summarized as follows:
Right of use assets
Operating leases
Finance leases
Total
Lease liabilities - current
Operating leases
Finance leases
Total
Lease liabilities - non-current
Operating leases
Finance leases
Total
2020
2019
5,838 $
2,572
8,410 $
2020
2019
2,178 $
159
2,337 $
2020
2019
3,607 $
2,472
6,079 $
7,338
—
7,338
2,475
—
2,475
4,827
—
4,827
$
$
$
$
$
$
58
For the year ended December 31, 2020 and 2019, 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:
Lease Cost
Operating lease cost
Finance Lease cost
Amortization of ROU asset
Interest on lease liabilities
Total finance lease
Total lease cost
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
ROU assets obtained in exchange for new operating lease liabilities, net of ROU asset
disposals
ROU assets obtained in exchange for new finance lease liabilities, net of ROU asset
disposals
Weighted-average remaining lease term - operating leases
Weighted-average remaining lease term - finance leases
Weighted-average discount rate - operating leases
Weighted-average discount rate - finance leases
Year ended December 31
2020
2019
$
3,105
$
3,181
$
$
$
$
$
210
137
347
—
—
—
3,452
$
3,181
2,864
$
3,216
137
151
—
—
3,152
$
3,216
1,042
2,782
$
$
10,173
—
4.15 years
12.25 years
4.93 years
n/a
4.5 %
5.1 %
4.6 %
n/a
Rent expense charged to operations under operating lease agreements for 2020, 2019, and 2018 aggregated approximately $3,105,
$3,181, and $3,917, respectively.
NOTE 20 – DERIVATIVE 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 (cash flow hedge) with the Swap Counterparty and a cross-currency swap (net
investment hedge) with the Bank Counterparty. The Company's primary objective for holding derivative financial instruments is
to manage interest rate risk and foreign currency risk.
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. The Company's risk management objective and strategy with respect to the
interest rate swap is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in
cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective since changes
in the cash flows of the interest rate swap are expected to exactly offset the changes in the cash flows attributable to fluctuations
in the contractually specified interest rate on the interest payments associated with the Credit Agreement. The net interest
expense related to the interest rate swap contract was $1,593 for the year ended December 31, 2020 and the net interest income
59
related to the interest rate swap contract was $40 for the year ended December 31, 2019. These amounts were recorded in the
condensed consolidated statements of operations under interest expense, net.
At the same time, 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. 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 $2,275 and $1,317 for the years ended December 31, 2020 and 2019, respectively, which were recorded in the
condensed consolidated statements of operations under interest expense, net.
The derivative instruments are with a single counterparty and are subject to a contractual agreement that provides 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 are categorized as a master netting arrangement and presented as a net derivative
asset or derivative liability on the consolidated balance sheets.
As of December 31, 2020 and 2019, the fair value of the derivative instruments is presented as follows in the Company's
condensed consolidated balance sheets:
Derivative liabilities
Interest rate swap
Cross-currency swap
Derivative liabilities
2020
2019
$
$
4,865 $
6,793
11,658 $
1,771
332
2,103
On a quarterly basis, the Company assesses whether the hedging relationship related to the interest rate swap is highly effective at
achieving offsetting changes in cash flow attributable to the risk being hedged based on the following factors: (1) the key features
and terms as enumerated above for the interest rate swap and hedged transactions match during the period (2) it is probable that
the Swap Counterparty will not default on its obligations under the swap, and (3) the Company performs a qualitative review each
quarter to assess whether the relationship qualifies for hedge accounting.
In addition, on a quarterly basis the Company assesses whether the hedging relationship related to the cross-currency swap is
highly effective based on the following evaluations: (1) the Company will always have a sufficient amount of non-functional
currency (EUR) net investment balance to at least meet the cross-currency notional amount until the maturity date of the hedge (2)
it is probable that the Swap Counterparty will not default on its obligations under the swap, and (3) the Company performs a
qualitative review each quarter to assess whether the relationship qualifies for hedge accounting.
If any mismatches arise for either the interest rate swap or cross-currency swap, the Company will perform a regression analysis
to determine if the hedged transaction is highly effective. If determined not to be highly effective, the Company will discontinue
hedge accounting.
As of December 31, 2020, the Company assessed the hedging relationships for the interest rate swap and cross-currency swap and
determined them to be highly effective. As such, the net change in fair values of the derivative instruments was recorded in
accumulated other comprehensive income.
Losses and gains on our hedging instruments are recognized in accumulated other comprehensive income (loss) and categorized
as follows for the year ended December 31, 2020 and 2019:
Location within Statements of
Comprehensive Income
Year ended December 31
2020
2019
Cash flow hedge (interest rate swap), net
of tax
Net investment hedge (cross-currency
swap), net of tax
Unrealized (loss) on cash flow hedge, net
Net foreign currency translation adjustment
$
$
(2,285) $
(1,399)
(4,882)
(7,167) $
(262)
(1,661)
60
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61
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Balance - December 31, 2017
Additions charged (credited) to costs and expenses
Adjustments/deductions (a)
Balance - December 31, 2018
Additions charged (credited) to costs and expenses
Adjustments/deductions (a)
Balance - December 31, 2019
Additions charged (credited) to costs and expenses
Adjustments/deductions (a)
$
Allowance
for Doubtful
Accounts
Inventory
Reserve
431 $
43
136
610
1,776
(306)
2,080
140
(128)
2,315
898
(638)
2,575
7,069
(5,363)
4,281
5,964
(7,463)
Balance - December 31, 2020
$
2,092 $
2,782
(a) Represents write-offs and other adjustments
62
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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, 2020. 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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed under the supervision of our principal executive and principal financial
officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our 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 our directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition,
projections of any evaluation of controls effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
We completed the Zumbro and Chemogas acquisitions in 2019. As of December 31, 2020, management's assessment of and
conclusion of the effectiveness of our internal controls over financial reporting of both Zumbro and Chemogas 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 both Zumbro and Chemogas.
As of December 31, 2020, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in the 2013 Internal Control-Integrated Framework (New Framework) to conduct an assessment of the
effectiveness of our internal control over financial reporting. Based on this assessment, management has determined that our
internal control over financial reporting was effective as of December 31, 2020.
Attestation Report of Registered Public Accounting Firm
The independent registered public accounting firm of RSM US LLP has issued an attestation report on our internal control over
financial reporting, which is included herein.
63
Changes in Internal Control Over Financial Reporting
There has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
64
PART III
Item 10.
Directors, Executive Officers of the Registrant, and Corporate Governance.
(a)
Directors of the Company.
The required information is to be set forth in our Proxy Statement for the 2021 Annual Meeting of Stockholders (the “2021 Proxy
Statement”) under the captions “Nominees for Election as Director" and "Directors Not Standing for Election", which information
is hereby incorporated herein by reference.
(b)
Executive Officers of the Company.
The required information is to be set forth in the 2021 Proxy Statement under the captions "Continuing Directors' Biographical
Information" (as to Theodore L. Harris, the Company's Chief Executive Officer and President) and "Named Executive
Officers" (as to the Company's other 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 2021 Proxy Statement under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance,” which information is hereby incorporated herein by reference.
(d)
Code of Ethics.
The required information is to be set forth in the 2021 Proxy Statement under the caption “Codes of Business Conduct and
Ethics,” which information is hereby incorporated herein by reference. Our Code of Ethics for Senior Financial Officers is
available on the Corporate Governance page in the Investor Relations section of our website, www.balchem.com.
(e)
Corporate Governance.
The required information is to be set forth in the 2021 Proxy Statement under the captions “Nomination of Directors,” and
“Committees of the Board of Directors,” which information is hereby incorporated herein by reference.
Item 11.
Executive Compensation.
The information required by this Item is to be set forth in the 2021 Proxy Statement under the captions “Executive
Compensation,” “Compensation Committee Report,” and “Compensation Committee Interlocks and Insider Participation,” which
information is hereby incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is to be set forth in the 2021 Proxy Statement under the caption “Security Ownership of
Certain Beneficial Owners and of Management” and the caption “Equity Compensation Plan Information,” all of which
information is hereby incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions and Director Independence.
The information required by this Item is to be set forth in the 2021 Proxy Statement under the caption “Related Party
Transactions,” and “Director Independence,” which information is hereby incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services.
The information required by this Item is to be set forth in the 2021 Proxy Statement under the caption “Proposal 2 - Ratification of
Appointment of Independent Registered Public Accounting Firm,” which information is hereby incorporated herein by reference.
65
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Form 10-K:
1.
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019
and 2018
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, 2019 and
2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2020, 2019 and
2018
3.
Exhibits
Page Number
25
27
28
29
30
31
32
62
3.1
3.2
3.3
3.4
10.1
10.2
10.3
Balchem Corporation Composite Articles of Incorporation (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 11, 2021 (incorporated by reference to Exhibit 3.2
to the Company’s Current Report on Form 8-K dated February 12, 2021).
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).
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).*
Form of Restricted Stock Grant Agreement and Stock Option Agreement under the Balchem Corporation Second
Amended and Restated 1999 Stock Plan (incorporated by reference to Exhibit 10.14 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2012).
66
10.4
10.5
10.6
10.7
10.8
10.9
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 Quarterly Period Ended June 30,
2016).*
Balchem Corporation 2017 Omnibus Incentive Plan (incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-219722, dated August 4, 2017 and Appendix A to the Company's Proxy
Statement on Schedule 14A, filed April 27, 2017).
Forms of Restricted Stock Grant Agreement, Performance Share Unit Grant Agreement and Stock Option
Agreement under the Balchem Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2018).
Credit Agreement dated June 27,2018 among Balchem Corporation, the Domestic Guarantors (as defined in the
Credit Agreement), JPMorgan Chase Bank, N.A., as administrative agent, and the Lenders guarantors (as defined in
the Credit Agreement) (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated July 5, 2018).
Security and Pledge Agreement dated June 27, 2018 among Balchem Corporation, the Domestic Guarantors and
JPMorgan Chase Bank, N.A., (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-
K dated July 5, 2018).
Securities Purchase Agreement among (a) Balchem, (b) Chemogas Gilde B.V., a limited liability company organized
and existing under the laws of The Netherlands, (c) Dirk Battig, (d) Dirk Van den Borre, (e) Eric Matthijs, (f)
Christophe Marque, (g) Adamo Pia (h) Jurgen De Smet, and (i) Sebastien Verwilghen, dated as of May 2, 2019
(incorporated by reference to the Company’s Current Report on Form 8-K dated May 6, 2019) (certain exhibits and
schedules to the Securities Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and
the Company will furnish a copy of any such omitted exhibit or Schedule to the SEC upon Request)).
10.10
Equity Purchase Agreement relating to the Equity Interests of Zumbro River Brand, Inc. and Prairie Resources, LLC
dated as of December 13, 2019 (incorporated by reference to the Company’s Current Report on Form 8-K Dated
December 18, 2019) (certain exhibits and schedules to the Equity Purchase Agreement have been omitted pursuant
to Item 601(b)(2) of Regulation S-K and the Company will furnish a copy of any such omitted exhibit or Schedule to
the SEC upon Request)).
21
Subsidiaries of Registrant.
23.1
Consent of RSM US LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1
32.2
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
67
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL 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.
68
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.
SIGNATURES
Date: February 19, 2021
BALCHEM CORPORATION
By:/s/ Theodore L. Harris
Theodore L. Harris, President and
Chief Executive Officer
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.
SIGNATURES
/s/ Theodore L. Harris
Theodore L. Harris, President and
Chief Executive Officer (Chairman)
Date: February 19, 2021
/s/ Martin Bengtsson
Martin Bengtsson, Chief Financial Officer
and Treasurer (Principal Financial Officer)
Date: February 19, 2021
/s/ William A. Backus
William A. Backus, Chief Accounting Officer
(Principal Accounting Officer)
Date: February 19, 2021
/s/ Paul D. Coombs
Paul D. Coombs, Director
Date: February 19, 2021
/s/ David B. Fischer
David B. Fischer, Director
Date: February 19, 2021
/s/ Daniel E. Knutson
Daniel E. Knutson, Director
Date: February 19, 2021
/s/ Joyce Lee
Joyce Lee, Director
Date: February 19, 2021
/s/ Perry W. Premdas
Perry W. Premdas, Director
Date: February 19, 2021
/s/ Dr. John Televantos
Dr. John Televantos, Director
Date: February 19, 2021
/s/ Matthew Wineinger
Matthew Wineinger, Director
Date: February 19, 2021
69
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C O M P A N Y I N F O R M A T I O N
BOARD OF DIRECTORS
Theodore L. Harris
Paul D. Coombs
David B. Fischer
Daniel E. Knutson
Joyce J. Lee
Perry W. Premdas
Dr. John Y. Televantos
Matthew D. Wineinger
CORPORATE OFFICERS
Theodore L. Harris
Chairman and Chief Executive Officer
C. Martin Bengtsson
Chief Financial Officer
Treasurer
Mark A. Stach
General Counsel
Secretary
HEADQUARTERS
Balchem Corporation
52 Sunrise Park Road
New Hampton, NY 10958
845.326.5600
STOCK LISTING
NASDAQ Global Select Market
Symbol: BCPC
INVESTOR RELATIONS
Danielle Polanco
845.326.5600
TRANSFER AGENT
Broadridge Corporate Issuer Solutions, Inc.
2 Journal Square Plaza
Jersey City, NJ 07306
INDEPENDENT ACCOUNTANTS
RSM US LLP
1185 Avenue of the Americas, 6th Fl.
New York, NY 10036
WEB SITE
www.balchem.com
Balchem Corporation
52 Sunrise Park Road
New Hampton, NY 10958
Phone: (845) 326-5600
Fax: (845) 326-5702
Email: info@balchem.com
Web: www.balchem.com