BALCHEM CORP (Form: 10-K, Received: 02/28/2019 18:34:08)

0.66660.6666false--12-31FY20182018-12-310000009326YesfalseLarge Accelerated FilerBALCHEM CORPfalsefalseNoYes4310006100000.06670.066712000000012000000032019605322569153201960532256209P5Y000.380.420.472546000P18YP17YP10YP18YP17YP3YP15YP5YP3YP5Y00P2YP2Y3M2525200000020000000000P25YP28YP15YP2YP3Y13.6138.1060.0134.8159.9585.40 0000009326 2018-01-01 2018-12-31 0000009326 2018-06-30 0000009326 2019-02-21 0000009326 2018-12-31 0000009326 2017-12-31 0000009326 2017-01-01 2017-12-31 0000009326 2016-01-01 2016-12-31 0000009326 us-gaap:RetainedEarningsMember 2015-12-31 0000009326 us-gaap:TreasuryStockMember 2017-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-01-01 2016-12-31 0000009326 us-gaap:RetainedEarningsMember 2017-01-01 2017-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2015-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2016-01-01 2016-12-31 0000009326 us-gaap:RetainedEarningsMember 2016-01-01 2016-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0000009326 us-gaap:RetainedEarningsMember 2017-12-31 0000009326 us-gaap:RetainedEarningsMember 2018-01-01 2018-12-31 0000009326 us-gaap:CommonStockMember 2016-12-31 0000009326 us-gaap:TreasuryStockMember 2016-01-01 2016-12-31 0000009326 us-gaap:CommonStockMember 2018-12-31 0000009326 us-gaap:TreasuryStockMember 2018-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0000009326 us-gaap:TreasuryStockMember 2018-01-01 2018-12-31 0000009326 us-gaap:TreasuryStockMember 2017-01-01 2017-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0000009326 us-gaap:CommonStockMember 2016-01-01 2016-12-31 0000009326 us-gaap:CommonStockMember 2017-01-01 2017-12-31 0000009326 us-gaap:TreasuryStockMember 2015-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-12-31 0000009326 2015-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2015-12-31 0000009326 us-gaap:RetainedEarningsMember 2018-12-31 0000009326 us-gaap:RetainedEarningsMember 2016-12-31 0000009326 us-gaap:CommonStockMember 2017-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-01-01 2017-12-31 0000009326 us-gaap:TreasuryStockMember 2016-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000009326 us-gaap:CommonStockMember 2018-01-01 2018-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-12-31 0000009326 2016-12-31 0000009326 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-12-31 0000009326 us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-12-31 0000009326 us-gaap:CommonStockMember 2015-12-31 0000009326 bcpc:AnimalNutritionAndHealthMember 2018-12-31 0000009326 bcpc:AnimalNutritionAndHealthMember 2017-12-31 0000009326 bcpc:SpecialtyProductsMember 2017-12-31 0000009326 bcpc:HumanNutritionAndHealthMember 2017-12-31 0000009326 bcpc:IndustrialProductsMember 2018-12-31 0000009326 bcpc:HumanNutritionAndHealthMember 2018-12-31 0000009326 bcpc:IndustrialProductsMember 2017-12-31 0000009326 bcpc:SpecialtyProductsMember 2018-12-31 0000009326 us-gaap:AccountingStandardsUpdate201409Member us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-01-01 2018-12-31 0000009326 us-gaap:AccountingStandardsUpdate201602Member us-gaap:ScenarioForecastMember 2019-01-01 0000009326 srt:MaximumMember us-gaap:BuildingMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember bcpc:PatentsTradeSecretsMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember bcpc:RegulatoryRegistrationCostsMember 2018-01-01 2018-12-31 0000009326 us-gaap:CustomerListsMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember bcpc:OtherIntangibleAssetsExcludingRegulatoryRegistrationCostsAndPatentsTradeSecretsMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember us-gaap:TrademarksAndTradeNamesMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember us-gaap:EquipmentMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember bcpc:PatentsTradeSecretsMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember bcpc:OtherIntangibleAssetsExcludingRegulatoryRegistrationCostsAndPatentsTradeSecretsMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember us-gaap:TrademarksAndTradeNamesMember 2018-01-01 2018-12-31 0000009326 us-gaap:DevelopedTechnologyRightsMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember us-gaap:BuildingMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember us-gaap:EquipmentMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember bcpc:RegulatoryRegistrationCostsMember 2018-01-01 2018-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember 2017-06-01 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:CustomerRelationshipsMember 2017-06-01 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:NoncompeteAgreementsMember 2017-06-01 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:DevelopedTechnologyRightsMember 2017-06-01 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:TrademarksAndTradeNamesMember 2017-06-01 0000009326 bcpc:InnovativeFoodProcessorsIncMember 2017-06-01 2017-06-01 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:DevelopedTechnologyRightsMember 2018-01-01 2018-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:CustomerRelationshipsMember 2018-01-01 2018-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:GeneralAndAdministrativeExpenseMember 2017-01-01 2017-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:TrademarksMember 2018-01-01 2018-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember 2017-09-01 2017-09-30 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:TradeNamesMember 2018-01-01 2018-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:GeneralAndAdministrativeExpenseMember 2018-01-01 2018-12-31 0000009326 bcpc:InnovativeFoodProcessorsIncMember us-gaap:NoncompeteAgreementsMember 2018-01-01 2018-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2016-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2016-01-01 2016-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2015-12-31 0000009326 us-gaap:PerformanceSharesMember 2017-01-01 2017-12-31 0000009326 us-gaap:PerformanceSharesMember 2017-12-31 0000009326 us-gaap:PerformanceSharesMember 2016-12-31 0000009326 us-gaap:PerformanceSharesMember 2015-12-31 0000009326 us-gaap:PerformanceSharesMember 2016-01-01 2016-12-31 0000009326 us-gaap:PerformanceSharesMember 2018-01-01 2018-12-31 0000009326 us-gaap:PerformanceSharesMember 2018-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2018-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2017-12-31 0000009326 us-gaap:RestrictedStockMember 2018-01-01 2018-12-31 0000009326 us-gaap:RestrictedStockMember 2018-12-31 0000009326 us-gaap:RestrictedStockMember 2017-12-31 0000009326 us-gaap:RestrictedStockMember 2016-01-01 2016-12-31 0000009326 us-gaap:RestrictedStockMember 2016-12-31 0000009326 us-gaap:RestrictedStockMember 2015-12-31 0000009326 us-gaap:CostOfSalesMember 2017-01-01 2017-12-31 0000009326 us-gaap:OperatingExpenseMember 2018-01-01 2018-12-31 0000009326 us-gaap:OperatingExpenseMember 2017-01-01 2017-12-31 0000009326 us-gaap:CostOfSalesMember 2016-01-01 2016-12-31 0000009326 us-gaap:OperatingExpenseMember 2016-01-01 2016-12-31 0000009326 us-gaap:CostOfSalesMember 2018-01-01 2018-12-31 0000009326 bcpc:ExercisePriceRange3Member 2018-12-31 0000009326 bcpc:ExercisePriceRange1Member 2018-12-31 0000009326 bcpc:ExercisePriceRange3Member 2018-01-01 2018-12-31 0000009326 bcpc:ExercisePriceRange2Member 2018-12-31 0000009326 bcpc:ExercisePriceRange1Member 2018-01-01 2018-12-31 0000009326 bcpc:ExercisePriceRange2Member 2018-01-01 2018-12-31 0000009326 us-gaap:PerformanceSharesMember bcpc:EmployeeMember 2016-01-01 2016-12-31 0000009326 bcpc:OmnibusIncentivePlan2017Member 2018-12-31 0000009326 us-gaap:PerformanceSharesMember bcpc:EmployeeMember 2017-01-01 2017-12-31 0000009326 us-gaap:PerformanceSharesMember bcpc:EmployeeMember 2018-01-01 2018-12-31 0000009326 bcpc:OmnibusIncentivePlan2017Member 2018-01-01 2018-12-31 0000009326 bcpc:OmnibusIncentivePlan2017Member us-gaap:DirectorMember 2018-01-01 2018-12-31 0000009326 us-gaap:EmployeeStockOptionMember bcpc:OmnibusIncentivePlan2017Member 2018-12-31 0000009326 us-gaap:RestrictedStockMember us-gaap:DirectorMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember us-gaap:RestrictedStockMember bcpc:EmployeeMember 2018-01-01 2018-12-31 0000009326 bcpc:StockPlan1999Member 2018-12-31 0000009326 us-gaap:RestrictedStockMember 2017-01-01 2017-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2017-01-01 2017-12-31 0000009326 srt:MinimumMember us-gaap:RestrictedStockMember bcpc:EmployeeMember 2018-01-01 2018-12-31 0000009326 us-gaap:BuildingMember 2017-12-31 0000009326 us-gaap:LandMember 2017-12-31 0000009326 us-gaap:ConstructionInProgressMember 2017-12-31 0000009326 us-gaap:LandMember 2018-12-31 0000009326 us-gaap:EquipmentMember 2018-12-31 0000009326 us-gaap:ConstructionInProgressMember 2018-12-31 0000009326 us-gaap:BuildingMember 2018-12-31 0000009326 us-gaap:EquipmentMember 2017-12-31 0000009326 srt:NorthAmericaMember 2017-12-31 0000009326 srt:EuropeMember 2017-12-31 0000009326 srt:EuropeMember 2018-12-31 0000009326 srt:NorthAmericaMember 2018-12-31 0000009326 us-gaap:TrademarksAndTradeNamesMember 2017-12-31 0000009326 us-gaap:DevelopedTechnologyRightsMember 2017-12-31 0000009326 us-gaap:TrademarksAndTradeNamesMember 2018-12-31 0000009326 us-gaap:CustomerListsMember 2017-12-31 0000009326 us-gaap:OtherIntangibleAssetsMember 2017-12-31 0000009326 us-gaap:OtherIntangibleAssetsMember 2018-12-31 0000009326 us-gaap:DevelopedTechnologyRightsMember 2018-12-31 0000009326 us-gaap:CustomerListsMember 2018-12-31 0000009326 srt:MinimumMember us-gaap:OtherIntangibleAssetsMember 2018-01-01 2018-12-31 0000009326 srt:MaximumMember us-gaap:OtherIntangibleAssetsMember 2018-01-01 2018-12-31 0000009326 bcpc:StGabrielCCCompanyLLCMember 2016-01-01 2016-12-31 0000009326 bcpc:StGabrielCCCompanyLLCMember 2018-12-31 0000009326 bcpc:StGabrielCCCompanyLLCMember 2018-01-01 2018-12-31 0000009326 bcpc:EastmanChemicalCompanyMember bcpc:StGabrielCCCompanyLLCMember 2018-12-31 0000009326 bcpc:StGabrielCCCompanyLLCMember 2017-01-01 2017-12-31 0000009326 bcpc:StGabrielCCCompanyLLCMember 2017-12-31 0000009326 srt:MaximumMember bcpc:RevolvingCreditAgreementMember 2018-01-01 2018-12-31 0000009326 srt:MinimumMember bcpc:RevolvingCreditAgreementMember 2018-01-01 2018-12-31 0000009326 us-gaap:RevolvingCreditFacilityMember 2018-01-01 2018-12-31 0000009326 bcpc:RevolvingCreditAgreementMember 2018-06-27 0000009326 2018-04-01 2018-06-30 0000009326 us-gaap:RevolvingCreditFacilityMember 2014-05-07 0000009326 bcpc:RevolvingCreditAgreementMember 2018-12-31 0000009326 us-gaap:SecuredDebtMember 2014-05-07 0000009326 us-gaap:SecuredDebtMember 2018-01-01 2018-12-31 0000009326 bcpc:RevolvingCreditAgreementMember 2018-01-01 2018-12-31 0000009326 2018-06-27 2018-06-27 0000009326 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2016-01-01 2016-12-31 0000009326 us-gaap:EmployeeStockOptionMember 2017-01-01 2017-12-31 0000009326 us-gaap:StateAndLocalJurisdictionMember bcpc:TaxYear2031Member 2018-12-31 0000009326 2017-10-01 2017-12-31 0000009326 2018-10-01 2018-12-31 0000009326 us-gaap:ForeignCountryMember 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:HumanNutritionAndHealthMember 2018-01-01 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:HumanNutritionAndHealthMember 2016-01-01 2016-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:AnimalNutritionAndHealthMember 2018-01-01 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:IndustrialProductsMember 2017-01-01 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:AnimalNutritionAndHealthMember 2017-01-01 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:AnimalNutritionAndHealthMember 2016-01-01 2016-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:IndustrialProductsMember 2018-01-01 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:IndustrialProductsMember 2016-01-01 2016-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:SpecialtyProductsMember 2018-01-01 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:SpecialtyProductsMember 2017-01-01 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:HumanNutritionAndHealthMember 2017-01-01 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:SpecialtyProductsMember 2016-01-01 2016-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:AnimalNutritionAndHealthMember 2018-12-31 0000009326 us-gaap:MaterialReconcilingItemsMember 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:IndustrialProductsMember 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:IndustrialProductsMember 2017-12-31 0000009326 us-gaap:MaterialReconcilingItemsMember 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:HumanNutritionAndHealthMember 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:AnimalNutritionAndHealthMember 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:HumanNutritionAndHealthMember 2017-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:SpecialtyProductsMember 2018-12-31 0000009326 us-gaap:OperatingSegmentsMember bcpc:SpecialtyProductsMember 2017-12-31 0000009326 us-gaap:MaterialReconcilingItemsMember 2018-01-01 2018-12-31 0000009326 us-gaap:MaterialReconcilingItemsMember 2016-01-01 2016-12-31 0000009326 us-gaap:MaterialReconcilingItemsMember 2017-01-01 2017-12-31 0000009326 country:US 2016-01-01 2016-12-31 0000009326 country:US 2018-01-01 2018-12-31 0000009326 us-gaap:NonUsMember 2016-01-01 2016-12-31 0000009326 country:US 2017-01-01 2017-12-31 0000009326 us-gaap:NonUsMember 2018-01-01 2018-12-31 0000009326 us-gaap:NonUsMember 2017-01-01 2017-12-31 0000009326 us-gaap:ProductMember 2016-01-01 2016-12-31 0000009326 bcpc:BillAndHoldMember 2016-01-01 2016-12-31 0000009326 bcpc:ProductSalesMember 2018-01-01 2018-12-31 0000009326 us-gaap:ProductMember 2018-01-01 2018-12-31 0000009326 bcpc:ProductSalesMember 2017-01-01 2017-12-31 0000009326 bcpc:ConsignmentMember 2016-01-01 2016-12-31 0000009326 us-gaap:RoyaltyMember 2018-01-01 2018-12-31 0000009326 bcpc:ConsignmentMember 2018-01-01 2018-12-31 0000009326 us-gaap:RoyaltyMember 2016-01-01 2016-12-31 0000009326 bcpc:CoManufacturingMember 2016-01-01 2016-12-31 0000009326 bcpc:ConsignmentMember 2017-01-01 2017-12-31 0000009326 bcpc:CoManufacturingMember 2018-01-01 2018-12-31 0000009326 bcpc:BillAndHoldMember 2018-01-01 2018-12-31 0000009326 us-gaap:RoyaltyMember 2017-01-01 2017-12-31 0000009326 bcpc:ProductSalesMember 2016-01-01 2016-12-31 0000009326 bcpc:CoManufacturingMember 2017-01-01 2017-12-31 0000009326 bcpc:BillAndHoldMember 2017-01-01 2017-12-31 0000009326 us-gaap:ProductMember 2017-01-01 2017-12-31 0000009326 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-12-31 0000009326 us-gaap:AccumulatedTranslationAdjustmentMember 2018-01-01 2018-12-31 0000009326 us-gaap:AccumulatedTranslationAdjustmentMember 2017-12-31 0000009326 us-gaap:AccumulatedTranslationAdjustmentMember 2018-12-31 0000009326 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-12-31 0000009326 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-01-01 2018-12-31 0000009326 bcpc:CentralStatesSoutheastAndSouthwestAreasPensionFundMember 2017-01-01 2017-12-31 0000009326 bcpc:CentralStatesSoutheastAndSouthwestAreasPensionFundMember 2018-01-01 2018-12-31 0000009326 bcpc:CentralStatesSoutheastAndSouthwestAreasPensionFundMember 2016-01-01 2016-12-31 0000009326 bcpc:CorporateHeadquartersMember 2018-12-31 0000009326 bcpc:CorporateHeadquartersAndLaboratoryFacilityMember 2018-12-31 0000009326 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2018-12-31 0000009326 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2017-12-31 0000009326 bcpc:ServicesProvidedMember us-gaap:CorporateJointVentureMember 2017-01-01 2017-12-31 0000009326 us-gaap:CorporateJointVentureMember 2017-12-31 0000009326 bcpc:RawMaterialsSoldMember us-gaap:CorporateJointVentureMember 2017-01-01 2017-12-31 0000009326 us-gaap:CorporateJointVentureMember 2018-12-31 0000009326 bcpc:RawMaterialsSoldMember us-gaap:CorporateJointVentureMember 2018-01-01 2018-12-31 0000009326 bcpc:ServicesProvidedMember us-gaap:CorporateJointVentureMember 2018-01-01 2018-12-31 0000009326 us-gaap:CorporateJointVentureMember 2018-01-01 2018-12-31 0000009326 us-gaap:CorporateJointVentureMember 2017-01-01 2017-12-31 0000009326 2017-07-01 2017-09-30 0000009326 2017-01-01 2017-03-31 0000009326 2018-01-01 2018-03-31 0000009326 2018-07-01 2018-09-30 0000009326 2017-04-01 2017-06-30 0000009326 us-gaap:InventoryValuationReserveMember 2018-01-01 2018-12-31 0000009326 us-gaap:InventoryValuationReserveMember 2016-01-01 2016-12-31 0000009326 us-gaap:InventoryValuationReserveMember 2016-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2016-12-31 0000009326 us-gaap:InventoryValuationReserveMember 2017-01-01 2017-12-31 0000009326 us-gaap:InventoryValuationReserveMember 2017-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2018-01-01 2018-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2016-01-01 2016-12-31 0000009326 us-gaap:InventoryValuationReserveMember 2015-12-31 0000009326 us-gaap:InventoryValuationReserveMember 2018-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2017-01-01 2017-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2017-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2015-12-31 0000009326 us-gaap:AllowanceForCreditLossMember 2018-12-31 iso4217:USD xbrli:shares xbrli:pure xbrli:shares iso4217:USD bcpc:facility bcpc:revenue_sub-stream utreg:sqft bcpc:plan

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________

FORM 10-K

__________________________

(Mark One)



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2018
	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		13-2578432
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)



52 Sunrise Park Road, New Hampton, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (845) 326-5600

Securities registered pursuant to Section 12(b) of the Act:
Title of each class		Name of each exchange on which registered
Common Stock, par value $.06-2/3 per share		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 þ 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 þ

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 þ 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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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.



(Check one):	Large accelerated filer þ	Accelerated filer ¨
	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

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, 2018 was approximately $3,143,000,000. For purposes of this calculation, shares of the Registrant held by directors and officers of the Registrant and under the Registrant’s 401(k)/profit sharing plan have been excluded.

The number of shares outstanding of the Registrant’s Common Stock was 32,273,661 as of February 21, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the Registrant’s proxy statement for its 2019 Annual Meeting of Stockholders (the “2019 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, 2018 are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated therein.

Table of Contents

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.

Table of Contents

BALCHEM CORPORATION

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



		Page Numbers
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	8
Item 2.	Properties	9
Item 3.	Legal Proceedings	9
Item 4.	Mine Safety Disclosures	9

PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	10
Item 6.	Selected Financial Data	11
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	59
Item 9A.	Controls and Procedures	59
Item 9B.	Other Information	60

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	61
Item 11.	Executive Compensation	61
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	61
Item 13.	Certain Relationships and Related Transactions, and Director Independence	61
Item 14.	Principal Accounting Fees and Services	61

PART IV
Item 15.	Exhibits and Financial Statement schedules	62

SIGNATURE PAGE		65

Table of Contents

PART I


Item 1.	Business (All amounts in thousands, except share and per share data)

General:

Balchem Corporation (“Balchem,” the “Company,” “we” or “us”), 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, medical sterilization and industrial markets. Our reportable segments are strategic businesses that offer products and services to different markets. We presently have four reportable segments: Human Nutrition & Health; Animal Nutrition & Health; Specialty Products; and Industrial Products.

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.

We operate six wholly-owned domestic subsidiaries: SensoryEffects, Inc. (“SE”), a Delaware corporation, SensoryEffects Cereal Systems, Inc. (“SECS”), a Delaware corporation, Albion Laboratories, Inc. (formerly known as Albion International, Inc.) (“Albion”), a Nevada corporation, BCP Ingredients, Inc. (“BCP”), a Delaware corporation, Aberco, Inc. (“Aberco”), a Maryland corporation, and Innovative Food Processors, Inc. (“IFP”), a Delaware corporation. We operate three wholly-owned subsidiaries in Europe: Balchem BV, a Dutch limited liability company, Balchem Italia Srl and Bioscreen Technologies Srl, two Italian limited liability companies. We also operate one wholly-owned subsidiary in Canada: Balchem LTD, a Canadian corporation. Unless otherwise stated to the contrary, or unless the context otherwise requires, references to us in this report includes Balchem Corporation and its subsidiaries.

Human Nutrition & Health

Our Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. Our mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customer perceptions of brand value. Consequently, we make investments in such activities for long-term value differentiation. We also serve the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. We partner with our customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. Our expertise in trends analysis and product development, combined with our manufacturing capabilities in customized spray dried and emulsified powders, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates makes us a one-stop solutions provider for beverage and dairy product development needs. Additionally, we provide microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. We also create cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients.

Animal Nutrition & Health

Our Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from our microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, our microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. Our proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. 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 our ability to leverage the results of university and field research on the animal health benefits of our products. Management believes that success in the

Table of Contents

commodity-oriented basic choline chloride marketplace is highly dependent on our ability to maintain our strong reputation for excellent product quality and customer service. We continue to drive production efficiencies in order to maintain our competitive-cost position to effectively compete in a global marketplace.

Specialty Products

Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. Our 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the United States Environmental Protection Agency (“EPA”) and the United States Department of Transportation (“DOT”). Our inventory of these specially built drums, along with our two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. We also sell single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.

Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. We distribute our propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Our inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.

Our micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. We have a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, we determine optimal mineral balance for plant health. We then have a foliar applied Metalosate® product range, utilizing patented amino acid chelate technology. Our products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.

Industrial Products

Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. Our products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade choline bicarbonate is completely chloride free and our choline chloride reduces the amount of chlorides released into the environment up to 75% when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at our Italian operation and sold for a wide range of industrial applications in Europe.

Acquisitions

On June 1, 2017, we acquired 100 percent of the outstanding common shares of Innovative Food Processors, Inc. (“IFP”), a privately held manufacturer of agglomerated and microencapsulated food and nutrition ingredients, headquartered in Faribault, Minnesota. We made payments of approximately $22,975 on the acquisition date and $635 in September to true-up working capital, amounting to approximately $16,161 to the former shareholders, adjustments for working capital acquired of $5,065, and $2,384 to IFP’s lenders to pay off all IFP bank debt. The acquisition of IFP expanded our Human Nutrition & Health segment’s processing technology and market reach, and brought innovative and value-added systems to food, beverage, and nutrition customers.

We also completed one immaterial acquisition in 2017, Chol-Mix Kft, and another immaterial acquisition in 2018, Bioscreen Technologies Srl.

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.

Table of Contents

Intellectual Property

We currently hold 110 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 2019 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

In general, the businesses of our segments are not seasonal to any material extent.

Backlog

At December 31, 2018, we had a total backlog of $37,021 (including $26,432 for the HNH segment; $9,149 for the ANH segment; $549 for the Specialty Products segment and $891 for the Industrial Products segment), as compared to a total backlog of $41,270 at December 31, 2017 (including $27,098 for the HNH segment; $11,041 for the ANH segment; $573 for the Specialty Products segment and $2,558 for the Industrial Products segment). 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 2019 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. Therefore, we are unable to assess the size of all of our competitors or where we rank in comparison to such privately-held competitors. We are focused on the North American market due to EPA, United States Food and Drug Administration (“FDA”) and DOT regulations that are not yet required globally.

Research & Development

During the years ended December 31, 2018, 2017 and 2016, we incurred research and development expenses of approximately $11,592, $9,305, and $7,325, 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.

Table of Contents

Capital Projects

We continue to invest in projects across all production facilities and capital expenditures were approximately $19,170, $27,526, and $23,034 for 2018, 2017 and 2016, respectively. In 2018, we invested $5,662 to expand capacity in key product lines in the Human Nutrition & Health 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. In 2017, we spent approximately $13,200 to expand manufacturing capacity at our AMT facility in Utah to accommodate production previously manufactured in Clearfield, UT prior to the site fire. In 2016, capital expenditures of $1,800 were related to expanding our Animal Nutrition & Health capacity in the manufacturing facility located in Verona, Missouri. Additionally, we invested $6,800 in agglomeration production equipment during 2016. Capital expenditures are projected to range from $30,000 to $40,000 for 2019.

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 an 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”. Currently, 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. A Final Work Plan was issued in March 2014. The EPA anticipates this registration review process will take approximately seven years. As part of this review process, the EPA identified several testing requirements. To date, after discussion with EPA staff and submission of pertinent information, the EPA has issued waivers for four studies and one required study was submitted and accepted. Several waiver requests are still under consideration, and additional information has been requested. In December 2016, the EPA issued its Integrated Risk Information System (“IRIS”) assessment of EO, another aspect of EPA’s safety review of EO. To date, we have no knowledge of how this IRIS assessment will impact the registration review process. While some additional testing will be necessary, we believe that the use of ethylene oxide will continue to be permitted. The product, when used as a sterilant for certain medical devices, has no known equally effective substitute. 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. Currently, the EPA has 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. The EPA anticipates this review process will take approximately seven years. As part of the process, the EPA has identified several potential additional testing requirements. We have completed six of the required studies and they were submitted to the EPA for evaluation. Two of those studies have been deemed accepted, and the other four are still being evaluated. A waiver has been granted for one study. We are currently in discussions with the EPA regarding other studies. While it is possible that we will be required to perform additional testing, we believe that the use of propylene oxide to treat nuts and spices will continue to be permitted.

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 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 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

Table of Contents

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.

Employees

As of January 31, 2019, the Company employed approximately 1,135 persons. Approximately 108 employees at our Marano, Ticino, Italy facility are covered by a national collective bargaining agreement, which expires in 2022. Approximately 79 employees at the Company’s Verona, Missouri facility are covered by a collective bargaining agreement, which expires in 2020.

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. We make available through our website, free of charge, 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, as soon as reasonably practicable after they have been electronically filed with the Securities and Exchange Commission (SEC). Such reports are available via a link from the Investor Relations page on our website to a list of our reports on the Securities and Exchange Commission’s EDGAR website.


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:

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. and Italy exceed the Federal Deposit Insurance Corporation (“FDIC”) and Fondo Interbancario di Tutela dei Depositi (“FITD”) 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

Table of Contents

ethylene oxide as a medical device sterilant and spice fumigant and for propylene oxide as a fumigant of nuts and spices. The EPA has issued Reregistration Eligibility Decisions for both products in recent years and these uses have been approved for the time being. The EPA may re-examine the 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.

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.

Our financial success depends in part on the reliability and sufficiency of our manufacturing facilities.

Our revenues depend on the effective operation of our manufacturing, packaging, and processing facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard performance of equipment, power outages, the improper installation or operation of equipment, explosions, fires, natural disasters, failure to achieve or maintain safety or quality standards, work stoppages, supply or logistical outages, and the need to comply with environmental and other directives of governmental agencies. The occurrence of material operational problems, including, but not limited to, the above events, could adversely affect our profitability during the period of such operational difficulties.

Our business exposes us to potential product liability claims and recalls, which could adversely impact our financial condition and performance.

Our development, manufacture and sales of food ingredient, pharmaceutical and nutritional supplement products involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability judgment against us could also result in substantial and unexpected expenditures, affect consumer confidence in our products, and divert management’s attention from other responsibilities. Although we maintain product liability insurance coverage in amounts we believe are customary within the industry, there can be no assurance that this level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on results of operations and financial condition.

We face risks associated with our sales to customers and manufacturing operations outside the United States.

For the year ended December 31, 2018, approximately 25% 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 pending exit of the United Kingdom from the European Union; unexpected changes in regulatory requirements; certification requirements; environmental

Table of Contents

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 79 employees, or 7% of our North American workforce, as of December 31, 2018, are represented by a union under a single collective bargaining agreement, which was re-negotiated and is effective as of November 14, 2017. It will expire in 2020. In Europe, approximately 108 employees are covered by a collective bargaining agreement that will expire in 2022. We believe that our present labor relations with all of our union employees are satisfactory, however, our failure to renew these agreements on reasonable terms could result in labor disruptions and increased labor costs, which could adversely affect our financial performance. Similarly, if our relations with the union portion of our workforce do not remain positive, such employees could initiate a strike, work stoppage or slowdown in the future. In the event of such an action, we may not be able to adequately meet the needs of our customers using our remaining workforce and our operations and financial condition could be adversely affected. 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 and Canadian Dollars 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.

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.

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.

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

Table of Contents

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.

Demand for certain of our products is dependent on the levels of productivity by the oil and gas industry, particularly as it relates to shale gas fracturing. A substantial or an extended decline in oil and gas prices could result in lower expenditures by the oil and gas industry, which could have an adverse effect on our results of operations.

The oil and gas industry historically experiences periodic downturns. Demand for certain of our products depends on the level of expenditures by the oil and gas industry for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on the industry’s view of future oil and natural gas prices and are sensitive to the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. Declines in oil and gas prices could result in significant downturn in the oil and gas industry and thereby result in a reduction in demand for oilfield services and related products, which could lead to reduced demand for our products and downward pressure on the prices we charge. These effects could have an adverse effect on our results of operations and cash flows.

We may not be able to successfully consummate and manage acquisition, joint venture and divestiture activities which could have an impact on our results.

From time to time, we may acquire other businesses, enter into joint ventures and, based on an evaluation of our business portfolio, divest existing businesses. These acquisitions, joint ventures and divestitures may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities and indemnities, and potential disputes with the buyers or sellers. In addition, we may be required to incur asset impairment charges (including charges related to tangible assets, goodwill and other intangible assets) in connection with acquired businesses which may reduce our profitability. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Additionally, joint ventures inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks.

Technology failures or cyber security breaches could have an adverse effect on the Company’s operations.

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.


Item 1B.	Unresolved Staff Comments

None.

Table of Contents


Item 2.	Properties

We and our affiliates own or lease several manufacturing facilities and sales offices throughout the United States, and we own two manufacturing facilities in Europe and a single manufacturing facility in Canada. The following table sets forth a list of our principal offices, production and other facilities throughout the world as of December 31, 2018.



Site	Leased/Owned	Products/Functions
Corporate Offices
New Hampton, NY	Leased	corporate headquarters
Middletown, NY	Leased	administrative offices
St. Louis, MO	Leased (SensoryEffects)	administrative offices SensoryEffects
Layton, UT	Leased (Albion)	administrative offices Albion
Manufacturing Facilities
Verona, MO	Owned (BCP)	aqueous and dry choline chloride, animal feed products, human choline nutrients, repackaging for Specialty Products, and warehousing
Slate Hill, NY	Owned	encapsulated products, blending and repackaging for Specialty Products, and warehousing
Green Pond, SC	Owned	repackaging for Specialty Products and warehousing
Salt Lake City, UT	Owned	chelated mineral nutrients and warehousing
Covington, VA	Owned	encapsulated animal feed products and warehousing
Marano Ticino, Italy	Owned (Balchem Italia)	methylamines, metam sodium, animal, human and industrial grade choline, and warehousing
Bertinoro, Italy	Owned (Balchem Bioscreen)	encapsulated and fermented animal feed products
Sleepy Eye, MN	Owned (SensoryEffects)	spray drying of dairy creamers and cocoa blends, and warehousing
Bridgeton, MO	Owned (SensoryEffects)	creamer products, cocoa powders, liquid and solid flavor inclusions, and warehousing
Marshfield, WI	Owned (SensoryEffects)	spray drying of lipid based powders, blending, and warehousing
Reading, PA	Owned (SensoryEffects)	spray drying of human nutritional products and warehousing
Defiance, OH	Owned (SensoryEffects)	spray drying of creamer products, solid flavor inclusions for baking, blending and warehousing
Lincoln, NE	Leased (SensoryEffects)	cereal products and warehousing
Morrisburg, Canada	Owned (Balchem LTD)	dry choline chloride and warehousing
Roy, UT	Leased (Albion)	quality control lab
Ogden, UT	Owned (Albion)	human mineral spray drying and packaging
Ogden, UT	Leased (Albion)	human mineral warehousing
Ogden, UT	Leased (Albion)	Albion liquid product warehousing
Ogden, UT	Owned (Albion)	plant mineral liquid production and packaging
Ogden, UT	Owned (Albion)	raw land adjacent to the AMT manufacturing site
Whittemore, IA	Leased (Albion)	plant and animal spray drying and packaging
Faribault, MN	Owned (IFP)	manufacturing and processing of powdered products for the food and nutrition industries


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.

Table of Contents

PART II


Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


(a)	Market Information.

Our Common Stock is listed on the Nasdaq Global Market under the symbol “BCPC.”

On February 21, 2019 the closing price for the Common Stock on the Nasdaq Global Market was $86.36.


(b)	Record Holders.

As of February 21, 2019, the approximate number of holders of record of our Common Stock was 79. Such number does not include stockholders who hold their stock in street name. As of February 21, 2019, the total number of beneficial owners of our Common Stock is estimated to be approximately 28,001.


(c)	Dividends.

We declared cash dividends of $0.47 and $0.42 per share on our Common Stock during our fiscal years ended December 31, 2018 and 2017, respectively.


(d)	Issuer Purchase of Equity Securities

The following table summarizes the share repurchase activity for the three months ended December 31, 2018:



		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
October 1 – 31, 2018		1,187	$	96.42	1,187	$	151,665,960
November 1 – 30, 2018		—	$	—	—	$	151,665,960
December 1 – 31, 2018		706	$	78.91	706	$	124,066,486
		1,893			1,893

	(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 2,190,772 shares have been purchased, of which 706 shares remained in treasury at December 31, 2018. There is no expiration for this program.


(e)	Securities Authorized for Issuance Under Equity Compensation Plans.

For information concerning prior stockholder approval of and other matters relating to our equity incentive plans, see Item 12 in this Annual Report on Form 10-K.


(f)	Performance Graph.

The graph below sets forth the cumulative total stockholder return on our Common Stock (referred to in the table as “BCPC”) for the five years ended December 31, 2018, 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, 2013 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 our Common Stock shown on the graph below is historical only and not necessarily indicative of future performance.

Table of Contents


Item 6.	Selected Financial Data

The selected statements of operations data set forth below for the years ended December 31, 2018, 2017 and 2016 and the selected balance sheet data as of December 31, 2018 and 2017 have been derived from our Consolidated Financial Statements included elsewhere herein. The selected financial data for the years ended December 31, 2015 and 2014 and as of December 31, 2016, 2015 and 2014 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.

Table of Contents

(In thousands, except per share data)



Year ended December 31,	2018		2017			2016		2015		2014
Statement of Operations Data
Net sales	$	643,679	$	594,790		$	553,204	$	552,492	$	541,383
Earnings before income tax expense	99,030		88,488			82,934		87,063		77,052
Income tax expense	20,457		(1,583		)	26,962		27,341		24,226
Net earnings	78,573		90,071			55,972		59,722		52,826
Basic net earnings per common share	$	2.45	$	2.83		$	1.78	$	1.92	$	1.74
Diluted net earnings per common share	$	2.42	$	2.79		$	1.75	$	1.89	$	1.69

At December 31,	2018		2017			2016		2015		2014
Balance Sheet Data
Total assets	$	981,355	$	963,636		$	948,626	$	879,686	$	861,531
Long-term debt (including current portion)	156,000		218,964			280,490		295,963		332,500
Other long-term obligations	7,372		5,847			6,896		6,683		5,950
Total Stockholders' equity	691,618		616,881			521,033		463,705		391,898
Dividends per common share	$	0.47	$	0.42		$	0.38	$	0.34	$	0.30


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (All amounts in thousands, except share and per share data)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 — “Selected Financial Data” and our Consolidated Financial Statements and the related notes included in this report. 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. Our four reportable segments are strategic businesses that offer products and services to different markets: Human Nutrition & Health, Animal Nutrition & Health, Specialty Products, and Industrial Products.

Acquisitions

On June 1, 2017, we acquired 100 percent of the outstanding common shares of Innovative Food Processors, Inc. (“IFP”), a privately held manufacturer of agglomerated and microencapsulated food and nutrition ingredients, headquartered in Faribault, Minnesota. We made payments of approximately $22,975 on the acquisition date and subsequently $635 in September 2017 to true-up working capital, amounting to approximately $16,161 to the former shareholders, adjustments for working capital acquired of $5,065 and $2,384 to IFP’s lenders to pay off all IFP bank debt. The acquisition of IFP expanded our Human Nutrition & Health segment’s processing technology and market reach, and has brought innovative and value-added systems to food, beverage, and nutrition customers.

We also completed one immaterial acquisition in 2017, Chol-Mix Kft, and another immaterial acquisition in 2018, Bioscreen Technologies Srl.

Human Nutrition & Health

Our Human Nutrition & Health segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Human Nutrition & Health segment's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customer perceptions of brand value.

Table of Contents

Consequently, we make 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. We partner with our customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. Our expertise in trends analysis and product development, combined with manufacturing capabilities in customized spray dried and emulsified powders, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates makes us a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. We also create cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients.

Animal Nutrition & Health

Our Animal Nutrition & Health segment provides nutritional products derived from our microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, our microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. Our proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. 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 our 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 our ability to maintain our strong reputation for excellent product quality and customer service. We continue to drive production efficiencies in order to maintain our competitive-cost position to effectively compete in a global marketplace.

Specialty Products

Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. Specialty Products' 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the EPA and the DOT. Our inventory of these specially built drums, along with two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. We also sell single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.

Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. We distribute propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. The inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.

The micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. We have a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, we determine optimal mineral balance for plant health. We then have a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Our specialty products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.

Industrial Products

Table of Contents

reduces the amount of chlorides released into the environment up to 75% when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at our Italian operation and sold for a wide range of industrial applications in Europe.

We sell products for all four 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, 2018, 2017 and 2016 (in thousands):



Business Segment Net Sales:
	2018			2017			2016
Human Nutrition & Health	$	341,237		$	315,796		$	297,134
Animal Nutrition & Health	175,693			157,688			161,119
Specialty Products	75,808			73,355			70,126
Industrial Products	50,941			47,951			24,825
Total	$	643,679		$	594,790		$	553,204

Business Segment Earnings From Operations:
	2018			2017			2016
Human Nutrition & Health	$	48,490		$	44,010		$	38,156
Animal Nutrition & Health	26,673			22,292			28,686
Specialty Products	25,361			24,949			22,862
Industrial Products	9,013			6,413			1,949
Transaction and integration costs	(1,786		)	(2,496		)	(815		)
Indemnification settlement	—			2,087			—
Total	$	107,751		$	97,255		$	90,838

RESULTS OF OPERATIONS

(All amounts in thousands, except share and per share data)

Fiscal Year 2018 compared to Fiscal Year 2017

Net Sales

Net sales for 2018 were $643,679 as compared with $594,790 for 2017 an increase of $48,889 or 8.2%. Net sales for the Human Nutrition & Health segment were $341,237, compared with $315,796 for the year ended December 31, 2017, an increase of $25,441 or 8.1%. Sales from Powder Systems were up $20,990 or 18.2% and Encapsulates’ sales were up $5,231 or 15.1%, with the acquired IFP business contributing to both product lines’ increases. Net sales for the Animal Nutrition & Health segment were $175,693 for 2018 compared with $157,688 for the prior year, an increase of 18,005 or 11.4%, partly driven by a temporary reduction in Chinese competitive activity, particularly in Europe. Sales of global feed grade choline products increased $16,958 or 16.9%, primarily the result of higher sales volumes and increased average selling prices. Specialty Products segment sales for 2018 were $75,808 compared to sales of $73,355 for 2017, an increase of $2,453 or 3.3%, primarily driven by increased volumes and average selling prices for sterilization gases. Net sales for the Industrial Products segment were $50,941 for the year ended December 31, 2018, an increase of $2,990 or 6.2%. The increase is principally due to higher average selling prices of various choline and choline derivatives used in shale fracking applications.

Gross Margin

Gross margin for 2018 increased to $204,252 compared to $189,009 for 2017, an increase of $15,243 or 8.1%. Gross margin as a percentage of sales for 2018 decreased to 31.7% from 31.8% in the prior year comparative period. Gross margin percentage for the Human Nutrition & Health segment decreased 1.2% in 2018 as compared to 2017 primarily due to mix and increases in raw material prices. Gross margin percentage for the Animal Nutrition & Health segment increased 1.4% compared to 2017, due to increased volumes and average selling prices in monogastric species products, partly driven by a temporary reduction in Chinese competitive

Table of Contents

activity, particularly in Europe. Gross margin percentage for the Specialty Products segment increased 0.4%, due to increased average selling prices for sterilization gases. Gross margin percentage for the Industrial Products segment increased 3.9% from the prior year comparative period, primarily due to higher average selling prices of various choline and choline derivatives used in shale fracking applications.

Operating Expenses

Operating expenses for 2018 were $96,501 or 15.0% of net sales as compared to $91,754 or 15.4% of net sales for 2017. The increase was primarily due to increased expenses relating to research and development efforts in 2018 of $2,287, a favorable indemnification settlement of $2,087 in 2017 related to the SensoryEffects acquisition, impairment charges recorded in connection with the IFP integration of $1,718, increased outside services in selling & marketing of $1,112, and increased compensation related expenses of $2,649. These increases were partially offset by insurance proceeds associated with the Clearfield fire of $4,165 and lower amortization of $2,091.

Earnings From Operations

Principally as a result of the above-noted details, earnings from operations for 2018 were $107,751 as compared to $97,255 for 2017, an increase of $10,496 or 10.8%. Earnings from operations as a percentage of sales (“operating margin”) for 2018 and 2017 were 16.7% and 16.4%, respectively. We are continuing to focus on leveraging our plant capabilities, driving efficiencies from core volume growth, and broadening product applications of human and animal health specialty ingredients into both the domestic and international markets. Earnings from operations for the Human Nutrition & Health segment were $48,490, an increase of 4,480 or 10.2% primarily due to the aforementioned higher sales and the contribution of IFP. Animal Nutrition & Health segment earnings from operations were $26,673, an increase of $4,381 or 19.7%, primarily due to the aforementioned higher volumes and average selling prices in monogatric species products. Earnings from operations for the Specialty Products segment were $25,361, an increase of $412 or 1.7%, primarily the result of aforementioned increased volumes and average selling prices for sterilization gases. Earnings from operations from the Industrial Products segment of $9,013 increased $2,600, primarily due to the aforementioned higher sales and stronger gross margins due to the higher average selling prices.

Other Expenses (Income)

Interest expense for 2018 and 2017 was $7,611 and $7,532, respectively, and was primarily related to outstanding borrowings under our credit facility and includes a write-off of $363 of deferred financing costs in connection with the extinguished debt in 2018. Other expense was $1,110 and $1,235 for 2018 and 2017, respectively.

Income Tax Expense

The Company’s effective tax rate for 2018 and 2017 was 20.7% and (1.8)% respectively. For 2017, the effective tax rate was significantly affected by recording the impact of the Tax Cuts and Jobs Act (the “U.S. Tax Reform” or "TCJA"), enacted on December 22, 2017.

U.S. Tax Reform made broad and complex changes to the U.S. tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. In addition, the Internal Revenue Service (“IRS”) issued guidance, regulations and interpretations of U.S. Tax Reform during 2018. This guidance impacted various sections of the tax code relating to the use of foreign tax credits. Prior to enactment of the U.S. Tax Reform, foreign income taxes paid by Balchem’s foreign subsidiaries were generally available to mitigate potential additional U.S. tax on foreign earnings. Proposed regulations relating to foreign tax credits released in November 2018 clarified that deemed paid foreign tax credits related to Global Intangible Low-Taxed Income, or GILTI, would generally be available to offset only a portion of the foreign income taxes paid. Pending revisions or changes to the proposed regulations, foreign income taxes deemed paid are not expected to fully offset potential additional U.S. tax liability on earnings of foreign subsidiaries, creating a larger impact on the US tax rate from GILTI than anticipated prior to the passage of these regulations. Balchem accrued $4,185 of current foreign income tax expense in foreign jurisdictions in 2018. Of this amount only $1,135 is expected to be allowable under the currently proposed regulations as a foreign tax credit in the U.S. Future potential U.S. tax liability related to GILTI may not be fully offset by foreign tax credits.

U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. However, in March 2018, the FASB issued ASU No. 2018-05, “Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”), which clarifies the income tax accounting implications of the Tax Reform Act. Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary

Table of Contents

information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act.

In the fourth quarter of 2018, the company completed its analysis of the impact of U.S. Tax Reform. In total, the company recorded a tax benefit of $26,761 related to U.S. Tax Reform. This benefit is comprised of a provisional estimate of $25,791 recorded in the fourth quarter of 2017, and an additional $970 benefit recorded in the fourth quarter of 2018. Although the analysis for the impact of U.S. Tax Reform under the requirements of SAB 118 are complete, the IRS has issued and will continue to issue regulations related to U.S. Tax Reform. Due to the complexity and breadth of new tax law, implementation of the regulations may have an impact on the Company’s income tax.

Per SAB 118, the following U.S. Tax Reform-related impacts were recorded in the company’s financial statements:

•

In the fourth quarter of 2017, an estimated current tax expense of $1,389 was recorded for the deemed repatriation under Section 965, net of available foreign tax credits. In August of 2018, the IRS issued proposed regulations that clarified the computation of the deemed repatriation. In the fourth quarter of 2018, the company recorded a reduction to the tax of $970 related to the regulations, adjustments to foreign tax credit calculations, and the interaction of those calculations with other aspects of the tax code. The total amount recorded for the deemed repatriation tax was $419.

•

In the fourth quarter of 2017, an estimated deferred tax benefit of $27,255 was recorded to revalue the company’s net deferred tax liabilities from the 35% previous federal tax rate to the 21% federal tax rate in affect as of January 1, 2018. This was a non-cash benefit recorded to deferred tax expense. The rate impact of temporary item true-ups for amounts filed on tax returns was considered insignificant. The total amount recorded for the revaluation of deferred tax amounts to 21% was a benefit of $27,255.

•

In the fourth quarter of 2017, an estimated tax expense of $75 was recorded to reduce deferred tax assets associated with historic GAAP expensing of stock options issued to covered employees for purposes of the $1 million cap on wage deductibility under Section 162(m). The deferred tax asset ("DTA") was reduced to its expected realizable amount, after anticipation of the 162(m) limit in future years. This estimate was not subsequently adjusted.

•

The company did not estimate any deferred taxes related to the Global Intangible Low-Taxed Income, or GILTI, in the fourth quarter of 2017, as an analysis of the GILTI provisions were still underway. Additional guidance from the IRS on the computation of GILTI was issued in September and November of 2018, with more guidance still anticipated. The FASB noted that companies should make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year incurred. As of the fourth quarter 2018, the company has elected to include GILTI as tax expense in the period incurred. This resulted in no adjustment, since no deferred tax impact was recorded in the fourth quarter of 2017.

The company analyzed any potential Base Erosion and Anti-Abuse Tax (“BEAT”) on related-party transactions and determined they met the gross receipts test but did not meet the level of base erosion payments that would subject the company to BEAT in 2018.

On June 21, 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. (“Wayfair”) overturning the previous ruling of Quill Corp. v. North Dakota which required physical presence in a state before the collection and remittance of sales and use taxes would be required. As a result of this ruling, numerous states have undertaken the process to reevaluate their nexus requirements in order to capture increased revenue through both sales and use taxes and income taxes. Many states are still evaluating the application and effects of Wayfair and many are expected to issue changes to their nexus rules in the coming months. These changes may require us to increase the number of state jurisdictions in which we file, and we continue to evaluate the impact of these changes as they come into effect for each state.

Net Earnings

Principally as a result of the above-noted details, net earnings were $78,573 for 2018, as compared with $90,071 for 2017, a decrease of 12.8%, primarily due to the aforementioned favorable impact of U.S. Tax Reform in 2017, partially offset by the aforementioned higher earnings from operations.

Table of Contents

Fiscal Year 2017 compared to Fiscal Year 2016

Net Sales

Net sales for 2017 were $594,790 as compared with $553,204 for 2016, an increase of $41,586 or 7.5%. Net sales for the Human Nutrition & Health segment were $315,796, compared with $297,134, for the year ended December 31, 2016, an increase of $18,662 or 6.3%. Sales from Powder Systems were up $10,427 or 9.5% and Encapsulates’ sales were up $5,113 or 17.3%, with the acquired IFP business contributing to both product lines’ increases. The sales from the acquired Albion business contributed $4,269 to the overall increase, as a result of having one additional month in 2017. Net sales for the Animal Nutrition & Health segment were $157,688 for 2017 compared with $161,119 for the prior year, a decrease of $3,431 or 2.1%. Sales of products targeted for ruminant animal feed markets decreased 12.3% or $6,619 from the prior period. The decline was primarily the result of lower sales volumes of rumen-protected products and chelated minerals. Global feed grade choline product sales increased $2,517 or 2.6% primarily due to higher average selling prices. Specialty Products segment sales for 2017 were $73,355 compared to sales of $70,126 for 2016, an increase of $3,229 or 4.6%. Plant nutrition sales increased 23.9% through strong volumes into both the domestic and international markets, while the sales from the additional month of the acquired Albion business contributed $775 to the overall increase. Net sales for the Industrial Products segment were $47,951 for the year ended December 31, 2017, an increase of $23,126 or 93.2%. The increase is principally due to higher sales of various choline and choline derivatives used in shale fracking applications. Prior to the St. Gabriel CC Company, LLC joint venture becoming operational, we sold aqueous choline to our partner in the joint venture directly. As such, these sales no longer occurred in the year ended December 31, 2017, which partially offset the overall increase in sales for the segment (See Note 7).

Gross Margin

Gross margin for 2017 increased to $189,009 compared to $180,861 for 2016, an increase of $8,148 or 4.5%. Gross margin as a percentage of sales for 2017 decreased to 31.8% from 32.7% in the prior year comparative period. Gross margin percentage for the Human Nutrition & Health segment increased 0.7% in 2017 as compared to 2016, primarily due to the valuation of acquired Albion inventory to fair value in 2016, which increased cost of goods sold by $3,214, as it was sold during the year ended December 31, 2016. Gross margin percentage for the Animal Nutrition & Health segment decreased 4.1% compared to 2016, due to decreased volumes of products targeting ruminant species animals, increases in raw material costs, and increased competition in monogastric species products. Gross margin percentage for the Specialty Products segment increased 0.7%, primarily due to the valuation of acquired Albion inventory to fair value in 2016, which increased cost of goods sold by $2,149, as it was sold during the year ended December 31, 2016. This was partially offset by increases in raw material prices for sterilization gases and an unfavorable mix. Gross margin percentage for the Industrial Products segment increased 3.9% from the prior year comparative period, primarily due a more favorable customer mix, improved cost structure, and increased volumes.

Operating Expenses

Operating expenses for 2017 were $91,754 or 15.4% of net sales as compared to $90,023 or 16.7% of net sales for 2016. The increase was primarily due to increased expenses relating to research and development efforts in 2017 of $1,980, inclusion of IFP expenses of $1,876, increased transaction costs of $981 when compared to 2016, and a favorable legal settlement in 2016. These increases were partially offset by an indemnification settlement of $2,087 in 2017, which was a favorable settlement received relating to the SensoryEffects acquisition and lower amortization costs.

Earnings From Operations

Principally as a result of the above-noted details, earnings from operations for 2017 were $97,255 as compared to $90,838 for 2016, an increase of $6,417 or 7.1%. Earnings from operations as a percentage of sales (“operating margin”) for both 2017 and 2016 was 16.4%. The Company is continuing to focus on leveraging its plant capabilities, driving efficiencies from core volume growth, and broadening product applications of human and animal health specialty ingredients into both the domestic and international markets. Earnings from operations for the Human Nutrition & Health segment were $44,010, an increase of $5,854 or 15.3% primarily due to higher sales, the contribution of IFP, the aforementioned impact of valuation of the acquired Albion inventory to fair value in 2016 and higher sales. Animal Nutrition & Health segment earnings from operations were $22,292, a decrease of $6,394 or 22.3%, primarily due to an unfavorable product mix and increases in certain petrochemical raw material costs. Earnings from operations for the Specialty Products segment were $24,949, an increase of $2,087 or 9.1%, primarily the result of aforementioned valuation of the acquired Albion inventory to fair value in 2016 and increases in sales of chelated minerals for plant nutrition, partially offset by raw material increases related to sterilization gases and an unfavorable mix. Earnings from operations from the Industrial Products segment of $6,413 increased $4,464, primarily due to the aforementioned higher sales and stronger gross margins due to a more favorable customer mix and improved cost structure.

Table of Contents

Other Expenses (Income)

Interest expense for 2017 and 2016 was $7,544 and $7,265, respectively, and is primarily related to the loans entered into on May 7, 2014. Other expense was $1,235 and $648 for 2017 and 2016, respectively.

Income Tax Expense

The Company’s effective tax rate for 2017 and 2016 was (1.8)% and 32.5% respectively. The effective tax rate was significantly impacted by recording the impact of U.S. Tax Reform, enacted on December 22, 2017 by the U.S. government.

The Tax Reform Act makes broad and complex changes to the U.S. tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded a tax benefit of $27,255 due to remeasurement of deferred tax assets and liabilities and a tax charge of $1,389 due to the transition tax on deemed repatriation. In accordance with SAB 118, we have determined that the $27,255 of the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1,389 of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. The provisional amounts are subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the Tax Reform Act.

The FASB Staff also provided additional guidance to address the accounting for the effects of the provision in the Tax Reform Act related to the taxation of Global Intangible Low-Taxed Income (“GILTI”). Because of the complexity of the GILTI tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. We have not completed our analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided for under SAB 118.

The Tax Reform Act also changed the individuals whose compensation is subject to a $1 million cap on deductibility under Section 162(m) and includes performance-based compensation such as stock options, restricted shares, and performance shares in the calculation. The provision generally applies to taxable years beginning after December 31, 2017 and provides a transition for compensation paid pursuant to a written binding contract that is in effect on November 2, 2017. The Company will need to carefully review the terms of its compensation plans and agreements to assess whether such plans and agreements are considered to be written binding contracts in effect on November 2, 2017. Due to the complexity of applying this new provision and the limited time to consider tax reform, the Company has not yet completed its analysis of these new provisions and will finalize its analysis during the measurement period provided under SAB 118.

Net Earnings

Principally as a result of the above-noted details, net earnings were $90,071 for 2017, as compared with $55,972 for 2016, an increase of 60.9%.

Table of Contents

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, 2018, are summarized in the table below:



	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations (1)	$	16,628	$	3,445	$	4,913	$	2,583	$	5,687
Purchase obligations (2)	23,435		23,435		—		—		—
Debt obligations (3)	156,000		—		—		156,000		—
Interest payment obligations (4)	25,955		5,773		17,319		2,863		—
Total	$	222,018	$	32,653	$	22,232	$	161,446	$	5,687


(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, 2018, and it is assumed 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 $5,709 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 $54,268 at December 31, 2018 from $40,416 at December 31, 2017. At December 31, 2018, we had $19,203 of cash and cash equivalents held by our foreign subsidiaries. It is our intention to permanently reinvest these funds in our foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds in order to fund our U.S. operations or obligations. However, if these funds are needed for our U.S. operations, we could be required to pay additional taxes to repatriate these funds. Working capital was $144,258 at December 31, 2018 as compared to $90,940 at December 31, 2017, an increase of $53,318.

Operating Activities

Cash flows from operating activities were $118,697 as of December 31, 2018 as compared to $110,618 as of December 31, 2017 and $107,612 as of December 31, 2016. In 2018, cash flows from operating activities increased compared to 2017, primarily due to changes to deferred income taxes and improved accounts payable and accrued expenses, partially offset by lower net earnings and an increase in accounts receivable and inventory levels. In 2017, cash flows from operating activities increased compared to 2016 was primarily due to higher net earnings and improved accounts receivable, partially offset by changes to deferred income taxes as a result of the Tax Reform Act and less favorable accounts payable and accrued expenses.

Investing Activities

Table of Contents

As previously noted, on June 1, 2017, we acquired 100 percent of the outstanding common shares of IFP, a privately held manufacturer of agglomerated and microencapsulated food and nutrition ingredients, headquartered in Faribault, Minnesota, for a purchase price of $23,610. We also completed one immaterial acquisition in 2017, Chol-Mix Kft, and another immaterial acquisition in 2018, Bioscreen Technologies Srl.

We continue to invest in projects across all production facilities and capital expenditures were $19,170, $27,526, and $23,034, for 2018, 2017, and 2016, respectively. In 2018, we invested $5,662 to expand capacity in key product lines in the Human Nutrition & Health 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. In 2017, we spent approximately $13,225 to expand manufacturing capacity at our AMT facility in Utah to accommodate production previously manufactured in Clearfield, UT prior to the site fire. In 2016, we spent approximately $6,800 towards its agglomeration production equipment initiative, as well as approximately $1,825 related to expanding our Animal Nutrition & Health capacity in our manufacturing facility located in Verona, Missouri.

Financing Activities

On June 27, 2018, we entered into a Credit Agreement with a bank syndicate, which replaced the existing credit facility that had provided for a senior secured term loan A of $350,000 and a revolving loan of $100,000. The initial proceeds from the Credit Agreement were used to repay the outstanding balance of $210,750 on our senior secured term loan A, which was due May 2019. In addition to the repayment of the outstanding balance on June 27, 2018, we made total debt payments of $8,750 related to the senior secured term loan and $54,750 related to the revolving loan in 2018. During 2017, we made debt payments of $43,000 related to the senior secured term loan and net payments of $19,000 related to the revolving loan. During 2016, we borrowed $65,000 from the revolving loan to finance the acquisition of Albion International, Inc. We also made debt payments of $35,000 related to the senior secured term loan and net payments of $46,000 related to the revolving loan during 2016.

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 2,190,772 shares have been purchased, and we had 706 shares remaining in treasury at December 31, 2018. We 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 $8,272, $9,732, and $7,192 as of December 31, 2018, 2017, and 2016, respectively. Dividend payments were $13,432, $12,069, and $10,720 as of December 31, 2018, 2017, and 2016, 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 sheet as of December 31, 2018 and December 31, 2017 was $1,174 and $1,573, 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 subject to additional risk of loss in the event of our bankruptcy or insolvency. The deferred compensation liability as of December 31, 2018 was $265 and is included in other long-term obligations on our balance sheet.

Related Party Transactions

We were engaged in related party transactions with St. Gabriel CC Company, LLC for the year ended December 31, 2018. See Note 18.

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.

Table of Contents

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 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. We do not charge our customers rental fees on cylinders or drums used to ship our products.

The new accounting standard for the recognition of revenue, ASC 606, Revenue from Contracts with Customers, was adopted for the fiscal year beginning on January 1, 2018. Per the new standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The new standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Overall, the adoption of the new standard did not significantly alter our methodology for recognition of revenue. Although the new revenue standard had an immaterial impact on ongoing net income, we did implement changes to processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract review requirements, and gathering of information provided for disclosures.

There have been no material changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the year ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated the Company’s contracts and properly assessed the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate adoption of the standard on January 1, 2018.

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, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration, however there were no other triggering events which required asset impairment reviews.

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.

Table of Contents

In accordance with ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), we first assess qualitative factors to determine whether it is “more likely than not” (i.e. a likelihood of more than 50%) that the fair values of our reporting units are less than their respective carrying amounts, including goodwill, as a basis for determining whether it is necessary to perform the two step goodwill impairment test. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). We have an unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted; however we have elected not to adopt early as this ASU will not have a significant impact on our consolidated financial statements.

As of October 1, 2018 and 2017, we opted to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. We assessed the fair values of our reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for our conclusions, as well as the market approach and cost approach. Our estimates of future cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions. Our assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units was not considered impaired. We may perform the qualitative assessment in subsequent periods.

Accounts Receivable

We market our products worldwide to a diverse customer base, principally throughout the Americas, Europe, and Asia. We grant credit terms in the normal course of business to our customers. We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined through review of their current credit information. We continuously monitor collections and payments from customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimated losses are based on historical experience and any specific customer collection issues identified. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances and related bad debt expense may be required.

Post-employment Benefits

We provide life insurance and health care benefits for certain eligible retirees and health care benefits for certain retirees’ eligible survivors. The costs and obligations related to these benefits reflect our assumptions as to general economic conditions and health care cost trends. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease.

In accordance with ASC 715, “Compensation-Retirement Benefits,” we are 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 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, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration, however there were no other triggering events which required asset impairment reviews.

Income Taxes

Table of Contents

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation allowances would be established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.

We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision.

As of December 31, 2018, we have state income tax net operating loss (NOL) carryforwards of $10,114, which will expire in 2031. We believe that the benefit from the state NOL carryforwards will be realized. Therefore, a valuation allowance is not required to be established.

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

Cash and cash equivalents are held primarily in certificates of deposit and money market investment funds. We have no derivative financial instruments or derivative commodity instruments, nor do we have any financial instruments entered into for trading or hedging purposes. As of December 31, 2018, 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, 2018, would result in an increase or decrease in annual interest expense and a corresponding reduction or increase in cash flow of approximately $1,560. We are exposed to market risks for changes in foreign currency rates and has exposure to commodity price risks, including prices of our primary raw materials. Our objective is to seek a reduction in the potential negative earnings impact of changes in foreign exchange rates and raw material pricing arising in our business activities. We manage these financial exposures, where possible, through pricing and operational means. Our practices may change as economic conditions change.

Table of Contents


Item 8.	Financial Statements and Supplementary Data



Index to Financial Statements and Supplementary Data:		Page Numbers

Report of Independent Registered Public Accounting Firm		25
Consolidated Balance Sheets as of December 31, 2018 and 2017		27
Consolidated Statements of Earnings for the years ended December 31, 2018, 2017 and 2016		28
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016		29
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016		30
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016		31
Notes to Consolidated Financial Statements		32
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016		58

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Balchem Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Balchem Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, 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, 2018, and the related notes and the financial statement schedule of Balchem Corporation listed at Item 8 (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, 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, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2018, 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, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Bioscreen Technologies Srl (Bioscreen) from its assessment of internal control over financial reporting as of December 31, 2018, because it was acquired by the Company in a purchase business combination in the third quarter of 2018. We have also excluded Bioscreen from our audit of internal control over financial reporting. Bioscreen is a wholly owned subsidiary whose total assets and net sales represent approximately 2.0 percent and 0.2 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.

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.

Table of Contents

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.

/s/ RSM US LLP

We have served as the Company's auditor since 2004.

New York, New York

February 28, 2019

Table of Contents

BALCHEM CORPORATION

Consolidated Balance Sheets

December 31, 2018 and 2017

(Dollars in thousands, except share and per share data)



	2018			2017
Current assets:
Cash and cash equivalents	$	54,268		$	40,416
Accounts receivable, net of allowance for doubtful accounts of $610 and $431 at December 31, 2018 and 2017, respectively	99,545			91,226
Inventories	67,187			60,696
Prepaid expenses	3,830			4,774
Other current assets	1,484			2,224
Total current assets	226,314			199,336

Property, plant and equipment, net	194,339			189,793

Goodwill	447,995			441,361
Intangible assets with finite lives, net	105,985			128,073
Other assets	6,722			5,073
Total assets	$	981,355		$	963,636

Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable	$	33,789		$	28,451
Accrued expenses	22,025			22,930
Accrued compensation and other benefits	11,022			8,531
Dividends payable	15,220			13,484
Current portion of long-term debt	—			35,000
Total current liabilities	82,056			108,396

Long-term debt	—			183,964
Revolver loan - long-term	156,000			—
Deferred income taxes	44,309			48,548
Other long-term obligations	7,372			5,847
Total liabilities	289,737			346,755

Commitments and contingencies (note 16)

Stockholders’ equity:
Preferred stock, $25 par value. Authorized 2,000,000 shares; none issued and outstanding	—			—
Common stock, $.0667 par value. Authorized 120,000,000 shares; 32,256,915 shares issued and 32,256,209 outstanding at December 31, 2018 and 32,019,605 shares issued and outstanding at December 31, 2017	2,151			2,135
Additional paid-in capital	165,098			151,749
Retained earnings	528,027			464,639
Accumulated other comprehensive loss	(3,602		)	(1,642		)
Treasury stock, at cost: 706 and 0 shares at December 31, 2018 and 2017, respectively	(56		)	—
Total stockholders’ equity	691,618			616,881

Total liabilities and stockholders’ equity	$	981,355		$	963,636

See accompanying notes to consolidated financial statements.

Table of Contents

BALCHEM CORPORATION

Consolidated Statements of Earnings

Years Ended December 31, 2018, 2017 and 2016

(In thousands, except per share data)



	2018		2017			2016

Net sales	$	643,679	$	594,790		$	553,204

Cost of sales	439,427		405,781			372,343

Gross margin	204,252		189,009			180,861

Operating expenses:
Selling expenses	57,219		54,720			55,172
Research and development expenses	11,592		9,305			7,325
General and administrative expenses	27,690		27,729			27,526
	96,501		91,754			90,023

Earnings from operations	107,751		97,255			90,838

Other expenses:

Interest expense, net	7,611		7,532			7,256
Other, net	1,110		1,235			648

Earnings before income tax expense	99,030		88,488			82,934

Income tax expense/(benefit)	20,457		(1,583		)	26,962

Net earnings	$	78,573	$	90,071		$	55,972

Basic net earnings per common share	$	2.45	$	2.83		$	1.78

Diluted net earnings per common share	$	2.42	$	2.79		$	1.75

See accompanying notes to consolidated financial statements.

Table of Contents

BALCHEM CORPORATION

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2018, 2017 and 2016

(In thousands)



	2018			2017			2016

Net earnings	$	78,573		$	90,071		$	55,972

Other comprehensive (loss)/income, net of tax:

Net foreign currency translation adjustment	(2,982		)	5,404			(1,390		)

Net change in postretirement benefit plan, net of taxes of $434, $207, and $49 at December 31, 2018, 2017 and 2016, respectively	1,022			(197		)	(345		)

Other comprehensive (loss)/income	(1,960		)	5,207			(1,735		)

Comprehensive income	$	76,613		$	95,278		$	54,237

See accompanying notes to consolidated financial statements.

Table of Contents

BALCHEM CORPORATION

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2018, 2017 and 2016

(Dollars in thousands, except share and per share data)



	Total Stockholders' Equity			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Stock			Treasury Stock					Additional Paid-in Capital
	Total Stockholders' Equity			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares	Amount		Shares		Amount			Additional Paid-in Capital
Balance - December 31, 2015	$	463,705		$	344,197		$	(5,114	)	31,528,449	$	2,102	(1,089	)	(74		)	$	122,594

Net earnings	55,972			55,972			—			—	—		—		—			—
Other comprehensive loss	(1,735		)	—			(1,735		)	—	—		—		—			—
Dividends ($.38 per share)	(12,080		)	(12,080		)	—			—	—		—		—			—
Treasury shares purchased	(1,588		)	—			—			—	—		(24,912	)	(1,588		)	—
Shares and options issued under stock plans and an income tax benefit of $2,546	16,759			—			—			229,412	15		26,001		1,662			15,082

Balance - December 31, 2016	521,033			388,089			(6,849		)	31,757,861	2,117		—		—			137,676

Net earnings	90,071			90,071			—			—	—		—		—			—
Other comprehensive income, net of cumulative effect of accounting change	5,150			(57		)	5,207			—	—		—		—			—
Dividends ($.42 per share)	(13,464		)	(13,464		)	—			—	—		—		—			—
Treasury shares purchased	(1,905		)	—			—			—	—		(23,182	)	(1,905		)	—
Shares and options issued under stock plans	15,996			—			—			261,744	18		23,182		1,905			14,073

Balance - December 31, 2017	616,881			464,639			(1,642		)	32,019,605	2,135		—		—			151,749

Net earnings	78,573			78,573			—			—	—		—		—			—
Other comprehensive loss	(1,960		)	—			(1,960		)	—	—		—		—			—
Dividends ($.47 per share)	(15,185		)	(15,185		)	—			—	—		—		—			—
Treasury shares purchased	(1,394		)	—			—			—	—		(16,755	)	(1,394		)	—
Shares and options issued under stock plans	14,703			—			—			236,604	16		16,049		1,338			13,349

Balance - December 31, 2018	$	691,618		$	528,027		$	(3,602	)	32,256,209	$	2,151	(706	)	$	(56	)	$	165,098

See accompanying notes to consolidated financial statements.

Table of Contents

BALCHEM CORPORATION

Consolidated Statements of Cash Flows

Years Ended December 31, 2018, 2017 and 2016

(In thousands)



	2018			2017			2016
Cash flows from operating activities:
Net earnings	$	78,573		$	90,071		$	55,972

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	44,666			44,379			46,202
Stock compensation expense	6,413			6,264			7,024
Deferred income taxes	(5,403		)	(28,777		)	(6,881		)
Provision for doubtful accounts	43			69			258
Foreign currency transaction (gain)/loss	(141		)	340			(16		)
Asset impairment charge	1,801			—			—
(Gain)/Loss on disposal of assets	(3,244		)	254			320
Changes in assets and liabilities, net of acquired balances
Accounts receivable	(7,773		)	(3,906		)	(15,659		)
Inventories	(6,016		)	(319		)	4,745
Prepaid expenses and other current assets	1,517			(439		)	240
Accounts payable and accrued expenses	5,988			1,511			17,841
Income taxes	1,121			449			(2,765		)
Other	1,152			722			331
Net cash provided by operating activities	118,697			110,618			107,612

Cash flows from investing activities:
Capital expenditures	(19,170		)	(27,526		)	(23,034		)
Cash paid for acquisitions, net of cash acquired	(17,399		)	(17,393		)	(110,601		)
Proceeds from sale of property, plant and equipment	966			22			4
Proceeds from insurance	4,165			2,792			1,000
Intangible assets acquired	(553		)	(591		)	(963		)
Net cash used in investing activities	(31,991		)	(42,696		)	(133,594		)

Cash flows from financing activities:
Proceeds from revolving loan	210,750			25,000			72,500
Principal payments on revolving loan	(54,750		)	(44,000		)	(53,500		)
Principal payments on long-term debt	(219,500		)	(43,000		)	(35,000		)
Principal payment on acquired debt	(19		)	(2,384		)	(884		)
Cash paid for financing costs	(1,374		)	—			—
Proceeds from stock options exercised	8,272			9,732			7,192
Excess tax benefits from stock compensation	—			—			2,546
Dividends paid	(13,432		)	(12,069		)	(10,720		)
Purchase of treasury stock	(1,394		)	(1,905		)	(1,588		)
Net cash used in by financing activities	(71,447		)	(68,626		)	(19,454		)

Effect of exchange rate changes on cash	(1,407		)	2,477			(716		)

Increase/(Decrease) in cash and cash equivalents	13,852			1,773			(46,152		)

Cash and cash equivalents beginning of period	40,416			38,643			84,795
Cash and cash equivalents end of period	$	54,268		$	40,416		$	38,643

Supplemental Cash Flow Information - see Note 13

See accompanying notes to consolidated financial statements.

Table of Contents

BALCHEM CORPORATION

Notes to Consolidated Financial Statements

(All amounts in thousands, except share and per share data)

NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description

Balchem Corporation (including, unless the context otherwise requires, its wholly-owned subsidiaries, SensoryEffects, Inc., SensoryEffects Cereal Systems, Inc., Albion Laboratories, Inc. (formerly known as Albion International, Inc.), BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia Srl, Bioscreen Technologies Srl, Innovative Food Processors, Inc., and Balchem LTD (“Balchem” or the “Company”)), incorporated in the State of Maryland in 1967, is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical, agricultural, and medical sterilization industries.

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

Revenue for each of the Company’s business segments is recognized when control of the promised goods is transferred to our customers, in an amount tht reflects the consideration we expect to realize in exchange for those goods. The Company reports amounts billed to customers related to shipping and handling as revenue and includes costs incurred for shipping and handling in cost of sales. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities. In instances of shipments made on consignment, revenue is recognized when control is transferred to the customer. The Company does not charge its customers rental fees on cylinders or drums used to ship its products.

The new accounting standard for the recognition of revenue, Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, was adopted for the fiscal year beginning on January 1, 2018. Per the new standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The new standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Overall, the adoption of the new standard did not significantly alter our methodology for recognition of revenue.

The Company adopted ASC 606 using the modified retrospective method applied to those contracts that were in progress as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 605. The impact to revenues as a result of applying ASC 606 was an increase of $338 for the year ended December 31, 2018.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. The Company has funds in its cash accounts that are with third party financial institutions, primarily in certificates of deposit and money market funds. The Company’s U.S. and Italy cash balances at these financial institutions exceed the Federal Deposit Insurance Corporation (“FDIC”) and Fondo Interbancario di Tutela dei Depositi (“FITD”) insurance limits.

Accounts Receivable

Credit terms are granted in the normal course of business to the Company’s customers. On-going credit evaluations are performed on the Company’s customers and credit limits are adjusted based upon payment history and the customer's current credit worthiness,

Table of Contents

as determined through review of their current credit information. Collections and payments from customers are continuously monitored and allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments are maintained. Estimated losses are based on historical experience and any specific customer collection issues identified.

Inventories

Inventories are valued at the lower of cost (first in, first out or average) or net realizable value and have been reduced by an allowance for excess or obsolete inventories. Cost elements include material, labor and manufacturing overhead.

Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost.

Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows:



Buildings	15-25 years
Equipment	2-28 years

Expenditures for repairs and maintenance are charged to expense. Alterations and major overhauls that extend the lives or increase the capacity of plant assets are capitalized. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts and any resultant gain or loss is included in earnings.

For the year ended December 31, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration.

Business Concentrations

Financial instruments that subject the Company to credit risk consist primarily of accounts receivable and money market investments. Investments are managed within established guidelines to mitigate risks. Accounts receivable subject the Company to credit risk partially due to the concentration of amounts due from customers. The Company extends credit to its customers based upon an evaluation of the customers’ financial condition and credit histories. The majority of the Company’s customers are major national or international corporations. In 2018, 2017 and 2016, no customer accounted for more than 10% of total net sales.

Goodwill and Acquired Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC 350, “Intangibles-Goodwill and Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the provisions of ASC 350. The Company performs its annual test as of October 1. ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment if events and circumstances indicate that the asset might be impaired.

In accordance with ASC 350, the Company first assesses qualitative factors to determine whether it is “more likely than not” (i.e. a likelihood of more than 50%) that the fair values of its reporting units are less than their respective carrying amounts, including goodwill, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The Company has an unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test.

As of October 1, 2018 and 2017, the Company opted to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. As of October 1, 2018, it assessed the fair values of its reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for its conclusions. As of October 1, 2017, the Company assessed the fair values of its reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for its conclusions, as well as market approaches for certain reporting units. The Company’s estimates of future cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions. The Company’s assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units is not considered impaired. The Company may resume performing the qualitative assessment in subsequent periods.

Table of Contents

The Company had goodwill in the amount of $447,995 and $441,361 as of December 31, 2018 and December 31, 2017, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”



Goodwill at December 31, 2016	$	439,811
Goodwill as a result of the Acquisitions - see Note 2	1,550
Goodwill at December 31, 2017	441,361
Goodwill as a result of the Acquisitions – see Note 2	6,838
Impact due to change in foreign exchange rates	(204		)
Goodwill at December 31, 2018	$	447,995



	December 31, 2018		December 31, 2017
Human Nutrition & Health	$	405,527	$	405,334
Animal Nutrition & Health	18,578		12,137
Specialty Products	22,662		22,662
Industrial Products	1,228		1,228
Total	$	447,995	$	441,361

The following intangible assets with finite lives are stated at cost and are amortized either on an accelerated basis or on a straight-line basis over the following estimated useful lives:



		Amortization Period (in years)
Customer relationships and lists		10
Trademarks & trade names		5 - 17
Developed technology		5
Regulatory registration costs		5 - 10
Patents & trade secrets		15 - 17
Other		3 - 18

For the year ended December 31, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration.

Income Taxes

Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision.

Use of Estimates

Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and revenues and expenses during the reporting period. Estimates and assumptions are reviewed

Table of Contents

periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2018 and 2017 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable and accrued liabilities, and are carried at cost which approximates fair value due to the short-term maturity of these instruments.

Cost of Sales

Cost of sales are primarily comprised of raw materials and supplies consumed in the manufacture of product, as well as manufacturing labor, maintenance labor, depreciation expense, and direct overhead expense necessary to convert purchased materials and supplies into finished product. Cost of sales also includes inbound freight costs, outbound freight costs for shipping products to customers, warehousing costs, quality control and obsolescence expense.

Selling, General and Administrative Expenses

Selling expenses consist primarily of compensation and benefit costs, amortization of customer relationships and lists, trade promotions, advertising, commissions and other marketing costs. General and administrative expenses consist primarily of payroll and benefit costs, occupancy and operating costs of corporate offices, depreciation and amortization expense on non-manufacturing assets, information systems costs and other miscellaneous administrative costs.

Research and Development

Research and development costs are expensed as incurred.

Net Earnings Per Common Share

Basic net earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share is calculated in a manner consistent with basic net earnings per common share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding, unvested restricted stock, and unvested performance shares (using the treasury stock method).

Stock-based Compensation

The Company has stock-based employee compensation plans, which are described more fully in Note 3. The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation,” which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes based option-pricing model. Estimates of and assumptions about forfeiture rates, terms, volatility, interest rates and dividend yields are used to calculate stock-based compensation. A significant change to these estimates could materially affect the Company’s operating results.

Impairment of Long-lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year ended December 31, 2018, we recorded certain immaterial impairment charges in connection with the IFP integration.

Table of Contents

New Accounting Pronouncements

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The guidance requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, and the standard may be adopted either using the prospective or retrospective transition approach. The Company is currently evaluating the impact of this pronouncement on the Company’s consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans”, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This update should be applied on a retrospective basis to all periods presented and is effective for fiscal years ending after December 31, 2020. Early adoption is permitted. The Company expects this new guidance will have minimal impact on its financial reporting.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted; however, the Company has elected not to adopt early as this ASU will not have a significant impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which was further clarified by ASU 2018-11 and addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-of-use assets ("ROU") and lease liabilities for most leases in the Consolidated Balance Sheets. The guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The standard can be applied using the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. Entities may also elect the optional transition method provided under ASU 2018-11, “Leases, Topic 842: Targeted Improvement”, issued in July 2018, allowing for application of the standard at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will adopt the new standard on January 1, 2019 and has elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption. The new standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. The Company is substantially complete with its evaluation of the effect that the adoption of this ASU will have on the financial statements. While the Company continues to assess all of the effects of adoption, it currently believes the most significant effects will be related to (1) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its operating leases, and (2) providing significant new disclosures about its leasing activities. In connection with the adoption of this standard, the Company expects to recognize additional operating liabilities of approximately $12,900 with corresponding ROU assets of approximately $12,700 based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The Company does not anticipate any material impact to the Consolidated Statements of Earnings when compared to reporting under historical guidance and does not expect any impact to cash flows from or used in operating, financing, or investing on our Consolidated Statements of Cash Flows. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify, which means for those leases that qualify, the Company will not recognize ROU assets or lease liabilities. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its leases.

In May 2014, the FASB issued a comprehensive new revenue recognition standard that superseded existing revenue recognition guidance under U.S. GAAP. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for several transition methods: (a) a full retrospective adoption in which the standard is applied to all of the periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements with a cumulative-effect

Table of Contents

adjustment reflected in retained earnings. The standard also requires expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This new revenue recognition standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company performed a detailed review of its contract portfolio representative of its different businesses and compared historical accounting policies and practices to the new standard. Because the standard impacts its business processes, systems and controls, the Company also developed a comprehensive change management project plan to guide the implementation. Over the course of 2017, the Company conducted training sessions for those in its global organization that are impacted by the new standard. The Company’s primary business is the sale of products, and the adoption of the new revenue recognition standard did not have a material impact on its financial statements. The Company adopted the new standard effective January 1, 2018 utilizing the modified retrospective method. The cumulative-effect adjustment to retained earnings upon adoption was not material.

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which addresses the definition of what constitutes a business by providing clarification of the three elements that constitute a business. The guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted ASU 2017-01 on January 1, 2018 prospectively (prior periods have not been restated). There was no significant impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). The standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset when the transfer occurs as opposed to when the asset is transferred to an outside party as required under current U.S. GAAP. The standard does not apply to intra-entity transfers of inventory, which will continue to follow current U.S. GAAP. The guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted ASU 2016-16 on January 1, 2018 utilizing the modified retrospective method. There was no impact on the Company’s consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, “Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”), which clarifies the income tax accounting implications of the Tax Cuts and Jobs Act. The guidance is effective immediately. In the 4^th quarter of 2018, the company completed its analysis of the impact of U.S. Tax Reform.

NOTE 2 – SIGNIFICANT ACQUISITIONS

Acquisition of Innovative Food Processors, Inc.

On June 1, 2017, the Company acquired 100 percent of the outstanding common shares of Innovative Food Processors, Inc. (“IFP”), a privately held manufacturer of agglomerated and microencapsulated food and nutrition ingredients, headquartered in Faribault, Minnesota. The Company made payments of approximately $22,975 on the acquisition date and $635 in September to true-up working capital, amounting to approximately $16,161 to the former shareholders, adjustments for working capital acquired of $5,065, and $2,384 to IFP’s lenders to pay off all IFP bank debt. The acquisition of IFP expands the Company’s Human Nutrition & Health segment’s processing technology and market reach, while bringing innovative and value-added systems to food, beverage, and nutrition customers.

Management has completed its accounting for the acquisition. As a result, the fair values of the assets acquired and liabilities assumed have been determined and $1,340 of estimated goodwill has been recorded.

Table of Contents

The following table summarizes the fair values of the assets acquired and liabilities assumed:



Cash and cash equivalents	$	5,065
Accounts receivable	2,860
Inventories	2,537
Prepaid expenses	186
Property, plant and equipment	12,219
Customer relationships	2,942
Developed technology	1,078
Trademark & trade name	1,388
Covenant not to compete	126
Goodwill	1,340
Trade accounts payable	(844		)
Accrued expenses	(1,416		)
Bank debt	(2,384		)
Deferred income taxes	(3,871		)
Amount paid to shareholders	21,226
IFP bank debt paid on purchase date	2,384
Total amount paid	$	23,610

The goodwill of $1,340 arising from the IFP Acquisition consists largely of expected synergies, including the combined entities’ experience and technical problem solving capabilities, and acquired workforce. The goodwill is assigned to the Human Nutrition & Health segment, and is not tax deductible for income tax purposes.

The valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. In preparing the Company's fair value of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Additionally, certain intangible assets are not tax deductible.

Customer relationships are amortized over a 10-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trademark, trade name, covenant not to compete, and developed technology are amortized over 10 years, 5 years, 3 years, and 5 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined.

The Company is indemnified for tax liabilities prior to the acquisition date. Indemnified tax liabilities will create an indemnification asset (receivable). At this time, an indemnification asset (receivable) balance has not been established.

The Company also completed one immaterial acquisition in 2017, Chol-Mix Kft, and another immaterial acquisition in 2018, Bioscreen Technologies Srl.

Transaction and integration costs related to recent acquisitions are included in general and administrative expenses and amounted to $1,786 and $2,163 for the years ended December 31, 2018 and 2017, respectively.

NOTE 3 - STOCKHOLDERS’ EQUITY

STOCK-BASED COMPENSATION

All share-based payments, including grants of stock options, are recognized in the income statement as an operating expense, based on their fair values.

The Company has made an estimate of expected forfeitures, based on its historical experience, and is recognizing compensation cost only for those stock-based compensation awards expected to vest.

The Company’s results for the years ended December 31, 2018, 2017 and 2016 reflected the following compensation cost and such compensation cost had the following effects on net earnings:

Table of Contents



	Increase/(Decrease) for the Years Ended December 31,
	2018			2017			2016
Cost of sales	$	973		$	524		$	1,040
Operating expenses	5,440			5,736			5,984
Net earnings	(4,965		)	(3,990		)	(4,473		)

On December 31, 2018, the Company had one share-based compensation plan under which awards may be granted, which is described below (the “2017 Plan”).

In June 2017, the Company adopted the Balchem Corporation 2017 Omnibus Incentive Plan (“2017 Plan”) for officers, employees and directors of the Company and its subsidiaries. The 2017 Plan replaced the 1999 Stock Plan and amendments and restatements thereto (collectively to be referred to as the “1999 Plan’), which expired on April 9, 2018. No further awards will be made under the 1999 Plan, and the shares that remained available for grant under the 1999 Plan will only be used to settle outstanding awards granted under the 1999 Plan and will not become available under the 2017 Plan. The 2017 Plan is administered by the Compensation Committee of the Board of Directors of the Company. The 2017 Plan provides as follows: i) for a termination date of June 13, 2027; (ii) to authorize 1,600,000 shares reserved for future grants, a reduction from the 6,000,000 shares authorized for grant under the 1999 Plan; (iii) for the making of grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards, as well as for the making of cash performance awards; (iv) except as provided in an employment agreement as in effect on the effective date of the 2017 Plan, no automatic acceleration of outstanding awards upon the occurrence of a change in control of the Company; (v) certain annual limits on the number of shares and amount of cash that may be granted; (vii) for dividends or dividend equivalents otherwise payable on an unvested award to accrue and be paid only at such time as the vesting conditions applicable to the underlying award have been satisfied; (vii) for certain discretionary compensation recovery if the Company is required to prepare an accounting restatement of its financial statements due to the Company’s material noncompliance with any financial reporting requirements under the securities laws; and (viii) for compliance with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code” or the “Code”). No option will be exercisable for longer than ten years after the date of grant.

The shares to be issued upon exercise of the outstanding options have been approved, reserved and are adequate to cover all exercises. As of December 31, 2018, the 2017 Plan had 1,377,544 shares available for future awards.

The Company has Restricted Stock Grant Agreements with the Company's non–employee directors and certain employees. Under the Restricted Stock Grant Agreements, certain shares of the Company’s Common Stock have been granted, ranging from 70 shares to 54,000 shares, to its non-employee directors and certain employees, subject to time-based vesting requirements.

The Company also has performance share (“PS”) awards, which provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (“TSR”) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents.

The fair value of each option award issued under the Company’s stock plans is estimated on the date of grant using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical experience of employees’ exercise behavior. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.



	Year Ended December 31,
Weighted Average Assumptions:	2018		2017		2016
Expected Volatility	26.8	%	30.1	%	34.4	%
Expected Term (in years)	4.4		4.6		5.0
Risk-Free Interest Rate	2.6	%	1.8	%	1.2	%
Dividend Yield	0.6	%	0.5	%	0.5	%

The value of the restricted shares is based on the fair value of the award at the date of grant.

PS expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions

Table of Contents

used in the fair value determination were risk free interest rates of 2.4%, 1.5%, and 0.88%; dividend yields of 0.5%, 0.6%, and 0.6%; volatilities of 27%, 32%, 32%; and initial TSR’s of -10.5%, 8.2%, and -6.6% in each case for the years ended December 31, 2018, 2017, and 2016, respectively. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest 100% at the end of the third year following the grant in accordance with the performance metrics set forth.

Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally three years for stock options, three to four years for employee restricted stock awards, three years for employee performance share awards, and four years for non-employee director restricted stock awards.

A summary of stock option plan activity for 2018, 2017, and 2016 for all plans is as follows:



2018	# of Shares (000s)		Weighted Average Exercise Price
Outstanding at beginning of year	946		$	55.44
Granted	148		74.57
Exercised	(198	)	41.71
Forfeited	(6	)	74.90
Cancelled	(3	)	48.54
Outstanding at end of year	887		$	61.59
Exercisable at end of year	490		$	50.50



2017	# of Shares (000s)		Weighted Average Exercise Price
Outstanding at beginning of year	1,066		$	45.32
Granted	222		85.22
Exercised	(268	)	36.36
Forfeited	(52	)	72.29
Cancelled	(22	)	57.48
Outstanding at end of year	946		$	55.44
Exercisable at end of year	493		$	41.01



2016	# of Shares (000s)		Weighted Average Exercise Price
Outstanding at beginning of year	1,017		$	37.29
Granted	341		60.92
Exercised	(236	)	30.44
Forfeited	(56	)	58.23
Outstanding at end of year	1,066		$	45.32
Exercisable at end of year	604		$	34.77

The aggregate intrinsic value for outstanding stock options was $16,192, $24,714 and $41,161 at December 31, 2018, 2017 and 2016, respectively, with a weighted average remaining contractual term of 6.3 years at December 31, 2018. Exercisable stock options at December 31, 2018 had an aggregate intrinsic value of $13,887 with a weighted average remaining contractual term of 5.0 years.

Other information pertaining to option activity during the years ended December 31, 2018, 2017 and 2016 is as follows:



	Years Ended December 31,
	2018		2017		2016
Weighted-average fair value of options granted	$	18.62	$	23.20	$	18.48
Total intrinsic value of stock options exercised ($000s)	$	10,456	$	11,900	$	8,609

Table of Contents

Additional information related to stock options outstanding under all plans at December 31, 2018 is as follows:



		Options Outstanding			Options Exercisable
Range of Exercise Prices	Shares Outstanding (000s)	Weighted Average Remaining Contractual Term	Weighted Average Exercise Price		Number Exercisable (000s)	Weighted Average Exercise Price
$13.61 - $34.81	134	2.0 years	$	28.03	134	$	28.03
$38.10 - $59.95	195	5.2 years	52.51		191	52.39
$60.01 - $85.40	558	7.7 years	72.82		165	66.61
	887	6.3 years	$	61.59	490	$	50.50

Non-vested restricted stock activity for the years ended December 31, 2018, 2017 and 2016 is summarized below:



	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2017	66		$	65.66
Granted	42		77.50
Vested	(27	)	62.74
Forfeited	(2	)	74.57
Non-vested balance as of December 31, 2018	79		$	72.75



	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2016	102		$	54.18
Granted	21		83.43
Vested	(53	)	51.39
Forfeited	(4	)	55.45
Non-vested balance as of December 31, 2017	66		$	65.66



	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2015	150		$	47.46
Granted	19		61.22
Vested	(66	)	40.96
Forfeited	(1	)	56.77
Non-vested balance as of December 31, 2016	102		$	54.18

Non-vested performance share activity for the years ended December 31, 2018, 2017 and 2016 is summarized below:



	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2017	39		$	72.62
Granted	32		71.27
Vested	(15	)	58.78
Forfeited	(3	)	72.55
Non-vested balance as of December 31, 2018	53		$	75.61

Table of Contents



	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2016	34		$	61.06
Granted	16		93.85
Vested	—		—
Forfeited	(11	)	69.25
Non-vested balance as of December 31, 2017	39		$	72.62



	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested as of December 31, 2015	20		$	58.77
Granted	22		63.15
Vested	—		—
Forfeited	(8	)	60.88
Non-vested as of December 31, 2016	34		$	61.06

As of December 31, 2018, 2017 and 2016, there was $8,565, $7,742 and $8,260, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31, 2018, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.6 years. We estimate that share-based compensation expense for the year ended December 31, 2019 will be approximately $7,700.

REPURCHASE OF COMMON STOCK

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,190,772 shares have been purchased, of which 706 shares remained in treasury at December 31, 2018. No shares remained in treasury at December 31, 2017. During 2018 and 2017, a total of 16,755 and 23,182 shares, respectively, have been purchased at an average cost of $83.08 and $82.19 per share, respectively. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors. The Company also repurchases shares from employees in connection with settlement of transactions under the Company’s equity incentive plans.

NOTE 4 - INVENTORIES

Inventories at December 31, 2018 and 2017 consisted of the following:



	2018		2017
Raw materials	$	23,661	$	20,520
Work in progress	4,649		6,308
Finished goods	38,877		33,868
Total inventories	$	67,187	$	60,696

On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by analyzing demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reserved, if necessary. The reserve for inventory was $2,575 and $2,315 at December 31, 2018 and 2017, respectively.

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 2018 and 2017 are summarized as follows:



	2018		2017
Land	$	7,965	$	7,262
Building	67,702		63,224
Equipment	213,909		201,341
Construction in progress	18,170		13,860
	307,746		285,687
Less: Accumulated depreciation	113,407		95,894
Property, plant and equipment, net	$	194,339	$	189,793

Geographic Area Data - Long-Lived Assets (excluding intangible assets):



	2018		2017
North America	$	170,830	$	175,027
Europe	23,509		14,766
Total	194,339		189,793

Depreciation expense was $18,998, $17,121 and $15,907 for the years ended December 31, 2018, 2017 and 2016, respectively.

For the year ended December 31, 2018, the Company recorded certain immaterial impairment charges in connection with the IFP integration.

NOTE 6 - INTANGIBLE ASSETS

The Company had goodwill in the amount of $447,995 and $441,361 as of December 31, 2018 and 2017 subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.”

As of December 31, 2018 and 2017, the Company had identifiable intangible assets as follows:



	Amortization Period (In years)	2018 Gross Carrying Amount		2018 Accumulated Amortization		2017 Gross Carrying Amount		2017 Accumulated Amortization
Customer relationships & lists	10	$	192,185	$	122,545	$	190,061	$	105,573
Trademarks & trade names	5-17	39,934		16,755		40,630		12,895
Developed technology	5	13,338		8,604		13,338		5,936
Other	3-18	14,913		6,481		13,466		5,018
		$	260,370	$	154,385	$	257,495	$	129,422

Amortization of identifiable intangible assets was $24,988, $26,784 and $29,768 for 2018, 2017 and 2016, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is approximately $22,928 in 2019, $20,870 in 2020, $17,639 in 2021, $16,156 in 2022, and $14,861 in 2023. At December 31, 2018 and 2017, there were no identifiable intangible assets with indefinite useful lives as defined by ASC 350, “Intangibles-Goodwill and Other.” Identifiable intangible assets are reflected in the Company’s consolidated balance sheets under Intangible assets with finite lives, net. There were no changes to the useful lives of intangible assets subject to amortization in 2018 and 2017. For the year ended December 31, 2018, the Company recorded certain immaterial impairment charges in connection with the IFP integration.

The Federal Insecticide, Fungicide and Rodenticide Act, (“FIFRA”), a health and safety statute, requires that certain products within our specialty products segment must be registered with the U.S. Environmental Protection Agency ("EPA") because they are considered pesticides. Costs of such registrations are included as other in the table above.

Table of Contents

NOTE 7 – EQUITY-METHOD INVESTMENT

In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture (66.66% / 33.34% ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel aqueous choline chloride plant. The Company contributed the St. Gabriel plant, at cost, and expansion will be funded by the owners. The joint venture became operational as of July 1, 2016. St. Gabriel CC Company, LLC is a Variable Interest Entity (VIE) because the total equity at risk is not sufficient to permit the joint venture to finance its own activities without additional subordinated financial support. Additionally, voting rights (2 votes each) are not proportionate to the owners’ obligation to absorb expected losses or receive the expected residual returns of the joint venture. The Company will receive up to 2/3 of the production offtake capacity and absorbs operating expenses approximately proportional to the actual percentage of offtake. The joint venture is accounted for under the equity method of accounting since the Company is not the primary beneficiary, because it does not have the power to direct the activities of the joint venture that most significantly impact its economic performance. The Company recognized a loss of $569, $546, and $293 for the years ended December 31, 2018, 2017, and 2016, respectively, relating to its portion of the joint venture’s expenses in other expense. The carrying value of the joint venture at December 31, 2018 and 2017 is $4,902 and $4,804, respectively, and is recorded in other assets.

NOTE 8 – REVOLVING LOAN

On June 27, 2018, the Company and a bank syndicate entered into a five-year senior secured revolving credit agreement (“Credit Agreement”), which replaced the existing credit facility that had provided for a senior secured term loan A of $350,000 and a revolving loan of $100,000. The Credit Agreement, which expires on June 27, 2023, provides for revolving loans up to $500,000 (collectively referred to as the “loans”). The loans may be used for working capital, letters of credit, and other corporate purposes and may be drawn upon at the Company’s discretion. The initial proceeds from the Credit Agreement were used to repay the outstanding balance of $210,750 on its senior secured term loan A, which was due May 2019. There are no installment payments required on the revolving loans; they may be voluntarily prepaid in whole or in part without premium or penalty, and all outstanding amounts are due on the maturity date. As of December 31, 2018, the balance outstanding amounted to $156,000.

Amounts outstanding under the Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the Credit Agreement, and the interest rate was 3.647% at December 31, 2018. The Company is also required to pay a commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as defined in the Credit Agreement and ranges from 0.15% to 0.275% (0.175% at December 31, 2018). The unused portion of the revolving loan amounted to $344,000 at December 31, 2018. The Company is also required to pay, as applicable, letter of credit fees, administrative agent fees, and other fees to the arrangers and lenders.

Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the Credit Agreement. Costs associated with the issuance of the extinguished debt instrument were capitalized and amortized over the term of the respective financing arrangement using the effective interest method. Capitalized costs net of accumulated amortization totaled $1,268 at December 31, 2018 and are included in other assets on the balance sheet. Capitalized costs net of accumulated amortization totaled $536 at December 31, 2017 and are recorded as a reduction of long-term debt on the balance sheet. Amortization expense pertaining to these costs totaled $680, $474, and $526 for the years ended December 31, 2018, 2017 and 2016, respectively, and is included in interest expense in the accompanying condensed consolidated statements of earnings. In 2018, such interest expense included the write off $363 of deferred financing costs in connection with the extinguished debt in the second quarter of 2018.

The Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At December 31, 2018, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the Company.

Table of Contents

NOTE 9 - NET EARNINGS PER COMMON SHARE

The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per common share:



2018	Earnings (Numerator)		Number of Shares (Denominator)	Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	78,573	32,093,037	$	2.45

Effect of dilutive securities – stock options, restricted stock, and performance shares			351,858

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares	$	78,573	32,444,895	$	2.42



2017	Earnings (Numerator)		Number of Shares (Denominator)	Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	90,071	31,838,641	$	2.83

Effect of dilutive securities – stock options, restricted stock, and performance shares			391,165

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares	$	90,071	32,229,806	$	2.79



2016	Earnings (Numerator)		Number of Shares (Denominator)	Per Share Amount
Basic EPS – Net earnings and weighted average common shares outstanding	$	55,972	31,521,667	$	1.78

Effect of dilutive securities – stock options, restricted stock, and performance shares			400,971

Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares	$	55,972	31,922,638	$	1.75

The Company had 188,470, 199,010, and 2,500 stock options outstanding at December 31, 2018, 2017 and 2016, respectively that could potentially dilute basic earnings per share in future periods that were not included in diluted earnings per share because their effect on the period presented was anti-dilutive.

The Company has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted shares and they participate on a one-for-one basis with holders of Common Stock. These awards have an immaterial impact as participating securities with regard to the calculation using the two-class method for determining earnings per share.

NOTE 10 - INCOME TAXES

The Company’s effective tax rate for 2018 and 2017 was 20.7% and (1.8)% respectively. The 2017 effective tax rate was significantly affected by recording the impact of the Tax Cuts and Jobs Act (the “U.S. Tax Reform” or "TCJA"), enacted on December 22, 2017.

Table of Contents

territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. In addition, the Internal Revenue Service (“IRS”) issued guidance, regulations, and interpretations of U.S. Tax Reform during 2018. This guidance impacted various sections of the tax code relating to the use of foreign tax credits. Prior to enactment of U.S. Tax Reform, foreign income taxes paid by Balchem’s foreign subsidiaries were generally available to mitigate additional U.S. tax on foreign earnings. Proposed regulations relating to foreign tax credits released in November 2018 clarified that deemed paid foreign tax credits related to Global Intangible Low-Taxed Income, or GILTI, would generally only be available to offset a portion of the foreign income taxes paid. Pending revisions or changes to the proposed regulations, foreign income taxes deemed paid are not expected to fully offset potential additional U.S. tax liability on earnings of foreign subsidiaries. Balchem accrued $4,185 of current foreign income tax expense in foreign jurisdictions in 2018. Of this amount only $1,136 is expected to be allowable under the currently proposed regulations as a foreign tax credit in the U.S. Future potential U.S. tax liability related to GILTI may not be fully offset by foreign tax credits.

In accordance with SAB 118, the U.S. Tax Reform-related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed. The provisional amounts were also affected by guidance issued subsequent to the passage of U.S. Tax Reform. This guidance included regulations and interpretations issued by the IRS, changes in accounting standards, and federal and state legislation. Although the analysis for the impact of U.S. Tax Reform under the requirements of SAB 118 are complete, the IRS has issued and will continue to issue regulations related to U.S. Tax Reform. Due to the complexity and breadth of new tax law, implementation of the regulations may have an impact on the Company’s income tax.

Per SAB 118, the following U.S. Tax Reform-related impacts were recorded in the company’s financial statements:

•

In the fourth quarter of 2017, an estimated current tax expense of $1,389 was recorded for the deemed repatriation under Section 965, net of available foreign tax credits. In August of 2018, the IRS issued proposed regulations that clarified the computation of the deemed repatriation. In the fourth quarter of 2018, the company recorded a reduction to the tax of $970 related to the regulations, adjustments to foreign tax credit calculations, and the interaction of those calculation with other aspects of the tax code. The total amount recorded for the deemed repatriation tax was $419.

•

In the fourth quarter of 2017, an estimated tax expense of $75 was recorded to reduce deferred tax assets associated with historic GAAP expensing of stock options issued to covered employees for purposes of the $1 million cap on wage deductibility under Section 162(m). The DTA was reduced to its expected realizable amount, after anticipation of the 162(m) limit in future years. This estimate was not subsequently adjusted.

•

We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of

Table of Contents

those subsidiary earnings. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

Income tax expense consists of the following:



	2018			2017			2016
Current:
Federal	$	18,296		$	20,102		$	28,765
Foreign	4,060			3,015			2,670
State	3,880			2,790			2,483
Deemed Repatriation	(970		)	1,389			—
Deferred:
Federal	(3,788		)	(1,302		)	(7,114		)
Foreign	(69		)	62			52
State	(952		)	(384		)	106
Federal Rate Change	—			(27,255		)	—
Total income tax provision	$	20,457		$	(1,583	)	$	26,962

The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to earnings before income tax expense due to the following:



	2018			2017			2016
Income tax at Federal statutory rate	$	20,796		$	30,971		29,027
State income taxes, net of Federal income taxes	2,742			708			1,510
Federal Rate Change	—			(27,255		)	—
Stock Options	(1,293		)	(2,927		)	—
GILTI & FDII	1,027			—			—
Deemed Repatriation	(970		)	1,389			—
Foreign Tax Credits	(1,136		)	—			—
Domestic production activities deduction	—			(2,382		)	(3,299	)
Other	(709		)	(2,087		)	(276	)
Total income tax provision	$	20,457		$	(1,583	)	26,962

Table of Contents

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 were as follows:



	2018		2017
Deferred tax assets:
Inventories	$	1,260	$	1,297
Restricted stock and stock options	3,567		3,248
Other	2,885		1,764
Total deferred tax assets	7,712		6,309
Deferred tax liabilities:
Amortization	$	27,080	$	31,311
Depreciation	23,837		22,172
Other	1,104		1,374
Total deferred tax liabilities	52,021		54,857

Net deferred tax liability	$	44,309	$	48,548

There is no valuation allowance for deferred tax assets at December 31, 2018 and 2017. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of deferred tax asset realizable, however, could change if management’s estimate of future taxable income should change.

Provisions of ASC 740-10 clarify whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is included in other long-term obligations on the Company’s consolidated balance sheets, is as follows:



	2018			2017			2016
Balance at beginning of period	$	4,781		$	6,637		$	6,570
Increases for tax positions of prior years	1,366			393			332
Decreases for tax positions of prior years	(1,185		)	(2,711		)	(406		)
Increases for tax positions related to current year	747			462			141
Balance at end of period	$	5,709		$	4,781		$	6,637

All of the Company’s unrecognized tax benefits, if recognized in future periods, would impact the Company’s effective tax rate in such future periods.

The Company recognizes both interest and penalties as part of the income tax provision. During the years ended December 31, 2018, 2017 and 2016, the Company recognized approximately $207, $94 and $94 in interest and penalties, respectively. As of December 31, 2018 and 2017, accrued interest and penalties were $1,839 and $1,882, respectively.

The Company files income tax returns in the U.S. and in various states and foreign countries. In the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2014. The Company does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.

Table of Contents

NOTE 11 - SEGMENT INFORMATION

Human Nutrition & Health

The Company's Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customer perceptions of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation. This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. The Company partners with our customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company's expertise in trends analysis and product development, combined with manufacturing capabilities in customized spray dried and emulsified powders, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates makes the Company a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. The Company also creates cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients.

Animal Nutrition & Health

The Company’s Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, the Company’s microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity.

Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.

Specialty Products

Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. The Company’s 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the EPA and the DOT. The Company’s inventory of these specially built drums, along with its two filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.

Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. The Company distributes its propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Its inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization

Table of Contents

in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.

The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. The Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.

Industrial Products

Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. The Company’s products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade choline bicarbonate is completely chloride free and the Company's choline chloride reduces the amount of chlorides released into the environment up to 75% when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at its Italian operation and sold for a wide range of industrial applications in Europe.

Business Segment Assets:



	2018		2017
Human Nutrition & Health	$	702,692	$	719,010
Animal Nutrition & Health	136,810		118,418
Specialty Products	59,558		63,141
Industrial Products	22,822		18,471
Other Unallocated	59,473		44,596
Total	$	981,355	$	963,636

Other unallocated assets consist of certain cash, receivables, prepaid expenses, equipment and leasehold improvements, net of accumulated depreciation, and deferred income taxes, which the Company does not allocate to its individual business segments.

Business Segment Net Sales:



	2018		2017		2016
Human Nutrition & Health	$	341,237	$	315,796	$	297,134
Animal Nutrition & Health	175,693		157,688		161,119
Specialty Products	75,808		73,355		70,126
Industrial Products	50,941		47,951		24,825
Total	$	643,679	$	594,790	$	553,204

Business Segment Earnings Before Income Taxes:



	2018			2017			2016
Human Nutrition & Health	$	48,490		$	44,010		$	38,156
Animal Nutrition & Health	26,673			22,292			28,686
Specialty Products	25,361			24,949			22,862
Industrial Products	9,013			6,413			1,949
Transaction and integration costs	(1,786		)	(2,496		)	(815		)
Indemnification settlement	—			2,087			—
Interest and other income, net	(8,721		)	(8,767		)	(7,904		)
Total	$	99,030		$	88,488		$	82,934

Table of Contents

Transaction and integration costs were primarily related to the aforementioned definitive agreement (see Note 2), one immaterial acquisition completed in each of 2018 and 2017, and the acquisition of Albion International, Inc. in 2016.

Depreciation/Amortization:



	2018		2017		2016
Human Nutrition & Health	$	33,594	$	33,384	$	33,796
Animal Nutrition & Health	5,606		5,618		7,243
Specialty Products	4,092		4,097		3,787
Industrial Products	694		806		850
Total	$	43,986	$	43,905	$	45,676

Capital Expenditures:



	2018		2017		2016
Human Nutrition & Health	$	8,881	$	20,580	$	14,470
Animal Nutrition & Health	6,021		4,424		6,577
Specialty Products	2,356		1,306		1,286
Industrial Products	1,912		1,216		701
Total	$	19,170	$	27,526	$	23,034

NOTE 12 - REVENUE

Revenue Recognition

Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration we expect to realize in exchange for those goods.

The following table presents revenues disaggregated by revenue source (in thousands). Sales and usage-based taxes are excluded from revenues.



	2018		2017		2016
Product Sales	$	590,790	$	542,065	$	505,174
Co-manufacturing	41,348		41,658		39,396
Bill and Hold	4,612		4,094		3,061
Consignment	2,442		2,333		2,170
Product Sales Revenue	639,192		590,150		549,801

Royalty Revenue	4,487		4,640		3,403

Total	$	643,679	$	594,790	$	553,204

The following table presents revenues disaggregated by geography, based on the billing addresses of customers (in thousands):



	2018		2017		2016
United States	$	482,691	$	460,599	$	420,821
Foreign Countries	160,988		134,191		132,383
Total	$	643,679	$	594,790	$	553,204

Product Sales Revenues

The Company’s primary operation is the manufacturing and sale of health and wellness ingredient products, in which the Company receives an order from a customer and fulfills that order. The Company’s product sales have four sub-streams of revenue: product sales, co-manufacturing, bill and hold, and consignment.

Table of Contents

Under the co-manufacturing agreements, the Company is responsible for the manufacture of a finished good where the customer provides some or all of the raw materials. The Company controls the manufacturing process and the ultimate end-product before it is shipped to the customer. Based on these factors, the Company has determined that it is the principal in these agreements and therefore revenue is recognized in the gross amount of consideration the Company expects to be entitled for the goods provided.

Royalty Revenues

Royalty revenue consists of agreements with customers to use the Company’s intellectual property in exchange for a sales-based royalty. Royalty revenue is recorded as part of the Human Nutrition & Health segment.

Contract Liabilities

The Company records contract liabilities when cash payments are received or due in advance of performance, including amounts which are refundable.

The Company’s payment terms vary by the type and location of customers and the products offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products are delivered to the customer.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for products shipped.

NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the year for:



	2018		2017		2016
Income taxes	$	20,593	$	25,845	$	30,741
Interest	$	6,940	$	7,021	$	6,669

Non-cash financing activities:



	2018		2017		2016
Dividends payable	$	15,220	$	13,484	$	12,088

Table of Contents

NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in accumulated other comprehensive income (loss) were as follows:



	Years Ended December 31,
	2018			2017			2016
Net foreign currency translation adjustment	$	(2,982	)	$	5,404		$	(1,390	)

Net change in postretirement benefit plan (see Note 15 for further information)
Initial adoption of new plan	—			—			(444		)
Net gain/(loss) arising during the period	522			(49		)	101
Amortization of prior service credit/(cost)	74			74			57
Amortization of (gain)/loss	(8		)	(15		)	(10		)
Total before tax	588			10			(296		)
Tax	434			(207		)	(49		)
Net of tax	1,022			(197		)	(345		)

Total other comprehensive income (loss)	$	(1,960	)	$	5,207		$	(1,735	)

Accumulated other comprehensive income/(loss) at December 31, 2018 consisted of the following:



	Foreign currency translation adjustment			Postretirement benefit plan			Total
Balance December 31, 2017	$	(1,303	)	$	(339	)	$	(1,642	)
Other comprehensive (loss)/gain	(2,982		)	1,022			(1,960		)
Balance December 31, 2018	$	(4,285	)	$	683		$	(3,602	)

NOTE 15 - EMPLOYEE BENEFIT PLANS

During 2017, the Company sponsored two 401(k) savings plans for eligible employees. The plans allow participants to make pretax contributions and the Company matches certain percentages of those pretax contributions. The plans have a discretionary profit sharing portion and one of the plans matches 401(k) contributions with shares of the Company’s Common Stock. All amounts contributed to the plans are deposited into a trust fund administered by independent trustees. These plans were merged in January 2018. The merged plan allows participants to make pretax contributions and the Company matches certain percentages of those contributions which is made with shares of the Company’s stock. Additionally, this plan has a discretionary profit sharing portion. The Company provided for profit sharing contributions and matching 401(k) savings plan contributions of $825 and $3,153 in 2018, $395 and $2,594 in 2017, and $712 and $2,248 in 2016, respectively.

On June 1, 2018, the Company established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as of December 31, 2018 was $265 and is included in Other long-term obligations on the Company's balance sheet.

The Company also provides postretirement benefits in the form of an unfunded retirement medical plan under a collective bargaining agreement covering eligible retired employees of the Verona facility. The Company uses a December 31 measurement date for its postretirement medical plan. In accordance with ASC 715, “Compensation—Retirement Benefits,” the Company is required to recognize the over funded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, during 2016 the Company adopted an unfunded postretirement medical plan for Named Executive Officers.

Table of Contents

The actuarial recorded liabilities for such unfunded postretirement benefits are as follows:

Change in benefit obligation:



	2018			2017
Benefit obligation at beginning of year	$	1,573		$	1,411
Initial adoption of new plan	—			—
Service cost with interest to end of year	78			67
Interest cost	44			46
Participant contributions	40			28
Benefits paid	(136		)	(58		)
Actuarial (gain)/loss	(425		)	79
Benefit obligation at end of year	$	1,174		$	1,573

Change in plan assets:



	2018			2017
Fair value of plan assets at beginning of year	$	—		$	—
Employer (reimbursement)/contributions	96			30
Participant contributions	40			28
Benefits paid	(136		)	(58		)
Fair value of plan assets at end of year	$	—		$	—

Amounts recognized in consolidated balance sheet:



	2018			2017
Accumulated postretirement benefit obligation	$	(1,174	)	$	(1,573	)
Fair value of plan assets	—			—
Funded status	(1,174		)	(1,573		)
Unrecognized prior service cost	N/A			N/A
Unrecognized net (gain)/loss	N/A			N/A
Net amount recognized in consolidated balance sheet (after ASC 715) (included in other long-term obligations)	$	1,174		$	1,573
Accrued postretirement benefit cost (included in other long-term obligations)	N/A			N/A

Components of net periodic benefit cost:



	2018			2017			2016
Service cost with interest to end of year	$	78		$	67		$	66
Interest cost	44			46			48
Amortization of prior service credit/(cost)	74			74			57
Amortization of (gain)/loss	(8		)	(15		)	(10		)
Total net periodic benefit cost	$	188		$	172		$	161

Estimated future employer contributions and benefit payments are as follows:

Table of Contents



Year
2019	$	127
2020	89
2021	73
2022	90
2023	88
Years 2024-2028	497

Assumed health care cost trend rates have been used in the valuation of postretirement health insurance benefits. The trend rate is 6.26% in 2019 declining to 4.50% in 2038 and thereafter. A one percentage point increase in health care cost trend rates in each year would increase the accumulated postretirement benefit obligation as of December 31, 2018 by $100 and the net periodic postretirement benefit cost for 2018 by $19. A one percentage point decrease in health care cost trend rates in each year would decrease the accumulated postretirement benefit obligation as of December 31, 2018 by $86 and the net periodic postretirement benefit cost for 2018 by $16. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 3.50% in 2018 and 2.90% in 2017.

The Company contributes to one multiemployer defined benefit plan under the terms of a collective-bargaining agreement covering its union-represented employees of the Verona facility. The risks of participation in this multiemployer plan are different from single-employer plans in the following aspects: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (c) if the Company chooses to stop participating in its multiemployer plan, the Company will be required to pay that plan an amount based on the underfunded status of the plan, referred to as the withdrawal liability.

The Company’s participation in this plan for the annual period ended December 31, 2018 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN). The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. Finally, the period-to-period comparability of the contributions for 2018 and 2017 was affected by a 4.0% increase in the 2018 contribution rate. There have been no other significant changes that affect the comparability of 2018 and 2017 contributions. The Company does not represent more than 5% of the contributions to this pension fund.

Pension
Fund

EIN/Pension
Plan
Number

Pension Plan Protection Act Zone Status

FIP/RP Status

Pending/ Implemented

Contributions of Balchem Corporation

Surcharge
Imposed

Expiration Date of Collective-
Bargaining
Agreement

2018

2017

2018

2017

2016

Central States,

Southeast and

Southwest Areas

Pension Fund

36-6044243

Red as of 1/1/18

Red as of 1/1/17

Implemented

$614

$594

$576

7/11/2020

NOTE 16 - COMMITMENTS AND CONTINGENCIES

In 2018, the Company entered into a two (2) year lease extension for approximately 20,000 square feet of office space, which serves as the Company’s corporate headquarters and as a laboratory facility. During 2018, the Company also entered into a two year and three month lease for 7,952 square feet of additional office space, which serves as an expansion of the corporate headquarters. The Company leases various other office, warehousing, and production space under non-cancelable operating leases, which expire at various times through 2031. The Company also leases most of its vehicles and office equipment under non-cancelable operating leases, which expire at various times through 2025. Rent expense charged to operations under such lease agreements for 2018, 2017 and 2016 aggregated approximately $3,917, $3,417 and $3,134, respectively.

Aggregate future minimum rental payments required under non-cancelable operating leases at December 31, 2018 are as follows:



Year
2019	$	3,445
2020	2,911
2021	2,002
2022	1,401
2023	1,182
Thereafter	5,687
Total minimum lease payments	$	16,628

The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on portions of the site. Remediation was conducted by the prior owner under the oversight of the EPA and the Missouri Department of Natural Resources (“MDNR”). While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for potential liabilities associated with the Superfund site.

From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity.

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2018 and December 31, 2017 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximate fair value due to the short-term maturity of these instruments. Cash and cash equivalents at December 31, 2018 and 2017 includes $793 and $782 in money market funds. The money market funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.”

NOTE 18 – RELATED PARTY TRANSACTIONS

The Company provides services on a contractual agreement to St. Gabriel CC Company, LLC. These services include accounting, information technology, quality control, and purchasing services, as well as operation of the St. Gabriel CC Company, LLC plant. The Company also sells raw materials to St. Gabriel CC Company, LLC. These raw materials are used in the production of finished goods that are, in turn, sold by Saint Gabriel CC Company, LLC to the Company for resale to unrelated parties. As such, the sale of these raw materials to St. Gabriel CC Company, LLC in this scenario lacks economic substance and therefore the Company does not include them in net sales within the consolidated statement of earnings.

The services the Company provided amounted to $3,694 and $3,445, respectively, for the years ended December 31, 2018 and 2017. The raw materials sold amounted to $31,107 and $23,459, respectively, for the years ended December 31, 2018 and 2017. These services and raw materials are primarily recorded in cost of goods sold net of the finished goods received from St. Gabriel CC Company, LLC of $22,540 and $20,827, respectively for the years ended December 31, 2018 and 2017. At December 31, 2018 and 2017, the Company had receivables of $3,210 and $6,190, respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold and payables of $1,943 and $4,112, respectively, for finished goods received recorded in accrued expenses. In addition, the Company had payables in the amount of $314 and $363 related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accrued expenses as of December 31, 2018 and 2017, respectively.

Table of Contents

NOTE 19 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(In thousands, except per share data)



	2018								2017
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net sales	$	161,410	$	163,687	$	155,043	$	163,539	$	137,728	$	147,082	$	150,716	$	159,264
Gross profit	51,459		53,466		48,002		51,325		44,429		46,761		46,181		51,638
Earnings before income taxes	25,177		25,061		23,529		25,263		20,710		22,560		20,697		24,522
Net earnings	19,346		19,679		19,214		20,334		15,518		16,536		16,043		41,975
Basic net earnings per common share	$	.60	$	.61	$	.60	$	.63	$	.49	$	.52	$	.50	$	1.31
Diluted net earnings per common share	$	.60	$	.61	$	.59	$	.63	$	.48	$	.51	$	.50	$	1.30

Table of Contents

BALCHEM CORPORATION

Valuation and Qualifying Accounts

Years Ended December 31, 2018, 2017 and 2016

(In thousands)



Description	Balance at Beginning of Year		Additions Charged (Credited) to Costs and Expenses		Adjustments/Deductions				Balance at End of Year
Year ended December 31, 2018
Allowance for doubtful accounts	$	431	$	43	$	136		^(a)	$	610
Inventory reserve	2,315		898		(638		)	^(a)	2,575

Year ended December 31, 2017
Allowance for doubtful accounts	$	489	$	126	$	(184	)	^(a)	$	431
Inventory reserve	2,546		538		(769		)	^(a)	2,315

Year ended December 31, 2016
Allowance for doubtful accounts	$	235	$	417	$	(163	)	^(a)	$	489
Inventory reserve	1,823		905		(182		)	^(a)	2,546


^(a)	represents write-offs and other adjustments

Table of Contents


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, 2018. 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.

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management does not expect that our disclosure controls and procedures or its internal control over financial reporting will prevent or detect all errors and all fraud.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Balchem Italia Srl completed an acquisition of Bioscreen Technologies Srl during 2018. Management’s assessment of and conclusion on the effectiveness of our internal control over financial reporting excludes the internal controls over financial reporting of Bioscreen

Table of Contents

Technologies Srl ("Bioscreen"). The acquisition contributed approximately 0.2% of our net sales for the year ended December 31, 2018, and accounted for approximately 2.0% of our assets as of December 31, 2018. Registrants are permitted to exclude acquisitions from their assessment of internal controls over financial reporting during the first year if, among other circumstances and factors, there is not adequate time between the consummation date of the acquisition and the assessment date for assessing internal controls. Management is in the process of implementing internal control procedures in Bioscreen.

As of December 31, 2018, 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, 2018.

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.

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

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, companies are required, among other things, to disclose certain activities, transactions or dealings with the Government of Iran or entities controlled directly or indirectly by the Government of Iran. Disclosure is generally required even where such activities, transactions or dealings are de minimis. During the year ending December 31, 2017, we sold, in a single sales transaction, 765 twenty-five kilogram bags of ReaShure® encapsulated choline, at a sales price of $82,238 to Imex Gulf, Inc., a privately held U.S. corporation headquartered in Plano, Texas. Imex Gulf, Inc. exported this product to Pishgaman Taghzieh DTI Co.in Tehran, Iran, for subsequent sale and distribution in Iran. We conducted this product sale in compliance with applicable laws. The sale of ReaShure®, an animal feed ingredient, is permissible pursuant to certain statutory and regulatory exemptions from U.S. sanctions applicable to food products.

Table of Contents

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 2019 Annual Meeting of Stockholders (the “2019 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 2019 Proxy Statement under the captions "Nominees for Election as Director" (as to Theodore L. Harris, the Company's President and Chief Executive Officer) and "Executive Officers" (as to the Company's other executive officers), which information is hereby incorporated herein by reference.


(a)	Section 16(a) Beneficial Ownership Reporting Compliance.

The required information is to be set forth in the 2019 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 2019 Proxy Statement under the caption “Code 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 2019 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 2019 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 2019 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 set forth in the 2019 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 set forth in the 2019 Proxy Statement under the caption “Proposal No. 2 - Ratification of Appointment of Independent Registered Public Accounting Firm,” which information is hereby incorporated herein by reference.

Table of Contents

PART IV

Item 15. Exhibits and Financial Statement Schedules.

The following documents are filed as part of this Form 10-K:



1.	Financial Statements	Page Number

	Report of Independent Registered Public Accounting Firm	25

	Consolidated Balance Sheets as of December 31, 2018 and 2017	27

	Consolidated Statements of Earnings for the years ended December 31, 2018, 2017 and 2016	28

	Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016	29

	Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018, 2017 and 2016	30

	Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016	31

	Notes to Consolidated Financial Statements	32

2.	Financial Statement Schedules

	Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016	58

3.	Exhibits

3.1	Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 16, 2006 for the year ended December 31, 2005).

3.2	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).

3.3	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).

3.4	By-laws of the Company, as amended and restated as of February 21, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated February 22, 2017), as amended by the amendment thereto effective December 13, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated December 19, 2017).

10.1	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).*

10.2	Form of Restricted Stock Grant Agreement and Stock Option Agreement (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2011 10-K”)).

Table of Contents



10.3		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).*

10.4		Employment Agreement, dated as of April 22, 2016, between the Company and Theodore L. Harris (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the For the Quarterly Period Ended June 30, 2016).*

10.5		Stock Purchase Agreement, dated as of February 1, 2016, among Albion International, Inc., a Nevada Corporation, and certain equity owners thereof, (incorporated by reference to the Company’s Current Report on Form 8-K dated February 4, 2016). (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the Stock Purchase Agreement have been omitted and the Company agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request).

10.6		Stock Purchase Agreement, dated as of March 31, 2014, among Performance Chemicals & Ingredients Company (d/b/a SensoryEffects), a Delaware corporation, certain equity owners thereof, the Company and, solely for the limited purposes described therein, Highlander Partners, L.P. (incorporated by reference to the Company’s Current Report on Form 8-K dated April 1, 2014). (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the Stock Purchase Agreement have been omitted and the Company agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request).

10.7		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).

10.8		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).

10.9		2017 Omnibus Incentive Plan of the Company (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).

10.10		Forms of Restricted Stock Grant Agreement, Performance Share Unit Grant Agreement and Stock Option Agreement.

10.11		Offer Letter, dated as of January 10, 2019, between the Company and Martin Bengtsson (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 4, 2019).

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		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.

32.2		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

Table of Contents



101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

* Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date: February 28, 2019	BALCHEM CORPORATION
	By:/s/ Theodore L. Harris
	Theodore L. Harris, President and
	Chief Executive Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/ Theodore L. Harris
Theodore L. Harris, President and
Chief Executive Officer (Chairman)
Date: February 28, 2019

/s/ Martin Bengtsson
Martin Bengtsson, Chief Financial Officer
and Treasurer (Principal Financial Officer)
Date: February 28, 2019

/s/ William A. Backus
William A. Backus, Chief Accounting Officer
(Principal Accounting Officer)
Date: February 28, 2019

/s/ Paul D. Coombs
Paul D. Coombs, Director
Date: February 28, 2019

/s/ David B. Fischer
David B. Fischer, Director
Date: February 28, 2019

/s/ Daniel E. Knutson
Daniel E. Knutson, Director
Date: February 28, 2019

/s/ Perry W. Premdas
Perry W. Premdas, Director
Date: February 28, 2019

/s/ Dr. John Televantos
Dr. John Televantos, Director
Date: February 28, 2019

/s/ Matthew Wineinger
Matthew Wineinger, Director
Date: February 28, 2019

Exhibit 10.10

FINAL FORMS OF AGREEMENT

BALCHEM CORPORATION

EMPLOYEES RESTRICTED STOCK GRANT AGREEMENT

2017 Omnibus Incentive Plan

RESTRICTED STOCK GRANT AGREEMENT made as of this __th day of __________, _____, between Balchem Corporation, Inc., a Maryland corporation (the “Company”) and ________________ (“Grantee”).

1. Grant of Restricted Stock. Pursuant to the Company’s 2017 Omnibus Incentive Plan (the “Plan”), the Company hereby grants to Grantee _______________ (______) shares of the common stock par value six and two-thirds cents ($0.06 2/3) per share of the Company (the “Restricted Shares”), on the terms and subject to the conditions and restrictions and other provisions set forth in this Agreement and in the Plan. Any capitalized terms used in this Agreement and not defined shall have the meanings set forth in the Plan. This grant of Restricted Shares is subject to Grantee’s execution and delivery to the Company of a copy of this Agreement. Grantee is not required to pay any purchase price for the Restricted Shares.

2. Vesting of Restricted Shares. Unless they vest on an earlier date as provided in Section 4 hereof, the Restricted Shares will vest on ___________, which is three (3) years from the date first set forth above, provided that Grantee has remained in continuous employment with the Company and/or any member of the Group through such vesting date.

3. Restrictions on the Restricted Shares. Until the Restricted Shares have vested, Grantee may not sell, transfer, assign, pledge, or otherwise encumber them except as permitted in Section 6 hereof. Stock certificates representing the Restricted Shares will be registered in Grantee’s name (or Grantee will be recorded as the owner of the shares on the Company’s books) as of the date of this Agreement, but such certificates will be held by the Company on Grantee’s behalf until such shares vest. When all or a portion of the Restricted Shares vest, a certificate representing such shares (minus any shares retained to satisfy tax withholding obligations, as described in Section 10 hereof) will be delivered to Grantee (or the vesting of such shares will be duly recorded on the Company’s books) as soon as practicable. To the extent the Restricted Shares have vested, they shall be fully transferable (subject to applicable securities law requirements) and not subject to forfeiture upon termination of employment or otherwise. Except in circumstances where a different treatment is provided in Section 4 hereof, in the event of a termination of Grantee’s employment with the Company and the other members of the Group for any reason, all of the Restricted Shares that have not previously vested will be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. At the request of the Company, Grantee shall execute and deliver to the Company a stock power, endorsed in blank, relating to the Restricted Shares.

4. Acceleration of Vesting. Notwithstanding the vesting date set forth in Section 2 hereof, the following vesting rules shall apply upon the following events.

(a) Death. In the event of Grantee’s death while employed by the Company or a member of the Group, all Restricted Shares shall immediately vest.

(b) Disability. In the event of Grantee’s Disability (as such term is defined below) while employed by the Company or a member of the Group, the number of Restricted Shares that shall vest upon such Disability shall be the number of whole shares equal to the product of (A) 1/48 of the total number of Restricted Shares subject to this Grant and (B) the number of full months of Grantee’s continuous employment with the Company and/or the other members of the Group from the date of this Agreement to the date of Grantee’s Disability; and all Restricted Shares not so vested shall be immediately forfeited. For the purposes of this Agreement, the term “Disability” shall mean “permanent and total disability” as defined in Section 22(e)(3) of the Code or successor statute.

(c) Change in Control. The treatment of the Restricted Shares in the event of a Change in Control (as defined in the Plan), shall be governed by the terms of the Plan.

(d) Committee Discretion. The Committee shall have absolute discretion to determine the date and circumstances of Grantee’s termination of employment or of the occurrence of Disability or a Change in Control, and its determination shall be final, conclusive and binding. The Committee, in its sole discretion, may accelerate the vesting of Restricted Shares, in whole or in part, based on service, performance, and/or such other factors or criteria as the Committee may determine, subject to the minimum vesting restrictions set forth in the Plan.

5. Voting and Dividends. Grantee shall have the right to vote the Restricted Shares and to receive dividends with respect to the Restricted Shares equal to the dividends paid on the Company’s Stock. If any dividend is declared and paid in cash, such cash dividend will be accrued without interest until, and will be paid within thirty (30) days following the date that, the restrictions applicable to such Restricted Shares lapse, or will be forfeited at such time as such Restricted Shares are forfeited. If any dividend is declared and paid by the Company in a form other than cash, such non-cash dividend shall be subject to the same vesting schedule, forfeiture terms and other restrictions as are applicable to the Restricted Shares with respect to which the dividends were paid. Any dividends received or accrued by Grantee applicable to the Restricted Shares granted hereunder shall be forfeited and, if applicable, returned to the Company in the event the Restricted Shares do not vest in accordance with Section 2 above.

6. Permitted Transfers. The following transactions shall be exempt from the restrictions on transfer set forth in Section 3 hereof:

(i) Grantee’s transfer of any or all of the Restricted Shares either during his/her lifetime or on death by will or intestacy to his/her immediate family or to a trust the beneficiaries of which are exclusively one or more of Grantee and a member or members of Grantee’s immediate family, except any such transfers made pursuant to any divorce or separation proceedings or settlement (for purposes hereof, the term “immediate family” shall mean spouse, lineal descendant, father, mother, brother or sister of Grantee making the transfer); or

(ii) a transfer of Restricted Shares to the guardian or conservator of Grantee; provided, however, that in any such case, the transferee or other recipient shall receive and hold such Restricted Shares subject to the provisions of this Agreement and there shall be no further transfer of such Restricted Shares except in accordance with this Agreement.

No transfer pursuant to this Section 6 shall be effective, and the Company shall not be required to recognize any transferee of Restricted Shares hereunder as a stockholder of the Company, unless and until the transferee agrees in writing to be bound by the provisions of this Agreement.

7. Restrictive Legend. At the discretion of the Company, all certificates (electronic or otherwise) representing Restricted Shares owned by Grantee shall have affixed thereto a legend in substantially the following form, in addition to any other legends that may be required under federal or state securities laws or under any applicable shareholders agreement:

THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE AND RESTRICTIONS ON TRANSFER AS SET FORTH IN A CERTAIN RESTRICTED STOCK GRANT AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED OWNER OF THIS CERTIFICATE (OR HIS/HER PREDECESSOR IN INTEREST), AND SUCH AGREEMENT IS AVAILABLE FOR INSPECTION WITHOUT CHARGE AT THE OFFICE OF THE CORPORATION.

8. Adjustments for Stock Splits, Stock Dividends, etc. In the event of any stock split‑up, stock dividend, stock distribution or other reclassification of the stock of the Company, any and all new, substituted or additional securities to which Grantee is entitled by reason of his or her ownership of the Restricted Shares shall be automatically subject to the same vesting schedule, forfeiture terms and other restrictions in the same manner and to the same extent as the Restricted Shares.

9. Section 83(b) Election. Grantee understands that under Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), unless Grantee files an election under Section 83(b) of the Code, Grantee will recognize ordinary compensation income on the date the Restricted Shares are no longer subject to a substantial risk of forfeiture (which is generally the date such shares vest) in an amount equal to the fair market value of the Restricted Shares on that date. Grantee may, however, elect to recognize income with respect to some or all of the Restricted Shares as of the date of grant of such Restricted Shares in an amount equal to the fair market value of the Restricted Shares on that date (without any discount for the transfer and forfeiture restrictions on the Restricted Shares). In order to make this election, Grantee must file an election under Section 83(b) of the Code with the Internal Revenue Service no later than 30 days after the date of grant of the Restricted Shares. Grantee also understands that if he or she makes a Section 83(b) election and subsequently forfeits some or all of the Restricted Shares that were subject to the election, he or she will not be able to claim a deduction or capital loss with respect to the forfeited shares. Grantee also understands that cash dividends accrued on the Restricted Shares (prior to vesting) will be taxable as ordinary compensation income when received if Grantee did not make a Section 83(b) election, and will be taxable as dividend income if Grantee made a Section 83(b) election; and that non-cash dividends on the Restricted Shares generally will be taxable as ordinary compensation income at the same time as the Restricted Shares to which such dividends relate if Grantee did not make a Section 83(b) election, or treated as dividend income when received if Grantee made a Section 83(b) election. Grantee acknowledges that it is Grantee’s sole responsibility, and not the Company’s, to file a timely election under Section 83(b) if he or she chooses to do so. Grantee is relying solely on Grantee’s advisors with respect to the decision as to whether or not to file a Section 83(b) election. Grantee also agrees to provide the Company with a copy of the Section 83(b) election if one is filed.

10. Withholding. Grantee shall be required to remit to the Company, and the Company shall have the right to deduct from any compensation payable to Grantee, the amount sufficient to satisfy any federal, state or local withholding tax liability in respect of the Restricted Shares and to take all such other action as the Committee deems necessary to satisfy all obligations for payment of such withholding taxes. To the extent permitted by the Committee, and subject to any terms and conditions imposed by the Committee, Grantee may elect to have the Company’s withholding obligation for federal, state and local taxes, including payroll taxes, with respect to the Restricted Stock satisfied (i) by having the Company withhold from the shares otherwise deliverable to Grantee shares of Stock having a value equal to the amount of such withholding obligation with respect to the Stock or (ii) by delivering to the Company shares of unrestricted Stock. Alternatively, the Committee may require that a portion of shares of Stock otherwise deliverable be withheld and applied to satisfy the statutory withholding obligation with respect to the Restricted Shares.

11. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.

12. Amendment. No provision of this Agreement shall be amended, either generally or in any particular instance, except in a writing signed by the Company and Grantee.

13. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and Grantee and their respective heirs, executors, administrators, legal representatives, and permitted transferees. No transfer of any of the Shares shall be effective unless the transferee first agrees in writing to all of the terms hereof.

14. No Rights to Employment. Nothing contained in this Agreement or the Plan shall be construed as giving Grantee any right to be retained, in any position, as an employee of or consultant or advisor to the Company.

15. Notices. All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery, delivery by Federal Express or other recognized overnight delivery service or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, return receipt requested, if to the Company at its executive offices and if to Grantee at the address shown beneath his or her signature to this Agreement, or in either case at such other address or addresses as either party shall designate to the other in accordance with this Section.

16. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.

17. Entire Agreement. This Agreement and the documents and agreements referenced herein constitute the entire agreement between the parties, and supersede all prior agreements and understandings, relating to the subject matter of this Agreement.

18. Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of New York. The Company and Grantee hereby (a) agree that any action, suit

or other proceeding arising out of or based upon this Agreement shall be brought in the courts of the State of New York or any federal court located in such state, and (b) irrevocably consent and submit to the exclusive jurisdiction of such courts for the purpose of any such action, suit or proceeding.

19. Plan. The Restricted Shares are issued pursuant to the Company’s 2017 Omnibus Incentive Plan, a copy of which has been furnished to Grantee, and are subject to such Plan in all respects. Nothing contained in this Agreement shall in any way be deemed to alter or modify the provisions of the Plan and no act of the Company or its directors, officers or employees shall be deemed to be a waiver or modification of any provision of the Plan. The provisions of the Plan shall in all respects govern this Agreement. The Committee shall have authority in its discretion, but subject to the express provisions of the Plan, to interpret the Plan and this Agreement; to prescribe, amend and rescind rules and regulations relating to the Plan and this Agreement; and to make all other determinations deemed necessary or advisable for the administration of the Plan or this Agreement. The Committee’s determination on the foregoing matters shall be conclusive.

20. Section 409A Compliance. This Agreement is intended to comply with, or be exempt from, the requirements of Section 409A of the Code and the regulations issued thereunder. To the extent of any inconsistencies with the requirements of Section 409A, this Agreement shall be interpreted and amended in order to meet such Section 409A requirements. Notwithstanding anything contained in this Agreement or in any amendments hereto to the contrary, it is the intent of the Company to have the Plan interpreted and construed to comply with, or be exempt from, any and all provisions of Section 409A including any subsequent amendments, rulings or interpretations from appropriate governmental agencies.

21. Data Privacy. Grantee expressly consents to the collection, use and transfer, in electronic or other form, of Grantee’s personal data by and among the Company, a member of the Group, and any broker or third party assisting the Company in administering the Plan or providing recordkeeping services for the Plan, for the purpose of implementing, administering and managing Grantee’s participation in the Plan. By accepting this award Grantee waives any data privacy rights he or she may have with respect to such information.

22. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to the Restricted Shares or other equity awards granted by the Company, whether under the Plan or otherwise, or any other Company securities by electronic means. By accepting this grant of Restricted Shares, whether electronically or otherwise, Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through any on-line or electronic system established and maintained by the Company or another third party designated by the Company, including but not limited to the use of electronic signatures or click-through acceptance of terms and conditions.

23. Compensation Recovery. The Restricted Shares shall be subject to the provisions of any applicable compensation recovery policy contained in the Plan or implemented by the Company, including without limitation any compensation recovery policy adopted to comply with the requirements of applicable law, to the extent set forth in such compensation recovery policy.

24. Parachute Payments.

or agreement with the Company or any of its affiliates) (collectively, the “Payments”) that would constitute a “parachute payment” within the meaning of Section 280G of the Code, shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax but only if, by reason of such reduction, the net after-tax benefit received by Grantee exceeds the net after-tax benefit that would be received by Grantee if no such reduction was made. If a reduction in payments or benefits constituting “parachute payments” is necessary under the preceding sentence, the reduction shall be made in the manner that results in the greatest economic benefit for Grantee.

(b) The “net after-tax benefit” shall mean (i) the Payments Grantee receives or is then entitled to receive from the Company that would constitute “parachute payments” within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income and employment taxes payable by Grantee with respect to the foregoing calculated at the highest marginal income tax rate for each year in which the foregoing shall be paid to Grantee (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of Excise Tax imposed with respect to the payments and benefits described in Section 25(a) above.

(c) The independent registered public accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the event described in Section 280G(b)(2)(A)(i) of the Code shall perform the foregoing calculations. If the independent registered public accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting such change in control, change of ownership or similar transaction, the Company shall appoint a nationally recognized independent registered public accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such independent registered public accounting firm required to be made hereunder.

(d) The independent registered public accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Grantee within thirty (30) calendar days after the date on which Grantee’s right to a Payment is triggered (if requested at that time by the Company or Grantee) or such other time as reasonably requested by the Company or Grantee. Any good faith determinations of the independent registered public accounting firm made hereunder shall be final, binding and conclusive upon the Company and Grantee.

25. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

BALCHEM CORPORATION

By: ________________________________

Ted Harris

Chairman, President and CEO

GRANTEE:

___________________________________

(Signature)

Print Name: ____________________________________

Address: ____________________________________________

_____________________________________________

FINAL FORMS OF AGREEMENT

BALCHEM CORPORATION

EMPLOYEES PERFORMANCE SHARE UNIT

GRANT AGREEMENT

2017 Omnibus Incentive Plan

PERFORMANCE SHARE UNIT GRANT AGREEMENT (this “Agreement”) made as of this _________ between Balchem Corporation, Inc., a Maryland corporation (the “Company”) and ________________ (“Grantee”).

1.Grant of PSUs. Pursuant to the Company’s 2017 Omnibus Incentive Plan (the “Plan”), the Company hereby grants to Grantee an award for a target number of ______ Performance Share Units (the “Target PSUs”). Each Performance Share Unit (“PSU”) represents the right to receive one share of the Company’s common stock, par value six and two-thirds cents ($0.06 2/3) per share (“Stock”), subject to the terms and conditions, restrictions and other provisions set forth in this Agreement and in the Plan. The number of PSUs that Grantee actually earns (the “Earned PSUs”) will depend on the extent to which the performance criteria for the award (as set forth in Section 3 hereof) have been satisfied during the Performance Period (as defined in Section 2 hereof), and may be more or less than the Target PRSUs based on the level of performance achieved. Any Target PSUs in excess of the Earned PSUs shall be forfeited as of the last day of the Performance Period. Any capitalized terms used in this Agreement and not defined shall have the meanings set forth in the Plan. This grant of PSUs is subject to Grantee’s execution and delivery to the Company of a copy of this Agreement. Grantee is not required to pay any purchase price for the PSUs.

2.Performance Period. The performance period for this award is January 1, 2018 through December 31, 2020 (the “Performance Period”).

3.Performance Criteria. _____________ shares of the Target PSUs are granted with respect to the Company’s EBITDA growth performance (as recorded by the Company) for the Performance Period and ____________ shares of the Target PSUs are granted with respect to the Company’s relative Total Shareholder Return (TSR) as compared to the TSR of the Russell 2000 market index for the Performance Period. For purposes of the TSR metric, stock price performance for both the Company and the Russell 2000 market index will be determined based on the 60-day average price beginning November 1, 2017 and the 60-day average price beginning November 1, 2020 (in each case taking dividends paid into account). However, if the Company’s absolute TSR is negative, the Board or the Committee may reduce or eliminate the payout with respect to the TSR metric. The number of Earned PSUs may range from 50% to 200% of the target award on each metric. A table showing the percentage of the Target PSUs that will be earned for various levels of achievement of the performance metrics is set forth as Exhibit A to this Agreement. The Committee shall have absolute discretion to determine the manner of making the calculations called for under this Section 3 and the extent to which the performance criteria set forth in this Section 3 have been attained, and its determination shall be final, conclusive and binding on Grantee. In addition, the Committee shall retain absolute discretion to reduce the number of Earned PSUs that will be treated as earned by Grantee based on such factors as the Committee may deem appropriate in its sole discretion.

4.Time-Vesting Requirement. The PSUs are subject to forfeiture until they vest. Unless they vest on an earlier date as provided in Section 5 hereof, the Earned PSUs will vest on the date that the Committee determines the number of Earned PSUs under Section 3 hereof, provided that Grantee has remained in continuous employment with the Company and/or the other members of the Group through such vesting date. Except in circumstances where a different treatment is provided in Section 5 hereof, in the event of Grantee’s termination of employment with the Company and/or the other members of the Group (whether by Grantee or by his or her employer) all of Grantee’s PSUs (whether or not Earned PSUs) which have not vested prior to such termination of employment will be forfeited.

5.Acceleration of Vesting. Notwithstanding the vesting date set forth in Section 4 hereof, the PSUs shall vest upon the following events, and shall be deemed Earned to the extent set forth below.

(a) Death or Disability. In the event of Grantee’s death or Disability (as such term is defined below) while employed by the Company or any other member of the Group, the number of PSUs that shall vest (and be deemed to have been Earned) at the end of the Performance Period shall be the number of whole PSUs equal to the product of (A) 1/36 of the total number of Earned PSUs determined by the Committee under Section 3 hereof at the end of the Performance Period and (B) the number of full months of Grantee’s continuous employment with the Company and/or the other members of the Group from the beginning of the Performance Period to the date of Grantee’s death or Disability, as the case may be. To the extent vested, such PSUs shall be settled in accordance with Section 7 hereof, and all PSUs not so vested shall be forfeited. For the purposes of this Agreement, the term “Disability” shall mean “permanent and total disability” as defined in Section 22(e)(3) of the Code or successor statute.

(b) Retirement. In the event of Grantee’s Retirement (as such term is defined below) from the Company or any other member of the Group on or following the first anniversary of the date of grant of the PSUs, the number of PSUs that shall vest (and be deemed to have been Earned) at the end of the Performance Period shall be the number of whole PSUs equal to the product of (A) 1/36 of the total number of Earned PSUs determined by the Committee under Section 3 hereof at the end of the Performance Period and (B) the number of full months of Grantee’s continuous employment with the Company and/or the other members of the Group from the beginning of the Performance Period to the date of Grantee’s Retirement. To the extent vested, such PSUs shall be settled in accordance with Section 7 hereof, and all PSUs not so vested shall be forfeited. For the avoidance of doubt, in the event of Grantee’s Retirement from the Company or any other member of the Group prior to the first anniversary of the date of grant of the PSUs, all of Grantee’s PSUs will be forfeited. For purposes of this Agreement, the term “Retirement” shall mean termination of employment, with no less than one (1) year’s prior notice to the Company, at a time when the sum of Grantee’s age and years of service is at least 70, provided that Grantee has at least ten (10) years of service.

(c) Change in Control. The treatment of the PSUs in the event of a Change in Control (as defined in the Plan) shall be governed by the terms of the Plan.

6.Voting and Dividends Equivalents.

(a) Voting; Rights as Stockholder. Grantee shall have no voting rights or other rights as a stockholder with respect to the PSUs or the shares of Stock underlying the PSUs.

(b) Dividend Equivalents. Grantee shall have the right to receive dividend equivalents with respect to the PSUs (to the extent Earned) equal to the [ordinary] cash dividends paid on the Company’s Stock. If the Company declares a cash dividend on its Stock, Grantee will be entitled to be credited with dividend equivalent units equal to (i) the amount of such dividend declared and paid with respect to one share of Stock, multiplied by (ii) the number of Target PSUs subject to this Grant plus the number of dividend equivalent units previously credited with respect to such Target PSUs, that are outstanding on the applicable dividend payment date, divided by (iii) the Fair Market Value of a share of Stock on the dividend payment date. Dividend equivalent units will not be credited with interest. Each dividend equivalent unit represents one share of Stock, and will be paid in shares of Stock at the same time and to the same extent to which the Company issues the shares of Stock underlying the PSUs with respect to which they were credited. (In other words, if the PSUs are earned at the Target level, 100% of the dividend equivalent units will be paid; if the PSUs are earned at Threshold level, 50% of the dividend equivalent units will be paid; and if the PSUs are earned at Maximum level, 200% of the dividend equivalent units will be paid.) Subject to the restrictions contained in the Plan, the Committee may prospectively change the method of crediting dividend equivalent units as it, in its sole discretion, determines appropriate from time to time.

7.Settlement of PSUs. Grantee’s PSUs that vest under this Agreement will be settled on the date the Committee determines the number of Earned PSUs under Section 3 hereof, but in no event later than the March 15 of the calendar year after the calendar year in which the Performance Period ends. On (or as soon as practicable after) the settlement date of a PSU, the Company will deliver to Grantee (or record Grantee as the owner on the Company’s books) one share of Stock for each of Grantee’s PSUs and dividend equivalent units being settled on such date. The Stock delivered upon the settlement of Grantee’s PSUs and dividend equivalent units will be fully transferable (subject to any applicable securities law restrictions) and not subject to forfeiture. The shares of Stock delivered upon such settlement will have full voting and dividend rights and will entitle the holder to all other rights of a stockholder of the Company.

8.Restrictions on Transfer of PSUs. Grantee may not sell, transfer, assign, or pledge Grantee’s PSUs or any rights under this Agreement. Notwithstanding the foregoing, Grantee may designate one or more members of Grantee’s immediate family or a trust whose beneficiaries are exclusively one or more members of Grantee’s immediate family to receive Grantee’s PSUs upon Grantee’s death. For purposes of this Agreement, the term “immediate family” shall mean the spouse, lineal descendant, father, mother, brother or sister of Grantee. In the absence of any such designation, shares of Stock that Grantee is entitled to receive upon his/her death shall instead be delivered to the legal representative of Grantee’s estate.

9.Adjustments for Stock Splits, Stock Dividends, etc. In the event of any stock split‑up, stock dividend, stock distribution or other reclassification of Stock, the number of Grantee’s Target PSUs shall be appropriately adjusted to prevent enhancement or dilution of benefits, and Grantee’s Earned PSUs shall be determined with respect to such adjusted number. In addition, the Committee has the authority, in its discretion, to make changes to the PSUs to reflect a corporate transaction, such as a merger of the Company into another corporation, any consolidation of the Company with another company, any separation of the Company, any reorganization of the Company or any partial or complete liquidation of the Company.

10.Withholding. Grantee shall be required to remit to the Company, and the Company shall have the right to deduct from any compensation payable to Grantee, the amount sufficient to satisfy any federal, state or local withholding tax liability in respect of the PSUs and to take all such other action as the Committee deems necessary to satisfy all obligations for payment of such withholding taxes. To the extent permitted by the Committee, and subject to any terms and conditions imposed by the Committee, Grantee may elect to have the Company’s withholding obligation for federal, state and local taxes, including payroll taxes, with respect to the PSUs satisfied (i) by having the Company withhold from the shares otherwise deliverable to Grantee shares of Stock having a value equal to the amount of such withholding obligation with respect to the Stock or (ii) by delivering to the Company shares of unrestricted Stock. Alternatively, the Committee may require that a portion of shares of Stock otherwise deliverable be withheld and applied to satisfy the statutory withholding obligation with respect to the PSUs.

11.Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.

12.Amendment. No provision of this Agreement shall be amended, either generally or in any particular instance, except in a writing signed by the Company and Grantee.

14.No Rights To Employment. Nothing contained in this Agreement shall be construed as giving Grantee any right to be retained, in any position, as an employee of or consultant or advisor to the Company.

15.Notices. All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery, delivery by Federal Express or other recognized overnight delivery service or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, return receipt requested, if to the Company at its executive offices and if to Grantee at the address shown beneath his or her signature to this Agreement, or in either case at such other address or addresses as either party shall designate to the other in accordance with this Section.

16.Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.

17.Entire Agreement. This Agreement and the documents and agreements referenced herein constitute the entire agreement between the parties, and supersede all prior agreements and understandings, relating to the subject matter of this Agreement.

18.Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of New York. The Company and Grantee hereby (a) agree that any action, suit or other proceeding arising out of or based upon this Agreement shall be brought in the courts of the State

of New York or any federal court located in such state, and (b) irrevocably consent and submit to the exclusive jurisdiction of such courts for the purpose of any such action, suit or proceeding.

19.Plan. The PSUs are issued pursuant to the Company’s 2017 Omnibus Incentive Plan, a copy of which has been furnished to Grantee, and are subject to such Plan in all respects. Nothing contained in this Agreement shall in any way be deemed to alter or modify the provisions of the Plan and no act of the Company or its directors, officers or employees shall be deemed to be a waiver or modification of any provision of the Plan. The provisions of the Plan shall in all respects govern this Agreement. The Committee shall have authority in its discretion, but subject to the express provisions of the Plan, to interpret the Plan and this Agreement; to prescribe, amend and rescind rules and regulations relating to the Plan and this Agreement; and to make all other determinations deemed necessary or advisable for the administration of the Plan or this Agreement. The Committee’s determination on the foregoing matters shall be conclusive.

20.Section 409A Compliance. This Agreement is intended to comply with, or be exempt from, the requirements of Section 409A of the Code (“Section 409A”) and the regulations issued thereunder. To the extent of any inconsistencies with the requirements of Section 409A, this Agreement shall be interpreted and amended in order to meet such Section 409A requirements. Notwithstanding anything contained in this Agreement or in any amendments hereto to the contrary, it is the intent of the Company to have the Plan interpreted and construed to comply with, or be exempt from, any and all provisions of Section 409A including any subsequent amendments, rulings or interpretations from appropriate governmental agencies. Without limiting the foregoing, notwithstanding the provisions of Section 7 hereof, if Grantee is a “specified employee” within the meaning of Section 409A of the Code, as determined by the Committee in accordance with Section 409A, any shares to be delivered in settlement of Grantee’s PSUs and dividend equivalent units that constitute “deferred compensation” within the meaning of Section 409A and that are otherwise payable or deliverable upon Grantee’s termination from employment (other than any payments that are permitted under Section 409A to be paid within six months following termination of employment of a specified employee) shall be suspended until the six-month anniversary of Grantee’s termination of employment (or date of death, if earlier), at which time all share deliveries that were suspended shall be paid to Grantee in a lump sum. A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the settlement of PSUs upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A.

21.Data Privacy. Grantee expressly consents to the collection, use and transfer, in electronic or other form, of Grantee's personal data by and among the Company, any other member of the Group, and any broker or third party assisting the Company in administering the Plan or providing recordkeeping services for the Plan, for the purpose of implementing, administering and managing Grantee's participation in the Plan. By accepting this award Grantee waives any data privacy rights he may have with respect to such information.

22.Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to the PSUs or other equity awards granted by the Company, whether under the Plan or otherwise, or any other Company securities by electronic means. By accepting this grant of PSUs, whether electronically or otherwise, Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through any on-line or electronic system established and maintained by

the Company or another third party designated by the Company, including but not limited to the use of electronic signatures or click-through electronic acceptance of terms and conditions.

23.Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

24.Compensation Recovery. The PSUs shall be subject to the provisions of any applicable compensation recovery policy contained in the Plan or implemented by the Company, including without limitation any compensation recovery policy adopted to comply with the requirements of applicable law, to the extent set forth in such compensation recovery policy.

25.Parachute Payments.

(a) Grantee shall bear all expense of, and be solely responsible for, any excise tax imposed by Section 4999 of the Code (the “Excise Tax”); provided, however, that any payment or benefit received or to be received by Grantee (whether payable under the terms of this Agreement or any other plan, arrangement or agreement with the Company or any of its affiliates) (collectively, the “Payments”) that would constitute a “parachute payment” within the meaning of Section 280G of the Code, shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax but only if, by reason of such reduction, the net after-tax benefit received by Grantee exceeds the net after-tax benefit that would be received by Grantee if no such reduction was made. If a reduction in payments or benefits constituting “parachute payments” is necessary under the preceding sentence, the reduction shall be made in the manner that results in the greatest economic benefit for Grantee.

made hereunder shall be final, binding and conclusive upon the Company and Grantee.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

BALCHEM CORPORATION

By:

Ted Harris

Chairman, President and CEO

GRANTEE:

(Signature)

Print Name: ____________________________________

Address: ____________________________________________

_____________________________________________

Exhibit A ¹

Performance Metrics Table

EBITDA Metric (50% of Target PSU Award)



	Below Threshold	Threshold	Target	Maximum
EBITDA Growth 2018-2020.Note: Years to be updated for applicable performance period.	below [•]%	[•]% ([•]% of Target)	[•]% ([•]% of Target)	[•]% ([•]% of Target)
Payout (Percentage of EBITDA-Based Target PSUs)	0%	[•]%	[•]%	[•]%

Note: Awards for results between points above threshold will be interpolated on straight-line basis.

Relative TSR Metric (50% of Target PSU Award)



	Below Threshold	Threshold	Target	Maximum
Relative TSR Percentile 2018-2020.Note: Years to be updated for applicable performance period.	below 25th percentile	25th percentile	50th percentile	75th percentile
Payout (Percentage of TSR-Based Target PSUs)	0%	50%	100%	200%

Note: Awards for results between points above threshold will be interpolated on straight-line basis.

If Balchem absolute TSR is negative, the Board or Committee may reduce or eliminate payout for this metric.

_____________________________


1.	Note: Exhibit A to be updated for applicable performance period.


2.	Note: Years to be updated for applicable performance period


3.	Note: Years to be updated for applicable performance period

FINAL FORMS OF AGREEMENT

BALCHEM CORPORATION

STOCK OPTION GRANT AGREEMENT

2017 Omnibus Incentive Plan

This STOCK OPTION GRANT AGREEMENT (the “Grant”), dated as of ________ is between BALCHEM CORPORATION, a Maryland corporation (the “Company”) and

(“Optionee”).

W I T N E S S E T H:

Grant of Options. Pursuant to the provisions of the Company’s 2017 Omnibus Incentive Plan, as the same may be amended from time to time (the “Plan”), the Company has on the date set forth on Exhibit A hereto (such date, the “Grant Date”) granted to Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option to purchase from the Company the number of shares of the Company’s common stock par value six and two-thirds cents ($0.06 2/3) per share (“Stock”) set forth in Exhibit A at the price per share set forth in Exhibit A (the stock options granted hereby being referred to as the “Option” or the “Options”). The Option is a non-qualified stock option. Any capitalized terms used in this Grant and not defined herein shall have the meanings set forth in the Plan.

Terms and Conditions. The term of the Option shall be for the period specified in Exhibit A. The Option shall be exercisable on the date or dates set forth, or upon satisfaction of the conditions set forth, in Exhibit A, provided that (unless expressly provided otherwise in Section 4 hereof or in Exhibit A) Optionee is an employee of the Company or any other member of the Group on each such date. To the extent the Option has become exercisable, it may be exercised, prior to the end of the Option term, at any time in whole or in part and from time to time, subject to earlier termination as provided in Sections 3 and 4 of this Grant, unless otherwise expressly provided in Exhibit A. Unless otherwise provided in Exhibit A, the Option may not be exercised (a) as to fewer than 100 shares at any one time (or for the remaining shares then purchasable under the Option, if fewer than 100 shares), and (b) until fulfillment of any conditions precedent set forth in Section 7 hereof. The holder of any Option shall not have any rights as a stockholder with respect to the Stock issuable upon exercise of an Option until certificates for such Stock shall have been issued and delivered to him or her after the exercise of the Option.

Termination of Employment. In the event that the employment of Optionee with the Company or other member of the Group shall be terminated (otherwise than by reason of (i) death, (ii) Disability (as such term is defined in Section 4 hereof), (iii) Retirement (as such term is defined in Section 4 hereof) on or after the first anniversary of the Grant Date, or (iv) for Cause), the Option shall be exercisable (to the extent that Optionee shall have been entitled to do so at the termination of his or her employment) at any time prior to the expiration of the period of sixty (60) days after such termination, but in no event later than the specified expiration date of the Option, except as may be expressly provided in Exhibit A. Notwithstanding anything herein to the contrary, in the event that the employment of Optionee shall be terminated for Cause, all vested and unvested portions of the

Option shall be immediately forfeited by Optionee without any consideration.

This Grant does not constitute an employment contract. Nothing in the Plan or in this Grant shall confer upon Optionee any right to be continued in the employ of the Company or any other member of the Group for the length of any vesting schedule or for any portion thereof or for any other period of time, or interfere in any way with the right of the Company or any other member of the Group to terminate or otherwise modify the terms of Optionee’s employment; provided, that a change in Optionee’s duties or position shall not affect Optionee’s Option so long as Optionee is still an employee of the Company or any other member of the Group.


4.	Death, Disability, or Retirement of Optionee or Change in Control.

(a) Death. If Optionee ceases to be employed by the Company and all other members of the Group by reason of his or her death, the Option shall become fully exercisable upon such termination of employment and may be exercised by Optionee’s estate, personal representative or beneficiary who has acquired the Option by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the Option or two years after the date of Optionee’s death, except as may otherwise be provided in Exhibit A.

(b) Disability. If Optionee ceases to be employed by the Company and all other members of the Group by reason of his or her Disability, the Option shall continue to vest during the Optionee’s lifetime and become exercisable in accordance with the vesting schedule set forth in Exhibit A. Except as otherwise provided in Exhibit A, any unexercised portion of the Option may be exercised by Optionee (or in the event of death, by Optionee’s estate, personal representative of beneficiary who has acquired the Option by will or by the laws of descent and distribution) prior to the later of (i) two years after Optionee’s termination of employment or (ii) two years after the vesting date of the Option, but in any case, not beyond the specified expiration date of the Option. For the purposes of the Grant, the term “Disability” shall mean “permanent and total disability” as defined in Section 22(e)(3) of the Code or successor statute.

(c) Retirement. If Optionee ceases to be employed by the Company and all members of the Group by reason of his or her Retirement on or after the first anniversary of the Grant Date, the Option shall continue to vest during the Optionee’s lifetime and become exercisable in accordance with the vesting schedule set forth in Exhibit A. Except as otherwise provided in Exhibit A, any unexercised portion of the Option may be exercised by Optionee (or in the event of death, by Optionee’s estate, personal representative of beneficiary who has acquired the Option by will or by the laws of descent and distribution) prior to the later of (i) two years after Optionee’s termination of employment or (ii) two years after the vesting date of the Option, but in any case not beyond the specified expiration date of the Option. For the avoidance of doubt, if Optionee ceases to be employed by the Company and all members of the Group by reason of his or her Retirement prior to the first anniversary of the Grant Date, the Option shall immediately be forfeited by Optionee for no consideration. For purposes of the Grant, the term “Retirement” shall mean termination of employment with no less than one (1) year’s prior notice to the Company, at a time when the sum of Optionee’s age and years of service is at least 70, provided that Optionee has at least ten years of service.

(d) Change in Control. The treatment of the Option in the event of a Change in Control (as defined in

the Plan) shall be governed by the terms of the Plan.


5.	Transferability of Option. The Option shall not be transferable otherwise than by will or the laws of descent and distribution, except as, and then only to the extent, if any, provided in Exhibit A hereto or as subsequently approved by the Board or the Committee.


6.	Adjustments Upon Changes in Capitalization. In the event of changes in the outstanding stock of the Company by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations or liquidations, the number and class of shares subject to the Option shall be correspondingly adjusted as provided in the Plan.

Conditions Precedent to Exercise of Option. In the event that the exercise of the Option or the issuance and delivery of the shares hereunder shall be subject to, or shall require, any prior exchange listing, prior approval of the stockholders of the Company, or other prior condition or act, pursuant to the applicable laws, regulations or policies of any stock exchange, federal or local government or its agencies or representatives, and/or pursuant to the Plan, then the Option shall not be deemed to be exercisable under this Grant until such condition is satisfied. The Company shall not be liable in any manner to Optionee or any other party for any failure or delay by the Company on its part to fulfill any such condition, and any such failure or delay shall not extend the term of the Option.

Methods of Exercising Option. Subject to the terms and conditions of this Grant, the Option may be exercised by delivering a signed, completed exercise notice in the form of Exhibit B hereto, as the same may be modified from time to time by determination of the Company in its discretion, to the Company, at its office at 52 Sunrise Park Road, New Hampton, New York, 10958 or such other address as the Company may designate. Such notice shall (i) identify the Option to which it applies, (ii) state the election to exercise the Option, (iii) designate the number of shares in respect of which the Option is being exercised, and (iv) be signed by the person or persons so exercising the Option, and shall otherwise be in such form and substance as the Company may require. Such notice shall be accompanied by payment of the full purchase price of such shares. The Company shall deliver to Optionee, at such address as is provided in the notice, a certificate or certificates representing such shares as soon as practicable after the notice shall be received and all conditions to the exercise of the Option are fulfilled and satisfied. Payment of such purchase price shall be made (a) in United States dollars in cash or by check, or (b) through delivery of shares of Stock previously owned by Optionee for at least six months and having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option, or (c) by any combination of the above. Notwithstanding the foregoing, Optionee may not pay any part of the exercise price hereof by transferring Stock to the Company if such Stock is not fully vested or is subject to a substantial risk of forfeiture within the meaning of Section 83 of the Code. The certificate or certificates for the shares as to which the Option shall have been so exercised shall be issued in the name of the person or persons so exercising the Option (or, if the Option shall be exercised by Optionee and if Optionee shall so request in the notice exercising the Option, the certificate shall be issued in the name of Optionee and another person jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option shall be exercised by any person or persons other than Optionee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. At the election of the

Company, such certificate may bear such legends regarding the limited transferability of the shares under applicable securities laws as the Company may require. All shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable.

Compliance with Law. The exercise of the Option and the issuance and transfer of shares of Stock shall be subject to compliance by the Company and Optionee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company’s Stock may be listed. No share of Stock shall be issued pursuant to the Option unless and until any then applicable requirements of state or federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. Optionee understands that the Company is under no obligation to register the shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.

10.

Capital Changes and Business Successions. The Plan contains provisions covering the treatment of the Option in a number of contingencies such as stock splits and mergers. Provisions in the Plan for adjustment with respect to stock subject to options and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference. In general, Optionee should not assume that the Option necessarily would survive the acquisition of the Company.

11.

Withholding Taxes. Optionee shall be required to remit to the Company, and the Company shall have the right to deduct from any compensation payable to Optionee, the amount sufficient to satisfy any federal, state or local withholding tax liability in respect of the Options and to take all such other action as the Committee deems necessary to satisfy all obligations for payment of such withholding taxes. To the extent permitted by the Committee, and subject to any terms and conditions imposed by the Committee, Optionee may elect to have the Company’s withholding obligation for federal, state and local taxes, including payroll taxes, with respect to the Options satisfied (i) by having the Company withhold from the shares otherwise deliverable to Optionee shares of Stock having a value equal to the amount of such withholding obligation with respect to the Stock or (ii) by delivering to the Company shares of unrestricted Stock. Alternatively, the Committee may require that a portion of shares of Stock otherwise deliverable be withheld and applied to satisfy the statutory withholding obligation with respect to the Options.

12.

Terms of Plan Control. The Option granted hereunder is granted pursuant to the provisions of the Plan, the receipt of a copy of which Optionee hereby acknowledges. Nothing contained in this Grant shall in any way be deemed to alter or modify the provisions of the Plan and no act of the Company or its directors, officers or employees shall be deemed to be a waiver or modification of any provision of the Plan. The provisions of the Plan shall in all respects govern the Option. The Committee shall have authority in its discretion, but subject to the express provisions of the Plan, to interpret the Plan and this Grant; to prescribe, amend and rescind rules and regulations relating to the Plan and the Option; and to make all other determinations deemed necessary or advisable for the administration of the Plan or the Option. The Committee’s determination on the foregoing matters shall be conclusive.


13.	Governing Law. This Grant shall be construed, interpreted and enforced in accordance with the laws

of the State of New York. The Company and the Optionee hereby (a) agree that any action, suit or other proceeding arising out of or based upon this Grant shall be brought in the courts of the State of New York or any federal court located in such state, and (b) irrevocably consent and submit to the exclusive jurisdiction of such courts for the purpose of any such action, suit or proceeding.


14.	No Right as Shareholder. Optionee shall not have any rights as a shareholder with respect to any shares of Stock subject to the Option prior to the date of exercise of the Option.


15.	Severability. The invalidity or unenforceability of any provision of this Grant shall not affect the validity or enforceability of any other provision of this Grant and each other provision of this Grant shall be severable and enforceable to the extent permitted by law.


16.	Pronouns. Whenever the context may require, any pronouns used in this Grant shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.


17.	Entire Agreement. This Grant and the documents and agreements referenced herein constitute the entire agreement between the parties, and supersede all prior agreements and understandings, relating to the subject matter of this Grant.

18.

Notices. All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery, delivery by Federal Express or other recognized overnight delivery service or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, return receipt requested, if to the Company at its executive offices and if to Optionee at the address shown beneath his or her signature to this Grant, or in either case at such other address or addresses as either party shall designate to the other in accordance with this Section.

19.

Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to this Option, any future options or other equity awards granted by the Company, whether under the Plan or otherwise, or any other Company securities by electronic means. By accepting this Option, whether electronically or otherwise, Optionee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through any on-line or electronic system established and maintained by the Company or another third party designated by the Company, including but not limited to the use of electronic signatures or click-through electronic acceptance of terms and conditions.


20.	Counterparts. This Grant may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

21.

Data Privacy. Optionee expressly consents to the collection, use and transfer, in electronic or other form, of Optionee’s personal data by and among the Company, any member of the Group, and any broker or third party assisting the Company in administering the Plan or providing recordkeeping services for the Plan, for the purpose of implementing, administering and managing Optionee’s participation in the Plan. By accepting this Grant, Optionee waives any data privacy rights he or she may have with respect to such information.


22.	Compensation Recovery. The Options shall be subject to the provisions of any applicable compensation recovery policy contained in the Plan or implemented by the Company, including without limitation any compensation recovery policy adopted to comply with the requirements of applicable law, to the extent set forth in such compensation recovery policy.


23.	Parachute Payments.

IN WITNESS WHEREOF, the Company has caused this Grant to be executed by its duly authorized officer and Optionee has executed this Grant as of the date first written above.

BALCHEM CORPORATION

By: ____________________________________

Theodore L. Harris

Chairman, President and CEO

AGREED AND ACCEPTED:

________________________________

OPTIONEE:

Address: ________________________

________________________

Exhibit 21

LIST OF SUBSIDIARIES



Subsidiaries of the Registrant	Jurisdiction of Organization

BCP Ingredients, Inc.	Delaware

Balchem BV	Netherlands

Balchem Italia Srl	Italy

Bioscreen Technologies Srl	Italy

Balchem Ltd.	Canada

Aberco, Inc.	Maryland

SensoryEffects, Inc.	Delaware

SensoryEffects Cereal Systems, Inc.	Delaware

Albion Laboratories, Inc.	Nevada

Innovative Food Processors, Inc.	Delaware

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statements (Nos. 333-219722, 333-155655, and 333-118291) on Form S-8 of Balchem Corporation and Subsidiaries of our report dated February 28, 2019, relating to the consolidated financial statements, the financial statement schedule and the effectiveness of internal control over financial reporting of Balchem Corporation and Subsidiaries, appearing in this Annual Report on Form 10-K of Balchem Corporation and Subsidiaries for the year ended December 31, 2018.

/s/ RSM US LLP

New York, New York

February 28, 2019

Exhibit 31.1

CERTIFICATIONS

I, Theodore L. Harris, certify that:


1.	I have reviewed this annual report on Form 10-K of Balchem Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: February 28, 2019	/s/ Theodore L. Harris
	Theodore L. Harris
	President and Chief Executive Officer
	(Principal Executive Officer)

Exhibit 31.2

CERTIFICATIONS

I, Martin Bengtsson, certify that:


1.	I have reviewed this annual report on Form 10-K of Balchem Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: February 28, 2019	/s/ Martin Bengtsson
	Martin Bengtsson
	Chief Financial Officer and Treasurer
	(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Balchem Corporation (the “Company”) on Form 10-K for the period ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Theodore L. Harris, President, and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:


(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



	/s/ Theodore L. Harris
	Theodore L. Harris
	President and
	Chief Executive Officer
	(Principal Executive Officer)
	February 28, 2019

This certification accompanies the above-described Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Balchem Corporation (the "Company") on Form 10-K for the period ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Martin Bengtsson, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:


(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



	/s/ Martin Bengtsson
	Martin Bengtsson
	Chief Financial Officer and Treasurer
	(Principal Financial Officer)
	February 28, 2019