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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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 classTrading symbolName of each exchange on which registered
Common Stock, par value $.06-2/3 per shareBCPCNasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes   No




Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
 
 
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the common stock, par value $.06-2/3 per share (the “Common Stock”), issued and outstanding and held by non-affiliates of the Registrant, based upon the closing price for the Common Stock on the NASDAQ Global Market on June 30, 2019 was approximately $3,212,000,000. For purposes of this calculation, shares of the Registrant held by directors and officers of the Registrant and under the Registrant’s 401(k)/profit sharing plan have been excluded.
The number of shares outstanding of Common Stock was 32,254,855 as of February 13, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant’s proxy statement for its 2020 Annual Meeting of Stockholders (the “2020 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, 2019 are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated therein.


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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.



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BALCHEM CORPORATION
ANNUAL REPORT ON FORM 10-K
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PART I
Item 1.  Business (All amounts in thousands, except share and per share data)
General:
Balchem Corporation (“Balchem,” the “Company,” “we” or “us”), 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.
Human Nutrition & Health
Our Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for nutrition and 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 customers' appreciation of brand value. 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. We have expertise in trends analysis and product development. When combined with our strong manufacturing capabilities in customized spray dried and emulsified powders, extrusion and agglomeration, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates, we are a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, sports and protein bars, dietary plans, and nutritional supplements. 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 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 competitive global marketplace.

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Specialty Products
Ethylene oxide, at the 100% level and blended with carbon dioxide, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. Our 100% ethylene oxide product and blends are distributed worldwide in specially designed, reusable and recyclable drum and cylinder packaging, to assure compliance with safety, quality and environmental standards as outlined by the applicable regulatory agencies in the countries our products are shipped to. Our inventory of these specially built drums and cylinders, along with our five 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.
We also distribute a number of other gases for various uses, most notably propylene oxide and ammonia. Propylene oxide is marketed and sold in the U.S. as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. We distribute our propylene oxide product in the U.S. primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Propylene oxide is also sold worldwide to customers in approved reusable and recyclable drum and cylinder packaging for various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings. Ammonia is used primarily as a refrigerant, and also for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and cylinder packaging approved for use in the countries these products are shipped to. Our inventory of cylinders for these products also represents a significant capital investment.

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 May 27, 2019, we acquired 100 percent of the outstanding common shares of Chemogas Holding NV, a privately held specialty gases company headquartered in Grimbergen, Belgium ("Chemogas"). We made payments of approximately €99,503 (translated to $111,324) on the acquisition date, amounting to approximately €88,579 (translated to $99,102) to the former shareholders and approximately €10,924 (translated to $12,222) to Chemogas' lender to pay off all Chemogas bank debt. Considering the cash acquired of €3,943 (translated to $4,412), net payments made to the former shareholders were €84,636 (translated to $94,690). The acquisition was primarily financed through our Credit Agreement (as defined below). Chemogas, through its subsidiary companies, has been a leader in the packaging and distribution of a wide variety of specialty gases, most notably ethylene oxide, primarily in the European and Asian markets, for medical device sterilization. Through its operational and logistical excellence, Chemogas supports its customers' needs across more than 70 countries. With the acquisition, we significantly expand our geographic presence in the packaged ethylene oxide market, enabling us to offer worldwide service and support to its medical device sterilization customers within the Specialty Products segment. The Chemogas sites in Europe and Asia, along with Balchem's sites in the United States form a global network of facilities.

On December 13, 2019, we completed an acquisition of Zumbro River Brand, Inc. ("Zumbro"), headquartered in Albert Lea, MN. We made payments of $52,403 on the acquisition date, amounting to $47,058 to the former shareholders and $5,345 to Zumbro's lenders to pay Zumbro debt. Considering the cash acquired of $686, net payments made to the former shareholders equaled
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$46,372. The acquisition was primarily financed through the Company's Credit Agreement (as defined below). Zumbro specializes in developing, marketing, and manufacturing agglomerated and extruded products for the food and beverage industry and is a market leader in high protein and specialty extruded snacks, cereals, and crisps, marketed under the brands Z-Crisps®, Whey-Os, Whey-Vs, and Z-Texx Complete. Zumbro is integrated within Balchem's HNH Segment.

Raw Materials

The raw materials utilized by us in the manufacture of our products are sourced from suppliers both domestically and internationally. Such raw materials include materials derived from petrochemicals, minerals, metals, agricultural commodities and other readily available commodities and are subject to price fluctuations due to market conditions. We are not experiencing any current difficulties in procuring such materials and do not anticipate any such problems; however, we cannot assure that will always be the case.
Intellectual Property
We currently hold 111 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 2020 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, 2019, we had a total backlog of $36,776 (comprised of $29,846 for the HNH segment; $4,723 for the ANH segment; $2,132 for the Specialty Products segment and $75 for the Industrial Products segment), as compared to a total backlog of $37,021 at December 31, 2018 (comprised of $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). 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 2020 fiscal year.
Competition
Our competitors include many large and small companies, some of which have greater financial, research and development, production and other resources than us. Competition in the supplement, food and beverage markets we serve are based primarily on product performance, customer support, quality, service and price. The development of new and improved products is important to our success. This competitive environment requires substantial investments in product and manufacturing process research and development. In addition, the winning and retention of customer acceptance of our food and nutrition products involve substantial expenditures for application testing, either internally or at customer/prospect sites, and sales efforts. Our competition in this market includes a variety of ingredient and nutritional supplement companies many of which are privately-held. Therefore, it is difficult to assess the size of all of our segment competitors or where we rank in comparison to such privately-held competitors.
Competition in the animal feed and industrial markets we serve are based primarily on product performance, customer support, quality, service and price. The markets for our products are subject to competitive risks because these markets are highly price competitive. Our competition in this market includes a variety of animal nutrition and health ingredient companies, along with certain industrial companies, many of which are privately-held. Therefore, we are unable to assess the size of all of our competitors or where we rank in comparison to such privately-held competitors.
In the Specialty Products segment, our products face competition from alternative sterilizing technologies and products. Competition in this marketplace is based primarily on medical device compositions, product performance, customer support, quality, service and price. Our competition in this market includes sterilization companies, a number of which are privately-held.
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Research & Development
During the years ended December 31, 2019, 2018 and 2017, we incurred research and development expenses of approximately $11,377, $11,592, and $9,305, respectively, on Company-sponsored research and development for new products, improvements to existing products, and manufacturing processes. We have historically funded our research and development programs with funds available from current operations with the intent of recovering those costs from profits derived from future sales of products resulting from, or enhanced by, the research and development effort.
We prioritize our product development activities in an effort to allocate resources to those product candidates that, we believe, have the greatest commercial potential. Factors we consider in determining the products to pursue include projected markets and needs, status of our proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market.
Capital Projects
We continue to invest in projects across all production facilities and capital expenditures were approximately $25,790, $19,170, and $27,526 for 2019, 2018 and 2017, respectively. In 2019, we invested $6,437 to expand capacity in key product lines in the HNH segment and to invest in several other large projects including a new quality, research and development lab. In addition, we invested $3,739 for environmental, health, safety, and security upgrades to our facilities. In 2018, we invested $5,662 to expand capacity in key product lines in the HNH segment along with upgrading automation systems in our manufacturing sites to drive efficiencies. In addition, we invested $3,137 for environmental, health, safety, and security upgrades to our facilities. 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. Capital expenditures are projected to range from $30,000 to $35,000 for 2020.
Environmental / Regulatory Matters
The Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”), a health and safety statute, requires that certain products within our Specialty Products segment must be registered with the EPA because they are considered pesticides. In order to obtain a registration, an applicant typically must demonstrate, through extensive test data, that its product will not cause unreasonable adverse effects on human health or the environment. We hold EPA registrations permitting us to sell ethylene oxide as a medical device sterilant and spice fumigant, and propylene oxide as a fumigant of nuts and spices.
In April 2008, the EPA issued a RED (“Reregistration Eligibility Decision”) for ethylene oxide which permitted the continued use of ethylene oxide “to sterilize medical or laboratory equipment, pharmaceuticals, and aseptic packaging, or to reduce microbial load on musical instruments, cosmetics, whole and ground spices and other seasoning materials and artifacts, archival material or library objects”. 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 ethylene oxide (the "IRIS Assessment"), another aspect of EPA’s safety review of ethylene oxide. 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. In October 2019, the U.S. Food and Drug Administration, in a public statement said, "Although medical devices can be sterilized by several methods, ethylene oxide is the most common method of sterilization of medical devices in the U.S. and is a well-established and scientifically-proven method of preventing harmful microorganisms from reproducing and causing infections." Management believes the lack of availability of this product could not be easily tolerated by various medical device manufacturers or the health care industry due to the resultant infection potential.
Similarly, the EPA issued a RED for propylene oxide in August 2006. At that time, the EPA “determined that products containing the active ingredient PPO [propylene oxide] are eligible for reregistration provided that…risk mitigation measures…are adopted.” Our product label was amended as required to reflect these mitigation measures and also to show that propylene oxide has been reclassified as a restricted use pesticide. 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
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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 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 December 31, 2019, the Company employed approximately 1,424 persons. Approximately 105 employees at our Marano, Ticino, Italy facility are covered by a national collective bargaining agreement, which expires in 2022. Approximately 22 employees at our Bertinoro, Italy facility are also covered by a national collective bargaining agreement, which expired in 2019 and is currently under negotiation. Approximately 78 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 SEC’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
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we operate. Also, at any point in time we have funds in our cash accounts that are with third party financial institutions. These balances in the U.S., Italy, Belgium, Malaysia, Australia, Philippines, and Singapore could exceed the Federal Deposit Insurance Corporation (“FDIC”), Fondo Interbancario di Tutela dei Depositi (“FITD”), Financial Services and Markets Authority ("FSMA"), Perbadanan Insurans Deposit Malaysia ("PIDM"), Australian Prudential Regulation Authority ("APRA"), Philippine Deposit Insurance Corporation ("PDIC"), and Singapore Deposit Insurance Corporation ("SDIC") insurance limits, respectively. While we monitor the cash balances in our accounts, these balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. Additionally, our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in jurisdictions with differing statutory tax rates, changes in tax laws, regulations and judicial rulings or changes in the interpretation thereof.
Increased competition could hurt our business and financial results.
We face competition in our markets from a number of large and small companies, some of which have greater financial, research and development, production and other resources than we do. Our competitive position is based principally on performance, quality, customer support, service, breadth of product line, manufacturing or packaging technology and the selling prices of our products. Our competitors may improve the design and performance of their products and introduce new products with competitive price and performance characteristics. We expect to do the same to maintain our current competitive position and market share.
The loss of governmental permits and approvals would materially harm some of our businesses.
Pursuant to applicable environmental and safety laws and regulations, we are required to obtain and maintain certain governmental permits and approvals, including EPA registrations under FIFRA for two of our products. We maintain EPA FIFRA registrations for ethylene oxide as a medical device sterilant and spice fumigant and for propylene oxide as a fumigant of nuts and spices. The EPA has issued REDs 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.

Concerns about ethylene oxide emissions have resulted in certain state actions against certain of our customers that are currently impacting these customers’ ability to use the ethylene oxide process to sterilize medical devices, which may, in turn, affect sales to these customers.

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Certain of the Company’s customers who use ethylene oxide for the sterilization of medical devices have received ongoing state and local scrutiny for environmental concerns at their facilities. This scrutiny centers around the IRIS Assessment described in the “Environmental / Regulatory Matters” Section above, which resulted in a very conservative view of the risks associated with the production and use of ethylene oxide. The EPA has not yet used the IRIS Assessment to regulate change to existing permissible emissions’ limits. In the absence of a definitive EPA regulation, some state and local regulators have drawn their own conclusions from the IRIS Assessment, which has resulted in certain state actions against our customers that are currently impacting these customers’ ability to use the ethylene oxide process to sterilize medical devices. Because of these actions, one customer facility has been shut down and other customers are taking voluntary downtime to install new abatement equipment. The installation of the new abatement equipment is being done ahead of what is expected to be changes in the EPA regulations. The Company remains confident that the sterilization industry will be able to install abatement equipment to satisfy the new forthcoming EPA requirements. The Company is working with various stakeholders to ensure the EPA considers all available assessments to appropriately quantify ethylene oxide's risks. While the Company believes that EPA will, as it has in the past, ultimately regulate to lower emissions levels based on a combined consideration of the various assessments available and that industry will then adopt practices and procedures to ensure compliance with these new regulations, there is no assurance that this will be the case.

Our financial success depends in part on the reliability and sufficiency of our manufacturing facilities.
Our revenues depend on the effective operation of our manufacturing, packaging, and processing facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard performance of equipment, power outages, the improper installation or operation of equipment, explosions, fires, natural disasters, failure to achieve or maintain safety or quality standards, work stoppages, supply or logistical outages, and the need to comply with environmental and other directives of governmental agencies. The occurrence of material operational problems, including, but not limited to, the above events, could adversely affect our profitability during the period of such operational difficulties.
Our business exposes us to potential product liability claims and recalls, which could adversely impact our financial condition and performance.
Our development, manufacture and sales of food ingredient, pharmaceutical and nutritional supplement products involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability judgment against us could also result in substantial and unexpected expenditures, affect consumer confidence in our products, and divert management’s attention from other responsibilities. Although we maintain product liability insurance coverage in amounts we believe are customary within the industry, there can be no assurance that this level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on results of operations and financial condition.
We face risks associated with our sales to customers and manufacturing operations outside the United States.
For the year ended December 31, 2019, approximately 26% 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 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 78 employees, or 6% of our North American workforce, as of December 31, 2019, 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 105 employees at our Marano, Ticino, Italy facility are covered by a national collective bargaining agreement, which expires in 2022. Approximately 22 employees at our Bertinoro, Italy facility are also covered by a national collective bargaining agreement, which expired in 2019 and is currently under negotiation. We believe that our present labor relations with all our union employees are satisfactory, however, our failure to renew these agreements on
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reasonable terms could result in labor disruptions and increased labor costs, which could adversely affect our financial performance. Similarly, if our relations with the union portion of our workforce do not remain positive, such employees could initiate a strike, work stoppage or slowdown in the future. In the event of such an action, we may not be able to adequately meet the needs of our customers using our remaining workforce and our operations and financial condition could be adversely affected. Additionally, other portions of our workforce could become subject to union campaigns.
Our international operations subject us to currency translation risk and currency transaction risk which could cause our results to fluctuate from period to period.
The financial condition and results of operations of our foreign subsidiaries are reported in Euros, Canadian Dollars, Malaysian Ringgits, Singapore Dollars, Australian Dollars, and Philippine Pesos and then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Exchange rates between these currencies in recent years have fluctuated and may do so in the future. Furthermore, we incur currency transaction risk whenever we enter into either a purchase or a sales transaction using a currency different than the functional currency. Given the volatility of exchange rates, we may not be able to effectively manage our currency transactions and/or translation risks. Volatility in currency exchange rates could impact our business and financial results.

On May 28, 2019, we entered into a cross-currency swap to manage foreign exchange risk related to our investment in Chemogas. Although we utilize risk management tools, such as derivative instruments, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect revenue, expenses and results of operations and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated.
Our debt instruments impose operating and financial restrictions which could have an adverse impact on our business and results of operations.
Our incurrence of indebtedness could have negative consequences to us, including limiting our ability to borrow additional monies for our working capital, capital expenditures, acquisitions, debt service requirements or other general corporate purposes; limiting our flexibility in planning for, or reacting to, changes in our operations, our business or the industries in which we compete; our leverage may place us at a competitive disadvantage by limiting our ability to invest in the business or in further research and development; making us more vulnerable to downturns in our business or the economy; and there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.
Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without any such financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances.
Interest payable in accordance with our five-year senior secured revolving credit agreement (the "Credit Agreement") is based on a fluctuating rate. In light of potential fluctuations, we are exposed to risk resulting from adverse changes in interest rates.

On May 28, 2019, we entered into an interest rate swap to protect us against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of our outstanding debt. We use LIBOR ("the London interbank offered rate") as a reference rate in the derivative agreements. LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. As such, the future of LIBOR at this time is uncertain. In preparation for the potential phase out of LIBOR, we may need to renegotiate our financial obligations and derivative instruments that utilize LIBOR. However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference rate in our legacy agreements. Furthermore, the discontinuation of LIBOR may adversely impact our ability to manage and hedge exposures to fluctuations in interest rates using derivative instruments.
Adverse publicity or consumer concern regarding the safety or quality of food products containing our products, or health concerns, whether with our products, products in the same general class as our products or for food products containing our products, may result in the loss of sales. Also, consumer preferences for products containing our products may change.
We are dependent upon consumers’ perception of the safety, quality and possible dietary benefits of products containing our food ingredient products. As a result, substantial negative publicity concerning our products or other foods and beverages in which our
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products are used could lead to a loss of consumer confidence in those products, removal of those products from retailers’ shelves and reduced sales and prices of our products. Product quality issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could hurt the image of our products or of brands of products containing our products, and cause consumers to choose other products. Further, any product recall, whether our own or by a third party, whether due to real or unfounded allegations, could impact demand on food products containing our products or even our products.  Any of these events could have a material adverse effect on our business, results of operations and financial condition.  Consumer preferences, as well as trends, within the food industries change often and our failure to anticipate, identify or react to changes in these preferences and trends could, among other things, lead to reduced demand and price reductions, and could have an adverse effect on our business, results of operations and financial condition. While we continue to diversify our product offerings, developing new products entails risks and we cannot be certain that demand for our products and products containing our products will continue at current levels or increase in the future.
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.  Continuing substantial or extended declines 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 and has been experiencing one of such downturns since second quarter of 2019. 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 and we have seen declining demand since second quarter of 2019. 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. Further declines in oil and gas prices could result in a more significant downturn in the oil and gas industry and thereby result in further reduction in demand for oilfield services and related products, which could lead to further reduced demand for our products and further downward pressure on the prices we charge. These circumstances could ultimately have an adverse effect on our results of operations and cash flows beyond those that we have already experienced.
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.
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Item 2.  Properties
Our corporate headquarters is located in New Hampton, New York. Our operations are conducted at our owned and leased facilities throughout the U.S. and other foreign countries. These facilities house manufacturing and warehousing operations, as well as administrative offices.
The following is a summary of our principal properties:

SegmentLocationAdministrativeManufacturingWarehousing
Corporate4 U.S. cities4--
HNH15 U.S. cities and 3 foreign countries2133
ANH5 U.S. cities and 4 foreign countries18-
Specialty Products5 U.S. cities and 6 foreign countries191
Industrial Products1 U.S. city and 1 foreign country-2-

We believe that our production facilities and related machinery and equipment, are well maintained, suitable for their purpose, and adequate to support our businesses.

Item 3.  Legal Proceedings
We are involved in legal proceedings through the normal course of business. Management believes that any unfavorable outcome related to these proceedings will not have a material effect on our financial position, results of operations or liquidity.

Item 4.  Mine Safety Disclosures
None.

PART II
Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Common Stock is listed on the Nasdaq Global Market under the symbol “BCPC.”
On February 13, 2020 the closing price for the Common Stock on the Nasdaq Global Market was $111.94.
Record Holders
As of February 13, 2020, the approximate number of holders of record of Common Stock was 73. Such number does not include stockholders who hold their stock in street name.
Dividends
We declared cash dividends of $0.52 and $0.47 per share on Common Stock during our fiscal years ended December 31, 2019 and 2018, respectively.


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Performance Graph
The graph below sets forth the cumulative total stockholder return on the Common Stock (referred to in the table as “BCPC”) for the five years ended December 31, 2019, 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, 2014 and the subsequent reinvestment of dividends. The Russell 2000® Index measures the performance of the shares of the 2000 smallest companies included in the Russell 3000® Index. In light of our industry segments, we do not believe that published industry-specific indices are necessarily representative of stocks comparable to us. Nevertheless, we consider the Dow Jones U.S. Specialty Chemicals Index to be potentially useful as a peer group index with respect to us. The performance of the Common Stock shown on the graph below is historical only and not necessarily indicative of future performance.
bcpc-20191231_g1.jpg

Item 6.  Selected Financial Data
The selected statements of operations data set forth below for the years ended December 31, 2019, 2018 and 2017 and the selected balance sheet data as of December 31, 2019 and 2018 have been derived from our Consolidated Financial Statements included elsewhere herein. The selected financial data for the years ended December 31, 2016 and 2015 and as of December 31, 2017, 2016 and 2015 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.
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(In thousands, except per share data)
Year ended December 31,20192018201720162015
Statement of Operations Data
Net sales$643,705  $643,679  $594,790  $553,204  $552,492  
Earnings before income tax expense96,478  99,030  88,488  82,934  87,063  
Income tax expense (benefit)16,807  20,457  (1,583) 26,962  27,341  
Net earnings79,671  78,573  90,071  55,972  59,722  
Basic net earnings per common share$2.48  $2.45  $2.83  $1.78  $1.92  
Diluted net earnings per common share$2.45  $2.42  $2.79  $1.75  $1.89  
At December 31,20192018201720162015
Balance Sheet Data
Total assets$1,155,682  $981,355  $963,636  $948,626  $879,686  
Long-term debt (including current portion)248,569  156,000  218,964  280,490  295,963  
Other long-term obligations12,654  7,372  5,847  6,896  6,683  
Total Stockholders' equity743,667  691,618  616,881  521,033  463,705  
Dividends per common share$0.52  $0.47  $0.42  $0.38  $0.34  


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
         (All amounts in thousands, except share and per share data)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 “Selected Financial Data” and our Consolidated Financial Statements and the related notes included in this report. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (filed with the SEC on February 28, 2019) for additional discussion of our financial condition and results of operations for the year ended December 31, 2017, as well as our financial condition and results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017. 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: HNH, ANH, Specialty Products, and Industrial Products, as more fully described in Note 11 of the consolidated financial statements.
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, 2019, 2018 and 2017 (in thousands):
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Business Segment Net Sales:
201920182017
HNH$347,433  $341,237  $315,796  
ANH177,557  175,693  157,688  
Specialty Products92,257  75,808  73,355  
Industrial Products26,458  50,941  47,951  
Total$643,705  $643,679  $594,790  
Business Segment Earnings From Operations:
201920182017
HNH$48,429  $48,037  $43,747  
ANH25,868  26,607  22,255  
Specialty Products28,513  25,254  24,908  
Industrial Products3,730  8,988  6,402  
Transaction and integration costs, ERP implementation costs, and unallocated legal fees (1)
(3,436) (1,786) (2,496) 
Unallocated amortization expense (2)
(551) —  —  
Indemnification settlement (3)
—  —  2,087  
Total$102,553  $107,100  $96,903  
(1) Transaction and integration costs and unallocated legal fees for year ended December 31, 2019, 2018, and 2017 respectively, were primarily related to acquisitions. ERP implementation costs for the year ended December 31, 2019 and 2018 were related to a project in connection with a company-wide ERP system implementation.
(2) Unallocated amortization expense for year ended December 31, 2019 was related to amortization of an intangible asset in connection with a company-wide ERP system implementation.
(3) Indemnification settlement was related to a favorable settlement we received relating to the SensoryEffects acquisition.
Acquisitions

On December 13, 2019, the Company completed an acquisition of Zumbro. The Company made payments of $52,403 on the acquisition date, amounting to $47,058 to the former shareholders and $5,345 to Zumbro's lenders to pay Zumbro debt. Considering the cash acquired of $686, net payments made to the former shareholders were $46,372. Zumbro is integrated within HNH Segment.

On May 27, 2019, we acquired Chemogas. We made payments of approximately €99,503 (translated to $111,324) on the acquisition date, amounting to approximately €88,579 (translated to $99,102) to the former shareholders and approximately €10,924 (translated to $12,222) to Chemogas' lender to pay off all Chemogas bank debt. Considering the cash acquired of €3,943 (translated to $4,412), net payments made to the former shareholders were €84,636 (translated to $94,690).


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RESULTS OF OPERATIONS
(All amounts in thousands, except share and per share data)
Fiscal Year 2019 compared to Fiscal Year 2018
Net Earnings

(in thousands)20192018Increase
(Decrease)
% Change
Net sales$643,705  $643,679  $26  — %
Gross margin211,367  204,252  $7,115  3.5 %
Operating expenses108,814  97,152  $11,662  12.0 %
Earnings from operations102,553  107,100  (4,547) (4.2)%
Other expenses6,075  8,070  (1,995) (24.7)%
Income tax expense/(benefit)16,807  20,457  (3,650) (17.8)%
Net earnings$79,671  $78,573  $1,098  1.4 %

Net Sales
(in thousands)20192018Increase
(Decrease)
% Change
HNH$347,433  $341,237  $6,196  1.8 %
ANH177,557  175,693  1,864  1.1 %
Specialty Products92,257  75,808  16,449  21.7 %
Industrial Products26,458  50,941  (24,483) (48.1)%
Total$643,705  $643,679  $26  — %
Net sales for the HNH segment increased in 2019 compared to 2018, primarily due to an increase in Encapsulates' sales of $3,207 or 8.1% and higher Human Minerals sale of $3,049 or 7.0%. Net sales for the ANH segment increased in 2019 compared to 2018 primarily due to higher sales of ruminant animal feed market products of $4,657 or 10%, partially offset by reduced sales of monogastric species products of $2,793 or 2.2% primarily due to foreign currency changes and competitive pressures on volume and pricing in the European monogastric business. The increase in Specialty Products segment sales in 2019 compared to 2018 was primarily driven by higher ethylene oxide sales into the medical device sterilization market due to both the contribution of Chemogas and higher legacy product sales, partially offset by lower volumes in the plant nutrition business. Net sales for the Industrial Products segment decreased in 2019 compared to 2018, principally due to lower sales volumes of various choline and choline derivatives used in shale fracking applications.
Gross Margin
(in thousands)20192018Increase
(Decrease)
% Change
Gross margin$211,367  $204,252  $7,115  3.5 %
% of net sales32.8 %31.7 %
Gross margin as a percentage of sales increased in 2019 compared to 2018 primarily due to mix and certain lower raw material costs. Gross margin percentage for the HNH segment remained flat at 30.8% in 2019 compared to 30.7% in 2018. Gross margin percentage for the ANH segment increased by 1.0%, due to certain lower raw material costs and increased average selling prices on ruminant animal feed products, partially offset by lower average selling prices in monogastric species products due to competitive pressures in Europe. Gross margin percentage for the Specialty Products segment decreased 1.8%, primarily due to mix, and gross margin percentage for the Industrial Products segment increased 2.2% from the prior year comparative period, primarily due to certain lower raw material costs and mix.
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Operating Expenses
(in thousands)20192018Increase
(Decrease)
% Change
Operating expenses$108,814  $97,152  $11,662  12.0 %
% of net sales16.9 %15.1 %
The increase in operating expenses was primarily due to incremental operating expenses related to the Chemogas and Zumbro acquisitions of $4,751, higher bad debt expenses of $1,733, an increase in outside services of $1,686, a restructuring charge in the HNH segment of $1,026, and higher transaction and integration costs of $486.
Earnings From Operations
(in thousands)20192018Increase
(Decrease)
% Change
HNH$48,429  $48,037  $392  0.8 %
ANH25,868  26,607  (739) (2.8)%
Specialty Products28,513  25,254  3,259  12.9 %
Industrial Products3,730  8,988  (5,258) (58.5)%
Transaction and integration costs, ERP implementation costs, and unallocated legal fees(3,436) (1,786) (1,650) 92.4 %
Unallocated amortization expense(551) —  (551) N/A  
Earnings from operations$102,553  $107,100  $(4,547) (4.2)%
% of net sales (operating margin)15.9 %16.6 %
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 HNH segment increased primarily due to the aforementioned higher sales, partially offset by higher operating expenses. ANH segment earnings from operations decreased primarily due to higher operating expenses, partially offset by the higher sales and improved gross margin percentage. The increase in earnings from operations for the Specialty Products segment was primarily due to the aforementioned higher volumes for sterilization gases as well as the contribution from Chemogas. Earnings from operations from the Industrial Products segment decreased primarily due to the aforementioned lower sale volumes.

Other Expenses (Income)
(in thousands)20192018Increase
(Decrease)
% Change
Interest expense$5,959  $7,611  $(1,652) (21.7)%
Other, net116  459  (343) (74.7)%
$6,075  $8,070  $(1,995) (24.7)%

Interest expense for 2019 and 2018 was primarily related to outstanding borrowings under our credit facility. In 2018, interest expense also included a write-off of $363 of deferred financing costs in connection with the extinguished debt in 2018. 

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Income Tax Expense

(in thousands)20192018Increase
(Decrease)
% Change
Income tax expense (benefit)$16,807  $20,457  $(3,650) (17.8)%
Effective tax rate17.4 %20.7 %

Our effective tax rate for 2019 and 2018 was 17.4% and 20.7%, respectively. The decrease is primarily due to lower international taxes related to the Patent Box Decree as described below, and certain lower U.S. state taxes, partially offset by a reduction in foreign tax credits.

Italy introduced an elective tax regime (“Patent Box Decree”) that allows companies to benefit from a fifty percent exemption from corporate income tax and local tax on income derived from the direct/indirect use of qualifying intellectual property. During 2019, Balchem Italia received the required ad hoc advance tax ruling. The benefit of the Patent Box Decree had a significant beneficial impact on our effective tax rate for 2019.

Additionally, proposed and final guidance were issued by the U.S. Department of Treasury related to foreign tax credits under the U.S. Tax Cuts and Jobs Act ("U.S. Tax Reform"), which was enacted on December 22, 2017. We will continue to evaluate and analyze the impact of the U.S. Tax Reform and the additional guidance that has been issued, and may be issued, by the U.S. Department of Treasury, the SEC, and/or the Financial Accounting Standards Board ("FASB") regarding this act.

We have analyzed any potential Base Erosion and Anti-Abuse Tax (“BEAT”) on related-party transactions and determined we met the gross receipts test but did not meet the level of base erosion payments that would subject us to BEAT in 2019.

We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.
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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, 2019, are summarized in the table below:
 Payments due by period
 
Contractual Obligations
Total20202021-20222023-2024Thereafter
Operating lease obligations (1)
$13,064  $3,214  $3,938  $2,310  $3,602  
Purchase obligations (2)
37,221  37,221  —  —  —  
Debt obligations (3)
248,569  —  —  248,569  —  
Interest payment obligations (4)
25,688  7,348  14,696  3,644  —  
Total$324,542  $47,783  $18,634  $254,523  $3,602  
(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, 2019, and the assumption that there will be no prepayments of principal. This interest is related to the Credit Agreement that expires on June 27, 2023, and the Contractual Obligations table reflects this expiration date and related current contractual obligations.

The table above excludes a $4,762 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 $65,672 at December 31, 2019 from $54,268 at December 31, 2018.  At December 31, 2019, we had $35,213 of cash and cash equivalents held by our foreign subsidiaries.  It is our intention to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds to fund U.S. operations or obligations. However, if these funds are needed for U.S. operations, we could be required to pay additional withholding taxes to repatriate them. Working capital was $162,688 at December 31, 2019 as compared to $144,258 at December 31, 2018, an increase of $18,430. Working capital reflects the payment of the 2018 declared dividend in 2019 of $15,135 and proceeds from the sale of business and assets.
(in thousands)20192018Increase
(Decrease)
% Change
Cash flows provided by operating activities124,461  118,697  $5,764  4.9 %
Cash flows used in investing activities(156,225) (31,991) (124,234) (388.3)%
Cash flows provided by (used in) financing activities43,385  (71,447) 114,832  160.7 %
Operating Activities
The increase in cash flows from operating activities was primarily due to improved accounts receivable.
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Investing Activities
As previously noted, on May 27, 2019, we acquired 100 percent of the outstanding common shares of Chemogas. In addition, on December 13, 2019, we completed an acquisition of Zumbro. Cash paid for both acquisitions, net of cash acquired, amounted to $141,062.

On September 6, 2019, we sold an insignificant portion of the business which is included in "proceeds from sale of business and assets" in the consolidated statements of cash flows.

We continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and intangible assets were $28,413 and $19,723 for the years ended December 31, 2019 and 2018, respectively.
Financing Activities
The acquisitions of Chemogas and Zumbro were primarily funded through the Credit Agreement. We borrowed $168,569 against the revolving loan and also made payments of $17,567 on the acquired debt. Total debt payments on the revolving loan amounted to $76,000 during 2019 and we had $251,431 available under the Credit Agreement as of December 31, 2019.

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 2,431,767 shares have been purchased, and we had 203,879 shares remaining in treasury at December 31, 2019. 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. The Company also repurchases shares from employees in connection with settlement of transactions under the Company's equity incentive plans.

Proceeds from stock options exercised were $4,839 and $8,272 as of December 31, 2019 and 2018, respectively. Dividend payments were $15,135 and $13,432 as of December 31, 2019 and 2018, respectively.
Other Matters Impacting Liquidity
We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 15 – Employee Benefit Plans. The liability recorded in other long-term liabilities on the consolidated balance sheets as of December 31, 2019 and December 31, 2018 was $1,076 and $1,174, respectively, and the plans are not funded.  Historical cash payments made under these plans have typically been less than $100 per year. We do not anticipate any changes to the payments made in the current year for the plans.

On June 1, 2018, we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees.  Assets of the plan are held in a rabbi trust, which are included in non-current assets on our balance sheet. They are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company.  The deferred compensation liability as of December 31, 2019 and December 31, 2018 was $1,982 and $265, respectively, and is included in other long-term obligations on our balance sheet.

Chemogas has an unfunded defined benefit plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amount recorded for these obligations on our balance sheet as of December 31, 2019 was $596 and was included in other long-term obligations.

Related Party Transactions

We were engaged in related party transactions with St. Gabriel CC Company, LLC for the year ended December 31, 2019. Refer to Note 18, "Related Party Transactions".

Critical Accounting Policies

Our management is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates.

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Our “critical accounting policies” are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. Management considers the following accounting policies to be critical.

Revenue Recognition

Revenue for each of our business segments is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to realize in exchange for those goods. We report amounts billed to customers related to shipping and handling as revenue and include costs incurred for shipping and handling in cost of sales. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities. In instances of shipments made on consignment, revenue is recognized when control is transferred to the customer.

ASC 606, Revenue from Contracts with Customers, was adopted for the fiscal year beginning on January 1, 2018. Per the standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.
Inventories

Inventories are valued at the lower of cost (first in, first out or average) or net realizable value and have been reduced by an allowance for excess or obsolete inventories. The write-down of potentially obsolete or slow-moving inventory is recorded based on management’s assumptions about future demand and market conditions.

Long-lived assets

Long-lived assets, such as property, plant, and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year ended December 31, 2019, we incurred impairment charges of $1,026 in connection with a restructuring in the HNH segment.

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

In 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.

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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, 2019 and 2018, 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, health care benefits, and defined benefit pension plan payments for certain eligible retirees and health care benefits for certain retirees’ eligible survivors. The costs and obligations related to these benefits reflect our assumptions as to health care cost trends and key economic conditions including discount rates, expected rate of return on plan assets, and expected salary increases. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease.

In accordance with ASC 715, “Compensation-Retirement Benefits,” we are required to recognize the overfunded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in our statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.

Intangible Assets with Finite Lives

The useful life of an intangible asset is based on our assumptions regarding expected use of the asset; the relationship of the intangible asset to another asset or group of assets; any legal, regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or extension of the asset’s legal or contractual life without substantial cost; the effects of obsolescence, demand, competition and other economic factors; and the level of maintenance expenditures required to obtain the expected future cash flows from the asset and their related impact on the asset’s useful life. If events or circumstances indicate that the life of an intangible asset has changed, it could result in higher future amortization charges or recognition of an impairment loss. For the year ended December 31, 2019, there were no triggering events which required intangible asset impairment reviews.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation allowances would be established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and
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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, 2019, we have federal and state income tax net operating loss (NOL) carryforwards of $7,078, which will expire in 2034. We believe that the benefit from the state NOL carryforwards will be realized. Therefore, a valuation allowance is not required to be established. However, the Company also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas. These NOLs are not expected to be realized and therefore a valuation allowance on these items was established as of December 31, 2019. There was no valuation allowance for deferred tax assets as of December 31, 2018.

We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.

Stock-based Compensation

We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation-Stock Compensation.” Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. Expected volatilities are based on historical volatility of our stock. The expected term of the options is based on our historical experience of employees’ exercise behavior. As stock-based compensation expense recognized in the Consolidated Statements of Earnings is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. ASC 718 allows for forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period. See Note 3 in Notes to Consolidated Financial Statements for additional information.

New Accounting Pronouncements

See Note 1 in Notes to Consolidated Financial Statements regarding recent accounting pronouncements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Our cash and cash equivalents are held primarily in certificates of deposit and money market investment funds. In the second quarter of 2019, we entered into an interest rate swap and cross-currency swap for hedging purposes. Refer to details noted below (see Note 20). Additionally, as of December 31, 2019, 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, 2019, would result in an increase or decrease in annual interest expense and a corresponding reduction or increase in cash flow of approximately $2,486. We are exposed to commodity price risks, including prices of our primary raw materials. Our objective is to seek a reduction in the potential negative earnings impact of raw material pricing arising in our business activities. We manage these financial exposures, where possible, through pricing and operational means. Our practices may change as economic conditions change.

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Interest Rate Risk

We have exposure to market risk for changes in interest rates, including the interest rate relating to our credit agreement dated June 27, 2018. In the second quarter of 2019, we began to manage our interest rate exposure through the use of derivative instruments. All of our derivative instruments are utilized for risk management purposes, and are not used for trading or speculative purposes. We have hedged a portion of our floating interest rate exposure using an interest rate swap (see Note 20 to our consolidated financial statements). As of December 31, 2019, the notional amount of our outstanding interest rate swap was $108,569.

Foreign Currency Exchange Risk

The financial condition and results of operations of our foreign subsidiaries are reported in Euros, Canadian Dollars, Malaysian Ringgits, Singapore Dollars, Australian Dollars, and Philippine Pesos and then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Therefore, we are exposed to foreign currency exchange risk related to these currencies. Specifically, we are exposed to changes in exchange rates between the U.S. dollar and Euro. In the second quarter of 2019, we entered into a cross-currency swap, with a notional amount of $108,569, which we designated as a hedge of our net investment in Chemogas.

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Item 8.  Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data:Page Numbers

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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, 2019 and 2018, 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, 2019, and the related notes and schedule listed at Item 8 (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, 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, 2019 and 2018, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2019, 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, 2019, 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 Chemogas Holding NV and its subsidiaries (“Chemogas”) and Zumbro River Brand, Inc. (“Zumbro”) from its assessment of internal control over financial reporting as of December 31, 2019, because they were acquired by the Company in purchase business combinations in the second and fourth quarters, respectively, of 2019. We have also excluded Chemogas and Zumbro from our audit of internal control over financial reporting. Chemogas and Zumbro are wholly owned subsidiaries whose total assets and net sales represent approximately 15 percent and 3 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.

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.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Customer Relationships
As described in Note 2 to the financial statements, the Company completed the acquisition of Chemogas Holding NV and its subsidiaries (Chemogas) in May 2019 for $111.3 million, which resulted in $42.7 million of intangible assets being recorded, primarily consisting of $39.2 million in customer relationships. Management used the excess earnings method, a form of the income valuation approach, to determine the fair value of the customer relationships acquired, which required management to make significant judgment in formulating the significant estimates and assumptions about sales, operating margins, attrition rates, growth rates, and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and market place data.

We identified the Company’s valuation of the customer relationships due to of the acquisition of Chemogas as a critical audit matter as there was a high degree of auditor judgment, subjectivity, and audit effort, including the use of our fair value specialist, involved in performing procedures and evaluating audit evidence related to the significant estimates and assumptions utilized by management, including sales, operating margins, attrition rates, growth rates, and discount rates, when calculating the fair value of the acquired customer relationships.

Our audit procedures related to the Company’s valuation of acquired customer relationships as part of the Chemogas acquisition included the following, among others:

We obtained an understanding of the relevant controls related to the valuation of acquired customer relationships and tested such controls for design and operating effectiveness, including management review controls related to the development of the significant assumptions including sales, operating margins, attrition rates, growth rates, and discount rates.
We utilized historical data and compared management’s sales and operating margin forecasts to the most recent actual data available to determine reasonableness of assumptions for sales, operating margins, attrition rates, and growth rates.
With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates and, tested the relevance and reliability of source information underlying the determination of the discount rates and testing the mathematical accuracy of the calculation, and developed a range of independent estimates and comparing those to the discount rates selected by management.

Valuation of Reporting Units for Goodwill Impairment Testing
As described in Note 1 and 6 to the financial statements, the Company’s goodwill balance was $524 million as of December 31, 2019. The Company performed an annual goodwill impairment test as of October 1, 2019 using a quantitative evaluation for each of their reporting units. The Company determines the fair value of its reporting units using the income approach, based on a discounted cash flow valuation model. To test for goodwill impairment, the Company compares fair value of each reporting unit to its carrying value. When estimating the fair value of each reporting unit management makes significant estimates and assumptions related to a number of factors. The Company considers the impact of factors that are specific to each of the reporting units such as industry and economic changes as well as projected revenue and expense growth rates based upon annual budgets and longer-range strategic plans, which are highly sensitive to changes in domestic and foreign economic conditions, and the selection of an appropriate discount rate.

Given the significant estimates and assumptions management makes to estimate the fair value of the reporting units and the sensitivity of the operations to changes in U.S. and foreign economic conditions, we identified management’s assumptions related to the revenue and expense growth rates and the discount rates utilized in the valuation of the reporting units utilized in Company’s goodwill impairment tests as a critical audit matter. Auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

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Our audit procedures related to revenue and expense growth rates and discount rate utilized in the valuation of the Company’s reporting units included the following, among others:

We obtained an understanding of the relevant controls related to the valuation of the Company’s reporting units and tested such controls for design and operating effectiveness, including management review controls related to revenue and expense growth rates and the selection of an appropriate discount rate.
We evaluated the reasonableness of management’s forecasted revenue and expense growth rates by comparing actual results to management’s historical forecasts.
Due to the uncertain U.S and foreign economic growth, we evaluated the reasonableness of management’s forecasts of revenue and expense growth rates by comparing the forecasts to (1) the historical results, (2) internal communications to management and the board of directors, and (3) external communications made by management to analysts and investors.
We evaluated changes in the regulatory environment using industry reports containing analysis of the Company’s markets and assessed whether these changes were reflected in management’s forecasts of revenue and expense growth rates.
With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates and tested the relevance and reliability of source information underlying the determination of the discount rates, tested the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management.

/s/ RSM US LLP

We have served as the Company's auditor since 2004.
New York, New York
February 21, 2020

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BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2019 and 2018
(Dollars in thousands, except share and per share data)
20192018
Current assets:
Cash and cash equivalents$65,672  $54,268  
Accounts receivable, net of allowance for doubtful accounts of $2,080 and $610 at December 31, 2019 and 2018, respectively
93,444  99,545  
Inventories83,893  67,187  
Prepaid expenses4,385  3,830  
Prepaid income taxes5,098    
Other current assets2,454  1,484  
Total current assets254,946  226,314  
Property, plant and equipment, net216,859  190,919  
Goodwill523,998  447,995  
Intangible assets with finite lives, net143,924  109,405  
Right of use assets7,338  —  
Other assets8,617  6,722  
Total assets$1,155,682  $981,355  
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable$37,267  $33,345  
Accrued expenses24,604  22,025  
Accrued compensation and other benefits11,057  11,022  
Dividends payable16,855  15,220  
Income tax payable  444  
Lease liabilities - current2,475    
Total current liabilities92,258  82,056  
Revolving loan248,569  156,000  
Deferred income taxes56,431  44,309  
Lease liabilities - non-current4,827  —  
Derivative liabilities2,103    
Other long-term obligations7,827  7,372  
Total liabilities412,015  289,737  
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; 32,405,796 shares issued and 32,201,917 outstanding at December 31, 2019 and 32,256,915 shares issued and 32,256,209 shares outstanding at December 31, 2018, respectively
2,161  2,151  
Additional paid-in capital174,218  165,098  
Retained earnings590,921  528,027  
Accumulated other comprehensive loss(5,564) (3,602) 
Treasury stock, at cost: 203,879 and 706 shares at December 31, 2019 and 2018, respectively
(18,069) (56) 
Total stockholders’ equity743,667  691,618  
Total liabilities and stockholders’ equity$1,155,682  $981,355  
See accompanying notes to consolidated financial statements.
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BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2019, 2018 and 2017
(In thousands, except per share data)
201920182017
Net sales$643,705  $643,679  $594,790  
Cost of sales432,338  439,427  405,781  
Gross margin211,367  204,252  189,009  
Operating expenses:
Selling expenses60,932  57,219  54,720  
Research and development expenses11,377  11,592  9,305  
General and administrative expenses36,505  28,341  28,081  
108,814  97,152  92,106  
Earnings from operations102,553  107,100  96,903  
Other expenses:
Interest expense, net5,959  7,611  7,532  
Other, net116  459  883  
6,075  8,070  8,415  
Earnings before income tax expense96,478  99,030  88,488  
Income tax expense/(benefit)16,807  20,457  (1,583) 
Net earnings$79,671  $78,573  $90,071  
Basic net earnings per common share$2.48  $2.45  $2.83  
Diluted net earnings per common share$2.45  $2.42  $2.79  
See accompanying notes to consolidated financial statements.
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BALCHEM CORPORATION
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2019, 2018 and 2017
(In thousands)
201920182017
Net earnings$79,671  $78,573  $90,071  
Other comprehensive (loss)/income, net of tax:
Net foreign currency translation adjustment(891) (2,982) 5,404  
Unrealized loss on cash flow hedge, net of taxes of $372 at December 31, 2019
(1,399)     
Net change in postretirement benefit plan, net of taxes of $101, $434, and $207 at December 31, 2019, 2018 and 2017, respectively
328  1,022  (197) 
Other comprehensive (loss)/income(1,962) (1,960) 5,207  
Comprehensive income$77,709  $76,613  $95,278  
See accompanying notes to consolidated financial statements.
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BALCHEM CORPORATION
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands, except share and per share data)