BALCHEM CORP 10-K

Item 8. Financial Statements and Supplementary Data Index to Financial Statements and Supplementary Data: Page Numbers Report of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) 23 Consolidated Balance Sheets as of December 31, 20 2 1 and 20 20 25 Consolidated Statements of Earnings for the years ended December 31, 20 2 1 , 20 20 and 201 9 26 Consolidated Statements of Comprehensive Income for the years ended December 31, 20 2 1 , 20 20 and 201 9 27 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20 2 1 , 20 20 and 201 9 28 Consolidated Statements of Cash Flows for the years ended December 31, 20 2 1 , 20 20 and 201 9 29 Notes to Consolidated Financial Statements 30 Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 20 2 1 , 20 20 and 20 19 60 22 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Balchem Corporation Opinions on the Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Balchem Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 23 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Reporting Units for Goodwill Impairment Testing As described in Note 1 and 6 to the financial statements, the Company’s goodwill balance was $524 million as of December 31, 2021. The Company performed an annual goodwill impairment test as of October 1, 2021 using a quantitative evaluation for each of its reporting units. The Company determines the fair value of its reporting units using the income approach, based on a discounted cash flow valuation model. To test for goodwill impairment, the Company compares the fair value of each reporting unit to its carrying value. When determining the fair value of each reporting unit, management makes significant estimates and assumptions related to a number of factors. The Company considers the impact of factors that are specific to each of the reporting units such as industry and economic changes as well as projected revenue and expense growth rates based upon annual budgets and longer-range strategic plans, which are highly sensitive to changes in domestic and foreign economic conditions, and the selection of appropriate discount rates. Given the significant estimates and assumptions management makes to determine the fair value of the reporting units and the sensitivity of the operations to changes in U.S. and foreign economic conditions, we identified management’s assumptions related to the revenue and expense growth rates, the discount rates, and the terminal value calculation utilized in the valuation of the reporting units utilized in the Company’s goodwill impairment tests as a critical audit matter. Auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. Our audit procedures related to revenue and expense growth rates, discount rates, and the terminal value calculation utilized in the valuation of the Company’s reporting units included the following, among others: • We obtained an understanding of the relevant controls related to the valuation of the Company’s reporting units and tested such controls for design and operating effectiveness, including management review controls related to revenue and expense growth rates and the selection of appropriate discount rates. • We evaluated the reasonableness of management’s forecasted revenue and expense growth rates by comparing actual results to management’s historical forecasts. • Due to the uncertain U.S and foreign economic growth, we evaluated the reasonableness of management’s forecasts of revenue and expense growth rates by comparing the forecasts to (1) the historical results, (2) internal communications to management and the Board of Directors, and (3) external communications made by management to analysts and investors. • We evaluated changes in the regulatory environment using industry reports containing analysis of the Company’s markets and assessed whether these changes were reflected in management’s forecasts of revenue and expense growth rates. • With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates and tested the relevance and reliability of source information underlying the determination of the discount rates, tested the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management. • With the assistance of our fair value specialists, we evaluated the reasonableness and tested the mathematical accuracy of the terminal value calculation. /s/ RSM US LLP We have served as the Company's auditor since 2004. New York, New York February 24, 2022 24 Table of Contents BALCHEM CORPORATION Consolidated Balance Sheets December 31, 2021 and 2020 (Dollars in thousands, except share and per share data) 2021 2020 Current assets: Cash and cash equivalents $ 103,239 $ 84,571 Accounts receivable, net of allowance for doubtful accounts of $ 928 and $ 2,092 at December 31, 2021 and 2020, respectively 117,408 98,214 Inventories, net 91,058 70,620 Prepaid expenses 6,116 6,598 Prepaid income taxes — 3,447 Other current assets 4,411 3,438 Total current assets 322,232 266,888 Property, plant and equipment, net 237,517 228,096 Goodwill 523,949 529,463 Intangible assets with finite lives, net 94,665 121,660 Right of use assets - operating leases 6,929 5,838 Right of use assets - finance lease 2,359 2,572 Other assets 11,674 11,326 Total assets $ 1,199,325 $ 1,165,843 Liabilities and Stockholders’ Equity Current liabilities: Trade accounts payable $ 56,243 $ 23,742 Accrued expenses 43,411 29,655 Accrued compensation and other benefits 19,567 19,753 Dividends payable 20,886 18,941 Income tax payable 1,334 — Operating lease liabilities - current 2,194 2,178 Finance lease liabilities - current 167 159 Total current liabilities 143,802 94,428 Revolving loan 108,569 163,569 Deferred income taxes 46,455 51,359 Operating lease liabilities - non-current 4,811 3,607 Finance lease liabilities - non-current 2,303 2,472 Derivative liabilities 2,658 11,658 Other long-term obligations 13,712 10,517 Total liabilities 322,310 337,610 Commitments and contingencies (Note 16) Stockholders’ equity: Preferred stock, $ 25 par value. Authorized 2,000,000 shares; no ne issued and outstanding — — Common stock, $ .0667 par value. Authorized 120,000,000 shares; 32,287,150 shares issued and outstanding at December 31, 2021 and 32,372,621 shares issued and outstanding at December 31, 2020, respectively 2,154 2,160 Additional paid-in capital 147,716 165,160 Retained earnings 732,138 656,740 Accumulated other comprehensive (loss)/income ( 4,993 ) 4,173 Total stockholders’ equity 877,015 828,233 Total liabilities and stockholders’ equity $ 1,199,325 $ 1,165,843 See accompanying notes to consolidated financial statements. 25 Table of Contents BALCHEM CORPORATION Consolidated Statements of Earnings Years Ended December 31, 2021, 2020 and 2019 (In thousands, except per share data) 2021 2020 2019 Net sales $ 799,023 $ 703,644 $ 643,705 Cost of sales 555,849 479,747 432,338 Gross margin 243,174 223,897 211,367 Operating expenses: Selling expenses 60,413 58,630 60,932 Research and development expenses 13,524 10,332 11,377 General and administrative expenses 41,735 43,788 36,505 115,672 112,750 108,814 Earnings from operations 127,502 111,147 102,553 Other expenses: Interest expense, net 2,456 4,439 5,959 Other, net ( 187 ) 291 116 2,269 4,730 6,075 Earnings before income tax expense 125,233 106,417 96,478 Income tax expense 29,129 21,794 16,807 Net earnings $ 96,104 $ 84,623 $ 79,671 Basic net earnings per common share $ 2.98 $ 2.63 $ 2.48 Diluted net earnings per common share $ 2.94 $ 2.60 $ 2.45 See accompanying notes to consolidated financial statements. 26 Table of Contents BALCHEM CORPORATION Consolidated Statements of Comprehensive Income Years Ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Net earnings $ 96,104 $ 84,623 $ 79,671 Other comprehensive (loss)/ income, net of tax: Net foreign currency translation adjustment ( 11,255 ) 12,829 ( 891 ) Unrealized gain/(loss) on cash flow hedge, net of taxes of $ 654 , $ 809 , and $ 372 at December 31, 2021, 2020, and 2019, respectively 2,053 ( 2,285 ) ( 1,399 ) Net change in postretirement benefit plan, net of taxes of $ 13 , $ 127 , and $ 101 at December 31, 2021, 2020 and 2019, respectively 36 ( 807 ) 328 Other comprehensive (loss)/ income, net of tax ( 9,166 ) 9,737 ( 1,962 ) Comprehensive income $ 86,938 $ 94,360 $ 77,709 See accompanying notes to consolidated financial statements. 27 Table of Contents BALCHEM CORPORATION Consolidated Statements of Stockholders’ Equity Years Ended December 31, 2021, 2020 and 2019 (Dollars in thousands, except share and per share data) Total Stockholders' Equity Retained Earnings Accumulated Other Comprehensive Income (Loss) Common Stock Additional Paid-in Capital Shares Amount Balance - December 31, 2018 $ 691,618 $ 528,027 $ ( 3,602 ) 32,256,209 $ 2,151 $ 165,042 Net earnings 79,671 79,671 — — — — Other comprehensive (loss) ( 1,962 ) — ( 1,962 ) — — — Dividends ($ .52 per share) ( 16,777 ) ( 16,777 ) — — — — Repurchases of common stock ( 21,321 ) — — ( 240,995 ) ( 16 ) ( 21,305 ) Shares and options issued under stock plans 12,438 — — 186,703 13 12,425 Balance - December 31, 2019 743,667 590,921 ( 5,564 ) 32,201,917 2,148 156,162 Net earnings 84,623 84,623 — — — — Other comprehensive income 9,737 — 9,737 — — — Dividends ($ .58 per share) ( 18,804 ) ( 18,804 ) — — — — Repurchases of common stock ( 13,463 ) — — ( 136,629 ) ( 9 ) ( 13,454 ) Shares and options issued (canceled) under stock plans 22,473 — — 307,333 21 22,452 Balance - December 31, 2020 828,233 656,740 4,173 32,372,621 2,160 165,160 Net earnings 96,104 96,104 — — — — Other comprehensive (loss) ( 9,166 ) — ( 9,166 ) — — — Dividends ($ .64 per share) ( 20,706 ) ( 20,706 ) — — — — Repurchases of common stock ( 35,239 ) — — ( 249,848 ) ( 17 ) ( 35,222 ) Shares and options issued under stock plans 17,789 — — 164,377 11 17,778 Balance - December 31, 2021 $ 877,015 $ 732,138 $ ( 4,993 ) 32,287,150 $ 2,154 $ 147,716 See accompanying notes to consolidated financial statements. 28 Table of Contents BALCHEM CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Cash flows from operating activities: Net earnings $ 96,104 $ 84,623 $ 79,671 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 48,879 51,281 45,862 Stock compensation expense 10,802 8,303 7,596 Deferred income taxes ( 5,944 ) ( 4,627 ) ( 3,563 ) Provision for doubtful accounts 180 140 1,776 Unrealized (gain)/loss on foreign currency transactions and deferred compensation ( 384 ) 173 72 Asset impairment charge 1,675 1,915 1,140 (Gain)/loss on disposal of assets ( 1,728 ) 153 ( 3,134 ) Changes in assets and liabilities, net of acquired balances Accounts receivable ( 20,700 ) ( 3,599 ) 11,623 Inventories ( 21,023 ) 13,923 ( 11,401 ) Prepaid expenses and other current assets ( 881 ) ( 2,856 ) 477 Accounts payable and accrued expenses 47,067 ( 992 ) 1,134 Income taxes 4,787 1,859 ( 5,664 ) Other 1,680 198 ( 1,128 ) Net cash provided by operating activities 160,514 150,494 124,461 Cash flows from investing activities: Capital expenditures and intangible assets acquired ( 37,449 ) ( 33,828 ) ( 28,413 ) Cash paid for acquisitions, net of cash acquired — — ( 141,062 ) Proceeds from sale of business and assets 318 87 11,523 Proceeds from insurance 1,831 — 2,727 Purchase of convertible notes — ( 850 ) ( 1,000 ) Net cash used in investing activities ( 35,300 ) ( 34,591 ) ( 156,225 ) Cash flows from financing activities: Proceeds from revolving loan 5,000 10,000 168,569 Principal payments on revolving loan ( 60,000 ) ( 95,000 ) ( 76,000 ) Principal payments on finance lease ( 159 ) ( 151 ) — Principal payment on acquired debt — — ( 17,567 ) Proceeds from stock options exercised 6,943 14,155 4,839 Dividends paid ( 18,723 ) ( 16,705 ) ( 15,135 ) Repurchases of common stock ( 35,239 ) ( 13,463 ) ( 21,321 ) Net cash (used in) provided by financing activities ( 102,178 ) ( 101,164 ) 43,385 Effect of exchange rate changes on cash ( 4,368 ) 4,160 ( 217 ) Increase in cash and cash equivalents 18,668 18,899 11,404 Cash and cash equivalents beginning of period 84,571 65,672 54,268 Cash and cash equivalents end of period $ 103,239 $ 84,571 $ 65,672 Supplemental Cash Flow Information - see Note 13 See accompanying notes to consolidated financial statements. 29 Table of Contents BALCHEM CORPORATION Notes to Consolidated Financial Statements (All amounts in thousands, except share and per share data) NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description Balchem Corporation (“Balchem” or the “Company”), including, unless the context otherwise requires, its wholly-owned subsidiaries, incorporated in the State of Maryland in 1967, is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical, agricultural, and medical sterilization industries. Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform with the current period's presentation. Revenue Recognition Revenue for each of the Company’s business segments is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to realize in exchange for those goods. The Company reports amounts billed to customers related to shipping and handling as revenue and includes costs incurred for shipping and handling in cost of sales. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities. In instances of shipments made on consignment, revenue is recognized when control is transferred to the customer. In accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers , revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. The Company has funds in its cash accounts that are with third party financial institutions, primarily in certificates of deposit and money market funds. The Company's balances of cash and cash equivalents in the U.S., Italy, Belgium, Malaysia, Australia, Philippines, and Singapore exceed the Federal Deposit Insurance Corporation (“FDIC”), Fondo Interbancario di Tutela dei Depositi (“FITD”), Financial Services and Markets Authority ("FSMA"), Perbadanan Insurans Deposit Malaysia ("PIDM"), Australian Prudential Regulation Authority ("APRA"), Philippine Deposit Insurance Corporation ("PDIC"), and Singapore Deposit Insurance Corporation ("SDIC") insurance limits, respectively. Accounts Receivable Credit terms are granted in the normal course of business to the Company’s customers and on-going credit evaluations are performed on the Company’s customers. In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires that credit losses be reported based on expected losses instead of the incurred loss model. Based on this ASU, customers' credit limits are adjusted based upon their reasonably expected credit worthiness which is determined through review of their payment history, their current credit information, and any foreseeable future events. Collections and payments from customers are continuously monitored and allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments are maintained. Estimated losses are based on historical experience, any specific customer collection issues identified, 30 Table of Contents and any reasonably expected future adverse events. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances and related bad debt expense may be required. Inventories Inventories are valued at the lower of cost (first in, first out or average) or net realizable value and have been reduced by an allowance for excess or obsolete inventories. Cost elements include material, labor and manufacturing overhead. Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings 15 - 25 years Equipment 2 - 28 years Expenditures for repairs and maintenance are charged to expense. Alterations and major overhauls that extend the lives or increase the capacity of plant assets are capitalized. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts and any resultant gain or loss is included in earnings from operations. Business Concentrations Financial instruments that subject the Company to credit risk consist primarily of accounts receivable and money market investments. Investments are managed within established guidelines to mitigate risks. Accounts receivable subject the Company to credit risk partially due to the concentration of amounts due from customers. The Company extends credit to its customers based upon an evaluation of the customers’ financial condition and credit histories. In 2021, 2020 and 2019, no customer accounted for more than 10% of total net sales or accounts receivable. Post-employment Benefits We provide life insurance, health care benefits, and defined benefit pension plan payments for certain eligible retirees and health care benefits for certain retirees’ eligible survivors. The costs and obligations related to these benefits reflect our assumptions as to health care cost trends and key economic conditions including discount rates, expected rate of return on plan assets, and expected salary increases. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease. In accordance with ASC 715, “Compensation-Retirement Benefits,” we are required to recognize the overfunded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in our statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Goodwill and Acquired Intangible Assets Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC 350, “Intangibles-Goodwill and Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the provisions of ASC 350. The Company performed its annual test as of October 1. ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment if events and circumstances indicate that the asset might be impaired. In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. A goodwill impairment test will now be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance is effective for 31 Table of Contents annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted the new standard on January 1, 2020. As of October 1, 2021 and 2020, the Company opted to bypass the qualitative assessment and proceeded directly to performing the quantitative goodwill impairment test. The Company assessed the fair values of its reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for its conclusions. The Company's estimates of future cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions. The Company's assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units was not considered impaired as of October 1, 2021. However, during the second quarter of 2020, the Company recorded a goodwill impairment charge of $ 1,228 related to business formerly included in the Industrial Products segment. The Company may resume performing the qualitative assessment in subsequent periods. The Company had goodwill in the amount of $ 523,949 and $ 529,463 as of December 31, 2021 and 2020, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.” Goodwill at December 31, 2019 $ 523,998 Goodwill as a result of Zumbro Acquisition 432 Goodwill impairment ( 1,228 ) Impact due to change in foreign exchange rates 6,261 Goodwill at December 31, 2020 529,463 Impact due to change in foreign exchange rates ( 5,514 ) Goodwill at December 31, 2021 $ 523,949 December 31, 2021 December 31, 2020 HNH $ 424,044 $ 424,051 ANH 17,207 17,824 Specialty Products 82,654 87,539 Other and Unallocated 44 49 Total $ 523,949 $ 529,463 The following intangible assets with finite lives are stated at cost and are amortized either on an accelerated basis or on a straight-line basis over the following estimated useful lives: Amortization Period (in years) Customer relationships and lists 10 - 20 Trademarks & trade names 2 - 17 Developed technology 5 - 12 Regulatory registration costs 5 - 10 Patents & trade secrets 15 - 17 Other 2 - 18 Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. The useful life of an intangible asset is based on our assumptions regarding expected use of the asset; the relationship of the intangible asset to another asset or group of assets; any legal, regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or extension of the asset’s legal or contractual life without substantial cost; the effects of obsolescence, demand, competition and other economic factors; and the level of maintenance expenditures required to obtain the expected future cash flows from the asset and their related impact on the asset’s useful life. If events or circumstances indicate that the life of an 32 Table of Contents intangible asset has changed, it could result in higher future amortization charges or recognition of an impairment loss. For the year ended December 31, 2021, 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 are established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a fifty percent likelihood of being sustained. Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision. Use of Estimates Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates. Fair Value of Financial Instruments The Company has a number of financial instruments, none of which are held for trading purposes. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable and accrued liabilities, and are carried at cost which approximates fair value due to the short-term maturity of these instruments. In addition, non-current assets includes rabbi trust funds related to the Company's deferred compensation plan. The money market and rabbi trust funds are valued using level one inputs, as defined by ASC 820, "Fair Value Measurement." The Company also has derivative financial instruments, consisting of a cross-currency swap and an interest rate swap, which are included in either derivative asset or derivative liability, in the consolidated balance sheets (see Note 20, "Derivative Instruments and Hedging Activities"). The fair values of these derivative instruments are determined based on Level 2 inputs, using significant inputs that are observable either directly or indirectly, including interest rate curves and implied volatilities. Cost of Sales Cost of sales are primarily comprised of raw materials and supplies consumed in the manufacture of product, as well as manufacturing labor, maintenance labor, depreciation expense, and direct overhead expense necessary to convert purchased materials and supplies into finished product. Cost of sales also includes inbound freight costs, outbound freight costs for shipping products to customers, warehousing costs, quality control and obsolescence expense. Selling, General and Administrative Expenses Selling expenses consist primarily of compensation and benefit costs, amortization of customer relationships and lists, trade promotions, advertising, commissions and other marketing costs. General and administrative expenses consist primarily of payroll and benefit costs, occupancy and operating costs of corporate offices, depreciation and amortization expense on non-manufacturing assets, information systems costs and other miscellaneous administrative costs. 33 Table of Contents Research and Development Research and development costs are expensed as incurred. Net Earnings Per Common Share Basic net earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share is calculated in a manner consistent with basic net earnings per common share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding, unvested restricted stock, and unvested performance shares (using the treasury stock method). Stock-based Compensation The Company has stock-based employee compensation plans, which are described more fully in Note 3. The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation,” which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. The Company estimates the fair value of each option award on the date of grant using a Black-Scholes based option-pricing model. Estimates of and assumptions about forfeiture rates, terms, volatility, interest rates and dividend yields are used to calculate stock-based compensation. A significant change to these estimates could materially affect the Company’s operating results. Impairment of Long-lived Assets Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year ended December 31, 2019, we incurred impairment charges of $ 1,026 in connection with a restructuring in the HNH segment. Derivative Instruments and Hedging Activities The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In May 2019, the Company entered into an interest rate swap with JP Morgan Chase, N.A. (the "Swap Counterparty") and a cross-currency swap with JP Morgan Chase, N.A. (the "Bank Counterparty"). The Company's primary objective for holding derivative financial instruments is to manage interest rate risk and foreign currency risk. The Company does not enter into derivative financial instruments for trading or speculative purposes. On May 28, 2019, the Company entered into a pay-fixed, receive-floating interest rate swap with a notional amount of $ 108,569 and a maturity date of June 27, 2023. The Company's risk management objective and strategy with respect to the interest rate swap is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective since changes in the cash flows of the interest rate swap are expected to exactly offset the changes in the cash flows attributable to fluctuations in the contractually specified interest rate on the interest payments associated with the Credit Agreement. At the same time, the Company also entered into a cross-currency swap to manage foreign exchange risk related to the Company's net investment in Chemogas. This derivative has a notional amount of $ 108,569 , an effective date of May 28, 2019, and a maturity date of June 27, 2023. The derivative instruments are with the above single counterparty and are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. As such, the derivative instruments are categorized as a master netting arrangement and presented as a net derivative asset or derivative liability on the consolidated balance sheet. On a quarterly basis, we assess the effectiveness of the hedging relationships for the interest rate swap and cross-currency swap by reviewing the critical terms indicated in the applicable agreement. As of December 31, 2021, we assessed the hedging relationships and determined them to be highly effective. As such, the net change in fair values of the interest rate swap, that qualifies as a cash flow hedge, was recorded in accumulated other comprehensive income/(loss) and is subsequently reclassified 34 Table of Contents into interest expense as interest payments are made on our debt. For the cross-currency swap, the amounts that have not yet been recognized in earnings remained in the cumulative translation adjustment section of accumulated other comprehensive income until the hedged net investment is sold or liquidated in accordance with paragraphs 815-35-35-5A, "Derivatives and Hedging - Net Investment Hedges", and 830-30-40-1 through 40-1A, "Foreign Currency Matters - Derecognition". Refer to Note 20, "Derivative Instruments and Hedging Activities" for detailed information about our derivative financial instruments. New Accounting Pronouncements Recently Adopted Accounting Standards In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, this Standard Update is in effect from March 12, 2020 through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The Company adopted this new Standard in 2021. The Standard did not have a significant impact on the Company's consolidated financial statements and disclosures. In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The effective date of this Standard Update is for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Standard Update may be adopted either using the prospective or retrospective transition approach and could also be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company adopted the new Standard on January 1, 2021. The Standard did not have a significant impact on the Company's consolidated financial statements and disclosures. In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The guidance contained in this ASU requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. This ASU became effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Standard may be adopted either using the prospective or retrospective transition approach. The Company adopted the new Standard on January 1, 2020. The Standard Update did not have a significant impact on the Company’s consolidated financial statements and disclosures. In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,” which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This Update should be applied on a retrospective basis to all periods presented and is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company adopted the new Standard on January 1, 2020. The Standard Update did not have a significant impact on the Company's consolidated financial statements and disclosures. In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”, which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted the new Standard on January 1, 2020. This ASU did not have a significant impact on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires that credit losses be reported based on expected losses instead of the incurred loss model. The Update made several consequential amendments to the codification which requires the accounting for available-for-sale debt securities to be individually assessed for credit losses when fair value is less than the amortized cost basis. The FASB subsequently issued ASU 2019-04, ASU 2019-05, and ASU 2019-11, all of which further clarified ASU 2016-13. The 35 Table of Contents Company adopted the new Standard and related Updates on January 1, 2020. The adoption did not have a significant impact on the consolidated financial statements. NOTE 2 – SIGNIFICANT ACQUISITIONS AND DIVESTITURES Acquisitions On December 13, 2019, the Company completed the acquisition of Zumbro. The Company made payments of $ 52,403 on the acquisition date, amounting to $ 47,058 to the former shareholders and $ 5,345 to Zumbro's lenders to pay Zumbro debt. Considering the cash acquired of $ 686 , net payments made to the former shareholders were $ 46,372 . In May 2020, the Company received an adjustment for working capital acquired of $ 561 . The goodwill of $ 18,505 arising from the acquisition consists largely of expected synergies, including the combined entities' experience and technical problem-solving capabilities, and acquired workforce. The goodwill is assigned to Human Nutrition & Health ("HNH") and $ 4,723 is deductible for income taxes. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed: Cash and cash equivalents $ 686 Accounts receivable 3,314 Inventories 4,052 Prepaid & other current assets 521 Property, plant and equipment 15,245 Right of use assets 3,181 Customer relationships 8,200 Developed technology 4,400 Trade name 2,300 Other non-current assets 10 Accounts payable & accrued expenses ( 1,651 ) Lease liabilities ( 3,181 ) Debt ( 5,345 ) Deferred income taxes ( 3,740 ) Goodwill 18,505 Amount paid to shareholders 46,497 Zumbro debt paid on purchase date 5,345 Total amount paid on acquisition date $ 51,842 The estimated valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management's estimates and assumptions that are subject to change. In preparing our fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Valuation methods utilized included cost and market approaches for property, plant and equipment, excess earnings method for customer relationships and the relief from royalty method for other intangible assets. Customer relationships are amortized over a 15-year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade name and developed technology are amortized over 10 years and 12 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined. The Company is indemnified for tax liabilities related to periods prior to the acquisition date. Indemnified tax liabilities will create an indemnification asset (receivable). An indemnification asset balance has not been established. 36 Table of Contents On May 27, 2019, the Company acquired 100 percent of the outstanding common shares of Chemogas. The Company made payments of approximately € 99,503 (translated to $ 111,324 ) on the acquisition date, amounting to approximately € 88,579 (translated to $ 99,102 ) to the former shareholders and approximately € 10,924 (translated to $ 12,222 ) to Chemogas' lender to pay Chemogas bank debt. Considering the cash acquired of € 3,943 (translated to $ 4,412 ), net payments made to the former shareholders were € 84,636 (translated to $ 94,690 ). The goodwill of $ 59,319 that arose on the acquisition date consists largely of expected synergies, including the combined entities' experience and technical problem-solving capabilities, and acquired workforce. The goodwill is assigned to the Specialty Products segment and is not tax deductible for income tax purposes. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed: Cash and cash equivalents $ 4,412 Accounts receivable 4,176 Inventories 957 Property, plant and equipment 15,972 Customer relationships 39,158 Developed technology 2,461 Trade name 1,119 Other assets 1,491 Accounts payable ( 3,261 ) Bank debt ( 12,222 ) Other liabilities ( 1,030 ) Pension obligation (net) ( 594 ) Deferred income taxes ( 12,856 ) Goodwill 59,319 Amount paid to shareholders 99,102 Chemogas bank debt paid on purchase date 12,222 Total amount paid on acquisition date $ 111,324 The valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. In preparing our fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Valuation methods utilized included cost and market approaches for property, plant and equipment, excess earnings method for customer relationships and the relief from royalty method for other intangible assets. Customer relationships are amortized over a 20 -year period utilizing an accelerated method based on the estimated average customer attrition rate. Trade name and developed technology are amortized over 2 years and 10 years, respectively, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined. The Company is indemnified for tax liabilities related to periods prior to the acquisition date. Indemnified tax liabilities will create an indemnification asset (receivable). An indemnification asset balance has not been established. In connection with Chemogas and Zumbro acquisitions, the Company incurred transaction and integration costs of $ 26 , $ 1,480 , and $ 1,947 for the years ended December 31, 2021, 2020 and 2019, respectively. Total transaction and integration costs related to recent acquisitions, including the Chemogas and Zumbro acquisitions described above, are recorded in general and administrative expenses. These costs amounted to $ 448 , $ 2,011 , and $ 2,273 for the years ended December 31, 2021, 2020 and 2019, respectively. Divestiture On September 6, 2019, the Company sold an insignificant portion of its business. As a result of the transaction, the Company recorded a gain on sale, which was immaterial to the consolidated financial statements and included in general and administrative 37 Table of Contents expenses. Operating results for the portion of the business sold were insignificant relative to the Company’s consolidated financial results for year ended December 31, 2019. NOTE 3 - STOCKHOLDERS’ EQUITY STOCK-BASED COMPENSATION All share-based payments, including grants of stock options, are recognized in the statements of earnings as operating expenses, based on their fair values. The Company has made an estimate of expected forfeitures, based on its historical experience, and is recognizing compensation cost only for those stock-based compensation awards expected to vest. The Company’s results for the years ended December 31, 2021, 2020 and 2019 reflected the following compensation cost and such compensation cost had the following effects on net earnings: Increase/(Decrease) for the Year Ended, December 31 2021 2020 2019 Cost of sales $ 845 $ 1,115 $ 1,147 Operating expenses 9,957 7,188 6,449 Net earnings ( 8,370 ) ( 6,332 ) ( 5,884 ) On December 31, 2021, the Company had one share-based compensation plan under which awards may be granted, which is described below. In June 2017, the Company adopted the Balchem Corporation 2017 Omnibus Incentive Plan (“2017 Plan”) for officers, employees and directors of the Company and its subsidiaries. The 2017 Plan replaced the 1999 Stock Plan and amendments and restatements thereto (collectively to be referred to as the “1999 Plan"), which expired on April 9, 2018. No further awards will be made under the 1999 Plan, and the shares that remained available for grant under the 1999 Plan will only be used to settle outstanding awards granted under the 1999 Plan and will not become available under the 2017 Plan. The 2017 Plan is administered by the Compensation Committee of the Board of Directors of the Company. The 2017 Plan provides as follows: (i) for a termination date of June 13, 2027; (ii) the authorization of 1,600,000 shares for future grants (which represents a reduction from the 6,000,000 shares authorized for grant under the 1999 Plan); (iii) for the making of grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards, as well as for the making of cash performance awards; (iv) except as provided in an employment agreement as in effect on the effective date of the 2017 Plan, no automatic acceleration of outstanding awards upon the occurrence of a change in control of the Company; (v) certain annual limits on the number of shares and amount of cash that may be granted; (vii) for dividends or dividend equivalents otherwise payable on an unvested award to accrue and be paid only at such time as the vesting conditions applicable to the underlying award have been satisfied; (vii) for certain discretionary compensation recovery if the Company is required to prepare an accounting restatement of its financial statements due to the Company’s material noncompliance with any financial reporting requirements under the securities laws; and (viii) for compliance with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code” or the “Code”). No option will be exercisable for longer than ten years after the date of grant. The shares to be issued upon exercise of the outstanding options have been approved, reserved and are adequate to cover all exercises. As of December 31, 2021, the 2017 Plan had 703,707 shares available for future awards. The Company has Restricted Stock Grant Agreements with the Company's non–employee directors and certain employees. Under the Restricted Stock Grant Agreements, certain shares of the Common Stock have been granted, ranging from 70 shares to 54,000 shares, to its non-employee directors and certain employees, subject to time-based vesting requirements. The Company also has performance share (“PS”) awards, which provide the recipients the right to receive a certain number of shares of the Common Stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (“TSR”) where vesting is dependent upon the Company’s TSR performance over the performance period (typically three years ) relative to a comparator group consisting of the Russell 2000 index constituents. 38 Table of Contents The fair value of each option award issued under the Company’s stock plans is estimated on the date of grant using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical experience of employees’ exercise behavior. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Year Ended December 31, Weighted Average Assumptions: 2021 2020 2019 Expected Volatility 32.9 % 26.9 % 24.0 % Expected Term (in years) 4.9 3.9 4.0 Risk-Free Interest Rate 0.5 % 1.3 % 2.5 % Dividend Yield 0.5 % 0.5 % 0.6 % The value of the restricted shares is based on the fair value of the award at the date of grant. Performance Share expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the Performance Share vests. The assumptions used in the fair value determination were risk free interest rates of 0.2 %, 1.4 %, and 2.5 %; dividend yields of 0.6 %, 0.5 %, and 0.5 %; volatilities of 33 %, 24 %, and 24 %; and initial TSR’s of 11.7 %, 10.9 %, and - 5.9 % in each case for the years ended December 31, 2021, 2020, and 2019, respectively. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The Performance Shares will cliff vest 100 % at the end of the third year following the grant in accordance with the performance metrics set forth. Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally three years for stock options, three to four years for employee restricted stock awards, three years for employee performance share awards, and three to four years for non-employee director restricted stock awards. A summary of stock option plan activity for 2021, 2020, and 2019 for all plans is as follows: 2021 2020 2019 # of Shares (000s) Weighted Average Exercise Price # of Shares (000s) Weighted Average Exercise Price # of Shares (000s) Weighted Average Exercise Price Outstanding at beginning of year 858 $ 80.58 951 $ 68.18 887 $ 61.59 Granted 129 119.12 174 111.75 197 85.13 Exercised ( 109 ) 63.42 ( 256 ) 55.26 ( 112 ) 43.67 Forfeited ( 10 ) 106.93 ( 11 ) 92.94 ( 17 ) 80.88 Cancelled ( 1 ) 74.57 — — ( 4 ) 70.90 Outstanding at end of year 867 $ 88.19 858 $ 80.58 951 $ 68.18 Exercisable at end of year 538 $ 75.51 494 $ 69.04 581 $ 59.29 The aggregate intrinsic value for outstanding stock options was $ 69,711 , $ 29,735 and $ 31,814 at December 31, 2021, 2020 and 2019, respectively, with a weighted average remaining contractual term of 6.4 years at December 31, 2021. Exercisable stock options at December 31, 2021 had an aggregate intrinsic value of 50,128 with a weighted average remaining contractual term of 5.3 years. Other information pertaining to option activity during the years ended December 31, 2021, 2020 and 2019 is as follows: 39 Table of Contents Years Ended December 31, 2021 2020 2019 Weighted-average fair value of options granted $ 33.11 $ 24.36 $ 18.51 Total intrinsic value of stock options exercised ($000s) $ 7,866 $ 12,698 $ 6,135 Additional information related to stock options outstanding under all plans at December 31, 2021 is as follows: Options Outstanding Options Exercisable Range of Exercise Prices Shares Outstanding (000s) Weighted Average Remaining Contractual Term Weighted Average Exercise Price Number Exercisable (000s) Weighted Average Exercise Price $ 29.06 - $ 57.17 26 2.1 $ 47.26 26 $ 47.26 $ 58.52 - $ 85.40 541 5.5 75.55 476 74.37 $ 91.56 - $ 120.60 300 8.5 114.46 36 109.84 867 6.4 $ 88.19 538 $ 75.51 Non-vested restricted stock activity for the years ended December 31, 2021, 2020 and 2019 is summarized below: 2021 2020 2019 Shares (000s) Weighted Average Grant Date Fair Value Shares (000s) Weighted Average Grant Date Fair Value Shares (000s) Weighted Average Grant Date Fair Value Non-vested balance at beginning of year 159 $ 90.71 138 $ 80.03 79 $ 72.75 Granted 42 123.58 46 110.53 73 85.69 Vested ( 24 ) 85.83 ( 21 ) 67.60 ( 8 ) 58.52 Forfeited ( 11 ) 90.49 ( 4 ) 91.91 ( 6 ) 84.65 Non-vested balance at end of year 166 $ 99.70 159 $ 90.71 138 $ 80.03 Non-vested performance share activity for the years ended December 31, 2021, 2020 and 2019 is summarized below: 2021 2020 2019 Shares (000s) Weighted Average Grant Date Fair Value Shares (000s) Weighted Average Grant Date Fair Value Shares (000s) Weighted Average Grant Date Fair Value Non-vested balance at beginning of year 71 $ 91.99 70 $ 81.26 53 $ 75.61 Granted 36 108.74 20 126.46 33 81.79 Vested ( 24 ) 70.64 ( 8 ) 104.15 ( 9 ) 65.54 Forfeited ( 14 ) 81.03 ( 11 ) 82.71 ( 7 ) 60.85 Non-vested balance at end of year 69 $ 110.72 71 $ 91.99 70 $ 81.26 As of December 31, 2021, 2020 and 2019, there was $ 13,980 , $ 14,154 and $ 11,643 , respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31, 2021, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.2 years. We estimate that share-based compensation expense for the year ended December 31, 2022 will be approximately $ 11,900 . 40 Table of Contents REPURCHASE OF COMMON STOCK The Company's Board of Directors has approved a stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,818,244 shares have been purchased. The Company’s prior presentation of reflecting treasury stock separately within stockholders’ equity has been adjusted to conform to the presentation prescribed by the State of Maryland, where the Company is incorporated. In connection therewith, $ 7,873 of previously acquired treasury stock has been offset against additional paid-in capital and common stock in the consolidated balance sheet as of December 31, 2020. Corresponding adjustments to balances previously reflected as treasury stock of $ 7,873 and $ 18,069 for the years ended December 31, 2020 and 2019 were made to the consolidated statements of stockholders’ equity and prior references to “Treasury shares purchased” were updated to “Repurchases of common stock”, accordingly. There was no impact to total stockholders’ equity in any of the years presented as a result of these updates. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it is advisable to do so based on its assessment of corporate cash flow, market conditions and other factors. The Company also repurchases shares from employees in connection with settlement of transactions under the Company's equity incentive plans. During 2021, 2020, and 2019, the Company purchased 249,848 , 136,629 , and 240,995 shares, respectively, from open market purchases and from employees on a net-settlement basis to provide cash to employees to cover the associated employee payroll taxes. These shares were purchased at an average cost of $ 141.04 , $ 98.54 , and $ 88.47 per share, respectively. NOTE 4 - INVENTORIES Inventories, net of reserves at December 31, 2021 and 2020 consisted of the following: 2021 2020 Raw materials $ 28,639 $ 24,536 Work in progress 10,563 3,050 Finished goods 51,856 43,034 Total inventories $ 91,058 $ 70,620 On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by analyzing demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reserved, if necessary. The reserve for inventory was $ 1,425 and $ 2,782 at December 31, 2021 and 2020, respectively. NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2021 and 2020 are summarized as follows: 2021 2020 Land $ 11,692 $ 12,215 Building 89,602 86,873 Equipment 253,995 247,884 Construction in progress 52,930 31,240 408,219 378,212 Less: Accumulated depreciation 170,702 150,116 Property, plant and equipment, net $ 237,517 $ 228,096 Geographic Area Data - Long-Lived Assets (excluding intangible assets): 2021 2020 United States $ 197,432 $ 187,719 Foreign Countries 40,085 40,377 Total $ 237,517 $ 228,096 Depreciation expense was $ 23,295 , $ 22,990 and $ 19,791 for the years ended December 31, 2021, 2020 and 2019, respectively. 41 NOTE 6 - INTANGIBLE ASSETS The Company had goodwill in the amount of $ 523,949 and $ 529,463 as of December 31, 2021 and 2020, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.” The decrease in goodwill is due to foreign exchange translation adjustments. As of December 31, 2021 and 2020, the Company had identifiable intangible assets as follows: 2021 2020 Amortization Period (In years) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships & lists 10 - 20 $ 240,059 $ 173,489 $ 243,557 $ 158,051 Trademarks & trade names 2 - 17 43,116 28,985 43,208 24,974 Developed technology 5 - 12 20,234 14,607 21,674 13,693 Other 2 - 18 23,921 15,584 21,624 11,685 $ 327,330 $ 232,665 $ 330,063 $ 208,403 Amortization of identifiable intangible assets was $ 25,092 , $ 27,811 and $ 25,789 for 2021, 2020 and 2019, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is approximately $ 23,641 in 2022, $ 19,566 in 2023, $ 10,682 in 2024, $ 6,413 in 2025, and $ 5,083 in 2026. At December 31, 2021 and 2020, there were no identifiable intangible assets with indefinite useful lives as defined by ASC 350, “Intangibles-Goodwill and Other.” Identifiable intangible assets are reflected in the Company’s consolidated balance sheets under Intangible assets with finite lives, net. There were no changes to the useful lives of intangible assets subject to amortization in 2021 and 2020. The Federal Insecticide, Fungicide and Rodenticide Act, (“FIFRA”), a health and safety statute, requires that certain products within our specialty products segment must be registered with the U.S. Environmental Protection Agency (the "EPA") because they are considered pesticides. Costs of such registrations are included as other in the table above. NOTE 7 – EQUITY-METHOD INVESTMENT In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture ( 66.66 % / 33.34 % ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel aqueous choline chloride plant. The Company contributed the St. Gabriel plant, at cost, and all continued expansion and improvements are funded by the owners. The joint venture became operational as of July 1, 2016. St. Gabriel CC Company, LLC is a Variable Interest Entity (VIE) because the total equity at risk is not sufficient to permit the joint venture to finance its own activities without additional subordinated financial support. Additionally, voting rights ( 2 votes each) are not proportionate to the owners’ obligation to absorb expected losses or receive the expected residual returns of the joint venture. The Company will receive up to 2/3 of the production offtake capacity and absorbs operating expenses approximately proportional to the actual percentage of offtake. The joint venture is accounted for under the equity method of accounting since the Company is not the primary beneficiary as the Company does not have the power to direct the activities of the joint venture that most significantly impact its economic performance. The Company recognized a loss of $ 557 , $ 575 , and $ 388 for the years ended December 31, 2021, 2020, and 2019, respectively, relating to its portion of the joint venture’s expenses in other expense. The carrying value of the joint venture at December 31, 2021 and 2020 was $ 4,499 and $ 4,971 , respectively, and is recorded in other assets. NOTE 8 – REVOLVING LOAN On June 27, 2018, the Company and a bank syndicate entered into the Credit Agreement, which replaced the existing credit facility that had provided for a senior secured term loan of $ 350,000 and a revolving loan of $ 100,000 . The Credit Agreement, which expires on June 27, 2023, provides for revolving loans up to $ 500,000 (collectively referred to as the “loans”). The loans may be used for working capital, letters of credit, and other corporate purposes and may be drawn upon at the Company’s discretion. The initial proceeds from the Credit Agreement were used to repay the outstanding balance of $ 210,750 on its senior secured term loan, which was due May 2019. On May 23, 2019, the Company drew down $ 108,569 to fund the Chemogas acquisition. In connection with these additional borrowings, the Company entered into an interest rate swap to protect against adverse fluctuations in interest rates (see Note 20, "Derivative Instruments and Hedging Activities"). On December 13, 2019, the Company drew down $ 45,000 to fund the Zumbro acquisition. As of December 31, 2021, the total balance outstanding on the 42 Table of Contents Credit Agreement amounted to $ 108,569 . There are no installment payments required on the revolving loans; they may be voluntarily prepaid in whole or in part without premium or penalty, and all outstanding amounts are due on the maturity date. Amounts outstanding under the Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the Credit Agreement, and the interest rate was 1.102 % at December 31, 2021. The Company is also required to pay a commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as defined in the Credit Agreement and ranges from 0.15 % to 0.275 % ( 0.15 % at December 31, 2021). The unused portion of the revolving loan amounted to $ 391,431 at December 31, 2021. The Company is also required to pay, as applicable, letter of credit fees, administrative agent fees, and other fees to the arrangers and lenders. Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the Credit Agreement. Costs associated with the issuance of the extinguished debt instrument were capitalized and amortized over the term of the respective financing arrangement using the effective interest method. Capitalized costs net of accumulated amortization totaled $ 421 and $ 703 at December 31, 2021 and 2020, respectively, and are included in other assets on the consolidated balance sheets. Amortization expense pertaining to these costs totaled $ 282 for each of the years ended December 31, 2021, 2020, and 2019, and is included in interest expense in the accompanying consolidated statements of earnings. The Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At December 31, 2021, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements is secured by assets of the Company. NOTE 9 - NET EARNINGS PER COMMON SHARE The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per common share: Year Ended December 31, 2021 2020 2019 Net Earnings - Basic and Diluted $ 96,104 $ 84,623 $ 79,671 Share (000s) Weighted Average Common Shares - Basic 32,215 32,176 32,136 Effect of Dilutive Securities – Stock Options, Restricted Stock, and Performance Shares 457 327 369 Weighted Average Common Shares - Diluted 32,672 32,503 32,505 Net Earnings Per Share - Basic $ 2.98 $ 2.63 $ 2.48 Net Earnings Per Share - Diluted $ 2.94 $ 2.60 $ 2.45 The number of anti-dilutive shares were 155,294 , 204,672 , and 12,250 for 2021, 2020, and 2019. Anti-dilutive shares could potentially dilute basic earnings per share in future periods and therefore, were not included in diluted earnings per share. The Company has some share-based payment awards that have non-forfeitable dividend rights. These awards are restricted shares and they participate on a one -for-one basis with holders of Common Stock. These awards have an immaterial impact as participating securities with regard to the calculation using the two-class method for determining earnings per share. NOTE 10 - INCOME TAXES The Company’s effective tax rate for 2021, 2020 and 2019 was 23.3 %, 20.5 %, and 17.4 %, respectively. The increase from 2020 to 2021 is primarily due to a reduction in certain tax credits, lower tax benefits from stock-based compensation, and higher enacted state tax rates. On March 27, 2020 Congress passed the Coronavirus Aid, Relief, and Economic Security Act, and on December 31, 2020 Congress passed an additional round of COVID relief legislation as part of the Bipartisan-Bicameral Omnibus COVID Relief Deal. The Company has reviewed the change in law and determined that it does not have a significant impact on the Company’s tax provision or financial statements. In addition, Balchem will continue to evaluate and analyze the impact of the U.S. Tax Cuts 43 Table of Contents and Jobs Act that was enacted on December 22, 2017 and the additional guidance that has been issued, and may be issued, by the U.S. Department of Treasury, the SEC, and/or the Financial Accounting Standards Board ("FASB") regarding this act. The Company considers the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. The Company projects that its foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to its legal entity structure and the complexity of U.S. and local country tax laws. If the Company decides to repatriate the undistributed foreign earnings, it will need to recognize the income tax effects in the period it changes its assertion on indefinite reinvestment. Income tax expense consists of the following: 2021 2020 2019 Current: Federal $ 25,019 $ 19,249 $ 17,757 Foreign 7,553 3,399 1,609 State 3,664 3,590 818 Deferred: Federal ( 3,709 ) ( 3,017 ) ( 3,707 ) Foreign ( 3,038 ) 167 67 State ( 360 ) ( 1,594 ) 263 Total income tax provision $ 29,129 $ 21,794 $ 16,807 The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 21% for 2021, 2020, and 2019 to earnings before income tax expense due to the following: 2021 2020 2019 Income tax at Federal statutory rate $ 26,299 $ 22,348 $ 20,260 State income taxes, net of Federal income taxes 2,406 2,288 ( 244 ) Stock Options ( 924 ) ( 1,529 ) ( 222 ) GILTI — — 2,507 FDII ( 1,540 ) ( 1,400 ) ( 1,922 ) Patent Box Decree (related to prior years) — — ( 1,948 ) Foreign Tax Credits — — ( 1,125 ) Other 2,888 87 ( 499 ) Total income tax provision $ 29,129 $ 21,794 $ 16,807 44 Table of Contents The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 were as follows: 2021 2020 Deferred tax assets: Inventories $ 495 $ 1,470 Restricted stock and stock options 4,082 3,862 Lease liabilities 1,807 1,641 Currency and interest rate swap 649 2,831 Other 3,657 3,308 Total deferred tax assets 10,690 13,112 Deferred tax liabilities: Amortization $ 28,133 $ 32,872 Depreciation 25,484 27,897 Prepaid expenses 733 915 Right of use assets 1,769 1,926 Other 1,026 731 Total deferred tax liabilities 57,145 64,341 Valuation allowance — 130 Net deferred tax liability $ 46,455 $ 51,359 In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deductible differences. The amount of deferred tax asset realizable, however, could change if management’s estimate of future taxable income should change. As of December 31, 2021, the Company has state income tax net operating loss (NOL) carryforwards of $ 335 . The state NOL carryforwards will expire between 2025 and 2034. The Company believes that the benefit from the state NOL carryforwards will be realized, therefore a valuation allowance is not required to be established on these assets. The Company also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas. The Company considers the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and specific plans for reinvestment of those subsidiary earnings. The Company projects that foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to the Company's legal entity structure and the complexity of U.S. and local country tax laws. If Balchem decides to repatriate the undistributed foreign earnings, the income tax effects will need to be recognized in the period the Company changes its assertion on indefinite reinvestment. 45 Table of Contents Provisions of ASC 740-10 clarify whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is included in other long-term obligations on the Company’s consolidated balance sheets, is as follows: 2021 2020 2019 Balance at beginning of period $ 5,335 $ 4,762 $ 5,709 Increases for tax positions of prior years 806 267 431 Decreases for tax positions of prior years ( 260 ) ( 391 ) ( 1,978 ) Increases for tax positions related to current year — 697 600 Balance at end of period $ 5,881 $ 5,335 $ 4,762 All of Balchem's unrecognized tax benefits, if recognized in future periods, would impact the Company's effective tax rate in such future periods. The Company recognizes both interest and penalties as part of the income tax provision. During the years ended December 31, 2021, 2020 and 2019, these amounted to approximate ly $ 262 , $ 232 and $ 132 , respectively. As of December 31, 2021 and 2020, accrued interest and penalties were $ 2,106 and $ 1,845 , respectivel y. Balchem files income tax returns in the U.S. and in various states and foreign countries. In the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2017 and management does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. NOTE 11 - SEGMENT INFORMATION The Company currently reports three reportable segments: Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. Previously, the Company's four reportable segments were: Human Nutrition and Health, Animal Nutrition and Health, Specialty Products, and Industrial Products. However, effective in the first quarter of 2020, in order to align with the Company's strategic focus on health and nutrition, allocation of resources, and evaluation of operating performance, and given the 2019 reduction in portfolio scale of Industrial Products, the Company revised its reporting segment structure to three reportable segments stated above. These reportable segments are strategic businesses that offer products and services to different markets. This realignment has been retrospectively applied. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated" and applied retroactively to 2019. There were no changes to the Consolidated Financial Statements as a result of the change to the reportable segments. The Company expects that the new reportable segment structure will provide investors greater understanding of and alignment with the Company’s strategic focus. In order to ensure appropriate transparency and visibility into the financial performance of the Company, sufficient detail will continue to be provided relative to Other and Unallocated, including material contributions from oil and gas and other industrial market activities. Human Nutrition & Health The Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for nutrition and health applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. HNH's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customers' appreciation of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation. This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. The Company partners with its customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company has expertise in trends analysis and product development. When combined with its strong manufacturing capabilities in customized spray dried and emulsified powders, extrusion and agglomeration, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates, the Company is a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, sports and protein bars, 46 Table of Contents dietary plans, and nutritional supplements. The Company also creates cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients. Animal Nutrition & Health The Company’s Animal Nutrition & Health ("ANH") segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, ANH’s microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity. Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production efficiencies in order to maintain its competitive-cost position to effectively compete in a global marketplace. Specialty Products Ethylene oxide, at the 100% level and blended with carbon dioxide, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. Specialty Products' 100% ethylene oxide product and blends are distributed worldwide in specially designed, reusable and recyclable drum and cylinder packaging, to assure compliance with safety, quality and environmental standards as outlined by the applicable regulatory agencies in the countries our products are shipped to. The Company’s inventory of these specially built drums and cylinders, along with its five filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials. The Company also distributes a number of other gases for various uses, most notably propylene oxide and ammonia. Propylene oxide is marketed and sold in the U.S. as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. The Company distributes its propylene oxide product in the U.S. primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the Environmental Protection Agency ("EPA") and the Department of Transportation ("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, which are approved for use in the countries these products are shipped to. The Company's inventory of cylinders for these products also represents a significant capital investment. The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. The Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate ® product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances. 47 Table of Contents The segment information is summarized as follows: Business Segment Assets 2021 2020 Human Nutrition & Health $ 727,131 $ 717,232 Animal Nutrition & Health 158,971 157,454 Specialty Products 184,628 190,449 Other and Unallocated (1) 128,595 100,708 Total $ 1,199,325 $ 1,165,843 Business Segment Net Sales 2021 2020 2019 Human Nutrition & Health $ 442,733 $ 400,330 $ 347,433 Animal Nutrition & Health 226,776 192,191 177,557 Specialty Products 117,020 103,566 92,257 Other and Unallocated (2) 12,494 7,557 26,458 Total $ 799,023 $ 703,644 $ 643,705 Business Segment Earnings Before Income Taxes 2021 2020 2019 Human Nutrition & Health $ 76,031 $ 61,397 $ 48,429 Animal Nutrition & Health 26,179 29,979 25,868 Specialty Products 30,020 26,801 28,513 Other and Unallocated (2) ( 4,728 ) ( 7,030 ) ( 257 ) Interest and other expense ( 2,269 ) ( 4,730 ) ( 6,075 ) Total $ 125,233 $ 106,417 $ 96,478 Depreciation/Amortization 2021 2020 2019 Human Nutrition & Health $ 30,012 $ 32,117 $ 30,558 Animal Nutrition & Health 7,414 7,187 6,552 Specialty Products 8,332 9,699 7,401 Other and Unallocated (2) 3,121 2,278 1,351 Total $ 48,879 $ 51,281 $ 45,862 Capital Expenditures 2021 2020 2019 Human Nutrition & Health $ 23,714 $ 22,758 $ 18,159 Animal Nutrition & Health 8,100 6,039 3,921 Specialty Products 3,804 2,860 3,003 Other and Unallocated (2) 524 423 707 Total $ 36,142 $ 32,080 $ 25,790 48 Table of Contents (1) Other and Unallocated assets consist of certain cash, capitalized loan issuance costs, other assets, investments, and income taxes, which the Company does not allocate to its individual business segments. It also includes assets associated with a few minor businesses which individually do not meet the quantitative thresholds for separate presentation. (2) Other and Unallocated consists of a few minor businesses which individually do not meet the quantitative thresholds for separate presentation and corporate expenses that have not been allocated to a segment. Unallocated corporate expenses consist of: (i) Transaction and integration costs, ERP implementation costs, and unallocated legal fees totaling $ 1,264 , $ 2,410 and $ 3,436 for years ended December 31, 2021, 2020 and 2019, respectively, and (ii) Unallocated amortization expense of $ 2,792 , $ 1,888 , and $ 833 for years ended December 31, 2021, 2020, and 2019, respectively, related to an intangible asset in connection with a company-wide ERP system implementation and capitalized loan issuance costs that was included in interest expense in Company's consolidated statement of earnings. NOTE 12 - REVENUE Revenue Recognition Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration we expect to realize in exchange for those goods. The following table presents revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues. 2021 2020 2019 Product Sales $ 762,085 $ 666,193 $ 609,741 Co-manufacturing 27,994 29,063 24,087 Bill and Hold — 1,158 3,218 Consignment 4,439 2,939 2,299 Product Sales Revenue 794,518 699,353 639,345 Royalty Revenue 4,505 4,291 4,360 Total Revenue $ 799,023 $ 703,644 $ 643,705 The following table presents revenues disaggregated by geography, based on the billing addresses of customers: 2021 2020 2019 United States $ 584,661 $ 516,347 $ 475,033 Foreign Countries 214,362 187,297 168,672 Total $ 799,023 $ 703,644 $ 643,705 Product Sales Revenues The Company’s primary operation is the manufacturing and sale of health and wellness ingredient products, in which the Company receives an order from a customer and fulfills that order. The Company’s product sales are considered point-in-time revenue and consist of four sub-streams: product sales, co-manufacturing, bill and hold, and consignment. Under the co-manufacturing agreements, the Company is responsible for the manufacture of a finished good where the customer provides the majority of the raw materials. The Company controls the manufacturing process and the ultimate end-product before it is shipped to the customer. Based on these factors, the Company has determined that it is the principal in these agreements and therefore revenue is recognized in the gross amount of consideration the Company expects to be entitled for the goods provided. Royalty Revenues Royalty revenue consists of agreements with customers to use the Company’s intellectual property in exchange for a sales-based royalty. Royalties are considered over time revenue and are recorded in the HNH segment. Contract Liabilities The Company records contract liabilities when cash payments are received or due in advance of performance, including amounts which are refundable. 49 Table of Contents The Company’s payment terms vary by the type and location of customers and the products offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products are delivered to the customer. Practical Expedients and Exemptions The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for products shipped. NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: 2021 2020 2019 Income taxes $ 25,355 $ 22,637 $ 21,771 Interest $ 4,547 $ 4,666 $ 5,674 Non-cash financing activities: 2021 2020 2019 Dividends payable $ 20,886 $ 18,941 $ 16,855 NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME The changes in accumulated other comprehensive income (loss) were as follows: Years Ended December 31, 2021 2020 2019 Net foreign currency translation adjustment $ ( 11,255 ) $ 12,829 $ ( 891 ) Net change of cash flow hedge (see Note 20 for further information) Unrealized gain/(loss) on cash flow hedge 2,707 ( 3,094 ) ( 1,771 ) Tax ( 654 ) 809 372 Net of tax 2,053 ( 2,285 ) ( 1,399 ) Net change in postretirement benefit plan (see Note 15 for further information) Prior service (credit)/cost and (gain)/loss arising during the period ( 4 ) ( 503 ) 199 Amortization of prior service credit/(cost) 74 74 74 Amortization of gain/(loss) ( 21 ) ( 50 ) ( 46 ) Total before tax 49 ( 479 ) 227 Tax ( 13 ) 127 101 Adjustment (1) — ( 455 ) — Net of tax 36 ( 807 ) 328 Total other comprehensive (loss)/income $ ( 9,166 ) $ 9,737 $ ( 1,962 ) (1) One-time adjustment to the postretirement account. 50 Table of Contents Included in "Net foreign currency translation adjustment" were $ 4,766 of gain, $ 4,882 of loss, and $ 262 of loss, related to a net investment hedge, net of taxes of $ 1,527 , $ 1,579 , and $ 70 , for the years ended December 31, 2021, 2020, and 2019, respectively. See Note 20, "Derivative Instruments and Hedging Activities." Accumulated other comprehensive (loss)/income at December 31, 2021 consisted of the following: Foreign currency translation adjustment Cash flow hedge Postretirement benefit plan Total Balance December 31, 2020 $ 7,653 $ ( 3,684 ) $ 204 4,173 Other comprehensive (loss)/gain ( 11,255 ) 2,053 36 ( 9,166 ) Balance December 31, 2021 $ ( 3,602 ) $ ( 1,631 ) $ 240 ( 4,993 ) NOTE 15 - EMPLOYEE BENEFIT PLANS Defined Contribution Plans The Company sponsored two 401(k) savings plans for eligible employees, which were merged into one plan on January 1, 2021. The remaining plan allows participants to make pretax contributions and the Company matches certain percentages of those pretax contributions. The remaining plan also has a discretionary profit sharing portion and matches 401(k) contributions with shares of the Company’s Common Stock. All amounts contributed to the plan are deposited into a trust fund administered by independent trustees. The Company provided for profit sharing contributions and matching 401(k) savings plan contributions of $ 1,459 and $ 4,142 in 2021, $ 1,022 and $ 3,751 in 2020, and $ 592 and $ 3,451 in 2019, respectively. Postretirement Medical Plans The Company provides postretirement benefits in the form of two unfunded postretirement medical plans; one that is under a collective bargaining agreement and covers eligible retired employees of the Verona, Missouri facility and a plan for those named as executive officers in the Company’s proxy statement. The Company uses a December 31 measurement date for its postretirement medical plans. In accordance with ASC 715, “Compensation—Retirement Benefits,” the Company is required to recognize the over funded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The actuarial recorded liabilities for such unfunded postretirement benefits are as follows: Change in benefit obligation: 2021 2020 Benefit obligation at beginning of year $ 1,374 $ 1,076 Initial adoption of new plan — — Service cost with interest to end of year 87 68 Interest cost 23 26 Participant contributions 28 23 Benefits paid ( 426 ) ( 27 ) Actuarial gain 207 208 Benefit obligation at end of year $ 1,293 $ 1,374 Change in plan assets: 2021 2020 Fair value of plan assets at beginning of year $ — $ — Employer (reimbursement)/contributions 398 4 Participant contributions 28 23 Benefits paid ( 426 ) ( 27 ) Fair value of plan assets at end of year $ — $ — 51 Table of Contents Amounts recognized in consolidated balance sheet: 2021 2020 Accumulated postretirement benefit obligation $ 1,293 $ 1,374 Fair value of plan assets — — Funded status 1,293 1,374 Unrecognized prior service cost 74 74 Unrecognized net gain ( 50 ) ( 46 ) Net amount recognized in consolidated balance sheet (after ASC 715) (included in other long-term obligations) $ 1,293 $ 1,374 Accrued postretirement benefit cost (included in other long-term obligations) N/A N/A Components of net periodic benefit cost: 2021 2020 2019 Service cost with interest to end of year $ 87 $ 68 $ 63 Interest cost 23 26 39 Amortization of prior service cost 74 74 74 Amortization of gain ( 24 ) ( 50 ) ( 46 ) Total net periodic benefit cost $ 160 $ 118 $ 130 Estimated future employer contributions and benefit payments are as follows: Year 2022 $ 107 2023 91 2024 113 2025 91 2026 76 Years 2027-2031 479 Defined Benefit Pension Plans The Company contributes to one multiemployer defined benefit plan under the terms of a collective-bargaining agreement covering its union-represented employees of the Verona, Missouri facility. The risks of participation in this multiemployer plan are different from single-employer plans in the following aspects: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (c) if the Company was to stop participating in its multiemployer plan, the Company would be required to pay that plan an amount based on the underfunded status of the plan, referred to as the withdrawal liability. The Company’s participation in this plan for the annual period ended December 31, 2021 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN). The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone or critical and declining zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. Finally, the period-to-period comparability of the contributions for 2021 and 2020 was affected by a 4.0 % increase in the 2021 contribution rate. There have been no other significant changes that affect the comparability of 2021 and 2020 contributions. The Company does not represent more than 5% of the contributions to this pension fund. 52 Table of Contents Pension Fund EIN/Pension Plan Number Pension Plan Protection Act Zone Status FIP/RP Status Pending/ Implemented Contributions of Balchem Corporation Surcharge Imposed Expiration Date of Collective- Bargaining Agreement 2021 2020 2021 2020 2019 Central States, Southeast and Southwest Areas Pension Fund 36-6044243 Critical & Declining as of 1/1/21 Critical & Declining as of 1/1/20 Implemented $ 816 $ 774 $ 677 No 7/12/2025 On May 27, 2019, the Company acquired Chemogas, which has an unfunded defined benefit pension plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The actuarial recorded liabilities for such unfunded defined benefit pension plan are as follows: Change in benefit obligation: 2021 2020 Benefit obligation at beginning of year $ 2,053 $ 1,738 Service cost with interest to end of year 67 104 Interest cost 14 20 Participant contributions 24 21 Benefits paid ( 18 ) ( 11 ) Actuarial gain ( 127 ) 18 Exchange rate changes ( 154 ) 163 Benefit obligation at end of year $ 1,859 $ 2,053 Change in plan assets: 2021 2020 Fair value of plan assets at beginning of year $ 1,103 895 Actual return on plan assets 76 57 Employer (reimbursement)/contributions 73 57 Participant contributions 24 21 Benefits paid ( 18 ) ( 11 ) Exchange rate changes ( 83 ) 84 Fair value of plan assets at end of year $ 1,175 $ 1,103 Amounts recognized in consolidated balance sheet: 2021 2020 Benefit obligation $ ( 1,859 ) $ ( 2,053 ) Fair value of plan assets 1,175 1,103 Funded status ( 684 ) ( 950 ) Unrecognized prior service cost N/A N/A Unrecognized net (gain)/loss N/A N/A Net amount recognized in consolidated balance sheet (after ASC 715) (included in other long-term obligations) $ 684 $ 950 Accrued postretirement benefit cost (included in other long-term obligations) N/A N/A 53 Table of Contents Components of net periodic benefit cost: 2021 2020 2019 Service cost with interest to end of year $ 67 $ 104 $ — Interest cost 14 20 — Expected return on plan assets ( 34 ) ( 14 ) — Amortization of prior service cost — — — Amortization of net loss 3 — — Total net periodic benefit cost $ 50 $ 110 $ — Estimated future benefit payments are as follows: Year 2022 $ 1 2023 — 2024 — 2025 — 2026 — Years 2027-2031 22 Assumptions to determine benefit obligations: 2021 2020 Discount rate 1.00 % 0.75 % Assumptions to determine net cost: 2021 2020 2019 Discount rate 0.75 % 1.00 % N/A Expected return on assets 3.25 % 1.00 % N/A Deferred Compensation Plan On June 1, 2018, the Company established an unfunded, non-qualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as of December 31, 2021 and 2020 was $ 6,270 and $ 3,581 , respectively, and was included in other long-term obligations on the Company's balance sheet. The related rabbi trust assets were $ 6,267 and $ 3,582 as of December 31, 2021 and 2020, respectively, and were included in other non-current assets on the Company's consolidated balance sheets. NOTE 16 - COMMITMENTS AND CONTINGENCIES Aggregate future minimum rental payments required under non-cancelable operating and finance leases at December 31, 2021 are as follows: Year 2022 $ 2,900 2023 2,139 2024 1,891 2025 1,066 2026 700 Thereafter 2,428 Total minimum lease payments $ 11,124 The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on portions of the site. Remediation was conducted by the 54 prior owner under the oversight of the EPA and the Missouri Department of Natural Resources. While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for potential liabilities associated with the Superfund site. In September 2020, BCP Ingredients, Inc. (“BCP”), the Company subsidiary that operates the site received a General Notice Letter from the EPA regarding BCP’s potential liability for contamination at the site and, in February 2022, received a Special Notice Letter from EPA for the performance of a focused remedial investigation/feasibility study at the site with regard to the presence of certain contaminants, including 1,4 dioxane,. The Company has engaged experts to study site conditions and hydrogeology in connection with preparing its response to the notices. From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity. NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2021 and 2020 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximate fair value due to the short-term maturity of these instruments. Cash and cash equivalents at December 31, 2021 and 2020 included $ 933 and $ 817 in money market funds, respectively. Non-current assets at December 31, 2021 and 2020 included $ 6,267 and $ 3,582 , respectively, of rabbi trust funds related to the Company's deferred compensation plan. The money market and rabbi trust funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.” The Company also has derivative financial instruments, consisting of a cross-currency swap and an interest rate swap, which are included in derivative assets or derivative liabilities, in the consolidated balance sheets (see Note 20, "Derivative Instruments and Hedging Activities"). The fair values of these derivative instruments are determined based on Level 2 inputs, using significant inputs that are observable either directly or indirectly, including interest rate curves and implied volatilities. The derivative liability related to the cross-currency swap was $ 500 and $ 6,793 at December 31, 2021 and 2020, respectively. The derivative liability related to the interest rate swap was $ 2,158 and $ 4,865 at December 31, 2021 and 2020, respectively. NOTE 18 – RELATED PARTY TRANSACTIONS The Company provides services on a contractual agreement to St. Gabriel CC Company, LLC. These services include accounting, information technology, quality control, and purchasing services, as well as operation of the St. Gabriel CC Company, LLC plant. The Company also sells raw materials to St. Gabriel CC Company, LLC. These raw materials are used in the production of finished goods that are, in turn, sold by Saint Gabriel CC Company, LLC to the Company for resale to unrelated parties. As such, the sale of these raw materials to St. Gabriel CC Company, LLC in this scenario lacks economic substance and therefore the Company does not include them in net sales within the consolidated statements of earnings. The services the Company provided amounted to $ 3,637 , $ 3,396 , and $ 3,883 , respectively, for the years ended December 31, 2021, 2020, and 2019. The raw materials purchased and subsequently sold amounted to $ 27,915 , $ 13,495 , and $ 24,786 , respectively, for the years ended December 31, 2021, 2020, and 2019. These services and raw materials are primarily recorded in cost of goods sold net of the finished goods received from St. Gabriel CC Company, LLC of $ 22,043 , $ 12,190 , and $ 18,598 , respectively for the years ended December 31, 2021, 2020, and 2019. At December 31, 2021 and 2020, the Company had receivables of $ 10,504 and $ 2,809 , respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold and payables of $ 7,552 and $ 2,239 , respectively, for finished goods received recorded in accounts payable in 2021 and 2020. In addition, the Company had receivables in the amount of $ 164 and $ 72 related to non-contractual monies owed from St. Gabriel CC Company, LLC, recorded in receivables as of December 31, 2021 and 2020. The 55 Table of Contents Company had payables in the amount of $ 296 related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accounts payable as of December 31, 2021 and 2020. NOTE 19 – LEASES The Company has both real estate leases and equipment leases. The main types of equipment leases include forklifts, trailers, printers and copiers, railcars, and trucks. Leases are categorized as both operating leases and finance leases. As a result of electing the practical expedient within ASU 2016-02, variable lease payments are combined and recognized on the balance sheet in the event that those charges and any related increases are explicitly stated in the lease. Such payments include common area maintenance charges, property taxes, and insurance charges and are recorded in the ROU asset and corresponding liability when the payments are stated in the lease with (a) fixed or in-substance fixed amounts, or (b) a variable payment based on an index or rate. Due to the acquisitive nature of the Company and the potential for synergies upon integration of acquired entities, the Company determined that the reasonably certain criterion could not be met for any renewal periods beginning two years from December 31, 2021. In addition, the Company has historically not been exercising purchase options with equipment leases as it does not make economic sense to buy the equipment. Instead, the Company has historically replaced the equipment with a new lease. Therefore, the Company determined that the reasonably certain criterion could not be met as it relates to purchase options. The Company has no residual value guarantees in lease transactions. The Company did not identify any embedded leases. As indicated above, the Company elected the practical expedient to combine lease and non-lease components and recognizes the combined amount on the consolidated balance sheet. Management determined that since the Company has a centralized treasury function, the parent company would either fund or guarantee a subsidiary's loan for borrowing over a similar term. As such, the Company's management determined it is appropriate to utilize a corporate based borrowing rate for all locations. The Company developed four tranches of leases based on lease terms and these tranches reflect the composition of the current lease portfolio. The Company's borrowing history shows that interest rates of a term loan or a line of credit depend on the duration of the loan rather than the nature of the assets purchased by those funds. Based on this understanding, the Company elected to use a portfolio approach to discount rates, applying corporate rates to the tranches of leases based on lease terms. Based on the Company's risk rating, the company applied the following discount rates for new leases entered into during 2021: (1) 1 - 2 years, 1.45 % (2) 3 - 4 years, 2.04 % (3) 5 - 9 years, 2.38 % and (4) 10 + years, 3.10 %. In connection with the acquisition of Zumbro, the Company assumed a finance lease commitment for a warehouse, with an expiration date of March 31, 2033. The warehouse can be purchased at a pre-determined price beginning in 2023. Right of use assets and lease liabilities at December 31, 2021 and 2020 are summarized as follows: Right of use assets 2021 2020 Operating leases $ 6,929 $ 5,838 Finance leases 2,359 2,572 Total $ 9,288 $ 8,410 Lease liabilities - current 2021 2020 Operating leases $ 2,194 $ 2,178 Finance leases 167 159 Total $ 2,361 $ 2,337 Lease liabilities - non-current 2021 2020 Operating leases $ 4,811 $ 3,607 Finance leases 2,303 2,472 Total $ 7,114 $ 6,079 56 Table of Contents For the years ended December 31, 2021, 2020, and 2019, the Company's total lease costs were as follows, which included both amounts recognized in profits or losses during the period and amounts capitalized on the balance sheet, and the cash flows arising from lease transactions: Year ended December 31 2021 2020 2019 Lease Cost Operating lease cost $ 3,143 $ 3,105 $ 3,181 Finance Lease cost Amortization of ROU asset 210 210 — Interest on lease liabilities 129 137 — Total finance lease 339 347 — Total lease cost $ 3,482 $ 3,452 $ 3,181 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3,097 $ 2,864 $ 3,216 Operating cash flows from finance leases 129 137 — Financing cash flows from finance leases 159 151 — $ 3,385 $ 3,152 $ 3,216 ROU assets obtained in exchange for new operating lease liabilities, net of ROU asset disposals $ 3,804 $ 1,042 $ 10,173 ROU assets obtained in exchange for new finance lease liabilities, net of ROU asset disposals $ — $ 2,782 $ — Weighted-average remaining lease term - operating leases 4.21 years 4.15 years 4.93 years Weighted-average remaining lease term - finance leases 11.41 years 12.25 years n/a Weighted-average discount rate - operating leases 3.5 % 4.5 % 4.6 % Weighted-average discount rate - finance leases 5.1 % 5.1 % n/a Rent expense charged to operations under operating lease agreements for 2021, 2020, and 2019 aggregated approximately $ 3,143 , $ 3,105 , and $ 3,181 , respectively. NOTE 20 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to market fluctuations in interest rates as well as variability in foreign exchange rates. In May 2019, the Company entered into an interest rate swap (cash flow hedge) with the Swap Counterparty and a cross-currency swap (net investment hedge) with the Bank Counterparty. The Company's primary objective for holding derivative financial instruments is to manage interest rate risk and foreign currency risk. On May 28, 2019, the Company entered into a pay-fixed ( 2.05 %), receive-floating interest rate swap with a notional amount of $ 108,569 and a maturity date of June 27, 2023. The Company's risk management objective and strategy with respect to the interest rate swap is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective since changes in the cash flows of the interest rate swap are expected to exactly offset the changes in the cash flows attributable to fluctuations in the contractually specified interest rate on the interest payments associated with the Credit Agreement. The net interest expense related to the interest rate swap contract were $ 2,144 and $ 1,593 for the year ended December 31, 2021 and 2020. The 57 Table of Contents net interest income related to the interest rate swap contract was $ 40 for the year ended December 31, 2019. These amounts were recorded in the consolidated statements of operations under interest expense, net. At the same time, the Company also entered into a pay-fixed ( 0.00 %), receive-fixed ( 2.05 %) cross-currency swap to manage foreign exchange risk related to the Company's net investment in Chemogas. The derivative has a notional amount of $ 108,569 , an effective date of May 28, 2019, and a maturity date of June 27, 2023. The interest income related to the cross-currency swap contract was $ 2,257 , $ 2,275 , and $ 1,317 for the years ended December 31, 2021, 2020, and 2019, respectively, which were recorded in the consolidated statements of operations under interest expense, net. The derivative instruments are with a single counterparty and are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. As such, the derivative instruments are categorized as a master netting arrangement and presented as a net derivative asset or derivative liability on the consolidated balance sheets. As of December 31, 2021 and 2020, the fair value of the derivative instruments is presented as follows in the Company's consolidated balance sheets: Derivative liabilities 2021 2020 Interest rate swap $ 2,158 $ 4,865 Cross-currency swap 500 6,793 Derivative liabilities $ 2,658 $ 11,658 On a quarterly basis, the Company assesses whether the hedging relationship related to the interest rate swap is highly effective at achieving offsetting changes in cash flow attributable to the risk being hedged based on the following factors: (1) the key features and terms as enumerated above for the interest rate swap and hedged transactions match during the period (2) it is probable that the Swap Counterparty will not default on its obligations under the swap, and (3) the Company performs a qualitative review each quarter to assess whether the relationship qualifies for hedge accounting. In addition, on a quarterly basis the Company assesses whether the hedging relationship related to the cross-currency swap is highly effective based on the following evaluations: (1) the Company will always have a sufficient amount of non-functional currency (EUR) net investment balance to at least meet the cross-currency notional amount until the maturity date of the hedge (2) it is probable that the Swap Counterparty will not default on its obligations under the swap, and (3) the Company performs a qualitative review each quarter to assess whether the relationship qualifies for hedge accounting. If any mismatches arise for either the interest rate swap or cross-currency swap, the Company will perform a regression analysis to determine if the hedged transaction is highly effective. If determined not to be highly effective, the Company will discontinue hedge accounting. As of December 31, 2021, the Company assessed the hedging relationships for the interest rate swap and cross-currency swap and determined them to be highly effective. As such, the net change in fair values of the derivative instruments was recorded in accumulated other comprehensive income. Losses and gains on our hedging instruments are recognized in accumulated other comprehensive income (loss) and categorized as follows for the year ended December 31, 2021, 2020, and 2019: Location within Statements of Comprehensive Income Year ended December 31 2021 2020 2019 Cash flow hedge (interest rate swap), net of tax Unrealized gain (loss) on cash flow hedge, net $ 2,053 $ ( 2,285 ) $ ( 1,399 ) Net investment hedge (cross-currency swap), net of tax Net foreign currency translation adjustment 4,766 ( 4,882 ) ( 262 ) $ 6,819 $ ( 7,167 ) $ ( 1,661 ) 58 Table of Contents NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands, except per share data) 2021 2020 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $ 185,656 $ 202,365 $ 197,869 $ 213,133 $ 174,436 $ 173,355 $ 175,140 $ 180,713 Gross margin 58,727 59,447 60,934 64,066 55,331 55,380 56,368 56,818 Earnings before income taxes 29,983 30,019 32,085 33,146 24,490 25,973 27,907 28,047 Net earnings 23,411 22,731 25,013 24,949 19,768 21,125 21,568 22,162 Basic net earnings per common share $ .73 $ .71 $ .78 $ .78 $ .62 $ .66 $ .67 $ .69 Diluted net earnings per common share $ .72 $ .70 $ .77 $ .76 $ .61 $ .65 $ .66 $ .68 59 Table of Contents BALCHEM CORPORATION Valuation and Qualifying Accounts Years Ended December 31, 2021, 2020 and 2019 (In thousands) Allowance for Doubtful Accounts Inventory Reserve Balance - December 31, 2018 $ 610 $ 2,575 Additions charged (credited) to costs and expenses 1,776 7,069 Adjustments/deductions (a) ( 306 ) ( 5,363 ) Balance - December 31, 2019 2,080 4,281 Additions charged (credited) to costs and expenses 140 5,964 Adjustments/deductions (a) ( 128 ) ( 7,463 ) Balance - December 31, 2020 2,092 2,782 Additions charged (credited) to costs and expenses 180 7,312 Adjustments/deductions (a) ( 1,344 ) ( 8,669 ) Balance - December 31, 2021 $ 928 $ 1,425 (a) Represents write-offs and other adjustments 60 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.