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 ) 28 Consolidated Balance Sheets as of December 31, 20 2 2 and 20 2 1 31 Consolidated Statements of Earnings for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 32 Consolidated Statements of Comprehensive Income for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 33 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 34 Consolidated Statements of Cash Flows for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 35 Notes to Consolidated Financial Statements 36 Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 71 27 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, 2022 and 2021, 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, 2022, 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, 2022, 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, 2022 and 2021, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Kechu BidCo AS and its subsidiaries (Kappa) and Cardinal Associates, Inc. (Bergstrom) from its assessment of internal control over financial reporting as of December 31, 2022, because they were acquired by the Company in purchase business combinations in the second and third quarters, respectively, of 2022. We have also excluded Kappa and Bergstrom from our audit of internal control over financial reporting. Kappa and Bergstrom are wholly owned subsidiaries whose total assets and net sales collectively represent approximately 24.5 percent and 2.4 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022. 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 28 Table of Contents reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of customer relationships, technology and contingent consideration related to acquisitions As described in Note 2 to the financial statements, the Company completed two acquisitions during the year, acquiring Kechu BidCo AS and its subsidiaries (collectively, Kappa) in June 2022 and Cardinal Associates Inc. and its Bergstrom Nutrition business (collectively, Bergstrom) in August 2022. The total consideration on acquisition date for Kappa amounted to $307 million, which included an estimated acquisition-date fair value contingent consideration of $4 million. The total consideration on acquisition date for Bergstrom amounted to $78 million, which included an estimated acquisition-date fair value contingent consideration of $8 million. The respective contingent consideration may be paid if certain targets are achieved in 2023. The acquisition-date fair values of the contingent consideration liabilities were estimated using a scenario-based approach, estimating the expected payments based on the likelihood of achieving the respective targets. In connection with the acquisitions of Kappa and Bergstrom, the Company acquired customer relationships with acquisition-date fair values of $89 million and $30 million, respectively, and technology with acquisition-date fair values of $16 million and $5 million, respectively. For both acquisitions, management used the multi-period excess earnings method, a form of the income valuation approach, to determine the respective fair values of the customer relationships acquired and the relief from royalty method to determine the respective fair values of the technology acquired. In estimating the acquisition-date fair values of the contingent consideration, customer relationships and technology, management was required to make significant judgments in formulating the significant estimates and assumptions about future sales and operating expenses, probability of certain financial forecast scenarios, attrition rates, obsolescence curves, growth rates, royalty rates, and discount rates when utilizing the aforementioned valuation methods. We identified the Company’s valuation of the contingent consideration, customer relationships, and technology related to the acquisitions of Kappa and Bergstrom as a critical audit matter due to the high degree of auditor judgment, subjectivity, and audit effort, including the use of our fair value specialists, involved in performing procedures and evaluating audit evidence related to significant estimates and assumptions utilized by management, including sales, operating expenses, attrition rates, obsolescence curves, growth rates, royalty rates, and discount rates, when calculating the fair values of the contingent consideration, customer relationships, and technology. Our audit procedures related to the Company’s valuation of the contingent consideration, customer relationships, and technology in connection with the aforementioned acquisitions included the following, among others: • We obtained an understanding of the relevant controls related to the valuation of the contingent consideration, customer relationships, and technology and tested such controls for design and operating effectiveness, including management review controls related to the development of significant assumptions including future sales and operating expenses, attrition rates, obsolescence curves, growth rates, royalty rates and discount rates. • We evaluated the reasonableness of management’s forecasts of sales and operating expense growth rates and attrition rates by comparing the forecasts to (1) the historical results (2) internal communications to management and the Board of Directors, and (3) external communications made by management to analysts and investors, as applicable. • We evaluated the reasonableness of management’s determination of useful lives. • With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates, royalty rates, and the probability of certain financial forecast scenarios, and tested the relevance and reliability of source information underlying the determination of the discount rates and royalty rates, and developed a range of independent estimates, which we compared to the discount rates, royalty rates and the contingent consideration fair value arrived at by management. 29 Table of Contents 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 $770 million as of December 31, 2022. The Company performed an annual goodwill impairment test as of October 1, 2022 using a quantitative evaluation for each of its reporting units. The Company determines the fair value of its reporting units using the income approach, based on a discounted cash flow valuation model. To test for goodwill impairment, the Company compares the fair value of each reporting unit to its carrying value. When determining the fair value of each reporting unit, management makes significant estimates and assumptions related to a number of factors. The Company considers the impact of factors that are specific to each of the reporting units such as industry and economic changes as well as projected sales and expense growth rates based upon annual budgets and longer-range strategic plans, which are highly sensitive to changes in domestic and foreign economic conditions, and the selection of appropriate discount rates. Given the significant estimates and assumptions management makes to determine the fair value of the reporting units and the sensitivity of the operations to changes in U.S. and foreign economic conditions, we identified management’s assumptions related to the sales and expense growth rates, the discount rates, and the terminal value calculation utilized in the valuation of the reporting units within the Company’s goodwill impairment tests as a critical audit matter. Auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. Our audit procedures related to sales and expense growth rates, discount rates, and the terminal value calculation utilized in the valuation of the Company’s reporting units included the following, among others: • We obtained an understanding of the relevant controls related to the valuation of the Company’s reporting units and tested such controls for design and operating effectiveness, including management review controls related to sales and expense growth rates and the selection of appropriate discount rates. • We evaluated the reasonableness of management’s forecasted sales and expense growth rates by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s forecasts of sales and expense growth rates by comparing the forecasts to (1) the historical results, (2) internal communications to management and the Board of Directors, and (3) external communications made by management to analysts and investors, as applicable • We evaluated changes in the regulatory environment using industry reports containing analysis of the Company’s markets and assessed whether these changes were reflected in management’s forecasts of sales and expense growth rates. • With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates and tested the relevance and reliability of source information underlying the determination of the discount rates, tested the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management. • With the assistance of our fair value specialists, we evaluated the reasonableness and tested the mathematical accuracy of the terminal value calculation. /s/ RSM US LLP We have served as the Company's auditor since 2004. New York, New York February 24, 2023 30 Table of Contents BALCHEM CORPORATION Consolidated Balance Sheets December 31, 2022 and 2021 (Dollars in thousands, except share and per share data) 2022 2021 Current assets: Cash and cash equivalents $ 66,560 $ 103,239 Accounts receivable, net of allowance for doubtful accounts of $ 1,226 and $ 928 at December 31, 2022 and 2021, respectively 131,578 117,408 Inventories, net 119,668 91,058 Prepaid expenses 4,903 6,116 Derivative assets 5,993 — Other current assets 7,101 4,411 Total current assets 335,803 322,232 Property, plant and equipment, net 271,355 237,517 Goodwill 769,509 523,949 Intangible assets with finite lives, net 213,295 94,665 Right of use assets - operating leases 17,094 6,929 Right of use assets - finance lease 2,338 2,359 Other assets 15,118 11,674 Total assets $ 1,624,512 $ 1,199,325 Liabilities and Stockholders’ Equity Current liabilities: Trade accounts payable $ 57,322 $ 56,243 Accrued expenses 36,745 43,411 Accrued compensation and other benefits 16,544 19,567 Dividends payable 23,129 20,886 Income tax payable 2,280 1,334 Operating lease liabilities - current 3,796 2,194 Finance lease liabilities - current 226 167 Total current liabilities 140,042 143,802 Revolving loan 440,569 108,569 Deferred income taxes 62,784 46,455 Operating lease liabilities - non-current 13,806 4,811 Finance lease liabilities - non-current 2,213 2,303 Derivative liabilities — 2,658 Other long-term obligations 26,814 13,712 Total liabilities 686,228 322,310 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; 32,152,787 shares issued and outstanding at December 31, 2022 and 32,287,150 shares issued and outstanding at December 31, 2021, respectively 2,145 2,154 Additional paid-in capital 128,806 147,716 Retained earnings 814,487 732,138 Accumulated other comprehensive loss ( 7,154 ) ( 4,993 ) Total stockholders’ equity 938,284 877,015 Total liabilities and stockholders’ equity $ 1,624,512 $ 1,199,325 See accompanying notes to consolidated financial statements. 31 Table of Contents BALCHEM CORPORATION Consolidated Statements of Earnings Years Ended December 31, 2022, 2021 and 2020 (In thousands, except per share data) 2022 2021 2020 Net sales $ 942,358 $ 799,023 $ 703,644 Cost of sales 661,907 555,849 479,747 Gross margin 280,451 243,174 223,897 Operating expenses: Selling expenses 67,409 60,413 58,630 Research and development expenses 12,191 13,524 10,332 General and administrative expenses 55,665 41,735 43,788 135,265 115,672 112,750 Earnings from operations 145,186 127,502 111,147 Other expenses: Interest expense, net 10,268 2,456 4,439 Other, net 1,169 ( 187 ) 291 11,437 2,269 4,730 Earnings before income tax expense 133,749 125,233 106,417 Income tax expense 28,382 29,129 21,794 Net earnings $ 105,367 $ 96,104 $ 84,623 Basic net earnings per common share $ 3.29 $ 2.98 $ 2.63 Diluted net earnings per common share $ 3.25 $ 2.94 $ 2.60 See accompanying notes to consolidated financial statements. 32 Table of Contents BALCHEM CORPORATION Consolidated Statements of Comprehensive Income Years Ended December 31, 2022, 2021 and 2020 (In thousands) 2022 2021 2020 Net earnings $ 105,367 $ 96,104 $ 84,623 Other comprehensive (loss)/ income, net of tax: Net foreign currency translation adjustment ( 4,799 ) ( 11,255 ) 12,829 Unrealized gain/(loss) on cash flow hedge, net of taxes of $ 868 , $ 654 , and $ 809 at December 31, 2022, 2021, and 2020, respectively 2,696 2,053 ( 2,285 ) Net change in postretirement benefit plan, net of taxes of $ 24 , $ 13 , and $ 127 at December 31, 2022, 2021 and 2020, respectively ( 58 ) 36 ( 807 ) Other comprehensive (loss)/ income, net of tax ( 2,161 ) ( 9,166 ) 9,737 Comprehensive income $ 103,206 $ 86,938 $ 94,360 See accompanying notes to consolidated financial statements. 33 Table of Contents BALCHEM CORPORATION Consolidated Statements of Stockholders’ Equity Years Ended December 31, 2022, 2021 and 2020 (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, 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 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 Net earnings 105,367 105,367 — — — — Other comprehensive (loss) ( 2,161 ) — ( 2,161 ) — — — Dividends ($ .71 per share) ( 23,018 ) ( 23,018 ) — — — — Repurchases of common stock ( 35,423 ) — — ( 252,304 ) ( 16 ) ( 35,407 ) Shares and options issued under stock plans 16,504 — — 117,941 7 16,497 Balance - December 31, 2022 $ 938,284 $ 814,487 $ ( 7,154 ) 32,152,787 $ 2,145 $ 128,806 See accompanying notes to consolidated financial statements. 34 Table of Contents BALCHEM CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, 2022, 2021 and 2020 (In thousands) 2022 2021 2020 Cash flows from operating activities: Net earnings $ 105,367 $ 96,104 $ 84,623 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 51,848 48,879 51,281 Stock compensation expense 13,224 10,802 8,303 Deferred income taxes ( 8,362 ) ( 5,944 ) ( 4,627 ) Provision for doubtful accounts 401 180 140 Unrealized loss/(gain) on foreign currency transactions and deferred compensation 914 ( 384 ) 173 Asset impairment charge 23 1,675 1,915 Loss/(gain) on disposal of assets 343 ( 1,728 ) 153 Changes in assets and liabilities, net of acquired balances Accounts receivable ( 3,618 ) ( 20,700 ) ( 3,599 ) Inventories ( 7,804 ) ( 21,023 ) 13,923 Prepaid expenses and other current assets 1,870 ( 881 ) ( 2,856 ) Accounts payable and accrued expenses ( 15,543 ) 47,067 ( 992 ) Income taxes 296 4,787 1,859 Other ( 423 ) 1,680 198 Net cash provided by operating activities 138,536 160,514 150,494 Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired ( 365,780 ) — — Capital expenditures and intangible assets acquired ( 50,290 ) ( 37,449 ) ( 33,828 ) Proceeds from sale of assets 206 318 87 Proceeds from insurance — 1,831 — Purchase of convertible notes ( 150 ) — ( 850 ) Net cash used in investing activities ( 416,014 ) ( 35,300 ) ( 34,591 ) Cash flows from financing activities: Proceeds from revolving loan 435,000 5,000 10,000 Principal payments on revolving loan ( 103,000 ) ( 60,000 ) ( 95,000 ) Principal payment on acquired debt ( 30,988 ) — — Cash paid for financing costs ( 1,232 ) — — Principal payments on finance lease ( 177 ) ( 159 ) ( 151 ) Proceeds from stock options exercised 3,212 6,943 14,155 Dividends paid ( 20,713 ) ( 18,723 ) ( 16,705 ) Repurchases of common stock ( 35,423 ) ( 35,239 ) ( 13,463 ) Net cash provided by (used in) financing activities 246,679 ( 102,178 ) ( 101,164 ) Effect of exchange rate changes on cash ( 5,880 ) ( 4,368 ) 4,160 (Decrease) increase in cash and cash equivalents ( 36,679 ) 18,668 18,899 Cash and cash equivalents beginning of period 103,239 84,571 65,672 Cash and cash equivalents end of period $ 66,560 $ 103,239 $ 84,571 Supplemental Cash Flow Information - see Note 13 See accompanying notes to consolidated financial statements. 35 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. and other countries exceed the insurance limits of the Federal Deposit Insurance Corporation (“FDIC”) and other relevant insurance limits in other countries. 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, 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. 36 Table of Contents Inventories Inventories are valued at the lower of cost (first in, first out) or net realizable value and have been reduced by an allowance for excess or obsolete inventories. Cost elements include material, labor and manufacturing overhead. Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings 15 - 25 years Equipment 2 - 28 years Expenditures for repairs and maintenance are charged to expense. Alterations and major overhauls that extend the lives or increase the capacity of plant assets are capitalized. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts and any resultant gain or loss is included in earnings 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 2022, 2021 and 2020, 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 purchase price over the fair value of net assets acquired in accordance with ASC 805, "Business Combinations". 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, "Intangibles-Goodwill and Other". 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. As of October 1, 2022 and 2021, 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 37 Table of Contents 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, 2022 and 2021. The Company may resume performing the qualitative assessment in subsequent periods. The Company had goodwill in the amount of $ 769,509 and $ 523,949 as of December 31, 2022 and 2021, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.” Goodwill at December 31, 2020 $ 529,463 Impact due to change in foreign exchange rates ( 5,514 ) Goodwill at December 31, 2021 523,949 Goodwill as a result of the Kappa acquisition 216,295 Goodwill as a result of the Bergstrom acquisition 31,209 Impact due to change in foreign exchange rates ( 1,944 ) Goodwill at December 31, 2022 $ 769,509 December 31, 2022 December 31, 2021 HNH $ 665,804 $ 424,044 ANH 24,218 17,207 Specialty Products 79,429 82,654 Other and Unallocated 58 44 Total $ 769,509 $ 523,949 The following intangible assets with finite lives are stated at cost and are amortized either on an accelerated basis or on a straight-line basis over the following estimated useful lives: Amortization Period (in years) Customer relationships and lists 10 - 20 Trademarks and trade names 2 - 17 Developed technology 5 - 12 Regulatory registration costs 5 - 10 Patents and 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 intangible asset has changed, it could result in higher future amortization charges or recognition of an impairment loss. For the year ended December 31, 2022, there were no triggering events which required intangible asset impairment reviews. 38 Table of Contents 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 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 derivative assets and derivative liabilities, in the consolidated balance sheets (see Note 20, Derivative Instruments and Hedging Activities). The fair values of these derivative instruments are determined based on Level 2 inputs, using significant inputs that are observable either directly or indirectly, including interest rate curves and implied volatilities. Cost of Sales Cost of sales are primarily comprised of raw materials and supplies consumed in the manufacture of product, as well as manufacturing labor, maintenance labor, depreciation expense, and direct overhead expense necessary to convert purchased materials and supplies into finished product. Cost of sales also includes inbound freight costs, outbound freight costs for shipping products to customers, warehousing costs, quality control and obsolescence expense. Selling, General and Administrative Expenses Selling expenses consist primarily of compensation and benefit costs, amortization of customer relationships and lists, trade promotions, advertising, commissions and other marketing costs. General and administrative expenses consist primarily of payroll and benefit costs, occupancy and operating costs of corporate offices, depreciation and amortization expense on non-manufacturing assets, information systems costs and other miscellaneous administrative costs. Research and Development 39 Table of Contents Research and development costs are associated directly with the Company's efforts to develop, design, and enhance its products, services, technologies, or processes. Such costs are expensed as incurred. Net Earnings Per Common Share Basic net earnings per common share is calculated by dividing net 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 either the Black-Scholes model or the Binomial model, whichever is deemed to be most appropriate. Estimates of and assumptions about forfeiture rates, terms, volatility, interest rates and dividend yields are used to calculate stock-based compensation. A significant change to these estimates could materially affect the Company’s operating results. Impairment of Long-lived Assets Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. 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. 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, 2022, 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 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. 40 Table of Contents Recently Adopted Accounting Pronouncements 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 GAAP 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. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." The amendments in this Update defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024 as the UK Financial Conduct Authority ("FCA") announced that the intended cessation date would be June 30, 2023, which is beyond the current sunset date of Topic 848. The Company adopted the Standard Update in 2021. Due to the discontinuation of LIBOR and under the relief provided by Topic 848, during the third quarter of 2022, the Company modified its existing interest rate swap and replaced LIBOR with 1-month CME Term SOFR (see Note 20, Derivative Instruments and Hedging Activities). The modification of the agreement 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. ASU 2019-12 became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a significant impact on the Company's consolidated financial statements and disclosures. NOTE 2 – SIGNIFICANT ACQUISITIONS Cardinal Associates Inc. ("Bergstrom") On August 30, 2022, the Company's wholly-owned subsidiary Albion Laboratories, Inc. ("Albion") entered into a Stock Purchase Agreement, and closed on such transaction with Cardinal Associates Inc. ("Cardinal"), a corporation organized under the laws of the State of Washington, pursuant to which Albion acquired 100 % of the voting equity interests of Cardinal and its Bergstrom Nutrition business (collectively, "Bergstrom"). Bergstrom Nutrition is a leading science-based manufacturer of MSM, based in Vancouver, Washington. MSM is a widely used nutritional ingredient with strong scientific evidence supporting its benefits for joint health, sports nutrition, skin and beauty, healthy aging, and pet health. The addition of OptiMSM ® , Bergstrom Nutrition's MSM brand, to the Company's portfolio within the Human Nutrition and Health and Animal Nutrition and Health segments provides a synergistic scientific advantage in Balchem's key strategic therapeutic focus areas such as longevity and performance and is a strong fit with Balchem's specialty, science-backed mineral products. The Company made payments of $ 70,892 for the acquisition, amounting to $ 70,686 to the former shareholders or on behalf of the former shareholders and $ 206 to pay off Bergstrom's bank debt. Net of cash acquired of $ 773 , total payments made to the former shareholders or on behalf of the former shareholders of Bergstrom were $ 69,913 . The acquisition was primarily financed through the 2022 Credit Agreement (see Note 8, Revolving Loan). In connection with this transaction, the former shareholders of Bergstrom have an opportunity to receive an additional payment in 2024 if certain financial performance targets and other metrics are met, and therefore the Company recorded a contingent consideration liability, which was valued at $ 11,400 as of December 31, 2022. As a result, total payments related to the transaction are expected to be $ 82,292 , comprised of the upfront cash consideration of $ 70,892 and the fair value of the earn-out payment of $ 11,400 . The goodwill of $ 31,209 that arose on the acquisition date consists largely of expected synergies, including the combined entities' experience and technical problem-solving capabilities, and acquired workforce. 80 % of the goodwill is assigned to the Human Nutrition and Health business segment and 20 % of the goodwill is assigned to the Animal Nutrition and Health business segment. For tax purposes, a joint election under 338(h)(10) was made to treat the stock acquisition as a deemed asset acquisition, therefore generating tax amortizable goodwill. 41 Table of Contents The following table summarizes the estimated fair values of the assets acquired and liabilities assumed: Cash and cash equivalents $ 773 Accounts receivable 4,699 Inventories 3,972 Property, plant and equipment 2,243 Right of use assets 866 Customer relationships 29,900 Developed technology 4,600 Trademarks 2,300 Other assets 197 Accounts payable ( 699 ) Other current liabilities ( 462 ) Bank debt ( 206 ) Lease liabilities ( 871 ) Goodwill 31,209 Total consideration on acquisition date 78,521 Increase to contingent consideration liability 3,565 Total expected consideration 82,086 To pay off bank debt 206 Total expected payments $ 82,292 The estimated fair value of tangible and intangible assets acquired and liabilities assumed is based on management’s estimates and assumptions, which are subject to change. In preparing our preliminary fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Valuation methods utilized include net realizable value for inventory, multi-period excess earnings method for customer relationships, the relief from royalty method for other intangible assets, and a scenario-based approach for the contingent consideration. The Company made certain measurement period adjustments based on changes in facts and circumstances as of the acquisition date, which resulted in an increase in the value of intangible assets of $ 3,300 and a decrease in property, plant and equipment and goodwill of $ 457 and $ 2,851 , respectively. The purchase price and related allocation of assets acquired and liabilities assumed is preliminary pending final working capital true-up negotiations with the sellers. Customer relationships are amortized over a 15-year period utilizing a percentage of excess earnings over economic life method. The corporate trademark and product trademarks are amortized over 2 years and 10 years, respectively, and developed technology is amortized over 12 years, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined. Transaction and integration costs related to the Bergstrom acquisition are included in general and administrative expenses and were $ 1,039 for the year ended December 31, 2022. There were no such amounts related to this acquisition for years ended December 31, 2021 and 2020. 42 Table of Contents Kechu BidCo AS and Its Subsidiary Companies ("Kappa") On June 21, 2022, Balchem Corporation and its wholly-owned subsidiary, Balchem B.V., completed the acquisition of Kechu BidCo AS and its subsidiary companies, including Kappa Bioscience AS, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway (all acquired companies collectively referred to as “Kappa”). Kappa manufactures specialty vitamin K2, a fast-growing specialty vitamin that plays a crucial role in the human body for bone health, heart health and immunity. Primarily, vitamin K2 supports the transport and distribution of calcium in the body. Vitamin K2 is important at all life stages, from pregnancy and early life to healthy aging. The acquisition strengthens the Company's scientific and technical expertise, geographic reach, and marketplace leadership, which should ultimately lead to accelerated growth for the Company's portfolios within the Human Nutrition and Health segment. The Company made payments of approximately kr 3,305,653 ("kr" indicates the Norwegian krone), amounting to approximately kr 3,001,981 to the former shareholders and approximately kr 303,672 to Kappa's lenders to pay off all Kappa bank debt. Net of cash acquired of kr 63,064 , total payments to the former shareholders were kr 2,938,917 . Net of gains on foreign currency forward contracts of $ 512 (see Note 20, Derivative Instruments and Hedging Activities), these payments translated to approximately $ 333,112 , amounting to approximately $ 302,464 paid to the former shareholders and approximately $ 30,648 to Kappa's lenders. Net of cash acquired of $ 6,365 , total payments made to the former shareholders of Kappa were approximately $ 296,099 . The acquisition was primarily financed through the 2018 Credit Agreement (see Note 8, Revolving Loan). In connection with this transaction, the former shareholders of Kappa have an opportunity to receive an additional payment in 2024 if certain financial performance targets and other metrics are met. There was no contingent consideration liability recorded as of December 31, 2022. The goodwill of $ 216,295 that arose on the acquisition date consists largely of expected synergies, including the combined entities' experience and technical problem-solving capabilities, and acquired workforce. The goodwill is assigned to the Human Nutrition and Health business segment and is not deductible for income tax purposes. 43 Table of Contents The following table summarizes the estimated fair values of the assets acquired and liabilities assumed. The transactions were completed in Norwegian kroner ("NOK") and the amounts were translated to U.S. dollars ("USD") using the foreign currency exchange rate as of June 21, 2022. Cash and cash equivalents $ 6,365 Accounts receivable 8,036 Inventories 17,600 Property, plant and equipment 9,854 Right of use assets 3,349 Customer relationships 88,813 Developed technology 15,643 Trademarks 5,046 Other assets 2,399 Accounts payable ( 3,301 ) Bank debt ( 30,648 ) Lease liabilities ( 3,349 ) Other liabilities ( 4,373 ) Deferred income taxes, net ( 24,716 ) Goodwill 216,295 Total consideration on acquisition date 307,013 Decrease to contingent consideration liability ( 4,037 ) Net gain on foreign currency exchange forward contracts ( 512 ) Total expected consideration 302,464 Kappa bank debt paid on acquisition date 30,648 Total expected payments $ 333,112 The estimated fair value of tangible and intangible assets acquired and liabilities assumed is based on management’s estimates and assumptions, which are subject to change. In preparing our preliminary fair value estimates of the intangible assets and certain tangible assets acquired, management, among other things, consulted an independent advisor. Valuation methods utilized include net realizable value for inventory, multi-period excess earnings method for customer relationships, the relief from royalty method for other intangible assets, and a scenario-based approach for the contingent consideration. The Company made certain measurement period adjustments based on changes in facts and circumstances as of the acquisition date, which resulted in a decrease in the value of intangible assets, contingent consideration, and deferred income tax liabilities of $ 28,264 , $ 20,250 , and $ 4,411 , respectively, and an increase in goodwill of $ 3,704 . The purchase price and related allocation of assets acquired and liabilities assumed is preliminary pending management's final review of deferred tax liabilities related to certain non-deductible assets. Customer relationships are amortized over a 15-year period utilizing a percentage of excess earnings over economic life method. The corporate trademark and product trademarks are amortized over 2 years and 10 years, respectively, and developed technology is amortized over 12 years, utilizing the straight-line method as the consumption pattern of the related economic benefits cannot be reliably determined. Transaction and integration costs related to the Kappa acquisition are included in general and administrative expenses and was $ 1,731 for year ended December 31, 2022. There were no such amounts related to this acquisition for year ended December 31, 2021 and 2020. 44 Table of Contents The following selected unaudited pro forma information presents the consolidated results of operations as if the business combinations in 2022 had occurred as of January 1, 2021. Twelve Months ended December 31, Net Sales Net Earnings Kappa & Bergstrom actual results included in the Company's consolidated income statement in 2022 $ 22,158 $ ( 5,359 ) 2022 Supplemental pro forma combined financial $ 982,021 $ 110,181 2021 Supplemental pro forma combined financial $ 859,252 $ 90,672 The above selected unaudited pro forma information includes the following acquisition-related adjustments: (1) additional amortization of intangible assets and depreciation of fixed assets; (2) adjustments related to the fair value of the acquired inventory, (3) adjustments to interest expense on borrowings at rates in effect during the related period, factoring in estimated payments based on free cash flow, and (4) other one-time adjustments. The pro forma information presented does not purport to be indicative of the results that actually would have been attained if these acquisitions had occurred at the beginning of the periods presented and is not intended to be a projection of future results. 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, 2022, 2021 and 2020 reflected the following compensation cost and such compensation cost had the following effects on net earnings: Increase/(Decrease) for the Year Ended December 31, 2022 2021 2020 Cost of sales $ 1,302 $ 845 $ 1,115 Operating expenses 11,922 9,957 7,188 Net earnings ( 10,214 ) ( 8,370 ) ( 6,332 ) On December 31, 2022, 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 45 Table of Contents 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, 2022, the 2017 Plan had 408,380 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”) market condition where vesting is dependent upon the Company’s TSR performance over the performance period (typically three years ) relative to a comparator group consisting of the Russell 2000 index constituents. The fair value of each option award issued under the Company’s stock plans is estimated on the date of grant using either the Black-Scholes model or the Binomial model, whichever is deemed to be most appropriate. For the years ended December 31, 2022, 2021, and 2020, the fair value of each option grant uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical experience of employees’ exercise behavior. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Year Ended December 31, Weighted Average Assumptions: 2022 2021 2020 Expected Volatility 30.3 % 32.9 % 26.9 % Expected Term (in years) 7.3 4.9 3.9 Risk-Free Interest Rate 2.8 % 0.5 % 1.3 % Dividend Yield 0.5 % 0.5 % 0.5 % The value of the restricted shares is based on the fair value of the award at the date of grant. Performance Share expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the Performance Share vests. The assumptions used in the fair value determination were risk free interest rates of 1.8 %, 0.2 %, and 1.4 %; dividend yields of 0.5 %, 0.6 %, and 0.5 %; volatilities of 32 %, 33 %, and 24 %; and initial TSR’s of - 15.7 %, 11.7 %, and 10.9 % in each case for the years ended December 31, 2022, 2021, and 2020, 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 to five years for stock options, three years for employee restricted stock awards, three years for employee performance share awards, and three years for non-employee director restricted stock awards. 46 Table of Contents A summary of stock option plan activity for 2022, 2021, and 2020 for all plans is as follows: 2022 2021 2020 # 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 867 $ 88.19 858 $ 80.58 951 $ 68.18 Granted 239 139.04 129 119.12 174 111.75 Exercised ( 44 ) 73.58 ( 109 ) 63.42 ( 256 ) 55.26 Forfeited ( 17 ) 124.89 ( 10 ) 106.93 ( 11 ) 92.94 Cancelled — — ( 1 ) 74.57 — — Outstanding at end of year 1,045 $ 99.82 867 $ 88.19 858 $ 80.58 Exercisable at end of year 654 $ 81.95 538 $ 75.51 494 $ 69.04 The aggregate intrinsic value for outstanding stock options was $ 27,221 , $ 69,711 and $ 29,735 at December 31, 2022, 2021 and 2020, respectively, with a weighted average remaining contractual term of 6.4 years at December 31, 2022. Exercisable stock options at December 31, 2022 had an aggregate intrinsic value of 26,279 with a weighted average remaining contractual term of 5.0 years. Other information pertaining to option activity during the years ended December 31, 2022, 2021 and 2020 is as follows: Years Ended December 31, 2022 2021 2020 Weighted-average fair value of options granted $ 44.77 $ 33.11 $ 24.36 Total intrinsic value of stock options exercised ($000s) $ 2,713 $ 7,866 $ 12,698 Additional information related to stock options outstanding under all plans at December 31, 2022 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 $ 38.10 - $ 74.57 267 3.6 $ 65.05 267 $ 65.05 $ 76.89 - $ 111.94 403 5.75 93.78 349 91.06 $ 113.24 - $ 150.85 375 8.9 131.11 38 117.05 1,045 6.4 $ 99.82 654 $ 81.95 47 Table of Contents Non-vested restricted stock activity for the years ended December 31, 2022, 2021 and 2020 is summarized below: 2022 2021 2020 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 166 $ 99.70 159 $ 90.71 138 $ 80.03 Granted 46 137.17 42 123.58 46 110.53 Vested ( 82 ) 82.15 ( 24 ) 85.83 ( 21 ) 67.60 Forfeited ( 8 ) 118.07 ( 11 ) 90.49 ( 4 ) 91.91 Non-vested balance at end of year 122 $ 124.42 166 $ 99.70 159 $ 90.71 Non-vested performance share activity for the years ended December 31, 2022, 2021 and 2020 is summarized below: 2022 2021 2020 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 69 $ 110.72 71 $ 91.99 70 $ 81.26 Granted 39 114.22 36 108.74 20 126.46 Vested ( 35 ) 53.17 ( 24 ) 70.64 ( 8 ) 104.15 Forfeited ( 3 ) 84.09 ( 14 ) 81.03 ( 11 ) 82.71 Non-vested balance at end of year 70 $ 127.69 69 $ 110.72 71 $ 91.99 As of December 31, 2022, 2021 and 2020, there was $ 20,791 , $ 13,980 and $ 14,154 , respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31, 2022, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.9 years. We estimate that share-based compensation expense for the year ended December 31, 2023 will be approximately $ 14,600 . 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 3,070,548 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 adopted in 2021 as prescribed by the State of Maryland, where the Company is incorporated. In connection therewith, 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 2022, 2021, and 2020, the Company purchased 252,304 , 249,848 , and 136,629 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 $ 140.40 , $ 141.04 , and $ 98.54 per share, respectively. 48 Table of Contents NOTE 4 - INVENTORIES Inventories, net of reserves at December 31, 2022 and 2021 consisted of the following: 2022 2021 Raw materials $ 44,477 $ 28,639 Work in progress 3,143 10,563 Finished goods 72,048 51,856 Total inventories $ 119,668 $ 91,058 On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by analyzing demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reserved, if necessary. The reserve for inventory was $ 2,640 and $ 1,425 at December 31, 2022 and 2021, respectively. NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2022 and 2021 are summarized as follows: 2022 2021 Land $ 11,415 $ 11,692 Building 90,644 89,602 Equipment 278,851 253,995 Construction in progress 79,928 52,930 460,838 408,219 Less: Accumulated depreciation 189,483 170,702 Property, plant and equipment, net $ 271,355 $ 237,517 Geographic Area Data - Long-Lived Assets (excluding intangible assets): 2022 2021 United States $ 211,588 $ 197,432 Foreign Countries 59,767 40,085 Total $ 271,355 $ 237,517 Depreciation expense was $ 24,033 , $ 23,295 and $ 22,990 for the years ended December 31, 2022, 2021 and 2020, respectively. NOTE 6 - INTANGIBLE ASSETS The Company had goodwill in the amount of $ 769,509 and $ 523,949 as of December 31, 2022 and 2021, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.” The increase in goodwill is the result of the acquisitions of Kappa and Bergstrom, partially offset by foreign exchange translation adjustments. 49 As of December 31, 2022 and 2021, the Company had identifiable intangible assets as follows: 2022 2021 Amortization Period (In years) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships and lists 10 - 20 $ 357,131 $ 190,576 $ 240,059 $ 173,489 Trademarks and trade names 2 - 17 50,058 33,416 43,116 28,985 Developed technology 5 - 12 40,473 16,171 20,234 14,607 Other 2 - 18 25,041 19,245 23,921 15,584 $ 472,703 $ 259,408 $ 327,330 $ 232,665 Amortization of identifiable intangible assets was $ 27,271 , $ 25,092 and $ 27,811 for 2022, 2021 and 2020, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense is approximately $ 28,395 in 2023, $ 19,305 in 2024, $ 15,938 in 2025, $ 15,847 in 2026, and $ 15,267 in 2027. At December 31, 2022 and 2021, 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 2022 and 2021. 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 $ 559 , $ 557 , and $ 575 for the years ended December 31, 2022, 2021, and 2020, respectively, relating to its portion of the joint venture’s expenses in other expense. The Company made capital contributions to the investment totaling $ 355 , $ 85 , and $ 366 for the years ended December 31, 2022, 2021, and 2020 respectively. The carrying value of the joint venture at December 31, 2022 and 2021 was $ 4,295 and $ 4,499 , respectively, and is recorded in other assets. NOTE 8 – REVOLVING LOAN On June 27, 2018, the Company and a bank syndicate entered into a credit agreement (the "2018 Credit Agreement"), which provided for revolving loans up to $ 500,000 , due on June 27, 2023. During the second quarter of 2022, the Company borrowed $ 345,000 under the 2018 Credit Agreement to fund the Kappa acquisition (see Note 2,Significant Acquisitions). On July 27, 2022, the Company entered into an Amended and Restated Credit Agreement (the "2022 Credit Agreement") with certain lenders in the form of a senior secured revolving credit facility, due on July 27, 2027. The 2022 Credit Agreement allows for up to $ 550,000 of borrowing. 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 Company used initial proceeds from the 2022 Credit Agreement to repay the outstanding balance of $ 433,569 due in June 2023 under the 2018 Credit Agreement. During the third quarter of 2022, the Company borrowed another $ 70,000 to fund the Bergstrom acquisition (see Note 2, Significant Acquisitions). As of December 31, 2022, the total balance outstanding on the 2022 Credit Agreement amounted to $ 440,569 . As of December 31, 2021, the total balance outstanding on the 2018 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. In connection with entering into the Amended and Restated Credit Agreement, the Company also modified its existing interest rate swap under the relief provided for in ASC 848, "Reference Rate Reform" (see Note 20 Derivative Instruments and Hedging Activities). 50 Table of Contents Amounts outstanding under the 2022 Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the 2022 Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the 2022 Credit Agreement, and the interest rate was 5.798 % at December 31, 2022. 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 2022 Credit Agreement and ranges from 0.150 % to 0.225 % ( 0.200 % at December 31, 2022). The unused portion of the revolving loan amounted to $ 109,431 at December 31, 2022. 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 2022 Credit Agreement. Capitalized costs net of accumulated amortization totaled $ 1,317 and $ 421 at December 31, 2022 and December 31, 2021, respectively, and are included in other assets on the condensed consolidated balance sheets. Amortization expense pertaining to these costs totaled $ 335 , $ 282 , and $ 282 for the years ended December 31, 2022, 2021, and 2020, respectively, and are included in "Interest expense" in the accompanying condensed consolidated statements of earnings. The 2022 Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At December 31, 2022, 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, 2022 2021 2020 Net Earnings - Basic and Diluted $ 105,367 $ 96,104 $ 84,623 Share (000s) Weighted Average Common Shares - Basic 32,019 32,215 32,176 Effect of Dilutive Securities – Stock Options, Restricted Stock, and Performance Shares 374 457 327 Weighted Average Common Shares - Diluted 32,393 32,672 32,503 Net Earnings Per Share - Basic $ 3.29 $ 2.98 $ 2.63 Net Earnings Per Share - Diluted $ 3.25 $ 2.94 $ 2.60 The number of anti-dilutive shares were 371,513 , 155,294 , and 204,672 for 2022, 2021, and 2020. Anti-dilutive shares could potentially dilute basic earnings per share in future periods and therefore, were not included in diluted earnings per share. NOTE 10 - INCOME TAXES The Company’s effective tax rate for 2022, 2021 and 2020 was 21.2 %, 23.3 % , and 20.5 %, respectively. The decrease from 2021 to 2022 is primarily due to an increase in certain tax credits and deductions and certain lower state taxes. On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, and on December 31, 2020, Congress passed an additional round of COVID relief legislation as part of the Bipartisan-Bicameral Omnibus COVID Relief Deal. The Company has reviewed the change in law and determined that it does not have a significant impact on the Company’s tax provision or financial statements. In addition, Balchem will continue to evaluate and analyze the impact of the U.S. Tax Cuts and Jobs Act that was enacted on December 22, 2017 and the additional guidance that has been issued, and may be issued, by the U.S. Department of Treasury, the SEC, and/or the Financial Accounting Standards Board ("FASB") regarding this act. 51 Table of Contents 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: 2022 2021 2020 Current: Federal $ 26,423 $ 25,019 $ 19,249 Foreign 7,103 7,553 3,399 State 3,964 3,664 3,590 Deferred: Federal ( 7,532 ) ( 3,709 ) ( 3,017 ) Foreign ( 215 ) ( 3,038 ) 167 State ( 1,361 ) ( 360 ) ( 1,594 ) Total income tax provision $ 28,382 $ 29,129 $ 21,794 The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 21% for 2022, 2021, and 2020 to earnings before income tax expense due to the following: 2022 2021 2020 Income tax at Federal statutory rate $ 28,087 $ 26,299 $ 22,348 State income taxes, net of Federal income taxes 1,862 2,406 2,288 Stock Options ( 676 ) ( 924 ) ( 1,529 ) FDII ( 1,778 ) ( 1,540 ) ( 1,400 ) Foreign rate differential 2,066 1,188 413 Other ( 1,179 ) 1,700 ( 326 ) Total income tax provision $ 28,382 $ 29,129 $ 21,794 52 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, 2022 and 2021 were as follows: 2022 2021 Deferred tax assets: Inventories $ 1,038 $ 495 Restricted stock and stock options 3,932 4,082 Lease liabilities 5,439 1,807 Foreign currency and interest rate swaps — 649 Research and development 4,134 — Other 3,717 3,657 Total deferred tax assets 18,260 10,690 Deferred tax (liabilities): Amortization $ ( 46,688 ) $ ( 28,133 ) Depreciation ( 25,097 ) ( 25,484 ) Prepaid expenses ( 462 ) ( 733 ) Foreign currency and interest rate swaps ( 1,456 ) — Right of use assets ( 5,324 ) ( 1,769 ) Other ( 1,995 ) ( 1,026 ) Total deferred tax (liabilities) ( 81,022 ) ( 57,145 ) Valuation allowance ( 22 ) — Net deferred tax (liability) $ ( 62,784 ) $ ( 46,455 ) 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, 2022, the Company has state income tax net operating loss (NOL) carryforwards of $ 366 . The state NOL carryforwards will expire between 2026 and 2035. The Company believes that the benefit from the state NOL carryforwards will not be realized, therefore a valuation allowance has been established in the amount of $ 22 . The Company also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas Holding NV, a privately held specialty gases company headquartered in Grimbergen, Belgium ("Chemogas"). 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: 2022 2021 2020 Balance at beginning of period $ 5,881 $ 5,335 $ 4,762 Increases for tax positions of prior years 2,194 806 267 Decreases for tax positions of prior years ( 2,260 ) ( 260 ) ( 391 ) Increases for tax positions related to current year — — 697 Balance at end of period $ 5,815 $ 5,881 $ 5,335 All of Balchem's unrecognized tax benefits, if recognized in future periods, would impact the Company's effective tax rate in such future periods. 53 Table of Contents The Company recognizes both interest and penalties as part of the income tax provision. During the year ended December 31, 2022, these amounts were reduced by $ 371 . During the years ended December 31, 2021 and 2020, total interest and penalties amounted to approximate ly $ 262 and $ 232 , respectively. As of December 31, 2022 and 2021, accrued interest and penalties were $ 1,735 and $ 2,106 , 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 2018 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 Balchem Corporation reports three reportable segments: Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated." Human Nutrition and Health The Human Nutrition and Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for nutrition and health applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products; proprietary technologies have been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customers' appreciation of brand value. Consequently, the Company 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. With its strong manufacturing capabilities in customized spray dried and emulsified powders, extrusion and agglomeration, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, ice cream bases and variegates, the Company is a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, sports and protein bars, dietary plans, and nutritional supplements. The Company also creates cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients. Through the Kappa and Bergstrom acquisitions, respectively, this segment recently began manufacturing specialty vitamin K2, which is a fast-growing specialty vitamin that plays a crucial role in the human body for bone health, heart health and immunity, and MSM, which is a widely used nutritional ingredient that provides benefits for joint health, sports nutrition, skin and beauty, and healthy aging. Animal Nutrition and Health The Company’s Animal Nutrition and Health ("ANH") segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to the essential nutrient choline chloride. For ruminant animals, the Company’s microencapsulated products boost health and milk production by delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the 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. Through the Bergstrom acquisition, this segment recently began manufacturing MSM, which is a widely used nutritional ingredient that provides benefits for pet health. 54 Table of Contents Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace. Specialty Products The Company re-packages and distributes a number of performance gases and chemicals for various uses by its customers, notably ethylene oxide, propylene oxide, and ammonia. Ethylene oxide 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. Contract sterilizers and medical device manufacturers are principal customers for this product. Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shelled and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes, and for various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings Ammonia is used primarily as a refrigerant, and also for heat treatment of metals and various chemical synthesis applications, and is distributed in reusable and recyclable drum and cylinder packaging approved for use in the countries these products are shipped to. The Company’s performance gases and chemicals are distributed worldwide in specially designed, reusable and recyclable drum and cylinder packaging, to assure compliance with safety, quality and environmental standards as outlined by the applicable regulatory agencies in the countries our products are shipped to. The Company’s inventory of these specially built drums and cylinders, along with its five filling facilities, represents a significant capital investment. The Company also sells single use canisters for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily to producers of 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. The segment information is summarized as follows: Business Segment Assets 2022 2021 Human Nutrition and Health $ 1,170,238 $ 727,131 Animal Nutrition and Health 175,972 158,971 Specialty Products 177,187 184,628 Other and Unallocated (1) 101,115 128,595 Total $ 1,624,512 $ 1,199,325 Business Segment Net Sales 2022 2021 2020 Human Nutrition and Health $ 527,131 $ 442,733 $ 400,330 Animal Nutrition and Health 262,297 226,776 192,191 Specialty Products 131,438 117,020 103,566 Other and Unallocated (2) 21,492 12,494 7,557 Total $ 942,358 $ 799,023 $ 703,644 55 Table of Contents Business Segment Earnings Before Income Taxes 2022 2021 2020 Human Nutrition and Health $ 82,125 $ 76,031 $ 61,397 Animal Nutrition and Health 36,056 26,179 29,979 Specialty Products 32,789 30,020 26,801 Other and Unallocated (2) ( 5,784 ) ( 4,728 ) ( 7,030 ) Interest and other expense ( 11,437 ) ( 2,269 ) ( 4,730 ) Total $ 133,749 $ 125,233 $ 106,417 Depreciation/Amortization 2022 2021 2020 Human Nutrition and Health $ 33,728 $ 30,012 $ 32,117 Animal Nutrition and Health 6,685 7,414 7,187 Specialty Products 7,507 8,332 9,699 Other and Unallocated (2) 3,928 3,121 2,278 Total $ 51,848 $ 48,879 $ 51,281 Capital Expenditures 2022 2021 2020 Human Nutrition and Health $ 33,668 $ 23,714 $ 22,758 Animal Nutrition and Health 10,809 8,100 6,039 Specialty Products 4,004 3,804 2,860 Other and Unallocated (2) 605 524 423 Total $ 49,086 $ 36,142 $ 32,080 (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 $ 3,581 , $ 1,264 and $ 2,410 for years ended December 31, 2022 , 2021 and 2020, respectively, and (ii) Unallocated amortization expense of $ 2,951 , $ 2,510 , and $ 1,606 for years ended December 31, 2022 , 2021 , and 2020, respectively, related to an intangible asset in connection with a company-wide ERP system implementation. 56 Table of Contents 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: 2022 2021 2020 Product Sales $ 894,318 $ 762,085 $ 666,193 Co-manufacturing 40,621 27,994 29,063 Bill and Hold — — 1,158 Consignment 4,227 4,439 2,939 Product Sales Revenue 939,166 794,518 699,353 Royalty Revenue 3,192 4,505 4,291 Total Revenue $ 942,358 $ 799,023 $ 703,644 The following table presents revenues disaggregated by geography, based on customers' delivery addresses: 2022 2021 2020 United States $ 682,238 $ 584,661 $ 516,347 Foreign Countries 260,120 214,362 187,297 Total $ 942,358 $ 799,023 $ 703,644 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. 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. 57 Table of Contents 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: 2022 2021 2020 Income taxes $ 33,016 $ 25,355 $ 22,637 Interest $ 11,879 $ 4,547 $ 4,666 Non-cash financing and investing activities: 2022 2021 2020 Dividends payable $ 23,129 $ 20,886 $ 18,941 Contingent consideration liability $ 11,872 $ — $ — NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME The changes in accumulated other comprehensive income (loss) were as follows: Years Ended December 31, 2022 2021 2020 Net foreign currency translation adjustment $ ( 4,799 ) $ ( 11,255 ) $ 12,829 Net change of cash flow hedge (see Note 20 for further information) Unrealized gain/(loss) on cash flow hedge 3,564 2,707 ( 3,094 ) Tax ( 868 ) ( 654 ) 809 Net of tax 2,696 2,053 ( 2,285 ) Net change in postretirement benefit plan (see Note 15 for further information) Prior service credit and gain arising during the period ( 41 ) ( 4 ) ( 503 ) Amortization of prior service credit 9 74 74 Amortization of loss ( 2 ) ( 21 ) ( 50 ) Total before tax ( 34 ) 49 ( 479 ) Tax ( 24 ) ( 13 ) 127 Adjustment (1) — — ( 455 ) Net of tax ( 58 ) 36 ( 807 ) Total other comprehensive (loss)/income $ ( 2,161 ) $ ( 9,166 ) $ 9,737 (1) One-time adjustment to the postretirement account. Included in "Net foreign currency translation adjustment" were gains/(losses) of $ 3,851 , $ 4,766 , and $( 4,882 ), related to a net investment hedge, net of taxes of $( 1,236 ), $( 1,527 ), and $ 1,579 , for the years ended December 31, 2022, 2021, and 2020, respectively. See Note 20, Derivative Instruments and Hedging Activities. 58 Table of Contents Accumulated other comprehensive (loss)/income at December 31, 2022 consisted of the following: Foreign currency translation adjustment Cash flow hedge Postretirement benefit plan Total Balance December 31, 2021 $ ( 3,602 ) $ ( 1,631 ) $ 240 $ ( 4,993 ) Other comprehensive (loss)/gain ( 4,799 ) 2,696 ( 58 ) ( 2,161 ) Balance December 31, 2022 $ ( 8,401 ) $ 1,065 $ 182 $ ( 7,154 ) 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. On June 21, 2022, the Company completed the acquisition of Kappa, which sponsors one defined contribution plan for its employees. In addition, on August 30, 2022, the Company completed the acquisition of Bergstrom, which sponsors one defined contribution plan for its employees. The plan allows participants to make pretax and after tax contributions. Bergstrom matches certain percentages of those contributions.The Company provided for profit sharing contributions and matching 401(k) savings plan contributions of $ 1,151 and $ 4,363 in 2022, $ 1,459 and $ 4,142 in 2021, and $ 1,022 and $ 3,751 in 2020, 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. 59 Table of Contents The actuarial recorded liabilities for such unfunded postretirement benefits are as follows: Change in benefit obligation: 2022 2021 Benefit obligation at beginning of year $ 1,293 $ 1,374 Service cost with interest to end of year 79 87 Interest cost 26 23 Participant contributions 27 28 Benefits paid ( 69 ) ( 426 ) Actuarial loss 109 207 Benefit obligation at end of year $ 1,465 $ 1,293 Change in plan assets: 2022 2021 Fair value of plan assets at beginning of year $ — $ — Employer contributions 42 398 Participant contributions 27 28 Benefits paid ( 69 ) ( 426 ) Fair value of plan assets at end of year $ — $ — Amounts recognized in consolidated balance sheet: 2022 2021 Accumulated postretirement benefit obligation $ ( 1,465 ) $ ( 1,293 ) Fair value of plan assets — — Funded status ( 1,465 ) ( 1,293 ) Unrecognized prior service cost 74 74 Unrecognized net gain ( 24 ) ( 50 ) Net amount recognized in consolidated balance sheet (after ASC 715) (included in other long-term obligations) $ ( 1,465 ) $ ( 1,293 ) Accrued postretirement benefit cost (included in other long-term obligations) N/A N/A Components of net periodic benefit cost: 2022 2021 2020 Service cost with interest to end of year $ 79 $ 87 $ 68 Interest cost 26 23 26 Amortization of prior service cost 9 74 74 Amortization of gain ( 2 ) ( 24 ) ( 50 ) Total net periodic benefit cost $ 112 $ 160 $ 118 60 Table of Contents Estimated future employer contributions and benefit payments are as follows: Year 2023 $ 118 2024 151 2025 149 2026 113 2027 115 Years 2028-2032 622 Assumptions to determine benefit obligations: 2022 2021 Discount rate 4.40 % 2.10 % Assumptions to determine net cost: 2022 2021 2020 Discount rate 2.10 % 1.75 % 2.50 % 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, 2022 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 2022 and 2021 was affected by a 4.0 % increase in the 2022 contribution rate. There have been no other significant changes that affect the comparability of 2022 and 2021 contributions. The Company does not represent more than 5% of the contributions to this pension fund. Pension Fund EIN/Pension Plan Number Pension Plan Protection Act Zone Status FIP/RP Status Pending/ Implemented Contributions of Balchem Corporation Surcharge Imposed Expiration Date of Collective- Bargaining Agreement 2022 2021 2022 2021 2020 Central States, Southeast and Southwest Areas Pension Fund 36-6044243 Critical & Declining as of 1/1/22 Critical & Declining as of 1/1/21 Implemented $ 939 $ 816 $ 774 No 7/12/2025 The Company provides an unfunded defined benefit pension plan for employees working in Belgium. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. 61 Table of Contents The actuarial recorded liabilities for such unfunded defined benefit pension plan are as follows: Change in benefit obligation: 2022 2021 Benefit obligation at beginning of year $ 1,859 $ 2,053 Service cost with interest to end of year 44 67 Interest cost 17 14 Participant contributions 27 24 Benefits paid ( 60 ) ( 18 ) Actuarial gain ( 194 ) ( 127 ) Exchange rate changes ( 104 ) ( 154 ) Benefit obligation at end of year $ 1,589 $ 1,859 Change in plan assets: 2022 2021 Fair value of plan assets at beginning of year $ 1,175 $ 1,103 Actual return on plan assets 26 76 Employer contributions 94 73 Participant contributions 27 24 Benefits paid ( 60 ) ( 18 ) Exchange rate changes ( 66 ) ( 83 ) Fair value of plan assets at end of year $ 1,196 $ 1,175 Amounts recognized in consolidated balance sheet: 2022 2021 Benefit obligation $ ( 1,589 ) $ ( 1,859 ) Fair value of plan assets 1,196 1,175 Funded status ( 393 ) ( 684 ) 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) $ ( 393 ) $ ( 684 ) Accrued postretirement benefit cost (included in other long-term obligations) N/A N/A Components of net periodic benefit cost: 2022 2021 2020 Service cost with interest to end of year $ 44 $ 67 $ 104 Interest cost 17 14 20 Expected return on plan assets ( 37 ) ( 34 ) ( 14 ) Amortization of prior service cost — — — Amortization of net loss — 3 — Total net periodic benefit cost $ 24 $ 50 $ 110 62 Table of Contents Estimated future benefit payments are as follows: Year 2023 $ 1 2024 — 2025 — 2026 — 2027 — Years 2028-2032 24 Assumptions to determine benefit obligations: 2022 2021 Discount rate 4.00 % 1.00 % Assumptions to determine net cost: 2022 2021 2020 Discount rate 1.00 % 0.75 % 1.00 % Expected return on assets 3.25 % 3.25 % 1.00 % Deferred Compensation Plan The Company maintains an unfunded, non-qualified deferred compensation plan for the benefit of a select group of management or highly compensated employees. Assets 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, 2022 and 2021 was $ 8,543 and $ 6,270 , respectively, and was included in other long-term obligations on the Company's balance sheet. The related rabbi trust assets were $ 8,547 and $ 6,267 as of December 31, 2022 and 2021, respectively, and were included in other non-current assets on the Company's consolidated balance sheets. NOTE 16 - COMMITMENTS AND CONTINGENCIES The Company is obligated to make rental payments under non-cancelable operating and finance leases. Aggregate future minimum rental payments required under these leases at December 31, 2022 are disclosed in Note 19, Leases. The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on portions of the site. Remediation was conducted by the prior owner under the oversight of the EPA and the Missouri Department of Natural Resources. While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for potential liabilities associated with the Superfund site, and one of the sellers, in turn, has the benefit of certain contractual indemnification by the prior owner that executed the above-described Superfund remedy. In February 2022, BCP Ingredients, Inc. (“BCP”), the Company subsidiary that operates the site, received Special Notice Letter from EPA for the performance of a focused remedial investigation/feasibility study (“RI/FS”) at the site with regard to the presence of certain contaminants, including 1,4 dioxane. BCP, along with the prior owner of the Verona facility submitted a joint response to the notice in November 2022. 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. 63 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, 2022 and 2021 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, 2022 and 2021 included $ 934 and $ 933 in money market funds, respectively. Non-current assets at December 31, 2022 and 2021 included $ 8,547 and $ 6,267 , respectively, of rabbi trust funds related to the Company's deferred compensation plan. The money market and rabbi trust funds are valued using level one inputs, as defined by ASC 820, “Fair Value Measurement.” The contingent consideration liabilities included on the balance sheet at of December 31, 2022 amount to $ 11,400 and were valued using level three 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 assets related to the cross-currency swap and the interest rate swap were $ 4,587 and $ 1,406 at December 31, 2022, respectively. The derivative liabilities related to the cross-currency swap and the interest rate swap were $ 500 and $ 2,158 at December 31, 2021, respectively. NOTE 18 – RELATED PARTY TRANSACTIONS The Company provides services under 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 condensed consolidated statements of earnings. Payments for the services the Company provided amounted to $ 4,213 , $ 3,637 , and $ 3,396 , respectively, for the years ended December 31, 2022, 2021, and 2020. The raw materials purchased and subsequently sold amounted to $ 39,853 , $ 27,915 , and $ 13,495 , respectively, for the years ended December 31, 2022, 2021, and 2020. 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 $ 29,062 , $ 22,043 , and $ 12,190 , respectively for the years ended December 31, 2022, 2021, and 2020. At December 31, 2022 and 2021, the Company had receivables of $ 8,820 and $ 10,504 , respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold. The Company also had payables of $ 5,224 and $ 7,552 , respectively, recorded in accounts payable for finished goods received from St. Gabriel CC Company, LLC. In addition, the Company had receivables in the amount of $ 164 related to non-contractual monies owed from St. Gabriel CC Company, LLC, recorded in receivables as of December 31, 2021. There were no such receivables as of December 31, 2022. The 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, 2022 and 2021. 64 Table of Contents NOTE 19 – LEASES The Company has both real estate leases and equipment leases. The main types of equipment leases include forklifts, trailers, printers and copiers, railcars, and trucks. Leases are categorized as both operating leases and finance leases. As a result of electing the practical expedient within ASU 2016-02, variable lease payments are combined and recognized on the balance sheet in the event that those charges and any related increases are explicitly stated in the lease. Such payments include common area maintenance charges, property taxes, and insurance charges and are recorded in the right of use asset and corresponding liability when the payments are stated in the lease with (a) fixed or in-substance fixed amounts, or (b) a variable payment based on an index or rate. Due to the acquisitive nature of the Company and the potential for synergies upon integration of acquired entities, the Company determined that the reasonably certain criterion could not be met for any renewal periods beginning two years from December 31, 2022. In addition, the Company has historically not been exercising purchase options under the equipment leases as it does not make economic sense to buy the equipment. Instead, the Company has historically replaced the equipment with new leases. Therefore, the Company determined that the reasonably certain criterion could not be met as it relates to purchase options. The Company has no residual value guarantees in lease transactions. On June 22, 2022, the Company signed a ten-year real estate sublease for approximately 40,000 square feet of office space, which serves as the Company's new corporate headquarters and will also serve as a laboratory facility. The sublease commenced in the fourth quarter of 2022 and the Company recognized a right of use asset and lease liability as of the commencement date in accordance with ASC 842, Lease Accounting. 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 2022: (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 an acquisition in 2019, 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. 65 Table of Contents Right of use assets and lease liabilities at December 31, 2022 and 2021 are summarized as follows: Right of use assets 2022 2021 Operating leases $ 17,094 $ 6,929 Finance leases 2,338 2,359 Total $ 19,432 $ 9,288 Lease liabilities - current 2022 2021 Operating leases $ 3,796 $ 2,194 Finance leases 226 167 Total $ 4,022 $ 2,361 Lease liabilities - non-current 2022 2021 Operating leases $ 13,806 $ 4,811 Finance leases 2,213 2,303 Total $ 16,019 $ 7,114 66 Table of Contents For the years ended December 31, 2022, 2021, and 2020, 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, 2022 2021 2020 Lease Cost Operating lease cost $ 4,478 $ 3,143 $ 3,105 Finance Lease cost Amortization of ROU asset 210 210 210 Interest on lease liabilities 125 129 137 Total finance lease 335 339 347 Total lease cost $ 4,813 $ 3,482 $ 3,452 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 4,269 $ 3,097 $ 2,864 Operating cash flows from finance leases 125 129 137 Financing cash flows from finance leases 177 159 151 $ 4,571 $ 3,385 $ 3,152 ROU assets obtained in exchange for new operating lease liabilities, net of ROU asset disposals $ 11,488 $ 3,804 $ 1,042 ROU assets obtained in exchange for new finance lease liabilities, net of ROU asset disposals $ — $ — $ 2,782 Weighted-average remaining lease term - operating leases 5.63 years 4.21 years 4.15 years Weighted-average remaining lease term - finance leases 9.95 years 11.41 years 12.25 years Weighted-average discount rate - operating leases 2.7 % 3.5 % 4.5 % Weighted-average discount rate - finance leases 5.0 % 5.1 % 5.1 % Rent expense charged to operations under operating lease agreements for 2022, 2021, and 2020 aggregated approximately $ 4,478 , $ 3,143 , and $ 3,105 , respectively. Aggregate future minimum rental payments required under non-cancelable operating and finance leases at December 31, 2022 are as follows: Year 2023 $ 5,352 2024 4,155 2025 3,141 2026 2,741 2027 2,298 Thereafter 6,880 Total minimum lease payments $ 24,567 67 Table of Contents 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 JP Morgan Chase, N.A. (the "Swap Counterparty") and a cross-currency swap (net investment hedge) 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. 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 receive-floating interest rate was based on the London Interbank Offered Rate ("LIBOR") in the original trade agreement. Due to the discontinuation of LIBOR, in the third quarter of 2022, the Company modified its existing interest rate swap to reference 1-month CME Term SOFR (CME Group Benchmark Administration Limited as administrator of the forward-looking term Secured Overnight Financing Rate) in the amended trade terms. This modification was made under the relief provided for in ASC 848, "Reference Rate Reform" and therefore the derivative continues to qualify for hedge accounting. 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 2022 Credit Agreement. The net interest income related to the interest rate swap contract was $ 400 for the year ended December 31, 2022. The net interest expense related to the interest rate swap contract were $ 2,144 and $ 1,593 for the years ended December 31, 2021 and 2020, respectively. 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 $ 2,250 , $ 2,257 , and $ 2,275 for the years ended December 31, 2022, 2021, and 2020, 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 condensed consolidated balance sheets. As of December 31, 2022 and 2021, the fair value of the derivative instruments is presented as follows in the Company's consolidated balance sheets: Derivative assets (liabilities) 2022 2021 Interest rate swap $ 1,406 $ ( 2,158 ) Cross-currency swap 4,587 ( 500 ) Derivative assets (liabilities) $ 5,993 $ ( 2,658 ) 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. 68 Table of Contents As of December 31, 2022, 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. Gains and losses on our hedging instruments are recognized in accumulated other comprehensive income (loss) and categorized as follows for the year ended December 31, 2022, 2021, and 2020: Location within Statements of Comprehensive Income Year ended December 31 2022 2021 2020 Cash flow hedge (interest rate swap), net of tax Unrealized gain (loss) on cash flow hedge, net $ 2,696 $ 2,053 $ ( 2,285 ) Net investment hedge (cross-currency swap), net of tax Net foreign currency translation adjustment 3,851 4,766 ( 4,882 ) $ 6,547 $ 6,819 $ ( 7,167 ) On June 21, 2022, the Company completed the acquisition of Kappa (as defined in Note 2, Significant Acquisitions). In the process of acquiring Kappa, the Company entered into four short-term foreign currency exchange forward contracts with JP Morgan Chase, N.A to manage fluctuations in foreign currency exchange rates related to the acquisition. The Company did not designate these contracts as hedged transactions under the applicable sections of ASC Topic 815, "Derivatives and Hedging". For the year ended December 31, 2022, the net gains on these forward contracts of $ 512 were recorded in other income or loss in the condensed consolidated statements of earnings. As of December 31, 2022, the Company did not maintain any open foreign currency exchange forward contracts as all four contracts expired before June 30, 2022. The following table summarizes the key terms of the four forward exchange contracts: Date entered into Date expired on Balchem to sell Balchem to buy June 15, 2022 June 21, 2022 USD 294,555 NOK 2,924,553 June 15, 2022 June 17, 2022 USD 6,436 EUR 6,180 June 15, 2022 June 21, 2022 USD 16,640 EUR 15,972 June 15, 2022 June 21, 2022 EUR 15,972 NOK 165,210 69 Table of Contents NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands, except per share data) 2022 2021 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $ 228,867 $ 236,693 $ 244,267 $ 232,531 $ 185,656 $ 202,365 $ 197,869 $ 213,133 Gross margin 71,506 71,876 68,430 68,639 58,727 59,447 60,934 64,066 Earnings before income taxes 37,630 39,258 31,085 25,776 29,983 30,019 32,085 33,146 Net earnings 28,930 29,782 25,249 21,406 23,411 22,731 25,013 24,949 Basic net earnings per common share $ .90 $ .93 $ .79 $ .67 $ .73 $ .71 $ .78 $ .78 Diluted net earnings per common share $ .89 $ .92 $ .78 $ .66 $ .72 $ .70 $ .77 $ .76 70 Table of Contents BALCHEM CORPORATION Valuation and Qualifying Accounts Years Ended December 31, 2022, 2021 and 2020 (In thousands) Allowance for Doubtful Accounts Inventory Reserve Balance - December 31, 2019 $ 2,080 $ 4,281 Additions charged to costs and expenses 140 5,964 Adjustments/deductions (a) ( 128 ) ( 7,463 ) Balance - December 31, 2020 2,092 2,782 Additions charged to costs and expenses 180 7,312 Adjustments/deductions (a) ( 1,344 ) ( 8,669 ) Balance - December 31, 2021 928 1,425 Additions charged to costs and expenses 401 6,786 Adjustments/deductions (a) ( 103 ) ( 5,571 ) Balance - December 31, 2022 $ 1,226 $ 2,640 (a) Represents write-offs and other adjustments 71 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.