NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All dollar amounts in thousands, except share and per share data)
NOTE 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein have been prepared by the Company in accordance with the accounting policies described in its
December 31, 2018
consolidated financial statements, and should be read in conjunction with the consolidated financial statements and notes, which appear in the Annual Report on Form 10-K for the year ended
December 31, 2018
. References in this report to the “Company” mean either Balchem Corporation or Balchem Corporation and its subsidiaries, including SensoryEffects, Inc., SensoryEffects Cereal Systems, Inc., Albion Laboratories, Inc. (formerly known as Albion International, Inc.), BCP Ingredients, Inc., Aberco, Inc., Balchem BV, Balchem Italia Srl, Bioscreen Technologies Srl, Innovative Food Processors, Inc., and Balchem LTD, on a consolidated basis, as the context requires.
In the opinion of management, the unaudited condensed consolidated financial statements furnished in this Form 10-Q include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” or “GAAP”) governing interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934 (the "Exchange Act") and therefore do not include some information and notes necessary to conform to annual reporting requirements. The results of operations for the
three
months ended
March 31, 2019
are not necessarily indicative of the operating results expected for the full year or any interim period.
Certain reclassifications have been made to prior period amounts to conform with the current period's presentation.
Recent Accounting Pronouncements
Recently Issued Accounting Standards
In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements," which further clarifies the determination of fair value of leases and modifies transition disclosure requirements for changes in accounting principles. The effective date of the amendments is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
The Company is currently evaluating the impact of this pronouncement on the Company’s consolidated financial statements and disclosures.
As stated below, the Company adopted Accounting Standards Codification ("ASC") 842 ("ASU 2016-02), Leases, as of January 1, 2019.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The guidance requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted and the standard may be adopted either using the prospective or retrospective transition approach. The Company is currently evaluating the impact of this pronouncement on the Company’s consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,” which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This update should be applied on a retrospective basis to all periods presented and is effective for fiscal years ending after December 31, 2020. Early adoption is permitted. The Company expects this new guidance will have minimal impact on its financial reporting.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (ASU 2017-04), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted; however, the Company has elected not to adopt early as this ASU will not have a significant impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which was clarified by ASU 2018-11 and addresses the recognition of assets and liabilities that arise from all leases. The guidance requires lessees to recognize right-of-use assets
("ROU") and lease liabilities for most leases in the Consolidated Balance Sheets. The guidance is effective for annual and interim periods beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019 and has elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption. The new standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify, which means for those leases that qualify, the Company will not recognize ROU assets or lease liabilities. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its leases. Refer to Note 19 "Leases."
NOTE 2 – SIGNIFICANT ACQUISITIONS AND DIVESTITURES
The Company did not complete any acquisitions during the
three
months ended
March 31, 2019
or
2018
. Total transaction and integration costs related to recent acquisitions, including the subsequent event identified below, are recorded in general and administrative expenses and amounted to
$485
and
$689
for the three months ended March 31, 2019 and 2018, respectively.
Potential Divestiture
As of March 31, 2019, the Company was in negotiations for the sale of an insignificant portion of the Company's business. The transaction is estimated to be completed during 2019 and no gain or loss has been recognized in the Company's condensed consolidated statements of earnings as of March 31, 2019. The related assets and liabilities have been reclassified as current assets held for sale and current liabilities held for sale within the Company's condensed consolidated balance sheets as of March 31, 2019 and include the following:
|
|
|
|
|
|
|
|
March 31, 2019
|
Accounts receivable
|
|
$
|
353
|
|
Inventory
|
|
376
|
|
Property, plant, and equipment, net
|
|
9,314
|
|
Right of use assets
|
|
317
|
|
Goodwill
|
|
1,380
|
|
Other current assets
|
|
8
|
|
Assets held for sale
|
|
$
|
11,748
|
|
|
|
|
Trade accounts payable
|
|
$
|
126
|
|
Accrued expenses
|
|
260
|
|
Accrued compensation and other benefits
|
|
52
|
|
Lease liabilities
|
|
319
|
|
Liabilities held for sale
|
|
$
|
757
|
|
Subsequent Event
On May 2, 2019, the Company entered into a securities purchase agreement for the acquisition of Chemogas Holding NV and its Subsidiaries ("Chemogas"), a privately held specialty gases company headquartered in Grimbergen, Belgium, for a purchase price of
€95,000
, subject to certain adjustments as provided in the definitive agreement. The transaction is subject to customary conditions to closing and will be financed through the Company's Credit Agreement (as defined below) and cash on hand.
Chemogas has been a leader in the packaging and distribution of a wide variety of specialty gases, most notably ethylene oxide, primarily in the European and Asian markets, for medical device sterilization. Through its operational and logistical excellence, Chemogas supports its customers' needs across more than
70
countries. With this acquisition, Balchem significantly expands its geographic presence in the packaged ethylene oxide market, enabling the Company to offer worldwide service and support to its medical device sterilization customers within the Specialty Products segment. The Chemogas sites in Europe and Asia will form a global network of facilities when combined with Balchem's sites in the United States.
In connection with this transaction, the Company incurred transaction costs of
$307
for the three months ended March 31, 2019, which are included in general and administrative expenses.
NOTE 3 – STOCKHOLDERS’ EQUITY
STOCK-BASED COMPENSATION
The Company’s results for the
three
months ended
March 31, 2019
and
2018
reflected the following stock-based compensation cost, and such compensation cost had the following effects on net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) for the
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Cost of sales
|
|
$
|
288
|
|
|
$
|
245
|
|
Operating expenses
|
|
1,343
|
|
|
1,548
|
|
Net earnings
|
|
(1,258
|
)
|
|
(1,378
|
)
|
As allowed by ASC 718, 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 stock incentive plans allow for the granting of stock awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans.
No
option will be exercisable for longer than
ten years
after the date of grant. The Company has approved and reserved a number of shares to be issued upon exercise of the outstanding options that is adequate to cover all exercises. As of
March 31, 2019
, the plans had
1,096,274
shares available for future awards. Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally
three years
for stock options,
three
to
four years
for employee restricted stock awards,
three years
for employee performance share awards, and
three
to
four years
for non-employee director restricted stock awards. Certain awards provide for accelerated vesting if there is a change in control (as defined in the plans) or other qualifying events.
Option activity for the
three
months ended
March 31, 2019
and
2018
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31, 2019
|
|
Shares (000s)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual
Term
|
Outstanding as of December 31, 2018
|
|
887
|
|
|
$
|
61.59
|
|
|
$
|
16,192
|
|
|
|
Granted
|
|
185
|
|
|
84.19
|
|
|
|
|
|
Exercised
|
|
(7
|
)
|
|
40.85
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Canceled
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of March 31, 2019
|
|
1,065
|
|
|
$
|
65.64
|
|
|
$
|
28,924
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2019
|
|
685
|
|
|
$
|
56.91
|
|
|
$
|
24,588
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31, 2018
|
|
Shares (000s)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual
Term
|
Outstanding as of December 31, 2017
|
|
946
|
|
|
$
|
55.44
|
|
|
$
|
24,714
|
|
|
|
Granted
|
|
148
|
|
|
74.57
|
|
|
|
|
|
Exercised
|
|
(39
|
)
|
|
32.83
|
|
|
|
|
|
Forfeited
|
|
(1
|
)
|
|
73.49
|
|
|
|
|
|
Canceled
|
|
(1
|
)
|
|
25.39
|
|
|
|
|
|
Outstanding as of March 31, 2018
|
|
1,053
|
|
|
$
|
58.98
|
|
|
$
|
24,680
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2018
|
|
637
|
|
|
$
|
48.54
|
|
|
$
|
21,306
|
|
|
5.3
|
ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yields of
0.6%
and
0.6%
; expected volatilities of
24%
and
27%
; risk-free interest rates of
2.5%
and
2.6%
; and expected lives of
4.0 years
and
4.4 years
, in each case for the
three
months ended
March 31, 2019
and
2018
, respectively.
The Company used a projected expected life for each award granted based on historical experience of employees’ exercise behavior. Expected volatility is based on the Company’s historical volatility levels. 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.
Other information pertaining to option activity during the
three
months ended
March 31, 2019
and
2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Weighted-average fair value of options granted
|
|
$
|
18.26
|
|
|
$
|
18.62
|
|
Total intrinsic value of stock options exercised ($000s)
|
|
$
|
302
|
|
|
$
|
1,825
|
|
Non-vested restricted stock activity for the
three
months ended
March 31, 2019
and
2018
is summarized below:
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2018
|
|
79
|
|
|
$
|
72.75
|
|
Granted
|
|
66
|
|
|
84.27
|
|
Vested
|
|
(8
|
)
|
|
58.52
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested balance as of March 31, 2019
|
|
137
|
|
|
$
|
79.16
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2017
|
|
66
|
|
|
$
|
65.66
|
|
Granted
|
|
36
|
|
|
74.57
|
|
Vested
|
|
(6
|
)
|
|
50.32
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested balance as of March 31, 2018
|
|
96
|
|
|
$
|
70.10
|
|
Non-vested performance share activity for the
three
months ended
March 31, 2019
and
2018
is summarized below:
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2018
|
|
53
|
|
|
$
|
75.61
|
|
Granted
|
|
33
|
|
|
81.79
|
|
Vested
|
|
(9
|
)
|
|
65.64
|
|
Forfeited
|
|
(7
|
)
|
|
60.85
|
|
Non-vested balance as of March 31, 2019
|
|
70
|
|
|
$
|
81.26
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
Shares (000s)
|
|
Weighted
Average Grant
Date Fair
Value
|
Non-vested balance as of December 31, 2017
|
|
39
|
|
|
$
|
72.62
|
|
Granted
|
|
32
|
|
|
71.27
|
|
Vested
|
|
(15
|
)
|
|
58.78
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested balance as of March 31, 2018
|
|
56
|
|
|
$
|
75.47
|
|
The performance share (“PS”) awards provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and relative total shareholder return (TSR) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents. Expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions used in the fair value determination were risk free interest rates of
2.5%
and
2.4%
; dividend yields of
0.5%
and
0.5%
; volatilities of
24%
and
27%
; and initial TSR’s of
-5.9%
and
-10.5%
, in each case for the
three
months ended
March 31, 2019
and
2018
, respectively. Expense is estimated based on the number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest
100%
at the end of the third year following the grant in accordance with the performance metrics set forth.
As of
March 31, 2019
and
2018
, there was
$17,475
and
$13,487
, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of
March 31, 2019
, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately
2 years
. The Company estimates that share-based compensation expense for the year ended
December 31, 2019
will be approximately
$7,700
.
REPURCHASE OF COMMON STOCK
The Company has an approved stock repurchase program. The total authorization under this program is
3,763,083
shares. Since the inception of the program in June 1999, a total of
2,199,268
shares have been purchased, of which
6,196
shares remained in treasury at
March 31, 2019
. During the
three
months ended
March 31, 2019
and
2018
, a total of
8,496
and
10,454
shares, respectively, have been purchased at an average cost of
$85.53
and
$75.04
per share, respectively. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors.
NOTE 4 – INVENTORIES
Inventories at
March 31, 2019
and
December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Raw materials
|
|
$
|
21,398
|
|
|
$
|
23,661
|
|
Work in progress
|
|
5,102
|
|
|
4,649
|
|
Finished goods
|
|
40,264
|
|
|
38,877
|
|
Total inventories
|
|
$
|
66,764
|
|
|
$
|
67,187
|
|
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at
March 31, 2019
and
December 31, 2018
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Land
|
|
$
|
8,489
|
|
|
$
|
7,965
|
|
Building
|
|
68,844
|
|
|
67,702
|
|
Equipment
|
|
201,890
|
|
|
213,909
|
|
Construction in progress
|
|
21,362
|
|
|
18,170
|
|
|
|
300,585
|
|
|
307,746
|
|
Less: accumulated depreciation
|
|
112,549
|
|
|
113,407
|
|
Property, plant and equipment, net
|
|
$
|
188,036
|
|
|
$
|
194,339
|
|
NOTE 6 – INTANGIBLE ASSETS
The Company had goodwill in the amount of
$446,453
and
$447,995
as of
March 31, 2019
and
December 31, 2018
, respectively, subject to the provisions of ASC 350, “Intangibles-Goodwill and Other.” The decrease in goodwill is primarily the result of the reclassification of a portion of the Company's
goodwill to assets held for sale (See Note 2) of
$1,380
, with the remaining change due to foreign exchange translation adjustments. Refer to Note 2 "Significant Acquisitions and Divestitures" for more information.
Identifiable intangible assets with finite lives at
March 31, 2019
and
December 31, 2018
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Period
(in years)
|
|
Gross
Carrying
Amount at
03/31/19
|
|
Accumulated
Amortization
at 3/31/2019
|
|
Gross
Carrying
Amount at
12/31/2018
|
|
Accumulated
Amortization
at 12/31/2018
|
Customer relationships & lists
|
|
10
|
|
$
|
192,120
|
|
|
$
|
126,408
|
|
|
$
|
192,185
|
|
|
$
|
122,545
|
|
Trademarks & trade names
|
|
5-17
|
|
39,681
|
|
|
17,409
|
|
|
39,934
|
|
|
16,755
|
|
Developed technology
|
|
5
|
|
13,338
|
|
|
9,271
|
|
|
13,338
|
|
|
8,604
|
|
Other
|
|
3-18
|
|
14,907
|
|
|
6,870
|
|
|
14,913
|
|
|
6,481
|
|
|
|
|
|
$
|
260,046
|
|
|
$
|
159,958
|
|
|
$
|
260,370
|
|
|
$
|
154,385
|
|
Amortization of identifiable intangible assets was approximately
$5,842
and
$6,193
for the
three
months ended
March 31, 2019
and 2018, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, estimated amortization expense is
$17,140
for the remainder of
2019
,
$20,878
for
2020
,
$17,645
for
2021
,
$16,151
for
2022
,
$14,879
for
2023
and
$6,486
for
2024
. At
March 31, 2019
and 2018, there were
no
identifiable intangible assets with indefinite useful lives as defined by ASC 350. Identifiable intangible assets are reflected in “Intangible assets with finite lives, net” in the Company’s condensed consolidated balance sheets. There were no changes to the useful lives of intangible assets subject to amortization during the
three
months ended
March 31, 2019
and 2018.
NOTE 7 – EQUITY-METHOD INVESTMENT
In 2013, the Company and Eastman Chemical Company (formerly Taminco Corporation) formed a joint venture (
66.66%
/
33.34%
ownership), St. Gabriel CC Company, LLC, to design, develop, and construct an expansion of the Company’s St. Gabriel aqueous choline chloride plant. The Company contributed the St. Gabriel plant, at cost, and expansion will be funded by the owners. The joint venture became operational as of July 1, 2016. St. Gabriel CC Company, LLC is a Variable Interest Entity (VIE) because the total equity at risk is not sufficient to permit the joint venture to finance its own activities without additional subordinated financial support. Additionally, voting rights (
2
votes each) are not proportionate to the owners’ obligation to absorb expected losses or receive the expected residual returns of the joint venture. The Company will receive up to 2/3 of the production offtake capacity and absorbs operating expenses approximately proportional to the actual percentage of offtake. The joint venture is accounted for under the equity method of accounting since the Company is not the primary beneficiary 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
$101
and
$139
for the three months ended
March 31, 2019
and
2018
, respectively, relating to its portion of the joint venture's expenses in other expense. The carrying value of the joint venture at
March 31, 2019
and
December 31, 2018
is
$4,801
and
$4,902
, respectively, and is recorded in other assets
.
NOTE 8 – REVOLVING LOAN
On June 27, 2018, the Company and a bank syndicate entered into a five year senior secured revolving credit agreement (“Credit Agreement”), which replaced the existing credit facility that had provided for a senior secured term loan A of
$350,000
and a revolving loan of
$100,000
. The Credit Agreement, which expires on
June 27, 2023
, provides for revolving loans up to
$500,000
(collectively referred to as the “loans”). The loans may be used for working capital, letters of credit, and other corporate purposes and may be drawn upon at the Company’s discretion. The initial proceeds from the Credit Agreement were used to repay the outstanding balance of
$210,750
on its senior secured term loan A, which was due
May 2019
. There are
no
installment payments required on the revolving loans; they may be voluntarily prepaid in whole or in part without premium or penalty, and all outstanding amounts are due on the maturity date. As of
March 31, 2019
, the balance outstanding amounted to
$140,000
.
Amounts outstanding under the Credit Agreement are subject to an interest rate equal to a fluctuating rate as defined by the Credit Agreement plus an applicable rate. The applicable rate is based upon the Company’s consolidated net leverage ratio, as defined in the Credit Agreement, and the interest rate was
3.496%
at
March 31, 2019
. The Company is also required to pay a commitment fee on the unused portion of the revolving loan, which is based on the Company’s consolidated net leverage ratio as defined in the Credit Agreement and ranges from
0.15%
to
0.275%
(
0.15%
at
March 31, 2019
). The unused portion of the revolving loan amounted to
$360,000
at
March 31, 2019
. The Company is also required to pay, as applicable, letter of credit fees, administrative agent fees, and other fees to the arrangers and lenders.
Costs associated with the issuance of the revolving loans are capitalized and amortized on a straight-line basis over the term of the Credit Agreement. Costs associated with the issuance of the extinguished debt instrument were capitalized and amortized over the term of the respective financing arrangement using the effective interest method. Capitalized costs net of accumulated amortization totaled
$1,197
and
$1,268
at
March 31, 2019
and December 31, 2018, respectively, and are included in other assets on the balance sheet. Amortization expense pertaining to these costs totaled
$71
and
$109
for the three months ended
March 31, 2019
and 2018, respectively, and are included in interest expense in the accompanying condensed consolidated statements of earnings.
The Credit Agreement contains quarterly covenants requiring the consolidated leverage ratio to be less than a certain maximum ratio and the consolidated interest coverage ratio to exceed a certain minimum ratio. At
March 31, 2019
, the Company was in compliance with these covenants. Indebtedness under the Company’s loan agreements are secured by assets of the Company.
NOTE 9 – NET EARNINGS PER SHARE
The following presents a reconciliation of the net earnings and shares used in calculating basic and diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Net
Earnings
(Numerator)
|
|
Number of
Shares
(Denominator)
|
|
Per Share
Amount
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
18,783
|
|
|
32,188,469
|
|
|
$
|
.58
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
320,663
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
18,783
|
|
|
32,509,132
|
|
|
$
|
.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
Net
Earnings
(Numerator)
|
|
Number of
Shares
(Denominator)
|
|
Per Share
Amount
|
Basic EPS – Net earnings and weighted average common shares outstanding
|
|
$
|
19,346
|
|
|
31,985,332
|
|
|
$
|
.60
|
|
Effect of dilutive securities – stock options, restricted stock, and performance shares
|
|
|
|
342,001
|
|
|
|
Diluted EPS – Net earnings and weighted average common shares outstanding and effect of stock options, restricted stock, and performance shares
|
|
$
|
19,346
|
|
|
32,327,333
|
|
|
$
|
.60
|
|
The Company had
515,573
and
347,211
stock options outstanding at
March 31, 2019
and
2018
, respectively, that could potentially dilute basic earnings per share in future periods that were not included in diluted earnings per share because their effect on the period presented was anti-dilutive.
NOTE 10 – INCOME TAXES
The Company’s effective tax rate for the three months ended
March 31, 2019
and
2018
, was
24.2%
and
23.2%
, respectively. The increase in the effective tax rate for the three months ended
March 31, 2019
compared to the three months ended
March 31, 2018
was attributable to higher state taxes and lower excess tax benefits from stock-based compensation.
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 Securities and Exchange Commission, or the Financial Accounting Standards Board regarding this act.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and would establish a valuation allowance if it believed that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.
The Company accounts for uncertainty in income taxes utilizing ASC 740-10, "Income Taxes". ASC 740-10 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosures. The application of ASC 740-10 requires judgment related to the uncertainty in income taxes and could impact our effective tax rate.
The Company files income tax returns in the U.S. and in various states and foreign countries. As of
March 31, 2019
, in the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2014. As of
March 31, 2019
and
December 31, 2018
, the Company had approximately
$5,648
and
$5,709
, respectively, of unrecognized tax benefits, which are included in other long-term obligations on the Company’s consolidated balance sheets. The Company includes interest expense or income as well as potential penalties on unrecognized tax positions as a component of income tax expense in the consolidated statements of earnings. The total amount of accrued interest and penalties related to uncertain tax positions at
March 31, 2019
and
December 31, 2018
was approximately
$1,854
and
$1,839
, respectively, and is included in other long-term obligations.
NOTE 11 – SEGMENT INFORMATION
Human Nutrition & Health
The Company's Human Nutrition & Health ("HNH") segment provides human grade choline nutrients and mineral amino acid chelated products through this segment for wellness applications. Choline is recognized to play a key role in the development and structural integrity of brain cell membranes in infants, processing dietary fat, reproductive development and neural functions, such as memory and muscle function. The Company's mineral amino acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for inclusion in premier human nutrition products. Proprietary technology has been combined to create an organic molecule in a form the body can readily assimilate. Sales growth for human nutrition applications is reliant on differentiation from lower-cost competitive products through scientific data, intellectual property and customer perceptions of brand value. Consequently, the Company makes investments in such activities for long-term value differentiation. This segment also serves the food and beverage industry for beverage, bakery, dairy, confectionary, and savory manufacturers. The Company partners with our customers from ideation through commercialization to bring on-trend beverages, baked goods, confections, dairy and meat products to market. The Company's expertise in trends analysis and product development, combined with manufacturing capabilities in customized spray dried and emulsified powders, blended lipid systems, liquid flavor delivery systems, juice and dairy bases, chocolate systems, as well as ice cream bases and variegates makes the Company a one-stop solutions provider for beverage and dairy product development needs. Additionally, this segment provides microencapsulation solutions to a variety of applications in food, pharmaceutical and nutritional ingredients to enhance performance of nutritional fortification, processing, mixing, and packaging applications and shelf-life. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends, confections, and nutritional supplements. The Company also creates cereal systems for ready-to-eat cereals, grain-based snacks, and cereal based ingredients.
Animal Nutrition & Health
The Company’s Animal Nutrition & Health (“ANH”) segment provides nutritional products derived from its microencapsulation and chelation technologies in addition to basic choline chloride. For ruminant animals, the Company’s microencapsulated products boost health and milk production, delivering nutrient supplements that are biologically available, providing required nutritional levels. The Company’s proprietary chelation technology provides enhanced nutrient absorption for various species of production and companion animals and is marketed for use in animal feed throughout the world. ANH also manufactures and supplies choline chloride, an essential nutrient for monogastric animal health, predominantly to the poultry, pet and swine industries. Choline, which is manufactured and sold in both dry and aqueous forms, plays a vital role in the metabolism of fat. In poultry, choline deficiency can result in reduced growth rates and perosis in young birds, while in swine production choline is a necessary and required component of gestating and lactating sow diets for both liver health and prevention of leg deformity.
Sales of value-added encapsulated products are highly dependent on overall industry economics as well as the Company's ability to leverage the results of university and field research on the animal health and production benefits of our products. Management believes that success in the commodity-oriented basic choline chloride marketplace is highly dependent on the Company’s ability to maintain its strong reputation for excellent product quality and customer service. The Company continues to drive production efficiencies in order to maintain its competitive-cost position to effectively compete in a competitive global marketplace.
Specialty Products
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily for use in the health care industry. It is used to sterilize a wide range of medical devices because of its versatility and effectiveness in treating hard or soft surfaces, composites, metals, tubing and different types of plastics without negatively impacting the performance of the device being sterilized. The Company’s 100% ethylene oxide product is distributed in uniquely designed, recyclable, double-walled, stainless steel drums to assure compliance with safety, quality and environmental standards as outlined by the EPA and the DOT. The Company’s inventory of these specially built drums, along with its
two
filling facilities, represents a significant capital investment. Contract sterilizers and medical device manufacturers are principal customers for this product. The Company also sells single use canisters with 100% ethylene oxide for use in sterilizing re-usable devices typically processed in autoclave units in hospitals. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spices and other seasoning materials.
Propylene oxide is marketed and sold as a fumigant to aid in the control of insects and microbiological spoilage; and to reduce bacterial and mold contamination in certain shell and processed nut meats, processed spices, cacao beans, cocoa powder, raisins, figs and prunes. The Company distributes its propylene oxide product primarily in recyclable, single-walled, carbon steel cylinders according to standards outlined by the EPA and the DOT. Its inventory of these cylinders also represents a significant capital investment. Propylene oxide is also sold to customers seeking smaller (as opposed to bulk) quantities and whose requirements include utilization in various chemical synthesis applications, such as increasing paint durability and manufacturing specialty starches and textile coatings.
The Company’s micronutrient agricultural nutrition business sells chelated minerals primarily into high value crops. The Company has a unique and patented two-step approach to solving mineral deficiency in plants to optimize health, yield and shelf-life. First, the Company determines optimal mineral balance for plant health. The Company then has a foliar applied Metalosate product range, utilizing patented amino acid chelate technology. Its products quickly and efficiently deliver mineral nutrients. As a result, the farmer/grower gets healthier crops that are more resistant to disease and pests, larger yields and healthier food for the consumer with extended shelf life for produce being shipped long distances.
Industrial Products
Certain derivatives of choline chloride are manufactured and sold into industrial applications predominately as a component for hydraulic fracturing of shale natural gas wells. The Company’s products offer an attractive, effective and more environmentally responsible alternative than other clay stabilizers. Industrial grade choline bicarbonate is completely chloride free and the Company's choline chloride reduces the amount of chlorides released into the environment up to
75%
when compared to potassium chloride. The Industrial Products segment also includes the manufacture and sale of methylamines. Methylamines are a primary building block for the manufacture of choline products and are produced at its Italian operation and sold for a wide range of industrial applications in Europe.
The segment information is summarized as follows:
Business Segment Assets:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Human Nutrition & Health
|
|
$
|
703,042
|
|
|
$
|
702,692
|
|
Animal Nutrition & Health
|
|
135,738
|
|
|
136,810
|
|
Specialty Products
|
|
65,715
|
|
|
59,558
|
|
Industrial Products
|
|
25,588
|
|
|
22,822
|
|
Other Unallocated
(1)
|
|
41,805
|
|
|
59,473
|
|
Total
|
|
$
|
971,888
|
|
|
$
|
981,355
|
|
|
|
|
|
|
(1)
Other unallocated assets consist of certain cash, receivables, prepaid expenses, equipment and leasehold improvements, net of accumulated depreciation, and deferred income taxes, which the Company does not allocate to its individual business segments.
|
Business Segment Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Human Nutrition & Health
|
|
$
|
85,149
|
|
|
$
|
83,063
|
|
Animal Nutrition & Health
|
|
43,361
|
|
|
46,141
|
|
Specialty Products
|
|
18,424
|
|
|
17,740
|
|
Industrial Products
|
|
10,095
|
|
|
14,466
|
|
Total
|
|
$
|
157,029
|
|
|
$
|
161,410
|
|
Business Segment Earnings Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Human Nutrition & Health
|
|
$
|
13,703
|
|
|
$
|
12,932
|
|
Animal Nutrition & Health
|
|
5,256
|
|
|
7,484
|
|
Specialty Products
|
|
6,697
|
|
|
5,034
|
|
Industrial Products
|
|
1,637
|
|
|
2,479
|
|
Transaction costs, integration costs, and unallocated legal fees
(2)
|
|
(804
|
)
|
|
(689
|
)
|
Unallocated amortization expense
(3)
|
|
(9
|
)
|
|
—
|
|
Interest and other (expense)
|
|
(1,687
|
)
|
|
(2,063
|
)
|
Total
|
|
$
|
24,793
|
|
|
$
|
25,177
|
|
|
|
|
|
|
(2)
Transaction costs, integration costs and unallocated legal fees for three month ended March 31, 2019 and 2018, respectively, were primarily related to acquisitions.
|
(3)
Unallocated amortization expense for three months ended March 31, 2019 was related to amortization of intangible assets in connection with a company-wide ERP system implementation.
|
Depreciation/Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Human Nutrition & Health
|
|
$
|
7,986
|
|
|
$
|
8,532
|
|
Animal Nutrition & Health
|
|
1,578
|
|
|
1,305
|
|
Specialty Products
|
|
1,021
|
|
|
1,010
|
|
Industrial Products
|
|
171
|
|
|
171
|
|
Total
|
|
$
|
10,756
|
|
|
$
|
11,018
|
|
Capital Expenditures
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Human Nutrition & Health
|
|
$
|
5,255
|
|
|
$
|
2,079
|
|
Animal Nutrition & Health
|
|
1,471
|
|
|
830
|
|
Specialty Products
|
|
1,474
|
|
|
582
|
|
Industrial Products
|
|
288
|
|
|
244
|
|
Total
|
|
$
|
8,488
|
|
|
$
|
3,735
|
|
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 the Company expects 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.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Product Sales
|
|
$
|
143,874
|
|
|
$
|
146,914
|
|
Co-manufacturing
|
|
10,630
|
|
|
10,707
|
|
Bill and Hold
|
|
857
|
|
|
1,289
|
|
Consignment
|
|
589
|
|
|
1,045
|
|
Product Sales Revenue
|
|
155,950
|
|
|
159,955
|
|
Royalty Revenue
|
|
1,079
|
|
|
1,455
|
|
Total Revenue
|
|
$
|
157,029
|
|
|
$
|
161,410
|
|
The following table presents revenues disaggregated by geography, based on the billing addresses of customers:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
United States
|
|
$
|
118,111
|
|
|
$
|
120,668
|
|
Foreign Countries
|
|
38,918
|
|
|
40,742
|
|
Total Revenue
|
|
$
|
157,029
|
|
|
$
|
161,410
|
|
Product Sales Revenues
The Company’s primary operation is the manufacturing and sale of health and wellness ingredient products, in which the Company receives an order from a customer and fulfills that order. The Company’s product sales have
four
sub-streams of revenue: product sales, co-manufacturing, bill and hold, and consignment.
Under the co-manufacturing agreements, the Company is responsible for the manufacture of a finished good where the customer provides some or all of the raw materials. The Company controls the manufacturing process and the ultimate end-product before it is shipped to the customer. Based on these factors, the Company has determined that it is the principal in these agreements and therefore revenue is recognized in the gross amount of consideration the Company expects to be entitled for the goods provided.
Royalty Revenues
Royalty revenue consists of agreements with customers to use the Company’s intellectual property in exchange for a sales-based royalty. Royalty revenue is recorded as part of the Human Nutrition & Health segment.
Contract Liabilities
The Company records contract liabilities when cash payments are received or due in advance of performance, including amounts which are refundable.
The Company’s payment terms vary by the type and location of customers and the products offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products are delivered to the customer.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for products shipped.
NOTE 13 –
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the
three
months ended
March 31, 2019
and
2018
for income taxes and interest is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Income taxes
|
|
$
|
58
|
|
|
$
|
—
|
|
Interest
|
|
$
|
1,459
|
|
|
$
|
1,763
|
|
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive (loss)/income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Net foreign currency translation adjustment
|
|
$
|
(1,089
|
)
|
|
$
|
1,363
|
|
|
|
|
|
|
Net change in postretirement benefit plan (see Note 15 for further information)
|
|
|
|
|
Amortization of prior service cost
|
|
18
|
|
|
18
|
|
Amortization of gain
|
|
(11
|
)
|
|
(1
|
)
|
Total before tax
|
|
7
|
|
|
17
|
|
Tax
|
|
(2
|
)
|
|
(4
|
)
|
Net of tax
|
|
5
|
|
|
13
|
|
|
|
|
|
|
Total other comprehensive (loss)/income
|
|
$
|
(1,084
|
)
|
|
$
|
1,376
|
|
Accumulated other comprehensive loss at
March 31, 2019
and
December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustment
|
|
Postretirement
benefit plan
|
|
Total
|
Balance December 31, 2018
|
|
$
|
(4,285
|
)
|
|
$
|
683
|
|
|
$
|
(3,602
|
)
|
Other comprehensive (loss)/income
|
|
(1,089
|
)
|
|
5
|
|
|
(1,084
|
)
|
Balance March 31, 2019
|
|
$
|
(5,374
|
)
|
|
$
|
688
|
|
|
$
|
(4,686
|
)
|
NOTE
15
– EMPLOYEE BENEFIT PLANS
The Company provides postretirement benefits in the form of
two
unfunded postretirement medical plans; one that under a collective bargaining agreement covers eligible retired employees of the Verona facility and a plan for those named as executive officers in the Company’s proxy statement
.
Net periodic benefit costs for such retirement medical plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
Service cost
|
|
$
|
16
|
|
|
$
|
19
|
|
Interest cost
|
|
10
|
|
|
11
|
|
Amortization of prior service cost
|
|
18
|
|
|
18
|
|
Amortization of gain
|
|
(11
|
)
|
|
(1
|
)
|
Net periodic benefit cost
|
|
$
|
33
|
|
|
$
|
47
|
|
The amount recorded for these obligations on the Company’s balance sheet as of
March 31, 2019
and
December 31, 2018
is
$1,200
and
$1,174
, respectively, and is included in other long-term obligations. These plans are unfunded and approved claims are paid from Company funds. Historical cash payments made under such plan have typically been less than
$100
per year.
On June 1, 2018, the Company established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability was
$1,513
and
$265
as of March 31, 2019 and December 31, 2018, respectively, and is included in other long-term obligations on the Company’s balance sheet. The related rabbi trust assets were
$1,513
and
$265
as of March 31, 2019 and December 31, 2018, respectively, and are included in other non-current assets on the Company's balance sheet.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Rent expense charged to operations under lease agreements for the
three
months ended
March 31, 2019
and
2018
aggregated approximately
$813
and
$786
, respectively.
Aggregate future minimum rental payments required under all non-cancelable operating leases at
March 31, 2019
are as follows:
|
|
|
|
|
Year
|
|
April 1, 2019 to December 31, 2019
|
$
|
2,562
|
|
2020
|
2,912
|
|
2021
|
2,005
|
|
2022
|
1,415
|
|
2023
|
1,176
|
|
2024
|
1,024
|
|
Thereafter
|
3,594
|
|
Total minimum lease payments
|
$
|
14,688
|
|
The Company’s Verona, Missouri facility, while held by a prior owner, was designated by the EPA as a Superfund site and placed on the National Priorities List in 1983, because of dioxin contamination on portions of the site. Remediation was conducted by the prior owner under the oversight of the EPA and the Missouri Department of Natural Resources (“MDNR”). While the Company must maintain the integrity of the capped areas in the remediation areas on the site, the prior owner is responsible for completion of any further Superfund remedy. The Company is indemnified by the sellers under its May 2001 asset purchase agreement covering its acquisition of the Verona, Missouri facility for potential liabilities associated with the Superfund site.
From time to time, the Company is a party to various litigation, claims and assessments. Management believes that the ultimate outcome of such matters will not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity.
NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments,
none
of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at
March 31, 2019
and
December 31, 2018
does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of debt approximates fair value as the interest rate is based on market and the Company’s consolidated leverage ratio. The Company’s financial instruments also include cash equivalents, accounts receivable, accounts payable, and accrued liabilities, which are carried at cost and approximate fair value due to the short-term maturity of these instruments. Cash and cash equivalents at
March 31, 2019
and
December 31, 2018
includes
$797
and
$793
in money market funds, respectively. Non-current assets at March 31, 2019 and December 31, 2018 includes
$1,513
and
$265
, 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.”
NOTE
18
–
RELATED PARTY TRANSACTIONS
The Company provides services on a contractual agreement to St. Gabriel CC Company, LLC. These services include accounting, information technology, quality control, and purchasing services, as well as operation of the St. Gabriel CC Company, LLC plant. The Company also sells raw materials to St. Gabriel CC Company, LLC. These raw materials are used in the production of finished goods that are, in turn, sold by Saint Gabriel CC Company, LLC to the Company for resale to unrelated parties. As such, the sale of these raw materials to St. Gabriel CC Company, LLC in this scenario lacks economic substance and therefore the Company does not include them in net sales within the consolidated statement of earnings.
The services the Company provided amounted to
$868
and
$927
, respectively, for the three months ended
March 31, 2019
and
2018
. The raw materials sold amounted to
$6,808
and
$7,278
, respectively, for the three months ended
March 31, 2019
and
2018
. These services and raw materials are primarily recorded in cost of goods sold net of the finished goods received from St. Gabriel CC Company, LLC of
$5,312
and
$6,036
, respectively, for the three months ended
March 31, 2019
and
2018
. At
March 31, 2019
and December 31, 2018, the Company had receivables of
$4,897
and
$3,210
, respectively, recorded in accounts receivable from St. Gabriel CC Company, LLC for services rendered and raw materials sold and payables of
$1,567
and
$1,943
, respectively, for finished
goods received recorded in accrued expenses. In addition, the Company had payables in the amount of
$310
and
$314
, respectively, related to non-contractual monies owed to St. Gabriel CC Company, LLC, recorded in accrued expenses as of
March 31, 2019
and
December 31, 2018
, respectively.
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. All leases are categorized as operating leases. As a result of electing the practical expedient, variable lease payments are combined and recognized on the balance sheet in the event that those charges and any related increases are explicitly stated in the lease. Such payments include common area maintenance charges, property taxes, and insurance charges and are recorded in the ROU asset and corresponding liability when the payments are stated in the lease with (a) fixed or in-substance fixed amounts, or (b) a variable payment based on an index or rate. Due to the acquisitive nature of the Company and the potential for synergies upon integration of acquired entities, the Company determined that the reasonably certain criterion could not be met for any renewal periods beginning two years beyond the implementation date, which is January 1, 2019. In addition, the Company has historically not been exercising purchase options with equipment leases as it does not make economic sense to buy the equipment. Instead, the Company has historically replaced the equipment with a new lease. Therefore, the Company determined that the reasonably certain criterion could not be met as it relates to purchase options. The Company has no residual value guarantees in lease transactions.
The Company did not identify any embedded leases. As indicated above, the Company elected the practical expedient to combine lease and non-lease components and recognizes the combined amount on the consolidated balance sheet.
Management determined that since the Company has a centralized treasury function, the parent company would either fund or guarantee a subsidiary's loan for borrowing over a similar term. As such, the Company's management determined it is appropriate to utilize a corporate based borrowing rate for all locations. The Company developed four tranches of leases based on lease terms and these tranches reflect the composition of the current lease portfolio. The Company's borrowing history shows that interest rates of a term loan or a line of credit depend on the duration of the loan rather than the nature of the assets purchased by those funds. Based on this understanding, the Company elected to use a portfolio approach to discount rate, 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 upon implementation: (1) 1-2 years,
3.45%
(2) 3-4 years,
4.04%
(3) 5-9 years,
4.38%
and (4) 10+ years,
5.10%
.
For the three months ended March 31, 2019, the Company's total lease cost is as follows, which includes 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:
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
Lease Cost
|
|
|
Operating lease cost
|
|
813
|
|
|
|
|
Other information
|
|
|
(Gains) and losses on sale and leaseback transactions, net
|
|
—
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
819
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
12,874
|
|
|
|
|
Weighted-average remaining lease term - operating leases
|
|
4.88 years
|
|
|
|
|
Weighted-average discount rate - operating
|
|
4.5
|
%
|