INCOME TAXES

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

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

U.S. Tax Reform made broad and complex changes to the U.S. tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a

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

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

In the fourth quarter of 2018, the company completed its analysis of the impact of U.S. Tax Reform. In total, the company recorded a tax benefit of $26,761 related to U.S. Tax Reform. This benefit is comprised of a provisional estimate of $25,791 recorded in the fourth quarter of 2017, and an additional $970 benefit recorded in the fourth quarter of 2018.

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

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

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

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

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

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

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

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

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

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

Income tax expense consists of the following:

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

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

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

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

	2018		2017
Deferred tax assets:
Inventories	$	1,260	$	1,297
Restricted stock and stock options	3,567		3,248
Other	2,885		1,764
Total deferred tax assets	7,712		6,309
Deferred tax liabilities:
Amortization	$	27,080	$	31,311
Depreciation	23,837		22,172
Other	1,104		1,374
Total deferred tax liabilities	52,021		54,857
Net deferred tax liability	$	44,309	$	48,548

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

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

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

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

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

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

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