BALCHEM CORPORATION (All amounts in thousands, except share and per share data) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 - "Selected Financial Data" and our Consolidated Financial Statements and the related notes included in this report. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 (filed with theSEC onFebruary 28, 2019 ) for additional discussion of our financial condition and results of operations for the year endedDecember 31, 2017 , as well as our financial condition and results of operations for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 . Those statements in the following discussion that are not historical in nature should be considered to be forward-looking statements that are inherently uncertain. See "Cautionary Statement Regarding Forward-Looking Statements."
Overview
We develop, manufacture, distribute and market specialty performance ingredients and products for the nutritional, food, pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets. Our four reportable segments are strategic businesses that offer products and services to different markets: HNH, ANH, Specialty Products, and Industrial Products, as more fully described in Note 11 of the consolidated financial statements. We sell products for all four segments through our own sales force, independent distributors, and sales agents. The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three years endedDecember 31, 2019 , 2018 and 2017 (in thousands): 12 -------------------------------------------------------------------------------- Table of Contents Business SegmentNet Sales : 2019 2018 2017 HNH$ 347,433 $ 341,237 $ 315,796 ANH 177,557 175,693 157,688 Specialty Products 92,257 75,808 73,355 Industrial Products 26,458 50,941 47,951 Total$ 643,705 $ 643,679 $ 594,790 Business Segment Earnings From Operations: 2019 2018 2017 HNH$ 48,429 $ 48,037 $ 43,747 ANH 25,868 26,607 22,255 Specialty Products 28,513 25,254 24,908 Industrial Products 3,730 8,988 6,402 Transaction and integration costs, ERP implementation costs, and unallocated legal fees (1) (3,436) (1,786) (2,496) Unallocated amortization expense (2) (551) - - Indemnification settlement (3) - - 2,087 Total$ 102,553 $
107,100
(1) Transaction and integration costs and unallocated legal fees for year endedDecember 31, 2019 , 2018, and 2017 respectively, were primarily related to acquisitions. ERP implementation costs for the year endedDecember 31, 2019 and 2018 were related to a project in connection with a company-wide ERP system implementation. (2) Unallocated amortization expense for year endedDecember 31, 2019 was related to amortization of an intangible asset in connection with a company-wide ERP system implementation. (3) Indemnification settlement was related to a favorable settlement we received relating to theSensoryEffects acquisition. Acquisitions OnDecember 13, 2019 , the Company completed an acquisition of Zumbro. The Company made payments of$52,403 on the acquisition date, amounting to$47,058 to the former shareholders and$5,345 to Zumbro's lenders to pay Zumbro debt. Considering the cash acquired of$686 , net payments made to the former shareholders were$46,372 . Zumbro is integrated within HNH Segment. OnMay 27, 2019 , we acquired Chemogas. We made payments of approximately €99,503 (translated to$111,324 ) on the acquisition date, amounting to approximately €88,579 (translated to$99,102 ) to the former shareholders and approximately €10,924 (translated to$12,222 ) to Chemogas' lender to pay off all Chemogas bank debt. Considering the cash acquired of €3,943 (translated to$4,412 ), net payments made to the former shareholders were €84,636 (translated to$94,690 ). 13
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RESULTS OF OPERATIONS
(All amounts in thousands, except share and per share data)
Fiscal Year 2019 compared to Fiscal Year 2018
Net Earnings
Increase
(in thousands) 2019 2018 (Decrease) % Change
Net sales $ 643,705 $ 643,679 $ 26 - %
Gross margin 211,367 204,252 $ 7,115 3.5 %
Operating expenses 108,814 97,152 $ 11,662 12.0 %
Earnings from operations 102,553 107,100 (4,547) (4.2) %
Other expenses 6,075 8,070 (1,995) (24.7) %
Income tax expense/(benefit) 16,807 20,457 (3,650) (17.8) %
Net earnings $ 79,671 $ 78,573 $ 1,098 1.4 %
Net Sales
Increase
(in thousands) 2019 2018 (Decrease) % Change
HNH $ 347,433 $ 341,237 $ 6,196 1.8 %
ANH 177,557 175,693 1,864 1.1 %
Specialty Products 92,257 75,808 16,449 21.7 %
Industrial Products 26,458 50,941 (24,483) (48.1) %
Total $ 643,705 $ 643,679 $ 26 - %
Net sales for the HNH segment increased in 2019 compared to 2018, primarily due
to an increase in Encapsulates' sales of $3,207 or 8.1% and higher Human
Minerals sale of $3,049 or 7.0%. Net sales for the ANH segment increased in 2019
compared to 2018 primarily due to higher sales of ruminant animal feed market
products of $4,657 or 10%, partially offset by reduced sales of monogastric
species products of $2,793 or 2.2% primarily due to foreign currency changes and
competitive pressures on volume and pricing in the European monogastric
business. The increase in Specialty Products segment sales in 2019 compared to
2018 was primarily driven by higher ethylene oxide sales into the medical device
sterilization market due to both the contribution of Chemogas and higher legacy
product sales, partially offset by lower volumes in the plant nutrition
business. Net sales for the Industrial Products segment decreased in 2019
compared to 2018, principally due to lower sales volumes of various choline and
choline derivatives used in shale fracking applications.
Gross Margin
Increase
(in thousands) 2019 2018 (Decrease) % Change
Gross margin
32.8 % 31.7 %
Gross margin as a percentage of sales increased in 2019 compared to 2018
primarily due to mix and certain lower raw material costs. Gross margin
percentage for the HNH segment remained flat at 30.8% in 2019 compared to 30.7%
in 2018. Gross margin percentage for the ANH segment increased by 1.0%, due to
certain lower raw material costs and increased average selling prices on
ruminant animal feed products, partially offset by lower average selling prices
in monogastric species products due to competitive pressures in Europe . Gross
margin percentage for the Specialty Products segment decreased 1.8%, primarily
due to mix, and gross margin percentage for the Industrial Products segment
increased 2.2% from the prior year comparative period, primarily due to certain
lower raw material costs and mix.
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Operating Expenses
Increase
(in thousands) 2019 2018 (Decrease) % Change
Operating expenses $ 108,814 $ 97,152 $ 11,662 12.0 %
% of net sales 16.9 % 15.1 %
The increase in operating expenses was primarily due to incremental operating
expenses related to the Chemogas and Zumbro acquisitions of $4,751 , higher bad
debt expenses of $1,733 , an increase in outside services of $1,686 , a
restructuring charge in the HNH segment of $1,026 , and higher transaction and
integration costs of $486 .
Earnings From Operations
Increase
(in thousands) 2019 2018 (Decrease) % Change
HNH $ 48,429 $ 48,037 $ 392 0.8 %
ANH 25,868 26,607 (739) (2.8) %
Specialty Products 28,513 25,254 3,259 12.9 %
Industrial Products 3,730 8,988 (5,258) (58.5) %
Transaction and integration
costs, ERP implementation costs,
and unallocated legal fees (3,436) (1,786) (1,650) 92.4 %
Unallocated amortization expense (551) - (551) N/A
Earnings from operations $ 102,553 $ 107,100 $ (4,547) (4.2) %
% of net sales (operating margin) 15.9 % 16.6 %
We are continuing to focus on leveraging our plant capabilities, driving
efficiencies from core volume growth, and broadening product applications of
human and animal health specialty ingredients into both the domestic and
international markets. Earnings from operations for the HNH segment increased
primarily due to the aforementioned higher sales, partially offset by higher
operating expenses. ANH segment earnings from operations decreased primarily due
to higher operating expenses, partially offset by the higher sales and improved
gross margin percentage. The increase in earnings from operations for the
Specialty Products segment was primarily due to the aforementioned higher
volumes for sterilization gases as well as the contribution from Chemogas.
Earnings from operations from the Industrial Products segment decreased
primarily due to the aforementioned lower sale volumes.
Other Expenses (Income)
Increase
(in thousands) 2019 2018 (Decrease) % Change
Interest expense $ 5,959 $ 7,611 $ (1,652) (21.7) %
Other, net 116 459 (343) (74.7) %
$ 6,075 $ 8,070 $ (1,995) (24.7) %
Interest expense for 2019 and 2018 was primarily related to outstanding
borrowings under our credit facility. In 2018, interest expense also included a
write-off of
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Income Tax Expense
Increase
(in thousands) 2019 2018 (Decrease) % Change
Income tax expense (benefit) $ 16,807 $ 20,457 $ (3,650) (17.8) %
Effective tax rate 17.4 % 20.7 %
Our effective tax rate for 2019 and 2018 was 17.4% and 20.7%, respectively. The
decrease is primarily due to lower international taxes related to the Patent Box
Decree as described below, and certain lower U.S. state taxes, partially offset
by a reduction in foreign tax credits.
Italy introduced an elective tax regime ("Patent Box Decree") that allows
companies to benefit from a fifty percent exemption from corporate income tax
and local tax on income derived from the direct/indirect use of qualifying
intellectual property. During 2019, Balchem Italia received the required ad hoc
advance tax ruling. The benefit of the Patent Box Decree had a significant
beneficial impact on our effective tax rate for 2019.
Additionally, proposed and final guidance were issued by the U.S. Department of
Treasury related to foreign tax credits under the U.S. Tax Cuts and Jobs Act
("U.S. Tax Reform"), which was enacted on December 22, 2017 . We will continue to
evaluate and analyze the impact of the U.S. Tax Reform and the additional
guidance that has been issued, and may be issued, by the U.S. Department of
Treasury , the SEC , and/or the Financial Accounting Standards Board ("FASB")
regarding this act.
We have analyzed any potential Base Erosion and Anti-Abuse Tax ("BEAT") on
related-party transactions and determined we met the gross receipts test but did
not meet the level of base erosion payments that would subject us to BEAT in
2019.
We consider the undistributed earnings of certain non-U.S. subsidiaries to be
indefinitely reinvested outside of the United States on the basis of estimates
that future domestic cash generation will be sufficient to meet future domestic
cash needs and our specific plans for reinvestment of those subsidiary earnings.
We project that our foreign earnings will be utilized offshore for working
capital and future foreign growth. The determination of the unrecognized
deferred tax liability on those undistributed earnings is not practicable due to
our legal entity structure and the complexity of U.S. and local country tax
laws. If we decide to repatriate the undistributed foreign earnings, we will
need to recognize the income tax effects in the period we change our assertion
on indefinite reinvestment.
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LIQUIDITY AND CAPITAL RESOURCES
(All amounts in thousands, except share and per share data)
Contractual Obligations
The Company's contractual obligations as of December 31, 2019 , are summarized in
the table below:
Payments due by period
Contractual Obligations Total 2020 2021-2022 2023-2024 Thereafter Operating lease obligations (1)
$ 13,064 $ 3,214
37,221 37,221 - - -
Debt obligations (3) 248,569 - - 248,569 -
Interest payment obligations (4) 25,688 7,348 14,696 3,644 -
Total $ 324,542 $ 47,783 (1) Principally includes obligations associated with future minimum non-cancelable operating lease obligations.
(2) Principally includes open purchase orders with vendors for inventory not yet received or recorded on our balance sheet.
(3) Consists of contractual obligations under the Credit Agreement, which was effective on
(4) Includes interest payments on debt obligations based on interest rates at
The table above excludes a$4,762 liability for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, as we are unable to reasonably estimate the timing of settlement, if any.
We know of no current or pending demands on, or commitments for, our liquid assets that will materially affect our liquidity.
We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments. We are actively pursuing additional acquisition candidates. We could seek additional bank loans or access to financial markets to fund such acquisitions, our operations, working capital, necessary capital investments or other cash requirements should we deem it necessary to do so.
Cash
Cash and cash equivalents increased to$65,672 atDecember 31, 2019 from$54,268 atDecember 31, 2018 . AtDecember 31, 2019 , we had$35,213 of cash and cash equivalents held by our foreign subsidiaries. It is our intention to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions; therefore, we do not currently expect to repatriate these funds to fundU.S. operations or obligations. However, if these funds are needed forU.S. operations, we could be required to pay additional withholding taxes to repatriate them. Working capital was$162,688 atDecember 31, 2019 as compared to$144,258 atDecember 31, 2018 , an increase of$18,430 . Working capital reflects the payment of the 2018 declared dividend in 2019 of$15,135 and proceeds from the sale of business and assets. Increase (in thousands) 2019 2018 (Decrease) % Change Cash flows provided by operating activities 124,461 118,697$ 5,764 4.9 % Cash flows used in investing activities (156,225) (31,991) (124,234) (388.3) % Cash flows provided by (used in) financing activities 43,385 (71,447) 114,832 160.7 %
Operating Activities The increase in cash flows from operating activities was primarily due to improved accounts receivable.
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Investing Activities
As previously noted, on May 27, 2019 , we acquired 100 percent of the outstanding
common shares of Chemogas. In addition, on December 13, 2019 , we completed an
acquisition of Zumbro. Cash paid for both acquisitions, net of cash acquired,
amounted to $141,062 .
On
We continue to invest in corporate projects, improvements across all production facilities, and intangible assets. Total investments in property, plant and equipment and intangible assets were$28,413 and$19,723 for the years endedDecember 31, 2019 and 2018, respectively. Financing Activities The acquisitions of Chemogas and Zumbro were primarily funded through the Credit Agreement. We borrowed$168,569 against the revolving loan and also made payments of$17,567 on the acquired debt. Total debt payments on the revolving loan amounted to$76,000 during 2019 and we had$251,431 available under the Credit Agreement as ofDecember 31, 2019 . We have an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program inJune 1999 , a total of 2,431,767 shares have been purchased, and we had 203,879 shares remaining in treasury atDecember 31, 2019 . We intend to acquire shares from time to time at prevailing market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market conditions and other factors. The Company also repurchases shares from employees in connection with settlement of transactions under the Company's equity incentive plans. Proceeds from stock options exercised were$4,839 and$8,272 as ofDecember 31, 2019 and 2018, respectively. Dividend payments were$15,135 and$13,432 as ofDecember 31, 2019 and 2018, respectively. Other Matters Impacting Liquidity We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 15 - Employee Benefit Plans. The liability recorded in other long-term liabilities on the consolidated balance sheets as ofDecember 31, 2019 andDecember 31, 2018 was$1,076 and$1,174 , respectively, and the plans are not funded. Historical cash payments made under these plans have typically been less than$100 per year. We do not anticipate any changes to the payments made in the current year for the plans. OnJune 1, 2018 , we established an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees. Assets of the plan are held in a rabbi trust, which are included in non-current assets on our balance sheet. They are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The deferred compensation liability as ofDecember 31, 2019 andDecember 31, 2018 was$1,982 and$265 , respectively, and is included in other long-term obligations on our balance sheet. Chemogas has an unfunded defined benefit plan. The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees. The amount recorded for these obligations on our balance sheet as ofDecember 31, 2019 was$596 and was included in other long-term obligations.
Related Party Transactions
We were engaged in related party transactions with
Critical Accounting Policies
Our management is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America . These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates. 18 -------------------------------------------------------------------------------- Table of Contents Our "critical accounting policies" are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. Management considers the following accounting policies to be critical.
Revenue Recognition
Revenue for each of our business segments is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to realize in exchange for those goods. We report amounts billed to customers related to shipping and handling as revenue and include costs incurred for shipping and handling in cost of sales. Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities. In instances of shipments made on consignment, revenue is recognized when control is transferred to the customer. ASC 606, Revenue from Contracts with Customers, was adopted for the fiscal year beginning onJanuary 1, 2018 . Per the standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. The standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer. Inventories Inventories are valued at the lower of cost (first in, first out or average) or net realizable value and have been reduced by an allowance for excess or obsolete inventories. The write-down of potentially obsolete or slow-moving inventory is recorded based on management's assumptions about future demand and market conditions. Long-lived assets Long-lived assets, such as property, plant, and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year endedDecember 31, 2019 , we incurred impairment charges of$1,026 in connection with a restructuring in the HNH segment.Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC 350, "Intangibles-Goodwill and Other," requires the use of the acquisition method of accounting for a business combination and defines an intangible asset.Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the provisions of ASC 350. We performed our annual test as ofOctober 1 . ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment if events and circumstances indicate that the asset might be impaired. In accordance with ASU No. 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment" ("ASU 2011-08"), we first assess qualitative factors to determine whether it is "more likely than not" (i.e. a likelihood of more than 50%) that the fair values of our reporting units are less than their respective carrying amounts, including goodwill, as a basis for determining whether it is necessary to perform the two step goodwill impairment test. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). We have an unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. 19 -------------------------------------------------------------------------------- Table of Contents InJanuary 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 afterDecember 15, 2019 . Early adoption is permitted; however we have elected not to adopt early as this ASU will not have a significant impact on our consolidated financial statements. As ofOctober 1, 2019 and 2018, we opted to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. We assessed the fair values of our reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for our conclusions, as well as the market approach and cost approach. Our estimates of future cash flows included significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions. Our assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill. Accordingly, the goodwill of the reporting units was not considered impaired. We may perform the qualitative assessment in subsequent periods.
Accounts Receivable
We market our products worldwide to a diverse customer base, principally throughout theAmericas ,Europe , andAsia . We grant credit terms in the normal course of business to our customers. We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined through review of their current credit information. We continuously monitor collections and payments from customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimated losses are based on historical experience and any specific customer collection issues identified. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances and related bad debt expense may be required.
Post-employment Benefits
We provide life insurance, health care benefits, and defined benefit pension plan payments for certain eligible retirees and health care benefits for certain retirees' eligible survivors. The costs and obligations related to these benefits reflect our assumptions as to health care cost trends and key economic conditions including discount rates, expected rate of return on plan assets, and expected salary increases. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease. In accordance with ASC 715, "Compensation-Retirement Benefits," we are required to recognize the overfunded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in our statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.
Intangible Assets with Finite Lives
The useful life of an intangible asset is based on our assumptions regarding expected use of the asset; the relationship of the intangible asset to another asset or group of assets; any legal, regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or extension of the asset's legal or contractual life without substantial cost; the effects of obsolescence, demand, competition and other economic factors; and the level of maintenance expenditures required to obtain the expected future cash flows from the asset and their related impact on the asset's useful life. If events or circumstances indicate that the life of an intangible asset has changed, it could result in higher future amortization charges or recognition of an impairment loss. For the year endedDecember 31, 2019 , there were no triggering events which required intangible asset impairment reviews.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the fiscal year in which those temporary differences are expected to be
recovered or settled. Valuation allowances would be established when necessary
to reduce deferred tax assets to the amount expected to be realized. In
evaluating our ability to recover our deferred tax assets, in full or in part,
we consider all available positive and negative evidence, including our past
operating results, our forecast of future market growth, forecasted earnings,
future taxable income, and prudent and
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feasible tax planning strategies. The assumptions utilized in determining future
taxable income require significant judgment and are consistent with the plans
and estimates we are using to manage the underlying businesses.
We recognize uncertain income tax positions taken on income tax returns at the
largest amount that is more likely than not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision.
As ofDecember 31, 2019 , we have federal and state income tax net operating loss (NOL) carryforwards of$7,078 , which will expire in 2034. We believe that the benefit from the state NOL carryforwards will be realized. Therefore, a valuation allowance is not required to be established. However, the Company also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas. These NOLs are not expected to be realized and therefore a valuation allowance on these items was established as ofDecember 31, 2019 . There was no valuation allowance for deferred tax assets as ofDecember 31, 2018 . We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside ofthe United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity ofU.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment. Stock-based Compensation We account for stock-based compensation in accordance with the provisions of ASC 718, "Compensation-Stock Compensation." Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. Expected volatilities are based on historical volatility of our stock. The expected term of the options is based on our historical experience of employees' exercise behavior. As stock-based compensation expense recognized in the Consolidated Statements of Earnings is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. ASC 718 allows for forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period. See Note 3 in Notes to Consolidated Financial Statements for additional information.
New Accounting Pronouncements
See Note 1 in Notes to Consolidated Financial Statements regarding recent accounting pronouncements.
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