PART I
| Item 1. |
General
Sensient Technologies Corporation (the Company) was incorporated under the laws of the State of Wisconsin in 1882. Its principal executive offices are located at 777 East Wisconsin Avenue, Suite 1100, Milwaukee, Wisconsin 53202-5304, telephone (414) 271-6755.
The Company is subject to the informational and reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act). In accordance with the Exchange Act, the Company files annual, quarterly and current reports, proxy statements, and other information with the Securities and Exchange Commission (the Commission). These reports and other information may be accessed from the website maintained by the Commission at http:https://www.sec.gov.
The Company can also be reached at its website at www.sensient.com. The Company’s web address is provided as an inactive textual reference only, and the contents of that website are not incorporated in or otherwise to be regarded as part of this report. The Company makes available free of charge on its website its proxy statement, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with or furnished to the Commission. Charters for the Audit, Compensation and Development, Nominating and Corporate Governance, Finance, and Executive Committees of the Company’s Board of Directors, as well as the Company’s Code of Conduct, Corporate Governance Guidelines, Policy onRelating to Recovery of IncentiveErroneously Awarded Compensation, From Executives, and Non-Employee Directors and Executive Officers Stock Ownership Guidelines are also available on the Company’s website. These documents are also available in print to any shareholder, free of charge, upon request. If there are any amendments to the Code of Conduct, or if waivers from it are granted for executive officers or directors, those amendments or waivers also will be posted on the Company’s website.
Description of Business
The Company is a leading global manufacturer and marketer of colors, flavors, and other specialty ingredients. The Company uses advanced technologies and robust global supply chain capabilities to develop specialized solutions for food and beverages, as well as products that serve the pharmaceutical, nutraceutical, cosmetic, and personal care industries.industries. The Company’s customers range in size from small entrepreneurial businesses to major international manufacturers representing some of the world’s best-known brands.
The Company’s principal products (excluding the anticipated divestiture of its fragrances product line) include:
| ● | flavors, flavor enhancers, ingredients, extracts, and bionutrients; |
| ● | essential oils; |
| ● | dehydrated vegetables and other food ingredients; |
| ● | natural and synthetic food and beverage colors; |
| ● | personal care colors and ingredients; |
| ● | pharmaceutical and nutraceutical colors, excipients, and ingredients; and |
| ● | technical colors, specialty colors, and specialty dyes and pigments. |
For 2020,2023, the Company’s three reportable segments were the Flavors & Extracts Group and the Color Group, which are managed on a product line basis, and the Asia Pacific Group, which is managed on a geographic basis. During 2020, the Company changed the name of its Flavors & Fragrances Group to the Flavors & Extracts Group in order to more accurately reflect the group’s product portfolio. The Company’s corporate expenses, divestiture & other related costs and income, share-based compensation, and restructuring and other charges, including operational improvement plan costs and income and portfolio optimization plan costs, and certain other costs are included in the “Corporate & Other” category as described in this report. Financial information regarding the Company’s three reportable segments and the operations included within Corporate & Other is set forth in Note 12, Segment and Geographic Information, in the Notes to Consolidated Financial Statements included in this report.
Acquisitions
On July 15, 2021, the Company acquired substantially all of the assets of Flavor Solutions, Inc., a flavors business located in New Jersey.
On June 30, 2020,October 3, 2022, the Company completed the saleacquired Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. (collectively, Endemix), a natural colors business located in Turkey. The Company paid $23.3 million in cash for this acquisition, which is net of its inks product line, which was included$1.3 million in debt assumed. This business is part of the Color Group. segment.
Divestitures
In 2020,2021, the Company received $11.6$1.5 million of net cash forrelated to the salepreviously completed sales of theits yogurt fruit preparations and inks product line and expects to receive additional cash when it completes certain post-closing asset sales.
On November 23, 2020,April 1, 2021, the Company announced it had entered into a definitive agreement to sell itscompleted the sale of the fragrances product line (excluding its essential oils product line). The Company expects the transaction to be finalized in the first half for $36.3 million of 2021.net cash.
Flavors & Extracts Group
The Company is a global developer, manufacturer, and supplier of flavor and fragrance systems for the food, beverage, and personal care and household-products industries. The Company’s flavor formulations are used in many of the world’s best-known consumer products. Under the unified brand names of Sensient Flavors and Sensient Natural Ingredients, and Sensient Fragrances, the Group is a supplier to multinational and regional companies. As noted above, during the second quarter of 2021, the Company has announced it has entered into a definitive agreement to divest Sensient Fragrances while retainingdivested its fragrances product line (excluding its essential oils product line. During the third quarter of 2020, the Company divested its yogurt fruit preparations product line.line).
Operating through its Sensient Natural Ingredients business, which we formerly referred to as our Dehydrated Ingredients business, the Company believes it is the second largest producer (by sales) of dehydrated onion and garlic products in the United States. The Company is also one of the largest producers and distributors of chili powder, paprika, chili pepper, and dehydrated vegetables such as parsley, celery, and spinach. The Company sells dehydrated products to food manufacturers for use as ingredients and also for repackaging under private labels for sale to the retail market and to the food service industry. The advanced dehydration technologies utilized by Sensientour Natural Ingredients business permit fast and effective rehydration of ingredients used in many of today’s popular convenience foods.
As of December 31, 2020,2023, the Group’s principal manufacturing plants are located in California, Illinois, Michigan, Wisconsin, New Mexico, Belgium, China, Costa Rica, Mexico, Spain,Germany, and the United Kingdom.
Color Group
The Company is a developer, manufacturer, and supplier of colors for businesses worldwide. The Company provides natural and synthetic color systems for use in foods, beverages, pharmaceuticals, and nutraceuticals; colors and other ingredients for cosmetics,personal care, such as active ingredients, solubilizers, and surface treated pigments; pharmaceutical and nutraceutical excipients, such as colors, flavors, coatings, and nutraceutical ingredients; and technical colors for industrial applications.
The Company believes that it is one of the world’s largest producers (by sales) of synthetic and natural colors, and that it is the world’s largest manufacturer (by sales) of certified food colors. The Company sells its synthetic and natural colors to domestic and international producers of beverages, bakery products, processed foods, confections, pet foods, cosmetics,personal care, pharmaceuticals, and pharmaceuticals. Through 2020, thenutraceuticals. The Company also mademakes industrial colors and other dyes and pigments used in a variety of non-food applications. After the divestiture of the inks product line in the second quarter of 2020, the Company no longer sells specialty inks.
As of December 31, 2020,2023, the Group’s principal manufacturing plants are located in Missouri, New Jersey, Brazil, Canada, China, France, Germany, Italy, Mexico, Peru, Turkey, and the United Kingdom.
The Color Group operates under the following trade names:
| ● | Sensient Food Colors (food and beverage colors); |
| ● | Sensient Pharmaceutical Coating Systems (pharmaceutical and nutraceutical colors and coatings); |
| ● | Sensient Cosmetic Technologies |
| ● | Sensient |
The Company believes that its advanced process technology, state-of-the-art laboratory facilities and equipment, world-class application chemists, and a complete range of synthetic and natural color products constitute the basis for its market leadership position.
Asia Pacific Group
The Asia Pacific Group focuses on marketing the Company’s diverse product lines in the Pacific Rim under the Sensient name. Through these operations, the Company offers a full range of products from its Flavors & Extracts Group and Color Group as well as products developed by regional technical teams to appeal to local preferences.
Sales, marketing, and technical functions are managed through the Asia Pacific Group’s headquarters, which is located in Singapore. Manufacturing operations are located in Australia, China, India, Japan, Thailand, New Zealand, and the Philippines, with sales offices also located in the India and Thailand facilities. The Asia Pacific Group maintains additional offices for local technical support as well asand sales in China and Indonesia andas well as for research and development in Singapore.
Corporate
Corporate provides management, administrative, and support services to the Company from its headquarters in Milwaukee, Wisconsin. The Company’s corporate expenses, divestiture & other related costs and income, share-based compensation, restructuring and other charges, including operational improvement plan costs and income and portfolio optimization plan costs, and other costs, are included in the “Corporate & Other” category.
Research and Development/Quality Assurance
The development of specialized products and services is a complex technical process calling upon the combined knowledge and talents of the Company’s research, development, and quality assurance personnel. The Company believes that its competitive advantage lies in its ability to work with its customers to develop and deliver high-performance products that address the distinct needs of those customers.
The Company’s research, development, and quality assurance personnel support the Company’s efforts to improve existing products and develop new products tailored to customer needs, while providing on-goingongoing technical support and know-how to the Company’s manufacturing activities. The Company’s efforts also include the development of proprietary seed lines, sometimes in partnership with other business partners, for its natural ingredients and natural colors business lines. The Company employed 738760 people in research and development, quality assurance, quality control, and lab technician positions as of December 31, 2020.2023.
As part of its commitment to quality as a competitive advantage, the Company’s production facilities hold various certifications, such as those under the International Organization for Standardization (ISO) and those recognized by the Global Food Safety Initiative (GFSI), including the Safe Quality Food Program (SQF), British Retail Consortium (BRC), and Food Safety System Certification (FSSC 22000), for certifying the safety and quality of its products and production processes.
Products and Application Activities
The Company’s strategic focus is on the manufacturemanufacturing and marketing of high-performance components that bring life to products. Accordingly, the Company devotes considerable attention and resources to the development of product applications and processing improvements to support its customers’ numerous new and reformulated products. The majority of the proprietary processes and formulae developed by the Company are maintained as trade secrets and protected through internal physical and information technology controls and confidentiality agreements with customers.customers as well as confidentiality and non-competition agreements with employees.
Within the Flavors & Extracts Group, development activity is focused on ingredients, flavors, natural extracts, and essential oils as well as flavor systems that are responsive to consumer trends and the processing needs of our food and beverage customers. These activities include the development of functional ingredient systems for foods and beverages, savory flavors, and ingredient systems for prepared foods and flavors and ingredients for dairy, confectionery, and other applications. The Company believes that the development of yeast derivatives and other specialty ingredients also provides growth opportunities in bionutrients and biotechnology markets, such as probiotics and fermented ingredients, including enzymes, vitamins, and amino acids.
Within the Color Group, development activity for food and beverage product lines is focused on value-added products derived from synthetic dyes and pigments, natural food and beverage colors, and color systems. The Company also produces a diverse line of colors and ingredients for cosmetics,personal care, pharmaceutical, and nutraceutical applications, and technical colors for industrial applications.
Raw Materials
The Company uses a wide range of raw materials in producing its products. Chemicals used to produce certified colors are obtained from several domestic and foreign suppliers. Raw materials for natural colors, such as carmine, beta-carotene, annatto, and turmeric, are sourced internally at our Lima, Peru facility or purchased from overseas and U.S. sources. As of March 2018,October 2022, the Company owns a natural food colorings business in Lima, Peru,located near Istanbul, Turkey, and has vertically integrated production and processing capacity in annatto, carmine,black carrot and other natural color products.
In the production of flavors, extracts, and fragrances,essential oils, the principal raw materials include essential oils, aroma chemicals, botanicals, extracts, fruits, and juices. These raw materials are obtained from domestic and foreign suppliers. Flavor enhancers and secondary flavors are produced from brewers’ yeast and vegetable materials such as corn and soybeans. Chili peppers, onion, garlic, and other vegetables are acquired under annual contracts with numerous growers in the western United States and China.
The Company believes that its ability to reformulate its products and the general availability of alternate sources of materials from different geographic areas would generally enable it to maintain its competitive position in the event of an interruption in the supply of raw materials from a single supplier.
Competition
All Company products are sold in highly competitive markets. While no single factor is determinative, the Company’s competitive position is based principally on process and applications expertise, quality, technological advances resulting from its research and development, and customer service and support. Because of its highly differentiated products, the Company competes with only a few companies across multiple product lines and generally encounters different competitors in different product lines.
| • | Flavors & Extracts. Competition in the flavors, extracts, and |
| • | Color. Competition in the color market is diverse, with the majority of the Company’s competitors specializing in either synthetic dyes and pigments or natural colors or coloring foodstuffs (in Europe). The Company believes that it gains a competitive advantage as the only major basic manufacturer of a full range of color products, including synthetic dyes and pigments as well as natural colors. Competition in the supply of |
| • | Asia Pacific. The Company offers a broad array of products to customers through the Asia Pacific Group. Competition is based upon reliability in product quality, service, and price as well as technical support available to customers. |
Foreign Operations
Additional information regarding the Company’s foreign operations is set forth in Note 12, Segment and Geographic Information, in the Notes to Consolidated Financial Statements included in this report.
Patents, Formulae, and Trademarks
The Company owns or controls many patents, formulae, and trademarks related to its businesses. The businesses are not materially dependent upon any particular patent, trademark, or formula; however, trademarks, patents, and formulae are important to the business of the Company.
Human Capital
As of December 31, 2020,2023, the Company employed 3,9483,956 persons worldwide. Approximately 41%43% of our employees were employed in the United States, and approximately 59%57% were employed outside of the United States. Of our 3,9483,956 employees worldwide, we had 513505 general administration employees (e.g., accounting, administrative, regulatory compliance, IT, human resources, etc.), 2,4632,459 production employees, 440465 research and development employees, and 532527 sales and marketing employees.
We believe that our future success is dependent upon our continued ability to attract, retain, and motivate successful employees. Our Board of Directors oversees our human capital management program, in consultation with our CEO and Vice President, Human Resources. The Board also has routine contact with all Company officers and periodically receives presentations from the Group Presidents and Vice PresidentsPresident as well as select General Managers.
Talent Acquisition and Talent Development
We are committed to the recruitment, retention, and continued development of people who thrive and succeed in our culture. In furtherance of this goal, our primary areas of focus remain: (i) talent acquisition, (ii) on-boarding, (iii) coaching, development, and retention, and (iv) integrity and professionalism. As part of the Company’s effort to attract and motivate employees, we offer compensation and comprehensive benefits that we believe are competitive in the markets in which our employees workwe operate and in our industry.compete for talent. We also have a dedicated internal talent acquisition team, with deep knowledge of our Company and our core values, in order to help us find the best prospective employees for open positions worldwide. We hold ourselves accountable tofor filling open roles expeditiously by closely monitoring and limiting days to fill open roles. We also challenge ourselves to take a broad view of talent acquisition, regularly seeking talent from non-traditional backgrounds and from outside our industry.industry, and moving beyond restrictive pedigree requirements in favor of skills and the ability to learn. With our sales and technical roles, we have implemented a gamified AI-based platform to identify sales candidates, without bias, who share the behavioral and cognitive attributes of our most successful sales peopleand technical employees from around the world.
After hiring a candidate, we believe that an effective on-boarding is a critical factor in whether a new employee succeeds or fails. We continue to develop, and improve upon, an effectiveour on-boarding process to differentiate ourselves from our competitors and help enable our employees to succeed. We generally track our progress through weekly pre-hire team on-boarding calls, new hire surveys, (for which we had over a 95% completion rate in 2020), new hire interviews, business unit scorecards on fundamental on-boarding activities,hiring manager surveys, and a monthly report of our results to senior leadership. We also havepromote regular 1:1 meetings between non-production employees and their supervisors.
In order to continue to develop and retain our key talent, we offer training programs based upon the employee’s role in the Company. We also maintain personalized career planning, ongoing coaching and development by Corporate and local leadership, and a “High Potential Program,” which ensures our key talent learns from and gains exposure to senior leadership. Performance reviews and succession planning occur company-wide on an annual basis. Individual goals are set annually for each employee,employees, which flow from the Company strategy, and attainment of those goals is an element of the employee’s performance assessment. We invest in our development programs for high-impact roles, such as our General Manager in Training,Management Development, Sales Representative Trainee, and Flavorist Trainee programs. We continue to “promote-from-within” and provide opportunities for our internal employees to grow their careers, with over half of our senior leadership and over half of our business unit leaders previously having been promoted to their current role from within the Company. We closely monitor turnover overall and in critical roles to vet our retention efforts and identify areas of need for future investment.
Our Corporate Creed, set forth at the beginning of our Code of Conduct, sets forth three non-negotiable rules: (1) Always tell the truth; (2) Always produce safe, high-quality products in safe and secure facilities; and (3) Always be professional. Employees throughout the organization know these expectations as the “Three Rules.” Under the Three Rules, all of our employees are expected to exhibit and promote integrity and professionalism in the workplace. All of our employees must adhere to these non-negotiable expectations for appropriate behavior. We perform annual, company-wide training on our Code of Conduct, as well as for all new hires. The CEO personally provides instruction on the Three Rules during leadership training conducted each year throughout the organization. To further reinforce our expectations, the CEO internally publishes anonymized quarterly reports of Code of Conduct violations and their consequences. In addition, we strictly apply principles of non-discrimination, which are foundational to our non-negotiable expectations of integrity and professionalism, in all employment-related decisions.
Health and Safety
We take pride in our strong and continually improving health and safety programs, which we view as important aspects of our economic health and core values. We expect each employee to actively participate in and contribute to this philosophy. Examples of actions taken to demonstrate our commitment and progress toward achieving our goal of providing a safe workplace include: (i) Corporate Environmental, Health and Safety (EHS) Department oversight of safety and compliance matters at all Company facilities; (ii) periodic EHS audits conducted at Company facilities by third parties at the direction of the Corporate Legal Department to determine the state of facility compliance with applicable safety laws and regulations; (iii) implementation of “best-practice” programs and management systems across all business units worldwide; (iv) ongoing capital investments aimed at continually improving standards for environment, health, and safety in each of our plants around the world; (v) meaningful use of metrics to apply leading and lagging indicators toward incremental improvement and sustainable results; (vi) regular communication and engagement with employees on safety topics through safety committee meetings, plant-wide communication meetings, and “tool box” meetings; and (vii) root cause analysis of all injuries and near misses to ensure that lessons learned can be applied across the entire organization. We also maintain a corporate physical security program led by a retired Secret Service Agent. The physical security program aims to secure our facilities, protect our employees from workplace violence, ensure proper training and monitoring of travelers, and provide regular assessments of the security situations in the countries where we operate.
Regulation
The production, packaging, labeling, and distribution of certain of the products of the Company in the U.S. are subject to the regulations of various federal, state, and local governmental agencies, in particular the U.S. Food and Drug Administration. The Company is subject to similar regulations in many international markets, particularly Europe. Compliance with government laws, rules, regulating discharges into the environment, or otherwise relating to the protection of the environment,and regulations did not have, a material adverse effect on the Company’s operations for the year covered by this report. Current complianceand is not currently expected to have, a material adverse effect in the next two years.on our capital expenditures, results of operations, and competitive position.
| Item 1A. | Risk Factors. |
As with any business, the Company’s business and operations involve risks and uncertainties. In addition to the other discussions in this report, particularly those under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and “Forward-Looking Statements” above, the following factors should be considered:
Business Risks
Intense competition with our competitors may result in reduced sales and profitability.
We develop, manufacture, and sell flavors, flavor enhancers, ingredients, extracts, and bionutrients; essential oils; natural ingredients, including dehydrated vegetables and other food ingredients; natural and synthetic food and beverage colors; cosmeticpersonal care colors and ingredients; pharmaceutical and nutraceutical excipients and ingredients; and technical colors, specialty colors, and specialty dyes and pigments. We sell these products to customers in industries and markets that are highly competitive. We face intense competition from multiple competitors in each of our business lines. These competitors range from large multinational flavor companies with broad and sophisticated product portfolios and outstanding technological capabilities to smaller more specialized regional companies that focus on a single product line or offering. Our success against these competitors depends upon our ability to continually develop and manufacture safe, high quality, innovative, and legally compliant products across each of our product lines in varying batch sizes, at varying frequencies, and at acceptable prices. We also must provide outstanding product development support, on time delivery, regulatory assistance, and after-sale product support to all of our customers, wherever they are located. If we are unable to do these tasks, or if competitors do any of these tasks better than we do, we may lose part or all of our business with some customers. We do lose business to competitors from time to time. Competition can reduce both our sales and the prices at which we are able to sell our products, or cause us to incur additional costs to remain competitive, which can negatively affect our results.
Our business is impacted by adverse developments in economic, political, and capital market conditions, which could negatively affect our financial performance and our ability to grow or sustain the growth of our business.
We compete around the world in various geographic regions and product markets. Global economic and political conditions affect our businesses and the businesses of our customers and suppliers. Economic downturns, changes in interest rates, lower consumer confidence, decreasing employment levels, price instability, inflation, slowing economic growth, and social and political instability in the industries and/or markets where we compete could negatively affect our financial performance in future periods and adversely impact our ability to grow or sustain our business. For example, current macroeconomic and political instability caused by rising interest rates, global supply chain disruptions, inflation, ongoing conflicts between Russia and Ukraine as well as Israel and Hamas and related disruptions in the Red Sea and region, geopolitical tensions, and the strengthening of the U.S. dollar, have adversely impacted, and could continue to adversely impact, our results of operations.
We have experienced, and could continue to experience, increased raw material and energy cost inflation, as well as disruptions and delays in our supply chain, as a result of global macroeconomic trends, including increased global demand, labor shortages, geopolitical and economic tensions, including the conflicts between Russia and Ukraine and in the Middle East, which has grown out of the Israel and Hamas conflict. For example, suppliers located in Ukraine are our main source of sunflower oil, which is primarily used in our savory and beverage businesses. We have encountered difficulties, and may continue to encounter difficulties, in finding favorable pricing and reliable alternative sources or substitutes for certain of the raw materials we need (including sunflower oil) for certain products. If these difficulties persist, accelerate, or expand, our operations could be adversely affected.
These increased costs, or any potential shortage of energy or raw materials, could adversely affect our profitability. The military conflicts may also increase the risk of cybersecurity incidents, including the risk of cyberattacks in retaliation based upon the United States’ and/or European Union’s support for Ukraine or Israel. Such attacks, whether on us or on critical infrastructure and financial institutions globally, could also adversely affect our operations.
In addition, the credit markets provide us with liquidity to operate and grow our business beyond the liquidity that our cash flows provide. A worldwide economic downturn and/or disruption of the credit markets could reduce our access to capital or significantly increase our costs of capital, which may negatively impact our financial condition, results of operations, and cash flows. We have seen our interest expense rise as a result of increased interest rates, and a continued increase in such rates may negatively affect our results.
A disruption in our manufacturing operations could adversely affect our profitability.
We develop, manufacture, and distribute our products around the world. Generally, our labs and plants are dedicated to particular product lines. For example, many (but by no means all) of our food colors products are developed and manufactured in our St. Louis facility. While we have redundant capabilities across labs and plants for many product lines, in some cases, we only manufacture particular products at one facility. To establish a new manufacturing capability at a plant could require substantial time, money, and numerous governmental and customer approvals. Additionally, because of the complexity and highly specialized nature of many of the products we produce, it would require a tremendous amount of technical, engineering, and management time and effort to establish the new capability. Manufacturing involves inherent risks such as industrial accidents, environmental events, labor disputes, labor shortages, product quality control issues, safety issues, licensing, and regulatory compliance requirements, as well as natural disasters, conflicts, terrorist acts, civil unrest, ERP software issues, cyber-attacks, and other events that we cannot control. If one of our development or manufacturing facilities is disrupted or impaired, we could cause a supply disruption to our customers, which could cause short and long-term damage to our customer relationships. Such disruption would have an adverse effect on our financial performance and future growth.
Intense competition among our customers and their competitors may result in reduced sales and profitability for our customers and us.
Generally, we do not sell products directly to consumers. The customers to whom we sell our products incorporate our products into their own products. Our customers face intense competition. This competitive pressure has caused some of the Company’sour customers to change or reduce ordering patterns, to resist price increases, to discontinue or reduce existing product offerings, and to introduce fewer new products and reduce or eliminate traditional limited time offerings. Some of our large, multinational customers may increasingly become vertically integrated as a result of cost pressures, supply chain disruptions, or other reasons. We would lose business to the extent any of our customers are able to produce the products that we otherwise supply them. Additionally, the commercial outlets for many of our customers are also under intense competitive pressure, which has caused many such commercial outlets to be resistant to price increases from their suppliers. Ultimately, our ability to sell our products to customers depends upon our customers’ ability to succeed against their competitors and to respond effectively to the demands of their own customers.customers, including pressure to reduce prices. When our customers do not successfully compete, as happens from time to time, it can impact our sales and the prices at which we sell our products, which can negatively affect our results.
In some product lines, most of our sales are made to a relatively small number of customers; if we lose any of those customers, sales and operating results could decline.
In some of our product lines, our sales are concentrated with a small number of customers. While we do not currently have any single customer that we consider to be significant to us as a whole, the loss of a significant customer for a particular product line could substantially affect the sales and profitability of that line or the business unit that sells that product line, which may cause us to re-evaluate that line. Those developments could negatively affect our results.
Consolidation has resulted in customers with increased buying power, which can affect our profitability.
Many of our customers have consolidated in recent years and we expect the combination trend to continue in many business lines. These consolidations have often produced large, sophisticated customers with increased buying power who are more capable of resisting price increases.increases or vertically integrating. If the larger size or greater buying power of those customers results in additional negotiating strength, the prices we are able to charge could be negatively affected and our profitability could decline. In addition, if any of these large customers are able to produce the products that we otherwise supply them, our results of operations may be adversely impacted.
Our sales and profitability are affected by changing consumer preferences, changing regulations and technologies, and our ability and our customers’ ability to make and sell to consumers in highly competitive markets.
Although we do not generally make or sell proprietary consumer products, many of our products are sold to companies that develop and market consumer products, either directly or through other commercial and retail outlets. Sales of flavors, colors, cosmeticpersonal care ingredients, pharmaceutical and nutraceutical excipients and ingredients, and many of our other products depend in part upon our customers’ ability to create and sell products to consumers in highly competitive markets, all of which are beyond our control. Our sales could also be affected by changing regulations or technologies (including, for example, off-label prescription drug use for weight loss) that could impact consumer demand for products that contain our products. Therefore, we depend upon our customers’ ability to create markets for the consumer products that incorporate the products that we manufacture. In addition, if we cannot adequately anticipate and respond to the needs of our customers as they evolve in response to changing consumer preferences, new technologies (including advancements such as artificial intelligence and machine learning, which may become critical in understanding consumer preferences in the future), and price demands, our results could be adversely affected. The ongoing COVID-19 pandemic hasand ongoing economic uncertainty have impacted consumer behavior in numerous ways and it is difficult to predict whether these changes will persist over the long term and how they will impact our customers. Additionally, the market pressures on our customers may adversely affect the willingness of these customers to launch new products, to introduce limited time offerings, and to grow or continue to produce existing product lines. InSince the past year,beginning of the COVID-19 pandemic, we have seen a reduction in new product launches, smallerthe size of new product launches and fewer limited time offerings from some of our customers. Any of these actions by our customers can adversely affect our results.
If we do not maintain an efficient cost structure, our profitability could decrease.
Our success depends in part on our ability to maintain an efficient cost structure. We regularly initiate cost-reduction measures that could impact our manufacturing, sales, operations, and information systems functions. If we do not continue to manage costs and achieve additional efficiencies, or we do not successfully implement related strategies, our competitiveness and our profits could decrease. As discussed above, the price pressures in our markets make such cost reduction efforts particularly important. For example, in 2023, the Company began the execution of a portfolio optimization plan to optimize certain production facilities, centralize and eliminate certain production and selling and administrative positions, and improve efficiencies globally within the Company. These types of activities have required, and may continue to require, the devotion of significant resources and management attention and may pose business risks. In addition, these actions may result in a deterioration of employee relations at the impacted locations in our business. Our ability to realize anticipated cost savings may be affected by a number of factors, including our ability to effectively reduce overhead, rationalize manufacturing capacity, and effectively produce products at the consolidated facilities. Furthermore, our cost reduction efforts may not be as effective as we had anticipated, which could have an adverse effect on our financial condition.
A disruption in our supply chain could adversely affect our profitability.
We generally rely on third party suppliers for various raw materials that we use to make our products. We use many different chemical products, natural products, and other commodities as raw material ingredients. We also use raw materials whose production is energy intensive and dependent on successful farming techniques and favorable climatic and environmental conditions. As the demand for natural products continues to grow, thesethe risks associated with agriculture, such as reduced crop yields, reduced crop availability, water shortages, increased water costs, reduced access to water, droughts, and other potentially more severe weather events, are becoming increasingly important. In addition, we obtain some raw materials from a single supplier or a limited number of suppliers. Disruptions or other issues with those suppliers could affect the availability of those materials. Even if there are multiple suppliers of a particular raw material, there are occasionally shortages. Constrictions in supply of raw materials can lead to increased costs. We may not be able to pass these costs to customers for a variety of reasons, including the fact that some of our competitors may not be subject to the increased costs. Additionally, government regulatory action against any of our suppliers or particular raw materials could also cause a supply disruption. For example, withinWe have, in the last 36 months, Chinesepast, dealt with regulators shut shutting down suppliers that provided the Company with raw materials used in synthetic colors.materials.
This adversely impacted the supply of raw materials for thesethe affected products and, therefore, impacted our ability to produce products containing these raw materials, whichmaterials. Additionally, our yields from harvests for onion were adversely impacted in 2021 and 2022 by both drought and flooding, resulting in reduced availability of onion products for our ability to provide these products at traditional quantitiesNatural Ingredients business in recent prior years. We increased the amount of onion and competitive prices.garlic planted in 2023, but there is no certainty that we will achieve greater yields or, if we do increase our yields, that there will be a market for such products. Any future unavailability or shortage of a raw material, however caused, could negatively affect our operations using that raw material and thus adversely affect our results.
We develop, manufacture, and distribute our products around the world. Generally, our labs and plants are dedicated to particular product lines. For example, many (but by no means all) of our food colors products are developed and manufactured in our St. Louis facility. While we have redundant capabilities across labs and plants for many product lines, in some cases we only manufacture particular products at one facility. To establish a new manufacturing capability at a plant would require substantial time, money, and numerous governmental and customer approvals. Additionally, because of the complexity and highly specialized nature of many of the products we produce, it would require a tremendous amount of technical, engineering, and management time and effort to establish the new capability. Manufacturing involves inherent risks such as industrial accidents, environmental events, labor disputes, product quality control issues, safety issues, licensing and regulatory compliance requirements, as well as natural disasters, conflicts, terrorist acts, cyber-attacks, and other events that we cannot control. If one of our development or manufacturing facilities is disrupted or impaired, we could cause a supply disruption to our customers, which could cause short and long-term damage to our customer relationships. Such disruption would have an adverse effect on our financial performance and future growth.
Efficient inventory management is essential to our performance. We must maintain appropriate inventory levels and product mix to meet customer demand, without incurring costs related to storing and holding excess inventory. If our inventory management decisions do not accurately predict demand or otherwise result in excess inventory, as has happened in the past, our financial results may be adversely impacted by markdowns, impairment charges, or other costs related to disposal of excess or obsolete inventory. For example, the shelf-life for natural products is generally shorter than synthetic products, so if the demand for natural products slows, it becomes more likely that any excess inventory could need to be written off or subject to markdowns and would have an adverse impact on our revenue and profitability. Additionally, if we do not maintain enough inventory to satisfy the demand of our customers, we may lose business to our competitors, which could adversely affect our results. During the COVID-19 pandemic, we held large quantities of raw material and finished goods inventory to minimize disruptions to our customers. As we continue to emerge from the pandemic, we may not be as effective as we intend in reducing our inventory to more normal levels. As we saw starting at the end of 2022 and continuing through 2023, many of our customers are also reducing their inventory to more normal levels. This has had an adverse impact on our ability to reduce our inventory at an optimal rate and may continue to have such an impact in the future.
We have experienced challenges as a result of ongoing domestic and global supply chain issues, particularly with respect to raw materials, logistics, and labor. In addition, we have experienced inflationary increases in the costs of raw materials, energy, transportation, and labor. Although we attempt to manage these challenges through pricing and other actions, we may not be able to increase our product prices enough to offset these increased costs. Increasing our prices also may reduce sales volume and related profitability and cause us to lose customers. If inflationary conditions persist, accelerate, or expand, it will become more difficult to manage these challenges without adverse impacts to our revenues and profitability.
We use various energy sources in our production and distribution processes. Commodity and energy prices are subject to significant volatility caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, disruptive world events (such as the Russia-Ukraine and Middle Eastern conflicts and related disruptions in the Red Sea and Arabian Sea discussed above), and changes in governmental regulations.regulations, particularly related to carbon reduction. Commodity, transportation, and energy price increases will raise both our raw material costs and operating costs. We may not be able to increase our product prices enough to offset these increased costs. Increasing our prices also may reduce sales volume and related profitability. Additionally, as many areas move away from using carbon-based sources of energy, we would initially anticipate increases in the cost of energy generated from renewable energy sources.sources as well as potential reliability and continuity issues related to electrical power generation, distribution, and supply. While the long-term environment impact of these moves is favorable, the shorter-termshorter and medium-term impact in increased energy prices could adversely affect our profitability.
The financial condition of our customers may adversely affect their ability to buy products from us at current levels, to accept price increases, or to pay for products that they have already purchased.
As mentioned above, our customers are under intense pressure in their markets from competitors and their end customers and as a result of changing consumer preferences. Historically, these combined pressures have resulted in some of the Company’s customers entering bankruptcy or receivership. There is risk that other customers of the Company could enter bankruptcy or receivership in the near-term. Once in bankruptcy or receivership, these customers are restricted from paying certain outstanding invoices to the Company until later in the bankruptcy process and even when able to pay, may not be able to pay the full amounts owed. Additionally, certain payments made to us prior to a customer declaring for bankruptcy may be, and have been, subject to clawback during the bankruptcy or receivership process. Financially distressed customers may change or reduce ordering patterns, reduce willingness to accept price increases, discontinue or reduce existing product offerings, and introduce fewer new products. Those developments could adversely affect our results.
In addition, if any of our suppliers become financially insolvent and fail to perform their obligations under arrangements with us, we may be forced to replace the underlying commitment at current or above market prices or on other terms that are less favorable to us with little recourse against such supplier. In such events, we may incur losses, or our results of operations, financial condition, or liquidity could otherwise be adversely affected.
The impact of currency exchange rate fluctuation may negatively affect our results.
We report the results of our foreign operations in the applicable local currency and then translate those results into U.S. dollars at applicable exchange rates. We are therefore subject to non-U.S. currency risks and non-U.S. exchange exposure. The applicable exchange rates between and among foreign currencies and the U.S. dollar have fluctuated and will continue to do so in the future. These fluctuations have impacted our results of operations in recent periods as discussed below in more detail under the headingsheading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such currency exchange rate volatility may also adversely impact our financial condition or liquidity. While we may use forward exchange contracts and foreign currency denominated debt to manage our exposure to foreign exchange risk, such risk management strategies do not insulate us completely from those exposures and may not be effective, and our results of operations could be adversely affected. Exchange rates can be volatile and a substantial weakening of foreign currencies against the U.S. dollar could reduce our profit margin in certain of our businesses outside of the U.S. and adversely impact the comparability of results from period to period. The continued strength of the U.S. dollar could continue to adversely impact our revenue and profit in non-U.S. jurisdictions.
Operating in foreign countries and emerging markets exposes us to increased risks, including economic, political, security, and international operation risks.
We operate, manufacture, and sell our products and obtain raw materials in many foreign countries and emerging markets. This subjects us to risks that could materially impact our operating results, including: difficulties in staffing and managing foreign personnel in diverse cultures; transportation and other supply chain delays or interruptions; sometimes unpredictable regulatory changes; physical security risks, including the potential for violence, civil and labor unrest, and possible terrorist attacks; difficulties in enforcing rights, collecting revenues, and protecting assets in foreign jurisdictions; and the effects of international political developments and political and economic instability. For example, we have a flavors manufacturing facility in Celaya, Mexico; this city continues to experience increased levels of political and criminal violence by narcotics trafficking cartels. While the instability in Mexico has not yet materially adversely impacted our business there, it could do so in the future, and our results of operations could be adversely affected.
In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to changes in duties, tariffs, trade regulations, employment regulations, taxes, or limitations on currency or fund transfers. For example, changes in the trade relationship between the U.S. and China as well as potential regulatory actions by the Chinese government may affect the availability and cost of our raw materials and products originating in China, the demand for, as well as the supply of, our products manufactured in China or containing raw materials from China, and the demand from Chinese customers for our products.
The impact of tariffs and other trade barriers may negatively affect our results.
The Company has manufacturing facilities located around the world. The Company sells to customers located both inside and outside the countries in which products are manufactured. The Company also depends upon suppliers both inside and outside the countries in which products are manufactured. Tariffs and other trade barriers imposed by the U.S. or other countries have affected and could continue to adversely affect our manufacturing costs, our ability to source and import raw materials, our ability to export our products to other markets, and our ability to compete successfully against other companies that are not impacted by tariffs to the same extent as the Company. Additionally, the uncertainties created by tariffs and other trade barriers have also affected and could continue to affect our customers’ demand for our products because, for example, the customers decide to delay product launches or destock inventory due to these uncertainties. It is difficult to predict the effects of current or future tariffs and other trade barriers and disputes, and the Company’s efforts to reduce the effects of tariffs through pricing and other measures may not be effective.In some cases, our products, such as U.S. grown garlic and onion, benefit from tariffs levied against foreign products. If these beneficial tariffs were reduced or eliminated, it could adversely affect our business and financial condition.
Stakeholder expectations in connection with ESG matters have been, and continue to be, rapidly evolving and increasing. The enhanced stakeholder and regulatory focus on ESG matters requires us to continuously monitor various developing standards and reporting requirements and make continuous progress in our efforts to reduce our, as well as our suppliers’, energy consumption, greenhouse gas emissions, water usage, and waste generation. Implementing such monitoring, reporting, and improved sustainability could be costly. Even where we make progress, our ESG practices still may not meet the standards of all of our stakeholders. For example, many of our large, global customers are committing to long-tern1 targets to reduce greenhouse gas emissions within their supply chains. If we are unable to achieve these reductions, our customers may seek out alternative suppliers who are better able to support such reductions. Certain of our customers have also indicated that they will require that their suppliers meet a certain score or grade on one or more sustainability platforms. If we are unable to meet such criteria, we may be unable to win new business or lose existing business with those customers. We are also experiencing certain of our customers requesting that we undertake specific sustainability initiatives, some of which may impose significant costs on the Company. If we fail to undertake such initiatives, we may lose business with those customers or, if we do undertake such initiatives and are unable to pass on the additional costs, our profitability could be adversely impacted. In addition, some of our customers and other stakeholders are requiring us to provide information on our plans relating to certain ESG matters, such as greenhouse gas emissions (including carbon scores for particular products we supply), and we expect this trend to continue as more regulations are being adopted. If we are unable to respond, or we are perceived to be responding inadequately, to the expectations of our stakeholders, our business and reputation could be harmed, our profit and revenue could decline, and it could have a negative impact us.on the trading price of our common stock.
In addition, the London interbank offered rate, isincreased focus on ESG matters may result in new or increased regulations, laws, and demands, such as carbon tax and tariff programs and enhanced sustainability reporting regimes, which could cause us to incur additional costs or to make changes to our operations to comply with any such regulations, laws, or demands. These actions are likely to increase costs associated with our operations, including costs for energy, raw materials, production, transportation, and labor. We are also likely to incur additional third-party service provider costs, including sustainability platform fees, audit costs, and other service fees from sustainability professionals in order to remain compliant with newly enacted regulations, laws, and demands, including the basic rate of interest used in lending between banksEuropean Union Corporate Sustainability Reporting Directive and California SB 253 and SB 261. If we are unable to pass on these costs, our profit could decline. Further, our customers and the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We have used LIBOR as a reference rate in our revolving loans, term loans, asset securitization program, and uncommitted credit facilities suchmarkets we serve may impose standards, regulations, market-based policies, or preferences that the interestwe may not be able to timely meet due to our creditors pursuant to these loans is calculated using LIBOR.
World events and natural disasters are beyond our control and could affect our results.
World events can adversely affect national, international, and local economies. Economies can also be affected by conflicts, natural disasters, changes in climate, severe weather (including droughts and flooding), epidemics, pandemics, (including the coronavirus, as discussed in more detail above), or other catastrophic events. Such events and conditions, as well as uncertainty in or impairment of financial markets, have adversely affected and could continue to affect our revenues and profitability, particularly if they occur in locations in which we or our customers have significant operations. Our natural colors, flavors, extracts, and essential oils businesses are dependent on favorable climatic conditions and the non-occurrence of natural disasters. Adverse weather events could impact our or our growers’ ability to plant, grow, and harvest crops, and such events could also increase the presence of disease and pests on such crops, which may negatively affect our ability to supply certain products. For example, our Natural Ingredients business has significant operations in California, which has been dealing with drought conditions, flooding, and water supply issues, which such issues had negatively impacted certain of our yields from onion harvests in prior years as discussed above. In the event that there is an insufficient supply of water for our operations or the operations of the growers that we contract with, our Natural Ingredients business may be materially impacted and could have an adverse effect on our results in future periods. While we make efforts to diversify where we grow products, these efforts may be insufficient to mitigate all adverse effects. In addition, while we have manufacturing facilities throughout the world, certain of our facilities are the sole manufacturer of a specific product, and a disruption in manufacturing could lead to increased costs of relocating or replacing the production of a product, or reformulating a product, which could have an adverse effect on our results.
Litigation and Regulatory Risks
Many of our products are used in items for human consumption and contact. We may be subject to product liability claims and product recalls, which could negatively impact our profitability and corporate image.
We sell flavors, fragrances,colors, and colorsother specialty ingredients that are used in foods, beverages, pharmaceuticals, cosmetics,personal care, nutraceuticals, and other items for human consumption or contact. These products involve risks such as product contamination or spoilage, product tampering, product defects, and other adulteration. If the consumption or use of our products causes product damage, injury, illness, or death, we may be subject to liability, including class action lawsuits and other civil and governmental litigation. We are also subject to product liability claims involving products containing diacetyl and related chemicals.chemicals as well as cosmetic ingredients that may have utilized talc in the past. From time to time, we or our customers have withdrawn or recalled products in the event of contamination, product defects, or perceived quality problems. If our customers withdraw or recall products related to ingredients that we provide to them, as has occurred in the past, they may make claims against us.
Although we vigorously defend against claims when they are made, there can be no assurance that any claims or recalls will not be material. While we maintain liability insurance against these risks, coverage may be unavailable or incomplete. A significant product defect, product recall, or product liability judgment can negatively impact our profitability for a period of time depending on the insurance coverage, costs, adverse publicity, product availability, scope, competitive reaction, and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the cost of defense and the negative publicity surrounding any assertion that our products caused illness, injury, or death or any recall involving our products could adversely affect our reputation with existing and potential customers and our corporate image and thereby adversely impact our profitability.
There are an enormous number of laws and regulations applicable to us, our suppliers, and our customers across all of our business lines. Compliance with these legal requirements is costly to us and can affect our operations as well as those of our suppliers and customers. Failure to comply could also be costly and disruptive.
Our facilities and products are subject to many laws and regulations relating to the environment, health, safety, and the content, processing, packaging, storage, distribution, quality, and safety of food, drugs, cosmetics,personal care, other consumer products, and industrial colors. These laws and regulations are administered in the United States by the Department of Agriculture, the Food and Drug Administration, the Environmental Protection Agency, the Department of Labor, and other federal and state governmental agencies. In addition, individual states may also enact regulations prohibiting or limiting the manufacturing and/or sale of goods containing certain of our products (such as the California Food Safety Act’s prohibition on red dye 3), which could cause a decrease in our sales of such products and negatively impact our results of operations. We, our suppliers, and our customers are subject to similar governmental regulation and oversight abroad. Compliance with these laws and regulations can be complex and costly and affect our, our suppliers’, and our customers’ operations. Also, if we, our suppliers, or our customers fail to comply with applicable laws and regulations, we could be subject to administrative penalties and injunctive relief, civil and criminal remedies, fines, recalls of products, and private civil lawsuits. Regulatory action against a supplier or customer can create risk for us and negatively affect our operations. As discussed above, actions by regulatory agencies against us and our suppliers can also adversely impact the availability of raw materials. AnytimeWhenever raw materials become more costly or unavailable due to legal, regulatory, or other governmental actions, our profitability could be adversely impacted.
Environmental compliance may be costly to us.
Our operations are subject to extensive and stringent laws and regulations that pertain to the discharge of materials into the environment, handling of materials, and disposition of wastes and air emissions. These rules operate or will operate at both the federal and state levels in the United States, and there are analogous laws at most of our overseas locations. Environmental regulations, and the potential failure to comply with them, can have serious consequences, including the costs of compliance and defense; interference with our operations or the ability to obtain required permits; civil, criminal, and administrative penalties; and negative publicity. Additionally, the ability of our suppliers to comply with environmental regulations may cause adverse effects on us by reducing or eliminating the availability of necessary raw materials or increasing the cost of raw materials. These factors might adversely impact our ability to make certain products as well as our profitability on the products that can be made.
We could be adversely affected by violations of anti-bribery and anti-corruption laws and regulations.
Our business is subject to the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act, and similar anti-bribery and anti-corruption laws and regulations in other countries where we operate. While the Company maintainswe maintain robust policies to prevent violations of these laws and to monitor third party risks, investigating and resolving actual or alleged violations of anti-bribery and anti-corruption laws is expensive and could negatively impact our results of operations or financial condition. Under these laws, companies may be held liable for the corrupt actions taken by their directors, officers, employees, agents, or other representatives. We could be subject to substantial civil and/or criminal fines and penalties if we or any of our representatives fail to comply with these laws, which could have a material adverse effect on our business and reputation.
Changes in tax rates or tax laws could expose us to additional tax liabilities that may negatively affect our results.
We are subject to taxes in the U.S. and numerous foreign jurisdictions. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates; changes in the valuation of deferred tax assets and liabilities; changes in liabilities for uncertain tax positions; the costs of repatriations; or changes in tax laws or their interpretation. Any of these changes could negatively impact our results. In addition, the Organisation for Economic Co-operation and Development published a statement updating and finalizing the key components of a two-pillar plan on global tax reform that has now been agreed upon by the majority of OECD members. Pillar Two imposes a global minimum corporate tax rate of 15%. Certain countries in which we operate have enacted legislation to adopt the Pillar Two framework, and several other countries are also considering changes to their tax laws to implement this framework. The Pillar Two framework is expected to be effective in fiscal year 2024. When and how this framework is adopted or enacted by the various countries in which we do business could increase tax complexity and uncertainty and may adversely affect our results of operations.
We are also subject to the routine examination of our income tax returns by tax authorities in those countries in which we operate, and we may be subject to assessments or audits in the future in any of these countries. The results of such assessments or audits, if adverse to the Company,us, could negatively impact our results.
We have transfer pricing policies that are a significant component of the management and compliance of our operations across international boundaries and overall financial results. Many countries routinely examine transfer pricing policies of taxpayers subject to their jurisdiction, challenge transfer pricing policies aggressively where there is potential non-compliance, and impose significant interest charges and penalties where non-compliance is determined. However, governmental authorities could challenge these policies more aggressively in the future and, if challenged, we may not prevail. We could suffer significant costs related to one or more challenges to our transfer pricing policies.
Structural and Organizational Risks
We depend on certain key personnel, and the loss of these persons may harm our business, including the loss of trade secrets.
Our success depends in large part on the continued service and availability of our key management and technical personnel, and on our ability to attract and retain qualified new personnel. The competition for these individuals can be significant and theif we are unable to successfully integrate, motivate, and reward our employees, we may not be able to retain them. The loss of key employees or inability to attract new employees in the future could harm our business. In addition, we need to provide for smooth transitions when replacing key management and technical personnel positions. Our operations and results may be negatively affected if we are not able to do so.
Additionally, many of our key personnel must have access to the Company’s trade secrets to effectively perform their job responsibilities. Although we seek to impose confidentiality, non-solicitation, loyalty, and non-competition obligations on many employees through agreements and our Code of Conduct, these efforts may not be successful. Furthermore, litigation to enforce departing employees’ legal obligations may not be, and has not always been, successful as the legal systems in many jurisdictions disfavor or prohibit restrictions on an employee’s right to change jobs as well as on preemptive measures to prevent the disclosure of a company’s trade secrets and intellectual property before it occurs. It may become more difficult to obtain and enforce non-competition agreements in the future, as there are various federal and state efforts ongoing in the U.S. that would prohibit or limit them. As a result, there is a possibility that certain competitors could attempt to exploit the Company’s trade secrets and confidential information to the Company’s competitive detriment, which could adversely impact our profitability.
We are exposed toface risks associated with strategic transactions that we have completed and may pursue in the future, which could adversely affect our divestitures, whichoperating results.
Our business strategy includes acquiring businesses, making investments that complement our existing businesses, and, based on an evaluation of our business portfolio, divesting existing businesses. We have acquired many companies and operations in the past and may continue to grow by acquisition in the future. We continue to analyze and evaluate acquisition opportunities with the potential to strengthen our industry position or enhance our existing product offerings. We may not be able to identify suitable acquisition candidates or have sufficient financing and/or cash available to successfully complete acquisitions in the future. Our future growth through acquisitions could involve significant risks that may have a material adverse effect on us.
In addition, strategic transactions may present operational, financial, and managerial challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses and raw material costs, assumption of unknown liabilities and indemnities that may not be discovered before an acquisition or fully reflected in the price we pay, and potential disputes with the buyers or sellers. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Divestitures have inherent risks, including potential post-closing liabilities and claims for indemnification, that may impact our ability to fully realize the anticipated benefits of those transactions and could result in expenses and charges that are greater than we currently anticipate.
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We may also need to finance future acquisitions, and the terms of any financing, and the need to ultimately repay or refinance any indebtedness, may have negative effects on us. Acquisitions also could have a dilutive effect on our financial results. Acquisitions also generally result in goodwill, which would need to be written off against earnings in the future if it becomes impaired. Acquisitions and investments may involve significant cash expenditures, debt incurrences, equity issuances, operating losses, and expenses.
Technology and Cybersecurity Risks
Our ability to protect our intellectual property rights is key to our performance.
We protect our intellectual property rights as trade secrets, through patents, under confidentiality agreements, and through internal and external physical and cyber securitycyber-security policies and systems. We could incur significant costs in asserting our intellectual property rights or defending ourselves from third party intellectual property claims. The laws of some of the countries in which we operate do not protect intellectual property rights to the same extent as the laws of the United States. IfOur failure to obtain or adequately protect our intellectual property rights (including in response to developments in artificial intelligence technologies), or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could have a material adverse impact on our business, financial condition, and results of operations. In addition, if other parties were to infringe on our intellectual property rights, or if a third party successfully asserted that we had infringed on their intellectual property rights, it could have an adverse impact on our business.
Our ability to successfully maintain and upgrade our information technology systems, and to respond effectively to failures, disruptions, compromises, or breaches of our information technology systems, may adversely affect our competitiveness and profitability.
Our success depends in part on our ability to maintain a current information technology platformplatforms, including some managed by third-party providers, for our businesses to operate effectively, reliably, and securely. We routinely review and upgrade our information technology and cybersecurity systems in order to better manage, report, and protect the information related to our formulas, research and development, manufacturing processes, trade secrets, sales, products, customers, personnel, and other operations. If we do not continue to maintain our information technology and cybersecurity platforms and successfully implement upgrades to systems to protect our vital information as well as our facilities and IT systems, our competitiveness and profits could decrease. In addition, as artificial intelligence capabilities and other new and evolving technologies improve and gain widespread use, we may experience cyber-attacks created using artificial intelligence or other new and evolving technologies, which may be difficult to detect and mitigate against. These attacks could be designed to directly attack information systems with increased speed and/or efficiency or create more effective phishing techniques. It is also possible for a threat to be introduced as a result of our customers and third-party providers using the output of an artificial intelligence tool or other new and evolving technologies that includes a threat, such as introducing malicious code by incorporating artificial intelligence-generated source code.
Because of the nature of our business, and the importance of our proprietary information and manufacturing facilities, we face threats and experience cybersecurity incidents and attempts from time to time, not only from hackers’ intent on theft and disruption, but also from malicious insiders that may attempt to steal Company information.information or negligent employees. Furthermore, our and our third-party providers’ information technology systems may beare susceptible to failures, disruptions, breaches, ransomware, theft, employee carelessness in the face of social engineering and phishing threats and attacks, and other similar cybersecurity events. We and third parties we utilize as vendors to support our business and operations have experienced such attacks in the past and while there has been no material impact on our business, any such attacks in the future could have an adverse impact on our business. The impact of any such event and the effectiveness of our response thereto may adversely affect our operations and subject us to lost business opportunities, increased operating costs, regulatory consequences, and reputational harm. While we take substantial steps to protect our information and systems through cyber security systems, monitoring, auditing, and training, these efforts mayare not always be successful. And, while we maintain liability insurance against these risks, coverage may be unavailable or incomplete.
In addition, the Company is subject to a variety of laws and regulations in the United States and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Compliance with and interpretation of various data privacy regulations continue to evolve and any violation could subject the Company to legal claims, regulatory penalties, and damage to its reputation. Our failure to comply with these evolving regulations, whether as a result of a cyber-attack or otherwise, could expose us to fines, sanctions, penalties, and other costs that could harm our reputation and adversely impact our financial results.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 1C. | Cybersecurity. |
Risk Management and Strategy
The Company recognizes the importance of assessing, identifying, and managing material risks associated with cybersecurity threats in order to safeguard our information systems and protect the confidentiality, integrity, and availability of our information systems and the information residing therein. We have implemented several cybersecurity processes to aid in our efforts to assess, identify, and manage such material risks.
Our risk management program considers cybersecurity threat risks alongside other risks as part of our overall risk assessment process. We believe that integrating our cybersecurity risk management into our broader risk management framework promotes a company-wide culture of cybersecurity risk management and ensures that cybersecurity considerations are an integral part of decision-making at every level.
We employ a wide range of tools, policies, and services, including but not limited to penetration testing, network and endpoint monitoring, vulnerability assessments, information segregation, and tabletop exercises to inform our risk identification and assessment. We routinely review and upgrade our information technology and cybersecurity systems in order to better manage, report, and protect the information related to our formulas and processes, research and development, trade secrets, products, customers and suppliers, employees, and other sensitive information. We also have a cybersecurity specific risk assessment process that helps us identify our cybersecurity threat risks and maturity level by comparing our processes to standards set by the International Organization for Standardization.
To provide for the availability of critical data and systems, maintain regulatory compliance, manage our material risks from cybersecurity threats, and to protect against, detect, and respond to cybersecurity incidents, we:
Run tabletop exercises with our executive team to simulate a response to a cybersecurity incident and use the findings to improve our processes and technologies;
Conduct regular third-party assessments of our cybersecurity program;
Undertake regular reviews of our incident response plan and other policies related to cybersecurity;
Run regular cyber penetration testing;
Through policy and practice, classify information, restrict access, and require employees to treat sensitive data with care; and
Conduct an annual employee training program, including regular phishing email simulations for all employees with access to corporate email systems to enhance awareness and responsiveness to such possible threats.
Our incident response plan coordinates the activities we take to prepare for, detect, respond to, and recover from cybersecurity incidents, which include processes to triage, assess severity of, escalate, contain, investigate, and remediate the incident, as well as to comply with potentially applicable legal obligations.
Recognizing the complexity and evolving nature of cybersecurity threats, the Company engages third-party experts, including assessors, auditors, and consultants, in evaluating and testing our risk management systems. Such engagements include: managed security services, regular audits, penetration testing, threat assessments, and consultation on security enhancements. The Company has processes in place to oversee and manage its use of third-party vendors. We conduct security assessments of third-party vendors engaged, limit the information systems of the Company available to the third party, and maintain monitoring to ensure compliance with our cybersecurity standards.
From time to time, we experience cybersecurity incidents and threats to our systems and information. Through the date hereof, no risks from identified cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected, and we do not believe are reasonably likely to materially affect, the Company, including our business strategy, results of operations, or financial condition. However, we cannot guarantee that we will not be materially affected in the future. Cybersecurity threats rapidly evolve and are complex, so we must continually adapt and enhance our processes. As we do this, we must make judgments about where and how to invest resources to most effectively protect ourselves from threats. These are inherently challenging processes, and we can provide no assurance that the processes that we implement will be effective. For more information regarding cybersecurity risks that could impact the Company, see our risk factor disclosures at Item 1A of this Annual Report on Form 10-K, which such disclosures are incorporated by reference herein.
Governance
Cybersecurity is an important part of our risk management processes and an area of focus for our Board and management. Our entire Board is responsible for the oversight of risks from cybersecurity threats. At least twice annually, the entire Board receives an overview from management of our cybersecurity progress and effectiveness, covering topics such as current cybersecurity landscape and emerging threats, data security posture, results from third-party assessments, status of ongoing initiatives and strategies, and material cybersecurity threat risks or, if any, incidents and developments. In these sessions, the Board receives materials and discusses such matters with our Chief Information Officer. The Board also receives annual training on cybersecurity. In addition, we have formed an executive level steering committee (including the CEO, CFO, Group Presidents, General Counsel, VP, Human Resources, Controller/Chief Accounting Officer, and Chief Information Officer) that provides oversight and routinely discusses cybersecurity matters.
Our cybersecurity risk management and strategy processes, which are discussed in greater detail above, are led by our Chief Information Officer, our Director of Information Security, and our Director of Infrastructure. These individuals collectively have over 85 years of prior work experience in various roles in the information security field, including managing and implementing effective information technology and cybersecurity programs, as well as relevant degrees and certifications, including a Certified Information Systems Security Professional certification. These members of management are informed about and monitor the prevention, mitigation, detection, and remediation of cybersecurity incidents through their management of, and participation in, the cybersecurity risk management and strategy processes described above, including the operation of our incident response plan. As discussed above, our Chief Information Officer reports to the entire Board about cybersecurity threat risks, among other cybersecurity matters, at least twice annually or more frequently as circumstances may require.
| Item 2. | Properties. |
We lease our corporate headquarters offices, which are located at 777 East Wisconsin Avenue, Milwaukee, Wisconsin. We own our Color Group headquarters offices located in St. Louis, Missouri. We lease our Asia Pacific Group headquarters offices located in Singapore. We own a part, and lease a part, of our Flavors & Extracts Group headquarters offices located in Hoffman Estates, Illinois. As of December 31, 2020,2023, the locations of our production properties by reportable segment are as follows:
Color Group:
U.S. – St. Louis, Missouri; and South Plainfield, New Jersey*.Missouri.
International – Jundiai, Brazil*; Delta, British Columbia, Canada*; Kingston, Ontario, Canada; Saint Ouen L’Aumone, France; Geesthacht, Germany; Reggio Emilia, Italy; Lerma, Mexico; Lima, Peru*; Johannesburg, South Africa; Gebze, Turkey; and Kings Lynn, United Kingdom.
Flavors & Extracts Group:
U.S. – Livingston and Turlock, California; Amboy, Illinois; Harbor Beach, Michigan; Juneau, Wisconsin; and Juneau, Wisconsin.Deming, New Mexico.
International – Heverlee, Belgium; Qingdao, China*; San Jose, Costa Rica*; Geesthacht, Germany; Celaya and Tlalnepantla*, Mexico; Granada, Spain; and Wales and Milton Keynes, United Kingdom.
Asia Pacific Group:
U.S. – None.
International – Keysborough, Australia; Guangzhou, China*; Mumbai, India*; Hitachi, Japan; Auckland, New Zealand; Manila, Philippines*; and Bangkok, Thailand*.
* Indicates a leased property at the location. The Company ended its Qingdao lease in 2020.
All properties are owned except as otherwise indicated above. All facilities are considered to be in good condition (ordinary wear and tear excepted) and suitable and adequate for the Company’s requirements.
| Item 3. | Legal Proceedings. |
See Part IV,II, Item 15,8, Note 16,17, Commitments and Contingencies, of this report for information regarding legal proceedings in which we are involved.
| Item 4. | Mine Safety Disclosure. |
Not applicable.
Information About Our Executive Officers
The executive officers of the Company and their ages as of February 20, 2021,22, 2024 are as follows:
| Name | Age | Position |
| Paul Manning | Chairman, President, and Chief Executive Officer | |
| Amy M. Agallar | Vice President and Treasurer | |
| Michael C. Geraghty | President, Color Group | |
| Thierry Hoang | Vice President, Asia Pacific Group | |
| Amy Schmidt Jones | Vice President, Human Resources and Senior Counsel | |
| John J. Manning | Senior Vice President, General Counsel, and Secretary | |
| President, Flavors | ||
| Stephen J. Rolfs | Senior Vice President and Chief Financial Officer | |
| Tobin Tornehl | Vice President, Controller and Chief Accounting Officer |
The Company has employed all of the individuals named above, in substantively their current positions, for at least the past five years except as follows:
Mr. Paul ManningMorris has held his present office since April 21, 2016,January 1, 2024, and previously served as President and Chief Executive Officer (2014 – April 2016).
Mr. Paul Manning (Chairman, President, and Chief Executive Officer) and Mr. John J. Manning (Senior Vice President, General Counsel, and Secretary) are brothers.
PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. |
The Company’s common stock is listed on the New York Stock Exchange under the ticker symbol “SXT.” The number of shareholders of record of the Company’s common stock on February 12, 20218, 2024 was 2,149.1,932.
Since 1962, the Company has paid, without interruption, a quarterly cash dividend. During fiscal 2020,2023, the Company paid aggregate cash dividends of $1.56$1.64 per share to our shareholders, and the Company most recently declared a dividend of $0.39$0.41 per share payable on March 1, 20212024 to shareholders of record on February 2, 2021.6, 2024. The timing, declaration, and payment of future dividends to holders of the Company’s common stock will depend upon many factors, including the Company’s financial condition and results of operations, the capital requirements of the Company’s businesses, industry practice, and any other relevant factors.
On October 19, 2017, the Board of Directors authorized the repurchase of up to three million shares (2017 Authorization). As of December 31, 2020, 774,9742023, 1,267,019 shares had been repurchased under the 2017 Authorization. There were no repurchases of shares by the Company during 2020.2023. There is no expiration date for the 2017 Authorization. The 2017 Authorization may be modified, suspended, or discontinued by the Board of Directors at any time. As of December 31, 2020,2023, the maximum number of shares that may be purchased under publicly announced plans is 2,225,026.1,732,981.
This graph compares the cumulative total shareholder return for the Company’s common stock over the last five years to the total returns on the Standard & Poor’s Midcap Specialty Chemicals Index (S&P Midcap Specialty Chemicals Index), the Standard & Poor’s Midcap Food Products Index (S&P Midcap Food Products Index), and the Standard & Poor’s 500 Stock Index (S&P 500 Index). The graph assumes a $100 investment made on December 31, 2015,2018, and reinvestment of dividends. The stock performance shown on the graph is not necessarily indicative of future price performance.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||
| Sensient Technologies Corporation | $ | 100 | $ | 127 | $ | 120 | $ | 94 | $ | 113 | $ | 130 | ||||||||||||
| S&P Midcap Specialty Chemicals Index | 100 | 125 | 134 | 127 | 151 | 162 | ||||||||||||||||||
| S&P Midcap Food Products Index | 100 | 122 | 128 | 119 | 139 | 153 | ||||||||||||||||||
| S&P 500 Index | 100 | 112 | 136 | 130 | 171 | 203 | ||||||||||||||||||
December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | December 31, 2023 | |||||||||||||||||||
| Sensient Technologies Corporation | $ | 100 | $ | 121 | $ | 139 | $ | 192 | $ | 143 | $ | 132 | ||||||||||||
| S&P Midcap Specialty Chemicals Index | 100 | 118 | 127 | 151 | 135 | 151 | ||||||||||||||||||
| S&P Midcap Food Products Index | 100 | 117 | 128 | 150 | 147 | 134 | ||||||||||||||||||
| S&P 500 Index | 100 | 131 | 156 | 200 | 164 | 207 | ||||||||||||||||||
Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services, LLC.
| Item 6. | [Reserved] |
| Quarterly Data | ||||||||||||||||||||
(In thousands except per share amounts) (unaudited) | ||||||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||||||||
| 2020 | ||||||||||||||||||||
| Revenue | $ | 350,677 | $ | 323,090 | $ | 323,566 | $ | 334,668 | $ | 1,332,001 | ||||||||||
| Gross profit | 111,893 | 102,214 | 105,646 | 103,994 | 423,747 | |||||||||||||||
| Net earnings | 20,773 | 30,620 | 32,910 | 25,169 | 109,472 | |||||||||||||||
| Earnings per basic share | 0.49 | 0.72 | 0.78 | 0.59 | 2.59 | |||||||||||||||
| Earnings per diluted share | 0.49 | 0.72 | 0.78 | 0.59 | 2.59 | |||||||||||||||
| 2019 | ||||||||||||||||||||
| Revenue | $ | 347,513 | $ | 339,186 | $ | 317,650 | $ | 318,585 | $ | 1,322,934 | ||||||||||
| Gross profit | 115,225 | 111,768 | 102,400 | 85,480 | 414,873 | |||||||||||||||
| Net earnings (loss) | 32,807 | 34,331 | 31,871 | (16,962 | ) | 82,047 | ||||||||||||||
| Earnings (loss) per basic share | 0.78 | 0.81 | 0.75 | (0.40 | ) | 1.94 | ||||||||||||||
| Earnings (loss) per diluted share | 0.78 | 0.81 | 0.75 | (0.40 | ) | 1.94 | ||||||||||||||
| Years ended December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||
| Summary of Operations | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 1,332,001 | 100.0 | % | $ | 1,322,934 | 100.0 | % | $ | 1,386,815 | 100.0 | % | $ | 1,362,265 | 100.0 | % | $ | 1,383,210 | 100.0 | % | ||||||||||||||||||||
| Cost of products sold | 908,254 | 68.2 | 908,061 | 68.6 | 920,686 | 66.4 | 886,775 | 65.1 | 907,783 | 65.6 | ||||||||||||||||||||||||||||||
| Selling and administrative expenses | 271,091 | 20.4 | 293,763 | 22.2 | 262,751 | 18.9 | 307,684 | 22.6 | 289,818 | 21.0 | ||||||||||||||||||||||||||||||
| Operating income | 152,656 | 11.5 | % | 121,110 | 9.2 | % | 203,378 | 14.7 | % | 167,806 | 12.3 | % | 185,609 | 13.4 | % | |||||||||||||||||||||||||
| Interest expense | 14,811 | 20,107 | 21,853 | 19,383 | 18,324 | |||||||||||||||||||||||||||||||||||
| Earnings before income taxes | 137,845 | 101,003 | 181,525 | 148,423 | 167,285 | |||||||||||||||||||||||||||||||||||
| Income taxes | 28,373 | 18,956 | 24,165 | 58,823 | 44,372 | |||||||||||||||||||||||||||||||||||
| Earnings from continuing operations | 109,472 | 82,047 | 157,360 | 89,600 | 122,913 | |||||||||||||||||||||||||||||||||||
| Gain from discontinued operations, net of tax | - | - | - | - | 3,343 | |||||||||||||||||||||||||||||||||||
| Net earnings | $ | 109,472 | $ | 82,047 | $ | 157,360 | $ | 89,600 | $ | 126,256 | ||||||||||||||||||||||||||||||
| Earnings per basic share: | ||||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 2.59 | $ | 1.94 | $ | 3.71 | $ | 2.05 | $ | 2.76 | ||||||||||||||||||||||||||||||
| Discontinued operations | - | - | - | - | 0.08 | |||||||||||||||||||||||||||||||||||
| Earnings per basic share | $ | 2.59 | $ | 1.94 | $ | 3.71 | $ | 2.05 | $ | 2.84 | ||||||||||||||||||||||||||||||
| Earnings per diluted share: | ||||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 2.59 | $ | 1.94 | $ | 3.70 | $ | 2.03 | $ | 2.74 | ||||||||||||||||||||||||||||||
| Discontinued operations | - | - | - | - | 0.07 | |||||||||||||||||||||||||||||||||||
| Earnings per diluted share | $ | 2.59 | $ | 1.94 | $ | 3.70 | $ | 2.03 | $ | 2.82 | ||||||||||||||||||||||||||||||
| Other Related Data | ||||||||||||||||||||||||||||||||||||||||
| Dividends per share, declared and paid | $ | 1.56 | $ | 1.47 | $ | 1.35 | $ | 1.23 | $ | 1.11 | ||||||||||||||||||||||||||||||
| Average common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
| Basic | 42,301 | 42,263 | 42,404 | 43,780 | 44,523 | |||||||||||||||||||||||||||||||||||
| Diluted | 42,346 | 42,294 | 42,499 | 44,031 | 44,843 | |||||||||||||||||||||||||||||||||||
| Book value per common share | $ | 22.04 | $ | 20.83 | $ | 20.34 | $ | 19.70 | $ | 18.83 | ||||||||||||||||||||||||||||||
| Price range per common share | 38.24-75.30 | 54.77-75.21 | 51.93-78.40 | 71.21- 84.98 | 52.69- 83.38 | |||||||||||||||||||||||||||||||||||
| Share price at December 31 | 73.77 | 66.09 | 55.85 | 73.15 | 78.58 | |||||||||||||||||||||||||||||||||||
| Capital expenditures | 52,162 | 39,100 | 50,740 | 56,344 | 81,216 | |||||||||||||||||||||||||||||||||||
| Depreciation | 48,153 | 52,159 | 50,950 | 46,956 | 45,714 | |||||||||||||||||||||||||||||||||||
| Amortization | 1,488 | 2,856 | 2,294 | 1,562 | 1,305 | |||||||||||||||||||||||||||||||||||
| Total assets | 1,740,860 | 1,740,151 | 1,824,940 | 1,724,340 | 1,667,860 | |||||||||||||||||||||||||||||||||||
| Long-term debt | 518,004 | 598,499 | 689,553 | 604,159 | 582,780 | |||||||||||||||||||||||||||||||||||
| Total debt | 527,251 | 619,111 | 709,599 | 624,289 | 603,358 | |||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 934,336 | 881,589 | 859,947 | 852,301 | 835,741 | |||||||||||||||||||||||||||||||||||
| Return on average shareholders’ equity | 12.3 | % | 9.2 | % | 18.8 | % | 10.3 | % | 14.7 | % | ||||||||||||||||||||||||||||||
| Total debt to total capital | 36.1 | % | 41.3 | % | 45.2 | % | 42.3 | % | 41.9 | % | ||||||||||||||||||||||||||||||
| Employees | 3,948 | 4,058 | 4,113 | 4,023 | 4,083 | |||||||||||||||||||||||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of the Company’s financial condition and results of operations for the fiscal years ended December 31, 2020 and 2019 should be read in conjunction with our audited consolidated financial statements and the notes to those statements. Discussion and analysisstatements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our cash flowsoperations for the fiscal year ended December 31, 2018 is included under2023, compared to the headingyear ended December 31, 2022. For a discussion of the year ended December 31, 2022, compared to the year ended December 31, 2021, please refer to Part II, Item 7. Management’s7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Financial PositionOperations” in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 20192022, filed with the Securities and Exchange Commission on February 21, 2020.17, 2023, which is incorporated herein by reference.
OVERVIEW
Sensient Technologies Corporation (the Company or Sensient) is a leading global developer, manufacturer and suppliermarketer of flavorcolors, flavors, and fragrance systems forother specialty ingredients. The Company uses advanced technologies at facilities around the world to develop specialty food and beverage systems; personal care, and household-products industries. The Company previously announced it has entered into a definitive agreement to sell its fragrances product line (excluding its essential oils, product line). The Company is also a leading developer, manufacturer,pharmaceutical, and supplier of colors for businesses worldwide. The Company provides natural and synthetic color systems for use in foods, beverages, pharmaceuticals and nutraceuticals; colorsnutraceutical systems; specialty colors; and other ingredients for cosmetics, pharmaceuticals,specialty and nutraceuticals; and technical colors for industrial applications.fine chemicals. The Company’s three reportable segments are the Flavors & Extracts Group (formerly known as the Flavors & Fragrances segment; see Note 12, Segment and Geographic Information) and the Color Group, which are both managed on a product line basis, and the Asia Pacific Group, which is managed on a geographic basis. The Company’s corporate expenses, divestiture & other related costs and income, share-based compensation, restructuring and other charges, including operational improvement plans, divestiture, share-based compensation, COVID-19 employee payment,plan costs and portfolio optimization plan costs, and other costs are included in the “Corporate & Other” category. In the second quarter of 2020, the Company divested its inks product line (Color Group), and in the third quarter of 2020, the Company divested its yogurt fruit preparations product line (Flavors & Extracts Group).
The Company’s diluted earnings per share were $2.59$2.21 in 20202023 and $1.94$3.34 in 2019. Included in the 20202022. 2023 results were $18.5negatively impacted by $27.8 million ($14.427.4 million after tax, $0.34$0.65 per share) of portfolio optimization plan costs. 2022 results were positively impacted by $2.5 million ($1.9 million after tax, $0.04 per share) of divestiture & other related costs, operational improvement plan costs, and a one-time COVID-19 employee payment. Included in the 2019 results were $45.9 million ($43.2 million after tax, $1.02 per share) of divestiture & other related costs.income. Adjusted diluted earnings per share, which exclude the divestiture & other related costs,income and the results of operations of the product lines divested or to be divested, the operational improvementportfolio optimization plan costs, were $2.86 in 2023 and the impact of the one-time COVID-19 employee payment, were $2.79$3.29 in 2020 and $2.92 in 20192022 (see discussion below regarding non-GAAP financial measures).
Additional information on the results is included below.
RESULTS OF OPERATIONS
Revenue
Sensient’s revenue was approximately $1.3$1.46 billion and $1.44 billion in both 20202023 and 2019.2022, respectively.
Gross Profit
The Company’s gross margin was 31.8%31.6% in 20202023 and 31.4%34.0% in 2019.2022. The increasedecrease in gross margin iswas primarily a result ofdue to higher raw material costs, lower divestiture & other relatedvolumes, and portfolio optimization plan costs, which decreased gross margin 20 basis points in 2020.2023, partially offset by higher selling prices in 2023.
Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 20.4%21.0% in 20202023 and 22.2%20.3% in 2019.2022. Selling and administrative expenses in 2020 included2023 were increased by portfolio optimization plan costs totaling $24.7 million and in 2022 were reduced by divestiture & other related expenses, operational improvement plan costs, and the one-time COVID-19 employee paymentincome totaling $15.7 million and in 2019 included divestiture & other related costs totaling $35.3$2.5 million. These expenses increased sellingSelling and administrative expense as a percent of revenue increased by approximately 120170 basis points and 270decreased by approximately 20 basis points in 20202023 and 2019, respectively.2022, respectively, as a result of these expenses and income. See Divestitures and Portfolio Optimization Plan below for further information.
Selling and administrative expenses as a percent of revenue was further impacted by lower performance-based compensation in 2023.
Operating Income
Operating income was $152.7$155.0 million in 20202023 and $121.1$196.8 million in 2019.2022. Operating margins were 11.5%10.6% in 20202023 and 9.2%13.7% in 2019. Divestiture & other related costs, operational improvement2022. Portfolio optimization plan costs and the one-time COVID-19 employee payment reduceddecreased operating margins by approximately 140200 basis points in 20202023 and divestiture & other related expenses reducedincome improved operating margins by approximately 35020 basis points in 2019.2022.
Additional information on segment results can be found in the Segment Information section.
Interest Expense
Interest expense was $14.8$25.2 million in 20202023 and $20.1$14.5 million in 2019.2022. The decreaseincrease in expense was primarily due to a decreasean increase in the average interest rate and the average debt outstanding.
Income Taxes
The effective income tax rate was 20.6%28.1% in 20202023 and 18.8%22.7% in 2019.2022. The effective tax rates in both 20202023 and 20192022 were impacted by the release of valuation allowances related to the foreign tax credit carryover and net operating losses, changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings,earnings. The effective tax rate in 2023 was also impacted by the limited tax deductibility of costs related to the divestiture & other related costs and the release of valuation allowances related to the foreign tax credit carryover and foreign net operating losses.portfolio optimization plan. See Note 11, Income Taxes, in the Notes to Consolidated Financial Statements included in this report for additional information.
| 2020 | 2019 | 2023 | 2022 | |||||||||||||
| Rate before divestiture and discrete items | 24.8 | % | 25.7 | % | ||||||||||||
| Divestiture & other related costs impact | 0.3 | % | 4.1 | % | ||||||||||||
| Rate before portfolio optimization plan and discrete items | 25.5 | % | 25.8 | % | ||||||||||||
| Portfolio optimization plan impact | 4.7 | % | - | |||||||||||||
| Discrete items | (4.5 | %) | (11.0 | %) | (2.1 | %) | (3.1 | %) | ||||||||
| Reported effective tax rate | 20.6 | % | 18.8 | % | 28.1 | % | 22.7 | % | ||||||||
The 20212024 effective income tax rate is estimated to be between 24% and 25%.
Acquisitions
On October 3, 2022, the Company acquired Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. (collectively, Endemix), before any divestiture & other related costs and discrete items, such as finalizationa natural colors business located in Turkey. The Company paid $23.3 million in cash for this acquisition, which is net of prior year foreign and domestic tax items, audit settlements, and valuation allowance adjustments.$1.3 million in debt assumed. This business is part of the Color segment.
See Note 2, Acquisitions, in the Notes to Consolidated Financial Statements included in this report for additional information.
Divestitures
In October 2019, the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. In the fourth quarter of 2019, the Board of Directors approved the sale of the inks product line, which was within the Color segment, and the fragrances product line (excluding its essential oils product line), which is within the Flavors & Extracts segment. In the second quarter of 2020, the Board of Directors approved the sale of the yogurt fruit preparations product line, which was within the Flavors & Extracts segment.
During the Company currently estimates 2021 divestiture charges will be $10 million to $14 million. The Company is expecting a non-cash charge of $8 million to $10 million upon closing the sale of the fragrances product line (excluding its essential oils product line) related to the reclassification of accumulated foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated Statement of Earnings. In addition, the Company expects other costs, primarily accelerated depreciation and other exiting activities expenses, to be between $2 million and $4 million. The Company anticipates that it will complete the sales and exit activities of these product lines in 2021.
positions, with such proposals remaining subject to information and consultation processes in certain countries. In addition, in the fourth quarter of 2020, the Company approved a one-time COVID-19 employee payment to reward the outstanding dedication and efforts ofColor segment, the Company’s employees during these challengingproposals include closing a manufacturing facility in Delta, British Columbia, Canada, closing a sales office in Argentina, and unprecedented times. This adjustment totaled approximately $3.0 million.centralizing and eliminating certain production positions as well as potentially eliminating some selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.
See Note 16, Portfolio Optimization Plan, in the Notes to Consolidated Financial Statements included in this report for additional information.
NON-GAAP FINANCIAL MEASURES
Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted revenue, adjusted operating income, adjusted net earnings, and adjusted diluted earnings per share, which exclude the results of the product lines divested or to be divested, the divestiture & other related income and restructuring and other costs, including the operational improvementportfolio optimization plan costs and a one-time COVID-19 employee payment and (2) percentage changes in revenue, operating income, and diluted earnings per share on an adjusted local currency basis, which eliminate the effects that result from translating its international operations into U.S. dollars, the results of product lines divested or to be divested, the divestiture & other related income, and restructuring and other costs, or income,including the operational improvementportfolio optimization plan costs, and the one-time COVID-19 employee payment.costs.
The Company has included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. These non-GAAP measures should not be considered in isolation. Rather, they should be considered together with GAAP measures and the rest of the information included in this report. Management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis and to gain additional insight into underlying operating and performance trends, and the Company believes the information can be beneficial to investors for the same purposes. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
| Twelve Months Ended December 31, | ||||||||||||
| (In thousands except per share amounts) | 2023 | 2022 | % Change | |||||||||
| Operating Income (GAAP) | $ | 155,023 | $ | 196,751 | (21.2 | )% | ||||||
| Portfolio optimization plan costs – Cost of products sold | 3,135 | - | ||||||||||
| Divestiture & other related income – Selling and administrative expenses | - | (2,532 | ) | |||||||||
| Portfolio optimization plan costs – Selling and administrative expenses | 24,706 | - | ||||||||||
| Adjusted operating income | $ | 182,864 | $ | 194,219 | (5.8 | )% | ||||||
| Net Earnings (GAAP) | $ | 93,394 | $ | 140,887 | (33.7 | )% | ||||||
| Divestiture & other related income, before tax | - | (2,532 | ) | |||||||||
Tax impact of divestiture & other related income(1) | - | 636 | ||||||||||
| Portfolio optimization plan costs, before tax | 27,841 | |||||||||||
Tax impact of portfolio optimization plan costs(1) | (415 | ) | ||||||||||
| Adjusted net earnings | $ | 120,820 | $ | 138,991 | (13.1 | )% | ||||||
| Diluted Earnings Per Share (GAAP) | $ | 2.21 | $ | 3.34 | (33.8 | )% | ||||||
| Divestiture & other related income, net of tax | - | (0.04 | ) | |||||||||
| Portfolio optimization plan costs, net of tax | 0.65 | - | ||||||||||
| Adjusted diluted earnings per share | $ | 2.86 | $ | 3.29 | (13.1 | )% | ||||||
(1) Tax impact adjustments were determined based on the nature of the underlying non-GAAP adjustments and their relevant jurisdictional tax rates.
| Twelve Months Ended December 31, | ||||||||||||
| (In thousands except per share amounts) | 2020 | 2019 | % Change | |||||||||
| Revenue (GAAP) | $ | 1,332,001 | $ | 1,322,934 | 0.7 | % | ||||||
| Revenue of the product lines divested or to be divested | (113,553 | ) | (143,172 | ) | ||||||||
| Adjusted revenue | $ | 1,218,448 | $ | 1,179,762 | 3.3 | % | ||||||
| Operating Income (GAAP) | $ | 152,656 | $ | 121,110 | 26.0 | % | ||||||
| Divestiture & other related costs – Cost of products sold | 1,795 | 10,567 | ||||||||||
| Divestiture & other related costs – Selling and administrative expenses | 10,360 | 35,313 | ||||||||||
| Operating income of the product lines divested or to be divested | (7,580 | ) | (1,978 | ) | ||||||||
| Operational improvement plan – Cost of products sold | 35 | - | ||||||||||
| Operational improvement plan – Selling and administrative expenses | 3,304 | - | ||||||||||
| COVID-19 employee payment– Cost of products sold | 1,036 | - | ||||||||||
| COVID-19 employee payment – Selling and administrative expenses | 1,986 | - | ||||||||||
| Adjusted operating income | $ | 163,592 | $ | 165,012 | (0.9 | %) | ||||||
| Net Earnings (GAAP) | $ | 109,472 | $ | 82,047 | 33.4 | % | ||||||
| Divestiture & other related costs, before tax | 12,155 | 45,880 | ||||||||||
| Tax impact of divestiture & other related costs | (2,605 | ) | (2,671 | ) | ||||||||
| Net earnings of the product lines divested or to be divested, before tax | (7,580 | ) | (1,978 | ) | ||||||||
| Tax impact of the product lines divested or to be divested | 1,945 | 399 | ||||||||||
| Operational improvement plan costs, before tax | 3,339 | - | ||||||||||
| Tax impact of operational improvement plan | (826 | ) | - | |||||||||
| COVID-19 employee payment, before tax | 3,022 | - | ||||||||||
| Tax impact of COVID-19 employee payment | (675 | ) | - | |||||||||
| Adjusted net earnings | $ | 118,247 | $ | 123,677 | (4.4 | %) | ||||||
| Diluted Earnings Per Share (GAAP) | $ | 2.59 | $ | 1.94 | 33.5 | % | ||||||
| Divestiture & other related costs, net of tax | 0.23 | 1.02 | ||||||||||
| Results of operations of the product lines divested or to be divested, net of tax | (0.13 | ) | (0.04 | ) | ||||||||
| Operational improvement plan, net of tax | 0.06 | - | ||||||||||
| COVID-19 employee payment, net of tax | 0.06 | - | ||||||||||
| Adjusted diluted earnings per share | $ | 2.79 | $ | 2.92 | (4.5 | %) | ||||||
Divestiture & other related costs areincome is discussed under “Divestitures” above and Note 14, Divestitures, in the Notes to the Consolidated Financial Statements included in this report. Operational improvementPortfolio optimization plan iscosts are discussed under “Operational Improvement“Portfolio Optimization Plan” above and Note 15, Operational Improvement16, Portfolio Optimization Plan, in the Notes to the Consolidated Financial Statements included in this report.
Note: Earnings per share calculations may not foot due to rounding differences.
The following table summarizes the percentage change in the 20202023 results compared to the 20192022 results in the respective financial measures.
| Twelve Months Ended December 31, 2020 | Twelve Months Ended December 31, 2023 | |||||||||||||||||||||||||||||||
| Total | Foreign Exchange Rates | Adjustments(1) | Adjusted Local Currency | Total | Foreign Exchange Rates | Adjustments(1) | Adjusted Local Currency | |||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
| Flavors & Extracts | 6.0 | % | (0.3 | %) | (2.5 | %) | 8.8 | % | 0.4 | % | 1.2 | % | N/A | (0.8 | %) | |||||||||||||||||
| Color | (6.4 | %) | (1.8 | %) | (3.9 | %) | (0.7 | %) | 0.7 | % | 1.6 | % | N/A | (0.9 | %) | |||||||||||||||||
| Asia Pacific | 2.5 | % | (0.3 | %) | (0.2 | %) | 3.0 | % | 1.7 | % | (1.8 | %) | N/A | 3.5 | % | |||||||||||||||||
| Total Revenue | 0.7 | % | (0.9 | %) | (2.7 | %) | 4.3 | % | 1.4 | % | 1.1 | % | N/A | 0.3 | % | |||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||||||||
| Flavors & Extracts | 21.4 | % | (0.7 | %) | 9.0 | % | 13.1 | % | (16.7 | %) | 0.6 | % | 0.0 | % | (17.3 | %) | ||||||||||||||||
| Color | (5.1 | %) | (1.6 | %) | (1.1 | %) | (2.4 | %) | (8.1 | %) | 1.5 | % | 0.0 | % | (9.6 | %) | ||||||||||||||||
| Asia Pacific | 13.9 | % | (0.2 | %) | (0.2 | %) | 14.3 | % | 4.4 | % | (1.9 | %) | 0.0 | % | 6.3 | % | ||||||||||||||||
| Corporate & Other | (24.2 | %) | 0.0 | % | (57.0 | %) | 32.8 | % | 30.6 | % | 0.0 | % | 56.3 | % | (25.7 | %) | ||||||||||||||||
| Operating Income | 26.0 | % | (1.9 | %) | 27.5 | % | 0.4 | % | ||||||||||||||||||||||||
| Total Operating Income | (21.2 | %) | 1.0 | % | (15.4 | %) | (6.8 | %) | ||||||||||||||||||||||||
| Diluted Earnings per Share | 33.5 | % | (2.1 | %) | 39.0 | % | (3.4 | %) | (33.8 | %) | 0.9 | % | (20.7 | %) | (14.0 | %) | ||||||||||||||||
| (1) |
Note: | Refer to table above for a reconciliation of these non-GAAP measures. |
SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is evaluated on operating income before any applicable divestiture & other related costs,income, share-based compensation, acquisition, restructuring and other costs, including the operational improvementportfolio optimization plan one-time COVID-19 employee payment,costs, and other costs (which are reported in Corporate & Other), interest expense, and income taxes.
The Company’s discussion below regarding its operating segments has been updated to reflect the Company’s disaggregation of revenue, which was adopted in the first quarter of 2018, as summarized in Part IV,II, Item I,8, Note 12, Segment and Geographic Information, of this report.
The Company’s reportable segments consist of the Flavors & Extracts, Color, and Asia Pacific segments.
Flavors & Extracts
Flavors & Extracts segment revenue was $742.0 and $700.4$741.1 million in 20202023 and 2019, respectively, an increase of approximately 6%. Foreign exchange rates did not have a significant impact on$738.0 million in 2022. The higher segment revenue in 2020. Segment revenue was higher than the prior year due to higher revenue in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by lower revenue in Yogurt Fruit Preparations and Fragrances.Flavors, Extracts & Flavor Ingredients. The higher revenue in Flavors, Extracts & Flavor Ingredients and Natural Ingredients was primarily due to favorable volumes andhigher selling prices, partially offset by the unfavorable impact of foreign exchange rates at Flavors, Extracts & Flavor Ingredients.lower volumes. The lower revenue in Yogurt Fruit Preparations was primarily due to lower volumes and the divestiture of the product line in the third quarter of 2020. The lower revenue in Fragrances was due to lower selling prices partially offset by higher volumes.
Flavors & Extracts segment operating income was $87.8 million in 2023 and $105.4 million in 2022, a decrease of approximately 17%. Foreign exchange rates increased segment operating income by approximately 1%. The lower selling prices.segment operating income was a result of lower operating income in Natural Ingredients and Flavors, Extracts & Flavor Ingredients. The lower operating income in Natural Ingredients was primarily due to higher raw material costs, lower volumes, and manufacturing and other costs,an unfavorable product mix, partially offset by higher selling prices and favorablelower manufacturing and other costs. The lower operating income in Flavors, Extracts & Flavor Ingredients was primarily due to higher raw material and manufacturing and other costs and lower volumes, and product mix.partially offset by higher selling prices. Segment operating income as a percent of revenue was 12.3%11.8% and 10.7%14.3% for 20202023 and 2019,2022, respectively.
Color
Segment revenue for the Color segment was $501.0$608.0 million in 20202023 and $535.2$604.0 million in 2019, a decrease2022, an increase of approximately 6%1%. Foreign exchange rates decreasedincreased segment revenue by approximately 2%. The lowerhigher segment revenue was primarily a result of lower revenue in Personal Care and Inks, partially offset by higher revenue in Food & Pharmaceutical Colors. TheColors, partially offset by lower revenue in Personal Care was primarily a result of lower volumes due to lower demand for makeup products due to COVID-19 and unfavorable foreign exchange rates, partially offset by higher selling prices. The lower revenue in Inks was primarily a result of divesting the product line in the second quarter of 2020 and lower volumes.Care. The higher revenue in Food & Pharmaceutical Colors was primarily due to favorable volumes and higher selling prices, partially offset by the unfavorableacquisition of Endemix Doğal Maddeler A.Ş., and the favorable impact of foreign exchange rates, partially offset by lower volumes. The lower revenue in Personal Care was primarily due to lower volumes, partially offset by higher selling prices and the favorable impact of foreign exchange rates.
Segment operating income for the Color segment was $96.0$105.4 million in 20202023 and $101.2$114.6 million in 2019,2022, a decrease of approximately 5%. Foreign exchange rates decreased segment operating income by approximately 2%8%. The lower segment operating income was primarily a result of lower operating income in Personal Care, partially offset by higher operating income in Food & Pharmaceutical Colors. The lower operating income in Personal Care was primarily a result of lower volumes due to lower demand for makeup products due to COVID-19, higher raw material and manufacturing and other costs and the unfavorable impact of foreign exchange rates,lower volumes, partially offset by higher selling prices. The higher operating income in Food & Pharmaceutical Colors was primarily due to lower raw material costs, volumes,higher selling prices and selling prices,the favorable impact of foreign exchange rates, which increased segment operating income by approximately 2%, partially offset by unfavorablehigher raw material and manufacturing and other costs.costs, lower volumes, and an unfavorable product mix. Segment operating income as a percent of revenue was 19.2% in 2020 compared to 18.9% in 2019.17.3% and 19.0% for 2023 and 2022, respectively.
Asia Pacific
Segment revenue for the Asia Pacific segment was $121.2$146.1 million and $118.2$143.6 million for 20202023 and 2019,2022, respectively, an increase of approximately 3%2%. Foreign exchange rates had a minimal impact on segment revenues. Segment revenue was higher than the prior year primarily due to higher volumes.selling prices, partially offset by lower volumes and the unfavorable impact of foreign exchange rates, which decreased segment revenue by approximately 2%.
Segment operating income for the Asia Pacific segment was $22.1$30.8 million in 20202023 and $19.4$29.5 million in 2019,2022, an increase of approximately 14% compared to the prior year.4%. Foreign exchange rates did not have a significant impact ondecreased segment operating income.income by approximately 2%. The increase in segment operating income was a result of higher volumesselling prices, partially offset by higher raw material costs and lower raw material costs.volumes. Segment operating income as a percent of revenue was 18.2%21.1% in 20202023 and 16.4%20.5% in 2019, respectively.2022.
Corporate & Other
The Corporate & Other operating loss was $56.4$68.9 million in 20202023 and $74.4$52.8 million in 2019. The lower operating loss was primarily a result of lower divestiture & other related costs in 2020 of $12.2 million compared to $45.9 million in 2019. These lower divestiture & other related costs in 2020 were partially offset by higher stock based compensation of $6.3 million, operational improvement plan costs of $3.3 million, and the one-time COVID-19 employee payment of $3.0 million. There were no operational improvement plan costs or COVID-19 employee payment in 2019. See the Divestitures, Operational Improvement Plan, and COVID-19 Employee Payment sections above for further information.
| 2019 | 2018 | |||||||
| Rate before 2017 Tax Legislation, divestiture and discrete items | 25.7 | % | 20.7 | % | ||||
| 2017 Tax Legislation | - | (3.7 | %) | |||||
| Divestiture & other related costs impact | 4.1 | % | - | |||||
| Discrete items | (11.0 | %) | (3.7 | %) | ||||
| Reported effective tax rate | 18.8 | % | 13.3 | % | ||||
| Twelve Months Ended December 31, | ||||||||||||
| (In thousands except per share amounts) | 2019 | 2018 | % Change | |||||||||
| Revenue (GAAP) | $ | 1,322,934 | $ | 1,386,815 | (4.6 | %) | ||||||
| Revenue of the product lines divested or to be divested | (143,172 | ) | (160,870 | ) | ||||||||
| Adjusted revenue | $ | 1,179,762 | $ | 1,225,945 | (3.8 | %) | ||||||
| Operating Income (GAAP) | $ | 121,110 | $ | 203,378 | (40.5 | %) | ||||||
| Divestiture & other related costs – Cost of products sold | 10,567 | - | ||||||||||
| Divestiture & other related costs – Selling and administrative expenses | 35,313 | - | ||||||||||
| Operating income of the product lines divested or to be divested | (1,978 | ) | (3,123 | ) | ||||||||
| Adjusted operating income | $ | 165,012 | $ | 200,255 | (17.6 | %) | ||||||
| Net Earnings (GAAP) | $ | 82,047 | $ | 157,360 | (47.9 | %) | ||||||
| Divestiture & other related costs, before tax | 45,880 | - | ||||||||||
| Tax impact of divestiture & other related costs | (2,671 | ) | - | |||||||||
| Net earnings of the product lines divested or to be divested, before tax | (1,978 | ) | (3,123 | ) | ||||||||
| Tax impact of the product lines divested or to be divested | 399 | 103 | ||||||||||
| 2017 Tax Legislation | - | (6,634 | ) | |||||||||
| Adjusted net earnings | $ | 123,677 | $ | 147,706 | (16.3 | %) | ||||||
| Diluted Earnings per Share (GAAP) | $ | 1.94 | $ | 3.70 | (47.6 | %) | ||||||
| Divestiture & other related costs, net of tax | 1.02 | - | ||||||||||
| Results of operations of the product lines divested or to be divested, net of tax | (0.04 | ) | (0.07 | ) | ||||||||
| 2017 Tax Legislation | - | (0.16 | ) | |||||||||
| Adjusted diluted earnings per share | $ | 2.92 | $ | 3.48 | (16.1 | %) | ||||||
| Twelve Months Ended December 31, 2019 | ||||||||||||||||
| Total | Foreign Exchange Rates | Adjustments(1) | Adjusted Local Currency | |||||||||||||
| Revenue | ||||||||||||||||
| Flavors & Extracts | (6.2 | %) | (1.4 | %) | (0.3 | %) | (4.5 | %) | ||||||||
| Color | (3.4 | %) | (2.7 | %) | (1.0 | %) | 0.3 | % | ||||||||
| Asia Pacific | (4.0 | %) | (0.4 | %) | 0.0 | % | (3.6 | %) | ||||||||
| Total Revenue | (4.6 | %) | (1.8 | %) | (0.7 | %) | (2.1 | %) | ||||||||
| Operating Income | ||||||||||||||||
| Flavors & Extracts | (22.3 | %) | (0.5 | %) | (0.8 | %) | (21.0 | %) | ||||||||
| Color | (10.7 | %) | (2.9 | %) | 0.1 | % | (7.9 | %) | ||||||||
| Asia Pacific | (7.1 | %) | 2.9 | % | 0.0 | % | (10.0 | %) | ||||||||
| Corporate & Other | 173.4 | % | (0.1 | %) | 168.6 | % | 4.9 | % | ||||||||
| Operating Income | (40.5 | %) | (1.6 | %) | (22.9 | %) | (16.0 | %) | ||||||||
| Diluted Earnings per Share | (47.6 | %) | (1.4 | %) | (31.8 | %) | (14.4 | %) | ||||||||
LIQUIDITY AND FINANCIAL POSITION
Financial Condition
The Company’s financial position remains strong. The Company is in compliance with its loan covenants calculated in accordance with applicable agreements as of December 31, 2020.2023. The Company expects its cash flow from operations and its existing debt capacity can be used to meet anticipated future cash requirements for operations, capital expenditures, and dividend payments, as well as potential acquisitions and stock repurchases. The Company’s contractual obligations consist primarily of operational commitments, which we expect to continue to be able to satisfy through cash generated from operations, and debt. The Company has various series of notes outstanding that mature from 2024 through 2029, with approximately $82 million coming due in 2024. The Company believes that it has the ability to refinance or repay all of its obligations through a combination of cash flow from operations, issuance of additional notes, and substantial borrowing capacity of approximately $318 million under the Company’s revolving credit facility, which matures in 2026.
As a result of our ability to manage the impact of inflation on boththrough pricing and other actions, the impact of inflation was not material to the Company’s financial position and its results of operations has been minimal and is not expected to significantly affect 2021 results.
Cash Flows from Operating Activities
Net cash provided by operating activities was $169.7 million and $12.1 million in 2023 and 2022, respectively. Operating cash flow provided the primary source of funds for operating needs, capital expenditures, and shareholder dividends. The increase in net cash provided by operating activities in 2023 was primarily due to a decrease in the cash used for inventory investments during 2023 compared to 2022 and an increase in cash provided by accounts receivable.
Cash Flows from Investing Activities
Net cash used in investing activities was $87.6 million and $98.4 million in 2023 and 2022, respectively. Capital expenditures were $87.9 million in 2023 and $79.3 million in 2022. In 2022, the Company received $2.5 million of proceeds from the divestiture of the yogurt fruit preparations product line. The Company paid $1.7 million and $21.7 million in 2023 and 2022, respectively, for the acquisition of Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. and $1.0 million in 2022 related to a purchase price holdback associated with the acquisition of Flavor Solutions, Inc.
Cash Flows from Financing Activities
Net cash used in financing activities was $82.0 million in 2023, and net cash provided by financing activities was $86.2 million in 2022. The Company had a net decrease in debt of $3.5 million in 2023 compared to a net increase in debt of $157.2 million in 2022. For the purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. The Company has paid uninterrupted quarterly cash dividends since commencing public trading of its stock in 1962. Dividends paid per share were $1.64 in 2023 and 2022. Total dividends paid were $69.2 million and $68.9 million in 2023 and 2022, respectively.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., management is required to make estimates and assumptions that have an impact on the asset, liability, revenue, and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk, and financial condition. The Company believes, given current facts and circumstances, that its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining the net realizable value of accounts receivable, inventories, and property, plant, and equipment. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas:
Revenue Recognition
The Company recognizes revenue at the transfer of control of its products to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. Revenue is recognized when control of the product is transferred to the customer, the customer is obligated to pay the Company, and the Company has no remaining obligations, which is typically at shipment. See Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in this report for additional details.
Goodwill Valuation
The Company reviews the carrying value of goodwill annually utilizing several valuation methodologies, including a discounted cash flow model. The Company completed its annual goodwill impairment test under Accounting Standards Codification (ASC) 350, Intangibles – Goodwill and Other, in the third quarter of 2020.2023. In conducting its annual test for impairment, the Company performed a qualitative assessment of its previously calculated fair values for each of its reporting units. Fair value is estimated using both a discounted cash flow analysis and an analysis of comparable company market values. If the fair value of a reporting unit exceeds its net book value, no impairment exists. The Company’s three reporting units each had goodwill recorded and were tested for impairment. All three reporting units had fair values that were above their respective net book values by at least 90%75%. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect the reporting units’ fair value and result in an impairment charge.
Income Taxes
The Company estimates its income tax expense in each of the taxing jurisdictions in which it operates. The Company is subject to a tax audit in each of these jurisdictions, which could result in changes to the estimated tax expense. The amount of these changes would vary by jurisdiction and would be recorded when probable and estimable. These changes could impact the Company’s financial statements. Management has recorded valuation allowances to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2020,2023, the Company recorded gross deferred tax assets of $118$117.4 million with an associated valuation allowance of $48$34.1 million. Examples of deferred tax assets include deductions, net operating losses, and tax credits that the Company believes will reduce its future tax payments. In assessing the future realization of these assets, management has considered future taxable income and ongoing tax planning strategies. An adjustment to the recorded valuation allowance as a result of changes in facts or circumstances could result in a significant change in the Company’s tax expense. The Company does not provide for deferred taxes on unremitted earnings of foreign subsidiaries, which are considered to be invested indefinitely.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method with the exception of certain locations of the Flavors & Extracts segment where cost is determined using a weighted average method. Net realizable value is determined on the basis of estimated realizable values. Cost includes direct materials, direct labor, and manufacturing overhead.
The Company estimates any required write-downs for inventory obsolescence by examining inventories on a quarterly basis to determine if there are any damaged items or slow movingslow-moving products in which the carrying values could exceed net realizable value. Inventory write-downs are recorded as the difference between the cost of inventory and its estimated market value. The Company recorded non-cash charges of $1.8 million and $9.8$3.1 million in 2020 and 2019, respectively,2023 in Cost of Products Sold primarily related to the yogurt fruit preparations divestiture.portfolio optimization plan. The charges reduced the carrying value of certain inventories, as they were determined to be excess. While significant judgment is involved in determining the net realizable value of inventory, the Company believes that inventory is appropriately stated at the lower of cost or net realizable value.
Commitments and Contingencies
The Company is subject to litigation and other legal proceedings arising in the ordinary course of its businesses or arising under applicable laws and regulations. Estimating liabilities and costs associated with these matters requires the judgment of management, who rely in part on information from Company legal counsel. When it is probable that the Company has incurred a liability associated with claims or pending or threatened litigation matters and the Company’s exposure is reasonably estimable, the Company records a charge against earnings. The Company recognizes related insurance reimbursement when receipt is deemed probable. The Company’s estimate of liabilities and related insurance recoveries may change as further facts and circumstances become known.
NEW PRONOUNCEMENTS
Refer to the "“Recently Adopted Accounting Pronouncements” and “Recently Issued Accounting Pronouncements”Pronouncements sections” section within Note 1, "“Summary of Significant Accounting Policies,"” in the Notes to Consolidated Financial Statements included in this report for additional details.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
The Company is exposed to market risks, including changes in interest rates, currency exchange rates, and commodity prices. Where possible, the Company nets certain of these exposures to take advantage of natural offsets. For certain remaining exposures, the Company may enter into various derivative transactions pursuant to the Company’s hedging policies. The financial impacts of these hedging instruments are offset by corresponding changes in the underlying exposures being hedged.
The Company does not hold or issue derivative financial instruments for trading purposes. Note 1 and Note 7 to the Consolidated Financial Statements include discussions of the Company’s accounting policies for financial instruments.
Because the Company manufactures and sells its products throughout the world, it is exposed to movements in foreign currency exchange rates. The major foreign currency exposures include the markets in Western Europe, Latin America, Canada, and Asia. The primary purpose of the Company’s foreign currency hedging activities is to protect against the volatility associated with foreign currency sales, purchases of materials, and other assets and liabilities created during the normal course of business. The Company generally utilizes foreign exchange contracts with durations of less than 18 months that may or may not be designated as cash flow hedges under ASC 815, Derivatives and Hedging. The net fair value of these instruments, based on dealer quotes, was an asset of $0.5$1.0 million and was a liability of $0.2 millionas of December 31, 20202023 and 20192022, respectively. At December 31, 2020,2023, the potential gain or loss in the fair value of the Company’s outstanding foreign exchange contracts, assuming a hypothetical 10% fluctuation in the currencies of such contracts, would be approximately $2.1$3.5 million. However, any change in the value of the contracts, real or hypothetical, would be significantly offset by a corresponding change in the value of the underlying hedged items. In addition, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
The Company has certain debt denominated in Euros and British Pounds. The Swiss Franc debt was extinguished in connection with the sale of the inks product line on June 30, 2020. These non-derivative debt instruments act as partial hedges of the Company’s Euro and British Pound net asset positions. The potential increase or decrease in the annual U.S. dollar equivalent interest expense of the Company’s outstanding foreign currency-denominated debt, assuming a hypothetical 10% fluctuation in the currencies of such debt, would be approximately $0.7$1.1 million at December 31, 2020.2023. However, any change in interest expense from fluctuations in currency, real or hypothetical, would be significantly offset by a corresponding change in the value of the foreign income before interest. In addition, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
The Company manages its debt structure and interest rate risk through the use of fixed rate and floating rate debt. The Company’s primary exposure is to interest rates in the U.S. and Western Europe. At December 31, 2020,2023, the potential increase or decrease in annual interest expense of floating rate debt, assuming a hypothetical 10% fluctuation in interest rates, would be immaterial.$1.0 million.
The Company is the purchaser of certain commodities, such as vanilla, corn, sugar, soybean meal, and fruits. The Company generally purchases these commodities based upon market prices that are established with the vendor as part of the purchase process. In general, the Company does not use commodity financial instruments to hedge commodity prices due to a high correlation between the commodity cost and the ultimate selling price of the Company’s products. On occasion, the Company may enter into non-cancelable forward purchase contracts, as deemed appropriate, to reduce the effect of price fluctuations on future manufacturing requirements.
| Item 8. | Financial Statements and Supplementary Data. |
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
| (In thousands except per share amounts) | 2020 | 2019 | 2018 | 2023 | 2022 | 2021 | ||||||||||||||||||
| Revenue | $ | 1,332,001 | $ | 1,322,934 | $ | 1,386,815 | $ | 1,456,450 | $ | 1,437,039 | $ | 1,380,264 | ||||||||||||
| Cost of products sold | 908,254 | 908,061 | 920,686 | 996,153 | 947,928 | 925,603 | ||||||||||||||||||
| Selling and administrative expenses | 271,091 | 293,763 | 262,751 | 305,274 | 292,360 | 284,633 | ||||||||||||||||||
| Operating income | 152,656 | 121,110 | 203,378 | 155,023 | 196,751 | 170,028 | ||||||||||||||||||
| Interest expense | 14,811 | 20,107 | 21,853 | 25,172 | 14,547 | 12,544 | ||||||||||||||||||
| Earnings before income taxes | 137,845 | 101,003 | 181,525 | 129,851 | 182,204 | 157,484 | ||||||||||||||||||
| Income taxes | 28,373 | 18,956 | 24,165 | 36,457 | 41,317 | 38,739 | ||||||||||||||||||
| Net earnings | $ | 109,472 | $ | 82,047 | $ | 157,360 | $ | 93,394 | $ | 140,887 | $ | 118,745 | ||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||
| Basic | $ | 2.59 | $ | 1.94 | $ | 3.71 | $ | 2.22 | $ | 3.36 | $ | 2.82 | ||||||||||||
| Diluted | $ | 2.59 | $ | 1.94 | $ | 3.70 | $ | 2.21 | $ | 3.34 | $ | 2.81 | ||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||||
| Basic | 42,301 | 42,263 | 42,404 | 42,027 | 41,888 | 42,077 | ||||||||||||||||||
| Diluted | 42,346 | 42,294 | 42,499 | 42,242 | 42,213 | 42,258 | ||||||||||||||||||
See notes to consolidated financial statements.
| (In thousands) | Years Ended December 31, | |||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Net earnings | $ | 109,472 | $ | 82,047 | $ | 157,360 | ||||||
| Cash flow hedges adjustment, net of tax of $524, $193 and $32, respectively | 948 | (346 | ) | 816 | ||||||||
| Pension adjustment, net of tax of $475, $409 and $347, respectively | (1,293 | ) | (1,221 | ) | 1,027 | |||||||
| Foreign currency translation on net investment hedges | (24,044 | ) | 3,091 | 13,661 | ||||||||
| Tax effect of current year activity on net investment hedges | 5,973 | (768 | ) | (3,393 | ) | |||||||
| Foreign currency translation on long-term intercompany loans | (7,731 | ) | (752 | ) | 3,276 | |||||||
| Tax effect of current year activity on intercompany long-term loans | 3,757 | (768 | ) | (2,498 | ) | |||||||
| Reclassification of cumulative translation to net earnings | (8,625 | ) | 0 | 0 | ||||||||
| Other foreign currency translation | 34,932 | 3,311 | (27,721 | ) | ||||||||
| Total comprehensive income | $ | 113,389 | $ | 84,594 | $ | 142,528 | ||||||
| Years Ended December 31, | ||||||||||||
| (In thousands) | 2023 | 2022 | 2021 | |||||||||
| Net earnings | $ | 93,394 | $ | 140,887 | $ | 118,745 | ||||||
Cash flow hedges adjustment, net of tax benefit of $(984), $(471), and $(430), respectively | 1,596 | (805 | ) | (543 | ) | |||||||
Pension adjustment, net of tax (benefit) expense of $(72), $(462), and $577, respectively | (287 | ) | (1,439 | ) | 1,612 | |||||||
| Foreign currency translation on net investment hedges | (11,378 | ) | 19,340 | 17,937 | ||||||||
| Tax effect of current year activity on net investment hedges | 2,826 | (4,804 | ) | (4,455 | ) | |||||||
| Foreign currency translation on long-term intercompany loans | (1,813 | ) | (2,468 | ) | 13,798 | |||||||
| Tax effect of current year activity on long-term intercompany loans | 1,820 | (2,408 | ) | (3,990 | ) | |||||||
| Reclassification of cumulative translation to net earnings | - | - | 10,203 | |||||||||
| Other foreign currency translation | 35,807 | (33,476 | ) | (50,099 | ) | |||||||
| Total comprehensive income | $ | 121,965 | $ | 114,827 | $ | 103,208 | ||||||
See notes to consolidated financial statements.
| (In thousands except share and per share amounts) | December 31, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 24,770 | $ | 21,153 | ||||
| Trade accounts receivable | 234,132 | 213,201 | ||||||
| Inventories | 381,346 | 422,517 | ||||||
| Prepaid expenses and other current assets | 48,578 | 40,049 | ||||||
| Assets held for sale | 52,760 | 91,293 | ||||||
| Total current assets | 741,586 | 788,213 | ||||||
| Other assets | 89,883 | 80,939 | ||||||
| Deferred tax assets | 29,678 | 14,976 | ||||||
| Intangible assets, net | 10,930 | 11,802 | ||||||
| Goodwill | 423,290 | 407,042 | ||||||
| Property, Plant, and Equipment: | ||||||||
| Land | 31,422 | 31,431 | ||||||
| Buildings | 316,533 | 298,733 | ||||||
| Machinery and equipment | 703,485 | 652,063 | ||||||
| Construction in progress | 21,759 | 24,613 | ||||||
| 1,073,199 | 1,006,840 | |||||||
| Less accumulated depreciation | (627,706 | ) | (569,661 | ) | ||||
| 445,493 | 437,179 | |||||||
| Total assets | $ | 1,740,860 | $ | 1,740,151 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Trade accounts payable | $ | 107,324 | $ | 94,653 | ||||
| Accrued salaries, wages, and withholdings from employees | 34,462 | 18,655 | ||||||
| Other accrued expenses | 42,985 | 41,429 | ||||||
| Income taxes | 4,598 | 6,841 | ||||||
| Short-term borrowings | 9,247 | 20,612 | ||||||
| Liabilities held for sale | 17,339 | 19,185 | ||||||
| Total current liabilities | 215,955 | 201,375 | ||||||
| Deferred tax liabilities | 13,411 | 15,053 | ||||||
| Other liabilities | 30,213 | 17,813 | ||||||
| Accrued employee and retiree benefits | 28,941 | 25,822 | ||||||
| Long-term debt | 518,004 | 598,499 | ||||||
| Shareholders’ Equity: | ||||||||
| Common stock, par value $0.10 a share, authorized 100,000,000 shares; issued 53,954,874 shares | 5,396 | 5,396 | ||||||
| Additional paid-in capital | 102,909 | 98,425 | ||||||
| Earnings reinvested in the business | 1,578,662 | 1,536,100 | ||||||
| Treasury stock, 11,647,627 and 11,682,636 shares, respectively, at cost | (593,540 | ) | (595,324 | ) | ||||
| Accumulated other comprehensive loss | (159,091 | ) | (163,008 | ) | ||||
| 934,336 | 881,589 | |||||||
| Total liabilities and shareholders’ equity | $ | 1,740,860 | $ | 1,740,151 | ||||
| December 31, | ||||||||
| (In thousands except share and per share amounts) | 2023 | 2022 | ||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 28,934 | $ | 20,921 | ||||
| Trade accounts receivable | 272,164 | 302,109 | ||||||
| Inventories | 598,399 | 564,110 | ||||||
| Prepaid expenses and other current assets | 37,119 | 47,640 | ||||||
| Total current assets | 936,616 | 934,780 | ||||||
| Other assets | 94,873 | 96,609 | ||||||
| Deferred tax assets | 41,564 | 32,717 | ||||||
| Intangible assets, net | 12,112 | 18,600 | ||||||
| Goodwill | 424,065 | 415,715 | ||||||
| Property, Plant, and Equipment: | ||||||||
| Land | 31,901 | 31,444 | ||||||
| Buildings | 343,594 | 322,268 | ||||||
| Machinery and equipment | 781,789 | 722,294 | ||||||
| Construction in progress | 59,091 | 65,809 | ||||||
| 1,216,375 | 1,141,815 | |||||||
| Less accumulated depreciation | (711,098 | ) | (658,622 | ) | ||||
| 505,277 | 483,193 | |||||||
| Total assets | $ | 2,014,507 | $ | 1,981,614 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Trade accounts payable | $ | 131,114 | $ | 142,365 | ||||
| Accrued salaries, wages, and withholdings from employees | 26,412 | 43,738 | ||||||
| Other accrued expenses | 52,024 | 51,231 | ||||||
| Income taxes | 13,296 | 14,446 | ||||||
| Short-term borrowings | 13,460 | 20,373 | ||||||
| Total current liabilities | 236,306 | 272,153 | ||||||
| Deferred tax liabilities | 14,260 | 15,977 | ||||||
| Other liabilities | 37,817 | 37,191 | ||||||
| Accrued employee and retiree benefits | 27,715 | 26,364 | ||||||
| Long-term debt | 645,085 | 630,331 | ||||||
| Shareholders’ Equity: | ||||||||
Common stock, par value $0.10 a share, authorized 100,000,000 shares; issued 53,954,874 shares | 5,396 | 5,396 | ||||||
Additional paid‑in capital | 115,941 | 124,043 | ||||||
| Earnings reinvested in the business | 1,726,872 | 1,702,700 | ||||||
Treasury stock, 11,885,398 and 12,058,773 shares, respectively, at cost | (622,768 | ) | (631,853 | ) | ||||
| Accumulated other comprehensive loss | (172,117 | ) | (200,688 | ) | ||||
| 1,053,324 | 999,598 | |||||||
| Total liabilities and shareholders’ equity | $ | 2,014,507 | $ | 1,981,614 | ||||
See notes to consolidated financial statements.
| (In thousands) | Years ended December 31, | |||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Cash Flows from Operating Activities | ||||||||||||
| Net earnings | $ | 109,472 | $ | 82,047 | $ | 157,360 | ||||||
| Adjustments to arrive at net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 49,641 | 55,015 | 53,244 | |||||||||
| Share-based compensation expense (income) | 5,608 | (739 | ) | 503 | ||||||||
| Net (gain) loss on assets | (252 | ) | (1,122 | ) | 63 | |||||||
| Loss on divestitures and other charges | 6,904 | 44,375 | 0 | |||||||||
| Deferred income taxes | (8,705 | ) | (19,340 | ) | 9,844 | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Trade accounts receivable | (11,357 | ) | 10,930 | (96,638 | ) | |||||||
| Inventories | 46,828 | 25,238 | (34,114 | ) | ||||||||
| Prepaid expenses and other assets | (12,868 | ) | 3,257 | (12,544 | ) | |||||||
| Trade accounts payable and other accrued expenses | 15,524 | (18,251 | ) | 7,457 | ||||||||
| Accrued salaries, wages, and withholdings from employees | 15,140 | (3,039 | ) | 599 | ||||||||
| Income taxes | 22 | (1,836 | ) | (7,335 | ) | |||||||
| Other liabilities | 2,823 | 647 | 5,081 | |||||||||
| Net cash provided by operating activities | 218,780 | 177,182 | 83,520 | |||||||||
| Cash Flows from Investing Activities | ||||||||||||
| Acquisition of property, plant, and equipment | (52,162 | ) | (39,100 | ) | (50,740 | ) | ||||||
| Cash receipts on sold receivables | 0 | 0 | 91,142 | |||||||||
| Proceeds from sale of assets | 1,075 | 2,242 | 2,615 | |||||||||
| Proceeds from divestiture of businesses | 12,595 | 0 | 0 | |||||||||
| Acquisition of new business | 0 | 0 | (31,100 | ) | ||||||||
| Other investing activities | 5,071 | (553 | ) | 2,916 | ||||||||
| Net cash (used in) provided by investing activities | (33,421 | ) | (37,411 | ) | 14,833 | |||||||
| Cash Flows from Financing Activities | ||||||||||||
| Proceeds from additional borrowings | 36,667 | 47,083 | 322,529 | |||||||||
| Debt payments | (154,348 | ) | (134,449 | ) | (284,332 | ) | ||||||
| Purchase of treasury stock | 0 | 0 | (76,734 | ) | ||||||||
| Dividends paid | (66,057 | ) | (62,190 | ) | (57,410 | ) | ||||||
| Other financing activities | (415 | ) | (1,027 | ) | (2,777 | ) | ||||||
| Net cash used in financing activities | (184,153 | ) | (150,583 | ) | (98,724 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 2,411 | 64 | 2,928 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 3,617 | (10,748 | ) | 2,557 | ||||||||
| Cash and cash equivalents at beginning of year | 21,153 | 31,901 | 29,344 | |||||||||
| Cash and cash equivalents at end of year | $ | 24,770 | $ | 21,153 | $ | 31,901 | ||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 14,751 | $ | 20,130 | $ | 21,567 | ||||||
| Income taxes | 44,755 | 40,139 | 24,089 | |||||||||
| Capitalized interest | 514 | 540 | 604 | |||||||||
| Years ended December 31, | ||||||||||||
| (In thousands) | 2023 | 2022 | 2021 | |||||||||
| Cash Flows from Operating Activities | ||||||||||||
| Net earnings | $ | 93,394 | $ | 140,887 | $ | 118,745 | ||||||
| Adjustments to arrive at net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 57,820 | 52,467 | 52,051 | |||||||||
| Share-based compensation expense | 8,933 | 16,138 | 9,573 | |||||||||
| Net loss on assets | 541 | 276 | 331 | |||||||||
| Net (gain) loss on divestitures and other charges | — | (2,532 | ) | 14,021 | ||||||||
Portfolio optimization plan costs | 24,089 | — | — | |||||||||
| Deferred income taxes | (5,100 | ) | (11,010 | ) | (6,071 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Trade accounts receivable | 35,801 | (46,086 | ) | (34,571 | ) | |||||||
| Inventories | (28,193 | ) | (159,014 | ) | (36,323 | ) | ||||||
| Prepaid expenses and other assets | 5,767 | (5,055 | ) | (6,057 | ) | |||||||
| Trade accounts payable and other accrued expenses | (5,978 | ) | 17,489 | 21,326 | ||||||||
| Accrued salaries, wages, and withholdings from employees | (17,830 | ) | 3,486 | 7,321 | ||||||||
| Income taxes | (1,175 | ) | 4,422 | 4,275 | ||||||||
| Other liabilities | 1,628 | 602 | 597 | |||||||||
| Net cash provided by operating activities | 169,697 | 12,070 | 145,218 | |||||||||
| Cash Flows from Investing Activities | ||||||||||||
| Acquisition of property, plant, and equipment | (87,868 | ) | (79,322 | ) | (60,788 | ) | ||||||
| Proceeds from sale of assets | 156 | 264 | 216 | |||||||||
| Proceeds from divestiture of businesses | - | 2,532 | 37,790 | |||||||||
| Acquisition of new businesses | (1,650 | ) | (22,714 | ) | (13,875 | ) | ||||||
| Other investing activities | 1,741 | 792 | 1,097 | |||||||||
| Net cash used in investing activities | (87,621 | ) | (98,448 | ) | (35,560 | ) | ||||||
| Cash Flows from Financing Activities | ||||||||||||
| Proceeds from additional borrowings | 351,662 | 328,597 | 112,194 | |||||||||
| Debt payments | (355,161 | ) | (171,447 | ) | (110,168 | ) | ||||||
| Purchase of treasury stock | — | — | (42,511 | ) | ||||||||
| Dividends paid | (69,222 | ) | (68,915 | ) | (66,694 | ) | ||||||
| Other financing activities | (9,278 | ) | (2,056 | ) | (582 | ) | ||||||
| Net cash (used in) provided by financing activities | (81,999 | ) | 86,179 | (107,761 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 7,936 | (4,620 | ) | (927 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 8,013 | (4,819 | ) | 970 | ||||||||
| Cash and cash equivalents at beginning of year | 20,921 | 25,740 | 24,770 | |||||||||
| Cash and cash equivalents at end of year | $ | 28,934 | $ | 20,921 | $ | 25,740 | ||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 24,443 | $ | 14,716 | $ | 12,593 | ||||||
| Income taxes | 39,681 | 48,242 | 29,224 | |||||||||
| Capitalized interest | 1,984 | 910 | 471 | |||||||||
See notes to consolidated financial statements.
| (In thousands except share and per share amounts) | Common | Additional Paid-in | Earnings Reinvested in the | Treasury Stock | Accumulated Other Comprehensive | |||||||||||||||||||
| Stock | Capital | Business | Shares | Amount | (Loss) Income | |||||||||||||||||||
| Balances at December 31, 2017 | $ | 5,396 | $ | 107,176 | $ | 1,414,485 | 10,759,291 | $ | (525,422 | ) | $ | (149,334 | ) | |||||||||||
| Net earnings | 157,360 | |||||||||||||||||||||||
| Other comprehensive loss | (14,832 | ) | ||||||||||||||||||||||
| Cash dividends paid – $1.35 per share | (57,410 | ) | ||||||||||||||||||||||
| Share-based compensation | 503 | |||||||||||||||||||||||
| Stock options exercised | (80 | ) | (4,000 | ) | 200 | |||||||||||||||||||
| Non-vested stock issued upon vesting | (5,454 | ) | (111,185 | ) | 5,454 | |||||||||||||||||||
| Benefit plans | 350 | (15,126 | ) | 769 | ||||||||||||||||||||
| Purchase of treasury stock | 1,060,000 | (76,734 | ) | |||||||||||||||||||||
| Other | (832 | ) | 1,808 | 42,243 | (2,067 | ) | (1,389 | ) | ||||||||||||||||
| Balances at December 31, 2018 | 5,396 | 101,663 | 1,516,243 | 11,731,223 | (597,800 | ) | (165,555 | ) | ||||||||||||||||
| Net earnings | 82,047 | |||||||||||||||||||||||
| Other comprehensive income | 2,547 | |||||||||||||||||||||||
| Cash dividends paid – $1.47 per share | (62,190 | ) | ||||||||||||||||||||||
| Share-based compensation | (739 | ) | ||||||||||||||||||||||
| Non-vested stock issued upon vesting | (2,343 | ) | (45,981 | ) | 2,343 | |||||||||||||||||||
| Benefit plans | 72 | (18,597 | ) | 948 | ||||||||||||||||||||
| Other | (228 | ) | 15,991 | (815 | ) | |||||||||||||||||||
| Balances at December 31, 2019 | 5,396 | 98,425 | 1,536,100 | 11,682,636 | (595,324 | ) | (163,008 | ) | ||||||||||||||||
| Net earnings | 109,472 | |||||||||||||||||||||||
| Other comprehensive income | 3,917 | |||||||||||||||||||||||
| Cash dividends paid – $1.56 per share | (66,057 | ) | ||||||||||||||||||||||
| Share-based compensation | 5,608 | |||||||||||||||||||||||
| Non-vested stock issued upon vesting | (1,352 | ) | (26,515 | ) | 1,352 | |||||||||||||||||||
| Benefit plans | 241 | (16,344 | ) | 833 | ||||||||||||||||||||
| Other | (13 | ) | (853 | ) | 7,850 | (401 | ) | |||||||||||||||||
| Balances at December 31, 2020 | $ | 5,396 | $ | 102,909 | $ | 1,578,662 | 11,647,627 | $ | (593,540 | ) | $ | (159,091 | ) | |||||||||||
(In thousands except share and per share | Common | Additional Paid-in | Earnings Reinvested in the | Treasury Stock | Accumulated Other Comprehensive | |||||||||||||||||||
| amounts) | Stock | Capital | Business | Shares | Amount | (Loss) Income | ||||||||||||||||||
| Balances at December 31, 2020 | $ | 5,396 | $ | 102,909 | $ | 1,578,662 | 11,647,627 | $ | (593,540 | ) | $ | (159,091 | ) | |||||||||||
| Net earnings | 118,745 | |||||||||||||||||||||||
| Other comprehensive loss | (15,537 | ) | ||||||||||||||||||||||
Cash dividends paid – $1.58 per share | (66,694 | ) | ||||||||||||||||||||||
| Share-based compensation | 9,573 | |||||||||||||||||||||||
| Non-vested stock issued upon vesting | (1,264 | ) | (24,711 | ) | 1,264 | |||||||||||||||||||
| Benefit plans | 338 | (14,791 | ) | 756 | ||||||||||||||||||||
| Purchase of treasury stock | 492,045 | (42,511 | ) | |||||||||||||||||||||
| Other | (204 | ) | 7,379 | (377 | ) | |||||||||||||||||||
Balances at December 31, 2021 | 5,396 | 111,352 | 1,630,713 | 12,107,549 | (634,408 | ) | (174,628 | ) | ||||||||||||||||
| Net earnings | 140,887 | |||||||||||||||||||||||
| Other comprehensive loss | (26,060 | ) | ||||||||||||||||||||||
Cash dividends paid – $1.64 per share | (68,915 | ) | ||||||||||||||||||||||
| Share-based compensation | 16,138 | |||||||||||||||||||||||
| Non-vested stock issued upon vesting | (3,239 | ) | (61,821 | ) | 3,239 | |||||||||||||||||||
| Benefit plans | 560 | (11,786 | ) | 618 | ||||||||||||||||||||
| Other | (768 | ) | 15 | 24,831 | (1,302 | ) | ||||||||||||||||||
Balances at December 31, 2022 | | 5,396 | | 124,043 | 1,702,700 | 12,058,773 | | (631,853 | ) | | (200,688 | ) | ||||||||||||
| Net earnings | 93,394 | |||||||||||||||||||||||
| Other comprehensive income | 28,571 | |||||||||||||||||||||||
Cash dividends paid – $1.64 per share | (69,222 | ) | ||||||||||||||||||||||
| Share-based compensation | 8,933 | |||||||||||||||||||||||
| Non-vested stock issued upon vesting | (14,987 | ) | (286,019 | ) | 14,987 | |||||||||||||||||||
| Benefit plans | 375 | (18,172 | ) | 952 | ||||||||||||||||||||
| Other | (2,423 | ) | 130,816 | (6,854 | ) | |||||||||||||||||||
Balances at December 31, 2023 | $ | 5,396 | $ | 115,941 | $ | 1,726,872 | 11,885,398 | $ | (622,768 | ) | $ | (172,117 | ) | |||||||||||
See notes to consolidated financial statements.
Years ended December 31, 2020, 2019,2023, 2022, and 20182021
1. Summary of Significant Accounting Policies
Nature of Operations
Sensient Technologies Corporation, together with its subsidiaries (the Company or Sensient), is a leading global manufacturer and marketer of colors, flavors, and fragrances.other specialty ingredients. The Company uses advanced technologies at facilities around the world to develop specialty food and beverage systems; cosmetic, fragrances,personal care, essential oils, pharmaceutical, and nutraceutical systems; specialty colors; and other specialty and fine chemicals. The Company’s 3three reportable segments are the Flavors & Extracts Group (formerly known as the Flavors & Fragrances segment; see Note 12, Segment and Geographic Information) and the Color Group, which are managed on a product line basis, and the Asia Pacific Group, which is managed on a geographic basis. The Company’s corporate expenses, divestiture & other related costs and income, share-based compensation, restructuring and other charges, including operational improvement plans, divestiture, share-based compensation, COVID-19 employee payment,plan costs and income and portfolio optimization plan costs, and other costs are included in the “Corporate & Other” category. In the second quarter of 2020,2021, the Company divested its inksfragrances (excluding essential oils) product line, and in the third quarter of 2020, the Company divested its yogurt fruit preparations product line.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements requires the use of management’s estimates and assumptions that affect reported amounts of assets, liabilities, revenue, and expenses during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue at the transfer of control of its products to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five-step approach:
| • | Identification of the contract, or contracts, with a customer |
| • | Identification of the performance obligations in the contract |
| • | Determination of the transaction price |
| • | Allocation of the transaction price to the performance obligations in the contract |
| • | Recognition of revenue when, or as, the Company satisfies the performance obligations |
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, coupled with the Company’s purchase order acceptances, to be the contracts with the customer. For each contract, the Company considers the identified performance obligation to be the promise to transfer products. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment and then determines the net consideration to which the Company expects to be entitled. In addition, the Company assesses the customer’s ability to pay as part of its evaluation of the contract. As the Company’s standard payment terms are less than one year, the Company elected the practical expedient under Accounting Standards Codification (ASC) 606-10-32-18, and determined that its contracts do not have a significant financing component. The Company allocates the transaction price to each distinct product based on the relative standalone selling price. Revenue is recognized when control of the product is transferred to the customer, the customer is obligated to pay the Company, and the Company has no remaining obligations, which is typically at shipment. In certain locations, primarily outside the United States, product shippingdelivery terms may vary. Thus, in such locations, the point at which control of the product transfers to the customer and revenue recognition occurs will vary accordingly.
Customer returns of non-conforming products are estimated at the time revenue is recognized. In certain customer relationships, volume rebates exist, which are recognized according to the terms and conditions of the contractual relationship. Customer returns, rebates, and discounts are not material to the Company’s consolidated financial statements. The Company has elected to recognize the revenue and cost for freight and shipping when control over the products has transferred to the customer. The Company has elected to immediately expense contract costs related to obtaining a contract as the amortization period of the asset the Company otherwise would have recognized would have been less than a year.
In addition to evaluating the Company’s performance based on the segments above, revenue is also disaggregated and analyzed by product line and geographic market (See Note 12, Segment and Geographic Information, for further information).
Cost of Products Sold
Cost of products sold includes materials, labor, and overhead expenses incurred in the manufacture of our products. Cost of products sold also includes charges for obsolete and slow-moving inventories as well as costs for quality control, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, other costs of our internal distribution network, and costs incurred for shipping and handling. The Company records fees billed to customers for shipping and handling as revenue.
Selling and Administrative Expenses
Selling and administrative expenses primarily include the salaries and related costs for executive, finance, accounting, human resources, information technology, research and development, and legal personnel as well as salaries and related costs of salespersons and commissions paid to external sales agents.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition as cash equivalents.
Accounts Receivable
Receivables are recorded at their face amount, less an allowance for losses on doubtful accounts. The allowance for doubtful accounts is based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions. Specific accounts are written off against the allowance for doubtful accounts when it is deemed that the receivable is no longer collectible.
Inventories
Inventories are stated at the lower of cost or net realizable value. Net realizable value is determined on the basis of estimated realizable values. Cost is determined using the first-in, first-out (FIFO) method with the exception of certain locations of the Flavors & Extracts Group where cost is determined using a weighted average method. Inventories include finished and in-process products totaling $268.1$437.1 million and $313.1$385.2 million at December 31, 20202023 and 2019,2022, respectively, and raw materials and supplies of $113.2$161.3 million and $109.4$178.9 million at December 31, 20202023 and 2019,2022, respectively.
The Company recorded a non-cash charge of $1.8$3.1 million and $9.8 million, in inCost of products soldProducts Sold related to the divested product lines portfolio optimization plan in 2020 and 2019, respectively.2023. The non-cash charge reduced the carrying value of certain inventories, as they were determined to be excess. See Note 14,16, DivestituresPortfolio Optimization Plan, for additional information.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost reduced by accumulated depreciation. Depreciation is provided over the estimated useful life of the related asset using the straight-line method for financial reporting. The estimated useful lives for buildings and leasehold improvements range from 5 to 40 years. Machinery and equipment have estimated useful lives ranging from 3 to 20 years. Interest costs on significant projects constructed or developed for the Company’s own use are capitalized as part of the asset.
Goodwill and Other Intangible Assets
The carrying value of goodwill is evaluated for impairment on an annual basis or more frequently when an indicator of impairment occurs. The impairment assessment includes comparing the carrying amount of net assets, including goodwill, of each reporting unit to its respective fair value as of the date of the assessment. Fair value was estimated based upon an evaluation of the reporting unit’s estimated future discounted cash flows as well as the public trading and private transaction valuation multiples for comparable companies. The Company performed such a quantitative analysis in 2019,2022, which indicated a substantial premium compared to the carrying value of net assets, including goodwill, at the reporting unit level. In 20202023 and 2018,2021, the Company completed a qualitative assessment noting no indicators of impairment. The Company did 0tnot record impairment charges for any of its reporting units in 2020, 20192023, 2022, or 2018.
The cost of intangible assets with determinable useful lives is amortized on a straight-line basis to reflect the pattern of economic benefits consumed, ranging from 5 to 2025 years. These assets include technological know-how, customer relationships, patents, trademarks, trade secrets, and non-compete agreements, among others.
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if potential impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on the difference between fair value and carrying value. Impairment losses were recorded as a result of the Company’s divestiture of its inks product line and its anticipated divestiture of its fragrances product line (excluding its essential oils product line). in 2021 and the Company’s portfolio optimization plan in 2023. See Note 14, Divestitures, and Note 16, Portfolio Optimization Plan, for additional information.
Leases
The Company enters into lease agreements for certain office space, warehouses, land, and equipment in the ordinary course of business. The Company determines if an arrangement is a lease at inception and evaluates the lease classification (i.e., operating lease or financing lease) at that time. Lease arrangements with an initial term of 12 months or less are considered short-term leases and are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the term of the lease.
Operating leases are included in Other Assets, Other Accrued Expenses, and Other Liabilities on the Company’s Consolidated Balance Sheet. Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.
The Company uses its incremental borrowing rate on the commencement date for determining the present value of lease payments. The Company considers the likelihood of exercising options to extend or terminate the lease when determining the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient of accounting for the lease and non-lease components of each lease as a single lease component.
Derivative Financial Instruments
The Company selectively uses derivative financial instruments to reduce market risk associated with changes in foreign currency and interest rate exposures, which exist as part of ongoing business operations. All derivative transactions are authorized and executed pursuant to the Company’s risk management policies and procedures, which strictly prohibit the use of financial instruments for speculative trading purposes.
The primary objectives of the foreign exchange risk management activities are to understand and mitigate the impact of potential foreign exchange fluctuations on the Company’s financial results and its economic well-being. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. These risk management transactions may involve the use of foreign currency derivatives to protect against exposure resulting from recorded accounts receivable and payable. The Company may utilize forward exchange contracts, generally with maturities of less than 18 months, which qualify as cash flow hedges. Generally, these foreign exchange contracts are intended to offset the effect of exchange rate fluctuations on non-functional currency denominated sales and purchases. For derivative instruments that are designated as cash flow hedges, gains and losses are deferred in accumulated other comprehensive incomeAccumulated Other Comprehensive Income (OCI) until the underlying transaction is recognized in earnings.
For hedges designated as cash flow hedges, the Company elects critical terms that match at the onset of the hedge transaction. Hedge accounting is permitted only if the hedge meets the critical terms match requirements. The Company reviews the critical terms at each effectiveness testing date to ensure the respective terms match; therefore, achieving a highly effective hedge.
Interest Rate Hedging
The Company is exposed to interest rate risk through its corporate borrowing activities. The objective of the Company’s interest rate risk management activities is to manage the levels of the Company’s fixed and floating interest rate exposure to be consistent with the Company’s preferred mix. The interest rate risk management program may include entering into interest rate swaps, which qualify as fair value hedges, when there is a desire to modify the Company’s exposure to interest rates. Gains or losses on fair value hedges are recognized in earnings, net of gains and losses on the fair value of the hedged instruments.
Net Investments Hedging
The Company is exposed to risk related to its net investments in foreign subsidiaries. As part of its risk management activities, the Company may enter into foreign-denominated debt to be used as a non-derivative instrument to hedge the Company’s net investment in foreign subsidiaries. The change in the fair value of debt designated as a net investment hedge is recorded in foreign currency translation in OCI.
Commodity Purchases
The Company purchases certain commodities in the normal course of business that result in physical delivery of the goods and, hence, are excluded from ASC 815, Derivatives and Hedging.
Translation of Foreign Currencies
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of foreign operations are translated into U.S. dollars at current exchange rates. Revenue and expense accounts are translated into U.S. dollars at average exchange rates prevailing during the year. Adjustments resulting from the translation of foreign accounts into U.S. dollars are recorded in foreign currency translation in OCI. Transaction gains and losses that occur as a result of transactions denominated in non-functional currencies are included in earnings and were not significant during the years ended December 31, 2020, 2019,2023, 2022, and 2018.2021.
Share-Based Compensation
Share-based compensation expense is recognized over the vesting period of each award based on the fair value of the instrument at the time of grant as summarized in Note 8, Share-Based Compensation.
Income Taxes
The Company recognizes a current tax liability or asset for the estimated taxes payable or refundable on tax returns for the current year and a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits for which the utilization of the asset is not considered likely.
Earnings Per Share
The difference between basic and diluted earnings per share (EPS) is the dilutive effect of stock options and non-vested stock. Diluted EPS assumes that non-vested stock has vested and all dilutive stock options, for which the average market price exceeds the exercise price (in-the-money), are exercised. Stock options for which the exercise price exceeds the average market price (out-of-the-money) have an anti-dilutive effect on EPS, and accordingly, are excluded from the calculation.vested.
The following table sets forth the computation of basic and diluted EPS for the years ended December 31:
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
| (In thousands except per share amounts) | 2020 | 2019 | 2018 | 2023 | 2022 | 2021 | ||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Net earnings | $ | 109,472 | $ | 82,047 | $ | 157,360 | $ | 93,394 | $ | 140,887 | $ | 118,745 | ||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Denominator for basic EPS - weighted average common shares | 42,301 | 42,263 | 42,404 | 42,027 | 41,888 | 42,077 | ||||||||||||||||||
| Effect of dilutive securities | 45 | 31 | 95 | 215 | 325 | 181 | ||||||||||||||||||
| Denominator for diluted EPS - diluted weighted average shares outstanding | 42,346 | 42,294 | 42,499 | 42,242 | 42,213 | 42,258 | ||||||||||||||||||
| Earnings per Common Share | ||||||||||||||||||||||||
| Earnings per Common Share: | ||||||||||||||||||||||||
| Basic | $ | 2.59 | $ | 1.94 | $ | 3.71 | $ | 2.22 | $ | 3.36 | $ | 2.82 | ||||||||||||
| Diluted | $ | 2.59 | $ | 1.94 | $ | 3.70 | $ | 2.21 | $ | 3.34 | $ | 2.81 | ||||||||||||
The Company has a share-based compensation plan under which employees may be granted share-based awards in which non-forfeitable dividends are paid on non-vested shares for certain awards. As such, these shares are considered participating securities under the two-class method of calculating EPS as described in ASC 260, Earnings per Share. The two-class method of calculating EPS did not have a material impact on the Company’s EPS calculations as of December 31, 2020, 2019,2023, 2022, and 2018.2021.
Accumulated Other Comprehensive Income (Loss)
Accumulated OCI is composed primarily of foreign currency translation, pension liability, and unrealized gains or losses on cash flow hedges. See Note 10, Accumulated Other Comprehensive Income, for additional information.
Research and Development
Research and development costs are recorded in Selling and Administrative Expenses in the year they are incurred. Research and development costs were $38.548.1 million, $40.142.2 million, and $43.034.3 million, during the years ended December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively.
Advertising
Advertising costs are recorded in Selling and Administrative Expenses as they are incurred. Advertising costs were $2.02.5 million, $2.21.9 million, and $2.5$2.4 million, during the years ended December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively.
Environmental Liabilities
The Company records liabilities related to environmental remediation obligations when estimated future expenditures are probable and reasonably estimable. Such accruals are adjusted as further information becomes available or as circumstances change. Estimated future expenditures are discounted to their present value when the timing and amount of future cash flows are fixed and readily determinable. Recoveries of remediation costs from other parties, if any, are recognized as assets when their receipt is realizable.
Subsequent Events
The Company performed an evaluation of subsequent events through the date these financial statements were issued. See Note 17,18, Subsequent Event, for additional information.
Recently AdoptedIssued Accounting Pronouncements
In June 2016,November 2023, the Financial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2016-13,2023-07, Financial Instruments - Credit LossesSegment Reporting (Topic 326)280): Measurement of Credit Losses on Financial InstrumentsImprovements to Reportable Segment Disclosures, which replaces the incurred loss impairment model with a methodology that reflects expected credit losses. Under the new standard,requires public entities are required to measure expected credit losses on financial instruments held at amortized cost, including trade receivables, based on historical experience, current conditions, and reasonable forecasts. The Company adopted this standard in the first quarterprovide disclosures of 2020. The adoption of this standard resulted in an increase of $0.9 million to the allowance for losses on Trade Accounts Receivable and a corresponding decrease in Earnings Reinvested in the Business as of January 1, 2020. The adoption of this standard did not have an impact on the Company’s Consolidated Statements of Earnings or to cash provided by or used in operating, financing, or investing activities on the Company’s Consolidated Statements of Cash Flows.
Other recently issued accounting pronouncements are not expected to have a material impact on the Company'sCompany’s consolidated financial statements.
2. Acquisitions
On March 9, 2018,July 15, 2021, the Company completedacquired substantially all of the acquisitionassets of certain net assets and the natural color business of Flavor Solutions, Inc.GlobeNatural, a company basedflavors business located in Lima, Peru.New Jersey. The Company paid $10.8 million of cashpurchase price for this acquisition.acquisition was $14.9 million in cash. The assets acquired and liabilities assumed were recorded at their estimated fair valuesvalue as of the acquisition date. The Company acquired net assets of $1.4$0.4 million and identified intangible assets, principally customer relationships, of $2.0$5.0 million. The remaining $9.5 million andwas allocated the remaining $7.4 million to goodwill. These operations are included inThis business is part of the ColorFlavors & Extracts segment.
On July 10, 2018,October 3, 2022, the Company completed the acquisition of acquired Endemix Doğal Maddeler A.Ş. and Mazza Innovation Limited (Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş.now known as Sensient Natural Extraction Inc.) (collectively, Endemix), a botanical extractionnatural colors business with patented solvent-free extraction processes, located in Vancouver, Canada.Turkey. The Company paid $19.8$23.3 million ofin cash for this acquisition.acquisition, which is net of $1.3 million in debt assumed. The assets acquired and liabilities assumed were recorded at their estimated fair valuesvalue as of the acquisition date. The Company acquired net assets of $4.0$9.0 million and identified intangible assets, principally technological know-how and customer relationships, of $6.9$4.9 million. The remaining $8.9$9.4 million was allocated to goodwill. These operations are included inThis business is part of the Color segment.
3. Trade Accounts Receivable
Trade accounts receivables are recorded at their face amount, less an allowance for expected losses on doubtful accounts. The allowance for doubtful accounts is calculated based on customer-specific analysis and an aging methodology using historical loss information. The Company believes historical loss information is a reasonable basis for expected credit losses as the Company’s historical credit loss experience correlates with its customer delinquency status. This information is also adjusted for any known current economic conditions, including the current and expected impact of COVID-19. Currently, the COVID-19 pandemic has not had and is not anticipated to have a material impact on trade accounts receivable.conditions. Forecasted economic conditions have not had a significant impact on the current credit loss estimate due to the short-term nature of the Company’s customer receivables,receivables; however, the Company will continue to monitor and evaluate the rapidly changing economic conditions. Additionally, as the Company only has 1one portfolio segment, there are not different risks between portfolios. Specific accounts are written off against the allowance for doubtful accounts when the receivable is deemed no longer collectible.
The following table summarizes the changes in the allowance for doubtful accounts duringfor the yearyears ended December 31, 2020:2023 and 2022:
| (In thousands) | Allowance for Doubtful Accounts | Allowance for Doubtful Accounts | ||||||
| Balance at December 31, 2019 | $ | 6,913 | ||||||
| Adoption of ASU 2016-13 | 853 | |||||||
Balance at December 31, 2021 | $ | 4,877 | ||||||
| Provision for expected credit losses | 565 | 944 | ||||||
| Accounts written off | (1,590 | ) | (1,305 | ) | ||||
| Divestitures | (2,174 | ) | ||||||
| Translation and other activity | (676 | ) | (80 | ) | ||||
| Balance at December 31, 2020 | $ | 3,891 | ||||||
Balance at December 31, 2022 | $ | 4,436 | ||||||
| Provision for expected credit losses | 1,020 | |||||||
| Accounts written off | (1,279 | ) | ||||||
| Translation and other activity | ||||||||
| Balance at December 31, 2023 | $ | 4,373 | ||||||
39
4. Goodwill and Intangible Assets
At December 31, 20202023 and 2019,2022, goodwill is the only intangible asset that is not subject to amortization. The following table summarizes intangible assets with determinable useful lives by major category as of December 31, 20202023 and 2019:2022:
| 2020 | 2019 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| (In thousands except weighted average amortization years) | Weighted Average Amortization Years | Cost | Accumulated Amortization | Cost | Accumulated Amortization | Weighted Average Amortization Years | Cost | Accumulated Amortization | Cost | Accumulated Amortization | ||||||||||||||||||||||||||||||
| Technological know-how | 17.8 | $ | 7,570 | $ | (1,787 | ) | $ | 7,570 | $ | (1,391 | ) | 12.6 | $ | 7,452 | $ | (4,412 | ) | $ | 12,005 | $ | (3,383 | ) | ||||||||||||||||||
| Customer relationships | 13.4 | 3,401 | (1,898 | ) | 3,474 | (1,653 | ) | 19.0 | 9,689 | (3,242 | ) | 9,697 | (2,691 | ) | ||||||||||||||||||||||||||
| Patents, trademarks, non-compete agreements, and other | 15.2 | 10,925 | (7,281 | ) | 10,496 | (6,694 | ) | 15.4 | 12,147 | (9,522 | ) | 11,596 | (8,624 | ) | ||||||||||||||||||||||||||
| Total finite-lived intangibles | 15.8 | $ | 21,896 | $ | (10,966 | ) | $ | 21,540 | $ | (9,738 | ) | 15.9 | $ | 29,288 | $ | (17,176 | ) | $ | 33,298 | $ | (14,698 | ) | ||||||||||||||||||
Amortization of intangible assets was $1.5 million in 2020, $2.9 million in 2019, and $2.3 million in 2018.2023, $2.0 million in 2022, and $1.8 million in 2021. Estimated amortization expense, for the five years subsequent to December 31, 2020,2023, is $1.5$1.9 million in 2021 and 2022; $1.32024; $1.9 million in 2023; and $1.12025; $1.7 million in 20242026; $1.3 million in 2027; and 2025.$1.2 million in 2028.
The changes in goodwill for the years ended December 31, 20202023 and 2019,2022, by reportable business segment, were as follows:
| (In thousands) | Flavors & Extracts | Color | Asia Pacific | Consolidated | ||||||||||||
| Balance as of December 31, 2018 | $ | 112,086 | $ | 298,908 | $ | 5,181 | $ | 416,175 | ||||||||
| Currency translation impact | (184 | ) | (641 | ) | 77 | (748 | ) | |||||||||
Goodwill related to divestitures(1) | (3,754 | ) | (4,631 | ) | 0 | (8,385 | ) | |||||||||
| Balance as of December 31, 2019 | $ | 108,148 | $ | 293,636 | $ | 5,258 | $ | 407,042 | ||||||||
| Currency translation impact | 3,565 | 10,086 | 399 | 14,050 | ||||||||||||
Goodwill related to divestitures(2) | 657 | 1,541 | 0 | 2,198 | ||||||||||||
| Balance as of December 31, 2020 | $ | 112,370 | $ | 305,263 | $ | 5,657 | $ | 423,290 | ||||||||
| (In thousands) | Flavors & Extracts | Color | Asia Pacific | Consolidated | ||||||||||||
Balance as of December 31, 2021 | $ | 103,716 | $ | 311,264 | $ | 5,054 | $ | 420,034 | ||||||||
| Currency translation impact | (2,796 | ) | (10,625 | ) | (338 | ) | (13,759 | ) | ||||||||
Acquisitions(1) | — | 9,440 | — | 9,440 | ||||||||||||
Balance as of December 31, 2022 | $ | 100,920 | $ | 310,079 | $ | 4,716 | $ | 415,715 | ||||||||
| Currency translation impact | 2,393 | 6,102 | (145 | ) | 8,350 | |||||||||||
Balance as of December 31, 2023 | $ | 103,313 | $ | 316,181 | $ | 4,571 | $ | 424,065 | ||||||||
| (1) | In |
5. Leases
The Company leases certain office space, warehouses, land, and equipment under operating lease arrangements. Some of the Company’s leases include options to extend the leases for up to an additional five years. Some of the Company’s lease agreements also include rental payments that are adjusted periodically for inflation (i.e., CPI index).
The Company recorded operating lease expense, which includes short-term lease expense and variable lease costs, of $11.9 million, $10.611.3 million, and $11.2$9.6 million during the years ended December 31, 20202023, 2022, and 2019,2021, respectively. Rent expense totaled $13.5 million during the year ended December 31,2018.
For the years ended December 31, 20202023, 2022, and 2019,2021, the Company paid $10.3 million,$9.29.3 million, and $9.98.2 million, respectively, in cash for operating leases, not including short-term lease expense or variable lease costs. The Company entered into operating leases that resulted in $9.0 million,$13.017.2 million, and $7.19.8 million of right-of-use assets in exchange for operating lease obligations for the years ended December 31,2020 2023, 2022, and 2019,2021, respectively.
The Company included $23.3 million and $16.8included $36.3 million of right-of-use assets in Other assetsAssets, $6.0 million and $7.2$28.0 million of operating lease liabilities in Other accrued expenses, $17.5 million and $9.9 million of operating lease liabilities in Other liabilitiesLiabilities, on the Company’s Consolidated Balance Sheets as of Decemberboth December 31, 20202023 and 2019, respectively.2022. The Company included $1.8$8.6 million and $8.2 million of operating lease liabilities in Assets held for saleOther Accrued Expenses and $1.8 million in Liabilities held for sale on the Company’s Consolidated Balance Sheets as of DecemberDecember 31, 2019.2023 and 2022, respectively.
The Company’s weighted average remaining operating lease term was 6.37.6 years as of December 31, 2020.2023. The Company’s weighted average discount rate for operating leases was 4.5%4.17% as of December 31, 2020.2023.
As of December 31, 2020,2023, maturities of operating lease liabilities for future annual periods are as follows:
(In thousands) | ||||
Year ending December 31, | ||||
| 2021 | $ | 6,861 | ||
| 2022 | 4,762 | |||
| 2023 | 3,436 | |||
| 2024 | 2,500 | |||
| 2025 | 1,945 | |||
| Thereafter | 7,850 | |||
| Total lease payments | 27,354 | |||
| Less imputed interest | (3,806 | ) | ||
| Present value of lease liabilities | $ | 23,548 | ||
(In thousands) | ||||
Year ending December 31, | ||||
| 2024 | $ | 10,023 | ||
| 2025 | 6,207 | |||
| 2026 | 4,801 | |||
| 2027 | 4,151 | |||
| 2028 | 3,236 | |||
| Thereafter | 14,932 | |||
| Total lease payments | 43,350 | |||
| Less imputed interest | (6,762 | ) | ||
| Present value of lease liabilities | $ | 36,588 | ||
6. Debt
Long-term Debt
Long-term debt consisted of the following unsecured obligations at December 31:
| (In thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
3.66% senior notes due November 2023 | $ | 75,000 | $ | 75,000 | ||||||||||||
3.65% senior notes due May 2024 | 27,000 | 27,000 | ||||||||||||||
4.19% senior notes due November 2025 | 25,000 | 25,000 | ||||||||||||||
1.85% Euro-denominated senior notes due November 2022 | 81,672 | 74,968 | ||||||||||||||
3.06% Euro-denominated senior notes due November 2023 | 46,722 | 42,887 | ||||||||||||||
1.27% Euro-denominated senior notes due May 2024 | 61,080 | 56,066 | ||||||||||||||
1.71% Euro-denominated senior notes due May 2027 | 48,864 | 44,853 | ||||||||||||||
2.53% British Pound-denominated notes due November 2023 | 34,176 | 33,143 | ||||||||||||||
2.76% British Pound-denominated notes due November 2025 | 34,176 | 33,143 | ||||||||||||||
| Term loan | 8,375 | 51,438 | ||||||||||||||
3.66% senior notes due November 2023 | $ | - | $ | 75,000 | ||||||||||||
3.65% senior notes due May 2024 | 27,000 | 27,000 | ||||||||||||||
4.19% senior notes due November 2025 | 25,000 | 25,000 | ||||||||||||||
| 6.08% senior notes due November 2026 | 35,000 | - | ||||||||||||||
| 6.14% senior notes due November 2027 | 35,000 | - | ||||||||||||||
| 4.94% senior notes due May 2028 | 75,000 | - | ||||||||||||||
| 6.34% senior notes due November 2029 | 35,000 | - | ||||||||||||||
3.06% Euro-denominated senior notes due November 2023 | - | 40,945 | ||||||||||||||
1.27% Euro-denominated senior notes due May 2024 | 55,194 | 53,527 | ||||||||||||||
1.71% Euro-denominated senior notes due May 2027 | 44,155 | 42,822 | ||||||||||||||
| 4.15% Euro-denominated senior notes due May 2028 | 44,155 | - | ||||||||||||||
| 4.62% Euro-denominated senior notes due November 2029 | 44,155 | - | ||||||||||||||
2.53% British Pound-denominated notes due November 2023 | - | 30,208 | ||||||||||||||
2.76% British Pound-denominated notes due November 2025 | 31,827 | 30,208 | ||||||||||||||
| Euro-denominated term loan | 82,790 | 80,291 | ||||||||||||||
| Revolving Credit Facilities | 83,324 | 134,393 | 111,039 | 225,469 | ||||||||||||
| Various other notes | 1,647 | 783 | 117 | 622 | ||||||||||||
| Total debt | 527,036 | 598,674 | 645,432 | 631,092 | ||||||||||||
| Less debt fees | (143 | ) | (175 | ) | (230 | ) | (260 | ) | ||||||||
| Less current portion | (8,889 | ) | 0 | (117 | ) | (501 | ) | |||||||||
| Total long-term debt | $ | 518,004 | $ | 598,499 | $ | 645,085 | $ | 630,331 | ||||||||
In October 2019,November 2022, the Company entered into a €75 million unsecured term loan (Term Loan) with PNC Bank, N.A (PNC Bank) that matures in November 2024. The Company immediately borrowed the full amount of the Term Loan and used the proceeds to repay the €66.9 million 1.85% senior note that came due in November 2022 and a portion of outstanding borrowings on the Company’s revolving credit facility. The term loan will act as a partial hedge of the Company’s net asset position in Euros. See Note 7, Derivative Instruments and Hedging Activity, for additional information. Borrowings on the Term Loan bear interest at a variable rate, based upon the Eurocurrency Rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. The average interest rate on the Term Loan was 4.49% for the year ended December 31, 2023.
In December 2022, the Company amended the amended and restated credit agreement (Credit Agreement) to, among other things, transition from the London Inter-Bank Offered Rate to: (i) the Secured Overnight Financing Rate (SOFR) as the benchmark rate under the Credit Agreement for borrowings denominated in U.S. dollars and (ii) the Euro Interbank Offered Rate for borrowings denominated in Euros. Borrowings under the revolving credit facility bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below.
The borrowings under the revolving credit facility, excluding borrowings on the accounts receivable securitization program, had an average interest rate of 5.74% and 3.01% for the years ended December 31, 2023 and 2022, respectively.
In May 2023, the Company entered into an agreement to issue $75 million and €40 million in five-year, fixed-rate, senior notes at coupon rates of 4.94% and 4.15%, respectively. The notes were issued in May 2023, and the proceeds were used to repay a portion of existing indebtedness under the Company’s Credit Agreement. The notes will mature in May 2028.
In August 2023, the Company amended its accounts receivable securitization program with Wells Fargo Bank N.A. (Wells Fargo) to reduceextend the program amounttermination date from $August 202370 million to $August 202465 million.. Under the amended program, Wells Fargo has extended a secured loan (Secured Loan) of up to $65$85 million to the Company secured by Wells Fargo’s undivided interests in certain of the Company’s trade accounts receivables. The $65 million facility was renewed in October 2020. The interest rate on the Secured Loan is LIBORthe SOFR as administered by the Federal Reserve Bank of New York plus 1.00%.a 10 basis point Term SOFR Adjustment plus an Applicable Margin of 70 basis points. The Company has the intent and ability either to repayrefinance the Secured Loan with available funds from the Company’s existing long-term revolving credit facility or to extend its accounts receivable program with Wells Fargo when it matures. Accordingly, the Secured Loan has been classified as long-term debt on the Company’s Consolidated Balance Sheet and is included with the Revolving Credit Facilities above. As of December 31, 2020,2023, the amount was fully drawn.
In May 2017,November 2023, the Company executed an amended and restated creditentered into a fixed rate, senior note purchase agreement with a syndicatethe purchasers named therein pursuant to which the Company issued $105 million of banks to, among other things, (a) increase Sensient’s term loan facility by $U.S. dollar-denominated senior notes and 30€40 million (from $115of Euro-denominated senior notes. The three U.S. dollar-denominated notes were issued for $35 million to $145 million), (b) extend the maturity of Sensient’s $350 million multi-currency revolving credit facility from each, maturing in November 20202026, to November 2027May 2022, and (c) modify certain other provisionsNovember 2029, and bearing interest rates of the credit agreement as set forth therein. At December 31, 2020, the Company’s term loan borrowings total $8.46.08%, 6.14%, and 6.34%, respectively. The Euro-denominated note was issued for €40 million, with repayments completingmaturing in 2021. Borrowings under both the revolving creditNovember 2029 and term loan facilities bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below.
The aggregate amounts of contractual maturities on long-term debt subsequent to December 31, 2020,2023, are as follows:
(In thousands) | ||||||||
Year ending December 31, | ||||||||
| 2021 | $ | 73,892 | ||||||
| 2022 | 100,481 | |||||||
| 2023 | 156,414 | |||||||
| 2024 | 88,210 | $ | 249,849 | |||||
| 2025 | 59,176 | 56,795 | ||||||
| 2026 | 61,013 | |||||||
| 2027 | 79,135 | |||||||
| 2028 | 119,144 | |||||||
| Thereafter | 48,863 | 79,149 | ||||||
| Total long-term debt maturities | $ | 527,036 | $ | 645,085 | ||||
The Company had $329.0$317.8 million available under the revolving credit facility and $45.8$32.2 million available under other lines of credit from several banks at December 31, 2020.2023.
Substantially all of the senior financing obligations contain restrictions concerning interest coverage, borrowings, and investments. The most restrictive loan covenants require a Leverage Ratio less than 3.5 and an Interest Coverage Ratio greater than 3.0, in each case, as defined in the Company’s Credit Agreement. The Company is in compliance with all of these restrictions at December 31, 2020. The following table summarizes the Company’s most restrictive loan covenants calculated in accordance with the applicable agreements as of December 31, 2020:
2023.
The Company had stand-by and trade letters of credit outstanding of $2.7$6.2 million and $2.6$2.8 million as of December 31, 20202023 and 2019,2022, respectively.
Short-term Borrowings
The Company’s short-term borrowings consisted of the following items at December 31:
| (In thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
| U.S. credit facilities | $ | 138 | $ | 20,280 | $ | 13,343 | $ | 19,872 | ||||||||
| Current maturities of long-term debt | 8,889 | 0 | 117 | 501 | ||||||||||||
| Loans of foreign subsidiaries | 220 | 332 | ||||||||||||||
| Total | $ | 9,247 | $ | 20,612 | $ | 13,460 | $ | 20,373 | ||||||||
The weighted average interest rates on short-term borrowings were 1.36%6.58% and 2.53%5.47% at December 31, 20202023 and 2019,2022, respectively.
7. Derivative Instruments and Hedging Activity
The Company may use derivative instruments for the purpose of hedging currency, commodity, and interest rate exposures, which exist as part of ongoing business operations. As a policy, the Company does not engage in speculative or leveraged transactions nor does the Company hold or issue financial instruments for trading purposes. Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged transaction. Hedge accounting, which generally results in the deferral of derivative gains and losses until such time as the underlying transaction is recognized in net earnings, is permitted only if the hedging relationship is expected to be highly effective at the inception of the transaction and on an ongoing basis.
The Company manages its exposure to foreign exchange risk by the use of forward exchange contracts to reduce the effect of fluctuating foreign currencies on non-functional currency sales, purchases, and other known foreign currency exposures. These forward exchange contracts generally have maturities of less than 18 months. The Company also uses certain debt denominated in foreign currencies to manage the net asset positions of the Company’s foreign subsidiaries. The Company’s primary hedging activities and their accounting treatment are summarized below.
Forward Exchange Contracts
Certain forward exchange contracts have been designated as cash flow hedges. The Company had $54.1$58.4 million and $59.9$70.1 million of forward exchange contracts, designated as cash flow hedges, outstanding as of December 31, 20202023 and 2019,2022, respectively. For the yearyears ended December 31, 2020, losses2023, 2022, and 2021, gains of $2.2 million, $1.0 million, and $1.3 million, respectively, were reclassified into net earnings in the Company’s Consolidated Statement of Earnings that offset the earnings impact of the related non-functional asset or liability hedged in the same period. For the years ended December 31, 2019 and 2018, the amounts reclassified into net earnings in the Company’s Consolidated Statement of Earnings that offset the earnings impact of the related non-functional asset or liability hedged in the same period were not material. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges and the results of these transactions are not material to the financial statements.
Net Investment Hedges
The Company has designated certain foreign currency denominated long-term borrowings as partial hedges of the Company’s foreign currency net asset positions. As of December 31, 2020,2023 and 2022, the total value of the Company’s net investment hedges was $325.0 million.$313.3 million and $315.5 million, respectively. These net investment hedges includedinclude Euro and British Pound denominated long-term debt. As of December 31, 2019, the total value of the Company’s net investment hedges was $363.4 million. These net investment hedges then included Euro, Swiss Franc, and British Pound denominated long-term debt. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in OCI. The impact of foreign exchange rates on these debt instruments has increased debt by $24.0$11.4 million and decreased debt by $3.1$19.3 million for the years ended December 31, 20202023 and 2019,2022, respectively, which has beenand are recorded as foreign currency translation in OCI. For the years ended December 31, 2023 and 2022, there was no reclassification of OCI with respect to net investment hedges into net earnings. For the year ended December 31, 2020,2021, losses of $10.8$4.2 million were reclassified into net earnings in the Company’s Consolidated Statement of Earnings that offset the underlying transactions’ impact on earnings in the same period. TheseIn 2021, the losses were primarily associated with the partial termination of the net investment hedge related to the Swiss FrancEuro debt that was terminated in connection with the sale of the inksfragrances product line, including the SwissSpanish legal entity, on June 30, 2020.entity. See Note 14, Divestitures, for additional information. There were no amounts reclassified into net earnings for the years ended December 31, 2019 and 2018.
Concentrations of Credit Risk
Counterparties to forward exchange contracts consist of large international financial institutions. While these counterparties may expose the Company to potential losses due to the credit risk of non-performance, losses are not anticipated. Concentrations of credit risk with respect to trade accounts receivable are limited by the large number of customers, generally short payment terms, and their dispersion across geographic areas.
8. Share-Based Compensation
The Company has varioustraditionally maintained separate stock plans for non-employee directors, the 2012 Non-Employee Directors Stock Plan, and employees, the 2017 Stock Plan, under which employeesdirectors and directorsemployees may be granted non-vested stock whichthat vests over a specific time period.time-period. In April 2017, the shareholders of the Company approved the 2017 Stock Plan authorizing 1.8 million shares for issuance as non-vested stock in the form of restricted stock, restricted stock units, performance stock units, non-qualified stock options, incentive stock options, and stock appreciation rights. In April 2022, the shareholders of the Company approved an Amended and Restated 2017 Stock Plan. The Amended and Restated 2017 Stock Plan incorporates substantially all of the key terms of the Company’s 2012 Non-Employee Directors Stock Plan into the Company’s existing 2017 Stock Plan, creating one omnibus plan covering the Company’s non-employee directors, officers, and key employees. The total number of shares of common stock reserved for issuance under the Amended and Restated 2017 Stock Plan increased by 350 thousand shares (from 1.8 million to 2.15 million in aggregate), plus any cancellations of shares issued under the Amended and Restated 2017 Stock Plan. As of December 31, 2020,2023, there were 1.21.0 million shares available to issue as non-vested stock under the Company’s existingAmended and Restated 2017 Stock Plan.The Company may also issue up to 0.2 million shares of stock plans.pursuant to its 1999 Amended and Restated Directors Deferred Compensation Plan.
The Company recognizes expense for shares of non-vested stock over the a three-year vesting period with a pro-rata vesting upon retirement. Beginning with awards granted in December 2013, the vesting period is three years. During the period of restriction, the holder of non-vested stock has voting rights and is entitled to receive all dividends and other distributions paid with respect to the stock. The holders of the performance stock units are not entitled to vote or receive dividends and other distributions paid with respect to the stock, until the units have vested and shares of stock issued.
Grants issued after December 2013 and before December 2020 to elected officers consist of 100% performance stock unit awards. These awards are based on a three-year performance period and a three-year vesting period with a pro-rata vesting upon retirement. Three-year performance that exceeds the stated performance metrics would result in an award up to 150% of the original grant, except for the grant issued in December 2019, which would result in an award up to 200% of the original grant for three-year performance that exceedsgrant. Starting with the stated performance metrics. The December 2020 grant, consistsgrants issued to elected officers consist of 60% performance stock unit awards (as described above) and 40% non-vested restricted stock awards. The December 2020 performance stock unit awards are based on a three-year performance period and a three-year vesting period with a pro-rata vesting upon retirement. Three-year performance that exceeds the stated performance metrics would result in an award up to 200% of the original grant. The December 2020 non-vested restricted stock awards granted are based on a three-year vesting period with a pro-rata vesting upon retirement.
The Company expenses awards for non-vested stock, including time-vesting stock and performance stock units, based on the fair value of the Company’s common stock at the date of the grant.
The December 2019 performance stock unit awards, which were based on the three-year performance period of January 1, 2020 to December 31, 2022, exceeded the stated performance metrics, which resulted in an award payout of 200% of the original grant upon vesting in February 2023.
The following table summarizes the non-vested stock and performance stock unit activity:
(In thousands except fair value) | Shares | Grant Date Weighted Average Fair Value | Aggregate Intrinsic Value | Shares | Grant Date Weighted Average Fair Value | Aggregate Intrinsic Value | ||||||||||||||||||
| Outstanding at December 31, 2017 | 412 | $ | 65.64 | $ | 30,113 | |||||||||||||||||||
Outstanding at December 31, 2020 | 451 | $ | 63.28 | $ | 33,283 | |||||||||||||||||||
| Granted | 142 | 59.45 | 129 | 90.10 | ||||||||||||||||||||
| Vested | (111 | ) | 56.91 | (25 | ) | 61.91 | ||||||||||||||||||
| Cancelled | (63 | ) | 64.71 | (73 | ) | 72.37 | ||||||||||||||||||
| Outstanding at December 31, 2018 | 380 | 66.02 | 21,239 | |||||||||||||||||||||
Outstanding at December 31, 2021 | 482 | | 69.15 | 48,271 | ||||||||||||||||||||
| Granted | 134 | 60.04 | 168 | 73.52 | ||||||||||||||||||||
| Vested | (46 | ) | 63.61 | (62 | ) | 58.81 | ||||||||||||||||||
| Cancelled | (64 | ) | 62.39 | (69 | ) | 58.62 | ||||||||||||||||||
| Outstanding at December 31, 2019 | 404 | 64.89 | 26,710 | |||||||||||||||||||||
Outstanding at December 31, 2022 | 519 | | 73.19 | | 37,883 | |||||||||||||||||||
| Granted | 142 | 65.61 | 201 | 61.61 | ||||||||||||||||||||
| Vested | (27 | ) | 74.21 | |||||||||||||||||||||
| Vested, net | (179 | ) | 63.02 | |||||||||||||||||||||
| Cancelled | (68 | ) | 73.39 | (5 | ) | 72.45 | ||||||||||||||||||
| Outstanding at December 31, 2020 | 451 | $ | 63.28 | $ | 33,283 | |||||||||||||||||||
Outstanding at December 31, 2023 | 536 | $ | 72.26 | $ | 35,383 | |||||||||||||||||||
The total intrinsic values of shares vested during 2020, 2019,2023, 2022, and 2018,2021, was $1.4$20.3 million, $3.0$5.1 million, and $7.7$1.9 million, respectively.
As of December 31, 2020,2023, total remaining unearned compensation, net of expected forfeitures, related to non-vested stock and performance stock units was $16.6$20.9 million, which will be amortized over the weighted average remaining service period of 2.342.2 years.
Total pre-tax share-based compensation expense (income) recognized in the Consolidated Statements of Earnings was $5.6$8.9 million, ($0.7)$16.1 million, and $0.5$9.6 million in 2020, 2019,2023, 2022, and 2018,2021, respectively. The Company also recognized tax related benefits (expense) of $0.8$1.1 million, ($0.2)$1.2 million, and ($0.3)$1.0 million in 2020, 2019,2023, 2022, and 2018,2021, respectively.During the year ended December 31, 2019, the Company determined that it was not probable that it would meet the stated performance metrics related to certain performance-based awards resulting in an adjustment of share-based compensation of $3.6 million.
9. Retirement Plans
The Company provides benefits under defined contribution plans including a savings plan and an employee stock ownership plan (ESOP). The savings plan covers substantially all domestic salaried and certain non-union hourly employees and provides for matching contributions up to 4% of each employee’s salary. The ESOP covers substantially all domestic employees and provides for contributions based on a percentage of each employee’s compensation as determined by the Company’s Board of Directors. Total expense for the Company’s defined contribution plans was $6.1$8.2 million in 2020 and $6.02023, $7.8 million in 20192022, and 2018.$6.7 million in 2021.
Although the Company intends for these defined contribution plans to be the primary retirement benefit for most employees, the Company also has several defined benefit plans. The funded status of the defined benefit plans was as follows at December 31:
| (In thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
| Benefit obligation at beginning of year | $ | 39,421 | $ | 34,152 | $ | 32,367 | $ | 41,780 | ||||||||
| Service cost | 1,601 | 1,432 | 1,741 | 1,622 | ||||||||||||
| Interest cost | 1,022 | 1,273 | 1,886 | 953 | ||||||||||||
| Foreign currency exchange rate changes | 690 | 558 | 999 | (1,488 | ) | |||||||||||
| Benefits paid | (1,948 | ) | (1,899 | ) | ||||||||||||
| Amendments | 42 | 0 | ||||||||||||||
| Actuarial loss | 4,803 | 3,905 | ||||||||||||||
| Benefits and settlements paid | (2,737 | ) | (1,724 | ) | ||||||||||||
| Actuarial loss (gain) | 2,157 | (8,776 | ) | |||||||||||||
| Benefit obligation at end of year | 45,631 | 39,421 | 36,413 | 32,367 | ||||||||||||
| Plan assets at beginning of year | 31,776 | 28,299 | 19,929 | 32,982 | ||||||||||||
| Company contributions | 1,117 | 1,086 | 1,598 | 1,027 | ||||||||||||
| Foreign currency exchange rate changes | 882 | 968 | 920 | (2,430 | ) | |||||||||||
| Benefits paid | (1,948 | ) | (1,899 | ) | (2,737 | ) | (1,724 | ) | ||||||||
| Actual gain on plan assets | 3,849 | 3,322 | ||||||||||||||
| Actual gain (loss) on plan assets | 1,560 | (9,926 | ) | |||||||||||||
| Plan assets at end of year | 35,676 | 31,776 | 21,270 | 19,929 | ||||||||||||
| Funded status | $ | (9,955 | ) | $ | (7,645 | ) | $ | (15,143 | ) | $ | (12,438 | ) | ||||
| Accumulated benefit obligation | $ | 44,559 | $ | 38,596 | $ | 34,786 | $ | 31,472 | ||||||||
Amounts recognized in the Consolidated Balance Sheets at December 31:
| (In thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
| Accrued employee and retiree benefits | $ | (19,349 | ) | $ | (17,143 | ) | $ | (19,165 | ) | $ | (16,822 | ) | ||||
| Other accrued expenses | (722 | ) | (710 | ) | (726 | ) | (745 | ) | ||||||||
| Other assets | 10,116 | 10,208 | 4,748 | 5,129 | ||||||||||||
| Net liability | $ | (9,955 | ) | $ | (7,645 | ) | $ | (15,143 | ) | $ | (12,438 | ) | ||||
Components of annual benefit cost:
| (In thousands) | 2023 | 2022 | 2021 | |||||||||
| Service cost | $ | 1,741 | $ | 1,622 | $ | 1,740 | ||||||
| Interest cost | 1,886 | 953 | 851 | |||||||||
| Expected return on plan assets | (1,007 | ) | (785 | ) | (728 | ) | ||||||
| Recognized actuarial (gain) loss | (656 | ) | 32 | 267 | ||||||||
| Settlement income | - | - | (151 | ) | ||||||||
| Defined benefit expense | $ | 1,964 | $ | 1,822 | $ | 1,979 | ||||||
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Service cost | $ | 1,601 | $ | 1,432 | $ | 1,465 | ||||||
| Interest cost | 1,022 | 1,273 | 1,137 | |||||||||
| Expected return on plan assets | (813 | ) | (896 | ) | (896 | ) | ||||||
| Recognized actuarial loss (gain) | 41 | (176 | ) | (141 | ) | |||||||
| Settlement income | 0 | 0 | (179 | ) | ||||||||
| Defined benefit expense | $ | 1,851 | $ | 1,633 | $ | 1,386 | ||||||
The Company’s non-service cost portion of defined benefit expense is recorded in Interest Expense on the Company’s Consolidated Statements of Earnings. The Company’s service cost portion of defined benefit expense is recorded in Selling and Administrative Expenses on the Company’s Consolidated Statements of Earnings.
Weighted average liability assumptions as of December 31:
| 2020 | 2019 | 2023 | 2022 | |||||||||||||
| Discount rate | 1.87 | % | 2.69 | % | 5.15 | % | 5.12 | % | ||||||||
| Expected return on plan assets | 2.17 | % | 2.68 | % | 4.91 | % | 4.89 | % | ||||||||
| Rate of compensation increase | 0.34 | % | 0.34 | % | 1.14 | % | 0.90 | % | ||||||||
Weighted average cost assumptions for the year ended December 31:
| 2020 | 2019 | 2018 | 2023 | 2022 | 2021 | |||||||||||||||||||
| Discount rate | 2.69 | % | 3.80 | % | 3.16 | % | 5.12 | % | 2.35 | % | 1.87 | % | ||||||||||||
| Expected return on plan assets | 2.68 | % | 3.21 | % | 3.03 | % | 4.89 | % | 2.54 | % | 2.17 | % | ||||||||||||
| Rate of compensation increase | 0.34 | % | 0.31 | % | 0.33 | % | 0.90 | % | 1.02 | % | 1.07 | % | ||||||||||||
The aggregate amounts of benefits expected to be paid from defined benefit plans in each of the next five years subsequent to December 31, 2020,2023, which include employees’ expected future service, are as follows: 2021, $1.6 million; 2022, $3.9 million; 2023, $1.6 million; 2024, $4.0$2.0 million; 2025, $1.7$9.2 million; 2026, $2.0 million; 2027, $2.0 million; 2028, $2.1 million; and $11.7$13.2 million in total for the years 20262029 through 2030.2033.
The Company expects to contribute $1.2$0.7 million to defined benefit plans in 2021.2024.
Amounts in accumulated other comprehensive loss at December 31 were as follows:
| (In thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
| Unrecognized net actuarial loss | $ | 2,402 | $ | 683 | $ | 2,936 | $ | 2,210 | ||||||||
| Prior service cost | 187 | 146 | 155 | 153 | ||||||||||||
| Total before tax effects | $ | 2,589 | $ | 829 | $ | 3,091 | $ | 2,363 | ||||||||
The pension adjustments, net of tax, recognized in OCI, were as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Net actuarial (loss) gain arising during the period | $ | (1,293 | ) | $ | (1,091 | ) | $ | 1,257 | ||||
| Prior service cost | (32 | ) | 0 | (127 | ) | |||||||
| Amortization of actuarial loss (gain), included in defined benefit expense | 32 | (130 | ) | (103 | ) | |||||||
| Pension adjustment, net of tax | $ | (1,293 | ) | $ | (1,221 | ) | $ | 1,027 | ||||
| (In thousands) | 2023 | 2022 | 2021 | |||||||||
Net actuarial gain (loss) arising during the period | $ | 192 | $ | (1,466 | ) | $ | 1,528 | |||||
| Amortization of actuarial (gain) loss, included in defined benefit expense | (479 | ) | 27 | 84 | ||||||||
| Pension adjustment, net of tax | $ | (287 | ) | $ | (1,439 | ) | $ | 1,612 | ||||
The investment objectives and target allocations for the Company’s pension plans related to the assets of the plans are reviewed on a regular basis. The investment objectives for the pension assets are to maximize the return on assets while maintaining an overall level of risk appropriate for a retirement fund and ensuring the availability of funds for the payment of retirement benefits. The levels of risk assumed by the pension plans are determined by market conditions, the rate of return expectations, and the liquidity requirements of each pension plan. The actual asset allocations of each pension plan are reviewed on a regular basis to ensure that they are in line with the target allocations.
The following table presents the Company’s pension plan assets by asset category as of December 31, 20202023 and 2019:2022:
Fair Value as of December 31, | Fair Value Measurements at December 31, 2020 Using Fair Value Hierarchy | Fair Value as of December 31, | Fair Value Measurements at December 31, 2019 Using Fair Value Hierarchy | Fair Value as of December 31, | Fair Value Measurements at December 31, 2023 Using Fair Value Hierarchy | Fair Value as of December 31, | Fair Value Measurements at December 31, 2022 Using Fair Value Hierarchy | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2020 | Level 1 | Level 2 | Level 3 | 2019 | Level 1 | Level 2 | Level 3 | 2023 | Level 1 | Level 2 | Level 3 | 2022 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Funds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic | $ | 6,565 | $ | 6,565 | $ | 0 | $ | 0 | $ | 6,003 | $ | 6,003 | $ | 0 | $ | 0 | $ | 5,623 | $ | 5,623 | $ | — | $ | — | $ | 5,208 | $ | 5,208 | $ | — | $ | — | ||||||||||||||||||||||||||||||||
| International | 97 | 0 | 97 | 0 | 104 | 0 | 104 | 0 | 47 | — | 47 | — | 55 | — | 55 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| International Fixed Income Funds | 28,911 | 1,190 | 27,721 | 0 | 25,556 | 1,269 | 24,287 | 0 | 14,486 | 1,574 | 12,912 | — | 14,551 | 1,060 | 13,491 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other investments | 103 | 76 | 27 | - | 113 | 79 | 34 | 0 | 1,114 | 1,097 | 17 | — | 115 | 84 | 31 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets at fair value | $ | 35,676 | $ | 7,831 | $ | 27,845 | $ | 0 | $ | 31,776 | $ | 7,351 | $ | 24,425 | $ | 0 | $ | 21,270 | $ | 8,294 | $ | 12,976 | $ | — | $ | 19,929 | $ | 6,352 | $ | 13,577 | $ | — | ||||||||||||||||||||||||||||||||
The Company is required to categorize pension plan assets based on the following fair value hierarchy:
| Level 1: | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2: | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data. |
| Level 3: | Unobservable inputs that reflect the reporting entity’s own assumptions. |
10. Accumulated Other Comprehensive Income
The following table summarizes the changes in OCI for 2020, 2019,2023, 2022, and 2018:2021:
| (In thousands) | Cash Flow Hedges (1) | Pension Items (1) | Foreign Currency Items | Total | Cash Flow Hedges (1) | Pension Items (1) | Foreign Currency Items | Total | ||||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | (669 | ) | $ | (309 | ) | $ | (148,356 | ) | $ | (149,334 | ) | ||||||||||||||||||||
Balance as of December 31, 2020 | $ | 749 | $ | (1,965 | ) | $ | (157,875 | ) | $ | (159,091 | ) | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 667 | 1,130 | (16,675 | ) | (14,878 | ) | 775 | 1,528 | (26,809 | ) | (24,506 | ) | ||||||||||||||||||||
| Amounts reclassified from OCI | 149 | (103 | ) | 0 | 46 | (1,318 | ) | 84 | 10,203 | 8,969 | ||||||||||||||||||||||
| Adoption of ASU 2018-02 | 0 | (169 | ) | (1,220 | ) | (1,389 | ) | |||||||||||||||||||||||||
| Balance as of December 31, 2018 | $ | 147 | $ | 549 | $ | (166,251 | ) | $ | (165,555 | ) | ||||||||||||||||||||||
Balance as of December 31, 2021 | $ | 206 | $ | (353 | ) | $ | (174,481 | ) | $ | (174,628 | ) | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (111 | ) | (1,091 | ) | 4,114 | 2,912 | 215 | (1,466 | ) | (23,816 | ) | (25,067 | ) | |||||||||||||||||||
| Amounts reclassified from OCI | (235 | ) | (130 | ) | 0 | (365 | ) | (1,020 | ) | 27 | - | (993 | ) | |||||||||||||||||||
| Balance as of December 31, 2019 | $ | (199 | ) | $ | (672 | ) | $ | (162,137 | ) | $ | (163,008 | ) | ||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (374 | ) | (1,325 | ) | 12,887 | 11,188 | ||||||||||||||||||||||||||
Balance as of December 31, 2022 | $ | (599 | ) | $ | (1,792 | ) | $ | (198,297 | ) | $ | (200,688 | ) | ||||||||||||||||||||
| Other comprehensive income before reclassifications | 3,833 | 192 | 27,262 | 31,287 | ||||||||||||||||||||||||||||
| Amounts reclassified from OCI | 1,322 | 32 | (8,625 | ) | (7,271 | ) | (2,237 | ) | (479 | ) | - | (2,716 | ) | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | 749 | $ | (1,965 | ) | $ | (157,875 | ) | $ | (159,091 | ) | |||||||||||||||||||||
Balance as of December 31, 2023 | $ | 997 | $ | (2,079 | ) | $ | (171,035 | ) | $ | (172,117 | ) | |||||||||||||||||||||
| (1) | Cash Flow Hedges and Pension Items are net of tax. |
11. Income Taxes
Earnings before income taxes were as follows:
| (In thousands) | 2020 | 2019 | 2018 | 2023 | 2022 | 2021 | ||||||||||||||||||
| United States | $ | 72,593 | $ | 38,356 | $ | 80,641 | $ | 45,900 | $ | 73,192 | $ | 71,764 | ||||||||||||
| Foreign | 65,252 | 62,647 | 100,884 | 83,951 | 109,012 | 85,720 | ||||||||||||||||||
| Total | $ | 137,845 | $ | 101,003 | $ | 181,525 | $ | 129,851 | $ | 182,204 | $ | 157,484 | ||||||||||||
The provision for income taxes was as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Current income tax expense (benefit): | ||||||||||||
Federal (1) | $ | 9,660 | $ | 12,994 | $ | (9,071 | ) | |||||
| State | 3,000 | 2,622 | 205 | |||||||||
| Foreign | 24,418 | 22,680 | 23,187 | |||||||||
| 37,078 | 38,296 | 14,321 | ||||||||||
| Deferred expense (benefit): | ||||||||||||
| Federal | (6,918 | ) | (17,246 | ) | 3,977 | |||||||
| State | (565 | ) | 18 | 3,164 | ||||||||
| Foreign | (1,222 | ) | (2,112 | ) | 2,703 | |||||||
| (8,705 | ) | (19,340 | ) | 9,844 | ||||||||
| Income taxes | $ | 28,373 | $ | 18,956 | $ | 24,165 | ||||||
| (In thousands) | 2023 | 2022 | 2021 | |||||||||
| Current income tax expense: | ||||||||||||
| Federal | $ | 11,153 | $ | 21,640 | $ | 16,807 | ||||||
| State | 2,814 | 5,138 | 5,128 | |||||||||
| Foreign | 27,590 | 25,549 | 22,875 | |||||||||
41,557 | 52,327 | 44,810 | ||||||||||
| Deferred benefit: | ||||||||||||
| Federal | (4,656 | ) | (8,520 | ) | (4,159 | ) | ||||||
| State | (813 | ) | (1,353 | ) | (1,189 | ) | ||||||
| Foreign | 369 | (1,137 | ) | (723 | ) | |||||||
(5,100 | ) | (11,010 | ) | (6,071 | ) | |||||||
| Income taxes | $ | 36,457 | $ | 41,317 | $ | 38,739 | ||||||
The reconciliation between the U.S. Federal tax rate and the actual effective tax rate was as follows:
| 2020 | 2019 | 2018 | 2023 | 2022 | 2021 | |||||||||||||||||||
| Taxes at statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||
| State income taxes, net of federal income tax benefit | 2.2 | 2.2 | 1.1 | 1.1 | 1.7 | 3.0 | ||||||||||||||||||
| Tax credits | (1.5 | ) | (2.6 | ) | (1.5 | ) | (1.9 | ) | (1.3 | ) | (1.4 | ) | ||||||||||||
| Taxes on foreign earnings | 2.8 | 5.1 | (0.4 | ) | 4.8 | 2.9 | 4.7 | |||||||||||||||||
| Global Intangible Low-Taxed Income | 0.1 | 0.9 | 0.6 | 0.6 | 0.4 | 0.7 | ||||||||||||||||||
| Foreign Derived Tangible Income | (1.1 | ) | (1.0 | ) | (0.6 | ) | ||||||||||||||||||
| Foreign Derived Intangible Income | (1.3 | ) | (1.0 | ) | (0.9 | ) | ||||||||||||||||||
| Loss on balance sheet hedge | 2.0 | 0 | 0 | - | - | 0.7 | ||||||||||||||||||
| Resolution of prior years’ tax matters | (0.1 | ) | (0.4 | ) | (0.3 | ) | 0.3 | (0.1 | ) | (0.4 | ) | |||||||||||||
| Valuation allowance adjustments | (3.7 | ) | (8.8 | ) | 0.4 | 2.8 | (2.7 | ) | (2.9 | ) | ||||||||||||||
| 2017 Tax Legislation | 0 | 0 | (3.7 | ) | ||||||||||||||||||||
| U.S. tax accounting method changes | 0 | 0 | (2.9 | ) | ||||||||||||||||||||
| Nondeductible compensation | 1.2 | 1.9 | 1.1 | |||||||||||||||||||||
| Other, net | (1.1 | ) | 2.4 | (0.4 | ) | (0.5 | ) | (0.1 | ) | (1.0 | ) | |||||||||||||
| Effective tax rate | 20.6 | % | 18.8 | % | 13.3 | % | 28.1 | % | 22.7 | % | 24.6 | % | ||||||||||||
Taxes on foreign earnings include the difference between the tax rates applied to foreign earnings relative to the U.S. statutory tax rate, accruals for foreign unrecognized tax benefits, and the impact of the U.S. foreign tax credit, not including the impact from Global Intangible Low-Taxed Income (GILTI). The impact on the Company’s effective tax rate varies from year to year based on the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rates in 20202023, 2022, and 20192021 were bothall impacted by tax costs related to the divestitures and the release of valuation allowances related to the foreign tax credit carryover. The 2019 effective tax rate was also impacted by valuation allowance adjustments related to foreigncarryover and net operating losses. The effective tax rate in 20182023 was also favorably impacted by U.S.the limited tax accounting method changes thatdeductibility of costs related to the portfolio optimization plan, and the effective tax rates in 2022 and 2021 were filed withimpacted by tax costs related to the IRS in thedivestitures. See Note 14, second quarter of Divestitures2018, and generation of foreign tax credits duringNote 16, 2018.Portfolio Optimization Plan.
The Company’s valuation allowance at December 31, 20202023 and 20192022 was $47.834.1 million and $54.328.1 million, respectively. Therespectively. In 2023, the valuation allowance was increased by $16.2 million in the first quarter of 2019related to the increase in the foreign tax credit deferredcredits was reduced, and the valuation allowance related to state and foreign NOLs was increased. In 2022, the valuation allowance related to foreign tax asset.credits and state and foreign NOLs was reduced. During 2019 and 2020,2021, the Company completed tax planning strategies and Federal tax regulations were finalized that resulted in the partial release of this valuation allowance. The valuation allowance was also increased in 2019 by $6.8 million for the deferred tax assets related to net operating losses that the Company does not believe are more likely than not to be realized.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following:
| (In thousands) | 2020 | 2019 | ||||||
| Deferred tax assets: | ||||||||
| Benefit plans | $ | 7,665 | $ | 6,293 | ||||
| Liabilities and reserves | 19,291 | 21,085 | ||||||
Operating loss and credit carryovers(1) | 77,756 | 82,000 | ||||||
| Other | 13,228 | 1,126 | ||||||
| Gross deferred tax assets | 117,940 | 110,504 | ||||||
Valuation allowance(1) | (47,813 | ) | (54,326 | ) | ||||
| Deferred tax assets | 70,127 | 56,178 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant, and equipment | (31,709 | ) | (29,869 | ) | ||||
| Goodwill | (22,012 | ) | (21,744 | ) | ||||
| Other | 0 | (5,192 | ) | |||||
| Deferred tax liabilities | (53,721 | ) | (56,805 | ) | ||||
| Net deferred tax assets (liabilities) | $ | 16,406 | $ | (627 | ) | |||
| (In thousands) | 2023 | 2022 | ||||||
| Deferred tax assets: | ||||||||
| Benefit plans | $ | 8,976 | $ | 8,601 | ||||
| Liabilities and reserves | 20,960 | 18,623 | ||||||
| Operating loss and credit carryovers | 59,615 | 60,070 | ||||||
| Capitalized research and development costs | 13,148 | 7,882 | ||||||
| Other | 14,680 | 4,414 | ||||||
| Gross deferred tax assets | 117,379 | 99,590 | ||||||
| Valuation allowance | (34,122 | ) | (28,073 | ) | ||||
| Deferred tax assets | 83,257 | 71,517 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant, and equipment | (33,654 | ) | (34,174 | ) | ||||
| Goodwill | (22,299 | ) | (20,603 | ) | ||||
| Deferred tax liabilities | (55,953 | ) | (54,777 | ) | ||||
| Net deferred tax assets | $ | 27,304 | $ | 16,740 | ||||
At December 31, 2020,2023, foreign tax credit carryovers were $39.331.7 million, all of which expiresexpire before 2035. At December 31, 2020,2023, foreign operating loss carryovers were $110$76.7 million. Included in the foreign operating loss carryovers are losses of $11.8$13.5 million that expire through 2035,2036 and $98.2$63.2 million that expire after 20352036 or do not have an expiration date. At December 31, 2020,2023, state operating loss carryovers were $132.6$115.1 million, which expire prior to 2035.2036.
The Company is electing to recognize GILTI as a period expense in the period the tax is incurred.
The Organisation for Economic Co-operation and Development has issued Pillar Two model rules imposing a global minimum corporate tax rate of 15%. Many countries have implemented laws based on these model rules, with expected effective dates beginning in fiscal year 2024. As currently designed, Pillar Two will ultimately apply to our worldwide operations. These rules are not expected to materially increase our global tax costs as we do not have material operations in jurisdictions with tax rates lower than the Pillar Two minimum. We will continue to monitor U.S. and global legislative action related to Pillar Two for potential impacts.
Federal and state income taxes are provided on international subsidiary income distributed to or taxable in the U.S. during the year. At December 31, 2020,2023, no additional income or withholding taxes have been provided for the $625$720.8 million of undistributed earnings or any additional outside basis differences inherent in these entities, as these amounts are considered to be invested indefinitely. If the undistributed earnings were repatriated, the Company estimates it would have a withholding tax liability of $28.3$37.1 million. The determination of the tax liability for any outside basis differences is not practicable.
A reconciliation of the change in the liability for unrecognized tax benefits for 20202023 and 20192022 is as follows:
| (In thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
| Balance at beginning of year | $ | 6,032 | $ | 6,026 | $ | 3,939 | $ | 3,761 | ||||||||
| Increases for tax positions taken in the current year | 805 | 750 | 876 | 800 | ||||||||||||
| Increases for tax positions taken in prior years | 1,267 | 199 | ||||||||||||||
| Decreases related to settlements with tax authorities | (386 | ) | (341 | ) | (175 | ) | (209 | ) | ||||||||
| Decreases as a result of lapse of the applicable statutes of limitations | (625 | ) | (591 | ) | (610 | ) | (338 | ) | ||||||||
| Foreign currency exchange rate changes | 352 | (11 | ) | 221 | (75 | ) | ||||||||||
| Balance at the end of year | $ | 7,445 | $ | 6,032 | $ | 4,251 | $ | 3,939 | ||||||||
The amount of the unrecognized tax benefits that would affect the effective tax rate, if recognized, was approximately $6.6$4.3 million. The Company recognizes interest and penalties related to the unrecognized tax benefits in income tax expense. As of December 31, 2020 and 2019, $0.7$0.4 million and $0.6 million, respectively, of accrued interest and penalties were reported as an income tax liability in each period.as of both December 31, 2023 and 2022. The liability for unrecognized tax benefits relates to multiple jurisdictions and is reported in Other liabilitiesLiabilities on the Company’s Consolidated Balance Sheet at December 31, 2020.2023.
The Company believes that it is reasonably possible that the total amount of liability for unrecognized tax benefits as of December 31, 2020,2023, will decrease by approximately $2.5$0.9 million during 2021,2024, of which $0.3$0.8 million is estimated to impact the effective tax rate. The potential decrease relates to various tax matters for which the statute of limitations may expire or will be otherwise settled in 2021.2024. The amount that is ultimately recognized in the financial statements will be dependent upon various factors including potential increases or decreases in unrecognized tax benefits as a result of examinations, settlements, and other unanticipated items that may occur during the year. With limited exceptions, the Company is no longer subject to federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2015.
2019.12. Segment and Geographic Information
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income before divestiture & other related costs and income, share-based compensation, restructuring and other charges, including operational improvement plan costs one-time COVID-19 employee payment,and income and portfolio optimization plan costs, interest expense, and income taxes (segment operating income). Total revenue and segment operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation.
Assets by business segment and geographic region are those assets used in the Company’s operations in each segment and geographic region. Segment assets reflect the allocation of goodwill to each segment. Corporate & Other assets consist primarily of accounts receivables from the securitization program, investments, deferred tax assets, and fixed assets.
Segment Information
The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is evaluated on operating income of the respective business units before divestiture & other related costs and income, share-based compensation, and restructuring and other charges, including operational improvement plan costs and income and portfolio optimization plan costs, which are reported in Corporate & Other.
The Company’s 3three reportable segments are Flavors & Extracts and Color segments, which are both managed on a product line basis, and the Asia Pacific segment, which is managed on a geographic basis. The Company’s Flavors & Extracts segment produces flavor, extracts, and fragranceessential oils products that impart a desired taste, texture, aroma, or other characteristic to a broad range of consumersconsumer and other products. The Color segment produces natural and synthetic color systems for foods, beverages, pharmaceuticals, and nutraceuticals; colors, ingredients, and systems for cosmetics; specialty inkspersonal care; and technical colors for industrial applications. The Asia Pacific segment is managed on a geographic basis and produces and distributes color, flavor, and fragranceessential oils products for the Asia Pacific countries. The Company’s corporate expenses, divestiture & other related costs and income, share-based compensation, restructuring and other charges, including operational improvement plan expenses, COVID-19 employee payment,costs and income and portfolio optimization plan costs, and certain other costs are included in the “Corporate & Other” category.
Divestiture & other related costs and income and restructuring and other costs, including the operational improvement plan costs and income and portfolio optimization plan costs, for the years ended December 31,2020 2023, 2022, and 2019,2021, are further described in Note 14, Divestitures,14, Divestitures, andNote 15,Operational Improvement Plan, and Note 16, Portfolio Optimization Plan, and are included in the operating income (loss) results in Corporate & Other below. There were 0 divestiture & other related costs, restructuring and other costs, or operational improvement plan costs in 2018. In addition, the Company’s corporate expenses and share-based compensation are included in Corporate & Other.
| (In thousands) | Flavors & Extracts | Color | Asia Pacific | Corporate & Other | Consolidated | |||||||||||||||
2023: | ||||||||||||||||||||
| Revenue from external customers | $ | 716,049 | $ | 594,316 | $ | 146,085 | $ | — | $ | 1,456,450 | ||||||||||
| Intersegment revenue | 25,023 | 13,643 | 5 | — | 38,671 | |||||||||||||||
| Total revenue | 741,072 | 607,959 | 146,090 | — | 1,495,121 | |||||||||||||||
| Operating income (loss) | 87,773 | 105,370 | 30,800 | (68,920 | ) | 155,023 | ||||||||||||||
| Interest expense | — | — | — | 25,172 | 25,172 | |||||||||||||||
| Earnings (loss) before income taxes | 87,773 | 105,370 | 30,800 | (94,092 | ) | 129,851 | ||||||||||||||
| Assets | 792,674 | 846,559 | 112,335 | 262,939 | 2,014,507 | |||||||||||||||
| Capital expenditures | 40,489 | 37,720 | 2,923 | 6,736 | 87,868 | |||||||||||||||
| Depreciation and amortization | 29,400 | 22,294 | 2,548 | 3,578 | 57,820 | |||||||||||||||
2022: | ||||||||||||||||||||
| Revenue from external customers | $ | 710,592 | $ | 583,379 | $ | 143,068 | $ | — | $ | 1,437,039 | ||||||||||
| Intersegment revenue | 27,411 | 20,638 | 513 | — | 48,562 | |||||||||||||||
| Total revenue | 738,003 | 604,017 | 143,581 | — | 1,485,601 | |||||||||||||||
| Operating income (loss) | 105,424 | 114,619 | 29,492 | (52,784 | ) | 196,751 | ||||||||||||||
| Interest expense | — | — | — | 14,547 | 14,547 | |||||||||||||||
| Earnings (loss) before income taxes | 105,424 | 114,619 | 29,492 | (67,331 | ) | 182,204 | ||||||||||||||
| Assets | 738,181 | 849,425 | 115,132 | 278,876 | 1,981,614 | |||||||||||||||
| Capital expenditures | 40,805 | 30,300 | 2,164 | 6,053 | 79,322 | |||||||||||||||
| Depreciation and amortization | 26,660 | 20,174 | 2,489 | 3,144 | 52,467 | |||||||||||||||
2021: | ||||||||||||||||||||
| Revenue from external customers | $ | 717,688 | $ | 527,626 | $ | 134,950 | $ | — | $ | 1,380,264 | ||||||||||
| Intersegment revenue | 21,739 | 17,644 | 398 | — | 39,781 | |||||||||||||||
| Total revenue | 739,427 | 545,270 | 135,348 | — | 1,420,045 | |||||||||||||||
| Operating income (loss) | 98,660 | 103,575 | 26,330 | (58,537 | ) | 170,028 | ||||||||||||||
| Interest expense | — | — | — | 12,544 | 12,544 | |||||||||||||||
| Earnings (loss) before income taxes | 98,660 | 103,575 | 26,330 | (71,081 | ) | 157,484 | ||||||||||||||
| Assets | 639,992 | 738,139 | 108,126 | 259,236 | 1,745,493 | |||||||||||||||
| Capital expenditures | 35,846 | 16,806 | 2,813 | 5,323 | 60,788 | |||||||||||||||
| Depreciation and amortization | 26,020 | 20,572 | 2,748 | 2,711 | 52,051 | |||||||||||||||
| (In thousands) | Flavors & Extracts | Color | Asia Pacific | Corporate & Other | Consolidated | |||||||||||||||
2020: | ||||||||||||||||||||
| Revenue from external customers | $ | 724,483 | $ | 486,536 | $ | 120,982 | $ | 0 | $ | 1,332,001 | ||||||||||
| Intersegment revenue | 17,552 | 14,482 | 245 | 0 | 32,279 | |||||||||||||||
| Total revenue | 742,035 | 501,018 | 121,227 | 0 | 1,364,280 | |||||||||||||||
| Operating income (loss) | 90,974 | 96,034 | 22,075 | (56,427 | ) | 152,656 | ||||||||||||||
| Interest expense | 0 | 0 | 0 | 14,811 | 14,811 | |||||||||||||||
| Earnings (loss) before income taxes | 90,974 | 96,034 | 22,075 | (71,238 | ) | 137,845 | ||||||||||||||
| Assets | 686,348 | 718,665 | 100,258 | 235,589 | 1,740,860 | |||||||||||||||
| Capital expenditures | 24,541 | 19,840 | 2,687 | 5,094 | 52,162 | |||||||||||||||
| Depreciation and amortization | 24,801 | 19,368 | 2,578 | 2,894 | 49,641 | |||||||||||||||
2019: | ||||||||||||||||||||
| Revenue from external customers | $ | 682,705 | $ | 522,051 | $ | 118,178 | $ | 0 | $ | 1,322,934 | ||||||||||
| Intersegment revenue | 17,651 | 13,108 | 70 | 0 | 30,829 | |||||||||||||||
| Total revenue | 700,356 | 535,159 | 118,248 | 0 | 1,353,763 | |||||||||||||||
| Operating income (loss) | 74,961 | 101,190 | 19,382 | (74,423 | ) | 121,110 | ||||||||||||||
| Interest expense | 0 | 0 | 0 | 20,107 | 20,107 | |||||||||||||||
| Earnings (loss) before income taxes | 74,961 | 101,190 | 19,382 | (94,530 | ) | 101,003 | ||||||||||||||
| Assets | 714,779 | 734,343 | 99,183 | 191,846 | 1,740,151 | |||||||||||||||
| Capital expenditures | 16,968 | 16,521 | 2,545 | 3,066 | 39,100 | |||||||||||||||
| Depreciation and amortization | 27,179 | 22,088 | 2,581 | 3,167 | 55,015 | |||||||||||||||
2018: | ||||||||||||||||||||
| Revenue from external customers | $ | 723,189 | $ | 540,499 | $ | 123,127 | $ | 0 | $ | 1,386,815 | ||||||||||
| Intersegment revenue | 23,743 | 13,505 | 37 | 0 | 37,285 | |||||||||||||||
| Total revenue | 746,932 | 554,004 | 123,164 | 0 | 1,424,100 | |||||||||||||||
| Operating income (loss) | 96,433 | 113,306 | 20,856 | (27,217 | ) | 203,378 | ||||||||||||||
| Interest expense | 0 | 0 | 0 | 21,853 | 21,853 | |||||||||||||||
| Earnings (loss) before income taxes | 96,433 | 113,306 | 20,856 | (49,070 | ) | 181,525 | ||||||||||||||
| Assets | 782,145 | 752,305 | 103,808 | 186,682 | 1,824,940 | |||||||||||||||
| Capital expenditures | 23,679 | 21,744 | 2,858 | 2,459 | 50,740 | |||||||||||||||
| Depreciation and amortization | 25,922 | 21,931 | 2,451 | 2,940 | 53,244 | |||||||||||||||
Geographic Information
The Company has manufacturing facilities or sales offices in North America, Europe, Asia, Australia, South America, and Africa.
The Company’s annual revenue summarized by geographic location is as follows:
(In thousands) | Flavors & Extracts | Color | Asia Pacific | Corporate & Other | Consolidated | Flavors & Extracts | Color | Asia Pacific | Corporate & Other | Consolidated | ||||||||||||||||||||||||||||||
2020: | ||||||||||||||||||||||||||||||||||||||||
2023: | ||||||||||||||||||||||||||||||||||||||||
| Revenue from external customers: | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | 491,641 | $ | 241,608 | $ | 81 | $ | 0 | $ | 733,330 | $ | 553,790 | $ | 304,995 | $ | 125 | $ | — | $ | 858,910 | ||||||||||||||||||||
| Europe | 160,083 | 129,704 | 193 | 0 | 289,980 | 113,757 | 162,644 | 236 | — | 276,637 | ||||||||||||||||||||||||||||||
| Asia Pacific | 30,080 | 52,414 | 117,427 | 0 | 199,921 | 21,382 | 58,003 | 142,281 | — | 221,666 | ||||||||||||||||||||||||||||||
| Other | 42,679 | 62,810 | 3,281 | 0 | 108,770 | 27,120 | 68,674 | 3,443 | — | 99,237 | ||||||||||||||||||||||||||||||
| Total revenue from external customers | $ | 724,483 | $ | 486,536 | $ | 120,982 | $ | 0 | $ | 1,332,001 | $ | 716,049 | $ | 594,316 | $ | 146,085 | $ | — | $ | 1,456,450 | ||||||||||||||||||||
| Long-lived assets: | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | 244,921 | $ | 252,906 | $ | 0 | $ | 102,577 | $ | 600,404 | $ | 297,615 | $ | 277,730 | $ | — | $ | 114,995 | $ | 690,340 | ||||||||||||||||||||
| Europe | 112,424 | 226,840 | 0 | 0 | 339,264 | 82,938 | 244,587 | — | 24 | 327,549 | ||||||||||||||||||||||||||||||
| Asia Pacific | 204 | 4,670 | 31,834 | 0 | 36,708 | 8 | 4,199 | 30,473 | — | 34,680 | ||||||||||||||||||||||||||||||
| Other | 782 | 22,116 | 0 | 0 | 22,898 | 241 | 25,081 | — | — | 25,322 | ||||||||||||||||||||||||||||||
| Total long-lived assets | $ | 358,331 | $ | 506,532 | $ | 31,834 | $ | 102,577 | $ | 999,274 | $ | 380,802 | $ | 551,597 | $ | 30,473 | $ | 115,019 | $ | 1,077,891 | ||||||||||||||||||||
2019: | ||||||||||||||||||||||||||||||||||||||||
2022: | ||||||||||||||||||||||||||||||||||||||||
| Revenue from external customers: | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | 448,393 | $ | 251,593 | $ | 112 | $ | 0 | $ | 700,098 | $ | 541,120 | $ | 304,778 | $ | 120 | $ | — | $ | 846,018 | ||||||||||||||||||||
| Europe | 158,902 | 148,393 | 336 | 0 | 307,631 | 115,925 | 151,437 | 213 | — | 267,575 | ||||||||||||||||||||||||||||||
| Asia Pacific | 32,203 | 57,268 | 116,508 | 0 | 205,979 | 29,092 | 61,064 | 139,134 | — | 229,290 | ||||||||||||||||||||||||||||||
| Other | 43,207 | 64,797 | 1,222 | 0 | 109,226 | 24,455 | 66,100 | 3,601 | — | 94,156 | ||||||||||||||||||||||||||||||
| Total revenue from external customers | $ | 682,705 | $ | 522,051 | $ | 118,178 | $ | 0 | $ | 1,322,934 | $ | 710,592 | $ | 583,379 | $ | 143,068 | $ | — | $ | 1,437,039 | ||||||||||||||||||||
| Long-lived assets: | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | 251,822 | $ | 220,723 | $ | 0 | $ | 80,128 | $ | 552,673 | $ | 286,497 | $ | 271,075 | $ | — | $ | 107,784 | $ | 665,356 | ||||||||||||||||||||
| Europe | 102,631 | 242,311 | 0 | 0 | 344,942 | 86,248 | 236,719 | — | 24 | 322,991 | ||||||||||||||||||||||||||||||
| Asia Pacific | 1,017 | 3,758 | 31,007 | 0 | 35,782 | 237 | 3,796 | 29,915 | — | 33,948 | ||||||||||||||||||||||||||||||
| Other | 504 | 18,037 | 0 | 0 | 18,541 | 389 | 24,150 | — | — | 24,539 | ||||||||||||||||||||||||||||||
| Total long-lived assets | $ | 355,974 | $ | 484,829 | $ | 31,007 | $ | 80,128 | $ | 951,938 | $ | 373,371 | $ | 535,740 | $ | 29,915 | $ | 107,808 | $ | 1,046,834 | ||||||||||||||||||||
2018: | ||||||||||||||||||||||||||||||||||||||||
2021: | ||||||||||||||||||||||||||||||||||||||||
| Revenue from external customers: | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | 477,083 | $ | 245,649 | $ | 0 | $ | 0 | $ | 722,732 | $ | 523,960 | $ | 263,031 | $ | 116 | $ | — | $ | 787,107 | ||||||||||||||||||||
| Europe | 173,562 | 168,340 | 155 | 0 | 342,057 | 135,348 | 142,741 | 140 | — | 278,229 | ||||||||||||||||||||||||||||||
| Asia Pacific | 31,506 | 59,548 | 121,975 | 0 | 213,029 | 29,880 | 59,914 | 131,772 | — | 221,566 | ||||||||||||||||||||||||||||||
| Other | 41,038 | 66,962 | 997 | 0 | 108,997 | 28,500 | 61,940 | 2,922 | — | 93,362 | ||||||||||||||||||||||||||||||
| Total revenue from external customers | $ | 723,189 | $ | 540,499 | $ | 123,127 | $ | 0 | $ | 1,386,815 | $ | 717,688 | $ | 527,626 | $ | 134,950 | $ | — | $ | 1,380,264 | ||||||||||||||||||||
| Long-lived assets: | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | 255,131 | $ | 230,187 | $ | 0 | $ | 76,996 | $ | 562,314 | $ | 268,934 | $ | 250,682 | $ | — | $ | 105,150 | $ | 624,766 | ||||||||||||||||||||
| Europe | 125,157 | 265,688 | 0 | 0 | 390,845 | 91,934 | 225,916 | — | 25 | 317,875 | ||||||||||||||||||||||||||||||
| Asia Pacific | 1,061 | 3,319 | 27,872 | 0 | 32,252 | 275 | 4,513 | 32,901 | — | 37,689 | ||||||||||||||||||||||||||||||
| Other | 277 | 16,387 | 0 | 0 | 16,664 | 568 | 23,442 | — | — | 24,010 | ||||||||||||||||||||||||||||||
| Total long-lived assets | $ | 381,626 | $ | 515,581 | $ | 27,872 | $ | 76,996 | $ | 1,002,075 | $ | 361,711 | $ | 504,553 | $ | 32,901 | $ | 105,175 | $ | 1,004,340 | ||||||||||||||||||||
Sales in the United States, based on the final country of destination of the Company’s products, were $614.3707.1 million, $575.2711.1 million, and $586.2658.0 million, in 2020,2023, 2019,2022, and 2018,2021, respectively. No other country of destination exceeded 10% of consolidated sales. Total long-lived assets in the United States amounted to $518.2603.2 million, $471.8586.8 million, and $484.9550.3 million, at December 31, 2020,2023, 2019,2022, and 2018,2021, respectively.
Product Information
The Company’s revenue summarized by product portfolio is as follows:
(In thousands) | Flavors & Extracts | Color | Asia Pacific | Consolidated | ||||||||||||
2020: | ||||||||||||||||
| Flavors, Extracts & Flavor Ingredients | $ | 399,331 | $ | - | $ | - | $ | 399,331 | ||||||||
| Natural Ingredients | 243,161 | - | - | 243,161 | ||||||||||||
| Fragrances | 85,354 | - | - | 85,354 | ||||||||||||
| Yogurt Fruit Preparations | 14,189 | - | - | 14,189 | ||||||||||||
| Food & Pharmaceutical Colors | - | 346,269 | - | 346,269 | ||||||||||||
| Personal Care | - | 141,331 | - | 141,331 | ||||||||||||
| Inks | - | 13,418 | - | 13,418 | ||||||||||||
| Asia Pacific | - | - | 121,227 | 121,227 | ||||||||||||
| Intersegment Revenue | (17,552 | ) | (14,482 | ) | (245 | ) | (32,279 | ) | ||||||||
| Total revenue from external customers | $ | 724,483 | $ | 486,536 | $ | 120,982 | $ | 1,332,001 | ||||||||
2019: | ||||||||||||||||
| Flavors, Extracts & Flavor Ingredients | $ | 378,967 | $ | - | $ | - | $ | 378,967 | ||||||||
| Natural Ingredients | 214,027 | - | - | 214,027 | ||||||||||||
| Fragrances | 86,399 | - | - | 86,399 | ||||||||||||
| Yogurt Fruit Preparations | 20,963 | - | - | 20,963 | ||||||||||||
| Food & Pharmaceutical Colors | - | 340,327 | - | 340,327 | ||||||||||||
| Personal Care | - | 159,640 | - | 159,640 | ||||||||||||
| Inks | - | 35,192 | - | 35,192 | ||||||||||||
| Asia Pacific | - | - | 118,248 | 118,248 | ||||||||||||
| Intersegment Revenue | (17,651 | ) | (13,108 | ) | (70 | ) | (30,829 | ) | ||||||||
| Total revenue from external customers | $ | 682,705 | $ | 522,051 | $ | 118,178 | $ | 1,322,934 | ||||||||
2018: | ||||||||||||||||
| Flavors, Extracts & Flavor Ingredients | $ | 403,762 | $ | - | $ | - | $ | 403,762 | ||||||||
| Natural Ingredients | 224,280 | - | - | 224,280 | ||||||||||||
| Fragrances | 91,786 | - | - | 91,786 | ||||||||||||
| Yogurt Fruit Preparations | 27,104 | - | - | 27,104 | ||||||||||||
| Food & Pharmaceutical Colors | - | 332,878 | - | 332,878 | ||||||||||||
| Personal Care | - | 179,485 | - | 179,485 | ||||||||||||
| Inks | - | 41,641 | - | 41,641 | ||||||||||||
| Asia Pacific | - | - | 123,164 | 123,164 | ||||||||||||
| Intersegment Revenue | (23,743 | ) | (13,505 | ) | (37 | ) | (37,285 | ) | ||||||||
| Total revenue from external customers | $ | 723,189 | $ | 540,499 | $ | 123,127 | $ | 1,386,815 | ||||||||
(In thousands) | Flavors & Extracts | Color | Asia Pacific | Consolidated | ||||||||||||
2023: | ||||||||||||||||
| Flavors, Extracts & Flavor Ingredients | $ | 496,036 | $ | — | $ | — | $ | 496,036 | ||||||||
| Natural Ingredients | 245,036 | — | — | 245,036 | ||||||||||||
| Food & Pharmaceutical Colors | — | 452,204 | — | 452,204 | ||||||||||||
| Personal Care | — | 155,755 | — | 155,755 | ||||||||||||
| Asia Pacific | — | — | 146,090 | 146,090 | ||||||||||||
| Intersegment Revenue | (25,023 | ) | (13,643 | ) | (5 | ) | (38,671 | ) | ||||||||
| Total revenue from external customers | $ | 716,049 | $ | 594,316 | $ | 146,085 | $ | 1,456,450 | ||||||||
2022: | ||||||||||||||||
| Flavors, Extracts & Flavor Ingredients | $ | 498,055 | $ | — | $ | — | $ | 498,055 | ||||||||
| Natural Ingredients | 239,948 | — | — | 239,948 | ||||||||||||
| Food & Pharmaceutical Colors | — | 437,065 | — | 437,065 | ||||||||||||
| Personal Care | — | 165,335 | — | 165,335 | ||||||||||||
| Inks | — | 1,617 | — | 1,617 | ||||||||||||
| Asia Pacific | — | — | 143,581 | 143,581 | ||||||||||||
| Intersegment Revenue | (27,411 | ) | (20,638 | ) | (513 | ) | (48,562 | ) | ||||||||
| Total revenue from external customers | $ | 710,592 | $ | 583,379 | $ | 143,068 | $ | 1,437,039 | ||||||||
2021: | ||||||||||||||||
| Flavors, Extracts & Flavor Ingredients | $ | 455,818 | $ | — | $ | — | $ | 455,818 | ||||||||
| Natural Ingredients | 255,772 | — | — | 255,772 | ||||||||||||
| Fragrances | 22,739 | — | — | 22,739 | ||||||||||||
| Yogurt Fruit Preparations | 5,098 | — | — | 5,098 | ||||||||||||
| Food & Pharmaceutical Colors | — | 385,069 | — | 385,069 | ||||||||||||
| Personal Care | — | 158,237 | — | 158,237 | ||||||||||||
| Inks | — | 1,964 | — | 1,964 | ||||||||||||
| Asia Pacific | — | — | 135,348 | 135,348 | ||||||||||||
| Intersegment Revenue | (21,739 | ) | (17,644 | ) | (398 | ) | (39,781 | ) | ||||||||
| Total revenue from external customers | $ | 717,688 | $ | 527,626 | $ | 134,950 | $ | 1,380,264 | ||||||||
13. Fair Value Measurements
ASC 820, Fair Value Measurement, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. As of December 31, 20202023 and 2019,2022, the Company’s assets and liabilities subject to this standard are forward exchange contracts. The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was an asset of $0.5$1.0 million and a liability of $0.2 million as of December 31, 20202023 and 2019,2022, respectively. The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, and short-term borrowings were approximately the same as the fair values as of December 31, 2020.2023. The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at December 31, 20202023 and 2019,2022, was $526.9$645.2 million and $598.5 million.$630.8 million, respectively. The fair value of the long-term debt at December 31, 20202023 and 2019,2022, was $556.1$653.7 million and $620.0$622.2 million, respectively.
14. Divestitures
In October 2019, the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. In the fourth quarter of 2019, the Board of Directors approved the sale of the inks product line, which is within the Color segment, and the fragrances product line (excluding its essential oils product line), which is within the Flavors & Extracts segment (formerly known as the Flavors & Fragrances segment; see Note 12, Segment and Geographic Information). In the second quarter of 2020, the Board of Directors approved the sale of the yogurt fruit preparations product line, which is within the Flavors & Extracts segment. The divesting and exit of these 3 product lines does not meet the criteria to be presented as a discontinued operation on the Consolidated Statements of Earnings.
On November 23, 2020,April 1, 2021, the Company announced it had entered into a definitive agreement to sellcompleted the sale of its fragrances product line (excluding its essential oils product line). The for $36.3 million of net cash. As a result of the completion of the sale, the Company expectsrecorded a non-cash net loss of $11.3 million for the transaction to be finalized in the first half of 2021.
| (In thousands) | 2020 | 2019 | ||||||
| Assets held for sale: | ||||||||
| Trade accounts receivable, less allowance for losses of $456 and $2,350, respectively | $ | 20,722 | $ | 31,653 | ||||
| Inventories | 25,045 | 34,612 | ||||||
| Prepaid expenses and other current assets | 1,843 | 5,528 | ||||||
| Property, Plant, and Equipment, net | 3,434 | 14,496 | ||||||
| Intangible assets | 1,716 | 5,004 | ||||||
| Assets held for sale | $ | 52,760 | $ | 91,293 | ||||
| Liabilities held for sale: | ||||||||
| Trade accounts payable | $ | 13,967 | $ | 12,318 | ||||
| Accrued salaries, wages, and withholdings from employees | 1,739 | 1,677 | ||||||
| Other accrued expenses | 1,633 | 5,190 | ||||||
| Liabilities held for sale | $ | 17,339 | $ | 19,185 | ||||
The Company reports all costs and income associated with the divestitures in Corporate & Other. There were no divestiture & other related costs for the year ended December 31, 2023. For the year ended December 31, 2022, the Company recorded a $2.5 million gain in Selling and Administrative Expenses associated with the yogurt fruit preparations product line.
The following table summarizes the divestiture & other related costs for the year ended December 31, 2020:2021:
| (In thousands) | Yogurt Fruit Preparations | Fragrances | Inks | Corporate/ Other | Consolidated | Yogurt Fruit Preparations | Fragrances | Inks | Corporate/ Other | Consolidated | ||||||||||||||||||||||||||||||
| Non-cash impairment charges – Selling and administrative expenses | $ | 2,597 | $ | 2,055 | $ | 8,928 | $ | (861 | ) | $ | 12,719 | $ | (1,000 | ) | $ | 1,062 | $ | - | $ | - | $ | 62 | ||||||||||||||||||
| Non-cash charges – Cost of products sold | 1,679 | 77 | (203 | ) | 242 | 1,795 | - | 95 | (9 | ) | - | 86 | ||||||||||||||||||||||||||||
| Reclassification of foreign currency translation and related items – Selling and administrative expenses | 0 | 0 | (8,625 | ) | 0 | (8,625 | ) | - | 10,201 | 2 | - | 10,203 | ||||||||||||||||||||||||||||
Other costs - Selling and administrative expenses(1) | 337 | 3,029 | 892 | 2,008 | 6,266 | 917 | 2,553 | (281 | ) | 598 | 3,787 | |||||||||||||||||||||||||||||
| Total | $ | 4,613 | $ | 5,161 | $ | 992 | $ | 1,389 | $ | 12,155 | $ | (83 | ) | $ | 13,911 | $ | (288 | ) | $ | 598 | $ | 14,138 | ||||||||||||||||||
| (1) | Other costs – Selling and administrative expenses include employee separation costs, bad debt expense, environmental remediation costs, professional services, accelerated depreciation, and other related costs. |
| (In thousands) | Yogurt Fruit Preparations | Fragrances | Inks | Corporate/ Other | Consolidated | |||||||||||||||
| Non-cash impairment charges – Selling and administrative expenses | $ | 0 | $ | 18,204 | $ | 15,849 | $ | 555 | $ | 34,608 | ||||||||||
| Non-cash charges – Cost of products sold | 9,767 | 0 | 0 | 0 | 9,767 | |||||||||||||||
Other costs - Selling and administrative expenses(1) | 0 | 305 | 26 | 374 | 705 | |||||||||||||||
Other costs – Cost of products sold(2) | 800 | 0 | 0 | 0 | 800 | |||||||||||||||
| Total | $ | 10,567 | $ | 18,509 | $ | 15,875 | $ | 929 | $ | 45,880 | ||||||||||
The Company recorded non-cash impairment charges in Selling and Administrative Expenses, primarily related to property, plant, and equipment and allocated goodwill, during the yearsyear ended December 31, 2020 and 2019,2021, when the estimated fair value less costs to sell the product line was lower than its carrying value. The estimated fair values for the inks and fragrances (excluding its essential oils product line) product lines were determined based on indicative bids, which are classified as Level 3 inputs in the fair value measurement hierarchy. The Company recorded non-cash charges in Cost of Products Sold during the yearsyear ended December 31, 2020 and 2019,2021, to reduce the carrying value of certain inventories, when they were determined to be excess. The Company recorded a non-cash gainloss during the year ended December 31, 2020,2021, related to the reclassification of foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated StatementStatements of Earnings. The estimated fair value of the fragrances product line (excluding its essential oils product line) was determined based on indicative bids, which are classified as Level 3 inputs in the fair value measurement hierarchy.
In March 2020, the Company was notified by the potential buyer of the Company’s fragrances product line that environmental sampling conducted at the Company’s Granada, Spain location had identified the presence of contaminants in soil and groundwater in certain areas of the property. The Company records liabilities related to environmental remediation obligations when estimated future expenditures are probable and the amount of the liability is reasonably estimable. Based upon an environmental investigation and a quantitative risk assessment performed by a consultant hired by the Company, the Company has recorded $0.8$0.3 million related to these obligations in Selling and Administrative Expenses during the year ended December 31, 2020.2021.
15. Operational Improvement Plan
During the third quarter of 2020, the Company approved an operational improvement plan (Operational Improvement Plan) to consolidate manufacturing facilities and improve efficiencies within the Company. As part of the Operational Improvement Plan, the Company is combiningcombined its New Jersey cosmetics manufacturing facility in the Personal Care product line of the Color segment into its existing Color segment facility in Missouri. In addition, the Company is centralizingcentralized certain Flavors & Extracts segment support functions in Europe into one location. In the Asia Pacific segment, the Company incurred costs in connection with the elimination of certain selling and administrative positions.
During the second quarter of 2021, the Company received cash proceeds, net of associated expenses, in connection with the termination of a New Jersey office and laboratory space lease. The terminated lease was originally executed in November 2020 as part of the Operational Improvement Plan; however, the landlord for the property requested to terminate the lease prior to the end of its term and compensated the Company as part of a negotiated resolution for that termination.
The Company reports all costs and income associated with the Operational Improvement Plan in Corporate & Other. There were no Operational Improvement Plan costs recorded for the years ended December 31, 2023 and 2022.
The following table summarizes the Operational Improvement Plan income and expenses recorded in Selling and Administrative Expenses by segment for the year ended December 31, 2020:2021:
(In thousands) | Flavors & Extracts | Color | Asia Pacific | Consolidated | ||||||||||||
| Employee separation | $ | (123 | ) | $ | (8 | ) | $ | (351 | ) | $ | (482 | ) | ||||
Other income(1) | - | (3,624 | ) | - | (3,624 | ) | ||||||||||
Other costs(2) | - | 2,207 | 4 | 2,211 | ||||||||||||
| Total | $ | (123 | ) | $ | (1,425 | ) | $ | (347 | ) | $ | (1,895 | ) | ||||
| (In thousands) | Flavors & Extracts | Color | Asia Pacific | Consolidated | ||||||||||||
| Employee separation | $ | 352 | $ | 1,749 | $ | 589 | $ | 2,690 | ||||||||
Other costs(1) | 0 | 640 | 9 | 649 | ||||||||||||
| Total | $ | 352 | $ | 2,389 | $ | 598 | $ | 3,339 | ||||||||
| (1) | Other income includes cash received for the early termination of a lease less associated expenses. |
| (2) | Other costs include professional services, accelerated depreciation, and other related costs. |
During the fourth quarter of 2023, the board of directors of the Company approved a portfolio optimization plan (Portfolio Optimization Plan) to undertake an effort to optimize certain production facilities and improve efficiencies within the Company. As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company is evaluating the potential closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the potential closure of its sales office in Granada, Spain, and the potential centralization and elimination of certain selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. In addition, in the Color segment, the Company’s proposals include closing a manufacturing facility in Delta, British Columbia, Canada, closing a sales office in Argentina, and centralizing and eliminating certain production positions as well as potentially eliminating some selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.
The Company recorded the Operational Improvement Plan expenses fornon-cash impairment charges in Selling and Administrative Expenses, primarily related to certain property, plant, and equipment and definite-lived intangible assets during the year ended December 31, 2020,2023, when the estimated fair value of these assets was lower than the carrying value. The estimated fair value for property, plant, and equipment was based on an independent market valuation, which is classified as follows:Level 3 inputs in the fair value measurement hierarchy. The definite-lived intangible assets relate to a product line to be shut down and were fully impaired as of December 31, 2023. The Company also recorded non-cash charges in Cost of Products Sold during the year ended December 31, 2023, to reduce the carrying value of certain inventories when they were determined to be excess.
| (In thousands) | Selling and Administrative Expenses | Cost of Products Sold | Consolidated | |||||||||
| Employee separation | $ | 2,690 | $ | 0 | $ | 2,690 | ||||||
Other costs(1) | 614 | 35 | 649 | |||||||||
| Total | $ | 3,304 | $ | 35 | $ | 3,339 | ||||||
As of December 31, 2020,2023, the Company recorded $2.2$3.7 million of accrued liabilities in Other accrued expensesAccrued Expenses on the Company’s Consolidated Balance Sheet related to this plan. The Company expects the total coststhis plan would, if executed in 2020 and 2021 associated with the Operational Improvement Plan to be between $5 million and $7full, cost approximately $40 million, primarily related to severancenon-cash impairment charges and accelerated depreciation.proposed employee separation costs, and upon completion would reduce annual operating costs by approximately $8 million to $10 million, with the full benefit expected to be achieved after 2025. The Company proposes to reduce headcount by approximately 130 positions, primarily in the Flavors & Extracts and Color segments, related to certain production and selling and administrative positions.
The following table summarizes the Portfolio Optimization Plan expenses by segment for the year ended December 31, 2023:
(In thousands) | Flavors & Extracts | Color | Corporate & Other | Consolidated | ||||||||||||
| Non-cash impairment charges – Selling and administrative expenses | $ | 11,599 | $ | 9,355 | $ | - | $ | 20,954 | ||||||||
| Non-cash charges – Cost of products sold | 2,040 | 1,095 | - | 3,135 | ||||||||||||
| Employee separation – Selling and administrative expenses | 2,820 | 288 | 108 | 3,216 | ||||||||||||
Other costs – Selling and administrative expenses(1) | 39 | 497 | - | 536 | ||||||||||||
| Total | $ | 16,498 | $ | 11,235 | $ | 108 | $ | 27,841 | ||||||||
| (1) | Other costs include legal settlements, professional services, and other related costs. |