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FORWARD-LOOKING STATEMENTS
This documentreport contains forward-looking statements that reflect management’s current assumptions and estimates of future economic circumstances, industry conditions, Company performance, and financial results. Forward-looking statements include statements in the future tense, statements referring to any period after December 31, 2019,2022, and statements including the terms “expect,” “believe,” “anticipate,” and other similar terms that express expectations as to future events or conditions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that could cause actual events to differ materially from those expressed in thosethe forward-looking statements. A variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results. These factors and assumptions include, among others, the Company’s ability to manage economic and capital market conditions and the impact of recessions and economic downturns; the impact of macroeconomic and geopolitical volatility, including inflation and shortages impacting the availability and cost of raw materials, energy, and other supplies; the availability and cost of labor, logistics, and transportation; the impact and uncertainty created by the COVID-19 pandemic and efforts to manage it on the global economy, including, but not limited to, its effects on our employees, facilities, customers, and suppliers, governmental regulations and restrictions, and general economic conditions; the uncertain impacts of the ongoing conflict between Russia and Ukraine on our supply chain, input costs, including energy and transportation, and on general economic conditions; the pace and nature of new product introductions by the Company and the Company’s customers; ourthe Company’s ability to anticipate and respond to changing consumer preferences and changing technologies; the Company’s ability to successfully implement its growth strategies; the outcome of the Company’s various productivity-improvement and cost-reduction efforts, and acquisition and divestiture activities; the success of the Company’s efforts to explore strategic alternatives for certain non-core product lines; the effectiveness of the Company’s past restructuring activities; changes in costs of raw materials, including energy;activities, and operational improvement plan; industry, regulatory, legal, and economic factors related to the Company’s domestic and international business; the effects of tariffs, trade barriers, and disputes; growth in markets for products in which the Company competes; industry and customer acceptance of price increases; actions by competitors; currency exchange rate fluctuations; and the matters discussed below under the heading “Risk Factors” and under Part II, including the critical accounting policies set forth under the heading “CRITICAL ACCOUNTING POLICIES” within “Management’s Discussion and Analysis of Financial Condition and Results of Operation.Operations.” Except to the extent required by applicable law, the Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied thereinherein will not be realized.
NON-GAAP FINANCIAL MEASURES
Within this document, the Company reports certain non-GAAP financial measures, including: (1) adjusted revenue, adjusted operating income, adjusted net earnings, and adjusted diluted EPSearnings per share (which exclude divestiture & other related costs and income, the impactsresults of the Tax Cuts and Jobs Act (2017 Tax Legislation),divested product lines, and restructuring and other costs)costs, which include operational improvement plan costs and income) and (2) percentage changes in revenue, operating income, and diluted EPS,earnings per share on an adjusted operating income, and adjusted diluted EPS on a local currency basis (which eliminate the effects that result from translating its international operations into U.S. dollars)dollars, divestiture & other related costs and income, the results of the divested product lines, and restructuring and other costs, which include operational improvement plan costs and income). 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. The Company believes this information can be beneficial to investors for these same purposes. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
Additional information related to the Company’s use of non-GAAP financial measures and the divestiture & other related costs and income, the impacts fromresults of the 2017 Tax Legislation, as well asdivested product lines, restructuring and other costs, which include operational improvement plan costs and income, and the one-time COVID-19 employee payment that have been excluded from the non-GAAP financial measures, in 2019, 2018, and 2017, and reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures are available below in Item 7 under the sectionssection titled “NON-GAAP FINANCIAL MEASURES.”
| Item 1. | Business. |
Sensient Technologies Corporation (the “Company”)Company) was incorporated under the laws of the State of Wisconsin in 1882 in Wisconsin.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”)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”)Commission). These reports and other information may be accessed from the website maintained by the Commission at http://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 on Recovery of Incentive Compensation From Executives, and 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.
The Company is a leading global manufacturer and marketer of colors, flavors, and fragrances.other specialty ingredients. The Company uses advanced technologies at facilities around the worldand robust global supply chain capabilities to develop specialtyspecialized solutions for food and beverage systems; cosmetic, fragrance,beverages, as well as products that serve the pharmaceutical, nutraceutical, and nutraceutical ingredients and systems; specialty inks and colors; and other specialty and fine chemicals.personal care industries. The Company’s customers includerange in size from small entrepreneurial businesses to major international manufacturers representing some of the world’s best-known brands. In October 2019, the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and fruit preparation product lines. The Company anticipates that it will complete sales and exit activities of those product lines in 2020.
The Company’s principal products (excluding the anticipated divestitures) include:
For 2019,2022, the Company’s three reportable segments were the Flavors & FragrancesExtracts Group and the Color Group, which are managed on a product 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, and restructuring and other charges including operational improvement plan costs and income, 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.
On July 2018,15, 2021, the Company acquired substantially all of the assets of Flavor Solutions, Inc., a flavors business located in New Jersey. The purchase price for this acquisition was $14.9 million in cash. This business is now part of the Flavors & Extracts segment.
On October 3, 2022, the Company acquired 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 $1.3 million in debt assumed, with $1.7 million of such amount being held back by the Company for 12 months to satisfy any indemnification claims that may arise. This business is now part of the Color segment.
On June 30, 2020, the Company completed the acquisitionsale of Mazza Innovation Limited (now knownits inks product line. In 2021 and 2020, the Company received $0.5 million and $11.6 million of net cash, respectively, as Sensient Natural Extraction Inc.). This business was included in Corporate & Other in 2018. Beginning inpart of the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change.sale.
On April 1, 2021, the Company completed the sale of its fragrances product line (excluding its essential oils product line) for $36.3 million of net cash.
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 third quarter of 2020 and the second quarter of 2021, the Company has announceddivested its intent to divest itsyogurt fruit preparationpreparations product line and Sensient Fragrances while retainingfragrances product line (excluding its essential oils product line.line), respectively.
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, 2019,2022, 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.
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; specialty inks; and technical colors for industrial applications. As noted above, the Company has announced its intent to divest its inks product line.
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 2019, thenutraceuticals. The Company also mademakes industrial colors specialty inks, and other dyes and pigments used in a variety of non-food applications. After the anticipated divestiture of the inks product line in the second quarter of 2020, the Company would no longer manufacture or sellsells specialty inks.
As of December 31, 2019,2022, the Group’s principal manufacturing plants are located in Missouri, New Jersey, Brazil, Canada, China, France, Germany, Italy, Mexico, Peru, Switzerland,Turkey, and the United Kingdom.
The Color Group operates under the following trade names:
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.
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 & FragrancesExtracts 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.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 India,and Indonesia and Thailand, andas well as for research and development in Singapore.
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,other charges including operational improvement plan costs and income, and other costs, are included in the “Corporate & Other” category. From July 2018 through December 2018, the results of Sensient Natural Extraction Inc. were included in the Corporate and Other category. They are now included in the Color Group. The results for 2018 have been restated to reflect this change.
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 employed 761789 people in research and development, quality assurance, quality control, and lab technician positions as of December 31, 2019.2022.
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.
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 & FragrancesExtracts 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.
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.
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 & |
| • | 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. |
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.
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 trademark;formula; however, trademarks, patents, and formulae are important to the business of the Company.
As of December 31, 2019,2022, the Company employed 4,0584,094 persons worldwide. Approximately 44% of our employees were employed in the United States, and approximately 56% were employed outside of the United States. Of our 4,094 employees worldwide, we had 506 general administration employees (e.g., accounting, administrative, regulatory compliance, IT, human resources, etc.), 2,575 production employees, 477 research and development employees, and 536 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 President 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 we operate and 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 to 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, 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 candidates, without bias, who share the behavioral and cognitive attributes of our most successful sales and 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 effective 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, new hire interviews, and a monthly report of our results to senior leadership. We also have 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, 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 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.
| 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 Operation”Operations” below and “Forward-Looking Statements” above, the following factors should be considered:
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 and fragrances 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 us,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, which can negatively affect our results.
Our business is impacted by adverse developments in economic 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 have caused global supply chain disruptions, inflation, and the strengthening of the U.S. dollar, which have adversely impacted and could continue to adversely impact our results of 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.
The coronavirus/COVID-19 has significantly impacted worldwide economic conditions and could adversely affect our results and financial condition. |
The coronavirus, also known as COVID-19, has caused, and may continue to cause, a material adverse effect on the level of economic activity around the world, including through factory shutdowns, disruptions in supply and logistics, travel and transportation restrictions, widespread illness and quarantines, and uncertainty and volatility in the financial markets. These disruptions present numerous risks to our operations. We may be unable to produce goods due to constraints in production caused by our factories being ordered to close; our inability to obtain raw materials due to shortages, transportation disruptions, or supplier shutdowns; or due to illnesses and quarantines affecting our workforce. Any of these events could adversely affect our ability to produce and sell our products, resulting in reduced revenue.
While all of our manufacturing facilities currently remain open, it remains possible that a government could order partial or total shutdown of one or more of our facilities as a result of a zero-COVID government policy or otherwise. Earlier during the COVID-19 pandemic in 2020 through 2022, our facilities in China and India were shut down at times by the local governments as a result of COVID-19 restrictions. Any such future shutdowns could adversely affect our results. Even if our facilities are allowed to remain open, an outbreak of illness among employees at any of our facilities could result in a temporary or prolonged manufacturing disruption or facility closure. We have also found it difficult to hire production workers and other employees in some markets as a result of the COVID-19 pandemic and changing dynamics in the employment market, which have increased competition for labor. Additionally, changes in governmental policies could also affect our ability to operate our facilities.
Even if we can produce our products, we may not be able to ship them on time due to transportation disruptions. In addition, due to travel restrictions and customer shutdowns, we may not be able to continue sales efforts with some new and existing customers. Even where we can produce our products, offer our products for sale, and deliver them, our customers may not be able to fully operate their production facilities due to shutdowns or their inability to obtain other raw materials necessary to produce their products, which may result in less demand for our products. Customers may also face transportation disruptions for their products, which could reduce customers’ sales and, therefore, customers’ demand for our products. Additionally, many customers have cancelled or delayed new product introductions due to the disruptions created by the COVID-19 pandemic. It is unclear when, or if, such new product introductions will return to pre-COVID-19 pandemic levels. A prolonged decline of new product introductions or limited time offerings could adversely affect our results.
Overall, COVID-19 and the volatile economic conditions stemming from the COVID-19 pandemic could exacerbate the other risk factors that we identify in this report, any of which could materially adversely impact our business. More broadly, the COVID-19 pandemic has demonstrated the massive economic and societal impacts that can be generated by a global pandemic, and there can be no assurance that there will not be a resurgence of COVID-19, globally or in regions that are significant to us, or the outbreak of another pandemic in the future, either of which could materially adversely impact our business. As a result of any of the foregoing, our results or financial condition could be adversely impacted and the impacts could be material.
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. 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.
The ongoing military conflict between Russia and Ukraine, and the global response to it, may adversely affect our operations.
In February 2022, Russia invaded Ukraine. This ongoing military conflict has increased the likelihood of supply chain interruptions and, for certain raw materials, decreased our ability to source materials that we need to make our products. 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. In addition, we have experienced increased costs for transportation, energy, and raw materials due in part to the negative impact of the Russia-Ukraine military conflict on the global economy. These increased costs, or any potential shortage of energy or raw materials, could adversely affect our profitability. The military conflict may also increase the risk of cybersecurity incidents, including the risk of cyberattacks in retaliation for the United States’ and European Union’s support of Ukraine and sanctions against Russia or otherwise. Such attacks, whether on us or on critical infrastructure and financial institutions globally, could also adversely affect our operations. It is not possible to predict the broader or long-term consequences of this military conflict, which could include further sanctions, regional instability, a wider military conflict, and adverse effects on international trade policies and economic conditions, cybersecurity, currency exchange rates, and financial markets. 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.
11
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 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, and price demands, our results could be adversely affected. The COVID-19 pandemic and 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 2020 and 2021, the Company executed an operational improvement plan to further consolidate manufacturing facilities and improve efficiencies within the Personal Care business line of 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. 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, the 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 could also cause a supply disruption. We have, in the past, dealt with regulators shutting down suppliers that provided the Company with raw materials. This adversely impacted the supply of raw materials for the affected products and, therefore, impacted our ability to produce products containing these raw materials. 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 Natural Ingredients business. 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 may not be able to manage inventory as effectively as anticipated, which may adversely impact our performance.
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 as the demand for natural products grows, 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. Since the beginning of the COVID-19 pandemic, we have held large quantities of raw material and finished goods inventory to minimize disruptions to our customers. As we emerge from the worst impacts of the pandemic, we may not be as effective as we intend in reducing our inventory to more normal levels.
Raw material, energy, labor, and transportation cost volatility, including inflation in prices due to ongoing supply chain challenges and other macroeconomic forces, may reduce our profitability.
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 military conflict discussed above), and changes in governmental regulations, particularly related to carbon reduction. Commodity, transportation, and energy price increases will raise both our raw material costs and operating costs. 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 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 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 as a result of changing consumer preferences. TheseHistorically, these combined pressures have resulted in some of the Company’s customers entering bankruptcy or receivership during the past 12 months.receivership. There is risk that other customers of the Company could enter bankruptcy or receivership in the next 12 months.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, financiallycertain 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.
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. 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 headings “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 delays or interruptions; sometimes unpredictable regulatory changes; physical security risks; and the effects of international political developments and political and economic instability. For example, we have a natural colors business in Peru, which has experienced political instability in recent years, including the removal of its president in late 2022. While the political instability of Peru has not yet materially adversely impacted our business in Peru, it could do so in the future, and our results of operations could be adversely affected. Also, we have a flavors manufacturing facility in Celaya, Mexico, which has experienced increased levels of political and criminal violence by narcotics trafficking cartels during 2022. 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, 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. Chinese government pandemic control policies also caused our facilities to be shutdown for certain periods during 2022. 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. For example, we have production facilities, customers, and suppliers in the United Kingdom, and greater trade restrictions resulting from the departure of the United Kingdom from the European Union could result in increased costs and other adverse financial impacts to our business. 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. Various stakeholders’ increasing and changing expectations and new laws and regulations with respect to Environmental, Social, and Governance (ESG) matters may impose additional costs on us or expose us to additional risks. 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-term 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. 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, 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 on the trading price of our common stock. In addition, the increased focus on ESG matters may result in new or increased regulations, laws, and demands, such as carbon tax 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 raw materials, production, and transportation. If we are unable to pass on these costs, our profit could decline. Further, our customers and the markets we serve may impose standards, regulations, market-based policies, or preferences that we may not be able to timely meet due to the required level of capital investment or technological advancement, which in the case of the availability of sustainable energy to support our operations is generally outside our control. If we fail to keep up with changing regulations and preferences, or if we fail to innovate or operate in ways that maximize sustainability, our customers may choose more sustainable suppliers. Failing to quickly and cost-efficiently adapt to stakeholder ESG expectations and standards could adversely affect our business and financial condition. Additionally, consumers who buy food and personal care products from our customers may be unwilling to pay the higher prices that could result from the increased costs of products as a result of these sustainability efforts, which could adversely affect our business and financial condition. 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. 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. As noted above, our yields from harvests for onion were adversely impacted in 2021 and 2022 by both drought and flooding, resulting in reduced availability of our onion products. 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, and colors 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. 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.
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, specialty inks, 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. 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. ActionsAs discussed above, actions by regulatory agencies against us and our suppliers can also adversely impact the availability of raw materials. For example, within last 18 months Chinese regulators shutdown suppliers that provided the Company with raw materials for synthetic colors and inks. This adversely impacted the supply of raw materials for these products and, therefore, impacted our ability to produce these products and our ability to provide these products at traditional quantities and competitive prices. AnytimeWhenever raw materials become more costly or unavailable due to legal, regulatory, or other governmental actions, our profitability could be adversely impacted.
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.
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 we 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.
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 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 the loss of key employees 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. 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.
Our business is subjectstrategy includes acquiring businesses and making investments that complement our existing businesses. We have acquired many companies and operations in the past and may continue growth by acquisition in the future. We continue to analyze and evaluate acquisition opportunities with 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 maintains robust policiespotential to prevent violations of these laws andstrengthen our industry position or enhance our existing product offerings. We may not be able to monitor third party risks, investigating and resolving actualidentify suitable acquisition candidates 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 civilhave sufficient financing and/or criminal fines and penalties if we or any of our representatives failcash available to comply with these laws, whichsuccessfully complete acquisitions in the future. Our future growth through acquisitions could involve significant risks that may have a material adverse effect on our business and reputation.us. We may also be at risk for liabilities associated with acquisitions that the Company has made in the past. Acquired companies may have significant latent liabilities that may not be discovered before an acquisition or fully reflected in the price we pay.
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.
In addition, since 2020, we have completed the divestiture of each of our inks, yogurt fruit preparations, and fragrances (excluding the essential oils product line) product lines. 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 a given divestiture. If any additional post-closing risks materialize, the benefits of such divestitures may not be fully realized, if at all, and our business, financial condition, and results of operations could be negatively impacted.
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 security 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. 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 platform 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. Because of the nature of our business, and the importance of our proprietary information and manufacturing facilities, we face threats not only from hackers’ intent on theft (including theft through the use of ransomware) and disruption, but also from malicious insiders that may attempt to steal Company information. Furthermore, our information technology systems may be susceptible to failures, disruptions, breaches, ransomware, theft, employee carelessness in the face of social engineering threats, and other similar cybersecurity events. 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 may not always be successful. And, while we maintain liability insurance against these risks, coverage may be unavailable or incomplete.
| Item 1B. | Unresolved Staff Comments. |
None.
| 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 & FragrancesExtracts Group headquarters offices located in Hoffman Estates, Illinois. As of December 31, 2019,2022, 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; Morges, Switzerland;Gebze, Turkey; and Kings Lynn, United Kingdom.
Flavors & FragrancesExtracts 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.
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 II, Item 8, Note 16, Commitments and Contingencies, of this report for information regarding legal proceedings in which we are involved.
| Item 4. | Mine Safety Disclosure. |
Not applicable.
The executive officers of the Company and their ages as of February 20, 2020,17, 2023 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 | |
| E. Craig Mitchell | 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:
Ms. Agallar has held her present office since January 9, 2019. Prior to joining the Company, Ms. Agallar was Director – Business Development CIS of Modine Manufacturing (June 2018 – January 2019), and Director – Global Treasury Operations of Modine Manufacturing (2011– June 2018).
Ms. Jones has held her present office since April 2, 2018. Prior to joining the Company, Ms. Jones was a partner of Michael Best & Friedrich LLP (1998 – March 2018).
| Mr. Tornehl has held his present office since November 10, 2018, and previously served as Director, Finance (2008 – November 2018). |
Mr. Paul Manning (Chairman, President, and Chief Executive Officer) and Mr. John J. Manning (Senior Vice President, General Counsel, and Secretary) are brothers.
The Company’s common stock is listed on the New York Stock Exchange under the ticker symbol “SXT.” The only market in whichnumber of shareholders of record of the Company’s common stock on February 9, 2023 was 1,990.
Since 1962, the Company has paid, without interruption, a quarterly cash dividend. During fiscal 2022, the Company paid aggregate cash dividends of $1.64 per share to our shareholders, and the Company most recently declared a dividend of $0.41 per share payable on March 1, 2023 to shareholders of record on February 7, 2023. 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, 2022, 1,267,019 shares had been repurchased under the 2017 Authorization. There were no repurchases of shares by the Company during 2022. There is listedno 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, 2022, the maximum number of shares that may be purchased under publicly announced plans is the New York Stock Exchange.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, 2014,2017, and reinvestment of dividends. The stock performance shown on the graph is not necessarily indicative of future price performance.
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Sensient Technologies Corporation | $ | 100 | $ | 106 | $ | 135 | $ | 127 | $ | 99 | $ | 120 | $ | 100 | $ | 78 | $ | 94 | $ | 108 | $ | 150 | $ | 111 | ||||||||||||||||||||||||
| S&P Midcap Specialty Chemicals Index | 100 | 97 | 121 | 130 | 123 | 146 | 100 | 95 | 113 | 121 | 144 | 128 | ||||||||||||||||||||||||||||||||||||
| S&P Midcap Food Products Index | 100 | 104 | 127 | 133 | 124 | 146 | 100 | 93 | 109 | 120 | 140 | 137 | ||||||||||||||||||||||||||||||||||||
| S&P 500 Index | 100 | 101 | 113 | 138 | 132 | 174 | 100 | 96 | 126 | 149 | 191 | 157 | ||||||||||||||||||||||||||||||||||||
Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services, LLC.
| Item 6. | [Reserved] |
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||||||||
| 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 | ||||||||||||||
| 2018 | ||||||||||||||||||||
| Revenue | $ | 356,477 | $ | 363,041 | $ | 342,734 | $ | 324,563 | $ | 1,386,815 | ||||||||||
| Gross profit | 123,071 | 121,470 | 115,573 | 106,015 | 466,129 | |||||||||||||||
| Net earnings | 38,194 | 39,123 | 47,193 | 32,850 | 157,360 | |||||||||||||||
| Earnings per basic share | 0.89 | 0.93 | 1.12 | 0.78 | 3.71 | |||||||||||||||
| Earnings per diluted share | 0.89 | 0.92 | 1.12 | 0.78 | 3.70 | |||||||||||||||
| Years ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||
| Summary of Operations | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 1,322,934 | 100.0 | % | $ | 1,386,815 | 100.0 | % | $ | 1,362,265 | 100.0 | % | $ | 1,383,210 | 100.0 | % | $ | 1,375,964 | 100.0 | % | ||||||||||||||||||||
| Cost of products sold | 908,061 | 68.6 | 920,686 | 66.4 | 886,775 | 65.1 | 907,783 | 65.6 | 921,531 | 67.0 | ||||||||||||||||||||||||||||||
| Selling and administrative expenses | 293,763 | 22.2 | 262,751 | 18.9 | 307,684 | 22.6 | 289,818 | 21.0 | 288,092 | 20.9 | ||||||||||||||||||||||||||||||
| Operating income | 121,110 | 9.2 | % | 203,378 | 14.7 | % | 167,806 | 12.3 | % | 185,609 | 13.4 | % | 166,341 | 12.1 | % | |||||||||||||||||||||||||
| Interest expense | 20,107 | 21,853 | 19,383 | 18,324 | 16,945 | |||||||||||||||||||||||||||||||||||
| Earnings before income taxes | 101,003 | 181,525 | 148,423 | 167,285 | 149,396 | |||||||||||||||||||||||||||||||||||
| Income taxes | 18,956 | 24,165 | 58,823 | 44,372 | 42,149 | |||||||||||||||||||||||||||||||||||
| Earnings from continuing operations | 82,047 | 157,360 | 89,600 | 122,913 | 107,247 | |||||||||||||||||||||||||||||||||||
| Gain (loss) from discontinued operations, net of tax | - | - | - | 3,343 | (462 | ) | ||||||||||||||||||||||||||||||||||
| Net earnings | $ | 82,047 | $ | 157,360 | $ | 89,600 | $ | 126,256 | $ | 106,785 | ||||||||||||||||||||||||||||||
| Earnings per basic share: | ||||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 1.94 | $ | 3.71 | $ | 2.05 | $ | 2.76 | $ | 2.34 | ||||||||||||||||||||||||||||||
| Discontinued operations | - | - | - | 0.08 | (0.01 | ) | ||||||||||||||||||||||||||||||||||
| Earnings per basic share | $ | 1.94 | $ | 3.71 | $ | 2.05 | $ | 2.84 | $ | 2.33 | ||||||||||||||||||||||||||||||
| Earnings per diluted share: | ||||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 1.94 | $ | 3.70 | $ | 2.03 | $ | 2.74 | $ | 2.32 | ||||||||||||||||||||||||||||||
| Discontinued operations | - | - | - | 0.07 | (0.01 | ) | ||||||||||||||||||||||||||||||||||
| Earnings per diluted share | $ | 1.94 | $ | 3.70 | $ | 2.03 | $ | 2.82 | $ | 2.31 | ||||||||||||||||||||||||||||||
| Other Related Data | ||||||||||||||||||||||||||||||||||||||||
| Dividends per share, declared and paid | $ | 1.47 | $ | 1.35 | $ | 1.23 | $ | 1.11 | $ | 1.04 | ||||||||||||||||||||||||||||||
| Average common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
| Basic | 42,263 | 42,404 | 43,780 | 44,523 | 45,910 | |||||||||||||||||||||||||||||||||||
| Diluted | 42,294 | 42,499 | 44,031 | 44,843 | 46,204 | |||||||||||||||||||||||||||||||||||
| Book value per common share | $ | 20.83 | $ | 20.34 | $ | 19.70 | $ | 18.83 | $ | 18.78 | ||||||||||||||||||||||||||||||
| Price range per common share | 54.77 - 75.21 | 51.93 - 78.40 | 71.21 - 84.98 | 52.69 - 83.38 | 56.71 - 70.53 | |||||||||||||||||||||||||||||||||||
| Share price at December 31 | 66.09 | 55.85 | 73.15 | 78.58 | 62.82 | |||||||||||||||||||||||||||||||||||
| Capital expenditures | 39,100 | 50,740 | 56,344 | 81,216 | 79,941 | |||||||||||||||||||||||||||||||||||
| Depreciation | 52,159 | 50,950 | 46,956 | 45,714 | 46,694 | |||||||||||||||||||||||||||||||||||
| Amortization | 2,856 | 2,294 | 1,562 | 1,305 | 1,245 | |||||||||||||||||||||||||||||||||||
| Total assets | 1,740,151 | 1,824,940 | 1,724,340 | 1,667,860 | 1,703,732 | |||||||||||||||||||||||||||||||||||
| Long-term debt | 598,499 | 689,553 | 604,159 | 582,780 | 613,502 | |||||||||||||||||||||||||||||||||||
| Total debt | 619,111 | 709,599 | 624,289 | 603,358 | 634,157 | |||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 881,589 | 859,947 | 852,301 | 835,741 | 845,127 | |||||||||||||||||||||||||||||||||||
| Return on average shareholders’ equity | 9.2 | % | 18.8 | % | 10.3 | % | 14.7 | % | 11.6 | % | ||||||||||||||||||||||||||||||
| Total debt to total capital | 41.3 | % | 45.2 | % | 42.3 | % | 41.9 | % | 42.9 | % | ||||||||||||||||||||||||||||||
| Employees | 4,058 | 4,113 | 4,023 | 4,083 | 4,032 | |||||||||||||||||||||||||||||||||||
| 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, 2019 and 2018 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 financial conditionoperations for the fiscal year ended December 31, 2017 is included under2022, compared to the headingyear ended December 31, 2021. For a discussion of the year ended December 31, 2021, compared to the year ended December 31, 2020, 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/A filed10-K for the fiscal year ended December 31, 20182021, filed with the Securities and Exchange Commission (SEC) on February 25, 2019.18, 2022, 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, essential oils, pharmaceutical, and household-products industries. The Company is also a leading 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, inks,nutraceutical systems; specialty colors; and other ingredients for cosmetics, pharmaceuticals, nutraceuticalsspecialty and digital printing; and technical colors for industrial applications.fine chemicals. The Company’s three reportable segments are the Flavors & FragrancesExtracts Group and the Color Group, which are managed on a product basis, and the Asia Pacific Group, which is managed on a geographic basis. The Company’s corporate expenses, restructuring including operational improvement plans, divestiture, share-based compensation, and other costs are included in the “Corporate & Other” category. In July 2018,the second quarter of 2020, the Company completed the acquisition of Sensient Natural Extraction Inc. This business was included in Corporate & Other in 2018. Beginning in the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change.
The Company’s diluted earnings per share were $1.94$3.34 in 20192022 and $3.70$2.81 in 2018. Included in the 20192021. 2022 results were $45.9positively impacted by $2.5 million ($43.21.9 million after tax, $1.02$0.04 per share) of divestiture & other related costs. Included in the 2018income. 2021 results was $6.6were negatively impacted by $12.2 million ($14.8 million after tax, $0.35 per share) of a benefitdivestiture & other related to the enactment of the Tax Cutscosts and Jobs Act (2017 Tax Legislation), equating to an impact of a 16 cents per share benefit.operational improvement plan costs and income. Adjusted diluted earnings per share, which exclude the divestiture & other related costs as well asand income, the impactresults of operations of the 2017 Tax Legislation,divested product lines, and the operational improvement plan costs and income, were $2.96$3.29 in 20192022 and $3.55$3.13 in 20182021 (see discussion below regarding non-GAAP financial measures and the Company’s divestiture related costs and the impact of the 2017 Tax Legislation)measures).
Additional information on the results is included below.
RESULTS OF OPERATIONS
Revenue
Sensient’s revenue was approximately $1.3 billion and $1.4 billion in 2019both 2022 and 2018, respectively.2021.
Gross Profit
The Company’s gross margin was 31.4%34.0% in 20192022 and 33.6%32.9% in 2018.2021. The decreaseincrease in gross margin iswas primarily a result of unfavorable volumedue to higher selling prices and the impact of a $10.6 million inventory adjustment related to the divestingdivestiture of the inks, fragrances, and yogurt fruit preparationpreparations product line,lines, which decreased gross margin 40 basis points in 2021, partially offset by higher selling prices. See Divestitures below for further information on the inventory adjustment.raw material costs in 2022.
Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 22.2%20.3% in 20192022 and 18.9%20.6% in 2018, respectively. Divestiture2021. Selling and administrative expenses in 2022 were reduced by divestiture & other related income totaling $2.5 million and in 2021 were increased by divestiture & other related expenses and operational improvement plan costs of $35.3 million in 2019 were included in Selling and administrative expense and increased sellingincome totaling $12.2 million. Selling and administrative expense as a percent of revenue decreased by approximately 27020 basis points and increased by approximately 90 basis points in 2019.2022 and 2021, respectively, as a result of these income and expenses. See Divestitures below for further information.
Operating Income
Operating income was $121.1$196.8 million in 20192022 and $203.4$170.0 million in 2018.2021. Operating margins were 9.2%13.7% in 20192022 and 14.7%12.3% in 2018.2021. Divestiture & other related income improved operating margins by approximately 20 basis points in 2022 and divestiture & other related costs and operational improvement plan costs and income reduced operating margins by approximately 35090 basis points in 2019.2021.
Additional information on segment results can be found in the Segment Information section.
Interest Expense
Interest expense was $20.1$14.5 million in 20192022 and $21.9$12.5 million in 2018.2021. The decreaseincrease in expense was primarily due to an increase in the decrease in average debt outstanding.outstanding and the average interest rate.
Income Taxes
The effective income tax rate was 18.8%22.7% in 20192022 and 13.3%24.6% in 2018.2021. The effective tax rates in both 20192022 and 20182021 were impacted by changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rate in 2019 was impacted by tax costs related toearnings, the divestiture & other related costs and income, and the release of valuation allowances related to the foreign tax credit carryover and foreign net operating losses. The effective tax rate in 2018 was also favorably impacted by U.S. tax accounting method changes that were filed with the IRS in the second quarter of 2018 and generation of foreign tax credits during 2018. See Note 11,Income Taxes, in the Notes to Consolidated Financial Statements included in this report for additional 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% |
| 2022 | 2021 | |||||||
| Rate before divestiture and discrete items | 25.8 | % | 24.3 | % | ||||
| Divestiture & other related costs and income impact | - | 4.2 | % | |||||
| Discrete items | (3.1 | %) | (3.9 | %) | ||||
| Reported effective tax rate | 22.7 | % | 24.6 | % | ||||
The 20202023 effective income tax rate is estimated to be between 24% and 25%26%, before any discrete items, such as finalization of prior year foreign and domestic tax items, audit settlements, and valuation allowance adjustments.
Acquisitions
On March 9, 2018,July 15, 2021, the Company completedacquired substantially all of the acquisition of certain net assets and the natural color business of GlobeNatural,Flavor Solutions, Inc., a flavors business located in New Jersey. The purchase price for this acquisition was $14.9 million in cash. This business is now part of the Flavors & Extracts segment.
On October 3, 2022, the Company acquired Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. (collectively, Endemix), a company basednatural colors business located in Lima, Peru.Turkey. The Company paid $10.8$23.3 million ofin cash for this acquisition. The assets acquired and liabilitiesacquisition, which is net of $1.3 million in debt assumed, were recorded at their estimated fair values aswith $1.7 million of such amount being held back by the acquisition date. The Company acquired net assetsfor 12 months to satisfy any indemnification claims that may arise. This business is now part of $1.4 million and identified intangible assets, principally customer relationships of $2.0 million, and allocated the remaining $7.4 million to goodwill. These operations are included in the Color segment.
Divestitures
On June 30, 2020, the carrying valueCompany completed the sale of certain long-lived assets to their fair value. An estimateits inks product line. In 2021 and 2020, the Company received $0.5 million and $11.6 million of net cash, respectively, as part of the fair valuesale.
On September 18, 2020, the Company completed the sale of theseits yogurt fruit preparations product lines less cost to sell was determined to be lower than its carrying value. This estimate will be finalizedline. The Company received $2.5 million of net cash in 2022 and adjusted$1.0 million of net cash in each of 2021 and 2020, as necessary upon the closingpart of the sales or as assumptions change. Also insale.
On April 1, 2021, the fourth quarterCompany completed the sale of 2019,its fragrances product line (excluding its essential oils product line) for $36.3 million of net cash. As a result of the completion of the sale, the Company recorded a non-cash chargenet loss of $9.8$11.3 million, and disposal costs of $0.8 million, in Cost of products sold,for the year ended December 31, 2021, primarily related to the fruit preparation divestiture. The charge reducedreclassification of accumulated foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the carrying valueConsolidated Statements of Earnings.
See Note 14, Divestitures, in the Notes to Consolidated Financial Statements included in this report for additional information.
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 combined 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 centralized 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 inventories,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 they were determinedpart of the Operational Improvement Plan; however, the landlord for the property requested to be excessterminate the lease prior to the end of its term and compensated the Company as part of December 31, 2019.a negotiated resolution for that termination. The Company also incurred $1.3 million of additionalreports all costs primarily related to severance,and income associated with the Operational Improvement Plan in Corporate & Other.
See Note 15, Operational Improvement Plan, in the fourth quarter of 2019,Notes to Consolidated Financial Statements included in Selling and administrative expenses,this report related to the anticipated divestitures and other exit activities.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 EPS (whichearnings per share, which exclude the results of the divested product lines, the divestiture & other related costs as well asand income, and the impact of the 2017 Tax Legislation)operational improvement plan costs and income, and (2) percentage changes in revenue, operating income, and diluted EPS,earnings per share on an adjusted operating income, and adjusted diluted EPS on a local currency basis, (whichwhich eliminate the effects that result from translating its international operations into U.S. dollars).dollars, the results of the divested product lines, the divestiture & other related costs and income, and the operational improvement plan costs and income.
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. Thetrends, and the Company believes that thisthe 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) | 2022 | 2021 | % Change | |||||||||
| Revenue (GAAP) | $ | 1,437,039 | $ | 1,380,264 | 4.1 | % | ||||||
| Revenue of the divested product lines | - | (30,062 | ) | |||||||||
| Adjusted revenue | $ | 1,437,039 | 1,350,202 | 6.4 | % | |||||||
| Operating Income (GAAP) | $ | 196,751 | $ | 170,028 | 15.7 | % | ||||||
| Divestiture & other related costs – Cost of products sold | - | 86 | ||||||||||
| Divestiture & other related (income) costs – Selling and administrative expenses | (2,532 | ) | 14,052 | |||||||||
| Operating income of the divested product lines | - | (1,880 | ) | |||||||||
| Operational improvement plan income – Selling and administrative expenses | - | (1,895 | ) | |||||||||
| Adjusted operating income | $ | 194,219 | $ | 180,391 | 7.7 | % | ||||||
| Net Earnings (GAAP) | $ | 140,887 | $ | 118,745 | 18.6 | % | ||||||
| Divestiture & other related (income) costs, before tax | (2,532 | ) | 14,138 | |||||||||
Tax impact of divestiture & other related costs and income(1) | 636 | 2,092 | ||||||||||
| Net earnings of the divested product lines, before tax | - | (1,880 | ) | |||||||||
Tax impact of the divested product lines(1) | - | 460 | ||||||||||
| Operational improvement plan income, before tax | - | (1,895 | ) | |||||||||
Tax impact of operational improvement plan(1) | - | 471 | ||||||||||
| Adjusted net earnings | $ | 138,991 | $ | 132,131 | 5.2 | % | ||||||
| Diluted Earnings Per Share (GAAP) | $ | 3.34 | $ | 2.81 | 18.9 | % | ||||||
| Divestiture & other related (income) costs, net of tax | (0.04 | ) | 0.38 | |||||||||
| Results of operations of the divested product lines, net of tax | - | (0.03 | ) | |||||||||
| Operational improvement plan, net of tax | - | (0.03 | ) | |||||||||
| Adjusted diluted earnings per share | $ | 3.29 | $ | 3.13 | 5.1 | % | ||||||
| Twelve Months Ended December 31, | ||||||||||||
| (In thousands except per share amounts) | 2019 | 2018 | % Change | |||||||||
| 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 | - | ||||||||||
| Adjusted operating income | $ | 166,990 | $ | 203,378 | (17.9 | %) | ||||||
| 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 | ) | - | |||||||||
| 2017 Tax Legislation | - | (6,634 | ) | |||||||||
| Adjusted net earnings | $ | 125,256 | $ | 150,726 | (16.9 | %) | ||||||
| Diluted EPS (GAAP) | $ | 1.94 | $ | 3.70 | (47.6 | %) | ||||||
| Divestiture & other related costs, net of tax | 1.02 | - | ||||||||||
| 2017 Tax Legislation | - | (0.16 | ) | |||||||||
| Adjusted diluted EPS | $ | 2.96 | $ | 3.55 | (16.6 | %) | ||||||
Divestiture & other related costs and income are discussed under ““Divestitures” above and Note 14, Divestitures, in the Notes to the Divestitures”Consolidated Financial Statements included in this report. Operational improvement plan costs and income are discussed under “Operational Improvement Plan” above and Note 15, Divestitures, Operational Improvement Plan, in the Notes tothe 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 20192022 results compared to the 20182021 results in the respective financial measures.
| Twelve Months Ended December 31, 2019 | Twelve Months Ended December 31, 2022 | |||||||||||||||||||||||||||
| Total | Foreign Exchange Rates | Local Currency | Total | Foreign Exchange Rates | Adjustments(1) | Adjusted Local Currency | ||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||
| Flavors & Fragrances | (6.2%) | (1.4%) | (4.8%) | |||||||||||||||||||||||||
| Flavors & Extracts | (0.2 | %) | (2.2 | %) | (3.8 | %) | 5.8 | % | ||||||||||||||||||||
| Color | (3.4%) | (2.7%) | (0.7%) | 10.8 | % | (3.8 | %) | (0.4 | %) | 15.0 | % | |||||||||||||||||
| Asia Pacific | (4.0%) | (0.4%) | (3.6%) | 6.1 | % | (8.0 | %) | (0.3 | %) | 14.4 | % | |||||||||||||||||
| Total Revenue | (4.6%) | (1.8%) | (2.8%) | 4.1 | % | (3.4 | %) | (2.2 | %) | 9.7 | % | |||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||||
| Flavors & Fragrances | (22.3%) | (0.5%) | (21.8%) | |||||||||||||||||||||||||
| Flavors & Extracts | 6.9 | % | (0.9 | %) | (2.5 | %) | 10.3 | % | ||||||||||||||||||||
| Color | (10.7%) | (2.9%) | (7.8%) | 10.7 | % | (5.1 | %) | 0.7 | % | 15.1 | % | |||||||||||||||||
| Asia Pacific | (7.1%) | 2.9% | (10.0%) | 12.0 | % | (10.1 | %) | (0.4 | %) | 22.5 | % | |||||||||||||||||
| Corporate & Other | 173.4% | (0.1%) | 173.5% | (9.8 | %) | 0.0 | % | (29.4 | %) | 19.6 | % | |||||||||||||||||
| Operating Income | (40.5%) | (1.6%) | (38.9%) | |||||||||||||||||||||||||
| Diluted EPS | (47.6%) | (1.4%) | (46.2%) | |||||||||||||||||||||||||
Adjusted operating income (1) | (17.9%) | (1.6%) | (16.3%) | |||||||||||||||||||||||||
Adjusted diluted EPS (1) | (16.6%) | (1.7%) | (14.9%) | |||||||||||||||||||||||||
| Total Operating Income | 15.7 | % | (5.2 | %) | 8.4 | % | 12.5 | % | ||||||||||||||||||||
| Diluted Earnings per Share | 18.9 | % | (5.3 | %) | 14.3 | % | 9.9 | % | ||||||||||||||||||||
| (1) | For Revenue, adjustments consist of revenues of the divested product lines. For Operating Income and Diluted Earnings per Share, adjustments consist of the results of the divested product lines, divestitures & other related costs and income, and operational improvement plan costs and income. |
| 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 and income, share-based compensation, acquisition, restructuring including the operational improvement plan, 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 & Fragrances,Extracts, Color, and Asia Pacific segments.
Flavors & FragrancesExtracts
Flavors & FragrancesExtracts segment revenue was $700.4$738.0 and $746.9$739.4 million in 20192022 and 2018,2021, respectively. Foreign exchange rates decreased segment revenue by approximately 1% in 2019. Segment2%, while the divestitures of Yogurt Fruit Preparations and Fragrances decreased segment revenue by approximately 4%. The lower segment revenue was lower than the prior yearprimarily due to these reasons as well as lower revenue in Flavors, Fragrances and Natural Ingredients. The lower revenues in Flavors and Fragrances was primarily a result of unfavorable volumes and exchange rates,Ingredients, partially offset by higher selling prices.revenue in Flavors, Extracts & Flavor Ingredients. The lower revenue in Natural Ingredients was primarily a result ofdue to unfavorable volumes, and lowerpartially offset by higher selling prices. The higher revenue in Flavors, Extracts & Flavor Ingredients was primarily due to higher selling prices, favorable volumes, and the acquisition of Flavor Solutions, Inc. on July 15, 2021, partially offset by the unfavorable impact of foreign exchange rates.
Flavors & FragrancesExtracts segment operating income was $75.0$105.4 million in 20192022 and $96.4$98.7 million in 2018, a decrease2021, an increase of approximately 22%7%. Foreign exchange rates decreased segment operating income by approximately 1%, while the divestitures of Yogurt Fruit Preparations and Fragrances decreased segment operating income by approximately 3%. The lowerhigher segment operating income was primarily a result of higher operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by lower operating income in both Flavors and Fragrances.Fragrances due to the divestiture of the product line in 2021. The lowerhigher operating income in both Flavors, and Fragrances was primarily a result of lower volumes, higher manufacturing and other costs, and higher raw materials costs, partially offset by higher selling prices and a favorable product mix. Segment operating income as a percent of revenue was 10.7% and 12.9% for 2019 and 2018, respectively.
| 2018 | 2017 | |||||||
| Rate before 2017 Tax Legislation, restructuring and discrete items | 20.7% | 24.5% | ||||||
| 2017 Tax Legislation | (3.7%) | 12.4% | ||||||
| Restructuring impact | - | 3.9% | ||||||
| Discrete items | (3.7%) | (1.2%) | ||||||
| Reported effective tax rate | 13.3% | 39.6% | ||||||
| Twelve Months Ended December 31, | ||||||||||||
| (In thousands except per share amounts) | 2018 | 2017 | % Change | |||||||||
| Operating Income (GAAP) | $ | 203,378 | $ | 167,806 | 21.2 | % | ||||||
| Restructuring – Cost of products sold | - | 2,889 | ||||||||||
| Restructuring – Selling and administrative | - | 33,627 | ||||||||||
Other – Selling and administrative (1) | - | 11,555 | ||||||||||
| Adjusted operating income | $ | 203,378 | $ | 215,877 | (5.8 | %) | ||||||
| Net Earnings (GAAP) | $ | 157,360 | $ | 89,600 | 75.6 | % | ||||||
| Restructuring & other, before tax | - | 48,071 | ||||||||||
| Tax impact of restructuring & other | - | (5,602 | ) | |||||||||
| 2017 Tax Legislation | (6,634 | ) | 18,446 | |||||||||
| Adjusted net earnings | $ | 150,726 | $ | 150,515 | 0.1 | % | ||||||
| Diluted EPS (GAAP) | $ | 3.70 | $ | 2.03 | 82.3 | % | ||||||
| Restructuring & other, net of tax | - | 0.96 | ||||||||||
| 2017 Tax Legislation | (0.16 | ) | 0.42 | |||||||||
| Adjusted diluted EPS | $ | 3.55 | $ | 3.42 | 3.8 | % | ||||||
| Twelve Months Ended December 31, 2018 | ||||||||||||
| Total | Foreign Exchange Rates | Local Currency | ||||||||||
| Revenue | ||||||||||||
| Flavors & Fragrances | 0.0% | 1.1% | (1.1%) | |||||||||
| Color | 5.3% | 0.4% | 4.9% | |||||||||
| Asia Pacific | 0.0% | (0.1%) | 0.1% | |||||||||
| Total Revenue | 1.8% | 0.7% | 1.1% | |||||||||
| Operating Income | ||||||||||||
| Flavors & Fragrances | (15.7%) | 0.0% | (15.7%) | |||||||||
| Color | (0.1%) | 1.0% | (1.1%) | |||||||||
| Asia Pacific | 0.4% | 1.3% | (0.9%) | |||||||||
| Corporate & Other | (66.3%) | 1.4% | (67.7%) | |||||||||
| Operating Income | 21.2% | 0.2% | 21.0% | |||||||||
| Diluted EPS | 82.3% | 0.0% | 82.3% | |||||||||
Adjusted operating income (1) | (5.8%) | 0.7% | (6.5%) | |||||||||
Adjusted diluted EPS (1) | 3.8% | 0.6% | 3.2% | |||||||||
Color
Segment revenue for the Color segment was $554.0$604.0 million in 20182022 and $526.4$545.3 million in 2017,2021, an increase of approximately 5%11%. Foreign exchange rates had a minimal impact ondecreased segment revenue.revenue by approximately 4%. The higher segment revenue was primarily a result of higher revenue in Food & BeveragePharmaceutical Colors and Cosmetics.Personal Care. The higher revenue in Food & BeveragePharmaceutical Colors was primarily a resultdue to higher selling prices, favorable volumes, and the acquisition of higher volumes, Endemix Doğal Maddeler A.Ş., partially offset by the unfavorable impact of the GlobeNatural acquisition (approximately 1%), favorableforeign exchange rates, and higher selling prices.rates. The higher revenue in CosmeticsPersonal Care was primarily a resultdue to higher selling prices and favorable volumes, partially offset by the unfavorable impact of higher volumes.foreign exchange rates.
Segment operating income for the Color segment was $113.3$114.6 million in 20182022 and $113.4$103.6 million in 2017. Segment2021, an increase of approximately 11%. Foreign exchange rates decreased segment operating income by approximately 5%, while the Inks divestiture increased segment operating income by approximately 1%. The higher segment operating income was consistent with the prior year asprimarily a result of higher operating income in Cosmetics,Food & Pharmaceutical Colors and Personal Care due to higher selling prices and favorable volumes, partially offset by higher raw material costs and manufacturing and other costs, unfavorable product mix, and the unfavorable impact of the Sensient Natural Extraction Inc. acquisition included in Other Colors. The higher operating income in Cosmetics was primarily a result of higher volumes and selling prices, favorable product mix, lower raw material costs, and the favorable impact offoreign exchange rates, partially offset by higher manufacturing and other costs. Foreign exchange rates increased segment operating income by approximately 1%.rates. Segment operating income as a percent of revenue was 20.5%19.0% in 2018 compared to 21.5% in 2017.both 2022 and 2021.
Asia Pacific
Segment revenue for the Asia Pacific segment was $123.2$143.6 million and $135.3 million for both 20182022 and 2017.2021, respectively, an increase of approximately 6%. Foreign exchange rates had a minimal impact ondecreased segment revenues.revenue by approximately 8%. Segment revenue was consistent withhigher than the prior year asprimarily due to higher selling prices were mostlyand favorable volumes, partially offset by lower volumes.the unfavorable impact of foreign exchange rates.
Segment operating income for the Asia Pacific segment was $20.9$29.5 million in 20182022 and $20.8$26.3 million in 2017, a slight2021, an increase over the prior year.of approximately 12%. Foreign exchange rates decreased segment operating income by approximately 10%. The slight increase in segment operating income was a result of higher selling prices favorable product mix, and favorable exchange rates, mostlyvolumes, partially offset by higher raw material costs and manufacturing and other costs. Foreigncosts and the unfavorable impact of foreign exchange rates increased segment operating income by approximately 1%.rates. Segment operating income as a percent of revenue was 16.9%20.5% in both 20182022 and 2017.19.5% in 2021.
Corporate & Other
The Corporate & Other operating loss was $27.2$52.8 million in 20182022 and $80.7$58.5 million in 2017.2021. The lower operating loss was primarily a result of the absence in 2018 of the restructuring2022 favorably impacted by divestiture & other related income totaling $2.5 million and 2021 negatively impacted by divestiture and other related costs that were incurredand operational improvement plan costs and income totaling $12.2 million, partially offset by higher performance-based compensation in 2017 2022. See the Divestitures and lower performance-based executive compensation incurred in 2018. Restructuring and other costs were $48.1 million in 2017. There were no restructuring and other costs incurred in 2018. Operational Improvement Plan sections above for further information.
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, 2019. In the fourth quarter of 2019, the Company amended its accounts receivable securitization program, and decreased the commitment size from $70 million to $65 million. See Note 9, Accounts Receivable Securitization, in the Notes to Consolidated Financial Statements included in this report for additional information.
2022. 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 2023 through 2027, with approximately $146 million coming due in 2023. The Company believes that it has the ability to refinance or repay these obligations through a combination of cash flow from operations, issuance of additional notes, and substantial borrowing capacity of approximately $207 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 2020 results.
2022. The Company has paid uninterrupted quarterly cash dividends since commencing public tradingexperienced increased costs for certain inputs, such as raw materials, shipping and logistics, and labor-related costs. We continue to expect to manage these impacts in its stock in 1962. In the fourth quarter of 2019, the Company increased its quarterly dividend from 36 cents per share to 39 cents per share. Dividends paid per share were $1.47 in 2019near term, but persistent, accelerated, or expanded inflationary conditions could exacerbate these challenges and $1.35 in 2018. Total dividends paid were $62.2 million and $57.4 million in 2019 and 2018, respectively.impact our profitability.
Sensient purchased 1.1 millionrepurchased 492,045 shares of Company stock in 20182021 for a total cost of $76.7 million and 1.1 million shares of Company stock in 2017 for a total cost of $87.2$42.5 million. There were no shares of Company stock purchasedrepurchased in 2019.2022 or 2020. In October 2017, the Board of Directors authorized the repurchase of up to three million shares. As of December 31, 2019, 2.2 million2022, 1,732,981 shares were available to be repurchased under the existing authorization. The Company’s share repurchase program has no expiration date. These authorizations may be modified, suspended, or discontinued by the Board of Directors at any time.
Cash Flows from Operating Activities
Net cash provided by operating activities was $12.1 million and $145.2 million in 2022 and 2021, respectively. Operating cash flow provided the primary source of funds for operating needs. The decrease in net cash provided by operating activities in 2022 was primarily due to an increase in the cash used for inventory as the Company invested in strategic inventory positions in order to manage production and on time delivery despite disruptions in our supply chain.
Cash Flows from Investing Activities
Net cash used in investing activities was $98.4 million and $35.6 million in 2022 and 2021, respectively. Capital expenditures were $79.3 million in 2022 and $60.8 million in 2021. In 2022, the Company received $2.5 million of proceeds from the divestiture of the yogurt fruit preparations product line. In 2021, the Company received $37.8 million of proceeds from the divestitures of the inks product line, yogurt fruit preparations product line, and fragrances product line. In 2022, the Company paid $21.7 million for the acquisition of Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. and $1.0 million related to the holdback associated with the acquisition of Flavor Solutions, Inc. In 2021, the Company paid $13.9 million for the acquisition of Flavor Solutions, Inc.
Cash Flows from Financing Activities
Net cash provided by financing activities was $86.2 million in 2022, and net cash used in financing activities was $107.8 million in 2021. The Company had a net increase in debt of $157.2 million and $2.0 million in 2022 and 2021, respectively. The increase in net debt in 2022 was primarily needed to fund capital expenditures and shareholder dividends due to the strategic use of operating cash flow to invest in inventory as described above. For the purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. The Company repurchased shares of its common stock for $42.5 million during 2021. There were no repurchases of shares of the Company’s common stock in 2022. 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 2022 and $1.58 in 2021. Total dividends paid were $68.9 million and $66.7 million in 2022 and 2021, 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 2019.2022. In conducting its annual test for impairment, the Company performed a quantitative assessment of the fair values for each of its reporting units and compared each of these values to the net book value of each reporting unit. 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 significantly above their respective net book values.values by at least 90%. 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.
In the fourth quarter of 2019, as a result of the Company’sCompany meeting the assets held for sale criteria for its divestitures of its inks and fragrances (excluding its essential oils product line) product lines, the Company allocated $8.4 million of goodwill to that disposal group. The $8.4 million of goodwill related to the disposal groups was determined to be fully impaired. In 2020, the fair value of the disposal groups decreased, which resulted in the previously allocated goodwill of $2.2 million to be reallocated to its respective financial reporting units. In 2021, the fair value of the disposal groups again increased, which resulted in an additional $0.8 million of goodwill allocated to the disposal groups. See Note 15, 14, Divestitures, in the Notes to Consolidated Financial Statements included in this report for additional details.
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, 2022, the Company recorded gross deferred tax assets of $99.6 million with an associated valuation allowance of $28.1 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 & Fragrances 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 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. In the fourth quarter of 2019, theThe Company recorded a non-cash chargecharges of $9.8$0.1 million and disposal costs of $0.8$1.8 million in 2021 and 2020, respectively, in Cost of products soldProducts Sold primarily related to the anticipatedyogurt fruit preparationpreparations divestiture. There were no non-cash charges recorded in 2022 related to the yogurt fruit preparations divestiture. The chargecharges reduced the carrying value of certain inventories, as they were determined to be excess as of December 31, 2019.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.
| (in thousands) | Total | 1 year | 2-3 years | 4-5 years | > 5 years | |||||||||||||||
| Long-term debt | $ | 598,499 | $ | 128,251 | $ | 132,896 | $ | 234,364 | $ | 102,988 | ||||||||||
| Interest payments on long-term debt | 54,631 | 14,459 | 23,362 | 12,930 | 3,880 | |||||||||||||||
| Operating lease obligations | 20,325 | 8,429 | 7,610 | 2,769 | 1,517 | |||||||||||||||
| Manufacturing purchase commitments | 87,942 | 83,244 | 4,698 | –– | –– | |||||||||||||||
| Pension funding obligations | 26,021 | 1,731 | 5,875 | 5,917 | 12,498 | |||||||||||||||
| Total contractual obligations | $ | 787,418 | $ | 236,114 | $ | 174,441 | $ | 255,980 | $ | 120,883 | ||||||||||
| 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 57 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 a liability of $0.2 million and an asset of $0.1 million as of December 31, 20192022 and 20182021, respectively. At December 31, 2019,2022, 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 $1.4$1.8 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 Swiss Francs, and British Pounds. These non-derivative debt instruments act as partial hedges of the Company’s Euro Swiss Franc, 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$0.8 million at December 31, 2019.2022. 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, 2019,2022, the potential increase or decrease in annual interest expense of floating rate debt, assuming a hypothetical 10% fluctuation in interest rates, would be approximately $0.5$1.1 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.