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| | Outstanding at April 30, 20192020 | Common Stock, par value $0.10 per share | | 42,319,163 42,357,694 |
SENSIENT TECHNOLOGIES CORPORATION
| | | Page No. | | | | | PART I. FINANCIAL INFORMATION: | | | | | | | Item 1. | Financial Statements: | | | |
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| | | | | 5 | | | | | | | | 6 | | | | | | Item 2. | | 1315 | | | | | | Item 3. | | 1621 | | | | | | Item 4. | | 1621 | | | | | PART II. OTHER INFORMATION: | | | | | | | Item 1. | | 1721 | | | | | | Item 1A. | | 1722 | | | | | | Item 2. | | 1723 | | | | | | Item 6. | | 1723 | | | | | | | | 1824 | | | | | | | | 1925 |
PART I. | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In thousands except per share amounts) (Unaudited)
| | Three Months Ended March 31, | | | | Three Months Ended March 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | | | | | | | | | | | | Revenue | | $ | 347,513 | | | $ | 356,477 | | | $ | 350,677 | | | $ | 347,513 | | | | | | | | | | | | | | | | | | | Cost of products sold | | | 232,288 | | | | 233,406 | | | | 238,784 | | | | 232,288 | | | | | | | | | | | | | | | | | | | Selling and administrative expenses | | | 65,805 | | | | 67,390 | | | | 77,332 | | | | 65,805 | | | | | | | | | | | | | | | | | | | Operating income | | | 49,420 | | | | 55,681 | | | | 34,561 | | | | 49,420 | | | | | | | | | | | | | | | | | | | Interest expense | | | 5,402 | | | | 5,555 | | | | 4,307 | | | | 5,402 | | | | | | | | | | | | | | | | | | | Earnings before income taxes | | | 44,018 | | | | 50,126 | | | | 30,254 | | | | 44,018 | | | | | | | | | | | | | | | | | | | Income taxes | | | 11,211 | | | | 11,932 | | | | 9,481 | | | | 11,211 | | | | | | | | | | | | | | | | | | | Net earnings | | $ | 32,807 | | | $ | 38,194 | | | $ | 20,773 | | | $ | 32,807 | | | | | | | | | | | | | | | | | | | Weighted average number of shares outstanding: | | | | | | | | | | Weighted average number of common shares outstanding: | | | | | | | | | | Basic | | | 42,239 | | | | 42,879 | | | | 42,284 | | | | 42,239 | | Diluted | | | 42,275 | | | | 43,034 | | | | 42,307 | | | | 42,275 | | | | | | | | | | | | | | | | | | | Earnings per common share: | | | | | | | | | | | | | | | | | Basic | | $ | 0.78 | | | $ | 0.89 | | | $ | 0.49 | | | $ | 0.78 | | Diluted | | $ | 0.78 | | | $ | 0.89 | | | $ | 0.49 | | | $ | 0.78 | | | | | | | | | | | | | | | | | | | Dividends declared per common share | | $ | 0.36 | | | $ | 0.33 | | | $ | 0.39 | | | $ | 0.36 | |
See accompanying notes to consolidated condensed financial statements.
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
| | Three Months Ended March 31, | | | | 2020 | | | 2019 | | | | | | | | | Comprehensive (loss) income | | $ | (23,580 | ) | | $ | 32,091 | |
| | Three Months Ended March 31, | | | | 2019 | | | 2018 | | | | | | | | | Comprehensive Income | | $ | 32,091 | | | $ | 62,058 | |
See accompanying notes to consolidated condensed financial statements.
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)
ASSETS | | March, 31 2019 (Unaudited) | | | December 31, 2018 | | | March 31, 2020 (Unaudited) | | | December 31, 2019 | | | | | | | | | | | | | | | CURRENT ASSETS: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 33,896 | | | $ | 31,901 | | | $ | 23,085 | | | $ | 21,153 | | Trade accounts receivable, net | | | 273,800 | | | | 255,350 | | | | 240,123 | | | | 213,201 | | Inventories | | | 468,324 | | | | 490,757 | | | | 384,157 | | | | 422,517 | | Prepaid expenses and other current assets | | | 50,276 | | | | 44,857 | | | | 38,768 | | | | 40,049 | | Assets held for sale | | | | 78,612 | | | | 91,293 | | | | | | | | | | | | | | | | | | | TOTAL CURRENT ASSETS | | | 826,296 | | | | 822,865 | | | | 764,745 | | | | 788,213 | | | | | | | | | | | | | | | | | | | OTHER ASSETS | | | 87,891 | | | | 66,788 | | | | 82,367 | | | | 80,939 | | DEFERRED TAX ASSETS | | | 8,653 | | | | 9,189 | | | | 10,741 | | | | 14,976 | | INTANGIBLE ASSETS, NET | | | 18,295 | | | | 18,867 | | | | 11,463 | | | | 11,802 | | GOODWILL | | | 413,710 | | | | 416,175 | | | | 400,515 | | | | 407,042 | | | | | | | | | | | | | | | | | | | PROPERTY, PLANT, AND EQUIPMENT: | | | | | | | | | | | | | | | | | Land | | | 36,467 | | | | 36,787 | | | | 30,078 | | | | 31,431 | | Buildings | | | 319,242 | | | | 318,463 | | | | 293,331 | | | | 298,733 | | Machinery and equipment | | | 695,811 | | | | 688,003 | | | | 645,866 | | | | 652,063 | | Construction in progress | | | 32,973 | | | | 34,772 | | | | 25,328 | | | | 24,613 | | | | | 1,084,493 | | | | 1,078,025 | | | | 994,603 | | | | 1,006,840 | | Less accumulated depreciation | | | (598,467 | ) | | | (586,969 | ) | | | (571,608 | ) | | | (569,661 | ) | | | | 486,026 | | | | 491,056 | | | | 422,995 | | | | 437,179 | | | | | | | | | | | | | | | | | | | TOTAL ASSETS | | $ | 1,840,871 | | | $ | 1,824,940 | | | $ | 1,692,826 | | | $ | 1,740,151 | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | Trade accounts payable | | $ | 108,381 | | | $ | 131,812 | | | $ | 91,437 | | | $ | 94,653 | | Accrued salaries, wages, and withholdings from employees | | | 20,255 | | | | 23,410 | | | | 19,724 | | | | 18,655 | | Other accrued expenses | | | 38,703 | | | | 31,198 | | | | 41,140 | | | | 41,429 | | Income taxes | | | 10,031 | | | | 8,234 | | | | 8,410 | | | | 6,841 | | Short-term borrowings | | | 20,082 | | | | 20,046 | | | | 20,105 | | | | 20,612 | | Liabilities held for sale | | | | 19,821 | | | | 19,185 | | | | | | | | | | | | | | | | | | | TOTAL CURRENT LIABILITIES | | | 197,452 | | | | 214,700 | | | | 200,637 | | | | 201,375 | | | | | | | | | | | | | | | | | | | DEFERRED TAX LIABILITIES | | | 31,097 | | | | 28,976 | | | | 14,511 | | | | 15,053 | | OTHER LIABILITIES | | | 21,845 | | | | 8,554 | | | | 20,224 | | | | 17,813 | | ACCRUED EMPLOYEE AND RETIREE BENEFITS | | | 23,801 | | | | 23,210 | | | | 25,457 | | | | 25,822 | | LONG‑TERM DEBT | | | 688,952 | | | | 689,553 | | | LONG-TERM DEBT | | | | 589,339 | | | | 598,499 | | | | | | | | | | | | | | | | | | | SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | Common stock | | | 5,396 | | | | 5,396 | | | | 5,396 | | | | 5,396 | | Additional paid‑in capital | | | 100,485 | | | | 101,663 | | | Additional paid-in capital | | | | 99,080 | | | | 98,425 | | Earnings reinvested in the business | | | 1,533,832 | | | | 1,516,243 | | | | 1,539,520 | | | | 1,536,100 | | Treasury stock, at cost | | | (595,718 | ) | | | (597,800 | ) | | | (593,977 | ) | | | (595,324 | ) | Accumulated other comprehensive loss | | | (166,271 | ) | | | (165,555 | ) | | | (207,361 | ) | | | (163,008 | ) | | | | | | | | | | | | | | | | | | TOTAL SHAREHOLDERS’ EQUITY | | | 877,724 | | | | 859,947 | | | | 842,658 | | | | 881,589 | | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,840,871 | | | $ | 1,824,940 | | | $ | 1,692,826 | | | $ | 1,740,151 | |
See accompanying notes to consolidated condensed financial statements.
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(In thousands)
(Unaudited)
| | Three Months Ended March 31, | | | | 2019 | | | 2018 | | | | | | | | | Cash flows from operating activities: | | | | | | | Net earnings | | $ | 32,807 | | | $ | 38,194 | | Adjustments to arrive at net cash provided by (used in) operating activities: | | | | | | | | | Depreciation and amortization | | | 13,672 | | | | 12,578 | | Share-based compensation | | | 687 | | | | 1,254 | | Net (gain) loss on assets | | | (41 | ) | | | 70 | | Deferred income taxes | | | 2,674 | | | | (4,346 | ) | Changes in operating assets and liabilities | | | (26,375 | ) | | | (66,441 | ) | | | | | | | | | | Net cash provided by (used in) operating activities | | | 23,424 | | | | (18,691 | ) | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Acquisition of property, plant, and equipment | | | (8,300 | ) | | | (11,058 | ) | Cash receipts on sold receivables | | | - | | | | 44,406 | | Proceeds from sale of assets | | | 45 | | | | 45 | | Acquisition of new businesses | | | - | | | | (11,000 | ) | Other investing activity | | | (301 | ) | | | 789 | | | | | | | | | | | Net cash (used in) provided by investing activities | | | (8,556 | ) | | | 23,182 | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from additional borrowings | | | 16,689 | | | | 92,348 | | Debt payments | | | (12,577 | ) | | | (12,280 | ) | Purchase of treasury stock | | | - | | | | (72,704 | ) | Dividends paid | | | (15,218 | ) | | | (14,274 | ) | Other financing activity | | | (803 | ) | | | (2,715 | ) | | | | | | | | | | Net cash used in financing activities | | | (11,909 | ) | | | (9,625 | ) | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | (964 | ) | | | 6,210 | | | | | | | | | | | Net increase in cash and cash equivalents | | | 1,995 | | | | 1,076 | | Cash and cash equivalents at beginning of period | | | 31,901 | | | | 29,344 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 33,896 | | | $ | 30,420 | |
See accompanying notes to consolidated condensed financial statements.
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS (In thousands, except per share amounts)thousands) (Unaudited)
| | Three Months Ended March 31, | | | | 2020 | | | 2019 | | | | | | | | | Cash flows from operating activities: | | | | | | | Net earnings | | $ | 20,773 | | | $ | 32,807 | | Adjustments to arrive at net cash provided by operating activities: | | | | | | | | | Depreciation and amortization | | | 12,404 | | | | 13,672 | | Share-based compensation | | | 1,177 | | | | 687 | | Net loss (gain) on assets | | | 14 | | | | (41 | ) | Loss on divestitures | | | 10,558 | | | | - | | Deferred income taxes | | | 4,077 | | | | 2,674 | | Changes in operating assets and liabilities: | | | | | | | | | Trade accounts receivable | | | (41,684 | ) | | | (19,230 | ) | Inventories | | | 29,058 | | | | 22,112 | | Prepaid expenses and other assets | | | (6,048 | ) | | | (7,573 | ) | Accounts payable and other accrued expenses | | | 2,773 | | | | (21,857 | ) | Accrued salaries, wages and withholdings from employees | | | 1,611 | | | | (3,022 | ) | Income taxes | | | 1,662 | | | | 2,213 | | Other liabilities | | | 553 | | | | 982 | | | | | | | | | | | Net cash provided by operating activities | | | 36,928 | | | | 23,424 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Acquisition of property, plant, and equipment | | | (9,411 | ) | | | (8,300 | ) | Proceeds from sale of assets | | | 6 | | | | 45 | | Other investing activities | | | 4,505 | | | | (301 | ) | | | | | | | | | | Net cash used in investing activities | | | (4,900 | ) | | | (8,556 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from additional borrowings | | | 9,669 | | | | 16,689 | | Debt payments | | | (11,104 | ) | | | (12,577 | ) | Dividends paid | | | (16,500 | ) | | | (15,218 | ) | Other financing activities | | | (249 | ) | | | (803 | ) | | | | | | | | | | Net cash used in financing activities | | | (18,184 | ) | | | (11,909 | ) | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | (11,912 | ) | | | (964 | ) | | | | | | | | | | Net increase in cash and cash equivalents | | | 1,932 | | | | 1,995 | | Cash and cash equivalents at beginning of period | | | 21,153 | | | | 31,901 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 23,085 | | | $ | 33,896 | |
| | Common Stock | | | Additional Paid-In Capital | | | Earnings Reinvested in the Business | | | Treasury Stock | | | Accumulated Other Comprehensive Income (Loss) | |
| | |
| Shares | Amount | Balances at December 31, 2017 | | $ | 5,396 | | | $ | 107,176 | | | $ | 1,414,485 | | | | 10,759,291 | | | $ | (525,422 | ) | | $ | (149,334 | ) | Net earnings | | | - | | | | - | | | | 38,194 | | | | - | | | | - | | | | - | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 23,864 | | Cash dividends paid – $0.33 per share | | | - | | | | - | | | | (14,274 | ) | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | 1,254 | | | | - | | | | - | | | | - | | | | - | | Stock options exercised | | | - | | | | (38 | ) | | | - | | | | (2,000 | ) | | | 98 | | | | - | | Non-vested stock issued upon vesting | | | - | | | | (4,842 | ) | | | - | | | | (99,152 | ) | | | 4,842 | | | | - | | Benefit plans | | | - | | | | 350 | | | | - | | | | (15,126 | ) | | | 769 | | | | - | | Purchase of treasury stock | | | - | | | | - | | | | - | | | | 1,000,000 | | | | (72,704 | ) | | | - | | Other | | | - | | | | (801 | ) | | | 418 | | | | 40,430 | | | | (1,975 | ) | | | - | | Balances at March 31, 2018 | | $ | 5,396 | | | $ | 103,099 | | | $ | 1,438,823 | | | | 11,683,443 | | | $ | (594,392 | ) | | $ | (125,470 | ) |
| | Common Stock | | | Additional Paid-In Capital | | | Earnings Reinvested in the Business | | |
Treasury Stock | | | Accumulated Other Comprehensive Income (Loss) | |
| | |
| Shares
| Amount | Balances at December 31, 2018 | | $ | 5,396 | | | $ | 101,663 | | | $ | 1,516,243 | | | | 11,731,223 | | | $ | (597,800 | ) | | $ | (165,555 | )
| Net earnings | | | - | | | | - | | | | 32,807 | | | | - | | | | - | | | | - | | Other comprehensive income (loss)
| | | - | | | | - | | | | - | | | | - | | | | - | | | | (716 | )
| Cash dividends paid – $0.36 per share | | | - | | | | - | | | | (15,218 | ) | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | 687 | | | | - | | | | - | | | | - | | | | - | | Non-vested stock issued upon vesting | | | - | | | | (1,784 | ) | | | - | | | | (35,016 | ) | | | 1,784 | | | | - | | Benefit plans | | | - | | | | 72 | | | | - | | | | (18,597 | ) | | | 948 | | | | - | | Other | | | - | | | | (153 | ) | | | - | | | | 12,769 | | | | (650 | ) | | | - | | Balances at March 31, 2019 | | $ | 5,396 | | | $ | 100,485 | | | $ | 1,533,832 | | | | 11,690,379 | | | $ | (595,718 | ) | | $ | (166,271 | )
|
See accompanying notes to consolidated condensed financial statements.
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except share and per share amounts) (Unaudited)
| | | | | Additional | | | Earnings Reinvested | | | Treasury Stock | | | Accumulated Other Comprehensive | | | | | Three Months Ended March 31, 2019 | | Common Stock | | | Paid-In Capital | | | in the Business | | | Shares | | | Amount | | | Income (Loss) | | | Total Equity | | Balances at December 31, 2018 | | $ | 5,396 | | | $ | 101,663 | | | $ | 1,516,243 | | | | 11,731,223 | | | $ | (597,800 | ) | | $ | (165,555 | ) | | $ | 859,947 | | Net earnings | | | - | | | | - | | | | 32,807 | | | | - | | | | - | | | | - | | | | 32,807 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (716 | ) | | | (716 | ) | Cash dividends paid - $0.36 per share | | | - | | | | - | | | | (15,218 | ) | | | - | | | | - | | | | - | | | | (15,218 | ) | Share-based compensation | | | - | | | | 687 | | | | - | | | | - | | | | - | | | | - | | | | 687 | | Non-vested stock issued upon vesting | | | - | | | | (1,784 | ) | | | - | | | | (35,016 | ) | | | 1,784 | | | | - | | | | - | | Benefit plans | | | - | | | | 72 | | | | - | | | | (18,597 | ) | | | 948 | | | | - | | | | 1,020 | | Other | | | - | | | | (153 | ) | | | - | | | | 12,769 | | | | (650 | ) | | | - | | | | (803 | ) | Balances at March 31, 2019 | | $ | 5,396 | | | $ | 100,485 | | | $ | 1,533,832 | | | | 11,690,379 | | | $ | (595,718 | ) | | $ | (166,271 | ) | | $ | 877,724 | |
| | | | | Additional | | | Earnings Reinvested | | | Treasury Stock | | | Accumulated Other Comprehensive | | | | | Three Months Ended March 31, 2020 | | Common Stock | | | Paid-In Capital | | | in the Business | | | Shares | | | Amount | | | Income (Loss) | | | Total Equity | | Balances at December 31, 2019 | | $ | 5,396 | | | $ | 98,425 | | | $ | 1,536,100 | | | | 11,682,636 | | | $ | (595,324 | ) | | $ | (163,008 | ) | | $ | 881,589 | | Net earnings | | | - | | | | - | | | | 20,773 | | | | - | | | | - | | | | - | | | | 20,773 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (44,353 | ) | | | (44,353 | ) | Cash dividends paid - $0.39 per share | | | - | | | | - | | | | (16,500 | ) | | | - | | | | - | | | | - | | | | (16,500 | ) | Share-based compensation | | | - | | | | 1,177 | | | | - | | | | - | | | | - | | | | - | | | | 1,177 | | Non-vested stock issued upon vesting | | | - | | | | (724 | ) | | | - | | | | (14,200 | ) | | | 724 | | | | - | | | | - | | Benefit plans | | | - | | | | 241 | | | | - | | | | (16,344 | ) | | | 833 | | | | - | | | | 1,074 | | Adoption of ASU 2016-13 | | | - | | | | - | | | | (853 | ) | | | - | | | | - | | | | - | | | | (853 | ) | Other | | | - | | | | (39 | ) | | | - | | | | 4,114 | | | | (210 | ) | | | - | | | | (249 | ) | Balances at March 31, 2020 | | $ | 5,396 | | | $ | 99,080 | | | $ | 1,539,520 | | | | 11,656,206 | | | $ | (593,977 | ) | | $ | (207,361 | ) | | $ | 842,658 | |
See accompanying notes to consolidated condensed financial statements.
SENSIENT TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
In the opinion of Sensient Technologies Corporation (the “Company”)Company), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) that are necessary to present fairly the financial position of the Company as of March 31, 2019,2020, and the results of operations, comprehensive income, cash flows, and shareholders’ equity for the three months ended March 31, 20192020 and 2018.2019. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Expenses are charged to operations in the period incurred.
Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2018,2019, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change, except for the Company’s Lease and Derivative Financial InstrumentsAccounts Receivable accounting policies. These policies have beenpolicy. This policy was updated in the first quarter of 2020 as a result of the Company’s adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), and ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, in the first quarter of 2019 and are described below.
Leases
The Company enters into lease agreements for certain office space, warehouses, land, and equipment in the ordinary course of business. The Company determines if an arrangement is a lease at inception and evaluates the lease classification (i.e., operating lease or financing lease) at that time. Lease arrangements with an initial term of 12 months or less are considered short-term leases and are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the term of the lease.
Operating leases are included in Other Assets, Other Accrued Expenses, and Other Liabilities on the Company’s Consolidated Condensed Balance Sheet. Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.
The Company uses its incremental borrowing rate on the commencement date for determining the present value of lease payments. The Company considers the likelihood of exercising options to extend or terminate the lease when determining the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for the lease and non-lease components as a single lease component for all leases.
Derivative Financial Instruments
The Company selectively uses derivative financial instruments to reduce market risk associated with changes in foreign currency and interest rate exposures that exist as part of ongoing business operations. All derivative transactions are authorized and executed pursuant to the Company’s risk management policies and procedures, which strictly prohibit the use of financial instruments for speculative trading purposes.
The primary objectives of the foreign exchange risk management activities are to understand and mitigate the impact of potential foreign exchange fluctuations on the Company’s financial results and its economic well-being. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. Generally, these risk management transactions involve the use of foreign currency derivatives to protect against exposure resulting from recorded accounts receivable and payable. The Company may utilize forward exchange contracts, generally with maturities of less than 18 months, that qualify as cash flow hedges. Generally, these foreign exchange contracts are intended to offset the effect of exchange rate fluctuations on non-functional currency denominated sales and purchases. For derivative instruments that are designated as cash flow hedges, gains and losses, including any hedge ineffectiveness, are deferred in accumulated other comprehensive income (OCI) until the underlying transaction is recognized in earnings.
Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the transaction and on an ongoing basis.
Recently Adopted Accounting Pronouncements
In February 2016 the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize the lease assets and liabilities that arise from leases on the balance sheet and to disclose qualitative and quantitative information about lease transactions. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional transition method allowing entities to apply the new lease standard at the adoption date. The Company adopted each of these standards in the first quarter of 2019 using the optional transition method allowed under ASU 2018-11. The Company elected the following practical expedients permitted within the standard:
| 1. | The Company will not re-assess an expired or existing contract to determine if it is a lease or contains a lease. |
| 2. | The Company will not re-assess the lease classification for an existing lease based on the new standard’s lease classification criteria. |
| 3. | The Company will not re-assess the accounting treatment for initial direct costs on existing leases based on the new standard’s guidance. |
| 4. | The Company will account for the lease and non-lease components as a single lease component for all leases. |
The adoption of this standard resulted in the recognition of $20.7 million in right-of-use assets and lease liabilities for operating leases as of January 1, 2019. The adoption of this standard did not have an impact on the Company’s Consolidated Statements of Earnings, or to cash provided by or used in operating, financing, or investing activities on the Company’s Consolidated Condensed Statements of Cash Flows.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which expands an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line item as the hedged item. This ASU is effective for fiscal years and interim periods beginning after December 15, 2018. The Company adopted this standard in the first quarter of 2019, and the adoption did not have a material impact on the Company’s consolidated financial statements.
The Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, in the first quarter of 2018 using monthly cash receipts as its unit of account. In the second quarter of 2018, the Company updated its unit of account to daily cash receipts for the cash received related to the beneficial interest in the previously transferred receivables. As a result, the reported results as of June 30, 2018, included an adjustment of $35.4 million for collections on beneficial interest in previously transferred receivables and an adjustment of $1.6 million for company owned life insurance proceeds for the three months ended March 31, 2018, which were previously reported as cash flows from operating activities. The Consolidated Condensed Statement of Cash Flows for the three months ended March 31, 2018 have been updated to reflect these adjustments.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, 13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses ofon Financial Instruments, and is described below.
Accounts Receivable Receivables are recorded at their face amount, less an allowance for losses on doubtful accounts. The allowance for doubtful accounts is based on customer-specific analysis and expected future credit losses based on historical experience, current conditions, and expected future conditions. Specific accounts are written off against the allowance for doubtful accounts when the receivable is deemed no longer collectible.
Recently Adopted Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment model with a methodology that reflects expected credit losses. Under the new methodology,standard, entities will beare required to measure expected credit losses on financial instruments held at amortized cost, including trade receivables, based on historical experience, current conditions, and reasonable forecasts. AdoptionThe Company adopted this standard in the first quarter of 2020. The adoption of this guidance is requiredstandard resulted in an increase of $0.9 million to the allowance for interimlosses on Trade Accounts Receivable and annual periods beginning after December 15, 2019, with earlya corresponding decrease in Earnings Reinvested in the Business as of January 1,2020. The adoption permitted for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the expected impact of this standard.
standard did not have an impact on the Company’s Consolidated Condensed Statements of Earnings, or to cash provided by or used in operating, financing, or investing activities on the Company’s Consolidated Statements of Cash Flows. In January 2017, the FASB issued ASU 2017-04, No. 2017-04,Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates step two of the current goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. This standard will be applied prospectively and is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluatingadopted this standard in the expectedfirst quarter of 2020, and the adoption did not have a material impact of this standard.on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which changes the requirements for fair value measurements by removing, modifying, and adding certain disclosures. AdoptionThe Company adopted this standard in the first quarter of this guidance2020, and the adoption did not have a material impact on the Company’s consolidated financial statements or its related disclosures.
Recently Issued Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans Subtopic 715-20, which amends Accounting Standards Codification (ASC) 715-20,Compensation – Retirement Benefits – Defined Benefit Plans – General. This standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The effective date is required for interim and annual periods beginning after December 15, 2019,January 1,2021, with early adoption permitted. The Company is currently evaluating the expectedpotential impact of this standard.standard on its disclosures.
In March 2020, the FASB issued ASU No. 2020-04,Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative rates. The guidance is effective upon issuance and generally can be applied through December 31,2022. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and its related disclosures.
Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2018,2019, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change, except as discussed above.
2. | AcquisitionsDivestitures |
On March 9, 2018,In October 2019, the Company completedannounced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. In October 2019, the acquisitionBoard of certain net assets andDirectors approved the natural color business of GlobeNatural, a company based in Lima, Peru. The Company paid $10.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values assale of the acquisition date. The Company acquired net assets 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.
On July 10, 2018, the Company completed the acquisition of Mazza Innovation Limited, a botanical extraction business with patented solvent-free extraction processes, located in Vancouver, Canada. The Company paid $19.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company acquired net assets of $4.0 million and identified intangible assets, principally technological know-how, of $6.9 million. The remaining $8.9 million was allocated to goodwill. 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 ininks product line, which is within the Color segment. The resultsCompany has signed a memorandum of understanding with a potential buyer. In November 2019, the Board of Directors approved the sale of the fragrances product line (excluding its essential oils product line), which is within the Flavors & Fragrances segment. The Company has signed a memorandum of understanding with a potential buyer. As a result, the Company met all of the assets held for 2018 havesale criteria for the inks and fragrances disposal groups. The divesting and exit of these products lines does not meet the criteria to be presented as a discontinued operation on the Consolidated Condensed Statements of Earnings.
As of March 31,2020, the yogurt fruit preparations product line, which is included in the Flavors & Fragrances segment, did not meet all of the assets held for sale criteria. Subsequent to March 31,2020, the Board of Directors approved the sale of the yogurt fruit preparations product line. See Note 12,Subsequent Events, for further information.
The assets and liabilities related to the inks and fragrances product lines are recorded in Assets held for sale and Liabilities held for sale as of March 31,2020 and December 31,2019, as follows:
(in thousands) | | March 31, 2020 | | | December 31, 2019 | | Assets held for sale: | | | | | | | Trade accounts receivable, net | | $ | 34,610 | | | $ | 31,653 | | Inventories | | | 30,104 | | | | 34,612 | | Prepaid expenses and other current assets | | | 6,628 | | | | 5,528 | | Property, Plant, and Equipment, net | | | 4,643 | | | | 14,496 | | Intangible assets, net | | | 2,627 | | | | 5,004 | | Assets held for sale | | $ | 78,612 | | | $ | 91,293 | | | | | | | | | | | Liabilities held for sale: | | | | | | | | | Trade accounts payable | | $ | 13,532 | | | $ | 12,318 | | Accrued salaries, wages and withholdings from employees | | | 1,222 | | | | 1,677 | | Other accrued expenses | | | 5,067 | | | | 5,190 | | Liabilities held for sale | | $ | 19,821 | | | $ | 19,185 | |
During the year ended December 31,2019, the Company estimated that the fair value of the inks product line less costs to sell was lower than its carrying value resulting in a non-cash impairment charge of $15.8 million. As of March 31,2020, the Company revised its estimate of the fair value of the inks product line based on indicative bids resulting in an additional non-cash impairment charge of $9.4 million recorded in Selling and Administrative Expenses during the three months ended March 31,2020. The charge adjusted the carrying value of certain long-lived assets, primarily property, plant, and equipment, intangible assets and allocated goodwill, to their estimated fair value. This estimate will be finalized and adjusted as necessary upon the closing of the sale or as estimates change. In addition, the Company currently estimates a non-cash gain of $6 million to $8 million upon closing the transaction related to the reclassification of accumulated foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated Condensed Statements of Earnings.
During the year ended December 31,2019, the Company estimated that the fair value of the fragrances product line less costs to sell was lower than its carrying value resulting in a non-cash impairment charge of $18.2 million. As of March 31,2020, the Company revised its estimate of the fair value of the fragrances product line based on indicative bids resulting in an additional non-cash impairment charge of $0.3 million recorded in Selling and Administrative Expenses during the three months ended March 31,2020. The charge adjusted the carrying value of certain long-lived assets, primarily property, plant and equipment and allocated goodwill, to their estimated fair value. This estimate will be finalized and adjusted as necessary upon the closing of the sale or as estimates change. In addition, the Company currently estimates an additional non-cash charge of $10 million to $12 million upon closing related to the reclassification of accumulated foreign currency translation and related items from Accumulated Other Comprehensive Loss (OCI) to Selling and Administrative Expenses in the Consolidated Condensed Statement of Earnings.
In March 2020, the Company was notified by a potential buyer of the Company’s fragrances product line that environmental sampling conducted at the Company’s Granada, Spain, location had identified the presence of contaminants in soil and groundwater in certain areas of the property. The Company is in the process of conducting its own environmental investigation to confirm the presence and extent of these contaminants and plans to perform a quantitative risk assessment to determine whether or what remedial action is required under Spanish law. At the conclusion of this work, if necessary, the Company intends to report any confirmed contamination, along with a remediation plan to address the contamination, if necessary, to the relevant Spanish authorities. Due to the impacts of COVID-19 in Spain, the Company has not been restatedable to reflectconduct a quantitative assessment of the issues identified in the environmental sampling. Consequently, the Company is unable to quantify any potential remediation costs at this change.time.
The Company also incurred $1.3 million of other divestiture and exit related costs, primarily severance and legal expenses, and $0.6 million of non-cash expenses charge related to other exit activities in the period ended March 31,2020, which is recorded in Selling and Administrative Expenses. Also during the period, the Company recorded a non-cash charge of $0.2 million in Costs of Products Sold related to the value of certain inventories.
Excluding any potential remediation costs associated with the Granada, Spain, location of the fragrances product line, which the Company is unable to quantify at this time as discussed above, the Company expects total cash costs in 2019 and 2020 associated with the anticipated divestitures of all three product lines to be between $7 million and $10 million, primarily related to severance and other exit activities.
3. | Trade Accounts Receivable |
Trade accounts receivables are recorded at their face amount, less an allowance for expected losses on doubtful accounts. The allowance for doubtful accounts is calculated based on customer-specific analysis and an aging methodology using historical loss information. The Company believes historical loss information is a reasonable basis for expected credit losses as the Company’s historical credit loss experience correlates with its customer delinquency status. This information is also adjusted for any known current economic conditions including the current and expected impact of COVID-19. Currently, the COVID-19 pandemic is not anticipated to have a material impact on trade accounts receivable. Forecasted economic conditions do not have a significant impact on the current credit loss estimate due to the short-term nature of the Company’s customer receivables, however, the Company will continue to monitor and evaluate the rapidly changing economic conditions. Additionally, as the Company only has 1 portfolio segment, there are not different risks between portfolios. Specific accounts are written off against the allowance for doubtful accounts when the receivable is deemed no longer collectible.
The following table summarizes the changes in the allowance for doubtful accounts during the three month period ended March 31,2020:
(In thousands) | | Allowance for Doubtful Accounts | | Balance at December 31, 2019 | | $ | 6,913 | | Adoption of ASU 2016-13 | | | 853 | | Provision for expected credit losses | | | 240 | | Accounts written off | | | (336 | ) | Translation and other activity | | | (643 | ) | Balance at March 31, 2020 | | $ | 7,027 | |
At March 31, 2020, and December 31, 2019, inventories included finished and in-process products totaling $282.9 million and $313.1 million, respectively, and raw materials and supplies of $101.3 million and $109.4 million, respectively.
Accounting Standards Codification (ASC)ASC 820,Fair Value Measurements and DisclosuresMeasurement, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. As of March 31, 2020 and December 31, 2019, the Company’s assets and liabilities subject to this standard are forward exchange contracts. The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was a liability of $1.8 million and $0.1 million as of March 31, 2020 and December 31, 2019, respectively. The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, and short-term borrowings were approximately the same as the fair values as of March 31, 2019.2020. The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at March 31, 2019,2020 was $689.0$589.3 million. The fair value of the long-term debt at March 31, 2020 was $589.7 million.
During the fourth quarter of 2019, the Company met the assets held for sale criteria for its inks and fragrances product lines. During the first quarter of 2020, the estimated fair value of the disposal groups was $702.7 million.updated to $59.0 million, resulting in the recording of an additional impairment of $9.7 million in the three months ended March 31, 2020. The fair value of these product lines were determined based on indicative bids, which are classified as Level 3 inputs in the fair value measurement hierarchy. See Note 2, Divestitures, for further information.
Operating results by segment for the periods presented are as follows:
(In thousands) | | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Corporate & Other | | | Consolidated | | | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Corporate & Other | | | Consolidated | | Three months ended March 31, 2019: | | | | | | | | | | | | | | | | | Three months ended March 31, 2020: | | | | | | | | | | | | | | | | | Revenue from external customers | | $ | 178,744 | | | $ | 140,250 | | | $ | 28,519 | | | $ | - | | | $ | 347,513 | | | $ | 181,187 | | | $ | 139,193 | | | $ | 30,297 | | | $ | - | | | $ | 350,677 | | Intersegment revenue | | | 4,809 | | | | 3,629 | | | | - | | | | - | | | | 8,438 | | | | 5,311 | | | | 4,302 | | | | 152 | | | | - | | | | 9,765 | | Total revenue | | $ | 183,553 | | | $ | 143,879 | | | $ | 28,519 | | | $ | - | | | $ | 355,951 | | | $ | 186,498 | | | $ | 143,495 | | | $ | 30,449 | | | $ | - | | | $ | 360,442 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | 23,125 | | | $ | 30,199 | | | $ | 4,218 | | | $ | (8,122 | ) | | $ | 49,420 | | | $ | 20,871 | | | $ | 29,664 | | | $ | 5,059 | | | $ | (21,033 | ) | | $ | 34,561 | | Interest expense | | | - | | | | - | | | | - | | | | 5,402 | | | | 5,402 | | | | - | | | | - | | | | - | | | | 4,307 | | | | 4,307 | | Earnings (loss) before income taxes | | $ | 23,125 | | | $ | 30,199 | | | $ | 4,218 | | | $ | (13,524 | ) | | $ | 44,018 | | | $ | 20,871 | | | $ | 29,664 | | | $ | 5,059 | | | $ | (25,340 | ) | | $ | 30,254 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2018: | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2019: | | | | | | | | | | | | | | | | | | | | | | Revenue from external customers | | $ | 182,482 | | | $ | 143,728 | | | $ | 30,267 | | | $ | - | | | $ | 356,477 | | | $ | 178,744 | | | $ | 140,250 | | | $ | 28,519 | | | $ | - | | | $ | 347,513 | | Intersegment revenue | | | 5,864 | | | | 3,432 | | | | - | | | | - | | | | 9,296 | | | | 4,809 | | | | 3,629 | | | | - | | | | - | | | | 8,438 | | Total revenue | | $ | 188,346 | | | $ | 147,160 | | | $ | 30,267 | | | $ | - | | | $ | 365,773 | | | $ | 183,553 | | | $ | 143,879 | | | $ | 28,519 | | | $ | - | | | $ | 355,951 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | 25,327 | | | $ | 33,672 | | | $ | 4,872 | | | $ | (8,190 | ) | | $ | 55,681 | | | $ | 23,125 | | | $ | 30,199 | | | $ | 4,218 | | | $ | (8,122 | ) | | $ | 49,420 | | Interest expense | | | - | | | | - | | | | - | | | | 5,555 | | | | 5,555 | | | | - | | | | - | | | | - | | | | 5,402 | | | | 5,402 | | Earnings (loss) before income taxes | | $ | 25,327 | | | $ | 33,672 | | | $ | 4,872 | | | $ | (13,745 | ) | | $ | 50,126 | | | $ | 23,125 | | | $ | 30,199 | | | $ | 4,218 | | | $ | (13,524 | ) | | $ | 44,018 | |
The Company evaluates performance based on operating income before divestiture and other related costs, restructuring and other charges, interest expense, and income taxes (segment operating income). Total revenue and segment operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Condensed Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation. The 2020 divestiture and other related costs, which pertain to the anticipated divestitures of the respective segments beforeCompany’s inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines, are reported in Corporate & Other. There were no divestiture and other related costs or restructuring and other costs interest expense, and income taxes. There were no restructuring and other costs incurred in either the first quarter of 2019 or 2018.
In July 2018, the Company completed the acquisition of Mazza Innovation Limited (See Note 2, Acquisitions, for further information). This business was included in Corporate & Other in 2018. Beginning in the first quarterthree months 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.2019.
In addition to evaluating the Company’s performance based on the segments above, revenue is also disaggregated and analyzed by product line and geographic market. The following table displaystables display the Company’s revenue by these major sources.
Product LinesDuring the first quarter of 2020, the Company updated its product line disclosures as a result of its previous announcement regarding its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines.
(In thousands) | | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Consolidated | | Three months ended March 31, 2019: | | | | | | | | | | | | | Flavors | | $ | 104,276 | | | $ | - | | | $ | - | | | $ | 104,276 | | Natural Ingredients | | | 51,219 | | | | - | | | | - | | | | 51,219 | | Fragrances | | | 28,058 | | | | - | | | | - | | | | 28,058 | | Food & Beverage Colors | | | - | | | | 80,364 | | | | - | | | | 80,364 | | Cosmetics | | | - | | | | 38,283 | | | | - | | | | 38,283 | | Other Colors | | | - | | | | 25,232 | | | | - | | | | 25,232 | | Asia Pacific | | | - | | | | - | | | | 28,519 | | | | 28,519 | | Intersegment Revenue | | | (4,809 | ) | | | (3,629 | ) | | | - | | | | (8,438 | ) | Total revenue from external customers | | $ | 178,744 | | | $ | 140,250 | | | $ | 28,519 | | | $ | 347,513 | |
Flavors, Extracts & Flavor Ingredients now includes essential oils, which was previously reported in Fragrances. Fragrances now only includes the aroma chemicals and fragrance compounds product lines. Yogurt Fruit Preparations is now disclosed separately; previously it was reported in the Flavors product line.
Food & Beverage Colors now includes pharmaceutical colors and natural extraction, which were previously reported in Other Colors. Personal Care includes cosmetic and non-food colors. Inks is now disclosed separately; previously it was reported in Other Colors.
The results for 2019 have been restated to reflect these changes.
| | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Consolidated | | Three months ended March 31, 2018: | | | | | | | | | | | | | Flavors | | $ | 109,051 | | | $ | - | | | $ | - | | | $ | 109,051 | | Natural Ingredients | | | 53,201 | | | | - | | | | - | | | | 53,201 | | Fragrances | | | 26,094 | | | | - | | | | - | | | | 26,094 | | Food & Beverage Colors | | | - | | | | 76,816 | | | | - | | | | 76,816 | | Cosmetics | | | - | | | | 45,504 | | | | - | | | | 45,504 | | Other Colors | | | - | | | | 24,840 | | | | - | | | | 24,840 | | Asia Pacific | | | - | | | | - | | | | 30,267 | | | | 30,267 | | Intersegment Revenue | | | (5,864 | ) | | | (3,432 | ) | | | - | | | | (9,296 | ) | Total revenue from external customers | | $ | 182,482 | | | $ | 143,728 | | | $ | 30,267 | | | $ | 356,477 | |
Product Lines
(In thousands) | | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Consolidated | | Three months ended March 31, 2020: | | | | | | | | | | | | | Flavors, Extracts & Flavor Ingredients | | $ | 101,453 | | | $ | - | | | $ | - | | | $ | 101,453 | | Natural Ingredients | | | 57,600 | | | | - | | | | - | | | | 57,600 | | Fragrances | | | 22,284 | | | | - | | | | - | | | | 22,284 | | Yogurt Fruit Preparations | | | 5,161 | | | | - | | | | - | | | | 5,161 | | Food & Beverage Colors | | | - | | | | 90,793 | | | | - | | | | 90,793 | | Personal Care | | | - | | | | 43,743 | | | | - | | | | 43,743 | | Inks | | | - | | | | 8,959 | | | | - | | | | 8,959 | | Asia Pacific | | | - | | | | - | | | | 30,449 | | | | 30,449 | | Intersegment Revenue | | | (5,311 | ) | | | (4,302 | ) | | | (152 | ) | | | (9,765 | ) | Total revenue from external customers | | $ | 181,187 | | | $ | 139,193 | | | $ | 30,297 | | | $ | 350,677 | |
Three months ended March 31, 2019: | | | | | | | | | | | | | Flavors, Extracts & Flavor Ingredients | | $ | 103,528 | | | $ | - | | | $ | - | | | $ | 103,528 | | Natural Ingredients | | | 51,219 | | | | - | | | | - | | | | 51,219 | | Fragrances | | | 23,267 | | | | - | | | | - | | | | 23,267 | | Yogurt Fruit Preparations | | | 5,539 | | | | - | | | | - | | | | 5,539 | | Food & Beverage Colors | | | - | | | | 88,848 | | | | - | | | | 88,848 | | Personal Care | | | - | | | | 44,921 | | | | - | | | | 44,921 | | Inks | | | - | | | | 10,110 | | | | - | | | | 10,110 | | Asia Pacific | | | - | | | | - | | | | 28,519 | | | | 28,519 | | Intersegment Revenue | | | (4,809 | ) | | | (3,629 | ) | | | - | | | | (8,438 | ) | Total revenue from external customers | | $ | 178,744 | | | $ | 140,250 | | | $ | 28,519 | | | $ | 347,513 | |
Geographic Markets
(In thousands) | | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Consolidated | | | Flavors & Fragrances | | | Color | | | Asia Pacific | | | Consolidated | | Three months ended March 31, 2019: | | | | | | | | | | | | | | Three months ended March 31, 2020: | | | | | | | | | | | | | | North America | | $ | 112,747 | | | $ | 66,007 | | | $ | 25 | | | $ | 178,779 | | | $ | 116,701 | | | $ | 66,265 | | | $ | - | | | $ | 182,966 | | Europe | | | 48,001 | | | | 42,135 | | | | 41 | | | | 90,177 | | | | 43,877 | | | | 38,738 | | | | 22 | | | | 82,637 | | Asia Pacific | | | 7,609 | | | | 16,425 | | | | 28,266 | | | | 52,300 | | | | 9,355 | | | | 15,975 | | | | 29,122 | | | | 54,452 | | Other | | | 10,387 | | | | 15,683 | | | | 187 | | | | 26,257 | | | | 11,254 | | | | 18,215 | | | | 1,153 | | | | 30,622 | | Total revenue from external customers | | $ | 178,744 | | | $ | 140,250 | | | $ | 28,519 | | | $ | 347,513 | | | $ | 181,187 | | | $ | 139,193 | | | $ | 30,297 | | | $ | 350,677 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2018: | | | | | | | | | | | | | | | | | | Three months ended March 31, 2019: | | | | | | | | | | | | | | | | | | North America | | $ | 119,055 | | | $ | 63,582 | | | $ | - | | | $ | 182,637 | | | $ | 112,747 | | | $ | 66,007 | | | $ | 25 | | | $ | 178,779 | | Europe | | | 45,427 | | | | 43,631 | | | | 6 | | | | 89,064 | | | | 48,001 | | | | 42,135 | | | | 41 | | | | 90,177 | | Asia Pacific | | | 7,022 | | | | 16,910 | | | | 30,011 | | | | 53,943 | | | | 7,609 | | | | 16,425 | | | | 28,266 | | | | 52,300 | | Other | | | 10,978 | | | | 19,605 | | | | 250 | | | | 30,833 | | | | 10,387 | | | | 15,683 | | | | 187 | | | | 26,257 | | Total revenue from external customers | | $ | 182,482 | | | $ | 143,728 | | | $ | 30,267 | | | $ | 356,477 | | | $ | 178,744 | | | $ | 140,250 | | | $ | 28,519 | | | $ | 347,513 | |
At March 31, 2019, and December 31, 2018, inventories included finished and in-process products totaling $310.6 million and $320.4 million, respectively, and raw materials and supplies of $157.7 million and $170.4 million, respectively.
The Company’s components of annual benefit cost for the defined benefit plans for the periods presented are as follows:
| | Three Months Ended March 31, | | | Three Months Ended March 31, | | (In thousands) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | | | | | | | | | | | | Service cost | | $ | 359 | | | $ | 368 | | | $ | 400 | | | $ | 359 | | Interest cost | | | 320 | | | | 289 | | | | 256 | | | | 320 | | Expected return on plan assets | | | (231 | ) | | | (245 | ) | | | (209 | ) | | | (231 | ) | Recognized actuarial gain | | | (39 | ) | | | (27 | ) | | Recognized actuarial loss (gain) | | | | 16 | | | | (39 | ) | Total defined benefit expense | | $ | 409 | | | $ | 385 | | | $ | 463 | | | $ | 409 | |
The Company’s non-service cost portion of defined benefit expense is recorded in Interest Expense on the Company’s Consolidated Condensed Statements of Earnings. The Company’s service cost portion of defined benefit expense is recorded in Selling and Administrative Expenses on the Company’s Consolidated Condensed Statements of Earnings.
The Company leases certain office space, warehouses, land, and equipment under operating lease arrangements. Some of the Company’s leases include options to extend the leases for up to an additional five years. Some of the Company’s lease agreements also include rental payments that are adjusted periodically for inflation (i.e., CPI index).
The Company recorded operating lease expense, which includes short-term lease expense and variable lease costs, of $3.0 million for the three months ended March 31, 2019.
For the three months ended March 31, 2019, the Company paid $2.5 million in cash for operating leases, not including short-term lease expense or variable lease costs. The Company entered into operating leases that resulted in $2.4 million of right-of-use assets in exchange for operating lease obligations for the three months ended March 31, 2019.
The Company included $20.8 million of right-of-use assets in Other Assets and $7.9 million and $12.9 million of operating lease liabilities in Other Accrued Expenses and Other Liabilities, respectively, on the Company’s Consolidated Condensed Balance Sheets as of March 31, 2019.
The Company’s weighted average remaining operating lease term was 3.7 years as of March 31, 2019. The Company’s weighted average discount rate for operating leases was 3.8% as of March 31, 2019.
As of March 31, 2019, maturities of operating lease liabilities for future annual periods are as follows:
(in thousands) | | | | | | | | Year ending December 31, | | | | 2019 | | $ | 6,537 | | 2020 | | | 6,998 | | 2021 | | | 3,715 | | 2022 | | | 1,800 | | 2023 | | | 1,044 | | Thereafter | | | 2,330 | | Total lease payments | | | 22,424 | | Less imputed interest | | | (1,651 | ) | Present value of lease liabilities | | $ | 20,773 | |
8. | Derivative Instruments and Hedging Activity |
The Company may use forward exchange contracts and foreign currency denominated debt to manage its exposure to foreign exchange risk in order to reduce the effect of fluctuating foreign currencies on short-term foreign currency denominated intercompany transactions, non-functional currency raw material purchases, non-functional currency sales, and other known foreign currency exposures. These forward exchange contracts generally have maturities of less than 18 months. The Company’s primary hedging activities and their accounting treatment are summarized below.
Forward exchange contracts – Certain forward exchange contracts have been designated as cash flow hedges. The Company had $59.2$54.5 million and $76.0$59.9 million of forward exchange contracts designated as cash flow hedges outstanding as of March 31, 2019,2020, and December 31, 2018,2019, respectively. For the three months ended March 31, 20192020 and 2018,2019, the amounts reclassified into net earnings in the Company’s Consolidated Condensed Statement of Earnings that offset the earningsunderlying transactions' impact of the related non-functional asset or liability hedgedon earnings in the same period were not material. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges; thehedges. The results of these transactions were not material to the financial statements.
Net investment hedges – The Company has certain debt denominated in Euros, Swiss Francs, and British Pounds. These debt instruments have been designated as partial hedges of the Company’s Euro, Swiss Franc, and British Pound net asset positions. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in OCI. As of March 31, 2019,2020, and December 31, 2018,2019, the total value of the Company’s Euro, Swiss Franc, and British Pound debt designated as net investment hedges was $361.7$355.0 million and $366.5$363.4 million, respectively. For the three months ended March 31, 2019,2020, the impact of foreign exchange rates on these debt instruments decreased debt by $4.9$8.4 million, which has been recorded as foreign currency translation in OCI.
The effective income tax rates for the three months ended March 31, 20192020 and 2018,2019, were 25.5%31.3% and 23.8%25.5%, respectively. The effective tax rates infor the three months ended March 31, 2020 and 2019 were both 2019 and 2018 were impacted by changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, and the mix of foreign earnings.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act allows for the deferral of income and social security tax payments, a five-year carryback for net operating losses, changes to interest expense and business loss limitation rules, certain new tax credits, and certain new loans and grants to businesses. The Company has reviewed its income tax assumptions and projections in light of the CARES Act and does not expect the CARES Act to materially impact the Company’s income tax expense or projections. As of March 31, 2020, the Company was considering the option to defer future tax payments (income taxes and certain payroll taxes) in accordance with the CARES Act. Subsequent to March 31, 2020, the Company has decided to defer certain tax payments in accordance with the CARES Act. The Company will continue to evaluate the CARES Act for opportunities as additional information is released on the CARES Act.
10. | Accumulated Other Comprehensive Income |
The following table summarizes the changes in OCI during the three-monththree month periods ended March 31, 20192020 and 2018:2019:
(In thousands) | | Cash Flow Hedges (a) | | | Pension Items (a) | | | Foreign Currency Items | | | Total | | Balance as of December 31, 2017 | | $ | (669 | ) | | $ | (309 | ) | | $ | (148,356 | ) | | $ | (149,334 | ) | Other comprehensive income before reclassifications | | | 670 | | | | - | | | | 23,186 | | | | 23,856 | | Amounts reclassified from OCI | | | 38 | | | | (30 | ) | | | - | | | | 8 | | Balance as of March 31, 2018 | | $ | 39 | | | $ | (339 | ) | | $ | (125,170 | ) | | $ | (125,470 | ) |
(In thousands) | | Cash Flow Hedges (a) | | | Pension Items (a) | | | Foreign Currency Items | | | Total | | Balances at December 31, 2019 | | $ | (199 | ) | | $ | (672 | ) | | $ | (162,137 | ) | | $ | (163,008 | ) | Other comprehensive loss before reclassifications | | | (1,865 | ) | | | - | | | | (42,925 | ) | | | (44,790 | ) | Amounts reclassified from OCI | | | 429 | | | | 8 | | | | - | | | | 437 | | Balances at March 31, 2020 | | $ | (1,635 | ) | | $ | (664 | ) | | $ | (205,062 | ) | | $ | (207,361 | ) |
(In thousands) | | Cash Flow Hedges (a) | | | Pension Items (a) | | | Foreign Currency Items | | | Total | | Balance as of December 31, 2018 | | $ | 147 | | | $ | 549 | | | $ | (166,251 | ) | | $ | (165,555 | ) | Other comprehensive income before reclassifications | | | 597 | | | | - | | | | (1,164 | ) | | | (567 | ) | Amounts reclassified from OCI | | | (112 | ) | | | (37 | ) | | | - | | | | (149 | ) | Balance as of March 31, 2019 | | $ | 632 | | | $ | 512 | | | $ | (167,415 | ) | | $ | (166,271 | ) |
(In thousands) | | Cash Flow Hedges (a) | | | Pension Items (a) | | | Foreign Currency Items | | | Total | | Balances at December 31, 2018 | | $ | 147 | | | $ | 549 | | | $ | (166,251 | ) | | $ | (165,555 | ) | Other comprehensive income (loss) before reclassifications | | | 597 | | | | - | | | | (1,164 | ) | | | (567 | ) | Amounts reclassified from OCI | | | (112 | ) | | | (37 | ) | | | - | | | | (149 | ) | Balances at March 31, 2019 | | $ | 632 | | | $ | 512 | | | $ | (167,415 | ) | | $ | (166,271 | ) |
| (a) | Cash Flow Hedges and Pension Items are net of tax. |
11. | Accounts Receivable Securitization |
The Company is engaged in an accounts receivable securitization program with Wells Fargo & Company (Wells Fargo). The commitment size under the program is $70 million.
Between October 2016 and June 2018, the Company accounted for sales of trade receivables under the program as a reduction of accounts receivable in the Consolidated Condensed Balance Sheets in accordance with ASC Topic 860, Transfers and Servicing (ASC Topic 860).
In June 2018, the Company amended the program. Following the amendment, the Company no longer accounts for the sales of the trade receivables in accordance with ASC Topic 860, and instead now maintains the trade receivables and related debt on its Consolidated Condensed Balance Sheets.
Under the amended program, Wells Fargo has extended a secured loan of up to $70 million to the Company secured by Wells Fargo’s undivided interests in certain of the Company’s trade accounts receivables. The program expires in October 2019; however, the Company has the intent and ability to refinance or extend the program prior to maturity. As of March 31, 2019, $70 million was borrowed under the program.
12. | Commitments and Contingencies |
Agar v. Sensient Natural Ingredients LLC
On March 29, 2019, Calvin Agar (Agar), a former employee, filed a Class Action Complaint in Stanislaus County Superior Court against Sensient Natural Ingredients LLC (SNI). On May 22, 2019, Agar filed a First Amended Class Action Complaint against SNI (the Complaint). Agar alleges that SNI improperly reported overtime pay on employees’ wage statements, in violation of the California Labor Code. The Complaint alleges two causes of action, both of which concern the wage statements.
The Complaint does not allege that SNI failed to pay any overtime due to Agar or any of the putative class or group members. The Complaint merely challenges the manner in which SNI has reported overtime pay on its wage statements.
SNI maintains that it has accurately paid Agar and the putative class members for all overtime worked, and that they have not experienced any harm. SNI further maintains that the format of its wage statements does not violate the requirements of state law or any specific guidance from California decisional law, the California Division of Labor Standards Enforcement, or the California Labor Commissioner's Office. Finally, SNI contended that certain of the state law claims are subject to mandatory individual arbitration.
SNI filed its Answer and Affirmative Defenses to the Complaint on July 10, 2019. The parties participated in an early mediation in the case in December 2019, which was not successful. On March 17, 2020, the Court granted Agar leave to file a Second Amended Complaint, which removed the claim that SNI had asserted was subject to mandatory individual arbitration. SNI filed a Demurrer to the Second Amended Complaint, seeking dismissal of the remaining claim, on May 1, 2020. SNI continues to evaluate the developing legal authority on this issue. SNI intends to vigorously defend its interests, absent a reasonable resolution.
Other Claims The Company is subject to various claims and litigation arising in the normal course of business. The Company establishes reserves for claims and proceedings when it is probable that liabilities exist and reasonable estimates of loss can be made. While it is not possible to predict the outcome of these matters, based on our assessment of the facts and circumstances now known, we do not believe that these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.
Refer to Note 2, Divestitures, for information about potential environmental remediation costs associated with our Granada, Spain location. The amount of any losses related to such remediation cannot be reasonably estimated at this time.
On April 9,2020, the Board of Directors approved the sale of the yogurt fruit preparations product line. The Company has signed a memorandum of understanding with a potential buyer. The Company estimates a non-cash impairment charge of $7 million to $9 million will be recorded related to the sale. The Company anticipates that it will complete the sale and exit activities of this product line within the year. 12
Index On April 23, 2020, the Company announced its quarterly dividend of 39 cents per share would be payable on June 1, 2020.ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
This document 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 March 31, 2020, 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 those 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 the impact and uncertainty created by the ongoing COVID-19 pandemic, including, but not limited to, its effects on our employees, facilities, customers and suppliers, the availability and cost of raw materials and other supplies, logistics and transportation, governmental regulations and restrictions and general economic conditions; the pace and nature of new product introductions by the Company and the Company’s customers; our 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; 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; the matters discussed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and below under Item 1A of this Quarterly Report on Form 10-Q; and the matters discussed below under Item 2 including the critical accounting policies referenced therein. 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 therein will not be realized.
OVERVIEW
Revenue Revenue was $347.5$350.7 million and $356.5$347.5 million for the three months ended March 31, 2020 and 2019, and 2018, respectively. TheFor the three months ended March 31, 2020, the impact of foreign exchange rates decreased consolidated revenue by approximately 3%2%.
Gross Margin The Company’s gross margin was 31.9% and 33.2% for the three months ended March 31, 2019.
Gross Profit
The Company’s gross margin was 33.2%2020 and 34.5% for the three months ended March 31, 2019, and 2018, respectively. The decrease in gross margin iswas primarily a result of higher manufacturing costs as a percent of revenue due to lower volumes and higher raw material costs.costs in natural ingredients and unfavorable product mix.
Selling and Administrative Expense Selling and administrative expense as a percent of revenue was 22.1% and 18.9% for both the three months ended March 31, 2020 and 2019, respectively. Divestiture and 2018.other related costs of $11.7 million were included in Selling and Administrative Expenses for the three months ended March 31, 2020. The increase in selling and administrative expense as a percent of revenue is primarily due to the divestiture and other related costs incurred in 2020, which increased selling and administrative expense as a percent of revenue by 330 basis points for the three months ended March 31, 2020.
Operating Income Operating income was $49.4$34.6 million and $55.7$49.4 million for the three months ended March 31, 20192020 and 2018,2019, respectively. Operating margins were 14.2%9.9% and 15.6%14.2% for the three months ended March 31, 2020 and 2019, respectively. The decrease in operating margins is primarily due to the divestiture and 2018, respectively.other related costs incurred in 2020, which decreased operating margins by 340 basis points for the three months ended March 31, 2020.
Interest Expense Interest expense was $5.4$4.3 million and $5.6$5.4 million for the three months ended March 31, 20192020 and 2018,2019, respectively. The decrease in expense was primarily due to the decrease in the average interest rate.debt outstanding.
Income Taxes The effective income tax rates for the three months ended March 31, 2020 and 2019, were 31.3% and 2018, were 25.5% and 23.8%, respectively. The effective tax rates infor the three months ended March 31, 2020 and 2019 were both 2019 and 2018 were impacted by changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, and the mix of foreign earnings.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act allows for the deferral of income and social security tax payments, a five-year carryback for net operating losses, changes to interest expense and business loss limitation rules, certain new tax credits, and certain new loans and grants to businesses. The Company has reviewed its income tax assumptions and projections in light of the CARES Act and does not expect the CARES Act to materially impact the Company’s income tax expense or projections. As of March 31, 2020, the Company was considering the option to defer future tax payments (income taxes and certain payroll taxes) in accordance with the CARES Act. Subsequent to March 31, 2020, the Company has decided to defer certain tax payments in accordance with the CARES Act. The Company will continue to evaluate the CARES Act for opportunities as additional information is released on the CARES Act.
Divestitures In October 2019, the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. The Board of Directors approved the sale of the inks product line, which is within the Color segment, and the sale of the fragrances product line, which is within the Flavors & Fragrances segment.
In the three months ended March 31, 2020, the Company recorded a non-cash impairment charge of $9.7 million, primarily related to property, plant and equipment, intangibles and allocated goodwill, in Selling and Administrative Expenses, related to the disposal group as described in Note 2, Divestitures, to the Consolidated Condensed Financial Statements included in this report. The charge reduced the carrying value of certain long-lived assets to their estimated fair value. An estimate of the fair value of these product lines less cost to sell was determined to be lower than its carrying value. This estimate will be finalized and adjusted as necessary upon the closing of the sales or as assumptions change.
In the three months ended March 31, 2020, the Company also incurred $2.1 million of additional costs, primarily related to severance and legal expenses, related to the anticipated divestitures and other exit activities.
Refer to Note 2, Divestitures, and Note 12, Subsequent Events, to the Consolidated Condensed Financial Statements included in this report for information about anticipated additional charges and expenses associated with these divestitures.
COVID-19 COVID-19 is now affecting most of the world, including through widespread illness, quarantines, factory shutdowns, and travel and transportation restrictions. While the Company’s financial position remains strong, the Company has seen several financial and operational impacts from the pandemic as of this filing.
For the three months ended March 31, 2020, demand for the Company’s products remained strong, especially in product lines that serve the food, beverage, and pharmaceutical markets. There has been softer demand in other product lines the Company serves, particularly in cosmetics and some product lines that supply the quick service restaurant segment due to widespread restaurant shutdowns and quarantine orders. While COVID-19 appears to have contributed to demand for food-related products and dampened demand for personal care related products, it is difficult to quantify the impact of COVID-19 on demand for the Company’s products. The Company continues to believe that it will achieve its projected earnings guidance.
During the three months ended March 31, 2020, the Company had a production facility in China and a production facility in India that were required to temporarily suspend operations. All of the Company’s production facilities are open and operating as of this filing, but the Company continues to monitor developments and regulations in regions where production facilities are located. The Company also continues to monitor supply chains and has increased inventory in certain key raw materials, although the Company did not experience any significant disruptions during the three months ended March 31, 2020.
As of March 31, 2020, the Company is in compliance with its loan covenants and does not anticipate any non-compliance in the future. COVID-19 has not adversely impacted the Company’s capital or financial resources. Furthermore, the Company expects its 2019 effective income tax rateforecasted cash flows from operations and its available debt capacity will be able to meet future cash requirements for operations, capital expenditures, contractual maturities on long-term debt, and dividend payments.
The Company reviewed its goodwill, intangible assets, and long-lived assets for potential impairment indicators as of March 31, 2020, and except for the impairments associated with the product lines to be approximately 22% - 23%.divested noted above, no indicators of impairment were identified. The Company also reviewed its trade accounts receivables for potential collection issues and did not identify any concerns. The Company will continue to monitor cash collections and review trade receivable aging to identify any deterioration in quality.
AcquisitionsThe Company estimates that the incremental expenses related to its COVID-19 response will be less than $3 million at the currently projected run-rate. All of the Company’s manufacturing plants continue in operation and have generally been designated as part of the critical infrastructure in the countries in which they operate.
On March 9, 2018,
In October 2019, the Company completedannounced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. While the acquisition of certain net assetssales and the natural color business of GlobeNatural, a company based in Lima, Peru. The Company paid $10.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair valuesexit activities are still anticipated to be completed as of the acquisition date. date of this filing, travel and transportation restrictions have slowed down various activities related to the divestitures.
The Company acquired net assets of $1.4 millioncontinues to believe its internal controls over financial reporting and identified intangible assets, principally customer relationships of $2.0 million,its disclosure controls and allocated the remaining $7.4 millionprocedures are effective to goodwill. These operations are included in the Color segment.ensure their design and operation continue to be effective as some employees perform tasks from alternative work locations. Internal audit continues to perform their planned audit procedures remotely from alternative work locations. See Item 4, Controls and Procedures, for further information.
On July 10, 2018, the Company completed the acquisition of Mazza Innovation Limited, a botanical extraction business with patented solvent-free extraction processes, located in Vancouver, Canada. The Company paid $19.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company acquired net assets of $4.0 million and identified intangible assets, principally technological know-how, of $6.9 million. The remaining $8.9 million was allocated to goodwill. 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.
NON-GAAP FINANCIAL MEASURES
Within the following table,tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted revenue, adjusted operating income, adjusted net earnings, and adjusted diluted EPS, which exclude the results of the product lines to be divested and the divestiture and other related costs, and (2) percentage changes in revenue, operating income, and diluted EPS on aan adjusted local currency basis, which eliminate the effects that result from translating its international operations into U.S. dollars.dollars, the results of product lines to be divested, and the divestiture and other related costs.
The Company has included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. These non-GAAP measures should not be considered in isolation. Rather, they should be considered together with GAAP measures and the rest of the information included in this report. Management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis and to gain additional insight into underlying operating and performance trends, and the Company believes the information can be beneficial to investors for the same purposes. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
| | Three Months Ended March 31, | | (In thousands except per share amounts) | | 2020 | | | 2019 | | | % Change | | Revenue (GAAP) | | $ | 350,677 | | | $ | 347,513 | | | | 0.9 | % | Revenue of the product lines to be divested | | | (36,585 | ) | | | (39,021 | ) | | | | | Adjusted revenue | | $ | 314,092 | | | $ | 308,492 | | | | 1.8 | % | | | | | | | | | | | | | | Operating Income (GAAP) | | $ | 34,561 | | | $ | 49,420 | | | | (30.1 | %) | Divestiture & other related costs – Cost of products sold | | | 190 | | | | - | | | | | | Divestiture & other related costs – Selling and administrative expenses | | | 11,653 | | | | - | | | | | | Operating income of the product lines to be divested | | | (1,385 | ) | | | (32 | ) | | | | | Adjusted operating income | | $ | 45,019 | | | $ | 49,388 | | | | (8.8 | %) | | | | | | | | | | | | | | Net Earnings (GAAP) | | $ | 20,773 | | | $ | 32,807 | | | | (36.7 | %) | Divestiture & other related costs, before tax | | | 11,843 | | | | - | | | | | | Tax impact of divestiture & other related costs | | | (934 | ) | | | - | | | | | | Net earnings of the product lines to be divested, before tax | | | (1,385 | ) | | | (32 | ) | | | | | Tax impact of the product lines to be divested | | | 297 | | | | 11 | | | | | | Adjusted net earnings | | $ | 30,594 | | | $ | 32,786 | | | | (6.7 | %) | | | | | | | | | | | | | | Diluted EPS (GAAP) | | $ | 0.49 | | | $ | 0.78 | | | | (37.2 | %) | Divestiture & other related costs, net of tax | | | 0.26 | | | | - | | | | | | Results of operations of the product lines to be divested, net of tax | | | (0.03 | ) | | | - | | | | | | Adjusted diluted EPS | | $ | 0.72 | | | $ | 0.78 | | | | (7.7 | %) |
The following table summarizes the percentage change for the results of the three months ended March 31, 2019,2020, compared to the results for the three months ended March 31, 2018,2019, in the respective financial measures.
| | Three Months Ended March 31, 2020 | | Revenue | | Total | | | Foreign Exchange Rates | | | Product Lines to be Divested | | | Adjusted Local Currency | | Flavors & Fragrances | | | 1.6 | % | | | (1.1 | %) | | | (0.9 | %) | | | 3.6 | % | Color | | | (0.3 | %) | | | (2.2 | %) | | | (0.9 | %) | | | 2.8 | % | Asia Pacific | | | 6.8 | % | | | (1.7 | %) | | | 0.0 | % | | | 8.5 | % | Total Revenue | | | 0.9 | % | | | (1.6 | %) | | | (0.6 | %) | | | 3.1 | % | | | | | | | | | | | | | | | | | | Operating Income | | | | | | | | | | | | | | | | | Flavors & Fragrances | | | (9.7 | %) | | | (0.9 | %) | | | 5.7 | % | | | (14.5 | %) | Color | | | (1.8 | %) | | | (2.3 | %) | | | 0.2 | % | | | 0.3 | % | Asia Pacific | | | 19.9 | % | | | 0.7 | % | | | 0.0 | % | | | 19.2 | % | Corporate & Other | | | 159.0 | % | | | 0.0 | % | | | 145.8 | % | | | 13.2 | % | Total Operating Income | | | (30.1 | %) | | | (1.8 | %) | | | (21.1 | %) | | | (7.2 | %) | Diluted EPS | | | (37.2 | %) | | | (2.6 | %) | | | (29.5 | %) | | | (5.1 | %) |
| | Three Months Ended March 31, 2019 | | | | Total | | | Foreign Exchange Rates | | | Local Currency | | Revenue | | | | | | | | | | Flavors & Fragrances | | | (2.5 | %) | | | (2.3 | %) | | | (0.2 | %) | Color | | | (2.2 | %) | | | (4.6 | %) | | | 2.4 | % | Asia Pacific | | | (5.8 | %) | | | (3.5 | %) | | | (2.3 | %) | Total Revenue | | | (2.5 | %) | | | (3.3 | %) | | | 0.8 | % | | | | | | | | | | | | | | Operating Income | | | | | | | | | | | | | Flavors & Fragrances | | | (8.7 | %) | | | (1.1 | %) | | | (7.6 | %) | Color | | | (10.3 | %) | | | (4.7 | %) | | | (5.6 | %) | Asia Pacific | | | (13.4 | %) | | | (0.4 | %) | | | (13.0 | %) | Corporate & Other | | | (0.8 | %) | | | (0.2 | %) | | | (0.6 | %) | Total Operating Income | | | (11.2 | %) | | | (3.3 | %) | | | (7.9 | %) | Diluted EPS | | | (12.4 | %) | | | (3.4 | %) | | | (9.0 | %) |
SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by theits chief operating decision maker to allocate resources and assess performance. The Company evaluates performance based on operating income of the respective segments before divestiture and other related costs, restructuring and other costs,charges, interest expense, and income taxes.taxes (segment operating income). There were no restructuring and other costscharges incurred in either of the first quarterthree months of 20192020 or 2018.2019.
In July 2018, the Company completed the acquisition of Mazza Innovation Limited (See Acquisitions above for further information). This 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.
Flavors & Fragrances Flavors & Fragrances segment revenue was $183.6$186.5 million and $188.3$183.6 million for the three months ended March 31, 2020 and 2019, and 2018, respectively, a decreasean increase of approximately 3%2%. Foreign exchange rates decreased segment revenue by approximately 2%1%. The decreaseincrease was primarily a result of lowerhigher revenue in Flavors and Natural Ingredients, partially offset by higher revenue in Fragrances. The lower revenue in Flavors, was primarily due to the unfavorable impact of exchange rates and unfavorable volumes.Extracts & Flavor Ingredients. The lowerhigher revenue in Natural Ingredients was primarily due to the unfavorable impact of selling prices and unfavorablehigher volumes. The higherlower revenue in FragrancesFlavors, Extracts & Flavor Ingredients was primarily due to the favorable impact of selling priceslower volumes and volumes, partially offset by the unfavorable impact of exchange rates.
Flavors & Fragrances segment operating income was $23.1$20.9 million and $25.3$23.1 million for the three months ended March 31, 20192020 and 2018,2019, respectively, a decrease of approximately 9%10%. Foreign exchange rates decreased segment operating income by approximately 1%. The lower segment operating income was primarily a result of the timing of inventory reductions and cost reductions relative to lower operating incomeproduction volumes in Flavors, partially offset by higher operating income at NaturalExtracts & Flavor Ingredients. The lower operating income in Flavors was primarily a result of higher manufacturing and other costs, and lower volumes, partially offset by higher selling prices and favorable product mix. The higher operating income in Natural Ingredients was primarily due to lower raw material costs and manufacturing and other costs, partially offset by lower selling prices. Segment operating income as a percent of revenue was 12.6%11.2% in the current quarter and 13.4%compared to 12.6% in the prior year’s comparable quarter.
Color Segment revenue for the Color segment was $143.9$143.5 million and $147.2$143.9 million for the three months ended March 31, 2020 and 2019, and 2018, respectively, a decrease of approximately 2%.respectively. Foreign exchange rates decreased segment revenue by approximately 5%2%. The decrease was primarily a result of lower revenue in Cosmetics, partially offset by higher revenueHigher revenues in Food & Beverage Colors. TheColors were offset by lower revenuerevenues in Cosmetics was primarily a result of lower volumesPersonal Care and the unfavorable impact of exchange rates.Inks. The higher revenue in Food & Beverage Colors was primarily a result of higher volumes, higher selling prices, and the impact of the prior year acquisition, partially offset by the unfavorable impact of exchange rates. The lower revenue in Personal Care was primarily due to the unfavorable impact of exchange rates and lower revenue in Asia, while the lower revenue in Inks was primarily due to lower volumes.
Segment operating income for the Color segment was $30.2$29.7 million and $33.7$30.2 million for the three months ended March 31, 20192020 and 2018,2019, respectively, a decrease of approximately 10%2%. Foreign exchange rates decreased segment operating income by approximately 5%2%. The lower segment operating income was primarily a result of lower operating income in CosmeticsPersonal Care, partially offset by higher operating income in Food & Beverage Colors. The lower segment operating income in Personal Care was primarily as a result of lower volumes, due to COVID-19 and the unfavorable impact of foreign exchange rates, partially offset by lower raw material costs. Operatingdemand for makeup products. The higher segment operating income forin Food and& Beverage Colors was in line with prior year, as favorableprimarily a result of higher volumes and price were offset by unfavorable raw materials, manufacturing and other costs, and exchange rates.favorable product mix. Segment operating income as a percent of revenue was 21.0%20.7% in the current quarter and 22.9%21.0% in the prior year’s comparable quarter.
Asia Pacific Segment revenue for the Asia Pacific segment was $28.5$30.4 million and $30.3$28.5 million for the three months ended March 31, 2020 and 2019, and 2018, respectively, a decreasean increase of approximately 6%7%. Foreign exchange rates decreased segment revenue by approximately 4%2%. The lowerhigher segment revenue was primarily due to lower volumes and unfavorable exchange rates.higher volumes.
Segment operating income for the Asia Pacific segment was $4.2$5.1 million and $4.9$4.2 million for the three months ended March 31, 2020 and 2019, and 2018, respectively, a decreasean increase of approximately 13%20%. Foreign exchange rates had minimal impact onincreased segment operating income.income by approximately 1%. The higher segment operating income was primarily due to higher sales volumes. Segment operating income as a percent of revenue was 14.8%16.6% in the current quarter and 16.1%14.8% in the prior year’s comparable quarter.
Corporate & Other The Corporate & Other operating expense was $8.1$21.0 million and $8.2$8.1 million for the three months ended March 31, 2020 and 2019, respectively. The higher operating expense for the three months ended March 31, 2020 was primarily due to the period including $11.8 million of divestiture and 2018, respectively.other related costs and higher non-cash share-based compensation. There were no divestiture and other related costs in the prior year comparable period.
LIQUIDITY AND FINANCIAL CONDITION
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 March 31, 2019.2020. The Company expects its cash flow from operations and its available debt capacity can be used to meet future cash requirements for operations, capital expenditures, dividend payments, acquisitions, and stock repurchases.
Cash Flows from Operating Activities Net cash provided by operating activities was $36.9 million and $23.4 million in the three months ended March 31, 2019, and net cash used in operating activities was $18.7 million in the three months ended March 31, 2018. The Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, in the first quarter of 2018 using monthly cash receipts as its unit of account. In the second quarter of 2018, the Company updated its unit of account to daily cash receipts for the cash received related to the beneficial interest in the previously transferred receivables. As a result, the reported results as of June 30, 2018, included an adjustment of $35.4 million for collections on beneficial interest in previously transferred receivables and an adjustment of $1.6 million for company owned life insurance proceeds for the three months ended March 31, 2018, which were previously reported as2020 and 2019, respectively. The increase in net cash flows fromprovided by operating activities. The Consolidated Condensed Statement of Cash Flows foractivities was due to a $14.3 million decrease in cash used in working capital during the three months ended March 31, 2018 have been updated2020, compared to reflect these adjustments.the three months ended March 31, 2019.
Cash Flows from Investing Activities Net cash used in investing activities was $4.9 million and $8.6 million during the three months ended March 31, 2019.2020 and 2019, respectively. During the three months ended March 31, 2018, net2020, the Company received cash provided by investing activities was $23.2 million.proceeds of $4.6 million related to the redemption of miscellaneous investments. Capital expenditures were $9.4 million and $8.3 million and $11.1 million forduring the three months ended March 31, 2020 and 2019, and 2018, respectively. During the first three months of 2018, the Company has included $44.4 million of cash receipts on sold receivables, related to the adoption of ASU 2016-15, discussed above. During the three months ended March 31, 2018, the Company made acquisitions for a total of $11 million.
Cash Flows from Financing Activities Net cash used in financing activities was $11.9$18.2 million and $9.6$11.9 million for the three months ended March 31, 2020 and 2019, and 2018, respectively. The Company repurchased $72.7 million of Company stock for the three months ended March 31, 2018 and did not repurchase any Company stock in the three months ended March 31, 2019. Net debt decreased by $1.4 million and increased by $4.1 million and $80.1 million for the three months ended March 31, 20192020 and 2018,2019, respectively. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $15.2$16.5 million and $14.3$15.2 million were paid during the three months ended March 31, 20192020 and 2018,2019, respectively. Dividends paid were 36$0.39 per share and $0.36 cents per share and 33 cents per share infor the first three months of 20192020 and 2018,2019, respectively.
CONTRACTUAL OBLIGATIONS
There have been no material changes in the Company’s contractual obligations during the quarter ended March 31, 2019.2020. For additional information about contractual obligations, refer to “Contractual Obligations” under Item 7 of the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 2018.2019.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2019,2020, the Company had no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2019.2020. For additional information about critical accounting policies, refer to “Critical Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 2018.2019.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in the Company’s exposure to market risk during the quarter ended March 31, 2019.2020. For additional information about market risk, refer to Item 7A of the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 2018.2019.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures: The Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chairman, President, and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report, of the design and operation of the disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the Company’s Chairman, President, and Chief Executive Officer and its Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Change in Internal Control Over Financial Reporting: There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the Company’s most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
This document 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 March 31, 2019, 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 those 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 the pace and nature of new product introductions by the Company and the Company’s customers; the Company’s ability to successfully implement its growth strategies; the outcome of the Company’s various productivity-improvement and cost-reduction efforts; the effectiveness of the Company’s past restructuring activities; changes in costs and availability of raw materials and energy; industry and economic factors related to the Company’s domestic and international business; competition from other suppliers of colors, flavors, and fragrances; growth or contraction in markets for products in which the Company competes; terminations and other changes in customer relationships; the costs of compliance, or failure to comply, with laws and regulations applicable to our industries and markets; changing consumer preferences and changing technologies; industry and customer acceptance of price increases; currency exchange rate fluctuations; cost and availability of credit; results of litigation, governmental investigations, or other proceedings; complications as a result of existing or future information technology system applications and hardware; the matters discussed under Item 1A of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2018; and the matters discussed above under Item 2 including the critical accounting policies referenced therein. 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 therein will not be realized.
PART II. | OTHER INFORMATION |
Agar v. Sensient Natural Ingredients LLC
On March 29, 2019, Calvin Agar (Agar), a former employee, filed a Class Action Complaint in Stanislaus County Superior Court against Sensient Natural Ingredients LLC (SNI). On May 22, 2019, Agar filed a First Amended Class Action Complaint against SNI (the Complaint). Agar alleges that SNI improperly reported overtime pay on employees’ wage statements, in violation of the California Labor Code. The Complaint alleges two causes of action, both of which concern the wage statements.
The Complaint does not allege that SNI failed to pay any overtime due to Agar or any of the putative class or group members. The Complaint merely challenges the manner in which SNI has reported overtime pay on its wage statements.
SNI maintains that it has accurately paid Agar and the putative class members for all overtime worked, and that they have not experienced any harm. SNI further maintains that the format of its wage statements does not violate the requirements of state law or any specific guidance from California decisional law, the California Division of Labor Standards Enforcement, or the California Labor Commissioner's Office. Finally, SNI contended that certain of the state law claims are subject to mandatory individual arbitration.
SNI filed its Answer and Affirmative Defenses to the Complaint on July 10, 2019. The parties participated in an early mediation in the case in December 2019, which was not successful. On March 17, 2020, the Court granted Agar leave to file a Second Amended Complaint, which removed the claim that SNI had asserted was subject to mandatory individual arbitration. SNI filed a Demurrer to the Second Amended Complaint, seeking dismissal of the remaining claim, on May 1, 2020. SNI continues to evaluate the developing legal authority on this issue. SNI intends to vigorously defend its interests, absent a reasonable resolution.
Other Claims The Company is subject to various claims and litigation arising in the normal course of business. The Company establishes reserves for claims and proceedings when it is probable that liabilities exist and reasonable estimates of loss can be made. While it is not possible to predict the outcome of these matters, based on our assessment of the facts and circumstances now known, we do not believe that these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.
There were no material changes to the risk factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 2018.2019, except as follows:
The Coronavirus/COVID-19 could adversely affect our results and financial condition.
The Coronavirus, also known as COVID-19, is now adversely affecting most of the world, including through widespread illness, quarantines, factory shutdowns, and travel and transportation restrictions. 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 supplier shutdowns, shortages, or transportation disruptions; 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.
Around Chinese New Year, the Chinese government ordered us (along with other companies) to shut down our manufacturing facilities for approximately ten days, where we make food colors, cosmetic ingredients, flavors, and dehydrated garlic and onion for the Chinese and other Asian markets. Additionally, our facility in India, where we make food and personal care products, was shut down for several days after the Indian government ordered a nationwide lockdown (that facility subsequently began operating again several days later after it was designated as part of the critical infrastructure for India). These shutdowns did not have a material impact on our results for Asia Pacific, but additional shutdowns or other government actions could adversely affect our results.
While all of our manufacturing facilities currently remain open because they have been designated as part of the critical infrastructure of the countries in which they operate (food and/or chemical production), these designations could be changed or modified in the future, resulting in a partial or total shutdown of one or more of our facilities. Such 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 closure. 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. Such events could adversely affect our results.
Social disruptions such as widespread illness, quarantines, unemployment, and general anxiety could also reduce consumer demand for the products our customers make. This would result in less demand for our products. Such events could adversely affect our results. In addition, we may face heightened cybersecurity risks as a result of increased cybercriminal activity during a social disruption and due to a greater percentage of our workforce working remotely. While we take substantial steps (including in our remote work environment) to protect the information related to our formulas, research and development, manufacturing processes, trade secrets, sales, products, customers, personnel, and other operations through cybersecurity systems, monitoring, auditing, and training, these efforts may not always be successful.
Overall, the COVID-19 pandemic and governmental and social responses have evolved rapidly in a short period of time and we expect that the situation will remain dynamic for the foreseeable future. There can be no assurance that our experience to date with respect to facility operations, customer demand, the availability of supplies and transportation, and other factors impacting our results and financial condition will be predictive of the ongoing impacts in the short or long term. Even as stay-home orders and quarantines are eventually lifted, it is difficult to predict how economic conditions and changes in customer and consumer behavior may impact our results over the longer term. As a result of any of the foregoing, our results or financial condition could be adversely impacted and the impacts could be material. We are exposed to risks associated with our divestitures, which may impact our ability to fully realize the anticipated benefits of those transactions and could result in expenses and charges that are greater than we currently anticipate.
We have previously announced our intent to divest certain product lines. If those product lines are not sold in a timely manner, whether delayed by COVID-19 or otherwise, our profitability could be adversely impacted and management could be distracted from the core remaining businesses of the Company. We could also incur expenses with these divestitures and additional charges that are greater than we currently anticipate. Additionally, as part of our divestiture of certain fragrance product lines, we are moving our essential oils manufacturing capability to another Sensient facility. Any such move is inherently risky and could result in production delays and disruptions, which could in turn adversely impact our current and future ability to sell to customers. Divestitures also contain inherent risks that may impact our ability to fully realize the benefits of such divestiture, including possible delays in closing and potential post-closing claims for indemnification. If any of these 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.
Additionally, in connection with the divestiture of our fragrances product line, a potential buyer notified us that environmental sampling conducted at our Granada, Spain, location identified the presence of contaminants in soil and groundwater in certain areas of the property. Due to the impacts of COVID-19 in Spain, we have not been able to conduct a quantitative assessment of the issues identified in the environmental sampling. Environmental regulations, and the potential failure to comply with them, can have serious consequences, including the costs of compliance, defense, and remediation; interference with our operations or the ability to obtain required permits; civil, criminal, and administrative penalties; and negative publicity. The amount and timing of potential environmental remediation costs and complying with environmental laws associated with our Granada, Spain, location are difficult to predict as a result of the current circumstances and may be material.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On October 19, 2017, the Board of Directors authorized the repurchase of up to three million shares (2017 Authorization). As of March 31, 2020, 774,974 shares had been repurchased under the 2017 Authorization. There were no repurchases of shares by the Company during the first quarter of 2019.three months ended March 31, 2020. There is no expiration date for the 2017 Authorization. As of March 31, 2019, the maximum number of shares that may be purchased under publicly announced plans is 2,225,026. The 2017 Authorization may be modified, suspended, or discontinued by the Board of Directors at any time. As of March 31, 2020, the maximum number of shares that may be purchased under publicly announced plans is 2,225,026.
See Exhibit Index following this report.
SENSIENT TECHNOLOGIES CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 20192020
Exhibit | Description
| Description | | Incorporated by Reference From | | Filed Herewith | | | | | | | | | Filed Herewith
| Sensient Technologies Corporation Amended and Restated By-Laws | | Exhibit 3.2 to Current Report on Form 8-K filed March 27, 2020 (Commission File No. 1-7626) | | | | | | | | | | | | Executive Employment Contract, dated as of February 13, 2020, by and between Sensient Technologies Corporation and Paul Manning | | Exhibit 10.1 to Current Report on Form 8-K filed February 14, 2020 (Commission File No. 1-7626) | | | | | | | | | | | | Certifications of the Company’s Chairman, President & Chief Executive Officer and Senior Vice President & Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act | | | | X | | | | | | | | | | Certifications of the Company’s Chairman, President & Chief Executive Officer and Senior Vice President & Chief Financial Officer pursuant to 18 United States Code § 1350 | | | | X | | | | | | | | 101101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive data files pursuant to Rule 405 of Regulation S-TData File because its XBRL tags are embedded within the Inline XBRL document) | | | | X | | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | X | | | | | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | X | | | | | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | X | | | | | | | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | X | | | | | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | X | | | | | | | | 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | | | X |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | SENSIENT TECHNOLOGIES CORPORATION | | | | | | Date: | May 4, 2020 | By: | /s/ John J. Manning | | | | | John J. Manning, Senior Vice President, General Counsel & Secretary | | | | | | | Date: | May 6, 2019 | By: | /s/ John J. Manning | | | | | John J. Manning, Vice President, | | | | | General Counsel & Secretary | | | | | | | Date: | May 6, 20194, 2020 | By: | /s/ Stephen J. Rolfs | | | | | Stephen J. Rolfs, Senior Vice President & Chief Financial Officer | |
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