SENSIENT TECHNOLOGIES CORP 10-K

Item 8. Financial Statements and Supplementary Data. CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, (In thousands except per share amounts) 2022 2021 2020 Revenue $ 1,437,039 $ 1,380,264 $ 1,332,001 Cost of products sold 947,928 925,603 908,254 Selling and administrative expenses 292,360 284,633 271,091 Operating income 196,751 170,028 152,656 Interest expense 14,547 12,544 14,811 Earnings before income taxes 182,204 157,484 137,845 Income taxes 41,317 38,739 28,373 Net earnings $ 140,887 $ 118,745 $ 109,472 Earnings per common share: Basic $ 3.36 $ 2.82 $ 2.59 Diluted $ 3.34 $ 2.81 $ 2.59 Weighted average number of common shares outstanding: Basic 41,888 42,077 42,301 Diluted 42,213 42,258 42,346 See notes to consolidated financial statements. 28 Index CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, (In thousands) 2022 2021 2020 Net earnings $ 140,887 $ 118,745 $ 109,472 Cash flow hedges adjustment, net of tax (benefit) expense of $( 471 ), $( 430 ), and $ 524 , respectively ( 805 ) ( 543 ) 948 Pension adjustment, net of tax (benefit) expense of $( 462 ), $ 577 , and $( 475 ), respectively ( 1,439 ) 1,612 ( 1,293 ) Foreign currency translation on net investment hedges 19,340 17,937 ( 24,044 ) Tax effect of current year activity on net investment hedges ( 4,804 ) ( 4,455 ) 5,973 Foreign currency translation on long-term intercompany loans ( 2,468 ) 13,798 ( 7,731 ) Tax effect of current year activity on intercompany long-term loans ( 2,408 ) ( 3,990 ) 3,757 Reclassification of cumulative translation to net earnings - 10,203 ( 8,625 ) Other foreign currency translation ( 33,476 ) ( 50,099 ) 34,932 Total comprehensive income $ 114,827 $ 103,208 $ 113,389 See notes to consolidated financial statements. 29 Index CONSOLIDATED BALANCE SHEETS December 31, (In thousands except share and per share amounts) 2022 2021 Assets Current Assets: Cash and cash equivalents $ 20,921 $ 25,740 Trade accounts receivable 302,109 261,121 Inventories 564,110 411,635 Prepaid expenses and other current assets 47,640 42,657 Total current assets 934,780 741,153 Other assets 96,609 92,952 Deferred tax assets 32,717 29,901 Intangible assets, net 18,600 14,975 Goodwill 415,715 420,034 Property, Plant, and Equipment: Land 31,444 31,028 Buildings 322,268 315,207 Machinery and equipment 722,294 715,344 Construction in progress 65,809 32,801 1,141,815 1,094,380 Less accumulated depreciation ( 658,622 ) ( 647,902 ) 483,193 446,478 Total assets $ 1,981,614 $ 1,745,493 Liabilities and Shareholders’ Equity Current Liabilities: Trade accounts payable $ 142,365 $ 125,519 Accrued salaries, wages, and withholdings from employees 43,738 40,939 Other accrued expenses 51,231 46,292 Income taxes 14,446 11,016 Short-term borrowings 20,373 8,539 Total current liabilities 272,153 232,305 Deferred tax liabilities 15,977 14,349 Other liabilities 37,191 28,829 Accrued employee and retiree benefits 26,364 28,579 Long-term debt 630,331 503,006 Shareholders’ Equity: Common stock, par value $ 0.10 a share, authorized 100,000,000 shares; issued 53,954,874 shares 5,396 5,396 Additional paid-in capital 124,043 111,352 Earnings reinvested in the business 1,702,700 1,630,713 Treasury stock, 12,058,773 and 12,107,549 shares, respectively, at cost ( 631,853 ) ( 634,408 ) Accumulated other comprehensive loss ( 200,688 ) ( 174,628 ) 999,598 938,425 Total liabilities and shareholders’ equity $ 1,981,614 $ 1,745,493 See notes to consolidated financial statements. 30 Index CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, (In thousands) 2022 2021 2020 Cash Flows from Operating Activities Net earnings $ 140,887 $ 118,745 $ 109,472 Adjustments to arrive at net cash provided by operating activities: Depreciation and amortization 52,467 52,051 49,641 Share-based compensation expense 16,138 9,573 5,608 Net loss (gain) on assets 276 331 ( 252 ) Net (gain) loss on divestitures and other charges ( 2,532 ) 14,021 6,904 Deferred income taxes ( 11,010 ) ( 6,071 ) ( 8,705 ) Changes in operating assets and liabilities: Trade accounts receivable ( 46,086 ) ( 34,571 ) ( 11,357 ) Inventories ( 159,014 ) ( 36,323 ) 46,828 Prepaid expenses and other assets ( 5,055 ) ( 6,057 ) ( 12,868 ) Trade accounts payable and other accrued expenses 17,489 21,326 15,524 Accrued salaries, wages, and withholdings from employees 3,486 7,321 15,140 Income taxes 4,422 4,275 22 Other liabilities 602 597 2,823 Net cash provided by operating activities 12,070 145,218 218,780 Cash Flows from Investing Activities Acquisition of property, plant, and equipment ( 79,322 ) ( 60,788 ) ( 52,162 ) Proceeds from sale of assets 264 216 1,075 Proceeds from divestiture of businesses 2,532 37,790 12,595 Acquisition of new businesses ( 22,714 ) ( 13,875 ) — Other investing activities 792 1,097 5,071 Net cash used in investing activities ( 98,448 ) ( 35,560 ) ( 33,421 ) Cash Flows from Financing Activities Proceeds from additional borrowings 328,597 112,194 36,667 Debt payments ( 171,447 ) ( 110,168 ) ( 154,348 ) Purchase of treasury stock — ( 42,511 ) — Dividends paid ( 68,915 ) ( 66,694 ) ( 66,057 ) Other financing activities ( 2,056 ) ( 582 ) ( 415 ) Net cash provided by (used in) financing activities 86,179 ( 107,761 ) ( 184,153 ) Effect of exchange rate changes on cash and cash equivalents ( 4,620 ) ( 927 ) 2,411 Net (decrease) increase in cash and cash equivalents ( 4,819 ) 970 3,617 Cash and cash equivalents at beginning of year 25,740 24,770 21,153 Cash and cash equivalents at end of year $ 20,921 $ 25,740 $ 24,770 Cash paid during the year for: Interest $ 14,716 $ 12,593 $ 14,751 Income taxes 48,242 29,224 44,755 Capitalized interest 910 471 514 See notes to consolidated financial statements. 31 Index CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands except share and per share Common Additional Paid-in Earnings Reinvested in the Treasury Stock Accumulated Other Comprehensive amounts) Stock Capital Business Shares Amount (Loss) Income Balances at December 31, 2019 $ 5,396 $ 98,425 $ 1,536,100 11,682,636 $ ( 595,324 ) $ ( 163,008 ) Net earnings 109,472 Other comprehensive income 3,917 Cash dividends paid – $ 1.56 per share ( 66,057 ) Share-based compensation 5,608 Non-vested stock issued upon vesting ( 1,352 ) ( 26,515 ) 1,352 Benefit plans 241 ( 16,344 ) 833 Other ( 13 ) ( 853 ) 7,850 ( 401 ) Balances at December 31, 2020 5,396 102,909 1,578,662 11,647,627 ( 593,540 ) ( 159,091 ) Net earnings 118,745 Other comprehensive loss ( 15,537 ) Cash dividends paid – $ 1.58 per share ( 66,694 ) Share-based compensation 9,573 Non-vested stock issued upon vesting ( 1,264 ) ( 24,711 ) 1,264 Benefit plans 338 ( 14,791 ) 756 Purchase of treasury stock 492,045 ( 42,511 ) Other ( 204 ) 7,379 ( 377 ) Balances at December 31, 2021 5,396 111,352 1,630,713 12,107,549 ( 634,408 ) ( 174,628 ) Net earnings 140,887 Other comprehensive loss ( 26,060 ) Cash dividends paid – $ 1.64 per share ( 68,915 ) Share-based compensation 16,138 Non-vested stock issued upon vesting ( 3,239 ) ( 61,821 ) 3,239 Benefit plans 560 ( 11,786 ) 618 Other ( 768 ) 15 24,831 ( 1,302 ) Balances at December 31, 2022 $ 5,396 $ 124,043 $ 1,702,700 12,058,773 $ ( 631,853 ) $ ( 200,688 ) See notes to consolidated financial statements. 32 Index NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2022, 2021, and 2020 1. Summary of Significant Accounting Policies Nature of Operations Sensient Technologies Corporation, together with its subsidiaries (the Company or Sensient), is a leading global manufacturer and marketer of colors, flavors, and other specialty ingredients. The Company uses advanced technologies at facilities around the world to develop specialty food and beverage systems; personal care, essential oils, pharmaceutical, and nutraceutical systems; specialty colors; and other specialty and fine chemicals. The Company’s three reportable segments are the Flavors & Extracts Group and the Color Group, which are managed on a product basis, and the Asia Pacific Group, which is managed on a geographic basis. The Company’s corporate expenses, restructuring including operational improvement plans, divestiture, share-based compensation, the one-time COVID-19 employee payment in 2020, and other costs are included in the “Corporate & Other” category. In the second quarter of 2020, the Company divested its inks product line; in the third quarter of 2020, the Company divested its yogurt fruit preparations product line; and in the second quarter of 2021, the Company divested its fragrances (excluding essential oils) product line. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements requires the use of management’s estimates and assumptions that affect reported amounts of assets, liabilities, revenue, and expenses during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Revenue Recognition The Company recognizes revenue at the transfer of control of its products to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five-step approach: • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies the performance obligations The Company considers customer purchase orders, which in some cases are governed by master sales agreements, coupled with the Company’s purchase order acceptances, to be the contracts with the customer. For each contract, the Company considers the identified performance obligation to be the promise to transfer products. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment and then determines the net consideration to which the Company expects to be entitled. In addition, the Company assesses the customer’s ability to pay as part of its evaluation of the contract. As the Company’s standard payment terms are less than one year, the Company elected the practical expedient under Accounting Standards Codification (ASC) 606-10-32-18, and determined that its contracts do not have a significant financing component. The Company allocates the transaction price to each distinct product based on the relative standalone selling price. Revenue is recognized when control of the product is transferred to the customer, the customer is obligated to pay the Company, and the Company has no remaining obligations, which is typically at shipment. In certain locations, primarily outside the United States, product delivery terms may vary. Thus, in such locations, the point at which control of the product transfers to the customer and revenue recognition occurs will vary accordingly. Customer returns of non-conforming products are estimated at the time revenue is recognized. In certain customer relationships, volume rebates exist, which are recognized according to the terms and conditions of the contractual relationship. Customer returns, rebates, and discounts are not material to the Company’s consolidated financial statements. The Company has elected to recognize the revenue and cost for freight and shipping when control over the products has transferred to the customer. The Company has elected to immediately expense contract costs related to obtaining a contract as the amortization period of the asset the Company otherwise would have recognized would have been less than a year. In addition to evaluating the Company’s performance based on the segments above, revenue is also disaggregated and analyzed by product line and geographic market (See Note 12, Segment and Geographic Information, for further information) . 33 Index Cost of Products Sold Cost of products sold includes materials, labor, and overhead expenses incurred in the manufacture of our products. Cost of products sold also includes charges for obsolete and slow-moving inventories as well as costs for quality control, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, other costs of our internal distribution network, and costs incurred for shipping and handling. The Company records fees billed to customers for shipping and handling as revenue. Selling and Administrative Expenses Selling and administrative expenses primarily include the salaries and related costs for executive, finance, accounting, human resources, information technology, research and development, and legal personnel as well as salaries and related costs of salespersons and commissions paid to external sales agents. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition as cash equivalents. Accounts Receivable Receivables are recorded at their face amount, less an allowance for losses on doubtful accounts. The allowance for doubtful accounts is based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions. Specific accounts are written off against the allowance for doubtful accounts when it is deemed that the receivable is no longer collectible. Inventories Inventories are stated at the lower of cost or net realizable value. Net realizable value is determined on the basis of estimated realizable values. Cost is determined using the first-in, first-out (FIFO) method. Inventories include finished and in-process products totaling $ 385.2 million and $ 280.2 million at December 31, 2022 and 2021, respectively, and raw materials and supplies of $ 178.9 million and $ 131.4 million at December 31, 2022 and 2021, respectively. The Company recorded a non-cash charge of $ 0.1 million and $ 1.8 million in Cost of Products Sold related to the divested product lines in 2021 and 2020, respectively. There were no non-cash charges recorded in 2022 related to the divested product lines. The non-cash charge reduced the carrying value of certain inventories, as they were determined to be excess. See Note 14, Divestitures , for additional information. Property, Plant, and Equipment Property, plant, and equipment are recorded at cost reduced by accumulated depreciation. Depreciation is provided over the estimated useful life of the related asset using the straight-line method for financial reporting. The estimated useful lives for buildings and leasehold improvements range from 5 to 40 years. Machinery and equipment have estimated useful lives ranging from 3 to 20 years. Interest costs on significant projects constructed or developed for the Company’s own use are capitalized as part of the asset. Goodwill and Other Intangible Assets The carrying value of goodwill is evaluated for impairment on an annual basis or more frequently when an indicator of impairment occurs. The impairment assessment includes comparing the carrying amount of net assets, including goodwill, of each reporting unit to its respective fair value as of the date of the assessment. Fair value was estimated based upon an evaluation of the reporting unit’s estimated future discounted cash flows as well as the public trading and private transaction valuation multiples for comparable companies. The Company performed such a quantitative analysis in 2022, which indicated a substantial premium compared to the carrying value of net assets, including goodwill, at the reporting unit level. In 2021 and 2020, the Company completed a qualitative assessment noting no indicators of impairment. The Company did no t record impairment charges for any of its reporting units in 2022, 2021, or 2020. In the fourth quarter of 2019, as a result of the Company meeting the assets held for sale criteria for its divestitures of its inks and fragrances (excluding its essential oils product line) product lines, the Company allocated $ 8.4 million of goodwill to those disposal groups. The $ 8.4 million of goodwill related to the disposal groups was determined to be fully impaired. In 2020, the fair value of the disposal groups decreased, which resulted in the previously allocated goodwill of $ 2.2 million to be reallocated to its respective financial reporting units. In 2021, the fair value of the disposal groups increased, which resulted in an additional $ 0.8 million of goodwill allocated to the disposal groups. See Note 14, Divestitures, for additional details. The cost of intangible assets with determinable useful lives is amortized on a straight-line basis to reflect the pattern of economic benefits consumed, ranging from 5 to 25 years. These assets include technological know-how, customer relationships, patents, trademarks, trade secrets, and non-compete agreements, among others. 34 Index Impairment of Long-lived Assets The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if potential impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on the difference between fair value and carrying value. Impairment losses were recorded as a result of the Company’s divestiture of its inks product line and its divestiture of its fragrances product line (excluding its essential oils product line). See Note 14 , Divestitures , for additional information. Leases The Company enters into lease agreements for certain office space, warehouses, land, and equipment in the ordinary course of business. The Company determines if an arrangement is a lease at inception and evaluates the lease classification (i.e., operating lease or financing lease) at that time. Lease arrangements with an initial term of 12 months or less are considered short-term leases and are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the term of the lease. Operating leases are included in Other Assets , Other Accrued Expenses , and Other Liabilities on the Company’s Consolidated Balance Sheet. Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate on the commencement date for determining the present value of lease payments. The Company considers the likelihood of exercising options to extend or terminate the lease when determining the lease term. The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient of accounting for the lease and non-lease components of each lease as a single lease component. Derivative Financial Instruments The Company selectively uses derivative financial instruments to reduce market risk associated with changes in foreign currency and interest rate exposures, which exist as part of ongoing business operations. All derivative transactions are authorized and executed pursuant to the Company’s risk management policies and procedures, which strictly prohibit the use of financial instruments for speculative trading purposes. The primary objectives of the foreign exchange risk management activities are to understand and mitigate the impact of potential foreign exchange fluctuations on the Company’s financial results and its economic well-being. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. These risk management transactions may involve the use of foreign currency derivatives to protect against exposure resulting from recorded accounts receivable and payable. The Company may utilize forward exchange contracts, generally with maturities of less than 18 months, which qualify as cash flow hedges. Generally, these foreign exchange contracts are intended to offset the effect of exchange rate fluctuations on non-functional currency denominated sales and purchases. For derivative instruments that are designated as cash flow hedges, gains and losses are deferred in Accumulated Other Comprehensive Income (OCI) until the underlying transaction is recognized in earnings. For hedges designated as cash flow hedges, the Company elects critical terms that match at the onset of the hedge transaction. Hedge accounting is permitted only if the hedge meets the critical terms match requirements. The Company reviews the critical terms at each effectiveness testing date to ensure the respective terms match; therefore, achieving a highly effective hedge. Interest Rate Hedging The Company is exposed to interest rate risk through its corporate borrowing activities. The objective of the Company’s interest rate risk management activities is to manage the levels of the Company’s fixed and floating interest rate exposure to be consistent with the Company’s preferred mix. The interest rate risk management program may include entering into interest rate swaps, which qualify as fair value hedges, when there is a desire to modify the Company’s exposure to interest rates. Gains or losses on fair value hedges are recognized in earnings, net of gains and losses on the fair value of the hedged instruments. Net Investments Hedging The Company is exposed to risk related to its net investments in foreign subsidiaries. As part of its risk management activities, the Company may enter into foreign-denominated debt to be used as a non-derivative instrument to hedge the Company’s net investment in foreign subsidiaries. The change in the fair value of debt designated as a net investment hedge is recorded in foreign currency translation in OCI. 35 Index Commodity Purchases The Company purchases certain commodities in the normal course of business that result in physical delivery of the goods and, hence, are excluded from ASC 815, Derivatives and Hedging . Translation of Foreign Currencies For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of foreign operations are translated into U.S. dollars at current exchange rates. Revenue and expense accounts are translated into U.S. dollars at average exchange rates prevailing during the year. Adjustments resulting from the translation of foreign accounts into U.S. dollars are recorded in foreign currency translation in OCI. Transaction gains and losses that occur as a result of transactions denominated in non-functional currencies are included in earnings and were not significant during the years ended December 31, 2022, 2021, and 2020. Share-Based Compensation Share-based compensation expense is recognized over the vesting period of each award based on the fair value of the instrument at the time of grant as summarized in Note 8, Share-Based Compensation. Income Taxes The Company recognizes a current tax liability or asset for the estimated taxes payable or refundable on tax returns for the current year and a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits for which the utilization of the asset is not considered likely. Earnings Per Share The difference between basic and diluted earnings per share (EPS) is the dilutive effect of non-vested stock. Diluted EPS assumes that non-vested stock has vested. The following table sets forth the computation of basic and diluted EPS for the years ended December 31: Years Ended December 31, (In thousands except per share amounts) 2022 2021 2020 Numerator: Net earnings $ 140,887 $ 118,745 $ 109,472 Denominator: Denominator for basic EPS - weighted average common shares 41,888 42,077 42,301 Effect of dilutive securities 325 181 45 Denominator for diluted EPS - diluted weighted average shares outstanding 42,213 42,258 42,346 Earnings per Common Share: Basic $ 3.36 $ 2.82 $ 2.59 Diluted $ 3.34 $ 2.81 $ 2.59 The Company has a share-based compensation plan under which employees may be granted share-based awards in which non-forfeitable dividends are paid on non-vested shares for certain awards. As such, these shares are considered participating securities under the two-class method of calculating EPS as described in ASC 260, Earnings per Share. The two-class method of calculating EPS did not have a material impact on the Company’s EPS calculations as of December 31, 2022, 2021, and 2020. All EPS amounts are presented on a diluted basis unless otherwise noted. Accumulated Other Comprehensive Income (Loss) Accumulated OCI is composed primarily of foreign currency translation, pension liability, and unrealized gains or losses on cash flow hedges. See Note 10, Accumulated Other Comprehensive Income, for additional information. Research and Development Research and development costs are recorded in S elling and Administrative Expenses in the year they are incurred. Research and development costs were $ 42.2 million, $ 34.3 million, and $ 38.5 million, during the years ended December 31, 2022, 2021, and 2020, respectively. Advertising Advertising costs are recorded in Selling and Administrative Expenses as they are incurred. Advertising costs were $ 1.9 million, $ 2.4 million, and $ 2.0 million, during the years ended December 31, 2022, 2021, and 2020, respectively. 36 Index Environmental Liabilities The Company records liabilities related to environmental remediation obligations when estimated future expenditures are probable and reasonably estimable. Such accruals are adjusted as further information becomes available or as circumstances change. Estimated future expenditures are discounted to their present value when the timing and amount of future cash flows are fixed and readily determinable. Recoveries of remediation costs from other parties, if any, are recognized as assets when their receipt is realizable. Subsequent Events The Company performed an evaluation of subsequent events through the date these financial statements were issued. See Note 17, Subsequent Event , for additional information. 2. Acquisitions On July 15, 2021, the Company acquired substantially all of the assets of Flavor Solutions, Inc . , a flavors business located in New Jersey. The purchase price for this acquisition was $ 14.9 million in cash. The assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date. The Company acquired net assets of $ 0.4 million and identified intangible assets, principally customer relationships, of $ 5.0 million. The remaining $ 9.5 million was allocated to goodwill. This business is now part of the Flavors & Extracts segment. On October 3, 2022, the Company acquired Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. (collectively, Endemix), a natural colors business located in Turkey. The Company paid $ 23.3 million in cash for this acquisition, which is net of $ 1.3 million in debt assumed, with $ 1.7 million of such amount being held back by the Company for 12 months to satisfy any indemnification claims that may arise. The assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date. The Company acquired net assets of $ 9.0 million and identified intangible assets, principally technological know-how and customer relationships, of $ 4.9 million. The remaining $ 9.4 million was allocated to goodwill. The Company is still in the process of finalizing the estimated values for identifiable intangible assets and fixed assets. The Company anticipates completing this analysis in 2023. This business is now part of the Color segment. 3. Trade Accounts Receivable Trade accounts receivables are recorded at their face amount, less an allowance for expected losses on doubtful accounts. The allowance for doubtful accounts is calculated based on customer-specific analysis and an aging methodology using historical loss information. The Company believes historical loss information is a reasonable basis for expected credit losses as the Company’s historical credit loss experience correlates with its customer delinquency status. This information is also adjusted for any known current economic conditions, including the current and expected impact of COVID-19. Currently, the COVID-19 pandemic has not had and is not anticipated to have a material impact on trade accounts receivable. Forecasted economic conditions have not had a significant impact on the current credit loss estimate due to the short-term nature of the Company’s customer receivables; however, the Company will continue to monitor and evaluate the rapidly changing economic conditions. Additionally, as the Company only has one 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 for the years ended December 31, 2022 and 2021: (In thousands) Allowance for Doubtful Accounts Balance at December 31, 2020 $ 3,891 Provision for expected credit losses 1,631 Accounts written off ( 434 ) Translation and other activity ( 211 ) Balance at December 31, 2021 $ 4,877 Provision for expected credit losses 944 Accounts written off ( 1,305 ) Translation and other activity ( 80 ) Balance at December 31, 2022 $ 4,436 37 Index 4. Goodwill and Intangible Assets At December 31, 2022 and 2021, goodwill is the only intangible asset that is not subject to amortization. The following table summarizes intangible assets with determinable useful lives by major category as of December 31, 2022 and 2021: 2022 2021 (In thousands except weighted average amortization years) Weighted Average Amortization Years Cost Accumulated Amortization Cost Accumulated Amortization Technological know-how 14.4 $ 12,005 $ ( 3,383 ) $ 8,870 $ ( 2,314 ) Customer relationships 19.0 9,697 ( 2,691 ) 7,084 ( 2,269 ) Patents, trademarks, non-compete agreements, and other 15.6 11,596 ( 8,624 ) 11,606 ( 8,002 ) Total finite-lived intangibles 16.2 $ 33,298 $ ( 14,698 ) $ 27,560 $ ( 12,585 ) Amortization of intangible assets was $ 2.0 million in 2022, $ 1.8 million in 2021, and $ 1.5 million in 2020. Estimated amortization expense, for the five years subsequent to December 31, 2022, is $ 2.3 million in 2023; $ 2.0 million in 2024; $ 2.0 million in 2025; $ 1.8 million in 2026; and $ 1.6 million in 2027. The changes in goodwill for the years ended December 31, 2022 and 2021, by reportable business segment, were as follows: (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Balance as of December 31 , 2020 $ 112,370 $ 305,263 $ 5,657 $ 423,290 Currency translation impact ( 17,298 ) 6,001 ( 603 ) ( 11,900 ) Goodwill related to divestitures (1) ( 812 ) — — ( 812 ) Acquisitions (2) 9,456 — — 9,456 Balance as of December 31 , 2021 $ 103,716 $ 311,264 $ 5,054 $ 420,034 Currency translation impact ( 2,796 ) ( 10,625 ) ( 338 ) ( 13,759 ) Acquisitions (2) — 9,440 — 9,440 Balance as of December 31 , 2022 $ 100,920 $ 310,079 $ 4,716 $ 415,715 (1) In the fourth quarter of 2019, the Company met all of the assets held for sale criteria related to the divestitures of its inks product line and fragrances product line (excluding its essential oils product line). Goodwill was allocated to those disposal groups and was determined to be fully impaired based on the estimated fair value of each of the disposal groups. In 2021, the fair value of the fragrances product line (excluding its essential oils product line) disposal group increased, which increased the value of goodwill allocated to the disposal group by $ 0.8 million. See Note 14, Divestitures, for additional information. (2) In 2021, the Company acquired Flavor Solutions, Inc. In 2022, the Company acquired Endemix. See Note 2, Acquisitions, for additional information. 5. Leases The Company leases certain office space, warehouses, land, and equipment under operating lease arrangements. Some of the Company’s leases include options to extend the leases for up to an additional five years . Some of the Company’s lease agreements also include rental payments that are adjusted periodically for inflation (i.e., CPI index). The Company recorded operating lease expense, which includes short-term lease expense and variable lease costs, of $ 11.3 million, $ 9.6 million, and $ 10.6 million during the years ended December 31, 2022, 2021, and 2020, respectively. For the years ended December 31, 2022, 2021, and 2020, the Company paid $ 9.3 million, $ 8.2 million , and $ 9.2 million, respectively, in cash for operating leases, not including short-term lease expense or variable lease costs. The Company entered into operating leases that resulted in $ 17.2 million, $ 9.8 million, and $ 13.0 million of right-of-use assets in exchange for operating lease obligations for the years ended December 31, 2022, 2021, and 2020, respectively. 38 Index The Company included $ 36.3 million and $ 26.5 million of right-of-use assets in Other Assets , $ 8.2 million and $ 6.2 million of operating lease liabilities in Other Accrued Expenses , and $ 28.0 million and $ 20.6 million of operating lease liabilities in Other Liabilities , on the Company’s Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively. The Company’s weighted average remaining operating lease term was 6.5 years as of December 31, 2022. The Company’s weighted average discount rate for operating leases was 3.6 % as of December 31, 2022. As of December 31, 2022, maturities of operating lease liabilities for future annual periods are as follows: (In thousand s) Year ending December 31, 2023 $ 9,297 2024 8,218 2025 4,827 2026 3,559 2027 2,969 Thereafter 12,035 Total lease payments 40,905 Less imputed interest ( 4,638 ) Present value of lease liabilities $ 36,267 6. Debt Long-term Debt Long-term debt consisted of the following unsecured obligations at December 31: (In thousands) 2022 2021 3.66 % senior notes due November 2023 $ 75,000 $ 75,000 3.65 % senior notes due May 2024 27,000 27,000 4.19 % senior notes due November 2025 25,000 25,000 1.85 % Euro-denominated senior notes due November 2022 - 76,017 3.06 % Euro-denominated senior notes due November 2023 40,945 43,487 1.27 % Euro-denominated senior notes due May 2024 53,527 56,850 1.71 % Euro-denominated senior notes due May 2027 42,822 45,480 2.53 % British Pound-denominated notes due November 2023 30,208 33,829 2.76 % British Pound-denominated notes due November 2025 30,208 33,829 Euro-denominated term loan 80,291 - Revolving Credit Facilities 225,469 86,000 Various other notes 622 1,137 Total debt 631,092 503,629 Less debt fees ( 260 ) ( 136 ) Less current portion ( 501 ) ( 487 ) Total long-term debt $ 630,331 $ 503,006 In May 2021, the Company executed an amended and restated credit agreement ( Credit Agreement ) with a syndicate of banks to extend the maturity of Sensient’s $ 350 million multi-currency revolving credit facility from May 2022 to May 2026 and to modify certain other provisions of the credit agreement as set forth therein. In December 2022, the Company amended the Credit Agreement to, among other things, transition from the London Inter-Bank Offered Rate to: (i) the Secured Overnight Financing Rate (SOFR) as the benchmark rate under the Credit Agreement for borrowings denominated in U.S. dollars and (ii) the Euro Interbank Offered Rate for borrowings denominated in Euros. Borrowings under the revolving credit facility bear interest at a variable rate, based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. 39 Index In August 2022, the Company amended its accounts receivable securitization program with Wells Fargo Bank N.A. (Wells Fargo) to increase the program amount from $ 30 million to $ 85 million. Under the amended program, Wells Fargo has extended a secured loan (Secured Loan) of up to $ 85 million to the Company secured by Wells Fargo’s undivided interests in certain of the Company’s trade accounts receivables. The interest rate on the Secured Loan is the SOFR as administered by the Federal Reserve Bank of New York plus a 10 basis point Term SOFR Adjustment plus an Applicable Margin of 70 basis points. The Company has the intent and ability either to repay the Secured Loan with available funds from the Company’s existing long-term revolving credit facility or to extend its accounts receivable program with Wells Fargo when it matures. Accordingly, the Secured Loan has been classified as long-term debt on the Company’s Consolidated Balance Sheet and is included with the Revolving Credit Facilities above. As of December 31, 2022, the amount was fully drawn. In November 2022, the Company entered into a 75 million Euro unsecured term loan (Term Loan) with PNC Bank, N.A (PNC Bank) that matures in November 2024 . The Company immediately borrowed the full amount of the Term Loan and used the proceeds to repay the 66.9 million Euro 1.85 % senior note that came due in November 2022 and a portion of outstanding borrowings on the Company’s revolving credit facility. The term loan will act as a partial hedge of the Company’s net asset position in Euros. See Note 7, Derivative Instruments and Hedging Activity , for additional information. Borrowings on the Term Loan bear interest at a variable rate, based upon the Eurocurrency Rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below. The average interest rate on the Term Loan was 2.72 % for the year ended December 31, 2022. The borrowings under the revolving credit facility, excluding borrowings on the accounts receivable securitization program, had an average interest rate of 3.01 % and 1.33 % for the years ended December 31, 2022 and 2021, respectively. The aggregate amounts of contractual maturities on long-term debt subsequent to December 31, 2022, are as follows: (In thousand s) Year ending December 31, 2023 $ 231,654 2024 160,939 2025 55,208 2026 140,469 2027 42,822 Total long-term debt maturities $ 631,092 The Company had $ 206.7 million available under the revolving credit facility and $ 25.5 million available under other lines of credit from several banks at December 31, 2022. Substantially all of the senior financing obligations contain restrictions concerning interest coverage, borrowings, and investments. The most restrictive loan covenants require a Leverage Ratio less than 3.5 and an Interest Coverage Ratio greater than 3.0 , in each case, as defined in the Company’s Credit Agreement. The Company is in compliance with all of these restrictions at December 31, 2022. The Company had stand-by and trade letters of credit outstanding of $ 2.8 million as of both December 31, 2022 and 2021. Short-term Borrowings The Company’s short-term borrowings consisted of the following items at December 31: (In thousands) 2022 2021 U.S. credit facilities $ 19,872 $ 7,284 Current maturities of long-term debt 501 487 Loans of foreign subsidiaries - 768 Total $ 20,373 $ 8,539 The weighted average interest rates on short-term borrowings were 5.47 % and 1.55 % at December 31, 2022 and 2021, respectively. 7. Derivative Instruments and Hedging Activity The Company may use derivative instruments for the purpose of hedging currency, commodity, and interest rate exposures, which exist as part of ongoing business operations. As a policy, the Company does not engage in speculative or leveraged transactions nor does the Company hold or issue financial instruments for trading purposes. Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged transaction. Hedge accounting, which generally results in the deferral of derivative gains and losses until such time as the underlying transaction is recognized in net earnings, is permitted only if the hedging relationship is expected to be highly effective at the inception of the transaction and on an ongoing basis. 40 Index The Company manages its exposure to foreign exchange risk by the use of forward exchange contracts to reduce the effect of fluctuating foreign currencies on non-functional currency sales, purchases, and other known foreign currency exposures. These forward exchange contracts generally have maturities of less than 18 months. The Company also uses certain debt denominated in foreign currencies to manage the net asset positions of the Company’s foreign subsidiaries. The Company’s primary hedging activities and their accounting treatment are summarized below. Forward Exchange Contracts Certain forward exchange contracts have been designated as cash flow hedges. The Company had $ 70.1 million and $ 48.6 million of forward exchange contracts, designated as cash flow hedges, outstanding as of December 31, 2022 and 2021, respectively. For the years ended December 31, 2022, 2021, and 2020, gains of $ 1.0 million and $ 1.3 million and a loss of $ 1.3 million, respectively, were reclassified into net earnings in the Company’s Consolidated Statement of Earnings that offset the earnings impact of the related non-functional asset or liability hedged in the same period. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges and the results of these transactions are not material to the financial statements. Net Investment Hedges The Company has designated certain foreign currency denominated long-term borrowings as partial hedges of the Company’s foreign currency net asset positions. As of December 31, 2022 and 2021, the total value of the Company’s net investment hedges was $ 315.5 million and $ 289.5 million, respectively. These net investment hedges include Euro and British Pound denominated long-term debt. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in OCI. The impact of foreign exchange rates on these debt instruments decreased debt by $ 19.3 million and $ 17.9 million for the years ended December 31, 2022 and 2021, respectively, and are recorded as foreign currency translation in OCI. For the year ended December 31, 2022, there was no reclassification of OCI with respect to net investment hedges into net earnings. For the years ended December 31, 2021 and 2020, losses of $ 4.2 million and $ 10.8 million, respectively, were reclassified into net earnings in the Company’s Consolidated Statement of Earnings that offset the underlying transactions’ impact on earnings in the same period. In 2021, the losses were primarily associated with the partial termination of the net investment hedge related to the Euro debt in connection with the sale of the fragrances product line, including the Spanish legal entity. In 2020, the losses were primarily associated with the termination of the net investment hedge related to the Swiss Franc debt that terminated in connection with the sale of the inks product line, including its Swiss legal entity. See Note 14, Divestitures , for additional information. Concentrations of Credit Risk Counterparties to forward exchange contracts consist of large international financial institutions. While these counterparties may expose the Company to potential losses due to the credit risk of non-performance, losses are not anticipated. Concentrations of credit risk with respect to trade accounts receivable are limited by the large number of customers, generally short payment terms, and their dispersion across geographic areas. 8. Share-Based Compensation The Company has traditionally maintained separate stock plans for non-employee directors, the 2012 Non-Employee Directors Stock Plan, and employees, the 2017 Stock Plan, under which directors and employees may be granted non-vested stock that vests over a specific time-period. In April 2017, the shareholders of the Company approved the 2017 Stock Plan authorizing 1.8 million shares for issuance as non-vested stock in the form of restricted stock, restricted stock units, performance stock units, non-qualified stock options, incentive stock options, and stock appreciation rights. In April 2022, the shareholders of the Company approved an Amended and Restated 2017 Stock Plan. The Amended and Restated 2017 Stock plan incorporates substantially all of the key terms of the Company’s 2012 Non-Employee Directors Stock Plan into the Company’s existing 2017 Stock Plan, creating one omnibus plan covering the Company’s non-employee directors, officers, and key employees. The total number of shares of common stock reserved for issuance under the Amended and Restated 2017 Stock Plan increased by 350 thousand shares (from 1.8 million to 2.15 million in aggregate), plus any cancellations of shares issued under the Amended and Restated 2017 Stock Plan. As of December 31, 2022, there were 1.3 million shares available to issue as non-vested stock under the Company’s Amended and Restated 2017 Stock Plan. The Company may also issue up to 0.2 million shares of stock pursuant to its 1999 Amended and Restated Directors Deferred Compensation Plan . The Company recognizes expense for shares of non-vested stock over a three-year vesting period with a pro-rata vesting upon retirement. During the period of restriction, the holder of non-vested stock has voting rights and is entitled to receive all dividends and other distributions paid with respect to the stock. The holders of the performance stock units are not entitled to vote or receive dividends and other distributions paid with respect to the stock, until the units have vested and shares of stock issued . 41 Index Grants issued after December 2013 and before December 2020 to elected officers consist of 100 % performance stock unit awards. These awards are based on a three-year performance period and a three-year vesting period with a pro-rata vesting upon retirement. Three-year performance that exceeds the stated performance metrics would result in an award up to 200 % of the original grant. Starting with the December 2020 grant, grants issued to elected officers consist of 60 % performance stock unit awards and 40 % non-vested restricted stock awards. The performance stock unit awards are based on a three-year performance period and a three-year vesting period with a pro-rata vesting upon retirement. Three-year performance that exceeds the stated performance metrics would result in an award up to 200 % of the original grant. The non-vested restricted stock awards granted are based on a three-year vesting period with a pro-rata vesting upon retirement. The Company expenses awards for non-vested stock, including time-vesting stock and performance stock units, based on the fair value of the Company’s common stock at the date of the grant. The following table summarizes the non-vested stock and performance stock unit activity: (In thousands except fair value) Shares Grant Date Weighted Average Fair Value Aggregate Intrinsic Value Outstanding at December 31 , 2019 404 $ 64.89 26,710 Granted 142 65.61 Vested ( 27 ) 74.21 Cancelled ( 68 ) 73.39 Outstanding at December 31 , 2020 451 $ 63.28 33,283 Granted 129 90.10 Vested ( 25 ) 61.91 Cancelled ( 73 ) 72.37 Outstanding at December 31 , 2021 482 $ 69.15 $ 48,271 Granted 168 73.52 Vested ( 62 ) 58.81 Cancelled ( 69 ) 58.62 Outstanding at December 31 , 2022 519 $ 73.19 $ 37,883 The total intrinsic values of shares vested during 2022, 2021, and 2020, was $ 5.1 million, $ 1.9 million, and $ 1.4 million, respectively. As of December 31, 2022, total remaining unearned compensation, net of expected forfeitures, related to non-vested stock and performance stock units was $ 23.3 million, which will be amortized over the weighted average remaining service period of 2.15 years. Total pre-tax share-based compensation expense recognized in the Consolidated Statements of Earnings was $ 16.1 million, $ 9.6 million, and $ 5.6 million in 2022, 2021, and 2020, respectively. The Company also recognized tax related benefits of $ 1.2 million, $ 1.0 million, and $ 0.8 million, in 2022, 2021, and 2020, respectively. 9. Retirement Plans The Company provides benefits under defined contribution plans including a savings plan and an employee stock ownership plan (ESOP). The savings plan covers substantially all domestic salaried and certain non-union hourly employees and provides for matching contributions up to 4 % of each employee’s salary. The ESOP covers substantially all domestic employees and provides for contributions based on a percentage of each employee’s compensation as determined by the Company’s Board of Directors. Total expense for the Company’s defined contribution plans was $ 7.8 million in 2022, $ 6.7 million in 2021, and $ 6.1 million in 2020. 42 Index Although the Company intends for these defined contribution plans to be the primary retirement benefit for most employees, the Company also has several defined benefit plans. The funded status of the defined benefit plans was as follows at December 31: (In thousands) 2022 2021 Benefit obligation at beginning of year $ 41,780 $ 45,631 Service cost 1,622 1,740 Interest cost 953 851 Foreign currency exchange rate changes ( 1,488 ) ( 291 ) Benefits and settlements paid ( 1,724 ) ( 3,298 ) Actuarial gain ( 8,776 ) ( 2,853 ) Benefit obligation at end of year 32,367 41,780 Plan assets at beginning of year 32,982 35,676 Company contributions 1,027 947 Foreign currency exchange rate changes ( 2,430 ) ( 297 ) Benefits paid ( 1,724 ) ( 1,718 ) Settlement payments - ( 1,580 ) Actual loss on plan assets ( 9,926 ) ( 46 ) Plan assets at end of year 19,929 32,982 Funded status $ ( 12,438 ) $ ( 8,798 ) Accumulated benefit obligation $ 31,472 $ 40,873 Amounts recognized in the Consolidated Balance Sheets at December 31: (In thousands) 2022 2021 Accrued employee and retiree benefits $ ( 16,822 ) $ ( 18,375 ) Other accrued expenses ( 745 ) ( 693 ) Other assets 5,129 10,270 Net liability $ ( 12,438 ) $ ( 8,798 ) Components of annual benefit cost: (In thousands) 2022 2021 2020 Service cost $ 1,622 $ 1,740 $ 1,601 Interest cost 953 851 1,022 Expected return on plan assets ( 785 ) ( 728 ) ( 813 ) Recognized actuarial loss 32 267 41 Settlement income - ( 151 ) - Defined benefit expense $ 1,822 $ 1,979 $ 1,851 The Company’s non-service cost portion of defined benefit expense is recorded in Interest Expense on the Company’s Consolidated Statements of Earnings. The Company’s service cost portion of defined benefit expense is recorded in Selling and Administrative Expenses on the Company’s Consolidated Statements of Earnings. Weighted average liability assumptions as of December 31: 2022 2021 Discount rate 5.12 % 2.35 % Expected return on plan assets 4.89 % 2.54 % Rate of compensation increase 0.90 % 1.02 % Weighted average cost assumptions for the year ended December 31: 2022 2021 2020 Discount rate 2.35 % 1.87 % 2.69 % Expected return on plan assets 2.54 % 2.17 % 2.68 % Rate of compensation increase 1.02 % 1.07 % 0.88 % The aggregate amounts of benefits expected to be paid from defined benefit plans in each of the next five years subsequent to December 31, 2022, which include employees’ expected future service, are as follows: 2023, $ 1.7 million; 2024, $ 9.0 million; 2025, $ 1.5 million; 2026, $ 1.6 million; 2027, $ 1.6 million; and $ 10.1 million in total for the years 2028 through 2032. The Company expects to contribute $ 0.8 million to defined benefit plans in 2023. 43 Index Amounts in accumulated other comprehensive loss at December 31 were as follows: (In thousands) 2022 2021 Unrecognized net actuarial loss $ 2,210 $ 221 Prior service cost 153 179 Total before tax effects $ 2,363 $ 400 The pension adjustments, net of tax, recognized in OCI, were as follows: (In thousands) 2022 2021 2020 Net actuarial (loss) gain arising during the period $ ( 1,466 ) $ 1,528 $ ( 1,293 ) Prior service cost - - ( 32 ) Amortization of actuarial loss, included in defined benefit expense 27 84 32 Pension adjustment, net of tax $ ( 1,439 ) $ 1,612 $ ( 1,293 ) The investment objectives and target allocations for the Company’s pension plans related to the assets of the plans are reviewed on a regular basis. The investment objectives for the pension assets are to maximize the return on assets while maintaining an overall level of risk appropriate for a retirement fund and ensuring the availability of funds for the payment of retirement benefits. The levels of risk assumed by the pension plans are determined by market conditions, the rate of return expectations, and the liquidity requirements of each pension plan. The actual asset allocations of each pension plan are reviewed on a regular basis to ensure that they are in line with the target allocations. The following table presents the Company’s pension plan assets by asset category as of December 31, 2022 and 2021: Fair Value as of December 31, Fair Value Measurements at December 31, 2022 Using Fair Value Hierarchy Fair Value as of December 31, Fair Value Measurements at December 31, 2021 Using Fair Value Hierarchy (In thousands) 2022 Level 1 Level 2 Level 3 2021 Level 1 Level 2 Level 3 Equity Funds Domestic $ 5,208 $ 5,208 $ — $ — $ 7,033 $ 7,033 $ — $ — International 55 — 55 — 79 — 79 — International Fixed Income Funds 14,551 1,060 13,491 — 25,732 889 24,843 — Other investments 115 84 31 — 138 115 23 — Total assets at fair value $ 19,929 $ 6,352 $ 13,577 $ — $ 32,982 $ 8,037 $ 24,945 $ — The Company is required to categorize pension plan assets based on the following fair value hierarchy: Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data. Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. 44 Index 10. Accumulated Other Comprehensive Income The following table summarizes the changes in OCI for 2022, 2021, and 2020: (In thousands) Cash Flow Hedges (1) Pension Items (1) Foreign Currency Items Total Balance as of December 31 , 2019 $ ( 199 ) $ ( 672 ) $ ( 162,137 ) $ ( 163,008 ) Other comprehensive income (loss) before reclassifications ( 374 ) ( 1,325 ) 12,887 11,188 Amounts reclassified from OCI 1,322 32 ( 8,625 ) ( 7,271 ) Balance as of December 31 , 2020 $ 749 $ ( 1,965 ) $ ( 157,875 ) $ ( 159,091 ) Other comprehensive income (loss) before reclassifications 775 1,528 ( 26,809 ) ( 24,506 ) Amounts reclassified from OCI ( 1,318 ) 84 10,203 8,969 Balance as of December 31 , 2021 $ 206 $ ( 353 ) $ ( 174,481 ) $ ( 174,628 ) Other comprehensive income (loss) before reclassifications 215 ( 1,466 ) ( 23,816 ) ( 25,067 ) Amounts reclassified from OCI ( 1,020 ) 27 - ( 993 ) Balance as of December 31 , 2022 $ ( 599 ) $ ( 1,792 ) $ ( 198,297 ) $ ( 200,688 ) (1) Cash Flow Hedges and Pension Items are net of tax. 11. Income Taxes Earnings before income taxes were as follows: (In thousands) 2022 2021 2020 United States $ 73,192 $ 71,764 $ 72,593 Foreign 109,012 85,720 65,252 Total $ 182,204 $ 157,484 $ 137,845 The provision for income taxes was as follows: (In thousands) 2022 2021 2020 Current income tax expense: Federal $ 21,640 $ 16,807 $ 9,660 State 5,138 5,128 3,000 Foreign 25,549 22,875 24,418 52,327 44,810 37,078 Deferred benefit: Federal ( 8,520 ) ( 4,159 ) ( 6,918 ) State ( 1,353 ) ( 1,189 ) ( 565 ) Foreign ( 1,137 ) ( 723 ) ( 1,222 ) ( 11,010 ) ( 6,071 ) ( 8,705 ) Income taxes $ 41,317 $ 38,739 $ 28,373 The reconciliation between the U.S. Federal tax rate and the actual effective tax rate was as follows : 2022 2021 2020 Taxes at statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal income tax benefit 1.7 3.0 2.2 Tax credits ( 1.3 ) ( 1.4 ) ( 1.5 ) Taxes on foreign earnings 2.9 4.7 2.8 Global Intangible Low-Taxed Income 0.4 0.7 0.1 Foreign Derived Intangible Income ( 1.0 ) ( 0.9 ) ( 1.1 ) Loss on balance sheet hedge - 0.7 2.0 Resolution of prior years’ tax matters ( 0.1 ) ( 0.4 ) ( 0.1 ) Valuation allowance adjustments ( 2.7 ) ( 2.9 ) ( 3.7 ) Nondeductible compensation 1.9 1.1 - Other, net ( 0.1 ) ( 1.0 ) ( 1.1 ) Effective tax rate 22.7 % 24.6 % 20.6 % Certain reclassifications to prior year amounts have been made to conform to current year presentation. 45 Index Taxes on foreign earnings include the difference between the tax rates applied to foreign earnings relative to the U.S. statutory tax rate, accruals for foreign unrecognized tax benefits, and the impact of the U.S. foreign tax credit, not including the impact from Global Intangible Low-Taxed Income (GILTI). The impact on the Company’s effective tax rate varies from year to year based on the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rates in 2022, 2021, and 2020 were all impacted by tax costs related to the divestitures and the release of valuation allowances related to the foreign tax credit carryover and net operating losses. The Company’s valuation allowance at December 31, 2022 and 2021 was $ 28.1 million and $ 34.2 million, respectively . In 2022 and 2021, the valuation allowance related to foreign tax credits and state and foreign NOLs was reduced. During 2020, the Company completed tax planning strategies and Federal tax regulations were finalized that resulted in the partial release of this valuation allowance. The increase of the 2021 effective tax rate from GILTI compared to 2020 is primarily related to not filing the high tax election given the foreign rate mix. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following: (In thousands) 2022 2021 Deferred tax assets: Benefit plans $ 8,601 $ 8,144 Liabilities and reserves 18,623 16,577 Operating loss and credit carryovers 60,070 68,646 Capitalized research and development costs 7,882 - Other 4,414 10,031 Gross deferred tax assets 99,590 103,398 Valuation allowance ( 28,073 ) ( 34,242 ) Deferred tax assets 71,517 69,156 Deferred tax liabilities: Property, plant, and equipment ( 34,174 ) ( 32,560 ) Goodwill ( 20,603 ) ( 21,044 ) Deferred tax liabilities ( 54,777 ) ( 53,604 ) Net deferred tax assets $ 16,740 $ 15,552 Certain reclassifications to prior year amounts have been made to conform to current year presentation. At December 31, 2022, foreign tax credit carryovers were $ 34.3 million , all of which expires before 2035. At December 31, 2022, foreign operating loss carryovers were $ 68.2 million. Included in the foreign operating loss carryovers are losses of $ 8.0 million that expire through 2036 and $ 60.2 million that expire after 2036 or do not have an expiration date. At December 31, 2022, state operating loss carryovers were $ 119 million, which expire prior to 2036. The Company is electing to recognize GILTI as a period expense in the period the tax is incurred. Federal and state income taxes are provided on international subsidiary income distributed to or taxable in the U.S. during the year. At December 31, 2022, no additional income or withholding taxes have been provided for the $ 673.9 million of undistributed earnings or any additional outside basis differences inherent in these entities, as these amounts are considered to be invested indefinitely. If the undistributed earnings were repatriated, the Company estimates it would have a withholding tax liability of $ 34.7 million. The determination of the tax liability for any outside basis differences is not practicable. A reconciliation of the change in the liability for unrecognized tax benefits for 2022 and 2021 is as follows: (In thousands) 2022 2021 Balance at beginning of year $ 3,761 $ 7,445 Increases for tax positions taken in the current year 800 715 Decreases related to settlements with tax authorities ( 209 ) ( 3,643 ) Decreases as a result of lapse of the applicable statutes of limitations ( 338 ) ( 367 ) Foreign currency exchange rate changes ( 75 ) ( 389 ) Balance at the end of year $ 3,939 $ 3,761 46 Index The amount of the unrecognized tax benefits that would affect the effective tax rate, if recognized, was approximately $ 3.9 million. The Company recognizes interest and penalties related to the unrecognized tax benefits in income tax expense. $ 0.4 million of accrued interest and penalties were reported as an income tax liability as of both December 31, 2022 and 2021. The liability for unrecognized tax benefits relates to multiple jurisdictions and is reported in Other Liabilities on the Company’s Consolidated Balance Sheet at December 31, 2022. The Company believes that it is reasonably possible that the total amount of liability for unrecognized tax benefits as of December 31, 2022, will decrease by approximately $ 0.8 million during 2023, of which $ 0.7 million is estimated to impact the effective tax rate. The potential decrease relates to various tax matters for which the statute of limitations may expire or will be otherwise settled in 2023. The amount that is ultimately recognized in the financial statements will be dependent upon various factors including potential increases or decreases in unrecognized tax benefits as a result of examinations, settlements, and other unanticipated items that may occur during the year. With limited exceptions, the Company is no longer subject to federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2018. 12. Segment and Geographic Information The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income before divestiture & other related costs and income, share-based compensation, restructuring and other charges including operational improvement plan costs and income, the one-time COVID-19 employee payment in 2020, interest expense , and income taxes (segment operating income). Total revenue and segment operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation. Assets by business segment and geographic region are those assets used in the Company’s operations in each segment and geographic region. Segment assets reflect the allocation of goodwill to each segment. Corporate & Other assets consist primarily of accounts receivables from the securitization program, investments, deferred tax assets, and fixed assets. Segment Information The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is evaluated on operating income of the respective business units before divestiture & other related costs and income, share-based compensation, and restructuring and other charges including operational improvement plan costs and income, which are reported in Corporate & Other. The Company’s three reportable segments are Flavors & Extracts and Color segments, which are both managed on a product line basis, and the Asia Pacific segment, which is managed on a geographic basis. The Company’s Flavors & Extracts segment produces flavor, extracts, and essential oils products that impart a desired taste, texture, aroma, or other characteristic to a broad range of consumers and other products. The Color segment produces natural and synthetic color systems for foods, beverages, pharmaceuticals, and nutraceuticals; colors, ingredients, and systems for personal care; and technical colors for industrial applications. The Asia Pacific segment is managed on a geographic basis and produces and distributes color, flavor, and essential oils products for the Asia Pacific countries. The Company’s corporate expenses, divestiture & other related costs and income, share-based compensation, operational improvement plan expenses and income, the one-time COVID-19 employee payment, and other costs are included in the “Corporate & Other” category. 47 Index Divestiture & other related costs and income and restructuring and other costs, including the operational improvement plan costs and income, for the years ended December 31, 2022, 2021 , and 2020 , are further described in Note 14, Divestitures, and Note 15, Operational Improvement Plan, and are included in the operating income (loss) results in Corporate & Other below. In addition, the Company’s corporate expenses and share-based compensation are included in Corporate & Other. (In thousands) Flavors & Extracts Color Asia Pacific Corporate & Other Consolidated 2022 : Revenue from external customers $ 710,592 $ 583,379 $ 143,068 $ — $ 1,437,039 Intersegment revenue 27,411 20,638 513 — 48,562 Total revenue 738,003 604,017 143,581 — 1,485,601 Operating income (loss) 105,424 114,619 29,492 ( 52,784 ) 196,751 Interest expense — — — 14,547 14,547 Earnings (loss) before income taxes 105,424 114,619 29,492 ( 67,331 ) 182,204 Assets 738,181 849,425 115,132 278,876 1,981,614 Capital expenditures 40,805 30,300 2,164 6,053 79,322 Depreciation and amortization 26,660 20,174 2,489 3,144 52,467 2021 : Revenue from external customers $ 717,688 $ 527,626 $ 134,950 $ — $ 1,380,264 Intersegment revenue 21,739 17,644 398 — 39,781 Total revenue 739,427 545,270 135,348 — 1,420,045 Operating income (loss) 98,660 103,575 26,330 ( 58,537 ) 170,028 Interest expense — — — 12,544 12,544 Earnings (loss) before income taxes 98,660 103,575 26,330 ( 71,081 ) 157,484 Assets 639,992 738,139 108,126 259,236 1,745,493 Capital expenditures 35,846 16,806 2,813 5,323 60,788 Depreciation and amortization 26,020 20,572 2,748 2,711 52,051 2020 : Revenue from external customers $ 724,483 $ 486,536 $ 120,982 $ — $ 1,332,001 Intersegment revenue 17,552 14,482 245 — 32,279 Total revenue 742,035 501,018 121,227 — 1,364,280 Operating income (loss) 90,974 96,034 22,075 ( 56,427 ) 152,656 Interest expense — — — 14,811 14,811 Earnings (loss) before income taxes 90,974 96,034 22,075 ( 71,238 ) 137,845 Assets 686,348 718,665 100,258 235,589 1,740,860 Capital expenditures 24,541 19,840 2,687 5,094 52,162 Depreciation and amortization 24,801 19,368 2,578 2,894 49,641 48 Index Geographic Information The Company has manufacturing facilities or sales offices in North America, Europe, Asia, Australia, South America, and Africa. The Company’s annual revenue summarized by geographic location is as follows: (In thousands) Flavors & Extracts Color Asia Pacific Corporate & Other Consolidated 2022 : Revenue from external customers: North America $ 541,120 $ 304,778 $ 120 $ — $ 846,018 Europe 115,925 151,437 213 — 267,575 Asia Pacific 29,092 61,064 139,134 — 229,290 Other 24,455 66,100 3,601 — 94,156 Total revenue from external customers $ 710,592 $ 583,379 $ 143,068 $ — $ 1,437,039 Long-lived assets: North America $ 286,497 $ 271,075 $ — $ 107,784 $ 665,356 Europe 86,248 236,719 — 24 322,991 Asia Pacific 237 3,796 29,915 — 33,948 Other 389 24,150 — — 24,539 Total long-lived assets $ 373,371 $ 535,740 $ 29,915 $ 107,808 $ 1,046,834 2021 : Revenue from external customers: North America $ 523,960 $ 263,031 $ 116 $ — $ 787,107 Europe 135,348 142,741 140 — 278,229 Asia Pacific 29,880 59,914 131,772 — 221,566 Other 28,500 61,940 2,922 — 93,362 Total revenue from external customers $ 717,688 $ 527,626 $ 134,950 $ — $ 1,380,264 Long-lived assets: North America $ 268,934 $ 250,682 $ — $ 105,150 $ 624,766 Europe 91,934 225,916 — 25 317,875 Asia Pacific 275 4,513 32,901 — 37,689 Other 568 23,442 — — 24,010 Total long-lived assets $ 361,711 $ 504,553 $ 32,901 $ 105,175 $ 1,004,340 2020 : Revenue from external customers: North America $ 491,641 $ 241,608 $ 81 $ — $ 733,330 Europe 160,083 129,704 193 — 289,980 Asia Pacific 30,080 52,414 117,427 — 199,921 Other 42,679 62,810 3,281 — 108,770 Total revenue from external customers $ 724,483 $ 486,536 $ 120,982 $ — $ 1,332,001 Long-lived assets: North America $ 244,921 $ 252,906 $ — $ 102,577 $ 600,404 Europe 112,424 226,840 — — 339,264 Asia Pacific 204 4,670 31,834 — 36,708 Other 782 22,116 — — 22,898 Total long-lived assets $ 358,331 $ 506,532 $ 31,834 $ 102,577 $ 999,274 Sales in the United States, based on the final country of destination of the Company’s products, were $ 711.1 million , $ 658.0 million , and $ 614.3 million , in 2022, 2021, and 2020, respectively. No other country of destination exceeded 10% of consolidated sales. Total long-lived assets in the United States amounted to $ 586.8 million , $ 550.3 million , and $ 518.2 million , at December 31, 2022, 2021, and 2020, respectively. 49 Index Product Information The Company’s revenue summarized by product portfolio is as follows: (In thousands) Flavors & Extracts Color Asia Pacific Consolidated 2022 : Flavors, Extracts & Flavor Ingredients $ 498,055 $ — $ — $ 498,055 Natural Ingredients 239,948 — — 239,948 Food & Pharmaceutical Colors — 437,065 — 437,065 Personal Care — 165,335 — 165,335 Inks — 1,617 — 1,617 Asia Pacific — — 143,581 143,581 Intersegment Revenue ( 27,411 ) ( 20,638 ) ( 513 ) ( 48,562 ) Total revenue from external customers $ 710,592 $ 583,379 $ 143,068 $ 1,437,039 2021 : Flavors, Extracts & Flavor Ingredients $ 455,818 $ — $ — $ 455,818 Natural Ingredients 255,772 — — 255,772 Fragrances 22,739 — — 22,739 Yogurt Fruit Preparations 5,098 — — 5,098 Food & Pharmaceutical Colors — 385,069 — 385,069 Personal Care — 158,237 — 158,237 Inks — 1,964 — 1,964 Asia Pacific — — 135,348 135,348 Intersegment Revenue ( 21,739 ) ( 17,644 ) ( 398 ) ( 39,781 ) Total revenue from external customers $ 717,688 $ 527,626 $ 134,950 $ 1,380,264 2020 : Flavors, Extracts & Flavor Ingredients $ 399,331 $ — $ — $ 399,331 Natural Ingredients 243,161 — — 243,161 Fragrances 85,354 — — 85,354 Yogurt Fruit Preparations 14,189 — — 14,189 Food & Pharmaceutical Colors — 346,269 — 346,269 Personal Care — 141,331 — 141,331 Inks — 13,418 — 13,418 Asia Pacific — — 121,227 121,227 Intersegment Revenue ( 17,552 ) ( 14,482 ) ( 245 ) ( 32,279 ) Total revenue from external customers $ 724,483 $ 486,536 $ 120,982 $ 1,332,001 13. Fair Value Measurements ASC 820, Fair Value Measurement , defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. As of December 31, 2022 and 2021, 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 $ 0.2 million and an asset of $ 0.1 million as of December 31, 2022 and 2021, respectively. The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, and short-term borrowings were approximately the same as the fair values as of December 31, 2022. The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at December 31, 2022 and 2021, was $ 630.8 million and $ 503.5 million, respectively. The fair value of the long-term debt at December 31, 2022 and 2021, was $ 622.2 million and $ 520.0 million, respectively. 50 Index 14. Divestitures On June 30, 2020, the Company completed the sale of its inks product line. In 2021 and 2020, the Company received $ 0.5 million and $ 11.6 million of net cash, respectively, as part of the sale. On September 18, 2020, the Company completed the sale of its yogurt fruit preparations product line.The Company received $ 2.5 million of net cash in 2022 and $ 1.0 million of net cash in each of 2021 and 2020, as part of the sale. On April 1, 2021, the Company completed the sale of its fragrances product line (excluding its essential oils product line) for $ 36.3 million of net cash. As a result of the completion of the sale, the Company recorded a non-cash net loss of $ 11.3 million for the year ended December 31, 2021, primarily 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 Statements of Earnings. The Company reports all costs and income associated with the divestitures in Corporate & Other. For the year ended December 31, 2022, the Company recorded a $ 2.5 million gain in Selling and Administrative Expenses associated with the yogurt fruit preparations product line. The following table summarizes the divestiture & other related costs for the year ended December 31, 2021: (In thousands) Yogurt Fruit Preparations Fragrances Inks Corporate/ Other Consolidated Non-cash impairment charges – Selling and administrative expenses $ ( 1,000 ) $ 1,062 $ - $ - $ 62 Non-cash charges – Cost of products sold - 95 ( 9 ) - 86 Reclassification of foreign currency translation and related items – Selling and administrative expenses - 10,201 2 - 10,203 Other costs - Selling and administrative expenses (1) 917 2,553 ( 281 ) 598 3,787 Total $ ( 83 ) $ 13,911 $ ( 288 ) $ 598 $ 14,138 (1) Other costs – Selling and administrative expenses include employee separation costs, bad debt expense, environmental remediation costs, professional services, accelerated depreciation, and other related costs. The following table summarizes the divestiture & other related costs for the year ended December 31, 2020: (In thousands) Yogurt Fruit Preparations Fragrances Inks Corporate/ Other Consolidated Non-cash impairment charges – Selling and administrative expenses $ 2,597 $ 2,055 $ 8,928 $ ( 861 ) $ 12,719 Non-cash charges – Cost of products sold 1,679 77 ( 203 ) 242 1,795 Reclassification of foreign currency translation and related items – Selling and administrative expenses - - ( 8,625 ) - ( 8,625 ) Other costs - Selling and administrative expenses (1) 337 3,029 892 2,008 6,266 Total $ 4,613 $ 5,161 $ 992 $ 1,389 $ 12,155 (1) Other costs – Selling and administrative expenses include employee separation costs, environmental remediation costs, professional services, accelerated depreciation, and other related costs. The Company recorded non-cash impairment charges in Selling and Administrative Expenses, primarily related to property, plant, and equipment and allocated goodwill, during the years ended December 31, 2021 and 2020, when the estimated fair value less costs to sell the product line was lower than its carrying value. The estimated fair values for the inks and fragrances (excluding its essential oils product line) product lines were determined based on indicative bids, which are classified as Level 3 inputs in the fair value measurement hierarchy. The Company recorded non-cash charges in Cost of Products Sold during the years ended December 31, 2021 and 2020, to reduce the carrying value of certain inventories, when they were determined to be excess. The Company recorded a non-cash loss during the year ended December 31, 2021 and a non-cash gain during the year ended December 31, 2020, related to the reclassification of foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated Statements of Earnings. 51 Index In March 2020, the Company was notified by the buyer of the Company’s fragrances product line that environmental sampling conducted at the Company’s Granada, Spain location had identified the presence of contaminants in soil and groundwater in certain areas of the property. The Company records liabilities related to environmental remediation obligations when estimated future expenditures are probable and the amount of the liability is reasonably estimable. Based upon an environmental investigation and a quantitative risk assessment performed by a consultant hired by the Company, the Company has recorded $ 0.3 million and $ 0.8 million related to these obligations in Selling and Administrative Expenses during the years ended December 31, 2021 and 2020, respectively. 15. Operational Improvement Plan During the third quarter of 2020, the Company approved an operational improvement plan (Operational Improvement Plan) to consolidate manufacturing facilities and improve efficiencies within the Company. As part of the Operational Improvement Plan, the Company combined its New Jersey cosmetics manufacturing facility in the Personal Care product line of the Color segment into its existing Color segment facility in Missouri. In addition, the Company centralized certain Flavors & Extracts segment support functions in Europe into one location. In the Asia Pacific segment, the Company incurred costs in connection with the elimination of certain selling and administrative positions. During the second quarter of 2021, the Company received cash proceeds, net of associated expenses, in connection with the termination of a New Jersey office and laboratory space lease. The terminated lease was originally executed in November 2020 as part of the Operational Improvement Plan; however, the landlord for the property requested to terminate the lease prior to the end of its term and compensated the Company as part of a negotiated resolution for that termination. The Company reports all costs and income associated with the Operational Improvement Plan in Corporate & Other. There were no Operational Improvement Plan costs recorded for the year ended December 31, 2022. The following table summarizes the Operational Improvement Plan income and expenses recorded in Selling and Administrative Expenses by segment for the year ended December 31, 2021: (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Employee separation $ ( 123 ) $ ( 8 ) $ ( 351 ) $ ( 482 ) Other income (1) - ( 3,624 ) - ( 3,624 ) Other costs (2) - 2,207 4 2,211 Total $ ( 123 ) $ ( 1,425 ) $ ( 347 ) $ ( 1,895 ) (1) Other income includes cash received for the early termination of a lease less associated expenses. (2) Other costs include professional services, accelerated depreciation, and other related costs. The following table summarizes the Operational Improvement Plan expenses by segment for the year ended December 31, 2020: (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Employee separation $ 352 $ 1,749 $ 589 $ 2,690 Other costs (1) - 640 9 649 Total $ 352 $ 2,389 $ 598 $ 3,339 (1) Other costs include professional services, accelerated depreciation, and other related costs. The Company recorded the Operational Improvement Plan expenses for the year ended December 31, 2020, as follows: (In thousands) Selling and Administrative Expenses Cost of Products Sold Consolidated Employee separation $ 2,690 $ - $ 2,690 Other costs (1) 614 35 649 Total $ 3,304 $ 35 $ 3,339 (1) Other costs include professional services, accelerated depreciation, and other related costs. 52 Index As of December 31, 2021, accrued liabilities in Other Accrued Expenses totaled $ 0.8 million related to this plan. There were no amounts accrued as of December 31, 2022 related to this plan. 16. Commitments and Contingencies 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. See Note 14, Divestitures , for information about estimated environmental remediation costs associated with our former Granada, Spain location. 17. Subsequent Event On January 20, 2023 , the Company announced its quarterly dividend of 41 cents per share would be payable on March 1, 2023 . 53 Index Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Sensient Technologies Corporation Milwaukee, Wisconsin Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Sensient Technologies Corporation and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the account or disclosure to which it relates. Income Taxes--Valuation Allowances for Deferred Tax Assets Description of the Matter As described in Note 11 to the consolidated financial statements, at December 31, 2022, the Company had gross deferred tax assets of $99.6 million, $60.1 million of which relate to net operating losses (NOLs), foreign tax credits and other tax credits reduced by a $28.1 million valuation allowance. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of all available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Management’s analysis of the realizability of its deferred tax assets related to NOLs, foreign tax credits and other tax credits was significant to our audit because the amounts are material to the financial statements and the assessment process related to the realizability of these deferred tax assets is complex, and involves significant judgments that include projections of income, sources of income and tax planning strategies. 54 Index How We Addressed the Matter in Our Audit We tested controls relating to the realizability of deferred tax assets, including controls over management’s projections of future taxable income, the future reversal of existing taxable temporary differences and management’s identification and use of available tax planning strategies. To test management’s assessment of the realizability of its deferred tax assets related to NOLs, foreign and other tax credits, our audit procedures included, among others, evaluation of the assumptions used by the Company to develop tax planning strategies and projections of future taxable income by jurisdiction and testing the completeness and accuracy of the underlying data used in its projections. We involved our tax professionals to evaluate the application of tax law in the Company’s available tax planning strategies and projections of future taxable income. We assessed the historical accuracy of management’s projections and reconciled the projections of future taxable income with other forecasted financial information prepared by the Company. We also tested the Company’s scheduling of the reversal of existing temporary taxable differences. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2006. Milwaukee, Wisconsin February 17, 2023 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.