Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those statements (Part
II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended December 31, 2023, compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022, compared to the
year ended December 31, 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the
Securities and Exchange Commission on February 17, 2023, which is incorporated herein by reference.
OVERVIEW
Sensient Technologies Corporation (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 both managed on a product line basis, and the Asia Pacific Group, which is managed on a geographic basis. The Company’s corporate expenses, divestiture & other related costs and income,
share-based compensation, restructuring and other charges, including operational improvement plan costs and portfolio optimization plan costs, and other costs are included in the “Corporate & Other” category.
The Company’s diluted earnings per share were $2.21 in 2023 and $3.34 in 2022. 2023 results were negatively impacted by $27.8 million ($27.4 million after tax, $0.65 per share) of portfolio optimization plan costs. 2022
results were positively impacted by $2.5 million ($1.9 million after tax, $0.04 per share) of divestiture & other related income. Adjusted diluted earnings per share, which exclude the divestiture & other related income and the portfolio
optimization plan costs, were $2.86 in 2023 and $3.29 in 2022 (see discussion below regarding non-GAAP financial measures).
Additional information on the results is included below.
RESULTS OF OPERATIONS
2023 vs. 2022
Revenue
Sensient’s revenue was approximately $1.46 billion and $1.44 billion in 2023 and 2022, respectively.
Gross Profit
The Company’s gross margin was 31.6% in 2023 and 34.0% in 2022. The decrease in gross margin was primarily due to higher raw material costs, lower volumes, and portfolio optimization plan costs, which decreased gross
margin 20 basis points in 2023, partially offset by higher selling prices in 2023.
Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 21.0% in 2023 and 20.3% in 2022. Selling and administrative expenses in 2023 were increased by portfolio optimization plan costs totaling $24.7 million and in
2022 were reduced by divestiture & other related income totaling $2.5 million. Selling and administrative expense as a percent of revenue increased by approximately 170 basis points and decreased by approximately 20 basis points in 2023 and
2022, respectively, as a result of these expenses and income. See Divestitures and Portfolio Optimization Plan below for further information.
Selling and administrative expenses as a percent of revenue was further impacted by lower performance-based compensation in 2023.
Operating Income
Operating income was $155.0 million in 2023 and $196.8 million in 2022. Operating margins were 10.6% in 2023 and 13.7% in 2022. Portfolio optimization plan costs decreased operating margins by approximately 200 basis
points in 2023 and divestiture & other related income improved operating margins by approximately 20 basis points in 2022.
Additional information on segment results can be found in the Segment Information section.
Interest Expense
Interest expense was $25.2 million in 2023 and $14.5 million in 2022. The increase in expense was primarily due to an increase in the average interest rate and average debt outstanding.
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Income Taxes
The effective income tax rate was 28.1% in 2023 and 22.7% in 2022. The effective tax rates in both 2023 and 2022 were impacted by the release of valuation allowances related to the foreign tax credit carryover and
net operating losses, changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rate in 2023 was also impacted by the limited tax
deductibility of costs related to the portfolio optimization plan. See Note 11, Income Taxes , in the Notes to Consolidated Financial Statements
included in this report for additional information.
2023
2022
Rate before portfolio optimization plan and discrete items
25.5
%
25.8
%
Portfolio optimization plan impact
4.7
%
-
Discrete items
(2.1
%)
(3.1
%)
Reported effective tax rate
28.1
%
22.7
%
The 2024 effective income tax rate is estimated to be between 24% and 25%.
Acquisitions
On October 3, 2022, the Company acquired Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. (collectively, Endemix), 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. This business is part of the Color segment.
See Note 2, Acquisitions , in the Notes to Consolidated Financial Statements included in this report for additional information.
Divestitures
In 2022, the Company received $2.5 million of net cash related to the previously completed sale of its yogurt fruit preparations product line.
See Note 14, Divestitures , in the Notes to Consolidated Financial Statements included in this report for additional information.
Portfolio Optimization Plan
During the fourth quarter of 2023, the board of directors of the Company approved a portfolio optimization plan (Portfolio Optimization Plan) to undertake an effort to optimize certain production facilities and improve
efficiencies within the Company. As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company is evaluating the potential closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the potential
closure of its sales office in Granada, Spain, and the potential centralization and elimination of certain selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries.
In addition, in the Color segment, the Company’s proposals include closing a manufacturing facility in Delta, British Columbia, Canada, closing a sales office in Argentina, and centralizing and eliminating certain production positions as well as
potentially eliminating some selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. The Company reports all costs associated with the Portfolio Optimization Plan
in the Corporate & Other segment.
See Note 16, Portfolio Optimization Plan , in the Notes to Consolidated Financial Statements included in this
report for additional information.
NON-GAAP FINANCIAL MEASURES
Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted operating income, adjusted net earnings, and adjusted diluted earnings per share, which exclude the divestiture
& other related income and restructuring and other costs, including the portfolio optimization plan costs and (2) percentage changes in revenue, operating income, and diluted earnings per share on an adjusted local currency basis, which
eliminate the effects that result from translating its international operations into U.S. dollars, the divestiture & other related income, and restructuring and other costs, including the portfolio optimization plan 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.
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Twelve Months Ended December 31,
(In thousands except per share amounts)
2023
2022
% Change
Operating Income (GAAP)
$
155,023
$
196,751
(21.2
)%
Portfolio optimization plan costs – Cost of products sold
3,135
-
Divestiture & other related income – Selling and administrative expenses
-
(2,532
)
Portfolio optimization plan costs – Selling and administrative expenses
24,706
-
Adjusted operating income
$
182,864
$
194,219
(5.8
)%
Net Earnings (GAAP)
$
93,394
$
140,887
(33.7
)%
Divestiture & other related income, before tax
-
(2,532
)
Tax impact of divestiture & other related income (1)
-
636
Portfolio optimization plan costs, before tax
27,841
Tax impact of portfolio optimization plan costs (1)
(415
)
Adjusted net earnings
$
120,820
$
138,991
(13.1
)%
Diluted Earnings Per Share (GAAP)
$
2.21
$
3.34
(33.8
)%
Divestiture & other related income, net of tax
-
(0.04
)
Portfolio optimization plan costs, net of tax
0.65
-
Adjusted diluted earnings per share
$
2.86
$
3.29
(13.1
)%
(1) Tax impact adjustments were determined based on the nature of the underlying non-GAAP adjustments and their relevant jurisdictional tax rates.
Divestiture & other related income is discussed under “Divestitures” above and Note 14, Divestitures, in the Notes to the Consolidated Financial
Statements included in this report. Portfolio optimization plan costs are discussed under “Portfolio Optimization Plan” above and Note 16, Portfolio Optimization Plan, in the Notes to the Consolidated Financial Statements included in this report.
Note: Earnings per share calculations may not foot due to rounding differences .
The following table summarizes the percentage change in the 2023 results compared to the 2022 results in the respective financial measures.
Twelve Months Ended December 31, 2023
Total
Foreign
Exchange
Rates
Adjustments (1)
Adjusted Local
Currency
Revenue
Flavors & Extracts
0.4
%
1.2
%
N/A
(0.8
%)
Color
0.7
%
1.6
%
N/A
(0.9
%)
Asia Pacific
1.7
%
(1.8
%)
N/A
3.5
%
Total Revenue
1.4
%
1.1
%
N/A
0.3
%
Operating Income
Flavors & Extracts
(16.7
%)
0.6
%
0.0
%
(17.3
%)
Color
(8.1
%)
1.5
%
0.0
%
(9.6
%)
Asia Pacific
4.4
%
(1.9
%)
0.0
%
6.3
%
Corporate & Other
30.6
%
0.0
%
56.3
%
(25.7
%)
Total Operating Income
(21.2
%)
1.0
%
(15.4
%)
(6.8
%)
Diluted Earnings per Share
(33.8
%)
0.9
%
(20.7
%)
(14.0
%)
(1)
For Operating Income and Diluted Earnings per Share, adjustments consist of divestiture & other related income in 2022 and portfolio optimization plan costs in 2023.
Note:
Refer to table above for a reconciliation of these non-GAAP measures.
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Index
SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is evaluated on operating income before
any applicable divestiture & other related income, share-based compensation, acquisition, restructuring and other costs, including the portfolio optimization plan costs, and other costs (which are reported in Corporate & Other), interest
expense, and income taxes.
The Company’s discussion below regarding its operating segments has been updated to reflect the Company’s disaggregation of revenue, as summarized in Part II, Item 8, Note 12, Segment
and Geographic Information , of this report.
The Company’s reportable segments consist of the Flavors & Extracts, Color, and Asia Pacific segments.
Flavors & Extracts
Flavors & Extracts segment revenue was $741.1 million in 2023 and $738.0 million in 2022. The higher segment revenue was due to higher revenue in Natural Ingredients, partially offset by lower revenue in Flavors,
Extracts & Flavor Ingredients. The higher revenue in Natural Ingredients was primarily due to higher selling prices, partially offset by lower volumes. The lower revenue in Flavors, Extracts & Flavor Ingredients was primarily due to lower
volumes, partially offset by higher selling prices and the favorable impact of foreign exchange rates, which increased segment revenue by approximately 1%.
Flavors & Extracts segment operating income was $87.8 million in 2023 and $105.4 million in 2022, a decrease of approximately 17%. Foreign exchange rates increased segment operating income by approximately 1%. The
lower segment operating income was a result of lower operating income in Natural Ingredients and Flavors, Extracts & Flavor Ingredients. The lower operating income in Natural Ingredients was primarily due to higher raw material costs, lower
volumes, and an unfavorable product mix, partially offset by higher selling prices and lower manufacturing and other costs. The lower operating income in Flavors, Extracts & Flavor Ingredients was primarily due to higher raw material and
manufacturing and other costs and lower volumes, partially offset by higher selling prices. Segment operating income as a percent of revenue was 11.8% and 14.3% for 2023 and 2022, respectively.
Color
Segment revenue for the Color segment was $608.0 million in 2023 and $604.0 million in 2022, an increase of approximately 1%. Foreign exchange rates increased segment revenue by approximately 2%. The higher segment
revenue was a result of higher revenue in Food & Pharmaceutical Colors, partially offset by lower revenue in Personal Care. The higher revenue in Food & Pharmaceutical Colors was primarily due to higher selling prices, the acquisition of
Endemix Doğal Maddeler A.Ş. , and the favorable impact of foreign exchange rates, partially offset by lower volumes. The lower revenue in Personal Care was primarily due
to lower volumes, partially offset by higher selling prices and the favorable impact of foreign exchange rates.
Segment operating income for the Color segment was $105.4 million in 2023 and $114.6 million in 2022, a decrease of approximately 8%. The lower segment operating income was a result of lower operating income in Personal
Care, partially offset by higher operating income in Food & Pharmaceutical Colors. The lower operating income in Personal Care was primarily due to higher raw material and manufacturing and other costs and lower volumes, partially offset by
higher selling prices. The higher operating income in Food & Pharmaceutical Colors was primarily due to higher selling prices and the favorable impact of foreign exchange rates, which increased segment operating income by approximately 2%,
partially offset by higher raw material and manufacturing and other costs, lower volumes, and an unfavorable product mix. Segment operating income as a percent of revenue was 17.3% and 19.0% for 2023 and 2022, respectively.
Asia Pacific
Segment revenue for the Asia Pacific segment was $146.1 million and $143.6 million for 2023 and 2022, respectively, an increase of approximately 2%. Segment revenue was higher than the prior year primarily due to higher
selling prices, partially offset by lower volumes and the unfavorable impact of foreign exchange rates, which decreased segment revenue by approximately 2%.
Segment operating income for the Asia Pacific segment was $30.8 million in 2023 and $29.5 million in 2022, an increase of approximately 4%. Foreign exchange rates decreased segment operating income by approximately 2%.
The increase in segment operating income was a result of higher selling prices, partially offset by higher raw material costs and lower volumes. Segment operating income as a percent of revenue was 21.1% in 2023 and 20.5% in 2022.
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Index
Corporate & Other
The Corporate & Other operating loss was $68.9 million in 2023 and $52.8 million in 2022. The higher operating loss was primarily a result of portfolio optimization plan costs totaling $27.8 million negatively
impacting 2023 and divestiture & other related income totaling $2.5 million favorably impacting 2022, partially offset by lower performance-based compensation in 2023. See the Divestitures and Portfolio Optimization Plan sections above for further information.
LIQUIDITY AND FINANCIAL POSITION
Financial Condition
The Company’s financial position remains strong. The Company is in compliance with its loan covenants calculated in accordance with applicable agreements as of December 31, 2023. The Company expects its cash flow
from operations and its existing debt capacity can be used to meet anticipated future cash requirements for operations, capital expenditures, and dividend payments, as well as potential acquisitions and stock repurchases. The Company’s
contractual obligations consist primarily of operational commitments, which we expect to continue to be able to satisfy through cash generated from operations, and debt. The Company has various series of notes outstanding that mature from 2024
through 2029, with approximately $82 million coming due in 2024. The Company believes that it has the ability to refinance or repay all of its obligations through a combination of cash flow from operations, issuance of additional notes, and
substantial borrowing capacity of approximately $318 million under the Company’s revolving credit facility, which matures in 2026.
As a result of our ability to manage the impact of inflation through pricing and other actions, the impact of inflation was not material to the Company’s financial position and its results of operations in 2023. The
Company has experienced increased costs for certain inputs, such as raw materials, shipping and logistics, and labor-related costs. We continue to expect to manage these impacts in the near term, but persistent, accelerated, or expanded
inflationary conditions could exacerbate these challenges and impact our profitability.
In October 2017, the Board of Directors authorized the repurchase of up to three million shares. As of December 31, 2023, 1,732,981 shares were available to be repurchased under the existing authorization. The Company’s
share repurchase program has no expiration date. These authorizations may be modified, suspended, or discontinued by the Board of Directors at any time. There were no shares of Company stock repurchased in 2023 or 2022.
Cash Flows from Operating Activities
Net cash provided by operating activities was $169.7 million and $12.1 million in 2023 and 2022, respectively. Operating cash flow provided the primary source of funds for operating needs, capital expenditures, and
shareholder dividends. The increase in net cash provided by operating activities in 2023 was primarily due to a decrease in the cash used for inventory investments during 2023 compared to 2022 and an increase in cash provided by accounts
receivable.
Cash Flows from Investing Activities
Net cash used in investing activities was $87.6 million and $98.4 million in 2023 and 2022, respectively. Capital expenditures were $87.9 million in 2023 and $79.3 million in 2022. In 2022, the Company received $2.5
million of proceeds from the divestiture of the yogurt fruit preparations product line. The Company paid $1.7 million and $21.7 million in 2023 and 2022, respectively, for the acquisition of Endemix Doğal
Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. and $1.0 million in 2022 related to a purchase price holdback associated with the acquisition of Flavor Solutions, Inc.
Cash Flows from Financing Activities
Net cash used in financing activities was $82.0 million in 2023, and net cash provided by financing activities was $86.2 million in 2022. The Company had a net decrease in debt of $3.5 million in 2023 compared to a net
increase in debt of $157.2 million in 2022. For the purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. The Company has paid uninterrupted quarterly cash dividends since commencing public trading
of its stock in 1962. Dividends paid per share were $1.64 in 2023 and 2022. Total dividends paid were $69.2 million and $68.9 million in 2023 and 2022, respectively.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., management is required to make estimates and assumptions that have an impact on the asset, liability, revenue,
and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk, and financial condition. The Company believes, given current facts and
circumstances, that its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may
differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining the net realizable value of accounts receivable, inventories, and property, plant, and equipment.
Management believes the Company’s most critical accounting estimates and assumptions are in the following areas:
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Index
Revenue Recognition
The Company recognizes revenue at the transfer of control of its products to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. Revenue is recognized when
control of the product is transferred to the customer, the customer is obligated to pay the Company, and the Company has no remaining obligations, which is typically at shipment. See Note 1, Summary of Significant
Accounting Policies, in the Notes to Consolidated Financial Statements included in this report for additional details.
Goodwill Valuation
The Company reviews the carrying value of goodwill annually utilizing several valuation methodologies, including a discounted cash flow model. The Company completed its annual goodwill impairment test under Accounting
Standards Codification (ASC) 350, Intangibles – Goodwill and Other , in the third quarter of 2023. In conducting its annual test for impairment, the Company performed a qualitative assessment of its
previously calculated fair values for each of its reporting units. Fair value is estimated using both a discounted cash flow analysis and an analysis of comparable company market values. If the fair value of a reporting unit exceeds its net book
value, no impairment exists. The Company’s three reporting units each had goodwill recorded and were tested for impairment. All three reporting units had fair values that were above their respective net book values by at least 75%. Changes in
estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect the reporting units’ fair value and result in an impairment charge.
Income Taxes
The Company estimates its income tax expense in each of the taxing jurisdictions in which it operates. The Company is subject to a tax audit in each of these jurisdictions, which could result in changes to the estimated
tax expense. The amount of these changes would vary by jurisdiction and would be recorded when probable and estimable. These changes could impact the Company’s financial statements. Management has recorded valuation allowances to reduce the
Company’s deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2023, the Company recorded gross deferred tax assets of $117.4 million with an associated valuation allowance of $34.1 million. Examples of
deferred tax assets include deductions, net operating losses, and tax credits that the Company believes will reduce its future tax payments. In assessing the future realization of these assets, management has considered future taxable income and
ongoing tax planning strategies. An adjustment to the recorded valuation allowance as a result of changes in facts or circumstances could result in a significant change in the Company’s tax expense. The Company does not provide for deferred taxes
on unremitted earnings of foreign subsidiaries, which are considered to be invested indefinitely.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value is determined on the basis of estimated realizable values. Cost
includes direct materials, direct labor, and manufacturing overhead.
The Company estimates any required write-downs for inventory obsolescence by examining inventories on a quarterly basis to determine if there are any damaged items or slow-moving products in which the carrying values
could exceed net realizable value. Inventory write-downs are recorded as the difference between the cost of inventory and its estimated market value. The Company recorded non-cash charges of $3.1 million in 2023 in Cost of Products Sold related to the portfolio optimization plan. The charges reduced the carrying value of certain inventories, as they were determined to be excess. While significant judgment is involved in determining the net
realizable value of inventory, the Company believes that inventory is appropriately stated at the lower of cost or net realizable value.
Commitments and Contingencies
The Company is subject to litigation and other legal proceedings arising in the ordinary course of its businesses or arising under applicable laws and regulations. Estimating liabilities and costs associated with these
matters requires the judgment of management, who rely in part on information from Company legal counsel. When it is probable that the Company has incurred a liability associated with claims or pending or threatened litigation matters and the
Company’s exposure is reasonably estimable, the Company records a charge against earnings. The Company recognizes related insurance reimbursement when receipt is deemed probable. The Company’s estimate of liabilities and related insurance
recoveries may change as further facts and circumstances become known.
NEW PRONOUNCEMENTS
Refer to the “ Recently Issued Accounting Pronouncements ” section within Note 1, “ Summary of Significant Accounting Policies ,” in the Notes
to Consolidated Financial Statements included in this report for additional details.
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