SENSIENT TECHNOLOGIES CORPORATION The following discussion and analysis of the Company's financial condition and results of operations for the fiscal years endedDecember 31, 2019 and 2018 should be read in conjunction with our audited consolidated financial statements and the notes to those statements. Discussion and analysis of our financial condition for the fiscal year endedDecember 31, 2017 is included under the heading Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Financial Position in our Annual Report on Form 10-K/A filed for the fiscal year endedDecember 31, 2018 with theSecurities and Exchange Commission (SEC) onFebruary 25, 2019 .
OVERVIEW
Sensient Technologies Corporation (the Company orSensient ) is a global developer, manufacturer, and supplier of flavor and fragrance systems for the food, beverage, personal care, and household-products industries. The Company is also a leading developer, manufacturer, and supplier of colors for businesses worldwide. The Company provides natural and synthetic color systems for use in foods, beverages, pharmaceuticals and nutraceuticals; colors, inks, and other ingredients for cosmetics, pharmaceuticals, nutraceuticals and digital printing; and technical colors for industrial applications. The Company's three reportable segments are theFlavors & Fragrances Group and theColor Group , which are managed on a product basis, and theAsia Pacific Group , which is managed on a geographic basis. The Company's corporate expenses, restructuring, divestiture, share-based compensation, and other costs are included in the "Corporate & Other" category. InJuly 2018 , the Company completed the acquisition ofSensient Natural Extraction Inc. This business was included in Corporate & Other in 2018. Beginning in the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change. In 2019, the Company's business was impacted by a number of adverse market factors.Sensient experienced uncertainty and higher costs tied to raw material availability, tariffs, and trade disruptions.Sensient was also impacted by changing consumer trends for food and cosmetic products. In 2019,Sensient's Color segment experienced strong demand for natural colors and pharmaceuticals and each of these product lines delivered positive volume growth. The ability to convert this volume growth to profit growth was limited, in part by raw material cost increases. Revenue growth in food colors and pharmaceuticals was offset by lower sales of color cosmetic ingredients and lower sales of inks. After several years of strong consumer demand for color cosmetics, consumer demand for these products has softened, which resulted in destocking throughout the supply chain and lower sales forSensient's color cosmetic ingredients.Sensient's inks product line has experienced intense competition, which has resulted in lower sales and profits in this product line. Within the Flavors & Fragrances segment,Sensient's finished flavor product lines delivered favorable volume growth in 2019, however, the segment was impacted by lower demand in other flavor ingredient product lines, particularly those that are used in yogurt and certain prepared food categories. The Company implemented a number of actions in response to these challenges, including cost reductions in each of its segments. Furthermore, inOctober 2019 , the Company announced its intent to divest its inks, certain parts of its fragrances product line, and fruit preparation product line. These product lines represent approximately 10% of the company's consolidated revenue and 1% of the Company's consolidated operating income. The Company anticipates that it will complete sales and exit activities of those product lines in 2020. 19
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The Company's diluted earnings per share were$1.94 in 2019 and$3.70 in 2018. Included in the 2019 results were$45.9 million ($43.2 million after tax,$1.02 per share) of divestiture & other related costs. Included in the 2018 results was$6.6 million of a benefit related to the enactment of the Tax Cuts and Jobs Act (2017 Tax Legislation), equating to an impact of a16 cents per share benefit. Adjusted diluted earnings per share, which exclude the divestiture & other related costs as well as the impact of the 2017 Tax Legislation, were$2.96 in 2019 and$3.55 in 2018 (see discussion below regarding non-GAAP financial measures and the Company's divestiture related costs and the impact of the 2017 Tax Legislation). Since 1962, the Company has paid, without interruption, a quarterly cash dividend. In the fourth quarter of 2019, the Company increased the quarterly dividend by3 cents per share from36 cents to39 cents per share, or$1.56 per share on an annualized basis. In addition, the Company repurchased$76.7 million of Company stock in 2018.
Additional information on the results is included below.
RESULTS OF OPERATIONS 2019 vs. 2018
Revenue
Gross Profit The Company's gross margin was 31.4% in 2019 and 33.6% in 2018. The decrease in gross margin is primarily a result of unfavorable volume and the impact of a$10.6 million inventory adjustment related to the divesting of the fruit preparation product line, partially offset by higher selling prices. See Divestitures below for further information on the inventory adjustment. Selling and Administrative Expenses Selling and administrative expense as a percent of revenue was 22.2% in 2019 and 18.9% in 2018, respectively. Divestiture & other related costs of$35.3 million in 2019 were included in Selling and administrative expense and increased selling and administrative expense as a percent of revenue by approximately 270 basis points in 2019. See Divestitures below for further information. Operating Income Operating income was$121.1 million in 2019 and$203.4 million in 2018. Operating margins were 9.2% in 2019 and 14.7% in 2018. Divestiture & other related costs reduced operating margins by approximately 350 basis points in 2019.
Additional information on segment results can be found in the Segment Information section.
Interest Expense
Interest expense was
Income Taxes The effective income tax rate was 18.8% in 2019 and 13.3% in 2018. The effective tax rates in both 2019 and 2018 were impacted by changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rate in 2019 was impacted by tax costs related to the divestiture & other related costs and the release of valuation allowances related to the foreign tax credit carryover and foreign net operating losses. The effective tax rate in 2018 was also favorably impacted byU.S. tax accounting method changes that were filed with theIRS in the second quarter of 2018 and generation of foreign tax credits during 2018. See Note 11, Income Taxes, in the Notes to Consolidated Financial Statements included in this report for additional information. OnDecember 22, 2017 , theU.S. enacted the 2017 Tax Legislation. The 2017 Tax Legislation significantly changedU.S. corporate income tax laws by reducing theU.S. corporate income tax rate to 21% beginning in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings ofU.S. subsidiaries. As a result, the Company recorded a provisional net tax expense of$18.4 million during the fourth quarter of 2017. This amount consists of reevaluating theU.S. deferred tax assets and liabilities based on the lower corporate income tax rate, adjustments to the Company's foreign tax credit carryover, and the one-time mandatory tax on previously deferred foreign earnings ofU.S. subsidiaries. In 2018, the Company finalized its provisional estimates related to the 2017 Tax Legislation resulting in an income tax benefit of$6.6 million .Sensient considers$11.8 million to be the final net tax expense related to the 2017 Tax Legislation.
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2019 2018
Rate before 2017 Tax Legislation, divestiture and discrete items 25.7%
20.7%
2017 Tax Legislation -
(3.7%)
Divestiture & other related costs impact 4.1%
-
Discrete items (11.0%)
(3.7%)
Reported effective tax rate 18.8%
13.3%
The 2020 effective income tax rate is estimated to be between 24% and 25%, before any discrete items, such as finalization of prior year foreign and domestic tax items, audit settlements, and valuation allowance adjustments.
Acquisitions
OnMarch 9, 2018 , the Company completed the acquisition of certain net assets and the natural color business of GlobeNatural, a company based inLima, Peru . The Company paid$10.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company acquired net assets of$1.4 million and identified intangible assets, principally customer relationships of$2.0 million , and allocated the remaining$7.4 million to goodwill. These operations are included in the Color segment. OnJuly 10, 2018 , the Company completed the acquisition ofSensient Natural Extraction Inc. , a botanical extraction business with patented solvent-free extraction processes, located inVancouver, Canada . The Company paid$19.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company acquired net assets of$4.0 million and identified intangible assets, principally technological know-how, of$6.9 million . The remaining$8.9 million was allocated to goodwill. This business was included in Corporate & Other in 2018. Beginning in the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change.
Divestitures
InOctober 2019 , the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and fruit preparation product lines. The Board of Directors approved the sale of the inks product line, which is within the Color segment, and the sale of the fragrances product line, which is within the Flavors & Fragrances segment. In the fourth quarter of 2019, the Company recorded a non-cash impairment charge of$34.0 million , primarily related to property, plant and equipment and allocated goodwill, in Selling and administrative expenses, related to the disposal group as described in Note 15, Divestitures to the Consolidated Financial Statements included in this report. The charge reduced the carrying value of certain long-lived assets to their fair value. An estimate of the fair value of these product lines less cost to sell was determined to be lower than its carrying value. This estimate will be finalized and adjusted as necessary upon the closing of the sales or as assumptions change. Also in the fourth quarter of 2019, the Company recorded a non-cash charge of$9.8 million and disposal costs of$0.8 million , in Cost of products sold, related to the fruit preparation divestiture. The charge reduced the carrying value of certain inventories, as they were determined to be excess as ofDecember 31, 2019 . The Company also incurred$1.3 million of additional costs, primarily related to severance, in the fourth quarter of 2019, in Selling and administrative expenses, related to the anticipated divestitures and other exit activities. 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 EPS (which exclude divestiture & other related costs as well as the impact of the 2017 Tax Legislation) and (2) percentage changes in revenue, operating income, diluted EPS, adjusted operating income, and adjusted diluted EPS on a local currency basis (which eliminate the effects that result from translating its international operations intoU.S. dollars). The Company has included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. These non-GAAP measures should not be considered in isolation. Rather, they should be considered together with GAAP measures and the rest of the information included in this report. Management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis and to gain additional insight into underlying operating and performance trends. The Company believes that this 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) 2019 2018 % Change
Operating Income (GAAP) $ 121,110 $ 203,378 (40.5 %)
Divestiture & other related costs - Cost of
products sold 10,567 -
Divestiture & other related costs - Selling and administrative expenses 35,313 - Adjusted operating income$ 166,990 $ 203,378 (17.9 %) Net Earnings (GAAP)$ 82,047 $ 157,360 (47.9 %) Divestiture & other related costs, before tax 45,880
-
Tax impact of divestiture & other related costs (2,671 ) - 2017 Tax Legislation - (6,634 ) Adjusted net earnings$ 125,256 $ 150,726 (16.9 %) Diluted EPS (GAAP)$ 1.94 $ 3.70 (47.6 %) Divestiture & other related costs, net of tax 1.02 - 2017 Tax Legislation - (0.16 ) Adjusted diluted EPS$ 2.96 $ 3.55 (16.6 %)
Divestiture & other related costs are discussed under "Divestitures" above and Note 15, Divestitures, in the Notes to 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 2019 results compared to the 2018 results in the respective financial measures.
Twelve Months Ended December 31, 2019
Foreign
Exchange Local
Total Rates Currency
Revenue
Flavors & Fragrances (6.2%) (1.4%) (4.8%)
Color (3.4%) (2.7%) (0.7%)
Asia Pacific (4.0%) (0.4%) (3.6%)
Total Revenue (4.6%) (1.8%) (2.8%)
Operating Income
Flavors & Fragrances (22.3%) (0.5%) (21.8%)
Color (10.7%) (2.9%) (7.8%)
Asia Pacific (7.1%) 2.9% (10.0%)
Corporate & Other 173.4% (0.1%) 173.5%
Operating Income (40.5%) (1.6%) (38.9%)
Diluted EPS (47.6%) (1.4%) (46.2%)
Adjusted operating income (1) (17.9%) (1.6%) (16.3%)
Adjusted diluted EPS (1) (16.6%) (1.7%) (14.9%)
(1) Refer to table above for a reconciliation of these non-GAAP measures.
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SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is evaluated on operating income before any applicable divestiture & other related costs, share-based compensation, acquisition, restructuring and other costs (which are reported in Corporate & Other), interest expense, and income taxes. InJuly 2018 , the Company completed the acquisition ofSensient Natural Extraction Inc. (See Acquisitions above for further information). This business was included in Corporate & Other in 2018. Beginning in the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change. The Company's discussion below regarding its operating segments has been updated to reflect the Company's disaggregation of revenue, which was adopted in the first quarter of 2018, as summarized in Part IV, Item I, Note 12, Segment and Geographic Information, of this report.
The Company's reportable segments consist of the Flavors & Fragrances, Color,
and
Flavors & Fragrances Flavors & Fragrances segment revenue was$700.4 and$746.9 million in 2019 and 2018, respectively. Foreign exchange rates decreased segment revenue by approximately 1% in 2019. Segment revenue was lower than the prior year due to lower revenue in Flavors, Fragrances and Natural Ingredients. The lower revenues in Flavors and Fragrances was primarily a result of unfavorable volumes and exchange rates, partially offset by higher selling prices. The lower revenue in Natural Ingredients was primarily a result of unfavorable volumes and lower selling prices. Flavors & Fragrances segment operating income was$75.0 million in 2019 and$96.4 million in 2018, a decrease of approximately 22%. Foreign exchange rates decreased segment operating income by approximately 1%. The lower segment operating income was primarily a result of lower operating income in both Flavors and Fragrances. The lower operating income in both Flavors and Fragrances was primarily a result of lower volumes, higher manufacturing and other costs, and higher raw materials costs, partially offset by higher selling prices and a favorable product mix. Segment operating income as a percent of revenue was 10.7% and 12.9% for 2019 and 2018, respectively.
Color
Segment revenue for the Color segment was$535.2 million in 2019 and$554.0 million in 2018, a decrease of approximately 3%. Foreign exchange rates decreased segment revenue by approximately 3%. The lower segment revenue was primarily a result of lower revenue in Cosmetics and Other Colors, partially offset by higher revenue in Food & Beverage Colors. The lower revenue in Cosmetics was primarily a result of lower volumes and unfavorable exchange rates. The lower revenue in Other Colors was primarily a result of lower volumes and unfavorable exchange rates, partially offset by the additional revenue from theSensient Natural Extraction Inc. acquisition. The higher revenue in Food & Beverage Colors was primarily a result of higher volumes, the additional revenue from the GlobeNatural acquisition, and higher selling prices, partially offset by unfavorable exchange rates. The additional revenue from theSensient Natural Extraction Inc. and GlobeNatural acquisitions represent less than 1% of total segment revenue. Segment operating income for the Color segment was$101.2 million in 2019 and$113.3 million in 2018, a decrease of approximately 11%. Foreign exchange rates decreased segment operating income by approximately 3%. The lower segment operating income was primarily a result of lower operating income in Food & Beverage Colors, Cosmetics, and Other Colors. The lower segment operating income in Food & Beverage Colors was primarily due to higher raw material costs, unfavorable product mix, higher manufacturing and other costs and unfavorable exchange rates, partially offset by higher volumes and selling prices. The lower segment operating income in Cosmetics was primarily a result of lower volumes, unfavorable product mix, higher raw material costs, and the unfavorable impact of exchange rates, partially offset by lower manufacturing and other costs. The lower segment operating income in Other Colors was primarily a result of lower volumes and operating costs related to theSensient Natural Extraction Inc. acquisition, partially offset by lower raw material costs. Segment operating income as a percent of revenue was 18.9% in 2019 compared to 20.5% in 2018.Asia Pacific Segment revenue for theAsia Pacific segment was$118.2 million and$123.2 million for 2019 and 2018, respectively. Foreign exchange rates had a minimal impact on segment revenues. Segment revenue was slightly lower than prior year as lower volumes were partially offset by higher selling prices. Segment operating income for theAsia Pacific segment was$19.4 million in 2019 and$20.9 million in 2018, a decrease of approximately 7% compared to the prior year. Foreign exchange rates increased segment operating income by approximately 3%. The decrease in segment operating income was a result of lower volumes and higher manufacturing and other costs, partially offset by higher selling prices and favorable exchange rates. Segment operating income as a percent of revenue was 16.4% in 2019 and 16.9% in 2018, respectively. Corporate & Other The Corporate & Other operating loss was$74.4 million in 2019 and$27.2 million in 2018. The higher operating loss was primarily a result of the divestiture & other related costs in 2019 of$45.9 million . See Divestitures above for further information. There were no divestiture & other related costs incurred in 2018.
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Index RESULTS OF OPERATIONS 2018 vs. 2017 Revenue
Gross Profit The Company's gross margin was 33.6% in 2018 and 34.9% in 2017. Included in the cost of products sold are$2.9 million of restructuring costs for 2017. The decrease in gross margin is primarily a result of higher raw material costs and the unfavorable impact of product mix, partially offset by higher selling prices. Restructuring costs reduced gross margin by 20 basis points in 2017. Selling and Administrative Expenses Selling and administrative expense as a percent of revenue was 18.9% in 2018 and 22.6% in 2017, respectively. Restructuring and other costs of$45.2 million in 2017 were included in selling and administrative expense. Selling and administrative expense as a percent of revenue was lower in 2018 than in 2017 primarily as a result of the 2017 restructuring and other costs and lower performance-based executive compensation in 2018. Restructuring and other costs increased selling and administrative expense as a percent of revenue by 330 basis points in 2017. Operating Income Operating income was$203.4 million in 2018 and$167.8 million in 2017. Operating margins were 14.7% in 2018 and 12.3% in 2017. Restructuring and other costs reduced operating margins by 350 basis points in 2017.
Additional information on segment results can be found in the Segment Information section.
Interest Expense
Interest expense was
Income Taxes The effective income tax rate was 13.3% in 2018 and 39.6% in 2017. The effective tax rates in both 2018 and 2017 were impacted by changes in estimates associated with the finalization of prior year foreign and domestic tax items, audit settlements, adjustments to valuation allowances and mix of foreign earnings. The effective tax rate in 2018 was also favorably impacted byU.S. tax accounting method changes that were filed with theIRS in the second quarter of 2018 and generation of foreign tax credits during 2018. The 2017 effective tax rate was impacted by the limited tax deductibility of losses, the result of the cumulative foreign currency effect related to certain repatriation transactions, and restructuring and other activities. OnDecember 22, 2017 , theU.S. enacted the 2017 Tax Legislation. The 2017 Tax Legislation significantly changedU.S. corporate income tax laws by reducing theU.S. corporate income tax rate to 21% beginning in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings ofU.S. subsidiaries. As a result, the Company recorded a provisional net tax expense of$18.4 million during the fourth quarter of 2017. This amount consists of reevaluating theU.S. deferred tax assets and liabilities based on the lower corporate income tax rate, adjustments to the Company's foreign tax credit carryover, and the one-time mandatory tax on previously deferred foreign earnings ofU.S. subsidiaries. In 2018, the Company finalized its provisional estimates related to the 2017 Tax Legislation resulting in an income tax benefit of$6.6 million .Sensient considers$11.8 million to be the final net tax expense related to the 2017 Tax Legislation. 2018 2017 Rate before 2017 Tax Legislation, restructuring and discrete items 20.7% 24.5% 2017 Tax Legislation (3.7%) 12.4% Restructuring impact - 3.9% Discrete items (3.7%) (1.2%) Reported effective tax rate 13.3% 39.6% Acquisitions OnMarch 9, 2018 , the Company completed the acquisition of certain net assets and the natural color business of GlobeNatural, a company based inLima, Peru . The Company paid$10.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company acquired net assets of$1.4 million and identified intangible assets, principally customer relationships of$2.0 million , and allocated the remaining$7.4 million to goodwill. These operations are included in the Color segment. 24
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OnJuly 10, 2018 , the Company completed the acquisition ofSensient Natural Extraction Inc. , a botanical extraction business with patented solvent-free extraction processes, located inVancouver, Canada . The Company paid$19.8 million of cash for this acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company acquired net assets of$4.0 million and identified intangible assets, principally technological know-how, of$6.9 million . The remaining$8.9 million was allocated to goodwill. This business was included in Corporate & Other in 2018. Beginning in the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change.
Restructuring
BetweenMarch 2014 and 2017, the Company executed a restructuring plan (2014 Restructuring Plan) to eliminate underperforming operations, consolidate manufacturing facilities, and improve efficiencies within the Company. In accordance with GAAP, the Company recorded total restructuring costs of$36.5 million for the year endedDecember 31, 2017 . No restructuring costs were recorded for the year endedDecember 31, 2018 .
Divestiture
In 2016, the Company's Board of Directors authorized management to explore strategic alternatives for a facility and certain related business lines within the Flavors & Fragrances segment inStrasbourg, France . In 2016, the Company recorded a non-cash impairment charge of$10.8 million , in Selling and administrative expenses, and incurred$0.7 million of outside professional fees and other related costs in 2016, as a result of the then anticipated divestiture. InJanuary 2017 , the Company completed this divestiture for approximately$12.5 million . The Company recognized an additional non-cash loss of$11.6 million in 2017. NON-GAAP FINANCIAL MEASURES Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted operating income, adjusted net earnings, and adjusted diluted EPS (which exclude restructuring and other costs as well as the impact of the 2017 Tax Legislation) and (2) percentage changes in revenue, operating income, diluted EPS, adjusted operating income, and adjusted diluted EPS on a local currency basis (which eliminate the effects that result from translating its international operations intoU.S. dollars). The other costs in 2017 are divestiture related costs, discussed under "Divestiture" above. The Company has included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. These non-GAAP measures should not be considered in isolation. Rather, they should be considered together with GAAP measures and the rest of the information included in this report. Management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis and to gain additional insight into underlying operating and performance trends. The Company believes that this information can be beneficial to investors for the same purposes. These non-GAAP measures may not be comparable to similarly titled measures used by other companies. Twelve Months Ended December 31, (In thousands except per share amounts) 2018 2017 % Change Operating Income (GAAP)$ 203,378 $ 167,806 21.2 % Restructuring - Cost of products sold -
2,889
Restructuring - Selling and administrative -
33,627
Other - Selling and administrative (1) - 11,555 Adjusted operating income$ 203,378 $ 215,877 (5.8 %) Net Earnings (GAAP)$ 157,360 $ 89,600 75.6 % Restructuring & other, before tax -
48,071
Tax impact of restructuring & other - (5,602 ) 2017 Tax Legislation (6,634 )
18,446
Adjusted net earnings$ 150,726 $ 150,515 0.1 % Diluted EPS (GAAP)$ 3.70 $ 2.03 82.3 % Restructuring & other, net of tax -
0.96
2017 Tax Legislation (0.16 )
0.42
Adjusted diluted EPS$ 3.55 $ 3.42 3.8 %
(1) The other costs are for the divestiture related costs discussed under "Divestiture" above.
Note: Earnings per share calculations may not foot due to rounding differences.
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The following table summarizes the percentage change in the 2018 results compared to the 2017 results in the respective financial measures.
Twelve Months Ended December 31, 2018
Foreign
Exchange Local
Total Rates Currency
Revenue
Flavors & Fragrances 0.0% 1.1% (1.1%)
Color 5.3% 0.4% 4.9%
Asia Pacific 0.0% (0.1%) 0.1%
Total Revenue 1.8% 0.7% 1.1%
Operating Income
Flavors & Fragrances (15.7%) 0.0% (15.7%)
Color (0.1%) 1.0% (1.1%)
Asia Pacific 0.4% 1.3% (0.9%)
Corporate & Other (66.3%) 1.4% (67.7%)
Operating Income 21.2% 0.2% 21.0%
Diluted EPS 82.3% 0.0% 82.3%
Adjusted operating income (1) (5.8%) 0.7% (6.5%)
Adjusted diluted EPS (1) 3.8% 0.6% 3.2%
(1) Refer to table above for a reconciliation of these non-GAAP measures.
SEGMENT INFORMATION The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is evaluated on operating income before any applicable restructuring and other costs, share-based compensation, (which are reported in Corporate & Other), interest expense, and income taxes. InJuly 2018 , the Company completed the acquisition ofSensient Natural Extraction Inc. (See Acquisitions above for further information). This business was included in Corporate & Other in 2018. Beginning in the first quarter of 2019, the results of operations of this business are now reported in the Color segment. The results for 2018 have been restated to reflect this change. The Company's discussion below regarding its operating segments has been updated to reflect the Company's disaggregation of revenue, which was adopted in the first quarter of 2018, as summarized in Part IV, Item I, Note 12, Segment and Geographic Information, of this report.
The Company's reportable segments consist of the Flavors & Fragrances, Color,
and
Flavors & Fragrances Flavors & Fragrances segment revenue was$746.9 million in both 2018 and 2017. Foreign exchange rates increased segment revenue by approximately 1% in 2018. Segment revenue was consistent with the prior year due to higher revenue in Fragrances and Natural Ingredients, mostly offset by lower revenue in Flavors. The higher revenue in Fragrances is primarily a result of higher selling prices, favorable volumes, and favorable exchange rates. The higher revenue in Natural Ingredients is primarily a result of favorable volumes, partially offset by lower selling prices and the impact of the 2017 sale of the European Natural Ingredients business as part of the Company's prior restructuring activities. The lower revenue in Flavors was primarily a result of lower volumes, partially offset by the favorable impact of exchange rates and higher selling prices. Flavors & Fragrances segment operating income was$96.4 million in 2018 and$114.3 million in 2017, a decrease of approximately 16%. Foreign exchange rates had a minimal impact on segment operating income. The lower segment operating income was primarily a result of lower operating income in Flavors and Natural Ingredients. The lower operating income in Flavors was primarily a result of lower volumes (primarily at the production site affected by last year's plant consolidation) and product mix, partially offset by higher selling prices, lower manufacturing and other costs, and lower raw material costs. The lower operating income in Natural Ingredients was primarily due to higher raw material costs, primarily onion, and lower selling prices, partially offset by higher volumes and lower manufacturing and other costs. Segment operating income as a percent of revenue was 12.9% and 15.3% for 2018 and 2017, respectively.
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Color
Segment revenue for the Color segment was$554.0 million in 2018 and$526.4 million in 2017, an increase of approximately 5%. Foreign exchange rates had a minimal impact on segment revenue. The higher segment revenue was primarily a result of higher revenue in Food & Beverage Colors and Cosmetics. The higher revenue in Food & Beverage Colors was primarily a result of higher volumes, the impact of the GlobeNatural acquisition (approximately 1%), favorable exchange rates, and higher selling prices. The higher revenue in Cosmetics was primarily a result of higher volumes. Segment operating income for the Color segment was$113.3 million in 2018 and$113.4 million in 2017. Segment operating income was consistent with the prior year as a result of higher operating income in Cosmetics, offset by the unfavorable impact of theSensient Natural Extraction Inc. acquisition included in Other Colors. The higher operating income in Cosmetics was primarily a result of higher volumes and selling prices, favorable product mix, lower raw material costs, and the favorable impact of exchange rates, partially offset by higher manufacturing and other costs. Foreign exchange rates increased segment operating income by approximately 1%. Segment operating income as a percent of revenue was 20.5% in 2018 compared to 21.5% in 2017.Asia Pacific Segment revenue for theAsia Pacific segment was$123.2 million for both 2018 and 2017. Foreign exchange rates had a minimal impact on segment revenues. Segment revenue was consistent with the prior year as higher selling prices were mostly offset by lower volumes. Segment operating income for theAsia Pacific segment was$20.9 million in 2018 and$20.8 million in 2017, a slight increase over the prior year. The slight increase in segment operating income was a result of higher selling prices, favorable product mix, and favorable exchange rates, mostly offset by higher manufacturing and other costs. Foreign exchange rates increased segment operating income by approximately 1%. Segment operating income as a percent of revenue was 16.9% in both 2018 and 2017. Corporate & Other The Corporate & Other operating loss was$27.2 million in 2018 and$80.7 million in 2017. The lower operating loss was primarily a result of the absence in 2018 of the restructuring and other costs that were incurred in 2017 and lower performance-based executive compensation incurred in 2018. Restructuring and other costs were$48.1 million in 2017. There were no restructuring and other costs incurred in 2018. 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 ofDecember 31, 2019 . In the fourth quarter of 2019, the Company amended its accounts receivable securitization program, and decreased the commitment size from$70 million to$65 million . See Note 9, Accounts Receivable Securitization, in the Notes to Consolidated Financial Statements included in this report for additional information. 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, dividend payments, acquisitions, and stock repurchases. The impact of inflation on both the Company's financial position and its results of operations has been minimal and is not expected to significantly affect 2020 results. Cash Flows from Operating Activities Net cash provided by operating activities was$177.2 million and$83.5 million in 2019 and 2018, respectively. Operating cash flow provided the primary source of funds for operating needs, capital expenditures, shareholder dividends, acquisitions, and share repurchases. The increase in net cash provided by operating activities in 2019 is primarily due to the adoption of Accounting Standards Update (ASU) No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) in the first quarter of 2018, which required certain cash receipts related to the Company's accounts receivable securitization (i.e. the deferred purchase price) to be classified as investing activities. As a result, in 2018, the Company included$91.1 million of cash received as deferred purchase price as investing activities, which prior to ASU 2016-15, were recorded as operating activities. Cash Flows from Investing Activities Net cash used in investing activities was$37.4 million in 2019. Net cash provided by investing activities was$14.8 million in 2018. Capital expenditures were$39.1 million in 2019 and$50.7 million in 2018. As required under ASU 2016-15, the Company included$91.1 million of cash received as deferred purchase price under its accounts receivable securitization as cash provided by investing activities in 2018. In 2018, the Company purchasedSensient Natural Extraction Inc. , for approximately$19.8 million , GlobeNatural for approximately$10.8 million , and the assets of one other business for an immaterial amount.
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Cash Flows from Financing Activities Net cash used in financing activities was$150.6 million in 2019 and$98.7 million in 2018. The Company had a net decrease in debt of$87.4 million in 2019 and a net increase in debt of$38.2 million in 2018.Sensient purchased$76.7 million of Company stock in 2018. There were no Company stock purchases in 2019. The Company has paid uninterrupted quarterly cash dividends since commencing public trading in its stock in 1962. In the fourth quarter of 2019, the Company increased its quarterly dividend from36 cents per share to39 cents per share. Dividends paid per share were$1.47 in 2019 and$1.35 in 2018. Total dividends paid were$62.2 million and$57.4 million in 2019 and 2018, respectively. ISSUER PURCHASES OF EQUITY SECURITIESSensient purchased 1.1 million shares of Company stock in 2018 for a total cost of$76.7 million and 1.1 million shares of Company stock in 2017 for a total cost of$87.2 million . There were no shares of Company stock purchased in 2019. InOctober 2017 , the Board of Directors authorized the repurchase of up to three million shares. As ofDecember 31, 2019 , 2.2 million 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. CRITICAL ACCOUNTING POLICIES In preparing the financial statements in accordance with accounting principles generally accepted in theU.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 theU.S. , and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining the net realizable value of accounts receivable, inventories, and property, plant, and equipment. Management believes the Company's most critical accounting estimates and assumptions are in the following areas: Revenue Recognition The Company recognizes revenue at the transfer of control of its products to the Company's customers in an amount reflecting the consideration to which the Company expects to be entitled. Revenue is recognized when control of the product is transferred to the customer, the customer is obligated to pay the Company and the Company has no remaining obligations, which is typically at shipment. See Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in this report for additional details. Goodwill Valuation The Company reviews the carrying value of goodwill annually utilizing several valuation methodologies, including a discounted cash flow model. The Company completed its annual goodwill impairment test under Accounting Standards Codification (ASC) 350, Intangibles -Goodwill and Other, in the third quarter of 2019. In conducting its annual test for impairment, the Company performed a quantitative assessment of the fair values for each of its reporting units and compared each of these values to the net book value of each reporting unit. Fair value is estimated using both a discounted cash flow analysis and an analysis of comparable company market values. If the fair value of a reporting unit exceeds its net book value, no impairment exists. The Company's three reporting units each had goodwill recorded and were tested for impairment. All three reporting units had fair values that were significantly above their respective net book values. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect the reporting units' fair value and result in an impairment charge. In the fourth quarter of 2019, as a result of the Company's meeting the assets held for sale criteria for its divestitures of its inks and fragrances (excluding its essential oils product line) product lines, the Company allocated$8.4 million of goodwill to that disposal group. The$8.4 million of goodwill related to the disposal groups was determined to be fully impaired. See Note 15, Divestitures, in the Notes to Consolidated Financial Statements included in this report for additional details. Income Taxes The Company estimates its income tax expense in each of the taxing jurisdictions in which it operates. The Company is subject to a tax audit in each of these jurisdictions, which could result in changes to the estimated tax expense. The amount of these changes would vary by jurisdiction and would be recorded when probable and estimable. These changes could impact the Company's financial statements. Management has recorded valuation allowances to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. 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.
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Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method with the exception of certain locations of the Flavors & Fragrances segment where cost is determined using a weighted average method. Net realizable value is determined on the basis of estimated realizable values. Cost includes direct materials, direct labor, and manufacturing overhead. The Company estimates any required write-downs for inventory obsolescence by examining inventories on a quarterly basis to determine if there are any damaged items or slow moving products in which the carrying values could exceed net realizable value. Inventory write-downs are recorded as the difference between the cost of inventory and its estimated market value. In the fourth quarter of 2019, the Company recorded a non-cash charge of$9.8 million and disposal costs of$0.8 million , in Cost of products sold related to the anticipated fruit preparation divestiture. The charge reduced the carrying value of certain inventories, as they were determined to be excess as ofDecember 31, 2019 . 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. CONTRACTUAL OBLIGATIONS The Company is subject to certain contractual obligations, including long-term debt, interest payments on long-term debt, operating leases, manufacturing purchases, and pension benefit obligations. The Company had unrecognized tax benefits of$4.9 million as ofDecember 31, 2019 . However, the Company cannot make a reasonably reliable estimate of the period of potential cash settlement of the liabilities and, therefore, has not included unrecognized tax benefits in the following table of significant contractual obligations as ofDecember 31, 2019 . PAYMENTS DUE BY PERIOD (in thousands) Total 1 year 2-3 years 4-5 years > 5 years Long-term debt$ 598,499 $ 128,251 $ 132,896 $ 234,364 $ 102,988 Interest payments on long-term debt 54,631 14,459 23,362 12,930 3,880 Operating lease obligations 20,325 8,429
7,610 2,769 1,517 Manufacturing purchase commitments 87,942 83,244 4,698
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Pension funding obligations 26,021 1,731
5,875 5,917 12,498
Total contractual obligations
NEW PRONOUNCEMENTS Refer to the "Recently Adopted Accounting Pronouncements" and "Recently Issued Accounting Pronouncements" sections within Note 1, "Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements included in this report for additional details.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements as of
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