SENSIENT TECHNOLOGIES CORP - Annual Report: 2015 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2015

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-7626

Sensient Technologies Corporation

777 EAST WISCONSIN AVENUE

MILWAUKEE, WISCONSIN  53202-5304

(414) 271-6755

(Address of Principal Executive Offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☒  No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐   No  ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.  Yes ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

 

The aggregate market value of the voting Common Stock held by non-affiliates of the Registrant as of June 30, 2015, was $3,076,116,649.  For purposes of this computation only, the Registrant’s directors and executive officers were considered to be affiliates of the Registrant.  Such characterization shall not be construed to be an admission or determination for any other purpose that such persons are affiliates of the Registrant.

There were 44,965,308 shares of Common Stock outstanding as of February 19, 2016.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s 2016 Notice of Annual Meeting and Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015 (see Part III of this Form 10-K).

 

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SENSIENT TECHNOLOGIES CORPORATION—FORM 10-K FOR YEAR ENDED DECEMBER 31, 2015 INDEX

FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements that reflect management’s current assumptions and estimates of future economic circumstances, industry conditions, Company performance and financial results.  Forward-looking statements include statements in the future tense, statements referring to any period after December 31, 2015, and statements including the terms “expect,” believe,” “anticipate” and other similar terms that express expectations as to future events or conditions.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements.  Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that could cause actual events to differ materially from those expressed in those statements.  A variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results.  These factors and assumptions include the pace and nature of new product introductions by the Company and the Company’s customers; the Company’s ability to successfully implement its growth strategies; the outcome of the Company’s various productivity-improvement and cost-reduction efforts; the effectiveness of the Company’s restructuring activities; changes in costs of raw materials, including energy; industry and economic factors related to the Company’s domestic and international business; growth in markets for products in which the Company competes; industry and customer acceptance of price increases; actions by competitors; currency exchange rate fluctuations; and the matters discussed below under the heading “Risk Factors” and under Part II, including the critical accounting policies set forth below on pages 22 through 23.  Except to the extent required by applicable law, the Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

 

PART I

Item 1.

Business

General

Sensient Technologies Corporation (the “Company”) was incorporated in 1882 in Wisconsin.  Its principal executive offices are located at 777 East Wisconsin Avenue, Suite 1100, Milwaukee, Wisconsin 53202-5304, telephone (414) 271-6755.

The Company is subject to the informational and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Act”), and, in accordance with the Act, has filed annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission”). These reports and other information may be read and copied at the public reference facilities of the Commission at its principal offices at 100 F Street, N.E., Washington, D.C. 20549, and can also be accessed from the website maintained by the Commission at http://www.sec.gov.  The public may obtain information on operations of the public reference room by calling the Commission at (800) SEC-0330.

The Company’s common stock is listed on the New York Stock Exchange under the ticker symbol “SXT.”  Information about the Company may be obtained at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

The Company can also be reached at its website at www.sensient.com.  The Company’s web address is provided as an inactive textual reference only, and the contents of that website are not incorporated in or otherwise to be regarded as part of this report.  The Company makes available free of charge on its website its proxy statement, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Act as soon as reasonably practicable after such documents are electronically filed with or furnished to the Commission.  Charters for the Audit, Compensation and Development, and Nominating and Corporate Governance Committees of the Company’s Board of Directors, as well as the Company’s Code of Conduct, Corporate Governance Guidelines, our Policy on Recovery of Incentive Compensation From Executives and our Directors and Officers Stock Ownership Guidelines are also available on the Company’s website, and are available in print to any shareholder, free of charge, upon request. If there are any amendments to the Code of Conduct or the Corporate Governance Guidelines, or if waivers from any of them are granted for executive officers or directors, those amendments or waivers also will be posted on the Company’s website.

Description of Business

The Company is a leading global manufacturer and marketer of colors, flavors and fragrances.  The Company uses advanced technologies at facilities around the world to develop specialty food and beverage systems, cosmetic and pharmaceutical systems, specialty inks and colors, and other specialty and fine chemicals.  The Company’s customers include major international manufacturers representing some of the world’s best-known brands.

The Company’s principal products include:

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flavors, flavor enhancers, ingredients and bionutrients;

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fragrances, aroma chemicals and essential oils;

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natural ingredients, including dehydrated vegetables and other food ingredients;

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natural and synthetic food and beverage colors;

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cosmetic colors and ingredients and pharmaceutical excipients and ingredients; and

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technical colors, specialty inks and colors, and specialty dyes and pigments.

The Company’s three reportable segments are the Flavors & Fragrances Group and the Color Group, which are managed on a product-and-services basis, and the Asia Pacific Group, which is managed on a geographic basis.  The Company’s corporate expenses and restructuring and other costs are included in the “Corporate & Other” category.  Financial information regarding the Company’s three reportable segments and the operations included within Corporate & Other is set forth below on pages 47 through 49 under the heading “Segment and Geographic Information.”

 

In 2014, the Company announced and began a restructuring plan related to eliminating underperforming operations, consolidating manufacturing facilities and improving efficiencies within the Company, with an emphasis on the Flavors & Fragrances Group. Additional information regarding the costs related to the implementation of restructuring plan is set forth below on pages 50 through 52 under the heading “Restructuring Charges.”

 

Flavors & Fragrances Group

The Company is a global developer, manufacturer and supplier of flavor and fragrance systems for the food, beverage, personal care and household-products industries.  The Company’s flavor formulations are used in many of the world’s best-known consumer products.  Under the unified brand names of Sensient Flavors, Sensient Natural Ingredients and Sensient Fragrances, the Group is a supplier to multinational companies.

The Flavors & Fragrances Group produces flavor and fragrance products that impart a desired taste, texture, aroma and/or other characteristics to a broad range of consumer and other products.  This Group includes the Company’s natural ingredients business, which produces ingredients for food processors.  The main products of the Group are systems products, including flavor-delivery systems, and compounded and blended products.  In addition, the Group has strong positions in selected ingredient products such as essential oils, natural and synthetic flavors, and aroma chemicals.  The Group serves food and non-food industries.  In food industries, markets include savory, beverage and sweet flavors.  In non-food industries, the Group supplies fragrance products to the personal and home-care markets.

Operating through its Sensient Natural Ingredients business, the Company believes it is the second largest producer (by sales) of dehydrated onion and garlic products in the United States.  The Company is also one of the largest producers and distributors of chili powder, paprika, chili pepper and dehydrated vegetables such as parsley, celery and spinach. Domestically, the Company sells dehydrated products to food manufacturers for use as ingredients and also for repackaging under private labels for sale to the retail market and to the food service industry.  Advanced dehydration technologies utilized by Sensient Natural Ingredients permit fast and effective rehydration of ingredients used in many of today’s popular convenience foods.

The Flavors & Fragrances Group operates principally through the Company’s subsidiaries Sensient Flavors LLC and Sensient Natural Ingredients LLC.  The Group’s principal manufacturing plants are located in California, Illinois, Indiana, Michigan, Wisconsin, Belgium, China, France, Mexico, the Netherlands, Spain and the United Kingdom.

Beginning in the first quarter of 2015, the results of operations for the Company’s businesses in Central and South America, previously reported in the Corporate & Other segment, are now reported in the Flavors & Fragrances segment. Results for 2014 and 2013 have been restated to reflect these changes.

Color Group

The Company is a developer, manufacturer and supplier of colors for businesses worldwide.  The Company provides natural and synthetic color systems for use in foods, beverages and pharmaceuticals; colors and other ingredients for cosmetics, such as active ingredients, solubilizers and surface treated pigments; pharmaceutical excipients, such as colors, flavors and coatings; specialty inks; and technical colors for industrial applications.

The Company believes that it is one of the world’s largest producers (by sales) of synthetic and natural colors, and that it is the world’s largest manufacturer (by sales) of certified food colors.  The Company sells its synthetic and natural colors to domestic and international producers of beverages, bakery products, processed foods, confections, pet foods, cosmetics and pharmaceuticals.  The Company also makes industrial colors, specialty inks and other dyes and pigments used in a variety of non-food applications.

The Color Group operates principally through the Company’s subsidiary Sensient Colors LLC.  The Group’s principal manufacturing plants are located in Missouri, New Jersey, Brazil, Canada, France, Germany, Italy, Mexico, Switzerland and the United Kingdom.

The Color Group operates under the following trade names:

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Sensient Food Colors (food and beverage colors);

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Sensient Pharmaceutical Coating Systems (pharmaceutical colors and coatings);

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Sensient Cosmetic Technologies (cosmetic colors and ingredients and systems);

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Sensient Inks (specialty inks); and

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Sensient Industrial Colors (paper colors; and industrial colors for plastics, leather, wood stains, antifreeze and other uses).

The Company believes that its advanced process technology, state-of-the-art laboratory facilities and equipment, world class application chemists and a complete range of synthetic and natural color products constitute the basis for its market leadership position.

 

Asia Pacific Group

The Asia Pacific Group focuses on marketing the Company’s diverse product line in the Pacific Rim under the Sensient name. Through these operations, the Company offers a full range of products from its Flavors & Fragrances Group and Color Group, as well as products developed by regional technical teams to appeal to local preferences.

Sales, marketing and technical functions are managed through the Asia Pacific Group’s headquarters in Australia. Manufacturing operations are located in Australia, China, Japan, New Zealand and the Philippines.  The Asia Pacific Group maintains offices for local technical support, as well as sales, in China, India, Indonesia, Korea and Thailand, and is significantly expanding its research and development capabilities in Singapore.

Research and Development/Quality Assurance

The development of specialized products and services is a complex technical process calling upon the combined knowledge and talents of the Company’s research, development and quality assurance personnel.  The Company believes that its competitive advantage lies in its ability to work with its customers to develop and deliver high-performance products that address the distinct needs of those customers.

The Company’s research, development and quality assurance personnel support the Company’s efforts to improve existing products and develop new products tailored to customer needs, while providing on-going technical support and know-how to the Company’s manufacturing activities. The Company employed 726 people in research and development, quality assurance, quality control and lab technician positions as of December 31, 2015.

Expenditures for research and development related to continuing operations in calendar year 2015 were $35.1 million, compared with $35.9 million in the year ended December 31, 2014, and $34.1 million in the year ended December 31, 2013.  As part of its commitment to quality as a competitive advantage, the Company’s production facilities hold various certifications, such as those under the International Organization for Standardization (ISO) and those recognized by the Global Food Safety Initiative (GFSI), including the Safe Quality Food Program (SQF), British Retail Consortium (BRC), Food Safety System Certification (FSSC 22000) and International Featured Standards (IFS), for certifying the safety and quality of its products and production processes.

 

Products and Application Activities

The Company’s strategic focus is on the manufacture and marketing of high-performance components that bring life to products.  Accordingly, the Company devotes considerable attention and resources to the development of product applications and processing improvements to support its customers’ numerous new and reformulated products.  The majority of the proprietary processes and formulae developed by the Company are maintained as trade secrets and under confidentiality agreements with customers.

Within the Flavors & Fragrances Group, development activity is focused on ingredients, flavors, fragrances, and flavor and fragrance systems that are responsive to consumer trends and the processing needs of our food and beverage customers.  These activities include the development of functional ingredient systems for foods and beverages, savory flavors, and ingredient systems for prepared foods and flavors and ingredients for dairy, confectionery and other applications.  The Company believes that the development of yeast derivatives and other specialty ingredients also provides growth opportunities in bionutrients and biotechnology markets, such as pharmaceuticals, vitamins, vaccines and bioremediation.

Within the Color Group, development activity for food and beverage product lines is focused on value-added products derived from synthetic dyes and pigments and natural food and beverage colors and on color systems.  The Company also produces a diverse line of colors and ingredients for cosmetics and pharmaceutical applications and technical colors for industrial applications.

Raw Materials

The Company uses a wide range of raw materials in producing its products. Chemicals used to produce certified colors are obtained from several domestic and foreign suppliers.  Raw materials for natural colors, such as carmine, beta-carotene, annatto and turmeric, are purchased from overseas and U.S. sources.  In the production of flavors and fragrances, the principal raw materials include essential oils, aroma chemicals, botanicals, fruits and juices, and are obtained from domestic and foreign suppliers.  Flavor enhancers and secondary flavors are produced from brewers’ yeast and vegetable materials such as corn and soybeans.  Chili peppers, onion, garlic and other vegetables are acquired under annual contracts with numerous growers in the western United States and Europe.  The Company has expanded its sources of vegetables to include growers in China.

The Company believes that its ability to reformulate its products and the general availability of alternate sources of materials would enable it to maintain its competitive position in the event of an interruption in the supply of raw materials from a single supplier.

 

Competition

All Company products are sold in highly competitive markets.  While no single factor is determinative, the Company’s competitive position is based principally on process and applications expertise, quality, technological advances resulting from its research and development, and customer service and support.  Because of its highly differentiated products, the Company competes with only a few companies across multiple product lines, and is more likely to encounter competition specific to an individual product.

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Flavors & Fragrances. Competition to supply the flavors and fragrances industries has taken on an increasingly global nature.  Most of the Company’s customers do not buy their entire flavor and/or fragrance products from a single supplier and the Company does not compete with a single supplier in all product categories.  Competition for the supply of flavors and fragrances is based on the development of customized ingredients for new and reformulated customer products, as well as on quality, customer service and price.   Competition to supply dehydrated vegetable products is present through several large and small domestic competitors, as well as competitors in other countries.  Competition for the supply of dehydrated vegetables is based principally on product quality, customer service and price.

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Color.  Competition in the color market is diverse, with the majority of the Company’s competitors specializing in either synthetic dyes and pigments or natural colors.  The Company believes that it gains a competitive advantage as the only major basic manufacturer of a full range of color products, including synthetic dyes and pigments as well as natural colors.  Competition in the supply of cosmetic colors and ingredients, specialty inks and pharmaceutical excipients is based on the development of customized products and solutions as well as quality, customer service, and price.  The Company believes that its reputation and capacity as a color producer as well as its product development give it a competitive advantage in these markets.

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Asia Pacific. Because of the broad array of products available to customers of the Asia Pacific Group, the Company believes that it is able to offer a wider product base than many of its competitors.  Competition is based upon reliability in product quality, service and price as well as technical support available to customers.

Foreign Operations

Additional information regarding the Company’s foreign operations is set forth below on pages 47 through 49 under the heading “Segment and Geographic Information.”

Patents, Formulae and Trademarks

The Company owns or controls many patents, formulae and trademarks related to its businesses.  The businesses are not materially dependent upon any particular patent or trademark; however, trademarks, patents and formulae are important to the business of the Company.

Employees

As of December 31, 2015, the Company employed 4,032 persons worldwide.

Regulation

Compliance with government provisions regulating discharges into the environment, or otherwise relating to the protection of the environment, did not have a material adverse effect on the Company’s operations for the year covered by this report.  Current compliance is not expected to have a material adverse effect in the next two years.  The production, packaging, labeling and distribution of certain of the products of the Company in the U.S. are subject to the regulations of various federal, state and local governmental agencies, in particular the U.S. Food and Drug Administration.  The Company is subject to similar regulations in many international markets.

Item 1A.

Risk Factors.

As with any business, the Company’s business and operations involve risks and uncertainties.  In addition to the other discussions in this report, particularly those in “Management’s Discussion & Analysis of Operations & Financial Condition” from pages 14 through 24 and “Forward-Looking Statements” above, the following factors should be considered:

 

 

·	In some product lines, most of our sales are made to a relatively small number of customers; if we lose any of those customers, sales and operating results could decline.

 

In some of our product lines, our sales are concentrated to a small number of customers.  While we do not currently have any single customer that we consider to be significant to us as a whole, the loss of a significant customer of a product line could substantially affect the sales and profitability of that line, which may cause us to re-evaluate that line.  Those developments could affect our results.  In addition, the financial condition of our customers may adversely affect their ability to buy from us or to pay for products that they have already purchased.

 

·	Many of our products are used in items for human consumption and contact.  We may be subject to product liability claims and product recalls, which could negatively impact our profitability and corporate image.

We sell flavors, fragrances and colors which are used in foods, beverages, pharmaceuticals, cosmetics and other items for human consumption or contact.  These products involve risks such as product contamination or spoilage, product tampering and other adulteration.  We may be subject to liability if the consumption or use of our flavors, fragrances and colors, or products which incorporate ingredients we manufacture, cause injury, illness or death.  In addition, we or our customers may need to recall products in the event of contamination or damage.

A significant product defect, product liability judgment or product recall may negatively impact our profitability for a period of time depending on publicity, product availability, scope, competitive reaction and consumer attitudes.  Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness, injury or death could adversely affect our reputation with existing and potential customers and our corporate image.

·	Consolidation has resulted in customers with increased buying power, which can affect our profitability.

Many of our customers have consolidated in recent years and we expect the combination trend to continue.  These consolidations have often produced large, sophisticated customers with increased buying power who are more capable of resisting price increases.  If the larger size or greater buying power of those customers results in additional negotiating strength, the prices we are able to charge could be negatively affected and our profitability could decline.

·	Intense competition may result in reduced sales and profitability.

The industries and markets in which we operate are highly competitive.  That competition can reduce both our sales and the prices at which we are able to sell our products, which can in turn negatively affect our profitability.

·	Our sales and profitability are affected by changing consumer preferences and changing technologies.

Although we do not generally make or sell proprietary consumer products, many of our products are sold to companies which develop and market consumer products.  Sales of these flavors, fragrances, colors and inks depend in part upon our customers’ ability to identify and meet consumer preferences and their sales and marketing efforts, all of which are beyond our control.  Our sales could also be affected by changing technologies that could impact consumer demand for products that contain our flavors, fragrances, colors and inks.  Therefore, we depend upon our customers’ ability to create markets for the consumer products which incorporate many of the flavors, fragrances, colors and inks which we manufacture.

·	If we do not maintain an efficient cost structure, our profitability could decrease.

Our success depends in part on our ability to maintain an efficient cost structure.  We regularly initiate cost-reduction measures that could impact our manufacturing, sales, operations and information systems functions.  If we do not continue to manage costs and achieve additional efficiencies, or we do not successfully implement related strategies, our competitiveness and our profits could decrease.

·	Commodity, energy and transportation price volatility and increases or material shortages may reduce our profits.

We use many different commodities as raw ingredients.  We also use petroleum-based raw materials and other raw materials whose production is energy intensive.  In addition, various energy sources are used in our production and distribution processes. Commodity and energy prices are subject to significant volatility caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, world events, and changes in governmental programs.  Commodity and energy price increases will raise both our raw material costs and operating costs.  We may not be able to increase our product prices enough to offset these increased costs.  Increasing our prices also may reduce sales volume and related profitability.

 

In addition, we obtain some of the raw materials that we use from a single supplier or a limited number of suppliers, and problems with those suppliers could affect the availability of those materials.  Even if there are multiple suppliers of a particular raw material, there are occasional shortages.  An unavailability or shortage of a raw material could negatively affect our operations using that raw material and thus our results.

·	There are many laws and regulations applicable to our industries.  Compliance with those requirements is costly to us and can affect our operations.  Failure to comply could also be costly and disruptive.

Our facilities and products are subject to many laws and regulations relating to health, safety and the processing, packaging, storage, distribution, quality and safety of food, drugs, cosmetics and other consumer products, specialty inks and industrial colors.  These laws and regulations are administered in the United States by the Department of Agriculture, the Food and Drug Administration, the Environmental Protection Agency, the Department of Labor and other federal and state governmental agencies.  We are subject to similar governmental regulation and oversight abroad.  Compliance with these laws and regulations can be costly and affect our operations.  Also, if we fail to comply with applicable laws and regulations, we could be subject to administrative penalties and injunctive relief, civil remedies, fines and recalls of our products.  Our customers, particularly those in the pharmaceutical industry, are also subject to laws and regulations which may impose costs on or create risk for us.

·	Environmental compliance may be costly to us.

Our operations are subject to extensive and increasingly stringent laws and regulations which pertain to the discharge of materials into the environment and the handling and disposition of wastes.  These rules operate or will operate at both the federal and state levels in the United States, and there are analogous laws at many of our overseas locations.  Environmental regulations, and the potential failure to comply with them, can have serious consequences, including the costs of compliance and defense, interference with our operations or the ability to obtain required permits, civil and administrative penalties and negative publicity.

·	Operating in foreign countries and emerging markets exposes us to increased risks, including economic, political and international operation risks.

We operate, manufacture and sell our products in many foreign countries and emerging markets.  The international aspects of our business subject us to risks that could materially impact our operating results, including: difficulties in staffing and managing foreign personnel in diverse cultures; transportation delays or interruptions; and the effects of international political developments and political and economic instability.  In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to changes in duties, tariffs, trade regulations, taxes or limitations on currency or fund transfers.

 

·	We depend on certain key personnel, and the loss or retirement of these persons may harm our business.

Our success depends in large part on the continued service and availability of our key management and technical personnel, and on our ability to attract and retain qualified new personnel.  The competition for these individuals can be significant, and the loss of key employees could harm our business.   In addition, as some of these persons approach retirement age, we need to provide for smooth transitions, and our operations and results may be negatively affected if we are not able to do so.

·	We may not successfully complete and integrate past and future acquisitions, which could adversely affect our operating results.

We have acquired many companies and operations in the past and may continue growth by acquisition in the future.  Our future growth through acquisitions could involve significant risks that may have a material adverse effect on us.  We may also be at risk for factors associated with acquisitions that the Company has made in the past.  Acquired companies may also have significant latent liabilities which may not be discovered before an acquisition or fully reflected in the price we pay.

We may also need to finance future acquisitions, and the terms of any financing, and the need to ultimately repay or refinance any indebtedness, may have negative effects on us.  Acquisitions also could have a dilutive effect on our financial results.  Acquisitions also generally result in goodwill, which would need to be written off against earnings in the future if it becomes impaired.

 

·	Our ability to successfully maintain and upgrade our information technology systems, and to effectively respond to failures, disruptions or breaches of our information technology systems, may affect our competitiveness and our profits could decrease.

Our success depends in part on our ability to maintain a current information technology platform for our business to operate.  We routinely review and upgrade our information technology systems in order to better manage and report the sales, manufacturing and other operations of our business.  If we do not continue to maintain our information technology platform and successfully implement upgrades to the system, our competitiveness and profits could decrease.  Furthermore, our information technology systems may be susceptible to failures, disruptions, breaches and other similar cyber-security events.  The impact of any such event and the effectiveness of our response thereto may adversely affect our operations and subject us to increased operating costs.

·	World events and natural disasters are beyond our control and could affect our results.

World events can adversely affect national, international and local economies.  Economies can also be affected by natural disasters or by epidemics.  Such events and conditions, as well as the current impairment of financial markets, have adversely affected and could continue to affect our revenues and profitability, particularly if they occur in locations in which we or our customers have significant operations. In addition, while we have manufacturing facilities throughout the world, certain of our facilities are the sole manufacturer of a specific product and a disruption in manufacturing could lead to increased costs of relocating or replacing the production of a product, or reformulating a product, which could have an adverse effect on our results.

Item 1B.

Unresolved Staff Comments.

The Company received comment letters from the staff of the Securities and Exchange Commission's Division of Corporation Finance dated June 24, 2015 and August 6, 2015 regarding its Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and 2014 Annual Report to Shareholders. The Company responded to the staff comments on July 8, 2015 and August 18, 2015, respectively, with supplemental information and analyses. The staff comments related to various matters, including the Company’s disclosures of its restructuring activities, its treatment of long-lived assets, and its use of non-GAAP financial measures. The comment letters and the Company’s response letters are available on the Securities and Exchange Commission’s website.

As of the date of this annual report on Form 10-K, the Company has not received confirmation from the staff of the Division of Corporation Finance of the Securities and Exchange Commission that their review process relating to the comment letters had been completed. If the Company receives additional comments from the staff, the Company intends to attempt to resolve such additional comments promptly.

Refer to Item 3 for information about the informal inquiry the Company received from the staff of Securities and Exchange Commission’s Division of Enforcement on October 22, 2015.

Item 2.

Properties.

We lease our corporate headquarters offices, which are located at 777 East Wisconsin Avenue, Milwaukee, Wisconsin. We own our Color Group headquarters offices located in St. Louis, Missouri and our Asia Pacific Group headquarters offices located in Keysborough, Australia. We own a part, and lease a part, of our Flavors & Fragrances Group headquarters offices located in Hoffman Estates, Illinois. The locations of our production properties by reportable segment are as follows:

Color Group:

U.S. – St. Louis, Missouri; and South Plainfield, New Jersey*.

International – Jundiai, Brazil*; Kingston, Ontario, Canada; Saint Ouen L’Aumone, France*; Geesthacht, Germany; Reggio Emilia, Italy; Lerma, Mexico; Johannesburg, South Africa; Morges, Switzerland; and Kings Lynn, United Kingdom*.

Flavors & Fragrances Group:

U.S. – Livingston and Turlock, California; Amboy, Illinois; Indianapolis, Indiana; Harbor Beach, Michigan; and Juneau, Wisconsin.

International – Heverlee, Belgium; Qingdao, China*; San Jose, Costa Rica*; Marchais and Strasbourg, France; Celaya and Tlalnepantla, Mexico; Elburg, Netherlands; Granada, Spain; and Wales and Milton Keynes, United Kingdom.

Asia Pacific:

U.S. – None.

International – Keysborough, Australia; Guangzhou, China*; Hitachi, Japan; Auckland, New Zealand; Manila, Philippines*; and Bangkok, Thailand*.

 

Item 3.

Legal Proceedings.

Commercial Litigation

On September 21, 2015, the U.S. Equal Employment Opportunity Commission filed a civil complaint against Sensient Natural Ingredients LLC (SNI) in the U.S. District Court for the Eastern District of California.  SNI is a wholly owned subsidiary of the Company. The EEOC’s complaint alleges that SNI failed to comply with the Americans with Disabilities Act (ADA), as amended, when it terminated five employees in 2011.  The EEOC seeks to enjoin SNI from engaging in employment practices that discriminate on the basis of disability; asks the Court to order SNI to implement policies, practices, and programs to ensure it does not violate the ADA; and requests back pay with prejudgment interest, reinstatement, front pay, compensation for past and future pecuniary and non-pecuniary losses, and punitive damages on behalf of the five named former employees and any similarly aggrieved individuals.  Recoverable compensatory and punitive damages are subject to statutory caps.  The complaint does not request a specific damages amount.  To date, the EEOC has provided the Company with a list of 13 additional potentially aggrieved former employees not listed in the complaint who may have been terminated in violation of the ADA during the relevant time period.

The Company is vigorously investigating the facts alleged in the complaint to determine what exposure SNI may have.  Since 2013, SNI’s on-site human resources representatives have worked closely with both Company counsel and outside labor and employment counsel to ensure that all policies, procedures and actions, including terminations, comply with applicable law.  At this early stage, it is not possible to assess the probability of any legal or financial exposure in this matter.

On October 22, 2015, the Company received an informal inquiry from the staff of the Securities and Exchange Commission’s Division of Enforcement requesting the voluntary provision of documents and information generally related to the Company’s disclosures of its restructuring activities, its treatment of long-lived assets, and its use of non-GAAP financial measures in its SEC filings and 2014 Annual Report to Shareholders. The Company is fully cooperating with the inquiry and is unable to predict the outcome of the inquiry or its potential impact.

The Company is involved in various other claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information from Company counsel, the ultimate resolution of these actions will not materially affect the consolidated financial statements of the Company.

Item 4.

Mine Safety Disclosure.

Not applicable.

 

Executive Officers of the Registrant

The executive officers of the Company and their ages as of February 19, 2016, are as follows:

The Company has employed all of the individuals named above, in substantively their current positions, for at least the past five years except as follows.  Mr. Paul Manning has held his present office since February 2, 2014, and previously served as President and Chief Operating Officer (October 2012 – February 2014) and President, Color Group (2010 – October 2012).  Mr. Geraghty has held his present office since October 18, 2012, and previously served as General Manager, Food Colors USA (April 2011 – October 2012).  Mr. Grover has held his present office since December 3, 2015.  Prior to joining the Company, Mr. Grover served as Vice President, Strategy and Vice President, Logistics Services for US Foods, Inc. from September 2012 to November 2015 and January 2013 to November 2015, respectively, and as Director, Strategy and Business Development and Business Director – Asia for Brady Corporation from 2009 to September 2012.  Mr. John Manning has held his present office since January 2, 2013.  Prior to joining the Company, Mr. John Manning served as an Assistant U.S. Attorney and Deputy Criminal Chief for the United States Attorney’s Office – Eastern District of Wisconsin from 2004 to December 2012 and 2006 to December 2012, respectively.  Ms. Morin has held her present office since October 20, 2015, and previously served as Human Resources Director, Flavors & Fragrances Group (August 2013 – October 2015).  Prior to joining the Company, Ms. Morin served as Vice President Human Resources for Harbor Light Hospice, Inc. from April 2012 to August 2013, and as Senior Human Resources Director of Exel from 2005 to April 2012.  Mr. Rolfs has held his present position since February 7, 2015, and previously served as Senior Vice President, Administration (July 2013 – February 2015) and Vice President, Administration (2010 – July 2013).

 

PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The only market in which the common stock of the Company is traded is the New York Stock Exchange. The range of the high and low sales prices as quoted in the New York Stock Exchange – Composite Transaction tape for the common stock of the Company and the amount of dividends declared for the fiscal years 2015 and 2014 are set forth below:

In 2015 and 2014, common stock dividends were paid on a quarterly basis, and it is expected that quarterly dividends will continue to be paid in the future. On July 23, 2015, the Company announced an increase in its cash dividend on its common stock from an annual rate of $1.00 per share to an annual rate of $1.08 per share, commencing with the quarterly dividend paid on September 1, 2015, to shareholders of record on August 7, 2015.

This graph compares the cumulative total shareholder return for the Company’s common stock over the last five years to the total returns on the Standard & Poor’s Midcap Specialty Chemicals Index (the “S&P Midcap Specialty Chemicals Index”), the Standard & Poor’s Midcap Food Products Index (the “S&P Midcap Food Products Index”) and the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”). The graph assumes a $100 investment made on December 31, 2010, and reinvestment of dividends. The stock performance shown on the graph is not necessarily indicative of future price performance.

Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services, LLC.

 

On August 21, 2014, the Board of Directors authorized the repurchase of up to five million shares.  As of February 19, 2016, 2,966,062 shares had been repurchased under this authorization.  The Company repurchased 201,811 shares during the fourth quarter of 2015 and a total of 2,733,301 shares during 2015.

The following table provides the specified information about the repurchases of shares by the Company during the fourth quarter of 2015.

The number of shareholders of record on February 19, 2016, was 2,480.

Information regarding the Company’s equity compensation plans is incorporated by reference into Item 11 of Part III of this report.

 

Item 6.

Selected Financial Data.

The following selected financial data is derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Quarterly Data

 

Five Year Review

The 2015 results include a charge of $43.6 million ($33.6 million after tax, or $0.73 per share) related to the restructuring and other costs.  These costs pertain to the Company’s 2014 Restructuring Plan related to eliminating underperforming operations, consolidating manufacturing facilities and improving efficiencies within the Company, and to acquisition related costs.

 

The 2014 results include a charge of $90.6 million ($65.5 million after tax, or $1.34 per share) related to the restructuring and other costs.  These costs pertain to the Company’s 2014 Restructuring Plan related to eliminating underperforming operations, consolidating manufacturing facilities and improving efficiencies within the Company, and to proxy contest costs.

 

The 2013 results include a charge of $31.7 million ($22.0 million after tax, or $0.44 per share) related to the 2013 restructuring program related to the relocation of the Flavors & Fragrances Group headquarters to Chicago, as well as a profit improvement plan across all segments of the Company.

 

The 2011 results include a charge of $4.8 million ($3.7 million after tax, or $0.07 per share) related to the Company’s plan to improve the profitability and efficiency of selected operations. The 2011 results also include a gain of $3.6 million ($3.6 million after tax, or $0.07 per share) related to the revaluation of the Company’s non-controlling interest in a subsidiary.

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

OVERVIEW

Sensient Technologies Corporation (the “Company”) is a global developer, manufacturer and supplier of flavor and fragrance systems for the food, beverage, personal care and household-products industries. In addition, the Company is a developer, manufacturer and supplier of colors for businesses worldwide. The Company provides natural and synthetic color systems for use in foods, beverages and pharmaceuticals; colors and other ingredients for cosmetics, pharmaceuticals and specialty inks; and technical colors for industrial applications. The Company has three reporting segments: the Flavors & Fragrances segment; the Color segment; and the Asia Pacific segment.

The Company’s 2015 diluted earnings per share from continuing operations were $2.32 in 2015 and $1.67 in 2014. Included in the 2015 and 2014 results, were $43.6 million and $90.6 million, respectively, of restructuring and other costs, or 73 cents per share and $1.34 per share, respectively. Adjusted diluted earnings per share, which exclude these restructuring and other costs, were $3.05 in 2015 and $3.02 in 2014 (see discussion below regarding Non-GAAP Financial Measures and the Company’s Restructuring Activities).

In 2015, the Company continued a series of strategic initiatives to increase shareholder value. The Company’s restructuring activities continue to eliminate underperforming businesses and consolidate manufacturing operations. The Company continued to pay an uninterrupted since 1962 quarterly cash dividend and increased the quarterly dividend by 2 cents per share from 25 cents to 27 cents per share, or $1.08 per share on an annualized basis, in 2015.  Furthermore, the Company repurchased $176.6 million of Company stock in 2015, which is in addition to the $137.2 million repurchased in 2014.

Additional information on the results is included below.

RESULTS OF CONTINUING OPERATIONS

2015 vs. 2014

Revenue

Sensient’s revenue was $1.4 billion in both 2015 and 2014. The impact of foreign exchange rates reduced consolidated revenue by 7.4% in 2015.

Gross Profit

The Company’s gross margin was 33.0% in 2015 and 33.7% in 2014. Included in the cost of products sold are $6.1 million and $1.9 million of restructuring costs for 2015 and 2014, respectively. The decrease in the gross margin is primarily due to the lower volumes in the Color segment’s specialty inks business and higher restructuring costs. Restructuring costs reduced gross margin by 50 basis points and 20 basis points in 2015 and 2014, respectively.

Selling and Administrative Expenses

Selling and administrative expense as a percent of revenue was 20.9% in 2015 and 24.7% in 2014. Restructuring and other costs of $37.5 million and $88.6 million for 2015 and 2014, respectively, were included in selling and administrative expense. The decrease in selling and administrative expense as a percent of revenue is primarily a result of the decrease in restructuring and other costs, and lower corporate expenses, primarily a reduction of performance based executive compensation costs of $6.8 million. Restructuring and other costs increased selling and administrative expense as a percent of revenue by 270 basis points and 610 basis points in 2015 and 2014, respectively.

Operating Income

Operating income was $166.3 million in 2015 and $130.7 million in 2014. Operating margins increased to 12.1% in 2015 from 9.0% in 2014. Restructuring and other costs reduced operating margins by 320 basis points and 630 basis points in 2015 and 2014, respectively.

Additional information on segment results can be found in the Segment Information section.

Interest Expense

Interest expense was $16.9 million in 2015 and $16.1 million in 2014. The increase in expense was primarily due to the increase in average debt outstanding which was partially offset by the lower average interest rates.

Income Taxes

The effective income tax rate was 28.2% in 2015 and 28.6% in 2014. The effective tax rates in both 2015 and 2014 were impacted by changes in estimates associated with the finalization of prior year tax items, audit settlements, mix of foreign earnings and restructuring costs. In total, net impact of the discrete items and restructuring costs reduced the effective income tax rate by 2.4% for 2015 and had no net impact on the rate in 2014.

 

Acquisition

On June 29, 2015, the Company completed the acquisition of the business and net assets of Xennia Technology Ltd. (“Xennia”) for $8.4 million. The Xennia business has been integrated with the specialty inks business in the Color segment. The Company acquired goodwill and intangibles of approximately $6.2 million and has incurred acquisition related costs of $0.8 million, which are included in the Corporate & Other segment.

Restructuring

The Company incurred restructuring costs in both continuing and discontinued operations. The discussion in this note relates to the combination of both continuing and discontinued operations unless otherwise noted. Restructuring costs related to discontinued operations are recorded in discontinued operations within the Company’s Consolidated Statements of Earnings and are discussed in more detail in Note 13, Discontinued Operations.

In March of 2014, the Company announced that it was initiating a restructuring plan (2014 Restructuring Plan or “Plan”) to eliminate underperforming operations, consolidate manufacturing facilities and improve efficiencies within the Company. The Company determined that it had redundant manufacturing capabilities in both North America and Europe and that it could lower costs and operate more efficiently by consolidating into fewer facilities. Eight facilities were identified for consolidation in the Flavors & Fragrances segment, four in North America and four in Europe. To date, closures have been announced in Indianapolis, Indiana, United States; Cornwall, Mississauga and Halton Hills, Canada; Bremen, Germany; and Milan, Italy. The Company also discontinued one of the businesses in the Color segment, located near Leipzig, Germany, because it did not fit with the Company’s long term strategic plan and it had generated losses for several years.  In 2015, the Company identified additional opportunities to consolidate manufacturing operations at one of the Color segment’s facilities in Europe and eliminate additional positions in the European Flavors & Fragrances businesses.

Based on this Plan, the Company determined that certain long-lived assets associated with the underperforming operations were impaired.  The Company reduced the carrying amounts of these assets to their aggregate respective fair values which were determined based on independent market valuations.  The fair values of the remaining long-lived assets are estimated to be approximately $19 million, which includes certain of the land, buildings and equipment in the assets held for sale, noted below.  Also certain machinery and equipment has been identified to be disposed of at the time of the facility closures and the associated depreciation for these assets has been accelerated.  The Company recorded long-lived asset impairments, including the impairment charges and accelerated depreciation of $14.5 million and $70.2 million, during the years ended December 31, 2015 and 2014, respectively.  Since initiating the Plan, the Company has recorded $84.7 million of long-lived asset impairments, including the impairment charges and accelerated depreciation.  In addition, certain intangible assets, inventory and other current assets were also determined to be impaired and were written down.

The Company has also incurred employee separation and other restructuring costs as a result of this Plan.  The Company expects to reduce headcount by approximately 400 positions at the affected facilities, primarily in the Flavors & Fragrances segment, related to direct and indirect labor at manufacturing sites.  As of December 31, 2015, approximately 220 positions have been eliminated as a result of this Plan.

As a part of the Plan, the Company anticipates selling its European Natural Ingredients business, a business in the Flavors & Fragrances segment, in 2016.  This business has two facilities, located in Marchais, France and Elburg, the Netherlands, which will be included in the expected sale.  The European Natural Ingredients business has not generated significant profits for several years and it does not fit with the Company’s long-term strategic plan.  In connection with the anticipated sale of the European Natural Ingredients business, the Company has recorded an impairment charge of $2.0 million in 2015, reducing the carrying value of the long-lived assets for this business to zero.  An estimate of the fair value of this business, less cost to sell, was determined to be lower than its carrying value. The difference between the fair value and its carrying value exceeded the existing net book value of the long-lived assets.  Upon completion of the sale, the Company expects to recognize an additional non-cash loss of approximately $12.0 million.

The Company has recorded assets held for sale of land, buildings and equipment of $9.6 million related to the 2014 Restructuring Plan, and inventory, receivables and other assets of $21.4 million related to the anticipated sale of the European Natural Ingredients business. The Company also has $4.1 million of liabilities held for sale related to the anticipated sale of the European Natural Ingredients business.

The Company recorded total restructuring costs of $42.8 million and $98.4 million in the years ended December 31, 2015 and 2014, respectively, in accordance with GAAP and based on an internal review of the affected facilities and consultation with legal and other advisors.  Since initiating the 2014 Restructuring Plan, the Company has incurred $141 million of restructuring costs through December 31, 2015.  The Company expects to incur approximately $16 million of additional restructuring costs by the end of 2016.

 

The Company expects that the closure and sale of these operations will significantly lower the Company's operating costs over the next few years.  Upon initiating the Plan, the Company estimated the annual cost reductions to be approximately $30 million, when fully implemented.  The U.S. dollar has strengthened considerably since the initiation of the Plan, and based on the current exchange rates, the dollar value of the same cost savings would now be approximately $22 million.  In 2015, the Company identified additional cost savings opportunities and as a result of these actions the current estimate of annual cost savings is approximately $27 million.  The Company has already realized approximately $12 million of these cost savings, with approximately $3 million realized in 2014 and an additional $9 million in 2015.  The Company expects to realize approximately $6 million to $7 million of incremental savings in 2016 and the remaining savings in 2017.  The Company has also implemented price increases to further mitigate the impact of foreign currency movements.

In connection with the 2014 Restructuring Plan, the Company approved a plan to dispose of a certain business within the Color segment.  Production ceased in 2014 and the business met the criteria to be reported as a discontinued operation.  The pre-tax loss from discontinued operations, which includes restructuring costs, was not material in 2015 and $11.5 million in 2014.

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 from continuing operations (which exclude restructuring costs, acquisition related costs, and costs related to the 2014 proxy contest) and (2) percentage changes in revenue, operating income, diluted EPS, adjusted operating income, and adjusted diluted EPS on a local currency basis which eliminates the effects that result from translating its international operations into U.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, 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.

(1)

“Other” consists of acquisition related costs incurred in 2015 and proxy contest costs incurred in 2014. The Company incurred $0.8 million of acquisition related costs in 2015 and $3.2 million of proxy contest costs in 2014.

 

The following table summarizes the percentage change in the 2015 results compared to the 2014 results in the respective financial 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 of the respective business units before restructuring charges which are reported in the Corporate & Other segment.

The Company’s reportable segments consist of the Flavors & Fragrances, Color, and Asia Pacific segments.  The Asia Pacific segment, which was previously reported in the Corporate & Other segment, meets the quantitative thresholds outlined in Accounting Standards Codification (ASC) 280, Segment Reporting, to be reported separately as of December 31, 2015.

The results of operations for the Company’s businesses in Central and South America have been included in the Flavors & Fragrances segment, beginning in 2015.  Previously, they had been reported in the Corporate & Other segment.  In addition, the Flavors & Fragrances and Color segments have reassigned customer accounts and revised cost allocations amongst the businesses within their respective segments, resulting in changes in the underlying components of segment revenue and segment operating income.  All prior year results have been restated to reflect each of these changes.

Flavors & Fragrances

Revenue for the Flavors & Fragrances segment was $819.0 million in 2015 and $851.5 million in 2014, a decrease of 3.8%. Foreign exchange rates reduced revenue 6.7% in 2015. The decrease in revenue was primarily due to lower revenue in Europe ($31.8 million) and Latin America ($2.6 million) partially offset by higher revenue in North America ($1.8 million). The lower revenue in Europe was primarily a result of the impact of unfavorable foreign exchange rates ($40.9 million) partially offset by higher selling prices ($6.9 million) and volumes ($2.3 million). The lower revenue in Latin America was a result of the impact of unfavorable exchange rates ($6.3 million) partially offset by higher selling prices ($2.9 million) and volumes ($0.8 million). The higher revenue in North America was primarily a result of higher selling prices ($13.2 million) partially offset by the impact of unfavorable exchange rates ($9.7 million) and volumes ($1.8 million).

Gross margin increased 20 basis points to 27.1% in 2015 from 26.9% in 2014. The increase was primarily due to the impact of higher selling prices, product mix and savings associated with the 2014 Restructuring Plan partially offset by higher raw material costs.

Segment operating income for the Flavors & Fragrances segment was $121.9 million in 2015 and $120.9 million in 2014, an increase of 0.8%. Foreign exchange rates reduced segment operating income by 2.9% in 2015. The higher segment operating income was primarily a result of higher segment operating income in Europe ($2.3 million) and lower segment operating income in North America ($1.2 million). The higher operating income in Europe was primarily due to higher selling prices ($6.9 million), product mix ($4.3 million) and savings associated with the Restructuring Plan ($2.0 million) partially offset by higher raw material costs ($7.0 million), manufacturing and other costs ($3.6 million) and unfavorable exchange rates ($0.3 million). The lower operating income in North America was primarily due to higher raw material costs ($14.3 million), higher production and other costs ($3.5 million), unfavorable exchange rates ($1.8 million) and unfavorable product mix ($1.6 million) partially offset by higher selling prices ($13.2 million), savings associated with the 2014 Restructuring Plan ($5.1 million) and volumes ($1.7 million). Segment operating margin increased 70 basis points in 2015 to 14.9% from 14.2% in 2014.

 

Color

Revenue for the Color segment was $470.9 million in 2015 and $509.3 million in 2014, a decrease of 7.5%. Foreign exchange rates reduced segment revenue 8.9% in 2015. The decrease in revenue was primarily due to lower revenue in non-food colors ($30.2 million) and food and beverage colors ($8.2 million). The lower revenue in non-food colors was primarily due to the impact of unfavorable exchange rates ($18.1 million), lower volumes ($13.6 million), primarily specialty inks, and lower selling prices ($5.1 million) partially offset by higher volumes resulting from the Xennia acquisition ($6.6 million). The lower revenue in food and beverage colors was primarily due to the impact of unfavorable exchange rates ($27.4 million), partially offset by higher selling prices ($13.1 million) and volumes ($6.1 million), which includes approximately $4 million from a one-off fourth quarter sale of natural colors.

Gross margin for the Color segment decreased 130 basis points to 40.3% in 2015 from 41.6% in 2014. The decrease was primarily due to the impact of the lower volumes, primarily specialty inks, and higher raw material costs, partially offset by higher selling prices and product mix.

Segment operating income for the Color segment was $94.8 million in 2015 and $114.0 million in 2014, a decrease of 16.9%. Foreign exchange rates reduced segment operating income by 8.8% in 2015. The lower segment operating income was due to lower non-food colors ($20.0 million) partially offset by higher food and beverage colors ($0.8 million). The lower operating income for non-food colors was primarily due to lower volumes ($8.0 million), primarily specialty inks, unfavorable exchange rates ($4.9 million), lower selling prices ($5.1 million) and higher manufacturing and other costs ($6.1 million) partially offset by favorable product mix ($3.9 million). The higher operating income for food and beverage colors was primarily due to the higher selling prices ($13.1 million), and higher volumes ($3.2 million), which includes approximately $2 million from a one-off fourth quarter sale of natural colors, partially offset by higher raw material costs ($10.6 million) and unfavorable exchange rates ($5.2 million). Segment operating margin was 20.1% in 2015 and 22.4% in 2014.

Asia Pacific

Revenue for the Asia Pacific segment was $130.6 million in 2015 and $133.3 million in 2014, a decrease of 2.1%. Foreign exchange rates reduced segment revenue by 6.4% in 2015.  Higher volumes ($5.2 million) and selling prices ($0.8 million) were offset by unfavorable exchange rates ($8.6 million).

Gross margin for the Asia Pacific segment increased 60 basis points to 37.5% in 2015 from 36.9% in 2014.  The increase was primarily due to the higher selling prices and favorable product mix.

Segment operating income for the Asia Pacific segment was $25.5 million in 2015 and $25.1 million in 2014, an increase of 1.5%. Foreign exchange rates reduced segment operating income by 5.1% in 2015. The higher segment operating income was a result of the higher volumes ($1.9 million), product mix ($1.1 million) and selling prices ($0.8 million) partially offset by the impact of unfavorable exchange rates ($1.3 million) and higher manufacturing and other costs ($2.1 million). Segment operating margin was 19.5% in 2015 and 18.8% in 2014.

Corporate & Other

The Corporate & Other expenses were $75.8 million in 2015 and $129.4 million in 2014, a decrease of 41.4%, primarily due to lower restructuring costs and lower costs for performance based compensation.  The Company evaluates segment performance before restructuring costs, and reports all of the restructuring and other costs in the Corporate & Other segment.  Restructuring and other costs were $43.6 million and $90.6 million in 2015 and 2014, respectively.

RESULTS OF CONTINUING OPERATIONS

2014 vs. 2013

Revenue

Sensient’s revenue was approximately $1.4 billion in 2014 and $1.5 billion in 2013. The impact of foreign exchange rates reduced consolidated revenue by 1.1% in 2014.

Gross Profit

The Company’s gross margin was 33.7% in 2014 and 32.5% in 2013. The increase in gross margin is primarily due to an increase in selling prices. Restructuring costs reduced gross margin 20 basis points and 10 basis points in 2014 and 2013, respectively.

Selling and Administrative Expense

Selling and administrative expense as a percent of revenue was 24.7% in 2014 compared to 20.6% in 2013. The increase in selling and administrative expenses during 2014 was attributable to the increase in restructuring costs of $88.6 million recorded in 2014 compared to $30.0 million recorded in 2013. Restructuring and other costs increased selling and administrative expenses as a percent of revenue by 610 basis points and 200 basis points in 2014 and 2013, respectively.

 

Operating Income

Operating income was $130.7 million in 2014 compared to $173.8 million in 2013. The decrease in operating income was primarily attributable to the increase in restructuring costs in 2014 compared to 2013. Operating margins decreased 290 basis points to 9.0% in 2015 from 11.9% in 2014. Restructuring and other costs reduced operating margins by 630 basis points and 220 basis points in 2014 and 2013, respectively.

Additional information on segment results can be found in the Segment Information section.

Interest Expense

Interest expense was $16.1 million in both 2014 and 2013. The decrease in average interest rates offset the higher average outstanding debt balance.

Income Taxes

The effective income tax rate was 28.6% in 2014 and 27.5% in 2013. The effective tax rates for both 2014 and 2013 were affected by discrete items, including the favorable resolution of prior years’ tax matters and restructuring costs. In total, the discrete items and the impact of restructuring costs had no impact on the effective tax rate for 2014 and reduced the effective tax rate by 2.0% in 2013.

Restructuring Activities

In 2014, the Company announced that it was initiating its 2014 Restructuring Plan. The Company recorded $98.4 million of restructuring costs in 2014. For further information on the 2014 Restructuring Plan, see the discussion on pages 15 and 16 of Management’s Discussion and Analysis of Operations and Financial Condition.

In 2013, the Company successfully completed its 2013 restructuring program related to relocating the Flavors & Fragrances segment headquarters to Chicago, and generating operating efficiencies across all segments of the Company by consolidating multiple facilities throughout Europe and North America. The Company recorded total costs of $31.7 million in 2013 related to the 2013 restructuring program. The plan resulted in the reduction of global headcount of approximately 280 employees performing various functions. Management estimates that operating costs were reduced by approximately $12 million and $7 million as of December 31, 2014 and 2013, respectively.

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 from continuing operations (which exclude restructuring costs, and costs related to the 2014 proxy contest) and (2) percentage changes in revenue, operating income, diluted EPS, adjusted operating income, and adjusted diluted EPS on a local currency basis which eliminates the effects that result from translating its international operations into U.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, 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.

 

(1)

“Other” consists of $3.2 million of proxy contest costs incurred in 2014.

The following table summarizes the percentage change in the 2014 results compared to the 2013 results in the respective financial measures.

SEGMENT INFORMATION

The Company’s reportable segments consist of the Flavors & Fragrances, Color, and Asia Pacific segments.  The Asia Pacific segment, which was previously reported in the Corporate & Other segment, meets the quantitative thresholds outlined in ASC 280, Segment Reporting, to be reported separately as of December 31, 2015.

The results of operations for the Company’s businesses in Central and South America have been included in the Flavors & Fragrances segment, beginning in 2015.  Previously, they had been reported in the Corporate & Other segment.  In addition, the Flavors & Fragrances and Color segments have reassigned customer accounts and revised cost allocations amongst the businesses within their respective segments, resulting in changes in the underlying components of segment revenue and segment operating income.  All prior year results have been restated to reflect each of these changes.

Flavors & Fragrances

Revenue for the Flavors & Fragrances segment was $851.5 million in 2014 and $880.6 million in 2013, a decrease of 3.3%. Foreign exchange rates decreased revenue by 0.6% in 2014. The decrease in revenue was primarily due to lower revenue in North America ($29.4 million) and Latin America ($1.2 million) partially offset by higher revenue in Europe ($1.6 million). The lower revenue in North America is primarily due to lower volumes ($41.6 million), mainly lower natural ingredient volumes, and unfavorable exchange rates ($5.8 million) partially offset by higher selling prices ($18.0 million). The lower revenue in Latin America was primarily due to unfavorable exchange rates ($1.7 million) and lower volumes ($0.9 million) partially offset by higher selling prices ($1.4 million). The higher revenue in Europe was primarily due to favorable foreign exchange rates ($2.5 million) partially offset by unfavorable volumes ($0.9 million).

 

Gross margin increased 130 basis points to 26.9% in 2014 from 25.6% in 2013. The increase was primarily due to the impact of higher selling prices partially offset by the lower volumes.

Segment operating income for the Flavors & Fragrances segment was $120.9 million in 2014 and $121.8 million in 2013, a decrease of 0.8%. Foreign exchange rates reduced segment operating income by 0.7%. Higher profit in Latin America ($0.7 million) was offset by lower profit in North America ($0.7 million) and Europe ($0.9 million). The higher profit in Latin America was primarily due to higher selling prices ($1.4 million) partially offset by unfavorable exchange rates ($0.3 million) and other items ($0.4 million). The lower profit in North America was primarily due to lower volumes ($11.6 million), mainly natural ingredients, higher manufacturing and other costs ($8.6 million) and unfavorable exchange rates ($1.0 million)  partially offset by higher selling prices ($18.0 million), product mix ($1.0 million) and savings associated with the restructuring program ($1.5 million). The lower profit in Europe was primarily due to higher employee costs ($4.4 million) partially offset by favorable raw material costs ($1.7 million), manufacturing and other costs ($1.4 million) and exchange rates ($0.5 million). Segment operating margin for the Flavors & Fragrances segment was 14.2% and 13.8% in 2014 and 2013, respectively.

Color

Revenue for the Color segment was $509.3 million in 2014 and $496.3 million in 2013, an increase of 2.6%. Foreign exchange rates reduced revenue by 1.1% in 2014.  The increase in revenue was primarily due to higher sales of non-food colors ($12.4 million) and food and beverage colors ($0.6 million). The higher sales of non-food colors was primarily due to higher volumes ($12.4 million) and the higher sales of food and beverage colors was primarily due to higher selling prices ($6.5 million) partially offset by unfavorable exchange rates ($5.0 million) and lower volumes ($1.0 million).

Gross margin for the Color segment increased 70 basis points to 41.6% in 2014 from 40.9% in 2013. The increase was primarily due to the impact of higher selling prices and the higher volumes.

Segment operating income for the Color segment was $114.0 million in 2014 and $107.2 million in 2013, an increase of 6.3%. Foreign exchange rates decreased segment operating income by 0.7% in 2014. The increase was primarily due to non-food colors ($5.4 million) and food and beverage colors ($1.4 million). The higher profit for non-food colors was primarily due to the higher volumes and favorable product mix ($10.5 million) partially offset by higher salaries and wages ($3.0 million) and raw material costs ($2.1 million). The higher profit for food and beverage colors was primarily due to higher selling prices ($6.5 million) partially offset by higher raw material costs ($1.6 million), lower volumes and mix ($1.1 million), higher manufacturing and other costs ($1.3 million) and higher salaries and wages ($1.1 million). Segment operating margin for the Color segment increased 80 basis points to 22.4% in 2014 from 21.6% in 2013.

Asia Pacific

Revenue for the Asia Pacific segment was $133.3 million in 2014 and $132.6 million in 2013, an increase of 0.5%. Foreign exchange rates reduced revenue by 3.3% in 2014.  The higher revenue was primarily due to higher volumes ($3.7 million) and selling prices ($1.3 million) partially offset by unfavorable exchange rates ($4.3 million).

Gross margin for the Asia Pacific segment increased 10 basis points to 36.9% in 2014 from 36.8% in 2013.  The increase was primarily due to the higher volumes and selling prices.

Segment operating income for the Asia Pacific segment was $25.1 million in 2014 and $22.2 million in 2013, an increase of 13.4%. Foreign exchange rates reduced segment operating income by 2.8% in 2014. The higher profit was primarily a result of the higher volumes ($1.7 million), selling prices ($1.3 million) and lower other costs ($0.5 million) partially offset by the impact of unfavorable exchange rates ($0.6 million). Segment operating margin was 18.8% in 2014 and 16.7% in 2013.

Corporate & Other

Corporate & Other expenses were $129.4 million in 2014 and $77.4 million in 2013, an increase of 67.1%. The Company evaluates segment performance before restructuring costs, and reports all of the restructuring and other costs in the Corporate & Other segment.  Restructuring and other costs were $90.6 million and $31.7 million in 2014 and 2013, respectively.  The increased Corporate & Other costs in 2014 are due to the higher restructuring costs, offset by lower expenses for executive compensation.

LIQUIDITY AND FINANCIAL POSITION

Financial Condition

The Company’s financial position remains strong. The Company entered into an amendment to its credit agreement in November 2015, to increase and extend the maturity of its credit facility. The amended facility consists of a $170 million term loan and a $350 million revolving loan agreement, and it replaces the $450 million credit facility that that Company entered into in October 2014. The Company also issued new fixed rate notes of €67 million in November 2015. Proceeds from the new term loan and the sale of notes were used to refinance existing debt.

 

The Company expects its cash flow from operations, the new debt agreements and its existing debt capacity can be used to meet 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 2016 results.

Cash Flows from Operating Activities

Net cash provided by operating activities was $128.1 million in 2015, $189.2 million in 2014 and $153.6 million in 2013.  Operating cash flow provided the primary source of funds for operating needs, capital expenditures, shareholder dividends, acquisitions, and some share repurchases.  The decrease in net cash provided by operating activities in 2015 is primarily due to the impact of foreign currency, higher payments of restructuring costs, and higher receivable balances.  The increase in net cash provided by operating activities in 2014 was primarily due to higher earnings and working capital reductions in the second half of 2014.

Cash Flows from Investing Activities

Net cash used in investing activities was $75.8 million in 2015, $79.1 million in 2014 and $98.2 million in 2013. Capital expenditures were $79.9 million in 2015, $79.4 million in 2014 and $104.2 million in 2013.

Cash Flows from Financing Activities

Net cash used in financing activities was $50.1 million in 2015, $98.6 million in 2014 and $48.2 million in 2013. The Company had a net increase in debt of $174.6 million in 2015, a net increase in debt of $85.8 million in 2014 and a net decrease in debt of $3.7 million in 2013. In 2015, Sensient purchased $176.6 million of Company stock which settled before December 31, 2015, and purchased $137.2 million in 2014 of Company stock which settled before December 31, 2014. There were no purchases of Company stock in 2013.

The Company has paid uninterrupted quarterly cash dividends since commencing public trading in its stock in 1962. In the third quarter of 2015, the Company increased its quarterly dividend from 25 cents per share to 27 cents per share. Dividends paid per share were $1.04 in 2015, 98 cents in 2014 and 91 cents in 2013. Total dividends paid were $48.1 million, $47.9 million and $45.5 million in 2015, 2014, and 2013, respectively.

ISSUER PURCHASES OF EQUITY SECURITIES

Sensient purchased 2.7 million shares of Company stock in 2015 for a total cost of $178.0 million and 2.5 million shares of Company stock in 2014 for a total cost of $138.3 million. There were no purchases of Company stock in 2013. In July 2014, the Board approved a share repurchase program under which the Company was authorized to repurchase five million shares of Company stock in addition to amounts remaining from a prior Board authorization. As of December 31, 2015, 2.1 million shares were available to be repurchased under existing authorizations. The Company’s share repurchase program has no expiration date.

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, property, plant and equipment, and prepaid expenses. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas:

Revenue Recognition

The Company recognizes revenue (net of estimated discounts, allowances and returns) when title passes, the customer is obligated to pay the Company and the Company has no remaining obligations. Such recognition typically corresponds with the shipment of goods.

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 ASC 350, Intangibles – Goodwill and Other, in the third quarter of 2015. 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 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 has three reporting units that had goodwill recorded and were tested for impairment. All three reporting units had fair values that were over 100% 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.

 

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.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method with the exception of certain locations of the Flavors & Fragrances Group where cost is determined using a weighted average method.  Market 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.  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 of market.

Commitments and Contingencies

The Company is subject to litigation and other legal proceedings arising in the ordinary course of its businesses or arising under provisions related to the protection of the environment. 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, operating leases, manufacturing purchases and pension benefit obligations. The Company had unrecognized tax benefits of $6.1 million as of December 31, 2015. 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 of December 31, 2015.

PAYMENTS DUE BY PERIOD

 

NEW PRONOUNCEMENTS

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and noncurrent in a classified balance sheet. This guidance is effective for interim and annual periods beginning after December 31, 2016, with early adoption permitted. We are currently evaluating the expected impact of this standard, and do not expect it to be material to our financial statements.

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires the acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The financial statements should contain the effect on earnings of changes in depreciation, amortization or other income effects calculated as if the accounting had been completed at the acquisition date.  This guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted.  The impact of this standard will not have a significant impact on the Company’s financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory.  Under this guidance, inventory that is accounted for using the first-in, first-out or average cost method shall be measured at the lower of cost or net realizable value, as opposed to the lower of cost or market measurement under current guidance. This guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. This new guidance is required to be retrospectively applied to all prior periods.  We are currently evaluating the expected impact of this standard.

In July 2015, the FASB affirmed its proposed one-year deferral of the effective date for ASU No. 2014-09, Revenue from Contracts with Customers.  Under this proposal, the requirements of the new standard are effective for interim and annual periods beginning after December 15, 2017.  The proposal also permits entities to adopt the standard for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the expected impact of this standard.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability.  Also, on August 18, 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, to clarify that the SEC staff would not object to deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line-of-credit arrangement.  This guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. This new guidance is required to be retrospectively applied to all prior periods. The impact of this standard will not have a significant impact on the Company’s financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements as of December 31, 2015.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

The Company is exposed to market risks, including changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures on a consolidated basis, the Company nets the exposures to take advantage of natural offsets. The Company also enters into various derivative transactions for some of the remaining exposures pursuant to the Company’s policies covering hedging practices. The financial impacts of these hedging instruments are offset by corresponding changes in the underlying exposures being hedged.

The Company does not hold or issue derivative financial instruments for trading purposes. Note 1 and Note 5 to the Consolidated Financial Statements include a discussion of the Company’s accounting policies for financial instruments.

A key part of the Company’s strategy is to expand into new geographic markets. Because the Company manufactures and sells its products throughout the world, it is exposed to movements in foreign currency exchange rates. The major foreign currency exposures involve the markets in Western Europe, Latin America and Canada. The primary purpose of the Company’s foreign currency hedging activities is to protect against the volatility associated with foreign currency sales, purchases of materials, and other assets and liabilities created during the normal course of business. The Company generally utilizes foreign exchange contracts with durations of less than 18 months that may or may not be designated as cash flow hedges under ASC 815, Derivatives and Hedging. The net fair value of these instruments, based on dealer quotes, was a liability of $0.2 million and $0.1 million as of December 31, 2015 and 2014, respectively. At December 31, 2015, the potential gain or loss in the fair value of the Company’s outstanding foreign exchange contracts, assuming a hypothetical 10% fluctuation in the currencies of such contracts, would be approximately $2.6 million. However, any change in the value of the contracts, real or hypothetical, would be significantly offset by a corresponding change in the value of the underlying hedged items. In addition, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

The Company has certain debt denominated in Euros and Swiss Francs. These non-derivative debt instruments act as partial hedges of the Company’s Euro and Swiss Franc net asset positions. The potential increase or decrease in the annual U.S. dollar interest expense of the Company’s outstanding foreign currency-denominated debt, assuming a hypothetical 10% fluctuation in the currencies of such debt, would be approximately $0.3 million at December 31, 2015. However, any change in interest expense from fluctuations in currency, real or hypothetical, would be significantly offset by a corresponding change in the value of the foreign income before interest. In addition, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

 

The Company manages its debt structure and interest rate risk through the use of fixed rate and floating rate debt and through the use of derivatives. The Company’s primary exposure is to interest rates in the U.S. and Western Europe. At December 31, 2015, the potential increase or decrease in annual interest expense, assuming a hypothetical 10% fluctuation in interest rates of floating rate debt, would be approximately $0.5 million.

The Company is the purchaser of certain commodities, such as corn, sugar, soybean meal and fruits. The Company generally purchases these commodities based upon market prices that are established with the vendor as part of the purchase process. In general, the Company does not use commodity financial instruments to hedge commodity prices due to a high correlation between the commodity cost and the ultimate selling price of the Company’s products. On occasion, the Company may enter into non-cancelable forward purchase contracts, as deemed appropriate, to reduce the effect of price fluctuations on future manufacturing requirements.

Item 8.

Financial Statements and Supplementary Data.

The financial statements required by this item are set forth on pages 28 through 53 below and the supplementary data required by this item are set forth on page 10 above.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s President and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, of the effectiveness, as of December 31, 2015, of the design and operation of the disclosure controls and procedures, as defined in Rule 13a-15(e) of the Act. Based upon that evaluation, the Company’s President and Chief Executive Officer and its Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of December 31, 2015.

Management’s Report on Internal Control over Financial Reporting. The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Act.  It is management’s policy to maintain a control-conscious environment through an effective system of internal accounting controls. These controls are supported by the careful selection of competent and knowledgeable personnel and by the communication of standard accounting and reporting policies and procedures throughout the Company. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015.  In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013 Framework).  Based on that assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015.

The Company’s internal control over financial reporting as of December 31, 2015, has been audited by Ernst & Young LLP, an independent registered public accounting firm. Their opinion on the Company’s internal control over financial reporting is set forth on page 55 below.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2015, that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.

Other Information.

None.

 

	Report of Independent Registered Public Accounting Firm	54
	Consolidated Balance Sheets – December 31, 2015 and 2014	30
	Consolidated Statements of Earnings – Years ended December 31, 2015, 2014 and 2013	28
	Consolidated Statements of Comprehensive Income – Years ended December 31, 2015, 2014 and 2013	29
	Consolidated Statements of Shareholders’ Equity – Years ended December 31, 2015, 2014 and 2013	32
	Consolidated Statements of Cash Flows – Years ended December 31, 2015, 2014 and 2013	31
	Notes to Consolidated Financial Statements	33-53

Schedule II – Valuation and Qualifying Accounts

56

		Years Ended December 31,
(in thousands except per share amounts)		2015				2014				2013
Revenue		$	1,375,964			$	1,447,821			$	1,462,126
Cost of products sold			921,531				959,311				987,080
Selling and administrative expenses			288,092				357,845				301,266
Operating income			166,341				130,665				173,780
Interest expense			16,945				16,067				16,147
Earnings before income taxes			149,396				114,598				157,633
Income taxes			42,149				32,827				43,335
Earnings from continuing operations			107,247				81,771				114,298
Loss from discontinued operations, net of tax			(462	)			(8,125	)			(1,003	)
Net earnings		$	106,785			$	73,646			$	113,295
Earnings per common share:
Basic:
Continuing operations		$	2.34			$	1.69			$	2.30
Discontinued operations			(0.01	)			(0.17	)			(0.02	)
Earnings per common share		$	2.33			$	1.52			$	2.28
Diluted:
Continuing operations		$	2.32			$	1.67			$	2.29
Discontinued operations			(0.01	)			(0.17	)			(0.02	)
Earnings per common share		$	2.31			$	1.51			$	2.27
Weighted average number of common shares outstanding:
Basic			45,910				48,525				49,755
Diluted			46,204				48,819				49,934

(in thousands)		Years Ended December 31,
		2015				2014				2013
Net earnings		$	106,785			$	73,646			$	113,295
Cash flow hedges adjustment, net of tax of $61, $153 and $50, respectively			(160	)			423				(134	)
Pension adjustment, net of tax of $613, $226 and $3,675, respectively			777				1,598				5,294
Foreign currency translation on net investment hedges			7,542				12,677				(4,020	)
Tax effect of current year activity on net investment hedges			(2,966	)			(4,947	)			1,810
Foreign currency translation on long-term intercompany loans			(10,681	)			(8,325	)			5,781
Other foreign currency translation			(79,446	)			(92,556	)			1,856
Total Comprehensive Income (Loss)		$	21,851			$	(17,484	)		$	123,882

(in thousands except share and per share amounts)		December 31,
Assets		2015				2014
Current Assets:
Cash and cash equivalents		$	11,997			$	20,329
Trade accounts receivable, less allowance for losses of $3,871 and $3,838, respectively			232,047				228,907
Inventories			409,159				449,409
Prepaid expenses and other current assets			44,673				37,713
Deferred income taxes			24,438				21,735
Assets held for sale			31,029				1,296
Total current assets			753,343				759,389
Other assets			79,561				77,376
Intangible assets – at cost, less accumulated amortization of $15,176 and $14,390, respectively			9,209				8,760
Goodwill			399,646				424,114
Property, Plant and Equipment:
Land			33,975				42,868
Buildings			274,318				295,381
Machinery and equipment			664,917				723,631
Construction in progress			62,515				54,579
			1,035,725				1,116,459
Less accumulated depreciation			(566,047	)			(620,892	)
			469,678				495,567
Total assets		$	1,711,437			$	1,765,206
Liabilities and Shareholders’ Equity
Current Liabilities:
Trade accounts payable		$	95,442			$	99,033
Accrued salaries, wages and withholdings from employees			23,530				30,010
Other accrued expenses			61,701				76,383
Income taxes			7,504				3,591
Short-term borrowings			20,655				15,888
Liabilities held for sale			4,090				—
Total current liabilities			212,922				224,905
Deferred income taxes			12,970				—
Other liabilities			7,534				17,372
Accrued employee and retiree benefits			19,007				24,983
Long-term debt			613,877				451,011
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			109,974				110,969
Earnings reinvested in the business			1,302,302				1,243,627
Treasury stock, 9,174,843 and 6,529,891 shares, respectively, at cost			(402,483	)			(227,929	)
Accumulated other comprehensive loss			(170,062	)			(85,128	)
			845,127				1,046,935
Total liabilities and shareholders’ equity		$	1,711,437			$	1,765,206

(in thousands)		Years ended December 31,
		2015				2014				2013
Cash Flows from Operating Activities
Net earnings		$	106,785			$	73,646			$	113,295
Adjustments to arrive at net cash provided by operating activities:
Depreciation and amortization			47,939				51,456				52,016
Share-based compensation			1,598				6,265				8,430
Loss on assets			13,190				70,745				695
Deferred income taxes			(4,452	)			(16,780	)			(6,178	)
Changes in operating assets and liabilities:
Trade accounts receivable			(21,721	)			(10,582	)			3,466
Inventories			3,041				64				(30,217	)
Prepaid expenses and other assets			2,698				6,479				616
Accounts payable and other accrued expenses			(8,792	)			6,745				3,606
Accrued salaries, wages and withholdings from employees			(2,851	)			(365	)			5,384
Income taxes			(5,520	)			7,047				(100	)
Other liabilities			(3,868	)			(5,532	)			2,540
Net cash provided by operating activities			128,047				189,188				153,553
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment			(79,941	)			(79,398	)			(104,246	)
Proceeds from sale of assets			12,912				1,029				6,225
Acquisition of new business			(8,393	)			—				—
Other investing activities			(372	)			(780	)			(208	)
Net cash used in investing activities			(75,794	)			(79,149	)			(98,229	)
Cash Flows from Financing Activities
Proceeds from additional borrowings			331,277				213,985				194,973
Debt payments			(156,662	)			(128,186	)			(198,686	)
Purchase of treasury stock			(176,566	)			(137,192	)			—
Dividends paid			(48,110	)			(47,893	)			(45,513	)
Proceeds from options exercised and other equity transactions			(73	)			733				1,007
Net cash used in financing activities			(50,134	)			(98,553	)			(48,219	)
Effect of exchange rate changes on cash and cash equivalents			(10,451	)			(10,993	)			(2,331	)
Net (decrease) increase in cash and cash equivalents			(8,332	)			493				4,774
Cash and cash equivalents at beginning of year			20,329				19,836				15,062
Cash and cash equivalents at end of year		$	11,997			$	20,329			$	19,836
Cash paid during the year for:
Interest		$	16,839			$	16,158			$	16,168
Income taxes			46,281				42,335				47,436
Capitalized interest			944				1,449				1,875

(in thousands except share and per share amounts)		Common				Additional Paid-in				Earnings Reinvested in the				Treasury Stock								Accumulated Other Comprehensive
		Stock				Capital				Business				Shares				Amount				Income (Loss)
Balances at December 31, 2012		$	5,396			$	98,253			$	1,150,092				4,264,821			$	(95,258	)		$	(4,585	)
Net earnings											113,295
Other comprehensive income																							10,587
Cash dividends paid – $0.91 per share											(45,513	)
Share-based compensation							8,430
Stock options exercised							(63	)							(47,584	)			1,063
Non-vested stock issued upon vesting							(2,113	)							(94,600	)			2,113
Benefit plans							385								(26,635	)			595
Other							227								9,825				(220	)
Balances at December 31, 2013			5,396				105,119				1,217,874				4,105,827				(91,707	)			6,002
Net earnings											73,646
Other comprehensive income																							(91,130	)
Cash dividends paid – $0.98 per share											(47,893	)
Share-based compensation							6,265
Stock options exercised							(161	)							(27,001	)			753
Non-vested stock issued upon vesting							(1,206	)							(40,300	)			1,206
Benefit plans							510								(18,185	)			406
Purchase of treasury stock															2,500,000				(138,288	)
Other							442								9,550				(299	)
Balances at December 31, 2014			5,396				110,969				1,243,627				6,529,891				(227,929	)			(85,128	)
Net earnings											106,785
Other comprehensive income																							(84,934	)
Cash dividends paid – $1.04 per share											(48,110	)
Share-based compensation							1,598
Stock options exercised							(356	)							(21,000	)			788
Non-vested stock issued upon vesting							(3,080	)							(74,300	)			3,080
Benefit plans							416								(15,165	)			546
Purchase of treasury stock															2,733,301				(178,037	)
Other							427								22,116				(931	)
Balances at December 31, 2015		$	5,396			$	109,974			$	1,302,302				9,174,843			$	(402,483	)		$	(170,062	)

		Years Ended December 31,
(in thousands except per share amounts)		2015				2014				2013
Numerator:
Net earnings from continuing operations		$	107,247			$	81,771			$	114,298
Denominator:
Denominator for basic earnings per share - weighted average common shares			45,910				48,525				49,755
Effect of dilutive securities			294				294				179
Denominator for diluted earnings per share - diluted weighted average shares outstanding			46,204				48,819				49,934
Earnings per common share from continuing operations
Basic		$	2.34			$	1.69			$	2.30
Diluted		$	2.32			$	1.67			$	2.29

						2015								2014
(In thousands except weighted average amortization years)		Weighted Average Amortization Years				Cost				Accumulated Amortization				Cost				Accumulated Amortization
Technological know-how			20.0			$	7,387			$	(4,738	)		$	6,459			$	(4,352	)
Customer relationships			20.0				6,575				(4,332	)			6,938				(4,170	)
Patents, trademarks, non-compete agreements and other			19.3				10,423				(6,106	)			9,753				(5,868	)
Total finite-lived intangibles			19.7			$	24,385			$	(15,176	)		$	23,150			$	(14,390	)

(In thousands)		Flavors & Fragrances				Color				Asia Pacific				Consolidated
Balance as of December 31, 2013		$	136,637			$	317,323			$	3,309			$	457,269
Currency translation impact			(10,614	)			(22,050	)			(333	)			(32,997	)
Impairment (1)			—				(158	)			—				(158	)
Balance as of December 31, 2014			126,023				295,115				2,976				424,114
Currency translation impact			(11,675	)			(17,272	)			(26	)			(28,973	)
Acquisition			—				4,505				—				4,505
Balance as of December 31, 2015		$	114,348			$	282,348			$	2,950			$	399,646