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Exhibit 13.1

 

 

2 0 1 4 A N N U A L R E P O R T growing shareholder value

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Sensient Technologies Corporation is a leading global developer, manufacturer and marketer of advanced color, flavor and fragrance systems. Sensient uses state-ofthe-art technologies at facilities around the world to develop and manufacture customized food and beverage systems Pharmaceutical colors, coatings and excipients; cosmetic color and ingredient systems; household and industrial product formulations; digital inks; and other specialty colors and chemicals. Financial Highlights in thousands except per share Years ended December 31, 2014 2013 % Change % Change Local Currency Results from Continuing Operations Revenue $1,447,821 $1,462,126 (1%) 0% Operating Income from Continuing Operations 130,665 173,780 (25%) (24%) Net Earnings from Continuing Operations 81,771 114,298 (28%) (27%) Diluted Earnings per Share from Continuing Operations 1.67 2.29 (27%) (26%) Adjusted Results from Continuing Operations* Adjusted Operating Income* 221,215 205,515 8% 9% Adjusted Net Earnings* 147,307 136,257 8% 9% Adjusted Diluted Earning per Share* 3.02 2.73 11% 12% Cash Flow Activity Cash Flows from Operating Activities 189,188 153,553 23% Capital Expenditures 79,398 104,246 (24%) Free Cash Flow 109,790 49,307 123% Total Debt 466,899 355,174 31% Dividends per share 0.98 0.91 8% * These are non-GAAP financial measures. Please see page 15 of this report (reference to Non-GAAP Financial Measures in MD&A section) for a reconciliation of these measures to GAAP and a discussion of why the Company is presenting this information.

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Letter to shareholders “ Our strategy is working. We are delivering operating profit growth, improved margins and strong cash flows. In addition, we have taken numerous significant actions that demonstrate our ongoing commitment to provide sustainable, long ‐ term value to our shareholders.” Paul Manning President and Chief Executive Officer Performance and Progress Sensient’s 2014 earnings per share increased 11% over last year’s performance to $3.02 per share. Operating margin increased 120 basis points to 15.3%, as each of our operating groups delivered higher margins this year. Overall, we had a very positive year that exceeded our performance objectives. Operating cash flow was also strong in 2014, increasing 23% to $189 million, and free cash flow more than doubled to $110 million. Return on invested capital also improved 50 basis points to 10.2%. We will continue to improve returns by delivering solid earnings growth, rationalizing our production assets, reducing our working capital levels and optimizing our capital allocation strategy. Revenue was stable in local currency terms, as we deliberately rationalized non ‐ strategic and low ‐ margin business. We began these efforts in 2010 in the Color Group and effectively concluded them in the first half of 2014. Revenue rationalization was more significant in the Flavors & Fragrances Group during 2014, and these actions will continue to impact the Group’s revenue growth in 2015. Consolidated revenue grew by 2.5% in local currency, excluding the impact of the rationalized business. Color Group – Another Strong Year The Color Group had another strong year in 2014, producing local currency revenue growth of 4%, and profit growth of 7%. The Color Group’s operating margins improved to 22.6%, an increase of 80 basis points over 2013. The Color Group’s 2014 performance was driven by its technical capabilities, innovation and market reach, and these strengths will continue to drive new growth. Sensient continues to build on our leadership in colors for foods and beverages. We stand out from competitors because of our unique ability to provide a full spectrum of both synthetic and natural color solutions. In 2014, our proprietary natural blue and brown color systems increased sales as manufacturers increasingly seek to extend their clean ‐ label offerings. The Color Group’s cosmetics business also performed well in 2014, and we expect sustainable growth moving forward. In 2015, we will 1

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2 0 1 4 N E T I N C O M E MILLION $147 2 2 0 1 4 C A S H F L O W MILLION $189 open a new Center of Excellence just outside Paris, where we can showcase our capabilities in cosmetics and work closely with manufacturers from around the world. This new facility will enable us to strengthen ties with customers, accelerate product development and increase sales. In 2014, our industrial ink business performed especially well, and we see significant opportunities for growth in this segment. Our proprietary line of aqueous colors for digital printing is environmentally friendly and provides tremendous advantages, including brighter colors and faster printing speeds, to manufacturers of clothing, textiles and other products. The Color Group’s performance in the last five years serves as a model for the entire Company. When I joined Sensient in 2009, the Color Group’s annual revenue was $375 million, operating income was just under $59 million and the operating margin was 15.7%. During the last five years, the Group’s businesses have delivered strong growth and expanded operating margins by focusing on product development and sales coverage, improving the product mix to emphasize value ‐ added solutions and reducing costs. From 2009 to 2014, Color Group revenue increased 35%, while eliminating $50 million in low-margin business, operating profit has nearly doubled and our operating margin increased by 690 basis points to 22.6%. Flavors & Fragrances Group – Change and Progress In 2013, we began implementing a series of strategic initiatives in the Flavors & Fragrances Group to match the success of the Color Group. We instituted processes used by the Color Group to foster new product development and strengthened our sales and technical teams. We also realigned our commercial and technical activities around industry segments that better serve our customers. In 2014, we began to eliminate non ‐ strategic product lines and products that do not generate adequate margins. We will continue to evaluate our product offerings with the goal of utilizing our unique ingredients within higher ‐ margin, value ‐ added flavor and fragrance systems that are differentiated from the competition. We are also streamlining production to improve plant utilization and lower costs. These strategic changes and restructuring efforts will temper our revenue growth in 2015 for the Flavors & Fragrances Group. We do expect to see improvement in both gross margins and operating margins next year. The Group remains on track to achieve operating margins in the high ‐ teens and consistent operating profit growth. Sensient’s new state ‐ of ‐ the ‐ art Flavors & Fragrances Group headquarters, located just outside Chicago, underscores our commitment to product development and customer engagement. At the new headquarters, we can better showcase our broad product portfolio, develop new solutions and collaborate with customers. Overall, the Flavors & Fragrances Group is on track. While the Group’s operating profit did not grow, we saw significant improvement in the gross profit margin, which increased by 130 basis points. Operating margins also improved, even with our investment in sales and technical personnel. Several of the Group’s businesses performed very well and achieved double ‐ digit profit growth in 2014. Highlights include new wins with yogurt products; a growing beverage flavors business; and improved profitability and margin growth for our natural ingredients business. 2

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S E N S I E N T T E C H N O L O G I E S C O R P O R AT I O N 2 0 1 4   Building Shareholder Value Early in 2014, the Company announced a fourpart plan to enhance shareholder value that included a dividend increase, share repurchases, restructuring savings and governance improvements. Each of these elements aligns with our objective to provide sustainable, long-term value to shareholders. In 2014, the Board of Directors increased the quarterly dividend 9% to 25 cents per share, or $1 per share on an annualized basis. Sensient has increased the quarterly dividend almost 40% over the last six years. The Board recognizes that dividends are an important mechanism for returning capital to shareholders. In the second quarter of 2014, the Company repurchased two million shares. In July, our Board approved a new share repurchase authorization, allowing the Company to repurchase an additional five million shares. The new authorization gives the Company the flexibility to repurchase shares over the next several years, and we purchased another 500,000 shares in the fourth quarter. Including dividend payments, Sensient returned $185 million to shareholders in 2014, and we will continue to repurchase shares on an opportunistic basis. The 2014 restructuring program was implemented to eliminate underperforming businesses and consolidate manufacturing operations. These actions are on track and we expect to complete most consolidation activities by the end of 2015. Our restructuring actions will provide ongoing operating efficiencies and reduced capital requirements. Sensient made a number of enhancements to our governance and compensation policies in 2014. We adopted a majority voting standard for uncontested Board elections, appointed an independent lead director and added two new independent directors. We will continue to evaluate potential director candidates, consistent with our ongoing commitment to Board refreshment. We have also more closely aligned pay to performance over the past few years, including linking 100% of share-based compensation awards for officers to performance targets. In total, these actions improved the Company’s cost structure, returned significant cash to shareholders and demonstrated our commitment to maintaining best ‐ in ‐ class governance and compensation practices. Investors responded favorably to these actions as our stock price hit an all ‐ time high near the end of last year. Total shareholder return for 2014, with reinvestment of dividends, was 27%, significantly in excess of the 15% earned by the S&P 400 Specialty Chemicals Index. We will continue to take actions focused on delivering sustainable, long ‐ term value to our shareholders. A Promising Future It was very gratifying to lead the Company in a positive direction during my first year as Chief Executive Officer. Sensient’s Color Group has consistently delivered strong results, and the Flavors & Fragrances Group is well positioned to make significant progress in 2015 and beyond. We have unmatched technologies, robust product development capabilities, deep market reach throughout our businesses and great people. We are now strengthening our ability to leverage these advantages in a number of ways. Notably, the Company is sharpening our focus on customers. We aim to be an indispensable creative and strategic partner to our customers— not simply a supplier. Our investment in exceptional scientific, technical and sales personnel plays a critical role in our ability to attract and retain customers. The pieces continue to fall into place across the Company. I want to conclude by thanking Sensient’s shareholders, customers, employees and Board members for your ongoing support. I have high expectations for the Company and look forward to sharing news of our progress. Sincerely, Paul Manning President and Chief Executive Officer

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RATEGIC Initiatives Sensient’s long-term strategy positions the Company for increased profitability and sustainable growth. The components of our strategy enable us to succeed in growing markets and deliver value to shareholders. E M P H A S I S O N Sensient is accelerating our shift to a product portfolio of complex, technology-driven systems that cannot be easily duplicated by our competitors. Our specialty systems bring unique attributes to our customers’ end products, which drives success in highly competitive consumer segments. Our products stand apart in the marketplace, enabling us to attract new projects, retain customers for the long term and achieve higher margins. We continue to exit low-margin, non-strategic businesses that do not offer growth opportunities or strong value to our customers. E N H A N C E D C A P I T A L A L L O C AT I O N The Company continues to improve capital allocation by reinvesting in projects with the highest return on invested capital, while maintaining investment-grade debt levels. We are also delivering shareholder value with a substantial dividend and stock buyback program.  

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I N D U S T R Y- L E A D I N G Personnel Sensient continually seeks out personnel with creative initiative, competitive energy and a commitment to serving customers and advancing the Company’s standing in the marketplace. We recruit top-level scientists, technicians and sales professionals with deep industry experience. Our personnel provide insight and expertise valued by our customers. O P T I M I Z E D M A N U FA C T U R I N G A C O M M I T M E N T TO O R G A N I C G R O W T H A N D I N N O V AT I O N Sensient is expanding our business by strengthening our engagement with customers at all stages of product development and manufacturing. We are also driving organic growth through our steadfast commitment to innovation and new product development.  

 

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COLOR Group Sensient’s Color Group is the leading global developer of high-performance colors and specialty ingredients for major consumer product segments. Through a robust R&D program, we advance the science of color and provide ongoing innovations that enable our customers to excel in highly competitive markets. We focus on developing unique products that deliver value to our customers. MARKETS WE SERV E % O F R E V E N U E G E N E R A T E D 59 % 22 % 14 % Food and Beverage Colors Cosmetic Ingredients Specialty Inks  

 

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S E N S I E N T T E C H N O L O G I E S C O R P O R AT I O N 2 0 1 4 2014 RESULTS S A L E S R E V E N U E 4 % 1 % O P E R AT I N G I N C O M E A S E N S E O F P E R S P E C T I V E Pharmaceutical Excipients Technical Colors Sensient’s Color Group has made significant progress over the last five years. We have eliminated non-strategic, low-margin operations to sharpen our focus on innovative, high-margin product lines. Since 2009, even while eliminating $50 million in low-margin revenue, overall Group revenues have increased by 35% and operating income has nearly doubled.  

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OLOR Group I N N OVAT I V E C O LOR S O LU T I O N S LARGEST PORTFOLIO Sensient partners with our customers to help them recognize consumer trends and benefit from the latest color innovations. We offer the broadest spectrum of natural and synthetic color systems for food and non-food markets available in the industry. A REVOLUTIONARY CHANGE IN DIGITAL PRINTING Sensient’s high-performance aqueous color systems for digital printing are enabling clothing, textile and other industrial manufacturers to make significant production and logistics changes that greatly improve their businesses. With Sensient technology, our customers can create a versatile selection of products using rapid, short-run printing that reduces cost and minimizes environmental impacts.  

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S E N S I E N T T E C H N O L O G I E S C O R P O R AT I O N 2 0 1 4 Sensient’s comprehensive approach to supply chain management enables our customers to maintain efficient operations and protect the value of their brands. Our emphasis on product safety through sourcing, manufacturing and testing provides peace of mind to our customers G L O B A L I N N O V AT I O N GLO CAL L O C A L A P P L I C AT I O N While Sensient’s R&D centers develop technologies with global scope, our regional service labs work closely with customers to formulate applications for local markets. The Company’s best-in-class technical, regulatory and sales services strengthen our ties to customers. S U P P LY C H A I N S A F E T Y it’s only N AT U R A L CLEAN-LABEL FOOD AND BEVERAGE Consumers are increasingly seeking naturally sourced products but still want vibrant, colorful products. Sensient is making significant progress in closing the gap between natural and synthetic colors. Our proprietary natural blue greatly expands the range of natural colors available across all food and beverage categories.  

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Group Sensient’s Flavors & Fragrances Group is a leading provider of specialty systems for manufacturers of foods, beverages and household products. We combine proprietary technologies, scientific expertise and consumer insight to create unique solutions that enable our customers to excel in competitive markets. We will achieve higher margins and sustainable growth by emphasizing value-added, technology-based flavor and fragrance systems. MARKETS WE SERV E % O F R E V E N U E G E N E R A T E D 27 % 27 % 20 % 10 % Natural Ingredients Sweet Savory Fragrance  

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S E N S I E N T T E C H N O L O G I E S C O R P O R AT I O N 2 0 1 4 2014 RESULTS S A L E S R E V E N U E 9 % 7 % Beverage BioNutrient A S T R O N G E R D I R E C T I O N In 2013, Sensient changed the strategic direction of the Flavors & Fragrances Group to drive operating profit growth. We began to shift our product mix to higher-margin, value-added products; added new management talent; and focused on cost reduction. We realigned our business units around customer-focused segments and relocated the Group’s global headquarters to the Chicago area. In 2014, we started the process of consolidating manufacturing facilities, which will provide substantial, ongoing cost savings. The Group’s gross profit margins improved by 130 basis points in 2014, and we expect continued improvement in operating margins during the next few years.  

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FRAGRANCES Group Natural Extracts D E L I V E R I N G T H E TA S T E O F NAT U R E Sensient uses proprietary extraction technologies to develop vibrant, authentic taste profiles from botanical sources. The resulting natural extracts can be combined to create an infinite variety of flavors, enabling our customers to manufacture unique products that stand out in the marketplace. Sensient’s raw-material sourcing helps ensure quality control, product safety and traceability. As a result, manufacturers can enhance their marketing by labeling finished products with specific provenance declarations. health & wellness Drawing on Sensient’s unique flavor portfolio, food and beverage manufacturers are able to meet the growing consumer demand for products with reduced sugar, sodium and fat. Our flavor technologies enable caloric -reduction, while enhancing taste, masking offnotes and adding nutritional value. We will continue to increase sales and strengthen our leadership in the expanding health and wellness segment.  

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S E N S I E N T T E C H N O L O G I E S C O R P O R AT I O N 2 0 1 4 less fat less sodium less sugar A proprietary, all-natural line of flavormasking technologies, Smoothenol 2G ™ eliminates off-notes and aftertastes associated with a new generation of natural, clean-label food and beverage products. This complete flavor-masking toolkit is unmatched in the industry. M O R E More Appealing SMOOTHENOL 2G ™ NATURAL MASKING TECHNOLOGY More Choices PURE VARIETALS TRUE-TO-TYPE NATURAL FLAVORS Today’s consumers are increasingly seeking fruit varietals as part of a healthy and flavorful diet. To enable our customers to capitalize on this trend, we introduced Pure Varietals, which bring distinct true-to-type fruit flavors to foods and beverages. This product line includes several fruit varieties, notably ten apple, six peach and six cherry flavors.

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FRAGRANCES Group 14 THE VALUE OF CONSUMER INSIGHT A P O S I T I V E R E ACTION Simple Apple Complete Apple Pie Sensient combines exclusive ingredients and reaction flavor technologies to develop more complex flavor profiles that appeal to consumers. These sophisticated systems result in authentic tastes that mirror entire dishes; for instance, not apple, but apple pie—complete with fruit, spice, sweetness and crust. Sensient consumer researchers shape product development and provide valuable insight to our customers. Through our proprietary predictive process, we identify consumer trends and emerging flavor preferences that drive new business development across all of our market segments. In 2014, our consumer insight research led to numerous product introductions including spirits, sauces and frozen desserts.  

 

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		Twelve Months Ended December 31,
		2014				2013				% Change
Operating Income from continuing operations (GAAP)		$	130,665			$	173,780				(24.8	%)
Restructuring - Cost of products sold			1,914				1,840
Restructuring & other - Selling and administrative			88,636				29,895
Adjusted operating income		$	221,215			$	205,515				7.6	%
Net Earnings from continuing operations (GAAP)		$	81,771			$	114,298				(28.5	%)
Restructuring & other, before tax			90,550				31,735
Tax impact of restructuring & other			(25,014	)			(9,776	)
Adjusted net earnings		$	147,307			$	136,257				8.1	%
Diluted EPS from continuing operations (GAAP)		$	1.67			$	2.29				(27.1	%)
Restructuring & other, net of tax			1.34				0.44
Adjusted diluted EPS		$	3.02			$	2.73				10.6	%

		2014				2013
Rate before restructuring and discrete items			28.6	%			29.5	%
Restructuring impact			0.8	%			(0.3	%)
Discrete items			(0.8	%)			(1.7	%)
Reported effective tax rate			28.6	%			27.5	%

		2013				2012
Rate before restructuring and discrete items			29.5	%			31.1	%
Restructuring impact			(0.3	%)			—
Discrete items			(1.7	%)			(2.2	%)
Reported effective tax rate			27.5	%			28.9	%

PAYMENTS DUE BY PERIOD

(in thousands)		Total				1 year				2-3 years				4-5 years				> 5 years
Long-term debt		$	451,011			$	18,384			$	142,870			$	168,487			$	121,270
Interest payments on long-term debt			53,143				13,731				22,331				12,920				4,161
Operating lease obligations			19,479				7,657				6,803				3,201				1,818
Manufacturing purchase commitments			50,064				48,846				1,218				—				—
Pension funding obligations			44,217				9,722				10,016				7,021				17,458
Total contractual obligations		$	617,914			$	98,340			$	183,238			$	191,629			$	144,707

Consolidated Statements of Earnings

(in thousands except per share amounts) Years ended December 31,		2014				2013				2012
Revenue		$	1,447,821			$	1,462,126			$	1,453,555
Cost of products sold			959,311				987,080				990,911
Selling and administrative expenses			357,845				301,266				269,765
Operating Income			130,665				173,780				192,879
Interest expense			16,067				16,147				16,901
Earnings Before Income Taxes			114,598				157,633				175,978
Income taxes			32,827				43,335				50,896
Earnings from Continuing Operations			81,771				114,298				125,082
Loss from discontinued operations, net of tax			(8,125	)			(1,003	)			(1,174	)
Net Earnings		$	73,646			$	113,295			$	123,908
Earnings per common share:
Basic:
Continuing operations		$	1.69			$	2.30			$	2.52
Discontinued operations			(0.17	)			(0.02	)			(0.02	)
Earnings per common share		$	1.52			$	2.28			$	2.50
Diluted:
Continuing operations		$	1.67			$	2.29			$	2.51
Discontinued operations			(0.17	)			(0.02	)			(0.02	)
Earnings per common share		$	1.51			$	2.27			$	2.49
Weighted average number of common shares outstanding:
Basic			48,525				49,755				49,596
Diluted			48,819				49,934				49,822

Consolidated Statements of Comprehensive Income

(in thousands) Years ended December 31,		2014				2013				2012
Net earnings		$	73,646			$	113,295			$	123,908
Cash flow hedges adjustment, net of tax of $153, $50 and $136, respectively			423				(134	)			(350	)
Pension adjustment, net of tax of $226, $3,675 and $1,040, respectively			1,598				5,294				(2,216	)
Tax effect on losses previously recorded in other comprehensive income			—				—				16,836
Foreign currency translation on net investment hedges			12,677				(4,020	)			(1,251	)
Tax effect of current year activity on net investment hedges			(4,947	)			1,810				—
Foreign currency translation on long term intercompany loans			(8,325	)			5,781				(1,540	)
Other foreign currency translation			(92,556	)			1,856				22,984
Total Comprehensive (Loss) Income		$	(17,484	)		$	123,882			$	158,371

Consolidated Balance Sheets

(in thousands except share and per share amounts) December 31,		2014				2013
Assets
Current Assets:
Cash and cash equivalents		$	20,329			$	19,836
Trade accounts receivable, less allowance for losses of $3,838 and $4,327, respectively			228,907				233,751
Inventories			449,409				474,452
Prepaid expenses and other current assets			37,713				38,079
Deferred income taxes			21,735				23,707
Assets held for sale			1,296				—
Total current assets			759,389				789,825
Other assets			77,376				47,786
Intangible assets – at cost, less accumulated amortization of $14,390 and $15,634, respectively			8,760				10,546
Goodwill			424,114				457,269
Property, Plant and Equipment:
Land			42,868				56,343
Buildings			295,381				374,388
Machinery and equipment			723,631				751,267
Construction in progress			54,579				55,236
			1,116,459				1,237,234
Less accumulated depreciation			(620,892	)			(671,926	)
			495,567				565,308
Total assets		$	1,765,206			$	1,870,734
Liabilities and Shareholders’ Equity
Current Liabilities:
Trade accounts payable		$	99,033			$	99,117
Accrued salaries, wages and withholdings from employees			30,010				32,669
Other accrued expenses			76,383				78,579
Income taxes			3,591				5,478
Short-term borrowings			15,888				7,050
Total current liabilities			224,905				222,893
Deferred income taxes			—				19,956
Other liabilities			17,372				8,539
Accrued employee and retiree benefits			24,983				28,538
Long-term debt			451,011				348,124
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			110,969				105,119
Earnings reinvested in the business			1,243,627				1,217,874
Treasury stock, 6,529,891 and 4,105,827 shares, respectively, at cost			(227,929	)			(91,707	)
Accumulated other comprehensive (loss) income			(85,128	)			6,002
			1,046,935				1,242,684
Total liabilities and shareholders’ equity		$	1,765,206			$	1,870,734

Consolidated Statements of Cash Flows

(in thousands) Years ended December 31,		2014				2013				2012
Cash Flows from Operating Activities
Net earnings		$	73,646			$	113,295			$	123,908
Adjustments to arrive at net cash provided by operating activities:
Depreciation and amortization			51,456				52,016				48,352
Share-based compensation			6,265				8,430				10,086
Loss (gain) on assets			70,745				695				(869	)
Deferred income taxes			(16,780	)			(6,178	)			2,916
Changes in operating assets and liabilities:
Trade accounts receivable			(10,582	)			3,466				(15,158	)
Inventories			64				(30,217	)			(23,125	)
Prepaid expenses and other assets			6,479				616				(9,405	)
Accounts payable and other accrued expenses			6,745				3,606				225
Accrued salaries, wages and withholdings from employees			(365	)			5,384				(1,209	)
Income taxes			7,047				(100	)			(1,689	)
Other liabilities			(5,532	)			2,540				5,334
Net cash provided by operating activities			189,188				153,553				139,366
Cash Flows from Investing Activities
Acquisition of property, plant and equipment			(79,398	)			(104,246	)			(103,806	)
Proceeds from sale of assets			1,029				6,225				1,364
Other investing activities			(780	)			(208	)			(242	)
Net cash used in investing activities			(79,149	)			(98,229	)			(102,684	)
Cash Flows from Financing Activities
Proceeds from additional borrowings			213,985				194,973				73,903
Debt payments			(128,186	)			(198,686	)			(58,052	)
Purchase of treasury stock			(137,192	)			—				(23,154	)
Dividends paid			(47,893	)			(45,513	)			(43,426	)
Proceeds from options exercised and other equity transactions			733				1,007				1,957
Net cash used in financing activities			(98,553	)			(48,219	)			(48,772	)
Effect of exchange rate changes on cash and cash equivalents			(10,993	)			(2,331	)			4,297
Net increase (decrease) in cash and cash equivalents			493				4,774				(7,793	)
Cash and cash equivalents at beginning of year			19,836				15,062				22,855
Cash and cash equivalents at end of year		$	20,329			$	19,836			$	15,062
Cash paid during the year for:
Interest		$	16,158			$	16,168			$	16,897
Income taxes			42,335				47,436				53,492
Capitalized interest			1,449				1,875				1,601

Consolidated Statements of Shareholders’ Equity

														Treasury Stock
(in thousands except share and per share amounts)		Common Stock				Additional Paid-in Capital				Earnings Reinvested in the Business				Shares				Amount				Accumulated Other Comprehensive Income (Loss)
Balances at December 31, 2011		$	5,396			$	94,187			$	1,069,610				4,038,011			$	(80,935	)		$	(39,048	)
Net earnings											123,908
Other comprehensive income																							34,463
Cash dividends paid – $0.87 per share											(43,426	)
Share-based compensation							10,086
Stock options exercised							52								(66,579	)			1,438
Non-vested stock issued upon vesting							(6,999	)							(313,812	)			6,999
Benefit plans							388								(22,925	)			480
Purchase of treasury stock															626,251				(23,154	)
Other							539								3,875				(86	)
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	)

Notes to Consolidated Financial Statements

  

Years ended December 31, 2014, 2013 and 2012

1.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations Sensient Technologies Corporation, together with its subsidiaries (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 reportable segments consist of the Flavors & Fragrances and Color Groups, which are managed on a products and services basis. The Asia Pacific Group and certain of the Company’s flavor businesses in Central and South America (Flavors Central & South America), which are managed on a geographic basis, are included in Corporate & Other.

Principles of Consolidation and Basis of Presentation   The consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for one of the Company’s business units within the Color Group have been reported as a discontinued operation for all periods presented. The corresponding assets have been reclassified in accordance with the authoritative literature on assets held for sale as of December 31, 2014. See Note 12, Discontinued Operations, for further information regarding discontinued operations.

Use of Estimates   The preparation of the consolidated financial statements requires the use of management’s estimates and assumptions that affect reported amounts of assets, liabilities, revenue and expenses during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Revenue Recognition   The Company recognizes revenue (net of estimated discounts, allowances and returns) when title to goods 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.

 

Cost of Products Sold   Cost of products sold includes materials, labor and overhead expenses incurred in the manufacture of our products. Cost of products sold also includes charges for obsolete and slow moving inventories, as well as costs for quality control, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, other costs of our internal distribution network and costs incurred for shipping and handling. The Company records fees billed to customers for shipping and handling as revenue .

Selling and Administrative Expenses   Selling and administrative expenses primarily include the salaries and related costs for executive, finance, accounting, human resources, information technology, research and development and legal personnel as well as salaries and related costs of salespersons and commissions paid to external sales agents .

Cash Equivalents   The Company considers all highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents .

Accounts Receivable   Receivables are recorded at their face amount, less an allowance for doubtful accounts. The allowance for doubtful accounts is based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions. Specific accounts are written off against the allowance for doubtful accounts when it is deemed that the receivable is no longer collectible.

Inventories   Inventories are stated at the lower of cost or market. Market is determined on the basis of estimated realizable values. 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. Inventories include finished and in-process products totaling $308.7 million and $317.1 million at December 31, 2014 and 2013, respectively, and raw materials and supplies of $140.7 million and $157.4 million at December 31, 2014 and 2013, respectively.

Property, Plant and Equipment   Property, plant and equipment are recorded at cost reduced by accumulated depreciation. Depreciation is provided over the estimated useful life of the related asset using the straight-line method for financial reporting. The estimated useful lives for buildings and leasehold improvements range from 5 to 40 years. Machinery and equipment have estimated useful lives ranging from 3 to 20 years. Interest costs on significant projects constructed or developed for the Company’s own use are capitalized as part of the asset .

Goodwill and Other Intangible Assets The carrying value of goodwill is evaluated for impairment on an annual basis or more frequently when an indicator of impairment occurs. The impairment assessment includes comparing the carrying amount of net assets, including goodwill, of each reporting unit to its respective fair value as of the date of the assessment. Fair value was estimated based upon an evaluation of the reporting unit’s estimated future discounted cash flow as well as the public trading and private transaction valuation multiples for comparable companies. Such determination of fair value yielded no impairment in 2014, 2013 or 2012.

 

28

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The cost of intangible assets with determinable useful lives is amortized on a straight-line basis to reflect the pattern of economic benefits consumed, ranging from 5 to 20 years. These assets include technological know-how, customer relationships, patents, trademarks and non-compete agreements, among others.

Impairment of Long-lived Assets   The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if potential impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on the difference between fair value and carrying value. Impairment losses were recorded as a result of the Company’s 2014 Restructuring Plan and 2013 restructuring plan. See Note 11, Restructuring Charges, for additional information .

Financial Instruments   The Company may use derivative financial instruments for the purpose of hedging currency and interest rate exposures which exist as part of ongoing business operations. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes.

Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the transaction and on an ongoing basis. Any ineffective portions are recognized in earnings immediately.

Interest Rate Hedging   The Company is exposed to interest rate risk through its corporate borrowing activities. The objective of the Company’s interest rate risk management activities is to manage the levels of the Company’s fixed and floating interest rate exposure to be consistent with the Company’s preferred mix. The interest rate risk management program may include entering into interest rate swaps, which qualify as fair value hedges, when there is a desire to modify the Company’s exposure to interest rates. Gains or losses on fair value hedges are recognized in earnings, net of gains and losses on the fair value of the hedged instruments.

Cash Flow Hedges   The primary objectives of the foreign exchange risk management activities are to understand and mitigate the impact of potential foreign exchange fluctuations on the Company’s financial results and its economic well-being. Generally, these risk management transactions involve the use of foreign currency derivatives to protect against exposure resulting from recorded accounts receivable and payable. The Company may utilize forward exchange contracts, generally with maturities of less than 12 months, which qualify as cash flow hedges. These foreign exchange contracts are intended to offset the effect of exchange rate fluctuations on recorded intercompany receivables and payables. Gains and losses on these instruments are deferred in accumulated other comprehensive (loss) income (“OCI”) until the underlying transaction is recognized in earnings.

The Company’s existing cash flow hedges are highly effective. As a result, any current impact on earnings due to cash flow hedge ineffectiveness is immaterial.

Net Investments Hedging The Company may enter into foreign-denominated debt to be used as a non-derivative instrument to hedge the Company’s net investment in foreign subsidiaries. The change in the carrying amount of the foreign-denominated debt on the Company’s books, attributable to changes in the spot foreign exchange rate, is a hedge of the net investment in its foreign subsidiaries. Changes in the fair value of debt designated as a net investment hedge are recorded in foreign currency translation in OCI .

Commodity Purchases   The Company purchases certain commodities in the normal course of business that result in physical delivery of the goods and, hence, are excluded from Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging .

Translation of Foreign Currencies For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of foreign operations are translated into U.S. dollars at current exchange rates. Revenue and expense accounts are translated into U.S. dollars at average exchange rates prevailing during the year. Adjustments resulting from the translation of foreign accounts into U.S. dollars are recorded in foreign currency translation in OCI. Transaction gains and losses that occur as a result of transactions denominated in non-functional currencies are included in earnings and were not significant during the three-year period ended December 31, 2014.

Share-Based Compensation   Share-based compensation expense is recognized over the vesting period of each award based on the fair value of the instrument at the time of grant as summarized in Note 5, Share-Based Compensation.

Income Taxes   The Company recognizes a current tax liability or asset for the estimated taxes payable or refundable on tax returns for the current year and a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits for which the utilization of the asset is not considered likely.

 

29

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Earnings Per Share The difference between basic and diluted earnings per share (“EPS”) is the dilutive effect of stock options and non-vested stock. Diluted EPS assumes that non-vested stock has vested and all dilutive stock options, for which the average market price exceeds the exercise price (in-the-money), are exercised. Stock options for which the exercise price exceeds the average market price (out-of-the-money) have an anti-dilutive effect on EPS, and accordingly, are excluded from the calculation.

The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the years ended December 31:

(in thousands except per share amounts)		2014				2013				2012
Numerator:
Net earnings from continuing operations		$	81,771			$	114,298			$	125,082
Denominator:
Denominator for basic earnings per share-weighted average common shares			48,525				49,755				49,596
Effect of dilutive securities			294				179				226
Denominator for diluted earnings per share-adjusted weighted average shares outstanding			48,819				49,934				49,822
Earnings per common share from continuing operations
Basic		$	1.69			$	2.30			$	2.52
Diluted		$	1.67			$	2.29			$	2.51

The Company has a share-based compensation plan under which employees may be granted share-based awards in which non-forfeitable dividends are paid on non-vested shares for certain awards. As such, these shares are considered participating securities under the two-class method of calculating EPS as described in ASC Topic 260, Earnings per Share. The two-class method of calculating EPS did not have a material impact on the Company’s EPS calculations as of December 31, 2014, 2013 and 2012.

In 2014, 2013 and 2012, there were no anti-dilutive stock options. All EPS amounts are presented on a diluted basis unless otherwise noted.

Accumulated Other Comprehensive Income (Loss) Accumulated OCI is composed primarily of foreign currency translation, pension liability and unrealized gains or losses on cash flow hedges. See Note 7, Accumulated Other Comprehensive Income, for additional information .

Research and Development   Research and development costs are recorded in selling and administrative expenses in the year they are incurred. Research and development costs related to continuing operations were $35.9 million, $34.1 million and $34.2 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Advertising Advertising costs are recorded in selling and administrative expenses as they are incurred. Advertising costs related to continuing operations were $1.9 million, $1.6 million and $2.2 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Environmental Liabilities   The Company records liabilities related to environmental remediation obligations when estimated future expenditures are probable and reasonably estimable. Such accruals are adjusted as further information becomes available or as circumstances change. Estimated future expenditures are discounted to their present value when the timing and amount of future cash flows are fixed and readily determinable. Recoveries of remediation costs from other parties, if any, are recognized as assets when their receipt is assured.

Subsequent Events   The Company performed an evaluation of subsequent events through the date these financial statements were issued and no such events were identified.

New Pronouncements   On January 1, 2014, the Company adopted Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires companies to change the balance sheet presentation of certain unrecognized tax benefits and deferred tax assets. The adoption of this ASU had no material impact on the Company’s balance sheet presentation, financial condition or results of operations.

On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation in ASC 205-20, “Discontinued Operations” and requires companies to provide additional disclosures for disposal transactions. Under the revised standard, a discontinued operation represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. ASU 2014-08 is required to be applied prospectively to all disposals that occur in annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company will prospectively apply this guidance in 2015.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The requirements of the new standard are effective for interim and annual periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the expected impact of this new standard.

 

30

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2.

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GOODWILL AND INTANGIBLE ASSETS

At December 31, 2014 and 2013, goodwill is the only intangible asset that is not subject to amortization.

The following table summarizes intangible assets with determinable useful lives by major category as of December 31, 2014 and 2013:

						2014								2013
(in thousands except weighted average amortization years)		Weighted Average Amortization Years				Cost				Accumulated Amortization				Cost				Accumulated Amortization
Technological know-how			20.0			$	6,459			$	(4,352	)		$	8,606			$	(5,328	)
Customer relationships			20.0				6,938				(4,170	)			7,944				(4,359	)
Patents, trademarks, non-compete agreements and other			19.2				9,753				(5,868	)			9,630				(5,947	)
Total finite-lived intangibles			19.7			$	23,150			$	(14,390	)		$	26,180			$	(15,634	)

Amortization of intangible assets was $1.2 million in 2014, $1.3 million in 2013 and $1.4 million in 2012. Estimated amortization expense each year for the five years subsequent to December 31, 2014, is $1.2 million in each year from 2015 through 2019.

The changes in goodwill for the years ended December 31, 2014 and 2013, by reportable business segment, were as follows:

(in thousands)		Flavors & Fragrances				Color				Corporate & Other				Consolidated
Balance as of December 31, 2012		$	135,784			$	311,650			$	3,884			$	451,318
Currency translation impact			853				5,673				(575	)			5,951
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			—				(158	)			—				(158	)
Balance as of December 31, 2014		$	126,023			$	295,115			$	2,976			$	424,114

A portion of the Color segment’s goodwill was written down in 2014 related to the discontinued operation.

3.

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DEBT

Long-term Debt   Long-term debt consisted of the following unsecured obligations at December 31:

          

(in thousands)		2014				2013
3.66% senior notes due November 2023		$	75,000			$	75,000
3.06% Euro-denominated senior notes due November 2023			46,270				52,566
4.47% senior notes due November 2018			25,000				25,000
4.14% senior notes due November 2017			25,000				25,000
4.91% senior notes due through May 2017			88,000				99,000
3.77% senior notes due November 2016			25,000				25,000
Term loan			98,750				—
Long-term revolving loan agreement			65,987				43,982
Various other notes			2,004				2,576
			451,011				348,124
Less current maturities			—				—
Total long-term debt		$	451,011			$	348,124

On October 24, 2014, the Company entered into a $450 million credit facility, consisting of a $350 million revolver and a $100 million term loan. The revolver will mature on October 24, 2019. Interest rates on borrowings under the revolver are at LIBOR plus a margin based on the Company’s leverage ratio. Currently, when fully drawn, the interest rate is at LIBOR plus 1.375% under the new agreement. The term loan bears interest at LIBOR plus 1.375% and has a final maturity date of October 24, 2019. The credit facility will be used to repay maturing debt and for general corporate purposes.

The borrowings under the long-term revolving loan agreement had an average interest rate of 1.54% for the years ended December 31, 2014 and 2013.

In April 2013, the Company entered into an agreement to issue $75 million and €38 million in ten-year, fixed-rate, senior notes at fixed coupon rates of 3.66% and 3.06%, respectively. These notes were issued in November 2013 and proceeds have been used to repay maturing notes and bank debt.

 

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The aggregate amounts of contractual maturities on long-term debt each year for the five years subsequent to December 31, 2014, are as follows: 2015, $18.4 million; 2016, $43.8 million; 2017, $99.1 million; 2018, $35.0 million; and 2019, $133.5 million.

The Company has approximately $18.4 million of long-term debt that matures in 2015. It is the Company’s intention and ability to refinance these maturities under the long-term revolving loan agreement and accordingly, that maturing debt has been classified as long-term debt in the Consolidated Balance Sheet.

The Company has $277.7 million available under the revolving loan agreement and $41.8 million available under other lines of credit from several banks at December 31, 2014.

Substantially all of the senior loan agreements contain restrictions concerning interest coverage, borrowings, investments and tangible net worth amounts. The Company is in compliance with all of these restrictions at December 31, 2014. The following table summarizes the Company’s most restrictive loan covenants calculated in accordance with the applicable agreements as of December 31, 2014:

(dollars in thousands)		Actual				Required
Debt to EBITDA (Maximum)			1.74				3.50
Net Worth (Minimum)		$	1,046,935			$	625,000
Interest Coverage (Minimum)			8.64				2.0

The Company has stand-by and trade letters of credit outstanding of $6.3 million as of December 31, 2014 and 2013.

Short-term Borrowings   The Company’s short-term borrowings consisted of the following items at December 31:

(in thousands)		2014				2013
Uncommitted loans		$	14,086			$	4,600
Loans of foreign subsidiaries			1,802				2,450
Total		$	15,888			$	7,050

The weighted average interest rates on short-term borrowings were 1.66% and 2.16% at December 31, 2014 and 2013, respectively.

4.

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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

The Company may use derivative instruments for the purpose of hedging currency, commodity and interest rate exposures, which exist as part of ongoing business operations. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes. Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged transaction. Hedge accounting, which generally results in the deferral of derivative gains and losses until such time as the underlying transaction is recognized in net earnings, is permitted only if the hedging relationship is expected to be highly effective at the inception of the transaction and on an ongoing basis. Any ineffective portions are recognized in earnings immediately.

The Company manages its exposure to foreign exchange risk by the use of forward exchange contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency denominated intercompany transactions, non-functional currency raw material purchases, non-functional currency sales and other known foreign currency exposures. These forward exchange contracts generally have maturities of less than twelve months. The Company also uses certain debt denominated in foreign currencies to manage the net asset positions of the Company’s foreign subsidiaries. The Company’s primary hedging activities and their accounting treatment are summarized below:

Forward Exchange Contracts The forward exchange contracts that have been designated as hedges are accounted for as cash flow hedges. The Company had $17.8 million and $29.6 million of forward exchange contracts, designated as hedges, outstanding as of December 31, 2014 and 2013, respectively. Due to the short-term nature of these contracts, the results of these transactions are not material to the financial statements. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges and the results of these transactions are also not material to the financial statements.

Net Investment Hedges The Company has certain debt denominated in Euros and Swiss Francs. These debt instruments have been designated as partial hedges of the Company’s Euro and Swiss Franc net asset positions. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in OCI. As of December 31, 2014 and 2013, the total value of the Company’s Euro and Swiss Franc debt designated as net investment hedges was $97.3 million and $96.5 million, respectively. The impact of foreign exchange rates on these debt instruments has decreased debt by $12.7 million for the year ended December 31, 2014 and increased debt by $4.0 million for the year ended December 31, 2013. These amounts have been recorded as foreign currency translation in OCI.

 

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Concentrations of Credit Risk Counterparties to forward exchange contracts consist of large international financial institutions. While these counterparties may expose the Company to potential losses due to the credit risk of non-performance, losses are not anticipated. Concentrations of credit risk with respect to trade accounts receivable are limited by the large number of customers, generally short payment terms and their dispersion across geographic areas.

5.

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SHARE-BASED COMPENSATION

The Company has various stock plans under which employees and directors may be granted non-vested stock which vests over a specific time period. The 2007 Stock Plan also allows for the granting of non-qualified stock options or incentive stock options. Upon vesting, the stock options allow the participant to purchase common stock at 100% of the closing market price on the day the options were granted. No options were granted in 2014, 2013 or 2012. As of December 31, 2014, there were 1.2 million shares available to be granted as non-vested stock under the Company’s existing stock plans.

Stock options became exercisable over a three-year vesting period, or earlier upon retirement, and expire 10 years from the date of grant. Expense for stock options was recognized on a straight-line basis over three years from the date of grant or over the period from the date of grant until the participant was retirement-eligible, whichever was less. Treasury shares are issued for non-vested stock awards and for the exercise of stock options.

The following table summarizes the transactions involving the Company’s stock option plans:

 

(in thousands   except exercise   price and life)		Options				Weighted Average Exercise Price				Weighted Average Remaining Life (Years)				Aggregate Intrinsic Value
Outstanding at December 31, 2011			207			$	22.36				3.1			$	3,222
Exercised			(66	)			22.38
Outstanding at December 31, 2012			141				22.35				2.7				1,859
Exercised			(48	)			21.00
Outstanding at December 31, 2013			93				23.04				2.2				2,374
Exercised			(27	)			21.92
Outstanding at December 31, 2014			66			$	23.49				1.7			$	2,438
Exercisable at December 31, 2014			66			$	23.49				1.7			$	2,438

 

The aggregate intrinsic value of stock options exercised during 2014, 2013 and 2012, was $0.8 million, $1.1 million and $0.9 million, respectively.

As of December 31, 2014, all stock options outstanding were vested.

The following table summarizes information concerning outstanding and exercisable stock options at December 31, 2014:

 

		Range of Exercise Price
(in thousands except life and exercise price )		$	18.57- 23.08			$	23.09- 26.11			$	26.12- 30.07
Options outstanding			25				20				21
Weighted average remaining contractual life, in years			1.1				1.3				2.8
Weighted average exercise price		$	19.34			$	23.86			$	28.16
Options exercisable			25				20				21
Weighted average exercise price		$	19.34			$	23.86			$	28.16

 

The Company’s stock plans also provide for the awarding of non-vested stock. Prior to December 2014, expense for shares of non-vested stock is recognized over the vesting period or during the period from the date of grant until the participant reaches age 65, whichever is shorter. The vesting period is five years for awards granted prior to December 2013 and three years beginning with awards granted in December 2013. During the period of restriction, the holder of non-vested stock has voting rights and is entitled to receive all dividends and other distributions paid with respect to the stock.

The December 2013 grant consisted of 50% performance stock units and 50% time-vesting stock. The number of shares issued under the performance stock units are based on certain performance metrics measured over a two-year performance period and the awards have a three-year vesting period. Two year performance that exceeds the stated performance metrics would result in an award up to 150% of the original grant. The holder of the performance stock units are not entitled to vote or receive dividends and other distributions paid with respect to the stock, until the units have vested and the shares of stock are issued.

 

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The December 2014 grant consisted of 100% performance stock unit awards which are based on a three-year performance and vesting period and a pro-rata vesting upon retirement. Three year performance that exceeds the stated performance metrics would result in an award up to 150% of the original grant. The holder of the performance stock units are not entitled to vote or receive dividends and other distributions paid with respect to the stock, until the units have vested and the shares of stock are issued.

The Company expenses awards for non-vested stock based on the fair value of the Company’s common stock at the date of the grant.

The following table summarizes the non-vested stock and performance stock unit activity:

(in thousands   except fair value)		Shares				Grant Date Weighted Average Fair Value				Aggregate Intrinsic Value
Outstanding at December 31, 2011			400			$	31.42			$	15,142
Granted			293				36.09
Vested			(314	)			33.59
Cancelled			(40	)			33.41
Outstanding at December 31, 2012			339				33.22				12,046
Granted			262				46.14
Vested			(94	)			40.57
Cancelled			(10	)			42.22
Outstanding at December 31, 2013			497				38.46				24,095
Granted			171				55.21
Vested			(40	)			27.15
Cancelled			(24	)			40.84
Outstanding at December 31, 2014			604			$	43.84			$	36,454

The total intrinsic values of shares vested during 2014, 2013 and 2012, was $2.2 million, $4.4 million and $11.2 million, respectively.

As of December 31, 2014, total remaining unearned compensation, net of expected forfeitures, related to non-vested stock and performance stock units was $15.7 million, which will be amortized over the weighted average remaining service period of 1.98 years.

Total pre-tax share-based compensation recognized in the Consolidated Statements of Earnings was $6.3 million, $8.4 million and $10.1 million in 2014, 2013 and 2012, respectively. Tax related benefits of $2.4 million, $2.6 million and $2.4 million were also recognized in 2014, 2013 and 2012, respectively. Cash received from the exercise of stock options was $0.6 million, $1.0 million and $1.5 million for 2014, 2013 and 2012, respectively, and is reflected in cash flows from financing activities in the Consolidated Statements of Cash Flows.

6.

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RETIREMENT PLANS

The Company provides benefits under defined contribution plans including a savings plan and an employee stock ownership plan (“ESOP”). The savings plan covers substantially all domestic salaried and certain non-union hourly employees and provides for matching contributions up to 4% of each employee’s salary. The ESOP covers substantially all domestic employees and provides for contributions based on a percentage of each employee’s compensation as determined by the Company’s Board of Directors. Total expense for the Company’s defined contribution plans was $5.0 million in 2014 and $4.7 million in 2013 and 2012.

Although the Company intends for these defined contribution plans to be the primary retirement benefit for most employees, the Company also has several defined benefit plans. The funded status of the defined benefit plans was as follows at December 31:

(in thousands)		2014				2013
Benefit obligation at beginning of year		$	72,582			$	76,957
Service cost			2,523				3,260
Interest cost			2,390				2,557
Foreign currency exchange rate changes			(1,889	)			(703	)
Benefits paid			(23,726	)			(5,194	)
Actuarial loss (gain)			5,858				(4,295	)
Curtailment gain			(2,342	)			—
Benefit obligation at end of year			55,396				72,582
Plan assets at beginning of year			37,122				35,141
Company contributions			22,402				5,701
Foreign currency exchange rate changes			(2,379	)			(539	)
Benefits paid			(23,726	)			(5,258	)
Actual gain on plan assets			6,101				2,077
Plan assets at end of year			39,520				37,122
Funded status		$	(15,876	)		$	(35,460	)
Accumulated benefit obligation		$	54,435			$	68,391

            

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Amounts recognized in the Consolidated Balance Sheets at December 31:

(in thousands)		2014				2013
Accrued employee and retiree benefits		$	(18,258	)		$	(21,206	)
Other accrued expenses			(7,263	)			(19,144	)
Prepaid expenses and other current assets			9,645				4,890
Net liability		$	(15,876	)		$	(35,460	)

Components of annual benefit cost:

(in thousands)		2014				2013				2012
Service cost		$	2,523			$	3,260			$	2,583
Interest cost			2,390				2,557				2,659
Expected return on plan assets			(1,791	)			(1,689	)			(1,428	)
Amortization of prior service cost			171				172				1,971
Recognized actuarial (gain) loss			(305	)			3,203				799
Settlement expense			1,467				1,177				—
Curtailment gain			(754	)			—				—
Defined benefit expense		$	3,701			$	8,680			$	6,584

Weighted average liability assumptions as of December 31:

		2014				2013
Discount rate			3.70	%			3.91	%
Expected return on plan assets			3.32	%			5.12	%
Rate of compensation increase			0.37	%			4.59	%

Weighted average cost assumptions for the year ended December 31:

		2014				2013
Discount rate			3.91	%			3.27	%
Expected return on plan assets			5.12	%			4.76	%
Rate of compensation increase			4.59	%			4.01	%

The aggregate amounts of benefits expected to be paid from defined benefit plans in each of the next five years subsequent to December 31, 2014, which include employees’ expected future service, are as follows: 2015, $9.6 million; 2016, $7.7 million; 2017, $2.3 million; 2018, $4.5 million; 2019, $2.5 million; and $17.5 million in total for the years 2020 through 2024.

The Company expects to contribute $9.7 million to defined benefit plans in 2015.

Amounts in accumulated other comprehensive income at December 31 were as follows:

(in thousands)		2014				2013
Prior service cost		$	—			$	1,182
Unrecognized net actuarial loss			7,407				7,944

The pension adjustments, net of tax, recognized in OCI, were as follows:

(in thousands)		2014				2013				2012
Net actuarial (loss) gain arising during the period		$	(387	)		$	3,180			$	(3,947	)
Amortization of actuarial loss, included in defined benefit expense			1,252				2,006				526
Amortization of prior service cost, included in defined benefit expense			733				108				1,205
Pension adjustment, net of tax		$	1,598			$	5,294			$	(2,216	)

The estimated actuarial loss for the defined benefit plans that will be amortized from accumulated other comprehensive loss into periodic benefit cost during 2015 is $0.3 million.

The investment objectives and target allocations for the Company’s pension plans related to the assets of the plans are reviewed on a regular basis. The investment objectives for the pension assets are to maximize the return on assets while maintaining an overall level of risk appropriate for a retirement fund and ensuring the availability of funds for the payment of retirement benefits. The levels of risk assumed by the pension plans are determined by market conditions, the rate of return expectations and the liquidity requirements of each pension plan. The actual asset allocations of each pension plan are reviewed on a regular basis to ensure that they are in line with the target allocations.

The following table presents the Company’s pension plan assets by asset category as of December 31, 2014 and 2013:

		Fair value as of December 31,				Fair Value Measurements at December 31, 2014 Using Fair Value Hierarchy												Fair Value as of December 31,				Fair Value Measurements at December 31, 2013 Using Fair Value Hierarchy
(in thousands)		2014				Level 1				Level 2				Level 3				2013				Level 1				Level 2				Level 3
Equity Funds
Domestic		$	6,424			$	6,424			$	—			$	—			$	6,143			$	6,143			$	—			$	—
International			242				—				242				—				7,294				—				7,294				—
International Fixed Income Funds			22,710				960				21,750				—				23,162				1,186				21,976				—
Other investments			10,144				38				10,106				—				523				40				483				—
Total assets at fair value		$	39,520			$	7,422			$	32,098			$	—			$	37,122			$	7,369			$	29,753			$	—

 

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The Company is required to categorize pension plan assets based on the following fair value hierarchy:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

7.

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ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables summarize the changes in OCI for 2014:

(in thousands )		Cash Flow Hedges (a)				Pension Items (a)				Foreign Currency Items				Total
Balance as of December 31, 2013		$	(99	)		$	(6,768	)		$	12,869			$	6,002
Other comprehensive income before reclassifications			554				(387	)			(93,151	)			(92,984	)
Amounts reclassified from OCI			(131	)			1,985				—				1,854
Balance as of December 31, 2014		$	324			$	(5,170	)		$	(80,282	)		$	(85,128	)

(a) Cash Flow Hedges and Pension Items are net of tax.

See Note 6, Retirement Plans, for more information on the pension items reclassified out of OCI and into Selling and Administrative expenses in the Statement of Earnings during 2014. See Note 4, Derivative Instruments and Hedging Activity, for additional information on the Company’s cash flow hedges.

8.

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INCOME TAXES

The provision for income taxes for continuing operations was as follows:

(in thousands)		2014				2013				2012
Currently payable:
Federal		$	18,642			$	21,252			$	22,394
State			2,264				3,065				3,024
Foreign			25,435				25,175				22,670
			46,341				49,492				48,088
Deferred (benefit) expense:
Federal			1,532				(5,125	)			170
State			(935	)			502				603
Foreign			(14,111	)			(1,534	)			2,035
			(13,514	)			(6,157	)			2,808
Income taxes		$	32,827			$	43,335			$	50,896

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following:

(in thousands)		2014				2013
Deferred tax assets:
Benefit plans		$	15,507			$	21,148
Liabilities and reserves			19,384				11,499
Operating loss and credit carryovers			57,128				51,292
Other			6,872				17,151
Gross deferred tax assets			98,891				101,090
Valuation allowance			(43,055	)			(43,048	)
Deferred tax assets			55,836				58,042
Deferred tax liabilities:
Property, plant and equipment			(1,619	)			(21,139	)
Other assets			(1,462	)			(1,411	)
Goodwill			(28,583	)			(28,573	)
Other			(1,426	)			(3,168	)
Deferred tax liabilities			(33,090	)			(54,291	)
Net deferred tax assets		$	22,746			$	3,751

As of December 31, 2014, $1.0 million of the net deferred tax asset balance, is a non-current asset and is reported in the other assets line item in the Consolidated Balance Sheet.

In 2012, the Company recorded a correction of a prior period item related to the tax effect on certain foreign denominated loan losses that were previously recorded in OCI. As a result, net deferred tax assets increased by $10.8 million, other current assets by $6.0 million and OCI by $16.8 million. The tax effect was recognized in OCI in 2012 and was not material to any previously reported year.

 

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At December 31, 2014, foreign operating loss carryovers were $116.2 million. Included in the foreign operating loss carryovers are losses of $10.1 million that expire through 2029 and $106.0 million that do not have an expiration date. At December 31, 2014, state operating loss carryovers were $99.3 million, all of which expire through 2029.

The effective tax rate for continuing operations differed from the statutory federal income tax rate of 35% as described below:

		2014				2013				2012
Taxes at statutory rate			35.0	%			35.0	%			35.0	%
State income taxes, net of federal income tax benefit			1.9				1.1				1.5
Tax credits			(0.4	)			(0.3	)			—
Taxes on foreign earnings			(4.7	)			(5.3	)			(4.1	)
Resolution of prior years’ tax matters			(0.6	)			(0.7	)			(1.4	)
U.S. manufacturing deduction			(2.0	)			(1.6	)			(1.8	)
Valuation allowance adjustments			0.2				(0.8	)			(0.5	)
Other, net			(0.8	)			0.1				0.2
Effective tax rate			28.6	%			27.5	%			28.9	%

Earnings from continuing operations before income taxes were as follows:

(in thousands)		2014				2013				2012
United States		$	56,211			$	55,461			$	79,118
Foreign			58,387				102,172				96,860
Total		$	114,598			$	157,633			$	175,978

Federal and state income taxes are provided on international subsidiary income distributed to or taxable in the United States during the year. At December 31, 2014, federal and state taxes have not been provided for approximately $449.8 million of unremitted earnings of the foreign subsidiaries that are considered to be invested indefinitely. Determination of the deferred tax liability on such earnings is not practicable.

A reconciliation of the change in the liability for unrecognized tax benefits for 2014 and 2013 is as follows:

(in thousands)		2014				2013
Balance at beginning of year		$	5,295			$	7,091
Increases for tax positions taken in the current year			718				818
Increases for tax positions taken in prior years			10,238				875
Decreases related to settlements with tax authorities			(1,044	)			(3,113	)
Decreases as a result of lapse of the applicable statutes of limitations			(751	)			(374	)
Foreign currency exchange rate changes			(516	)			(2	)
Balance at the end of year		$	13,940			$	5,295

The amount of the unrecognized tax benefits that would affect the effective tax rate, if recognized, was approximately $4.3 million. The Company recognizes interest and penalties related to the unrecognized tax benefits in income tax expense. As of December 31, 2014 and 2013, $0.5 million and $0.7 million, respectively, of accrued interest and penalties were reported as an income tax liability. The liability for unrecognized tax benefits relates to multiple jurisdictions and is reported in Other liabilities on the Consolidated Balance Sheet at December 31, 2014.

The Company believes that it is reasonably possible that the total amount of liability for unrecognized tax benefits as of December 31, 2014, will decrease by approximately $10.2 million during 2015, of which $0.3 million is estimated to impact the effective tax rate. The potential decrease relates to various tax matters for which the statute of limitations may expire or will be otherwise settled in 2015. The amount that is ultimately recognized in the financial statements will be dependent upon various factors including potential increases or decreases to unrecognized tax benefits as a result of examinations, settlements and other unanticipated items that may occur during the year. With limited exceptions, the Company is no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004.

9.

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SEGMENT AND GEOGRAPHIC INFORMATION

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income of the respective business units before restructuring charges, interest expense and income taxes. Total revenue and operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation. Corporate & Other revenue consists primarily of flavor, fragrances and color products sold by the Asia Pacific Group and Flavors Central & South America Group.

Assets by business segment and geographic region are those assets used in the Company’s operations in each segment and geographic region. Segment assets reflect the allocation of goodwill to each segment. Corporate & Other assets consist primarily of property and investments.

 

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Segment Information   The Company determines its operating segments based on information utilized by the chief operating decision maker to allocate resources and assess performance. The Company’s reportable segments consist of Flavors & Fragrances and Color and are both managed on a products and services basis. The Company’s Flavors & Fragrances segment produces flavor and fragrance products that impart a desired taste, texture, aroma or other characteristic to a broad range of consumer and other products. The Color segment produces natural and synthetic color systems for pharmaceuticals, foods and beverages; colors and formulations for cosmetics; and technical colors for industrial applications. Two additional segments, Asia Pacific and Flavors Central & South America are managed on a geographic basis and included in Corporate & Other.

Beginning in 2014, the results of operations for the Company’s fragrances businesses in Asia Pacific, previously reported in the Corporate & Other segment, are reported in the Flavors & Fragrances segment, and the results of operations for the Company’s pharmaceutical flavors business, previously reported in the Flavors & Fragrances segment, are reported in the Color segment with the pharmaceutical colors business. The Color segment results have been restated to remove the impact of a discontinued operation. The prior year results have been restated as a result of these changes.

Restructuring and other costs related to continuing operations for the years ended December 31, 2014 and 2013, are further described in Note 11, Restructuring Charges, and are included in the Operating income (loss) results in the Corporate & Other segment below. Consistent with presentation in the Consolidated Balance Sheets and Statements of Cash Flows, the below amounts for Assets, Capital expenditures, and Depreciation and amortization include discontinued operations for all periods presented and are included in the Corporate & Other segment.

(in thousands)		Flavors & Fragrances				Color				Corporate & Other				Consolidated
2014
Revenue from external customers		$	813,808			$	487,503			$	146,510			$	1,447,821
Intersegment revenue			33,214				20,574				229				54,017
Total revenue			847,022				508,077				146,739				1,501,838
Operating income (loss)			119,093				114,884				(103,312	)			130,665
Interest expense			—				—				16,067				16,067
Earnings (loss) before income taxes from continuing operations			119,093				114,884				(119,379	)			114,598
Assets			814,215				732,364				218,627				1,765,206
Capital expenditures			41,131				31,883				6,384				79,398
Depreciation and amortization			26,180				18,785				6,491				51,456
2013
Revenue from external customers		$	843,233			$	473,811			$	145,082			$	1,462,126
Intersegment revenue			33,269				21,246				97				54,612
Total revenue			876,502				495,057				145,179				1,516,738
Operating income (loss)			120,278				107,873				(54,371	)			173,780
Interest expense			—				—				16,147				16,147
Earnings (loss) before income taxes from continuing operations			120,278				107,873				(70,518	)			157,633
Assets			896,335				761,485				212,914				1,870,734
Capital expenditures			59,040				38,639				6,567				104,246
Depreciation and amortization			27,435				17,541				7,040				52,016
2012
Revenue from external customers		$	835,619			$	478,341			$	139,595			$	1,453,555
Intersegment revenue			34,428				22,326				34				56,788
Total revenue			870,047				500,667				139,629				1,510,343
Operating income (loss)			120,825				101,062				(29,008	)			192,879
Interest expense			—				—				16,901				16,901
Earnings (loss) before income taxes from continuing operations			120,825				101,062				(45,909	)			175,978
Assets			859,303				715,683				201,657				1,776,643
Capital expenditures			49,781				45,858				8,167				103,806
Depreciation and amortization			26,996				14,393				6,963				48,352

 

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Geographic Information The Company has manufacturing facilities or sales offices in North America, Europe, Asia, Australia, South America and Africa. The Company’s annual revenue from continuing operations summarized by geo­graphic location is as follows:

(in thousands)		2014				2013				2012
Revenue from external customers:
North America		$	750,345			$	782,088			$	783,840
Europe			389,588				382,077				370,490
Asia Pacific			193,163				188,917				197,658
Other			114,725				109,044				101,567
Consolidated		$	1,447,821			$	1,462,126			$	1,453,555
Long-lived assets:
North America		$	537,668			$	531,005			$	504,483
Europe			423,972				506,352				472,865
Asia Pacific			29,948				32,148				35,891
Other			14,229				11,404				12,050
Consolidated		$	1,005,817			$	1,080,909			$	1,025,289

              

Sales in the United States, based on the final country of destination of the Company’s products, were $573.6 million, $590.0 million and $596.4 million in 2014, 2013 and 2012, respectively. No other country of destination exceeded 10% of consolidated sales. Total long-lived assets in the United States amounted to $450.8 million, $389.7 million and $360.1 million at December 31, 2014, 2013 and 2012, respectively.

                       

Product Information The Company’s revenue from continu­ing operations summarized by product portfolio is as follows:

                         

(in thousands)		2014				2013				2012
Traditional Flavors & Fragrances		$	724,693			$	736,107			$	715,227
Natural Ingredients			227,538				244,155				252,941
Food & Beverage Colors			334,565				307,179				310,639
Non-Food Colors			215,042				229,297				231,536
Interdivision Revenue			(54,017	)			(54,612	)			(56,788	)
Consolidated		$	1,447,821			$	1,462,126			$	1,453,555

10.

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FAIR VALUE MEASUREMENTS

              

ASC 820, Fair Value Measurements and Disclosures, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. As of December 31, 2014 and 2013, the Company’s only assets and liabilities subject to this standard are forward contracts, investments in a money market fund and municipal bonds, and defined benefit plan assets (See Note 6, Retirement Plans, for addi­tional information on the defined benefit plan assets). The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was a liability of $0.1 million at December 31, 2014 and an asset of $0.2 million at December 31, 2013. The fair value of the investments based on December 31, 2014, and 2013, market quotes (Level 1 inputs) was an asset of $1.9 million and $19.8 million, respectively.

The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and short-term borrowings approximated fair values as of December 31, 2014 and 2013.

The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrow­ing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at December 31, 2014 and 2013, was $451.0 million and $348.1 million, respectively. The fair value of the long-term debt at December 31, 2014 and 2013, was approximately $464.5 million and $351.0 million, respectively.

                      

11.

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RESTRUCTURING CHARGES

                       

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 Condensed Statements of Earnings and are discussed in Note 12, Discontinued Operations, in more detail.

                     

In March of this year, the Company announced the 2014 Restructuring Plan related to eliminating underperform­ing operations, consolidating manufacturing facilities and improving efficiencies within the Company. The 2014 Restructuring Plan will impact several facilities and will generate cost savings estimated to be approximately $30 million per year, with incremental savings expected to be achieved over the next few years and the full benefit expected to be achieved after 2016. The Company also anticipates that the 2014 Restructuring Plan will include a reduction in headcount by approximately 300 employees, primarily direct and indirect manufacturing labor, and pre-tax charges of approximately $120 million to $130 million. In connection with the 2014 Restructuring Plan, approximately 100 employees were terminated as of December 31, 2014, and approximately $2.6 million of savings were recognized by December 31, 2014.

          

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The Company determined that certain long-lived assets, including land, buildings and certain pieces of equipment associated with the identified operations were impaired. As a result, the Company has reduced the carrying amounts of these assets to approximately $35 million, their aggregate respective fair values, which were determined based on independent market valuations for these assets. Also, certain machinery and equipment has been identified to be disposed of at the time of the facility closures, and the associated depreciation has been accelerated. In addition, certain intangible assets and inventory were determined to be impaired and were written down.

For the year ended December 31, 2014, the Company recorded restructuring and other costs of $101.5 million ($73.3 million after-tax), in accordance with GAAP and based on an internal review of the affected facilities and consultation with legal and other advisors. Included within the restructuring and other costs, the Company incurred $3.2 million for the year ended December 31, 2014, related to the 2014 proxy contest. For the year ended December 31, 2013, the Company recorded restructuring costs of $31.7 million ($22.0 million after-tax) related to the 2013 restructuring program to relocate the Flavors & Fragrances Group headquarters to Chicago and to implement a profit improvement plan across all segments of the Company. Costs incurred in 2014 related to the 2013 restructuring program were not material.

The Company evaluates performance based on operating income of each segment before restructuring costs. The restructuring and other costs related to continuing operations are recorded in the Corporate & Other segment. The following table summarizes the restructuring and other costs by segment and discontinued operations for the years ended December 31, 2014 and 2013:

(in thousands)		2014				2013
Flavors & Fragrances		$	83,871			$	22,284
Color			—				7,065
Corporate & Other			6,679				2,386
Total Continuing Operations			90,550				31,735
Discontinued Operations			10,998				—
Total Restructuring		$	101,548			$	31,735

The Company recorded restructuring and other charges in continuing operations for the years ended December 31, 2014 and 2013, as follows:

(in thousands)		Selling & Administrative				Cost of Products Sold				Total
2014
Employee separations		$	17,794			$	—			$	17,794
Long-lived asset impairment			63,431				—				63,431
Gain on asset sales			(602	)			—				(602	)
Write-down of inventory			—				1,914				1,914
Other costs (1)			8,013				—				8,013
Total		$	88,636			$	1,914			$	90,550

⁽¹⁾ Other costs include decommissioning costs, professional services, personnel moving costs, other related costs and 2014 proxy contest costs.

(in thousands)		Selling & Administrative				Cost of Products Sold				Total
2013
Employee separations		$	18,081			$	—			$	18,081
Long-lived asset impairment			4,176				—				4,176
Gain on asset sales			(3,019	)			—				(3,019	)
Write-down of inventory			—				1,840				1,840
Other costs (2)			10,657				—				10,657
Total		$	29,895			$	1,840			$	31,735

⁽²⁾ Other costs include decommissioning costs, professional services, personnel (other than employee separations) and moving related costs.

The Company expects to incur approximately $21 million to $31 million of additional restructuring costs by the end of 2016, consisting primarily of employee separations, asset impairments, and other restructuring related costs.

 

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Activities impacting the Company’s reserve for restructuring and other charges for the years ended December 31, 2014 and 2013 were as follows:

(in thousands )		Employee Separations				Assets Related and Other				Total
Balance as of December 31, 2012		$	—			$	—			$	—
Restructuring and other costs			18,081				13,654				31,735
Gain on sale of assets			—				3,019				3,019
Cash spent			(13,505	)			(9,069	)			(22,574	)
Reduction of assets			—				(6,016	)			(6,016	)
Translation adjustment			(14	)			—				(14	)
Balance as of December 31, 2013		$	4,562			$	1,588			$	6,150
Restructuring and other costs			18,951				82,597				101,548
Gain on sale of assets			—				602				602
Cash spent			(7,067	)			(8,773	)			(15,840	)
Reduction of assets			—				(75,117	)			(75,117	)
Translation adjustment			(1,537	)			—				(1,537	)
Balance as of December 31, 2014		$	14,909			$	897			$	15,806

These reserves are classified as current liabilities in the Consolidated Balance Sheets.

12.

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DISCONTINUED OPERATIONS

In connection with the 2014 Restructuring Plan, the Company approved a plan to dispose of a business unit within the Color segment. The Company determined that as of September 30, 2014, the business met the criteria to be presented as a discontinued operation as established in ASC Subtopic 205-20, Discontinued Operations. The results of this business have been reported as a discontinued operation in the Consolidated Statements of Earnings for all periods presented. The corresponding assets, which include property, plant, and equipment, have met the held for sale criteria and have been properly presented on the Consolidated Balance Sheets.

The following table summarizes the discontinued operation’s results, which are included in the loss from discontinued operations in the Consolidated Statements of Earnings for the years ended December 31, 2014, 2013, and 2012:

(in thousands)		2014				2013				2012
Net sales		$	5,197			$	5,424			$	5,495
Loss from discontinued operations before income taxes			(11,496	)			(1,418	)			(1,671	)
Income tax benefit			3,371				415				497
Loss from discontinued operations, net of tax		$	(8,125	)		$	(1,003	)		$	(1,174	)

Included in the loss before income taxes from discontinued operations are pre-tax restructuring costs of $11.0 million for the year ended December 31, 2014. See Note 11, Restructuring Charges, for additional information.

13.

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COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain facilities and equipment under operating lease arrangements. Aggregate minimum rental commitments at December 31, 2014, for all noncancelable operating leases with an initial lease term greater than one year for the years ending December 31 are as follows: 2015, $7.7 million; 2016, $4.3 million; 2017, $2.5 million; 2018, $1.8 million; 2019, $1.4 and $1.8 million thereafter.

Rent expense from continuing operations totaled $10.7 million, $10.6 million and $10.7 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Litigation and Other Claims

The Company is subject to various claims and litigation arising in the normal course of business. The Company establishes reserves for claims and proceedings when it is probable that liabilities exist and reasonable estimates of loss can be made. While it is not possible to predict the outcome of these matters, based on our assessment of the facts and circumstances now known, we do not believe that these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

 

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Management’s Report on Internal Control Over Financial Reporting

The management of Sensient Technologies Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. 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. These controls are 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, 2014. 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. Based on that assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014.

The Company’s independent registered public accounting firm has issued its report on the Company’s internal control over financial reporting. This report appears on page 43.

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholders of

Sensient Technologies Corporation

Milwaukee, Wisconsin

We have audited the accompanying consolidated balance sheets of Sensient Technologies Corporation and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sensient Technologies Corporation and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sensient Technologies Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.

             

            

Milwaukee, Wisconsin

February 26, 2015

 

42

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Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting

To The Board of Directors and Shareholders of

Sensient Technologies Corporation

Milwaukee, Wisconsin

We have audited Sensient Technologies Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Sensient Technologies Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that ­transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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.

In our opinion, Sensient Technologies Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sensient Technologies Corporation as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 26, 2015, expressed an unqualified opinion thereon.

                    

                      

Milwaukee, Wisconsin

February 26, 2015

 

43

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Quarterly Data

(in thousands except per share amounts) (unaudited)		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year
2014
Revenue		$	367,125			$	373,373			$	364,504			$	342,819			$	1,447,821
Gross profit			124,496				129,408				121,501				113,105				488,510
Earnings from continuing operations			2,631				30,147				22,664				26,329				81,771
Loss from discontinued operations, net of tax			(4,706	)			(1,086	)			(1,359	)			(974	)			(8,125	)
Net earnings			(2,075	)			29,061				21,305				25,355				73,646
Earnings per basic share:
Continuing operations			0.05				0.62				0.47				0.55				1.69
Discontinued operations			(0.09	)			(0.02	)			(0.03	)			(0.02	)			(0.17	)
Earnings per basic share			(0.04	)			0.60				0.44				0.53				1.52
Earnings per diluted share:
Continuing operations			0.05				0.62				0.47				0.55				1.67
Discontinued operations			(0.09	)			(0.02	)			(0.03	)			(0.02	)			(0.17	)
Earnings per diluted share			(0.04	)			0.59				0.44				0.53				1.51
2013
Revenue		$	364,254			$	377,295			$	370,457			$	350,120			$	1,462,126
Gross profit			117,015				122,288				119,812				115,931				475,046
Earnings from continuing operations			21,775				32,470				31,764				28,289				114,298
Loss from discontinued operations, net of tax			(336	)			(188	)			(239	)			(240	)			(1,003	)
Net earnings			21,439				32,282				31,525				28,049				113,295
Earnings per basic share:
Continuing operations			0.44				0.65				0.64				0.57				2.30
Discontinued operations			(0.01	)			—				—				—				(0.02	)
Earnings per basic share			0.43				0.65				0.63				0.56				2.28
Earnings per diluted share:
Continuing operations			0.44				0.65				0.64				0.57				2.29
Discontinued operations			(0.01	)			—				—				—				(0.02	)
Earnings per diluted share			0.43				0.65				0.63				0.56				2.27

 

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Common Stock Prices and Dividends

		2014								Dividends				2013								Dividends
		Market Price								Declared				Market Price								Declared
		High				Low				Per Share				High				Low				Per Share
First Quarter		$	57.11			$	46.08			$	0.48			$	39.39			$	35.54			$	0.22
Second Quarter			57.35				51.39				—				42.38				35.59				0.23
Third Quarter			56.99				51.60				0.25				48.15				39.96				0.23
Fourth Quarter			63.35				49.72				0.25				53.35				46.75				0.23

Company Stock Performance

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, 2009, and reinvestment of dividends. The stock performance shown on the graph is not necessarily indicative of future price performance.

                              

                                    

December 31,		2009				2010				2011				2012				2013				2014
Sensient Technologies Corporation		$	100			$	143			$	150			$	145			$	201			$	254
S&P Midcap Specialty Chemicals Index			100				139				162				223				278				319
S&P Midcap Food Products Index			100				125				150				159				225				330
S&P 500 Index			100				115				117				136				179				204

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

 

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Five Year Review

(in thousands except percentages, employee and per share data) Years ended December 31,		2014								2013								2012								2011								2010
Summary of Operations
Revenue		$	1,447,821				100.0	%		$	1,462,126				100.0	%		$	1,453,555				100.0	%		$	1,423,893				100.0	%		$	1,322,449				100.0	%
Cost of products sold			959,311				66.3				987,080				67.5				990,911				68.2				975,494				68.5				915,324				69.2
Selling and administrative expenses			357,845				24.7				301,266				20.6				269,765				18.6				256,283				18.0				231,680				17.5
Operating income			130,665				9.0				173,780				11.9				192,879				13.3				192,116				13.5				175,445				13.3
Interest expense			16,067				1.1				16,147				1.1				16,901				1.2				19,439				1.4				20,384				1.5
Earnings before income taxes			114,598				7.9				157,633				10.8				175,978				12.1				172,677				12.1				155,061				11.7
Income taxes			32,827				2.3				43,335				3.0				50,896				3.5				51,279				3.6				47,299				3.6
Earnings from continuing operations			81,771				5.6				114,298				7.8				125,082				8.6				121,398				8.5				107,762				8.1
Loss from discontinued operations, net of tax			(8,125	)			(0.6	)			(1,003	)			(0.1	)			(1,174	)			(0.1	)			(914	)			(0.1	)			(618	)			—
Net earnings		$	73,646				5.1	%		$	113,295				7.7	%		$	123,908				8.5	%		$	120,484				8.5	%		$	107,144				8.1	%
Earnings per basic share:
Continuing operations		$	1.69							$	2.30							$	2.52							$	2.44							$	2.19
Discontinued operations			(0.17	)							(0.02	)							(0.02	)							(0.02	)							(0.01	)
Earnings per basic share		$	1.52							$	2.28							$	2.50							$	2.42							$	2.18
Earnings per diluted share:
Continuing operations		$	1.67							$	2.29							$	2.51							$	2.43							$	2.18
Discontinued operations			(0.17	)							(0.02	)							(0.02	)							(0.02	)							(0.01	)
Earnings per diluted share		$	1.51							$	2.27							$	2.49							$	2.41							$	2.17
Other Related Data
Dividends per share, declared and paid		$	0.98							$	0.91							$	0.87							$	0.84							$	0.79
Average common shares outstanding:
Basic			48,525								49,755								49,596								49,746								49,138
Diluted			48,819								49,934								49,822								49,937								49,424
Book value per common share		$	21.94							$	24.72							$	23.09							$	20.87							$	19.70
Price range per common share			46.08-63.35								35.54-53.35								33.13-41.08								30.15-39.69								24.76-37.61
Share price at December 31			60.34								48.52								35.56								37.90								36.73
Capital expenditures			79,398								104,246								103,806								72,200								55,823
Depreciation			50,225								50,716								46,992								44,771								42,109
Amortization			1,231								1,300								1,360								1,328								1,314
Total assets			1,765,206								1,870,734								1,776,643								1,654,164								1,599,268
Long-term debt			451,011								348,124								333,979								312,422								324,360
Total debt			466,899								355,174								354,027								335,396								349,810
Shareholders’ equity			1,046,935								1,242,684								1,153,898								1,049,210								983,785
Return on average shareholders’ equity			6.4	%							9.5	%							11.3	%							11.4	%							11.6	%
Total debt to total capital			30.8	%							22.2	%							23.5	%							24.2	%							26.2	%
Employees			4,053								4,130								3,983								3,887								3,618

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

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.

The 2010 results include a credit of $1.5 million ($0.9 million after tax, or $0.02 per share) for additional insurance proceeds received on the 2009 environmental claims.