SENSIENT TECHNOLOGIES CORP (SXT) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited consolidated financial statements
and the notes to those statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended December 31, 2021, compared to the year ended December 31, 2020. For a discussion of the year
ended December 31, 2020, compared to the year ended December 31, 2019, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2020, filed with the Securities and Exchange Commission on February 22, 2021, which is incorporated herein by reference.
OVERVIEW
Sensient Technologies Corporation (the Company or Sensient) is a global developer, manufacturer, and supplier of flavor systems for the food, beverage, personal care, and
household-products industries. The Company is also a leading developer, manufacturer, and supplier of colors for businesses worldwide. The Company provides natural and synthetic color systems for use in foods, beverages, pharmaceuticals, and
nutraceuticals; colors and other ingredients for cosmetics, pharmaceuticals, and nutraceuticals; and technical colors for industrial applications. The Company’s three reportable segments are the Flavors & Extracts Group and the Color Group,
which are managed on a product basis, and the Asia Pacific Group, which is managed on a geographic basis. The Company’s corporate expenses, restructuring including operational improvement plans, divestiture, share-based compensation, the 2020
one-time COVID-19 employee payment, and other costs are included in the “Corporate & Other” category. In the second quarter of 2020, the Company divested its inks product line (Color Group); in the third quarter of 2020, the Company divested
its yogurt fruit preparations product line (Flavors & Extracts Group); and in the second quarter of 2021, the Company divested its fragrances product line (Flavors & Extracts Group).
The Company’s diluted earnings per share were $2.81 in 2021 and $2.59 in 2020. Included in the 2021 results were $12.2 million ($14.8 million after tax, $0.35 per share) of
divestiture & other related costs and operational improvement plan costs and income. Included in the 2020 results were $18.5 million ($14.4 million after tax, $0.34 per share) of divestiture & other related costs, operational improvement
plan costs, and a one-time COVID-19 employee payment. Adjusted diluted earnings per share, which exclude the divestiture & other related costs, the results of operations of the divested product lines, the operational improvement plan costs
and income, and the impact of the 2020 one-time COVID-19 employee payment, were $3.13 in 2021 and $2.79 in 2020 (see discussion below regarding non-GAAP financial measures).
Additional information on the results is included below.
RESULTS OF OPERATIONS
2021 vs. 2020
Revenue
Sensient’s revenue was approximately $1.4 billion and $1.3 billion in 2021 and 2020, respectively.
Gross Profit
The Company’s gross margin was 32.9% in 2021 and 31.8% in 2020. The increase in gross margin was primarily due to higher volumes and the divestiture of the inks, fragrances, and
yogurt fruit preparations product lines, which decreased gross margins 40 basis points and 110 basis points in 2021 and 2020, respectively.
22
Index
Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 20.6% in 2021 and 20.4% in 2020. Selling and administrative expenses in 2021 included divestiture & other related
expenses and operational improvement plan costs and income totaling $12.2 million and in 2020 included divestiture & other related expenses, operational improvement plan costs, and the one-time COVID-19 employee payment totaling $15.7
million. These expenses increased selling and administrative expense as a percent of revenue by approximately 90 and 120 basis points in 2021 and 2020, respectively. See Divestitures below for further
information.
Operating Income
Operating income was $170.0 million in 2021 and $152.7 million in 2020. Operating margins were 12.3% in 2021 and 11.5% in 2020. Divestiture & other related costs and operational
improvement plan costs and income reduced operating margins by approximately 90 basis points in 2021 and divestiture & other related costs, operational improvement plan costs, and the one-time COVID-19 employee payment reduced operating
margins by approximately 140 basis points in 2020.
Additional information on segment results can be found in the Segment Information section.
Interest Expense
Interest expense was $12.5 million in 2021 and $14.8 million in 2020. The decrease in expense was primarily due to a decrease in the average debt outstanding and the average interest
rate.
Income Taxes
The effective income tax rate was 24.6% in 2021 and 20.6% in 2020. The effective tax rates in both 2021 and 2020 were impacted by changes in estimates associated with the
finalization of prior year foreign and domestic tax items, audit settlements, mix of foreign earnings, the divestiture & other related costs, and the release of valuation allowances related to the foreign tax credit carryover and foreign
net operating losses. See Note 11, Income Taxes, in the Notes to Consolidated Financial Statements included in this report for additional information.
| 2021 | 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| Rate before divestiture and discrete items | 24.3 | % | 24.8 | % | ||||
| Divestiture & other related costs impact | 4.2 | % | 0.3 | % | ||||
| Discrete items | (3.9 | %) | (4.5 | %) | ||||
| Reported effective tax rate | 24.6 | % | 20.6 | % |
The 2022 effective income tax rate is estimated to be between 24% and 26%, before any discrete items, such as finalization of prior year foreign and domestic tax items, audit
settlements, and valuation allowance adjustments.
Divestitures
In October 2019, the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. The divesting and exit of these
three product lines does not meet the criteria to be presented as a discontinued operation on the Consolidated Statements of Earnings.
On June 30, 2020, the Company completed the sale of its inks product line. In 2021 and 2020, the Company received $0.5 million and $11.6 million of net cash, respectively, as part of the sale.
On September 18, 2020, the Company completed the sale of its yogurt fruit preparations product line. In 2021 and 2020, the Company received $1.0 million of net cash in both years, as part of the sale.
The sale also included an earnout based on future performance, which could result in additional cash consideration for the Company.
On April 1, 2021, the Company completed the sale of its fragrances product line (excluding its essential oils product line) for $36.3 million of net cash. As a result of the completion of the sale, the
Company recorded a non-cash net loss of $11.3 million, for the year ended December 31, 2021, primarily related to the reclassification of accumulated foreign currency translation and related items from Accumulated
Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated Statements of Earnings.
See Note 14, Divestitures, in the Notes to Consolidated Financial
Statements included in this report for additional information.
Operational Improvement Plan
During the third quarter of 2020, the Company approved an operational improvement plan (Operational Improvement Plan) to consolidate manufacturing facilities and improve efficiencies
within the Company. As part of the Operational Improvement Plan, the Company combined its New Jersey cosmetics manufacturing facility in the Personal Care product line of the Color segment into its existing Color segment facility in Missouri. In
addition, the Company is centralizing certain Flavors & Extracts segment support functions in Europe into one location. In the Asia Pacific segment, the Company incurred costs in connection with the elimination of certain selling and
administrative positions.
23
Index
During the second quarter of 2021, the Company received cash proceeds, net of associated expenses, in connection with the termination of a New Jersey office and laboratory space
lease. The terminated lease was originally executed in November 2020 as part of the Operational Improvement Plan; however, the landlord for the property requested to terminate the lease prior to the end of its term and compensated the Company as
part of a negotiated resolution for that termination. The Company reports all costs and income associated with the Operational Improvement Plan in Corporate & Other.
COVID-19 Employee Payment
In the fourth quarter of 2020, the Company approved a one-time COVID-19 employee payment to reward the outstanding dedication and efforts of the Company’s employees during these
challenging and unprecedented times. This adjustment totaled approximately $3.0 million.
NON-GAAP FINANCIAL MEASURES
Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted revenue, adjusted operating income, adjusted net earnings, and adjusted
diluted earnings per share, which exclude the results of the divested product lines, the divestiture & other related costs, the operational improvement plan costs and income, and the one-time COVID-19 employee payment in 2020 and (2)
percentage changes in revenue, operating income, and diluted earnings per share on an adjusted local currency basis, which eliminate the effects that result from translating its international operations into U.S. dollars, the results of the
divested product lines, the divestiture & other related costs and income, the operational improvement plan costs and income, and the one-time COVID-19 employee payment.
The Company has included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year
performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. These non-GAAP measures should not be considered in isolation. Rather, they
should be considered together with GAAP measures and the rest of the information included in this report. Management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis and to gain
additional insight into underlying operating and performance trends, and the Company believes the information can be beneficial to investors for the same purposes. These non-GAAP measures may not be comparable to similarly titled measures used by
other companies.
24
Index
| Twelve Months Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands except per share amounts) | 2021 | 2020 | % Change | |||||||||
| Revenue (GAAP) | $ | 1,380,264 | $ | 1,332,001 | 3.6 | % | ||||||
| Revenue of the divested product lines | (30,062 | ) | (113,553 | ) | ||||||||
| Adjusted revenue | $ | 1,350,202 | 1,218,448 | 10.8 | % | |||||||
| Operating Income (GAAP) | $ | 170,028 | $ | 152,656 | 11.4 | % | ||||||
| Divestiture & other related costs – Cost of products sold | 86 | 1,795 | ||||||||||
| Divestiture & other related costs – Selling and administrative expenses | 14,052 | 10,360 | ||||||||||
| Operating income of the divested product lines | (1,880 | ) | (7,580 | ) | ||||||||
| Operational improvement plan – Cost of products sold | - | 35 | ||||||||||
| Operational improvement plan – Selling and administrative (income) expenses | (1,895 | ) | 3,304 | |||||||||
| COVID-19 employee payment– Cost of products sold | - | 1,036 | ||||||||||
| COVID-19 employee payment – Selling and administrative expenses | - | 1,986 | ||||||||||
| Adjusted operating income | $ | 180,391 | $ | 163,592 | 10.3 | % | ||||||
| Net Earnings (GAAP) | $ | 118,745 | $ | 109,472 | 8.5 | % | ||||||
| Divestiture & other related costs, before tax | 14,138 | 12,155 | ||||||||||
| Tax impact of divestiture & other related costs | 2,092 | (2,605 | ) | |||||||||
| Net earnings of the divested product lines, before tax | (1,880 | ) | (7,580 | ) | ||||||||
| Tax impact of the divested product lines | 460 | 1,945 | ||||||||||
| Operational improvement plan (income) costs, before tax | (1,895 | ) | 3,339 | |||||||||
| Tax impact of operational improvement plan | 471 | (826 | ) | |||||||||
| COVID-19 employee payment, before tax | - | 3,022 | ||||||||||
| Tax impact of COVID-19 employee payment | - | (675 | ) | |||||||||
| Adjusted net earnings | $ | 132,131 | $ | 118,247 | 11.7 | % | ||||||
| Diluted Earnings Per Share (GAAP) | $ | 2.81 | $ | 2.59 | 8.5 | % | ||||||
| Divestiture & other related costs, net of tax | 0.38 | 0.23 | ||||||||||
| Results of operations of the divested product lines, net of tax | (0.03 | ) | (0.13 | ) | ||||||||
| Operational improvement plan, net of tax | (0.03 | ) | 0.06 | |||||||||
| COVID-19 employee payment, net of tax | - | 0.06 | ||||||||||
| Adjusted diluted earnings per share | $ | 3.13 | $ | 2.79 | 12.2 | % |
Divestiture & other related costs are discussed under “Divestitures” above and Note 14, Divestitures, in the Notes to the Consolidated Financial
Statements included in this report. Operational improvement plan is discussed under “Operational Improvement Plan” above and Note 15, Operational Improvement Plan, in the Notes to the Consolidated
Financial Statements included in this report.
Note: Earnings per share calculations may not foot due to rounding differences.
25
Index
The following table summarizes the percentage change in the 2021 results compared to the 2020 results in the respective financial measures.
| Twelve Months Ended December 31, 2021 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Foreign Exchange Rates | Adjustments(1) | Adjusted Local Currency | |||||||||||||
| Revenue | ||||||||||||||||
| Flavors & Extracts | (0.4 | %) | 1.6 | % | (11.4 | %) | 9.4 | % | ||||||||
| Color | 8.8 | % | 2.1 | % | (2.7 | %) | 9.4 | % | ||||||||
| Asia Pacific | 11.6 | % | 1.7 | % | (0.2 | %) | 10.1 | % | ||||||||
| Total Revenue | 3.6 | % | 1.8 | % | (7.3 | %) | 9.1 | % | ||||||||
| Operating Income | ||||||||||||||||
| Flavors & Extracts | 8.4 | % | 1.2 | % | (8.0 | %) | 15.2 | % | ||||||||
| Color | 7.9 | % | 2.6 | % | 0.5 | % | 4.8 | % | ||||||||
| Asia Pacific | 19.3 | % | (1.8 | %) | (0.5 | %) | 21.6 | % | ||||||||
| Corporate & Other | 3.7 | % | 0.0 | % | (18.4 | %) | 22.1 | % | ||||||||
| Total Operating Income | 11.4 | % | 2.1 | % | 1.0 | % | 8.3 | % | ||||||||
| Diluted Earnings per Share | 8.5 | % | 1.9 | % | (3.4 | %) | 10.0 | % |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | For Revenue, adjustments consist of revenues of the divested product lines. For Operating Income and Diluted Earnings per Share, adjustments consist of the results of the divested product lines, divestitures & other related costs, operational improvement plan costs and income, and the 2020 one-time COVID-19 employee payment. |
Note: Refer to table above for a reconciliation of these non-GAAP measures.
SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. Segment performance is
evaluated on operating income before any applicable divestiture & other related costs, share-based compensation, acquisition, restructuring including the operational improvement plan, the 2020 one-time COVID-19 employee payment, and other
costs (which are reported in Corporate & Other), interest expense, and income taxes.
The Company’s discussion below regarding its operating segments has been updated to reflect the Company’s disaggregation of revenue, which was adopted in the first quarter of 2018,
as summarized in Part II, Item 8, Note 12, Segment and Geographic Information, of this report.
The Company’s reportable segments consist of the Flavors & Extracts, Color, and Asia Pacific segments.
Flavors & Extracts
Flavors & Extracts segment revenue was $739.4 and $742.0 million in 2021 and 2020, respectively. Foreign exchange rates increased segment revenue by approximately 2%, while the
divestitures of Yogurt Fruit Preparations and Fragrances decreased segment revenue by approximately 11%. The lower segment revenue was primarily due to the divestitures of Yogurt Fruit Preparations and Fragrances, partially offset by higher
revenue in Flavors, Extracts & Flavor Ingredients and Natural Ingredients. The higher revenue in Flavors, Extracts & Flavor Ingredients was primarily due to favorable volumes and, to a lesser extent, selling prices, the favorable impact
of foreign exchange rates, and the acquisition of Flavor Solutions, Inc. on July 15, 2021. The higher revenue in Natural Ingredients was primarily due to favorable volumes and selling prices.
Flavors & Extracts segment operating income was $98.7 million in 2021 and $91.0 million in 2020, an increase of approximately 8%. Foreign exchange rates increased segment
operating income by approximately 1%, while the divestitures of Yogurt Fruit Preparations and Fragrances decreased segment operating income by approximately 8%. The higher segment operating income was primarily a result of higher operating income
in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by lower operating income in Yogurt Fruit Preparations and Fragrances due to the divestiture of the product lines. The higher operating income in Flavors,
Extracts & Flavor Ingredients was primarily due to favorable volumes and selling prices, favorable manufacturing and other costs, and the favorable impact of foreign exchange rates, partially offset by higher raw material costs and an
unfavorable product mix. The higher operating income in Natural Ingredients was primarily due to higher selling prices and volumes and a favorable product mix, partially offset by higher raw material and manufacturing and other costs. Segment
operating income as a percent of revenue was 13.3% and 12.3% for 2021 and 2020, respectively.
26
Index
Color
Segment revenue for the Color segment was $545.3 million in 2021 and $501.0 million in 2020, an increase of approximately 9%. Foreign exchange rates increased segment
revenue by approximately 2%, while the Inks divestiture decreased segment revenue by approximately 3%. The higher segment revenue was primarily a result of higher revenue in Food & Pharmaceutical Colors and Personal Care, partially offset
by lower revenue in Inks. The higher revenue in Food & Pharmaceutical Colors was primarily due to favorable volumes, the favorable impact of foreign exchange rates, and higher selling prices. The higher revenue in Personal Care was
primarily due to favorable volumes due to a recovery in demand in late 2021 after significantly reduced demand for makeup products in 2020 following the onset of COVID-19 and the favorable impact of foreign
exchange rates, partially offset by lower selling prices. The lower revenue in Inks was primarily a result of divesting the product line in the second quarter of 2020.
Segment operating income for the Color segment was $103.6 million in 2021 and $96.0 million in 2020, an increase of approximately 8%. Foreign exchange rates increased segment
operating income by approximately 3%, while the Inks divestiture increased segment operating income by approximately 1%. The higher segment operating income was primarily a result of higher operating income in Food & Pharmaceutical Colors due
to higher volumes, higher selling prices, and the favorable impact of foreign exchange rates, partially offset by higher raw material costs and manufacturing and other costs. Segment operating income as a percent of revenue was 19.0% in 2021
compared to 19.2% in 2020.
Asia Pacific
Segment revenue for the Asia Pacific segment was $135.3 million and $121.2 million for 2021 and 2020, respectively, an increase of approximately 12%. Foreign exchange rates increased
segment revenue by approximately 2%. Segment revenue was higher than the prior year primarily due to higher volumes and the favorable impact of foreign exchange rates.
Segment operating income for the Asia Pacific segment was $26.3 million in 2021 and $22.1 million in 2020, an increase of approximately 19% compared to the prior year. Foreign
exchange rates decreased segment operating income by approximately 2%. The increase in segment operating income was a result of higher volumes and favorable product mix, partially offset by higher raw material and manufacturing and other costs.
Segment operating income as a percent of revenue was 19.5% in 2021 and 18.2% in 2020.
Corporate & Other
The Corporate & Other operating loss was $58.5 million in 2021 and $56.4 million in 2020. The higher operating loss was primarily a result of higher performance-based
compensation and higher divestiture & other related costs, partially offset by lower operational improvement plan costs and the prior year including a one-time COVID-19 employee payment. See the Divestitures
and Operational Improvement Plan sections above for further information.
LIQUIDITY AND FINANCIAL POSITION
Financial Condition
The Company’s financial position remains strong. The Company is in compliance with its loan covenants calculated in accordance with applicable agreements as of December 31,
2021. The Company expects its cash flow from operations and its existing debt capacity can be used to meet anticipated future cash requirements for operations, capital expenditures, dividend payments, acquisitions, and stock repurchases. The
Company’s contractual obligations consist primarily of operational commitments, which we expect to continue to be able to satisfy through cash generated from operations, and debt. The Company has various series of notes outstanding that mature
from 2022 through 2027. The Company believes that it has the ability to refinance or repay these obligations through a combination of cash flow from operations, issuance of additional notes, and substantial borrowing capacity under the Company’s
revolving credit facility which matures in 2026.
As a result of our ability to manage the impact of inflation through pricing and other actions, the impact of inflation was not material to the Company’s financial position and its
results of operations in 2021. The Company currently anticipates inflation will not significantly impact 2022 results as a result of the Company’s pricing and other actions; however, the Company, like others in its industry, has faced challenges
due to conditions in the global supply chain and global economy. In particular, the Company has experienced increased costs for certain inputs, such as raw materials, shipping and logistics, and labor-related costs. We continue to expect to
manage these impacts in the near term, but persistent, accelerated, or expanded inflationary conditions could exacerbate these challenges and impact our profitability.
Sensient purchased 492,045 shares of Company stock in 2021 for a total cost of $42.5 million. There were no shares of Company stock purchased in 2020 or 2019. In October 2017, the
Board of Directors authorized the repurchase of up to three million shares. As of December 31, 2021, 1,732,981 shares were available to be repurchased under the existing authorization. The Company’s share repurchase program has no expiration
date. These authorizations may be modified, suspended, or discontinued by the Board of Directors at any time.
27
Index
Cash Flows from Operating Activities
Net cash provided by operating activities was $145.2 million and $218.8 million in 2021 and 2020, respectively. Operating cash flow provided the primary source of funds for operating
needs, capital expenditures, and shareholder dividends. The decrease in net cash provided by operating activities in 2021 is primarily due to an increase in the cash used for inventory as the Company invested in strategic inventory positions in
order to effectively manage production and on time delivery despite disruptions in our supply chain.
Cash Flows from Investing Activities
Net cash used in investing activities was $35.6 million and $33.4 million in 2021 and 2020, respectively. Capital expenditures were $60.8 million in 2021 and $52.2 million in 2020.
In 2021, the Company received $37.8 million of proceeds from the divestitures of the inks product line, yogurt fruit preparations product line, and fragrances product line. In 2020, the Company received $12.6 million of proceeds from the
divestitures of the inks product line and the yogurt fruit preparations product line. In 2021, the Company paid $13.9 million for the acquisition of Flavor Solutions, Inc.
Cash Flows from Financing Activities
Net cash used in financing activities was $107.8 million in 2021 and $184.2 million in 2020. The Company had a net increase in debt of $2.0 million in 2021 compared to a net decrease
in debt of $117.7 million in 2020. For the purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. The Company repurchased shares of its common stock for $42.5 million during 2021. There were no
repurchases of shares of the Company’s common stock in 2020. The Company has paid uninterrupted quarterly cash dividends since commencing public trading in its stock in 1962. Dividends paid per share were $1.58 in 2021 and $1.56 in 2020. Total
dividends paid were $66.7 million and $66.1 million in 2021 and 2020, respectively.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., management is required to make estimates and assumptions that have an
impact on the asset, liability, revenue, and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk, and financial condition. The Company
believes, given current facts and circumstances, that its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., and are consistently applied. Inherent in the nature of an estimate or assumption
is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining the net realizable value of accounts receivable, inventories,
and property, plant, and equipment. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas:
Revenue Recognition
The Company recognizes revenue at the transfer of control of its products to the Company’s customers in an amount reflecting the consideration to which the Company expects to be
entitled. Revenue is recognized when control of the product is transferred to the customer, the customer is obligated to pay the Company and the Company has no remaining obligations, which is typically at shipment. See Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in this report for additional details.
Goodwill Valuation
The Company reviews the carrying value of goodwill annually utilizing several valuation methodologies, including a discounted cash flow model. The Company completed its annual
goodwill impairment test under Accounting Standards Codification (ASC) 350, Intangibles – Goodwill and Other, in the third quarter of 2021. In conducting its annual test for impairment, the Company
performed a qualitative assessment of its previously calculated fair values for each of its reporting units. Fair value is estimated using both a discounted cash flow analysis and an analysis of comparable company market values. If the fair value
of a reporting unit exceeds its net book value, no impairment exists. The Company’s three reporting units each had goodwill recorded and were tested for impairment. All three reporting units had fair values that were above their respective net
book values by at least 90%. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect the reporting units’ fair value and result in an impairment charge.
In the fourth quarter of 2019, as a result of the Company meeting the assets held for sale criteria for its divestitures of its inks and fragrances (excluding its essential
oils product line) product lines, the Company allocated $8.4 million of goodwill to that disposal group. The $8.4 million of goodwill related to the disposal groups was determined to be fully impaired. In
2020, the fair value of the disposal groups decreased, which resulted in the previously allocated goodwill of $2.2 million to be reallocated to its respective financial reporting units. In 2021, the fair value of the disposal groups increased,
which resulted in an additional $0.8 million of goodwill allocated to the disposal groups. See Note 14, Divestitures, in the Notes to Consolidated
Financial Statements included in this report for additional details.
28
Index
Income Taxes
The Company estimates its income tax expense in each of the taxing jurisdictions in which it operates. The Company is subject to a tax audit in each of these jurisdictions, which
could result in changes to the estimated tax expense. The amount of these changes would vary by jurisdiction and would be recorded when probable and estimable. These changes could impact the Company’s financial statements. Management has recorded
valuation allowances to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2021, the Company recorded gross deferred tax assets of $106 million with an associated valuation
allowance of $37 million. Examples of deferred tax assets include deductions, net operating losses, and tax credits that the Company believes will reduce its future tax payments. In assessing the future realization of these assets, management has
considered future taxable income and ongoing tax planning strategies. An adjustment to the recorded valuation allowance as a result of changes in facts or circumstances could result in a significant change in the Company’s tax expense. The
Company does not provide for deferred taxes on unremitted earnings of foreign subsidiaries, which are considered to be invested indefinitely.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method with the exception of certain locations of the
Flavors & Extracts segment where cost is determined using a weighted average method. Net realizable value is determined on the basis of estimated realizable values. Cost includes direct materials, direct labor, and manufacturing overhead.
The Company estimates any required write-downs for inventory obsolescence by examining inventories on a quarterly basis to determine if there are any damaged items or slow moving
products in which the carrying values could exceed net realizable value. Inventory write-downs are recorded as the difference between the cost of inventory and its estimated market value. The Company recorded non-cash charges of $0.1 million,
$1.8 million, and $9.8 million, in 2021, 2020, and 2019, respectively, in Cost of Products Sold primarily related to the yogurt fruit preparations divestiture. The charges reduced the carrying value of
certain inventories, as they were determined to be excess. While significant judgment is involved in determining the net realizable value of inventory, the Company believes that inventory is appropriately stated at the lower of cost or net
realizable value.
Commitments and Contingencies
The Company is subject to litigation and other legal proceedings arising in the ordinary course of its businesses or arising under applicable laws and regulations. Estimating
liabilities and costs associated with these matters requires the judgment of management, who rely in part on information from Company legal counsel. When it is probable that the Company has incurred a liability associated with claims or pending
or threatened litigation matters and the Company’s exposure is reasonably estimable, the Company records a charge against earnings. The Company recognizes related insurance reimbursement when receipt is deemed probable. The Company’s estimate of
liabilities and related insurance recoveries may change as further facts and circumstances become known.
NEW PRONOUNCEMENTS
Refer to the “Recently Adopted Accounting Pronouncements” and “Recently Issued Accounting Pronouncements” sections within Note 1, Summary of Significant Accounting
Policies, in the Notes to Consolidated Financial Statements included in this report for additional details.