SENSIENT TECHNOLOGIES CORP

In the opinion of Sensient Technologies Corporation (the Company), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) that are necessary to present fairly the financial position of the Company as of September 30, 2024, and the results of operations, comprehensive income, and shareholders’ equity for the three and nine months ended September 30, 2024 and 2023, and cash flows for the nine months ended September 30, 2024 and 2023. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Expenses are charged to operations in the period incurred.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require the Company to disclose segment expenses that are significantand regularly provided to the Company’s chief operating decision maker (CODM). In addition, this ASU will require the Company to disclose the title and position of its CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company will adopt this ASU in the fourth quarter of 2024 using a retrospective transition method.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which will require the Company to disclose specified additional information in its income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. This ASU will also require the Company to disaggregate its income taxes paid disclosure by federal, state, and foreign taxes, with further disaggregation required for significant individual jurisdictions. This ASU is effective for fiscal years beginning after December 15, 2024. The Company will adopt this ASU in the fourth quarter of 2025 using a prospective transition method.

Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2023, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change.

During the fourth quarter of 2023, the Board of Directors of the Company approved a plan to undertake an effort to optimize certain production facilities and improve efficiencies within the Company (Portfolio Optimization Plan). As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company evaluated the closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the closure of its sales office in Granada, Spain, and the centralization and elimination of certain selling and administrative positions. In addition, in the Color segment, the Company evaluated the closure of a manufacturing facility in Delta, British Columbia, Canada, the closure of a sales office in Argentina, and centralizing and eliminating certain production positions and selling and administrative positions. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.

The Company’s Felinfach site will continue to operate until all production activities have successfully transferred to other locations, and then will be closed. The Company has substantially completed all other actions contemplated under the Portfolio Optimization Plan in accordance with local laws.

The Company recorded non-cash impairment charges in Selling and Administrative Expenses, primarily related to certain property, plant, and equipment during the nine months ended September 30, 2024, when the estimated fair value of these assets was lower than the carrying value. The property, plant, and equipment related to a product line that was shut down and determined to not be usable at other plant locations.

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The Company recorded $2.7 million and $3.7 million of accrued liabilities in Other Accrued Expenses on the Company’s Consolidated Balance Sheet related to the Portfolio Optimization Plan as of September 30, 2024 and December 31, 2023, respectively. The Company expects the Portfolio Optimization Plan will cost approximately $40 million, of which $33.6 million has been incurred through September 30, 2024, primarily related to non-cash impairment charges and proposed employee separation costs, and upon completion would reduce annual operating costs by approximately $8 million to $10 million, with the full benefit expected to be achieved after 2025. The Company anticipates it would reduce headcount by approximately 100 positions, primarily in the Flavors & Extracts and Color segments, related to certain production and selling and administrative positions.

The following table summarizes the Portfolio Optimization Plan expenses by segment for the three months ended September 30, 2024:

The following table summarizes the Portfolio Optimization Plan expenses by segment for the nine months ended September 30, 2024:

Trade accounts receivables are recorded at their face amount, less an allowance for expected losses on doubtful accounts. The allowance for doubtful accounts is calculated based on customer-specific analysis and an aging methodology using historical loss information. The Company believes historical loss information is a reasonable basis for expected credit losses as the Company’s historical credit loss experience correlates with its customer delinquency status. This information is also adjusted for any known current economic conditions. Forecasted economic conditions have not had a significant impact on the current credit loss estimate due to the short-term nature of the Company’s customer receivables; however, the Company will continue to monitor and evaluate as economic conditions change. Additionally, as the Company only hasone portfolio segment, there are not different risks between portfolios. Specific accounts are written off against the allowance for doubtful accounts when the receivable is deemed no longer collectible.

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The following table summarizes the changes in the allowance for doubtful accounts during the three and nine month periods ended September 30, 2024 and 2023:

At September 30, 2024, and December 31, 2023, inventories included finished and in-process products totaling $415.4 million and $437.1 million, respectively, and raw materials and supplies of $165.4 million and $161.3 million, respectively.

On August 30, 2024, the Company entered into Amendment No. 11 (Receivables Amendment) to the Receivables Purchase Agreement, dated as of October 3, 2016. The Receivables Amendment extended the termination date of the Receivables Purchase Agreement from August 30, 2024 to August 29, 2025.

On October 31, 2024, the Company entered into Amendment No. 1 (Loan Amendment) to the Loan Agreement with PNC Bank, N.A., dated as of November 7, 2022. The Loan Amendment extended the maturity date of the Loan Agreement from November 7, 2024 to November 7, 2025.

Accounting Standards Codification 820, Fair Value Measurement, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, and short-term borrowings were approximately the same as the fair values as of September 30, 2024 and December 31, 2023. 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 $0.3 million and an asset of $1.0 million as of September 30, 2024 and December 31, 2023, respectively. 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 September 30, 2024 and December 31, 2023 was $625.8 million and $645.2 million, respectively. The fair value of the long-term debt at September 30, 2024 and December 31, 2023 was $638.4 million and $653.7 million, respectively.

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The Company evaluates performance based on operating income before share-based compensation; restructuring and other charges, including Portfolio Optimization Plan costs; interest expense; and income taxes (segment operating income). Total revenue and segment 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.

The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. The Company’sthree reportable segments are the Flavors & Extracts and Color segments, which are both managed on a product line basis, and the Asia Pacific segment, which is managed on a geographic basis. The Company’s Flavors & Extracts segment produces flavor, extracts, and essential oils products that impart a desired taste, texture, aroma, or other characteristics to a broad range of consumer and other products. The Color segment produces natural and synthetic color systems for use in foods, beverages, pharmaceuticals, and nutraceuticals; colors and other ingredients for personal care, such as active ingredients, solubilizers, and surface treated pigments; pharmaceutical and nutraceutical excipients, such as colors, flavors, coatings, and nutraceutical ingredients; and technical colors for industrial applications. The Asia Pacific segment is managed on a geographic basis and produces and distributes color, flavor, and essential oils products in the Asia Pacific countries. The Company’s corporate expenses, share-based compensation, and restructuring and other charges, including Portfolio Optimization Plan costs, are included in the “Corporate & Other” category.

Operating results by segment for the periods presented are as follows:

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Product Lines

Geographic Markets

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The Company’s components of annual benefit cost for the defined benefit plans for the periods presented are as follows:

The Company’s non-service cost portion of defined benefit expense is recorded in Interest Expenseon the Company’s Consolidated Statements of Earnings. The Company’s service cost portion of defined benefit expense is recorded in Selling and Administrative Expenses on the Company’s Consolidated Statements of Earnings.

The Company may use forward exchange contracts and foreign currency denominated debt to manage its exposure to foreign exchange risk in order 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 18 months. The Company’s primary hedging activities and their accounting treatment are summarized below.

Forward exchange contracts – Certain forward exchange contracts have been designated as cash flow hedges. The Company had $24.3 million and $58.4 millionof forward exchange contracts designated as cash flow hedges outstanding as of September 30, 2024 and December 31, 2023, respectively. For the three and nine months ended September 30, 2024, the amounts reclassified into net earnings in the Company’s Consolidated Statements of Earnings that offset the underlying transactions’ impact on earnings in the same period were not material. For the three months ended September 30, 2023, a gain of $0.8 million was reclassified into net earnings in the Company’s Consolidated Statements of Earnings that offset the underlying transactions’ impact on earnings in the same period. For the nine months ended September 30, 2023, a gain of $1.4 million was reclassified into net earnings in the Company’s Consolidated Statements of Earnings that offset the underlying transactions’ impact on earnings in the same period. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges. The results of these transactions were not material to the financial statements of the Company.

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Net investment hedges – The Company has designated certain foreign currency denominated long-term borrowings as partial hedges of the Company’s foreign currency net asset positions. As of September 30, 2024 and December 31, 2023, the total value of the Company’s net investment hedges was $317.4 million and $313.3 million, respectively. These net investment hedges included Euro and British Pound denominated long-term debt. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in Other Comprehensive Income (OCI). For the three months ended September 30, 2024 and 2023, the impact of foreign exchange rates on these debt instruments increased debt by $12.6 million and decreased debt by $11.0 million, respectively, which has been recorded as foreign currency translation in OCI. For the nine months ended September 30, 2024 and 2023, the impact of foreign exchange rates on these debt instruments increased debt by $4.1 million and decreased debt by $2.8 million, respectively, which has been recorded as foreign currency translation in OCI.

The effective income tax rates for the three months ended September 30, 2024 and 2023 were 23.7% and 17.5%, respectively. For the nine months ended September 30, 2024 and 2023, the effective income tax rates were 25.7% and 22.7%, respectively. The effective tax rates for the three and nine months ended September 30, 2024 and 2023, were impacted by changes in estimates associated with the finalization of prior year foreign tax items and the mix of foreign earnings. The effective tax rates for both the three and nine months ended September 30, 2024, were also impacted by the limited tax deductibility of costs related to the Portfolio Optimization Plan. The effective tax rates for both the three and nine months ended September 30, 2023, were also impacted by changes in valuation allowances.

The following table summarizes the changes in OCI during the three and nine month periods ended September 30, 2024 and 2023:

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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.

On October 24, 2024, the Company announced its quarterly dividend of $0.41 per share would be payable on December 2, 2024.

On October 31, 2024, the Company entered into an amendment to its existing Loan Agreement with PNC Bank, N.A. See Note 5, Debt, for further details.

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