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SENSIENT TECHNOLOGIES : Management's Discussion and Analysis of Financial Condition and Results of Operation. (form 10-K)

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02/23/2018 | 05:13pm CET

OVERVIEW

Sensient Technologies Corporation (the "Company") is a global developer,
manufacturer, and supplier of flavor and fragrance systems for the food,
beverage, personal care, and household-products industries. The Company is also
a leading developer, manufacturer, and supplier of colors for businesses
worldwide. The Company provides natural and synthetic color systems for use in
foods, beverages, pharmaceuticals and nutraceuticals; colors, inks and other
ingredients for cosmetics, pharmaceuticals, nutraceuticals and digital printing;
and technical colors for industrial applications. The Company's three reportable
segments are the Flavors & Fragrances 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 and restructuring and other
costs are included in the "Corporate & Other" category.

The Company's diluted earnings per share from continuing operations were $2.03
in 2017 and $2.74 in 2016. Included in the 2017 and 2016 results, were $48.1
million, or $0.96 per share, and $26.1 million, or $0.47 per share,
respectively, of restructuring and other costs. Included in the 2017 results,
were $18.4 million of provisional tax expense related to the enactment of the
Tax Cuts and Jobs Act ("2017 Tax Legislation") in the fourth quarter of 2017,
equating to an impact of 42 cents per share. Adjusted diluted earnings per
share, which exclude these restructuring and other costs as well as the impact
of the 2017 Tax Legislation, were $3.42 in 2017 and $3.21 in 2016 (see
discussion below regarding non-GAAP financial measures and the Company's
restructuring activities, divestiture and income taxes).

Since 1962, the Company has paid without interruption a quarterly cash dividend.
In 2017, the Company increased the quarterly dividend by 3 cents per share from
30 cents to 33 cents per share, or $1.32 per share on an annualized basis. In
addition, the Company repurchased $87.2 million of Company stock in 2017, which
is in addition to the $50.1 million repurchased in 2016.

Additional information on the results is included below.

RESULTS OF CONTINUING OPERATIONS
2017 vs. 2016

Revenue

Sensient's revenue was approximately $1.4 billion in both 2017 and 2016.

Gross Profit
The Company's gross margin was 34.9% in 2017 and 34.4% in 2016. Included in the
cost of products sold are $2.9 million and $2.1 million of restructuring costs
for 2017 and 2016, respectively. The increase in the gross margin is primarily a
result of higher selling prices and the favorable impact of the divestitures
(See Note 12, Restructuring Charges, and Note 14, Divestitures), partially
offset by higher raw material and manufacturing costs. Restructuring costs
reduced gross margin by 20 basis points and 10 basis points in 2017 and 2016,
respectively.

                                                                              17

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Index

Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 22.6% in 2017 and
21.0% in 2016, respectively. Restructuring and other costs of $45.2 million and
$24.0 million for 2017 and 2016, respectively, were included in selling and
administrative expense. Selling and administrative expense as a percent of
revenue were higher in 2017 than 2016 primarily as a result of higher
restructuring and other costs, partially offset by lower performance based
executive compensation and professional fees. Restructuring and other costs
increased selling and administrative expense as a percent of revenue by 330
basis points and 180 basis points in 2017 and 2016, respectively.

Operating Income
Operating income was $167.8 million in 2017 and $185.6 million in 2016.
Operating margins were 12.3% in 2017 and 13.4% in 2016. Restructuring and other
costs reduced operating margins by 350 basis points and 190 basis points in 2017
and 2016, respectively.

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

Interest Expense Interest expense was $19.4 million in 2017 and $18.3 million in 2016. The increase in expense was primarily due to the increase in average debt outstanding.

Income Taxes
The effective income tax rate was 39.6% in 2017 and 26.5% in 2016. The effective
tax rates in both 2017 and 2016 were impacted by restructuring and other
activities, changes in estimates associated with the finalization of prior year
foreign and domestic tax items, audit settlements, adjustments to valuation
allowances and mix of foreign earnings. The effective tax rate in 2017 was also
impacted by the limited tax deductibility of losses (See Note 12, Restructuring
Charges) and the result of the cumulative foreign currency effect related to
certain repatriation transactions.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Act").
The Act, which is also commonly referred to as "2017 Tax Legislation",
significantly changes U.S. corporate income tax laws by reducing the U.S.
corporate income tax rate to 21% beginning in 2018 and creating a territorial
tax system with a one-time mandatory tax on previously deferred foreign earnings
of U.S. subsidiaries. As a result, the Company recorded a net charge of $18.4
million during the fourth quarter of 2017. This amount consists of reassessing
the U.S. deferred tax assets and liabilities based on the lower corporate income
tax rate, adjustments to the Company's foreign tax credit carryover, and the
one-time mandatory tax on previously deferred foreign earnings of U.S.
subsidiaries.

Although the Company believes that $18.4 million is a reasonable estimate of the
current year impact of the 2017 Tax Legislation, it should be considered a
provisional estimate. The Company expects additional guidance on the 2017 Tax
Legislation in 2018, and will finalize certain tax positions when it files its
2017 U.S. tax return. The ultimate impact could differ from these provisional
amounts, possibly materially, due to additional guidance, changes in
interpretation, additional analysis, and assumptions the Company has made. Any
adjustments to the provisional estimate will be reported in income tax expense
in the reporting period in which any such adjustments are determined, which will
be no later than the fourth quarter of 2018.

                                                          2017        2016
          Rate before restructuring and discrete items     24.5 %      27.7 %
          2017 Tax Legislation                             12.4 %         0 %
          Restructuring impact                              3.9 %       1.0 %
          Discrete items                                   (1.2 %)     (2.2 %)
          Reported effective tax rate                      39.6 %      26.5 %


The 2018 effective income tax rate is estimated to be between 24% and 25%, before any discrete items.

Restructuring

The Company incurred restructuring costs in both continuing and discontinued
operations. The discussion here 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 13, Discontinued Operations, in more detail.

                                                                            

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Index

Between March 2014 and 2017, the Company executed a restructuring plan ("2014
Restructuring Plan" or "Plan") to eliminate underperforming operations,
consolidate manufacturing facilities, and improve efficiencies within the
Company. The Company determined that it had redundant manufacturing capabilities
in both North America and Europe and that it could lower costs and operate more
efficiently by consolidating into fewer facilities. Eight facilities were
identified for consolidation in the Flavors & Fragrances segment, four in North
America and four in Europe. Closures have been completed in Indianapolis,
Indiana, United States? Cornwall, Mississauga, and Halton Hills, Canada? Bremen,
Germany? and Milan, Italy. As part of the Plan, the Company eventually sold its
European Natural Ingredients business, including its facilities in Elburg, the
Netherlands, and Marchais, France, as discussed below. In addition, the Company
discontinued one of the businesses in the Color segment, located near Leipzig,
Germany, because it did not fit with the Company's long-term strategic plan and
it had generated losses for several years. In 2015, the Company identified
additional opportunities to consolidate manufacturing operations at one of the
Color segment's facilities in Europe and to eliminate additional positions in
the European Flavors & Fragrances businesses. The Company has completed all of
the above-mentioned activities and closures, as of December 31, 2017.

Based on this Plan, the Company determined that certain long-lived assets
associated with the underperforming operations were impaired. The Company
reduced the carrying amounts of these assets to their aggregate respective fair
values, which were determined based on independent market valuations. Also,
certain machinery and equipment was identified to be disposed of at the time of
the facility closures and the associated depreciation for these assets has been
accelerated. The Company recorded long-lived asset impairments, including the
impairment charges and accelerated depreciation of $2.2 million, $1.9 million,
and $14.5 million during the years ended December 31, 2017, 2016, and 2015,
respectively. Since initiating the Plan, the Company has recorded $89 million of
long-lived asset impairments, including the impairment charges and accelerated
depreciation. In addition, certain intangible assets, inventory, and other
current assets were also determined to be impaired and were written down.

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

In connection with the 2014 Restructuring Plan, the Company approved a plan to
dispose of a certain business, located near Leipzig, Germany, within the Color
segment. Production ceased in 2014 and the business met the criteria to be
reported as a discontinued operation. In 2016, the facility and remaining assets
were sold and the entity was liquidated.

During the three months ended March 31, 2017, the Company sold its European
Natural Ingredients business (also known as the European Dehydrated Vegetable
business), a business in the Flavors & Fragrances segment. This business had two
facilities, located in Marchais, France, and Elburg, the Netherlands. As part of
the 2014 Restructuring Plan, the Company had concluded that the European Natural
Ingredients business had not generated significant profits for several years and
did not fit with the Company's long-term strategic plan. The Company completed
the sale of this business on March 27, 2017, for a de minimis amount and has
recognized a non-cash loss of approximately $21.6 million.

As of December 31, 2017, the Company has recorded assets held for sale of land,
buildings, and equipment of $2 million related to the 2014 Restructuring Plan.
In accordance with GAAP, the Company recorded total restructuring costs of $36.5
million, $11.1 million, and $42.8 million for the years ended December 31, 2017,
2016, and 2015, respectively. Since initiating the 2014 Restructuring Plan, the
Company has incurred $189 million of restructuring costs as of December 31,
2017.

The Company does not expect any restructuring costs in 2018.

Since initiating the Plan, the Company has realized total savings of
approximately $22 million as of December 31, 2017. In 2017, the Company realized
a de minimis amount of savings, but expects additional savings of approximately
$4 million to $5 million in 2018. Expected savings have shifted from 2017 to
2018 primarily due to the delay in closing the Indianapolis facility. The
Company continues its efforts to optimize production at the consolidated sites.

Divestiture

In 2016, the Company's Board of Directors authorized management to explore
strategic alternatives for a facility and certain related business lines within
the Flavors & Fragrances segment in Strasbourg, France. In 2016, the Company
recorded a non-cash impairment charge of $10.8 million, in selling and
administrative expense, reducing the carrying value of the long-lived assets for
this facility to zero. An estimate of the fair value of this business less cost
to sell was determined to be lower than its carrying value. The difference
between the fair value and its carrying value exceeded the existing net book
value of the long-lived assets. In addition, the Company incurred $0.7 million
of outside professional fees and other related costs in 2016, as a result of the
then anticipated divestiture.

On January 6, 2017, the Company completed the sale of this facility and certain
related business lines for approximately $12.5 million. At that time, the
Company recognized an additional non-cash loss of approximately $11.0 million
during the three months ended March 31, 2017. In addition, an additional
non-cash loss of approximately $0.6 million was recognized during the three
months ended June 30, 2017. The additional non-cash losses in 2017 were
primarily due to changes in the estimates related to working capital balances.

                                                                            

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Index

NON-GAAP FINANCIAL MEASURES
Within the following tables, the Company reports certain non-GAAP financial
measures, including: (1) adjusted operating income, adjusted net earnings, and
adjusted diluted EPS from continuing operations (which exclude restructuring and
other costs as well as the impact of the Tax Cuts and Jobs Act ("2017 Tax
Legislation")) and (2) percentage changes in revenue, operating income, diluted
EPS, adjusted operating income, and adjusted diluted EPS on a local currency
basis (which eliminate the effects that result from translating its
international operations into U.S. dollars). The other costs in 2017 and 2016
are divestiture related costs, discussed under "Divestiture" above.

The Company has included each of these non-GAAP measures in order to provide
additional information regarding our underlying operating results and comparable
year-over-year performance. Such information is supplemental to information
presented in accordance with GAAP and is not intended to represent a
presentation in accordance with GAAP. These non-GAAP measures should not be
considered in isolation. Rather, they should be considered together with GAAP
measures and the rest of the information included in this report. Management
internally reviews each of these non-GAAP measures to evaluate performance on a
comparative period-to-period basis and to gain additional insight into
underlying operating and performance trends. The Company believes that this
information can be beneficial to investors for the same purposes. These non-GAAP
measures may not be comparable to similarly titled measures used by other
companies.

                                                           Twelve Months Ended December 31,
(In thousands except per share amounts)                  2017              

2016 % Change Operating Income from continuing operations (GAAP) $ 167,806 $ 185,609

           (9.6 %)
Restructuring - Cost of products sold                       2,889           

2,065

Restructuring - Selling and administrative                 33,627           

12,486

Other - Selling and administrative (1)                     11,555           

11,535

Adjusted operating income                            $    215,877       $  211,695            2.0 %

Net Earnings from continuing operations (GAAP) $ 89,600 $ 122,913 (27.1 %) Restructuring & other, before tax

                          48,071           

26,086

Tax impact of restructuring & other                        (5,602 )         (4,999 )
Impact of the 2017 Tax Legislation                         18,446           

-

Adjusted net earnings                                $    150,515       $  144,000            4.5 %

Diluted EPS from continuing operations (GAAP) $ 2.03 $

   2.74          (25.9 %)
Restructuring & other, net of tax                            0.96             0.47
2017 Tax Legislation                                         0.42                -
Adjusted diluted EPS                                 $       3.42       $     3.21            6.5 %


(1) The other costs in 2017 and 2016 are for the divestiture related costs

discussed under "Divestiture" above.

Note: Earnings per share calculations may not foot due to rounding differences.

20

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Index

The following table summarizes the percentage change in the 2017 results compared to the 2016 results in the respective financial measures.

                                                                  Twelve 

Months Ended December 31, 2017

                                                                           Foreign Exchange
                                                        Total                   Rates                Local Currency
Revenue
Flavors & Fragrances                                         (6.1 %)                     0.0 %                  (6.1 %)
Color                                                         4.4 %                      0.9 %                   3.5 %
Asia Pacific                                                  1.6 %                      0.8 %                   0.9 %
Total Revenue                                                (1.5 %)                     0.5 %                  (2.0 %)

Operating Income From Continuing Operations
Flavors & Fragrances                                         (7.8 %)                    (0.4 %)                 (7.4 %)
Color                                                         7.2 %                      0.6 %                   6.5 %
Asia Pacific                                                (12.0 %)                     1.1 %                 (13.1 %)
Corporate & Other                                            18.9 %                      0.1 %                  18.7 %
Operating Income from continuing operations                  (9.6 %)                     0.2 %                  (9.8 %)
Diluted EPS from continuing operations                      (25.9 %)                     0.0 %                 (25.9 %)

Adjusted operating income (1)                                 2.0 %                      0.2 %                   1.8 %
Adjusted diluted EPS (1)                                      6.5 %                      0.3 %                   6.2 %


(1) Refer to table above for a reconciliation of these non-GAAP measures.



SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by
its chief operating decision maker to allocate resources and assess performance.
Segment performance is evaluated on operating income before restructuring and
other costs (which are reported in Corporate & Other), interest expense, and
income taxes.

The Company's reportable segments consist of the Flavors & Fragrances, Color, and Asia Pacific segments.

Beginning in the first quarter of 2017, the results of operations for certain of
the Company's cosmetic and fragrance businesses in the Asia Pacific segment are
now reported in the Color segment and Flavors & Fragrances segment,
respectively. In addition, the Color segment reassigned customer accounts and
revised cost allocations amongst the businesses within their segment resulting
in changes in the underlying components of segment revenue and segment operating
income. The results for 2016 have been restated to reflect these changes.

Flavors & Fragrances
Revenue for the Flavors & Fragrances segment was $746.9 million in 2017 and
$795.8 million in 2016, a decrease of 6.1%. Foreign exchange did not have a
material impact on revenue. The decrease in revenue was primarily due to lower
revenue in Europe ($27.2 million) and North America ($22.5 million). The lower
revenue in Europe was primarily due to the divestitures ($24.4 million) and
lower volumes ($6.5 million), partially offset by higher selling prices ($4.4
million). The lower revenue in North America was primarily due to lower volumes
($36.3 million), partially offset by higher selling prices ($13.2 million).

Gross margin increased 60 basis points to 28.2% in 2017 from 27.6% in 2016. The
increase was primarily due to the impact of higher selling prices and the impact
of the divestitures, partially offset by higher manufacturing and other costs
and lower volume and product mix.

Segment operating income for the Flavors & Fragrances segment was $114.3 million
in 2017, and $124.1 million in 2016. The lower segment operating income was
primarily a result of lower segment operating income in North America ($9.0
million). The lower operating income in North America was primarily due to
unfavorable volume and product mix ($11.7 million), higher manufacturing and
other costs ($6.7 million), and higher raw material costs ($3.1 million),
partially offset by higher selling prices ($13.2 million). Segment operating
margin was 15.3% in 2017 and 15.6% in 2016.

Color

Revenue for the Color segment was $526.4 million in 2017, and $504.1 million in
2016, an increase of 4.4%. The increase in revenue was primarily due to higher
revenue in non-food colors ($21.8 million). The higher revenue in non-food
colors was primarily due to higher volumes ($18.1 million), primarily in
cosmetic colors, and higher selling prices ($1.8 million).

                                                                            

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Index

Gross margin for the Color segment increased 20 basis points to 42.2% in 2017
from 42.0% in 2016. The increase was primarily due to higher selling prices,
favorable volumes, and product mix, partially offset by the unfavorable impact
of higher manufacturing and other costs.

Segment operating income for the Color segment was $113.4 million in 2017, and
$105.8 million in 2016, an increase of 7.2%. The higher segment operating income
was due to higher segment operating income in non-food colors ($9.8 million)
offset by lower segment operating income in food and beverage colors ($2.2
million). The higher operating income for non-food colors was primarily due to
favorable volume and product mix ($9.1 million). The lower profit for food and
beverage colors is primarily due to unfavorable volume and product mix ($4.4
million) and higher manufacturing and other costs ($1.8 million), partially
offset by higher selling prices ($3.3 million). Segment operating margin was
21.5% in 2017 and 21.0% in 2016.

Asia Pacific
Revenue for the Asia Pacific segment was $123.2 million in 2017, and $121.2
million in 2016, an increase of 1.6%.  The higher segment revenue was due to
higher selling prices ($1.7 million), partially offset by lower volumes ($0.6
million).

Gross margin for the Asia Pacific segment decreased 120 basis points to 36.8% in
2017 from 38.0% in 2016. The decrease was primarily due to unfavorable volumes
and product mix and higher manufacturing costs, partially offset by higher
selling prices and the favorable impact of exchange rates.

Segment operating income for the Asia Pacific segment was $20.8 million in 2017,
and $23.6 million in 2016, a decrease of 12.0%. The lower segment operating
income was a result of higher manufacturing and other costs ($3.2 million) and
unfavorable volume and product mix ($1.3 million), partially offset by higher
selling prices ($1.7 million). Segment operating margin was 16.9% in 2017 and
19.5% in 2016.

Corporate & Other
The Corporate & Other expenses were $80.7 million in 2017 and $67.9 million in
2016, an increase of 18.9%, primarily due to higher restructuring and other
costs ($22.0 million) partially offset by lower performance based executive
compensation ($4.1 million) and professional services ($3.6 million).  The
Company evaluates segment performance before restructuring and other costs, and
reports all of the restructuring and other costs in Corporate & Other.
Restructuring and other costs were $48.1 million and $26.1 million in 2017 and
2016, respectively.

RESULTS OF CONTINUING OPERATIONS
2016 vs. 2015

Revenue

Sensient's revenue was approximately $1.4 billion in both 2016 and 2015.

Gross Profit
The Company's gross margin was 34.4% in 2016 and 33.0% in 2015. Included in the
cost of products sold are $2.1 million and $6.1 million of restructuring costs
for 2016 and 2015, respectively. The increase in the gross margin is primarily a
result of higher selling prices and volumes, mainly in the Color segment,
savings associated with the 2014 Restructuring Plan ($7.9 million), and reduced
restructuring costs, partially offset by higher raw material and manufacturing
costs. Restructuring costs reduced gross margin by 10 basis points and 50 basis
points in 2016 and 2015, respectively.

Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 21.0% in 2016 and
20.9% in 2015. Restructuring and other costs of $24.0 million and $37.5 million
for 2016 and 2015, respectively, was included in selling and administrative
expense. Selling and administrative expense as a percent of revenue in 2016 was
comparable to 2015 as a result of higher performance based executive
compensation ($7.6 million) and professional fees ($6.2 million), partially
offset by lower restructuring and other costs ($13.5 million). Restructuring and
other costs increased selling and administrative expense as a percent of revenue
by 180 basis points and 270 basis points in 2016 and 2015, respectively.

Operating Income
Operating income was $185.6 million in 2016 and $166.3 million in 2015.
Operating margins increased to 13.4% in 2016 from 12.1% in 2015. Restructuring
and other costs reduced operating margins by 190 basis points and 320 basis
points in 2016 and 2015, respectively.

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

22

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Index

Interest Expense Interest expense was $18.3 million in 2016 and $16.9 million in 2015. The increase in expense was primarily due to the increase in average debt outstanding, which was partially offset by lower average interest rates.

Income Taxes
The effective income tax rate was 26.5% in 2016 and 28.2% in 2015. The effective
tax rates in both 2016 and 2015 were impacted by audit settlements, mix of
foreign earnings, and restructuring and other costs. The effective tax rate in
2015 was also impacted by changes in estimates associated with the finalization
of prior year tax items. In total, the net impact of these discrete items and
restructuring and other costs reduced the effective income tax rate by 1.2% for
2016 and 2.4% for 2015.

                                                          2016        2015
          Rate before restructuring and discrete items     27.7 %      30.6 %
          Restructuring impact                              1.0 %       0.9 %
          Discrete items                                   (2.2 %)     (3.3 %)
          Reported effective tax rate                      26.5 %      28.2 %


Restructuring

As part of the 2014 Restructuring Plan, the Company recorded $11.1 million and
$42.8 million of restructuring costs in 2016 and 2015, respectively. For further
information on the 2014 Restructuring Plan, see the discussion in the
Management's Discussion and Analysis of Financial Condition and Results of
Operation.

NON-GAAP FINANCIAL MEASURES
Within the following tables, the Company reports certain non-GAAP financial
measures, including: (1) adjusted operating income, adjusted net earnings, and
adjusted diluted EPS from continuing operations (which exclude restructuring and
other costs) and (2) percentage changes in revenue, operating income, diluted
EPS, adjusted operating income, and adjusted diluted EPS on a local currency
basis, which eliminates the effects that result from translating its
international operations into U.S. dollars. The other costs in 2016 are for the
divestiture related costs discussed under "Divestiture" above, and the other
costs in 2015 are acquisition related costs.

The Company has included each of these non-GAAP measures in order to provide
additional information regarding our underlying operating results and comparable
year-over-year performance. Such information is supplemental to information
presented in accordance with GAAP and is not intended to represent a
presentation in accordance with GAAP. These non-GAAP measures should not be
considered in isolation. Rather, they should be considered together with GAAP
measures and the rest of the information included in this report. Management
internally reviews each of these non-GAAP measures to evaluate performance on a
comparative period-to-period basis and to gain additional insight into
underlying operating and performance trends. The Company believes 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.

                                                            Twelve Months Ended December 31,
(In thousands except per share amounts)                  2016               2015          % Change
Operating Income from continuing operations (GAAP)   $    185,609       $    166,341           11.6 %
Restructuring - Cost of products sold                       2,065           

6,098

Restructuring - Selling and administrative                 12,486           

36,705

Other - Selling and administrative (1)                     11,535           

823

Adjusted operating income                            $    211,695       $    209,967            0.8 %

Net Earnings from continuing operations (GAAP) $ 122,913 $

  107,247           14.6 %
Restructuring & other, before tax                          26,086           

43,626

Tax impact of restructuring & other                        (4,999 )          (10,017 )
Adjusted net earnings                                $    144,000       $    140,856            2.2 %

Diluted EPS from continuing operations (GAAP) $ 2.74 $

     2.32           18.1 %
Restructuring & other, net of tax                            0.47           

0.73

Adjusted diluted EPS                                 $       3.21       $       3.05            5.2 %



(1) The other costs in 2016 are for the divestiture related costs discussed under

"Divestiture" above and the other costs in 2015 are acquisition related

     costs.



Note: Earnings per share calculations may not foot due to rounding differences.

23

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Index

The following table summarizes the percentage change in the 2016 results compared to the 2015 results in the respective financial measures.

                                                                 Twelve 

Months Ended December 31, 2016

                                                                              Foreign
                                                        Total              Exchange Rates           Local Currency
Revenue
Flavors & Fragrances                                         (2.9 %)                  (1.8 %)                  (1.0 %)
Color                                                         4.6 %                   (2.8 %)                   7.4 %
Asia Pacific                                                  9.0 %                   (1.3 %)                  10.3 %
Total Revenue                                                 0.5 %                   (2.1 %)                   2.6 %

Operating Income From Continuing Operations
Flavors & Fragrances                                          1.5 %                   (1.6 %)                   3.1 %
Color                                                         8.4 %                   (2.5 %)                  10.9 %
Asia Pacific                                                  6.2 %                   (1.8 %)                   8.0 %
Corporate & Other                                           (10.5 %)                  (1.5 %)                  (9.0 %)
Operating Income from continuing operations                  11.6 %                   (2.2 %)                  13.8 %
Diluted EPS from continuing operations                       18.1 %                   (2.6 %)                  20.7 %

Adjusted operating income (1)                                 0.8 %                   (2.3 %)                   3.2 %
Adjusted diluted EPS (1)                                      5.2 %                   (2.6 %)                   7.9 %



  (1) Refer to table above for a reconciliation of these non-GAAP measures.



SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by
its chief operating decision maker to allocate resources and assess performance.
Segment performance is evaluated on operating income before restructuring and
other costs (which are reported in Corporate & Other), interest expense, and
income taxes.

The Company's reportable segments consist of the Flavors & Fragrances, Color,
and Asia Pacific segments.  As stated above, beginning in the first quarter of
2017, the results of operations for certain of the Company's cosmetic and
fragrance businesses in the Asia Pacific segment are now reported in the Color
segment and Flavors & Fragrances segment. In addition, the Color segment
reassigned customer accounts and revised cost allocations amongst the businesses
within their segment resulting in changes in the underlying components of
segment revenue and segment operating income. All prior year results have been
restated to reflect each of these changes.

Flavors & Fragrances
Revenue for the Flavors & Fragrances segment was $795.8 million in 2016 and
$819.5 million in 2015, a decrease of 2.9%. The decrease in revenue was
primarily due to lower revenue in North America ($13.3 million) and Europe ($9.8
million). The lower revenue in North America was primarily due to lower volumes
($29.0 million), partially offset by higher selling prices ($18.0 million). The
lower revenue in Europe was primarily a result of the unfavorable impact of
exchange rates ($7.2 million) and lower volumes ($4.4 million), partially offset
by higher selling prices ($1.9 million).

Gross margin increased 50 basis points to 27.6% in 2016 from 27.1% in 2015. The
increase was primarily due to the impact of higher selling prices and savings
associated with the 2014 Restructuring Plan, partially offset by higher raw
material costs and lower volume and product mix.

Segment operating income for the Flavors & Fragrances segment was $124.1 million
in 2016 and $122.3 million in 2015, an increase of 1.5%. The higher segment
operating income was primarily a result of higher segment operating income in
North America ($5.8 million), partially offset by lower segment operating income
in Europe ($3.2 million) and lower segment operating income in Latin America
($0.8 million). The higher operating income in North America was primarily due
to higher selling prices ($18.0 million), savings associated with the
Restructuring Plan ($4.4 million), lower manufacturing and other costs ($3.1
million), and profit on the sale of an import right ($2.2 million) partially
offset by volume and product mix ($11.6 million) and higher raw material costs
($9.8 million). The lower operating income in Europe was primarily due to higher
manufacturing and other costs ($10.2 million), partially offset by savings
associated with the 2014 Restructuring Plan ($3.8 million), higher selling
prices ($1.9 million), and lower raw material costs ($1.3 million). The lower
operating income in Latin America was primarily due to higher raw material costs
($2.6 million), higher manufacturing and other costs ($1.9 million) and the
unfavorable impact of exchange rates ($1.2 million), partially offset by higher
selling prices ($2.6 million) and volume and product mix ($2.3 million). Segment
operating margin increased 70 basis points in 2016 to 15.6% from 14.9% in 2015.

                                                                            

24

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Index

Color

Revenue for the Color segment was $504.1 million in 2016 and $481.9 million in
2015, an increase of 4.6%. The increase in revenue was primarily due to higher
revenue in non-food colors ($21.9 million). The higher revenue in non-food
colors was primarily due to higher volumes ($27.5 million), primarily in
cosmetic colors and specialty inks, partially offset by the unfavorable impact
of exchange rates ($3.7 million) and lower selling prices ($1.9 million).

Gross margin for the Color segment increased 130 basis points to 42.0% in 2016
from 40.7% in 2015. The increase was primarily due to higher volumes and product
mix, selling prices and lower manufacturing costs, partially offset by the
unfavorable impact of exchange rates and higher raw material costs.

Segment operating income for the Color segment was $105.8 million in 2016 and
$97.7 million in 2015, an increase of 8.4%. The higher segment operating income
was due to higher non-food colors ($7.4 million) and food and beverage colors
($0.7 million). The higher operating income for non-food colors was primarily
due to volume and product mix ($14.4 million), partially offset by higher
manufacturing and other costs ($3.9 million), lower selling prices ($1.9
million), higher raw material costs ($0.6 million), and the unfavorable impact
of exchange rates ($0.6 million). The higher profit for food and beverage colors
is primarily due to higher selling prices ($8.8 million), volume and product mix
($2.7 million), and savings associated with the 2014 Restructuring Plan ($0.5
million), partially offset by higher raw material costs ($4.8 million), higher
manufacturing and other costs ($4.6 million) and the unfavorable impact of
exchange rates ($1.8 million). Segment operating margin was 21.0% in 2016 and
20.3% in 2015.

Asia Pacific Revenue for the Asia Pacific segment was $121.2 million in 2016, and $111.2 million in 2015, an increase of 9.0%. The higher segment revenue was due to higher volumes ($9.0 million) and selling prices ($2.5 million), partially offset by the unfavorable impact of exchange rates ($1.4 million).

Gross margin for the Asia Pacific segment increased 10 basis points to 38.0% in
2016 from 37.9% in 2015. The increase was primarily due to higher selling prices
and volumes and product mix, partially offset by higher manufacturing and other
costs and raw material costs.

Segment operating income for the Asia Pacific segment was $23.6 million in 2016,
and $22.2 million in 2015, an increase of 6.2%. The higher segment operating
income was a result of volume and product mix ($4.3 million) and higher selling
prices ($2.6 million), partially offset by higher manufacturing and other costs
($4.8 million), higher raw material costs ($0.3 million) and the unfavorable
impact of exchange rates ($0.5 million). Segment operating margin was 19.5% in
2016 and 20.0% in 2015.

Corporate & Other
The Corporate & Other expenses were $67.9 million in 2016, and $75.8 million in
2015, a decrease of 10.5%, primarily due to lower restructuring and other costs
($17.5 million), partially offset by higher performance based executive
compensation ($7.6 million) and professional services ($3.5 million).  The
Company evaluates segment performance before restructuring and other costs, and
reports all of the restructuring and other costs in Corporate & Other.
Restructuring and other costs were $26.1 million and $43.6 million in 2016 and
2015, respectively.

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, 2017. In the fourth quarter of 2017, the Company amended its
accounts receivable securitization program, and increased the commitment size
from $40 million to $60 million. The proceeds received from this program, which
equaled $40 million in 2016 and $20 million in 2017, are included in cash flows
from operating activities in the Condensed Consolidated Statements of Cash Flows
for the twelve months ended December 31, 2017 and 2016, See Note 7, Accounts
Receivable Securitization, for additional information.

The Company expects its cash flow from operations and its existing debt capacity
can be used to meet anticipated future cash requirements for operations, capital
expenditures, dividend payments, acquisitions, and stock repurchases. The impact
of inflation on both the Company's financial position and its results of
operations has been minimal and is not expected to significantly affect 2018
results.

Cash Flows from Operating Activities
Net cash provided by operating activities was $180.5 million in 2017; $222.5
million in 2016; and $128.0 million in 2015.  Operating cash flow provided the
primary source of funds for operating needs, capital expenditures, shareholder
dividends, acquisitions, and share repurchases. The decrease in net cash
provided by operating activities in 2017 is primarily due to higher working
capital balances, the timing of tax payments, and the impact of the accounts
receivable securitization program. The increase in net cash provided by
operating activities in 2016 is primarily due to increased cash earnings,
favorable changes in working capital, and the impact of the accounts receivable
securitization program.

                                                                              25

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Index

Cash Flows from Investing Activities
Net cash used in investing activities was $33.8 million in 2017; $75.2 million
in 2016; and $75.8 million in 2015. Capital expenditures were $56.3 million in
2017; $81.2 million in 2016; and $79.9 million in 2015. In 2017, the Company
sold a facility and certain related business lines in Strasbourg, France, for
approximately $12.5 million, its European Natural Ingredients business for a
nominal amount, and two other production facilities for $10.1 million.

Cash Flows from Financing Activities
Net cash used in financing activities was $153.4 million in 2017; $128.0 million
in 2016; and $50.1 million in 2015. The Company had a net decrease in debt of
$8.8 million in 2017; a net decrease in debt of $24.5 million in 2016; and a net
increase in debt of $174.6 million in 2015. Sensient purchased $87.2 million,
$50.1 million, and $176.6 million of Company stock, which settled in 2017, 2016,
and 2015, respectively.

The Company has paid uninterrupted quarterly cash dividends since commencing
public trading in its stock in 1962. In the fourth quarter of 2017, the Company
increased its quarterly dividend from 30 cents per share to 33 cents per share.
Dividends paid per share were $1.23 in 2017, $1.11 cents in 2016, and 1.04 cents
in 2015. Total dividends paid were $54.0 million, $49.6 million, and $48.1
million in 2017, 2016, and 2015, respectively.

ISSUER PURCHASES OF EQUITY SECURITIES
Sensient purchased 1.1 million shares of Company stock in 2017 for a total cost
of $87.2 million; 0.7 million shares of Company stock in 2016 for a total cost
of $47.5 million; and 2.7 million shares of Company stock in 2015 for a total
cost of $178.0 million. In 2014, the Board approved a share repurchase program
under which the Company was authorized to repurchase five million shares of
Company stock.  In October 2017, the Board of Directors authorized the
repurchase of up to three million additional shares. As of December 31, 2017,
3.3 million shares were available to be repurchased under existing
authorizations. The Company's share repurchase program has no expiration
date. These authorizations may be modified, suspended, or discontinued by the
Board of Directors at any time.

CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with accounting principles
generally accepted in the U.S., management is required to make estimates and
assumptions that have an impact on the asset, liability, revenue, and expense
amounts reported. These estimates can also affect supplemental information
disclosures of the Company, including information about contingencies, risk, and
financial condition. The Company believes, given current facts and
circumstances, that its estimates and assumptions are reasonable, adhere to
accounting principles generally accepted in the U.S., and are consistently
applied.  Inherent in the nature of an estimate or assumption is the fact that
actual results may differ from estimates and estimates may vary as new facts and
circumstances arise. The Company makes routine estimates and judgments in
determining the net realizable value of accounts receivable, inventories,
property, plant, and equipment, and prepaid expenses. Management believes the
Company's most critical accounting estimates and assumptions are in the
following areas:

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

Goodwill Valuation
The Company reviews the carrying value of goodwill annually utilizing several
valuation methodologies, including a discounted cash flow model. The Company
completed its annual goodwill impairment test under Accounting Standards
Codification (ASC) 350, Intangibles - Goodwill and Other, in the third quarter
of 2017. 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 over 100% above
their respective net book values. Changes in estimates of future cash flows
caused by items such as unforeseen events or changes in market conditions could
negatively affect the reporting units' fair value and result in an impairment
charge.

Income Taxes
The Company estimates its income tax expense in each of the taxing jurisdictions
in which it operates. The Company is subject to a tax audit in each of these
jurisdictions, which could result in changes to the estimated tax expense. The
amount of these changes would vary by jurisdiction and would be recorded when
probable and estimable. These changes could impact the Company's financial
statements. Management has recorded valuation allowances to reduce the Company's
deferred tax assets to the amount that is more likely than not to be realized.
Examples of deferred tax assets include deductions, net operating losses, and
tax credits that the Company believes will reduce its future tax payments. In
assessing the future realization of these assets, management has considered
future taxable income and ongoing tax planning strategies. An adjustment to the
recorded valuation allowance as a result of changes in facts or circumstances
could result in a significant change in the Company's tax expense. The Company
does not provide for deferred taxes on unremitted earnings of foreign
subsidiaries, which are considered to be invested indefinitely.

                                                                            

26

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Index

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is
determined using the first-in, first-out ("FIFO") method with the exception of
certain locations of the Flavors & Fragrances segment where cost is determined
using a weighted average method. Net realizable value is determined on the basis
of estimated realizable values. Cost includes direct materials, direct labor,
and manufacturing overhead.

The Company estimates any required write-downs for inventory obsolescence by
examining inventories on a quarterly basis to determine if there are any damaged
items or slow moving products in which the carrying values could exceed net
realizable value. Inventory write-downs are recorded as the difference between
the cost of inventory and its estimated market value. While significant judgment
is involved in determining the net realizable value of inventory, the Company
believes that inventory is appropriately stated at the lower of cost or net
realizable value.

Commitments and Contingencies
The Company is subject to litigation and other legal proceedings arising in the
ordinary course of its businesses or arising under applicable laws and
regulations. Estimating liabilities and costs associated with these matters
requires the judgment of management, who rely in part on information from
Company legal counsel. When it is probable that the Company has incurred a
liability associated with claims or pending or threatened litigation matters and
the Company's exposure is reasonably estimable, the Company records a charge
against earnings. The Company recognizes related insurance reimbursement when
receipt is deemed probable. The Company's estimate of liabilities and related
insurance recoveries may change as further facts and circumstances become known.

CONTRACTUAL OBLIGATIONS
The Company is subject to certain contractual obligations, including long-term
debt, operating leases, manufacturing purchases, and pension benefit
obligations. The Company had unrecognized tax benefits of $4.5 million as of
December 31, 2017. However, the Company cannot make a reasonably reliable
estimate of the period of potential cash settlement of the liabilities and,
therefore, has not included unrecognized tax benefits in the following table of
significant contractual obligations as of December 31, 2017.

PAYMENTS DUE BY PERIOD
(in thousands)                      Total        1 year        2-3 years      4-5 years      > 5 years
Long-term debt                    $ 604,159     $  34,134     $    23,755     $  290,008     $  256,262
Interest payments on long-term
debt                                 79,490        16,033          29,025         23,935         10,497
Operating lease obligations          35,388        10,210          13,481          6,545          5,152
Transition tax on foreign
earnings(1)                           5,564           445             890            890          3,339
Manufacturing purchase
commitments                          97,261        80,101          16,830            330              -
Pension funding obligations          27,489         3,729           3,484          5,909         14,367
Total contractual obligations     $ 849,351     $ 144,652     $    87,465   

$ 327,617 $ 289,617

(1) Relates to the one-time transition tax on earnings of foreign subsidiaries as

enacted by the 2017 Tax Legislation.



NEW PRONOUNCEMENTS
In July 2015, the Financial Accounting Standards Board (FASB) affirmed its
proposed one-year deferral of the effective date for Accounting Standards Update
(ASU) No. 2014-09, Revenue from Contracts with Customers. Under this proposal,
the requirements of the new standard are effective for interim and annual
periods beginning after December 15, 2017. The proposal also permits entities to
adopt the standard for interim and annual reporting periods beginning after
December 15, 2016. The Company currently recognizes revenue (net of estimated
discounts, allowances, and returns) when title to goods passes, the customer is
obliged to pay the Company, and the Company has no remaining obligations. Such
recognition typically corresponds with the shipment of goods. The Company
created a project team within its Corporate Finance Department, in 2016, to
review the potential impact that this ASU may have on the Company. At that time,
the Company's revenue recognition project team began gathering data, including
issuing a detailed revenue recognition questionnaire designed to highlight
instances of variable consideration, and reviewing existing contracts and other
relevant documents across all of the Company's segments. In the first quarter of
2017, the Company finalized a detailed project plan and distributed a second
revenue recognition questionnaire designed to examine potential instances of
variable consideration in greater detail. In the second and third quarters of
2017, the Company reviewed and analyzed the questionnaires and supporting
documentation and completed its review and analysis during the fourth quarter.
In addition, the Company has updated its current internal controls and
implemented additional controls and monitoring around revenue recognition during
the second and third quarters of 2017. The Company also conducted training for
all financial personnel on the new standard, controls, and monitoring during
the fourth quarter. The Company updated its Audit Committee throughout the year
on the status of the implementation of this ASU. The Company has completed its
analysis of its revenue streams and has not identified any significant changes
to the timing of recognition or measurement of revenue. The Company does not
anticipate that the new standard will have a material impact on the its
consolidated financial statements in 2018. The Company will incorporate this new
standard using the modified retrospective method.

                                                                            

27

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Index

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of
Inventory. Under this guidance, inventory that is accounted for using first-in,
first-out, or average cost method, shall be measured at the lower of cost or net
realizable value, as opposed to the lower of cost or market measurement under
previous guidance. This guidance became effective for interim and annual periods
beginning after December 15, 2016, with early adoption permitted. The Company
adopted this standard in the first quarter of 2017, and it did not have a
material effect on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires
lessees to recognize the lease assets and lease liabilities that arise from
leases on the balance sheet and to disclose qualitative and quantitative
information about lease transactions. This guidance is effective for fiscal
years beginning after December 15, 2018, including interim periods within those
fiscal years. The Company created a project team within its Corporate Finance
Department to review the potential impact that this ASU may have on the Company.
The project team has begun gathering data and reviewing existing leases and
other relevant documents across all of the Company's segments. The Company
continues to evaluate the potential impact of this standard.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows:
Classification of Certain Cash Receipts and Cash Payment. This ASU clarifies how
certain cash receipts and cash payments are presented and classified in the
statement of cash flows. Among these changes, is a requirement that a
transferor's receipt of a beneficial interest in securitized trade receivables
be disclosed as a noncash investing transaction. The guidance is effective for
fiscal years beginning after December 15, 2017, including interim periods within
those years. The Company does not expect this standard to have a material impact
on its financial statements.

In December 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes:
Intra-Entity Asset Transfers of Assets Other than Inventory. Under current GAAP,
the tax effects of intra-entity asset transfers are deferred until the
transferred asset is sold to a third party or otherwise recovered through use.
The new guidance eliminates the exception for all intra-entity sales of assets
other than inventory. The guidance is effective for fiscal years beginning after
December 15, 2017, including interim periods within those years. The Company
continues to evaluate the expected impact of this standard.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU
requires employers to present the service cost component of the net periodic
benefit cost in the same income statement line item as the other employee
compensation costs arising from services rendered during the period. The other
components of net benefit cost are to be presented outside of any subtotal of
operating income. This ASU is effective for fiscal years and interim periods
beginning after December 15, 2017, and early adoption is permitted. The Company
will adopt this standard in the first quarter of 2018, and it will not have a
material impact on the its consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to
Accounting for Hedging Activities, which expands an entity's ability to hedge
nonfinancial and financial risk components and reduce complexity in fair value
hedges of interest rate risk. This guidance eliminates the requirement to
separately measure and report hedge ineffectiveness and generally requires the
entire change in the fair value of a hedging instrument to be presented in the
same income statement line item as the hedged item. This ASU is effective for
fiscal years and interim periods beginning after December 15, 2018. The Company
is currently evaluating the expected impact of this standard.

OFF-BALANCE SHEET ARRANGEMENTS
In 2016, the Company entered into an accounts receivable securitization program
with a commitment size of $40 million, whereby transactions under the program
are accounted for as sales of trade receivables in accordance with ASC Topic
860, Transfers and Servicing, and removed from the Company's consolidated
balance sheet. In October 2017, the Company extended this program for one year
and increased the commitment size to $60 million (refer to Note 7, Accounts
Receivable Securitization, included in Part I, Item I of this report).

© Edgar Online, source Glimpses

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