What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-10-27 · 57 added, 137 removed, 132 unchanged (60% of the section changed)

42 unchanged sentences

Sustainability is at the heart of our company's vision to make the world a healthier place, and we proudly support the Ten Principles of the United Nations Global Compact on human rights, labor, environment and anti-corruption.

Our Sustainability Framework focuses on the most critical ESG topics relevant to our business and stakeholders.

We are very proud of our ESG accomplishments to date and will continue to foster these fundamental principles broadly along our entire value chain, develop new ideas and technologies that help us work smarter, and help build a world that is a better place to live.

As of September 30, 2023, we employed approximately 1,297 fu ll time employees worldwide.

Although we are facing challenging labor markets, we believe that we have been successful in attracting skilled, experienced, and diverse personnel in a competitive environment and that our human capital resources are adequate to perform all business functions.

In addition, we continue to enhance technology in order to optimize productivity and performance.

On August 30, 2022, we completed the acquisition of Bergstrom, a leading science-based manufacturer of methylsulfonylmethane ("MSM"), based in Vancouver, Washington, and on June 21, 2022, we completed the acquisition of Kappa, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway.

Details related to both acquisitions are disclosed in Note 2, Significant Acquisitions .

Our Sustainability Framework focuses on the most critical Environmental, Social, and Governance topics relevant to our business and stakeholders.

We are very proud of our significant progress relating to the Company's corporate social responsibilities and will continue to foster these fundamental principles broadly along our entire value chain, develop new ideas and technologies that help us work smarter, and help build a world that is a better place to live.

As of March 31, 2024, we employed approximately 1,301 ful l time employees worldwide.

We are seeing some modest improvement in most relevant labor markets and we believe that we have been successful in attracting skilled and experienced personnel in a competitive environment and that our human capital resources are adequate to perform all business functions.

In addition, we continue to enhance technology to further optimize productivity and performance.

Segment Results

We sell products for all three segments through our own sales force, independent distributors, and sales agents.

The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three and nine months ended September 30, 2023 and 2022:

Business Segment Net Sales Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

The following tables summarize consolidated net sales by segment and business segment earnings from operations for the three months ended March 31, 2024 and 2023:

Business Segment Net Sales Three Months Ended March 31,

Human Nutrition & Health $ 152,744 $ 132,653

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Other and Unallocated (1)

1,545 6,367 5,840 15,931

Total $ 239,659 $ 232,540

Business Segment Earnings From Operations Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Business Segment Earnings From Operations Three Months Ended March 31,

Human Nutrition & Health $ 33,257 $ 18,435

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Unallocated corporate expenses consist of:

(i) Transaction and integration costs and unallocated legal fees totaling $384 and $1,600 for the three and nine months ended September 30, 2023, respectively, and $1,640 and $2,816 for the three and nine months ended September 30, 2022, respectively, and (ii) Unallocated amortization expense of $0 and $312 for the three and nine months ended September 30, 2023, and $734 and $2,213 for the three and nine months ended September 30, 2022, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.

Results of Operations - Three Months Ended September 30, 2023 and 2022

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Net sales $ 229,948 $ 244,267 $ (14,319) (5.9) %

Gross margin 76,544 68,430 8,114 11.9 %

Operating expenses 32,930 34,805 (1,875) (5.4) %

Earnings from operations 43,614 33,625 9,989 29.7 %

Other expenses 7,139 2,540 4,599 181.1 %

Income tax expense 7,400 5,836 1,564 26.8 %

Net earnings $ 29,075 $ 25,249 $ 3,826 15.2 %

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Human Nutrition & Health $ 144,455 $ 142,655 $ 1,800 1.3 %

Animal Nutrition & Health 53,944 65,604 (11,660) (17.8) %

Specialty Products 30,004 29,641 363 1.2 %

Other 1,545 6,367 (4,822) (75.7) %

Total $ 229,948 $ 244,267 $ (14,319) (5.9) %

• The increase in net sales within the Human Nutrition & Health segment for the third quarter of 2023 as compared to the third quarter of 2022 was primarily driven by higher sales within the minerals and nutrients business, the incremental contribution of the Bergstrom acquisition, and a favorable impact related to changes in foreign currency exchange rates, partially offset by lower sales within food and beverage markets.

Total sales for this segment grew 1.3%, with volume and mix contributing 2.6%, the change in foreign currency exchange rates contributing 0.6%, and average selling prices contributing -2.0%.

• The decrease in net sales within the Animal Nutrition & Health segment for the third quarter of 2023 compared to the third quarter of 2022 was driven by lower sales in both the ruminant and monogastric species markets, partially offset by a favorable impact related to changes in foreign currency exchange rates.

Total sales for this segment decreased by 17.8%, with volume and mix contributing -15.2%, average selling prices contributing -4.8%, and the change in foreign currency exchange rates contributing 2.2%.

• The increase in net sales within the Specialty Products segment for the third quarter of 2023 compared to the third quarter of 2022 was due to higher sales in the plant nutrition business and a favorable impact related to changes in foreign currency exchange rates, partially offset by lower sales in the performance gases business.

Total sales for this segment increased by 1.2%, with average selling prices contributing 3.4%, the change in foreign currency exchange rates contributing 2.4%, and volume and mix contributing -4.5%.

• Sales relating to Other decreased from the prior year due to lower demand.

• Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market.

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Gross margin $ 76,544 $ 68,430 $ 8,114 11.9 %

% of net sales 33.3 % 28.0 %

Gross margin dollars increased in the third quarter of 2023 compared to the third quarter of 2022 due to higher average selling prices and a decrease in cost of goods sold of $22,433.

The 12.8% decrease in cost of goods sold was mainly driven by certain lower manufacturing input costs.

Operating Expenses

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Operating expenses $ 32,930 $ 34,805 $ (1,875) (5.4) %

% of net sales 14.3 % 14.2 %

The decrease in operating expenses in the third quarter of 2023 compared to the third quarter of 2022 was primarily due to reduced transaction and integration-related costs of $4,708, partially offset by a restructuring-related impairment charge of $1,618 and higher compensation-related expenses of $1,576.

Earnings from Operations

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Human Nutrition & Health $ 31,275 $ 20,584 $ 10,691 51.9 %

Animal Nutrition & Health 5,070 8,036 (2,966) (36.9) %

Specialty Products 8,740 7,105 1,635 23.0 %

Other and unallocated (1,471) (2,100) 629 30.0 %

Earnings from operations $ 43,614 $ 33,625 $ 9,989 29.7 %

% of net sales (operating margin) 19.0 % 13.8 %

• Human Nutrition & Health segment earnings from operations increased $10,691 and the gross margin contribution was $10,110.

In addition, operating expenses decreased by $578, primarily due to a favorable adjustment to transaction costs of $2,800, partially offset by a restructuring-related impairment charge of $1,262 and increased compensation-related expenses of $625.

• Animal Nutrition & Health segment earnings from operations decreased $2,966.

Gross margin decreased $2,367.

In addition, operating expenses increased by $598, primarily due to increased compensation-related expenses of $586 and a restructuring-related impairment charge of $356, partially offset by a favorable adjustment to transaction costs of $700.

• Specialty Products segment earnings from operations increased $1,635, primarily driven by higher average selling prices and lower manufacturing input costs.

• The increase in Other and unallocated was primarily driven by lower unallocated corporate expenses, partially offset by the aforementioned lower sales.

Other Expenses

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Interest expense $ 6,594 $ 3,642 $ 2,952 81.1 %

Other (income) expense, net 545 (1,102) 1,647 (149.5) %

$ 7,139 $ 2,540 $ 4,599 181.1 %

Interest expense for the three months ended September 30, 2023 and 2022 was primarily related to outstanding borrowings under the 2022 Credit Agreement.

The increase of $2,952 in interest expense is due to higher interest rates.

Income Tax Expense

Three Months Ended September 30, Increase

(in thousands) 2023 2022 % Change

Income tax expense $ 7,400 $ 5,836 $ 1,564 26.8 %

Effective tax rate 20.3 % 18.8 %

The increase in the effective tax rate was primarily due to certain higher state taxes and lower tax benefits from stock-based compensation.

Results of Operations - Nine Months Ended September 30, 2023 and 2022

Nine Months Ended September 30, Increase

(i) Transaction and integration costs of $440 and $565 for the three months ended March 31, 2024 and 2023, respectively, and (ii) Unallocated amortization expense of $0 and $312 for the three months ended March 31, 2024 and 2023, respectively, related to an intangible asset in connection with a company-wide ERP system implementation.

Results of Operations - Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

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Earnings from operations 41,676 34,408 7,268 21.1 %

Other expenses 16,864 3,908 12,956 331.5 %

Interest and other expenses 4,826 5,289 (463) (8.8) %

Income tax expense 7,864 6,409 1,455 22.7 %

Net earnings $ 28,986 $ 22,710 $ 6,276 27.6 %

Nine Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

4 unchanged sentences

Total $ 239,659 $ 232,540 $ 7,119 3.1 %

• The increase in net sales within the Human Nutrition & Health segment for the nine months ended September 30, 2023 as compared to 2022 was primarily driven by the contribution from recent acquisitions and a favorable impact related to changes in foreign currency exchange rates, partially offset by lower sales within food and beverage markets and the minerals and nutrients business.

Total sales for this segment grew 4.0%, with average selling prices contributing 4.8%, the change in foreign currency exchange rates contributing 0.2%, and volume and mix contributing -1.0%.

• The decrease in net sales within the Animal Nutrition & Health segment for the nine months ended September 30, 2023 as compared to 2022 was primarily driven by lower sales in the monogastric market, partially offset by incremental sales related to the Bergstrom acquisition, and a favorable impact related to changes in foreign currency exchange rates.

Total sales for this segment decreased by 8.8%, with volume and mix contributing -8.8%, average selling prices contributing -0.4%, and the change in foreign currency exchange rates contributing 0.5%.

• The decrease in net sales within the Specialty Products segment for the nine months ended September 30, 2023 as compared to 2022 was primarily due to lower sales in both the plant nutrition and performance gases businesses, partially offset by a favorable impact related to changes in foreign currency exchange rates.

• The increase in net sales within the Human Nutrition & Health segment for the first quarter of 2024 as compared to the first quarter of 2023 was primarily driven by higher sales within the minerals and nutrients business.

Total sales for this segment grew 15.1%, with volume and mix contributing 13.7%, average selling prices contributing 1.4%, and the change in foreign currency exchange rates contributing 0.1%.

• The decrease in net sales within the Animal Nutrition & Health segment for the first quarter of 2024 compared to the first quarter of 2023 was driven by lower sales in both the monogastric and ruminant species markets.

Total sales for this segment decreased by 16.9%, with average selling prices contributing -9.2%, volume and mix contributing -7.8%, and the change in foreign currency exchange rates contributing 0.1%.

• The decrease in net sales within the Specialty Products segment for the first quarter of 2024 compared to the first quarter of 2023 was due to lower sales in the plant nutrition business, partially offset by higher sales in the performance gases business.

Total sales for this segment decreased by 1.9%, with volume and mix contributing -5.9%, the change in foreign currency exchange rates contributing 0.1%, and average selling prices contributing 3.8%.

• Sales relating to Other decreased from the prior year primarily due to lower demand.

• Sales relating to Other decreased from the prior year due to lower demand.

Nine Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

1 unchanged sentence

% of net sales 34.0 % 31.5 %

Gross margin dollars increased in the nine months ended September 30, 2023 as compared to 2022 due to higher average selling prices and a decrease in cost of goods sold of $31,338.

Gross margin dollars increased in the first quarter of 2024 compared to the first quarter of 2023 due to higher sales and a decrease in cost of goods sold of $1,225.

The 0.8% decrease in cost of goods sold was mainly driven by certain lower manufacturing input costs.

Operating Expenses

Nine Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

1 unchanged sentence

% of net sales 16.6 % 16.7 %

The increase in operating expenses in the nine months ended September 30, 2023 as compared to 2022 was primarily due to restructuring-related impairment and asset disposal charges of $7,764, incremental operating expenses related to the Kappa and Bergstrom acquisitions of $7,099, and higher compensation-related expenses of $1,306, partially offset by reduced transaction and integration-related costs of $10,625.

The increase in operating expenses in the first quarter of 2024 compared to the first quarter of 2023 was primarily due to higher compensation-related expenses of $2,263 and the impact of a gain on sale of fixed assets recognized in the prior year of $818, partially offset by lower transaction and integration-related expenses of $1,725.

Earnings from Operations

Nine Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

5 unchanged sentences

% of net sales (operating margin) 17.4 % 14.8 %

• Human Nutrition & Health segment earnings from operations increased $12,617 and the gross margin contribution was $19,709.

This was partially offset by an increase in operating expenses of $7,093, primarily due to the incremental operating expenses related to the Kappa and Bergstrom acquisitions of $6,902 and restructuring-related impairment and asset disposal charges of $6,031, partially offset by favorable adjustments to transaction costs of $7,920.

• Animal Nutrition & Health segment earnings from operations decreased $4,713.

Gross margin decreased $3,576 primarily due to lower sales.

Additionally, operating expenses for this segment increased by $1,136, which was largely related to restructuring-related impairment charges of $1,444, higher compensation-related costs of $529, an increase in amortization of $363, and incremental operating expenses related to the Bergstrom acquisition of $197, partially offset by favorable adjustments to transaction costs of $1,980.

• Specialty Products segment earnings from operations increased $1,199, which was primarily driven by a 434 basis point increase in gross margin as a percent of sales.

The increase in gross margin was due to higher average selling prices and decreases in certain manufacturing input costs.

The increase was partially offset by an increase in operating expenses of $776, primarily driven by higher compensation-related expenses of $1,114.

• The decrease in Other and unallocated was primarily driven by the aforementioned lower sales, partially offset by decreases of unallocated corporate expenses.

Other Expenses

Nine Months Ended September 30, Increase

• Human Nutrition & Health segment earnings from operations increased $14,822 primarily due to the gross margin contribution of $15,362.

The increased gross margin was primarily due to the aforementioned higher sales and lower manufacturing input costs.

• Animal Nutrition & Health segment earnings from operations decreased $7,438 primarily due to the gross margin reduction of $7,527.

The decreased gross margin was primarily due to the aforementioned lower sales, partially offset by lower manufacturing input costs.

• Specialty Products segment earnings from operations increased $253.

Gross margin increased $1,186 primarily due to lower manufacturing input costs, and was partially offset by an increase in operating expenses.

• The decrease in Other and unallocated was primarily driven by the aforementioned lower sales, partially offset by lower unallocated corporate expenses.

Other Expenses (Income)

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

2 unchanged sentences

$ 4,826 $ 5,289 $ (463) (8.8) %

Interest expense for the nine months ended September 30, 2023 and 2022 was primarily related to outstanding borrowings under the 2022 Credit Agreement.

The increase of $12,175 in interest expense is due to the additional borrowings in connection with the acquisitions and higher interest rates.

Interest expense for the three months ended March 31, 2024 and 2023 was primarily related to outstanding borrowings under the 2022 Credit Agreement.

The decrease in interest expense is due to lower outstanding borrowings, partially offset by higher interest rates.

Income Tax Expense

Nine Months Ended September 30, Increase

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

1 unchanged sentence

Effective tax rate 21.3 % 22.0 %

The decrease in the effective tax rate was primarily due to certain lower state taxes and higher tax benefits from stock-based compensation.

The lower effective tax rate was primarily due to higher tax benefits from stock-based compensation and certain lower foreign taxes.

Liquidity and Capital Resources

During the nine months ended September 30, 2023, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

During the three months ended March 31, 2024, there were no material changes outside the ordinary course of business in the specified contractual obligations set forth in our Annual Report on Form 10-K for the year ended December 31, 2023.

We expect our operations to continue generating sufficient cash flow to fund working capital requirements and necessary capital investments.

1 unchanged sentence

We could seek additional bank loans or access to financial markets to fund such acquisitions, our operations, working capital, necessary capital investments or other cash requirements should we deem it necessary to do so.

Cash and cash equivalents increased to $76,952 at September 30, 2023 from $66,560 at December 31, 2022.

At September 30, 2023, the Company had $65,475 of cash and cash equivalents held by foreign subsidiaries.

Cash and cash equivalents decreased to $60,349 at March 31, 2024 from $64,447 at December 31, 2023.

At March 31, 2024, the Company had $52,908 of cash and cash equivalents held by foreign subsidiaries.

We presently intend to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions;

3 unchanged sentences

operations, we could be required to pay additional withholding taxes to repatriate these funds.

Working capital was $233,184 at September 30, 2023 as compared to $195,761 at December 31, 2022, an increase of $37,423.

Cash at September 30, 2023 reflects net repayments on the revolving loan of $60,000, capital expenditures and intangible assets acquired of $26,317, and payment of declared dividends in 2023 of $22,872.

Nine Months Ended September 30, Increase

Working capital was $200,434 at March 31, 2024 as compared to $165,751 at December 31, 2023, an increase of $34,683.

Significant cash payments during the first quarter of 2024 included payment of the 2023 declared dividend in 2024 of $25,555, net repayments on the revolving loan of $8,000, and capital expenditures and intangible assets acquired of $6,910.

Three Months Ended March 31, Increase

(in thousands) 2024 2023 % Change

1 unchanged sentence

Cash flows used in investing activities (6,739) (10,061) 3,322 33.0 %

Cash flows (used in) provided by

financing activities (83,175) 268,080 (351,255) 131.0 %

Cash flows used in financing activities (30,023) (33,318) 3,295 9.9 %

Operating Activities

The increase in cash flows from operating activities was primarily driven by the impact from changes in working capital.

The decrease in cash flows from operating activities was primarily driven by the impact from changes in working capital.

Investing Activities

We continue to invest in corporate projects, improvements across all production facilities, and intangible assets.

Total investments in property, plant and equipment and inta ngible assets were $26,317 and $35,793 f or the nine months ended September 30, 2023 and 2022, respectively.

In 2022, we completed the acquisitions of Kappa and Bergstrom.

Cash paid for these acquisitions, net of cash acquired, amounted to $1,252 and $365,780, for the nine months ended September 30, 2023 and 2022, respectively.

Total investments in property, plant and equipment and intangible assets were $6,910 and $9,664 for the three months ended March 31, 2024 and 2023, respectively.

Financing Activities

During 2023, we borrowed $18,000 under the 2022 Credit Agreement and made total loan payments of $78,000, resulting in $169,431 available under the 2022 Credit Agreement as of September 30, 2023.

During the first quarter of 2024, we borrowed $26,000 to fund the payment of the 2023 dividend and made total loan payments of $34,000, resulting in $248,431 available under the 2022 Credit Agreement (see Note 7, Revolving Loan ) as of March 31, 2024.

We have an approved stock repurchase program.

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Open market repurchases of common stock could be made pursuant to a trading plan established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions.

We also repurchase (withhold) shares from employees in connection with the tax settlement of vested shares and/or exercised stock options under the Company's omnibus incentive plan.

We also purchase (withhold) shares from employees in connection with the tax settlement of vested shares and/or exercised stock options under the Company's omnibus incentive plan.

Share repurchases are funded with existing cash on hand.

Proceeds from stock options exercised were $3,888 and $2,172 for the nine months ended September 30, 2023 and 2022, respectively.

Dividend payments were $22,872 and $20,708 for the nine months ended September 30, 2023 and 2022, respectively.

Proceeds from stock options exercised were $8,791 and $2,453 for the three months ended March 31, 2024 and 2023, respectively.

Dividend payments were $25,555 and $22,867 for the three months ended March 31, 2024 and 2023, respectively.

Other Matters Impacting Liquidity

As of March 31, 2024 and December 31, 2023, w e have a liability of $4,708 and $4,650, respectively, for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, for which we are unable to reasonably estimate the timing of settlement, if any.

We currently provide postretirement benefits in the form of two retirement medical plans, as discussed in Note 14, Employee Benefit Plans .

The liabil ity recorded in "Other long-term liabilities" on the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 was $1,462 and $1,465, respectively, an d the plans are not funded.

The liability recorded in "Other long-term liabilities" on the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023 was $1,298 and $1,395, respectively, and the plans are not funded.

Historical cash payments made under these plans have typically been less than $200 per year.

2 unchanged sentences

The plan provides for the payment of a lump sum at retirement or payments in case of death of the covered employees.

The amount recorded for these obligations on our balance sheets as of September 30, 2023 and December 31, 2022 were $379 and $393, respectively, and were included in "Other long-term obligations."

The amount recorded for these obligations on our balance sheets as of March 31, 2024 and December 31, 2023 were $400 and $420, respectively, and were included in "Other long-term obligations" on the condensed consolidated balance sheets.

We provide an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees.

1 unchanged sentence

They are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company.

The deferred compensation liability as of September 30, 2023 and December 31, 2022 was $9,594 and $8,527, respectively, and is included in "Other long-term obligations" on the condensed consolidated balance sheets.

The related rabbi trust assets were $9,613 and $8,547 as of September 30, 2023 and December 31, 2022, respectively, and were included in "Other non-current assets" on the condensed consolidated balance sheets.

The deferred compensation liability as of March 31, 2024 and December 31, 2023 was $10,782 and $10,188, respectively, and is included in "Other long-term obligations" on the condensed consolidated balance sheets.

The related rabbi trust assets were $10,789 and $10,188 as of March 31, 2024 and December 31, 2023, respectively, and were included in "Other non-current assets" on the condensed consolidated balance sheets.

Significant Accounting Policies

There were no changes to our Significant Accounting Policies, as described in its December 31, 2022 Annual Report on Form 10 - K, during the nine months ended September 30, 2023.

There were no changes to our Significant Accounting Policies, as described in our December 31, 2023 Annual Report on Form 10 - K, during the three months ended March 31, 2024.

Related Party Transactions

We were engaged in related party transactions with St.

Gabriel CC Company, LLC during the three and nine months ended September 30, 2023.

Gabriel CC Company, LLC during the three months ended March 31, 2024.

Refer to Note 17, Related Party Transactions .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis