SENSIENT TECHNOLOGIES CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except per share amounts) (Unaudited) Three Months Ended March 31, 2023 2022 Revenue $ 369,006 $ 355,521 Cost of products sold 244,343 230,675 Selling and administrative expenses 73,825 72,057 Operating income 50,838 52,789 Interest expense 6,002 2,993 Earnings before income taxes 44,836 49,796 Income taxes 11,185 12,725 Net earnings $ 33,651 $ 37,071 Weighted average number of common shares outstanding: Basic 41,970 41,865 Diluted 42,255 42,148 Earnings per common share: Basic $ 0.80 $ 0.89 Diluted $ 0.80 $ 0.88 Dividends declared per common share $ 0.41 $ 0.41 See accompanying notes to consolidated condensed financial statements. 1 Index SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended March 31, 2023 2022 Comprehensive income $ 49,952 $ 36,834 See accompanying notes to consolidated condensed financial statements. 2 Index SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) March 31, 2023 (Unaudited) December 31, 2022 Assets Current Assets: Cash and cash equivalents $ 24,017 $ 20,921 Trade accounts receivable 312,530 302,109 Inventories 573,706 564,110 Prepaid expenses and other current assets 49,639 47,640 Total current assets 959,892 934,780 Other assets 96,077 96,609 Deferred tax assets 35,108 32,717 Intangible assets, net 18,569 18,600 Goodwill 419,302 415,715 Property, Plant, and Equipment: Land 31,734 31,444 Buildings 325,796 322,268 Machinery and equipment 738,524 722,294 Construction in progress 73,502 65,809 1,169,556 1,141,815 Less accumulated depreciation ( 675,777 ) ( 658,622 ) 493,779 483,193 Total assets $ 2,022,727 $ 1,981,614 Liabilities and Shareholders ’ Equity Current Liabilities: Trade accounts payable $ 121,290 $ 142,365 Accrued salaries, wages, and withholdings from employees 22,788 43,738 Other accrued expenses 48,789 51,231 Income taxes 16,935 14,446 Short-term borrowings 24,849 20,373 Total current liabilities 234,651 272,153 Deferred tax liabilities 16,200 15,977 Other liabilities 36,652 37,191 Accrued employee and retiree benefits 27,224 26,364 Long-term debt 679,779 630,331 Shareholders’ Equity: Common stock 5,396 5,396 Additional paid-in capital 112,589 124,043 Earnings reinvested in the business 1,719,096 1,702,700 Treasury stock, at cost ( 624,473 ) ( 631,853 ) Accumulated other comprehensive loss ( 184,387 ) ( 200,688 ) Total shareholders’ equity 1,028,221 999,598 Total liabilities and shareholders’ equity $ 2,022,727 $ 1,981,614 See accompanying notes to consolidated condensed financial statements. 3 Index SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net earnings $ 33,651 $ 37,071 Adjustments to arrive at net cash provided by operating activities: Depreciation and amortization 14,150 13,056 Share-based compensation expense 2,267 4,163 Net loss (gain) on assets 8 ( 48 ) Deferred income taxes ( 2,351 ) 4,211 Changes in operating assets and liabilities: Trade accounts receivable ( 7,142 ) ( 20,841 ) Inventories ( 4,374 ) ( 11,901 ) Prepaid expenses and other assets ( 2,062 ) ( 11,111 ) Accounts payable and other accrued expenses ( 19,251 ) ( 10,267 ) Accrued salaries, wages, and withholdings from employees ( 21,187 ) ( 12,425 ) Income taxes 2,548 7,063 Other liabilities 698 137 Net cash used in operating activities ( 3,045 ) ( 892 ) Cash flows from investing activities: Acquisition of property, plant, and equipment ( 22,278 ) ( 12,736 ) Proceeds from sale of assets 1 89 Other investing activities ( 602 ) 434 Net cash used in investing activities ( 22,879 ) ( 12,213 ) Cash flows from financing activities: Proceeds from additional borrowings 50,827 40,099 Debt payments ( 1,351 ) ( 6,275 ) Dividends paid ( 17,255 ) ( 17,211 ) Other financing activities ( 7,669 ) ( 1,679 ) Net cash provided by financing activities 24,552 14,934 Effect of exchange rate changes on cash and cash equivalents 4,468 4,606 Net increase in cash and cash equivalents 3,096 6,435 Cash and cash equivalents at beginning of period 20,921 25,740 Cash and cash equivalents at end of period $ 24,017 $ 32,175 See accompanying notes to consolidated condensed financial statements. 4 Index SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except share and per share amounts) (Unaudited) Common Additional Paid-In Earnings Reinvested in the Treasury Stock Accumulated Other Comprehensive Total Three Months Ended March 31 , 2023 Stock Capital Business Shares Amount Income (Loss) Equity Balances at December 31, 2022 $ 5,396 $ 124,043 $ 1,702,700 12,058,773 $ ( 631,853 ) $ ( 200,688 ) $ 999,598 Net earnings - - 33,651 - - - 33,651 Other comprehensive income - - - - - 16,301 16,301 Cash dividends paid – $ 0.41 per share - - ( 17,255 ) - - - ( 17,255 ) Share-based compensation - 2,267 - - - - 2,267 Non-vested stock issued upon vesting - ( 11,956 ) - ( 228,181 ) 11,956 - - Benefit plans - 375 - ( 18,172 ) 952 - 1,327 Other - ( 2,140 ) - 105,524 ( 5,528 ) - ( 7,668 ) Balances at March 31 , 2023 $ 5,396 $ 112,589 $ 1,719,096 11,917,944 $ ( 624,473 ) $ ( 184,387 ) $ 1,028,221 Three Months Ended March 31 , 2022 Balances at December 31, 2021 $ 5,396 $ 111,352 $ 1,630,713 12,107,549 $ ( 634,408 ) $ ( 174,628 ) $ 938,425 Net earnings - - 37,071 - - - 37,071 Other comprehensive loss - - - - - ( 237 ) ( 237 ) Cash dividends paid – $ 0.41 per share - - ( 17,211 ) - - - ( 17,211 ) Share-based compensation - 4,163 - - - - 4,163 Non-vested stock issued upon vesting - ( 2,478 ) - ( 47,298 ) 2,478 - - Benefit plans - 560 - ( 11,786 ) 618 - 1,178 Other - ( 624 ) 15 20,403 ( 1,070 ) - ( 1,679 ) Balances at March 31 , 2022 $ 5,396 $ 112,973 $ 1,650,588 12,068,868 $ ( 632,382 ) $ ( 174,865 ) $ 961,710 See accompanying notes to consolidated condensed financial statements. 5 Index SENSIENT TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies 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 March 31, 2023, and the results of operations, comprehensive income, cash flows, and shareholders’ equity for the three months ended March 31, 2023 and 2022. 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. Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2022, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change. 2. Acquisition On October 3, 2022, the Company acquired Endemix Doğal Maddeler A.Ş. and Teknoloji Yatırımları ve Danışmanlık Sanayi ve Ticaret A.Ş. (collectively, Endemix), a natural colors business located in Turkey. The Company paid $ 23.3 million in cash for this acquisition, which is net of $ 1.3 million in debt assumed, with $ 1.7 million of such amount being held back by the Company for 12 months to satisfy any indemnification claims that may arise. The assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date. The Company acquired net assets of $ 8.9 million and identified intangible assets, principally technological know-how and customer relationships, of $ 4.9 million. The remaining $ 9.5 million was allocated to goodwill. The Company is still in the process of finalizing the estimated values for identifiable intangible assets and fixed assets. The Company will complete this analysis in 2023. This business is part of the Color segment. 3. Trade Accounts Receivable 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 the rapidly changing economic conditions. Additionally, as the Company only has one 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. 6 Index The following table summarizes the changes in the allowance for doubtful accounts during the three month periods ended March 31, 2023 and 2022: (In thousands) Three Months Ended March 31, 2023 Allowance for Doubtful Accounts Balance at December 31, 2022 $ 4,436 Provision for expected credit losses 120 Accounts written off ( 614 ) Translation and other activity 103 Balance at March 31, 2023 $ 4,045 (In thousands) Three Months Ended March 31, 2022 Allowance for Doubtful Accounts Balance at December 31, 2021 $ 4,877 Provision for expected credit losses 285 Accounts written off ( 367 ) Translation and other activity 117 Balance at March 31, 2022 $ 4,912 7 Index 4. Inventories At March 31, 2023, and December 31, 2022, inventories included finished and in-process products totaling $ 372.6 million and $ 385.2 million, respectively, and raw materials and supplies of $ 201.1 million and $ 178.9 million, respectively. 5. Fair Value 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 March 31, 2023 and December 31, 2022. The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was an asset of $ 1.2 million and a liability of $ 0.2 million as of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, was $ 680.2 million and $ 630.8 million, respectively. The fair value of the long-term debt at March 31, 2023 and December 31, 2022, was $ 672.5 million and $ 622.2 million, respectively. 6. Segment Information The Company evaluates performance based on operating income before share-based compensation, 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’s three 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 and share-based compensation are included in the “Corporate & Other” category. Operating results by segment for the periods presented are as follows: (In thousands) Flavors & Extracts Color Asia Pacific Corporate & Other Consolidated Three months ended March 31 , 2023 : Revenue from external customers $ 171,972 $ 156,949 $ 40,085 $ - $ 369,006 Intersegment revenue 6,880 4,212 - - 11,092 Total revenue $ 178,852 $ 161,161 $ 40,085 $ - $ 380,098 Operating income (loss) $ 22,180 $ 31,885 $ 9,241 $ ( 12,468 ) $ 50,838 Interest expense - - - 6,002 6,002 Earnings (loss) before income taxes $ 22,180 $ 31,885 $ 9,241 $ ( 18,470 ) $ 44,836 Three months ended March 31 , 2022 : Revenue from external customers $ 175,202 $ 143,928 $ 36,391 $ - $ 355,521 Intersegment revenue 7,525 4,510 74 - 12,109 Total revenue $ 182,727 $ 148,438 $ 36,465 $ - $ 367,630 Operating income (loss) $ 27,579 $ 30,657 $ 8,204 $ ( 13,651 ) $ 52,789 Interest expense - - - 2,993 2,993 Earnings (loss) before income taxes $ 27,579 $ 30,657 $ 8,204 $ ( 16,644 ) $ 49,796 Product Lines (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Three months ended March 31 , 2023 : Flavors, Extracts & Flavor Ingredients $ 124,825 $ - $ - $ 124,825 Natural Ingredients 54,027 - - 54,027 Food & Pharmaceutical Colors - 118,747 - 118,747 Personal Care - 42,414 - 42,414 Asia Pacific - - 40,085 40,085 Intersegment Revenue ( 6,880 ) ( 4,212 ) - ( 11,092 ) Total revenue from external customers $ 171,972 $ 156,949 $ 40,085 $ 369,006 Three months ended March 31 , 2022 : Flavors, Extracts & Flavor Ingredients $ 126,518 $ - $ - $ 126,518 Natural Ingredients 56,209 - - 56,209 Food & Pharmaceutical Colors - 103,109 - 103,109 Personal Care - 44,846 - 44,846 Inks - 483 - 483 Asia Pacific - - 36,465 36,465 Intersegment Revenue ( 7,525 ) ( 4,510 ) ( 74 ) ( 12,109 ) Total revenue from external customers $ 175,202 $ 143,928 $ 36,391 $ 355,521 8 Index Geographic Markets (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Three months ended March 31 , 2023 : North America $ 131,968 $ 78,377 $ 62 $ 210,407 Europe 28,927 43,252 103 72,282 Asia Pacific 5,201 18,149 39,195 62,545 Other 5,876 17,171 725 23,772 Total revenue from external customers $ 171,972 $ 156,949 $ 40,085 $ 369,006 Three months ended March 31 , 2022 : North America $ 126,702 $ 69,928 $ 58 $ 196,688 Europe 32,605 41,978 81 74,664 Asia Pacific 9,737 16,016 33,982 59,735 Other 6,158 16,006 2,270 24,434 Total revenue from external customers $ 175,202 $ 143,928 $ 36,391 $ 355,521 7. Retirement Plans The Company’s components of annual benefit cost for the defined benefit plans for the periods presented are as follows: Three Months Ended March 31, (In thousands) 2023 2022 Service cost $ 368 $ 408 Interest cost 409 244 Expected return on plan assets ( 239 ) ( 205 ) Recognized actuarial (gain) loss ( 139 ) 12 Total defined benefit expense $ 399 $ 459 The Company’s non-service cost portion of defined benefit expense is recorded in Interest Expense on 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. 8. Derivative Instruments and Hedging Activity 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 $ 55.5 million and $ 70.1 million of forward exchange contracts designated as cash flow hedges outstanding as of March 31, 2023 and December 31, 2022, respectively. For the three months ended March 31, 2023 and 2022 , 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. 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. 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 March 31, 2023 and December 31, 2022 , the total value of the Company’s net investment hedges was $ 319.9 million and $ 315.5 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 March 31, 2023 and 2022, the impact of foreign exchange rates on these debt instruments increased debt by $ 4.4 million and decreased debt by $ 7.9 million, respectively, which has been recorded as foreign currency translation in OCI. 9 Index 9. Income Taxes The effective income tax ra tes for the three months ended March 31, 2023 and 2022, were 24.9 % and 25.6 %, respectively. The effective tax rates for the three months ended March 31, 2023 and 2022 were both impacted by changes in estimates associated with the finalization of prior year foreign tax items and the mix of foreign earnings. 10. Accumulated Other Comprehensive Income The following table summarizes the changes in OCI during the three month periods ended March 31, 2023 and 2022: (In thousands) Cash Flow Hedges (1) Pension Items (1) Foreign Currency Items Total Balances at December 31, 2022 $ ( 599 ) $ ( 1,792 ) $ ( 198,297 ) $ ( 200,688 ) Other comprehensive income before reclassifications 1,700 - 14,841 16,541 Amounts reclassified from OCI ( 118 ) ( 122 ) - ( 240 ) Balances at March 31, 2023 $ 983 $ ( 1,914 ) $ ( 183,456 ) $ ( 184,387 ) (In thousands) Cash Flow Hedges (1) Pension Items (1) Foreign Currency Items Total Balances at December 31, 2021 $ 206 $ ( 353 ) $ ( 174,481 ) $ ( 174,628 ) Other comprehensive income (loss) before reclassifications 242 - ( 145 ) 97 Amounts reclassified from OCI ( 342 ) 8 - ( 334 ) Balances at March 31, 2022 $ 106 $ ( 345 ) $ ( 174,626 ) $ ( 174,865 ) (1) Cash Flow Hedges and Pension Items are net of tax. 11. Commitments and Contingencies 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. 12. Subsequent Event On April 27, 2023 , the Company announced its quarterly dividend of $ 0.41 per share would be payable on June 1, 2023 . 10 Index