SENSIENT TECHNOLOGIES CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that reflect management’s current assumptions and estimates of future economic circumstances, industry conditions, Company performance, and financial results. Forward-looking statements include statements in the future tense, statements referring to any period after March 31, 2023, and statements including the terms “expect,” “believe,” “anticipate,” and other similar terms that express expectations as to future events or conditions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that could cause actual events to differ materially from those expressed in the forward-looking statements. A variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results. These factors and assumptions include, among others, the Company’s ability to manage economic and capital market conditions and the impact of recessions and economic downturns; the impact of macroeconomic and geopolitical volatility, including inflation and shortages impacting the availability and cost of raw materials, energy, and other supplies; the availability and cost of labor, logistics, and transportation; the impact and uncertainty created by the COVID-19 pandemic and efforts to manage it on the global economy, including, but not limited to, its effects on our employees, facilities, customers, and suppliers, governmental regulations and restrictions, and general economic conditions; the uncertain impacts of the ongoing conflict between Russia and Ukraine on our supply chain, input costs, including energy and transportation, and on general economic conditions; the pace and nature of new product introductions by the Company and the Company’s customers; the Company’s ability to anticipate and respond to changing consumer preferences and changing technologies; the Company’s ability to successfully implement its growth strategies; the outcome of the Company’s various productivity-improvement and cost-reduction efforts, acquisition and divestiture activities, and operational improvement plan; industry, regulatory, legal, and economic factors related to the Company’s domestic and international business; the effects of tariffs, trade barriers, and disputes; growth in markets for products in which the Company competes; industry and customer acceptance of price increases; actions by competitors; currency exchange rate fluctuations; and the matters discussed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Except to the extent required by applicable law, the Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. OVERVIEW Revenue Revenue was $369.0 million and $355.5 million for the three months ended March 31, 2023 and 2022, respectively. The increase in revenue was primarily due to favorable pricing, partially offset by lower volumes. For the three months ended March 31, 2023, the impact of foreign exchange rates decreased consolidated revenue by approximately 1%. Gross Margin The Company’s gross margin was 33.8% and 35.1% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin was primarily due to higher input costs and lower volumes, partially offset by an increase in pricing. Selling and Administrative Expenses Selling and administrative expense as a percent of revenue was 20.0% and 20.3% for the three months ended March 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percent of revenue was primarily due to lower performance-based executive compensation recorded in Corporate & Other. Operating Income Operating income was $50.8 million and $52.8 million for the three months ended March 31, 2023 and 2022, respectively. Operating margins were 13.8% and 14.8% for the three months ended March 31, 2023 and 2022, respectively. The decrease in operating margin is primarily due to higher input costs and lower volumes, partially offset by an increase in pricing . Interest Expense Interest expense was $6.0 million and $3.0 million for the three months ended March 31, 2023 and 2022, respectively. The increase in expense was primarily due to an increase in the average interest rate and the average debt outstanding. 11 Index Income Taxes The effective income tax rates 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. 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. This business is part of the Color segment. NON-GAAP FINANCIAL MEASURES Within the following table, the Company reports certain non-GAAP financial measures, including: percentage changes in revenue, operating income, and diluted earnings per share on a local currency basis, which eliminate the effects that result from translating its international operations into U.S. dollars. The Company has included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. These non-GAAP measures should not be considered in isolation. Rather, they should be considered together with GAAP measures and the rest of the information included in this report. Management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis and to gain additional insight into underlying operating and performance trends, and the Company believes the information can be beneficial to investors for the same purposes. These non-GAAP measures may not be comparable to similarly titled measures used by other companies. The following table summarizes the percentage change for the results of the three months ended March 31, 2023, compared to the results for the three months ended March 31, 2022, in the respective financial measures. Three Months Ended March 31, 2023 Revenue Total Foreign Exchange Rates Local Currency Flavors & Extracts (2.1%) (0.8%) (1.3%) Color 8.6% (1.4%) 10.0% Asia Pacific 9.9% (4.7%) 14.6% Total Revenue 3.8% (1.4%) 5.2% Operating Income Flavors & Extracts (19.6%) (0.1%) (19.5%) Color 4.0% (2.3%) 6.3% Asia Pacific 12.6% (5.4%) 18.0% Corporate & Other (8.7%) (0.1%) (8.6%) Total Operating Income (3.7%) (2.2%) (1.5%) Diluted Earnings per Share (9.1%) (2.3%) (6.8%) 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 share-based compensation and other costs (which are reported in Corporate & Other), interest expense, and income taxes. The Company’s reportable segments consist of the Flavors & Extracts, Color, and Asia Pacific segments. 12 Index Flavors & Extracts Flavors & Extracts segment revenue was $178.9 million and $182.7 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of approximately 2%. The decrease was a result of lower revenue in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, primarily due to lower volumes, partially offset by higher selling prices. Flavors, Extracts & Flavor Ingredients was also unfavorably impacted by foreign exchange rates, which decreased segment revenue by approximately 1%. Flavors & Extracts segment operating income was $22.2 million and $27.6 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of approximately 20%. The lower segment operating income was a result of lower operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients. The lower operating income in Flavors, Extracts & Flavor Ingredients was primarily due to higher raw material costs, lower volumes, and higher manufacturing and other costs, partially offset by higher selling prices and a favorable product mix. The lower operating income in Natural Ingredients was primarily due to higher raw material costs, lower volumes, and an unfavorable product mix, partially offset by higher selling prices and lower manufacturing and other costs. Foreign exchange rates had an immaterial impact on segment operating income. Segment operating income as a percent of revenue was 12.4% in the current quarter compared to 15.1% in the prior year’s comparable quarter. Color Segment revenue for the Color segment was $161.2 million and $148.4 million for the three months ended March 31, 2023 and 2022, respectively, an increase of approximately 9%. The increase was primarily a result of higher revenue in Food & Pharmaceutical Colors, partially offset by lower revenue in Personal Care. The increase in Food & Pharmaceutical Colors was primarily due to higher selling prices and volumes and the acquisition of Endemix in October 2022, partially offset by the unfavorable impact of foreign exchange rates. The decrease in Personal Care was primarily due to lower volumes and the unfavorable impact of foreign exchange rates, partially offset by higher selling prices. Foreign exchange rates decreased segment revenue by approximately 1%. Segment operating income for the Color segment was $31.9 million and $30.7 million for the three months ended March 31, 2023 and 2022, respectively, an increase of approximately 4%. The increase in segment operating income was primarily a result of higher segment operating income in Food & Pharmaceutical Colors, partially offset by lower segment operating income in Personal Care. The higher operating income in Food & Pharmaceutical Colors was due to higher selling prices and volumes, partially offset by higher raw material costs, an unfavorable product mix, and higher manufacturing and other costs. The lower operating income in Personal Care was due to higher raw material costs, higher manufacturing and other costs, and lower volumes, partially offset by higher selling prices. Foreign exchange rates decreased segment operating income by approximately 2%. Segment operating income as a percent of revenue was 19.8% in the current quarter and 20.7% in the prior year’s comparable quarter. Asia Pacific Segment revenue for the Asia Pacific segment was $40.1 million and $36.5 million for the three months ended March 31, 2023 and 2022, respectively, an increase of approximately 10%. The increase was a result of higher volumes and selling prices, partially offset by the unfavorable impact of foreign exchange rates that decreased segment revenue by approximately 5%. Segment operating income for the Asia Pacific segment was $9.2 million and $8.2 million for the three months ended March 31, 2023 and 2022, respectively, an increase of approximately 13%. The increase was primarily a result of higher selling prices and volumes, partially offset by higher raw material costs and manufacturing and other costs. Foreign exchange rates decreased segment operating income by approximately 5%. Segment operating income as a percent of revenue was 23.1% in the current quarter and 22.5% in the prior year’s comparable quarter. Corporate & Other The Corporate & Other operating expense was $12.5 million and $13.7 million for the three months ended March 31, 2023 and 2022, respectively. The decrease was primarily a result of a decrease in performance-based executive compensation. LIQUIDITY AND FINANCIAL CONDITION 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 March 31, 2023. 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, and dividend payments as well as potential acquisitions and stock repurchases. The Company’s contractual obligations consist primarily of operational commitments, which we expect to continue to be able to satisfy through cash generated from operations and debt. The Company has various series of notes outstanding that mature from 2023 through 2027. The Company believes that it has the ability to refinance or repay these obligations through a combination of cash flow from operations, issuance of additional notes, and sufficient borrowing capacity under the Company’s revolving credit facility, which matures in 2026. 13 Index As a result of our ability to manage the impact of inflation through pricing and other actions, the impact of inflation was not material to the Company’s financial position and its results of operations for the three months ended March 31, 2023. The Company has experienced increased costs for certain inputs, such as raw materials, shipping and logistics, and labor-related costs. We continue to expect to manage these impacts in the near term, but persistent, accelerated, or expanded inflationary conditions could exacerbate these challenges and impact our profitability. Cash Flows from Operating Activities Net cash used in operating activities was $3.0 million and $0.9 million for the three months ended March 31, 2023 and 2022, respectively. Cash Flows from Investing Activities Net cash used in investing activities was $22.9 million and $12.2 million during the three months ended March 31, 2023 and 2022, respectively. Capital expenditures were $22.3 million and $12.7 million during the three months ended March 31, 2023 and 2022, respectively. Cash Flows from Financing Activities Net cash provided by financing activities was $24.6 million and $14.9 million for the three months ended March 31, 2023 and 2022, respectively. Net debt increased by $49.5 million and $33.8 million for the three months ended March 31, 2023 and 2022, respectively. The cash proceeds from the increase in net debt in the current period were primarily used to support capital expenditure investments during the three months ended March 31, 2023. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $17.3 million and $17.2 million were paid during the three months ended March 31, 2023 and 2022, respectively. Dividends paid per share were $0.41 for both the three months ended March 31, 2023 and 2022. CRITICAL ACCOUNTING POLICIES There have been no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2023. For additional information about the Company’s critical accounting policies, refer to “Critical Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company’s exposure to market risk during the quarter ended March 31, 2023. For additional information about market risk, refer to Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.