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, 2024 2023 Revenue $ 384,670 $ 369,006 Cost of products sold 258,121 244,343 Selling and administrative expenses 77,143 73,825 Operating income 49,406 50,838 Interest expense 7,045 6,002 Earnings before income taxes 42,361 44,836 Income taxes 11,421 11,185 Net earnings $ 30,940 $ 33,651 Weighted average number of common shares outstanding: Basic 42,104 41,970 Diluted 42,305 42,255 Earnings per common share: Basic $ 0.73 $ 0.80 Diluted $ 0.73 $ 0.80 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, 2024 2023 Comprehensive income $ 27,329 $ 49,952 See accompanying notes to consolidated condensed financial statements. 2 Index SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) March 31, 2024 (Unaudited) December 31, 2023 Assets Current Assets: Cash and cash equivalents $ 25,417 $ 28,934 Trade accounts receivable 298,488 272,164 Inventories 568,547 598,399 Prepaid expenses and other current assets 50,391 37,119 Total current assets 942,843 936,616 Other assets 93,960 94,873 Deferred tax assets 38,444 41,564 Intangible assets, net 11,706 12,112 Goodwill 420,541 424,065 Property, Plant, and Equipment: Land 31,496 31,901 Buildings 349,052 343,594 Machinery and equipment 794,891 781,789 Construction in progress 44,403 59,091 1,219,842 1,216,375 Less accumulated depreciation ( 721,654 ) ( 711,098 ) 498,188 505,277 Total assets $ 2,005,682 $ 2,014,507 Liabilities and Shareholders ’ Equity Current Liabilities: Trade accounts payable $ 104,834 $ 131,114 Accrued salaries, wages, and withholdings from employees 26,079 26,412 Other accrued expenses 52,503 52,024 Income taxes 16,004 13,296 Short-term borrowings 19,439 13,460 Total current liabilities 218,859 236,306 Deferred tax liabilities 14,072 14,260 Other liabilities 37,028 37,817 Accrued employee and retiree benefits 28,276 27,715 Long-term debt 643,511 645,085 Shareholders’ Equity: Common stock 5,396 5,396 Additional paid-in capital 112,389 115,941 Earnings reinvested in the business 1,740,500 1,726,872 Treasury stock, at cost ( 618,621 ) ( 622,768 ) Accumulated other comprehensive loss ( 175,728 ) ( 172,117 ) Total shareholders’ equity 1,063,936 1,053,324 Total liabilities and shareholders’ equity $ 2,005,682 $ 2,014,507 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, 2024 2023 Cash flows from operating activities: Net earnings $ 30,940 $ 33,651 Adjustments to arrive at net cash provided by operating activities: Depreciation and amortization 14,709 14,150 Share-based compensation expense 1,995 2,267 Net (gain) loss on assets ( 193 ) 8 Portfolio Optimization Plan costs 1,189 - Deferred income taxes ( 4 ) ( 2,351 ) Changes in operating assets and liabilities: Trade accounts receivable ( 28,331 ) ( 7,142 ) Inventories 26,624 ( 4,374 ) Prepaid expenses and other assets ( 13,655 ) ( 2,062 ) Accounts payable and other accrued expenses ( 21,993 ) ( 19,251 ) Accrued salaries, wages, and withholdings from employees 29 ( 21,187 ) Income taxes 3,150 2,548 Other liabilities 674 698 Net cash provided by (used in) operating activities 15,134 ( 3,045 ) Cash flows from investing activities: Acquisition of property, plant, and equipment ( 11,030 ) ( 22,278 ) Proceeds from sale of assets 93 1 Other investing activities ( 1 ) ( 602 ) Net cash used in investing activities ( 10,938 ) ( 22,879 ) Cash flows from financing activities: Proceeds from additional borrowings 38,053 50,827 Debt payments ( 27,031 ) ( 1,351 ) Dividends paid ( 17,312 ) ( 17,255 ) Other financing activities ( 2,828 ) ( 7,669 ) Net cash (used in) provided by financing activities ( 9,118 ) 24,552 Effect of exchange rate changes on cash and cash equivalents 1,405 4,468 Net (decrease) increase in cash and cash equivalents ( 3,517 ) 3,096 Cash and cash equivalents at beginning of period 28,934 20,921 Cash and cash equivalents at end of period $ 25,417 $ 24,017 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) Treasury Stock Three Months Ended March 31 , 2024 Common Stock Additional Paid-In Capital Earnings Reinvested in the Business Shares Amount Accumulated Other Comprehensive Income (Loss) Total Equity Balances at December 31, 2023 $ 5,396 $ 115,941 $ 1,726,872 11,885,398 $ ( 622,768 ) $ ( 172,117 ) $ 1,053,324 Net earnings - - 30,940 - - - 30,940 Other comprehensive loss - - - - - ( 3,611 ) ( 3,611 ) Cash dividends paid – $ 0.41 per share - - ( 17,312 ) - - - ( 17,312 ) Share-based compensation - 1,995 - - - - 1,995 Non-vested stock issued upon vesting - ( 5,365 ) - ( 102,396 ) 5,365 - - Benefit plans - 299 - ( 21,405 ) 1,122 - 1,421 Other - ( 481 ) - 44,652 ( 2,340 ) - ( 2,821 ) Balances at March 31 , 2024 $ 5,396 $ 112,389 $ 1,740,500 11,806,249 $ ( 618,621 ) $ ( 175,728 ) $ 1,063,936 Three Months Ended March 31 , 2023 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 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, 2024, and the results of operations, comprehensive income, cash flows, and shareholders’ equity for the three months ended March 31, 2024 and 2023. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Expenses are charged to operations in the period incurred. Recently Issued Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to provide disclosures of significant segment expenses and other segment items. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and its related disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to consistently categorize, and provide greater disaggregation of, information in the rate reconciliation table and further disaggregate income tax payments by jurisdiction. This ASU is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and its related disclosures. Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2023, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change. 2. Portfolio Optimization Plan During the fourth quarter of 2023, the board of directors of the Company approved a plan to undertake an effort to optimize certain production facilities and improve efficiencies within the Company (Portfolio Optimization Plan). As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company began evaluating the potential closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the potential closure of its sales office in Granada, Spain, and the potential centralization and elimination of certain selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. In addition, in the Color segment, the Company’s proposals include closing a manufacturing facility in Delta, British Columbia, Canada, closing a sales office in Argentina, and centralizing and eliminating certain production positions as well as potentially eliminating some selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment. The Company recorded non-cash impairment charges in Selling and Administrative Expenses , primarily related to certain property, plant, and equipment during the three months ended March 31, 2024, when the estimated fair value of these assets was lower than the carrying value. The property, plant, and equipment related to a product line that was shut down and determined to not be usable at other plant locations. 6 Index The Company recorded $ 3.4 million and $ 3.7 million of accrued liabilities in Other Accrued Expenses on the Company’s Consolidated Balance Sheet related to this plan as of March 31, 2024 and December 31, 2023, respectively. The Company expects this plan will cost approximately $ 40 million, primarily related to non-cash impairment charges and proposed employee separation costs, and upon completion would reduce annual operating costs by approximately $ 8 million to $ 10 million, with the full benefit expected to be achieved after 2025. The Company proposes to reduce headcount by approximately 120 positions, primarily in the Flavors & Extracts and Color segments, related to certain production and selling and administrative positions. The following table summarizes the Portfolio Optimization Plan expenses by segment for the three months ended March 31, 2024: (In thousands) Flavors & Extracts Color Corporate & Other Consolidated Non-cash impairment charges – Selling and administrative expenses $ - $ 975 $ - $ 975 Non-cash charges – Cost of products sold 125 ( 18 ) - 107 Employee separation – Selling and administrative expenses 611 491 28 1,130 Other costs – Selling and administrative expenses (1) 316 284 - 600 Total $ 1,052 $ 1,732 $ 28 $ 2,812 (1) Other costs include professional services, accelerated depreciation, accelerated lease costs, and other related costs. 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. The following table summarizes the changes in the allowance for doubtful accounts during the three-month periods ended March 31, 2024 and 2023: (In thousands) Three Months Ended March 31, 2024 Allowance for Doubtful Accounts Balance at December 31, 2023 $ 4,373 Provision for expected credit losses 307 Accounts written off ( 747 ) Translation and other activity ( 51 ) Balance at March 31, 2024 $ 3,882 (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 4. Inventories At March 31, 2024, and December 31, 2023, inventories included finished and in-process products totaling $ 416.9 million and $ 437.1 million, respectively, and raw materials and supplies of $ 151.6 million and $ 161.3 million, respectively. 7 Index 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, 2024 and December 31, 2023. The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was an asset of $ 1.4 million and $ 1.0 million as of March 31, 2024 and December 31, 2023, respectively. The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at March 31, 2024 and December 31, 2023, was $ 643.6 million and $ 645.2 million, respectively. The fair value of the long-term debt at March 31, 2024 and December 31, 2023, was $ 648.6 million and $ 653.7 million, respectively. 6. Segment Information The Company evaluates performance based on operating income before share-based compensation; restructuring and other charges, including Portfolio Optimization Plan costs ; interest expense; and income taxes (segment operating income). Total revenue and segment operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation. The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. The Company’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, share-based compensation, and restructuring and other charges, including Portfolio Optimization Plan costs, are included in the “Corporate & Other” category. Operating results by segment for the periods presented are as follows: (In thousands) Flavors & Extracts Color Asia Pacific Corporate & Other Consolidated Three months ended March 31 , 2024 : Revenue from external customers $ 188,022 $ 156,364 $ 40,284 $ - $ 384,670 Intersegment revenue 5,070 3,661 22 - 8,753 Total revenue $ 193,092 $ 160,025 $ 40,306 $ - $ 393,423 Operating income (loss) $ 23,678 $ 31,679 $ 8,776 $ ( 14,727 ) $ 49,406 Interest expense - - - 7,045 7,045 Earnings (loss) before income taxes $ 23,678 $ 31,679 $ 8,776 $ ( 21,772 ) $ 42,361 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 8 Index Product Lines (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Three months ended March 31 , 2024 Flavors, Extracts & Flavor Ingredients $ 124,805 $ - $ - $ 124,805 Natural Ingredients 68,287 - - 68,287 Food & Pharmaceutical Colors - 117,058 - 117,058 Personal Care - 42,967 - 42,967 Asia Pacific - - 40,306 40,306 Intersegment Revenue ( 5,070 ) ( 3,661 ) ( 22 ) ( 8,753 ) Total revenue from external customers $ 188,022 $ 156,364 $ 40,284 $ 384,670 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 Geographic Markets (In thousands) Flavors & Extracts Color Asia Pacific Consolidated Three months ended March 31 , 2024 : North America $ 146,952 $ 75,120 $ - $ 222,072 Europe 32,157 46,162 46 78,365 Asia Pacific 3,706 17,419 38,685 59,810 Other 5,207 17,663 1,553 24,423 Total revenue from external customers $ 188,022 $ 156,364 $ 40,284 $ 384,670 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 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) 2024 2023 Service cost $ 372 $ 368 Interest cost 401 409 Expected return on plan assets ( 242 ) ( 239 ) Recognized actuarial gain ( 91 ) ( 139 ) Total defined benefit expense $ 440 $ 399 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. 9 Index 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 $ 44.5 million and $ 58.4 million of forward exchange contracts designated as cash flow hedges outstanding as of March 31, 2024 and December 31, 2023, respectively. For the three months ended March 31, 2024 and 2023, 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, 2024 and December 31, 2023 , the total value of the Company’s net investment hedges was $ 306.7 million and $ 313.3 million, respectively. These net investment hedges included Euro and British Pound denominated long-term debt. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in Other Comprehensive Income (OCI). For the three months ended March 31, 2024 and 2023, the impact of foreign exchange rates on these debt instruments decreased debt by $ 6.6 million and increased debt by $ 4.4 million, respectively, which has been recorded as foreign currency translation in OCI. 9. Income Taxes The effective income tax ra tes for the three months ended March 31, 2024 and 2023, were 27.0 % and 24.9 %, respectively. The effective tax rates for the three months ended March 31, 2024 and 2023 were both impacted by changes in estimates associated with the finalization of prior year foreign tax items and the mix of foreign earnings. The effective tax rate for the three months ended March 31, 2024, was also impacted by the limited tax deductibility of costs related to the Portfolio Optimization Plan. 10. Accumulated Other Comprehensive Income The following table summarizes the changes in OCI during the three-month periods ended March 31, 2024 and 2023: (In thousands) Cash Flow Hedges (1) Pension Items (1) Foreign Currency Items Total Balances at December 31, 2023 $ 997 $ ( 2,079 ) $ ( 171,035 ) $ ( 172,117 ) Other comprehensive income (loss) before reclassifications 702 - ( 4,023 ) ( 3,321 ) Amounts reclassified from OCI ( 222 ) ( 68 ) - ( 290 ) Balances at March 31, 2024 $ 1,477 $ ( 2,147 ) $ ( 175,058 ) $ ( 175,728 ) (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 ) (1) Cash Flow Hedges and Pension Items are net of tax. 10 Index 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 25, 2024 , the Company announced its quarterly dividend of $ 0.41 per share would be payable on June 3, 2024 . 11 Index