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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-07 · 148 added, 78 removed, 109 unchanged (67% of the section changed)

3 unchanged sentences

Forward-looking statements include

statements in the future tense, statements referring to any period after March 31, 2024, and statements including the terms “expect,” “believe,” “anticipate,” and other similar terms that express expectations as to future events or conditions.

statements in the future tense, statements referring to any period after June 30, 2024, and statements including the terms “expect,” “believe,” “anticipate,” and other similar terms that express expectations as to future events or conditions.

Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements.

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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.

Revenue was $384.7 million and $369.0 million for the three months ended March 31, 2024 and 2023, respectively.

The increase in revenue was primarily due to higher volumes and favorable pricing.

For the three months ended March 31, 2024,

foreign exchange rates had an immaterial impact on revenue.

The Company’s gross margin was 32.9% and 33.8% for the three months ended March 31, 2024 and 2023, respectively.

The decrease in gross margin was primarily due to higher raw material costs, partially offset by an increase in pricing.

Revenue was $403.5 million and $374.3 million for the three months ended June 30, 2024 and 2023, respectively.

Revenue was $788.2 million and $743.3 million for the six months ended June 30, 2024 and 2023, respectively.

The increase in revenue

for the three and six months ended June 30, 2024 was primarily due to higher volumes and selling prices.

For the three months ended June 30, 2024, the impact of foreign exchange rates decreased consolidated revenue by approximately 1%.

exchange rates did not have a material impact on revenue for the six months ended June 30, 2024.

The Company’s gross margin was 32.4% and 32.6% for the three months ended June 30, 2024 and 2023, respectively.

The Company’s gross margin was 32.6% and 33.2% for the six months ended June 30, 2024 and 2023, respectively.

The decrease in gross

margin for both the three and six months ended June 30, 2024 was primarily due to higher raw material costs, partially offset by higher volumes and selling prices.

Selling and Administrative Expenses

Selling and administrative expense as a percent of revenue was 20.1% and 20.0% for the three months ended March 31, 2024 and 2023, respectively.

For the three months ended March 31, 2024, selling and administrative expenses were increased by

Portfolio Optimization Plan costs totaling $2.7 million, which increased selling and administrative expenses as a percent of revenue by approximately 70 basis points.

See Portfolio Optimization Plan below

for further information.

This increase was largely offset as a percent of revenue due to increased operating leverage due to revenue growth without corresponding increases in selling and administrative expenses.

Selling and administrative expense as a percent of revenue was 20.1% and 18.9% for the three months ended June 30, 2024 and 2023, respectively.

Selling and administrative expense as a percent of revenue was 20.1% and 19.4% for the six months

ended June 30, 2024 and 2023, respectively.

For the three months ended June 30, 2024, selling and administrative expenses were increased by Portfolio Optimization Plan costs totaling $1.5 million, which increased selling and administrative expenses

as a percent of revenue by approximately 40 basis points.

For the six months ended June 30, 2024, selling and administrative expenses were increased by Portfolio Optimization Plan costs totaling $4.3 million, which increased selling and

administrative expenses as a percent of revenue by approximately 60 basis points.

See Portfolio Optimization Plan below for further information.

The remaining increase in selling and administrative expense

as a percent of revenue for the three months ended June 30, 2024 was primarily due to higher performance-based executive compensation in 2024.

Operating Income

Operating income was $49.4 million and $50.8 million for the three months ended March 31, 2024 and 2023, respectively.

Operating margins were 12.8% and 13.8% for the three months ended March 31, 2024 and 2023, respectively.

Optimization Plan costs decreased operating margins by approximately 80 basis points for the three months ended March 31, 2024.

Operating income was $49.7 million and $51.6 million for the three months ended June 30, 2024 and 2023, respectively.

Operating margins were 12.3% and 13.8% for the three months ended June 30, 2024 and 2023, respectively.

Portfolio Optimization

Plan costs decreased operating margins by approximately 40 basis points for the three months ended June 30, 2024.

The remaining decrease in operating margin was primarily due to the higher raw material costs and higher performance-based executive

compensation in 2024, partially offset by higher volumes and selling prices .

Operating income was $99.1 million and $102.4 million for the six months ended June 30, 2024 and 2023, respectively.

Operating margins were 12.6% and 13.8% for the six months ended June 30, 2024 and 2023, respectively.

Portfolio Optimization

Plan costs decreased operating margins by approximately 50 basis points for the six months ended June 30, 2024.

The remaining decrease in operating margin was primarily due to the higher raw material costs and higher performance-based executive

compensation in 2024, partially offset by higher volumes and selling prices .

Interest Expense

Interest expense was $7.0 million and $6.0 million for the three months ended March 31, 2024 and 2023, respectively.

The increase in expense was primarily due to an increase in the average interest rate.

The effective income tax rates 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.

Interest expense was $7.7 million and $6.4 million for the three months ended June 30, 2024 and 2023, respectively, and $14.7 million and $12.4 million for the six months ended June 30, 2024 and 2023, respectively.

The increase in expense for

the three and six months ended June 30, 2024 was primarily due to an increase in the average interest rate.

The effective income tax rates for the three months ended June 30, 2024 and 2023 were 26.4% and 24.8%, respectively.

For the six months ended June 30, 2024 and 2023, the effective income tax rates were 26.7% and 24.9%, respectively.

effective tax rates for the three and six months ended June 30, 2024 and 2023 were impacted by the mix of foreign earnings and changes in estimates associated with the finalization of prior year foreign tax items.

The effective tax rates for both

the three and six months ended June 30, 2024 were also impacted by the limited tax deductibility of costs related to the Portfolio Optimization Plan.

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.

Optimization Plan).

As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company evaluated the closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the closure of its sales office in Granada,

Spain, and the centralization and elimination of certain selling and administrative positions.

In addition, in the Color segment, the Company evaluated the closure of a manufacturing facility in Delta, British Columbia, Canada, the closure of a

sales office in Argentina, and centralizing and eliminating certain production positions and selling and administrative positions.

The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.

In the three months ended March 31, 2024, the Company incurred $2.8 million related to the Portfolio Optimization Plan recorded in Corporate & Other, primarily for costs associated with employee separation and impairment of fixed assets.

T he Company’s Felinfach site will continue to operate until all production activities have successfully transferred to other locations, and then will be closed.

The Company has substantially completed

all other actions contemplated under the Portfolio Optimization Plan in accordance with local laws.

In the three and six months ended June 30, 2024, the Company incurred $1.8 million and $4.6 million, respectively, related to the Portfolio Optimization Plan recorded in Corporate & Other, primarily for costs associated with decommissioning,

employee separation, and impairment of fixed assets.

NON-GAAP FINANCIAL MEASURES

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These non-GAAP measures may not be comparable to similarly titled measures used by other companies.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands, except per share amounts)

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(1) Tax impact adjustments were determined based on the nature of the underlying non-GAAP adjustments and their relevant jurisdictional tax rates.

Portfolio Optimization Plan costs are discussed under “Portfolio Optimization Plan” above and Note 2, Portfolio Optimization Plan, in the Notes to the Consolidated Financial Statements included in

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

The following table summarizes the percentage change for the results of the three months ended March 31, 2024, compared to the results for the three months ended March 31, 2023, in the respective financial measures.

Three Months Ended March 31, 2024

The following table summarizes the percentage change for the results of the three and six months ended June 30, 2024, compared to the results for the three and six months ended June 30, 2023, in the respective financial measures.

Three Months Ended June 30, 2024

Six Months Ended June 30, 2024

Foreign Exchange Rates

Adjustments (1)

Adjusted Local Currency

Foreign Exchange Rates

Adjustments (1)

Adjusted Local Currency

Flavors & Extracts

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Segment performance is evaluated on operating income before share-based compensation,

restructuring and other costs, including the Portfolio Optimization Plan costs and other costs (which are reported in Corporate & Other);

interest expense;

and income taxes.

restructuring and other costs, including the Portfolio Optimization Plan costs, 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.

Flavors & Extracts

Flavors & Extracts segment revenue was $193.1 million and $178.9 million for the three months ended March 31, 2024 and 2023, respectively, an increase of approximately 8%.

Flavors & Extracts segment revenue was $209.2 million and $188.3 million for the three months ended June 30, 2024 and 2023, respectively, an increase of approximately 11%.

The increase was primarily a result of higher revenue in Natural

Ingredients, primarily due to higher volumes.

Foreign exchange rates increased segment revenue by approximately 1%.

Flavors & Extracts segment operating income was $23.7 million and $22.2 million for the three months ended March 31, 2024 and 2023, respectively, an increase of approximately 7%.

The higher segment operating income was a result of higher

operating income in Flavors, Extracts & Flavor Ingredients, partially offset by lower operating income in Natural Ingredients.

The higher operating income in Flavors, Extracts & Flavor Ingredients was primarily due to lower raw material

costs and higher selling prices.

The lower operating income in Natural Ingredients was primarily due to higher raw material costs, partially offset by higher volumes.

Foreign exchange rates increased segment operating income by approximately 1%.

Segment operating income as a percent of revenue was 12.3% in the current quarter compared to 12.4% in the prior year’s comparable quarter.

Segment revenue for the Color segment was $160.0 million and $161.2 million for the three months ended March 31, 2024 and 2023, respectively, a decrease of approximately 1%.

The decrease was primarily a result of lower revenue in Food &

Pharmaceutical Colors, primarily due to lower volumes, partially offset by the favorable impact of foreign exchange rates that increased segment revenue by approximately 1%.

Segment operating income for the Color segment was $31.7 million and $31.9 million for the three months ended March 31, 2024 and 2023, respectively, a decrease of approximately 1%.

Foreign exchange rates increased segment operating income by

approximately 1%.

Segment operating income as a percent of revenue was 19.8% for both the three months ended March 31, 2024 and 2023.

Segment revenue for the Asia Pacific segment was $40.3 million and $40.1 million for the three months ended March 31, 2024 and 2023, respectively, an increase of approximately 1%.

Foreign exchange rates had an immaterial impact on segment revenue for the three months ended June 30, 2024.

Flavors & Extracts segment revenue was $402.3 million and $367.1 million for the six months ended June 30, 2024 and 2023, respectively, an increase of approximately 10%.

The increase was primarily a result of higher revenue in Natural

Ingredients, primarily due to higher volumes.

Foreign exchange rates increased segment revenue by approximately 1% for the six months ended June 30, 2024.

Flavors & Extracts segment operating income was $26.2 million and $24.5 million for the three months ended June 30, 2024 and 2023, respectively, an increase of approximately 7%.

The higher segment operating income was primarily a result of

higher operating income in Flavors, Extracts & Flavor Ingredients, primarily due to higher selling prices and lower raw material costs, partially offset by higher manufacturing and other costs.

Segment operating income as a percent of revenue

was 12.5% in the current quarter compared to 13.0% in the prior year’s comparable quarter.

Foreign exchange rates had an immaterial impact on segment revenue for the three months ended June 30, 2024.

Flavors & Extracts segment operating income was $49.9 million and $46.6 million for the six months ended June 30, 2024 and 2023, respectively, an increase of approximately 7%.

The increase was a result of higher segment operating income in

Flavors, Extracts & Flavor Ingredients, partially offset by lower segment operating income in Natural Ingredients.

The higher segment operating income in Flavors, Extracts & Flavor Ingredients was primarily a result of lower raw material

costs and higher selling prices, partially offset by higher manufacturing and other costs and lower volumes.

The lower segment operating income in Natural Ingredients was primarily a result of higher raw material costs, partially offset by higher

Foreign exchange rates had an immaterial impact on segment operating income for the six months ended June 30, 2024.

Segment operating income as a percent of revenue was 12.4% in the current six month period compared to 12.7% in the prior

year’s comparable six month period.

Segment revenue for the Color segment was $167.7 million and $160.5 million for the three months ended June 30, 2024 and 2023, respectively, an increase of approximately 5%.

The increase was a result of higher revenue in Food &

Pharmaceutical Colors and Personal Care, primarily due to higher volumes and higher selling prices.

Foreign exchange rates decreased segment revenue by approximately 1%.

Segment operating income for the Asia Pacific segment was $8.8 million and $9.2 million for the three months ended March 31, 2024 and 2023, respectively, a decrease of approximately 5%.

Segment revenue for the Color segment was $327.7 million and $321.6 million for the six months ended June 30, 2024 and 2023, respectively, an increase of approximately 2%.

The increase was a result of higher revenue in Food & Pharmaceutical

Colors and Personal Care.

The higher revenue in Food & Pharmaceutical Colors was primarily due to higher selling prices.

The higher revenue in Personal Care was primarily due to higher selling prices and higher volumes.

Foreign exchange rates

had an immaterial impact on segment revenue for the six months ended June 30, 2024.

Segment operating income for the Color segment was $31.5 million and $29.2 million for the three months ended June 30, 2024 and 2023, respectively, an increase of approximately 8%.

The increase in segment operating income was a result of higher

operating income in Personal Care.

The higher operating income in Personal Care was primarily due to higher selling prices and higher volumes.

Foreign exchange rates decreased segment operating income by approximately 1%.

Segment operating income

as a percent of revenue was 18.8% in the current quarter and 18.2% in the prior year’s comparable quarter.

Segment operating income for the Color segment was $63.2 million and $61.1 million for the six months ended June 30, 2024 and 2023, respectively, an increase of approximately 3%.

The increase in segment operating income was primarily a result of

higher operating income in Personal Care, partially offset by lower operating income in Food & Pharmaceutical Colors.

The higher operating income in Personal Care was primarily due to higher selling prices, lower manufacturing and other costs,

and favorable volumes.

The lower operating income in Food & Pharmaceutical Colors was primarily due to higher manufacturing and other costs, partially offset by higher selling prices, lower raw material costs, and a favorable product mix.

Foreign exchange rates had an immaterial impact on segment operating income for the six months ended June 30, 2024.

Segment operating income as a percent of revenue was 19.3% in the current six month period and 19.0% in the prior year’s comparable

Segment revenue for the Asia Pacific segment was $38.6 million and $36.0 million for the three months ended June 30, 2024 and 2023, respectively, an increase of approximately 7%.

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 4%.

Segment revenue for the Asia Pacific segment was $78.9 million and $76.1 million for the six months ended June 30, 2024 and 2023, respectively, an increase of approximately 4%.

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 4%.

Segment operating income for the Asia Pacific segment was $7.9 million and $7.6 million for the three months ended June 30, 2024 and 2023, respectively, an increase of approximately 4%.

Foreign exchange rates decreased segment operating income

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Segment operating income as a percent of revenue was 20.4% in the current quarter and 21.0% in the prior year’s comparable quarter.

Segment operating income for the Asia Pacific segment was $16.7 million and $16.8 million for the six months ended June 30, 2024 and 2023, respectively, a decrease of approximately 1%.

Foreign exchange rates decreased segment operating income by

approximately 5%.

Segment operating income as a percent of revenue was 21.1% in the current six month period and 22.1% in the prior year’s comparable period.

Corporate & Other

The Corporate & Other operating expense was $14.7 million and $12.5 million for the three months ended March 31, 2024 and 2023, respectively.

The Corporate & Other operating expense was $15.9 million and $9.7 million for the three months ended June 30, 2024 and 2023, respectively.

The higher operating expense was primarily a result of Portfolio Optimization Plan costs totaling

$2.8 million negatively impacting the three months ended March 31, 2024.

$1.8 million negatively impacting the three months ended June 30, 2024, and higher performance-based executive compensation costs.

See the Portfolio Optimization Plan section above for further information.

The Corporate & Other operating expense was $30.7 million and $22.1 million for the six months ended June 30, 2024 and 2023, respectively.

The higher operating expense was primarily a result of Portfolio Optimization Plan costs totaling $4.6

million negatively impacting the six months ended June 30, 2024, and higher performance-based executive compensation costs.

See the Portfolio Optimization Plan section above for further information.

LIQUIDITY AND FINANCIAL CONDITION

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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, 2024.

The Company is in compliance with its loan covenants calculated in accordance with applicable agreements as of June 30, 2024.

The Company expects its cash flow from operations and its existing

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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.

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, 2024.

The Company has experienced increased costs for certain inputs, such as raw materials, shipping and logistics, and labor-related costs.

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Cash Flows from Operating Activities

Net cash provided by operating activities was $15.1 million and net cash used in operating activities was $3.0 million for the three months ended March 31, 2024 and 2023, respectively.

The increase in net cash provided by operating activities

was primarily due to a decrease in the cash used for performance-based compensation payments made during 2024 compared to 2023 and an increase in cash provided by inventory during 2024 compared to 2023, partially offset by a decrease in cash

Net cash provided by operating activities was $58.9 million and $51.7 million for the six months ended June 30, 2024 and 2023, respectively.

The increase in net cash from operating activities was primarily due to a decrease in cash used for

performance-based compensation payments (which are determined based on prior year performance) made during 2024 compared to 2023 and an increase in cash provided by inventory during 2024 compared to 2023, partially offset by a decrease in cash

provided by accounts receivable.

Cash Flows from Investing Activities

Net cash used in investing activities was $10.9 million and $22.9 million during the three months ended March 31, 2024 and 2023, respectively.

Capital expenditures were $11.0 million and $22.3 million during the three months ended March 31, 2024

and 2023, respectively.

Net cash used in investing activities was $22.9 million and $43.0 million during the six months ended June 30, 2024 and 2023, respectively.

Capital expenditures were $22.9 million and $45.1 million during the six months ended June 30, 2024 and

2023, respectively.

Cash Flows from Financing Activities

Net cash used in financing activities was $9.1 million and net cash provided by financing activities was $24.6 million for the three months ended March 31, 2024 and 2023, respectively.

Net debt increased by $11.0 million and $49.5 million for

the three months ended March 31, 2024 and 2023, respectively.

For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates.

Dividends of $17.3 million were paid during each of the three months ended

March 31, 2024 and 2023.

Dividends paid per share were $0.41 for both the three months ended March 31, 2024 and 2023.

Net cash used in financing activities was $26.1 million and net cash provided by financing activities was $0.5 million for the six months ended June 30, 2024 and 2023, respectively.

Net debt increased by $11.6 million and $43.1 million for the

six months ended June 30, 2024 and 2023, respectively.

The cash proceeds from the increase in net debt in the current period were primarily used to support capital expenditure investments during the six months ended June 30, 2024.

For purposes of

the cash flow statement, net changes in debt exclude the impact of foreign exchange rates.

Dividends of $34.7 million and $34.6 million were paid during the six months ended June 30, 2024 and 2023, respectively.

Total dividends of $0.82 per share

were paid for both the six months ended June 30, 2024 and 2023.

CRITICAL ACCOUNTING POLICIES

There have been no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2024.

There have been no material changes in the Company’s critical accounting policies during the quarter ended June 30, 2024.

For additional information about the Company’s critical accounting policies, refer to “Critical Accounting Policies” under

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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, 2024.

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, 2023.

There have been no material changes in the Company’s exposure to market risk during the quarter ended June 30, 2024.

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, 2023.

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