SENSIENT TECHNOLOGIES CORPORATION 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 afterMarch 31, 2022 , 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 impact and uncertainty created by the ongoing COVID-19 pandemic, including, but not limited to, its effects on our employees, facilities, customers, and suppliers; the availability and cost of raw materials, energy, and other supplies; the availability and cost of labor, logistics, and transportation; the uncertain impacts of the ongoing conflict betweenRussia andUkraine on our supply chain, input costs, including energy and transportation, and generally on economic conditions; governmental regulations and restrictions; and general economic conditions, including inflation; 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; the effectiveness of the Company's past restructuring activities; changes in costs of raw materials, including energy; 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 in Part II of this Quarterly Report on Form 10-Q and Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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$355.5 million and$359.7 million for the three months endedMarch 31, 2022 and 2021, respectively. The decrease in revenue was primarily due to the sale of the Company's Fragrances product line onApril 1, 2021 , partially offset by favorable pricing and volumes. For the three months endedMarch 31, 2022 , the impact of foreign exchange rates decreased consolidated revenue by approximately 2%. Gross Profit The Company's gross margin was 35.1% and 32.1% for the three months endedMarch 31, 2022 and 2021, respectively. The increase in gross margin was primarily due to an increase in pricing and volumes, partially offset by higher input costs. Selling and Administrative Expenses Selling and administrative expense as a percent of revenue was 20.3% and 19.1% for the three months endedMarch 31, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percent of revenue was primarily due to an increase in expenses in the Color segment and higher performance-based executive compensation recorded in Corporate & Other, partially offset by divestiture & other related expenses and operational improvement plan costs in the prior period. Selling and administrative expenses for the three months endedMarch 31, 2021 included divestiture & other related expenses and operational improvement plan costs totaling$2.5 million . There were no divestiture & other related costs or operational improvement plan costs for the three months endedMarch 31, 2022 . These expenses increased selling and administrative expense as a percent of revenue by 70 basis points for the three months endedMarch 31, 2021 . Operating Income Operating income was$52.8 million and$46.9 million for the three months endedMarch 31, 2022 and 2021, respectively. Operating margins were 14.8% and 13.0% for the three months endedMarch 31, 2022 and 2021, respectively. The increase in operating margin is primarily due to higher pricing and volumes, and the lack of divestiture & other related costs and operational improvement plan costs in the current period, partially offset by higher performance-based executive compensation recorded in Corporate & Other. 14
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Interest Expense Interest expense was$3.0 million and$3.4 million for the three months endedMarch 31, 2022 and 2021, respectively. The decrease in expense was primarily due to the lower average interest rate in the current period compared to the comparable prior year period. Income Taxes The effective income tax rates for the three months endedMarch 31, 2022 and 2021 were 25.6% and 27.1%, respectively. The effective tax rates for the three months endedMarch 31, 2022 and 2021 were both impacted by changes in estimates associated with the finalization of prior year foreign tax items and the mix of foreign earnings.
Divestitures
OnJune 30, 2020 , the Company completed the sale of its inks product line. OnSeptember 18, 2020 , the Company completed the sale of its yogurt fruit preparations product line. This sale also included an earnout based on future performance, which could result in additional cash consideration for the Company. OnApril 1, 2021 , the Company completed the sale of its fragrances product line (excluding its essential oils product line) for$36.3 million of net cash. In the three months endedMarch 31, 2021 , the Company incurred$1.6 million related to the divestitures, primarily for costs associated with employee separation and accelerated depreciation of fixed assets. There were no costs related to the divestitures incurred during the three months endedMarch 31, 2022 . Operational Improvement Plan During the third quarter of 2020, the Company approved an operational improvement plan (Operational Improvement Plan) to consolidate manufacturing facilities and improve efficiencies within the Company. As part of the Operational Improvement Plan, the Company combined itsNew Jersey cosmetics manufacturing facility in the Personal Care product line of the Color segment into its existing Color segment facility inMissouri . In addition, the Company centralized certain Flavors & Extracts segment support functions inEurope into one location. In theAsia Pacific segment, the Company incurred costs in connection with the elimination of certain selling and administrative positions.
In the three months ended
Acquisition
OnJuly 15, 2021 , the Company acquired substantially all of the assets ofFlavor Solutions, Inc. , a flavors business located inNew Jersey . The purchase price for this acquisition was$14.9 million in cash with approximately$1.0 million of such amount being held back by the Company for 12 months in order to satisfy post-closing 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$0.4 million and identified intangible assets, principally customer relationships, of$5.0 million . The remaining$9.5 million was allocated to goodwill. This business is now part of the Flavors & Extracts segment.
COVID-19
COVID-19 has adversely affected most of the world through widespread illness,
quarantines, factory shutdowns, and travel and transportation disruptions and
restrictions. These adverse effects could continue in parts of the world. While
the Company's financial position remains strong, the Company has seen several
financial and operational impacts from the pandemic as of this filing. We have
experienced various degrees of supply chain challenges and attempted to mitigate
those challenges by increasing inventory in certain key raw materials and using
secondary suppliers and new methods of procurement where available. In addition,
we have experienced inflationary increases in costs associated with certain raw
materials, logistics, transportation, and labor. In response, we have taken
pricing actions to offset these increases.
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For the three months endedMarch 31, 2022 , demand for many of the Company's products remained strong. All of the Company's production facilities are open and operating as of this filing, but the Company continues to monitor developments and regulations in regions where its production facilities are located. Governmental and social responses to the COVID-19 pandemic continue to evolve. There continues to be uncertainty related to the impacts of new COVID-19 variants, and we expect that the situation will remain dynamic and difficult to predict for the foreseeable future. There can be no assurance that our experience to date with respect to facility operations, customer demand, the availability of supplies and transportation, and other factors impacting our results and financial condition will be predictive of the ongoing impacts in the short or long term. It is difficult to predict how economic conditions and changes in customer and consumer behavior may impact our results over the longer term. As a result of any of the foregoing, our results or financial condition could be adversely impacted and the impacts could be material.
NON-GAAP FINANCIAL MEASURES
Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted revenue, adjusted operating income, adjusted net earnings, and adjusted diluted earnings per share, which exclude the results of the divested product lines, the divestiture & other related costs, and the operational improvement plan costs and (2) percentage changes in revenue, operating income, and diluted earnings per share on an adjusted local currency basis, which eliminate the effects that result from translating its international operations intoU.S. dollars, the results of the divested product lines, the divestiture & other related costs, and the operational improvement plan costs. 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. 16
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Three Months Ended March 31,
(In thousands except per share amounts) 2022 2021 % Change
Revenue (GAAP) $ 355,521 $ 359,702 (1.2 %)
Revenue of the divested product lines - (25,570 )
Adjusted revenue $ 355,521 $ 334,132 6.4 %
Operating Income (GAAP) $ 52,789 $ 46,897 12.6 %
Divestiture & other related costs - Cost of
products sold - 25
Divestiture & other related costs - Selling and administrative expenses -
1,547
Operating income of the divested product lines - (2,927 ) Operational improvement plan - Selling and administrative expenses - 1,001 Adjusted operating income$ 52,789 $ 46,543 13.4 % Net Earnings (GAAP)$ 37,071 $ 31,668 17.1 % Divestiture & other related costs, before tax -
1,572
Tax impact of divestiture & other related costs -
793
Net earnings of the divested product lines, before tax
- (2,927 )
Tax impact of the divested product lines - 723
Operational improvement plan costs, before tax -
1,001
Tax impact of operational improvement plan - (296 ) Adjusted net earnings$ 37,071 $ 32,534 13.9 % Diluted Earnings Per Share (GAAP)$ 0.88 $ 0.75 17.3 % Divestiture & other related costs, net of tax -
0.06
Results of operations of the divested product lines, net of tax - (0.05 ) Operational improvement plan costs, net of tax -
0.02
Adjusted diluted earnings per share$ 0.88 $ 0.77 14.3 % Divestiture & other related costs are discussed under "Divestitures" above and Note 2, Divestitures, in the Notes to the Consolidated Condensed Financial Statements included in this report. The Operational Improvement Plan is discussed under "Operational Improvement Plan" above and Note 3, Operational Improvement Plan, in the Notes to the Consolidated Condensed Financial Statements included in this report.
Note: Earnings per share calculations may not foot due to rounding differences.
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The following table summarizes the percentage change for the results of the
three months ended
Three Months Ended March 31, 2022
Foreign Adjusted
Exchange Local
Revenue Total Rates Adjustments (1) Currency
Flavors & Extracts (9.1 %) (1.9 %) (12.3 %) 5.1 %
Color 9.4 % (1.9 %) (0.5 %) 11.8 %
Asia Pacific 7.8 % (5.6 %) (1.0 %) 14.4 %
Total Revenue (1.2 %) (2.2 %) (7.4 %) 8.4 %
Operating Income
Flavors & Extracts 2.1 % (1.2 %) (11.4 %) 14.7 %
Color 15.3 % (2.4 %) 0.2 % 17.5 %
Asia Pacific 21.5 % (7.8 %) (1.7 %) 31.0 %
Corporate & Other 1.4 % 0.0 % (24.0 %) 25.4 %
Total Operating Income 12.6 % (3.2 %) (0.4 %) 16.2 %
Diluted Earnings per Share 17.3 % (4.0 %) 4.4 % 16.9 %
(1) For Revenue, adjustments consist of revenues of the divested product lines.
For Operating Income and Diluted Earnings per Share, adjustments consist of
the results of the divested product lines, divestiture & other related costs,
and operational improvement plan costs.
Note: Refer to table above for a reconciliation of these non-GAAP measures.
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 any applicable divestiture & other related costs, share-based compensation, acquisition, restructuring including the Operational Improvement Plan, 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
Flavors & Extracts Flavors & Extracts segment revenue was$182.7 million and$200.9 million for the three months endedMarch 31, 2022 and 2021, respectively, a decrease of approximately 9%. Foreign exchange rates decreased segment revenue by approximately 2%. The decrease was primarily a result of lower revenue in Fragrances and Natural Ingredients, partially offset by higher revenue in Flavors, Extracts & Flavor Ingredients. The lower revenues in Fragrances was due to the divestiture of the product line inApril 2021 . The lower revenue in Natural Ingredients was primarily due to lower volumes, partially offset by higher selling prices. The higher revenue in Flavors, Extracts & Flavor Ingredients was primarily due to higher volumes, higher selling prices, and the acquisition ofFlavor Solutions, Inc. in July of 2021, partially offset by the unfavorable impact of foreign exchange rates. Flavors & Extracts segment operating income was$27.6 million and$27.0 million for the three months endedMarch 31, 2022 and 2021, respectively, an increase of approximately 2%. Foreign exchange rates decreased segment operating income by approximately 1%. The higher segment operating income was primarily a result of higher operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by the divestiture of the Fragrances product line in April of 2021. The higher operating income in Flavors, Extracts & Flavor Ingredients was primarily due to higher selling prices, higher volumes, and lower manufacturing and other costs, partially offset by higher raw material costs. The higher operating income in Natural Ingredients was primarily due to higher selling prices and a favorable product mix, partially offset by lower volumes, higher raw material costs, and higher manufacturing and other costs. Segment operating income as a percent of revenue was 15.1% in the current quarter compared to 13.4% in the prior year's comparable quarter. 18
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Color
Segment revenue for the Color segment was$148.4 million and$135.7 million for the three months endedMarch 31, 2022 and 2021, respectively, an increase of approximately 9%. The increase was a result of higher revenue in Food & Pharmaceutical Colors and Personal Care, primarily due to higher volumes and selling prices, partially offset by the unfavorable impact of foreign exchange rates that decreased segment revenue by approximately 2%. Segment operating income for the Color segment was$30.7 million and$26.6 million for the three months endedMarch 31, 2022 and 2021, respectively, an increase of approximately 15%. Foreign exchange rates decreased segment operating income by approximately 2%. The increase in segment operating income was a result of higher segment operating income in Food & Pharmaceutical Colors and Personal Care. The higher operating income in Food & Pharmaceutical Colors was due to higher volumes and selling prices, partially offset by higher raw material costs and higher manufacturing and other costs. The higher operating income in Personal Care was due to higher volumes and selling prices, partially offset by higher manufacturing and other costs. Segment operating income as a percent of revenue was 20.7% in the current quarter and 19.6% in the prior year's comparable quarter.Asia Pacific Segment revenue for theAsia Pacific segment was$36.5 million and$33.8 million for the three months endedMarch 31, 2022 and 2021, respectively, an increase of approximately 8%. 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 6%. Segment operating income for theAsia Pacific segment was$8.2 million and$6.8 million for the three months endedMarch 31, 2022 and 2021, respectively, an increase of approximately 22%. The increase was primarily a result of higher volumes and selling prices, partially offset by the unfavorable impact of foreign exchange rates that decreased segment operating income by approximately 8%. Segment operating income as a percent of revenue was 22.5% in the current quarter and 20.0% in the prior year's comparable quarter. Corporate & Other The Corporate & Other operating expense was$13.7 million and$13.5 million for the three months endedMarch 31, 2022 and 2021, respectively. Operating expense for the three months endedMarch 31, 2022 was consistent with the prior period primarily due to an increase in performance-based executive compensation offset by the prior period including divestiture & other related expenses of$1.6 million and operational improvement plan expenses of$1.0 million . There were no divestiture & other related expenses or operational improvement plan expenses in the current period.
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 ofMarch 31, 2022 . 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, dividend payments, 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 2022 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 substantial 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 endedMarch 31, 2022 . The Company currently anticipates inflation will not significantly impact the remainder of 2022, as a result of the Company's pricing and other actions; however, the Company, like others in its industry, has faced challenges due to conditions in the global supply chain and global economy. In particular, 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. 19
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Cash Flows from Operating Activities Net cash used in operating activities was$0.9 million for the three months endedMarch 31, 2022 , compared to net cash provided by operating activities of$29.0 million for the three months endedMarch 31, 2021 . The decrease in net cash from operating activities was primarily due to an increase in cash used for inventory and higher incentive payments in 2022. Cash Flows from Investing Activities Net cash used in investing activities was$12.2 million and$9.8 million during the three months endedMarch 31, 2022 and 2021, respectively. Capital expenditures were$12.7 million and$14.2 million during the three months endedMarch 31, 2022 and 2021, respectively. In addition, during the three months endedMarch 31, 2021 , the Company received cash proceeds of$4.1 million related to the Company's divestiture activities. Cash Flows from Financing Activities Net cash provided by financing activities was$14.9 million for the three months endedMarch 31, 2022 , and net cash used in financing activities was$15.9 million for the three months endedMarch 31, 2021 . Net debt increased by$33.8 million and$12.5 million for the three months endedMarch 31, 2022 and 2021, respectively. The cash proceeds from the increase in net debt in the current period were primarily used to support inventory investments during the three months endedMarch 31, 2022 . For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. The Company repurchased shares of its common stock for$11.7 million during the three months endedMarch 31, 2021 . There were no repurchases of shares of the Company's common stock in the current period. Dividends of$17.2 million and$16.5 million were paid during the three months endedMarch 31, 2022 and 2021, respectively. Dividends paid were$0.41 and$0.39 per share for the three months endedMarch 31, 2022 and 2021, respectively.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Company's critical accounting policies during the quarter endedMarch 31, 2022 . 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 endedDecember 31, 2021 .
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