| 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 September 30, 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 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; governmental regulations and restrictions, and general economic conditions, including inflation; 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; 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 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as updated and supplemented in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 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 $361.1 million and $344.3 million for the three months ended September 30, 2022 and 2021, respectively. Revenue was $1.1 billion and $1.0 billion for the nine months ended September 30, 2022 and 2021, respectively. The increase in revenue for the three months ended September 30, 2022, was primarily due to higher selling prices. The increase in revenue for the nine months ended September 30, 2022, was primarily due to higher selling prices and volumes, partially offset by the sale of the Company’s Fragrances product line on April 1, 2021. For the three and nine months ended September 30, 2022, the impact of foreign exchange rates decreased consolidated revenue by approximately 4% and 3%, respectively.
Gross Margin
The Company’s gross margin was 33.7% and 33.4% for the three months ended September 30, 2022 and 2021, respectively. The Company’s gross margin was 34.7% and 32.9% for the nine months ended September 30, 2022 and 2021, respectively. The increase in gross margin for both the three and nine months ended September 30, 2022, was primarily due to increased pricing and volumes, partially offset by higher input costs and unfavorable product mix.
Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 20.6% and 19.8% for the three months ended September 30, 2022 and 2021, respectively. Selling and administrative expense as a percent of revenue was 20.4% and 20.5% for the nine months ended September 30, 2022 and 2021, respectively.
Selling and administrative expenses for the three and nine months ended September 30, 2021, included divestiture & other related expenses and operational improvement plan costs and income totaling $0.7 million and $11.5 million, respectively. There were no divestiture & other related costs or operational improvement plan costs for the three or nine months ended September 30, 2022.
The increase in selling and administrative expense as a percent of revenue for the three months ended September 30, 2022 is primarily due to higher performance-based executive compensation in 2022, partially offset by the lack of divestiture & other related costs and operational improvement plan costs in 2022. The decrease in selling and administrative expense as a percent of revenue for the nine months ended September 30, 2022, is primarily due to the lack of divestiture & other related costs and operational improvement plan costs in 2022, substantially offset by higher performance-based executive compensation in 2022. The divestiture & other related costs and operational improvement plan costs increased selling and administrative expense as a percent of revenue by 20 and 110 basis points for the three and nine months ended September 30, 2021, respectively.
Operating Income
Operating income was $47.5 million and $47.0 million for the three months ended September 30, 2022 and 2021, respectively. Operating margins were 13.2% and 13.6% for the three months ended September 30, 2022 and 2021, respectively. The decrease in operating margin is primarily due to higher input costs and unfavorable product mix, partially offset by higher pricing and volumes and the lack of divestiture & other related costs and operational improvement plan costs in the current period.
Operating income was $155.5 million and $129.6 million for the nine months ended September 30, 2022 and 2021, respectively. Operating margins were 14.3% and 12.5% for the nine months ended September 30, 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 input costs and unfavorable product mix.
Interest Expense
Interest expense was $3.7 million and $3.0 million for the three months ended September 30, 2022 and 2021, respectively, and $9.7 million and $9.8 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in expense for the three months ended September 30, 2022, was primarily due to a higher average debt balance and higher average interest rate compared to the comparable prior year period. The decrease in expense for the nine months ended September 30, 2022, 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 ended September 30, 2022 and 2021, were 17.7% and 22.8%, respectively. For the nine months ended September 30, 2022 and 2021, the effective income tax rates were 23.3% and 23.6%, respectively. The effective tax rates for the three and nine months ended September 30, 2022 and 2021, were both impacted by changes in estimates associated with the finalization of prior year foreign tax items, the mix of foreign earnings, and changes in valuation allowances. The three and nine months ended September 30, 2021, were also impacted by audit settlements and changes in deferred tax assets and liabilities due to newly enacted tax rates.
Divestitures
On June 30, 2020, the Company completed the sale of its inks product line. On September 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. On April 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.
For the three and nine months ended September 30, 2021, the Company incurred costs of $0.2 million and $13.5 million, respectively, related to the divestitures. The costs incurred in the nine month period primarily related to a non-cash net loss for the reclassification of accumulated foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated Statements of Earnings. There were no costs related to the divestitures incurred during the three or nine months ended September 30, 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 its New Jersey cosmetics manufacturing facility in the Personal Care product line of the Color segment into its existing Color segment facility in Missouri. In addition, the Company centralized certain Flavors & Extracts segment support functions in Europe into one location. In the Asia Pacific segment, the Company incurred costs in connection with the elimination of certain selling and administrative positions.
During the second quarter of 2021, the Company received cash proceeds, net of associated expenses, in connection with the termination of a New Jersey office and laboratory space lease. The terminated lease was originally executed in November 2020 as part of the Operational Improvement Plan; however, the landlord for the property requested to terminate the lease prior to the end of its term and compensated the Company as part of a negotiated resolution for that termination.
In the three and nine months ended September 30, 2021, the Company recorded costs of $0.5 million and income of $2.0 million, respectively, related to the Operational Improvement Plan. The income in the nine month period primarily related to the gain associated with the terminated New Jersey lease. There were no costs or income related to the Operational Improvement Plan incurred during the three or nine months ended September 30, 2022.
Acquisition
On July 15, 2021, the Company acquired substantially all of the assets of Flavor Solutions, Inc., a flavors business located in New Jersey. The purchase price for this acquisition was $14.9 million in cash. 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, energy, transportation, and labor. In response, we have taken pricing actions to offset these increases.
For the three and nine months ended September 30, 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 income 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 into U.S. dollars, the results of the divested product lines, the divestiture & other related costs, and the operational improvement plan costs or income.
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.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| (In thousands, except per share amounts) | | 2022 | | | 2021 | | | % Change | | | 2022 | | | 2021 | | | % Change | |
| Revenue (GAAP) | | $ | 361,076 | | | $ | 344,287 | | | | 4.9 | % | | $ | 1,088.303 | | | $ | 1,039,816 | | | | 4.7 | % |
| Revenue of the divested product lines | | | - | | | | (1,622 | ) | | | | | | | - | | | | (29,399 | ) | | | | |
| Adjusted revenue | | $ | 361,076 | | | $ | 342,665 | | | | 5.4 | % | | $ | 1,088,303 | | | $ | 1,010,417 | | | | 7.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Income (GAAP) | | $ | 47,493 | | | $ | 46,958 | | | | 1.1 | % | | $ | 155,526 | | | $ | 129,608 | | | | 20.0 | % |
| Divestiture & other related costs – Cost of products sold | | | - | | | | - | | | | | | | | - | | | | 28 | | | | | |
| Divestiture & other related costs – Selling and administrative expenses | | | - | | | | 241 | | | | | | | | - | | | | 13,473 | | | | | |
| Operating loss (income) of the divested product lines | | | - | | | | 70 | | | | | | | | - | | | | (2,398 | ) | | | | |
| Operational improvement plan – Selling and administrative expenses (income) | | | - | | | | 483 | | | | | | | | - | | | | (2,010 | ) | | | | |
| Adjusted operating income | | $ | 47,493 | | | $ | 47,752 | | | | (0.5 | %) | | $ | 155,526 | | | $ | 138,701 | | | | 12.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Earnings (GAAP) | | $ | 36,048 | | | $ | 33,912 | | | | 6.3 | % | | $ | 111,766 | | | $ | 91,516 | | | | 22.1 | % |
| Divestiture & other related costs, before tax | | | - | | | | 241 | | | | | | | | - | | | | 13,501 | | | | | |
Tax impact of divestiture & other related costs(1) | | | - | | | | 1,179 | | | | | | | | - | | | | 283 | | | | | |
| Net loss (earnings) of the divested product lines, before tax | | | - | | | | 70 | | | | | | | | - | | | | (2,398 | ) | | | | |
Tax impact of the divested product lines(1) | | | - | | | | (18 | ) | | | | | | | - | | | | 590 | | | | | |
| Operational improvement plan costs (income), before tax | | | - | | | | 483 | | | | | | | | - | | | | (2,010 | ) | | | | |
Tax impact of operational improvement plan(1) | | | - | | | | (115 | ) | | | | | | | - | | | | 44 | | | | | |
| Adjusted net earnings | | $ | 36,048 | | | $ | 35,752 | | | | 0.8 | % | | $ | 111,766 | | | $ | 101,526 | | | | 10.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted earnings per share (GAAP) | | $ | 0.85 | | | $ | 0.80 | | | | 6.3 | % | | $ | 2.65 | | | $ | 2.16 | | | | 22.7 | % |
| Divestiture & other related costs, net of tax | | | - | | | | 0.03 | | | | | | | | - | | | | 0.33 | | | | | |
| Results of operations of the divested product lines, net of tax | | | - | | | | - | | | | | | | | - | | | | (0.04 | ) | | | | |
| Operational improvement plan costs (income, net of tax | | | - | | | | 0.01 | | | | | | | | - | | | | (0.05 | ) | | | | |
| Adjusted diluted earnings per share | | $ | 0.85 | | | $ | 0.85 | | | | 0.0 | % | | $ | 2.65 | | | $ | 2.40 | | | | 10.4 | % |
| (1) | Tax impact adjustments were determined based on the nature of the underlying non-GAAP adjustments and their relevant jurisdictional tax rates. |
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.
The following table summarizes the percentage change for the results of the three and nine months ended September 30, 2022, compared to the results for the three and nine months ended September 30, 2021, in the respective financial measures.
| | | Three Months Ended September 30, 2022 | | | Nine Months Ended September 30, 2022 | |
| Revenue | | Total | | | Foreign Exchange Rates | | | Adjustments(1) | | | Adjusted Local Currency | | | Total | | | Foreign Exchange Rates | | | Adjustments(1) | | | Adjusted Local Currency | |
| Flavors & Extracts | | | 3.0 | % | | | (2.9 | %) | | | (0.8 | %) | | | 6.7 | % | | | (0.5 | %) | | | (2.4 | %) | | | (5.0 | %) | | | 6.9 | % |
| Color | | | 8.8 | % | | | (5.5 | %) | | | (0.3 | %) | | | 14.6 | % | | | 11.8 | % | | | (3.8 | %) | | | (0.4 | %) | | | 16.0 | % |
| Asia Pacific | | | 5.3 | % | | | (9.2 | %) | | | 0.0 | % | | | 14.5 | % | | | 9.5 | % | | | (7.4 | %) | | | (0.3 | %) | | | 17.2 | % |
| Total Revenue | | | 4.9 | % | | | (4.4 | %) | | | (0.6 | %) | | | 9.9 | % | | | 4.7 | % | | | (3.3 | %) | | | (3.0 | %) | | | 11.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Flavors & Extracts | | | 4.7 | % | | | (1.1 | %) | | | 0.2 | % | | | 5.6 | % | | | 9.4 | % | | | (1.2 | %) | | | (4.0 | %) | | | 14.6 | % |
| Color | | | 3.5 | % | | | (7.4 | %) | | | 0.0 | % | | | 10.9 | % | | | 13.3 | % | | | (4.9 | %) | | | 0.9 | % | | | 17.3 | % |
| Asia Pacific | | | 5.3 | % | | | (11.0 | %) | | | 0.0 | % | | | 16.3 | % | | | 19.5 | % | | | (9.6 | %) | | | (0.5 | %) | | | 29.6 | % |
| Corporate & Other | | | 16.0 | % | | | (0.1 | %) | | | (7.4 | %) | | | 23.5 | % | | | (9.6 | %) | | | 0.0 | % | | | (30.4 | %) | | | 20.8 | % |
| Total Operating Income | | | 1.1 | % | | | (6.5 | %) | | | 1.8 | % | | | 5.8 | % | | | 20.0 | % | | | (5.1 | %) | | | 8.4 | % | | | 16.7 | % |
| Diluted Earnings per Share | | | 6.3 | % | | | (6.3 | %) | | | 5.5 | % | | | 7.1 | % | | | 22.7 | % | | | (5.1 | %) | | | 12.8 | % | | | 15.0 | % |
| (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 and income. |
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 Asia Pacific segments.
Flavors & Extracts
Flavors & Extracts segment revenue was $187.0 million and $181.7 million for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately 3%. Foreign exchange rates decreased segment revenue by approximately 3%. The increase was primarily a result of higher revenue in Flavors, Extracts & Flavor Ingredients, offset by lower revenue in Natural Ingredients and lower revenue due to the completion of post-closing activities associated with the divestiture of Yogurt Fruit Preparations. The higher revenue in Flavors, Extracts & Flavor Ingredients was primarily due to higher selling prices and higher volumes, partially offset by the unfavorable impact of foreign exchange rates. The lower revenue in Natural Ingredients was primarily due to lower volumes, partially offset by higher selling prices.
Flavors & Extracts segment revenue was $559.1 million and $562.0 million for the nine months ended September 30, 2022 and 2021, respectively, a decrease of approximately 1%. Foreign exchange rates decreased segment revenue by approximately 2%. The decrease was primarily a result of lower revenue due to the completion of post-closing activities associated with the divestiture of Yogurt Fruit Preparations and the divestiture of Fragrances and lower revenue in Natural Ingredients, partially offset by higher revenue in Flavors, Extracts & Flavor Ingredients. 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 selling prices, higher volumes, and the acquisition of Flavor Solutions, Inc. in July of 2021, partially offset by the unfavorable impact of foreign exchange rates.
Flavors & Extracts segment operating income was $26.3 million and $25.2 million for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately 5%. 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 primarily due to higher selling prices and higher volumes, partially offset by higher raw material costs and higher manufacturing and other costs. Segment operating income as a percent of revenue was 14.1% in the current quarter compared to 13.9% in the prior year’s comparable quarter.
Flavors & Extracts segment operating income was $83.9 million and $76.7 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of approximately 9%. Foreign exchange rates decreased segment operating income by approximately 1%. The increase was primarily a result of higher segment operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by lower segment operating income due to the divestiture of Fragrances in April of 2021. The higher segment operating income in Flavors, Extracts & Flavor Ingredients was primarily a result of higher selling prices and volumes, partially offset by higher raw material costs, higher manufacturing and other costs, and the unfavorable impact of foreign exchange rates. The higher segment operating income in Natural Ingredients was primarily a result of higher selling prices and 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 15.0% in the current nine month period compared to 13.7% in the prior year’s comparable nine month period.
Color
Segment revenue for the Color segment was $151.5 million and $139.2 million for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately 9%. The increase was a result of higher revenue in Food & Pharmaceutical Colors, primarily due to higher volumes and selling prices, partially offset by the unfavorable impact of foreign exchange rates that decreased segment revenue by approximately 6%.
Segment revenue for the Color segment was $456.2 million and $408.2 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of approximately 12%. 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 4%.
Segment operating income for the Color segment was $28.2 million and $27.3 million for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately 4%. Foreign exchange rates decreased segment operating income by approximately 7%. The increase in segment operating income was a result of higher operating income in Food & Pharmaceutical Colors and Personal Care, primarily due to higher selling prices and volumes, partially offset by higher raw material costs, higher manufacturing and other costs, unfavorable product mix, and the unfavorable impact of foreign exchange rates. Segment operating income as a percent of revenue was 18.6% in the current quarter and 19.6% in the prior year’s comparable quarter.
Segment operating income for the Color segment was $90.0 million and $79.5 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of approximately 13%. Foreign exchange rates decreased segment operating income by approximately 5%. The increase in segment operating income was a result of higher operating income in Food & Pharmaceutical Colors and Personal Care, primarily due to higher selling prices and volumes, partially offset by higher raw material costs, higher manufacturing and other costs, unfavorable product mix, and the unfavorable impact of foreign exchange rates. Segment operating income as a percent of revenue was 19.7% in the current nine month period and 19.5% in the prior year’s comparable period.
Asia Pacific
Segment revenue for the Asia Pacific segment was $35.2 million and $33.4 million for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately 5%. 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 9%.
Segment revenue for the Asia Pacific segment was $109.0 million and $99.6 million for the nine months ended September 30, 2022 and 2021, 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, which decreased segment revenue by approximately 7%.
Segment operating income for the Asia Pacific segment was $7.0 million and $6.6 million for the three months ended September 30, 2022 and 2021, respectively, an increase of approximately 5%. The increase was primarily a result of higher volumes and selling prices, partially offset by higher other operating costs and the unfavorable impact of foreign exchange rates that decreased segment operating income by approximately 11%. Segment operating income as a percent of revenue was 19.7% in both the current quarter and the prior year’s comparable quarter.
Segment operating income for the Asia Pacific segment was $22.9 million and $19.1 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of approximately 20%. The increase was primarily a result of higher volumes and selling prices, partially offset by higher raw material and other operating costs, unfavorable product mix, and the unfavorable impact of foreign exchange rates that decreased segment operating income by approximately 10%. Segment operating income as a percent of revenue was 21.0% in the current nine month period and 19.2% in the prior year’s comparable period.
Corporate & Other
The Corporate & Other operating expense was $14.0 million and $12.1 million for the three months ended September 30, 2022 and 2021, respectively. The increase was primarily due to higher performance-based executive compensation in 2022, partially offset by the prior year including divestiture & other related costs and operational improvement plan costs. There were no divestiture & other related expenses or operational improvement plan income or costs in the current period.
The Corporate & Other operating expense was $41.3 million and $45.7 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease was primarily due to the prior period including divestiture & other related expenses of $13.5 million, partially offset by higher performance-based executive compensation in 2022 and the prior period including operational improvement plan income of $2.0 million. There were no divestiture & other related expenses or operational improvement plan income or costs in the current nine-month 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 of September 30, 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 or nine months ended September 30, 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 energy, 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 provided by operating activities was $14.9 million and $116.1 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease in net cash from operating activities was primarily due to an increase in cash used for inventory in 2022 as the Company invested in its inventory position to support demand and address supply chain challenges.
Cash Flows from Investing Activities
Net cash used in investing activities was $51.7 million and $13.1 million during the nine months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2021, the Company received cash proceeds of $36.8 million related to the Company’s divestiture activities. During the nine months ended September 30, 2022 and 2021, the Company paid $1.0 million and $13.9 million related to the acquisition of Flavors Solutions, Inc., respectively. Capital expenditures were $51.7 million and $37.6 million during the nine months ended September 30, 2022 and 2021, respectively.
Cash Flows from Financing Activities
Net cash provided by financing activities was $46.3 million for the nine months ended September 30, 2022, and net cash used in financing activities was $93.5 million for the nine months ended September 30, 2021. Net debt increased by $100.1 million and decreased by $11.9 million for the nine months ended September 30, 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 nine months ended September 30, 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 $31.5 million during the nine months ended September 30, 2021. There were no repurchases of shares of the Company’s common stock in 2022. Dividends of $51.7 million and $49.5 million were paid during the nine months ended September 30, 2022 and 2021, respectively. Dividends paid were $1.23 and $1.17 per share for the nine months ended September 30, 2022 and 2021, respectively.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Company’s critical accounting policies during the quarter ended September 30, 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 ended December 31, 2021.
| 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 September 30, 2022. 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, 2021.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures: The Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chairman, President, and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report, of the design and operation of the disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the Company’s Chairman, President, and Chief Executive Officer and its Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting: During the quarter ended September 30, 2022, the Company upgraded an enterprise resource planning software application used in two business units within the Flavors & Extracts segment. The upgrade included order taking, manufacturing, general ledger, and financial reporting processes. For the system change, the Company followed an implementation process that required significant pre-implementation planning, design, and testing. There have been no other changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| PART II. | OTHER INFORMATION |
See Part I, Item 1, Note 14, Commitments and Contingencies, of this report for information regarding legal proceedings in which the Company is involved.
There were no material changes to the risk factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as updated and supplemented in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On October 19, 2017, the Board of Directors authorized the repurchase of up to three million shares (2017 Authorization). As of September 30, 2022, 1,267,019 shares had been repurchased under the 2017 Authorization. There is no expiration date for the 2017 Authorization. The 2017 Authorization may be modified, suspended, or discontinued by the Board of Directors at any time. As of September 30, 2022, the maximum number of shares that may be purchased under publicly announced plans is 1,732,981. No shares were purchased by the Company during the three or nine months ended September 30, 2022.
See Exhibit Index following this report.
SENSIENT TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
| Exhibit | Description | Incorporated by Reference From | Filed Herewith |
| | | | |
| Amendment No. 9 to Receivables Purchase Agreement, dated as of August 31, 2022, among Sensient Receivables LLC, Sensient Technologies Corporation, and Wells Fargo Bank, National Association. | Exhibit 10.1 to Current Report on Form 8-K filed September 6, 2022 (Commission File No. 1-7626) | |
| | | | |
| Certifications of the Company’s Chairman, President & Chief Executive Officer and Senior Vice President & Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act | | X |
| | | | |
| Certifications of the Company’s Chairman, President & Chief Executive Officer and Senior Vice President & Chief Financial Officer pursuant to 18 United States Code § 1350 | | X |
| | | | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | | X |
| | | | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | X |
| | | | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X |
| | | | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X |
| | | | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | X |
| | | | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X |
| | | | |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | X |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | SENSIENT TECHNOLOGIES CORPORATION |
| | | | |
| Date: | November 1, 2022 | By: | /s/ John J. Manning |
|
| | | | John J. Manning, Senior Vice President, General Counsel & Secretary | |
| | | | |
| Date: | November 1, 2022 | By: | /s/ Stephen J. Rolfs |
|
| | | | Stephen J. Rolfs, Senior Vice President & Chief Financial Officer | |
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