10-Q 1 ef20026304_10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:
March 31, 2024
 

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
to
 
Commission file number: 001-07626

Sensient Technologies Corporation
(Exact name of registrant as specified in its charter)

Wisconsin
 
39-0561070
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

777 EAST WISCONSIN AVENUE, MILWAUKEE, WISCONSIN 53202-5304
(Address of principal executive offices)

Registrant’s telephone number, including area code:
(414) 271-6755

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.10 per share
SXT
New York Stock Exchange LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding at April 24, 2024
Common Stock, par value $0.10 per share
 
42,364,905



SENSIENT TECHNOLOGIES CORPORATION
INDEX

   
Page No.
     
PART I. FINANCIAL INFORMATION:
 
     
Item 1.
Financial Statements:
 
 

 
 
1
 

 
 
2
 
 
 
3
 
 
 
4
 
 
 
 
5
     
 
6
     
Item 2.
12
     
Item 3.
16
     
Item 4.
16
     
PART II. OTHER INFORMATION:
 
     
Item 1.
16
     
Item 1A.
16
     
Item 2.
16
 
 
Item 5.
 16
     
Item 6
Exhibits.  16
     
 
17
     
 
18

PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS

SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
(Unaudited)

 
Three Months
Ended March 31,
 
             
   
2024
   
2023
 
             
Revenue
 
$
384,670
   
$
369,006
 
Cost of products sold
   
258,121
     
244,343
 
Selling and administrative expenses
   
77,143
     
73,825
 
Operating income
   
49,406
     
50,838
 
Interest expense
   
7,045
     
6,002
 
Earnings before income taxes
   
42,361
     
44,836
 
Income taxes
   
11,421
     
11,185
 
Net earnings
 
$
30,940
   
$
33,651
 
                 
Weighted average number of common shares outstanding:
               
Basic
   
42,104
     
41,970
 
Diluted
   
42,305
     
42,255
 
                 
Earnings per common share:
               
Basic
 
$
0.73
   
$
0.80
 
Diluted
 
$
0.73
   
$
0.80
 
                 
Dividends declared per common share
 
$
0.41
   
$
0.41
 

See accompanying notes to consolidated condensed financial statements.

1

SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months
Ended March 31,
 
   
2024
   
2023
 
             
Comprehensive income
 
$
27,329
   
$
49,952
 

See accompanying notes to consolidated condensed financial statements.

2

SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)


 
March 31,
2024
(Unaudited)
   
December 31,
2023
 
Assets
           
Current Assets:
           
Cash and cash equivalents
 
$
25,417
   
$
28,934
 
Trade accounts receivable
   
298,488
     
272,164
 
Inventories
   
568,547
     
598,399
 
Prepaid expenses and other current assets
   
50,391
     
37,119
 
                 
Total current assets
   
942,843
     
936,616
 
                 
Other assets
   
93,960
     
94,873
 
Deferred tax assets
   
38,444
     
41,564
 
Intangible assets, net
   
11,706
     
12,112
 
Goodwill
   
420,541
     
424,065
 
Property, Plant, and Equipment:
               
Land
   
31,496
     
31,901
 
Buildings
   
349,052
     
343,594
 
Machinery and equipment
   
794,891
     
781,789
 
Construction in progress
   
44,403
     
59,091
 
     
1,219,842
     
1,216,375
 
Less accumulated depreciation
   
(721,654)
   
(711,098)
     
498,188
     
505,277
 
                 
Total assets
 
$
2,005,682
   
$
2,014,507
 
                 
Liabilities and ShareholdersEquity
               
                 
Current Liabilities:
               
Trade accounts payable
 
$
104,834
   
$
131,114
 
Accrued salaries, wages, and withholdings from employees
   
26,079
     
26,412
 
Other accrued expenses
   
52,503
     
52,024
 
Income taxes
   
16,004
     
13,296
 
Short-term borrowings
   
19,439
     
13,460
 
                 
Total current liabilities
   
218,859
     
236,306
 
                 
Deferred tax liabilities
   
14,072
     
14,260
 
Other liabilities
   
37,028
     
37,817
 
Accrued employee and retiree benefits
   
28,276
     
27,715
 
Long-term debt
   
643,511
     
645,085
 
Shareholders’ Equity:
               
Common stock
   
5,396
     
5,396
 
Additional paid-in capital
   
112,389
     
115,941
 
Earnings reinvested in the business
   
1,740,500
     
1,726,872
 
Treasury stock, at cost
   
(618,621)
   
(622,768)
Accumulated other comprehensive loss
   
(175,728)
   
(172,117)
                 
Total shareholders’ equity
   
1,063,936
     
1,053,324
 
                 
Total liabilities and shareholders’ equity
 
$
2,005,682
   
$
2,014,507
 

See accompanying notes to consolidated condensed financial statements.

3

SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three Months
Ended March 31,
 
   
2024
   
2023
 
             
Cash flows from operating activities:
           
Net earnings
 
$
30,940
   
$
33,651
 
Adjustments to arrive at net cash provided by operating activities:
               
Depreciation and amortization
   
14,709
     
14,150
 
Share-based compensation expense
   
1,995
     
2,267
 
Net (gain) loss on assets
   
(193
)
   
8
 
Portfolio Optimization Plan costs
    1,189       -  
Deferred income taxes
   
(4
)
   
(2,351
)
Changes in operating assets and liabilities:
               
Trade accounts receivable
   
(28,331
)
   
(7,142
)
Inventories
   
26,624
     
(4,374
)
Prepaid expenses and other assets
   
(13,655
)
   
(2,062
)
Accounts payable and other accrued expenses
   
(21,993
)
   
(19,251
)
Accrued salaries, wages, and withholdings from employees
   
29
     
(21,187
)
Income taxes
   
3,150
     
2,548
 
Other liabilities
   
674
     
698
 
                 
Net cash provided by (used in) operating activities
   
15,134
     
(3,045
)
                 
Cash flows from investing activities:
               
Acquisition of property, plant, and equipment
   
(11,030
)
   
(22,278
)
Proceeds from sale of assets
   
93
     
1
 
Other investing activities
   
(1
)
   
(602
)
                 
Net cash used in investing activities
   
(10,938
)
   
(22,879
)
                 
Cash flows from financing activities:
               
Proceeds from additional borrowings
   
38,053
     
50,827
 
Debt payments
   
(27,031
)
   
(1,351
)
Dividends paid
   
(17,312
)
   
(17,255
)
Other financing activities
   
(2,828
)
   
(7,669
)
                 
Net cash (used in) provided by financing activities
   
(9,118
)
   
24,552
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
1,405
     
4,468
 
                 
Net (decrease) increase in cash and cash equivalents
   
(3,517
)
   
3,096
 
Cash and cash equivalents at beginning of period
   
28,934
     
20,921
 
Cash and cash equivalents at end of period
 
$
25,417
   
$
24,017
 

See accompanying notes to consolidated condensed financial statements.

4

SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
(Unaudited)

 
   
   
   
Treasury Stock
   

   

 
Three Months Ended March 31, 2024
 
Common
Stock
   
Additional
Paid-In
Capital
   
Earnings
Reinvested
in the
Business
   
Shares
   
Amount
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Equity
 
Balances at December 31, 2023
 
$
5,396
   
$
115,941
   
$
1,726,872
     
11,885,398
   
$
(622,768
)
 
$
(172,117
)
 
$
1,053,324
 
Net earnings
   
-
     
-
     
30,940
     
-
     
-
     
-
     
30,940
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(3,611
)
   
(3,611
)
Cash dividends paid $0.41 per share
   
-
     
-
     
(17,312
)
   
-
     
-
     
-
     
(17,312
)
Share-based compensation
   
-
     
1,995
     
-
     
-
     
-
     
-
     
1,995
 
Non-vested stock issued upon vesting
   
-
     
(5,365
)
   
-
     
(102,396
)
   
5,365
     
-
     
-
 
Benefit plans
    -       299       -       (21,405 )     1,122       -       1,421  
Other
   
-
     
(481
)
   
-
     
44,652
     
(2,340
)
   
-
     
(2,821
)
Balances at March 31, 2024
 
$
5,396
   
$
112,389
   
$
1,740,500
     
11,806,249
   
$
(618,621
)
 
$
(175,728
)
 
$
1,063,936
 

Three Months Ended March 31, 2023
                                         
Balances at December 31, 2022
  $ 5,396     $ 124,043     $ 1,702,700       12,058,773     $ (631,853 )   $ (200,688 )   $ 999,598  
Net earnings
    -       -       33,651       -       -       -       33,651  
Other comprehensive income
    -       -       -       -       -       16,301       16,301  
Cash dividends paid $0.41 per share
    -       -       (17,255 )     -       -       -       (17,255 )
Share-based compensation
    -       2,267       -       -       -       -       2,267  
Non-vested stock issued upon vesting
    -       (11,956 )     -       (228,181 )     11,956       -       -  
Benefit plans
    -       375       -       (18,172 )     952       -       1,327  
Other
    -       (2,140 )     -       105,524       (5,528 )     -       (7,668 )
Balances at March 31, 2023
  $ 5,396     $ 112,589     $ 1,719,096       11,917,944     $ (624,473 )   $ (184,387 )   $ 1,028,221  

See accompanying notes to consolidated condensed financial statements.
5

SENSIENT TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1.
Accounting Policies

In the opinion of Sensient Technologies Corporation (the Company), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) that are necessary to present fairly the financial position of the Company as of March 31, 2024, and the results of operations, comprehensive income, cash flows, and shareholders’ equity for the three months ended March 31, 2024 and 2023. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Expenses are charged to operations in the period incurred.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to provide disclosures of significant segment expenses and other segment items. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and its related disclosures.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to consistently categorize, and provide greater disaggregation of, information in the rate reconciliation table and further disaggregate income tax payments by jurisdiction. This ASU is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and its related disclosures.

Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2023, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change.

2.
Portfolio Optimization Plan

During the fourth quarter of 2023, the board of directors of the Company approved a plan to undertake an effort to optimize certain production facilities and improve efficiencies within the Company (Portfolio Optimization Plan). As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company began evaluating the potential closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the potential closure of its sales office in Granada, Spain, and the potential centralization and elimination of certain selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. In addition, in the Color segment, the Company’s proposals include closing a manufacturing facility in Delta, British Columbia, Canada, closing a sales office in Argentina, and centralizing and eliminating certain production positions as well as potentially eliminating some selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.

The Company recorded non-cash impairment charges in Selling and Administrative Expenses, primarily related to certain property, plant, and equipment during the three months ended March 31, 2024, when the estimated fair value of these assets was lower than the carrying value. The property, plant, and equipment related to a product line that was shut down and determined to not be usable at other plant locations.

6

The Company recorded $3.4 million and $3.7 million of accrued liabilities in Other Accrued Expenses on the Company’s Consolidated Balance Sheet related to this plan as of March 31, 2024 and December 31, 2023, respectively. The Company expects this plan will cost approximately $40 million, primarily related to non-cash impairment charges and proposed employee separation costs, and upon completion would reduce annual operating costs by approximately $8 million to $10 million, with the full benefit expected to be achieved after 2025. The Company proposes to reduce headcount by approximately 120 positions, primarily in the Flavors & Extracts and Color segments, related to certain production and selling and administrative positions.

The following table summarizes the Portfolio Optimization Plan expenses by segment for the three months ended March 31, 2024:

 
(In thousands)
 
Flavors &
Extracts
   

Color
   
Corporate 
& Other
   
Consolidated
 
Non-cash impairment charges – Selling and administrative expenses
 
$
-
   
$
975
   
$
-
   
$
975
 
Non-cash charges – Cost of products sold
   
125
     
(18
)
   
-
     
107
 
Employee separation – Selling and administrative expenses
   
611
     
491
     
28
     
1,130
 
Other costs – Selling and administrative expenses(1)
   
316
     
284
     
-
     
600
 
Total
 
$
1,052
   
$
1,732
   
$
28
   
$
2,812
 


(1)
Other costs include professional services, accelerated depreciation, accelerated lease costs, and other related costs.

3.
Trade Accounts Receivable

Trade accounts receivables are recorded at their face amount, less an allowance for expected losses on doubtful accounts. The allowance for doubtful accounts is calculated based on customer-specific analysis and an aging methodology using historical loss information. The Company believes historical loss information is a reasonable basis for expected credit losses as the Company’s historical credit loss experience correlates with its customer delinquency status. This information is also adjusted for any known current economic conditions. Forecasted economic conditions have not had a significant impact on the current credit loss estimate due to the short-term nature of the Company’s customer receivables; however, the Company will continue to monitor and evaluate the rapidly changing economic conditions. Additionally, as the Company only has one portfolio segment, there are not different risks between portfolios. Specific accounts are written off against the allowance for doubtful accounts when the receivable is deemed no longer collectible.

The following table summarizes the changes in the allowance for doubtful accounts during the three-month periods ended March 31, 2024 and 2023:

(In thousands)
Three Months Ended March 31, 2024
 
Allowance for
Doubtful Accounts
 
Balance at December 31, 2023
 
$
4,373
 
Provision for expected credit losses
   
307
 
Accounts written off
   
(747
)
Translation and other activity
   
(51
)
Balance at March 31, 2024
 
$
3,882
 

(In thousands)
Three Months Ended March 31, 2023
 
Allowance for
Doubtful Accounts
 
Balance at December 31, 2022
 
$
4,436
 
Provision for expected credit losses
   
120
 
Accounts written off
   
(614
)
Translation and other activity
   
103
 
Balance at March 31, 2023
 
$
4,045
 

4.
Inventories
 
At March 31, 2024, and December 31, 2023, inventories included finished and in-process products totaling $416.9 million and $437.1 million, respectively, and raw materials and supplies of $151.6 million and $161.3 million, respectively.

7

5.
Fair Value

Accounting Standards Codification 820, Fair Value Measurement, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, and short-term borrowings were approximately the same as the fair values as of March 31, 2024 and December 31, 2023. The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was an asset of $1.4 million and $1.0 million as of March 31, 2024 and December 31, 2023, respectively. The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at March 31, 2024 and December 31, 2023, was $643.6 million and $645.2 million, respectively. The fair value of the long-term debt at March 31, 2024 and December 31, 2023, was $648.6 million and $653.7 million, respectively.

6.
Segment Information

The Company evaluates performance based on operating income before share-based compensation; restructuring and other charges, including Portfolio Optimization Plan costs; interest expense; and income taxes (segment operating income). Total revenue and segment operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation.

The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. The Company’s three reportable segments are the Flavors & Extracts and Color segments, which are both managed on a product line basis, and the Asia Pacific segment, which is managed on a geographic basis. The Company’s Flavors & Extracts segment produces flavor, extracts, and essential oils products that impart a desired taste, texture, aroma, or other characteristics to a broad range of consumer and other products. The Color segment produces natural and synthetic color systems for use in foods, beverages, pharmaceuticals, and nutraceuticals; colors and other ingredients for personal care, such as active ingredients, solubilizers, and surface treated pigments; pharmaceutical and nutraceutical excipients, such as colors, flavors, coatings, and nutraceutical ingredients; and technical colors for industrial applications. The Asia Pacific segment is managed on a geographic basis and produces and distributes color, flavor, and essential oils products in the Asia Pacific countries. The Company’s corporate expenses, share-based compensation, and restructuring and other charges, including Portfolio Optimization Plan costs, are included in the “Corporate & Other” category.

Operating results by segment for the periods presented are as follows:

(In thousands)
 
Flavors &
Extracts
   
Color
   
Asia
Pacific
   
Corporate &
Other
   
Consolidated
 
Three months ended March 31, 2024:
                             
Revenue from external customers
 
$
188,022
   
$
156,364
   
$
40,284
   
$
-
   
$
384,670
 
Intersegment revenue
   
5,070
     
3,661
     
22
     
-
     
8,753
 
Total revenue
 
$
193,092
   
$
160,025
   
$
40,306
   
$
-
   
$
393,423
 
                                         
Operating income (loss)
 
$
23,678
   
$
31,679
   
$
8,776
   
$
(14,727
)
 
$
49,406
 
Interest expense
   
-
     
-
     
-
     
7,045
     
7,045
 
Earnings (loss) before income taxes
 
$
23,678
   
$
31,679
   
$
8,776
   
$
(21,772
)
 
$
42,361
 
                                         
Three months ended March 31, 2023:
                                       
Revenue from external customers
 
$
171,972
   
$
156,949
   
$
40,085
   
$
-
   
$
369,006
 
Intersegment revenue
   
6,880
     
4,212
     
-
     
-
     
11,092
 
Total revenue
 
$
178,852
   
$
161,161
   
$
40,085
   
$
-
   
$
380,098
 
                                         
Operating income (loss)
 
$
22,180
   
$
31,885
   
$
9,241
   
$
(12,468
)
 
$
50,838
 
Interest expense
   
-
     
-
     
-
     
6,002
     
6,002
 
Earnings (loss) before income taxes
 
$
22,180
   
$
31,885
   
$
9,241
   
$
(18,470
)
 
$
44,836
 

8

Product Lines

(In thousands)
 
Flavors &
Extracts
   
Color
   
Asia Pacific
   
Consolidated
 
Three months ended March 31, 2024
                       
Flavors, Extracts & Flavor Ingredients
 
$
124,805
   
$
-
   
$
-
   
$
124,805
 
Natural Ingredients
   
68,287
     
-
     
-
     
68,287
 
Food & Pharmaceutical Colors
   
-
     
117,058
     
-
     
117,058
 
Personal Care
   
-
     
42,967
     
-
     
42,967
 
Asia Pacific
   
-
     
-
     
40,306
     
40,306
 
Intersegment Revenue
   
(5,070
)
   
(3,661
)
   
(22
)
   
(8,753
)
Total revenue from external customers
 
$
188,022
   
$
156,364
   
$
40,284
   
$
384,670
 
                                 
Three months ended March 31, 2023:
                               
Flavors, Extracts & Flavor Ingredients
 
$
124,825
   
$
-
   
$
-
   
$
124,825
 
Natural Ingredients
   
54,027
     
-
     
-
     
54,027
 
Food & Pharmaceutical Colors
   
-
     
118,747
     
-
     
118,747
 
Personal Care
   
-
     
42,414
     
-
     
42,414
 
Asia Pacific
   
-
     
-
     
40,085
     
40,085
 
Intersegment Revenue
   
(6,880
)
    (4,212 )    
-
     
(11,092
)
Total revenue from external customers
 
$
171,972
   
$
156,949
   
$
40,085
   
$
369,006
 

Geographic Markets

(In thousands)
 
Flavors &
Extracts
   
Color
   
Asia Pacific
   
Consolidated
 
Three months ended March 31, 2024:
                       
North America
 
$
146,952
   
$
75,120
   
$
-
   
$
222,072
 
Europe
   
32,157
     
46,162
     
46
     
78,365
 
Asia Pacific
   
3,706
     
17,419
     
38,685
     
59,810
 
Other
   
5,207
     
17,663
     
1,553
     
24,423
 
Total revenue from external customers
 
$
188,022
   
$
156,364
   
$
40,284
   
$
384,670
 
                                 
Three months ended March 31, 2023:
                               
North America
 
$
131,968
   
$
78,377
   
$
62
   
$
210,407
 
Europe
   
28,927
     
43,252
     
103
     
72,282
 
Asia Pacific
   
5,201
     
18,149
     
39,195
     
62,545
 
Other
   
5,876
     
17,171
     
725
     
23,772
 
Total revenue from external customers
 
$
171,972
   
$
156,949
   
$
40,085
   
$
369,006
 

7.
Retirement Plans

The Company’s components of annual benefit cost for the defined benefit plans for the periods presented are as follows:


 
Three Months Ended
March 31,
 
(In thousands)
 
2024
   
2023
 
Service cost
 
$
372
   
$
368
 
Interest cost
    401       409  
Expected return on plan assets
   
(242
)
   
(239
)
Recognized actuarial gain
    (91 )     (139 )
Total defined benefit expense
 
$
440
   
$
399
 

The Company’s non-service cost portion of defined benefit expense is recorded in Interest Expense on the Company’s Consolidated Statements of Earnings. The Company’s service cost portion of defined benefit expense is recorded in Selling and Administrative Expenses on the Company’s Consolidated Statements of Earnings.

9

8.
Derivative Instruments and Hedging Activity

The Company may use forward exchange contracts and foreign currency denominated debt to manage its exposure to foreign exchange risk in order to reduce the effect of fluctuating foreign currencies on short-term foreign currency denominated intercompany transactions, non-functional currency raw material purchases, non-functional currency sales, and other known foreign currency exposures. These forward exchange contracts generally have maturities of less than 18 months. The Company’s primary hedging activities and their accounting treatment are summarized below.

Forward exchange contracts – Certain forward exchange contracts have been designated as cash flow hedges. The Company had $44.5 million and $58.4 million of forward exchange contracts designated as cash flow hedges outstanding as of March 31, 2024 and December 31, 2023, respectively. For the three months ended March 31, 2024 and 2023, the amounts reclassified into net earnings in the Company’s Consolidated Statements of Earnings that offset the underlying transactions’ impact on earnings in the same period were not material. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges. The results of these transactions were not material to the financial statements.

Net investment hedges – The Company has designated certain foreign currency denominated long-term borrowings as partial hedges of the Company’s foreign currency net asset positions. As of March 31, 2024 and December 31, 2023, the total value of the Company’s net investment hedges was $306.7 million and $313.3 million, respectively. These net investment hedges included Euro and British Pound denominated long-term debt. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in Other Comprehensive Income (OCI). For the three months ended March 31, 2024 and 2023, the impact of foreign exchange rates on these debt instruments decreased debt by $6.6 million and increased debt by $4.4 million, respectively, which has been recorded as foreign currency translation in OCI.

9.
Income Taxes

The effective income tax 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.

10.
Accumulated Other Comprehensive Income

The following table summarizes the changes in OCI during the three-month periods ended March 31, 2024 and 2023:

(In thousands)
 
Cash Flow
Hedges (1)
   
Pension
Items (1)
   
Foreign
Currency
Items
   
Total
 
Balances at December 31, 2023
 
$
997
   
$
(2,079
)
 
$
(171,035
)
 
$
(172,117
)
Other comprehensive income (loss) before reclassifications
   
702
     
-
     
(4,023
)
   
(3,321
)
Amounts reclassified from OCI
   
(222
)
   
(68
)
   
-
     
(290
)
Balances at March 31, 2024
 
$
1,477
   
$
(2,147
)
 
$
(175,058
)
 
$
(175,728
)

(In thousands)
 
Cash Flow
Hedges (1)
   
Pension
Items (1)
   
Foreign
Currency
Items
   
Total
 
Balances at December 31, 2022
 
$
(599
)
 
$
(1,792
)
 
$
(198,297
)
 
$
(200,688
)
Other comprehensive income before reclassifications
   
1,700
     
-
     
14,841
     
16,541
 
Amounts reclassified from OCI
   
(118
)
   
(122
)
   
-
     
(240
)
Balances at March 31, 2023
 
$
983
   
$
(1,914
)
 
$
(183,456
)
 
$
(184,387
)


(1)
Cash Flow Hedges and Pension Items are net of tax.

10

11.
Commitments and Contingencies


The Company is subject to various claims and litigation arising in the normal course of business. The Company establishes reserves for claims and proceedings when it is probable that liabilities exist and reasonable estimates of loss can be made. While it is not possible to predict the outcome of these matters, based on our assessment of the facts and circumstances now known, we do not believe that these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

12.
Subsequent Event

On April 25, 2024, the Company announced its quarterly dividend of $0.41 per share would be payable on June 3, 2024.

11

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that reflect management’s current assumptions and estimates of future economic circumstances, industry conditions, Company performance, and financial results. Forward-looking statements include statements in the future tense, statements referring to any period after March 31, 2024, and statements including the terms “expect,” “believe,” “anticipate,” and other similar terms that express expectations as to future events or conditions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that could cause actual events to differ materially from those expressed in the forward-looking statements. A variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results. These factors and assumptions include, among others, the Company’s ability to manage general business, economic, and capital market conditions, including actions taken by customers in response to such market conditions, and the impact of recessions and economic downturns; the impact of macroeconomic and geopolitical volatility, including inflation and shortages impacting the availability and cost of raw materials, energy, and other supplies, disruptions and delays in the Company’s supply chain, and the conflicts between Russia and Ukraine and Israel and Hamas and other parties in the Middle East; the availability and cost of labor, logistics, and transportation; 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 Portfolio Optimization Plan; industry, regulatory, legal, and economic factors related to the Company’s domestic and international business; the effects of tariffs, trade barriers, and disputes; growth in markets for products in which the Company competes; industry and customer acceptance of price increases; actions by competitors; the Company’s ability to enhance its innovation efforts and drive cost efficiencies; 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, 2023. 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 $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.

Gross Margin
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.

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.

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

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.

12

Income Taxes
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.

Portfolio Optimization Plan
During the fourth quarter of 2023, the board of directors of the Company approved a plan to undertake an effort to optimize certain production facilities and improve efficiencies within the Company (Portfolio Optimization Plan). As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company began evaluating the potential closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the potential closure of its sales office in Granada, Spain, and the potential centralization and elimination of certain selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. In addition, in the Color segment, the Company’s proposals include closing a manufacturing facility in Delta, British Columbia, Canada, closing a sales office in Argentina, and centralizing and eliminating certain production positions as well as potentially eliminating some selling and administrative positions, with such proposals remaining subject to information and consultation processes in certain countries. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.

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.

NON-GAAP FINANCIAL MEASURES

Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted operating income, adjusted net earnings, and adjusted diluted earnings per share, which exclude restructuring and other costs, including the Portfolio Optimization 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 into U.S. dollars and restructuring and other costs, including the Portfolio Optimization 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.

   
Three Months Ended March 31,
 
(In thousands except per share amounts)
 
2024
   
2023
   
% Change
 
Operating Income (GAAP)
 
$
49,406
   
$
50,838
     
(2.8
)%
Portfolio Optimization Plan costs – Cost of products sold
   
107
     
-
         
Portfolio Optimization Plan costs – Selling and administrative expenses
   
2,705
     
-
         
Adjusted operating income
 
$
52,218
   
$
50,838
     
2.7
%
                         
Net Earnings (GAAP)
 
$
30,940
   
$
33,651
     
(8.1
)%
Portfolio Optimization Plan costs, before tax
   
2,812
      -          
Tax impact of Portfolio Optimization Plan costs(1)
   
(355
)
    -          
Adjusted net earnings
 
$
33,397
   
$
33,651
     
(0.8
)%
                         
Diluted Earnings Per Share (GAAP)
 
$
0.73
   
$
0.80
     
(8.8
)%
Portfolio Optimization Plan costs, net of tax
   
0.06
     
-