FORWARD-LOOKING STATEMENTS
This document 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, 2020, 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 those 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 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 and other
supplies, logistics and transportation, governmental regulations and
restrictions and general economic conditions; the pace and nature of new product
introductions by the Company and the Company's customers; our 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 and acquisition and divestiture activities; the success
of the Company's efforts to explore strategic alternatives for certain non-core
product lines; 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; the matters discussed under Item 1A of the Company's Annual Report
on Form 10-K for the year ended December 31, 2019 and below under Item 1A of
this Quarterly Report on Form 10-Q; and the matters discussed below under Item 2
including the critical accounting policies referenced therein. 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 $350.7 million and $347.5 million for the three months ended March
31, 2020 and 2019, respectively. For the three months ended March 31, 2020, the
impact of foreign exchange rates decreased consolidated revenue by approximately
2%.
Gross Margin
The Company's gross margin was 31.9% and 33.2% for the three months ended March
31, 2020 and 2019, respectively. The decrease in gross margin was primarily a
result of higher raw material costs in natural ingredients and unfavorable
product mix.
Selling and Administrative Expense
Selling and administrative expense as a percent of revenue was 22.1% and 18.9%
for the three months ended March 31, 2020 and 2019, respectively. Divestiture
and other related costs of $11.7 million were included in Selling and
Administrative Expenses for the three months ended March 31, 2020. The increase
in selling and administrative expense as a percent of revenue is primarily due
to the divestiture and other related costs incurred in 2020, which increased
selling and administrative expense as a percent of revenue by 330 basis points
for the three months ended March 31, 2020.
Operating Income
Operating income was $34.6 million and $49.4 million for the three months ended
March 31, 2020 and 2019, respectively. Operating margins were 9.9% and 14.2% for
the three months ended March 31, 2020 and 2019, respectively. The decrease in
operating margins is primarily due to the divestiture and other related costs
incurred in 2020, which decreased operating margins by 340 basis points for the
three months ended March 31, 2020.
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Interest Expense
Interest expense was $4.3 million and $5.4 million for the three months ended
March 31, 2020 and 2019, respectively. The decrease in expense was primarily due
to the decrease in the average debt outstanding.
Income Taxes
The effective income tax rates for the three months ended March 31, 2020 and
2019, were 31.3% and 25.5%, respectively. The effective tax rates for the three
months ended March 31, 2020 and 2019 were both impacted by changes in estimates
associated with the finalization of prior year foreign tax items, audit
settlements, and the mix of foreign earnings.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief
and Economic Security Act (CARES Act). The CARES Act allows for the deferral of
income and social security tax payments, a five-year carryback for net operating
losses, changes to interest expense and business loss limitation rules, certain
new tax credits, and certain new loans and grants to businesses. The Company has
reviewed its income tax assumptions and projections in light of the CARES Act
and does not expect the CARES Act to materially impact the Company's income tax
expense or projections. As of March 31, 2020, the Company was considering the
option to defer future tax payments (income taxes and certain payroll taxes) in
accordance with the CARES Act. Subsequent to March 31, 2020, the Company has
decided to defer certain tax payments in accordance with the CARES Act. The
Company will continue to evaluate the CARES Act for opportunities as additional
information is released on the CARES Act.
Divestitures
In October 2019, the Company announced its intent to divest its inks, fragrances
(excluding its essential oils product line), and yogurt fruit preparations
product lines. The Board of Directors approved the sale of the inks product
line, which is within the Color segment, and the sale of the fragrances product
line, which is within the Flavors & Fragrances segment.
In the three months ended March 31, 2020, the Company recorded a non-cash
impairment charge of $9.7 million, primarily related to property, plant and
equipment, intangibles and allocated goodwill, in Selling and Administrative
Expenses, related to the disposal group as described in Note 2, Divestitures, to
the Consolidated Condensed Financial Statements included in this report. The
charge reduced the carrying value of certain long-lived assets to their
estimated fair value. An estimate of the fair value of these product lines less
cost to sell was determined to be lower than its carrying value. This estimate
will be finalized and adjusted as necessary upon the closing of the sales or as
assumptions change.
In the three months ended March 31, 2020, the Company also incurred $2.1 million
of additional costs, primarily related to severance and legal expenses, related
to the anticipated divestitures and other exit activities.
Refer to Note 2, Divestitures, and Note 12, Subsequent Events, to the
Consolidated Condensed Financial Statements included in this report for
information about anticipated additional charges and expenses associated with
these divestitures.
COVID-19
COVID-19 is now affecting most of the world, including through widespread
illness, quarantines, factory shutdowns, and travel and transportation
restrictions. While the Company's financial position remains strong, the Company
has seen several financial and operational impacts from the pandemic as of this
filing.
For the three months ended March 31, 2020, demand for the Company's products
remained strong, especially in product lines that serve the food, beverage, and
pharmaceutical markets. There has been softer demand in other product lines the
Company serves, particularly in cosmetics and some product lines that supply the
quick service restaurant segment due to widespread restaurant shutdowns and
quarantine orders. While COVID-19 appears to have contributed to demand for
food-related products and dampened demand for personal care related products, it
is difficult to quantify the impact of COVID-19 on demand for the Company's
products. The Company continues to believe that it will achieve its projected
earnings guidance.
During the three months ended March 31, 2020, the Company had a production
facility in China and a production facility in India that were required to
temporarily suspend operations. 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 production facilities are located.
The Company also continues to monitor supply chains and has increased inventory
in certain key raw materials, although the Company did not experience any
significant disruptions during the three months ended March 31, 2020.
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As of March 31, 2020, the Company is in compliance with its loan covenants and
does not anticipate any non-compliance in the future. COVID-19 has not adversely
impacted the Company's capital or financial resources. Furthermore, the Company
expects its forecasted cash flows from operations and its available debt
capacity will be able to meet future cash requirements for operations, capital
expenditures, contractual maturities on long-term debt, and dividend payments.
The Company reviewed its goodwill, intangible assets, and long-lived assets for
potential impairment indicators as of March 31, 2020, and except for the
impairments associated with the product lines to be divested noted above, no
indicators of impairment were identified. The Company also reviewed its trade
accounts receivables for potential collection issues and did not identify any
concerns. The Company will continue to monitor cash collections and review trade
receivable aging to identify any deterioration in quality.
The Company estimates that the incremental expenses related to its COVID-19
response will be less than $3 million at the currently projected run-rate. All
of the Company's manufacturing plants continue in operation and have generally
been designated as part of the critical infrastructure in the countries in which
they operate.
In October 2019, the Company announced its intent to divest its inks, fragrances
(excluding its essential oils product line), and yogurt fruit preparations
product lines. While the sales and exit activities are still anticipated to be
completed as of the date of this filing, travel and transportation restrictions
have slowed down various activities related to the divestitures.
The Company continues to believe its internal controls over financial reporting
and its disclosure controls and procedures are effective to ensure their design
and operation continue to be effective as some employees perform tasks from
alternative work locations. Internal audit continues to perform their planned
audit procedures remotely from alternative work locations. See Item 4, Controls
and Procedures, for further information.
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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 EPS, which exclude the results of the product
lines to be divested and the divestiture and other related costs, and (2)
percentage changes in revenue, operating income, and diluted EPS on an adjusted
local currency basis, which eliminate the effects that result from translating
its international operations into U.S. dollars, the results of product lines to
be divested, and the divestiture and other related 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) 2020 2019 % Change
Revenue (GAAP) $ 350,677 $ 347,513 0.9 %
Revenue of the product lines to be divested (36,585 ) (39,021 )
Adjusted revenue $ 314,092 $ 308,492 1.8 %
Operating Income (GAAP) $ 34,561 $ 49,420 (30.1 %)
Divestiture & other related costs - Cost of
products sold 190 -
Divestiture & other related costs - Selling and
administrative expenses 11,653 -
Operating income of the product lines to be
divested (1,385 ) (32 )
Adjusted operating income $ 45,019 $ 49,388 (8.8 %)
Net Earnings (GAAP) $ 20,773 $ 32,807 (36.7 %)
Divestiture & other related costs, before tax 11,843 -
Tax impact of divestiture & other related costs (934 ) -
Net earnings of the product lines to be divested,
before tax (1,385 ) (32 )
Tax impact of the product lines to be divested 297 11
Adjusted net earnings $ 30,594 $ 32,786 (6.7 %)
Diluted EPS (GAAP) $ 0.49 $ 0.78 (37.2 %)
Divestiture & other related costs, net of tax 0.26 -
Results of operations of the product lines to be
divested, net of tax (0.03 ) -
Adjusted diluted EPS $ 0.72 $ 0.78 (7.7 %)
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The following table summarizes the percentage change for the results of the
three months ended March 31, 2020, compared to the results for the three months
ended March 31, 2019, in the respective financial measures.
Three Months Ended March 31, 2020
Product
Foreign Lines to Adjusted
Exchange be Local
Revenue Total Rates Divested Currency
Flavors & Fragrances 1.6 % (1.1 %) (0.9 %) 3.6 %
Color (0.3 %) (2.2 %) (0.9 %) 2.8 %
Asia Pacific 6.8 % (1.7 %) 0.0 % 8.5 %
Total Revenue 0.9 % (1.6 %) (0.6 %) 3.1 %
Operating Income
Flavors & Fragrances (9.7 %) (0.9 %) 5.7 % (14.5 %)
Color
(1.8 %) (2.3 %) 0.2 % 0.3 %
Asia Pacific 19.9 % 0.7 % 0.0 % 19.2 %
Corporate & Other 159.0 % 0.0 % 145.8 % 13.2 %
Total Operating Income (30.1 %) (1.8 %) (21.1 %) (7.2 %)
Diluted EPS (37.2 %) (2.6 %) (29.5 %) (5.1 %)
SEGMENT INFORMATION
The Company determines its operating segments based on information utilized by
its chief operating decision maker to allocate resources and assess performance.
The Company evaluates performance based on operating income before divestiture
and other related costs, restructuring and other charges, interest expense, and
income taxes (segment operating income). There were no restructuring and other
charges incurred in either of the first three months of 2020 or 2019.
Flavors & Fragrances
Flavors & Fragrances segment revenue was $186.5 million and $183.6 million for
the three months ended March 31, 2020 and 2019, respectively, an increase of
approximately 2%. Foreign exchange rates decreased segment revenue by
approximately 1%. The increase was a result of higher revenue in Natural
Ingredients, partially offset by lower revenue in Flavors, Extracts & Flavor
Ingredients. The higher revenue in Natural Ingredients was primarily due to
higher volumes. The lower revenue in Flavors, Extracts & Flavor Ingredients was
primarily due to lower volumes and the unfavorable impact of exchange rates.
Flavors & Fragrances segment operating income was $20.9 million and $23.1
million for the three months ended March 31, 2020 and 2019, respectively, a
decrease of approximately 10%. Foreign exchange rates decreased segment
operating income by approximately 1%. The lower segment operating income was
primarily a result of the timing of inventory reductions and cost reductions
relative to lower production volumes in Flavors, Extracts & Flavor Ingredients.
Segment operating income as a percent of revenue was 11.2% in the current
quarter compared to 12.6% in the prior year's comparable quarter.
Color
Segment revenue for the Color segment was $143.5 million and $143.9 million for
the three months ended March 31, 2020 and 2019, respectively. Foreign exchange
rates decreased segment revenue by approximately 2%. Higher revenues in Food &
Beverage Colors were offset by lower revenues in Personal Care and Inks. The
higher revenue in Food & Beverage Colors was primarily a result of higher
volumes, partially offset by the unfavorable impact of exchange rates. The lower
revenue in Personal Care was primarily due to the unfavorable impact of exchange
rates and lower revenue in Asia, while the lower revenue in Inks was primarily
due to lower volumes.
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Segment operating income for the Color segment was $29.7 million and $30.2
million for the three months ended March 31, 2020 and 2019, respectively, a
decrease of approximately 2%. Foreign exchange rates decreased segment operating
income by approximately 2%. The lower segment operating income was primarily a
result of lower operating income in Personal Care, partially offset by higher
operating income in Food & Beverage Colors. The lower segment operating income
in Personal Care was primarily a result of lower volumes, due to COVID-19 and
lower demand for makeup products. The higher segment operating income in Food &
Beverage Colors was primarily a result of higher volumes and favorable product
mix. Segment operating income as a percent of revenue was 20.7% in the current
quarter and 21.0% in the prior year's comparable quarter.
Asia Pacific
Segment revenue for the Asia Pacific segment was $30.4 million and $28.5 million
for the three months ended March 31, 2020 and 2019, respectively, an increase of
approximately 7%. Foreign exchange rates decreased segment revenue by
approximately 2%. The higher segment revenue was primarily due to higher
volumes.
Segment operating income for the Asia Pacific segment was $5.1 million and $4.2
million for the three months ended March 31, 2020 and 2019, respectively, an
increase of approximately 20%. Foreign exchange rates increased segment
operating income by approximately 1%. The higher segment operating income was
primarily due to higher sales volumes. Segment operating income as a percent of
revenue was 16.6% in the current quarter and 14.8% in the prior year's
comparable quarter.
Corporate & Other
The Corporate & Other operating expense was $21.0 million and $8.1 million for
the three months ended March 31, 2020 and 2019, respectively. The higher
operating expense for the three months ended March 31, 2020 was primarily due to
the period including $11.8 million of divestiture and other related costs and
higher non-cash share-based compensation. There were no divestiture and other
related costs in the prior year comparable 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 March 31, 2020. The Company expects its cash flow from operations and its
available debt capacity can be used to meet future cash requirements for
operations, capital expenditures, dividend payments, acquisitions, and stock
repurchases.
Cash Flows from Operating Activities
Net cash provided by operating activities was $36.9 million and $23.4 million
for the three months ended March 31, 2020 and 2019, respectively. The increase
in net cash provided by operating activities was due to a $14.3 million decrease
in cash used in working capital during the three months ended March 31, 2020,
compared to the three months ended March 31, 2019.
Cash Flows from Investing Activities
Net cash used in investing activities was $4.9 million and $8.6 million during
the three months ended March 31, 2020 and 2019, respectively. During the three
months ended March 31, 2020, the Company received cash proceeds of $4.6 million
related to the redemption of miscellaneous investments. Capital expenditures
were $9.4 million and $8.3 million during the three months ended March 31, 2020
and 2019, respectively.
Cash Flows from Financing Activities
Net cash used in financing activities was $18.2 million and $11.9 million for
the three months ended March 31, 2020 and 2019, respectively. Net debt decreased
by $1.4 million and increased by $4.1 million for the three months ended March
31, 2020 and 2019, respectively. For purposes of the cash flow statement, net
changes in debt exclude the impact of foreign exchange rates. Dividends of $16.5
million and $15.2 million were paid during the three months ended March 31, 2020
and 2019, respectively. Dividends paid were $0.39 per share and $0.36 cents per
share for the first three months of 2020 and 2019, respectively.
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CONTRACTUAL OBLIGATIONS
There have been no material changes in the Company's contractual obligations
during the quarter ended March 31, 2020. For additional information about
contractual obligations, refer to "Contractual Obligations" under Item 7 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2019.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2020, the Company had no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Company's critical accounting
policies during the quarter ended March 31, 2020. For additional information
about 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, 2019.
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