INTERNATIONAL FLAVORS & FRAGRANCES INC. (UNLESS INDICATED OTHERWISE, DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The following management's discussion and analysis should be read in conjunction
with the management's discussion and analysis of financial condition and results
of operations, liquidity and capital resources included in our 2021 Annual
Report on Form 10-K ("2021 Form 10-K").
OVERVIEW
Company Background
OnFebruary 1, 2021 , the Company completed its Merger withNutrition & Biosciences, Inc. ("N&B"), a subsidiary of DuPont formed to hold theNutrition and Biosciences business (the "N&B Business", and such transaction, the "N&B Transaction") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") with DuPont de Nemours, Inc. ("DuPont"). The shares issued in the Merger represented approximately 55.4% of the common stock of IFF on a fully diluted basis, after giving effect to the Merger, as ofFebruary 1, 2021 .
As a result of the N&B Transaction, and following our 2018 acquisition of
We are organized into four reportable operating segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions. The Company's consolidated financial information for the three and nine months endedSeptember 30, 2022 reflect the results of N&B for the full three and nine months in the period endedSeptember 30, 2022 , respectively, whereas the three and nine months endedSeptember 30, 2021 reflect three and eight months of results of N&B in the period endedSeptember 30, 2021 , respectively.
Our Nourish segment consists of an innovative and broad portfolio of natural-based ingredients to enhance nutritional value, texture and functionality in a wide range of beverage, dairy, bakery, confectionery and culinary applications.
Our Health & Biosciences segment consists of a biotechnology-driven portfolio where enzymes, food cultures, probiotics and specialty ingredients for food and non-food applications are developed and produced. The biotechnology-driven portfolio of this segment produces cultures for use in fermented foods such as yogurt, cheese and fermented beverages. It also uses industrial fermentation to produce enzymes and microorganisms that provide product and process performance benefits to household detergents, animal feed, ethanol production and brewing. Health & Biosciences is comprised of five business units: Health, Cultures & Food Enzymes, Home & Personal Care, Animal Nutrition and Grain Processing. Our Scent segment creates fragrance compounds, fragrance ingredients and cosmetic ingredients that are integral elements in the world's finest perfumes and best-known household and personal care products. The Scent segment is comprised of three business units: Fragrance Compounds, Fragrance Ingredients and Cosmetic Actives. Our Pharma Solutions segment produces a vast portfolio of cellulosics and seaweed-based pharmaceutical excipients, used to improve the functionality and delivery of active pharmaceutical ingredients, including controlled or modified drug release formulations, and enabling the development of more effective pharmaceutical formulations.
Financial Measures - Currency Neutral
Changes in our financial results include the impact of changes in foreign currency exchange rates. We provide currency neutral calculations in this report to remove the impact of these items. Our method in calculating currency neutral numbers is conducted by translating current year invoiced sale amounts at the exchange rates used for the corresponding prior year period. We use currency neutral results in our analysis of subsidiary and/or segment performance. We also use currency neutral numbers when analyzing our performance against our competitors. We are presenting currency neutral numbers for all operating segments for the three months endedSeptember 30, 2022 , but will not be presenting currency neutral numbers for the Nourish, Health & Biosciences and Pharma Solutions operating segments for the nine months endedSeptember 30, 2022 as these operating segments include the effects of the Merger with N&B, which closed onFebruary 1, 2021 . As a result, the nine months endedSeptember 30, 2022 reflect the results of N&B for the full nine months in the third quarter of 2022, whereas the nine months endedSeptember 30, 2021 reflect eight months of results of N&B in the third quarter of 2021, which do not present equally comparable periods. 32
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Impairment of
For the third quarter of 2022, we determined that goodwill impairment triggering events occurred for our Nourish, Health & Biosciences and Pharma Solutions reporting units, which required us to complete an interim impairment assessment. The primary indicators that were deemed to be triggering events in the quarter for the reporting units were declines in projections across various reporting units and ongoing adverse macroeconomic impacts such as inflation, increases in interest rates and unfavorable effects from exchange rates. As a result of the triggering events, we assessed the fair value of the reporting units using an income approach. Under the income approach, we determine the fair value by using a discounted cash flow method at a rate of return that reflects the relative risk of the projected future cash flows of each reporting unit, as well as a terminal value. We use the most current actual and forecasted operating data available. Key estimates and assumptions used in these valuations include revenue growth rates, gross margins, EBITDA margins, terminal growth rates and discount rates. In performing the quantitative impairment test, we determined that the fair value of the Nourish and Pharma Solutions reporting units exceeded its carrying value, and determined that there was no impairment of goodwill relating to these reporting units. The Pharma Solutions reporting unit had excess fair value over carrying value of less than 10% and goodwill of approximately$1.188 billion . We determined that the carrying value of the Health & Biosciences reporting unit exceeded its fair value and recorded a goodwill impairment charge of$2.250 billion in the Consolidated Statements of (Loss) Income and Comprehensive Loss for the three and nine months endedSeptember 30, 2022 (see Note 6 for additional information). While we believe that the assumptions used in the impairment test were reasonable, changes in key assumptions, including, lower revenue growth, lower gross margin, lower EBITDA margin, lower terminal growth rates or increasing discount rates could result in a future impairment and we may be required to write-off the remainder of, or a portion of, the remaining goodwill. Such charge could have a material effect on our Consolidated Statements of Operations and Balance Sheets. These estimates and assumptions are considered Level 3 inputs under the fair value hierarchy.
Impact of the Events in
We maintain operations in bothRussia andUkraine and, additionally, export products to customers inRussia andUkraine from operations outside the region. In response to the events inUkraine , we have limited the production and supply of ingredients in and toRussia to only those that meet the essential needs of people, including food, hygiene and medicine. In 2021, total sales to Russian customers were approximately 2% of total sales. For each of the three and nine months endedSeptember 30, 2022 sales to Russian customers were approximately also 2% of total sales.
In 2021, total sales to Ukrainian customers were less than 1% of total sales.
For each of the three and nine months ended
During the second quarter of 2022, we recorded a charge of approximately$120 million related to the impairment of certain long-lived assets inRussia . In addition, we recorded a charge of approximately$11 million related to expected credit losses on receivables from customers located inRussia andUkraine (for export and domestic sales). For additional information, refer to Note 1 to the Consolidated Financial Statements and Part I, Item 1A, "Risk Factors," of our 2021 Form 10-K filed onFebruary 28, 2022 with theSEC .
Impact of COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization designated COVID-19 as a global pandemic. Various policies and initiatives have been implemented around the world to reduce the global transmission of COVID-19. Although there continue to be minor disruptions, all of IFF's manufacturing facilities remain open and continue to manufacture products. The COVID-19 pandemic remains a serious threat to the health of the world's population and certain countries and regions continue to suffer from outbreaks or have seen a recurrence of infections, especially with the emergence of new variants of the virus. Accordingly, the Company continues to take the threat from COVID-19 seriously. The impact that COVID-19 will have on our consolidated results of operations for the remainder of 2022 remains uncertain. Due to the length and severity of COVID-19, there is continued volatility as a result of retail and travel, consumer shopping and consumption behavior. Moreover, as a result of disruptions or uncertainty relating to the COVID-19 pandemic, we are experiencing, and may continue to experience, increased costs, delays or limited availability related to raw materials, strain on shipping and transportation resources, and higher energy prices, which have negatively impacted, and may continue to negatively impact, our margins and operating results. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources. Although IFF has not experienced and does not currently anticipate any impairment charges related to COVID-19, the continuing effects of a prolonged pandemic could result in increased risk of asset write-downs and impairments. Any of these events could potentially result in a material adverse impact on IFF's business and results of operations. 33
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For more detailed information about risks related to COVID-19, refer to
Part I, Item 1A, "Risk Factors," of our 2021 Form 10-K filed on
Financial Performance Overview
Sales
Sales in the third quarter of 2022 decreased$8 million , or 0.3% on a reported basis, to$3.063 billion compared to$3.071 billion in the 2021 period. On a currency neutral basis, sales in the third quarter of 2022 increased 6% compared to the 2021 period. Exchange rate variations had an unfavorable impact on net sales for the third quarter of 2022 of 6%. The effect of exchange rates can vary by business and region, depending upon the mix of sales priced inU.S. dollars as compared to other currencies. In addition, the decrease in sales was primarily driven by the net impact of the divestiture of the Microbial Control business unit and acquisition ofHealth Wright Products, Inc. ("change in business portfolio mix"), which was approximately$89 million , and volume decreases, offset in part by price increases across all businesses.
Gross Profit
Gross profit in the third quarter of 2022 decreased$89 million , or 8% on a reported basis, to$1.001 billion (32.7% of sales) compared to$1.090 billion (35.5% of sales) in the 2021 period. The decrease in gross profit was primarily driven by higher costs of goods sold as a result of higher commodity prices and manufacturing costs, change in business portfolio mix and volume decreases, offset in part by favorable net pricing across various businesses.
Adjusted Operating EBITDA
Adjusted operating EBITDA in the third quarter of 2022 decreased$36 million , or 6% on a reported basis, to$612 million (20.0% of sales) compared to$648 million (21.1% of sales) in the comparable 2021 period. On a currency neutral basis, adjusted operating EBITDA in the third quarter of 2022 increased 2% compared to the 2021 period. Exchange rate variations had an unfavorable impact on adjusted operating EBITDA for the third quarter of 2022 of 8%. In addition, the decrease in adjusted operating EBITDA was driven by volume decreases and the change in business portfolio mix, offset in part by favorable net pricing across various businesses. 34
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RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
(DOLLARS IN MILLIONS EXCEPT PER SHARE
AMOUNTS) 2022 2021 Change 2022 2021 Change
Net sales $ 3,063 $ 3,071 - % $ 9,596 $ 8,625 11 %
Cost of goods sold 2,062 1,981 4 % 6,314 5,871 8 %
Gross profit 1,001 1,090 (8) % 3,282 2,754 19 %
Research and development (R&D) expenses 145 156 (7) % 460 463 (1) %
Selling and administrative (S&A) expenses 413 436 (5) % 1,328 1,299 2
%
Amortization of acquisition-related intangibles 182 195 (7) % 552 547 1 % Impairment of goodwill 2,250 - NMF 2,250 - NMF Impairment of long-lived assets - - NMF 120 -
NMF
Restructuring and other charges (4) 6 (167) % 5 34 (85)
%
Gains on sales of fixed assets - (1) (100) % (2) (1) 100 % Operating (loss) profit (1,985) 298 NMF (1,431) 412 NMF Interest expense 83 74 12 % 232 216 7 % Other income, net (33) (26) 27 % (43) (44) (2) % (Loss) Income before taxes (2,035) 250 NMF (1,620) 240
NMF
Provision for income taxes 160 53 202 % 220 53 NMF Net (loss) income$ (2,195) $ 197 NMF$ (1,840) $ 187 NMF Net income attributable to noncontrolling interests 2 3 (33) % 6 7 (14)
%
Net (loss) income attributable to IFF shareholders$ (2,197) $ 194 NMF$ (1,846) $ 180
NMF
Net (loss) income per share - diluted
NMF$ (7.22) $ 0.75 NMF Gross margin 32.7 % 35.5 % (280) bps 34.2 % 31.9 % 230 bps R&D as a percentage of sales 4.7 % 5.1 % (40) bps 4.8 % 5.4 % (60)
bps
S&A as a percentage of sales 13.5 % 14.2 % (70) bps 13.8 % 15.1 % (130) bps Operating margin (64.8) % 9.7 % NMF (14.9) % 4.8 % NMF Effective tax rate (7.9) % 21.2 % NMF (13.6) % 22.1 % NMF Segment net sales Nourish$ 1,703 $ 1,662 2 %$ 5,252 $ 4,638 13 % Health & Biosciences 512 618 (17) % 1,838 1,683 9 % Scent 591 580 2 % 1,756 1,699 3 % Pharma Solutions 257 211 22 % 750 605 24 % Consolidated$ 3,063 $ 3,071 $ 9,596 $ 8,625 _______________________ NMF: Not meaningful Cost of goods sold includes the cost of materials and manufacturing expenses. R&D includes expenses related to the development of new and improved products and technical product support. S&A expenses include expenses necessary to support our commercial activities and administrative expenses supporting our overall operating activities including compliance with governmental regulations. 35 -------------------------------------------------------------------------------- Table of Contents THIRD QUARTER 2022 IN COMPARISON TO THIRD QUARTER 2021
Sales
Sales for the third quarter of 2022 decreased$8 million , or 0.3% on a reported basis, to$3.063 billion , compared to$3.071 billion in the prior year period. On a currency neutral basis, sales in the third quarter of 2022 increased 6% compared to the 2021 period. Exchange rate variations had an unfavorable impact on net sales for the third quarter of 2022 of 6%. The effect of exchange rates can vary by business and region, depending upon the mix of sales priced inU.S. dollars as compared to other currencies. In addition, the decrease in sales was primarily driven by the change in business portfolio mix, with a net impact of approximately$89 million , and volume decreases, offset in part by price increases across all businesses.
Sales Performance by Segment
% Change in Sales - Third Quarter 2022 vs. Third Quarter
2021
Reported Currency Neutral(1)
Nourish 2 % 9 %
Health & Biosciences -17 % -12 %
Scent 2 % 9 %
Pharma Solutions 22 % 28 %
Total 0 % 6 %
_______________________(1)Currency neutral sales growth is calculated by translating current year invoiced sale amounts at the exchange rates for the corresponding prior year period.
Nourish Nourish sales in 2022 increased$41 million , or 2% on a reported basis, to$1.703 billion compared to$1.662 billion in the prior year period. On a currency neutral basis, Nourish sales increased 9% in 2022 compared to the prior year period. Performance in the Nourish operating segment was driven by price increases, particularly in the Ingredients and Food Design business units, offset in part by unfavorable impacts from exchange rate variations and volume decreases. Health & Biosciences Health & Biosciences sales in 2022 decreased$106 million , or 17% on a reported basis, to$512 million compared to$618 million in the prior year period. On a currency neutral basis, Health & Biosciences sales decreased 12% in 2022 compared to the prior year period. Performance in the Health & Biosciences operating segment was driven by the change in business portfolio mix, with a net impact of approximately$89 million , unfavorable impacts from exchange rate variations and volume decreases, offset in part by price increases across various business units.
Scent
Scent sales in 2022 increased$11 million , or 2% on a reported basis, to$591 million , compared to$580 million in the prior year period. On a currency neutral basis, Scent sales increased 9% in 2022 compared to the prior year period. Performance in the Scent operating segment was driven by price and volume increases, primarily in the Fragrance Compounds and Fragrance Ingredients business units, offset in part by unfavorable impacts from exchange rate variations.
Pharma Solutions
Pharma Solutions sales in 2022 increased$46 million , or 22% on a reported basis, to$257 million compared to$211 million in the prior year period. On a currency neutral basis, Pharma Solutions sales increased 28% in 2022 compared to the prior year period. Performance in the Pharma Solutions operating segment was driven by price and volume increases, offset in part by unfavorable impacts from exchange rate variations. Cost of Goods Sold Cost of goods sold increased$81 million to$2.062 billion (67.3% of sales) in the third quarter of 2022 compared to$1.981 billion (64.5% of sales) in the third quarter of 2021. The increase in cost of goods sold was primarily driven by higher material costs, due to higher commodity prices, and higher manufacturing expenses, offset in part by the change in business portfolio mix, with a net impact of approximately$75 million , and volume decreases in sales. 36
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Research and Development (R&D) Expenses
R&D expenses decreased$11 million to$145 million (4.7% of sales) in the third quarter of 2022 compared to$156 million (5.1% of sales) in the third quarter of 2021. The decrease in R&D expenses was primarily driven by lower employee related expenses, including salaries, wages and bonuses, and professional fees, including consulting costs, and the change in business portfolio mix, offset in part by higher operating expenses for R&D related activities.
Selling and Administrative (S&A) Expenses
S&A expenses decreased$23 million to$413 million (13.5% of sales) in the third quarter of 2022 compared to$436 million (14.2% of sales) in the third quarter of 2021. The decrease in S&A expenses was primarily driven by lower employee related expenses, including salaries, wages and bonuses, and the change in business portfolio mix, offset in part by higher professional fees, including consulting costs.
Restructuring and Other Charges
Restructuring and other charges was a credit of$4 million in the third quarter of 2022 compared to an expense of$6 million in the third quarter of 2021. The decrease was primarily driven by reversals of prior severance cost accruals and lower severance costs incurred in the third quarter of 2022 (see Note 4 for additional information).
Amortization of Acquisition-Related Intangibles
Amortization expenses decreased to$182 million in the third quarter of 2022 compared to$195 million in the third quarter of 2021. The decrease in amortization expense was primarily driven by the reduction in intangible assets as a result of the divestiture of the Microbial Control business unit, offset in part by the impact of acquisitions of intangible assets fromHealth Wright Products, Inc. (see Note 3, Note 6 and Note 18 for additional information).
Impairment of
Impairment of goodwill was$2.250 billion in the third quarter of 2022, which was related to the Health & Biosciences reporting unit. See Note 1 and Note 6 for additional information.
Impairment of Long-Lived Assets
There was no impairment of long-lived assets in the third quarter of 2022.
Interest Expense
Interest expense increased to$83 million in the third quarter of 2022 compared to$74 million in the 2021 period. The increase in interest expense was due to higher cost of debt (see Note 8 for additional information). Average cost of debt was 2.9% for the 2022 period compared to 2.5% for the 2021 period.
Other Income, Net
In the third quarter of 2022, we recognized other income, net, of$33 million compared to$26 million in the 2021 period. The change of$7 million was primarily due to foreign exchange gains in the third quarter of 2022 compared to foreign exchange losses in the 2021 period and gain from divestiture of the Microbial Control business unit, offset in part by lower pension income in the third quarter of 2022 compared to the 2021 period due to the adjustment to correct net income amounts related to certain defined benefit plans in prior years (see Note 13 for additional information).
Income Taxes
The effective tax rate for the three months endedSeptember 30, 2022 was (7.9)% compared to 21.2% for the three months endedSeptember 30, 2021 . The quarter-over-quarter decrease was primarily due to the recording of the tax effects of the divestiture of the Microbial Control business unit and book to tax differences related to the impairment of goodwill in the Health & Biosciences operating segment.
Segment Adjusted Operating EBITDA Results by Business Unit
The Company uses Segment Adjusted Operating EBITDA for internal reporting and
performance measurement purposes. Segment Adjusted Operating EBITDA is defined
as Income Before Taxes before depreciation and amortization expense, interest
expense, restructuring and other charges and certain non-recurring items. Our
determination of reportable segments was made on the basis of our strategic
priorities within each segment and corresponds to the manner in which our Chief
Operating Decision Maker reviews and evaluates operating performance to make
decisions about resources to be allocated to the segment. In addition to our
strategic priorities, segment reporting is also based on differences in the
products and services we provide.
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Three Months Ended September 30,
(DOLLARS IN MILLIONS) 2022 2021
Segment Adjusted Operating EBITDA:
Nourish $ 287 $ 327
Health & Biosciences 137 151
Scent 119 130
Pharma Solutions 69 40
Total 612 648
Depreciation & Amortization (293) (297)
Interest Expense (83) (74)
Other Income, net 33 26
Acquisition Related Costs (1) -
Restructuring and Other Charges 4 (6)
Gains on sales of fixed assets - 1
Impairment of Goodwill (2,250) -
Business Divestiture Costs (31) (16)
Employee Separation Costs - (22)
Global Shared Services Implementation Costs (1) -
N&B Inventory Step-Up Costs - 14
Integration Related Costs (25) (24)
(Loss) Income Before Taxes $ (2,035) $ 250
Segment Adjusted Operating EBITDA margin:
Nourish 16.9 % 19.7 %
Health & Biosciences 26.8 % 24.4 %
Scent 20.1 % 22.4 %
Pharma Solutions 26.8 % 19.0 %
Consolidated 20.0 % 21.1 %
Nourish Segment Adjusted Operating EBITDA
Nourish Segment Adjusted Operating EBITDA decreased$40 million , or 12% on a reported basis, to$287 million in the third quarter of 2022 (16.9% of segment sales) from$327 million (19.7% of segment sales) in the comparable 2021 period. On a currency neutral basis, Nourish Segment Adjusted Operating EBITDA decreased 5% in 2022 compared to the prior year period. The decrease was primarily driven by volume decreases and unfavorable impacts from exchange rate variations, offset in part by favorable net pricing across various businesses.
Health & Biosciences Segment Adjusted Operating EBITDA
Health & Biosciences Segment Adjusted Operating EBITDA decreased$14 million , or 9% on a reported basis, to$137 million in the third quarter of 2022 (26.8% of segment sales) from$151 million (24.4% of segment sales) in the comparable 2021 period. On a currency neutral basis, Health & Biosciences Segment Adjusted Operating EBITDA decreased 4% in 2022 compared to the prior year period. The decrease was primarily driven by volume decreases, unfavorable impacts from exchange rate variations and the change in business portfolio mix. The increase in Health & Biosciences Segment Adjusted Operating EBITDA margin, as a percentage of sales, was primarily due to favorable net pricing, offset in part by volume decreases.
Scent Segment Adjusted Operating EBITDA
Scent Segment Adjusted Operating EBITDA decreased$11 million , or 8% on reported basis, to$119 million in the third quarter of 2022 (20.1% of segment sales) from$130 million (22.4% of segment sales) in the comparable 2021 period. On a currency neutral basis, Scent Segment Adjusted Operating EBITDA increased 3% in 2022 compared to the prior year period. The decrease was primarily driven by unfavorable impacts from exchange rate variations and unfavorable net pricing, offset in part by volume increases in Fragrance Compounds and Fragrance Ingredients. 38
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Pharma Solutions Segment Adjusted Operating EBITDA
Pharma Solutions Segment Adjusted Operating EBITDA increased$29 million , or 73% on a reported basis, to$69 million in the third quarter of 2022 (26.8% of segment sales) from$40 million (19.0% of segment sales) in the comparable 2021 period. On a currency neutral basis, Pharma Solutions Segment Adjusted Operating EBITDA increased 76% in 2022 compared to the prior year period. The increase was primarily driven by favorable net pricing and volume increases, offset in part by unfavorable impacts from exchange rate variations in the operating segment.
FIRST NINE MONTHS 2022 IN COMPARISON TO FIRST NINE MONTHS 2021
Sales
Sales for the first nine months of 2022 increased
Sales Performance by Segment
% Change in Sales - First Nine Months 2022 vs. First Nine Months
2021
Reported Currency Neutral(1)
Nourish 13 % NMF
Health & Biosciences 9 % NMF
Scent 3 % 8 %
Pharma Solutions 24 % NMF
Total 11 % NMF
_______________________(1)Currency neutral sales growth is calculated by translating current year invoiced sale amounts at the exchange rates for the corresponding prior year period.
NMF: Not meaningful Nourish Nourish sales in 2022 increased$614 million , or 13% on a reported basis, to$5.252 billion compared to$4.638 billion in the prior year period. Nourish sales included approximately$293 million of incremental sales attributable to N&B for the month of January in the 2022 period. In addition, performance in the Nourish operating segment was driven by price increases, particularly in the Ingredients and Food Design business units, offset in part by volume decreases across various business units.
Health & Biosciences
Health & Biosciences sales in 2022 increased$155 million , or 9% on a reported basis, to$1.838 billion compared to$1.683 billion in the prior year period. Health & Biosciences sales included approximately$202 million of incremental sales attributable to N&B for the month of January in the 2022 period. The decrease in Health & Biosciences sales, excluding the impact of N&B for the month of January in the 2022 period, was primarily driven by the change in business portfolio mix, offset in part by price and volume increases across various business units.
Scent
Scent sales in 2022 increased$57 million , or 3% on a reported basis, to$1.756 billion , compared to$1.699 billion in the prior year period. On a currency neutral basis, Scent sales increased 8% in 2022 compared to the prior year period. Performance in the Scent operating segment was driven by volume and price increases, primarily in the Fragrance Compounds and Fragrance Ingredients business units, offset in part by unfavorable impacts from exchange rate variations.
Pharma Solutions
Pharma Solutions sales in 2022 increased$145 million , or 24% on a reported basis, to$750 million compared to$605 million in the prior year period. Pharma Solutions sales included approximately$73 million of incremental sales attributable to N&B for the month of January in the 2022 period. In addition, performance in the Pharma Solutions operating segment was primarily driven by price and volume increases. 39
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Cost of Goods Sold
Cost of goods sold increased$443 million to$6.314 billion (65.8% of sales) in the first nine months of 2022 compared to$5.871 billion (68.1% of sales) in the 2021 period. Cost of goods sold included approximately$389 million of incremental costs attributable to N&B for the month of January in the 2022 period. In addition, excluding the impact of N&B for the month of January in the 2022 period and the N&B inventory step-up costs from the prior year period, the increase in cost of goods sold was primarily driven by higher material costs, due to higher commodity prices, and volume increases in sales, offset in part by the change in business portfolio mix.
Research and Development (R&D) Expenses
R&D expenses decreased$3 million to$460 million (4.8% of sales) in the first nine months of 2022 compared to$463 million (5.4% of sales) in the 2021 period. R&D expenses included approximately$20 million of incremental expenses attributable to N&B for the month of January in the 2022 period, which consisted primarily of employee related expenses, including salaries, wages and bonuses and operating expenses for R&D related activities. In addition, excluding the impact of N&B for the month of January in the 2022 period, R&D expenses decreased primarily due to lower employee related expenses, including salaries, wages and bonuses, and professional fees, including consulting costs, offset in part by higher operating expenses for R&D related activities.
Selling and Administrative (S&A) Expenses
S&A expenses increased$29 million to$1.328 billion (13.8% of sales) in the first nine months of 2022 compared to$1.299 billion (15.1% of sales) in the 2021 period. S&A expenses included approximately$51 million of incremental expenses attributable to N&B for the month of January in the 2022 period, which consisted primarily of employee related expenses, including salaries, wages and bonuses, professional fees, including consulting costs, and operating expenses. In addition, excluding the impact of N&B for the month of January in the 2022 period, S&A expenses decreased primarily due to lower employee related expenses, including salaries, wages and bonuses, and professional fees, including consulting costs, offset in part by higher operating expenses for S&A related activities.
Restructuring and Other Charges
Restructuring and other charges decreased to$5 million in the first nine months of 2022 compared to$34 million in the first nine months of 2021. The decrease was primarily driven by lower severance costs incurred in the first nine months of 2022 (see Note 4 for additional information).
Amortization of Acquisition-Related Intangibles
Amortization expenses increased to$552 million in the first nine months of 2022 compared to$547 million in the 2021 period. Amortization expense included approximately$47 million attributable to N&B for the month of January in the 2022 period related to the intangible assets acquired through the Merger with N&B. Excluding the impact of N&B for the month of January in the 2022 period, the decrease in amortization expense was primarily driven by the reduction in intangible assets as a result of the divestiture of the Microbial Control business unit, offset in part by the impact of acquisitions of intangible assets fromHealth Wright Products, Inc. (see Note 3, Note 6 and Note 18 for additional information). Impairment ofGoodwill
Impairment of goodwill was
Impairment of Long-Lived Assets
Impairment of long-lived assets was$120 million in the first nine months of 2022. The impairment charge was due to the uncertainties related to our operations inRussia andUkraine and was allocated on a pro rata basis to intangible assets and property, plant and equipment (see Note 1, Note 5 and Note 6 for additional information).
Interest Expense
Interest expense increased to$232 million in the first nine months of 2022 compared to$216 million in the 2021 period. Interest expense included approximately$13 million attributable to N&B for the month of January in the 2022 period, which included the impact of the additional debt assumed in the Merger with N&B (see Note 8 for additional information). Average cost of debt was 2.7% for the 2022 period compared to 3.1% for the 2021 period. 40
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Other Income, Net
In the first nine months of 2022, we recognized other income, net, of$43 million compared to$44 million in the comparable 2021 period. Other income, net includes approximately$6 million attributable to N&B for the month of January in the 2022 period. Excluding the impact of N&B for the month of January in the 2022 period, the decrease in other income, net was primarily due to lower pension income in the first nine months of 2022 compared to the 2021 period due to the adjustment during the 2021 period to correct net income amounts related to certain defined benefit plans in prior years (see Note 13 for additional information), offset in part by foreign exchange gains in the first nine months of 2022 compared to foreign exchange losses in the 2021 period and gain from divestiture of the Microbial Control business unit.
Income Taxes
The effective tax rate for the nine months endedSeptember 30, 2022 was (13.6)% compared to 22.1% for the nine months endedSeptember 30, 2021 . The year-over-year decrease was primarily due to the recording of the tax effects of the divestiture of the Microbial Control business unit and book to tax differences related to the impairment of goodwill in the Health & Biosciences operating segment, offset in part by certain one-time benefits.
Segment Adjusted Operating EBITDA Results by Business Unit
The Company uses Segment Adjusted Operating EBITDA for internal reporting and
performance measurement purposes. Segment Adjusted Operating EBITDA is defined
as Income Before Taxes before depreciation and amortization expense, interest
expense, restructuring and other charges and certain non-recurring items. Our
determination of reportable segments was made on the basis of our strategic
priorities within each segment and corresponds to the manner in which our Chief
Operating Decision Maker reviews and evaluates operating performance to make
decisions about resources to be allocated to the segment. In addition to our
strategic priorities, segment reporting is also based on differences in the
products and services we provide.
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Nine Months Ended September 30,
(DOLLARS IN MILLIONS) 2022 2021
Segment Adjusted Operating EBITDA:
Nourish $ 981 $ 921
Health & Biosciences 513 469
Scent 328 375
Pharma Solutions 192 131
Total 2,014 1,896
Depreciation & Amortization (897) (861)
Interest Expense (232) (216)
Other Income, net 43 44
Acquisition Related Costs (2) -
Restructuring and Other Charges (5) (34)
Gains on sales of fixed assets 2 1
Impairment of Goodwill (2,250) -
Impairment of Long-Lived Assets (120) -
Shareholder Activism Related Costs (3) (7)
Business Divestiture Costs (91) (21)
Employee Separation Costs (4) (28)
Global Shared Services Implementation Costs (1) -
Frutarom Acquisition Related Costs (1) -
N&B Inventory Step-Up Costs - (363)
N&B Transaction Related Costs - (91)
Integration Related Costs (73) (80)
(Loss) Income Before Taxes $ (1,620) $ 240
Segment Adjusted Operating EBITDA margin:
Nourish 18.7 % 19.9 %
Health & Biosciences 27.9 % 27.9 %
Scent 18.7 % 22.1 %
Pharma Solutions 25.6 % 21.7 %
Consolidated 21.0 % 22.0 %
Nourish Segment Adjusted Operating EBITDA
Nourish Segment Adjusted Operating EBITDA increased$60 million , or 7% on a reported basis, to$981 million in the first nine months of 2022 (18.7% of segment sales) from$921 million (19.9% of segment sales) in the comparable 2021 period. Nourish Segment Adjusted Operating EBITDA included approximately$65 million attributable to N&B for the month of January in the 2022 period. The decrease in Nourish Segment Adjusted Operating EBITDA, excluding the impact of N&B for the month of January in the 2022 period, was primarily driven by volume decreases, offset in part by favorable net pricing.
Health & Biosciences Segment Adjusted Operating EBITDA
Health & Biosciences Segment Adjusted Operating EBITDA increased$44 million , or 9% on a reported basis, to$513 million in the first nine months of 2022 (27.9% of segment sales) from$469 million (27.9% of segment sales) in the comparable 2021 period. Health & Biosciences Segment Adjusted Operating EBITDA included approximately$60 million attributable to N&B for the month of January in the 2022 period. The decrease in Health & Biosciences Segment Adjusted Operating EBITDA, excluding the impact of N&B for the month of January in the 2022 period, was primarily due to volume decreases, unfavorable net pricing and the change in business portfolio mix. 42
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Scent Segment Adjusted Operating EBITDA
Scent Segment Adjusted Operating EBITDA decreased$47 million , or 13% on a reported basis, to$328 million in the first nine months of 2022 (18.7% of segment sales) from$375 million (22.1% of segment sales) in the comparable 2021 period. On a currency neutral basis, Scent Segment Adjusted Operating EBITDA decreased 5% in 2022 compared to the prior year period. The decrease was primarily driven by unfavorable net pricing and impacts from exchange rate variations, offset in part by volume increases in Fragrance Compounds and Fragrance Ingredients.
Pharma Solutions Segment Adjusted Operating EBITDA
Pharma Solutions Segment Adjusted Operating EBITDA increased$61 million , or 47% on a reported basis, to$192 million in the first nine months of 2022 (25.6% of segment sales) from$131 million (21.7% of segment sales) in the comparable 2021 period. Pharma Solutions Segment Adjusted Operating EBITDA included approximately$12 million attributable to N&B for the month of January in the 2022 period. In addition, the increase in Pharma Solutions Segment Adjusted Operating EBITDA, excluding the impact of N&B for the month of January in the 2022 period, was primarily driven by favorable net pricing and volume increases. Liquidity Cash and Cash Equivalents We had cash and cash equivalents of$538 million atSeptember 30, 2022 compared to$711 million atDecember 31, 2021 and of this balance, a portion was held outsidethe United States . Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated tothe United States . Effective utilization of the cash generated by our international operations is a critical component of our strategy. We regularly repatriate cash from our non-U.S. subsidiaries to fund financial obligations in theU.S. As we repatriate these funds to theU.S. we will be required to pay income taxes in certainU.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. Accordingly, as ofSeptember 30, 2022 , we had a deferred tax liability of approximately$93 million for the effect of repatriating the funds to theU.S. , attributable to various non-U.S. subsidiaries. There is no deferred tax liability associated with non-U.S. subsidiaries where we intend to indefinitely reinvest the earnings to fund local operations and/or capital projects.
Cash Flows Provided By Operating Activities
Cash flows provided by operating activities for the nine months endedSeptember 30, 2022 was$189 million , or 2.0% of sales, compared to$1.126 billion , or 13.1% of sales, for the nine months endedSeptember 30, 2021 . The decrease in cash flows from operating activities during 2022 was primarily driven by the increase in working capital, largely related to inventories and accounts payable. We have various factoring agreements in theU.S. andThe Netherlands under which we can factor up to approximately$250 million in receivables. In addition, we have factoring agreements sponsored by certain customers. Under all of the arrangements, we sell the receivables on a non-recourse basis to unrelated financial institutions and account for the transactions as a sale of receivables. The applicable receivables are removed from our Consolidated Balance Sheets when the cash proceeds are received. The impact on cash flows from operating activities from participating in these programs decreased approximately$24 million and increased approximately$40 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The cost of participating in these programs was approximately$3 million and$2 million for the three months endedSeptember 30, 2022 and 2021, respectively, and was approximately$6 million and$5 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
Cash Flows Provided By Investing Activities
Cash flows provided by investing activities for the nine months endedSeptember 30, 2022 was$887 million compared to$75 million in the prior year period. The increase in cash flows from investing activities was primarily driven by the change in proceeds received from business divestiture and unwinding of derivative instruments, offset in part by the change in cash provided by the Merger with N&B, higher spending on property, plant and equipment and cash paid for acquisitions, net of cash received in the current year period. We have evaluated and re-prioritized our capital projects and expect that capital spending in 2022 will be approximately 5.0% of sales (net of potential grants and other reimbursements from government authorities), up from 3.4% in 2021. 43
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Cash Flows Used In Financing Activities
Cash flows used in financing activities for the nine months endedSeptember 30, 2022 was$1.087 billion compared to$1.022 billion in the prior year period. The increase in cash used in financing activities was primarily driven by higher repayments of commercial paper, net of borrowings, and higher cash dividend payments, offset in part by less repayments of long-term debt and revolving credit facility and short term borrowings.
We paid dividends totaling
Our capital allocation strategy seeks to maintain our investment grade rating while investing in the business and continuing to pay dividends and repaying debt. The Company does not have any rating downgrade triggers that would accelerate the maturity dates of its senior unsecured debt. However, any downgrade in our credit rating may, depending on the extent of such downgrade, negatively impact our ability to raise additional debt capital, our liquidity and capital position, and may increase our cost of borrowing for new capital raises. In addition, our existing Amended Revolving Credit Facility and Term Loans have pricing grids that are based on credit rating, such that our cost of borrowing may increase as our credit rating decreases. We make capital investments in our businesses to support our operational needs and strategic long-term plans. We are committed to maintaining our history of paying a dividend to investors which is determined by our Board of Directors at its discretion based on various factors.
We had a board approved stock repurchase program and as of
Capital Resources
Operating cash flow provides the primary source of funds for capital investment needs, dividends paid to shareholders and debt service repayments. We anticipate that cash flows from operations and availability under our existing credit facilities will be sufficient to meet our investing and financing needs. We regularly assess our capital structure, including both current and long-term debt instruments, as compared to our cash generation and investment needs in order to provide ample flexibility and to optimize our leverage ratios. We believe our existing cash balances are sufficient to meet our debt service requirements.
Refer to Note 8 for additional information.
Amended Revolving Credit Facility and Term Loans
As of
The amount that we are able to draw down under the Amended Revolving Credit
Facility is limited by financial covenants as described in more detail below. As
of
Refer to Note 8 of this Form 10-Q and Part IV, Item 15, "Exhibits and Financial Statement Schedules," Note 9 of our 2021 Form 10-K, filed onFebruary 28, 2022 , for additional information.
Debt Covenants
AtSeptember 30, 2022 , we were in compliance with all financial and other covenants, including the net debt to credit adjusted EBITDA ratio. AtSeptember 30, 2022 , our net debt to credit adjusted EBITDA(1) ratio was 3.93 to 1.0 as defined by the credit facility agreements, which is below the relevant level provided by our financial covenants of existing outstanding debt. _______________________ (1)Credit adjusted EBITDA and net debt, which are non-GAAP measures used for these covenants, are calculated in accordance with the definition in the debt agreements. In this context, these measures are used solely to provide information on the extent to which we are in compliance with debt covenants and may not be comparable to credit adjusted EBITDA and net debt used by other companies. Reconciliations of credit adjusted EBITDA to net income and net debt to total debt are as follows: 44
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Table of Contents (DOLLARS IN MILLIONS) Twelve Months Ended September 30, 2022 Net loss $ (1,756) Interest expense 305 Income taxes 242 Depreciation and amortization 1,192 Specified items(1) 2,613 Non-cash items(2) 18 Credit Adjusted EBITDA $ 2,614 _______________________ (1)Specified items for the 12 months endedSeptember 30, 2022 of$2.613 billion consisted of acquisition related costs, restructuring and other charges, impairment of goodwill, impairment of long-lived assets, shareholder activism related costs, business divestiture costs, employee separation costs, Global Shared Services implementation costs, pension settlement,Frutarom acquisition related costs, N&B inventory step-up costs and integration related costs. (2)Non-cash items represent all other adjustments to reconcile net (loss) income to net cash provided by operations as presented on the Statements of Cash Flows, including gains on disposal of assets, gains on business disposal and stock-based compensation. (DOLLARS IN MILLIONS) September 30, 2022 Total debt(1) $ 10,812 Adjustments: Cash and cash equivalents 538 Net debt $ 10,274 _______________________ (1)Total debt used for the calculation of net debt consists of short-term debt, long-term debt, short-term finance lease obligations and long-term finance lease obligations. Senior Notes As ofSeptember 30, 2022 , we had$9.216 billion aggregate principal amount outstanding in senior unsecured notes, with$1.266 billion principal amount denominated in EUR and$7.950 billion principal amount denominated in USD, which includes the N&B Senior Notes assumed as a result of the Merger. The notes bear interest ranging from 1.22% per year to 5.12% per year, with maturities fromMay 1, 2023 toDecember 1, 2050 . See Note 8 for additional information.
Contractual Obligations
We expect to contribute a total of$5 million to ourU.S. pension plans and a total of$33 million to our non-U.S. pension plans during 2022. During the nine months endedSeptember 30, 2022 , there were no contributions made to the qualifiedU.S. pension plans,$22 million of contributions were made to the non-U.S. pension plans, and$3 million of benefit payments were made with respect to our non-qualifiedU.S. pension plan. We also expect to contribute$4 million to our postretirement benefits other than pension plans during 2022. During the nine months endedSeptember 30, 2022 ,$2 million of contributions were made to postretirement benefits other than pension plans. As discussed in Note 16 to the Consolidated Financial Statements, atSeptember 30, 2022 , we had entered into various guarantees and had undrawn outstanding letters of credit from financial institutions. These arrangements reflect ongoing business operations, including commercial commitments, and governmental requirements associated with audits or litigation that are in process with various jurisdictions. Based on the current facts and circumstances, these arrangements are not reasonably likely to have a material impact on our consolidated financial condition, results of operations, or cash flows. New Accounting Standards
Refer to Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Non-GAAP Financial Measures
We use non-GAAP financial measures in this Form 10-Q, including: (i) currency
neutral metrics and (ii) adjusted operating EBITDA and adjusted operating EBITDA
margin. We also provide the non-GAAP measure net debt solely for the purpose of
providing information on the extent to which the Company is in compliance with
debt covenants contained in its debt agreements. Our non-GAAP financial measures
are defined below.
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These non-GAAP financial measures are intended 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. In discussing our historical and expected future results and financial condition, we believe it is meaningful for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of the Company's results under GAAP and may not be comparable to other companies' calculation of such metrics. Adjusted operating EBITDA and adjusted operating EBITDA margin exclude depreciation and amortization expense, interest expense, other (expense) income, net, restructuring and other charges and certain non-recurring items such as acquisition related costs, gains on sale of assets, impairment of goodwill, impairment of long-lived assets, shareholder activism related costs, business divestiture costs, employee separation costs, Global Shared Services implementation costs,Frutarom acquisition related costs, N&B inventory step-up costs, N&B transaction related costs and integration related costs. Net debt to credit adjusted EBITDA is the leverage ratio used in our credit agreement and defined as net debt divided by credit adjusted EBITDA. However, as credit adjusted EBITDA for these purposes was calculated in accordance with the provisions of the credit agreement, it may differ from the calculation used for adjusted operating EBITDA.
Cautionary Statement Under the Private Securities Litigation Reform Act of 1995
Statements in this Form 10-Q, which are not historical facts or information, are "forward-looking statements" within the meaning ofThe Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current assumptions, estimates and expectations including those concerning (i) the impacts of COVID-19 and our plans to respond to its implications; (ii) the expected impact of global supply chain challenges; (iii) expectations regarding sales and profit for the fiscal year 2022, including the impact of foreign exchange, pricing actions, raw materials, and sourcing, logistics and manufacturing costs; (iv) expectations of the impact of inflationary pressures and the pricing actions to offset exposure to such impacts; (v) the impact of high input costs, including commodities, raw materials, transportation and energy; (vi) our ability to drive cost discipline measures and the ability to recover margin to pre-inflation levels; (vii) the divestiture of our Microbial Control business and the progress of our portfolio optimization strategy, through non-core business divestitures and acquisitions, such as the Health Wright acquisition; (viii) our combination with N&B, including the expected benefits and synergies of the N&B Transaction and future opportunities for the combined company; (ix) the success of our integration efforts and ability to deliver on our synergy commitments as well as future opportunities for the combined company; (x) the growth potential of the markets in which we operate, including the emerging markets, (xi) expected capital expenditures in 2022; (xii) the expected costs and benefits of our ongoing optimization of our manufacturing operations, including the expected number of closings; (xiii) expected cash flow and availability of capital resources to fund our operations and meet our debt service requirements; (xiv) our ability to innovate and execute on specific consumer trends and demands; and (xv) our ability to continue to generate value for, and return cash to, our shareholders. These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in our business that could cause actual results and events to differ materially from those in the forward-looking statements. Certain of such forward-looking information may be identified by such terms as "expect", "anticipate", "believe", "intend", "outlook", "may", "estimate", "should", "predict" and similar terms or variations thereof. Such forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not guarantees of future results or performance, and involve significant risks, uncertainties and other factors, including assumptions and projections, for all forward periods. Our actual results may differ materially from any future results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others, the following:
•inflationary trends in the price of our input costs, such as raw materials, transportation and energy;
•supply chain disruptions, geopolitical developments, including the
•disruption in the development, manufacture, distribution or sale of our products from COVID-19 and other public health crises;
•risks related to the integration of the N&B business, including whether we will realize the benefits anticipated from the merger in the expected time frame;
•our ability to successfully establish and manage acquisitions, collaborations,
joint ventures or partnerships, or the failure to close strategic transactions
or divestments;
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•our ability to successfully market to our expanded and diverse customer base;
•our substantial amount of indebtedness and its impact on our liquidity and ability to return capital to its shareholders;
•our ability to effectively compete in our market and develop and introduce new products that meet customers' needs;
•our ability to retain key employees;
•changes in demand from large multi-national customers due to increased competition and our ability to maintain "core list" status with customers;
•our ability to successfully develop innovative and cost-effective products that allow customers to achieve their own profitability expectations;
•disruption in the development, manufacture, distribution or sale of our products from natural disasters, public health crises, international conflicts, terrorist acts, labor strikes, political crisis, accidents and similar events;
•volatility and increases in the price of raw materials, energy and transportation;
•the impact of a significant data breach or other disruption in our information technology systems, and our ability to comply with data protection laws in theU.S. and abroad;
•our ability to comply with, and the costs associated with compliance with, regulatory requirements and industry standards, including regarding product safety, quality, efficacy and environmental impact;
•our ability to meet increasing consumer, customer, shareholder and regulatory focus on sustainability;
•defect, quality issues (including product recalls), inadequate disclosure or misuse with respect to the products and capabilities;
•our ability to react in a timely and cost-effective manner to changes in consumer preferences and demands, including increased awareness of health and wellness;
•our ability to benefit from our investments and expansion in emerging markets;
•the impact of currency fluctuations or devaluations in the principal foreign markets in which we operate;
•economic, regulatory and political risks associated with our international operations;
•the impact of global economic uncertainty on demand for consumer products;
•our ability to comply with, and the costs associated with compliance with,
•our ability to successfully manage our working capital and inventory balances;
•the impact of the failure to comply withU.S. or foreign anti-corruption and anti-bribery laws and regulations, including theU.S. Foreign Corrupt Practices Act;
•any impairment on our tangible or intangible long-lived assets, including
goodwill associated with the N&B merger and the acquisition of
•our ability to protect our intellectual property rights;
•the impact of the outcome of legal claims, regulatory investigations and litigation;
•changes in market conditions or governmental regulations relating to our pension and postretirement obligations;
•the impact of changes in federal, state, local and international tax legislation or policies, including the Tax Cuts and Jobs Act, with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes;
•the impact of the
•the impact of the phase out of the London Interbank Offered Rate ("LIBOR") on interest expense; and
•risks associated with our CEO transition, including the impact of employee hiring and retention.
The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with theSEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. Please refer to Part I, Item 1A, "Risk Factors," of the 2021 Form 10-K for additional information regarding factors that could affect our results of operations, financial condition and liquidity. 47
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We intend our forward-looking statements to speak only as of the time of such statements and do not undertake or plan to update or revise them as more information becomes available or to reflect changes in expectations, assumptions or results. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this report or included in our other periodic reports filed with theSEC could materially and adversely impact our operations and our future financial results.
Any public statements or disclosures made by us following this report that modify or impact any of the forward-looking statements contained in or accompanying this report will be deemed to modify or supersede such outlook or other forward-looking statements in or accompanying this report.
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