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SENSIENT TECHNOLOGIES CORPORATION

(SXT)
  Report
Delayed Nyse  -  04:00:02 2023-02-03 pm EST
78.48 USD   -0.47%
01/30Sensient Announces Conference Call
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SENSIENT TECHNOLOGIES CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/03/2022 | 12:14pm EST

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, 2022, and statements including the terms "expect,"
"believe," "anticipate," and other similar terms that express expectations as to
future events or conditions. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for such forward-looking statements. Such
forward-looking statements are not guarantees of future performance and involve
known and unknown risks, uncertainties, and other factors that could cause
actual events to differ materially from those expressed in the forward-looking
statements. A variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results. These factors and
assumptions include, among others, the impact and uncertainty created by the
ongoing COVID-19 pandemic, including, but not limited to, its effects on our
employees, facilities, customers, and suppliers; the availability and cost of
raw materials, energy, and other supplies; the availability and cost of labor,
logistics, and transportation; the uncertain impacts of the ongoing conflict
between Russia and Ukraine on our supply chain, input costs, including energy
and transportation, and generally on economic conditions; governmental
regulations and restrictions; and general economic conditions, including
inflation; the pace and nature of new product introductions by the Company and
the Company's customers; the Company's ability to anticipate and respond to
changing consumer preferences and changing technologies; the Company's ability
to successfully implement its growth strategies; the outcome of the Company's
various productivity-improvement and cost-reduction efforts, acquisition and
divestiture activities, and operational improvement plan; the effectiveness of
the Company's past restructuring activities; changes in costs of raw materials,
including energy; industry, regulatory, legal, and economic factors related to
the Company's domestic and international business; the effects of tariffs, trade
barriers, and disputes; growth in markets for products in which the Company
competes; industry and customer acceptance of price increases; actions by
competitors; currency exchange rate fluctuations; and the matters discussed
under Item 1A in Part II of this Quarterly Report on Form 10-Q and Item 1A of
the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Except to the extent required by applicable law, the Company does not undertake
to publicly update or revise its forward-looking statements even if experience
or future changes make it clear that any projected results expressed or implied
therein will not be realized.

OVERVIEW

Revenue

Revenue was $355.5 million and $359.7 million for the three months ended March
31, 2022 and 2021, respectively.  The decrease in revenue was primarily due to
the sale of the Company's Fragrances product line on April 1, 2021, partially
offset by favorable pricing and volumes. For the three months ended March 31,
2022, the impact of foreign exchange rates decreased consolidated revenue by
approximately 2%.

Gross Profit
The Company's gross margin was 35.1% and 32.1% for the three months ended March
31, 2022 and 2021, respectively. The increase in gross margin was primarily due
to an increase in pricing and volumes, partially offset by higher input costs.

Selling and Administrative Expenses
Selling and administrative expense as a percent of revenue was 20.3% and 19.1%
for the three months ended March 31, 2022 and 2021, respectively. The increase
in selling and administrative expenses as a percent of revenue was primarily due
to an increase in expenses in the Color segment and higher performance-based
executive compensation recorded in Corporate & Other, partially offset by
divestiture & other related expenses and operational improvement plan costs in
the prior period.

Selling and administrative expenses for the three months ended March 31, 2021
included divestiture & other related expenses and operational improvement plan
costs totaling $2.5 million. There were no divestiture & other related costs or
operational improvement plan costs for the three months ended March 31, 2022.
These expenses increased selling and administrative expense as a percent of
revenue by 70 basis points for the three months ended March 31, 2021.

Operating Income
Operating income was $52.8 million and $46.9 million for the three months ended
March 31, 2022 and 2021, respectively. Operating margins were 14.8% and 13.0%
for the three months ended March 31, 2022 and 2021, respectively. The increase
in operating margin is primarily due to higher pricing and volumes, and the lack
of divestiture & other related costs and operational improvement plan costs in
the current period, partially offset by higher performance-based executive
compensation recorded in Corporate & Other.

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Interest Expense
Interest expense was $3.0 million and $3.4 million for the three months ended
March 31, 2022 and 2021, respectively. The decrease in expense was primarily due
to the lower average interest rate in the current period compared to the
comparable prior year period.

Income Taxes
The effective income tax rates for the three months ended March 31, 2022 and
2021 were 25.6% and 27.1%, respectively. The effective tax rates for the three
months ended March 31, 2022 and 2021 were both impacted by changes in estimates
associated with the finalization of prior year foreign tax items and the mix of
foreign earnings.

Divestitures

On June 30, 2020, the Company completed the sale of its inks product line. On
September 18, 2020, the Company completed the sale of its yogurt fruit
preparations product line. This sale also included an earnout based on future
performance, which could result in additional cash consideration for the
Company. On April 1, 2021, the Company completed the sale of its fragrances
product line (excluding its essential oils product line) for $36.3 million of
net cash.

In the three months ended March 31, 2021, the Company incurred $1.6 million
related to the divestitures, primarily for costs associated with employee
separation and accelerated depreciation of fixed assets. There were no costs
related to the divestitures incurred during the three months ended March 31,
2022.

Operational Improvement Plan
During the third quarter of 2020, the Company approved an operational
improvement plan (Operational Improvement Plan) to consolidate manufacturing
facilities and improve efficiencies within the Company. As part of the
Operational Improvement Plan, the Company combined its New Jersey cosmetics
manufacturing facility in the Personal Care product line of the Color segment
into its existing Color segment facility in Missouri. In addition, the Company
centralized certain Flavors & Extracts segment support functions in Europe into
one location. In the Asia Pacific segment, the Company incurred costs in
connection with the elimination of certain selling and administrative positions.

In the three months ended March 31, 2021, the Company incurred $1.0 million related to the Operational Improvement Plan recorded in Corporate & Other, primarily for costs associated with exiting its New Jersey cosmetics manufacturing facility. There were no costs related to the Operational Improvement Plan incurred during the three months ended March 31, 2022.

Acquisition

On July 15, 2021, the Company acquired substantially all of the assets of Flavor
Solutions, Inc., a flavors business located in New Jersey. The purchase price
for this acquisition was $14.9 million in cash with approximately $1.0 million
of such amount being held back by the Company for 12 months in order to satisfy
post-closing indemnification claims that may arise. The assets acquired and
liabilities assumed were recorded at their estimated fair value as of the
acquisition date. The Company acquired net assets of $0.4 million and identified
intangible assets, principally customer relationships, of $5.0 million. The
remaining $9.5 million was allocated to goodwill. This business is now part of
the Flavors & Extracts segment.

COVID-19

COVID-19 has adversely affected most of the world through widespread illness,
quarantines, factory shutdowns, and travel and transportation disruptions and
restrictions. These adverse effects could continue in parts of the world. While
the Company's financial position remains strong, the Company has seen several
financial and operational impacts from the pandemic as of this filing. We have
experienced various degrees of supply chain challenges and attempted to mitigate
those challenges by increasing inventory in certain key raw materials and using
secondary suppliers and new methods of procurement where available. In addition,
we have experienced inflationary increases in costs associated with certain raw
materials, logistics, transportation, and labor. In response, we have taken
pricing actions to offset these increases.

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For the three months ended March 31, 2022, demand for many of the Company's
products remained strong. All of the Company's production facilities are open
and operating as of this filing, but the Company continues to monitor
developments and regulations in regions where its production facilities are
located. Governmental and social responses to the COVID-19 pandemic continue to
evolve. There continues to be uncertainty related to the impacts of new COVID-19
variants, and we expect that the situation will remain dynamic and difficult to
predict for the foreseeable future. There can be no assurance that our
experience to date with respect to facility operations, customer demand, the
availability of supplies and transportation, and other factors impacting our
results and financial condition will be predictive of the ongoing impacts in the
short or long term. It is difficult to predict how economic conditions and
changes in customer and consumer behavior may impact our results over the longer
term. As a result of any of the foregoing, our results or financial condition
could be adversely impacted and the impacts could be material.

NON-GAAP FINANCIAL MEASURES


Within the following tables, the Company reports certain non-GAAP financial
measures, including: (1) adjusted revenue, adjusted operating income, adjusted
net earnings, and adjusted diluted earnings per share, which exclude the results
of the divested product lines, the divestiture & other related costs, and the
operational improvement plan costs and (2) percentage changes in revenue,
operating income, and diluted earnings per share on an adjusted local currency
basis, which eliminate the effects that result from translating its
international operations into U.S. dollars, the results of the divested product
lines, the divestiture & other related costs, and the operational improvement
plan costs.

The Company has included each of these non-GAAP measures in order to provide
additional information regarding our underlying operating results and comparable
year-over-year performance. Such information is supplemental to information
presented in accordance with GAAP and is not intended to represent a
presentation in accordance with GAAP. These non-GAAP measures should not be
considered in isolation. Rather, they should be considered together with GAAP
measures and the rest of the information included in this report. Management
internally reviews each of these non-GAAP measures to evaluate performance on a
comparative period-to-period basis and to gain additional insight into
underlying operating and performance trends, and the Company believes the
information can be beneficial to investors for the same purposes. These non-GAAP
measures may not be comparable to similarly titled measures used by other
companies.

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                                                           Three Months Ended March 31,
(In thousands except per share amounts)                 2022            2021         % Change
Revenue (GAAP)                                       $   355,521      $ 359,702           (1.2 %)
Revenue of the divested product lines                          -        (25,570 )
Adjusted revenue                                     $   355,521      $ 334,132            6.4 %

Operating Income (GAAP)                              $    52,789      $  46,897           12.6 %
Divestiture & other related costs - Cost of
products sold                                                  -            

25

Divestiture & other related costs - Selling and
administrative expenses                                        -          

1,547

Operating income of the divested product lines                 -         (2,927 )
Operational improvement plan - Selling and
administrative expenses                                        -          1,001
Adjusted operating income                            $    52,789      $  46,543           13.4 %

Net Earnings (GAAP)                                  $    37,071      $  31,668           17.1 %
Divestiture & other related costs, before tax                  -          

1,572

Tax impact of divestiture & other related costs                -            

793

Net earnings of the divested product lines, before tax

                                                            -         (2,927 )
Tax impact of the divested product lines                       -            

723

Operational improvement plan costs, before tax                 -          

1,001

Tax impact of operational improvement plan                     -           (296 )
Adjusted net earnings                                $    37,071      $  32,534           13.9 %

Diluted Earnings Per Share (GAAP)                    $      0.88      $    0.75           17.3 %
Divestiture & other related costs, net of tax                  -           

0.06

Results of operations of the divested product
lines, net of tax                                              -          (0.05 )
Operational improvement plan costs, net of tax                 -           

0.02

Adjusted diluted earnings per share                  $      0.88      $    0.77           14.3 %



Divestiture & other related costs are discussed under "Divestitures" above and
Note 2, Divestitures, in the Notes to the Consolidated Condensed Financial
Statements included in this report. The Operational Improvement Plan is
discussed under "Operational Improvement Plan" above and Note 3, Operational
Improvement Plan, in the Notes to the Consolidated Condensed Financial
Statements included in this report.

Note: Earnings per share calculations may not foot due to rounding differences.

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The following table summarizes the percentage change for the results of the three months ended March 31, 2022, compared to the results for the three months ended March 31, 2021, in the respective financial measures.

                                                              Three Months Ended March 31, 2022
                                                               Foreign                                  Adjusted
                                                              Exchange                                    Local
Revenue                                      Total              Rates           Adjustments (1)         Currency
Flavors & Extracts                               (9.1 %)             (1.9 %)               (12.3 %)             5.1 %
Color                                             9.4 %              (1.9 %)                (0.5 %)            11.8 %
Asia Pacific                                      7.8 %              (5.6 %)                (1.0 %)            14.4 %
Total Revenue                                    (1.2 %)             (2.2 %)                (7.4 %)             8.4 %

Operating Income
Flavors & Extracts                                2.1 %              (1.2 %)               (11.4 %)            14.7 %
Color                                            15.3 %              (2.4 %)                 0.2 %             17.5 %
Asia Pacific                                     21.5 %              (7.8 %)                (1.7 %)            31.0 %
Corporate & Other                                 1.4 %               0.0 %                (24.0 %)            25.4 %
Total Operating Income                           12.6 %              (3.2 %)                (0.4 %)            16.2 %
Diluted Earnings per Share                       17.3 %              (4.0 %)                 4.4 %             16.9 %


(1) For Revenue, adjustments consist of revenues of the divested product lines.

For Operating Income and Diluted Earnings per Share, adjustments consist of

the results of the divested product lines, divestiture & other related costs,

and operational improvement plan costs.

Note: Refer to table above for a reconciliation of these non-GAAP measures.

SEGMENT INFORMATION


The Company determines its operating segments based on information utilized by
its chief operating decision maker to allocate resources and assess performance.
Segment performance is evaluated on operating income before any applicable
divestiture & other related costs, share-based compensation, acquisition,
restructuring including the Operational Improvement Plan, and other costs (which
are reported in Corporate & Other), interest expense, and income taxes.

The Company's reportable segments consist of the Flavors & Extracts, Color, and Asia Pacific segments.


Flavors & Extracts
Flavors & Extracts segment revenue was $182.7 million and $200.9 million for the
three months ended March 31, 2022 and 2021, respectively, a decrease of
approximately 9%. Foreign exchange rates decreased segment revenue by
approximately 2%. The decrease was primarily a result of lower revenue in
Fragrances and Natural Ingredients, partially offset by higher revenue in
Flavors, Extracts & Flavor Ingredients. The lower revenues in Fragrances was due
to the divestiture of the product line in April 2021. The lower revenue in
Natural Ingredients was primarily due to lower volumes, partially offset by
higher selling prices. The higher revenue in Flavors, Extracts & Flavor
Ingredients was primarily due to higher volumes, higher selling prices, and the
acquisition of Flavor Solutions, Inc. in July of 2021, partially offset by the
unfavorable impact of foreign exchange rates.

Flavors & Extracts segment operating income was $27.6 million and $27.0 million
for the three months ended March 31, 2022 and 2021, respectively, an increase of
approximately 2%. Foreign exchange rates decreased segment operating income by
approximately 1%. The higher segment operating income was primarily a result of
higher operating income in Flavors, Extracts & Flavor Ingredients and Natural
Ingredients, partially offset by the divestiture of the Fragrances product line
in April of 2021. The higher operating income in Flavors, Extracts & Flavor
Ingredients was primarily due to higher selling prices, higher volumes, and
lower manufacturing and other costs, partially offset by higher raw material
costs. The higher operating income in Natural Ingredients was primarily due to
higher selling prices and a favorable product mix, partially offset by lower
volumes, higher raw material costs, and higher manufacturing and other costs.
Segment operating income as a percent of revenue was 15.1% in the current
quarter compared to 13.4% in the prior year's comparable quarter.

                                       18

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Color

Segment revenue for the Color segment was $148.4 million and $135.7 million for
the three months ended March 31, 2022 and 2021, respectively, an increase of
approximately 9%. The increase was a result of higher revenue in Food &
Pharmaceutical Colors and Personal Care, primarily due to higher volumes and
selling prices, partially offset by the unfavorable impact of foreign exchange
rates that decreased segment revenue by approximately 2%.

Segment operating income for the Color segment was $30.7 million and $26.6
million for the three months ended March 31, 2022 and 2021, respectively, an
increase of approximately 15%. Foreign exchange rates decreased segment
operating income by approximately 2%. The increase in segment operating income
was a result of higher segment operating income in Food & Pharmaceutical Colors
and Personal Care. The higher operating income in Food & Pharmaceutical Colors
was due to higher volumes and selling prices, partially offset by higher raw
material costs and higher manufacturing and other costs. The higher operating
income in Personal Care was due to higher volumes and selling prices, partially
offset by higher manufacturing and other costs. Segment operating income as a
percent of revenue was 20.7% in the current quarter and 19.6% in the prior
year's comparable quarter.

Asia Pacific
Segment revenue for the Asia Pacific segment was $36.5 million and $33.8 million
for the three months ended March 31, 2022 and 2021, respectively, an increase of
approximately 8%. The increase was a result of higher volumes and selling
prices, partially offset by the unfavorable impact of foreign exchange rates
that decreased segment revenue by approximately 6%.

Segment operating income for the Asia Pacific segment was $8.2 million and $6.8
million for the three months ended March 31, 2022 and 2021, respectively, an
increase of approximately 22%. The increase was primarily a result of higher
volumes and selling prices, partially offset by the unfavorable impact of
foreign exchange rates that decreased segment operating income by approximately
8%. Segment operating income as a percent of revenue was 22.5% in the current
quarter and 20.0% in the prior year's comparable quarter.

Corporate & Other
The Corporate & Other operating expense was $13.7 million and $13.5 million for
the three months ended March 31, 2022 and 2021, respectively. Operating expense
for the three months ended March 31, 2022 was consistent with the prior period
primarily due to an increase in performance-based executive compensation offset
by the prior period including divestiture & other related expenses of $1.6
million and operational improvement plan expenses of $1.0 million. There were no
divestiture & other related expenses or operational improvement plan expenses in
the current period.

LIQUIDITY AND FINANCIAL CONDITION


Financial Condition
The Company's financial position remains strong. The Company is in compliance
with its loan covenants calculated in accordance with applicable agreements as
of March 31, 2022. The Company expects its cash flow from operations and its
existing debt capacity can be used to meet anticipated future cash requirements
for operations, capital expenditures, dividend payments, acquisitions, and stock
repurchases. The Company's contractual obligations consist primarily of
operational commitments, which we expect to continue to be able to satisfy
through cash generated from operations and debt. The Company has various series
of notes outstanding that mature from 2022 through 2027. The Company believes
that it has the ability to refinance or repay these obligations through a
combination of cash flow from operations, issuance of additional notes, and
substantial borrowing capacity under the Company's revolving credit facility,
which matures in 2026.

As a result of our ability to manage the impact of inflation through pricing and
other actions, the impact of inflation was not material to the Company's
financial position and its results of operations for the three months ended
March 31, 2022. The Company currently anticipates inflation will not
significantly impact the remainder of 2022, as a result of the Company's pricing
and other actions; however, the Company, like others in its industry, has faced
challenges due to conditions in the global supply chain and global economy. In
particular, the Company has experienced increased costs for certain inputs, such
as raw materials, shipping and logistics, and labor-related costs. We continue
to expect to manage these impacts in the near term, but persistent, accelerated,
or expanded inflationary conditions could exacerbate these challenges and impact
our profitability.

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Cash Flows from Operating Activities
Net cash used in operating activities was $0.9 million for the three months
ended March 31, 2022, compared to net cash provided by operating activities of
$29.0 million for the three months ended March 31, 2021. The decrease in net
cash from operating activities was primarily due to an increase in cash used for
inventory and higher incentive payments in 2022.

Cash Flows from Investing Activities
Net cash used in investing activities was $12.2 million and $9.8 million during
the three months ended March 31, 2022 and 2021, respectively. Capital
expenditures were $12.7 million and $14.2 million during the three months ended
March 31, 2022 and 2021, respectively. In addition, during the three months
ended March 31, 2021, the Company received cash proceeds of $4.1 million related
to the Company's divestiture activities.

Cash Flows from Financing Activities
Net cash provided by financing activities was $14.9 million for the three months
ended March 31, 2022, and net cash used in financing activities was $15.9
million for the three months ended March 31, 2021. Net debt increased by $33.8
million and $12.5 million for the three months ended March 31, 2022 and 2021,
respectively. The cash proceeds from the increase in net debt in the current
period were primarily used to support inventory investments during the three
months ended March 31, 2022. For purposes of the cash flow statement, net
changes in debt exclude the impact of foreign exchange rates. The Company
repurchased shares of its common stock for $11.7 million during the three months
ended March 31, 2021. There were no repurchases of shares of the Company's
common stock in the current period. Dividends of $17.2 million and $16.5 million
were paid during the three months ended March 31, 2022 and 2021, respectively.
Dividends paid were $0.41 and $0.39 per share for the three months ended March
31, 2022 and 2021, respectively.

CRITICAL ACCOUNTING POLICIES


There have been no material changes in the Company's critical accounting
policies during the quarter ended March 31, 2022. For additional information
about the Company's critical accounting policies, refer to "Critical Accounting
Policies" under Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2021.

© Edgar Online, source Glimpses

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