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Nov. 2, 2021, 1:04 p.m. EDT

10-Q: SENSIENT TECHNOLOGIES CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that reflect management's current assumptions and estimates of future economic circumstances, industry conditions, Company performance, and financial results. Forward-looking statements include statements in the future tense, statements referring to any period after September 30, 2021, 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 energy, raw materials, and other supplies, the availability of 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; 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 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as updated below under Part II, Item 1A. 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

Gross Margin

The Company's gross margin was 32.9% and 32.1% for the nine months ended September 30, 2021 and 2020, respectively. The increase in gross margin was primarily due to higher Flavor & Extracts segment volumes and the impact of the divestiture & other related costs in the prior year period.

Selling and Administrative Expenses

Selling and administrative expenses included divestiture & other related costs and operational improvement plan costs and income totaling $0.7 million and $11.5 million for the three and nine months ended September 30, 2021, respectively, and $2.9 million and $11.3 million for the three and nine months ended September 30, 2020, respectively.

Operating Income

Index

Interest Expense

Income Taxes

Divestitures

On June 30, 2020, the Company completed the sale of its inks product line. In 2021 and 2020, the Company received $0.5 million and $11.6 million of net cash, respectively, as part of the sale.

On September 18, 2020, the Company completed the sale of its yogurt fruit preparations product line for $1.0 million. The sale 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. As a result of the completion of the sale, the Company recorded a non-cash net loss of $11.3 million, for the nine months ended September 30, 2021, primarily related to the reclassification of accumulated foreign currency translation and related items from Accumulated Other Comprehensive Loss to Selling and Administrative Expenses in the Consolidated Statements of Earnings.

Acquisition

Operational Improvement Plan

During the second quarter of 2021, the Company received cash proceeds, net of associated expenses, in connection with the termination of a New Jersey office and laboratory space lease. The terminated lease was originally executed in November 2020 as part of the Operational Improvement Plan; however, the landlord for the property requested to terminate the lease prior to the end of its term and compensated the Company as part of a negotiated resolution for that termination.

Index

COVID-19

For the three and nine months ended September 30, 2021, demand for many of the Company's products remained strong, especially in product lines that serve the food and beverage markets. There has been continued softer demand in other product lines the Company serves, particularly in the cosmetics product line and some product lines that supply the quick service restaurant segment due to continued widespread restaurant capacity and other operating restrictions. While COVID-19 appears to have initially contributed to demand for food-related products and dampened demand for personal care related products, it is difficult to quantify the continuing and future impact of COVID-19 on demand for the Company's products.

During the first quarter of 2020, the Company had a production facility in China and a production facility in India that were required to temporarily suspend operations. In addition, during the fourth quarter of 2020, the Company had a production facility in China that was 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 its production facilities are located. The Company also continues to monitor supply chains and has increased inventory in certain key raw materials and fast moving finished goods. Supply chains and logistics operations have been adversely impacted during the pandemic, but the Company did not experience any significant supply disruptions related to COVID-19 during the three and nine months ended September 30, 2021.

As of September 30, 2021, the Company continues to be in compliance with its financial 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, stock repurchases, and dividend payments.

The Company continues to monitor its trade accounts receivables for potential collection issues and has not identified any significant concerns as of this filing. The Company will continue to monitor cash collections and review trade receivable aging to identify any deterioration in quality.

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 outside the United States periodically perform tasks from alternative work locations. Internal audit continues to perform their audit procedures as planned, though some audit procedures are performed remotely for locations outside the United States where it is not reasonably possible to perform audit procedures in-person.

Overall, governmental and social responses to the COVID-19 pandemic continue to evolve. In particular, there continues to be uncertainty related to the timing and extent of vaccination programs, especially outside of the U.S., as well as 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. Even as stay-home orders and quarantines are being lifted in most areas, 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.

Index NON-GAAP FINANCIAL MEASURES

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

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







                                       Three Months Ended September 30,                  Nine Months Ended September 30,
        (In thousands, except       2021               2020          % Change           2021             2020         % Change
        per share amounts)
        Revenue (GAAP)          $    344,287       $    323,566            6.4 %   $    1,039,816      $ 997,333            4.3 %
        Revenue of the
        divested product
        lines                         (1,622 )          (23,588 )                         (29,399 )      (88,390 )
        Adjusted revenue        $    342,665       $    299,978           14.2 %   $    1,010,417      $ 908,943           11.2 %
        Operating Income
        (GAAP)                  $     46,958       $     41,155           14.1 %   $      129,608      $ 117,841           10.0 %
        Divestiture & other
        related costs
        (income) - Cost of
        products sold                      -               (148 )                              28          1,791
        Divestiture & other
        related costs  -
        Selling and
        administrative
        expenses                         241                312                            13,473          8,689
        Operating loss
        (income) of the
        divested product
        lines                             70             (2,449 )                          (2,398 )       (4,165 )
        Operational
        improvement plan -
        Cost of products sold              -                 35                                 -             35
        Operational
        improvement plan -
        Selling and
        administrative
        expenses (income)                483              2,606                            (2,010 )        2,606
        Adjusted operating
        income                  $     47,752       $     41,511           15.0 %   $      138,701      $ 126,797            9.4 %
        Net Earnings (GAAP)     $     33,912       $     32,910            3.0 %   $       91,516      $  84,303            8.6 %
        Divestiture & other
        related costs, before
        tax                              241                164                            13,501         10,480
        Tax impact of
        divestiture & other
        related costs                  1,179               (787 )                             283         (1,212 )
        Net loss (earnings)
        of the divested
        product lines, before
        tax                               70             (2,449 )                          (2,398 )       (4,165 )
        Tax impact of the
        divested product
        lines                            (18 )              655                               590          1,155
        Operational
        improvement plan
        costs (income),
        before tax                       483              2,641                            (2,010 )        2,641
        Tax impact of
        operational
        improvement plan                (115 )             (656 )                              44           (656 )
        Adjusted net earnings   $     35,752       $     32,478           10.1 %   $      101,526      $  92,546            9.7 %
        Diluted earnings per
        share (GAAP)            $       0.80       $       0.78            2.6 %   $         2.16      $    1.99            8.5 %
        Divestiture & other
        related costs
        (income), net of tax            0.03              (0.01 )                            0.33           0.22
        Results of operations
        of the divested
        product lines, net of
        tax                                -              (0.04 )                           (0.04 )        (0.07 )
        Operational
        improvement plan
        costs (income), net
        of tax                          0.01               0.05                             (0.05 )         0.05
        Adjusted diluted
        earnings per share      $       0.85       $       0.77           10.4 %   $         2.40      $    2.19            9.6 %
        


Index

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

The following table summarizes the percentage change for the results of the three and nine months ended September 30, 2021, compared to the results for the three and nine months ended September 30, 2020, in the respective financial measures.







                                                         Three Months Ended September 30, 2021                                              Nine Months Ended September 30, 2021
                                                        Foreign Exchange                             Adjusted Local                       Foreign Exchange                             Adjusted Local
        Revenue                         Total                Rates              Adjustments(1)          Currency           Total               Rates              Adjustments(1)          Currency
        Flavors & Extracts                  (0.7 %)                  1.1 %                (13.4 %)             11.6 %           1.6 %                  2.4 %                (10.7 %)              9.9 %
        Color                               19.6 %                   1.9 %                 (0.4 %)             18.1 %           7.1 %                  3.2 %                 (3.4 %)              7.3 %
        Asia Pacific                         8.8 %                  (0.5 %)                (0.2 %)              9.5 %          11.8 %                  3.6 %                 (0.2 %)              8.4 %
        Total Revenue                        6.4 %                   1.2 %                 (7.8 %)             13.0 %           4.3 %                  2.8 %                 (7.1 %)              8.6 %
        Operating Income
        Flavors & Extracts                   5.5 %                   0.6 %                (11.1 %)             16.0 %          13.7 %                  1.9 %                 (4.9 %)             16.7 %
        Color                               15.7 %                   1.8 %                 (0.9 %)             14.8 %           5.3 %                  3.5 %                  0.8 %               1.0 %
        Asia Pacific                         7.8 %                  (2.3 %)                (0.4 %)             10.5 %          19.4 %                 (0.7 %)                (0.3 %)             20.4 %
        Corporate & Other                   (2.5 %)                  0.0 %                (21.0 %)             18.5 %          11.1 %                  0.0 %                (11.0 %)             22.1 %
        Total Operating Income              14.1 %                   1.1 %                 (0.9 %)             13.9 %          10.0 %                  3.2 %                  0.3 %               6.5 %
        Diluted Earnings per Share           2.6 %                   0.0 %                 (6.5 %)              9.1 %           8.5 %                  3.0 %                 (1.3 %)              6.8 %
        


(1) For Revenue, adjustments consist of revenues of the divested product lines. For Operating Income and Diluted Earnings per Share, adjustments consist of the results of the divested product lines, divestiture & other related costs, and operational improvement plan costs and income.

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

SEGMENT INFORMATION

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

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

Flavors & Extracts

Index

Flavors & Extracts segment operating income was $25.2 million and $23.8 million for the three months ended September 30, 2021 and 2020, respectively, an increase of approximately 6%. Foreign exchange rates increased segment operating income by approximately 1%. The increase was primarily a result of higher segment operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by lower segment operating income due to the divestiture of Fragrances on April 1, 2021. The higher segment operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients was primarily a result of higher volumes, which were partially offset by higher raw material costs. Higher selling prices also contributed to the higher segment operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients. Segment operating income as a percent of revenue was 13.9% in the current quarter compared to 13.0% in the prior year's comparable quarter.

Flavors & Extracts segment operating income was $76.7 million and $67.5 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of approximately 14%. Foreign exchange rates increased segment operating income by approximately 2%. The increase was a result of higher segment operating income in Flavors, Extracts & Flavor Ingredients and Natural Ingredients, partially offset by lower segment operating income due to the divestiture of Fragrances on April 1, 2021. The higher segment operating income in Flavors, Extracts & Flavor Ingredients was primarily a result of higher volumes, lower manufacturing and other costs, and the favorable impact of foreign exchange rates, partially offset by higher raw material costs. The higher segment operating income in Natural Ingredients was primarily a result of higher volumes, which were partially offset by higher raw material costs. Higher selling prices also contributed to the higher segment operating income in . . .

Nov 02, 2021

COMTEX_396236326/2041/2021-11-02T13:04:16

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