Sensient Technologies Corp: Form 10-Q for the period ended Mar 31, 2025

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, 2025, and statements including the terms “expect,” “believe,” “anticipate,” and other similar terms that express expectations as to future events or conditions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that could cause actual events to differ materially from those expressed in the forward-looking statements. A variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results. These factors and assumptions include, among others, the Company’s ability to manage general business, economic, and capital market conditions, including actions taken by customers in response to such market conditions, and the impact of recessions and economic downturns; the impact of macroeconomic and geopolitical volatility, including inflation and shortages impacting the availability and cost of raw materials, energy, and other supplies, disruptions and delays in the Company’s supply chain, and the conflicts between Russia and Ukraine and in the Middle East; industry, regulatory, legal, and economic factors related to the Company’s domestic and international business; the effects of tariffs, trade barriers, and disputes; the availability and cost of labor, logistics, and transportation; the pace and nature of new product introductions by the Company and the Company’s customers; the Company’s ability to anticipate and respond to changing consumer preferences, changing technologies, and changing regulations; the Company’s ability to successfully implement its growth strategies; the outcome of the Company’s various productivity-improvement and cost-reduction efforts, acquisition and divestiture activities, and Portfolio Optimization Plan; growth in markets for products in which the Company competes; industry and customer acceptance of price increases; actions by competitors; the Company’s ability to enhance its innovation efforts and drive cost efficiencies; currency exchange rate fluctuations; and the matters discussed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. 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 $392.3 million and $384.7 million for the three months ended March 31, 2025 and 2024, respectively. The increase in revenue was primarily due to favorable pricing and higher volumes, partially offset by the unfavorable impact of foreign exchange rates that decreased revenue by approximately 2%.

Gross Margin

The Company’s gross margin was 33.6% and 32.9% for the three months ended March 31, 2025 and 2024, respectively. For the three months ended March 31, 2025, Portfolio Optimization Plan costs totaling $1.8 million decreased gross margin by 50 basis points. Portfolio Optimization Plan costs for the three months ended March 31, 2024 had an immaterial impact on gross margin. See Portfolio Optimization Plan below for further information. The Company’s gross margin was further impacted by the favorable pricing and higher volumes, partially offset by higher raw material costs.

Selling and Administrative Expenses

Selling and administrative expense as a percent of revenue was 19.9% and 20.1% for the three months ended March 31, 2025 and 2024, respectively. For the three months ended March 31, 2025 and 2024, selling and administrative expenses were increased by Portfolio Optimization Plan costs totaling $1.1 million and $2.7 million, respectively, which increased selling and administrative expenses as a percent of revenue by approximately 20 and 70 basis points, respectively. See Portfolio Optimization Plan below for further information. The decrease in Portfolio Optimization Plan costs as a percent of revenue was offset by higher performance-based executive compensation costs incurred in 2025.

Operating Income

Operating income was $53.5 million and $49.4 million for the three months ended March 31, 2025 and 2024, respectively. Operating margins were 13.6% and 12.8% for the three months ended March 31, 2025 and 2024, respectively. Portfolio Optimization Plan costs decreased operating margins by approximately 80 basis points for both the three months ended March 31, 2025 and 2024. The increase in operating margin was primarily due to favorable pricing and higher volumes, partially offset by higher raw material costs and higher performance-based executive compensation costs incurred in 2025.

Interest Expense

Interest expense was $7.3 million and $7.0 million for the three months ended March 31, 2025 and 2024, respectively. The increase in expense was primarily due to an increase in the average interest rate.

Income Taxes

The effective income tax rates for the three months ended March 31, 2025 and 2024, were 25.4% and 27.0%, respectively. The effective tax rates for the three months ended March 31, 2025 and 2024 were both impacted by changes in estimates associated with the finalization of prior year foreign tax items and the mix of foreign earnings. The effective tax rate for the three months ended March 31, 2024 was further impacted by the limited tax deductibility of costs related to the Portfolio Optimization Plan.

Acquisition

On February 14, 2025, the Company acquired Biolie SAS, a natural color extraction business located in France. The Company paid $4.8 million in cash for this acquisition, which is net of $0.2 million in debt assumed, with $0.5 million of such amount being held back by the Company for 60 days to satisfy any necessary working capital and net debt adjustments. The assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date. The Company acquired net assets of $0.3 million, with the remaining $4.5 million allocated to goodwill. This business is part of the Color segment.

Portfolio Optimization Plan

During the fourth quarter of 2023, the Board of Directors of the Company approved a plan to undertake an effort to optimize certain production facilities and improve efficiencies within the Company (Portfolio Optimization Plan). As part of the Portfolio Optimization Plan, in the Flavors & Extracts segment, the Company evaluated the closure of its manufacturing facility in Felinfach, Wales, United Kingdom, the closure of its sales office in Granada, Spain, and the centralization and elimination of certain selling and administrative positions. In addition, in the Color segment, the Company evaluated the closure of a manufacturing facility in Delta, British Columbia, Canada, the closure of a sales office in Argentina, and centralizing and eliminating certain production positions and selling and administrative positions. The Company reports all costs associated with the Portfolio Optimization Plan in the Corporate & Other segment.

The Company’s Felinfach site will continue to operate until all production activities have successfully transferred to other locations, and then will be closed. The Company has substantially completed all other actions contemplated under the Portfolio Optimization Plan in accordance with local laws.

For the three months ended March 31, 2025, the Company incurred costs of $2.9 million related to the Portfolio Optimization Plan recorded in Corporate & Other, primarily for dual plant operating costs, non-cash inventory charges, professional services, and employee separation costs. For the three months ended March 31, 2024, the Company incurred costs of $2.8 million related to the Portfolio Optimization Plan recorded in Corporate & Other, primarily for costs associated with employee separation and impairment of fixed assets.

NON-GAAP FINANCIAL MEASURES

Within the following tables, the Company reports certain non-GAAP financial measures, including: (1) adjusted operating income, adjusted net earnings, and adjusted diluted earnings per share, which exclude restructuring and other costs, including the Portfolio Optimization Plan costs, (2) percentage changes in revenue, operating income, and diluted earnings per share on an adjusted local currency basis, which eliminate the effects that result from translating its international operations into U.S. dollars and restructuring and other costs, including the Portfolio Optimization Plan costs, and (3) adjusted EBITDA, which excludes restructuring and other costs, including the Portfolio Optimization Plan costs, and non-cash share based compensation expense.

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.

Index

(In thousands except per share amounts)

(1) Tax impact adjustments were determined based on the nature of the underlying non-GAAP adjustments and their relevant jurisdictional tax rates.

Portfolio Optimization Plan costs are discussed under “Portfolio Optimization Plan” above and Note 3, Portfolio Optimization Plan, in the Notes to the Consolidated Financial Statements included in this report.

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 months ended March 31, 2025, compared to the results for the three months ended March 31, 2024, in the respective financial measures.

(1) Adjustments consist of Portfolio Optimization 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 share-based compensation (except for share-based compensation expense associated with stock grants to certain business unit leaders); restructuring and other costs, including the Portfolio Optimization Plan 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 $193.7 million and $193.1 million for the three months ended March 31, 2025 and 2024, respectively, an immaterial increase. Foreign exchange rates decreased segment revenue by approximately 1%.

Flavors & Extracts segment operating income was $25.0 million and $23.7 million for the three months ended March 31, 2025 and 2024, respectively, an increase of approximately 6%. The higher segment operating income was a result of higher operating income in Flavors, Extracts & Flavor Ingredients, partially offset by lower operating income in Natural Ingredients. The higher operating income in Flavors, Extracts & Flavor Ingredients was primarily due to higher volumes and selling prices. The lower operating income in Natural Ingredients was primarily due to higher raw material costs and lower volumes, partially offset by higher selling prices. Foreign exchange rates decreased segment operating income by approximately 1%. Segment operating income as a percent of revenue was 12.9% in the current quarter compared to 12.3% in the prior year’s comparable quarter.

Color

Segment revenue for the Color segment was $167.8 million and $160.0 million for the three months ended March 31, 2025 and 2024, respectively, an increase of approximately 5%. The increase was primarily a result of higher revenue in Food & Pharmaceutical Colors, primarily due to higher volumes and selling prices, partially offset by the unfavorable impact of foreign exchange rates that decreased segment revenue by approximately 3%.

Segment operating income for the Color segment was $34.9 million and $31.7 million for the three months ended March 31, 2025 and 2024, respectively, an increase of approximately 10%. The higher segment operating income was a result of higher operating income in Food & Pharmaceutical Colors, partially offset by lower operating income in Personal Care. The higher operating income in Food & Pharmaceutical Colors was primarily due to higher selling prices and volumes, partially offset by higher raw material costs and the unfavorable impact of foreign exchange rates that decreased segment operating income by approximately 4%. The lower operating income in Personal Care was primarily due to higher manufacturing and other costs. Segment operating income as a percent of revenue was 20.8% and 19.8% for the three months ended March 31, 2025 and 2024, respectively.

Asia Pacific

Segment revenue for the Asia Pacific segment was $41.9 million and $40.3 million for the three months ended March 31, 2025 and 2024, respectively, an increase of approximately 4%. The increase was primarily due to higher volumes, partially offset by the unfavorable impact of foreign exchange rates that decreased segment revenue by approximately 1%.

Segment operating income for the Asia Pacific segment was $9.4 million and $8.8 million for the three months ended March 31, 2025 and 2024, respectively, an increase of approximately 8%. Foreign exchange rates increased segment operating income by approximately 1%. Segment operating income as a percent of revenue was 22.5% in the current quarter and 21.8% in the prior year’s comparable quarter.

Corporate & Other

The Corporate & Other operating expense was $15.8 million and $14.7 million for the three months ended March 31, 2025 and 2024, respectively. The higher operating expense was primarily due to higher performance-based executive compensation costs in 2025. Portfolio Optimization Plan costs totaling $2.9 million and $2.8 million also negatively impacted the three months ended March 31, 2025 and 2024, respectively. See the Portfolio Optimization Plan section above for further information.

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, 2025. 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, and dividend payments, as well as potential 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 2025 through 2029. 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 sufficient 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, 2025. 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.

In the second quarter of 2025, the United States implemented significant new tariffs on imports from a wide range of countries. These actions, and retaliatory tariffs imposed by other countries on United States exports, have led to significant volatility and uncertainty in global markets. The Company anticipates incurring incremental tariff costs on certain raw materials to produce our products and certain finished goods shipped to customers. However, the Company expects to manage the impact of the increased tariff costs through pricing actions. To the extent the Company is unable to offset the increased tariff costs or the tariffs negatively impact demand, the Company’s revenue and profitability would be adversely impacted. If additional tariffs are adopted, the Company would incur additional tariff costs that could be material.

Cash Flows from Operating Activities

Net cash used in operating activities was $9.0 million and net cash provided by operating activities was $15.1 million for the three months ended March 31, 2025 and 2024, respectively. The decrease in net cash provided by operating activities was primarily due to an increase in the cash used for performance-based compensation payments (which are determined based on prior year performance) made during 2025 compared to 2024 and a decrease in cash provided by inventory during 2025 compared to 2024, partially offset by an increase in cash provided by accounts receivable.

Cash Flows from Investing Activities

Net cash used in investing activities was $21.3 million and $10.9 million during the three months ended March 31, 2025 and 2024, respectively. Capital expenditures were $16.9 million and $11.0 million during the three months ended March 31, 2025 and 2024, respectively. In 2025, the Company paid $4.3 million for the acquisition of Biolie SAS.

Cash Flows from Financing Activities

Net cash provided by financing activities was $36.0 million and net cash used in financing activities was $9.1 million for the three months ended March 31, 2025 and 2024, respectively. Net debt increased by $55.7 million and $11.0 million for the three months ended March 31, 2025 and 2024, respectively. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $17.4 million and $17.3 million were paid during the three months ended March 31, 2025 and 2024, respectively. Dividends paid per share were $0.41 for both the three months ended March 31, 2025 and 2024.

CRITICAL ACCOUNTING POLICIES

There have been no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2025. 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, 2024.

There have been no material changes in the Company’s exposure to market risk during the quarter ended March 31, 2025. For additional information about market risk, refer to Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.

Evaluation of Disclosure Controls and Procedures: The Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chairman, President, and Chief Executive Officer and its Vice President and Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report, of the design and operation of the disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the Company’s Chairman, President, and Chief Executive Officer and its Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting: There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There were no material changes to the risk factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.