SENSIENT TECHNOLOGIES CORP - Quarter Report: 2021 June (Form 10-Q)

In the opinion of Sensient Technologies Corporation (the Company), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) that are necessary to present fairly the financial position of the Company as of June 30, 2021, and the results of operations, comprehensive income, and shareholders’ equity for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Expenses are charged to operations in the period incurred.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which clarifies and simplifies aspects of the accounting for income taxes. ASU 2019-12 is effective for public business entities beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2019-12 on January 1, 2021, using retrospective, modified retrospective or prospective basis for certain amendments. There was no impact to the consolidated financial statements.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other inter-bank offered rates to alternative rates. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and its related disclosures.

Please refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2020, for additional details of the Company’s financial condition and a description of the Company’s accounting policies, which have been continued without change.

In October 2019, the Company announced its intent to divest its inks, fragrances (excluding its essential oils product line), and yogurt fruit preparations product lines. The divesting and exit of these three product lines does not meet the criteria to be presented as a discontinued operation on the Consolidated Statements of Earnings.

On June 30, 2020, the Company completed the sale of its inks product line. In 2020, the Company received $11.6 million of net cash and expects to receive additional cash when it completes certain post-closing asset sales.

On September 18, 2020, the Company completed the sale of its yogurt fruit preparations product line for $1.0 million. The sale included an earn-out 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). The Company received $36.3 million of net cash, subject to post-closing working capital and net debt adjustments. In addition, the Company expects to receive additional consideration for the collection of certain retained accounts receivable. As a result of the completion of the sale, the Company recorded a non-cash net loss of $11.3 million for the three months ended June 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.

The assets and liabilities related to the inks and fragrances (excluding its essential oils product line) product lines are recorded in Assets Held for Sale and Liabilities Held for Sale as of December 31, 2020, as follows:

(In thousands)		December 31, 2020
Assets held for sale:
Trade accounts receivable		$	20,722
Inventories			25,045
Prepaid expenses and other current assets			1,843
Property, plant, and equipment, net			3,434
Intangible assets			1,716
Assets held for sale		$	52,760
Liabilities held for sale:
Trade accounts payable		$	13,967
Accrued salaries, wages, and withholdings from employees			1,739
Other accrued expenses			1,633
Liabilities held for sale		$	17,339

The Company reports all costs associated with the divestitures in Corporate & Other. The following table summarizes the divestiture & other related costs for the three months ended June 30, 2021:

(In thousands)		Yogurt Fruit Preparations				Fragrances				Inks				Corporate/ Other				Total
Non-cash impairment charges – Selling and administrative expenses		$	-			$	1,062			$	-			$	-			$	1,062
Non-cash charges – Cost of products sold			-				3				-				-				3
Reclassification of foreign currency translation and related items – Selling and administrative expenses			-				10,193				-				-				10,193
Other costs - Selling and administrative expenses(1)			264				202				(98	)			62				430
Total		$	264			$	11,460			$	(98	)		$	62			$	11,688

The Company reports all costs associated with the divestitures in Corporate & Other. The following table summarizes the divestiture & other related costs for the three months ended June 30, 2020:

(In thousands)		Yogurt Fruit Preparations				Fragrances				Inks				Corporate/ Other				Total
Non-cash impairment charges – Selling and administrative expenses		$	2,386			$	-			$	(86	)		$	-			$	2,300
Non-cash charges – Cost of products sold			1,679				70				-				-				1,749
Reclassification of foreign currency translation and related items – Selling and administrative expenses			-				-				(8,217	)			-				(8,217	)
Other costs - Selling and administrative expenses(1)			518				1,288				194				641				2,641
Total		$	4,583			$	1,358			$	(8,109	)		$	641			$	(1,527	)

The Company reports all costs associated with the divestitures in Corporate & Other. The following table summarizes the divestiture & other related costs for the six months ended June 30, 2021:

(In thousands)		Yogurt Fruit Preparations				Fragrances				Inks				Corporate/ Other				Total
Non-cash impairment charges – Selling and administrative expenses		$	-			$	1,062			$	-			$	-			$	1,062
Non-cash charges – Cost of products sold			-				37				(9	)			-				28
Reclassification of foreign currency translation and related items – Selling and administrative expenses			-				10,193				-				-				10,193
Other costs - Selling and administrative expenses(1)			529				1,216				(205	)			437				1,977
Total		$	529			$	12,508			$	(214	)		$	437			$	13,260

The Company reports all costs associated with the divestitures in Corporate & Other. The following table summarizes the divestiture & other related costs for the six months ended June 30, 2020:

(In thousands)		Yogurt Fruit Preparations				Fragrances				Inks				Corporate/ Other				Total
Non-cash impairment charges – Selling and administrative expenses		$	2,386			$	339			$	9,351			$	-			$	12,076
Non-cash charges – Cost of products sold			1,679				70				-				190				1,939
Reclassification of foreign currency translation and related items – Selling and administrative expenses			-				-				(8,217	)			-				(8,217	)
Other costs - Selling and administrative expenses(1)			586				2,106				296				1,530				4,518
Total		$	4,651			$	2,515			$	1,430			$	1,720			$	10,316

In March 2020, the Company was notified by the buyer of the Company’s fragrances product line that environmental sampling conducted at the Company’s Granada, Spain location had identified the presence of contaminants in soil and groundwater in certain areas of the property. The Company records liabilities related to environmental remediation obligations when estimated future expenditures are probable and the amount of the liability is reasonably estimable. The Company recorded $0.8 million in the three months ended June 30, 2020, based upon an environmental investigation and a quantitative risk assessment performed by a consultant hired by the Company. During the six months ended June 30, 2021, the Company recorded an additional $0.3 million related to these obligations in Selling and Administrative Expenses based on further analysis at the site during the period. As of June 30, 2021, the Company estimates remaining 2021 divestiture & other related costs will not be significant.

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 is combining 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 is centralizing 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.

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. The Company reports all costs and income associated with the Operational Improvement Plan in Corporate & Other.

The following table summarizes the Operational Improvement Plan income and expenses recorded in Selling and Administrative Expenses by segment for the three months ended June 30, 2021:

(In thousands)		Flavors & Extracts				Color				Asia Pacific				Consolidated
Employee separation costs		$	3			$	26			$	(24	)		$	5
Other income(1)			-				(3,624	)			-				(3,624	)
Other costs			-				125				-				125
Total expense (income)		$	3			$	(3,473	)		$	(24	)		$	(3,494	)

(In thousands)		Flavors & Extracts				Color				Asia Pacific				Consolidated
Employee separation costs		$	(16	)		$	80			$	(68	)		$	(4	)
Other income(1)			-				(3,624	)			-				(3,624	)
Other costs(2)			-				1,134				1				1,135
Total expense (income)		$	(16	)		$	(2,410	)		$	(67	)		$	(2,493	)

As of June 30, 2021 and December 31, 2020, the Company recorded $1.6 million and $2.2 million, respectively, of accrued liabilities in Other Accrued Expenses on the Company’s Consolidated Balance Sheet related to this plan. The Company estimates remaining 2021 Operational Improvement Plan costs will be approximately $1 million.

Trade accounts receivables are recorded at their face amount, less an allowance for expected losses on doubtful accounts. The allowance for doubtful accounts is calculated based on customer-specific analysis and an aging methodology using historical loss information. The Company believes historical loss information is a reasonable basis for expected credit losses as the Company’s historical credit loss experience correlates with its customer delinquency status. This information is also adjusted for any known current economic conditions, including the current and expected impact of COVID-19. Currently, the COVID-19 pandemic has not had, and is not anticipated to have, a material impact on trade accounts receivable. Forecasted economic conditions have not had a significant impact on the current credit loss estimate due to the short-term nature of the Company’s customer receivables; however, the Company will continue to monitor and evaluate the rapidly changing economic conditions. Additionally, as the Company only has one portfolio segment, there are not different risks between portfolios. Specific accounts are written off against the allowance for doubtful accounts when the receivable is deemed no longer collectible.

The following tables summarize the changes in the allowance for doubtful accounts during the three and six month periods ended June 30, 2021 and 2020:

(In thousands) Three Months Ended June 30, 2021		Allowance for Doubtful Accounts
Balance at March 31, 2021		$	3,614
Provision for expected credit losses			138
Accounts written off			(20	)
Translation and other activity			17
Balance at June 30, 2021		$	3,749

(In thousands) Three Months Ended June 30, 2020		Allowance for Doubtful Accounts
Balance at March 31, 2020		$	7,027
Provision for expected credit losses			116
Accounts written off			(291	)
Divestiture			(2,174	)
Translation and other activity			212
Balance at June 30, 2020		$	4,890

(In thousands) Six Months Ended June 30, 2021		Allowance for Doubtful Accounts
Balance at December 31, 2020		$	3,891
Provision for expected credit losses			294
Accounts written off			(373	)
Translation and other activity			(63	)
Balance at June 30, 2021		$	3,749

(In thousands) Six Months Ended June 30, 2020		Allowance for Doubtful Accounts
Balance at December 31, 2019		$	6,913
Adoption of ASU 2016-13			853
Provision for expected credit losses			356
Accounts written off			(627	)
Divestiture			(2,174	)
Translation and other activity			(431	)
Balance at June 30, 2020		$	4,890

At June 30, 2021, and December 31, 2020, inventories included finished and in-process products totaling $250.4 million and $268.1 million, respectively, and raw materials and supplies of $109.8 million and $113.2 million, respectively.

On May 5, 2021, the Company entered into a Third Amended and Restated Credit Agreement (Credit Agreement). The Credit Agreement provides for a $350 million senior unsecured revolving credit facility, with up to $20 million of the facility being available as a sub-facility for standby and commercial letters of credit and sub-limits of up to $50 million on swing line loans. The Credit Agreement also (i) terminated the $145 million term loan facility (which had no amounts outstanding), (ii) extended the maturity of the Company’s revolving credit facility from May 2022 to May 2026, and (iii) modified certain other provisions. Funds are available in U.S. dollars, Canadian dollars, Euros, Swiss Francs, and other major currencies. Proceeds from the facility will be used to refinance existing indebtedness of the Company, for working capital, and other general corporate purpose needs of the Company. On May 6, 2021, the Company also amended its note purchase agreements to make substantially conforming changes as were made to the Credit Agreement.

Accounting Standards Codification 820, Fair Value Measurement, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. As of June 30, 2021 and December 31, 2020, the Company’s assets and liabilities subject to this standard are forward exchange contracts. The net fair value of the forward exchange contracts based on current pricing obtained for comparable derivative products (Level 2 inputs) was an asset of $0.7 million and $0.5 million as of June 30, 2021 and December 31, 2020, respectively. The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, and short-term borrowings were approximately the same as the fair values as of June 30, 2021 and December 31, 2020. The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2 inputs). The carrying value of the long-term debt at June 30, 2021 and December 31, 2020, was $483.7 million and $526.9 million, respectively. The fair value of the long-term debt at June 30, 2021 and December 31, 2020, was $507.5 million and $556.1 million, respectively.

The Company evaluates performance based on operating income before divestiture & other related costs, share-based compensation, restructuring and other charges including operational improvement plan costs, interest expense, and income taxes (segment operating income). Total revenue and segment operating income by business segment and geographic region include both sales to customers, as reported in the Company’s Consolidated Statements of Earnings, and intersegment sales, which are accounted for at prices that approximate market prices and are eliminated in consolidation.

The Company determines its operating segments based on information utilized by its chief operating decision maker to allocate resources and assess performance. The Company’s three reportable segments are the Flavors & Extracts and Color segments, which are both managed on a product line basis, and the Asia Pacific segment, which is managed on a geographic basis. The Company’s Flavors & Extracts segment produces flavor and fragrance products that impart a desired taste, texture, aroma, or other characteristic to a broad range of consumers and other products. The Color segment produces natural and synthetic color systems for foods, beverages, pharmaceuticals and nutraceuticals; colors, ingredients, and systems for cosmetics; and specialty inks and technical colors for industrial applications. The Asia Pacific segment is managed on a geographic basis and produces and distributes color and flavor products for the Asia Pacific countries. The Company’s corporate expenses, divestiture & other related costs, share-based compensation, operational improvement plan expenses, and other costs are included in the “Corporate & Other” category.

Divestiture & other related costs and restructuring and other costs, including the operational improvement plan costs, for the three and six months ended June 30, 2021 and 2020, are further described in Note 2, Divestitures, and Note 3, Operational Improvement Plan, and are included in the operating income (loss) results in Corporate & Other below. In addition, the Company’s corporate expenses and share-based compensation are included in Corporate & Other.

Operating results by segment for the periods presented are as follows:

(In thousands)		Flavors & Extracts				Color				Asia Pacific				Corporate & Other				Consolidated
Three months ended June 30, 2021:
Revenue from external customers		$	174,699			$	128,830			$	32,298			$	-			$	335,827
Intersegment revenue			4,702				4,377				19				-				9,098
Total revenue		$	179,401			$	133,207			$	32,317			$	-			$	344,925
Operating income (loss)		$	24,536			$	25,615			$	5,793			$	(20,191	)		$	35,753
Interest expense			-				-				-				3,322				3,322
Earnings (loss) before income taxes		$	24,536			$	25,615			$	5,793			$	(23,513	)		$	32,431
Three months ended June 30, 2020:
Revenue from external customers		$	178,430			$	116,879			$	27,781			$	-			$	323,090
Intersegment revenue			5,181				4,417				92				-				9,690
Total revenue		$	183,611			$	121,296			$	27,873			$	-			$	332,780
Operating income (loss)		$	22,752			$	22,263			$	4,849			$	(7,739	)		$	42,125
Interest expense			-				-				-				3,608				3,608
Earnings (loss) before income taxes		$	22,752			$	22,263			$	4,849			$	(11,347	)		$	38,517

(In thousands)		Flavors & Extracts				Color				Asia Pacific				Corporate & Other				Consolidated
Six months ended June 30, 2021:
Revenue from external customers		$	369,360			$	260,031			$	66,138			$	-			$	695,529
Intersegment revenue			10,952				8,896				19				-				19,867
Total revenue		$	380,312			$	268,927			$	66,157			$	-			$	715,396
Operating income (loss)		$	51,554			$	52,209			$	12,545			$	(33,658	)		$	82,650
Interest expense			-				-				-				6,755				6,755
Earnings (loss) before income taxes		$	51,554			$	52,209			$	12,545			$	(40,413	)		$	75,895
Six months ended June 30, 2020:
Revenue from external customers		$	359,617			$	256,072			$	58,078			$	-			$	673,767
Intersegment revenue			10,492				8,719				244				-				19,455
Total revenue		$	370,109			$	264,791			$	58,322			$	-			$	693,222
Operating income (loss)		$	43,623			$	51,927			$	9,908			$	(28,772	)		$	76,686
Interest expense			-				-				-				7,915				7,915
Earnings (loss) before income taxes		$	43,623			$	51,927			$	9,908			$	(36,687	)		$	68,771

(In thousands)		Flavors & Extracts				Color				Asia Pacific				Consolidated
Three months ended June 30, 2021:
Flavors, Extracts & Flavor Ingredients		$	111,763			$	-			$	-			$	111,763
Natural Ingredients			60,302				-				-				60,302
Fragrances			5,921				-				-				5,921
Yogurt Fruit Preparations			1,415				-				-				1,415
Food & Pharmaceutical Colors			-				94,092				-				94,092
Personal Care			-				38,323				-				38,323
Inks			-				792				-				792
Asia Pacific			-				-				32,317				32,317
Intersegment Revenue			(4,702	)			(4,377	)			(19	)			(9,098	)
Total revenue from external customers		$	174,699			$	128,830			$	32,298			$	335,827
Three months ended June 30, 2020:
Flavors, Extracts & Flavor Ingredients		$	101,642			$	-			$	-			$	101,642
Natural Ingredients			57,227				-				-				57,227
Fragrances			21,077				-				-				21,077
Yogurt Fruit Preparations			3,665				-				-				3,665
Food & Pharmaceutical Colors			-				86,825				-				86,825
Personal Care			-				31,095				-				31,095
Inks			-				3,376				-				3,376
Asia Pacific			-				-				27,873				27,873
Intersegment Revenue			(5,181	)			(4,417	)			(92	)			(9,690	)
Total revenue from external customers		$	178,430			$	116,879			$	27,781			$	323,090

(In thousands)		Flavors & Extracts				Color				Asia Pacific				Consolidated
Six months ended June 30, 2021:
Flavors, Extracts & Flavor Ingredients		$	219,853			$	-			$	-			$	219,853
Natural Ingredients			122,506				-				-				122,506
Fragrances			34,388				-				-				34,388
Yogurt Fruit Preparations			3,565				-				-				3,565
Food & Pharmaceutical Colors			-				187,877				-				187,877
Personal Care			-				79,838				-				79,838
Inks			-				1,212				-				1,212
Asia Pacific			-				-				66,157				66,157
Intersegment Revenue			(10,952	)			(8,896	)			(19	)			(19,867	)
Total revenue from external customers		$	369,360			$	260,031			$	66,138			$	695,529
Six months ended June 30, 2020:
Flavors, Extracts & Flavor Ingredients		$	203,095			$	-			$	-			$	203,095
Natural Ingredients			114,827				-				-				114,827
Fragrances			43,361				-				-				43,361
Yogurt Fruit Preparations			8,826				-				-				8,826
Food & Pharmaceutical Colors			-				177,618				-				177,618
Personal Care			-				74,838				-				74,838
Inks			-				12,335				-				12,335
Asia Pacific			-				-				58,322				58,322
Intersegment Revenue			(10,492	)			(8,719	)			(244	)			(19,455	)
Total revenue from external customers		$	359,617			$	256,072			$	58,078			$	673,767