Sensient Technologies Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial amounts below are rounded to millions unless noted. Sensient makes flavors, extracts, natural ingredients, colors, and related products through its Flavors & Extracts, Color, and Asia Pacific segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $361.1m | $344.3m | $1,088.3m | $1,039.8m |
| Operating income | $47.5m | $47.0m | $155.5m | $129.6m |
| Net earnings | $36.0m | $33.9m | $111.8m | $91.5m |
| Diluted EPS | $0.85 | $0.80 | $2.65 | $2.16 |
| Gross margin | 33.7% | 33.4% | 34.7% | 32.9% |
| Operating margin | 13.2% | 13.6% | 14.3% | 12.5% |
- Q3 revenue grew 4.9% reported; management’s adjusted local-currency measure showed 9.9% growth. For the nine months, reported growth was 4.7%, versus 11.0% adjusted local-currency growth. Foreign exchange reduced consolidated revenue by about 4% in Q3 and 3% year to date.
- Management attributed revenue and earnings improvement mainly to higher selling prices and, in several product lines, higher volumes. Pricing and volume benefits supported gross margin, while higher input costs and unfavorable product mix weighed on results.
- Q3 operating income rose 1.1%, but operating margin declined 0.4 percentage points. Nine-month operating income increased 20.0%; this comparison also benefited from the absence of prior-year divestiture and operational-improvement costs.
- Segment revenue and operating income for Q3 were: Flavors & Extracts $187.0m and $26.3m; Color $151.5m and $28.2m; Asia Pacific $35.2m and $7.0m. Color and Asia Pacific revenue increased; Flavors & Extracts growth was modest and included lower Natural Ingredients revenue.
Cash flow, liquidity, and debt
- Cash from operations was $14.9m for the first nine months, down from $116.1m a year earlier. The main driver was a $112.0m cash use from inventory, as Sensient built inventory to support demand and address supply-chain challenges.
- Capital expenditures were $51.7m, compared with $37.6m in the prior-year period. Investing cash outflow was $51.7m, versus $13.1m in 2021, when the company received $36.8m from divestitures.
- Financing provided $46.3m, including $187.7m of additional borrowings and $87.7m of debt payments. Sensient paid $51.7m in dividends and made no share repurchases in 2022. Cash ended the period at $46.6m.
- At September 30, cash was $46.6m, current assets $880.7m, and current liabilities $255.4m. Short-term borrowings were $21.9m and long-term debt $547.2m. Long-term debt had a disclosed fair value of $539.1m. The company said it was in compliance with loan covenants and expected operating cash flow and available debt capacity to meet anticipated needs.
- An August 2022 amendment increased the receivables-purchase facility from $30m to $85m and extended maturity to August 31, 2023; it also changed the benchmark rate from LIBOR to SOFR. Sensient reported various notes maturing from 2022 to 2027 and a revolving credit facility maturing in 2026.
Material changes, outlook, and risks
- Inventory increased to $501.4m from $411.6m at year-end 2021; receivables rose to $287.2m from $261.1m. Management linked inventory investment to demand and supply-chain risk.
- Management said pricing and other actions had kept inflation from materially affecting reported results through September, and expected inflation not to significantly affect the remainder of 2022. It cautioned that persistent or broader inflation could pressure profitability. No specific earnings or revenue guidance was provided in the supplied filing text.
- The filing cites risks from supply-chain constraints, input, energy, shipping and labor costs, foreign-exchange movements, COVID-19 uncertainty, the Russia-Ukraine conflict, customer acceptance of price increases, and general economic conditions. Management said production facilities were operating and demand for many products remained strong.
- There were no divestiture-related or operational-improvement-plan costs in the 2022 periods. The 2021 nine-month results included $13.5m of divestiture-related costs and $2.0m of operational-improvement-plan income; these items affect comparisons.
- On October 3, 2022, after quarter-end, Sensient acquired Turkish natural-colors businesses for $23.7m cash, net of $1.3m debt assumed; $2.0m was held back for working-capital adjustment and potential indemnification claims. A $0.41 per-share dividend was announced October 20, payable December 1, 2022.
- Sensient described California wage-and-hour and representative-action litigation involving Sensient Natural Ingredients. It said it intended to defend the cases and, in light of legal developments, did not consider them material or expect any resulting liabilities to have a material adverse effect. The filing also discusses environmental remediation obligations at its Granada, Spain site; the supplied text does not provide a clear current reserve amount.
Important facts for investors to verify
- Whether inventory levels convert to cash and whether operating cash flow recovers after the unusually large inventory build.
- Whether price increases continue to offset input-cost inflation without hurting volumes or product mix, and how foreign-exchange movements affect reported growth.
- Debt maturities, borrowing costs, covenant headroom, and Sensient’s capacity to fund capital spending, dividends, and acquisitions.
- Integration and performance of the Endemix acquisition, and the final working-capital and indemnification adjustments.
- Developments in the California litigation and Granada environmental remediation, including any change in estimated exposure or materiality.