Sensient Technologies Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and results
Sensient develops and manufactures flavors, extracts, colors and related ingredients. Its reportable segments are Flavors & Extracts, Color, and Asia Pacific. The company completed the sale of its fragrances product line (excluding essential oils) in April 2021 and acquired Flavor Solutions, Inc. in July 2021.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $344.3 million | $323.6 million | $1,039.8 million | $997.3 million |
| Operating income | $47.0 million | $41.2 million | $129.6 million | $117.8 million |
| Net earnings | $33.9 million | $32.9 million | $91.5 million | $84.3 million |
| Diluted EPS | $0.80 | $0.78 | $2.16 | $1.99 |
| Gross margin | 33.4% | 32.7% | 32.9% | 32.1% |
| Operating margin | 13.6% | 12.7% | 12.5% | 11.8% |
Q3 revenue rose 6.4% and operating income 14.1% year over year, while net earnings rose 3.0%. For the nine-month period, revenue increased 4.3%, operating income 10.0%, and net earnings 8.6%. Foreign exchange increased reported revenue by approximately 1% in Q3 and 3% year to date. Excluding divested product lines, adjusted revenue growth was 14.2% in Q3 and 11.2% year to date; adjusted local-currency revenue growth was 13.0% and 8.6%, respectively. These are non-GAAP measures.
Q3 effective tax rate was 22.8%, versus 12.6% a year earlier; the company attributed the year-over-year change to tax estimates, valuation allowances, enacted tax rates, audit settlements, and the mix of foreign earnings. Year-to-date rates were 23.6% and 20.8%. Lower interest expense partly reflected lower average debt outstanding.
Segments and material changes
- Flavors & Extracts: Q3 segment revenue was $181.7 million, down about 1%, while operating income increased about 6% to $25.2 million. Growth in flavors and natural ingredients, including higher volumes and pricing, was offset in revenue by the fragrances and yogurt fruit preparations divestitures. Year-to-date revenue increased about 2% and operating income about 14%.
- Color: Q3 revenue increased about 20% to $139.2 million and operating income about 16% to $27.3 million, mainly on higher volumes in food/pharmaceutical colors and personal care. Year-to-date revenue increased about 7% and operating income about 5%.
- Asia Pacific: Q3 revenue rose about 9% to $33.4 million and operating income about 8% to $6.6 million, primarily due to higher volumes. Year-to-date revenue and operating income rose about 12% and 19%, respectively.
Management cited higher volumes and selling prices as contributors to growth, with higher raw-material and manufacturing costs offsetting some segment gains. Q3 gross-margin improvement was attributed primarily to higher Color volumes. The year-to-date improvement reflected higher Flavors & Extracts volumes and prior-year divestiture-related costs.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $116.1 million, down from $142.9 million, primarily because of working-capital changes. Capital expenditures were $37.6 million, compared with $34.0 million.
- Investing cash outflow was $13.1 million. It included $36.8 million of divestiture proceeds and $13.9 million paid for Flavor Solutions.
- Financing cash outflow was $93.5 million, including $67.5 million of debt payments, $31.5 million of share repurchases, and $49.5 million of dividends paid. Net debt decreased $11.9 million, excluding foreign-exchange effects.
- At September 30, cash was $32.9 million; current assets were $739.0 million and current liabilities $224.4 million. Long-term debt was $490.9 million and short-term borrowings $10.5 million. Long-term debt carrying value including current maturities was $491.4 million; its estimated fair value was $512.1 million.
- In May, Sensient extended its $350 million revolving credit facility maturity to May 2026. Management reported compliance with loan covenants and said operating cash flow and available debt capacity were expected to meet anticipated needs, including capital expenditures, dividends, acquisitions and repurchases.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said demand remained strong in many food and beverage product lines, while cosmetics and some quick-service-restaurant-related lines remained softer. It cautioned that COVID-19’s future effects are difficult to predict.
- Management reported facilities operating and no significant COVID-related supply disruptions during the periods, but warned that pandemic developments, logistics, raw-material availability and costs, and customer demand remain uncertain. It said inflation’s impact had been minimal and was not expected to significantly affect 2021 results.
- A new risk disclosure concerns possible energy interruptions: a natural-gas pipeline serving the St. Louis facility could cease operations after December 13, 2021, and the Guangzhou facility faced intermittent electricity restrictions amid coal shortages. Potential disruptions or inability to find alternatives could adversely affect operations.
- The fragrances sale generated $36.3 million net cash and a non-cash net loss of $11.3 million for the nine-month period, primarily from foreign-currency translation reclassification. Total nine-month divestiture and related costs were $13.5 million. The Flavor Solutions acquisition cost $14.9 million, including approximately $1.0 million held back for potential indemnification claims.
- Several California wage-and-hour and representative-action matters involving Sensient Natural Ingredients are pending; the company says it intends to defend them. It also recorded an additional $0.3 million in 2021 for environmental remediation at its former Granada, Spain site. Management said other claims were not expected to materially affect financial position, although outcomes could affect results or cash flows in a particular period.
- Comprehensive income was $18.7 million in Q3, down from $51.2 million, despite higher net earnings; the quarter included a $15.2 million other comprehensive loss, principally reflecting foreign-currency items.
- The October 1, 2021 amendment to the receivables securitization program reduced the facility limit from $65 million to $30 million, with a possible one-time increase of up to $35 million at Wells Fargo’s discretion, and extended the termination date to October 1, 2022. The company announced a $0.41-per-share quarterly dividend payable December 1, 2021.
Important facts for investors to verify
- Whether volume and pricing gains can offset raw-material, energy, and logistics cost pressures, and whether recent segment growth persists.
- The effects of divestitures and the Flavor Solutions acquisition on comparable growth, margins, and future results; distinguish GAAP results from management’s adjusted non-GAAP measures.
- Operating cash flow and working-capital trends, capital spending, debt levels, and the company’s ability to fund dividends and repurchases while maintaining covenant compliance.
- Whether the St. Louis gas supply and Guangzhou electricity restrictions disrupt operations, and how COVID-19, supply-chain, and demand conditions evolve.
- Developments in the California litigation and Granada environmental remediation, including any changes to expected costs or contingencies.