Sensient Technologies Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Dollar amounts are in millions except per-share data. Comparisons are with Q1 2019 unless otherwise noted.
Business context and results
Sensient makes colors, flavors, fragrances and other specialty ingredients. It reported three segments: Flavors & Fragrances, Color, and Asia Pacific. The company is pursuing sales of its inks, fragrances (excluding essential oils), and yogurt fruit preparations product lines.
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $350.7 | $347.5 | +0.9%; foreign exchange reduced revenue by about 2% |
| Gross margin | 31.9% | 33.2% | Lower, mainly from higher natural-ingredients raw-material costs and unfavorable mix |
| Operating income / margin | $34.6 / 9.9% | $49.4 / 14.2% | Down 30.1%; includes divestiture and related costs |
| Interest expense | $4.3 | $5.4 | Lower, primarily due to lower average debt |
| Net earnings | $20.8 | $32.8 | Down 36.7% |
| Diluted EPS | $0.49 | $0.78 | Down 37.2% |
| Effective tax rate | 31.3% | 25.5% | Rates affected by prior-year tax estimates, audit settlements and foreign earnings mix |
Management’s non-GAAP adjusted results, excluding divestiture product lines and related costs, were revenue of $314.1 million, operating income of $45.0 million, net earnings of $30.6 million and diluted EPS of $0.72. Adjusted revenue declined 1.8% as reported, while adjusted local-currency revenue increased 3.1%; adjusted diluted EPS decreased 7.7%. These company-defined measures are supplemental, not GAAP results.
Cash flow, balance sheet and liquidity
- Operating cash flow was $36.9 million, versus $23.4 million; management attributed the increase to $14.3 million less cash used in working capital.
- Investing activities used $4.9 million, including $9.4 million of capital expenditures; financing activities used $18.2 million, including $16.5 million of dividends paid. Cash increased $1.9 million to $23.1 million.
- At March 31, cash was $23.1 million; current assets were $764.7 million and current liabilities $200.6 million. Long-term debt was $589.3 million and short-term borrowings $20.1 million.
- Shareholders’ equity was $842.7 million, down from $881.6 million at year-end, including a $44.4 million quarterly other comprehensive loss, primarily reflecting foreign-currency translation.
- The company said it was in compliance with loan covenants and expected operating cash flow and available debt capacity to meet operating, capital expenditure, debt maturity and dividend needs. No off-balance-sheet arrangements were reported.
Material changes, outlook and risks
- Segment performance: Flavors & Fragrances revenue rose about 2%, but operating income fell about 10%, partly due to production and inventory-reduction timing. Color revenue was approximately flat and operating income declined about 2%; lower Personal Care demand, including reduced makeup demand amid COVID-19, was partly offset by Food & Beverage Colors. Asia Pacific revenue rose about 7% and operating income about 20%, mainly on higher volumes.
- COVID-19: Management said food-, beverage- and pharmaceutical-related demand remained strong, while cosmetics and some quick-service-restaurant-related demand softened. Facilities in China and India temporarily suspended operations earlier in the quarter; all facilities were operating at filing time. The company reported no significant supply disruption, increased some key-material inventories, and estimated COVID-response incremental expense below $3 million at the then-current projected run rate.
- Management said it continued to believe it would achieve its projected earnings guidance, but the filing provides no clear numerical guidance. It warned that pandemic effects on demand, operations, supply, logistics and the economy remained uncertain.
- Divestiture charges and contingencies: Q1 included $9.7 million of non-cash impairment charges and $2.1 million of other divestiture/exit costs. The company estimated $7–$10 million of total 2019–2020 cash costs for the planned divestitures, excluding possible environmental remediation. A potential buyer identified soil and groundwater contaminants at the Granada, Spain site; assessment was delayed by COVID-19 and potential remediation costs could not be estimated. At closing, the company anticipated a $6–$8 million non-cash gain related to currency translation reclassification for inks and a $10–$12 million non-cash charge for fragrances.
- After quarter-end, the board approved the yogurt fruit preparations sale; the company estimated a further $7–$9 million non-cash impairment and expected the sale and exit activities within 2020. It also announced a $0.39-per-share dividend payable June 1, 2020.
- The company disclosed a California wage-statement class action concerning overtime reporting; it stated that the complaint did not allege unpaid overtime and said it intended to defend its interests. Other ordinary-course claims were not expected by management to materially affect financial position, though outcomes could affect results or cash flows.
Most important facts for investors to verify
- Whether the company met its stated earnings guidance and how COVID-19 affected demand, production, supply costs and cash collection after Q1.
- Progress, closing terms and final proceeds/costs for the inks, fragrances and yogurt fruit preparations divestitures, including final impairment and currency-translation impacts.
- The results of the Granada environmental investigation, any required remediation, and the eventual cost and timing.
- Whether margins and adjusted earnings recover, given the Q1 gross-margin decline and segment-level performance differences.
- Debt, covenant headroom, cash generation and dividend capacity as pandemic conditions and divestiture plans evolve.