Sensient Technologies Corporation — Q2 2018 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2018. Sensient makes and sells flavors, fragrances, colors, and related ingredients through its Flavors & Fragrances, Color, and Asia Pacific segments. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $363.0 | $338.5 | $719.5 | $679.9 |
| Gross margin | 33.5% | 35.2% | 34.0% | 35.3% |
| Operating income | $52.2 | $44.4 | $107.9 | $68.4 |
| Operating margin | 14.4% | 13.1% | 15.0% | 10.1% |
| Net earnings | $39.1 | $30.8 | $77.3 | $44.0 |
| Diluted EPS | $0.92 | $0.69 | $1.81 | $0.99 |
| Interest expense | $5.6 | $4.7 | $11.1 | $9.5 |
- Revenue growth: Q2 increased 7.3% (5.7% in local currency); first-half revenue increased 5.8% (2.6% in local currency). Foreign exchange contributed approximately 1.5% and 3.2%, respectively.
- Profitability: Gross margin declined as higher raw-material, manufacturing, and other costs outweighed benefits from volume and mix. GAAP operating income rose substantially year over year, but primarily because 2017 included restructuring and divestiture costs. Excluding those items, adjusted operating income was essentially flat in Q2 ($52.2 million versus $52.3 million) and up 0.3% for the first half ($107.9 million versus $107.6 million). Adjusted diluted EPS increased 5.7% in Q2 and 7.1% for the first half.
- Cash flow: First-half cash used in operations was $28.2 million, compared with $0.8 million provided in 2017. Changes in operating assets and liabilities used $143.5 million. Investing activities provided $56.9 million, including $91.1 million of collections on previously transferred receivables, while capital expenditures were $24.0 million. Financing activities used $28.9 million; cash ended at $30.9 million.
- Liquidity and debt: At June 30, current assets were $825.8 million and current liabilities $198.7 million. Short-term borrowings were $20.0 million and long-term debt was $732.8 million, up from $604.2 million at year-end 2017. The company said it was in compliance with loan covenants and expected operating cash flow and available debt capacity to meet future needs.
- Shareholder returns: The company repurchased $72.7 million of stock in the first quarter and none in the second quarter. First-half dividends paid were $28.2 million; dividends declared were $0.33 per share in Q2.
Material changes and segment performance
- Q2 revenue increased across all segments: Flavors & Fragrances to $198.7 million, Color to $144.3 million, and Asia Pacific to $30.5 million. Color growth reflected higher volumes, favorable currency, and the GlobeNatural acquisition; Flavors & Fragrances growth came primarily from Natural Ingredients and Fragrances.
- Flavors & Fragrances operating income fell 15.8% in Q2 to $24.0 million, with segment margin declining to 12.1% from 15.4%. Management cited lower volumes and product mix in Flavors, and lower selling prices and higher raw-material costs in Natural Ingredients. Color operating income rose 7.1% to $31.1 million; Asia Pacific rose 21.3% to $4.6 million.
- The company acquired GlobeNatural’s natural-color business in Peru in March for $10.8 million. On July 10, after quarter-end, it acquired Mazza Innovation for $20 million in cash.
- In June, the company amended its Wells Fargo receivables program: receivables previously treated as sold are now retained on the balance sheet, with a secured loan of up to $60 million. The full $60 million was drawn at quarter-end; the loan bears interest at LIBOR plus 0.75% and was classified as long-term debt. This increased both reported receivables and debt by $60 million.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described the financial position as strong and said cash flow and available borrowing capacity were expected to fund operations, capital spending, dividends, acquisitions, and repurchases.
- The company’s tax accounting under the 2017 Tax Cuts and Jobs Act remained provisional; final adjustments could be material and were expected no later than Q4 2018. Effective tax rates were 16.1% for Q2 2018 and 22.4% for Q2 2017; first-half rates were 20.1% and 25.3%.
- An Illinois complaint alleges wastewater violations at the Amboy facility in 2015–2016. Sensient disputes the allegations, is defending the matter, and stated that penalties, costs, or settlement were not expected to be material. Other ordinary-course litigation could affect results or cash flows in a particular period.
- Management identified risks including raw-material and energy costs and availability, customer and market changes, competition, foreign exchange, regulatory compliance, credit availability, and litigation. It reported no material changes to previously disclosed risk factors and no material change in market-risk exposure.
- Reported comprehensive income was $2.5 million in Q2 2018 versus $59.2 million in Q2 2017; accumulated other comprehensive loss increased to $162.1 million from $149.3 million at year-end, with foreign-currency translation a major component.
Important facts for investors to verify
- Whether margin pressure from raw materials and manufacturing costs persists, particularly in Flavors & Fragrances.
- How the working-capital outflow and receivables-program amendment affect operating cash conversion and reported debt in later periods.
- The effect of the $60 million secured loan, higher average debt, and interest expense on liquidity and financing costs.
- Final tax effects of the 2017 tax legislation and any resulting adjustments to provisional tax estimates.
- Integration and performance of GlobeNatural and Mazza Innovation, including the post-quarter Mazza acquisition.
- Developments in the Illinois environmental case and any changes to the company’s assessment of potential exposure.