Sensient Technologies Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Sensient is a global manufacturer of colors, flavors, and fragrances, with reportable Flavors & Fragrances, Color, and Asia Pacific segments.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1,362.3 million | $1,383.2 million |
| Gross profit / margin | $475.5 million / 34.9% | $475.4 million / 34.4% |
| Operating income / margin | $167.8 million / 12.3% | $185.6 million / 13.4% |
| Net earnings | $89.6 million | $126.3 million |
| Diluted EPS from continuing operations | $2.03 | $2.74 |
| Adjusted diluted EPS, non-GAAP | $3.42 | $3.21 |
| Cash from operations | $180.5 million | $222.5 million |
| Capital expenditures | $56.3 million | $81.2 million |
Fourth-quarter 2017 revenue was $328.9 million, gross profit was $112.6 million, net earnings were $13.4 million, and diluted EPS was $0.31. The corresponding fourth-quarter 2016 figures were $330.2 million, $112.6 million, $31.4 million, and $0.70.
At year-end, cash was $29.3 million, current assets $733.5 million, and current liabilities $216.3 million. Long-term debt was $604.2 million and short-term borrowings were $20.1 million, for total debt of approximately $624.3 million. The company reported $296.4 million available under its revolving credit facility and $66.8 million under other bank lines, and stated it was compliant with loan covenants.
Changes versus 2016
- Revenue declined 1.5%; management reported a 2.0% decline on a local-currency basis. Flavors & Fragrances revenue fell 6.1%, while Color revenue grew 4.4% and Asia Pacific revenue grew 1.6%.
- GAAP operating income fell 9.6%, and continuing-operations diluted EPS fell 25.9%. Results included $48.1 million of restructuring and other costs and an $18.4 million provisional tax charge related to 2017 tax legislation.
- Excluding restructuring and other costs and the tax-law charge, adjusted operating income increased 2.0%, adjusted net earnings increased 4.5%, and adjusted diluted EPS increased 6.5% (all non-GAAP measures).
- Operating cash flow declined by $42.0 million, which management attributed primarily to higher working-capital balances, tax-payment timing, and the receivables securitization program. Inventory increased to $463.5 million from $404.3 million.
- Flavors & Fragrances operating income decreased to $114.3 million from $124.1 million; Color increased to $113.4 million from $105.8 million; Asia Pacific declined to $20.8 million from $23.6 million.
Outlook, commentary, risks, and unusual items
- Management estimated a 2018 effective tax rate of 24%–25% before discrete items. The 2017 tax-law impact of $18.4 million is provisional; the final amount could differ, potentially materially, with adjustments expected no later than the fourth quarter of 2018.
- The 2014 restructuring plan was completed by year-end 2017. The company expected no restructuring costs in 2018 and forecast an additional $4–$5 million in savings that year; it had realized approximately $22 million in cumulative savings by year-end 2017.
- In 2017, the company sold its European Natural Ingredients business for a nominal amount and recorded a non-cash loss of approximately $21.6 million. It also sold a Strasbourg facility and related business lines for approximately $12.5 million, recording additional non-cash losses of about $11.6 million in 2017.
- The company announced an acquisition of a natural food-colorings business in Lima, Peru, anticipated to close in the first quarter of 2018. The filing does not provide a purchase price.
- Key stated risks include restructuring savings falling short, foreign-exchange movements, commodity and energy costs or supply interruptions, customer concentration in certain product lines, competitive and pricing pressure, product safety and recalls, regulation, international operating risks, and cybersecurity or IT disruptions.
- An informal SEC Division of Enforcement inquiry, received in 2015, concerned restructuring disclosures, long-lived asset accounting, and non-GAAP measures. The company said it was cooperating and could not predict the outcome or potential impact. Other ordinary-course claims were not expected by management to materially affect the consolidated financial statements.
- The company increased its annualized dividend rate to $1.32 per share in late 2017, repurchased $87.2 million of stock during the year, and authorized repurchases of up to three million additional shares. Its financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the provisional $18.4 million tax-law charge and the stated 2018 tax-rate outlook were finalized or revised.
- Whether the expected $4–$5 million of 2018 restructuring savings were realized, given delays in facility consolidation and limited savings in 2017.
- Whether working-capital and inventory growth reversed, and how operating cash flow developed after its 2017 decline.
- How the SEC inquiry was resolved and whether any further comments or actions followed.
- The closing terms and financial contribution of the announced Peru acquisition, and the effects of the completed divestitures on continuing revenue and margins.
- Debt maturities, refinancing plans, covenant headroom, and the ongoing use and impact of the receivables securitization program.