Sensient Technologies Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Dollar amounts are in millions, except per-share data. The company makes flavors and extracts, colors, and related products; its reportable segments are Flavors & Extracts, Color, and Asia Pacific.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $335.8 | $323.1 | $695.5 | $673.8 |
| Gross margin | 33.2% | 31.6% | 32.7% | 31.8% |
| Operating income | $35.8 | $42.1 | $82.7 | $76.7 |
| Operating margin | 10.6% | 13.0% | 11.9% | 11.4% |
| Net earnings | $25.9 | $30.6 | $57.6 | $51.4 |
| Diluted EPS | $0.61 | $0.72 | $1.36 | $1.21 |
- Q2 GAAP revenue rose 3.9%; management reported foreign exchange added about 4.4 percentage points to consolidated revenue growth. Excluding divested product lines, revenue increased 13.1% on a reported basis and 9.1% on an adjusted local-currency basis.
- Q2 GAAP operating income fell 15.1% and diluted EPS fell 15.3%. Management attributed the lower operating margin chiefly to divestiture-related charges, partly offset by operational-improvement-plan income. Adjusted operating income increased 10.3% and adjusted diluted EPS increased 12.9%.
- For the first half, GAAP revenue increased 3.2%, operating income 7.8%, net earnings 12.1%, and diluted EPS 12.4% year over year. Adjusted local-currency revenue growth was 6.4%.
- Q2 segment results: Flavors & Extracts operating income was $24.5 million, up about 8%; Color was $25.6 million, up about 15%; Asia Pacific was $5.8 million, up about 20%. Flavors & Extracts revenue was affected by the fragrance and yogurt fruit preparations divestitures.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $89.3 million, down from $107.6 million. Capital expenditures were $25.6 million, versus $21.4 million; operating cash flow less capital expenditures was $63.7 million.
- Investing activities provided $10.6 million, including $36.3 million of proceeds from divestitures. Financing activities used $92.7 million, including $62.6 million of debt payments, $22.5 million of share repurchases, and $33.0 million of dividends paid.
- At June 30, cash was $33.3 million; current assets were $708.1 million and current liabilities $196.4 million. Long-term debt was $483.2 million and short-term borrowings $0.8 million. The filing reports long-term debt carrying value, including current maturities, of $483.7 million.
- On May 5, the company extended its $350 million unsecured revolving credit facility maturity from May 2022 to May 2026 and terminated an undrawn $145 million term loan facility. Management said the company was in compliance with loan covenants and expected operating cash flow and available debt capacity to meet anticipated needs.
- The quarterly dividend declared was $0.39 per share, unchanged from the prior-year quarter. Cash and cash equivalents increased from $24.8 million at year-end 2020 to $33.3 million at June 30, 2021.
Material changes, outlook, and risks
- The fragrance product line sale closed April 1 for $36.3 million net cash, subject to post-closing adjustments; the company also expects proceeds from collection of retained receivables. The sale generated an $11.3 million non-cash net loss, primarily from reclassifying foreign-currency translation amounts. The inks and yogurt fruit preparations lines had been sold in 2020.
- The Q2 results included $11.7 million of divestiture and related costs and $3.5 million of operational-improvement-plan income. The latter primarily reflected a $3.6 million gain from negotiated early termination of a New Jersey lease. Management estimated about $1 million of remaining 2021 operational-improvement-plan costs; it expected remaining 2021 divestiture-related costs to be insignificant.
- Management gave no specific full-year revenue or earnings guidance in the provided filing text. It said food and beverage demand remained strong, while cosmetics and some quick-service-restaurant-related demand remained softer. All production facilities were operating; the company reported no significant COVID-19-related supply disruptions in the period, but flagged uncertainty from the pandemic, variants, supply and transportation availability, raw-material costs, currency movements, and customer demand.
- Management said inflation’s impact had been minimal and was not expected to significantly affect 2021 results. These statements are forward-looking and subject to risks; the company cautioned that pandemic and economic effects remain difficult to predict.
- On July 15, 2021, after quarter-end, the company acquired substantially all assets of Flavor Solutions, Inc. for $15 million cash, including approximately $1.1 million held back for potential indemnification claims. The business will join Flavors & Extracts.
- Contingencies include California employment-related class and representative actions involving Sensient Natural Ingredients. The company said it intends to defend its interests; it stated other claims were not expected to have a material adverse effect on financial position based on information then available, while noting outcomes could affect results or cash flows in a particular period. Environmental remediation obligations at a former fragrances-product-line site in Granada, Spain, remain under review.
Important facts for investors to verify
- How much of reported growth reflects underlying volumes and pricing versus foreign exchange and the removal of divested businesses; compare GAAP with the company’s non-GAAP adjusted measures.
- Whether segment growth and margins persist, particularly given the softer cosmetics and quick-service-restaurant-related demand and higher raw-material costs noted by management.
- The recurring earnings impact of divestiture charges, the lease-termination gain, and other operational-improvement costs, and the final proceeds and adjustments from completed divestitures.
- Debt maturities, facility availability, covenant headroom, and cash requirements after the Flavor Solutions acquisition, dividends, capital spending, and repurchases.
- Developments in the California employment cases and the Granada environmental remediation estimate; the filing does not provide a clear quantified estimate of potential loss for the employment cases.