Sensient Technologies Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Amounts below are in U.S. dollars.
Business context and results
Sensient supplies flavors, fragrances, colors, and related ingredients. Consolidated revenue increased 4.4% to $356.5 million, but foreign exchange contributed approximately 4.9 percentage points; revenue declined 0.5% on a local-currency basis.
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $356.5 million | $341.4 million | +4.4% |
| Gross margin | 34.5% | 35.4% | Lower mainly from higher raw-material, manufacturing, and other costs |
| Operating income | $55.7 million | $24.0 million | +131.6%; prior-year restructuring and other costs materially depressed GAAP results |
| Operating margin | 15.6% | 7.0% | Prior-year restructuring and other costs reduced margin by 920 basis points |
| Net earnings | $38.2 million | $13.2 million | +189.5% |
| Diluted EPS | $0.89 | $0.30 | Adjusted diluted EPS was $0.89 vs. $0.82, up 8.5% |
| Interest expense | $5.6 million | $4.8 million | Higher average debt and interest rates |
| Effective tax rate | 23.8% | 31.4% | 2018 rate affected by U.S. tax legislation and other tax items |
Management’s non-GAAP comparison excludes $31.3 million of 2017 restructuring and other costs before tax. On that basis, adjusted operating income increased 0.7% as reported (down 4.2% in local currency), and adjusted net earnings rose 4.3%. The 2017 costs included restructuring and expenses related to the Strasbourg divestiture.
Segments and material changes
- Flavors & Fragrances: Segment revenue was $188.3 million, up about 1%; segment operating income fell 12% to $25.3 million. Management cited weaker Flavors and Natural Ingredients performance, including raw-material costs, selling prices, volume, and mix.
- Color: Segment revenue rose about 10% to $147.2 million and operating income rose about 11% to $33.7 million, supported by Cosmetics and Food & Beverage Colors.
- Asia Pacific: Revenue increased about 2% to $30.3 million, while operating income declined about 5% to $4.9 million, primarily from higher manufacturing and other costs.
- Corporate & Other: Operating loss narrowed to $8.2 million from $40.1 million, mainly because 2017 included restructuring and divestiture-related costs and higher performance-based executive compensation.
- On March 9, Sensient acquired GlobeNatural’s natural-color business and certain net assets for $10.5 million cash. It was included in Color. Purchase-price allocation was incomplete; the company expected to finish identifying intangible assets in Q3 2018.
Cash flow, liquidity, and debt
- Operating cash flow was $18.3 million, down from $31.2 million, mainly due to higher working-capital balances. The company reclassified cash receipts on sold receivables from operating to investing activities under a newly adopted accounting standard.
- Investing activities used $13.8 million, including $11.1 million of capital expenditures and $11.0 million for business acquisitions. Financing activities used $9.6 million, including $72.7 million of share repurchases and $14.3 million of dividends, offset in part by $92.3 million of additional borrowings.
- Cash and equivalents were $30.4 million at quarter-end. Current assets were $761.9 million and current liabilities $203.2 million. Short-term borrowings were $20.2 million and long-term debt $691.3 million; debt therefore totaled about $711.5 million before cash.
- Net debt increased $80.1 million during the quarter, excluding foreign-exchange effects. The company said it was in compliance with loan covenants and expected operating cash flow and available debt capacity to fund operations, capital spending, dividends, acquisitions, and repurchases.
- The accounts-receivable securitization program has a $60 million commitment. Receivables sold totaled $99.2 million at March 31, 2018; the reported deferred purchase-price receivable was $39.2 million.
Outlook, risks, and unusual items
- Management expected the 2018 effective tax rate to be 22%–25%. Tax effects of the 2017 Tax Cuts and Jobs Act remained provisional and could change, possibly materially; any adjustments were to be recorded no later than Q4 2018.
- The filing provides no broader quantified revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Risks highlighted include raw-material and energy costs and availability, foreign exchange, competition, market and customer changes, product acceptance and pricing, regulation, litigation, and execution of growth and productivity initiatives.
- Ordinary-course claims and litigation were not expected by management to have a material adverse effect on financial position, though outcomes could affect results or cash flows in a period. The SEC Division of Enforcement confirmed on April 16, 2018 that it had closed its informal inquiry.
- Revenue-recognition guidance adopted in the quarter did not affect revenue recognized. The company also adopted other accounting standards, including a change to cash-flow classification for certain receivable-sale proceeds; adoption of the lease standard was still being evaluated.
- There were no restructuring and other costs in Q1 2018. Q1 2017 included the Strasbourg business-line and facility sale, $12.5 million of proceeds, and an approximately $11.0 million non-cash loss.
Important facts for investors to verify
- Whether underlying local-currency revenue and adjusted operating-income trends improve, particularly in Flavors & Fragrances and Asia Pacific.
- Whether margin pressure from raw-material and manufacturing costs persists, and how much reported growth continues to depend on foreign exchange.
- Final purchase-price allocation and subsequent performance of the GlobeNatural acquisition.
- Working-capital needs, receivables securitization activity, debt growth, and the funding of share repurchases and dividends.
- Final tax effects of the 2017 tax legislation and whether the expected 22%–25% tax rate is achieved.