Sensient Technologies Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless otherwise noted. Amounts below are in millions of U.S. dollars, except per-share data.
Business context and results
Sensient makes flavors, extracts, ingredients, and color products. Its reportable segments are Flavors & Extracts, Color, and Asia Pacific. The quarter reflected growth in Flavors & Extracts and Asia Pacific, while Color was pressured by weaker personal-care demand and the inks divestiture.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $359.7 | $350.7 | Up 2.6%; foreign exchange added about 2.7 percentage points. Adjusted revenue, excluding divested/to-be-divested product lines, rose 6.4%. |
| Gross margin | 32.1% | 31.9% | Up 0.2 percentage points. |
| Selling and administrative expense | $68.7 | $77.3 | Down; 19.1% of revenue versus 22.1%. |
| Operating income / margin | $46.9 / 13.0% | $34.6 / 9.9% | Operating income up 35.7%; lower divestiture-related costs were a major contributor. |
| Net earnings | $31.7 | $20.8 | Up 52.4%. |
| Diluted EPS | $0.75 | $0.49 | Up 53.1%; adjusted diluted EPS was $0.77 versus $0.72, up 6.9%. |
| Interest expense / effective tax rate | $3.4 / 27.1% | $4.3 / 31.3% | Lower interest expense reflected lower average debt and rates; tax rates reflected prior-year foreign-tax estimates and earnings mix. |
| Operating cash flow | $29.0 | $36.9 | Down, primarily due to increased cash use in working capital. |
| Capital expenditures | $14.2 | $9.4 | Higher year over year. |
| Cash and debt at March 31, 2021 | $28.0 cash; $524.2 long-term debt; $6.1 short-term borrowings | At December 31, 2020: $24.8 cash; $518.0 long-term debt; $9.2 short-term borrowings | Total reported borrowings were approximately $530.3 versus $527.3. |
Cash increased $3.2 during the quarter. Financing included $21.5 of additional borrowings, $9.0 of debt payments, $11.7 of treasury-stock purchases, and $16.5 of dividends paid. The declared dividend remained $0.39 per share. Comprehensive income was $16.5 versus a comprehensive loss of $23.6 in Q1 2020, reflecting a smaller other comprehensive loss, principally currency-related.
Segment performance
- Flavors & Extracts: Segment revenue was $200.9, up about 8%; segment operating income was $27.0, up about 30%. Higher volumes and lower manufacturing costs supported results.
- Color: Segment revenue was $135.7, down about 5%; segment operating income was $26.6, down about 10%. Food and pharmaceutical colors grew, but Personal Care was affected by weaker makeup demand and inks had been divested.
- Asia Pacific: Segment revenue was $33.8, up about 11%; segment operating income was $6.8, up about 34%, primarily on higher volumes.
Material changes, outlook, and risks
- On April 1, 2021, Sensient completed the sale of its fragrances product line, excluding essential oils. It had received $4.1 before quarter-end and estimated approximately $32 of additional net cash proceeds in Q2, subject to post-closing adjustments; $4.7 was subject to environmental-related escrow conditions. The company expected a non-cash loss of approximately $12 in Q2, mainly from reclassifying accumulated foreign-currency translation items. The sale was subsequent to the reporting date.
- Management estimated 2021 divestiture and related costs of $13–$14, including the expected Q2 non-cash loss, and expected remaining exit activities to be completed in 2021. The operational improvement plan is expected to cost $5–$6 in total for 2020 and 2021; Q1 2021 costs were $1.0.
- COVID-19 continued to create demand uncertainty: food, beverage, and pharmaceutical product demand was generally strong, while cosmetics and some quick-service-restaurant-related products remained softer. All production facilities were operating at filing time; no significant Q1 supply disruptions were reported. Management cautioned that pandemic effects, variants, customer behavior, raw-material availability and costs, logistics, currency movements, and other risks could materially affect results.
- Management said the financial position remained strong, the company was complying with loan covenants, and operating cash flow and available debt capacity were expected to meet anticipated needs, including capital expenditures, debt maturities, dividends, and repurchases. No quantitative full-year earnings or revenue guidance was provided in the supplied filing text.
- Environmental remediation at the Granada, Spain site remains relevant to the fragrance sale and escrow. The filing also describes California wage-related class and representative actions; outcomes are uncertain. Management did not believe other claims would materially affect financial position, but noted actual outcomes could affect results or cash flows in a period.
Important facts for investors to verify
- Confirm final fragrance-sale proceeds, post-closing adjustments, release conditions for the $4.7 escrow, and the timing and amount of the expected approximately $12 non-cash loss.
- Track whether growth and margin improvement persist after adjusting for foreign exchange, divestitures, and one-time costs; Color and personal-care demand were weaker.
- Monitor operating cash conversion, working-capital movements, capital spending, and debt levels, alongside management’s covenant-compliance and liquidity statements.
- Review the progress and cost of the operational improvement plan, environmental remediation obligations, and litigation developments; the filing does not state a clear quantified range for potential litigation losses.