Sensient Technologies Corporation — Q1 2019 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2019, compared with Q1 2018. Sensient operates in Flavors & Fragrances, Color, and Asia Pacific. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $347.5 million | $356.5 million | Down 2.5% |
| Gross margin | 33.2% | 34.5% | Down 1.3 percentage points |
| Operating income | $49.4 million | $55.7 million | Down 11.2% |
| Operating margin | 14.2% | 15.6% | Down 1.4 percentage points |
| Net earnings | $32.8 million | $38.2 million | Down 14.1% |
| Diluted EPS | $0.78 | $0.89 | Down 12.4% |
| Interest expense | $5.4 million | $5.6 million | Down |
| Operating cash flow | $23.4 million | $(18.7) million | Improved |
Management attributed lower gross margin primarily to higher manufacturing costs as a percentage of revenue, reflecting lower volumes and higher raw-material costs. Foreign exchange reduced consolidated revenue by approximately 3.3%; on a local-currency basis revenue increased 0.8%.
Segments and material changes
- Flavors & Fragrances: Segment revenue was $183.6 million, down about 3%; operating income was $23.1 million, down about 9%. Lower Flavors and Natural Ingredients results outweighed higher Fragrances revenue.
- Color: Segment revenue was $143.9 million, down about 2%; operating income was $30.2 million, down about 10%. Lower Cosmetics revenue and income were partly offset by Food & Beverage Colors.
- Asia Pacific: Revenue was $28.5 million, down about 6%; operating income was $4.2 million, down about 13%, primarily reflecting lower volumes and foreign exchange.
- Reported segment results include a change in classification: Mazza Innovation, acquired in July 2018, moved from Corporate & Other to Color beginning in Q1 2019; 2018 segment results were restated for comparison.
- Revenue declined across the company, while segment operating income also fell. Management cited volume, cost, pricing, mix, and currency effects that varied by product line and region.
Cash, debt, and liquidity
- Cash and cash equivalents were $33.9 million at March 31, 2019, versus $31.9 million at year-end 2018. Current assets were $826.3 million and current liabilities were $197.5 million.
- Long-term debt was $689.0 million and short-term borrowings were $20.1 million. The filing reports long-term debt fair value of $702.7 million. Net debt increased $4.1 million during the quarter, excluding foreign-exchange effects.
- Operating activities provided $23.4 million; investing activities used $8.6 million, including $8.3 million of capital expenditures; financing activities used $11.9 million. The company paid $15.2 million in dividends, or $0.36 per share, and made no share repurchases.
- Management said the company was in compliance with loan covenants and expected operating cash flow and available debt capacity to fund operations, capital expenditures, dividends, acquisitions, and repurchases.
- The company had $70 million drawn under its $70 million receivables-backed lending program, which expires in October 2019; it stated it intended and was able to refinance or extend the program before maturity.
Cash-flow comparisons require context: Q1 2018 figures were revised following a change in cash-flow classification, and the prior-year period included $44.4 million of receipts on sold receivables. The company reported no off-balance-sheet arrangements and no material quarterly changes in contractual obligations.
Outlook, risks, and unusual items
- Management expected a 2019 effective income tax rate of approximately 22%–23%; the Q1 rate was 25.5%, versus 23.8% a year earlier.
- The company adopted the new lease standard in Q1 2019, recording $20.7 million of operating-lease right-of-use assets and liabilities at adoption. Management said adoption did not affect earnings or cash flows. The new hedging standard had no material financial-statement impact.
- Risks highlighted include raw-material and energy costs and availability, foreign-exchange changes, competition, market and customer demand, customer relationships, product acceptance and innovation, regulatory compliance, credit availability, litigation, and information-technology issues. Management reported no material change in previously disclosed risk factors or market-risk exposure.
- Various claims and litigation arise in the ordinary course. Management did not expect them, individually or collectively, to materially harm financial position, but noted actual outcomes could affect results or cash flows in a period.
Important facts for investors to verify
- Whether weaker volumes and higher manufacturing and raw-material costs persist, and their effect on margins.
- How much of reported revenue and segment performance reflects currency movements versus underlying local-currency trends.
- Progress on refinancing or extending the $70 million receivables-backed facility before its October 2019 expiration.
- Whether the expected 22%–23% full-year tax rate is achieved and how prior-period tax estimates affect reported results.
- Comparability of cash flows across periods given the prior-year receivables-related reclassification and receipts.