Sensient Technologies Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 5, 2019. The company supplies flavors, fragrances, natural ingredients, and colors. All dollar amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $317.7 | $342.7 | $1,004.3 | $1,062.3 |
| Gross margin | 32.2% | 33.7% | 32.8% | 33.9% |
| Operating income | $38.8 | $50.3 | $135.6 | $158.1 |
| Operating margin | 12.2% | 14.7% | 13.5% | 14.9% |
| Net earnings | $31.9 | $47.2 | $99.0 | $124.5 |
| Diluted EPS | $0.75 | $1.12 | $2.34 | $2.92 |
| Interest expense | $4.9 | $5.4 | $15.5 | $16.5 |
- Q3 revenue declined 7.3% year over year; management attributed about 1 percentage point of the decline to foreign exchange and reported a 6.0% decline on a local-currency basis. Nine-month revenue fell 5.5% (3.2% in local currency).
- Profitability weakened: Q3 GAAP net earnings fell 32.5% and diluted EPS fell 33.0%; nine-month net earnings declined 20.5% and diluted EPS declined 19.9%. The nine-month comparison is also affected by a 2018 tax-law item; adjusted diluted EPS, excluding that item, fell 15.2%.
- Management cited unfavorable volume and product mix as drivers of lower Q3 gross margin, partly offset by higher selling prices. For the nine months, lower volumes and higher raw-material costs raised manufacturing costs as a share of revenue, partly offset by higher prices.
- Segment performance: Q3 Flavors & Fragrances revenue was $167.6 million and operating income $17.6 million; Color revenue was $127.0 million and operating income $23.4 million; Asia Pacific revenue was $30.1 million and operating income $5.4 million. Each segment reported lower revenue and operating income than the prior-year quarter.
- Cash flow: Nine-month operating cash flow was $127.6 million versus $8.9 million in 2018. The comparison is not directly like-for-like: adoption of a cash-flow accounting standard moved $91.1 million of receivables-related receipts into investing activities in 2018; lower working-capital cash use also contributed to the 2019 increase. Capital expenditures were $26.1 million versus $34.1 million.
- Liquidity and debt at September 30: Cash was $34.4 million; current assets were $792.4 million and current liabilities $192.2 million. Short-term borrowings were $20.2 million and long-term debt $617.0 million, totaling $637.2 million, down from $709.6 million at December 31, 2018. Nine-month net debt decreased $55.8 million. The company said it complied with loan covenants and expected operating cash flow and available debt capacity to cover operations, capital spending, dividends, acquisitions, and repurchases.
Changes, outlook, and notable items
- All three operating segments experienced weaker year-over-year results. Flavors & Fragrances faced lower volumes and higher manufacturing and raw-material costs; Color cited lower volumes and raw-material costs in key product lines; Asia Pacific cited lower volumes and unfavorable mix. Foreign exchange also reduced reported revenue.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It described the financial position as strong and identified cash flow and borrowing capacity as funding sources for anticipated needs.
- The board approved a sale and memorandum of understanding for the Global Inks product line after quarter-end. The company expected to sell it within a year and estimated a non-cash loss of $10–$12 million in Q4 2019; the estimate was subject to adjustment at closing. It did not expect related cash costs to materially affect results or cash flows.
- The quarterly dividend was increased to $0.39 per share, beginning with the dividend payable December 2, 2019; dividends declared were $0.36 per share in Q3 and $1.08 per share for the first nine months.
- Other subsequent event: the receivables securitization commitment was reduced from $70 million to $65 million and extended to October 2020. The company had borrowed $70 million under the program at September 30.
- Foreign-currency translation and other comprehensive losses weighed on comprehensive income, which was $14.1 million in Q3 versus $48.0 million a year earlier. The company reported no restructuring or other costs in the first nine months of either year.
Risks and contingencies
- The company added emphasis on tariffs and other trade barriers, which could raise manufacturing costs, constrain raw-material imports or product exports, and impair competitiveness; pricing and other mitigation may not be effective. Other disclosed exposures include raw-material costs and availability, customer and market changes, competition, currency movements, regulation, litigation, and economic conditions.
- A former employee’s California class action alleges improper reporting of overtime on wage statements; it does not allege unpaid overtime. The company disputes the claims and planned to defend its position; mediation was scheduled for December 11, 2019. Management said ordinary-course claims were not expected to materially affect financial position, though outcomes could affect results or cash flow in a particular period.
- The company adopted the lease standard in Q1 2019, recording $20.7 million of operating lease assets and liabilities at adoption. At September 30, operating lease liabilities were $20.1 million. Adoption did not affect earnings or cash flows. The company was still evaluating the expected impact of the forthcoming credit-loss standard.
Important facts for investors to verify
- Whether sales volumes and segment profitability stabilize, particularly in Flavors & Fragrances and Color, and whether pricing offsets volume and input-cost pressure.
- How much of the operating-cash-flow improvement reflects recurring operating performance versus working-capital changes and the 2018 cash-flow classification change.
- Debt reduction, borrowing capacity, covenant compliance, and the terms and utilization of the amended receivables program.
- The final Global Inks sale terms, timing, and non-cash loss compared with the preliminary $10–$12 million estimate.
- Developments in the California wage-statement case and the actual effect of tariffs, foreign exchange, and raw-material costs.