Sensient Technologies Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial amounts below are in millions of dollars unless noted.
Business context and results
Sensient makes colors, flavors, extracts, and related ingredients. It reports Flavors & Extracts, Color, and Asia Pacific segments. During the quarter, it completed the sale of its yogurt fruit preparations product line; the inks product line sale had closed in June. The sale of fragrances, excluding essential oils, remained pending.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $323.6 | $317.7 | $997.3 | $1,004.3 |
| Gross margin | 32.7% | 32.2% | 32.1% | 32.8% |
| Operating income | $41.2 | $38.8 | $117.8 | $135.6 |
| Operating margin | 12.7% | 12.2% | 11.8% | 13.5% |
| Net earnings | $32.9 | $31.9 | $84.3 | $99.0 |
| Diluted EPS | $0.78 | $0.75 | $1.99 | $2.34 |
| Interest expense | $3.5 | $4.9 | $11.4 | $15.5 |
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $142.9, versus $127.6 in 2019. Investing cash flow used $15.8; financing cash flow used $117.8.
- Capital expenditures were $34.0, up from $26.1. Cash from business divestitures was $12.2. Dividends paid totaled $49.5, or $1.17 per share.
- Cash was $26.9 at September 30, 2020, compared with $21.2 at year-end 2019. Long-term debt was $537.1 and short-term borrowings were $24.5, versus $598.5 and $20.6, respectively, at year-end. Management reported a $67.9 decrease in net debt during the first nine months, excluding foreign-exchange effects.
- Management said the company remained in compliance with loan covenants and expected operating cash flow and available debt capacity to cover operations, capital spending, debt maturities, and dividends. The filing reports no off-balance-sheet arrangements.
Changes versus prior comparable periods
- Q3 revenue rose 1.9% and GAAP diluted EPS rose 4.0%; nine-month revenue declined 0.7% and EPS declined 15.0%. On the company’s adjusted basis excluding divested/to-be-divested product lines and specified costs, revenue grew 5.8% and adjusted diluted EPS 4.1% in Q3; for nine months, adjusted revenue grew 1.6% while adjusted EPS fell 5.6%.
- Q3 gross and operating margins improved. Management attributed this to the inks divestiture, lower production costs and higher selling prices, along with stronger segment margins. Nine-month operating margin declined, reflecting lower Color volumes, higher non-cash performance-based compensation, and divestiture and improvement-plan costs.
- Flavors & Extracts and Asia Pacific reported higher segment operating income in both periods. Color operating income was nearly flat in Q3 but lower year to date, with weakness in Personal Care and Inks partly offset by Food & Pharmaceutical Colors.
- Interest expense declined in both periods, which the company attributed to lower average debt and interest rates. Nine-month operating cash flow improved, primarily due to a more favorable working-capital contribution.
Outlook, risks, and unusual items
- Management said it continued to expect to achieve its projected earnings guidance despite COVID-19 headwinds; the filing does not provide a clear numerical earnings target.
- COVID-19 supported demand in many food, beverage, and pharmaceutical lines but weakened demand in cosmetics and some products serving quick-service restaurants. The company estimated $4 million of incremental pandemic-response expenses for the first nine months. All manufacturing facilities were operating at filing time, with no significant supply disruptions reported; demand, production, transportation, and supply-chain effects remain uncertain.
- Q3 and nine-month results included $2.6 million of operational-improvement costs, mainly severance. Total 2020–2021 costs for the plan were estimated at $5–$7 million. Expected cash costs for all three divestitures across 2019–2021 were estimated at $6–$9 million.
- Divestiture-related items included a $9.4 million non-cash impairment charge and an $8.2 million non-cash foreign-currency reclassification gain related to inks; yogurt fruit preparations generated an approximately $0.9 million sale gain. The pending fragrances sale could trigger an estimated $10–$12 million non-cash foreign-currency reclassification charge at closing.
- Environmental contamination was identified at the Granada, Spain site associated with the fragrances business. The company recorded a $0.8 million remediation liability; actual costs could exceed the estimate.
- Three California employment matters were disclosed, including class and representative claims. The company intends to defend them; it said other claims were not expected to materially affect financial position, though outcomes could affect results or cash flows in a period.
- Comprehensive income was $51.2 million in Q3 versus $14.1 million a year earlier, including a substantial favorable quarterly change in other comprehensive income. The filing attributes this mainly to foreign-currency items; it is distinct from net earnings.
Important facts for investors to verify
- Whether demand weakness in Personal Care and restaurant-related products persists, and how it compares with strength in food, beverage, and pharmaceutical lines.
- Completion timing, proceeds, post-closing adjustments, and any additional charges from the pending fragrances divestiture; confirm the Granada remediation estimate.
- Progress and realized savings from the operational-improvement plan, against its $5–$7 million expected cost.
- Debt reduction, covenant compliance, cash generation, and the company’s ability to fund dividends and capital expenditures.
- Developments in the California employment cases and any effect on reserves, earnings, or cash flows.