Sensient Technologies Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Sensient develops and manufactures colors, flavors, and fragrances, reported through Flavors & Fragrances, Color, and Asia Pacific segments.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,386.8 million | $1,362.3 million |
| Gross profit / margin | $466.1 million / 33.6% | $475.5 million / 34.9% |
| Operating income / margin | $203.4 million / 14.7% | $167.8 million / 12.3% |
| Net earnings | $157.4 million | $89.6 million |
| Diluted EPS | $3.70 | $2.03 |
| Operating cash flow | $83.5 million | $36.3 million |
| Capital expenditures | $50.7 million | $56.3 million |
Revenue rose 1.8%. The gross margin declined 1.3 percentage points, primarily from higher raw-material costs and unfavorable product mix, partly offset by higher selling prices. GAAP operating income and EPS increased substantially against 2017, which included $48.1 million of restructuring and other costs and a $18.4 million tax charge related to U.S. tax reform. Excluding those items and tax-reform effects, adjusted operating income decreased 5.8% to $203.4 million, while adjusted diluted EPS increased 3.8% to $3.55 from $3.42.
Fourth quarter: Revenue was $324.6 million, gross profit $106.0 million, net earnings $32.9 million, and diluted EPS $0.78. The corresponding 2017 amounts were $328.9 million, $112.6 million, $13.4 million, and $0.31.
Segments and material changes
- Flavors & Fragrances: Revenue was essentially flat at $746.9 million; operating income fell about 16% to $96.4 million. Lower flavor volumes and product mix, and higher onion costs and lower selling prices in Natural Ingredients, weighed on results.
- Color: Revenue increased about 5% to $553.5 million; operating income rose about 1% to $114.9 million. Food & Beverage Colors and Cosmetics revenue grew, but product mix and raw-material costs pressured margin.
- Asia Pacific: Revenue was approximately flat at $123.2 million and operating income was $20.9 million, slightly higher year over year.
- Corporate & Other operating loss narrowed to $28.8 million from $80.7 million, mainly because 2017 included restructuring and divestiture costs.
Cash, debt, and liquidity
- Cash and cash equivalents were $31.9 million at year-end. Total debt was $709.6 million, including $689.6 million of long-term debt and $20.0 million of short-term borrowings; total debt to total capital was 45.2%, versus 42.3% in 2017.
- The company reported $264.5 million available under its revolving credit facility and $121.8 million under other bank lines. It was in compliance with debt covenants; debt/EBITDA was 2.79 against a maximum of 3.50, and interest coverage was 6.15 against a minimum of 2.00.
- Operating cash flow comparisons are affected by adoption of a cash-flow accounting standard: $91.1 million of cash receipts related to securitized receivables were classified as investing activities in 2018 (versus $141.5 million in 2017). The company said cash flow and existing debt capacity should meet anticipated operating, capital, dividend, acquisition, and repurchase needs.
- The receivables financing commitment was increased to $70 million and was fully drawn at year-end. Debt maturities include $313.1 million in 2022. The company paid $57.4 million in dividends, repurchased $76.7 million of stock, and increased its quarterly dividend from $0.33 to $0.36 per share.
Outlook, risks, and unusual items
- Management estimated a 2019 effective tax rate of 22.0%–23.0%, before discrete items. No broader revenue or earnings guidance is provided in the supplied filing text.
- Two 2018 acquisitions were completed: GlobeNatural’s natural-color business for $10.8 million and Mazza Innovation for $19.8 million. Mazza’s botanical extraction technology is being integrated and its results are reported in Corporate & Other.
- Key risks include raw-material and energy price volatility, foreign-exchange exposure, customer concentration in some product lines, competitive pricing pressure, product safety and recall exposure, regulatory and environmental compliance, acquisition integration, cybersecurity, and international uncertainty. The filing specifically highlights Brexit-related trade, supply-chain, regulatory, and workforce risks, and the potential effect of LIBOR’s planned phaseout on variable-rate debt.
- An Illinois wastewater-discharge lawsuit was settled for a $100,000 fine and consent decree; the court approved the settlement on February 20, 2019. Other ordinary-course claims were not expected by management to materially affect financial position, though outcomes could affect a particular period’s earnings or cash flows.
- The company reported no off-balance-sheet arrangements. The 2019 lease-accounting adoption was expected to add approximately $19–$22 million of lease assets and liabilities.
Most important facts for investors to verify
- Whether adjusted operating performance and segment margins stabilize, especially in Flavors & Fragrances, given the decline in its 2018 operating income.
- How much reported operating cash flow reflects underlying cash generation, considering the receivables-securitization classification change and working-capital movements.
- Debt refinancing and liquidity plans around the sizable 2022 maturity, variable-rate exposure, and the LIBOR transition.
- Progress and returns from integrating Mazza and GlobeNatural, and whether acquisition-related goodwill and intangible values remain supportable.
- Whether the projected 2019 tax rate and margin assumptions hold, and whether raw-material costs can be offset through pricing and productivity.