Sensient Technologies Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Sensient is a global manufacturer of colors, flavors, and fragrances, with Flavors & Fragrances, Color, and Asia Pacific reportable segments.
Financial performance
Amounts below are in U.S. dollars; annual figures are compared with 2018.
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Revenue | $1,322.9 million | $1,386.8 million | Down 4.6% reported; down 2.8% in local currency |
| Gross profit / margin | $414.9 million / 31.4% | $466.1 million / 33.6% | Margin down 2.2 percentage points |
| Operating income / margin | $121.1 million / 9.2% | $203.4 million / 14.7% | Down 40.5%; 2019 includes $45.9 million of divestiture-related costs |
| Adjusted operating income | $167.0 million | $203.4 million | Down 17.9%; non-GAAP |
| Net earnings | $82.0 million | $157.4 million | Down 47.9% |
| Diluted EPS | $1.94 | $3.70 | Adjusted diluted EPS was $2.96 and $3.55, respectively; non-GAAP |
| Operating cash flow | $177.2 million | $83.5 million | Increase partly reflects 2018 cash-flow classification under a new accounting standard |
| Capital expenditures | $39.1 million | $50.7 million | — |
| Total debt | $619.1 million | $709.6 million | Debt-to-total-capital ratio was 41.3%, versus 45.2% |
Interest expense was $20.1 million, down from $21.9 million. The effective tax rate was 18.8%, compared with 13.3%; the 2018 rate benefited from tax-related items. The company paid $62.2 million in dividends and increased its quarterly dividend from $0.36 to $0.39 per share in the fourth quarter. It made no share repurchases in 2019.
Fourth quarter: Revenue was $318.6 million versus $324.6 million in Q4 2018. Gross profit was $85.5 million versus $106.0 million. Sensient reported a net loss of $17.0 million, or $0.40 per diluted share, compared with net earnings of $32.9 million, or $0.78 per diluted share.
Liquidity, debt, and cash
- At year-end, cash and cash equivalents were $21.2 million; current assets were $788.2 million and current liabilities were $201.4 million.
- Long-term debt was $598.5 million, in addition to $20.6 million of short-term borrowings. The company reported $319.5 million available under its revolving credit facility and $58.1 million available under other bank lines.
- The company was in compliance with debt covenants. Its debt-to-EBITDA covenant was 2.86 against a maximum of 3.50; interest coverage was 5.25 against a minimum of 2.00.
- Financing cash outflow was $150.6 million, including $87.4 million of net debt reduction and $62.2 million of dividends. Year-end cash declined by $10.7 million.
Material changes and segment trends
- Flavors & Fragrances revenue was $700.4 million, down about 6% from $746.9 million; segment operating income fell about 22% to $75.0 million. Lower volumes, higher manufacturing and raw-material costs, and weaker natural-ingredient sales weighed on results, partly offset by pricing and product mix.
- Color revenue was $535.2 million, down about 3%; segment operating income declined about 11% to $101.2 million. Food and beverage colors grew, including natural colors, while cosmetics and other colors were weaker. Higher raw-material costs and unfavorable mix pressured profit.
- Asia Pacific revenue declined to $118.2 million from $123.2 million, and segment operating income declined to $19.4 million from $20.9 million, reflecting lower volumes and higher costs.
- Corporate & Other operating loss increased to $74.4 million from $27.2 million, primarily due to divestiture-related charges.
- Reported revenue fell 4.6%; currency translation accounted for 1.8 percentage points of the decline. Adjusted operating income still fell 17.9%, indicating weaker underlying performance beyond the divestiture charges.
Outlook, management commentary, risks, and unusual items
- In October 2019, Sensient announced plans to divest inks, fragrances excluding essential oils, and fruit preparation products. The lines represented approximately 10% of consolidated revenue and 1% of operating income. The company expected sales and exit activities to be completed in 2020.
- 2019 included $45.9 million of divestiture and related costs: a $34.0 million impairment charge, including allocated goodwill, and fruit-preparation inventory and disposal charges, among other costs. Management estimated $7 million to $12 million of cash exit costs. Subsequent to year-end, an updated indicative bid led to an estimated additional $6.5 million non-cash inks impairment in Q1 2020.
- Management estimated a 2020 effective tax rate of 24% to 25% before discrete items. The filing gives no specific 2020 revenue or earnings guidance.
- Management cited raw-material availability and cost, tariffs and trade disruptions, changing consumer trends, softer color-cosmetics demand, and reduced customer product launches as headwinds. Strong demand and volume growth in natural colors and pharmaceuticals did not fully translate into profit growth.
- Key risks include customer and supplier concentration in some product lines, commodity and energy cost volatility, foreign-exchange exposure, regulatory and product-liability risks, manufacturing or supply-chain disruptions, and the ability to complete planned divestitures. The company also noted Brexit uncertainty and the emerging Wuhan coronavirus disruption in China; the filing said the epidemic’s full impact was not yet predictable.
- A California wage-statement class action against a subsidiary was proceeding to discovery after unsuccessful mediation. The company said ordinary-course litigation was not expected to materially affect its financial position, while noting actual outcomes could affect results or cash flow in a period.
- Auditors issued unqualified opinions on the financial statements and internal control. The audit identified deferred-tax-asset valuation allowances as a critical audit matter.
Important facts for investors to verify
- Whether the planned divestitures closed on schedule, at what proceeds and final costs, and whether further impairments or currency-translation charges arose.
- Whether the decline in adjusted earnings and segment profitability stabilized, particularly in flavors, cosmetics, and natural ingredients.
- Whether operating cash flow remains strong after considering working-capital movements and the 2018 cash-flow classification difference.
- Debt maturities, refinancing of 2020 obligations, availability under credit facilities, and exposure to floating rates and LIBOR transition.
- The realization of deferred tax assets and the sustainability of the reported tax rate; 2019 included significant valuation-allowance changes and discrete tax items.