Sensient Technologies Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts below are in millions unless noted.
Business context and financial performance
Sensient makes flavors, fragrances, colors and related ingredients. The quarter reflected uneven demand during COVID-19: food, beverage and pharmaceutical-related demand remained strong, while cosmetics and some quick-service-restaurant-linked products weakened.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $323.1 | $339.2 | $673.8 | $686.7 |
| Operating income | $42.1 | $47.4 | $76.7 | $96.8 |
| Net earnings | $30.6 | $34.3 | $51.4 | $67.1 |
| Diluted EPS | $0.72 | $0.81 | $1.21 | $1.59 |
| Gross margin | 31.6% | 33.0% | 31.8% | 33.1% |
| Operating margin | 13.0% | 14.0% | 11.4% | 14.1% |
Q2 revenue fell 4.7% and first-half revenue fell 1.9%; foreign exchange reduced revenue by approximately 3% and 2%, respectively. Excluding currency, divested or planned-for-sale product lines, and related divestiture activity, adjusted local-currency revenue was flat in Q2 and rose 1.6% for the first half. Adjusted diluted EPS was $0.70 for Q2 (down 13.6%) and $1.42 for the first half (down 10.1%). These are non-GAAP measures and are not substitutes for GAAP results.
Q2 pressure on gross margin reflected lower Color volumes and a $1.7 inventory charge related to the yogurt fruit preparations sale. First-half margin also reflected higher natural-ingredient raw-material costs and divestiture costs. Q2 operating income included a net $3.3 of divestiture-related income; the first half included $8.4 of divestiture-related expense. Interest expense declined to $3.6 in Q2 and $7.9 for the first half, mainly due to lower average debt and rates.
Segments and material changes
- Flavors & Fragrances: Q2 segment revenue increased about 2% to $183.6 and segment operating income rose about 14% to $22.8. Higher natural ingredients and flavor sales and improved operating performance outweighed weakness in yogurt fruit preparations. First-half segment revenue increased about 2% to $370.1; operating income was broadly flat at $43.6.
- Color: Q2 segment revenue declined to $121.3 from $138.9 and operating income fell to $22.3 from $27.9. Personal Care and Inks were affected by weaker demand, particularly for makeup, and COVID-19-related volume weakness; currency also weighed on sales. First-half revenue and operating income declined to $264.8 and $51.9, respectively.
- Asia Pacific: Q2 revenue was $27.9 versus $29.0, while operating income increased to $4.8 from $4.2. First-half revenue was $58.3 versus $57.5 and operating income rose to $9.9 from $8.4.
Cash flow, debt and liquidity
- First-half cash from operations was $107.6, up from $76.2, primarily reflecting a $37.8 favorable year-over-year change in working-capital cash flows. Capital expenditures were $21.4 versus $16.6; operating cash flow less capital expenditures was approximately $86.2.
- Investing cash outflow was $5.8, compared with $17.0, including $11.3 of divestiture proceeds. Financing cash outflow was $93.6, including $98.8 of debt payments and $33.0 of dividends. Net debt decreased $60.2 before foreign-exchange effects.
- At June 30, cash was $20.9; short-term borrowings were $18.3 and long-term debt was $537.7. Current assets were $738.3 and current liabilities $213.2. Management said financial position remained strong and forecast operating cash flows and available debt capacity would cover operating needs, capital spending, debt maturities and dividends.
Outlook, unusual items and risks
- Management said it continued to believe it would achieve its projected earnings guidance despite COVID-19 headwinds; the filing text does not provide a clear numerical guidance target. Management cautioned that the pandemic’s future effects on demand, operations, supply chains and the economy were difficult to predict.
- All manufacturing facilities were operating at filing time. Temporary shutdowns occurred at facilities in China and India during Q1; no significant supply disruptions were reported through June 30. COVID-response expenses for the first half were estimated below $2.0.
- The inks product-line sale closed June 30. Sensient estimated enterprise value of approximately $14.5 and received $10.3 net cash at closing, subject to adjustments. It recorded an $8.2 non-cash gain from foreign-currency translation reclassification, alongside impairment charges and other divestiture costs. Fragrances (excluding essential oils) and yogurt fruit preparations remained planned divestitures; COVID-related travel and transport restrictions had slowed sale activities. The company estimated $10–$12 of additional non-cash foreign-currency reclassification expense upon closing the fragrance sale, and total cash divestiture costs of $6–$9.
- Environmental sampling at the Granada, Spain site identified soil and groundwater contaminants. A $0.8 remediation liability was recorded; the company warned final costs could exceed estimates. California wage-and-hour class and representative claims were pending; management intended to defend them. The filing said other claims were not expected to materially affect financial position, though outcomes could affect a particular period.
- After quarter-end, Sensient disclosed a technical default arising from a liquidation proceeding against a non-operating Czech subsidiary. On July 28, 2020, lenders and private-placement noteholders waived the event of default; the credit agreement was amended. Separately, the company stated it was compliant with financial covenants as of June 30.
- Six-month comprehensive income was reported as $9.7 versus $69.2 in 2019, reflecting a substantial adverse change in other comprehensive items, including foreign-currency effects. The filing reports a $41.7 first-half other comprehensive loss.
Important facts for investors to verify
- Progress and final proceeds, costs, impairments and foreign-currency reclassification effects from the remaining divestitures.
- The final environmental remediation exposure at Granada and the status or potential financial impact of the California employment claims.
- COVID-19 demand trends, particularly in Color, cosmetics and restaurant-related products, and whether management’s earnings outlook remains achievable.
- Debt balances, covenant terms and compliance following the July 28 waiver and credit-agreement amendment.
- Whether working-capital-supported operating cash flow is sustainable and sufficient to fund capital spending, debt service and dividends.