Sensient Technologies Corporation — Q2 2019 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended June 30, 2019; financial comparisons are with the corresponding 2018 periods. Sensient operates in Flavors & Fragrances, Color, and Asia Pacific. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $339.2 | $363.0 | $686.7 | $719.5 |
| Gross margin | 33.0% | 33.5% | 33.1% | 34.0% |
| Operating income | $47.4 | $52.2 | $96.8 | $107.9 |
| Operating margin | 14.0% | 14.4% | 14.1% | 15.0% |
| Net earnings | $34.3 | $39.1 | $67.1 | $77.3 |
| Diluted EPS | $0.81 | $0.92 | $1.59 | $1.81 |
| Interest expense | $5.2 | $5.6 | $10.6 | $11.1 |
- Q2 revenue declined 6.6% year over year (4.5% excluding foreign exchange); H1 revenue declined 4.6% (1.9% excluding foreign exchange). Q2 net earnings fell about 12.2%; H1 net earnings fell about 13.2%.
- Management attributed lower gross margins mainly to reduced volume, unfavorable product mix and higher raw-material or manufacturing costs; higher selling prices partly offset these pressures. Selling and administrative expense was 19.0% of revenue in both H1 periods.
- Q2 segment results: Flavors & Fragrances revenue was $180.1 and operating income $20.1; Color revenue was $138.9 and operating income $27.9; Asia Pacific revenue was $29.0 and operating income $4.2. Flavors & Fragrances and Color results were pressured by lower volumes; Color also cited tariffs and product mix in H1 commentary. Corporate & Other expenses were $4.8 in Q2, down from $7.6, primarily due to lower performance-based executive compensation.
Cash flow, debt and liquidity
- H1 operating cash flow was $76.2, versus cash used of $28.2 in H1 2018. Management cited less cash use in working capital and a cash-flow classification change. H1 2018 included $91.1 of securitization receipts in investing activities, limiting direct comparison.
- H1 investing cash use was $17.0, including $16.6 of capital expenditures. Financing cash use was $61.7, including $30.5 of dividends; debt payments were $55.2 and additional borrowings were $25.0. Cash declined $2.0 to $29.9.
- At June 30, cash was $29.9; current assets were $812.1 and current liabilities $194.7. Short-term borrowings were $20.3 and long-term debt was $656.7. Total reported borrowings were approximately $677.1, down from approximately $709.6 at December 31, 2018. Management reported a $30.2 H1 decrease in net debt and compliance with loan covenants.
- The company had drawn $70 million under its $70 million receivables securitization program, which was scheduled to expire in October 2019; management stated it intended and was able to refinance or extend it before maturity. Available debt capacity and operating cash flow were expected to support operations, capital expenditures, dividends, acquisitions and repurchases.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management characterized the financial position as strong and said operating cash flow and available borrowing capacity were expected to meet future cash requirements.
- Management cited volume and mix weakness, raw-material and manufacturing costs, foreign exchange, and tariffs as business pressures. The filing added that tariffs and other trade barriers could raise costs, constrain imports or exports, and weaken competitiveness; pricing and other mitigation may not be effective.
- A former employee’s California class action alleges improper overtime reporting on wage statements, not failure to pay overtime. The company disputes the allegations, filed its answer in July, and the parties scheduled mediation for December 11, 2019. The company said ordinary-course claims were not expected to materially affect its financial position, though outcomes could affect results or cash flow in a particular period.
- Adoption of the new lease standard resulted in $20.7 of operating lease right-of-use assets and liabilities at January 1, 2019, with no earnings or cash-flow impact. At June 30, operating lease liabilities were $21.2. The company reported no material restructuring costs in either H1 period and no off-balance-sheet arrangements.
- Dividend declared per share increased to $0.36 in Q2 from $0.33; H1 dividends declared were $0.72 per share versus $0.66. No shares were repurchased in H1 2019.
Key facts for investors to verify
- Whether sales volumes stabilize and margins recover after lower volume, mix pressure and elevated input costs.
- Progress in refinancing or extending the $70 million receivables facility before its October 2019 maturity, and the company’s debt reduction and covenant position.
- The financial and operational effects of tariffs, currency movements, and the company’s ability to offset cost increases through pricing.
- Developments and potential exposure from the California wage-statement class action and scheduled mediation.
- Segment-level trends, particularly Flavors & Fragrances weakness and Color profitability, including the effects of acquisitions and the realignment of Mazza Innovation into Color.