Sensient Technologies Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included for context. Sensient develops and manufactures flavors and fragrances, colors, specialty inks and related products. Its reportable segments are Flavors & Fragrances, Color, and Asia Pacific.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $1,376.0 million | $1,447.8 million |
| Gross profit / margin | $454.4 million / 33.0% | $488.5 million / 33.7% |
| Operating income / margin | $166.3 million / 12.1% | $130.7 million / 9.0% |
| Continuing-operations earnings | $107.2 million | $81.8 million |
| Net earnings | $106.8 million | $73.6 million |
| Diluted EPS, continuing operations | $2.32 | $1.67 |
| Operating cash flow | $128.0 million | $189.2 million |
| Capital expenditures | $79.9 million | $79.4 million |
| Cash and cash equivalents at year-end | $12.0 million | $20.3 million |
| Total debt at year-end | $634.5 million | $466.9 million |
GAAP revenue declined 5.0%; foreign exchange reduced revenue by 7.4%, while revenue increased 2.5% on a local-currency basis. Reported operating income and EPS improved largely because restructuring and other costs were lower. Excluding those costs, adjusted operating income fell 5.1% to $210.0 million, adjusted net earnings fell 4.4% to $140.9 million, and adjusted diluted EPS rose 1.0% to $3.05. These are company-defined non-GAAP measures.
Fourth-quarter revenue was $339.2 million versus $342.8 million in Q4 2014; gross profit was $106.1 million versus $113.1 million; continuing-operations earnings were $19.3 million versus $26.3 million; and diluted continuing-operations EPS was $0.43 versus $0.55.
Changes and segment trends
- Flavors & Fragrances: Revenue declined 3.8% to $819.0 million, but rose 2.9% in local currency. Segment operating income increased 0.8% to $121.9 million; margin rose to 14.9% from 14.2%.
- Color: Revenue declined 7.5% to $470.9 million, including an 8.9% foreign-exchange headwind. Segment operating income fell 16.9% to $94.8 million; margin decreased to 20.1% from 22.4%, reflecting weaker non-food colors, particularly specialty inks.
- Asia Pacific: Revenue declined 2.1% to $130.6 million, but increased 4.4% in local currency. Segment operating income increased 1.5% to $25.5 million; margin rose to 19.5% from 18.8%.
Consolidated gross margin fell 70 basis points, attributed mainly to lower specialty-inks volumes and higher restructuring costs. The effective tax rate was 28.2%, compared with 28.6% in 2014. Average diluted shares declined to 46.2 million from 48.8 million, in part alongside substantial share repurchases.
Cash, debt, liquidity and capital returns
Operating cash flow decreased $61.1 million year over year; management cited foreign currency effects, higher restructuring payments and higher receivables. Cash used in investing activities was $75.8 million. Cash used in financing activities was $50.1 million, despite a $174.6 million net increase in debt, reflecting share repurchases, dividends and debt payments.
Long-term debt was $613.9 million and short-term borrowings were $20.7 million at year-end. The company reported $255.3 million available under its revolving credit agreement and $86.3 million under other bank lines. Its amended facility includes a $170 million term loan and a $350 million revolver, maturing in November 2020. The company reported compliance with debt covenants; debt-to-EBITDA was 2.49 against a maximum of 3.50, and interest coverage was 7.60 against a minimum of 2.00.
2015 dividends paid were $1.04 per share, and the quarterly dividend increased from $0.25 to $0.27 during the year. The company repurchased 2.7 million shares for approximately $178.0 million. Its stated expectation that operating cash flow, debt agreements and available capacity will cover operating needs, capital spending, dividends, acquisitions and repurchases is management’s assessment, not a guarantee.
Outlook, restructuring and material risks
- The filing gives no specific 2016 revenue or EPS guidance. Management expects approximately $16 million of additional restructuring costs by the end of 2016.
- The 2014 restructuring plan had incurred approximately $141 million through year-end 2015. Management estimates current annual savings of approximately $27 million, of which about $12 million had been realized by year-end 2015; it expects $6–7 million of incremental savings in 2016 and the remainder in 2017. The original savings estimate was reduced for currency effects, and actual savings may differ.
- The company anticipates selling its European Natural Ingredients business in 2016. It expects an additional non-cash loss of approximately $12 million upon sale, beyond a $2 million 2015 impairment charge.
- Foreign exchange was a major headwind; additional risks include restructuring execution and savings, raw-material and energy costs or shortages, customer concentration in certain product lines, pricing pressure, competition, product quality/liability and recalls, regulation, international operations, and disruption of key facilities or IT systems.
- The SEC Division of Enforcement made an informal inquiry in October 2015 concerning restructuring disclosures, long-lived asset accounting and non-GAAP measures. The company said it was cooperating and could not predict the outcome. The SEC staff’s review of earlier comment letters on related matters had not been confirmed as complete when the 10-K was filed.
- An EEOC lawsuit against a subsidiary alleges disability-discrimination violations concerning employee terminations; 13 additional former employees were identified as potentially aggrieved. The company said the matter was at an early stage and exposure could not yet be assessed.
The financial statements and internal control over financial reporting received unqualified audit opinions from Ernst & Young LLP. Management reported effective disclosure controls and internal controls as of December 31, 2015.
Important facts for investors to verify
- Whether restructuring savings are achieved on schedule and whether additional costs or the expected sale-related loss differ from estimates.
- How much of the reported earnings improvement reflects lower restructuring charges and share repurchases versus underlying operating performance.
- Whether Color segment volumes and margins, especially specialty inks, recover, and whether local-currency growth continues to offset currency translation pressure.
- The outcome and potential financial or disclosure consequences of the SEC inquiry and EEOC litigation.
- Debt refinancing needs, liquidity after shareholder returns, and the company’s ability to sustain dividends and repurchases while operating cash flow is lower.