Sensient Technologies Corporation — Q2 2014 Form 10-Q
Business context and period. The filing covers the three and six months ended June 30, 2014; amounts below are in U.S. dollars. Sensient operates Flavors & Fragrances and Color businesses, with Corporate & Other results also reported. Comparative segment results were reclassified to reflect changes in the businesses assigned to those segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $374.7 million | $378.8 million | $742.8 million | $744.4 million |
| Operating income, GAAP | $48.2 million | $48.7 million | $49.8 million | $85.0 million |
| Net earnings, GAAP | $29.1 million | $32.3 million | $27.0 million | $53.7 million |
| Diluted EPS, GAAP | $0.59 | $0.65 | $0.55 | $1.08 |
| Gross margin | 34.6% | 32.3% | 34.2% | 32.2% |
| Operating margin, GAAP | 12.9% | 12.9% | 6.7% | 11.4% |
Management’s non-GAAP figures excluding restructuring and other costs show adjusted operating income of $61.2 million in Q2, up 10.6%, and $115.5 million for the first half, up 10.6%. Adjusted net earnings were $39.8 million in Q2, up 7.6%, and $75.2 million for the first half, up 10.8%; adjusted diluted EPS was $0.81 and $1.52, respectively. These are company-defined non-GAAP measures, not substitutes for GAAP results.
Q2 segment trends: Flavors & Fragrances revenue declined 4.6%, while operating income rose 4.9% to $33.6 million. Color revenue increased 3.9% and operating income increased 8.5% to $30.9 million. Corporate & Other revenue grew 3.6%; its operating loss was $16.2 million, including restructuring charges.
Cash, debt, and liquidity
- First-half operating cash flow was $69.4 million, compared with $70.0 million a year earlier. Investing cash outflow was $29.4 million, including $29.8 million of capital expenditures. Financing cash outflow was $30.9 million.
- Cash was $28.4 million at June 30, 2014, versus $19.8 million at year-end 2013. Management attributed operating cash generation being broadly stable to earnings, adjusted for restructuring, offset by increased working-capital use, particularly inventory.
- At June 30, short-term borrowings were $22.5 million and long-term debt was $472.1 million, versus $7.1 million and $348.1 million, respectively, at year-end. The debt-to-total-capital ratio rose to 30.1% from 22.2%. The company reported compliance with its most restrictive loan covenants.
- The company repurchased 2.0 million shares for $108.8 million in the first half, including 1.8 million shares for $97.8 million in Q2. First-half dividends paid were $23.8 million; dividends were $0.48 per share for the half, following an increase in the quarterly dividend to $0.25 beginning in Q2.
Material changes, outlook, and risks
- Restructuring and unusual charges: The 2014 plan targets underperforming operations, facility consolidation, and efficiency improvements. First-half restructuring and other costs were $65.7 million ($48.2 million after tax), including $47.9 million of long-lived asset impairment; Q2 costs were $13.0 million. The company also recorded $3.1 million of proxy-contest costs in the first half, including $2.2 million in Q2. Fewer than 10 employees had been terminated by June 30.
- Plan expectations: Management expects the plan to reduce annual costs by about $30 million, with full benefits expected after 2015, and to reduce headcount by approximately 300. It anticipates $30–$35 million of additional restructuring costs by the end of 2014 and another $25–$30 million by the end of 2016; the filing estimates total pre-tax charges of approximately $120–$130 million.
- Margins and taxes: Management said higher selling prices more than offset higher manufacturing costs, supporting gross-margin expansion. It expects a 31%–32% effective tax rate for the remainder of 2014 before discrete items and restructuring-related tax effects. Reported first-half earnings were also affected by the much larger restructuring burden and a higher effective tax rate.
- Liquidity and risks: Management expects operating cash flows and existing credit lines to fund operations, capital expenditures, dividends, acquisitions, and repurchases. It reported no material change in contractual obligations, market-risk exposure, or critical accounting policies, and no off-balance-sheet arrangements. Risks cited include restructuring execution, raw-material and energy costs, competition, customer and market changes, pricing acceptance, foreign exchange, credit availability, litigation, and IT-system issues. Ordinary-course claims and litigation were not expected by management to materially affect the financial statements.
Most important facts for investors to verify
- Whether restructuring charges, implementation timing, and the projected $30 million annual savings develop as planned.
- Whether improvement in adjusted operating results translates into sustained GAAP earnings and cash generation after restructuring charges.
- Debt growth and the effect of repurchases, dividends, working-capital needs, and capital spending on liquidity and covenant headroom.
- Whether pricing can continue to offset manufacturing and input-cost pressures, particularly as Flavors & Fragrances revenue declines.
- The assumptions behind the expected tax rate and the sensitivity of results to foreign exchange, customer demand, and other stated risks.