Sensient Technologies Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless otherwise stated, financial amounts are in millions. Comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $360.8 | $346.0 | $703.3 | $692.2 |
| Gross margin | 34.5% | 34.1% | 34.2% | 34.0% |
| Operating income | $43.7 | $45.1 | $91.2 | $91.5 |
| Operating margin | 12.1% | 13.0% | 13.0% | 13.2% |
| Continuing-operations earnings | $24.8 | $29.5 | $55.9 | $60.3 |
| Net earnings, including discontinued operations | $28.1 | $29.5 | $59.3 | $60.0 |
| Diluted continuing-operations EPS | $0.55 | $0.64 | $1.25 | $1.28 |
- Revenue rose 4.3% in Q2 and 1.6% in the first half; unfavorable foreign exchange reduced reported growth by 1.8 and 2.6 percentage points, respectively. On a local-currency basis, revenue increased 6.1% and 4.2%.
- Gross margin improved modestly, reflecting higher volumes—particularly in Color—and savings from the restructuring plan. Operating income declined slightly as higher selling and administrative costs offset revenue and gross-margin gains.
- Management’s non-GAAP adjusted diluted EPS, excluding restructuring and other costs, was $0.84 in Q2 (up 5.0%) and $1.59 in the first half (up 1.9%). GAAP diluted continuing-operations EPS declined 14.1% and 2.3%, respectively. These adjusted figures are not GAAP measures.
Cash, liquidity and debt
- First-half operating cash flow was $100.8, versus $76.9 a year earlier; management attributed the improvement to increased cash earnings and favorable working-capital changes. Capital expenditures were $34.3, compared with $37.0.
- Cash was $20.2 at June 30, 2016, up from $12.0 at year-end 2015. Long-term debt was $601.8 and short-term borrowings were $20.7; long-term debt’s estimated fair value was $624.4.
- Net debt decreased $15.6 in the first half. Financing cash outflows included $21.1 of settled share repurchases and $24.3 of dividends paid. The company reported compliance with loan covenants and said operating cash flow and available debt capacity should meet expected cash requirements.
- Dividends declared were $0.27 per share in Q2 and $0.54 for the first half. No off-balance-sheet arrangements were reported.
Segments and significant changes
- Color: Q2 segment revenue increased 8.0% and operating income 9.7%; first-half revenue increased 5.6% and operating income 7.8%. Growth was led by non-food colors, including cosmetic colors and specialty inks.
- Flavors & Fragrances: Q2 segment revenue increased 2.3% and operating income 8.6%; first-half revenue decreased 0.7% and operating income 0.3%. North American first-half volumes were weaker, while pricing and restructuring savings partly offset higher raw-material costs.
- Asia Pacific: Q2 revenue increased 7.0%, while operating income was essentially unchanged; first-half revenue increased 5.1% and operating income increased modestly. Currency was a headwind.
- Starting in Q1 2016, color businesses in China, South Korea and Japan were reassigned from Asia Pacific to Color; 2015 segment results were restated.
Outlook, restructuring and other matters
- The 2014 restructuring program is intended to consolidate facilities and reduce costs. The company estimated annual savings of about $27 million when fully implemented, down from its original $30 million estimate partly because of U.S. dollar strength. It expected $6–$7 million of incremental savings in 2016, with $4.1 million realized in the first half.
- The company expected about $13 million of additional restructuring costs by year-end 2016 and about $4 million in 2017. It had eliminated 272 of approximately 400 planned positions. Cumulative restructuring costs were $144.6 million through June 30.
- The company anticipated selling its European Natural Ingredients business within a year and estimated an additional non-cash loss of about $13 million upon sale. Separately, it was exploring a sale of a European facility and related business lines; a $10.3 million impairment was recorded in Q2, and a completed sale could result in an additional non-cash loss of about $9.1 million.
- Q2 discontinued-operations earnings included a $3.3 million reclassification of foreign-currency translation adjustments following liquidation of a Color business, as well as a $0.2 million asset-sale gain. This contributed to reported net earnings exceeding continuing-operations earnings.
- The EEOC disability-discrimination case against a subsidiary remained in discovery; the company said potential exposure could not yet be assessed. The company was also cooperating with an SEC staff inquiry concerning restructuring disclosures, long-lived assets and non-GAAP measures, and said it could not predict the outcome or impact.
- The filing identified uncertainty following the U.K. Brexit referendum, including possible trade restrictions, regulatory complexity and regional economic uncertainty. Management cited currency movements, raw-material costs and availability, customer and market changes, competition, restructuring execution, litigation and information-technology issues among forward-looking risks. No specific full-year revenue or earnings guidance was provided in the filing text.
Important facts for investors to verify
- Progress against the restructuring savings, cost, closure and headcount estimates, including the timing and realized proceeds of planned divestitures.
- The basis and potential effects of the two separately described expected sale-related losses—approximately $13 million and $9.1 million.
- Whether adjusted earnings trends translate into sustained GAAP earnings and cash generation, given higher interest expense, restructuring charges and Q2’s elevated tax rate.
- Developments and any financial consequences from the SEC inquiry and EEOC litigation.
- Foreign-exchange exposure, Brexit-related effects and the company’s debt and covenant position as business conditions change.