Sensient Technologies Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; selected fourth-quarter figures are also noted below. Sensient develops and manufactures colors, flavors and fragrances for food, beverage, personal care, pharmaceutical and industrial markets.
Financial performance
- Revenue: $1.383 billion, up 0.5% reported year over year. Currency translation reduced revenue by 2.1%; local-currency growth was 2.6%.
- Profit: Operating income was $185.6 million, up 11.6%, and operating margin was 13.4%, versus 12.1%. Continuing-operations earnings were $122.9 million; net earnings were $126.3 million, including a $3.3 million discontinued-operations gain. Diluted continuing-operations EPS was $2.74 versus $2.32.
- Adjusted results (non-GAAP): Adjusted operating income was $211.7 million, up 0.8%; adjusted diluted EPS was $3.21 versus $3.05, up 5.2%. These measures exclude restructuring and other costs.
- Margins: Gross margin increased to 34.4% from 33.0%. Management attributed improvement mainly to pricing, volume and restructuring savings, partly offset by higher raw-material and manufacturing costs.
- Cash flow and investment: Operating cash flow was $222.5 million, versus $128.0 million. Capital expenditures were $81.2 million; operating cash flow less capital expenditures was approximately $141.3 million. The company said higher cash flow reflected improved cash earnings, working-capital changes and its new receivables securitization program.
- Liquidity and debt: Cash was $25.9 million; current assets were $717.1 million and current liabilities $213.7 million. Total debt was about $603.4 million, down from $634.2 million; long-term debt was $582.8 million. The company reported $256 million available under its revolving facility and $41 million under other bank lines, and compliance with loan covenants. Debt-to-total-capital was 41.9%, versus 42.9%.
- Shareholder returns: Sensient paid $49.6 million in dividends, repurchased $50.1 million of stock, and raised its quarterly dividend from $0.27 to $0.30 per share during 2016.
Fourth quarter
Revenue was $330.2 million, compared with $339.2 million in fourth-quarter 2015. Continuing-operations earnings were $31.4 million versus $19.3 million; diluted continuing-operations EPS was $0.70 versus $0.43.
Segments and changes versus 2015
- Flavors & Fragrances: Segment revenue was $795.3 million, down 2.9%; operating income was $123.5 million, up 1.4%. Lower North American and European volumes and foreign exchange weighed on revenue; pricing and restructuring savings supported margins.
- Color: Segment revenue was $502.1 million, up 4.6%; operating income was $104.8 million, up 8.5%. Growth was led by non-food colors, including cosmetic colors and specialty inks. The segment benefited from volume, mix and pricing.
- Asia Pacific: Segment revenue was $127.5 million, up 9.3%; operating income was $25.2 million, up 6.2%, primarily on volume and pricing.
- Reported consolidated revenue was broadly stable, while segment performance varied. Segment results include intersegment revenue and therefore do not sum to consolidated revenue. The company reassigned its China, South Korea and Japan color operations from Asia Pacific to Color and restated prior periods.
Outlook, risks and unusual items
- Restructuring: The company expects approximately $22 million of additional restructuring costs through the end of 2017. It estimates annual savings of about $27 million when actions are fully implemented; approximately $22 million of cumulative savings had been realized by year-end 2016, including $9.1 million in 2016. No specific 2017 revenue or EPS guidance is provided.
- Divestitures: Sensient sold a Strasbourg facility and related business lines on January 6, 2017, for approximately $12.5 million; it expects an additional non-cash loss of about $6 million in first-quarter 2017. It also planned to sell its European Natural Ingredients business and anticipated an additional non-cash loss of approximately $20 million upon sale.
- Receivables program: In the fourth quarter, the company began a $40 million accounts-receivable securitization program. The $40 million proceeds were included in operating cash flow; receivables sold are removed from the balance sheet under the program’s accounting.
- Contingencies and regulatory matters: The SEC Division of Enforcement had an unresolved informal inquiry concerning restructuring disclosures, long-lived assets and non-GAAP measures; the company said it was cooperating and could not predict the outcome. An EEOC disability-discrimination case remained under settlement negotiations; Sensient accrued $0.6 million. The complaint did not specify damages.
- Principal risks: Foreign-exchange volatility, raw-material and energy costs or shortages, customer concentration and bargaining power, competition, changing consumer preferences, product liability or recalls, regulation, restructuring execution and international political/economic uncertainty, including Brexit.
- Accounting and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective at year-end.
Important facts for investors to verify
- Whether the restructuring delivers the stated $27 million annual savings and whether remaining costs stay within estimates.
- Completion and final proceeds or losses from the European Natural Ingredients sale, and the recorded outcome of the Strasbourg divestiture.
- How much 2016 operating cash-flow growth is repeatable apart from the receivables securitization and working-capital effects.
- Progress and potential exposure from the SEC inquiry and EEOC matter.
- Debt maturities, refinancing plans and covenant headroom, particularly the approximately $103.8 million of debt maturing in 2017.