Sensient Technologies Corporation — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Sensient operates through Flavors & Fragrances, Color, and Corporate & Other. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $344.5 | $364.5 | $1,036.8 | $1,105.0 |
| Gross margin | 32.7% | 33.3% | 33.6% | 34.0% |
| Operating income | $43.2 | $36.1 | $134.7 | $94.4 |
| Operating margin | 12.5% | 9.9% | 13.0% | 8.5% |
| Continuing-operations earnings | $27.6 | $22.7 | $87.9 | $55.4 |
| Net earnings | $27.6 | $21.3 | $87.6 | $48.3 |
| Diluted EPS, continuing operations | $0.61 | $0.47 | $1.89 | $1.13 |
- Revenue fell 5.5% in Q3 and 6.2% year to date. Foreign exchange reduced consolidated revenue by approximately 8.0% and 7.8%, respectively.
- GAAP operating income increased 19.7% in Q3 and 42.7% year to date, while adjusted operating income declined 5.1% and 5.7%, respectively. Adjusted diluted EPS was $0.77 in Q3 (down 1.3%) and $2.34 year to date (up 1.3%). Adjusted measures exclude restructuring and other specified costs and are not GAAP measures.
- Interest expense was $4.3 million in Q3 and $12.3 million year to date, modestly above 2014, primarily due to higher average debt outstanding.
- Operating cash flow was $93.5 million for the first nine months, down from $127.1 million, primarily due to greater use of working capital. Investing cash outflow was $51.2 million; financing cash outflow was $29.3 million. Ending cash was $24.2 million.
- At September 30, cash was $24.2 million, short-term borrowings $24.9 million, and long-term debt $604.6 million. Debt rose from $466.9 million at year-end 2014; shareholders’ equity declined from $1,046.9 million to $872.1 million. Treasury-stock purchases were a major financing use.
Material changes and operating drivers
- Flavors & Fragrances Q3 revenue declined 4.3%; segment operating income increased 2.5% to $31.4 million, with segment margin rising to 15.1%. Year-to-date revenue declined 4.7% and segment operating income declined 0.7%.
- Color Q3 revenue declined 9.1% and segment operating income declined 20.6% to $22.9 million. Year-to-date revenue fell 9.4% and operating income fell 17.3%. Management cited foreign exchange, lower specialty-ink volumes, and higher raw-material costs among the pressures.
- The company acquired Xennia Technology Ltd., a European specialty digital-inks business, on June 29 for $8.4 million; approximately $6 million of purchase price was allocated to intangible assets and goodwill. Acquisition-related costs were $0.9 million year to date.
- Share repurchases totaled 2.5 million shares for $165.4 million during the first nine months, compared with 2.0 million shares for $108.8 million in 2014. Dividends paid were $35.9 million; declared dividends were $0.77 per share year to date.
Restructuring, outlook, and risks
- The 2014 restructuring plan targets facility consolidation, reduced costs, and approximately 400 position eliminations; about 185 positions had been eliminated by September 30. Cumulative restructuring costs were $126.3 million. Q3 and year-to-date 2015 costs were $10.9 million and $27.7 million, respectively, below 2014 levels.
- Management expects approximately $9 million of additional restructuring costs by year-end 2015 and $7 million by the end of 2016. Estimated annual savings are about $8 million in 2015, an additional $6 million in 2016, and a further $8–9 million in 2017; current full-implementation annual savings estimate is approximately $25 million, versus the original $30 million estimate. Full benefits are expected after 2016.
- On November 6, 2015, after quarter-end, Sensient increased its term loan from $95 million to $170 million and issued €67 million (about $75 million) of seven-year notes at 1.85%. Proceeds are intended to refinance existing debt. The credit facility also includes a $350 million revolver and matures in 2020.
- On October 22, the SEC Division of Enforcement requested voluntary documents and information concerning restructuring disclosures, long-lived-asset accounting, and use of non-GAAP measures. Sensient is cooperating and says it cannot predict the outcome or potential impact.
- Management said ordinary-course claims and litigation were not expected to materially affect financial position, though outcomes could materially affect results or cash flows in a period. Forward-looking risks include foreign exchange, raw-material and energy costs, customer and market changes, competition, restructuring execution, credit availability, and litigation or governmental proceedings.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No off-balance-sheet arrangements or material changes in contractual obligations were reported.
Most important facts for investors to verify
- Whether the SEC inquiry leads to further action or changes to prior disclosures, asset accounting, or non-GAAP reporting.
- Whether restructuring costs, headcount reductions, and projected savings are achieved on the stated timeline and at the revised savings estimate.
- How much of the reported GAAP operating-income and EPS improvement reflects lower restructuring costs versus underlying operating performance; adjusted results declined in Q3 and year to date for operating income.
- Whether foreign-exchange pressure, weaker specialty-ink volumes, and Color segment margin declines persist.
- Debt and cash-flow trajectory following substantial share repurchases, and the effect of the post-quarter refinancing on interest costs and liquidity.