Sensient Technologies Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Sensient makes colors, flavors, fragrances, and specialty inks. Its reportable segments are Flavors & Fragrances, Color, and Corporate & Other. Results exclude discontinued operations unless stated otherwise. Foreign currency translation significantly reduced reported revenue and operating income.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $346.0 | $373.4 | $692.2 | $740.5 |
| Gross margin | 34.1% | 34.7% | 34.0% | 34.3% |
| Operating income | $45.1 | $49.7 | $91.5 | $58.3 |
| Net earnings | $29.5 | $29.1 | $60.0 | $27.0 |
| Diluted EPS | $0.63 | $0.59 | $1.28 | $0.55 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $76.9 | $69.4 |
Q2 revenue fell 7.3%; management attributed an approximately 8.1% decrease to foreign exchange. Operating income declined 9.4% before restructuring and other costs, to $55.5 million, and adjusted diluted EPS was $0.80 versus $0.81. For the first half, operating income rose 56.9% as reported, largely reflecting lower restructuring charges; excluding those costs, it declined 6.0% to $109.1 million. Adjusted first-half diluted EPS was $1.56 versus $1.53.
Segments and material changes
- Flavors & Fragrances: Q2 segment revenue decreased 5.9% and operating income decreased 4.7%. For the first half, revenue fell 4.9% and operating income fell 2.2%. Currency effects were a primary drag; segment operating margins improved modestly.
- Color: Q2 segment revenue decreased 9.7% and operating income decreased 19.3%; first-half revenue declined 9.6% and operating income declined 15.8%. Specialty-ink volume weakness and foreign exchange weighed on results; raw-material costs also affected food and beverage colors.
- Corporate & Other: Reported operating losses were $12.3 million for Q2 and $22.4 million for the first half, compared with $15.1 million and $66.6 million in 2014. The year-over-year improvement chiefly reflected lower restructuring and other charges.
- Discontinued operations generated net losses of $0.1 million in Q2 and $0.3 million for the first half, versus losses of $1.1 million and $5.8 million in the comparable 2014 periods.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $76.9 million, up from $69.4 million, primarily due to reduced working capital. Investing cash use was $32.8 million, including $37.0 million of capital expenditures and the $8.4 million Xennia acquisition; $12.6 million of asset-sale proceeds partly offset investment outlays.
- Financing cash use was $36.0 million. The company reported a $110.1 million increase in net debt during the first half, primarily to fund share repurchases. Cash increased $1.5 million from year-end to $21.8 million.
- At June 30, cash was $21.8 million, current assets $760.8 million, and current liabilities $230.8 million. Short-term borrowings were $24.1 million and long-term debt was $549.5 million; combined debt less cash was approximately $551.8 million. Long-term debt fair value was reported as $562.6 million.
- Share repurchases totaled $127.2 million for the first half; 1.0 million shares were repurchased in Q2 for $66.3 million. Dividends paid in the first half were $23.6 million, or $0.50 per share. After quarter-end, the company announced a quarterly dividend increase to $0.27 per share beginning with the September 1, 2015 payment.
- Management stated that operating cash flow and available debt capacity should support operations, capital spending, dividends, acquisitions, and repurchases. The filing reports no off-balance-sheet arrangements and no material quarterly change in contractual obligations.
Outlook, restructuring, and risks
- The 2014 restructuring plan had incurred $115.4 million of costs through June 30, 2015; approximately 180 of about 377 planned position eliminations had been completed. The company expected approximately $16 million of additional costs by year-end 2015 and $9 million by the end of 2016.
- Management expected approximately $7 million of restructuring-related savings in 2015, $6 million of incremental savings in 2016, and another $8–9 million in 2017; full benefits were expected after 2016. Savings estimates may vary with foreign exchange and other assumptions. No quantified full-year revenue or EPS guidance is provided in the filing.
- On June 29, Sensient acquired Xennia Technology Ltd., a European specialty-ink business, for $8.4 million. Approximately $6 million of purchase price was allocated to goodwill and intangible assets; acquisition-related costs were $0.9 million.
- Management cited risks including currency fluctuations, raw-material and energy costs, customer and market changes, competition, execution of restructuring and growth plans, credit availability, and litigation or environmental proceedings. Routine claims and litigation were not believed likely to materially affect financial position, though outcomes could affect results or cash flows in a particular period.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing notes that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How much of the reported revenue and profit decline reflects currency versus underlying volume, particularly in specialty inks.
- Whether restructuring savings materialize as estimated, and whether the expected additional costs or timing change.
- Debt levels, interest expense, and the sustainability of repurchases and dividend increases given debt-funded capital returns.
- Xennia’s integration, contribution, and performance within Color.
- Whether raw-material costs, exchange rates, and restructuring execution affect future segment margins and cash generation.