Sensient Technologies Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. Comparisons are with Q1 2013.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $368.1 million | $365.6 million |
| Operating income (GAAP) | $1.6 million | $36.3 million |
| Net income (loss) (GAAP) | $(2.1) million | $21.4 million |
| Diluted EPS (GAAP) | $(0.04) | $0.43 |
| Operating cash flow | $19.8 million | $25.6 million |
- Revenue increased slightly. Foreign exchange reduced consolidated revenue growth by approximately 70 basis points.
- Gross margin was 33.8%, up from 32.0%; excluding 2013 restructuring costs included in cost of sales, the increase was 160 basis points. Higher selling prices and favorable mix more than offset normal inflation.
- Reported operating margin was 0.4%, versus 9.9%, primarily reflecting $52.7 million of 2014 restructuring and other costs. Excluding those costs, management reported operating income of $54.3 million, up 10.6%, and operating margin of 14.8%, versus adjusted $49.1 million and 13.4% in 2013.
- Adjusted net income was $35.4 million and adjusted diluted EPS was $0.71, compared with $30.8 million and $0.62, respectively, in 2013. These are company-presented non-GAAP measures; GAAP results are shown above.
- Interest expense declined to $4.1 million from $4.3 million. The reported effective tax rate was 18.7%, versus 33.2%; excluding restructuring and other costs, rates were 29.5% and 31.2%. Prior-year tax-item estimate changes reduced both periods’ rates.
Segments and material changes
- Flavors & Fragrances: Revenue was $213.4 million, down 1.1%; operating income rose 5.4% to $29.9 million. Lower North American natural-ingredient volumes were associated with a focus on higher-margin value-added products; pricing and lower natural-ingredient raw-material costs supported profit.
- Color: Revenue increased 3.2% to $133.6 million and operating income increased 10.2% to $29.4 million, supported by higher food and non-food color volumes and favorable raw-material costs.
- Corporate & Other: Revenue was $35.3 million, up 1.3%. Reported operating loss was $57.8 million, including restructuring and other costs; before those costs, net expense improved to $5.0 million from $6.0 million.
- Segment reporting was realigned in 2014; the company restated 2013 segment results for comparability.
Cash, debt and liquidity
- Cash and equivalents were $17.5 million at March 31, 2014, down from $19.8 million at year-end. Operating cash flow fell to $19.8 million, which management attributed mainly to greater working-capital use, including higher receivables and inventory.
- Investing cash use was $13.9 million, including $14.7 million of capital expenditures. Financing cash use was $7.8 million; the company reported a net debt increase of $6.2 million, excluding foreign-exchange effects.
- Long-term debt was $386.7 million and short-term borrowings were $13.3 million. The debt-to-total-capital ratio rose to 24.9% from 22.5% at December 31, 2013. Management said cash flows and existing credit lines were expected to meet operating, capital, dividend, acquisition and repurchase needs.
- Cash dividends paid were $11.5 million. The company said the Q1 dividend paid was $0.23 per share and announced a $0.25 quarterly rate for the Q2 payment.
Outlook, risks and unusual items
- A restructuring plan announced in March targets underperforming operations, manufacturing consolidation and efficiency improvements. Q1 costs were $52.7 million, including $38.7 million of long-lived asset impairments, $1.0 million of intangible impairments, $12.3 million of employee separations, and other items. Management expects another $20–25 million of restructuring costs by year-end 2014 and $12–17 million in 2015.
- Management expects a 2014 effective tax rate of 31–32% before discrete items and restructuring-related tax effects.
- Forward-looking risks include execution of the restructuring and growth plans, raw-material and energy costs, competition, customer and market changes, pricing acceptance, currency movements, credit availability, litigation and information-technology issues. Management reported no material change in market-risk exposure or contractual obligations and no off-balance-sheet arrangements.
- The Vega employment class action settlement received final court approval; the company paid $205,297 in April 2014 and reported the matter concluded. Management said other ordinary-course litigation was not expected to materially affect the financial statements.
- After quarter-end, the company repurchased 740,000 shares for $40.2 million. During Q1 it repurchased 200,000 shares for $11.0 million; settlement of 150,000 shares occurred in April.
Important facts for investors to verify
- Whether restructuring charges and the projected additional costs are consistent with the pace and realized benefits of the operational plan; review both GAAP and management’s non-GAAP results.
- Working-capital trends, particularly receivables and inventory, and their effect on operating cash flow and borrowing needs.
- Debt levels, access to credit lines, and the impact of share repurchases and the higher dividend on liquidity.
- The filing reports $0.48 of dividends declared per common share in the earnings statement, while MD&A describes $0.23 per share paid in Q1; reconcile the differing figures and timing.