Sensient Technologies Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. Dollar amounts are in U.S. dollars.
Business context and performance
Sensient makes flavors, fragrances, colors, and other specialty ingredients. Its reportable segments are Flavors & Fragrances, Color, and Asia Pacific. Segment results for 2016 were recast to reflect certain businesses moving between segments.
- Revenue: $341.4 million, down 0.3%. Foreign exchange reduced revenue by about 1.2%; revenue increased 0.9% on a local-currency basis.
- Gross margin: 35.4%, up from 33.8%, attributed primarily to higher prices and volumes and the effect of a divestiture.
- Operating income: $24.0 million, down 49.4%; operating margin was 7.0%, versus 13.9%.
- Net earnings: $13.2 million, versus $31.2 million. Diluted EPS was $0.30, versus $0.69. The effective tax rate increased to 31.4% from 27.0%.
- Adjusted results (non-GAAP): Excluding restructuring and other costs, operating income was $55.3 million, up 8.7%; adjusted net earnings were $36.6 million, up 8.8%; and adjusted diluted EPS was $0.82, up 9.3% from $0.75.
- Cash flow: Operating cash flow was $37.6 million, down from $46.2 million, primarily due to greater working-capital use. Capital expenditures were $10.1 million. Net cash from investing activities was $2.4 million, including $12.5 million of business-sale proceeds; financing activities used $39.8 million.
- Liquidity and debt: Cash was $29.1 million. Short-term borrowings were $20.3 million and long-term debt was $572.2 million. The company reported compliance with loan covenants and said cash from operations and available debt capacity should meet expected needs.
Segments and material changes
- Flavors & Fragrances: Segment revenue was $186.9 million, down 5.8%; operating income was $28.8 million, up 4.1%. Lower North American and European revenue was partly offset by higher prices and improved segment margin.
- Color: Segment revenue was $134.1 million, up 6.0%; operating income was $30.2 million, up 7.5%, reflecting higher sales, particularly in non-food colors.
- Asia Pacific: Segment revenue was $29.6 million, up 5.1%; operating income was $5.2 million, down 8.0%, primarily due to higher manufacturing and other costs.
- The large decline in GAAP operating income and earnings principally reflects restructuring and divestiture charges. These costs were $31.3 million in Q1 2017, versus $3.3 million in Q1 2016, and reduced operating margin by 920 basis points versus 100 basis points in the prior-year quarter.
Outlook, unusual items, and risks
- No specific revenue or earnings forecast is provided. The company expects about $7 million of additional restructuring costs by the end of 2017.
- The 2014 restructuring plan has incurred $172.7 million of costs through March 31, 2017. Management estimates annual savings of about $27 million when fully implemented; about $22 million had been realized through the quarter. It expects about $1 million of additional savings by year-end 2017 and $3–$4 million in 2018. The Indianapolis facility closure was delayed to Q2 2017, shifting expected savings toward 2018.
- The European Natural Ingredients business was sold for a nominal amount in March, producing a non-cash loss of about $21 million. A Strasbourg facility and related business lines were sold in January for about $12.5 million, with an additional non-cash loss of about $11 million recognized in Q1.
- On May 3, 2017, Sensient issued new fixed-rate notes and amended its credit facilities to refinance existing debt, including extending its revolver maturity to May 2022 and increasing its term loan from $115 million to $145 million.
- The company identified foreign-exchange movements, input costs and availability, customer and market changes, competition, execution of restructuring and growth plans, and litigation or regulatory matters among factors that could affect results. It reported an SEC informal inquiry concerning restructuring disclosures, long-lived assets, and non-GAAP measures and said it could not predict the outcome.
- An EEOC case concerning alleged disability discrimination was settled, subject to court approval; Sensient had accrued $0.6 million. The filing states that other claims are not expected to materially affect financial position, though actual outcomes could affect a period’s results or cash flows.
Important facts for investors to verify
- Whether adjusted earnings growth is sustained and how much reported results continue to be affected by restructuring and divestiture charges.
- Progress and timing of the Indianapolis closure, remaining restructuring costs, and realization of the projected savings.
- Segment sales and margins, particularly the continued softness in Flavors & Fragrances and lower Asia Pacific operating income.
- Debt and refinancing terms, covenant headroom, and the effect of working-capital needs on operating cash flow.
- Developments in the SEC inquiry and final court approval and payment under the EEOC settlement.