Sensient Technologies Corporation — Q3 2014 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2014. Sensient manufactures flavors, fragrances and colors. Unless noted, amounts below are in millions of dollars. Results exclude discontinued operations where the company’s discussion does so; segment comparisons reflect its revised segment classifications, with 2013 restated.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $364.5 | $370.5 | $1,105.0 | $1,112.0 |
| Operating income, GAAP | $36.1 | $49.1 | $94.4 | $134.9 |
| Earnings from continuing operations | $22.7 | $31.8 | $55.4 | $86.0 |
| Net earnings, including discontinued operations | $21.3 | $31.5 | $48.3 | $85.2 |
| Diluted EPS from continuing operations | $0.47 | $0.64 | $1.13 | $1.72 |
- Gross margin was 33.3% in Q3 versus 32.3% a year earlier, and 34.0% for the nine months versus 32.3%. Management attributed the improvement primarily to higher selling prices; before restructuring costs, Q3 gross margin increased 140 basis points.
- Reported operating margin was 9.9% in Q3 versus 13.3%, and 8.5% for the nine months versus 12.1%. Excluding restructuring and other costs, adjusted operating income was $57.1 million in Q3, up 2.5%, and $173.2 million year to date, up 7.7%. Adjusted diluted EPS was $0.78 in Q3, up 8.3%, and $2.31 year to date, up 10.5%. These are non-GAAP measures; see the filing’s reconciliation.
- Q3 segment revenue and operating income: Flavors & Fragrances $215.5 million and $30.2 million; Color $127.8 million and $29.1 million; Corporate & Other $36.2 million and a $23.2 million operating loss. Flavors & Fragrances revenue declined, in part as the company rationalized lower-margin business; Color revenue and operating income increased.
- Comprehensive loss was $35.5 million in Q3, versus comprehensive income of $58.8 million in Q3 2013. Year-to-date comprehensive loss was $3.3 million versus income of $86.8 million, primarily reflecting foreign-currency translation losses reported in other comprehensive income.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $127.1 million, compared with $117.8 million; investing cash outflow was $46.5 million, including $46.7 million of capital expenditures; financing cash outflow was $68.6 million. Cash ended the period at $25.8 million, up from $19.8 million at year-end 2013.
- At September 30, current assets were $820.0 million and current liabilities $229.4 million. Long-term debt was $441.6 million and short-term borrowings $19.0 million. The company reported a debt-to-total-capital ratio of 29.5%, up from 22.2% at December 31, 2013, and said it was in compliance with loan covenants.
- Net debt increased by $75.4 million in the first nine months, primarily to fund the repurchase of 2.0 million shares for $108.8 million. Dividends paid were $35.9 million; dividends declared were $0.25 per share in Q3 and $0.73 per share year to date.
- On October 24, 2014, after quarter-end, Sensient entered a five-year, $450 million credit facility: a $350 million revolver and a $100 million term loan. Borrowings currently carry interest at LIBOR plus 1.375%; the facility is intended to refinance maturing debt and support general corporate purposes.
Material changes, outlook and risks
- The 2014 restructuring plan targets underperforming operations, facility consolidation and efficiencies. The company estimated about $30 million in annual cost savings, with the full benefit expected after 2016, and a workforce reduction of approximately 300. Fewer than 50 employees had been terminated by September 30, with limited savings recognized.
- Restructuring and other costs were $23.1 million in Q3 and $88.8 million year to date, including substantial asset impairments. The company expected another $12–$17 million of costs by the end of 2014 and $20–$25 million through the end of 2016. It reduced the carrying value of certain impaired long-lived assets to an aggregate fair value of approximately $34.9 million.
- A Color business unit ceased production and was classified as discontinued operations. Its after-tax loss was $1.4 million in Q3 and $7.2 million year to date; the filing describes a plan to dispose of the business but does not state a completed sale or sale proceeds.
- Management expected a 31%–32% effective tax rate for the remainder of 2014, before discrete items and restructuring-related tax effects. It said operating cash flow and available debt capacity were expected to cover operating needs, capital expenditures, dividends, acquisitions and repurchases.
- Key stated risks include execution of the restructuring and growth strategies; raw-material and energy costs; customer acceptance of price increases and product introductions; competition and market conditions; foreign-exchange movements; credit availability; customer relationship changes; and litigation or environmental proceedings. Management said ordinary-course claims and litigation were not expected to materially affect the financial statements. No off-balance-sheet arrangements were reported.
Investor verification points
- Track restructuring charges, remaining expected costs, workforce reductions and whether the projected savings materialize on schedule.
- Assess reported GAAP performance separately from management’s non-GAAP adjusted operating income, earnings and EPS.
- Verify the disposal outcome and remaining obligations for the discontinued Color business.
- Monitor debt, covenant compliance, refinancing under the October 2014 facility, and cash uses for repurchases and dividends.
- Review the effect of currency translation and other comprehensive losses, alongside segment revenue and margin trends.