Sensient Technologies Corporation — Q1 2015 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2015, compared with the same period in 2014. Sensient operates in Flavors & Fragrances and Color, with results also presented in Corporate & Other. Figures below are in millions of dollars except per-share amounts and where noted.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $346.2 | $367.1 | Down 5.7%; foreign exchange reduced consolidated revenue by approximately 7.3%. |
| Gross margin | 33.9% | 33.9% | Excluding restructuring costs, up 10 basis points. |
| Operating income (GAAP) | $46.4 | $8.6 | Includes restructuring and other costs of $7.1 and $46.2, respectively. |
| Adjusted operating income | $53.6 | $54.8 | Down 2.2%; adjusted operating margin rose 60 basis points to 15.5%. |
| Net earnings (loss) | $30.5 | $(2.1) | Includes discontinued-operations losses of $0.2 and $4.7, respectively. |
| Continuing-operations diluted EPS (GAAP) | $0.65 | $0.05 | Adjusted diluted EPS was $0.76 versus $0.71, up 7.0%. |
| Interest expense | $3.9 | $4.1 | Lower primarily due to a lower average interest rate. |
| Effective tax rate, continuing operations | 27.7% | 40.9% | 2015 rate benefited from an income-tax audit settlement; restructuring also affected both periods. |
| Operating cash flow | $30.6 | $19.8 | Improved primarily due to higher earnings and inventory reductions. |
| Capital expenditures | $13.4 | $14.7 | Net cash used in investing activities was $0.9, including $12.6 of facility-sale proceeds. |
| Cash and cash equivalents | $18.1 | $20.3 at Dec. 31, 2014 | Cash declined $2.2 during the quarter. |
| Debt | $503.8 | $466.9 at Dec. 31, 2014 | Balance-sheet short-term borrowings plus long-term debt; debt-to-total-capital ratio rose to 34.8% from 30.8%. |
Material changes and segment performance
- Revenue declined despite the company’s focus on value-added, technology-driven products and rationalization of non-strategic, lower-margin business. Management said rationalization had its greatest current-quarter impact in Flavors & Fragrances.
- Flavors & Fragrances: Segment revenue was $206.0 million versus $214.3 million; operating income was $30.5 million versus $30.2 million. Currency headwinds offset higher sales in North America and Latin America.
- Color: Segment revenue was $120.5 million versus $133.0 million, and operating income was $26.1 million versus $29.8 million. Foreign exchange and lower non-food color sales weighed on results; food and beverage color sales were higher.
- Adjusted operating income fell 2.2%, while reported operating income rose sharply because Q1 2014 included much larger restructuring costs. Q1 2015 GAAP net earnings also benefited from the lower restructuring charge and reduced discontinued-operations loss.
- Comprehensive loss was $30.9 million in Q1 2015, despite net earnings, largely reflecting a $61.6 million foreign-currency-related other comprehensive loss.
Liquidity, capital allocation, and outlook
- The company reported compliance with its loan covenants and said operating cash flow and available debt capacity should cover operating needs, capital expenditures, dividends, acquisitions, and stock repurchases. It reported no off-balance-sheet arrangements and no material quarterly changes in contractual obligations.
- Net debt increased $44.1 million during the quarter, primarily to fund share repurchases. The company repurchased 951,219 shares for an aggregate cost of $60.8 million; cash-flow-statement purchases reflect settlements within the quarter. Dividends paid were $11.9 million, or $0.25 per share.
- The 2014 restructuring plan targets approximately $30 million in annual operating-cost savings, with the full benefit expected after 2016. Approximately $1.5 million of continuing-operations savings were recognized in Q1 2015; about 110 of an expected 350 position reductions had occurred by March 31.
- Management expected approximately $19 million of additional restructuring costs by the end of 2015 and $6 million by the end of 2016. These estimates cover continuing and discontinued operations and may vary with exchange rates and other assumptions.
- Management expected a 2015 effective tax rate of 29.5%–30.5% before discrete items and restructuring costs. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Restructuring included asset impairments, employee-separation and other costs, inventory and intangible-asset write-downs, and facility closures. Two facilities were sold for net proceeds of $12.6 million, with a $1.3 million gain recorded in restructuring expense.
- Forward-looking results are exposed to currency movements, raw-material and energy costs, customer and market conditions, competition, pricing acceptance, credit availability, execution of growth and restructuring plans, litigation, environmental matters, and information-technology issues.
- The company is involved in ordinary-course claims and litigation. Management did not believe known matters would materially adversely affect financial position, but noted actual outcomes could materially affect results or cash flows in a particular period.
- Foreign-currency translation materially affected other comprehensive income. The company also reported a $0.5 million fair-value liability for forward exchange contracts at quarter-end.
- Management reported effective disclosure controls and procedures and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and segment operating performance stabilize as foreign-exchange effects and portfolio rationalization continue.
- Whether the restructuring plan achieves its approximately $30 million annual savings target after 2016, and whether remaining costs stay within management’s estimates.
- How debt and liquidity evolve after the quarter’s debt-funded repurchases, and whether repurchases remain consistent with other capital needs.
- Whether the expected 2015 tax rate range remains appropriate after discrete tax items and restructuring costs.
- The assumptions behind adjusted operating income and adjusted EPS, which are non-GAAP measures and exclude restructuring and other costs.