Sensient Technologies Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Sensient operates in Flavors & Fragrances, Color, and Asia Pacific. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $342.5 | $346.2 | Down 1.1% reported; up 2.4% in local currency. Currency reduced revenue about 3.5%. |
| Gross margin | 33.8% | 33.9% | Down 0.1 percentage point; restructuring costs reduced margin by 0.2 points versus 0.1 point. |
| Operating income | $47.5 | $46.4 | Up 2.3%; operating margin was 13.9%, versus 13.4%. |
| Adjusted operating income | $50.9 | $53.6 | Down 5.0%, excluding restructuring costs. |
| Net earnings | $31.2 | $30.5 | Earnings from continuing operations were $31.2 million versus $30.7 million. |
| Diluted EPS | $0.69 | $0.65 | Continuing-operations GAAP EPS rose 6.2%; adjusted diluted EPS was $0.75 versus $0.76. |
| Operating cash flow | $46.2 | $30.6 | Increase primarily reflected improved working capital. |
| Capital expenditures | $14.1 | $13.4 | Investing cash outflow was $14.1 million, versus $0.9 million net outflow in 2015, when asset-sale proceeds were $12.6 million. |
Balance sheet and liquidity: At March 31, cash was $24.7 million and current assets were $753.9 million, compared with current liabilities of $213.8 million. Short-term borrowings were $21.0 million and long-term debt was $629.9 million. The company reported net debt increased $8.3 million during the quarter, excluding foreign-exchange effects. It said it was in compliance with loan covenants and expected operating cash flow and available debt capacity to meet expected needs. Long-term debt fair value was estimated at $647.8 million, compared with its $629.9 million carrying value.
Material changes and business drivers
- Flavors & Fragrances revenue fell 3.7% and segment operating income fell 9.7%; lower volumes and mix, raw-material costs, and currency effects weighed on results. Segment operating margin declined to 13.9% from 14.8%.
- Color revenue rose 3.1% and segment operating income rose 6.0%; non-food color sales, particularly cosmetic colors, supported growth. Segment margin increased to 22.1% from 21.5%.
- Asia Pacific revenue increased 3.1% and operating income increased 6.3%, despite unfavorable currency effects; segment margin was 20.2%, versus 19.6%.
- Reported operating income improved while adjusted operating income and adjusted EPS declined. Restructuring costs were $3.3 million versus $7.1 million a year earlier. Lower restructuring expense helped reported results and selling and administrative expense.
- Weighted-average diluted shares fell to 45.0 million from 47.5 million. The company repurchased 263,770 shares for $15.4 million during the quarter; cash-flow-statement treasury-stock purchases were $17.9 million. Dividends paid were $12.2 million, and the declared dividend was $0.27 per share versus $0.25.
Outlook, restructuring, and risks
- No specific full-year revenue or earnings guidance was provided. Management expected restructuring-related annual cost savings of about $27 million when fully implemented, down from the original $30 million estimate partly due to currency movements. It expected $6–$7 million of incremental savings in 2016, including $2 million realized in Q1, with remaining savings expected in 2017.
- The 2014 restructuring plan had incurred $144.8 million of costs through March 31, 2016; approximately $12 million of additional costs were expected by year-end 2016. The plan anticipates about 400 job eliminations; 268 had occurred by quarter-end. The company anticipated selling its European Natural Ingredients business within a year and estimated an additional non-cash loss of about $11 million upon sale.
- The EEOC lawsuit against a wholly owned subsidiary alleges disability-discrimination violations involving five former employees; the EEOC had also identified 13 potentially aggrieved former employees. The company said it could not yet assess the probability or amount of exposure.
- The SEC had made an informal inquiry regarding restructuring disclosures, long-lived-asset accounting, and non-GAAP measures. Sensient said it was cooperating and could not predict the outcome or potential impact.
- Management cited risks including foreign-exchange movements, raw-material costs and availability, customer and market changes, competition, execution of restructuring and productivity initiatives, litigation, and regulatory matters. The company reported no material change in market-risk exposure, contractual obligations, or critical accounting policies during the quarter.
Important facts for investors to verify
- Whether underlying operating performance improves, given reported operating-income growth but declines in adjusted operating income and adjusted EPS.
- Delivery and timing of restructuring savings, remaining costs, planned facility actions, and the European Natural Ingredients sale and estimated loss.
- Effects of foreign exchange, raw-material costs, and segment-level volume and margin trends.
- Debt levels, refinancing capacity, covenant compliance, and continued cash generation amid repurchases and dividends.
- Developments and potential financial exposure in the EEOC matter and SEC inquiry; the filing provides no clear estimate of either exposure.