Sensient Technologies Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Unless otherwise noted, amounts below are in millions of U.S. dollars. Comparisons are with the corresponding 2012 periods.
Business context and results
Sensient makes flavors, fragrances, and colors. Second-quarter revenue rose 3.0% to $378.8 million; first-half revenue rose 1.5% to $744.4 million. Growth in Flavors & Fragrances and Corporate & Other was partly offset by lower Color revenue, reflecting lower volumes and the continued rationalization of non-strategic products.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $378.8 | $367.8 | $744.4 | $733.4 |
| Operating income | $48.7 | $54.3 | $85.0 | $100.8 |
| Net earnings | $32.3 | $34.9 | $53.7 | $63.8 |
| Diluted earnings per share | $0.65 | $0.70 | $1.08 | $1.28 |
| Gross margin | 32.3% | 32.6% | 32.2% | 32.1% |
| Operating margin | 12.9% | 14.8% | 11.4% | 13.7% |
| Interest expense | $4.0 | $4.3 | $8.3 | $8.8 |
Reported earnings fell despite higher revenue, primarily reflecting restructuring charges. Excluding those charges, management reported Q2 operating income of $55.3 million, up 1.9%, and first-half operating income of $104.4 million, up 3.6%. Adjusted operating margins were 14.6% for Q2 and 14.0% for the first half; these are company-presented non-GAAP measures.
Segments and material changes
- Flavors & Fragrances: Q2 revenue increased 4.1% to $227.9 million, while segment operating income declined to $32.6 million from $33.5 million. Higher volumes and pricing supported revenue; European costs and lower selling prices weighed on profit. First-half revenue rose 2.6%, while operating income declined to $61.5 million from $62.5 million.
- Color: Q2 revenue declined 2.1% to $126.6 million, but operating income increased to $27.7 million from $26.6 million, with margin rising to 21.9% from 20.5%. First-half revenue declined 2.7%, while operating income rose to $53.7 million from $52.3 million. The company cited lower volumes and the termination of a major customer’s supply agreement for non-strategic OEM inkjet products, partly offset by higher-margin digital inks and favorable mix.
- Corporate & Other: Q2 revenue increased 8.5% to $38.8 million, primarily on higher Asia Pacific volumes. Operating loss widened to $11.6 million from $5.7 million, primarily due to restructuring. First-half operating loss was $30.1 million versus $14.1 million.
Segment reporting was revised in 2013 to place certain Asia Pacific and China cosmetic and pharmaceutical businesses in Color; 2012 segment results were restated for comparison.
Cash flow, liquidity, and debt
- First-half operating cash flow was $70.0 million, up from $49.1 million, primarily because less cash was tied up in working capital. Capital expenditures were $55.2 million, versus $47.8 million; cash flow after capital expenditures was approximately $14.8 million.
- Investing cash outflow was $55.3 million. Financing cash outflow was $1.6 million, including $22.5 million of dividends paid. Cash increased $11.6 million to $26.7 million from year-end 2012.
- At June 30, cash was $26.7 million; current assets were $770.7 million and current liabilities $213.3 million. Short-term borrowings were $30.3 million and long-term debt was $342.7 million. Debt to total capital was 24.3%, compared with 23.5% at December 31, 2012.
- The company reported an agreement to issue $75 million of 10-year U.S. dollar senior notes at 3.66% and approximately €38 million at 3.06%, with proceeds expected in November 2013 and final maturity in November 2023. Management said proceeds would repay maturing debt and refinance floating-rate debt; cash flows, the planned financing, and existing credit lines were expected to meet cash needs.
Restructuring, outlook, and risks
The 2013 restructuring plan includes moving the Flavors & Fragrances headquarters to Chicago, consolidating facilities in Europe and North America, and reducing headcount by more than 200. Charges were $6.6 million in Q2 and $19.4 million for the first half ($4.7 million and $14.1 million after tax, respectively), including employee separations, asset impairments, inventory write-downs, and other costs. The company expected another $6 million to $9 million of charges by year-end 2013.
Management forecast a 32.0%–32.5% effective tax rate for the remainder of 2013, before discrete items and restructuring-related tax effects. The filing provides no specific full-year revenue or earnings guidance. Management cited raw-material and energy costs, customer and market changes, pricing acceptance, competition, foreign exchange, credit availability, litigation and environmental matters, and successful execution of growth and restructuring plans as factors that could cause results to differ from expectations.
Other notable items: foreign currency translation contributed to accumulated other comprehensive loss, which reached $30.3 million at June 30 from $4.6 million at year-end 2012. A California wage-and-hour class action was in discovery, with mediation scheduled for October 2013; the complaint alleged aggregate damages and costs not exceeding $5.0 million. A separate Cherry Blossom dispute was on appeal, with oral argument scheduled for September 2013; the filing does not provide a clear estimate of potential exposure. Management judged other routine claims not likely to materially affect the financial statements. The company reported no off-balance-sheet arrangements and no material changes in market-risk exposure.
Most important facts for investors to verify
- Whether restructuring delivers the anticipated savings and whether remaining 2013 charges stay within the stated $6 million–$9 million range.
- Whether underlying operating improvement, excluding restructuring, is sustained while reported margins and earnings remain pressured.
- Progress in replacing lost OEM inkjet sales with higher-margin digital inks and stabilizing Color volumes.
- Completion and use of the planned November debt financing, refinancing needs, and the effect of higher debt on leverage and liquidity.
- Developments and any potential financial exposure in the Cherry Blossom appeals and Vega class action.