Sensient Technologies Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. Amounts are in millions of dollars except per-share data. Sensient operates in Flavors & Fragrances, Color, and Corporate & Other.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Revenue | $365.7 | $349.7 | Up 4.6%; foreign exchange reduced growth by approximately 2% |
| Gross profit margin | 31.5% | 30.8% | Up 70 basis points |
| Operating income | $46.5 | $43.6 | Up 6.6%; operating margin approximately 12.7% vs. 12.5% |
| Interest expense | $4.4 | $4.9 | Lower average interest rate |
| Net earnings | $28.9 | $26.4 | Up 9.4% |
| Diluted EPS | $0.58 | $0.53 | Up $0.05 |
| Comprehensive income | $53.8 | $58.0 | Down; filing does not explain the year-over-year change in this summary |
| Operating cash flow | $9.0 | $28.4 | Lower mainly because of increased working-capital requirements |
| Capital expenditures | $16.9 | $10.1 | Higher investment; operating cash flow less capital expenditures was negative $8.0 million |
Segments and material changes
- Flavors & Fragrances: Revenue was $214.7 million, up 4.3%; operating income was $29.1 million versus $28.6 million. Higher North American and Mexican volumes were partly offset by weaker European profit and unfavorable currency effects. Segment operating margin was 13.5% versus 13.9%.
- Color: Revenue was $131.3 million, up 4.5%; operating income increased 14.2% to $25.5 million. Higher volumes and selling prices supported results; margin increased 160 basis points to 19.4%.
- Corporate & Other: Revenue increased 7.5% to $37.2 million, including intersegment revenue. Central and South American flavors operations were reclassified to this segment beginning in 2012; 2011 results were restated.
- Management attributed improved gross margin to higher selling prices more than offsetting raw-material cost increases and to favorable product mix. Selling and administrative expense rose to 18.8% of revenue from 18.3%, reflecting employee and performance-compensation costs and higher legal and professional fees.
Liquidity, debt, and capital allocation
- At March 31, 2012, cash was $13.3 million, current assets $733.8 million, and current liabilities $198.7 million. Cash declined from $22.9 million at year-end 2011; receivables rose to $247.8 million from $219.5 million and inventories to $418.1 million from $414.4 million.
- Long-term debt was $336.7 million, compared with $312.4 million at December 31, 2011; short-term borrowings were $22.0 million. Debt to total capital was 24.9%, up from 24.2%. The reported fair value of long-term debt, including current maturities, was $359.0 million.
- Investing cash outflow was $17.0 million; financing cash outflow was $5.9 million. The company repurchased 410,000 shares for $15.4 million (average $37.46) and paid $10.6 million in dividends. Net debt increased by $19.8 million, excluding foreign-exchange effects.
- The quarterly dividend was $0.21 per share in Q1; the company announced an increase to $0.22 for the Q2 payment. Management said operating cash flows and existing credit lines were expected to cover operating needs, capital expenditures, possible repurchases, and dividends.
Outlook, risks, and contingencies
- Management expected an effective tax rate of 32%–33% for the remainder of 2012, excluding discrete items. Q1’s rate was 31.3%, versus 31.8% in Q1 2011.
- No specific revenue or earnings guidance was provided. Forward-looking risks include customer product introductions and relationships, execution of growth and productivity plans, raw-material and energy costs, pricing acceptance, competition, economic conditions, foreign-exchange movements, credit availability, litigation, and information-technology issues.
- The company reported no off-balance-sheet arrangements and no material quarterly changes in contractual obligations or market-risk exposure. Disclosure controls were assessed as effective.
- Legal matters: The S.A.M. vineyard case was settled for a nominal one-time payment, without admission of fault, in exchange for releases and dismissal. Cherry Blossom-related appeals and bankruptcy claims remained pending, with a trial involving a Cherry Blossom principal scheduled for August 2012. In the Daito dispute, Sensient’s French subsidiary sought more than €3.8 million in damages; Daito asserted €1.6 million in counterclaims, and no trial date had been set. Management said other litigation was not expected to materially affect the financial statements, except as described.
Most important facts for investors to verify
- Whether working-capital investment, particularly higher receivables, continues to constrain operating cash flow.
- Whether pricing and product mix continue to offset raw-material cost increases, and how foreign exchange affects reported growth and profits.
- Progress on debt levels, liquidity, capital spending, share repurchases, and the increased dividend.
- Developments and potential financial exposure in the Cherry Blossom and Daito matters; the S.A.M. case has been settled.
- The filing’s MD&A appears to reverse the 2012 and 2011 labels when describing financing cash flow; the cash-flow statement reports outflows of $5.9 million in 2012 and $20.3 million in 2011.