Sensient Technologies Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and results
Sensient supplies flavors and fragrances, colors, and related products. Q2 revenue rose 12.9% year over year to $377.0 million; first-half revenue increased 12.1% to $726.7 million. Foreign exchange contributed 5.7% to quarterly revenue growth and 3.6% to first-half growth.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $377.0m | $334.0m | $726.7m | $648.0m |
| Operating income | $54.3m | $47.1m | $97.9m | $85.8m |
| Net earnings | $33.5m | $28.7m | $59.9m | $52.2m |
| Diluted EPS | $0.67 | $0.58 | $1.20 | $1.06 |
| Gross margin | 31.6% | 31.4% | 31.2% | 30.8% |
| Operating margin | 14.4% | 14.1% | 13.5% | 13.2% |
Quarterly operating income increased 15.2% and first-half operating income increased 14.1%. Higher selling prices and favorable product mix more than offset unfavorable costs; selling and administrative expense rates were 17.2% of revenue for Q2 (17.3% prior year) and 17.7% for the first half (17.6% prior year). Interest expense declined to $5.1 million in Q2 and $10.0 million in the first half, mainly reflecting lower average debt, partly offset by slightly higher rates. Effective tax rates were 31.9% for both 2011 periods, versus 31.1% and 31.0% in the comparable 2010 periods.
Segments and period-over-period changes
- Flavors & Fragrances: Q2 revenue grew 10.5% to $226.5 million and operating income rose 8.8% to $36.1 million; margin was 16.0% versus 16.2%. First-half revenue increased 9.5% to $433.2 million and operating income rose 7.8% to $65.1 million. North America and Europe benefited from higher prices and volumes; Latin American profit was pressured by costs and product mix.
- Color: Q2 revenue rose 17.2% to $132.4 million and operating income increased 18.0% to $24.6 million; margin was 18.6% versus 18.5%. First-half revenue grew 16.8% to $258.1 million and operating income increased 20.5% to $47.0 million. Growth reflected volume gains, pricing, and favorable currency, with raw-material costs partly offsetting food and beverage color profits.
- Corporate & Other: External revenue was $32.9 million in Q2 and $64.0 million for the first half; operating losses were $6.5 million and $14.2 million, respectively. The filing does not provide further explanation of the revenue increase in this segment.
Cash flow, liquidity, and debt
- First-half operating cash flow was $66.8 million, versus $64.2 million a year earlier. Working-capital changes used $23.1 million, compared with $13.7 million in the prior-year period.
- Capital expenditures were $23.8 million, up from $19.9 million. Operating cash flow covered capital expenditures and $21.0 million of dividends, while net debt repayments were $28.5 million.
- Cash was $14.3 million at June 30, 2011. Current assets were $707.3 million and current liabilities $197.6 million (current ratio approximately 3.6).
- Short-term borrowings were $22.2 million and long-term debt $309.2 million, for total reported debt of approximately $331.4 million, down from approximately $349.8 million at December 31, 2010. Debt-to-total-capital improved to 23.6% from 26.2%.
- The company increased its revolving credit facility from $300 million to $350 million, with maturity in April 2016. A $42.7 million term-loan balance was repaid using the facility. Sensient also agreed to issue $75 million of fixed-rate senior notes at rates of 3.77%–4.47%; proceeds were scheduled for November 2011 and intended for debt repayment and general corporate purposes. The company reported compliance with all debt covenants.
Outlook, risks, and contingencies
Management expected a 33.0% effective tax rate for the remainder of 2011, excluding discrete tax items. It stated that operating cash flows, new financing arrangements, and existing credit lines were expected to support operations, capital expenditures, and dividends. The filing provides no quantified revenue, earnings, or EPS forecast.
Key uncertainties identified include raw-material and energy costs, pricing acceptance, currency movements, competition, customer relationships, economic and market conditions, credit availability, and litigation or environmental matters. Management said market-risk exposure, contractual obligations, and critical accounting policies had not materially changed; there were no off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
- Litigation: In the S.A.M. vineyard case, plaintiffs alleged nearly $1 million in losses plus punitive damages related to onion processing at a former California facility. Sensient disputed the claims; trial was scheduled for October 31, 2011. The former facility had closed and onion processing was consolidated at a permitted site.
- Daito dispute: Sensient’s French subsidiary sought more than €3.8 million over termination of a European distribution relationship; Daito counterclaimed for €1.5 million. Proceedings were deferred to September 14, 2011, with no trial date set.
- Cherry Blossom dispute: Sensient appealed adverse rulings involving cherries, alleged liens, and recovery claims. Crossroads Financial also appealed the denial of its damages claim against Sensient. Amounts at issue beyond the cherries’ approximately $0.5 million book value are unclear in the filing.
Management judged that other ordinary-course claims would not materially affect the consolidated financial statements. The interim results are unaudited and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether revenue, pricing, volumes, and margins remain resilient as input costs and foreign-exchange effects change.
- Working-capital requirements, particularly receivables and inventories, and their effect on operating cash flow.
- Execution and terms of the planned $75 million note issuance, use of proceeds, and continued covenant compliance.
- Developments, potential exposure, and any recorded reserves for the disclosed litigation; the filing does not state clear expected loss amounts for these matters.
- Whether the expected 33.0% remainder-of-2011 tax rate and management’s liquidity expectations are realized.