Sensient Technologies Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $369.4 | $363.8 | $1,102.8 | $1,090.4 |
| Operating income | $50.7 | $49.9 | $151.5 | $147.9 |
| Net earnings | $32.9 | $32.0 | $96.7 | $91.9 |
| Diluted EPS | $0.66 | $0.64 | $1.94 | $1.84 |
| Interest expense | $4.5 | $4.9 | $13.2 | $14.9 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $92.2 | $106.6 |
Gross margin was 31.8% in Q3, up 30 basis points, and 32.0% for the nine months, up 70 basis points. Management attributed the improvement to favorable product mix and higher selling prices, which more than offset higher raw-material costs. Selling and administrative expenses rose to 18.1% of revenue in Q3 and 18.3% year to date, chiefly from higher employee costs; year-to-date expenses also included higher legal costs.
For the nine months, operating cash flow fell $14.4 million year over year, primarily because of increased working capital—higher receivables and inventory restocking. Capital expenditures were $67.6 million, versus $44.1 million a year earlier. Cash dividends paid were $32.5 million; the company also repurchased 460,000 shares for $17.1 million.
Financial position and liquidity
- At September 30, cash and equivalents were $12.3 million, current assets $750.4 million, and current liabilities $208.5 million. The current ratio was approximately 3.6.
- Short-term borrowings were $15.9 million and long-term debt was $328.8 million, for total reported borrowings of approximately $344.7 million. Debt to total capital was 23.7%, compared with 24.2% at December 31, 2011. Long-term debt fair value was estimated at $351.6 million.
- Management said cash flows from operations and existing credit lines should meet operating, capital expenditure, potential acquisition, potential repurchase, and dividend needs. There were no off-balance-sheet arrangements and no material quarterly change in contractual obligations.
Material changes and segment results
- Consolidated revenue increased 1.5% in Q3 and 1.1% year to date, while foreign exchange reduced revenue by 3.8% and 3.4%, respectively. Operating income increased 1.5% in Q3 and 2.4% year to date; currency reduced operating income by 3.6% in both periods.
- Flavors & Fragrances: Q3 revenue rose 2.0%, but operating income declined to $31.8 million from $33.1 million; margin fell to 14.2% from 15.0%. North American raw-material costs and customer inventory destocking weighed on profits. Nine-month operating income was $94.3 million versus $97.6 million.
- Color: Q3 revenue was nearly flat at $120.7 million; operating income increased to $23.5 million from $22.9 million, with margin rising to 19.4% from 18.9%. Nine-month operating income increased 7.2% to $74.9 million.
- Corporate & Other: Q3 revenue increased to $40.8 million and operating loss narrowed to $4.6 million from $6.1 million. The segment includes certain Central and South American flavor businesses beginning in 2012; 2011 figures were restated.
- Comprehensive income was $50.4 million in Q3 2012 versus a loss of $31.9 million in Q3 2011. The filing identifies foreign-currency translation as the primary difference between net earnings and comprehensive income.
Outlook, commentary, risks and contingencies
- The company expected an effective tax rate of approximately 32.25% for the remainder of 2012, excluding separately reported discrete items. No specific revenue or earnings forecast was provided.
- A major customer’s termination of a supply agreement is expected to reduce sales of OEM inkjet products beginning in mid-2013. Sensient described these as low-margin products and said it was focusing on higher-margin digital inks, including an expansion in Switzerland.
- Key stated risks include raw-material and energy costs, foreign-exchange movements, customer and market changes, competition, credit availability, litigation and environmental proceedings, and complications from information-technology systems.
- Litigation: In the Cherry Blossom dispute, appeals remain pending over the company’s cherries, claimed reimbursement and Crossroads Financial’s asserted lien and damages claim of an undetermined amount. In the Daito dispute, Sensient Cosmetic Technologies SAS seeks more than €3.8 million over termination of a distribution relationship; Daito asserts €1.6 million in counterclaims. Trial was anticipated in the first half of 2013. Management stated that other routine claims were not expected to materially affect the financial statements.
- Disclosure controls were reported effective. A new enterprise resource planning system was implemented at one significant Flavors & Fragrances location during the quarter; the company reported no other material internal-control change.
Important facts for investors to verify
- Whether revenue and margin trends persist after adjusting for the material negative foreign-exchange impact.
- Whether working-capital investment, particularly receivables and inventories, converts into operating cash flow and whether elevated capital spending continues.
- The effect and timing of the OEM inkjet customer’s supply-agreement termination, and the returns from the digital-inks expansion.
- Developments and potential financial exposure in the Cherry Blossom and Daito litigation, for which outcomes or final amounts were not clear in the filing.
- Whether the expected 32.25% remainder-of-2012 tax rate and management’s liquidity assessment are borne out by subsequent results.