Sensient Technologies Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Sensient reports Flavors & Fragrances, Color, and Corporate & Other segments. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $372.0 | $369.4 | $1,116.4 | $1,102.8 |
| Operating income | $48.8 | $50.7 | $133.8 | $151.5 |
| Net earnings | $31.5 | $32.9 | $85.2 | $96.7 |
| Diluted EPS | $0.63 | $0.66 | $1.71 | $1.94 |
| Gross margin | 32.3% | 31.8% | 32.2% | 32.0% |
| Operating margin | 13.1% | 13.7% | 12.0% | 13.7% |
| Interest expense | $4.0 | $4.5 | $12.3 | $13.2 |
Revenue rose 0.7% in Q3 and 1.2% year to date, while reported operating income and net earnings declined. Restructuring charges totaled $6.6 million in Q3 and $26.0 million year to date. Excluding those charges, management reported Q3 operating income of $55.4 million, up 9.2%, and nine-month operating income of $159.8 million, up 5.5%. Adjusted operating margins were 14.9% and 14.3%, respectively; these are non-GAAP measures.
Management attributed improved gross margins before restructuring to higher selling prices and favorable product mix, partly offset by higher manufacturing costs. Selling and administrative expenses before restructuring were 17.5% of revenue in Q3 and 18.0% year to date; management cited lower legal and professional fees and restructuring savings, partly offset by inflation.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $117.8 million, versus $92.2 million in 2012; management attributed the increase primarily to lower working-capital cash needs.
- Capital expenditures were $77.2 million, up from $67.6 million. Investing cash use was $71.5 million; financing cash use was $35.3 million.
- Cash at September 30 was $24.3 million, compared with $15.1 million at December 31, 2012. Current assets were $789.4 million and current liabilities $240.2 million.
- Short-term borrowings were $20.3 million and long-term debt was $334.9 million. The company reported a 22.7% debt-to-total-capital ratio, down from 23.5% at year-end 2012. Cash-flow-statement debt activity reflected a net reduction of $1.8 million, excluding currency effects.
- Dividends paid were $34.0 million year to date, or $0.68 per share, compared with $32.5 million and $0.65 per share in 2012. The quarterly dividend increased to $0.23 per share beginning in Q2.
Segment and period comparisons
- Flavors & Fragrances: Q3 segment revenue was $226.3 million, up 0.7%; operating income was $31.8 million, essentially flat. Nine-month revenue rose 2.0% to $671.2 million, while operating income declined to $93.2 million from $94.3 million, mainly reflecting weaker European profit.
- Color: Q3 segment revenue was $123.9 million, up 1.4%, and operating income increased 10.8% to $26.8 million. Nine-month revenue fell 1.4% to $378.3 million, while operating income rose 5.2% to $80.5 million. Non-food color sales were affected by termination of a major customer supply agreement; management cited product rationalization and growth in higher-margin digital inks and cosmetic colors.
- Corporate & Other: Q3 revenue was $37.6 million, down 0.6%; the operating loss widened to $9.8 million from $5.3 million, largely due to restructuring costs. Nine-month revenue increased 3.5% to $112.4 million, while the operating loss widened to $40.0 million from $19.4 million, also principally reflecting restructuring charges.
Outlook, unusual items, and risks
- The restructuring program includes moving the Flavors & Fragrances headquarters to Chicago, facility consolidations in Europe and North America, and reducing headcount by more than 200. The headquarters relocation was completed; the remainder was proceeding as planned. The company expected another $4 million to $6 million of restructuring costs by year-end 2013.
- Management expected the full-year 2013 effective tax rate to be within the recent five-year range of 28.9% to 30.5%. It said operating cash flows, a new debt agreement, and existing credit lines were expected to support operations, capital expenditures, possible stock repurchases, and dividends.
- In April 2013, the company agreed to issue 10-year fixed-rate senior notes of $75 million and approximately €38 million, at 3.66% and 3.06%, respectively. Proceeds were expected in November 2013 for maturing debt repayment and general corporate purposes; management also described approximately $125 million of borrowing to refinance floating-rate debt.
- Restructuring charges included employee separations, asset impairment, inventory write-downs, and a gain on asset sales. Forward-looking risks identified include customer and market changes, execution of growth and restructuring plans, raw-material and energy costs, competition, pricing, foreign exchange, credit availability, litigation, and information-technology issues.
- In the Cherry Blossom litigation, the Michigan Court of Appeals affirmed the trial court on October 31, 2013, including denial of Crossroads Financial’s claim seeking over $1.4 million from Sensient; Crossroads could petition for state supreme court review. A separate California wage-and-hour class action had a proposed settlement capped at $275,000 on a claims-made basis, subject to court approval.
- The company reported no material change in contractual obligations or market-risk exposure, no off-balance-sheet arrangements, and effective disclosure controls. Management said other ordinary-course claims were not expected to materially affect the financial statements.
Important facts for investors to verify
- Whether restructuring costs and expected remaining charges are consistent with the plan, and whether projected savings materialize.
- Whether underlying operating performance, especially European Flavors & Fragrances results and Color sales after the customer agreement ended, improves.
- Completion and terms of the November debt issuance, refinancing plans, and resulting interest and leverage profile.
- Cash conversion and capital-spending needs, including whether elevated inventory and receivables affect working capital.
- Final court approval and claims experience for the Vega settlement, and any further appeal in the Cherry Blossom matter.