Sensient Technologies Corporation — Q3 2011 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. Sensient operates through Flavors & Fragrances, Color, and Corporate & Other.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $363.8 million | $340.9 million | $1,090.4 million | $988.9 million |
| Operating income | $49.9 million | $47.8 million | $147.9 million | $133.6 million |
| Net earnings | $32.0 million | $29.2 million | $91.9 million | $81.4 million |
| Diluted EPS | $0.64 | $0.59 | $1.84 | $1.65 |
| Gross margin | 31.5% | 31.2% | 31.3% | 31.0% |
- Revenue rose 6.7% in Q3 and 10.3% year to date. Foreign exchange increased reported revenue by 3.8% and 3.7%, respectively.
- Operating income increased 4.6% in Q3 and 10.7% year to date. Higher selling prices and favorable product mix more than offset higher costs; selling and administrative expense as a share of revenue also increased.
- Q3 Flavors & Fragrances segment revenue increased 6.7%, while operating income rose 4.5%; segment operating margin was 15.2%, versus 15.5%. Color revenue increased 6.8%, operating income 14.2%, and segment operating margin rose to 18.9% from 17.7%.
- Cash from operations was $106.6 million for the first nine months, versus $110.5 million in 2010. Capital expenditures were $44.1 million, compared with $33.0 million. Operating cash flow funded capital spending, dividends and debt reduction.
- Cash and equivalents were $13.5 million at September 30, 2011, versus $14.3 million at December 31, 2010. Total current assets were $697.6 million and current liabilities $213.0 million.
- Short-term borrowings were $21.0 million and long-term debt $301.1 million. The company reported a 23.8% debt-to-total-capital ratio, down from 26.2% at year-end, and compliance with all debt covenants.
- Dividends paid totaled $31.5 million for the first nine months; dividends per share were $0.63, versus $0.59 in 2010.
Changes, outlook and notable items
- Management attributed year-to-date operating growth to higher revenue and gross margin, partly offset by increased selling and administrative costs. A $1.5 million insurance recovery benefited Q3 2010’s expense ratio.
- The company expects an effective tax rate of approximately 32.5% for the remainder of 2011, excluding discrete items. No specific revenue or earnings guidance is provided.
- A $350 million revolving credit facility, maturing in April 2016, replaced the prior facility; $42.7 million was used to repay a term loan. Sensient also agreed to issue $75 million of fixed-rate senior notes, with proceeds expected in November 2011 for debt repayment and general corporate purposes.
- After quarter-end, Sensient acquired the remaining interest in Brazilian distributor Les Colorants Wackherr do Brasil for $6.8 million. It anticipates a $3–$4 million after-tax remeasurement gain in Q4 2011. The company also expects an approximately $4 million pretax Q4 charge related to improving efficiency and profitability at selected foreign operations.
- Management identifies risks including raw-material and energy costs, currency movements, competition, customer and market changes, credit availability, execution of productivity initiatives, and litigation or other proceedings. The filing reports no off-balance-sheet arrangements and no material change in contractual obligations or market-risk exposure.
Contingencies and unusual items
- Cherry Blossom litigation remains on appeal. Disputes involve Sensient-owned cherries, claims for recoupment, and Crossroads Financial’s claims; the amount of Crossroads’ damages claim is undetermined.
- A California vineyard lawsuit alleges onion-processing emissions caused losses of almost $1 million plus punitive damages. The trial date was vacated while plaintiffs seek new counsel; Sensient says it will defend the claims.
- In a French commercial-court dispute, Sensient’s subsidiary seeks more than €3.8 million over termination of a distribution relationship; Daito asserts €1.5 million in counterclaims. No trial date was set. Management says resolution of other ordinary-course litigation is not expected to materially affect the financial statements, except as described.
- Currency translation reduced Q3 comprehensive income by $63.4 million, resulting in a comprehensive loss of $31.9 million despite positive net earnings.
Important facts for investors to verify
- Whether revenue and margin gains persist after excluding favorable foreign-exchange effects, and whether pricing continues to offset input-cost inflation.
- Working-capital trends, capital spending, and the company’s capacity to sustain dividends while reducing debt.
- Completion and terms of the $75 million note issuance, and the expected Q4 acquisition gain and restructuring charge.
- Developments and potential financial exposure in the Cherry Blossom, vineyard, and Daito disputes; the filing does not provide a clear estimate of total exposure.
- Whether the expected remainder-of-year tax rate and stated outlook are achieved; interim results are not necessarily indicative of full-year results.