Sensient Technologies Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are in millions of U.S. dollars unless noted. The company makes flavors, fragrances, and colors.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $367.8 | $377.0 | $733.4 | $726.7 |
| Operating income | $54.3 | $54.3 | $100.8 | $97.9 |
| Net earnings | $34.9 | $33.5 | $63.8 | $59.9 |
| Diluted EPS | $0.70 | $0.67 | $1.28 | $1.20 |
| Interest expense | $4.3 | $5.1 | $8.8 | $10.0 |
Q2 revenue declined about 2.4% year over year, while first-half revenue increased about 0.9%. Foreign exchange reduced consolidated revenue by 4.5% in Q2 and 3.2% in the first half. Gross margin improved to 32.6% from 31.6% in Q2 and to 32.1% from 31.2% for the first half. Management attributed the improvement to product mix and higher selling prices more than offsetting higher raw-material costs. Selling and administrative expenses were 17.9% of Q2 revenue versus 17.2%; for the first half, 18.3% versus 17.7%.
Segments and material changes
- Flavors & Fragrances: Q2 revenue was $218.9 million, down from $225.8 million; operating income was $33.5 million versus $35.9 million. First-half revenue was $433.6 million versus $431.8 million, while operating income declined to $62.5 million from $64.5 million. Q2 softness and costs in North America and Europe, and currency effects, weighed on results.
- Color: Q2 revenue was $127.9 million versus $132.4 million, but operating income rose to $25.9 million from $24.6 million. First-half revenue was $259.2 million versus $258.1 million and operating income rose to $51.5 million from $47.0 million. Product mix and pricing supported profits; foreign exchange reduced revenue and income.
- Corporate & Other: Q2 revenue increased to $38.5 million from $36.3 million; operating loss narrowed to $5.1 million from $6.2 million. The first-half operating loss narrowed to $13.2 million from $13.6 million.
Beginning in 2012, Central and South American flavor businesses were moved from Flavors & Fragrances into Corporate & Other; 2011 segment results were restated. The company also adopted a presentation standard for comprehensive income, with no effect on financial condition or operating results.
Cash flow, debt, and liquidity
- First-half operating cash flow was $49.1 million, down from $66.8 million, primarily because of increased working capital, including receivables and inventory restocking.
- Capital expenditures were $47.8 million versus $23.8 million; net investing cash outflow was $46.7 million versus $23.9 million. Spending supported capacity expansion and efficiency improvements.
- Net financing cash outflow was $13.6 million versus $46.7 million. The company had $47.6 million of additional borrowings and $23.4 million of debt payments, and repurchased $17.1 million of stock. Dividends paid were $21.5 million.
- Cash was $12.1 million at June 30, 2012, down from $22.9 million at year-end. Short-term borrowings were $17.8 million and long-term debt was $340.0 million, for total reported debt of approximately $357.8 million. Debt to total capital was 25.0%, up from 24.2% at December 31, 2011.
- Current assets were $721.7 million and current liabilities $186.3 million. Management said operating cash flows and existing credit lines should meet expected needs, including operations, capital spending, potential acquisitions or repurchases, and dividends. No off-balance-sheet arrangements were reported.
Outlook, risks, and unusual items
- Management expected an effective tax rate of approximately 32.5% for the remainder of 2012, excluding discrete items. No specific revenue or earnings guidance was provided.
- Higher selling and administrative expense included legal costs related to an effort to recover costs from a former law firm over an environmental liability tied to a 1988 transaction; management said no further costs were expected for that action.
- Two disclosed disputes remain unresolved. In the Cherry Blossom matter, appeals concern ownership/lien claims involving company cherries and related claims; a separate bankruptcy-related proceeding had a trial scheduled for December 2012, with mediation to be attempted. In the Daito dispute, Sensient’s French subsidiary seeks more than €3.8 million in damages over termination of a distribution relationship; Daito asserts €1.6 million in counterclaims. Trial was anticipated in the first half of 2013. The filing does not provide a clear estimate of the company’s ultimate exposure or any expected recovery.
- Identified business risks include currency fluctuations, raw-material and energy costs, competition, customer and market changes, credit availability, litigation and environmental matters, and information-technology system issues. Management reported no material change in market-risk exposure or critical accounting policies during the quarter.
Important facts for investors to verify
- Whether first-half working-capital demands and elevated capital expenditures continue to constrain operating cash flow and increase borrowing.
- Whether pricing and favorable mix can sustain gross-margin gains despite raw-material inflation and currency headwinds.
- Developments and potential financial effects of the Cherry Blossom and Daito litigation; the filing does not quantify a clear ultimate outcome.
- Actual tax rate versus the approximately 32.5% remainder-of-2012 expectation, and any discrete tax items.