Sensient Technologies Corporation — Q3 2010 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2010, compared with the same 2009 periods. The company reports Flavors & Fragrances and Color segments, plus Corporate & Other.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $340.9 million | $303.2 million | $988.9 million | $890.0 million |
| Operating income | $47.8 million | $39.0 million | $133.6 million | $120.6 million |
| Net earnings | $29.2 million | $22.8 million | $81.4 million | $70.3 million |
| Diluted EPS | $0.59 | $0.47 | $1.65 | $1.45 |
| Gross margin | 31.2% | 30.7% | 31.0% | 30.8% |
| Interest expense | $5.2 million | $5.5 million | $15.5 million | $18.4 million |
- Revenue grew 12.4% in Q3 and 11.1% year to date; reported growth included foreign-exchange effects. Operating income rose 22.5% in Q3 and 10.7% year to date; net earnings increased 28.0% and 15.8%, respectively.
- Q3 gross margin improved 50 basis points, attributed to higher selling prices and favorable mix, which more than offset higher raw-material costs in certain products. Year-to-date margin rose 20 basis points.
- Color was the strongest segment: revenue increased 20.3% in Q3 and 21.5% year to date; operating income increased 37.5% and 36.3%. Flavors & Fragrances revenue rose 6.4% and 4.5%, while operating income rose 4.8% in Q3 but declined year to date.
Cash, debt and liquidity
- Nine-month operating cash flow was $110.5 million, up from $98.6 million. Capital expenditures were $33.0 million; cash dividends paid were $29.1 million. Financing activities used $77.6 million, primarily reflecting debt repayments.
- At September 30, cash was $12.4 million; current assets were $678.3 million and current liabilities $213.1 million. Total current and long-term borrowings were approximately $360.3 million, down from $428.0 million at December 31, 2009. The reported debt-to-total-capital ratio improved to 27.2% from 32.0%.
- The company issued $110 million of fixed-rate notes at 4.91%, maturing May 3, 2017, and said proceeds were used to repay existing debt and for general corporate purposes. It reported compliance with loan covenants and no off-balance-sheet arrangements.
Outlook, commentary and risks
- Management expected a 33.0% effective tax rate for the remainder of 2010, excluding discrete tax items. The filing provides no specific revenue or earnings guidance.
- Management said operating cash flow and existing credit lines were expected to cover operating needs, capital expenditures and dividends. The annual goodwill impairment test found each reporting unit’s estimated fair value above its carrying value.
- Q3 operating income included insurance proceeds related to prior-year environmental litigation; the company said these increased operating profit by 3.7% in the quarter and 1.2% year to date. The filing also describes a 2009 pre-tax charge of approximately $11.3 million, net of insurance, for environmental settlements and related legal costs.
- Environmental liabilities were estimated at $1.1–$2.2 million, with a $2.0 million accrual. A new California vineyard lawsuit alleged nearly $1 million in losses plus punitive damages; Sensient said it believed the claims lacked merit. Remaining Cherry Blossom litigation concerned inventory, reimbursement and related issues; Crossroads’ claims against Sensient had been dismissed, while other issues remained pending.
- Forward-looking risks include raw-material and energy costs, pricing and customer relationships, competition, market conditions, foreign exchange, credit availability, litigation and environmental matters. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and profit growth reflects sustainable volume and pricing versus foreign exchange, product mix and the environmental-insurance proceeds.
- Whether Color’s strong growth continues and whether Flavors & Fragrances can restore year-to-date operating-income growth.
- Future cash conversion, working-capital requirements, capital spending, dividend funding and the pace of debt reduction.
- Final outcomes and any additional costs from environmental matters and the pending Cherry Blossom and California vineyard litigation.
- Whether the expected 33.0% remainder-of-2010 tax rate and management’s liquidity expectations are realized.