Sensient Technologies Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Dollar amounts below are in millions unless stated otherwise. Sensient makes flavors, fragrances, colors and related products.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $365.6 | $365.7 | Essentially flat |
| Gross margin | 32.0% | 31.5% | Up 0.5 percentage point |
| Operating income | $36.3 | $46.5 | Down 21.8% |
| Operating margin | 9.9% | 12.7% | Down 2.8 percentage points |
| Net earnings | $21.4 | $28.9 | Down 25.8% |
| Diluted EPS | $0.43 | $0.58 | Down $0.15 |
| Operating cash flow | $25.6 | $9.0 | Up $16.6 |
Reported results include $12.8 million of restructuring costs ($9.4 million after tax). Excluding these charges, management reported operating income of $49.1 million, operating margin of 13.4%, gross margin of 32.2%, and net earnings of $30.8 million. These are company-presented non-GAAP measures. The reported net margin was approximately 5.9%, compared with 7.9% a year earlier.
Interest expense was $4.3 million, slightly below $4.4 million. The effective tax rate was 33.2%, versus 31.3%; management said the 2013 rate was 31.2% excluding restructuring costs.
Segments and material changes
- Flavors & Fragrances: Segment revenue was $217.0 million, up 1.1%; operating income was $28.9 million versus $29.1 million. Higher North American selling prices and European volumes supported revenue; higher costs weighed on some regional profits.
- Color: Segment revenue was $127.9 million, down 3.3%; operating income was $26.0 million versus $25.8 million. Lower sales of non-food colors, including desktop ink products under a supply agreement pending termination, were partly offset by favorable mix. Industrial ink sales rose more than 25%.
- Corporate & Other: Revenue was $36.0 million, up 2.8%. Segment net expense was $18.6 million, including restructuring costs; excluding those costs, net expense was $5.8 million.
Consolidated gross margin improved on favorable product mix and higher selling prices, which more than offset increased manufacturing costs. Selling and administrative expense rose to 22.1% of revenue from 18.8%, largely reflecting restructuring charges; excluding those charges, it was 18.8%. Foreign exchange reduced revenue by approximately 20 basis points and increased operating profit by approximately 20 basis points. Segment comparisons reflect the company’s revised reporting of certain Asia-Pacific and China cosmetic and pharmaceutical businesses in Color, with 2012 restated.
Cash flow, liquidity and debt
- Operating cash flow was $25.6 million, with the improvement over 2012 mainly reflecting lower working-capital cash needs. Capital expenditures were $21.0 million, up from $16.9 million.
- Financing activities used $1.5 million; the company paid $11.0 million in dividends and increased debt by a net $9.5 million during the quarter. Cash rose to $19.5 million from $15.1 million.
- At March 31, current assets were $756.1 million and current liabilities $206.5 million; the current ratio was approximately 3.7. Inventories were $425.1 million, down from $442.7 million at year-end.
- Short-term borrowings were $32.8 million and long-term debt was $327.6 million, or $360.4 million combined. Debt to total capital was 23.9%, compared with 23.5% at December 31, 2012. The fair value of long-term debt, including current maturities, was estimated at $347.0 million.
On April 5, 2013, after quarter-end, Sensient agreed to issue 10-year fixed-rate notes of $75 million and approximately €38 million, at 3.66% and 3.06%, respectively. Proceeds are expected in November 2013 and are intended for maturing debt and general corporate purposes. The company said operating cash flow, this financing and existing credit lines should support operating needs, capital expenditures and dividends.
Outlook, unusual items and risks
- The restructuring plan includes moving the Flavors & Fragrances headquarters to Chicago, consolidating facilities in Europe and North America, and reducing headcount by more than 200. Q1 charges totaled $12.8 million, including employee separation, asset impairment and inventory write-down costs. The company expected an additional $13 million to $16 million of restructuring costs by December 2013.
- Management expected a 2013 effective tax rate of 32.0% to 32.5%, excluding discrete items and restructuring-related tax effects.
- Comprehensive income was $3.4 million versus $53.8 million a year earlier. Accumulated other comprehensive loss widened to $22.6 million from $4.6 million at year-end, primarily reflecting foreign-currency translation losses.
- Risks cited include execution of the restructuring and productivity plans; raw-material and energy costs; customer and market changes; competition; foreign exchange and credit availability; litigation and environmental matters; and information-technology implementation. The company reported no material change in market-risk exposure and no off-balance-sheet arrangements.
- In the Vega wage-and-hour class action, the complaint alleged damages and costs not exceeding $5.0 million. The company was evaluating the case and intended to defend itself. Cherry Blossom litigation remained on appeal; the filing did not state a clear expected loss amount. Management said other ordinary-course claims were not expected to materially affect the financial statements.
Important facts for investors to verify
- Whether restructuring implementation and the forecast additional $13 million to $16 million of charges proceed as expected, and whether stated adjusted performance adequately reflects recurring costs.
- Progress in replacing lower-margin Color sales with higher-margin products, and the effect of the pending desktop-ink supply agreement termination.
- Completion, timing and use of proceeds from the November 2013 debt issuance, along with debt maturities, interest costs and liquidity.
- Developments in the Vega and Cherry Blossom proceedings and any resulting financial exposure.
- Whether operating cash flow, working capital and capital spending support the dividend and other cash requirements.