Sensient Technologies Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 6, 2010. Financial amounts below are in U.S. dollars, generally millions, unless otherwise stated. Sensient operates Flavors & Fragrances and Color segments.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $334.0 | $304.0 | $648.0 | $586.8 |
| Operating income | $47.1 | $43.3 | $85.8 | $81.6 |
| Interest expense | $5.5 | $5.7 | $10.3 | $12.9 |
| Net earnings | $28.7 | $25.8 | $52.2 | $47.4 |
| Diluted EPS | $0.58 | $0.53 | $1.06 | $0.98 |
| Dividend per share | $0.20 | $0.19 | $0.39 | $0.38 |
- Q2 revenue rose 9.9%; first-half revenue rose 10.4%. Foreign exchange increased revenue by 0.1% and 2.6%, respectively.
- Gross margin was 31.4% in Q2, up 20 basis points, and 30.8% for the first half, down 10 basis points. Management attributed quarterly improvement to product mix and lower energy costs; first-half pressure reflected lower prices, especially in dehydrated flavors, partly offset by lower energy costs.
- Operating income increased 9.0% in Q2 and 5.1% for the first half. Higher selling and administrative expenses—17.3% of revenue in Q2 versus 16.9%, and 17.6% for the first half versus 17.0%—were attributed mainly to employee costs and performance-based compensation.
- Segments: Q2 Flavors & Fragrances revenue increased 3.8% to $205.0 million, while operating income declined to $33.2 million from $34.2 million. Color revenue increased 20.5% to $113.0 million and operating income rose 39.2% to $20.9 million. For the first half, Flavors & Fragrances revenue rose 3.6% but operating income fell to $60.4 million; Color revenue rose 22.2% and operating income rose 35.7% to $39.0 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $64.2 million, compared with $55.4 million in 2009. Capital expenditures were $19.9 million; cash dividends were $19.2 million. Cash from operations covered capital expenditures and dividends, while debt was reduced.
- Cash at June 30 was $13.9 million, compared with $12.2 million at year-end 2009. Current assets were $645.8 million and current liabilities $208.0 million.
- Short-term borrowings were $39.7 million and long-term debt $349.5 million, for total reported borrowings of about $389.1 million, down from about $428.0 million at December 31, 2009. The company reported debt to total capital of 30.7%, improved from 32.0%.
- Sensient issued $110 million of seven-year notes on May 3, 2010, at a fixed 4.91% coupon, using proceeds to refinance existing debt and for general corporate purposes. Management said operating cash flow and existing credit lines should meet anticipated operating, capital spending and dividend needs.
Outlook, risks and unusual matters
- Management expected a 33.0% effective tax rate for the rest of 2010, excluding discrete tax items. Lower raw-material costs were expected to continue for the remainder of 2010; the filing provides no specific revenue or earnings guidance.
- Key stated uncertainties include raw-material and energy costs, customer demand and new-product activity, pricing and acceptance of price increases, competition, foreign exchange, credit availability, execution of growth and cost initiatives, litigation and environmental matters, and information-technology implementation.
- Environmental settlements relating to the General Color Superfund site and Pleasant Gardens resulted in approximately $11.3 million of pretax charges in 2009. At June 30, 2010, estimated liabilities for these and other environmental matters were $7.6–$10.8 million, with an $8.9 million accrual remaining. The U.S. District Court approved the Superfund consent decree in July 2010; settlement agreements were being executed.
- In the Cherry Blossom vendor dispute, the court dismissed Crossroads’ claims against Sensient. Other claims, including possession of cherry inventory and reimbursement matters, remained subject to a bankruptcy-related stay or further proceedings. Management said other ordinary-course litigation was not expected to materially affect the financial statements.
- Currency translation adjustments were a loss of $72.6 million for the first half, contributing to comprehensive loss of $20.5 million despite net earnings of $52.2 million. Accumulated other comprehensive loss increased to $74.0 million from $1.3 million at year-end.
- The company reported no material changes in contractual obligations or market-risk exposure, and no off-balance-sheet arrangements. Disclosure controls were deemed effective. A new ERP application was implemented at one significant Flavors & Fragrances location during the quarter.
Important facts for investors to verify
- Whether Color’s strong growth and margin gains persist, and whether Flavors & Fragrances can recover profitability amid pricing pressure.
- How actual second-half tax expense compares with the 33.0% tax-rate expectation and whether discrete items arise.
- Final environmental settlement costs and any difference from the $8.9 million accrual and stated liability range.
- Progress and financial consequences of remaining Cherry Blossom-related claims and bankruptcy proceedings.
- Debt reduction, liquidity, and exposure to foreign exchange: currency translation substantially reduced reported equity and comprehensive income in the first half.