Sensient Technologies Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $349.7 | $314.1 | +11.3% |
| Gross profit margin | 30.8% | 30.2% | +0.6 percentage points |
| Operating income | $43.6 | $38.7 | +12.8% |
| Operating margin | 12.5% | 12.3% | Improved |
| Interest expense | $4.9 | $4.8 | Slight increase |
| Net earnings | $26.4 | $23.5 | +12.6% |
| Diluted earnings per share | $0.53 | $0.48 | +10.4% |
| Cash from operations | $28.4 | $23.4 | Higher by $5.0 |
| Capital expenditures | $10.1 | $8.3 | Higher by $1.8 |
| Dividends per share | $0.21 | $0.19 | Increased |
Segments and material changes
- Flavors & Fragrances: External-customer revenue was $199.6 million, up 7.4%; segment operating income was $29.0 million, up 6.5%. Revenue gains reflected higher selling prices and volumes in North America, higher prices in Europe, and favorable currency effects. Operating margin was 14.0%, versus 14.3%.
- Color: External-customer revenue was $118.9 million, up 14.1%; segment operating income was $22.3 million, up 23.4%. Food and beverage colors, including natural colors, and non-food colors contributed to growth; operating margin rose to 17.8% from 16.8%.
- Corporate & Other: External-customer revenue was $31.2 million, up 30.3%; operating loss widened to $7.7 million from $6.6 million.
- Management reported consolidated revenue growth of 11.3%, with foreign exchange contributing about 1%; currency increased operating income by about 2%. Higher selling prices more than offset higher raw-material costs, lifting gross margin. Selling and administrative expenses rose to 18.3% of revenue from 17.9%, mainly due to employee costs and performance-based compensation.
Cash, debt and liquidity
- Operating cash flow was $28.4 million; investing activities used $10.2 million and financing activities used $20.3 million. Operating cash funded capital expenditures, dividends and net debt repayments.
- Cash and cash equivalents were $14.0 million at March 31, 2011, versus $14.3 million at year-end 2010. The quarter-end balance-sheet figures show short-term borrowings of $20.7 million and long-term debt of $323.2 million. Total debt on this basis was $343.9 million, down from $349.8 million at year-end.
- Debt to total capital improved to 24.9% from 26.2% at December 31, 2010. The company stated it was in compliance with its most restrictive debt covenants.
- On March 22, the company agreed to issue $75 million of fixed-rate senior notes, with rates of 3.77%–4.47%, an average life of six years and final maturity in November 2018. Proceeds were expected in November 2011 for debt repayment and general corporate purposes.
- On April 7, after quarter-end, the company amended its revolving credit facility, increasing capacity from $300 million to $350 million and extending maturity to April 2016. The facility was used to repay a $42.7 million term-loan balance and is available for future liquidity needs. The filing says expected operating cash flows, financing arrangements and existing credit lines should support operations, capital spending and dividends.
Outlook, risks and unusual items
- Management expected a 33.0% effective tax rate for the remainder of 2011, excluding discrete tax items. Q1 rates were 31.8% in 2011 and 30.7% in 2010; both reflected changes in estimates on prior-year tax matters. No full-year revenue or earnings guidance is provided in the filing text.
- Management cautioned that interim results are not necessarily indicative of full-year results. Identified risks include raw-material and energy costs, customer and market conditions, competition, pricing acceptance, currency movements, credit availability, litigation and execution of growth and cost-reduction plans.
- Litigation: The company is appealing adverse rulings in the Cherry Blossom dispute involving company-owned cherries, claimed liens and recovery of payments; related claims and appeals remain unresolved. In the S.A.M. vineyard case, plaintiffs allege nearly $1 million in losses plus punitive damages related to alleged onion taint; the company considers the claims without merit and planned to defend them. Trial was scheduled for October 31, 2011. In the Daito distribution dispute, Sensient’s subsidiary seeks more than €3.8 million in damages, while Daito has asserted €1.5 million in counterclaims; no trial date had been set. Management said other claims were not expected to materially affect the consolidated financial statements, except as described.
- No material changes to contractual obligations, critical accounting policies or market-risk exposure were reported; no off-balance-sheet arrangements were reported. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
- Comprehensive income was $58.0 million versus a loss of $2.3 million in Q1 2010, driven in part by a $31.3 million currency-translation gain compared with a $26.1 million loss a year earlier. These translation movements were recorded in other comprehensive income, not net earnings.
Important facts for investors to verify
- Whether price increases and volume growth continue to offset raw-material inflation, and whether segment margins—particularly Flavors & Fragrances—stabilize or improve.
- Execution and terms of the planned $75 million note issuance and the amended $350 million revolving facility, including effects on refinancing needs and interest expense.
- Developments and potential financial exposure from the Cherry Blossom, S.A.M. vineyard and Daito disputes; the filing does not provide a clear estimate of the company’s potential liability or recovery in these matters.
- Cash conversion and working-capital demands: changes in operating assets and liabilities used $13.5 million of cash in Q1 2011.
- Tax-rate progression against management’s 33.0% expectation and the effect of discrete tax items.