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SXT > SEC Filings for SXT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for SENSIENT TECHNOLOGIES CORP

Form 10-Q for SENSIENT TECHNOLOGIES CORP


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Sensient's third quarter revenue was $369.4 million in 2012, an increase of 1.5% from the $363.8 million reported in 2011. Revenue was $1.10 billion and $1.09 billion for the nine months ended September 30, 2012 and 2011, respectively. The impact of foreign exchange rates decreased consolidated revenue by 3.8% and 3.4% in the quarter and nine months ended September 30, 2012, respectively. Revenue for the Flavors & Fragrances segment increased 2.0% and 1.0% for the quarter and nine months ended September 30, 2012, respectively, from the comparable periods last year. Color segment revenue decreased 0.3% for the quarter and increased 0.2% for the nine months ended September 30, 2012, from the comparable periods last year. Corporate and Other revenue increased 8.4% and 7.3% for the three and nine months ended September 30, 2012, respectively, from the comparable periods last year. Additional information on segment results can be found in the Segment Information section.

The gross profit margin increased 30 basis points to 31.8% for the quarter ended September 30, 2012, from 31.5% for the same period in 2011. For the nine months ended September 30, 2012, the gross profit margin increased 70 basis points to 32.0% from 31.3% in the comparable period in 2011. Favorable product mix combined with higher selling prices more than offset the impact of higher raw material costs for both the quarter and nine months ended September 30, 2012.

Selling and administrative expenses as a percent of revenue were 18.1% and 17.8% in the quarters ended September 30, 2012 and 2011, respectively. The increase in 2012 was primarily due to higher employee costs as a result of increases in sales and technical staff. For the nine months ended September 30, 2012 and 2011, selling and administrative expenses as a percent of revenue were 18.3% and 17.8%, respectively. The year-to-date increase in selling and administrative expenses as a percent of revenue was primarily due to higher employee costs, including increases in sales and technical staff, and higher legal costs incurred by the Company in an attempt to recover costs from one of its former law firms. The action related to a significant environmental liability arising out of a 1988 transaction in which the law firm was the Company's legal advisor. No additional costs were incurred in the third quarter and we do not expect to incur any future costs related to this action.

Third quarter operating income was $50.7 million in 2012, an increase of 1.5% from $49.9 million in 2011. Operating income was $151.5 million for the nine months ended September 30, 2012, an increase of 2.4% from $147.9 million reported in the comparable period of 2011. The impact of foreign exchange rates decreased operating income by 3.6% in both the quarter and nine months ended September 30, 2012. The changes in operating income were due to the revenue, gross profit margin and expense changes discussed above. Additional information can be found in the Segment Information section.

Interest expense for the third quarter of 2012 decreased 9.1% to $4.5 million from $4.9 million in the prior year's quarter. Interest expense decreased 11.3% to $13.2 million for the nine months ended September 30, 2012, from $14.9 million in the same period in 2011. In both the three and nine months ended September 30, 2012, the benefit of lower interest rates more than offset the impact of higher average debt.

The effective income tax rates were 28.9% for both quarters ended September 30, 2012 and 2011. The effective income tax rates were 30.1% and 30.9% for the nine months ended September 30, 2012 and 2011, respectively. The effective tax rates in both 2012 and 2011 were reduced by changes in estimates associated with the finalization of prior year tax items. In addition, the 2012 rate in the quarter and nine-month period and the 2011 rate in the quarter include a change in estimate of the Company's annual effective tax rate. The Company expects the effective tax rate for the remainder of 2012 to be approximately 32.25%, excluding the income tax expense or benefit related to discrete items, which will be reported separately in the quarter in which they occur.


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SEGMENT INFORMATION

Flavors & Fragrances -
Revenue for the Flavors & Fragrances segment was $224.7 million and $220.3 million in the third quarters of 2012 and 2011, respectively. Higher revenue in North America ($8.0 million), Europe ($2.7 million) and Mexico ($1.1 million) was offset by the unfavorable impact of foreign exchange rates $7.4 million. The higher revenue was due to increased volumes in all markets combined with higher prices in North America and Mexico.

Flavors & Fragrances segment operating income was $31.8 million and $33.1 million in the third quarters of 2012 and 2011, respectively. The decrease was primarily attributable to lower profit in North America ($1.9 million) combined with the unfavorable impact of foreign exchange rates ($0.5 million), partially offset by higher profit in Mexico ($0.7 million). The lower profit in North America was primarily related to increased raw material costs, partially offset by higher selling prices, combined with the impact of inventory destocking at certain customers. Higher profit in Mexico was primarily due to favorable pricing and product mix. Operating income as a percent of revenue was 14.2% and 15.0% for the third quarters of 2012 and 2011, respectively.

Revenue for the Flavors & Fragrances segment was $658.3 million and $652.1 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in revenue was primarily due to higher revenue in North America ($18.9 million), Europe ($5.4 million) and Mexico ($2.9 million). These were partially offset by the unfavorable impact of foreign exchange rates ($20.9 million). The higher revenue in both North America and Mexico was primarily due to higher prices and increased volumes. The higher revenue in Europe was primarily due to higher volumes of fragrances.

Operating income was $94.3 million and $97.6 million for the nine months ended September 30, 2012 and 2011, respectively. Lower profit in North America ($1.5 million) and Europe ($1.5 million) and the unfavorable impact of foreign exchange rates ($2.0 million) were partially offset by higher profit in Mexico ($1.6 million). The lower profit in North America was primarily due to higher raw material costs. The lower profit in Europe was primarily due to higher costs.

Color -
Revenue for the Color segment was $120.7 million and $121.0 million for the quarters ended September 30, 2012 and 2011, respectively. The unfavorable impact of foreign exchange rates ($6.3 million) more than offset the higher sales of non-food colors ($4.2 million) and higher sales of food and beverage colors ($1.8 million). The higher sales of non-food colors and food and beverage colors were primarily due to higher volumes and an increase in selling prices. Although sales of OEM inkjet products in the third quarter of 2012 were relatively flat with the prior year, the termination of a supply agreement by a major customer is expected to reduce sales of OEM inkjet ink products beginning in mid-2013. Sales under this supply agreement were low margin products that the Company continues to rationalize. As disclosed late in 2011, the Company is in the process of expanding its digital inks business in Switzerland. The Company believes that there is more potential in digital inks and is focusing on this higher margin business for growth.

Operating income for the quarter ended September 30, 2012, was $23.5 million, an increase of 2.5% from the $22.9 million reported in the comparable period last year. The increase was primarily due to higher profit on sales of food and beverage colors ($2.3 million) partially reduced by lower profit on sales of non-food colors ($0.7 million) and the unfavorable impact of foreign exchange rates ($1.2 million). The higher profit on sales of food and beverage colors was primarily driven by favorable product mix and higher selling prices and volumes. The lower profit on sales of non-food colors was primarily due to higher costs partially offset by increased selling prices and volumes. Operating income as a percent of revenue increased to 19.4% in the third quarter of 2012 compared to 18.9% in the prior year's quarter.

Color segment revenue was $379.9 million and $379.0 million for the nine months ended September 30, 2012 and 2011, respectively. Higher sales of non-food colors ($12.4 million) and food and beverage colors ($5.6 million) were mostly offset by the unfavorable impact of foreign exchange rates ($17.1 million). The higher sales of both non-food colors and food and beverage colors were due to both higher volumes and selling prices.


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Operating income was $74.9 million for the first nine months of 2012, an increase of 7.2% from $69.9 million reported for the first nine months of 2011. The increase was primarily due to the higher profit on sales of food and beverage colors ($8.1 million), partially offset by the unfavorable impact of foreign exchange rates ($3.3 million). The higher profit on sales of food and beverage colors was primarily due to the increased revenue discussed above combined with favorable product mix. Operating income as a percent of revenue was 19.7%, up from 18.4% in the prior year's first nine months.

Corporate & Other -
Corporate & Other includes the Asia Pacific region, China and beginning in 2012 certain of the Company's flavor businesses in Central and South America, in addition to the corporate office expenses. The 2011 results have been restated to reflect this change.

Revenue for the Corporate & Other segment was $40.8 million and $37.6 million for the quarters ended September 30, 2012 and 2011, respectively. The increase was primarily related to higher volumes in Asia Pacific.

The Corporate & Other segment reported operating losses of $4.6 million and $6.1 million for the quarters ended September 30, 2012 and 2011, respectively. The improvement in results was primarily due to the profit on higher volumes in Asia Pacific, and lower expenses.

Revenue for the Corporate & Other segment was $116.4 million and $108.5 million for the nine months ended September 30, 2012 and 2011, respectively. The increase was primarily due to higher volumes in Asia Pacific.

An operating loss of $17.8 million was reported in the first nine months of 2012 compared to $19.6 million in the prior year period. The improvement in results was primarily due to the profit on higher volumes in Asia Pacific, and lower expenses.

LIQUIDITY AND FINANCIAL CONDITION

The Company's ratio of debt to total capital was 23.7% and 24.2% as of September 30, 2012, and December 31, 2011, respectively. The decrease was due to higher total equity at September 30, 2012, partially reduced by higher debt. Debt increased due to the items noted below.

Net cash provided by operating activities was $92.2 million and $106.6 million for the nine months ended September 30, 2012 and 2011, respectively. The decrease in cash provided by operating activities was primarily due to higher cash required to fund an increase in working capital. The increase in working capital was primarily driven by higher accounts receivable related to the increase in local currency sales in 2012 compared to 2011 and inventory restocking at certain locations.

Net cash used in investing activities was $66.4 million and $44.3 million for the nine months ended September 30, 2012 and 2011, respectively. Capital expenditures were $67.6 million and $44.1 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in capital expenditures is related to the expansion of capabilities and improvement of efficiencies at various locations.

Net cash used in financing activities was $38.7 million in the first nine months of 2012 and $57.2 million in the comparable period of 2011. The cash required to fund capital expenditures, treasury stock purchases and dividend payments in the first nine months of 2012 caused the Company to increase debt by a net amount of $9.5 million compared to $28.8 million of net repayments of debt in the comparable period of 2011. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $32.5 million and $31.5 million were paid during the nine months ended September 30, 2012 and 2011, respectively. Dividends were 65 cents per share for the first nine months of 2012 and 63 cents per share in the comparable period of 2011, reflecting the Company's increase in the quarterly dividend to 22 cents per share beginning in the second quarter of 2012.

The Company's financial position remains strong. The Company expects that its cash flows from operations and existing lines of credit can be used to meet future cash requirements for operations, capital expenditures, acquisitions, if any, stock repurchases, if any, and dividend payments to shareholders.


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CONTRACTUAL OBLIGATIONS

There have been no material changes in the Company's contractual obligations during the quarter ended September 30, 2012. For additional information about contractual obligations, refer to pages 21 and 22 of the Company's 2011 Annual Report, portions of which were filed as Exhibit 13.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements as of September 30, 2012.

CRITICAL ACCOUNTING POLICIES

There have been no material changes in the Company's critical accounting policies during the quarter ended September 30, 2012. For additional information about critical accounting policies, refer to pages 19 and 20 of the Company's 2011 Annual Report, portions of which were filed as Exhibit 13.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011.


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