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SXT > SEC Filings for SXT > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for SENSIENT TECHNOLOGIES CORP

Form 10-Q for SENSIENT TECHNOLOGIES CORP


8-Nov-2013

Quarterly Report


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

OVERVIEW

Revenue was $372.0 million in the quarter ended September 30, 2013, compared to $369.4 million in the quarter ended September 30, 2012. Revenue for the nine months ended September 30, 2013, was $1.12 billion, an increase of 1.2% from the prior year. Revenue for the Flavors & Fragrances segment increased 0.7% and 1.2% for the quarter and nine months ended September 30, 2013, respectively, from the comparable periods last year. Color segment revenue increased 1.4% for the quarter ended September 30, 2013, but decreased 1.4% for the nine months ended September 30, 2013, from the comparable periods last year. The decrease in the nine-month period is primarily due to a reduction of sales of non-strategic and lower margin products. Corporate & Other revenue decreased 0.6% and increased 3.5% for the quarter and nine months ended September 30, 2013, respectively, from the comparable periods last year. The impact of foreign exchange rates increased consolidated revenue by approximately 20 basis points in both the quarter and nine months ended September 30, 2013, respectively. Additional information on group results can be found in the Segment Information section.

Earlier this year, the Company announced that it was initiating a broad and strategic restructuring plan. The plan included relocating the Flavors & Fragrances Group headquarters to Chicago, consolidating several operating facilities throughout Europe and North America, and reducing headcount by more than 200 employees. The relocation of the Flavors & Fragrances Group headquarters has been completed and the remainder of the restructuring plan is proceeding as planned.

The gross profit margin improved to 32.3% for the quarter ended September 30, 2013, from 31.8% for the same period in 2012. For the nine months ended September 30, 2013, gross profit margin improved 20 basis points to 32.2% from 32.0% for the same period in 2012. Included in cost of sales are $0.5 million and $1.4 million of restructuring costs in the three and nine months ended September 30, 2013, respectively, which reduced gross profit. Before the restructuring costs, gross profit margin increased 60 basis points to 32.4% in the third quarter primarily due to the impact of higher selling prices and improved product mix partially offset by an increase in manufacturing costs. For the nine months ended September 30, 2013, gross profit margin before the restructuring costs was 32.3%, an increase of 30 basis points primarily due to higher selling prices and favorable product mix, which more than offset higher manufacturing costs.

Selling and administrative expenses as a percent of revenue were 19.2% and 18.1% in the quarters ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, selling and administrative expenses as a percent of revenue were 20.2% and 18.3%, respectively. Restructuring costs of $6.0 million and $24.6 million were included in selling and administrative expenses in the three and nine months ended September 30, 2013, respectively. Before the restructuring costs, selling and administrative expenses as a percent of revenue were 17.5% and 18.0% for the three and nine months ended September 30, 2013, respectively. Lower legal and other professional fees and savings from the 2013 restructuring program were partially offset by normal inflationary increases in both the quarter and year-to-date period.

Operating income was $48.8 million and $50.7 million for the third quarters of 2013 and 2012, respectively. Before the $6.6 million of total restructuring costs, operating income for the third quarter of 2013 was $55.4 million, an increase of 9.2% from the prior year. Operating income for the nine months ended September 30, 2013 and 2012, was $133.8 million and $151.5 million, respectively. Before the $26.0 million of total restructuring costs, operating income for the first nine months of 2013 was $159.8 million, an increase of 5.5%. The impact of foreign exchange rates increased operating profit by approximately 50 basis points in both the three and nine months ended September 30, 2013, respectively. Operating margins were 13.1% and 13.7% for the third quarters of 2013 and 2012, respectively, and 12.0% and 13.7% for the nine months ended September 30, 2013 and 2012, respectively. Before the impact of the restructuring costs, 2013 operating margin was 14.9% in the third quarter and 14.3% for the first nine months of 2013.

Interest expense for the third quarters of 2013 and 2012 was $4.0 million and $4.5 million, respectively. For the first nine months of the year, interest expense was $12.3 million in 2013 and $13.2 million in 2012. The decrease is primarily due to lower average interest rates in the quarter and nine months ended September 30, 2013.


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The effective income tax rates were 29.5% and 28.9% for the quarters ended September 30, 2013 and 2012, respectively. The effective income tax rates were 29.8% and 30.1% in the nine months ended September 30, 2013 and 2012, respectively. Before the restructuring costs, the effective tax rates were 30.0% and 29.7% for the three and nine months ended September 30, 2013. The effective tax rates in both 2013 and 2012 were reduced by changes in estimates associated with the finalization of prior year tax items. The effective tax rates for the last five years have been in the range of 28.9% to 30.5%. The Company expects the effective tax rate for all of 2013 to be within this range.

The table below reconciles the reported three and nine months ended September 30, 2013, results to those results before the impact of the restructuring charge, which are non-GAAP financial measures.

    ($'s in thousands)                    Reported       Restructuring      Adjusted
                                            2013            Impact            2013
    Quarter ended September 30, 2013
    Revenue                               $ 371,993     $             -     $ 371,993
    Cost of products sold                   251,934                 545       251,389
    Selling and administrative expenses      71,269               6,041        65,228
    Operating income                         48,790              (6,586 )      55,376
    Interest expense                          4,048                   -         4,048
    Earnings before income taxes             44,742              (6,586 )      51,328
    Income taxes                             13,217              (2,206 )      15,423
    Net earnings                          $  31,525     $        (4,380 )   $  35,905

    Gross margin                               32.3 %                            32.4 %
    Selling and administrative                 19.2 %                            17.5 %
    Operating margin                           13.1 %                            14.9 %




     Nine Months ended September 30, 2013
     Revenue                                $ 1,116,439     $       -     $ 1,116,439
     Cost of products sold                      756,722         1,417         755,305
     Selling and administrative expenses        225,911        24,584         201,327
     Operating income                           133,806       (26,001 )       159,807
     Interest expense                            12,317             -          12,317
     Earnings before income taxes               121,489       (26,001 )       147,490
     Income taxes                                36,243        (7,512 )        43,755
     Net earnings                           $    85,246     $ (18,489 )   $   103,735

     Gross margin                                  32.2 %                        32.3 %
     Selling and administrative                    20.2 %                        18.0 %
     Operating margin                              12.0 %                        14.3 %

The company has included non-GAAP financial measures, to remove the costs related to the restructuring plan and provide investors with a view of operating performance excluding the restructuring costs.

SEGMENT INFORMATION

Flavors & Fragrances -
Revenue for the Flavors & Fragrances segment was $226.3 million and $224.7 million in the third quarters of 2013 and 2012, respectively. Higher revenue in North America ($0.4 million) and Mexico ($0.4 million), combined with the favorable impact of foreign exchange rates ($2.0 million) was partially offset by lower revenue in Europe ($1.3 million). The higher revenue in North America was primarily due to increased selling prices partially reduced by lower volumes. The higher revenue in Mexico was due to both higher selling prices and volume. The lower revenue in Europe was primarily due to lower volumes and lower selling prices.

Flavors & Fragrances segment operating income was $31.8 million in both the third quarters of 2013 and 2012. Higher profit in North America ($2.0 million) was offset by lower profit in Europe ($1.9 million). The higher profit in North America was primarily related to higher selling prices which more than offset increased costs. The lower profit in Europe was due to lower pricing, primarily in fragrances, and higher costs, including an increase in sales and technical staff. Operating income as a percent of revenue was 14.0% and 14.2% for the third quarters of 2013 and 2012, respectively.


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Revenue for the Flavors & Fragrances segment was $671.2 million for the nine months ended September 30, 2013, an increase of 2.0% from $658.3 million reported in the same period of 2012. The increase in revenue was due to higher revenue in North America ($7.0 million), Mexico ($1.2 million) and Europe ($1.1 million) combined with the favorable impact of foreign exchange rates ($3.6 million). The higher revenue in North America was primarily due to higher selling prices partially offset by lower volumes. The higher revenue in Mexico was due to both higher selling prices and increased volumes. The higher revenue in Europe was primarily due to higher volumes partially offset by lower selling prices in fragrances.

Operating income was $93.2 million and $94.3 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease in operating income was primarily due to lower profit in Europe ($3.5 million) partially offset by higher profit in North America ($2.5 million). The lower profit in Europe was primarily due to higher costs, including expansion of our sales and technical staff, and lower selling prices in fragrances. The higher profit in North America was primarily due to the impact of higher selling prices and volumes partially offset by higher raw material and other costs.

Color -
Revenue for the Color segment was $123.9 million and $122.1 million for the quarters ended September 30, 2013 and 2012, respectively. The increase in revenue was primarily related to higher sales of food and beverage colors ($1.8 million) partially offset by lower sales of non-food colors ($0.5 million). The higher sales of food and beverage colors were primarily due to higher volumes. The lower sales of non-food colors were primarily due to the termination of a supply agreement by a major customer of OEM inkjet ink products. Sales under this supply agreement were non-strategic products that the Company continues to rationalize and were partially offset by increased sales of higher margin digital inks and cosmetic colors.

Operating income for the quarter ended September 30, 2013, was $26.8 million, an increase of 10.8% from the $24.2 million reported in the comparable period last year. The increase was primarily due to higher profit on sales of food and beverage colors ($1.6 million) and non-food colors ($0.8 million). The higher profit on sales of food and beverage colors was primarily due to higher volumes and favorable product mix. The higher profit on sales of non-food colors was primarily driven by favorable product mix which more than offset the impact of the lower volume due to the termination of the supply agreement mentioned above. Operating income as a percent of revenue increased 190 basis points to 21.7% in the third quarter of 2013 from 19.8% in the prior year's third quarter.

Color segment revenue was $378.3 million and $383.6 million for the nine months ended September 30, 2013 and 2012, respectively. The lower revenue was primarily due to lower sales of non-food colors ($6.0 million) partially offset by higher sales of food and beverage colors ($0.6 million). The lower sales of non-food colors were primarily related to lower volumes as a result of the termination of the supply agreement. Higher sales of food and beverage colors were primarily related to increased volumes.

Operating income was $80.5 million for the first nine months of 2013, an increase of 5.2% from $76.5 million reported for the first nine months of 2012. The increase was primarily due to the higher profit on sales of non-food colors ($2.8 million) and on sales of food and beverage colors ($0.8 million) combined with the favorable impact of foreign exchange rates ($0.3 million). The higher profit on sales of non-food colors was primarily due to higher prices and favorable product mix. The higher profit on sales of food and beverage colors was primarily due to lower costs and favorable product mix. Operating income as a percent of revenue was 21.3% in the first nine months of 2013, up 130 basis points from the 20.0% reported in the first nine months of 2012.

Corporate & Other -
Revenue for the Corporate & Other segment was $37.6 million and $37.8 million for the quarters ended September 30, 2013 and 2012, respectively. The unfavorable impact of foreign exchange rates more than offset the higher volumes in Asia Pacific.

The Corporate & Other segment reported operating losses of $9.8 million and $5.3 million for the quarters ended September 30, 2013 and 2012, respectively. The lower results were primarily due to $6.6 million of restructuring charges recorded in the third quarter of 2013 partially offset by the profit on higher volumes in Asia Pacific and lower expenses. All restructuring charges for the Company are included in the Corporate & Other segment.

Revenue for the Corporate & Other segment was $112.4 million for the first nine months of 2013, an increase of 3.5% from the $108.6 million reported in the first nine months of 2012. The increase was primarily due to higher volumes in Asia Pacific.


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An operating loss of $40.0 million was reported in the first nine months of 2013 compared to an operating loss of $19.4 million in the prior year period. The lower results were primarily due to $26.0 million of restructuring charges in 2013 partially offset by 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 22.7% and 23.5% as of September 30, 2013, and December 31, 2012, respectively. The decrease was primarily due to higher total equity.

Net cash provided by operating activities was $117.8 million and $92.2 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in cash provided by operating activities was primarily due to lower cash required to fund working capital. The decrease in working capital requirements was primarily driven by a prior year increase in inventory and a current year increase in accounts payable.

Net cash used in investing activities was $71.5 million and $66.4 million for the nine months ended September 30, 2013 and 2012, respectively. Capital expenditures were $77.2 million and $67.6 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in capital expenditures is related to the expansion of capabilities and improvement of efficiencies at various locations combined with the capital required for the restructuring program.

Net cash used in financing activities was $35.3 million in the first nine months of 2013 and $38.7 million in the comparable period of 2012. In the first nine months of 2013, cash provided by operating activities was able to fund capital expenditures and dividend payments resulting in a net reduction of debt of $1.8 million. In the first nine months of 2012, debt increased by $9.5 million to fund capital expenditures, dividend payments and purchases of Company stock. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $34.0 million and $32.5 million were paid during the nine months ended September 30, 2013 and 2012, respectively. Dividends were 68 cents per share for the first nine months of 2013 and 65 cents per share in the comparable period of 2012, reflecting the Company's increase in the quarterly dividend to 23 cents per share beginning in the second quarter of 2013.

The Company's financial position remains strong. The Company entered into an agreement to borrow approximately $125 million of U.S. Dollar and Euro-denominated debt. Proceeds under the debt agreement will be received in November 2013 and will be used to pay off maturing debt and to re-finance floating-rate debt. The Company expects that its cash flows from operations, the new debt agreement and existing lines of credit can be used to meet future cash requirements for operations, capital expenditures, stock repurchases, if any, and dividend payments to shareholders.

CONTRACTUAL OBLIGATIONS

There have been no material changes in the Company's contractual obligations during the quarter ended September 30, 2013. For additional information about contractual obligations, refer to page 21 of the Company's 2012 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, 2012.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements as of September 30, 2013.

CRITICAL ACCOUNTING POLICIES

There have been no material changes in the Company's critical accounting policies during the quarter ended September 30, 2013. For additional information about critical accounting policies, refer to pages 19 and 20 of the Company's 2012 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, 2012.


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