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SXT > SEC Filings for SXT > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for SENSIENT TECHNOLOGIES CORP

Form 10-Q for SENSIENT TECHNOLOGIES CORP


7-May-2014

Quarterly Report


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

OVERVIEW

Revenue was $368.1 million and $365.6 million in the three months ended March 31, 2014 and 2013, respectively. Revenue for the Flavors & Fragrances segment decreased 1.1% for the first quarter of 2014, from the comparable quarter last year. Color segment revenue increased 3.2% for the three months ended March 31, 2014, from the comparable period last year. Corporate & Other revenue increased 1.3% for the quarter ended March 31, 2014, from the comparable period last year. The impact of foreign exchange rates decreased consolidated revenue by approximately 70 basis points in the quarter ended March 31, 2014. Additional information on group results can be found in the Segment Information section.

In March of this year, the Company announced that it was initiating a further restructuring plan to eliminate underperforming operations, consolidate manufacturing facilities and improve efficiencies within the Company. Based on this plan, the Company determined that certain long-lived assets associated with the underperforming operations were impaired, resulting in a write-down of the carrying amounts of these assets. In addition, certain intangible assets were determined to be impaired and were written down. Employee separation and other restructuring costs were also incurred during the first quarter of 2014. For the three months ended March 31, 2014, the Company recorded restructuring and other costs of $52.7 million. In 2013, the Company had restructuring costs to relocate the Flavors & Fragrances Group headquarters and consolidate manufacturing facilities resulting in the recording of $12.8 million of restructuring costs in the first quarter of 2013.

The gross profit margin increased 180 basis points to 33.8% for the quarter ended March 31, 2014, from 32.0% for the same period in 2013. Included in cost of sales for the quarter ended March 31, 2013, is $0.6 million of restructuring costs which reduced gross profit. Before the impact of the 2013 restructuring costs, gross margin increased 160 basis points in the current quarter. The impact of higher selling prices and favorable mix more than offset normal inflationary increases.

Selling and administrative expenses as a percent of revenue were 33.4% and 22.1% in the quarters ended March 31, 2014 and 2013, respectively. Included in the first quarters of 2014 and 2013, were $52.7 million and $12.2 million, respectively, of restructuring and other costs. Before the restructuring and other costs, selling and administrative expenses as a percent of revenue were 19.1% and 18.8% for the quarters ended March 31, 2014 and 2013, respectively, primarily due to inflationary increases.

Operating income was $1.6 million and $36.3 million for the first quarters of 2014 and 2013, respectively. Before the restructuring costs in both 2014 and 2013, operating income was $54.3 million and $49.1 million, respectively, an increase of 10.6%. The impact of foreign exchange rates decreased operating profit by approximately 110 basis points in the quarter. Operating margins were 0.4% and 9.9% for the first quarters of 2014 and 2013, respectively. Before the impact of the restructuring and other costs, first quarter 2014 operating margin increased 140 basis points to 14.8%.

Interest expense for the first quarters of 2014 and 2013 was $4.1 million and $4.3 million, respectively. The decrease is primarily due to a lower average interest rate in the quarter ended March 31, 2014.

The effective income tax rates were 18.7% and 33.2% for the quarters ended March 31, 2014 and 2013, respectively. Before the restructuring and other costs in both years, the effective tax rates were 29.5% and 31.2% for the first quarter of 2014 and 2013, respectively. The effective tax rates in both 2014 and 2013 were reduced by changes in estimates associated with the finalization of prior year tax items. The Company expects the effective tax rate for the remainder of 2014 to be between 31.0% and 32.0% before the income tax expense or benefit related to discrete items and the restructuring and other costs, which will be reported separately in the quarter in which they occur.


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The table below reconciles the reported first quarter results in both 2014 and 2013 to those results before the impact of the restructuring charge, non-GAAP financial measures.

                                         2014                                              2013
($'s in thousands
except per share                    Restructuring &                                   Restructuring
amounts)             Reported        Other Impact        Adjusted      Reported           Impact          Adjusted


Revenue              $ 368,131     $               -     $ 368,131     $ 365,640     $              -     $ 365,640
Cost of products
sold                   243,623                     -       243,623       248,503                  595       247,908
Selling and
administrative
expenses               122,929                52,722        70,207        80,799               12,178        68,621

Operating income         1,579               (52,722 )      54,301        36,338              (12,773 )      49,111
Interest expense         4,131                     -         4,131         4,261                    -         4,261

(Loss) earnings
before income
taxes                   (2,552 )             (52,722 )      50,170        32,077              (12,773 )      44,850
Income taxes              (477 )             (15,274 )      14,797        10,638               (3,366 )      14,004

Net (loss)
earnings             $  (2,075 )   $         (37,448 )   $  35,373     $  21,439     $         (9,407 )   $  30,846

Diluted earnings
per share            $   (0.04 )   $           (0.75 )   $    0.71     $    0.43     $          (0.19 )   $    0.62

Gross margin              33.8 %                              33.8 %        32.0 %                             32.2 %
Selling and
administrative            33.4 %                              19.1 %        22.1 %                             18.8 %
Operating margin           0.4 %                              14.8 %         9.9 %                             13.4 %

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. These non-GAAP financial measures are utilized by management in comparing the Company's operating performance on a consistent basis. The Company believes that these financial measures are appropriate to enhance an overall understanding of the Company's underlying operating performance trends compared to historical and prospective periods. The Company also believes that these measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP.

SEGMENT INFORMATION

Beginning in the first quarter of 2014, the results of operations for the Company's fragrances business in Asia Pacific and China, previously reported in the Corporate & Other segment, are reported in the Flavors & Fragrances Group, and the results of operations for the Company's pharmaceutical flavors business, previously reported in the Flavors & Fragrances Group, are reported in the Color Group with the pharmaceutical colors business. Results for 2013 have been restated to reflect these changes. Restructuring and other charges are reported in the Corporate & Other segment.

Flavors & Fragrances -
Revenue for the Flavors & Fragrances segment was $213.4 million in the first quarter of 2014 and $215.8 million in the comparable period last year. The decrease was primarily due to lower revenue in North America ($3.1 million) partially offset by higher revenue in Europe ($0.4 million) and the favorable impact of exchange rates ($0.3 million). The lower revenue in North America was primarily related to lower natural ingredient volumes as the Flavors & Fragrances segment focuses on higher margin, value-added products.

Operating income increased 5.4% to $29.9 million for the quarter ended March 31, 2014, compared to $28.4 million in the comparable period in 2013. Higher profit in North America ($1.3 million) and Europe ($0.4 million) was partially offset by the unfavorable impact of exchange rates ($0.3 million). The higher profit in North America was primarily due to higher selling prices for both natural ingredients and traditional flavors and lower raw material costs in natural ingredients. The higher profit in Europe was primarily due to lower production expenses. Operating income as a percent of revenue was 14.0%, an increase of 80 basis points from the prior year's quarter.


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Color -
Revenue for the Color segment for the first quarter was $133.6 million in 2014 and $129.5 million in 2013. The increase in revenue was primarily due to higher sales of non-food colors ($2.7 million) and food colors ($2.1 million) partially offset by the unfavorable impact of foreign exchange rates ($0.6 million). The higher sales of both non-food colors and food colors were primarily due to higher volumes.

Operating income increased 10.2% to $29.4 million for the quarter ended March 31, 2014, compared to $26.7 million in the first quarter of 2013. The increase was primarily due to higher profit in food and beverage colors ($1.4 million) and higher profit in non-food colors ($1.4 million). The higher profit of food and beverage colors was primarily due to favorable raw material costs and higher volumes. The higher profit of non-food colors was primarily driven by the higher volumes. Operating income as a percent of revenue was 22.0%, an increase of 140 basis points from the prior year's quarter.

Corporate & Other -
Revenue in the Corporate & Other segment was $35.3 million in the first quarter of 2014, an increase of 1.3% from $34.9 million reported in the prior year's quarter. The increase is primarily related to higher volumes in the Asia Pacific region.

The Corporate & Other segment reported net expense of $57.8 million for the first quarter of 2014 and $18.8 million for the first quarter of 2013. Restructuring costs of $52.7 million and $12.8 million are included in the Corporate & Other segment for the quarters ended March 31, 2014 and 2013, respectively. Group performance is evaluated on operating income of the respective business units prior to the recording of restructuring and other costs. Before restructuring and other costs, the net expense for Corporate & Other was $5.0 million in the first quarter of 2014 and $6.0 million in the comparable quarter of 2013. The improvement in results from 2013 is primarily related an increase in operating income in the Asia Pacific region.

LIQUIDITY AND FINANCIAL CONDITION

The Company's ratio of debt to total capital was 24.9% and 22.5% as of March 31, 2014, and December 31, 2013, respectively. The increase was primarily due to higher debt at March 31, 2014. Debt increases are discussed below.

Net cash provided by operating activities was $19.8 million and $25.6 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in cash provided by operating activities was primarily due to a higher use of cash to fund working capital. The increase in cash required to fund working capital was primarily driven by higher accounts receivables related to the increase in local currency sales in the first quarter of 2014 compared to 2013 and increased inventory at certain locations.

Net cash used in investing activities was $13.9 million and $21.1 million for the three months ended March 31, 2014 and 2013, respectively. Capital expenditures were $14.7 million and $21.0 million for the quarters ended March 31, 2014 and 2013, respectively.

Net cash used in financing activities was $7.8 million in the first three months of 2014 and $1.5 million in the comparable period of 2013. The cash required to fund the increase in working capital, capital expenditures and dividend payments combined with the repurchase of Company stock caused the Company to increase debt by a net amount of $6.2 million compared to $9.5 million in the first quarter of 2013. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $11.5 million and $11.0 million were paid during the three months ended March 31, 2014 and 2013, respectively. Dividends were 23 cents per share for the first quarter of 2014 and 22 cents per share for the first quarter of 2013. The Company announced an increase in its quarterly dividend rate to 25 cents per share for the payment to be made in the second quarter of 2014.

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, dividend payments, acquisitions and stock repurchases.

CONTRACTUAL OBLIGATIONS

There has been no material changes in the Company's contractual obligations during the quarter ended March 31, 2014. For additional information about contractual obligations, refer to page 21 of the Company's 2013 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, 2013.


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OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements as of March 31, 2014.

CRITICAL ACCOUNTING POLICIES

There has been no material changes in the Company's critical accounting policies during the quarter ended March 31, 2014. For additional information about critical accounting policies, refer to pages 19 and 20 of the Company's 2013 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, 2013.

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