Sensient Technologies Corporation (SXT) recently reported earnings of 70 cents per share in second quarter 2012, in line with the Zacks Consensus Estimate and 4.5% higher than the year-ago level of 67 cents per share. Reported earnings include litigation cost of 2 cents and unfavorable currency impact of 4 cents. Excluding the impact of foreign currency and the legal cost, earnings-per-share increased 12% in the quarter. The better-than-expected result was attributable to record-high operating income at its Color Group segment.
Total revenue dropped 2.4% year over year to $367.8 million during the quarter, due to unfavorable foreign currency translation. However, in local currency, revenue climbed 2.0%.
Quarter Highlights
During the quarter, sales at the Color Group segment decreased 3.4% year over year to $127.9 million, but in constant currency, it rose 2%. Flavors & Fragrances Group revenue was down 3.1% to $218.9 million, due to an adverse effect of currency translation of 4.3%. However, revenue at Corporate & Other, which includes the company’s operations in Asia Pacific and China as well as the company's flavor businesses in Central and South America, rose 6.1% to $38.5 million, benefiting from solid performances in Thailand and Philippines.
Operating income of the Color Group segment leaped 5.3% to $25.5 million, with operating margin expanding 170 basis points to 20.3%, helped by an improved product mix. However, in local currency, operating income of the Color Group business expanded 11.2%. Flavors & Fragrances Group operating income contracted 6.7% to $33.5 million, due to the weak performance in Europe and increased input costs.
Selling and administrative expenses scaled up 1.3% to $65.7 million, but cost of products sold dipped 3.9% to $247.8 million. Operating income of the company was flat year over year at $54.3 million but up 5% in local currency.
Financial Position
The company ended the quarter with cash flow from operations of $40.1 million, up from $38.4 million in the prior-year period, thanks to the lower use of cash for working capital needs. As of June 30, 2012, long-term debt stood at $340.0 million, up from $309.2 million as of June 30, 2011. The debt to capital ratio was 25% as of June 30, 2012 and debt to EBITDA was 1.5%. During the quarter, the company repurchased approximately 460,000 shares.
Despite the challenging economic conditions, Sensient continues to invest in the business. The company currently has several capital projects in progress to expand capabilities and improve efficiencies. Capital expenditures in the second quarter of 2012 were $30.9 million compared with $13.6 million in the year-ago quarter.
Outlook
The company reaffirmed its earnings outlook in the range of $2.50 – $2.59 per share for 2012. The tax rate for the remainder of 2012 is expected to be between 32% and 33%.
Our Take
We remain optimistic on the stock given its better-than-expected results, strong balance sheet position, strategic investments in infrastructure and continuous enhancement of shareholder value. However, unfavorable currency impact was a drag on the quarterly result. The Zacks Consensus Estimates for the upcoming quarter and fiscal 2012 are 67 cents and $2.54 per share, respectively, reflecting year-over-year growth of 4.17% and 5.10%.
Sensient, which competes with Quaker Chemical Corporation (KWR), carries a Zacks #3 Rank, implying a short-term Hold rating. Besides, we are also maintaining our long-term Neutral recommendation on the stock.
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