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Sensient Technologies Corporation (SXT - Snapshot Report) recently reported earnings of 66 cents per share in third quarter 2012, in line with the Zacks Consensus Estimate and 3.1% higher than the year-ago level of 64 cents per share. Reported earnings include unfavorable currency impact of 3 cents. Excluding impact of foreign currency, earnings-per-share were 5 cents, up 7.8% in the quarter.

Total revenue jumped only 1.5% year over year to $369.4 million during the quarter, due to unfavorable foreign currency translation. However, in local currency, revenue climbed up 5.0%.

Quarter Highlights

During the quarter, sales at the Color Group segment slipped 0.3% year over year to $120.7 million, but in constant currency, it grew 5%. However, despite the adverse currency impact of 3.4%, revenue at Flavors & Fragrances Group increased 2.0% to $224.7 million.

Moreover, 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, grew 8.4% to $40.8 million, benefiting from solid performances in Thailand, Singapore and Philippines.

Operating income of the Color Group segment leaped 2.5% to $23.5 million, with operating margin expanding 50 basis points to 19.4%, helped by an improved product mix. However, Flavors & Fragrances Group operating income contracted 4.0% to $31.8 million, due to customer inventory de-stocking and increased input costs.

Selling and administrative expenses scaled up 3.4% to $67.0 million and cost of products sold spiked 1.1% to $251.8 million. Though, operating income of the company advanced 1.5% year over year to $50.7 million and in local currency increased 8%.

The company also plans to make significant investments in Johannesburg, South Africa, to build a new color and flavor complex. Management believes that the new facility will enhance growth and bolster its position in the African market.

Financial Position

The company ended the quarter with cash flow from operations of $43.1 million, up from $39.7 million in the prior-year period, thanks to the higher cash earnings. As of September 30, 2012, long-term debt stood at $328.8 million, up from $301.1 million as of September 30, 2011. The debt to capital ratio improved to 23.7% at September 30, 2012, from 23.8% at September 30, 2011.

Despite the challenging economic conditions, Sensient continues to invest in the business to upgrade its facilities and develop new technologies. The company currently has several capital projects in progress to expand capabilities and improve efficiencies. Capital expenditures in the third quarter of 2012 were $20 million, flat year over year.  

Outlook

For 2012, the company narrowed its earnings per share outlook to $2.51 to $2.56 from its previous estimate of $2.50 to $2.59 per share.

Our Take

As the company reduced its outlook for 2012, we expect analysts to trim estimates for 2012. The Zacks Consensus Estimates for the upcoming quarter and fiscal 2012 are 61 cents and $2.54 per share, respectively, reflecting a year-over-year growth of 7.60% and 4.75%. However, we remain optimistic on the stock given its strategic investments in infrastructure and expansion in the African market .

Sensient, which competes with McCormick & Company, Inc. (MKC - Analyst Report), carries a Zacks #3 Rank, implying a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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