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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-7626
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SENSIENT TECHNOLOGIES CORPORATION
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0561070
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-5304
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(Address of principal executive offices)
Registrant's telephone number, including area code: (414) 271-6755
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Class Outstanding at October 31, 2003
- --------------------------------------- -----------------------------
Common Stock, par value $0.10 per share 46,677,311 shares
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SENSIENT TECHNOLOGIES CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Statements of Earnings
- Three and Nine Months Ended September 30, 2003 and 2002. 1
Consolidated Condensed Balance Sheets
- September 30, 2003 and December 31, 2002. 2
Consolidated Condensed Statements of Cash Flows
- Nine Months Ended September 30, 2003 and 2002. 3
Notes to Consolidated Condensed Financial Statements. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 10
Item 4. Controls and Procedures. 10
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures. 12
Exhibit Index. 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue $247,288 $237,995 $744,313 $690,694
Cost of products sold 168,505 159,439 503,131 463,208
Selling and administrative expenses 44,661 41,621 133,433 119,298
-------- -------- -------- --------
Operating income 34,122 36,935 107,749 108,188
Interest expense 7,642 7,249 22,459 22,428
-------- -------- -------- --------
Earnings before income taxes 26,480 29,686 85,290 85,760
Income taxes 5,813 9,500 22,492 27,444
-------- -------- -------- --------
Net earnings $ 20,667 $ 20,186 $ 62,798 $ 58,316
======== ======== ======== ========
Average number of common shares outstanding:
Basic 46,583 47,335 46,819 47,430
======== ======== ======== ========
Diluted 46,881 47,660 47,145 47,828
======== ======== ======== ========
Earnings per common share:
Basic $ .44 $ .43 $ 1.34 $ 1.23
======== ======== ======== ========
Diluted $ .44 $ .42 $ 1.33 $ 1.22
======== ======== ======== ========
Dividends per common share $ .1500 $ .1325 $ .4400 $ .3975
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
-1-
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,881 $ 2,103
Trade accounts receivable, net 176,205 160,155
Inventories 304,945 269,701
Prepaid expenses and other current assets 51,063 43,619
----------- -----------
TOTAL CURRENT ASSETS 541,094 475,578
----------- -----------
OTHER ASSETS 88,064 85,679
GOODWILL 413,987 384,241
INTANGIBLE ASSETS, NET 13,597 13,235
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 200,138 182,464
Machinery and equipment 524,754 462,925
----------- -----------
724,892 645,389
Less accumulated depreciation (353,103) (314,151)
----------- -----------
371,789 331,238
----------- -----------
TOTAL ASSETS $ 1,428,531 $ 1,289,971
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 68,685 $ 55,546
Accrued salaries, wages and withholdings from employees 12,728 14,197
Other accrued expenses 71,744 65,069
Income taxes 30,121 27,526
Short-term borrowings 104,382 34,618
Current maturities of long-term debt 12,181 12,374
----------- -----------
TOTAL CURRENT LIABILITIES 299,841 209,330
DEFERRED INCOME TAXES 11,077 10,942
OTHER LIABILITIES 11,734 16,141
ACCRUED EMPLOYEE AND RETIREE BENEFITS 42,669 42,493
LONG-TERM DEBT 519,674 511,707
SHAREHOLDERS' EQUITY:
Common stock 5,396 5,396
Additional paid-in capital 71,943 72,390
Earnings reinvested in the business 662,950 621,525
Treasury stock, at cost (148,682) (137,074)
Unearned portion of restricted stock (2,154) (2,951)
Accumulated other comprehensive income (loss) (45,917) (59,928)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 543,536 499,358
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,428,531 $ 1,289,971
=========== ===========
See accompanying notes to consolidated condensed financial statements.
-2-
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
-----------------------
2003 2002
-------- --------
Net cash provided by operating activities $ 41,358 $ 82,720
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (56,023) (22,911)
Acquisition of new businesses (net of cash acquired) (17,107) (48,450)
Proceeds from sale of assets 4,172 5,348
Decrease (increase) in other assets 463 (1,052)
-------- --------
Net cash used in investing activities (68,495) (67,065)
-------- --------
Cash flows from financing activities:
Proceeds from additional borrowings 93,033 14,049
Reduction in debt (26,478) (12,217)
Purchase of treasury stock (17,932) (11,950)
Dividends paid (21,372) (18,892)
Proceeds from options exercised and other 5,675 11,095
-------- --------
Net cash provided by (used in) financing activities 32,926 (17,915)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 989 49
-------- --------
Net increase (decrease) in cash and cash equivalents 6,778 (2,211)
Cash and cash equivalents at beginning of period 2,103 2,317
-------- --------
Cash and cash equivalents at end of period $ 8,881 $ 106
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 17,702 $ 18,458
Income taxes 18,156 16,688
Liabilities assumed in acquisitions $ 992 $ 11,454
See accompanying notes to consolidated condensed financial statements.
-3-
SENSIENT TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
In the opinion of Sensient Technologies Corporation (the "Company"), the
accompanying unaudited consolidated condensed financial statements contain
all adjustments, consisting of only normal recurring accruals, necessary to
present fairly the financial position of the Company as of September 30,
2003 and December 31, 2002, the results of operations for the three months
and nine months ended September 30, 2003 and 2002, and cash flows for the
nine months ended September 30, 2003 and 2002. The results of operations
for any interim period are not necessarily indicative of the results to be
expected for the full year.
Expenses are charged to operations in the year incurred. However, for
interim reporting purposes, certain expenses are charged to operations
based on an estimate rather than as expenses are actually incurred.
Certain amounts as previously presented have been reclassified to conform
to the current period presentation.
The Company has completed its annual assessment of the carrying value of
goodwill versus fair value as of July 1, 2003. The assessment yielded no
impairment.
Refer to the notes in the Company's annual consolidated financial
statements for the year ended December 31, 2002, for additional details of
the Company's financial condition and a description of the Company's
accounting policies, which have been continued without change.
2. Inventories
At September 30, 2003 and December 31, 2002, inventories included finished
and in-process products totaling $224.4 million and $195.9 million,
respectively, and raw materials and supplies of $80.5 million and $73.8
million, respectively.
3. Segment Information
Operating results and the related assets by segment for the periods
presented are as follows:
(In thousands)
Flavors & Corporate &
Fragrances Color Other Consolidated
---------- -------- ----------- ------------
Three months ended September 30, 2003:
Revenues from external customers $143,538 $ 85,940 $ 17,810 $247,288
Intersegment revenues 5,943 1,549 -- 7,492
-------- -------- -------- --------
Total revenue $149,481 $ 87,489 $ 17,810 $254,780
======== ======== ======== ========
Operating income (loss) $ 21,594 $ 17,608 $ (5,080) $ 34,122
Interest expense -- -- 7,642 7,642
-------- -------- -------- --------
Earnings (loss) before income taxes $ 21,594 $ 17,608 $(12,722) $ 26,480
======== ======== ======== ========
Three months ended September 30, 2002:
Revenues from external customers $138,227 $ 85,048 $ 14,720 $237,995
Intersegment revenues 6,638 4,188 -- 10,826
-------- -------- -------- --------
Total revenue $144,865 $ 89,236 $ 14,720 $248,821
======== ======== ======== ========
Operating income (loss) $ 20,703 $ 21,251 $ (5,019) $ 36,935
Interest expense -- -- 7,249 7,249
-------- -------- -------- --------
Earnings (loss) before income taxes $ 20,703 $ 21,251 $(12,268) $ 29,686
======== ======== ======== ========
-4-
(In thousands)
Flavors & Corporate &
Fragrances Color Other Consolidated
---------- ---------- ----------- ------------
Nine months ended September 30, 2003:
Revenues from external customers $ 425,600 $ 269,919 $ 48,794 $ 744,313
Intersegment revenues 17,600 8,632 -- 26,232
---------- ---------- ---------- ----------
Total revenue $ 443,200 $ 278,551 $ 48,794 $ 770,545
========== ========== ========== ==========
Operating income (loss) $ 63,878 $ 59,435 $ (15,564) $ 107,749
Interest expense -- -- 22,459 22,459
---------- ---------- ---------- ----------
Earnings (loss) before income taxes $ 63,878 $ 59,435 $ (38,023) $ 85,290
========== ========== ========== ==========
Assets $ 673,775 $ 603,167 $ 151,589 $1,428,531
========== ========== ========== ==========
Nine months ended September 30, 2002:
Revenues from external customers $ 409,110 $ 237,715 $ 43,869 $ 690,694
Intersegment revenues 16,987 14,654 -- 31,641
---------- ---------- ---------- ----------
Total revenue $ 426,097 $ 252,369 $ 43,869 $ 722,335
========== ========== ========== ==========
Operating income (loss) $ 63,371 $ 59,599 $ (14,782) $ 108,188
Interest expense -- -- 22,428 22,428
---------- ---------- ---------- ----------
Earnings (loss) before income taxes $ 63,371 $ 59,599 $ (37,210) $ 85,760
========== ========== ========== ==========
Assets $ 561,253 $ 507,249 $ 138,539 $1,207,041
========== ========== ========== ==========
4. Acquisitions
In August of 2003, the Company acquired Formulabs Iberica S.A., a
manufacturer and marketer of specialty inks, primarily for inkjet
applications, for $13.0 million in cash. In March of 2003, the Company
acquired certain assets of Kyowa Koryo Kagaku Kabushiki Kaisha, a former
Japanese flavor producer, for $4.1 million, net of cash acquired. The
Company has not completed the purchase price allocations related to these
acquisitions.
During the first nine months of 2002, the Company acquired four businesses
for cash in an aggregate amount of $48.5 million (net of cash acquired).
The businesses acquired were Cardre, Inc., a manufacturer of specialty
ingredients used in cosmetics, ECS Specialty Inks and Dyes, a producer and
marketer of inks for specialty printing applications, the flavors and
essential oil operations of C. Melchers GmbH & Company, and SynTec GmbH, a
manufacturer of specialty dyes and chemicals for the imaging industry. In
October of 2003, the Company paid $2.2 million and may be required to pay
up to 1.8 million Euro (approximately $2.1 million) of additional cash
consideration for the 2002 acquisitions subject to specific performance
targets in the second year following the acquisitions.
The operating results of the acquired businesses in 2003 and 2002 are
included in the financial results of the Company from the date of
acquisition.
5. Shareholders' Equity
During the nine months ended September 30, 2003 and 2002, the Company
repurchased 0.9 million and 0.6 million shares of its common stock for an
aggregate price of $17.9 million and $11.9 million, respectively.
Comprehensive income is comprised of net earnings, foreign currency
translation and unrealized gains and losses on cash flow hedges. Total
comprehensive income for the three months ended September 30, 2003 and 2002
was $16.6 million and $17.1 million, respectively. Total comprehensive
income for the nine months ended September 30, 2003 and 2002 was $76.8
million and $62.0 million, respectively.
6. Stock Plans
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." Stock options are granted at prices equal to
-5-
the fair value of the Company's common stock on the dates of grant.
Accordingly, no significant compensation cost has been recognized for the
grant of stock options under the Company's stock option plans. If the
Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net
earnings and earnings per common share would have been reduced to the pro
forma amounts indicated below:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net earnings:
As reported $ 20,667 $ 20,186 $ 62,798 $ 58,316
Add: reported stock compensation
Expense - net of tax 120 102 379 355
Less: fair value stock compensation
Expense - net of tax (562) (453) (1,824) (1,547)
---------- ---------- ---------- ----------
Pro forma net earnings $ 20,225 $ 19,835 $ 61,353 $ 57,124
========== ========== ========== ==========
Earnings per common share:
Basic as reported $ .44 $ .43 $ 1.34 $ 1.23
Less: net impact of fair value stock
Expense - net of tax (.01) (.01) (.03) (.03)
---------- ---------- ---------- ----------
Basic pro forma $ .43 $ .42 $ 1.31 $ 1.20
Diluted as reported $ .44 $ .42 $ 1.33 $ 1.22
Less: net impact of fair value stock
Expense - net of tax (.01) -- (.03) (.03)
---------- ---------- ---------- ----------
Diluted pro forma $ .43 $ .42 $ 1.30 $ 1.19
7. Cash Flows from Operating Activities
Cash flows from operating activities are detailed below:
Nine Months Ended September 30,
-------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net earnings $ 62,798 $ 58,316
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization 32,330 31,010
Gain on sale of assets (2,663) (473)
Changes in operating assets and liabilities (net of
effects of acquisitions of businesses) (51,107) (6,133)
-------- --------
Net cash provided by operating activities $ 41,358 $ 82,720
======== ========
8. Guarantees
In connection with the sale of substantially all of the Company's Yeast
business on February 23, 2001, the Company has provided the buyer of these
operations with indemnification against certain potential liabilities as is
customary in transactions of this nature. The period provided for
indemnification against most types of claims has now expired, but for
specific types of claims including, but not limited to tax and
environmental liabilities, the amount of time provided for indemnification
is either five years or the applicable statute of limitations. The maximum
amount of the Company's liability related to these provisions is capped at
approximately 35% of the consideration received in the transaction. In
cases where the Company believes it is probable that payments will be
required under these provisions, a liability was recognized at the time of
the asset sale. The Company believes that the probability of incurring
payments under these provisions in excess of the amount of the liability
recorded is remote.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenue for the quarter ended September 30, 2003 increased by 3.9% to
$247.3 million from $238.0 million for the comparable quarter of 2002. For
the nine months ended September 30, 2003, revenue increased by 7.8% to
$744.3 million. Revenue for the Flavors & Fragrances segment increased by
3.2% for the quarter and by 4.0% for the nine months ended September 30,
2003 over the comparable periods last year. Revenue for the Color segment
decreased by 2.0% for the quarter and increased by 10.4% for the nine
months ended September 30, 2003 over the comparable periods last year.
Additional information on group results can be found in the Segment
Information section.
The gross profit margin was 31.9% and 33.0% for the three months ended
September 30, 2003 and 2002, respectively. The decrease in margin resulted
from lower sales of North American food and beverage colors and lower
pricing in technical colors and dehydrated flavors. For the nine months
ended September 30, 2003 and 2002, the gross profit margin was 32.4% and
32.9%, respectively, the decrease was for the same reasons as provided for
the quarter.
Selling and administrative expenses as a percent of revenue were 18.1% and
17.5% for the three months ended September 30, 2003 and 2002, respectively.
Selling and administrative expenses as a percent of revenue were 17.9% and
17.3% for the nine months ended September 30, 2003 and 2002, respectively.
The increase was primarily attributable to expenses related to personnel
changes and additions to manage the expanded size and scope of the
Company's businesses after the recent acquisitions.
Operating income for the three months ended September 30, 2003 was $34.1
million, compared to $36.9 million for the comparable quarter in 2002.
Operating income for the nine months ended September 30, 2003 was $107.7
million versus $108.2 million for the comparable period last year.
Favorable foreign exchange rates increased both revenue and operating
income by approximately 4% and 5% for the three month and nine month
periods ended September 30, 2003, respectively, over the comparable period
last year.
Interest expense for the three months ended September 30, 2003 was $7.6
million, an increase of 5.4% over the prior year. The increase was a result
of higher average debt balances partially offset by lower interest rates.
For the nine months ended September 30, 2003, interest expense was
consistent with the prior year at $22.5 million.
The effective income tax rate was 22.0% and 32.0% for the three months
ended September 30, 2003 and 2002, respectively. The effective income tax
rate was 26.4% and 32.0% for the nine months ended September 30, 2003 and
2002, respectively. The effective tax rate for the three months ended
September 30, 2003 was reduced by the utilization of foreign tax losses
resulting from a recently identified tax planning strategy. The effective
tax rate for the nine months ended September 30, 2003 was also reduced by
the favorable settlement of certain prior year tax matters, the utilization
of foreign tax losses and other nominal adjustments. Management expects the
effective tax rate for the remainder of 2003 to be between 31% and 32%.
SEGMENT INFORMATION
Flavors & Fragrances -
For the three months ended September 30, 2003, the Flavors & Fragrances
segment reported a 3.2% increase in revenue, to $149.5 million compared to
$144.9 million for the same period last year. Favorable foreign exchange
rates resulted in a 4.4% increase in revenue. Excluding exchange rates,
revenue decreased 1.2%, or $1.8 million, primarily as a result of declines
in the U.S. flavors business ($3.7 million), partially offset by improved
results in Latin America ($2.2 million). Operating income in the quarter
ended September 30, 2003 was $21.6 million compared to $20.7 million last
year. Excluding the favorable effect of exchange rates ($0.8 million), the
increase was primarily attributable to improvements in the aroma chemicals
business in Spain ($0.9 million), reduced by lower sales of flavors in the
U.S. ($0.6 million). Operating income as a percent of revenue was 14.4%, an
increase of 10 basis points from the comparable quarter last year.
-7-
For the nine months ended September 30, 2003, the Flavors & Fragrances
segment reported a 4.0% increase in revenue, to $443.2 million compared to
$426.1 million for the same period last year. Favorable foreign exchange
rates and acquisitions resulted in a 5.3% and 0.9% increase in revenue,
respectively. Excluding exchange rates and acquisitions, revenue decreased
2.2%, or $9.3 million, primarily as a result of soft U.S. demand for
flavors ($10.6 million) partially offset by revenue growth in Latin America
($2.0 million). Operating income for the nine months ended September 30,
2003 was $63.9 million compared to $63.4 million last year. Favorable
foreign exchange rates and acquisitions resulted in a 4.2% and 1.0%
increase in operating income, respectively. Excluding the effect of
exchange rates ($2.7 million) and acquisitions ($0.7 million), the $2.8
million decrease was attributable to lower sales of flavors in the U.S.
($3.1 million) partially offset by gains in other markets. Operating income
as a percent of revenue was 14.4%, a decrease of 50 basis points from the
comparable period last year.
Color -
For the three months ended September 30, 2003, revenue for the Color
segment declined by $1.7 million, or 2.0% to $87.5 million. Favorable
foreign exchange rates and acquisitions resulted in a 3.2% and 2.5%
increase in revenue, respectively. Excluding exchange rates and
acquisitions, revenue decreased 7.7% or $6.8 million, primarily the result
of declines in the North American food and beverage colors business ($6.3
million) and in the technical colors business ($1.2 million). Operating
income for the three months ended September 30, 2003 was $17.6 million
versus $21.3 million from the comparable period last year. Excluding the
favorable effect of exchange rates ($0.7 million) and acquisitions ($0.3
million), the resulting decrease in operating income was primarily
attributable to declines in the North American food and beverage colors
business. Operating income as a percent of revenue was 20.1%, a decrease of
370 basis points from the comparable quarter last year, primarily due to
the reasons provided above.
For the nine months ended September 30, 2003, revenue for the Color segment
increased by $26.2 million, or 10.4% to $278.6 million. Favorable foreign
exchange rates and acquisitions resulted in a 4.7% and 3.3% increase in
revenue, respectively. Excluding exchange rates and acquisitions, revenue
increased 2.3% or $5.8 million, primarily the result of increased technical
color and cosmetic color sales ($4.1 million and $2.6 million,
respectively) and increased sales in Latin America ($4.0 million),
partially offset by declines in sales of food and beverage colors in North
America ($4.4 million). Operating income for the nine months ended
September 30, 2003 was $59.4 million versus $59.6 million from the
comparable period last year. Excluding the favorable effect of exchange
rates ($2.7 million) and acquisitions ($1.8 million), the $4.7 million
decrease in operating income was primarily the result lower sales of food
and beverage colors in North America. Operating income as a percent of
revenue was 21.3%, a decrease of 230 basis points from the comparable
period last year, primarily due to the reasons provided above.
FINANCIAL CONDITION
The Company's ratio of debt to total capital was 53.9% as of September 30,
2003, up from 52.8% as of December 31, 2002. The increase resulted from an
increase in debt needed to fund acquisitions and capital expenditures.
Net cash provided by operating activities was $41.4 million for the nine
months ended September 30, 2003, compared to $82.7 million for the nine
months ended September 30, 2002. The decrease in cash provided by operating
activities was primarily due to increased levels of inventories and other
working capital. Net cash decreased $30 million from the net increase in
inventories, which resulted from soft U.S. demand and increased inventories
from manufacturing consolidations.
Net cash used in investing activities was $68.5 million for the nine months
ended September 30, 2003 compared to $67.1 million in the comparable period
last year. Net cash used in investing activities in 2003 included capital
expenditures of $56.0 million and acquisitions of $17.1 million. Net cash
used in investing activities in 2002 included acquisitions of $48.5 million
and capital expenditures of $22.9 million. The increase in capital
expenditures is related primarily to the consolidation of recent
acquisitions in the U.S. and Europe.
-8-
Net cash provided by financing activities was $32.9 million for the nine
months ended September 30, 2003, compared to $17.9 million of net cash used
in the comparable period in the prior year. Net borrowings were $66.5
million in 2003 compared to net borrowings of $1.8 million in 2002. During
2003, the borrowings were used to fund acquisitions and capital
expenditures. During 2002, net borrowings were used to fund acquisitions.
Dividends of $20.9 million and $18.9 million were paid during the nine
months ended September 30, 2003 and 2002, respectively. In addition, $0.5
million was paid to shareholders in the third quarter of 2003 related to
the redemption of rights issued pursuant to the Company's Shareholders
Rights Plan.
The Company increased its quarterly cash dividend per share from $.1325 to
$.14 per share effective in December 2002. In addition, the Company raised
its quarterly dividend to $.15 per share effective in April 2003. As a
result of these increases, the annual dividend has grown from $.53 to $.60
per share since the third quarter of 2002.
The Company's financial position remains strong. Its expected cash flows
from operations and existing lines of credit can be used to meet future
cash requirements for operations, capital expansion programs and dividend
payments to shareholders.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with accounting
principles generally accepted in the U.S., management is required to make
estimates and assumptions that have an impact on the assets, liabilities,
revenue, and expense amounts reported. These estimates can also affect
supplemental information disclosures of the Company, including information
about contingencies, risk, and financial condition. The Company believes,
given current facts and circumstances, its estimates and assumptions are
reasonable, adhere to accounting principles generally accepted in the U.S.,
and are consistently applied. Inherent in the nature of an estimate or
assumption is the fact that actual results may differ from estimates and
estimates may vary as new facts and circumstances arise. The Company makes
routine estimates and judgments in determining the net realizable value of
accounts receivable, inventories, property, plant and equipment, and
prepaid expenses. Management believes the Company's most critical
accounting estimates and assumptions are in the following areas:
Goodwill Valuation
The Company reviews the carrying value of goodwill annually utilizing
several valuation methodologies, including a discounted cash flow model.
Changes in estimates of future cash flows caused by items such as
unforeseen events or changes in market conditions, could negatively affect
the reporting segment's fair value and result in an impairment charge.
However, the current fair values of the reporting segments are
significantly in excess of carrying values, and accordingly management
believes that only significant changes in the cash flow assumptions would
result in impairment.
Income Taxes
The Company files income tax returns and estimates its income tax expense
in each of the taxing jurisdictions in which it operates. The Company is
subject to a tax audit in each of these jurisdictions, which could result
in changes to the estimated tax expense. The amount of these changes would
vary by jurisdiction and would be recorded when known. These changes could
impact the Company's financial statements. Management has recorded
valuation allowances to reduce its deferred tax assets to the amount that
is more likely than not to be realized. In doing so, management has
considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance. An adjustment to the
recorded valuation allowance as a result of changes in facts or
circumstances could result in a significant change in the Company's tax
expense.
-9-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
quarter ended September 30, 2003. For additional information on market
risk, refer to pages 25 and 26 of the Company's 2002 Annual Report,
portions of which were filed as Exhibit 13.1 to the Company's Form 10-K for
the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that
is designed to ensure that information, which is required to be disclosed
by the Company, is accumulated and communicated to management in a timely
manner. An evaluation of the effectiveness of this system of disclosure
controls and procedures was performed under the supervision and with the
participation of the Company's management, including the Company's
Chairman, President & CEO and its Vice President, CFO & Treasurer, as of
the end of the period covered by this report. Based upon this evaluation,
the Company's management, including the Company's Chairman, President & CEO
and its Vice President, CFO & Treasurer, concluded that the current system
of controls and procedures is effective.
The Company maintains a system of internal control over financial
reporting. There has been no change in the Company's internal control over
financial reporting that occurred during the quarter ended September 30,
2003 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that reflect management's
current assumptions and estimates of future economic circumstances,
industry conditions, Company performance and financial results. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for such
forward-looking statements. Such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors that could cause actual events to differ
materially from those expressed in those statements. A variety of factors
could cause the Company's actual results and experience to differ
materially from the anticipated results. These factors and assumptions
include the pace and nature of new product introductions by the Company's
customers; execution of the Company's acquisition program and results of
newly acquired businesses; the Company's ability to successfully implement
its growth strategies; industry and economic factors related to the
Company's domestic and international business; growth in markets for
products in which the Company competes; industry acceptance of price
increases; currency exchange rate fluctuations; and the matters discussed
above under Item 2 including the critical accounting policies described
therein. The Company does not undertake to publicly update or revise its
forward-looking statements even if experience or future changes make it
clear that any projected results expressed or implied therein will not be
realized.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
At a meeting held on July 17, 2003, the Board of Directors authorized the
redemption of the rights issued pursuant to the Company's Shareholder
Rights Plan. Under the rights plan, one right is attached to each
outstanding share of common stock. The rights were redeemed at a price of
$.01 per right on September 3, 2003 to shareholders along with the $.15 per
share quarterly dividend payment. The total amount paid to shareholders
related to the rights redemption was $0.5 million and is reported on the
Dividends Paid line of the Statement of Cash Flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. (See Exhibit Index following this report.)
(b) Reports on Form 8-K. A report on Form 8-K was filed on October 23,
2003 to disclose earnings for the quarter ended September 30, 2003; a
report on Form 8-K was filed on July 17, 2003 to announce the
redemption of the Company's shareholder rights plan and a report on
Form 8-K was filed on July 16, 2003 to disclose earnings for the
quarter ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENSIENT TECHNOLOGIES CORPORATION
Date: November 13, 2003 By: /s/ John L. Hammond
-----------------------------------------
John L. Hammond, Vice President,
Secretary & General Counsel
Date: November 13, 2003 By: /s/ Richard F. Hobbs
-----------------------------------------
Richard F. Hobbs, Vice
President, Chief Financial
Officer & Treasurer
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SENSIENT TECHNOLOGIES CORPORATION
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Exhibit Description Incorporated by Reference From Filed Herewith
- ------- ----------- ------------------------------ --------------
31 Certification of the Company's Chairman,
President & Chief Executive Officer and Vice
President, Chief Financial Officer & Treasurer
pursuant to Rule 13a-14(a) of the Exchange Act. X
32 Certification of the Company's Chairman,
President & Chief Executive Officer and Vice
President, Chief Financial Officer & Treasurer
pursuant to 18 United States Code Section 1350 X
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