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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: June 30, 2004
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
SENSIENT TECHNOLOGIES CORPORATION
---------------------------------
(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
-----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (414) 271-6755
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 for 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 July 31, 2004
- --------------------------------------- ----------------------------
Common Stock, par value $0.10 per share 46,882,261 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 Six Months Ended June 30, 2004 and 2003. 1
Consolidated Condensed Balance Sheets
- June 30, 2004 and December 31, 2003. 2
Consolidated Condensed Statements of Cash Flows
- Six Months Ended June 30, 2004 and 2003. 3
Notes to Consolidated Condensed Financial Statements. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 11
Item 4. Controls and Procedures. 12
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures. 15
Exhibit Index. 16
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 Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue $263,838 $261,928 $518,003 $497,025
Cost of products sold 183,200 177,385 362,693 335,500
Selling and administrative expenses 46,614 45,850 92,703 87,898
-------- -------- -------- --------
Operating income 34,024 38,693 62,607 73,627
Interest expense 7,965 7,572 15,328 14,817
-------- -------- -------- --------
Earnings before income taxes 26,059 31,121 47,279 58,810
Income taxes 7,810 9,452 14,070 16,679
-------- -------- -------- --------
Net earnings $ 18,249 $ 21,669 $ 33,209 $ 42,131
======== ======== ======== ========
Average number of common shares outstanding:
Basic 46,510 46,824 46,493 46,939
======== ======== ======== ========
Diluted 46,790 47,163 46,764 47,278
======== ======== ======== ========
Earnings per common share:
Basic $ .39 $ .46 $ .71 $ .90
======== ======== ======== ========
Diluted $ .39 $ .46 $ .71 $ .89
======== ======== ======== ========
Dividends per common share $ .15 $ .15 $ .30 $ .29
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
-1-
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,468 $ 3,250
Trade accounts receivable, net 172,561 168,073
Inventories 321,346 318,755
Prepaid expenses and other current assets 44,986 46,652
----------- -----------
TOTAL CURRENT ASSETS 543,361 536,730
----------- -----------
OTHER ASSETS 70,045 78,525
GOODWILL 423,407 428,922
INTANGIBLE ASSETS, NET 17,001 17,553
PROPERTY, PLANT AND EQUIPMENT:
Land 28,113 29,042
Buildings 195,161 193,147
Machinery and equipment 546,733 537,623
----------- -----------
770,007 759,812
Less accumulated depreciation (387,013) (368,014)
----------- -----------
382,994 391,798
----------- -----------
TOTAL ASSETS $ 1,436,808 $ 1,453,528
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 74,760 $ 67,535
Accrued salaries, wages and withholdings from employees 11,859 12,871
Other accrued expenses 49,812 61,464
Income taxes 18,062 11,817
Short-term borrowings 97,043 114,974
Current maturities of long-term debt 13,480 13,759
----------- -----------
TOTAL CURRENT LIABILITIES 265,016 282,420
DEFERRED INCOME TAXES 25,229 23,529
OTHER LIABILITIES 8,034 11,329
ACCRUED EMPLOYEE AND RETIREE BENEFITS 31,824 30,208
LONG-TERM DEBT 514,356 525,924
SHAREHOLDERS' EQUITY:
Common stock 5,396 5,396
Additional paid-in capital 72,084 72,194
Earnings reinvested in the business 693,974 674,803
Treasury stock, at cost (146,155) (147,472)
Unearned portion of restricted stock (3,424) (3,844)
Accumulated other comprehensive income (loss) (29,526) (20,959)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 592,349 580,118
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,436,808 $ 1,453,528
=========== ===========
See accompanying notes to consolidated condensed financial statements.
-2-
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months
Ended June 30,
--------------------
2004 2003
-------- --------
Net cash provided by operating activities $ 52,899 $ 17,843
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (20,688) (37,281)
Acquisition of businesses - net of cash acquired -- (4,107)
Proceeds from sale of assets 1,092 2,498
Decrease in other assets 2,348 21
-------- --------
Net cash used in investing activities (17,248) (38,869)
-------- --------
Cash flows from financing activities:
Proceeds from additional borrowings 27,457 46,104
Reduction in debt (48,215) (533)
Purchase of treasury stock -- (9,668)
Dividends paid (14,036) (13,847)
Proceeds from options exercised and other 647 4,055
-------- --------
Net cash (used in) provided by financing activities (34,147) 26,111
-------- --------
Effect of exchange rate changes on cash and cash equivalents (286) 430
-------- --------
Net increase in cash and cash equivalents 1,218 5,515
Cash and cash equivalents at beginning of period 3,250 2,103
-------- --------
Cash and cash equivalents at end of period $ 4,468 $ 7,618
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 12,033 $ 14,655
Income taxes 3,981 12,849
Liabilities assumed in acquisitions $ -- $ --
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 June 30,
2004 and December 31, 2003, and the results of operations for the three
months and six months ended June 30, 2004 and 2003, and cash flows for the
six months ended June 30, 2004 and 2003. 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
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.
Refer to the notes in the Company's annual consolidated financial
statements for the year ended December 31, 2003, for additional details of
the Company's financial condition and a description of the Company's
accounting policies, which have been continued without change except for
the item described below.
On January 1, 2004, the Company adopted the remaining provisions of the
Financial Accounting Statements Board Interpretation No. 46 ("46R"),
"Consolidation of Variable Interest Entities," to clarify certain
provisions of FIN No. 46, and to exempt certain entities from its
requirements. There was no impact of adopting this interpretation on the
Company's consolidated financial statements.
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
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 Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
(In thousands except per share information) 2004 2003 2004 2003
---------- ---------- ---------- ----------
Net earnings:
As reported $ 18,249 $ 21,669 $ 33,209 $ 42,131
Add: reported stock compensation
expense - net of tax 175 126 355 258
Less: fair value stock compensation
expense - net of tax (519) (643) (1,181) (1,262)
---------- ---------- ---------- ----------
Pro forma net earnings $ 17,905 $ 21,152 $ 32,383 $ 41,127
========== ========== ========== ==========
Earnings per common share:
Basic as reported $ .39 $ .46 $ .71 $ .90
Less: net impact of fair value stock
compensation expense - net of tax (.01) (.01) (.01) (.02)
---------- ---------- ---------- ----------
Basic pro forma $ .38 $ .45 $ .70 $ .88
Diluted as reported $ .39 $ .46 $ .71 $ .89
Less: net impact of fair value stock
compensation expense - net of tax (.01) (.01) (.02) (.02)
---------- ---------- ---------- ----------
Diluted pro forma $ .38 $ .45 $ .69 $ .87
-4-
2. Segment Information
Operating results and the related assets by segment for the periods
presented are as follows:
Flavors & Corporate
(In thousands) Fragrances Color & Other Consolidated
---------- --------- --------- ------------
Three months ended June 30, 2004:
Revenues from external customers $ 154,024 $ 92,623 $ 17,191 $ 263,838
Intersegment revenues 6,492 2,891 -- 9,383
---------- --------- --------- ------------
Total revenue $ 160,516 $ 95,514 $ 17,191 $ 273,221
========== ========= ========= ============
Operating income (loss) $ 21,976 $ 17,704 $ (5,656) $ 34,024
Interest expense -- -- 7,965 7,965
---------- --------- --------- ------------
Earnings (loss) before income taxes $ 21,976 $ 17,704 $ (13,621) $ 26,059
========== ========= ========= ============
Three months ended June 30, 2003:
Revenues from external customers $ 148,096 $ 97,826 $ 16,006 $ 261,928
Intersegment revenues 6,095 3,668 -- 9,763
---------- --------- --------- ------------
Total revenue $ 154,191 $ 101,494 $ 16,006 $ 271,691
========== ========= ========= ============
Operating income (loss) $ 22,256 $ 21,631 $ (5,194) $ 38,693
Interest expense -- -- 7,572 7,572
---------- --------- --------- ------------
Earnings (loss) before income taxes $ 22,256 $ 21,631 $ (12,766) $ 31,121
========== ========= ========= ============
Flavors & Corporate
(In thousands) Fragrances Color & Other Consolidated
---------- ----------- ----------- ------------
Six months ended June 30, 2004:
Revenues from external customers $ 299,687 $ 184,266 $ 34,050 $ 518,003
Intersegment revenues 12,393 5,414 -- 17,807
---------- ----------- ----------- ------------
Total revenue $ 312,080 $ 189,680 $ 34,050 $ 535,810
========== =========== =========== ============
Operating income (loss) $ 39,788 $ 33,353 $ (10,534) $ 62,607
Interest expense -- -- 15,328 15,328
---------- ----------- ----------- ------------
Earnings (loss) before income taxes $ 39,788 $ 33,353 $ (25,862) $ 47,279
========== =========== =========== ============
Assets $ 687,182 $ 618,633 $ 130,993 $ 1,436,808
========== =========== =========== ============
Six months ended June 30, 2003:
Revenues from external customers $ 282,062 $ 183,979 $ 30,984 $ 497,025
Intersegment revenues 11,657 7,083 -- 18,740
---------- ----------- ----------- ------------
Total revenue $ 293,719 $ 191,062 $ 30,984 $ 515,765
========== =========== =========== ============
Operating income (loss) $ 42,284 $ 41,827 $ (10,484) $ 73,627
Interest expense -- -- 14,817 14,817
---------- ----------- ----------- ------------
Earnings (loss) before income taxes $ 42,284 $ 41,827 $ (25,301) $ 58,810
========== =========== =========== ============
Assets $ 675,179 $ 584,250 $ 133,027 $ 1,392,456
========== =========== =========== ============
-5-
3. Retirement Plans
The Company's components of benefit cost for the periods presented are as
follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
(In thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ 242 $ 235 $ 483 $ 469
Interest cost 420 408 839 816
Expected return on plan assets (64) (64) (127) (127)
Amortization of prior service cost 338 323 676 646
-------- -------- -------- --------
Defined benefit expense $ 936 $ 902 $ 1,871 $ 1,804
======== ======== ======== ========
During the three months and six months ended June 30, 2004, the Company
made contributions to its pension plans of $0.1 million and $0.17 million,
respectively. Total contributions to Company pension plans are expected to
be $0.5 million in 2004.
4. Inventories
At June 30, 2004 and December 31, 2003, inventories included finished and
in-process products totaling $235.7 million and $227.2 million,
respectively, and raw materials and supplies of $85.6 million and $91.6
million, respectively.
5. Special Charges
On December 19, 2003, the Company announced its intent to improve its cost
efficiency worldwide by reducing headcount and improving operational
efficiency. The Company recorded special charges of $6.5 million ($4.7
million after-tax, $0.10 per share) in December 2003. During the six
months ended June 30, 2004, approximately $2.2 million of payments, mostly
for severance, have been applied to the special charges reserve. The
remaining payments will be made in 2004.
A rollforward of the special charges reserve related to severance and
other employee separation costs is included below:
(In thousands)
December 31, 2003 $ 2,768
Amounts paid (2,219)
-------
June 30, 2004 $ 549
=======
6. Acquisitions
The Company has not acquired any businesses in 2004. 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 acquired Formulabs Iberica S.A., a manufacturer and marketer
of specialty inks, primarily for inkjet applications, in August 2003. The
Company has not completed the purchase price allocation for this
acquisition.
-6-
7. Shareholders' Equity
The Company did not repurchase any shares of its common stock during the
six months ended June 30, 2004. During the six months ended June 30, 2003,
the Company repurchased 0.5 million shares of its common stock for an
aggregate price of $9.7 million.
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 June 30, 2004 and 2003 was
$18.1 million and $39.6 million, respectively. Total comprehensive income
for the six months ended June 30, 2004 and 2003 was $24.6 million and
$60.2 million, respectively.
8. Cash Flows from Operating Activities
Cash flows from operating activities are detailed below:
Six Months Ended June 30,
-------------------------
(In thousands) 2004 2003
-------- --------
Cash flows from operating activities:
Net earnings $ 33,209 $ 42,131
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization 23,922 22,203
Gain on sale of assets -- (1,551)
Changes in operating assets and liabilities, net of
effects of acquisitions of businesses (4,232) (44,940)
-------- --------
Net cash provided by operating activities $ 52,899 $ 17,843
======== ========
9. 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 certain of these provisions
is capped at approximately 35% of the consideration received in the
transaction. Liability related to certain matters, including claims
relating to pre-closing environmental liabilities, is not capped. In cases
where the Company believed it is probable that payments would 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, other than with respect to the potential environmental
liabilities discussed below, is remote.
The Company has become aware that in June 2004, the United States
Environmental Protection Agency (the "EPA") issued a Notice of
Violation/Finding of Violation ("NOV") to Lesaffre Yeast Corporation
("Lesaffre") for alleged violations of the Wisconsin air emission
requirements. Some of these violations allegedly occurred before Lesaffre
purchased the Company's Yeast business. The Company has not received a
claim for indemnity from Lesaffre with respect to this matter. The Company
has not recorded a reserve for this potential liability because the amount
of any potential liability is not currently reasonably estimable. For
additional details see "Part II. Item 1. Legal Proceedings."
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenue for the quarter ended June 30, 2004 increased by 0.7% to $263.8
million from $261.9 million for the comparable quarter of 2003. For the
six months ended June 30, 2004, revenue increased by 4.2% to $518.0
million. Revenue for the Flavors & Fragrances segment increased by 4.1%
for the quarter and by 6.3% for the six months ended June 30, 2004 over
the comparable periods last year. Revenue for the Color segment
decreased by 5.9% for the quarter and by 0.7% for the six months ended
June 30, 2004 over the comparable periods last year. Revenue for Asia
Pacific increased by 7.4% for the quarter and by 9.9% for the six
months ended June 30, 2004 over the comparable periods last year.
Additional information on group results can be found in the Segment
Information section.
The gross profit margin was 30.6% and 32.3% for the three months ended
June 30, 2004 and 2003, respectively. Approximately one-half of the
margin decrease was due to lower pricing combined with higher costs in
the dehydrated flavors business. Pricing of dehydrated flavor products
declined, as compared to the previous year's comparable quarter, as a
result of increased competitive activity. The increased costs within
the dehydrated flavors business during the quarter were due to lower
yields in the most recent harvest as well as increased energy and other
processing costs. Approximately 25% of the decrease in gross profit
margin resulted from lower volumes and pricing in North American food
and beverage colors as well as in paper colors, and 25% of the decrease
related to lower production costs in 2003 from the buildup of inventory
for business consolidations. Lower volumes and pricing within the Color
segment during the quarter were primarily attributable to increased
competitive activity and lower demand for colors. For the six months
ended June 30, 2004 and 2003, the gross profit margin was 30.0% and
32.5%, respectively; the decrease was for the same reasons as provided
for the quarter.
Selling and administrative expenses as a percent of revenue were 17.7%
and 17.5% for the three months ended June 30, 2004 and 2003,
respectively. Selling and administrative expenses as a percent of
revenue were 17.9% and 17.7% for the six months ended June 30, 2004 and
2003, respectively. The increase was partially attributable to higher
professional service fees and other costs to comply with increased
regulations including Sarbanes-Oxley section 404.
Operating income for the three months ended June 30, 2004 was $34.0
million, compared to $38.7 million for the comparable quarter in 2003.
Operating income for the six months ended June 30, 2004 was $62.6
million, compared to $73.6 million for the comparable quarter in 2003.
Favorable foreign exchange rates increased revenue by 1.7% and 3.6% for
the three and six months ended June 30, 2004, respectively, and
increased operating income by 0.9% and 2.6% for the three and six
months ended June 30, 2004, respectively, over the comparable period
last year.
As discussed in Note 5 of the financial statements, the Company
announced on December 19, 2003, its intent to reduce headcount and
improve the operational efficiency of its operations. Savings as a
result of these initiatives had a positive impact on operating income
of $2.1 million in the quarter ended June 30, 2004 and $3.6 million for
the six months ended June 30, 2004. Additional restructuring savings
are expected to be realized during the remainder of the year.
Interest expense for the three months ended June 30, 2004 was $8.0
million, an increase of 5.2% over the prior year. The increase was a
result of higher average debt balances. Interest expense for the six
months ended June 30, 2004 was $15.3 million, an increase of 3.4% over
the prior year. Management expects annual interest expense for 2004 to
be approximately $32 million.
The effective income tax rate was 30.0% and 30.4% for the three months
ended June 30, 2004 and 2003, respectively. The effective income tax
rate was 29.8% and 28.4% for the six months ended June 30, 2004 and
2003, respectively. The effective tax rate for the three and six months
ended June 30, 2004 was reduced by the favorable settlement of certain
prior year tax matters. The effective tax rate for the three and six
months ended June 30, 2003 was also reduced by the favorable settlement
of certain prior year tax matters and other nominal adjustments.
Management expects the effective tax rate for the remainder of 2004 to
be 31%.
-8-
SEGMENT INFORMATION
Flavors & Fragrances -
For the three months ended June 30, 2004, revenue for the Flavors &
Fragrances segment increased by 4.1%, to $160.5 million, compared to
$154.2 million for the same period last year. Favorable foreign
exchange rates resulted in a 1.7% increase in revenue. Excluding
exchange rates, revenue increased 2.4%, or $3.7 million, primarily
because of higher fragrance sales ($2.1 million), which were due to the
recently completed expansion in the aroma chemical product line, and
improved results of traditional flavors in North America ($2.1
million), net of changes in other markets. Operating income in the
quarter ended June 30, 2004 was $22.0 million compared to $22.3 million
last year. Excluding the favorable effect of exchange rates (0.7%, or
$0.1 million), operating income decreased $0.4 million primarily
attributable to lower profits in the dehydrated flavors business ($2.0
million) due to lower pricing and higher product costs, partially
offset by improvement of traditional flavors in North America ($2.6
million), net of changes in other markets. Operating income as a
percent of revenue was 13.7%, a decrease of 70 basis points from the
comparable quarter last year.
For the six months ended June 30, 2004, revenue for the Flavors &
Fragrances segment increased by 6.3%, to $312.1 million, compared to
$293.7 million for the same period last year. Favorable foreign
exchange rates resulted in a 3.7% increase in revenue. Excluding
exchange rates, revenue increased 2.5%, or $7.5 million, primarily
because of higher fragrance sales ($3.8 million), which were due to the
recently completed expansion in the aroma chemical product line, and
improved results of traditional flavors in North America ($5.1
million), partially offset by lower pricing in the dehydrated flavors
business ($1.4 million). Operating income in the six months ended June
30, 2004 was $39.8 million compared to $42.3 million last year.
Excluding the favorable effect of exchange rates (1.7%, or $0.7
million), operating income decreased $3.2 million primarily
attributable to lower profits in the dehydrated flavors business ($4.4
million) due to lower pricing and higher product costs, partially
offset by improvements in other markets. Operating income as a percent
of revenue was 12.7%, a decrease of 170 basis points from the
comparable period last year.
Color -
For the three months ended June 30, 2004, revenue for the Color segment
decreased by $6.0 million, or 5.9% to $95.5 million. This quarter
represented the second largest sales quarter recorded at Color although
it was down in comparison to the record sales level in the second
quarter of 2003. Favorable foreign exchange rates and acquisitions
resulted in a 1.5% and 1.4% increase in revenue, respectively.
Excluding exchange rates and acquisitions, revenue decreased 8.7% or
$8.9 million, primarily the result of declines in volumes and prices in
food and beverage colors ($6.1 million), and in technical colors ($4.4
million), which includes paper colors, inkjet inks and other technical
colors. Declines in these areas were partially offset by continued
growth in the cosmetic color business ($1.7 million), net of changes in
other markets. Lower volumes and prices in food and beverage colors
were attributable to increased competitive activity and lower customer
demand. Lower sales of technical colors were due to increased
competitive activity and lower demand for paper colors. Technical color
sales were also reduced by lower pricing and volumes of inkjet ink for
aftermarket products, as was expected as this market matures. Technical
color sales were also impacted by lower volumes of OEM inkjet products
in comparison to last year's strong sales. For the remainder of the
year, management expects good growth of OEM inkjet products as the
market continues to show healthy growth.
Operating income for the three months ended June 30, 2004 was $17.7
million versus $21.6 million from the comparable period last year.
Excluding the favorable effect of exchange rates (0.9%, or $0.2
million) and acquisitions (1.5%, or $0.3 million), operating income
decreased $4.4 million as a result of declines in food and beverage
colors ($4.6 million), and by declines in technical colors ($3.0
million). Operating profit declines in these areas were offset by
continued growth in the cosmetic color business ($0.5 million) and by
the reduction of purchase accounting reserves ($2.6 million) related to
lower than expected environmental costs, shutdown costs and inventory
valuation write-downs associated with the closure of two manufacturing
sites. Operating income as a percent of revenue was 18.5%, a decrease
of 280 basis points from the comparable quarter last year, primarily
due to the reasons provided above. Quarterly profits for the Color
segment have continued to improve since the fourth quarter of 2003 as a
result of cost saving programs and other profit improvement
initiatives. Management expects this improvement to continue over the
remainder of the year.
-9-
For the six months ended June 30, 2004, revenue for the Color segment
decreased by $1.4 million, or 0.7% to $189.7 million. Favorable foreign
exchange rates and acquisitions resulted in a 3.2% and 1.6% increase in
revenue, respectively. Excluding exchange rates and acquisitions,
revenue decreased 5.5% or $10.6 million, primarily the result of
declines in volumes and prices in food and beverage colors ($9.4
million) and in technical colors ($5.1 million). In the inkjet segment
of technical colors, sales of OEM products increased in the period, but
were offset by lower sales of aftermarket inkjet products. Sales
declines in food and beverage and technical colors were partially
offset by continued growth in the cosmetic color business ($3.2
million), net of changes in other markets.
Operating income for the six months ended June 30, 2004 was $33.4
million versus $41.8 million from the comparable period last year.
Excluding the favorable effect of exchange rates (2.6%, or $1.1
million) and acquisitions (1.9%, or $0.8 million), operating income
decreased $10.4 million primarily attributable to declines in the food
and beverage colors business ($11.0 million), and by declines in
technical colors ($5.0 million). Operating income declines in these
areas were partially offset by continued growth in the cosmetic color
business ($1.1 million) and by the reduction of purchase accounting
reserves ($4.4 million) related to lower than expected environmental
costs, shutdown costs and inventory valuation write-downs associated
with the closure of two manufacturing sites. Operating income as a
percent of revenue was 17.6%, a decrease of 430 basis points from the
comparable period last year, primarily due to the reasons provided
above.
FINANCIAL CONDITION
Cash provided by operating activities increased $35 million for the six
months ended June 30, 2004 versus the comparable period last year. The
Company's ratio of debt to total capital improved to 51.3% as of June
30, 2004, from 53.0% as of December 31, 2003. The improvement resulted
primarily from a decrease in debt, which has declined $29.8 million
since December 31, 2003.
Net cash provided by operating activities was $52.9 million for the six
months ended June 30, 2004, compared to $17.8 million for the six
months ended June 30, 2003. The increase in cash provided by operating
activities was primarily due to a smaller increase in working capital
this year in comparison to last year, which increased net cash from
operating activities by $40.7 million. Net cash increased $20.3 million
related to management of trade accounts receivable and $15.3 million
related to inventories and $5.1 million related to other working
capital. The $15.3 million reduction in the growth of inventories
results from a $17.9 million increase during last year's comparable
period primarily to accommodate the consolidation of three
manufacturing facilities in the second half of last year, versus a $2.6
million increase this year, which included a one-time purchase of
approximately $6.5 million of dehydrated flavor inventory from a
competitor that exited the market.
Net cash used in investing activities was $17.2 million for the six
months ended June 30, 2004 compared to $38.9 million in the comparable
period last year. Net cash used in investing activities in 2004
included capital expenditures of $20.7 million. Net cash used in
investing activities in 2003 included capital expenditures of $37.3
million and acquisitions of $4.1 million.
Net cash used in financing activities was $34.1 million for the six
months ended June 30, 2004, compared to $26.1 million of net cash
provided by financing activities in the comparable period in the prior
year. During 2004, the net cash provided from operating activities was
sufficient to fund capital expenditures, pay dividends and reduce
borrowings. During 2003, net borrowings were used to fund acquisitions
and capital expenditures. Net repayments of debt were $20.7 million in
2004 compared to net borrowings of $45.6 million in 2003. Dividends of
$14.0 million and $13.8 million were paid during the six months ended
June 30, 2004 and 2003, respectively.
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 expenditures and
dividend payments to shareholders.
ISSUER PURCHASES OF EQUITY SECURITIES
The Company did not purchase any shares of Company stock during the
three months ended June 30, 2004. On April 27, 2001, the Company
approved a share repurchase program under which it is authorized
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to repurchase up to 5.0 million shares of Company stock. As of June 30,
2004, 4.3 million shares were available under this authorization. The
Company's share repurchase program has no expiration date.
CONTRACTUAL OBLIGATIONS
The Company is subject to certain contractual obligations, including
long-term debt, operating leases and manufacturing purchases. The
following table summarizes the Company's significant contractual
obligations as of June 30, 2004.
Payments due by period
(In thousands) Total < 1 year 1-3 years 3-5 years > 5 years
--------- -------- --------- --------- ---------
Long-term debt $ 527,836 $ 13,504 $ 231,736 $ 99,047 $ 183,549
Operating lease obligations 31,880 7,498 11,744 5,271 7,367
Manufacturing purchase commitments 60,313 35,488 21,334 3,467 24
--------- -------- --------- --------- ---------
Total contractual obligations $ 620,029 $ 56,490 $ 264,814 $ 107,785 $ 190,940
========= ======== ========= ========= =========
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 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.
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 June 30, 2004. For additional information on market
risk, refer to pages 19 and 20 of the Company's 2003 Annual Report,
portions of which were filed as Exhibit 13.1 to the Company's Form 10-K
for the year ended December 31, 2003.
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ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures
that is designed to ensure that all information required to be
disclosed by the Company is accumulated and communicated to management
in a timely manner. Management has reviewed this system of disclosure
controls and procedures as of the end of the period covered by this
report, under the supervision of and with the participation of the
Company's Chairman, President and Chief Executive Officer and its Vice
President, Chief Financial Officer and Treasurer. Based on that review,
the Chairman, President and Chief Executive Officer and the Vice
President, Chief Financial Officer and Treasurer have concluded that
the current system of controls and procedures is effective.
The Company maintains a system of internal control over financial
reporting. There have been no changes that materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting during the quarter ended June 30, 2004.
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; results of newly
acquired businesses; the Company's ability to successfully implement
its growth strategies; the outcome of the Company's various
productivity-improvement and cost-reduction efforts; changes in costs
of raw materials, including energy; industry and economic factors
related to the Company's domestic and international business;
competition from other suppliers of color and flavors and fragrances;
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Clean Air Act NOV
On June 24, 2004, the United States Environmental Protection Agency
(the "EPA") issued a Notice of Violation/Finding of Violation ("NOV")
to Lesaffre Yeast Corporation ("Lesaffre") for alleged violations of
the Wisconsin air emission requirements. The NOV generally alleges that
Lesaffre's Milwaukee, Wisconsin facility violated air emissions limits
for volatile organic compounds during certain periods from 1999 through
2003. Some of these violations allegedly occurred before Lesaffre
purchased Red Star Yeast & Products ("Red Star Yeast") from the
Company.
In connection with the sale of Red Star Yeast on February 23, 2001, the
Company provided Lesaffre and certain of its affiliates with
indemnification against environmental claims attributable to the
operation, activities or ownership of Red Star Yeast prior to February
23, 2001, the closing date of the sale. See Note 9 to the consolidated
condensed financial statements. The Company has not received a claim
for indemnity from Lesaffre with respect to this matter. The Company
expects to meet with the EPA and Lesaffre to discuss the NOV (and
appropriate means to help resolve the matter) in August 2004.
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Superfund Claim
On July 6, 2004, the Company received a notice from the EPA that the
Company's Sensient Colors Inc. subsidiary may be a potentially
responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation and Liability Act in connection with the General
Color Company Superfund Site located in Camden, New Jersey. This site
was excluded from the transaction in which the Company purchased H.
Kohnstamm & Company, Inc. (now known as Sensient Colors Inc.) in 1988
and liability for the property was retained by the seller, which
continued to operate at the site for approximately nine years. The
Company is investigating whether it will be able to recover from the
Kohnstamm shareholders and is evaluating the extent to which present
and former insurance carriers and other PRP's would share in any
portion of any liability that Sensient may have in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2004 Annual Meeting of Shareholders, held on April 22,
2004, the following actions were taken:
- The following Directors were elected for terms of office:
Votes For Votes Withheld
----------- --------------
Expiring in April 2007
Michael E. Batten 41,169,490 2,387,004
Dr. Fergus M. Clydesdale 41,336,954 2,219,540
Essie Whitelaw 41,070,861 2,485,634
Expiring in April 2005
James A.D. Croft 41,014,632 2,541,862
Mr. Croft was elected to a one-year term in order to balance
the classes of the Board at three members each.
Pursuant to the terms of the Company's Proxy Statement,
proxies received were voted, unless authority was withheld, in
favor of the nominees. The terms of office of the following
Directors continued after the meeting: John F. Bergstrom,
William V. Hickey, Kenneth P. Manning, Alberto Fernandez and
Hank Brown.
- The shareholders approved a proposal by the Board of Directors
to amend the Sensient Technologies Corporation 2002
Non-Employee Director Stock Plan to increase the annual grant
of restricted stock to non-employee directors of the Company
from 300 to 900 shares and to increase the number of shares
reserved and available for issuance under the plan from 30,000
to 90,000 shares. The shareholders cast 29,063,549 votes in
favor of this proposal, 8,686,841 votes against, and there
were 317,756 votes to abstain.
- The shareholders approved a proposal by the Board of Directors
to approve the Amended and Restated Sensient Technologies
Corporation Incentive Compensation Plan for Elected Corporate
Officers for purposes of Section 162(m) of the Internal
Revenue Code of 1986. The shareholders cast 39,651,848 votes
in favor of this proposal, 3,601,477 votes against, and there
were 303,168 votes to abstain.
- The shareholders approved a proposal by the Board of Directors
to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors to conduct the annual audit of
the consolidated financial statements of the Company and its
subsidiaries for the year ending December 31, 2004. The
shareholders cast 41,376,764 votes in favor of this proposal,
2,033,017 votes against, and there were 146,712 votes to
abstain.
ITEM 5. OTHER INFORMATION
On July 16, 2004, the Company announced that its Board of Directors has
voted to submit to shareholders a proposal requiring every director to
stand for election annually. Currently, each director is elected to a
three-year term, and a third of the Board of Directors stands for
election
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each year. If shareholders approve the proposal, all directors would be
elected to one-year terms. Shareholders will be asked to vote on the
proposal at the Company's annual meeting of shareholders scheduled to
be held on April 21, 2005.
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 April
20, 2004 to disclose earnings for the quarter ended March 31,
2004. A report on Form 8-K was filed on July 20, 2004 to
disclose earnings for the quarter ended June 30, 2004.
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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: August 6, 2004 By: /s/ John L. Hammond
-----------------------------------
John L. Hammond, Vice President,
Secretary & General Counsel
Date: August 6, 2004 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 JUNE 30, 2004
Exhibit Description Incorporated by Reference From Filed Herewith
- ------- ----------- ------------------------------ --------------
3.2 Amended and Restated By-Laws of Sensient X
Technologies Corporation as amended as of
July 15, 2004
10.1(c) Sensient Technologies Corporation 2002 Appendix C to Definitive Proxy
Non-Employee Directors Stock Plan Statement file on Schedule 14A
on March 15, 2004.
(Commission File No. 1-7626)
10.1(p) Amended and Restated Incentive Appendix D to Definitive Proxy
Compensation Plan for Elected Corporate Statement file on Schedule 14A
Officers on March 15, 2004.
(Commission File No. 1-7626)
31 Certifications of the Company's Chairman, X
President & Chief Executive Officer and Vice
President, Chief Financial Officer & Treasurer
pursuant to Rule 13a-14(a) of the Exchange
Act
32 Certifications of the Company's Chairman, X
President & Chief Executive Officer and
Vice President, Chief Financial Officer
& Treasurer pursuant to 18 United States
Code Section 1350
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