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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, 2004
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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
---------------------------------
(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 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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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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, 2004
- --------------------------------------- -------------------------------
Common Stock, par value $0.10 per share 46,895,920 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, 2004 and 2003. 1
Consolidated Condensed Balance Sheets
- September 30, 2004 and December 31, 2003. 2
Consolidated Condensed Statements of Cash Flows
- Nine Months Ended September 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. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
Item 4. Controls and Procedures. 13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings. 15
Item 5. Other Information. 16
Item 6. Exhibits. 16
Signatures. 17
Exhibit Index. 18
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,
------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue $256,849 $247,251 $774,819 $744,148
Cost of products sold 179,152 168,104 542,017 503,678
Selling and administrative expenses 41,415 45,025 133,913 132,721
-------- -------- -------- --------
Operating income 36,282 34,122 98,889 107,749
Interest expense 7,646 7,642 22,974 22,459
-------- -------- -------- --------
Earnings before income taxes 28,636 26,480 75,915 85,290
Income taxes 7,044 5,813 21,114 22,492
-------- -------- -------- --------
Net earnings $21,592 $20,667 $54,801 $62,798
-------- -------- -------- --------
Average number of common shares outstanding:
Basic 46,597 46,583 46,528 46,819
-------- -------- -------- --------
Diluted 46,896 46,881 46,808 47,145
-------- -------- -------- --------
Earnings per common share:
Basic $.46 $.44 $1.18 $1.34
-------- -------- -------- --------
Diluted $.46 $.44 $1.17 $1.33
-------- -------- -------- --------
Dividends per common share $.15 $.15 $.45 $.44
-------- -------- -------- --------
See accompanying notes to consolidated condensed financial statements.
1
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
September 30,
2004 December 31,
(Unaudited) 2003 *
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,256 $ 3,250
Trade accounts receivable, net 168,749 168,073
Inventories 326,077 318,755
Prepaid expenses and other current assets 45,426 46,652
------------ -----------
TOTAL CURRENT ASSETS 547,508 536,730
------------ -----------
OTHER ASSETS 75,521 78,525
GOODWILL 425,050 428,922
INTANGIBLE ASSETS, NET 17,141 17,553
PROPERTY, PLANT AND EQUIPMENT:
Land 30,298 29,042
Buildings 201,567 196,920
Machinery and equipment 558,020 539,634
------------ -----------
789,885 765,596
Less accumulated depreciation (404,856) (373,798)
------------ -----------
385,029 391,798
------------ -----------
TOTAL ASSETS $ 1,450,249 $ 1,453,528
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 75,584 $ 67,535
Accrued salaries, wages and withholdings from employees 11,339 12,871
Other accrued expenses 58,338 61,464
Income taxes 20,891 11,817
Short-term borrowings 81,449 114,974
Current maturities of long-term debt 7,510 13,759
------------ -----------
TOTAL CURRENT LIABILITIES 255,111 282,420
DEFERRED INCOME TAXES 24,668 23,529
OTHER LIABILITIES 6,557 11,329
ACCRUED EMPLOYEE AND RETIREE BENEFITS 32,764 30,208
LONG-TERM DEBT 518,573 525,924
SHAREHOLDERS' EQUITY:
Common stock 5,396 5,396
Additional paid-in capital 71,671 72,194
Earnings reinvested in the business 708,534 674,803
Treasury stock, at cost (144,117) (147,472)
Unearned portion of restricted stock (3,137) (3,844)
Accumulated other comprehensive income (loss) (25,771) (20,959)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 612,576 580,118
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,450,249 $ 1,453,528
============ ===========
See accompanying notes to consolidated condensed financial statements.
* Condensed from audited financial statements.
-2-
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
--------------------------------
2004 2003
--------- ---------
Net cash provided by operating activities $ 94,424 $ 41,359
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (32,535) (56,023)
Acquisition of businesses - net of cash acquired -- (17,107)
Proceeds from sale of assets 1,092 4,172
Decrease in other assets 2,822 463
--------- ---------
Net cash used in investing activities (28,621) (68,495)
--------- ---------
Cash flows from financing activities:
Proceeds from additional borrowings 188,664 93,033
Reduction in debt (232,160) (26,478)
Purchase of treasury stock -- (17,932)
Dividends paid (21,067) (21,372)
Proceeds from options exercised and other 2,756 5,674
--------- ---------
Net cash (used in) provided by financing activities (61,807) 32,925
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 10 989
--------- ---------
Net increase in cash and cash equivalents 4,006 6,778
Cash and cash equivalents at beginning of period 3,250 2,103
--------- ---------
Cash and cash equivalents at end of period $ 7,256 $ 8,881
========= =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 17,526 $17,702
Income taxes 8,816 18,156
Liabilities assumed in acquisitions $ -- $ 992
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,
2004 and December 31, 2003, and the results of operations for the three
months and nine months ended September 30, 2004 and 2003, and cash flows
for the nine months ended September 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 Standards 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 Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
(In thousands except per share information)
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net earnings:
As reported $ 21,592 $ 20,667 $ 54,801 $ 62,798
Add: reported stock compensation
expense -- net of tax 178 120 532 379
Less: fair value stock compensation
expense -- net of tax (598) (562) (1,778) (1,824)
---------- ---------- ---------- ----------
Pro forma net earnings $ 21,172 $ 20,225 $ 53,555 $ 61,353
========== ========== ========== ==========
Earnings per common share:
Basic as reported $ .46 $ .44 $ 1.18 $ 1.34
Less: net impact of fair value stock
compensation expense -- net of tax (.01) (.01) (.03) (.03)
---------- ---------- ---------- ----------
Basic pro forma $ .45 $ .43 $ 1.15 $ 1.31
Diluted as reported $ .46 $ .44 $ 1.17 $ 1.33
Less: net impact of fair value stock
compensation expense -- net of tax (.01) (.01) (.03) (.03)
---------- ---------- ---------- ----------
Diluted pro forma $ .45 $ .43 $ 1.14 $ 1.30
-4-
2. Segment Information
Operating results and the related assets by segment for the periods and at
the dates presented are as follows:
(In thousands) Flavors & Corporate
Fragrances Color & Other Consolidated
---------- ----- ------- -------------
Three months ended September 30, 2004:
Revenues from external customers $149,841 $ 89,040 $ 17,968 $256,849
Intersegment revenues 5,960 3,415 -- 9,375
-------- -------- -------- --------
Total revenue $155,801 $ 92,455 $ 17,968 $266,224
======== ======== ======== ========
Operating income (loss) $ 24,002 $ 17,033 $ (4,753) $ 36,282
Interest expense -- -- 7,646 7,646
-------- -------- -------- --------
Earnings (loss) before income taxes $ 24,002 $ 17,033 $(12,399) $ 28,636
======== ======== ======== ========
Three months ended September 30, 2003:
Revenues from external customers $143,538 $ 85,903 $ 17,810 $247,251
Intersegment revenues 5,943 1,549 -- 7,492
-------- -------- -------- --------
Total revenue $149,481 $ 87,452 $ 17,810 $254,743
======== ======== ======== ========
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
======== ======== ======== ========
(In thousands) Flavors & Corporate
Fragrances Color & Other Consolidated
---------- ----- ------- ------------
Nine months ended September 30, 2004:
Revenues from external customers $ 449,528 $ 273,273 $ 52,018 $ 774,819
Intersegment revenues 18,353 8,829 -- 27,182
---------- ---------- ---------- ----------
Total revenue $ 467,881 $ 282,102 $ 52,018 $ 802,001
========== ========== ========== ==========
Operating income (loss) $ 63,790 $ 50,386 $ (15,287) $ 98,889
Interest expense -- -- 22,974 22,974
---------- ---------- ---------- ----------
Earnings (loss) before income taxes $ 63,790 $ 50,386 $ (38,261) $ 75,915
========== ========== ========== ==========
Assets at September 30, 2004 $ 694,978 $ 614,450 $ 140,821 $1,450,249
---------- ---------- ---------- ----------
Nine months ended September 30, 2003:
Revenues from external customers $ 425,600 $ 269,754 $ 48,794 $ 744,148
Intersegment revenues 17,600 8,632 -- 26,232
---------- ---------- ---------- ----------
Total revenue $ 443,200 $ 278,386 $ 48,794 $ 770,380
========== ========== ========== ==========
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 at September 30, 2003 $ 693,334 $ 598,458 $ 132,453 $1,424,245
========== ========== ========== ==========
-5-
3. Acquisitions
The Company has not acquired any businesses in 2004.
During 2003, the Company acquired two businesses for cash in an aggregate
amount of $17.1 million, net of cash acquired. In March of 2003, the
Company acquired certain assets of Kyowa Koryo Kagaku Kabushiki Kaisha, a
former Japanese flavor producer. The Company acquired Formulabs Iberica
S.A., a manufacturer and marketer of specialty inks, primarily for inkjet
applications, in August 2003.
4. Inventories
At September 30, 2004 and December 31, 2003, inventories included finished
and in-process products totaling $244.3 million and $227.2 million,
respectively, and raw materials and supplies of $81.8 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. The charge included
$4.0 million of cash expenditures for severance and other employee
separation costs and $2.5 million of non-cash costs related to asset
impairment charges. During the nine months ended September 30, 2004,
approximately $2.3 million of payments, mostly for severance, have been
applied to the special charges reserve. As noted in the table below, the
remaining payments of $0.5 million will be made in the fourth quarter of
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 (2,282)
------
September 30, 2004 $ 486
======
6. Debt
On September 2, 2004, the Company obtained a new $150 million credit
facility with a group of seven banks to replace the former facility
scheduled to mature in June 2005. The new facility has a term of three
years. Interest rates are determined based upon LIBOR plus a margin subject
to adjustment on the basis of the rating accorded the Company's senior debt
by S&P and Moody's. In addition, the Company will pay a facility fee on the
total amount of the commitment and a utilization fee. The Company must
maintain a minimum fixed charge coverage ratio and may not exceed a stated
funded debt to capital ratio in addition to customary restrictions. The
credit facility will be used for working capital, commercial paper back-up
and other general corporate purposes.
-6-
7. Retirement Plans
The Company's components of the defined benefit plans cost for the periods
presented are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(In thousands)
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 242 $ 235 $ 725 $ 704
Interest cost 420 408 1,259 1,224
Expected return on plan assets (64) (64) (191) (191)
Amortization of prior service cost 338 323 1,014 969
------- ------- ------- -------
Defined benefit expense $ 936 $ 902 $ 2,807 $ 2,706
======= ======= ======= =======
During the three months and nine months ended September 30, 2004, the
Company made contributions to its defined benefit pension plans of $0.1
million and $0.3 million, respectively. Total contributions to Company
defined benefit pension plans are expected to be $0.5 million in 2004.
8. Shareholders' Equity
The Company did not repurchase any shares of its common stock during the
nine months ended September 30, 2004. During the nine months ended
September 30, 2003, the Company repurchased 0.9 million shares of its
common stock for an aggregate price of $17.9 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 September 30, 2004 and 2003
was $25.3 million and $16.6 million, respectively. Total comprehensive
income for the nine months ended September 30, 2004 and 2003 was $50.0
million and $76.8 million, respectively.
9. Cash Flows from Operating Activities
Cash flows from operating activities are detailed below:
Nine Months Ended September 30,
-------------------------------
(In thousands)
2004 2003
-------- --------
Cash flows from operating activities:
Net earnings $ 54,801 $ 62,798
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization 34,691 32,330
Gain on sale of assets -- (2,663)
Changes in operating assets and liabilities, net of
effects of acquisitions of businesses 4,932 (51,106)
-------- --------
Net cash provided by operating activities $ 94,424 $ 41,359
======== ========
-7-
10. Commitments and Contingencies
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, the Company has recognized a liability. The Company
believes that the probability of incurring payments under these provisions
in excess of the amount of the liability recorded is remote.
Environmental Matters
The Company is involved in two significant environmental cases, which are
described below in Part II. Item 1. Legal Proceedings. The Company is also
involved in other site closure and related environmental remediation and
compliance activities at manufacturing sites primarily related to a 2001
acquisition for which reserves for environmental matters were established
as of the date of purchase. Actions that are legally required or necessary
to prepare the sites for sale are currently being performed.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes
available or as circumstances change. Generally, estimated future
expenditures are discounted to their present value. Recoveries of
remediation costs from other parties, if any, are recognized as assets when
their receipt is assured. The Company has not recorded any potential
recoveries related to these matters, as receipts are not yet assured. As of
September 30, 2004, the Company has accrued $8.4 million for the above
environmental matters primarily related to the environmental reserves
established in connection with the 2001 acquisition discussed above. This
accrual represents management's best estimate of these liabilities.
Although costs could be significantly higher, it is the opinion of Company
management that the possibility that costs in excess of those accrued and
disclosed will have a material adverse impact on the Company's consolidated
financial statements is remote. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Litigation
There are two significant commercial cases pending against the Company,
which are disclosed below in Part II. Item 1. Legal Proceedings.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Revenue for the quarter ended September 30, 2004 increased 3.9% to
$256.8 million compared to $247.3 million for the comparable quarter
of 2003. For the nine months ended September 30, 2004, revenue was
$774.8 million, an increase of 4.1%. Revenue for the Flavors &
Fragrances segment increased 4.2% and 5.6% for the quarter and nine
months ended September 30, 2004, respectively, over the comparable
periods last year. Revenue for the Color segment increased 5.7% and
1.3% for the quarter and nine months ended September 30, 2004,
respectively, over the comparable periods last year. Additional
information on group results can be found in the Segment Information
section.
The gross profit margin was 30.3% and 32.0% for the three months
ended September 30, 2004 and 2003, respectively. Approximately
one-half of the margin decrease was due to lower pricing in the
dehydrated flavors business, North American food and beverage colors
and inkjet inks. The decrease in selling prices was a result of
increased competitive activity. The remainder of the decrease
primarily related to lower production costs in 2003 from the buildup
of inventory in anticipation of manufacturing consolidations at the
Company which were completed in the first half of 2004. For the nine
months ended September 30, 2004 and 2003, the gross profit margin was
30.0% and 32.3%, respectively. The decrease for the nine months was
caused by the same items that impacted the quarter. In addition, the
dehydrated flavors business experienced higher costs in the first
part of the year compared to the same period last year due to lower
yields as well as increased energy and other processing costs.
Selling and administrative expenses as a percent of revenue decreased
to 16.1% of revenue for the three months ended September 30, 2004,
versus 18.2% for the 2003 comparable period. Selling and
administrative expenses as a percent of revenue were 17.3% and 17.8%
for the nine months ended September 30, 2004 and 2003, respectively.
The decrease was a result of savings from the cost reduction programs
and lower benefit and other costs this year.
Operating income for the three months ended September 30, 2004
increased 6.3% to $36.3 million, compared to $34.1 million for the
comparable quarter in 2003. Operating income for the nine months
ended September 30, 2004 was $98.9 million, compared to $107.7
million for the comparable period in 2003.
Favorable foreign exchange rates increased revenue by 2.8% and 3.2%
for the three and nine months ended September 30, 2004, respectively,
and increased operating income by 1.8% and 2.4% for the three and
nine months ended September 30, 2004, respectively, over the
comparable periods last year.
As discussed in Note 5 of the consolidated condensed financial
statements, the Company announced on December 19, 2003, its intent to
reduce headcount and take other actions to improve the efficiency of
its operations. Savings as a result of these initiatives had a
positive impact on operating income of $2.0 million in the quarter
ended September 30, 2004 and $5.6 million for the nine months ended
September 30, 2004. Additional restructuring savings are expected to
be realized during the remainder of the year.
Interest expense of $7.6 million for the three months ended September
30, 2004 was flat with the prior year. A slight increase in average
rates was offset by lower average debt balances. Interest expense for
the nine months ended September 30, 2004 was $23.0 million, an
increase of 2.3% over the prior year. Management expects annual
interest expense for 2004 to be approximately $31 million.
The effective income tax rate was 24.6% and 22.0% for the three
months ended September 30, 2004 and 2003, respectively. The effective
income tax rate was 27.8% and 26.4% for the nine months ended
September 30, 2004 and 2003, respectively. The effective tax rate for
the three months ended September 30, 2004 was reduced by the
utilization of foreign tax losses resulting from a recently
implemented tax planning strategy and other nominal adjustments. The
effective tax rate for the nine months ended September 30, 2004 was
reduced by the items noted for the quarter and by the favorable
settlement of certain prior year tax matters. These items reduced the
effective tax rate by 6.7% and 3.3% for the quarter and nine months
ended September 30, 2004, respectively. The effective tax rate for
the quarter and nine months ended September 30, 2003 was reduced by
the utilization of foreign tax losses, the settlement of
-9-
prior year tax matters and other nominal adjustments. These items
reduced the effective tax rate by 9.8% and 5.7% for the quarter and
nine months ended September 30, 2003, respectively.
On October 22, 2004, the American Jobs Creation Act of 2004 (the
"Act") was signed into law. The Act contains $137 billion in tax cuts
over a ten-year period beginning in 2005, which are mainly targeted
at U.S. manufacturing businesses and multinational companies. We have
not yet completed our assessment of how the Act might impact our
future results of operations or cash flows.
SEGMENT INFORMATION
Flavors & Fragrances --
Revenue for the Flavors & Fragrances segment increased 4.2%, to
$155.8 million for the quarter ended September 30, 2004, compared to
$149.5 million for the same period last year. Favorable foreign
exchange rates resulted in a 2.8% increase in revenue. Excluding
exchange rates, revenue increased 1.4%, or $2.1 million, primarily
because of higher sales of traditional flavors in North America and
Europe ($2.6 million), partially offset by lower sales in dehydrated
flavors ($0.7 million), net of changes in other markets.
Operating income in the quarter ended September 30, 2004 was $24.0
million compared to $21.6 million last year, an increase of 11.2%.
Excluding the favorable effect of exchange rates (1.0%, or $0.2
million), operating income increased $2.2 million, primarily
attributable to higher results for traditional flavors in North
America and Europe ($3.2 million), partially offset by lower profits
in the dehydrated flavors business ($0.5 million) and in fragrances
($0.7 million), net of changes in other markets. Higher profit in
traditional flavors was primarily due to favorable product mix and
lower costs. Reduced profit in the dehydrated flavors and fragrances
businesses was caused by continued price competition. Operating
income as a percent of revenue was 15.4%, an increase of 100 basis
points from the comparable quarter last year.
For the nine months ended September 30, 2004, revenue for the Flavors
& Fragrances segment increased 5.6%, to $467.9 million, compared to
$443.2 million for the same period last year. Favorable foreign
exchange rates resulted in a 3.4% increase in revenue. Excluding
exchange rates, revenue increased 2.2%, or $9.5 million, primarily
the result of higher sales of traditional flavors in North America
and Europe ($7.6 million) and higher fragrance sales due to the
expansion in the aroma chemical product line ($4.1 million). These
items were offset by lower sales in the dehydrated flavors business
($2.1 million) and net changes in other markets.
Operating income for the nine months ended September 30, 2004 was
$63.8 million compared to $63.9 million last year. Excluding the
favorable effect of exchange rates (1.5%, or $0.9 million), operating
income decreased $1.0 million primarily attributable to lower profits
in the dehydrated flavors business due to lower pricing and higher
product costs ($4.8 million), partially offset by improvements of
traditional flavors in North America and Europe ($4.3 million), net
of changes in other markets. Costs were up in the dehydrated flavors
business due to lower yields in the 2003 harvest, primarily sold in
2004, as well as increased energy and other processing costs.
Operating income as a percent of revenue was 13.6%, a decrease of 80
basis points from the comparable period last year.
Color -
For the three months ended September 30, 2004, revenue for the Color
segment was $92.5 million, an increase of 5.7% from $87.5 million in
the comparable period last year. Favorable foreign exchange rates and
acquisitions resulted in a 2.7% and a 0.5% increase in revenue,
respectively. Excluding exchange rates and acquisitions, revenue
increased 2.5%, or $2.2 million, primarily the result of continued
growth of cosmetic colors ($1.1 million), increased pharmaceutical
sales ($0.5 million) and higher sales of food and beverage colors
($2.0 million). These increases in revenue were partially offset by
lower revenue in technical colors ($1.4 million). Increases in
volumes of food and beverage colors in North America more than offset
volume decreases in Europe and price declines in North America
attributable to increased competitive activity. Competitive pressure
continued to impact pricing of inkjet inks and paper products.
Volumes of technical colors were also down due to lower demand for
inkjet ink for aftermarket products and lower demand for paper
colors. Although revenue related to OEM inkjet ink products was
higher in the quarter, the Company expects that revenue will be
significantly lower in 2005 as a result of a major customer's recent
decision to consolidate inkjet ink purchases with other suppliers.
The customer's decision, which occurred near the completion of
negotiations for a new contract, was unexpected. During the first
nine months of 2004, this customer represented 10.7% and 12.5% of
Sensient's Color Group total revenue and operating income,
respectively. Sensient will continue to supply the customer inkjet
ink and
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color products on a transitional and spot basis, but expects inkjet
ink revenue to decline substantially in 2005 until the Company is
able to obtain additional business from new and existing inkjet
customers.
Operating income for the three months ended September 30, 2004 was
$17.0 million versus $17.6 million for the comparable period last
year. Excluding the favorable effect of exchange rates ($0.4
million), operating income decreased $1.0 million primarily
attributable to declines in food and beverage colors ($0.8 million)
and in technical colors ($1.6 million). Declines in these areas were
partially offset by continued growth in the cosmetic color business
($0.3 million), growth in the pharmaceutical colors business ($0.4
million), and the reduction of purchase accounting reserves ($0.7
million) related to lower than expected environmental and shutdown
costs associated with the closure of two manufacturing sites.
Operating income as a percent of revenue was 18.4%, a decrease of 170
basis points from the comparable quarter last year, primarily due to
the reasons provided above. Quarterly profits for the Color segment
have improved since the fourth quarter of 2003 as a result of cost
saving programs and other profit improvement initiatives.
For the nine months ended September 30, 2004, revenue for the Color
segment increased 1.3% to $282.1 million. Favorable foreign exchange
rates and acquisitions resulted in a 3.1% and a 1.2% increase in
revenue, respectively. Excluding exchange rates and acquisitions,
revenue decreased 3.0% or $8.2 million, primarily due to lower
volumes and prices in technical colors ($6.4 million) and in food and
beverage colors ($7.4 million). These revenue decreases were
partially offset by revenue increases in cosmetic colors ($4.3
million) and in pharmaceuticals ($1.3 million). Technical colors were
down due to lower pricing of aftermarket inkjet products, lower
pricing on paper dyes and a shift to bulk paper dyes. Lower prices
and volume in food and beverage colors were attributed to increased
competitive activity and customer cost reduction initiatives.
Operating income for the nine months ended September 30, 2004 was
$50.4 million versus $59.4 million from the comparable period last
year. Excluding the favorable impact of exchange rates (2.5% or $1.5
million) and acquisitions (1.4% or $0.8 million), operating income
decreased $11.4 million, primarily as the result of declines in the
food and beverage colors business ($11.4 million), and in technical
colors ($6.7 million). These items were partially offset by continued
growth in the cosmetic color business ($1.4 million), the reduction
of purchase accounting reserves ($5.1 million) and net changes in
other markets. The reduction of purchase accounting reserves was
related to lower than expected environmental costs, shutdown costs
and inventory related costs associated with the closure of two
manufacturing sites. Operating income as a percent of revenue was
17.9%, a decrease of 340 basis points from the comparable period last
year, primarily due to the reasons provided above.
FINANCIAL CONDITION
Cash provided by operating activities increased $53.1 million for the
nine months ended September 30, 2004 versus the comparable period
last year. The Company's ratio of debt to total capital improved to
49.8% as of September 30, 2004, from 53.0% as of December 31, 2003.
The improvement resulted primarily from a decrease in debt, which has
declined $47.1 million since December 31, 2003.
Net cash provided by operating activities was $94.4 million for the
nine months ended September 30, 2004, compared to $41.4 million for
the nine months ended September 30, 2003. The increase in cash
provided by operating activities was primarily due to a decrease in
operating capital in the nine months ended September 30, 2004 versus
an increase in operating capital in the comparable period last year.
Of the $56.0 million comparable improvement, $19.5 million related to
trade accounts receivable and $27.9 million related to inventories.
The improvement in inventories results from a $35.2 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 $7.3 million increase this year. The current year
inventory increase includes 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 $28.6 million for the nine
months ended September 30, 2004 compared to $68.5 million in the
comparable period last year. Net cash used in investing activities in
2004 included capital expenditures of $32.5 million. Net cash used in
investing activities in 2003 included capital expenditures of $56.0
million and acquisitions of $17.1 million.
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Net cash used in financing activities was $61.8 million for the nine
months ended September 30, 2004, compared to $32.9 million of net
cash provided by financing activities in the comparable period last
year. During 2004, 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
$43.5 million in 2004 compared to net borrowings of $66.6 million in
2003. On September 2, 2004, the Company obtained a new $150 million
credit facility to replace the former facility scheduled to mature in
June 2005. Additional information on the new facility is included in
Note 6 to the consolidated condensed financial statements. At
September 30, 2004, the Company had direct borrowings under the
revolving loan agreement of $15.9 million. The Company also had $64.0
million of outstanding commercial paper obligations at September 30,
2004. Dividends of $21.1 million and $21.4 million were paid during
the nine months ended September 30, 2004 and 2003, respectively.
The Company believes that its financial position remains strong. The
Company believes that 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
nine months ended September 30, 2004. On April 27, 2001, the Company
approved a share repurchase program under which it is authorized to
repurchase up to 5.0 million shares of Company stock. As of September
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 September 30, 2004.
Payments due by period
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
----- -------- --------- --------- ---------
Long-term debt $526,083 $7,510 $233,600 $99,293 $185,680
Operating lease obligations 35,088 8,690 12,232 5,874 8,292
Manufacturing purchase commitments 59,204 34,719 20,994 3,467 24
-------- ------- -------- -------- --------
Total contractual obligations $620,375 $50,919 $266,826 $108,634 $193,996
======== ======= ======== ======== ========
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, that 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. The Company performed
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its annual evaluation of goodwill and indefinite life intangibles
assets for impairment during the third quarter of 2004 and concluded
that no impairments existed.
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.
Commitments and Contingencies
The Company is subject to litigation and other legal proceedings
arising in the ordinary course of its businesses or arising under
provisions related to the protection of the environment. Estimating
liabilities and costs associated with these matters requires the
judgment of both management and Company counsel. When it is probable
that the Company has incurred a liability associated with claims or
pending or threatened litigation matters and the Company's exposure
is reasonably estimable, the Company records a charge against
earnings. The ultimate resolution of any exposure to the Company may
change as further facts and circumstances become known.
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, 2004. For additional
information about 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.
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 September
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. Forward-looking statements include statements in
the future tense and statements including the terms "expect,"
"believe," "anticipate," and other similar terms which express
expectations as to future events or conditions. 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;
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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 or contraction in markets for
products in which the Company competes; changes in customer
relationships; 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 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 10 to
the consolidated condensed financial statements. The Company has
not received a claim for indemnity from Lesaffre with respect to
this matter. The Company met with the EPA and Lesaffre to discuss
the NOV (and appropriate means to help resolve the matter) in
September 2004 and expects to hear from the EPA within the next
several months.
Superfund Claim
On July 6, 2004, the EPA notified the Company's Sensient Colors
Inc. subsidiary that it may be a potentially responsible party
("PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") for activities at the
General Color Company Superfund Site in Camden, New Jersey. The
EPA requested reimbursement of $10.9 million in clean-up costs,
plus interest. Sensient Colors Inc. advised the EPA that this site
had been expressly excluded from the Company's 1988 stock purchase
of H. Kohnstamm & Company, Inc. (now Sensient Colors Inc.). The
selling shareholders had retained ownership of and liability for
the site, and some became owners of General Color Company, which
continued to operate there until the mid-1990s. The EPA has
recently provided some of the additional information requested by
Sensient and agreed to make other items available for inspection.
The Company will review the information and assess the existence
and solvency of other PRPs, potential insurance coverage, the
nature of the alleged contamination, and the extent to which the
EPA's activities satisfy the requirements for reimbursement under
CERCLA, as well as the legal sufficiency of excluding this site
from the 1988 transaction.
Kraft Foods North America, Inc. v. Sensient Colors Inc.
On April 11, 2003, Kraft Foods North America, Inc. ("Kraft") filed
notice of its intention to arbitrate before the American
Arbitration Association in Chicago, Illinois certain claims
against Sensient Colors Inc. ("Sensient Colors"), a subsidiary of
Sensient Technologies Corporation, in the amount of $5.375
million. Kraft asserted a claim against Sensient Colors for breach
of contract and breach of warranty arising out of the sale of
colorants to Kraft for use in food products for young children
because they caused stains on the clothes, furniture and skin of
the consumers. Kraft also asserted a claim against Sensient Colors
based on its alleged breach of a settlement agreement. After
Sensient Colors unsuccessfully contested Kraft's right to
arbitrate these claims in Illinois state court, the arbitration
proceedings began in August 2004. During the week of August 23-27,
2004, Kraft presented most of its case. Due to the scheduling
conflicts of a member of the arbitration panel, the arbitration
will not resume until late January 2005. Sensient Colors believes
that Kraft's claims are without merit and intends to continue to
defend this matter vigorously.
Remmes v. Sensient Flavors, Inc. et al
In June 2004, the Company and certain other flavor manufacturers
were sued in Iowa state court by Kevin Remmes, who alleged that
while working at American Popcorn Company of Sioux City, Iowa, he
was exposed to butter flavoring vapors that caused injury to his
lungs and respiratory system. The Company, among others, has in
the past and continues to sell butter flavoring used in the
manufacture of microwave popcorn to American Popcorn Company. The
suit has been removed to Federal District Court for the Northern
District of Iowa, Western Division. The Company believes that
plaintiff's claims are without merit and has begun a vigorous
defense.
The Company is involved in various other claims and litigation
arising in the normal course of business. In the opinion of
management and Company counsel, the ultimate resolution of these
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actions will not materially affect the consolidated financial
statements of the Company except as described above.
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 each year. If shareholders
approve the proposal, all directors would be elected to one-year
terms, beginning at the Company's annual meeting in 2006.
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
See Exhibit Index following this report.
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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 8, 2004 By: /s/ John L. Hammond
----------------------------------------
John L. Hammond, Vice President,
Secretary & General Counsel
Date: November 8, 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 SEPTEMBER 30, 2004
Exhibit Description Incorporated by Reference From Filed Herewith
- ------- ----------- ------------------------------ --------------
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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