e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
OR
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o |
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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)
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Wisconsin
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39-0561070 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification
Number) |
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-5304
(Address of principal executive offices)
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class |
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Outstanding at April 30, 2010 |
Common Stock, par value $0.10 per share
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49,513,227 |
SENSIENT TECHNOLOGIES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
(Unaudited)
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Three Months |
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Ended March 31, |
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2010 |
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2009 |
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Revenue |
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$ |
314,076 |
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$ |
282,824 |
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Cost of products sold |
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219,130 |
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196,294 |
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Selling and administrative expenses |
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56,291 |
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48,146 |
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Operating income |
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38,655 |
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38,384 |
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Interest expense |
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4,778 |
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7,246 |
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Earnings before income taxes |
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33,877 |
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31,138 |
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Income taxes |
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10,410 |
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9,531 |
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Net earnings |
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$ |
23,467 |
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$ |
21,607 |
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Average number of common shares outstanding: |
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Basic |
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48,825 |
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48,145 |
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Diluted |
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49,121 |
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48,351 |
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Earnings per common share: |
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Basic |
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$ |
.48 |
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$ |
.45 |
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Diluted |
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$ |
.48 |
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$ |
.45 |
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Dividends per common share |
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$ |
.19 |
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$ |
.19 |
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See accompanying notes to consolidated condensed financial statements.
1
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
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March 31, |
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2010 |
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December 31, |
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(Unaudited) |
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2009 * |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
10,962 |
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$ |
12,219 |
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Trade accounts receivable, net |
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216,000 |
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200,186 |
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Inventories |
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370,974 |
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390,011 |
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Prepaid expenses and other current assets |
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58,674 |
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55,693 |
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TOTAL CURRENT ASSETS |
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656,610 |
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658,109 |
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OTHER ASSETS |
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37,833 |
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38,349 |
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INTANGIBLE ASSETS, NET |
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12,993 |
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13,621 |
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GOODWILL |
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442,134 |
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455,995 |
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PROPERTY, PLANT AND EQUIPMENT: |
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Land |
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48,084 |
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49,429 |
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Buildings |
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287,943 |
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293,200 |
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Machinery and equipment |
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620,613 |
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630,420 |
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Construction in progress |
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24,895 |
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20,211 |
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981,535 |
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993,260 |
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Less accumulated depreciation |
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(567,106 |
) |
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(567,643 |
) |
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414,429 |
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425,617 |
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TOTAL ASSETS |
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$ |
1,563,999 |
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$ |
1,591,691 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Trade accounts payable |
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$ |
85,793 |
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$ |
88,915 |
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Accrued salaries, wages and withholdings from employees |
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17,526 |
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22,568 |
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Other accrued expenses |
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61,167 |
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64,789 |
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Income taxes |
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3,133 |
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|
692 |
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Short-term borrowings |
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41,463 |
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39,181 |
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TOTAL CURRENT LIABILITIES |
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209,082 |
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216,145 |
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OTHER LIABILITIES |
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26,948 |
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27,203 |
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ACCRUED EMPLOYEE AND RETIREE BENEFITS |
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52,411 |
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50,796 |
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LONG-TERM DEBT |
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373,745 |
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388,852 |
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SHAREHOLDERS EQUITY: |
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Common stock |
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5,396 |
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5,396 |
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Additional paid-in capital |
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86,723 |
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85,504 |
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Earnings reinvested in the business |
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937,086 |
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922,963 |
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Treasury stock, at cost |
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(100,308 |
) |
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(103,878 |
) |
Accumulated other comprehensive loss |
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(27,084 |
) |
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(1,290 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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901,813 |
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908,695 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,563,999 |
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$ |
1,591,691 |
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See accompanying notes to consolidated condensed financial statements.
* |
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Condensed from audited financial statements. |
2
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months |
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Ended March 31, |
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2010 |
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2009 |
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Net cash provided by operating activities |
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$ |
23,441 |
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$ |
17,536 |
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Cash flows from investing activities: |
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Acquisition of property, plant and equipment |
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(8,305 |
) |
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(8,836 |
) |
Proceeds from sale of assets |
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36 |
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4 |
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Other investing activity |
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(49 |
) |
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(91 |
) |
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Net cash used in investing activities |
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(8,318 |
) |
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(8,923 |
) |
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Cash flows from financing activities: |
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Proceeds from additional borrowings |
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14,495 |
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|
120,237 |
|
Debt payments |
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(20,566 |
) |
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(122,234 |
) |
Dividends paid |
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(9,345 |
) |
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|
(9,220 |
) |
Proceeds from options exercised and other equity transactions |
|
|
3,348 |
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|
2,261 |
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Net cash used in financing activities |
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(12,068 |
) |
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(8,956 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
|
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(4,312 |
) |
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|
203 |
|
|
|
|
|
|
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|
|
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|
Net decrease in cash and cash equivalents |
|
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(1,257 |
) |
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(140 |
) |
Cash and cash equivalents at beginning of period |
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12,219 |
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|
8,498 |
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Cash and cash equivalents at end of period |
|
$ |
10,962 |
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$ |
8,358 |
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See accompanying notes to consolidated condensed financial statements.
3
SENSIENT TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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In the opinion of Sensient Technologies Corporation (the Company), the accompanying unaudited
consolidated condensed financial statements contain all adjustments (consisting of only normal
recurring adjustments) which are necessary to present fairly the financial position of the
Company as of March 31, 2010 and December 31, 2009, the results of operations for the three
months ended March 31, 2010 and 2009, and cash flows for the three months ended March 31, 2010
and 2009. The results of operations for any interim period are not necessarily indicative of
the results to be expected for the full year. |
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The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates. |
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Expenses are charged to operations in the year incurred. However, for interim reporting
purposes, certain expenses are charged to operations based on a proportionate share of estimated
annual amounts rather than as they are actually incurred. |
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Refer to the notes in the Companys annual consolidated financial statements for the year ended
December 31, 2009, for additional details of the Companys financial condition and a description
of the Companys accounting policies, which have been continued without change. |
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Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures,
defines fair value for financial assets and liabilities, establishes a framework for
measuring fair value in GAAP and expands disclosures about fair value measurements. As of
March 31, 2010 and December 31, 2009, the Companys only assets and liabilities subject
to this standard are forward exchange contracts and mutual fund investments. The fair
value of the forward exchange contracts based on current pricing obtained for comparable
derivative products (Level 2 inputs) at March 31, 2010 and December 31, 2009, was an
asset of $0.2 million and a liability of $0.3 million, respectively. The fair value of
the investments based on March 31, 2010 and December 31, 2009, market quotes (Level 1
inputs) was an asset of $13.4 million and $13.5 million, respectively. |
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The carrying values of the Companys cash and cash equivalents, trade accounts
receivable, accounts payable, accrued expenses and short term borrowings approximated
fair values as of March 31, 2010. The fair value of the Companys long-term debt,
including current maturities, is estimated using discounted cash flows based on the
Companys current incremental borrowing rates for similar types of borrowing
arrangements. The carrying value of the long-term debt at March 31, 2010 was $373.7
million. The fair value of the long-term debt at March 31, 2010 was $376.6 million. |
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In November 2009, the Company entered into an agreement to issue U.S. dollar denominated
debt totaling $110 million through a private placement of notes with a group of four
financial institutions. These notes were issued on May 3, 2010, and have a fixed
coupon rate of 4.91% with a final maturity date of May 3, 2017. Proceeds from the sale of
the notes have been used to repay existing indebtedness and for general
corporate purposes. |
4
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Operating results by segment for the periods and at the dates presented are as follows: |
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Flavors & |
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Corporate |
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(In thousands) |
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Fragrances |
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Color |
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& Other |
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Consolidated |
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Three months ended March 31, 2010: |
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Revenue from external customers |
|
$ |
185,935 |
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$ |
104,214 |
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$ |
23,927 |
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$ |
314,076 |
|
Intersegment revenue |
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|
4,767 |
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|
3,742 |
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|
|
344 |
|
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|
8,853 |
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Total revenue |
|
$ |
190,702 |
|
|
$ |
107,956 |
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|
$ |
24,271 |
|
|
$ |
322,929 |
|
|
|
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|
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|
|
|
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Operating income (loss) |
|
$ |
27,184 |
|
|
$ |
18,108 |
|
|
$ |
(6,637 |
) |
|
$ |
38,655 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
4,778 |
|
|
|
4,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
$ |
27,184 |
|
|
$ |
18,108 |
|
|
$ |
(11,415 |
) |
|
$ |
33,877 |
|
|
|
|
|
|
|
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|
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|
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|
|
Three months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
180,724 |
|
|
$ |
83,677 |
|
|
$ |
18,423 |
|
|
$ |
282,824 |
|
Intersegment revenue |
|
|
3,824 |
|
|
|
3,413 |
|
|
|
248 |
|
|
|
7,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
184,548 |
|
|
$ |
87,090 |
|
|
$ |
18,671 |
|
|
$ |
290,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
29,957 |
|
|
$ |
13,731 |
|
|
$ |
(5,304 |
) |
|
$ |
38,384 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
7,246 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
$ |
29,957 |
|
|
$ |
13,731 |
|
|
$ |
(12,550 |
) |
|
$ |
31,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010 and December 31, 2009, inventories included finished and in-process products
totaling $255.3 million and $275.5 million, respectively, and raw materials and supplies of
$115.7 million and $114.5 million, respectively. |
|
|
The Companys components of annual benefit cost for the defined benefit plans for the
periods presented are as follows: |
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
475 |
|
|
$ |
340 |
|
Interest cost |
|
|
718 |
|
|
|
731 |
|
Expected return on plan assets |
|
|
(331 |
) |
|
|
(263 |
) |
Amortization of prior service cost |
|
|
753 |
|
|
|
456 |
|
Amortization of actuarial loss |
|
|
118 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit expense |
|
$ |
1,733 |
|
|
$ |
1,314 |
|
|
|
|
|
|
|
|
5
|
|
During the three months ended March 31, 2010, the Company made contributions to its
defined benefit pension plans of $1.0 million. Total contributions to Company defined
benefit pension plans are expected to be $4.4 million in 2010. |
|
|
Comprehensive income is comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Net earnings |
|
$ |
23,467 |
|
|
$ |
21,607 |
|
Currency translation adjustments |
|
|
(26,123 |
) |
|
|
(26,980 |
) |
Net unrealized gain on cash flow hedges |
|
|
329 |
|
|
|
120 |
|
|
|
|
|
|
|
|
Net comprehensive loss |
|
$ |
(2,327 |
) |
|
$ |
(5,253 |
) |
|
|
|
|
|
|
|
8. |
|
Cash Flows from Operating Activities |
|
|
Cash flows from operating activities are detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
23,467 |
|
|
$ |
21,607 |
|
Adjustments to arrive at net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10,808 |
|
|
|
10,517 |
|
Share-based compensation |
|
|
755 |
|
|
|
781 |
|
Loss on assets |
|
|
250 |
|
|
|
329 |
|
Deferred income taxes |
|
|
755 |
|
|
|
959 |
|
Changes in operating assets and liabilities |
|
|
(12,594 |
) |
|
|
(16,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
23,441 |
|
|
$ |
17,536 |
|
|
|
|
|
|
|
|
9. |
|
Derivative Instruments and Hedging Activity |
|
|
The Company may use derivative instruments for the purpose of hedging currency, commodity and
interest rate exposures, which exist as part of ongoing business operations. As a policy, the
Company does not engage in speculative or leveraged transactions, nor does the Company hold or
issue financial instruments for trading purposes. Hedge effectiveness is determined by how
closely the changes in the fair value of the hedging instrument offset the changes in the fair
value or cash flows of the hedged transaction. Hedge accounting, which generally results in the
deferral of derivative gains and losses until such time as the underlying transaction is
recognized in net earnings, is permitted only if the hedging |
6
|
|
relationship is expected to be
highly effective at the inception of the transaction and on an ongoing basis. Any ineffective
portions are recognized in earnings immediately. |
|
|
The Company manages its exposure to foreign exchange risk by the use of forward exchange
contracts and foreign currency denominated debt to reduce the effect of fluctuating foreign
currencies on short-term foreign currency denominated intercompany transactions, non-functional
currency raw material purchases, non-functional currency sales and other known foreign currency
exposures. These derivatives may or may not be designated as hedges under ASC 815, Derivatives
and Hedging. These
forward exchange contracts have maturities of less than twelve months. The Companys primary
hedging activities and their accounting treatment are summarized below: |
Forward contracts designated as cash flow hedges The forward exchange contracts that have
been designated as hedges are accounted for as cash flow hedges. The Company had $10.8
million and $6.3 million of forward exchange contracts, designated as hedges, outstanding as
of March 31, 2010 and December 31, 2009, respectively. The fair values of these forward
exchange contracts at March 31, 2010 and December 31, 2009, was an asset of $0.1 million and
a liability of $0.1 million classified in Other Assets and Other Liabilities in the
Companys Consolidated Balance Sheets, respectively. The gains or losses on these
instruments are deferred in accumulated other comprehensive income (OCI) until the
underlying transaction is recognized in net earnings. As of March 31, 2010 and December 31,
2009, a gain of $0.2 million and a loss of $0.2 million were deferred in OCI in the
Companys Consolidated Balance Sheets, respectively. For the periods ended March 31, 2010
and 2009, a gain of $0.1 million and $1.3 million, respectively, was reclassified into
earnings in the Companys Consolidated Statement of Earnings which offset the earnings
impact of the related non-functional asset or liability that was hedged in each of the same
periods. Over the next twelve months, the Company expects to reclassify a gain of $0.2
million from OCI into net earnings.
Forward contracts not designated as cash flow hedges The Company also utilizes forward
exchange contracts that are not designated as cash flow hedges under ASC 815. These
contracts are marked-to-market in net earnings immediately, at the same time as the
non-functional asset or liability is marked-to-market in net earnings. The Company had $13.8
million and $23.2 million of forward exchange contracts, not designated as hedges,
outstanding as of March 31, 2010 and December 31, 2009, respectively, and recognized a gain
of $0.9 million and a loss of $0.3 million in net earnings for the three month periods ended
March 31, 2010 and 2009, respectively, which offset the earnings impact of the related
non-functional asset or liability in each of the same periods. As of March 31, 2010 and
December 31, 2009, the fair values of these forward contracts was an asset of $0.03 million
and a liability of $0.2 million which were classified in Other Assets and Other Liabilities,
respectively, in the Companys consolidated balance sheet.
Net investment hedges The Company has certain debt denominated in Euros and Swiss Francs.
These debt instruments have been designated as partial hedges of the Companys Euro and
Swiss Franc net asset positions. Changes in the fair value of this debt attributable to
changes in the spot foreign exchange rate are recorded in foreign currency translation in
OCI. As of March 31, 2010 and December 31, 2009, the total value of the Companys Euro and
Swiss Franc debt was $134.8 million and $141.7 million, respectively. A loss of $6.8 million
and a gain of $7.5 million have been recorded as foreign currency translation in OCI for the
three month periods ended March 31, 2010 and 2009, respectively.
|
|
The effective income tax rates for the three months ended March 31, 2010 and 2009 were
30.7% and 30.6%, respectively. The effective tax rates in both 2010 and 2009 were reduced
by changes in estimates associated with the finalization of prior year foreign tax items. |
|
|
The Company performed an evaluation of subsequent events through the date these financial
statements were issued. |
7
12. |
|
Commitments and Contingencies |
Environmental Matters
|
|
The Company is involved in various significant environmental matters, which are described below.
The Company is also involved in other site closure and related environmental remediation and
compliance activities at a manufacturing site related to a 2001 acquisition by the Company for
which reserves for environmental matters were established as of the date of purchase. |
Superfund Claim
|
|
In July 2004, the Environmental Protection Agency (EPA) notified the Companys subsidiary
Sensient Colors Inc. (Sensient Colors) 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 Site). The
EPA requested reimbursement of $10.9 million in clean-up costs, plus interest. Sensient Colors
advised the EPA that the Site had been expressly excluded from the Companys 1988 stock purchase
of H. Kohnstamm & Company, Inc. (now Sensient Colors). 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. In a letter to the EPA in January 2005, the
Company outlined legal challenges to the recoverability of certain costs and urged the EPA to
pursue General Color Company and related parties. The EPA informed Sensient Colors that it was
unwilling to discuss these legal challenges without prior conditions. In 2005, a private
developer, Westfield Acres Urban Renewal Association II, LP, pursuant to an agreement with the
EPA, began redevelopment efforts at the Site (construction of affordable housing) by demolishing
buildings thereon. Thereafter, the EPA removed allegedly contaminated soil from the locations
where the buildings once stood. |
|
|
In March 2007, the United States filed a complaint in the U.S. District Court in New Jersey
against Sensient Colors claiming over $16 million in response costs allegedly incurred and to
be incurred by the EPA pursuant to CERCLA. Sensient Colors moved to dismiss the United States
complaint, which motion was denied by the Court in October 2007. Sensient Colors timely filed
its answer and affirmative defenses to the United States complaint, as well as a third-party
complaint against current and former owners and/or operators of the Site. The United States
moved to strike Sensient Colors affirmative defenses. In an August 12, 2008 Opinion and Order,
following briefs and oral argument, the Court partly granted and partly denied the United
States motion, effectively preserving most of Sensient Colors affirmative defenses, either as
originally pled or with changes outlined by the Court. Sensient Colors promptly filed an amended
pleading incorporating the revised affirmative defenses. On July 29, 2008, Sensient Colors filed
a third-party complaint adding Kohnstamm Inc. (a Canadian affiliate of General Color Company)
and its president Avtar Singh as defendants. |
|
|
In late August 2008, in the course of reviewing documents produced by the EPA, Sensient Colors
discovered an e-mail exchange between EPA officials that Sensient Colors believes supports many
of the legal theories and affirmative defenses advanced by Sensient Colors in the litigation and
undermines key United States cost recovery claims. By letter dated August 26, 2008, based on the
above document and other evidence adduced in the case, Sensient Colors demanded that the United
States dismiss its case with prejudice and reimburse Sensient Colors for attorneys fees and
costs incurred. In response to the August 26, 2008 letter, the United States withdrew, without
prejudice, its then-pending motion to limit the scope of review to EPAs administrative record
and told the Court that it would respond to Sensients letter by September 10, 2008. The United
States then sought additional time for its review of Sensient Colors demand. In an October 3,
2008 Letter Order, the Court directed the United States to provide Sensient with notice of its
decision with respect to the demand for dismissal by October 31, 2008. In a letter to Sensient
Colors dated October 31, 2008, the United States declined to voluntarily dismiss the case but
agreed, with certain conditions, not to oppose depositions of current and former EPA employees
on the issues raised in Sensient Colors letter of August 26, 2008. The United States reserved
its rights to seek limitations on discovery and to seek to limit review of EPAs choice of
response action to the administrative record. |
|
|
Using the evidence that supports its demand for dismissal, Sensient Colors moved for leave to
amend its responsive pleading to include a new affirmative defense, a counterclaim against the
United States and the EPA, and third-party claims against certain EPA employees or agents. After
briefing, the motion for leave to amend was argued before the magistrate judge on November 18,
2008. On February 13, 2009, the magistrate issued an opinion and order denying Sensient Colors
motion for leave to amend. Sensient Colors appealed the magistrates decision to the district
court judge. On July 22, 2009, the |
8
|
|
district court judge issued a decision affirming the
magistrates opinion and order, largely on sovereign immunity grounds. |
|
|
Sensient Colors also issued subpoenas or deposition notices to numerous current or former EPA
officials. Motions were filed to block the depositions of former EPA Administrator Christine
Todd Whitman, former EPA Regional Administrator Jane Kenny, and EPA On-Scene Coordinator David
Rosoff. On January 28, 2009, the magistrate judge issued an opinion and order denying or
delaying Sensient Colors ability to conduct the foregoing depositions. Sensient Colors
exercised its right to
appeal the magistrates decision to the district court judge. On July 22, 2009, the district
court judge issued a decision reversing the magistrate and ordering the depositions of Kenny and
Rosoff to proceed. |
|
|
On May 8, 2009, Sensient Colors filed a motion for summary judgment seeking dismissal with
prejudice of the United States claims. |
|
|
Prior to arguing the summary judgment motion and to scheduling the depositions of the current
and former EPA officials, the United States and Sensient Colors agreed to meet with each other,
with the parties involved in the Pleasant Gardens dispute described below and with interested
insurers to determine if a resolution short of trial was possible. The parties met and
ultimately agreed to a settlement in principle to resolve the matter by specified payments among
the parties and their insurers. As a result of the proposed settlements, Sensients results for
the quarter and year ended December 31, 2009 included pre-tax charges for estimated settlement
liabilities and related legal costs, net of insurance reimbursements, of approximately $11.3
million. The proposed settlements remain subject to the preparation and execution of definitive
agreements and approval of proposed consent decrees by the U.S. District Court in New Jersey and
the Superior Court of New Jersey after an opportunity for public comment. |
Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co., et al.
|
|
The owner of Pleasant Gardens (Property), an apartment complex adjacent to the General Color
Superfund Site, filed a complaint in New Jersey state court in November 2003 against H.
Kohnstamm & Co. (now Sensient Colors), the Company, General Color Company, and unknown
defendants. Plaintiff seeks to hold defendants liable, in an unspecified amount, for damages
related to the alleged contamination of the Property. Plaintiff voluntarily dismissed the
Company without prejudice. Sensient Colors filed an answer denying liability and asserting
affirmative defenses. In November 2006, the Camden Redevelopment Agency (Agency) filed
condemnation litigation against plaintiff (and other purported interested parties) to take the
Property. Sensient Colors is not a party to the condemnation litigation. In advance of its
filing, the Agency notified plaintiff that its appraiser had assessed the fair market value of
the Property at $7.7 million and that its environmental consultant had estimated the costs for
environmental cleanup, purportedly to meet requirements of the New Jersey Department of
Environmental Protection (DEP), at $7.5 million. That amount has been held in escrow pending
the outcome of the lawsuit. Sensient Colors and plaintiff have pursued a reduction in the scope
and cost of the Agencys proposed environmental cleanup in meetings with the DEP, the Agency and
another party involved in the condemnation, the New Jersey Schools Construction Corporation
(NJSCC). To the extent that there is a reduction in the condemnation value of the Property due
to the Agencys remediation of contamination for which Sensient Colors is allegedly responsible,
such reduction may become a part of the damages claimed by plaintiff. In March 2007, plaintiff
filed an amended complaint naming the Agency, the NJSCC and the DEP as additional defendants in
furtherance of this effort. In April 2007, Sensient Colors filed its answer to the amended
complaint, including cross claims against these newly added parties. The Agency, the DEP and the
New Jersey Schools Development Authority (NJSDA) (which replaced the NJSCC as a state agency
effective August 7, 2007) each filed answers, cross-claims and counter-claims; Sensient Colors
has responded to all three cross-claims. Document discovery was completed in July 2008, and
expert and rebuttal expert reports have been exchanged. |
|
|
Sensient Colors advised the Court and the other parties in this litigation of the developments
in the Superfund Claim as described above. Sensient Colors took supplemental depositions of
several DEP officials and served subpoenas upon five current or former EPA officials. The United
States, though not a party to the Pleasant Gardens case, initially sought to quash those
subpoenas before the Pleasant Gardens court. On November 17, 2008, the United States removed the
subpoenas and related proceedings to federal court. At an initial court conference on the
removed proceedings on February 19, 2009, the federal magistrate judge asked for additional
briefing on the issue of the governments standing to seek to quash the state court subpoenas.
In September 2009, the federal magistrate judge |
9
|
|
ordered that former EPA officials could be
deposed but only as to individual and not official matters. Sensient Colors appealed this
decision to the district court judge. |
|
|
On January 8, 2009, the state court judge recused himself from the Pleasant Gardens case (as
well as the related insurance coverage case) because of a conflict of interest and the Pleasant
Gardens case was reassigned to another judge. In light of the recusal and reassignment, the new
judge re-scheduled the trial to commence no earlier than June 1, 2009, and indicated that
depending on how certain outstanding discovery issues are resolved, the trial might be deferred
further. On April 20, 2009, the court further extended the pretrial schedule and set a trial
date for October 5, 2009. On July 24, 2009,
Sensient Colors filed a motion for summary judgment on the grounds that the DEPs proposed
remedy was arbitrary and capricious. At a conference held on September 18, 2009, the state court
judge ordered that discovery be completed before November 15, 2009, that dispositive motions be
heard on December 11, 2009, and that the trial commence on February 8, 2010. The judge also
ordered that mediation occur before November 15, 2009. |
|
|
As described above, Sensient Colors met with the parties to the Pleasant Gardens litigation, to
the Superfund claims described above and their respective insurers, and they ultimately agreed
to a settlement in principle to resolve the matter by specified payments among the parties and
their insurers. As a result of the proposed settlements, Sensients results for the quarter and
year ended December 31, 2009, included pre-tax charges for estimated settlement liabilities and
related legal costs, net of insurance reimbursements, of approximately $11.3 million. The
proposed settlements remain subject to the preparation and execution of definitive agreements
and approval of proposed consent decrees by the U.S. District Court in New Jersey and the
Superior Court of New Jersey after an opportunity for public comment. |
|
|
As of March 31, 2010, total liabilities related to environmental matters are estimated to be
between $16.2 million and $19.3 million. As of March 31, 2010, the Company has accrued $17.5
million which primarily relates to the settlement of legal claims related to the Superfund and
Pleasant Gardens claims discussed above. The Company has a receivable of $11.1 million for
agreed upon insurance recoveries related to these liabilities. This accrual and receivable
represents managements best estimate of these items; however, the actual amounts may be
different than the levels reserved or estimated, in which case the Company would need to
recognize the difference in earnings in later periods. There can be no assurance that additional
environmental matters will not arise in the future. |
Commercial Litigation
|
|
In June 2009, Sensient sued one of its product vendors, Cherry Blossom LLC (Cherry Blossom), a
supplier of processed cherry products in Michigan, when Cherry Blossom prepared to close its
facility and refused to return to Sensient raw cherries to which Sensient held title. Sensient
sued for conversion, breach of contract, possession of the cherries, and money damages of
approximately $500,000. Cherry Blossom and its lender opposed the claim and the court deferred
the matter for trial. |
|
|
Crossroads Debt, LLC (Crossroads), a secured lender to Cherry Blossom, intervened in the case
and asserted multiple claims against Cherry Blossom related to Cherry Blossoms $1.4 million
debt to Crossroads. |
|
|
Crossroads also asserted cross-claims against Sensient related to payments by Sensient to Cherry
Blossom for the processed cherry product Sensient purchased from Cherry Blossom. |
|
|
Under Sensients contract with Cherry Blossom, Cherry Blossom would purchase Sensients raw
cherries for use in making finished cherry product. Sensient then purchased the finished
product from Cherry Blossom at a purchase price reduced by the amount Cherry Blossom owed
Sensient for raw cherries. Eventually, Cherry Blossom directed Sensient to make payments
directly to Crossroads, which Sensient did for about seven months, until Cherry Blossom ceased
operations. |
|
|
At a mediation on March 24, 2010, Crossroads claimed for the first time that because Sensient
paid for the finished cherry product by offsetting antecedent debt, Sensient is not a buyer in
the ordinary course of business as defined by the Uniform Commercial Code. As a result,
Crossroads claimed that Sensient was not entitled to take such offsets because Crossroads
claimed it has a perfected senior lien on the offset funds. Crossroads seeks the imposition of a
constructive trust over $1.4 million of such funds and |
10
|
|
a judgment requiring their return by
Sensient. The total exposure could exceed this amount due to interest. |
|
|
In addition, Sensient asserted indemnification claims against Crossroads related to a US
Department of Labor hot goods issue. Regarding hot goods, Sensient paid Cherry Blossoms
employees wages on behalf of Cherry Blossom and Crossroads after the DOL designated goods made
by the unpaid employees as hot and unable to be sold. |
|
|
Cherry Blossom counter-claimed against Sensient, primarily relating to ownership of the cherry
processing formulas. Sensient sold Cherry Blossom certain written materials containing formulas
used in
the processing of cherries. Cherry Blossom claims it has an exclusive right to use Sensients
formulas. On June 22, 2009, Cherry Blossom moved for an injunction to prohibit Sensient from
using its cherry processing formulas. The court denied that motion. |
|
|
The parties continue to engage in discovery. A mediation was held on March 24, 2010, but the
case was not resolved. Crossroads moved for summary judgment on April 12, 2010. The case is
scheduled for trial in June 2010. |
|
|
The Company is involved in various other claims and litigation arising in the normal course of
business. In the judgment of management, which relies in part on information from Company
counsel, the ultimate resolution of these actions will not materially affect the consolidated
financial statements of the Company except as described above. |
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Revenue for the first quarter of 2010 was $314.1 million compared to $282.8 million recorded in
the prior years first quarter. Revenue for the Flavors & Fragrances segment increased 3.3%
for the first quarter of 2010, from the comparable quarter last year. Color segment revenue
increased 24.0% for the three months ended March 31, 2010, from the comparable period last
year. Corporate and Other revenue increased 30.0% for the quarter ended March 31, 2010 from
the comparable period last year. The impact of foreign exchange rates increased consolidated
revenue by 5.3% in the quarter ended March 31, 2010. Additional information on group results
can be found in the Segment Information section.
The gross profit margin decreased 40 basis points to 30.2% for the quarter ended March 31,
2010, from 30.6% for the same period in 2009. The primary driver in the decrease was the
result of downward price adjustments in the dehydrated flavors product line in advance of
anticipated lower raw material costs.
Selling and administrative expenses as a percent of revenue were 17.9% and 17.0% in the
quarters ended March 31, 2010 and 2009, respectively. Higher employee costs, including the
impact of performance-based compensation, and professional fees were the primary drivers of the
increase.
Operating income was $38.7 million and $38.4 million for the quarters ended March 31, 2010 and
2009, respectively. The impact of foreign exchange rates increased operating income by 5.8% in
the quarter ended March 31, 2010. This favorable impact was offset by the other changes in
operating income due to the revenue, margin and expense changes discussed above. Additional
information can be found in the Segment Information section.
Interest expense for the first quarter of 2010 decreased 34.1% to $4.8 million from $7.2
million in the prior years quarter. The decrease was the result of lower interest rates
combined with lower average debt balances.
The effective income tax rates were 30.7% and 30.6% for the quarters ended March 31, 2010 and
2009, respectively. The effective tax rates in both 2010 and 2009 were reduced by changes in
estimates associated with the finalization of prior year foreign tax items. The Company
expects the effective tax rate for the remainder of 2009 to be 33.0%, excluding the income tax
expense or benefit related to discrete items, which will be reported separately in the quarter
in which they occur.
SEGMENT INFORMATION
Flavors & Fragrances
Revenue for the Flavors & Fragrances segment in the first quarters of 2010 and 2009 was $190.7
million and $184.5 million, respectively. The increase was primarily due to the favorable
impact of foreign exchange rates ($8.6 million) and higher revenue in Europe ($2.0 million).
These items were partially offset by lower revenue in North America ($4.0 million). The lower
revenue in North America was primarily due to downward selling price adjustments for dehydrated
flavors in advance of anticipated lower raw material costs. The increased revenue in Europe
was primarily related to higher volumes.
For the quarters ended March 31, 2010 and 2009, operating income was $27.2 million and $30.0
million, respectively. The decrease was primarily attributable to lower profit in North
America ($4.4 million) partially offset by the favorable impact of foreign exchange rates ($1.2
million) and higher profit in Europe ($0.6 million). The decrease in North America was driven
by downward selling price adjustments for dehydrated flavors and the increase in Europe was
primarily due to higher volume. Operating income as a percent of revenue was 14.3% and 16.2%
for the quarters ended March 31, 2010 and 2009, respectively.
Color
Revenue for the Color segment for the first quarter of 2010 was $108.0 million compared to
$87.1 million reported in the prior years first quarter, an increase of 24.0%. The increase
in revenue was due to higher sales of non-food colors ($9.0 million) and higher sales of food
and beverage colors ($7.2 million) combined with the favorable impact of foreign exchange rates
($4.7 million). The higher sales of both food
12
and beverage colors and non-food colors were primarily due to an increase in volumes. In
particular, sales of natural food and beverage colors in the quarter were strong.
Operating income for the quarter ended March 31, 2010, was $18.1 million, an increase of 31.9%
from the $13.7 million reported in the comparable period last year. The increase was due to
higher profit in food and beverage colors ($2.6 million) and higher profit in non-food colors
($1.0 million). The favorable impact of foreign exchange rates increased operating profit by
approximately $0.8 million. The higher profit in both food and beverage colors and non-food
colors was primarily driven by higher volumes. Operating income as a percent of revenue was
16.8%, an increase of 100 basis points from the prior years quarter.
LIQUIDITY AND FINANCIAL CONDITION
The Companys ratio of debt to total capital improved to 31.5% as of March 31, 2010, from 32.0%
as of December 31, 2009. The improvement was due to lower outstanding debt balances partially
offset by a reduction in equity balances.
Net cash provided by operating activities was $23.4 million and $17.5 million for the three
months ended March 31, 2010 and 2009, respectively. The increase in cash provided by operating
activities was primarily due to higher earnings and less cash required to fund working capital
increases in the first three months of 2010 compared to the same period in 2009.
Net cash used in investing activities was $8.3 million and $8.9 million for the three months
ended March 31, 2010 and 2009, respectively. Capital expenditures were $8.3 million and $8.8
million for the quarters ended March 31, 2010 and 2009, respectively.
Net cash used in financing activities was $12.1 million in the first three months of 2010 and
$9.0 million in the comparable period of 2009. The primary driver for the change was the
higher net repayments on debt in the first quarter of 2010 due to the higher cash provided by
operating activities. In the first quarter of 2010, net repayments on debt were $6.1 million
compared to $2.0 million for the first quarter of 2009. For purposes of the cash flow
statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $9.3
million and $9.2 million were paid during the three months ended March 31, 2010 and 2009,
respectively. In the first quarters of 2010 and 2009, the Companys cash provided from
operations was able to fund capital expenditures, pay dividends and reduce outstanding debt.
The Companys financial position remains strong. In November 2009, the Company entered into an
agreement to issue $110 million of notes on May 3, 2010. The proceeds from the new debt agreement
have been used to refinance existing debt and for general corporate purposes. The Company
expects that its cash flows from operations, this new debt agreement and existing lines of
credit can be used to meet future cash requirements for operations, capital expenditures and
dividend payments to shareholders.
On April 22, 2010, the Companys Board of Directors voted to increase the Companys cash
dividend from $0.19 per share to $0.20 per share effective for the quarterly dividend payable
on June 1, 2010, to shareholders of record on May 6, 2010.
CONTRACTUAL OBLIGATIONS
There have been no material changes in the Companys contractual obligations during the quarter
ended March 31, 2010. For additional information about contractual obligations, refer to pages
23 and 24 of the Companys 2009 Annual Report, portions of which were filed as Exhibit 13.1 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements as of March 31, 2010.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Companys critical accounting policies during the
quarter ended March 31, 2010. For additional information about critical accounting policies,
refer to pages 21 and 22 of the Companys 2009 Annual Report, portions of which were filed as
Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Companys exposure to market risk during the quarter
ended March 31, 2010. For additional information about market risk, refer to pages 22 and 23
of the Companys 2009 Annual Report, portions of which were filed as Exhibit 13.1 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: The Company carried out an evaluation, under
the supervision and with the participation of management, including the Companys Chairman and
Chief Executive Officer and its Senior Vice President and Chief Financial Officer, of the
effectiveness, as of the end of the period covered by this report, of the design and operation
of the disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act of
1934. Based upon that evaluation, the Companys Chairman and Chief Executive Officer and its
Senior Vice President and Chief Financial Officer have concluded that the disclosure controls
and procedures were effective as of the end of the period covered by this report.
Change in Internal Control Over Financial Reporting: There has been no change in the Companys
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) during the Companys most recent quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial
reporting.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that reflect managements current assumptions
and estimates of future economic circumstances, industry conditions, Company performance and
financial results. Forward-looking statements include statements in the future tense,
statements referring to any period after March 31, 2010, and statements including the terms
expect, believe, anticipate and other similar terms that 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 Companys 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 Companys customers; the Companys ability to
successfully implement its growth strategies; the outcome of the Companys various
productivity-improvement and cost-reduction efforts; changes in costs of raw materials and
energy; industry and economic factors related to the Companys domestic and international
business; competition from other suppliers of colors, flavors and fragrances; growth or
contraction in markets for products in which the Company competes; terminations and other
changes in customer relationships; industry and customer acceptance of price increases;
currency exchange rate fluctuations; cost and availability of credit; results of litigation,
environmental investigations or other proceedings; complications as a result of existing or
future information technology system applications and hardware; the matters discussed under
Item 1A of the Companys Annual Report on Form 10-K for the year ended December 31, 2009; and
the matters discussed above under Item 2 including the critical accounting policies referenced
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.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Superfund Claim
In July 2004, the Environmental Protection Agency (EPA) notified the Companys subsidiary
Sensient Colors Inc. (Sensient Colors) 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 Site). The
EPA requested reimbursement of $10.9 million in clean-up costs, plus interest. Sensient Colors
advised the EPA that the Site had been expressly excluded from the Companys 1988 stock purchase
of H. Kohnstamm & Company, Inc. (now Sensient Colors). 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. In a letter to the EPA in January 2005, the
Company outlined legal challenges to the recoverability of certain costs and urged the EPA to
pursue General Color Company and related parties. The EPA informed Sensient Colors that it was
unwilling to discuss these legal challenges without prior conditions. In 2005, a private
developer, Westfield Acres Urban Renewal Association II, LP, pursuant to an agreement with the
EPA, began redevelopment efforts at the Site (construction of affordable housing) by demolishing
buildings thereon. Thereafter, the EPA removed allegedly contaminated soil from the locations
where the buildings once stood.
In March 2007, the United States filed a complaint in the U.S. District Court in New Jersey
against Sensient Colors claiming over $16 million in response costs allegedly incurred and to
be incurred by the EPA pursuant to CERCLA. Sensient Colors moved to dismiss the United States
complaint, which motion was denied by the Court in October 2007. Sensient Colors timely filed
its answer and affirmative defenses to the United States complaint, as well as a third-party
complaint against current and former owners and/or operators of the Site. The United States
moved to strike Sensient Colors affirmative defenses. In an August 12, 2008 Opinion and Order,
following briefs and oral argument, the Court partly granted and partly denied the United
States motion, effectively preserving most of Sensient Colors affirmative defenses, either as
originally pled or with changes outlined by the Court. Sensient Colors promptly filed an amended
pleading incorporating the revised affirmative defenses. On July 29, 2008, Sensient Colors filed
a third-party complaint adding Kohnstamm Inc. (a Canadian affiliate of General Color Company)
and its president Avtar Singh as defendants.
In late August 2008, in the course of reviewing documents produced by the EPA, Sensient Colors
discovered an e-mail exchange between EPA officials that Sensient Colors believes supports many
of the legal theories and affirmative defenses advanced by Sensient Colors in the litigation and
undermines key United States cost recovery claims. By letter dated August 26, 2008, based on the
above document and other evidence adduced in the case, Sensient Colors demanded that the United
States dismiss its case with prejudice and reimburse Sensient Colors for attorneys fees and
costs incurred. In response to the August 26, 2008 letter, the United States withdrew, without
prejudice, its then-pending motion to limit the scope of review to EPAs administrative record
and told the Court that it would respond to Sensients letter by September 10, 2008. The United
States then sought additional time for its review of Sensient Colors demand. In an October 3,
2008 Letter Order, the Court directed the United States to provide Sensient with notice of its
decision with respect to the demand for dismissal by October 31, 2008. In a letter to Sensient
Colors dated October 31, 2008, the United States declined to voluntarily dismiss the case but
agreed, with certain conditions, not to oppose depositions of current and former EPA employees
on the issues raised in Sensient Colors letter of August 26, 2008. The United States reserved
its rights to seek limitations on discovery and to seek to limit review of EPAs choice of
response action to the administrative record.
Using the evidence that supports its demand for dismissal, Sensient Colors moved for leave to
amend its responsive pleading to include a new affirmative defense, a counterclaim against the
United States and the EPA, and third-party claims against certain EPA employees or agents. After
briefing, the motion for leave to amend was argued before the magistrate judge on November 18,
2008. On February 13, 2009, the magistrate issued an opinion and order denying Sensient Colors
motion for leave to amend. Sensient Colors appealed the magistrates decision to the district
court judge. On July 22, 2009, the district court judge issued a decision affirming the
magistrates opinion and order, largely on sovereign immunity grounds.
15
Sensient Colors also issued subpoenas or deposition notices to numerous current or former EPA
officials. Motions were filed to block the depositions of former EPA Administrator Christine
Todd Whitman, former EPA Regional Administrator Jane Kenny, and EPA On-Scene Coordinator David
Rosoff. On January 28, 2009, the magistrate judge issued an opinion and order denying or
delaying Sensient Colors ability to conduct the foregoing depositions. Sensient Colors
exercised its right to appeal the magistrates decision to the district court judge. On July 22,
2009, the district court judge issued a decision reversing the magistrate and ordering the
depositions of Kenny and Rosoff to proceed.
On May 8, 2009, Sensient Colors filed a motion for summary judgment seeking dismissal with
prejudice of the United States claims.
Prior to arguing the summary judgment motion and to scheduling the depositions of the current
and former EPA officials, the United States and Sensient Colors agreed to meet with each other,
with the parties involved in the Pleasant Gardens dispute described below and with interested
insurers to determine if a resolution short of trial was possible. The parties met and
ultimately agreed to a settlement in principle to resolve the matter by specified payments among
the parties and their insurers. As a result of the proposed settlements, Sensients results for
the quarter and year ended December 31, 2009 included pre-tax charges for estimated settlement
liabilities and related legal costs, net of insurance reimbursements, of approximately $11.3
million. The proposed settlements remain subject to the preparation and execution of definitive
agreements and approval of proposed consent decrees by the U.S. District Court in New Jersey and
the Superior Court of New Jersey after an opportunity for public comment.
Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co., et al.
The owner of Pleasant Gardens (Property), an apartment complex adjacent to the General Color
Superfund Site, filed a complaint in New Jersey state court in November 2003 against H.
Kohnstamm & Co. (now Sensient Colors), the Company, General Color Company, and unknown
defendants. Plaintiff seeks to hold defendants liable, in an unspecified amount, for damages
related to the alleged contamination of the Property. Plaintiff voluntarily dismissed the
Company without prejudice. Sensient Colors filed an answer denying liability and asserting
affirmative defenses. In November 2006, the Camden Redevelopment Agency (Agency) filed
condemnation litigation against plaintiff (and other purported interested parties) to take the
Property. Sensient Colors is not a party to the condemnation litigation. In advance of its
filing, the Agency notified plaintiff that its appraiser had assessed the fair market value of
the Property at $7.7 million and that its environmental consultant had estimated the costs for
environmental cleanup, purportedly to meet requirements of the New Jersey Department of
Environmental Protection (DEP), at $7.5 million. That amount has been held in escrow pending
the outcome of the lawsuit. Sensient Colors and plaintiff have pursued a reduction in the scope
and cost of the Agencys proposed environmental cleanup in meetings with the DEP, the Agency and
another party involved in the condemnation, the New Jersey Schools Construction Corporation
(NJSCC). To the extent that there is a reduction in the condemnation value of the Property due
to the Agencys remediation of contamination for which Sensient Colors is allegedly responsible,
such reduction may become a part of the damages claimed by plaintiff. In March 2007, plaintiff
filed an amended complaint naming the Agency, the NJSCC and the DEP as additional defendants in
furtherance of this effort. In April 2007, Sensient Colors filed its answer to the amended
complaint, including cross claims against these newly added parties. The Agency, the DEP and the
New Jersey Schools Development Authority (NJSDA) (which replaced the NJSCC as a state agency
effective August 7, 2007) each filed answers, cross-claims and counter-claims; Sensient Colors
has responded to all three cross-claims. Document discovery was completed in July 2008, and
expert and rebuttal expert reports have been exchanged.
Sensient Colors advised the Court and the other parties in this litigation of the developments
in the Superfund Claim as described above. Sensient Colors took supplemental depositions of
several DEP officials and served subpoenas upon five current or former EPA officials. The United
States, though not a party to the Pleasant Gardens case, initially sought to quash those
subpoenas before the Pleasant Gardens court. On November 17, 2008, the United States removed the
subpoenas and related proceedings to federal court. At an initial court conference on the
removed proceedings on February 19, 2009, the federal magistrate judge asked for additional
briefing on the issue of the governments standing to seek to quash the state court subpoenas.
In September 2009, the federal magistrate judge ordered that former EPA officials could be
deposed but only as to individual and not official matters. Sensient Colors appealed this
decision to the district court judge.
16
On January 8, 2009, the state court judge recused himself from the Pleasant Gardens case (as
well as the related insurance coverage case) because of a conflict of interest and the Pleasant
Gardens case was reassigned to another judge. In light of the recusal and reassignment, the new
judge re-scheduled the trial to commence no earlier than June 1, 2009, and indicated that
depending on how certain outstanding discovery issues are resolved, the trial might be deferred
further. On April 20, 2009, the court further extended the pretrial schedule and set a trial
date for October 5, 2009. On July 24, 2009, Sensient Colors filed a motion for summary judgment
on the grounds that the DEPs proposed remedy was arbitrary and capricious. At a conference held
on September 18, 2009, the state court judge ordered that discovery be completed before November
15, 2009, that dispositive motions be heard on December 11, 2009, and that the trial commence on
February 8, 2010. The judge also ordered that mediation occur before November 15, 2009.
As described above, Sensient Colors met with the parties to the Pleasant Gardens litigation, to
the Superfund claims described above and their respective insurers, and they ultimately agreed
to a settlement in principle to resolve the matter by specified payments among the parties and
their insurers. As a result of the proposed settlements, Sensients results for the quarter and
year ended December 31, 2009, included pre-tax charges for estimated settlement liabilities and
related legal costs, net of insurance reimbursements, of approximately $11.3 million. The
proposed settlements remain subject to the preparation and execution of definitive agreements
and approval of proposed consent decrees by the U.S. District Court in New Jersey and the
Superior Court of New Jersey after an opportunity for public comment.
Commercial Litigation
In June 2009, Sensient sued one of its product vendors, Cherry Blossom LLC (Cherry Blossom), a
supplier of processed cherry products in Michigan, when Cherry Blossom prepared to close its
facility and refused to return to Sensient raw cherries to which Sensient held title. Sensient
sued for conversion, breach of contract, possession of the cherries, and money damages of
approximately $500,000. Cherry Blossom and its lender opposed the claim and the court deferred
the matter for trial.
Crossroads Debt, LLC (Crossroads), a secured lender to Cherry Blossom, intervened in the case
and asserted multiple claims against Cherry Blossom related to Cherry Blossoms $1.4 million
debt to Crossroads.
Crossroads also asserted cross-claims against Sensient related to payments by Sensient to Cherry
Blossom for the processed cherry product Sensient purchased from Cherry Blossom.
Under Sensients contract with Cherry Blossom, Cherry Blossom would purchase Sensients raw
cherries for use in making finished cherry product. Sensient then purchased the finished
product from Cherry Blossom at a purchase price reduced by the amount Cherry Blossom owed
Sensient for raw cherries. Eventually, Cherry Blossom directed Sensient to make payments
directly to Crossroads, which Sensient did for about seven months, until Cherry Blossom ceased
operations.
At a mediation on March 24, 2010, Crossroads claimed for the first time that because Sensient
paid for the finished cherry product by offsetting antecedent debt, Sensient is not a buyer in
the ordinary course of business as defined by the Uniform Commercial Code. As a result,
Crossroads claimed that Sensient was not entitled to take such offsets because Crossroads
claimed it has a perfected senior lien on the offset funds. Crossroads seeks the imposition of a
constructive trust over $1.4 million of such funds and a judgment requiring their return by
Sensient. The total exposure could exceed this amount due to interest.
In addition, Sensient asserted indemnification claims against Crossroads related to a US
Department of Labor hot goods issue. Regarding hot goods, Sensient paid Cherry Blossoms
employees wages on behalf of Cherry Blossom and Crossroads after the DOL designated goods made
by the unpaid employees as hot and unable to be sold.
Cherry Blossom counter-claimed against Sensient, primarily relating to ownership of the cherry
processing formulas. Sensient sold Cherry Blossom certain written materials containing formulas
used in the processing of cherries. Cherry Blossom claims it has an exclusive right to use
Sensients formulas. On June 22, 2009, Cherry Blossom moved for an injunction to prohibit
Sensient from using its cherry processing formulas. The court denied that motion.
17
The parties continue to engage in discovery. A mediation was held on March 24, 2010, but the
case was not resolved. Crossroads moved for summary judgment on April 12, 2010. The case is
scheduled for trial in June 2010.
The Company is involved in various other claims and litigation arising in the normal course of
business. In the judgment of management, which relies in part on information from Company
counsel, the ultimate resolution of these actions will not materially affect the consolidated
financial statements of the Company except as described above.
ITEM 1A. RISK FACTORS
See Risk Factors in Item 1A of the Companys annual report on Form 10-K for the year ended
December 31, 2009.
ITEM 6. EXHIBITS
See Exhibit Index following this report.
18
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.
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SENSIENT TECHNOLOGIES CORPORATION
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Date: May 7, 2010 |
By: |
/s/ John L. Hammond
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John L. Hammond, Senior Vice President, |
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General Counsel & Secretary |
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Date: May 7, 2010 |
By: |
/s/ Richard F. Hobbs
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Richard F. Hobbs, Senior Vice President & Chief Financial Officer |
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19
SENSIENT TECHNOLOGIES CORPORATION
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
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Incorporated by Reference |
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Exhibit |
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Description |
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From |
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Filed Herewith |
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31
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Certifications of
the Companys
Chairman & Chief
Executive Officer
and Senior Vice
President & Chief
Financial Officer
pursuant to Rule
13a-14(a) of the
Exchange Act
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X |
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32
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Certifications of
the Companys
Chairman & Chief
Executive Officer
and Senior Vice
President & Chief
Financial Officer
pursuant to 18
United States Code
§ 1350
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X |
20