10-Q
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: September 30, 2008
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 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):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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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 October 31, 2008 |
Common Stock, par value $0.10 per share |
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48,346,337 shares |
SENSIENT TECHNOLOGIES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SENSIENT TECHNOLOGIES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
(Unaudited)
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Three Months |
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Nine Months |
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Ended September 30, |
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Ended September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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$ |
318,601 |
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$ |
294,311 |
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$ |
958,815 |
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$ |
883,889 |
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Cost of products sold |
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222,705 |
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205,326 |
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665,555 |
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614,280 |
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Selling and administrative expenses |
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55,041 |
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50,856 |
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167,919 |
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157,277 |
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Operating income |
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40,855 |
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38,129 |
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125,341 |
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112,332 |
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Interest expense |
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7,977 |
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8,640 |
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25,035 |
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27,362 |
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Earnings before income taxes |
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32,878 |
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29,489 |
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100,306 |
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84,970 |
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Income taxes |
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8,776 |
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8,706 |
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30,067 |
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25,608 |
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Net earnings |
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$ |
24,102 |
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$ |
20,783 |
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$ |
70,239 |
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$ |
59,362 |
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Average number of common shares outstanding: |
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Basic |
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47,792 |
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46,818 |
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47,554 |
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46,627 |
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Diluted |
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48,320 |
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47,306 |
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48,098 |
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47,123 |
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Earnings per common share: |
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Basic |
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$ |
.50 |
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$ |
.44 |
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$ |
1.48 |
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$ |
1.27 |
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Diluted |
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$ |
.50 |
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$ |
.44 |
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$ |
1.46 |
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$ |
1.26 |
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Dividends per common share |
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$ |
.19 |
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$ |
.18 |
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$ |
.55 |
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$ |
.50 |
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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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September 30, |
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2008 |
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December 31, |
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(Unaudited) |
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2007 * |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
10,099 |
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$ |
10,522 |
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Trade accounts receivable, net |
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215,906 |
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196,458 |
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Inventories |
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399,427 |
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361,534 |
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Prepaid expenses and other current assets |
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44,083 |
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41,530 |
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TOTAL CURRENT ASSETS |
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669,515 |
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610,044 |
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OTHER ASSETS |
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42,607 |
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44,404 |
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INTANGIBLE ASSETS, NET |
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14,148 |
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14,789 |
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GOODWILL |
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471,138 |
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476,611 |
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PROPERTY, PLANT AND EQUIPMENT: |
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Land |
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47,794 |
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46,013 |
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Buildings |
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258,641 |
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259,830 |
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Machinery and equipment |
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623,661 |
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612,265 |
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Construction in progress |
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42,560 |
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30,335 |
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972,656 |
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948,443 |
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Less accumulated depreciation |
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(555,817 |
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(530,109 |
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416,839 |
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418,334 |
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TOTAL ASSETS |
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$ |
1,614,247 |
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$ |
1,564,182 |
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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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$ |
99,158 |
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$ |
88,812 |
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Accrued salaries, wages and withholdings from employees |
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22,752 |
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23,684 |
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Other accrued expenses |
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64,655 |
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56,948 |
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Income taxes |
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4,708 |
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2,342 |
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Short-term borrowings |
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33,451 |
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57,487 |
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TOTAL CURRENT LIABILITIES |
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224,724 |
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229,273 |
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OTHER LIABILITIES |
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28,934 |
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26,670 |
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ACCRUED EMPLOYEE AND RETIREE BENEFITS |
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45,275 |
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44,197 |
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LONG-TERM DEBT |
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450,437 |
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449,621 |
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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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80,262 |
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75,233 |
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Earnings reinvested in the business |
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862,007 |
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818,180 |
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Treasury stock, at cost |
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(119,531 |
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(132,358 |
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Accumulated other comprehensive income |
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36,743 |
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47,970 |
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TOTAL SHAREHOLDERS EQUITY |
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864,877 |
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814,421 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,614,247 |
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$ |
1,564,182 |
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See accompanying notes to consolidated condensed financial statements.
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* |
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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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Nine Months |
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Ended September 30, |
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2008 |
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2007 |
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Net cash provided by operating activities |
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$ |
66,288 |
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$ |
80,660 |
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Cash flows from investing activities: |
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Acquisition of property, plant and equipment |
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(34,384 |
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(25,499 |
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Proceeds from sale of assets |
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1,946 |
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2,114 |
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Other investing activities |
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1,293 |
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(176 |
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Net cash used in investing activities |
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(31,145 |
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(23,561 |
) |
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Cash flows from financing activities: |
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Proceeds from additional borrowings |
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40,330 |
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38,977 |
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Debt payments |
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(65,420 |
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(83,110 |
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Dividends paid |
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(26,412 |
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(23,484 |
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Proceeds from options exercised |
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15,959 |
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12,024 |
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Net cash used in financing activities |
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(35,543 |
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(55,593 |
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Effect of exchange rate changes on cash and cash equivalents |
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(23 |
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478 |
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Net (decrease) increase in cash and cash equivalents |
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(423 |
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1,984 |
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Cash and cash equivalents at beginning of period |
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10,522 |
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5,035 |
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Cash and cash equivalents at end of period |
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$ |
10,099 |
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$ |
7,019 |
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See accompanying notes to consolidated condensed financial statements.
3
SENSIENT TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. |
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Accounting Policies |
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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 September 30, 2008 and December 31, 2007, the results of operations for the three
and nine months ended September 30, 2008 and 2007, and cash flows for the nine months ended
September 30, 2008 and 2007. 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 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, 2007, for additional details of the Companys financial condition and a
description of the Companys accounting policies, which have been continued without change
except for the item discussed in Note 3. |
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2. |
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Share-Based Compensation |
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The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, on January 1, 2006, using the modified prospective transition method. The
Company recognized $0.6 million and $0.5 million of share-based compensation expense for the quarters ended
September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and
2007, the Company recognized $1.4 million and $2.3 million of share-based compensation expense,
respectively. |
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The Company estimated the fair value of stock options using the Black-Scholes option pricing
model. Grants during the nine months ended September 30, 2008 and 2007 had weighted-average
fair values of $6.77 and $5.81 per share, respectively. Significant assumptions used in
estimating the fair value of the awards granted during the nine months ended September 30 are
as follows: |
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2008 |
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2007 |
Dividend yield |
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2.3 |
% |
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2.7 |
% |
Volatility |
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26.3 |
% |
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26.0 |
% |
Risk-free interest rate |
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3.1 |
% |
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4.8 |
% |
Expected term (years) |
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5.3 |
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5.0 |
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3. |
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Fair Value Measurements |
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On January 1, 2008 the Company adopted FASB Statement No. 157, Fair Value Measurements. This
Statement defines fair value for financial assets and liabilities, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures
about fair value measurements. As of September 30, 2008, the Companys only assets and
liabilities subject to this statement are forward contracts (all currently accounted for as
cash flow hedges) and mutual fund investments. Both of these financial instruments were
previously being recorded by the Company at fair value that meets the requirements as defined
by FASB Statement No. 157. Accordingly, there is no impact on the Companys net earnings and
financial position as a result of adopting this standard. The fair value of the forward
contracts based on current pricing obtained for comparable derivative products (Level 2 inputs
per Statement No. 157) at September 30, 2008 was an asset of $0.3 million. The fair value of
the investments based on September 30, 2008 market quotes (Level 1 inputs per Statement No.
157) was an asset of $16.3 million. |
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The Company reviewed Financial Accounting Standards Board (FASB) Statement No. 159, The Fair
Value Option for Financial Assets and Liabilities, which permits companies to choose to measure
many financial instruments and certain other items at fair value. The Company chose not to
elect the fair value option for any
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assets and liabilities not currently valued at fair value and determined that this statement
does not have an impact on its financial statements and disclosures. |
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4. |
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Segment Information |
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Operating results by segment for the periods and at the dates presented are as follows: |
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Flavors & |
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Corporate |
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(In thousands) |
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Fragrances |
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Color |
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& Other |
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Consolidated |
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Three months ended September 30,
2008: |
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Revenue from external customers |
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$ |
200,493 |
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$ |
99,424 |
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$ |
18,684 |
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$ |
318,601 |
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Intersegment revenue |
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5,975 |
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3,235 |
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|
630 |
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9,840 |
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Total revenue |
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$ |
206,468 |
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$ |
102,659 |
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$ |
19,314 |
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$ |
328,441 |
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Operating income (loss) |
|
$ |
31,565 |
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$ |
17,738 |
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$ |
(8,448 |
) |
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$ |
40,855 |
|
Interest expense |
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|
|
|
|
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|
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|
7,977 |
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|
7,977 |
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Earnings (loss) before income taxes |
|
$ |
31,565 |
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|
$ |
17,738 |
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|
$ |
(16,425 |
) |
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$ |
32,878 |
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Three months ended September 30,
2007: |
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Revenue from external customers |
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$ |
189,008 |
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$ |
88,576 |
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$ |
16,727 |
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$ |
294,311 |
|
Intersegment revenue |
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3,979 |
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|
2,509 |
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|
425 |
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6,913 |
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Total revenue |
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$ |
192,987 |
|
|
$ |
91,085 |
|
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$ |
17,152 |
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$ |
301,224 |
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|
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|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
29,232 |
|
|
$ |
15,752 |
|
|
$ |
(6,855 |
) |
|
$ |
38,129 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
8,640 |
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|
8,640 |
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|
Earnings (loss) before income taxes |
|
$ |
29,232 |
|
|
$ |
15,752 |
|
|
$ |
(15,495 |
) |
|
$ |
29,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flavors & |
|
|
|
|
|
|
Corporate |
|
|
|
|
(In thousands) |
|
Fragrances |
|
|
Color |
|
|
& Other |
|
|
Consolidated |
|
Nine months ended September 30,
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
601,076 |
|
|
$ |
301,720 |
|
|
$ |
56,019 |
|
|
$ |
958,815 |
|
Intersegment revenue |
|
|
15,017 |
|
|
|
11,051 |
|
|
|
2,149 |
|
|
|
28,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
616,093 |
|
|
$ |
312,771 |
|
|
$ |
58,168 |
|
|
$ |
987,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
94,304 |
|
|
$ |
55,531 |
|
|
$ |
(24,494 |
) |
|
$ |
125,341 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
25,035 |
|
|
|
25,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
$ |
94,304 |
|
|
$ |
55,531 |
|
|
$ |
(49,529 |
) |
|
$ |
100,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
560,261 |
|
|
$ |
274,705 |
|
|
$ |
48,923 |
|
|
$ |
883,889 |
|
Intersegment revenue |
|
|
12,083 |
|
|
|
8,390 |
|
|
|
1,774 |
|
|
|
22,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
572,344 |
|
|
$ |
283,095 |
|
|
$ |
50,697 |
|
|
$ |
906,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
85,010 |
|
|
$ |
50,022 |
|
|
$ |
(22,700 |
) |
|
$ |
112,332 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
27,362 |
|
|
|
27,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
$ |
85,010 |
|
|
$ |
50,022 |
|
|
$ |
(50,062 |
) |
|
$ |
84,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Beginning in the first quarter of 2008, the Companys operations in China, previously reported
in the Flavors & Fragrances Group, are reported in the Corporate and Other segment. Results for
2007 have been restated to reflect this change. |
|
5. |
|
Inventories |
|
|
|
At September 30, 2008 and December 31, 2007, inventories included finished and in-process
products totaling $294.6 million and $266.3 million, respectively, and raw materials and
supplies of $104.8 million and $95.2 million, respectively. |
|
6. |
|
Retirement Plans |
|
|
|
The Companys components of annual benefit cost for the defined benefit plans for the periods
presented are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
335 |
|
|
$ |
261 |
|
|
$ |
1,004 |
|
|
$ |
784 |
|
Interest cost |
|
|
738 |
|
|
|
601 |
|
|
|
2,236 |
|
|
|
1,797 |
|
Expected return on plan assets |
|
|
(283 |
) |
|
|
(161 |
) |
|
|
(861 |
) |
|
|
(480 |
) |
Amortization of prior service cost |
|
|
488 |
|
|
|
484 |
|
|
|
1,463 |
|
|
|
1,452 |
|
Amortization of actuarial loss |
|
|
55 |
|
|
|
49 |
|
|
|
171 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit expense |
|
$ |
1,333 |
|
|
$ |
1,234 |
|
|
$ |
4,013 |
|
|
$ |
3,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2008, the Company made contributions to
its defined benefit pension plans of $2.7 million and $4.7 million. Total contributions to
Company defined benefit pension plans are expected to be $5.9 million in 2008. |
|
7. |
|
Comprehensive Income |
|
|
|
Comprehensive income is comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net earnings |
|
$ |
24,102 |
|
|
$ |
20,783 |
|
|
$ |
70,239 |
|
|
$ |
59,362 |
|
Currency translation adjustments |
|
|
(41,967 |
) |
|
|
20,679 |
|
|
|
(11,822 |
) |
|
|
35,743 |
|
Net unrealized (loss) gain on
cash flow hedges |
|
|
(588 |
) |
|
|
312 |
|
|
|
595 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive (loss) income |
|
$ |
(18,453 |
) |
|
$ |
41,774 |
|
|
$ |
59,012 |
|
|
$ |
95,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
8. |
|
Cash Flows from Operating Activities |
|
|
|
Cash flows from operating activities are detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
70,239 |
|
|
$ |
59,362 |
|
Adjustments to arrive at net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
33,828 |
|
|
|
33,154 |
|
Stock-based compensation |
|
|
1,353 |
|
|
|
2,344 |
|
Loss (gain) on assets |
|
|
969 |
|
|
|
(469 |
) |
Deferred income taxes |
|
|
1,557 |
|
|
|
8,545 |
|
Changes in operating assets and liabilities |
|
|
(41,658 |
) |
|
|
(22,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
66,288 |
|
|
$ |
80,660 |
|
|
|
|
|
|
|
|
9. |
|
Debt |
|
|
|
On October 7, 2008, the Company entered into an $85 million senior unsecured term loan
credit agreement (Term Loan) with a group of four banks. Subsequently, on October 31,
2008, an additional bank joined the Term Loan agreement, bringing the overall Term Loan
to $105 million with five banks. The Term Loan allows the Company to make one or more
borrowings on or before April 1, 2009. The Term Loan matures on June 15, 2012. The
interest rate on the Term Loan is based on floating rates at the Companys election of
either (1) the higher of (a) the prime rate or (b) the federal funds rate plus 0.5% or
(2) a Eurodollar base rate derived from LIBOR plus a margin (initially 225 basis points
but subject to adjustment as the Companys leverage ratio changes). The Company may
prepay the Term Loan in whole or in part prior to the maturity date without any penalty.
The Term Loan contains a number of requirements and financial covenants similar to those
in the Companys current loan agreements. The Term Loan will be used to retire the
Companys public debt when it matures in April 2009. Accordingly, that maturing debt has
been classified as long-term debt on the Consolidated Condensed Balance Sheet. |
|
10. |
|
Commitments and Contingencies |
|
|
|
Environmental Matters |
7
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. Actions that are legally required are substantially complete.
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
2006, 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. All
outstanding motions are scheduled to be resolved at a November 18, 2008 status conference.
Deposition discovery is currently stayed; however, pursuant to the Courts October 3, 2008
Letter Order, deposition notices may be served on or after November 3, 2008, and the depositions
themselves may be scheduled on or after December 8, 2008.
Sensient Colors intends to vigorously defend its interests in the litigation. It is evaluating,
among other things, the pursuit of additional PRPs and additional challenges to the EPAs right
to recover its claimed response costs. A portion of Sensient Colors legal defense costs is
being paid by insurers with a reservation of coverage rights. Litigation to resolve coverage
issues is pending.
8
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. Limited discovery has occurred. 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. 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. Fact discovery was completed in mid-July, and expert and rebuttal expert reports
have been exchanged. Depositions of experts are on-going.
Sensient Colors has advised the Court and the other parties in this litigation of the
developments in the Superfund Claim as described above. Sensient Colors recently served
subpoenas and deposition notices upon several current and former EPA officials, and will
re-depose the DEP witnesses regarding such issues. EPA, though not a party to the Pleasant
Gardens action, has filed a motion to quash the subpoenas of the current and former EPA
officials. Sensient Colors will oppose this motion, which has a return date of November 21,
2008. Under the current case management order, fact and expert discovery is to be completed by
December 19, 2008, with trial to begin on March 16, 2009.
As of September 30, 2008, the liabilities related to environmental matters are estimated to be
between $1.5 million and $25.7 million. As of September 30, 2008, the Company has accrued $1.8
million, which is all related to the environmental reserves established in connection with a
2001 acquisition. This accrual represents managements best estimate of these liabilities;
however, the actual liabilities may be above the levels reserved or estimated, in which case
the Company would need to take charges or establish reserves in later periods. Also, the
Company has not been able to make a reasonable estimate of the liabilities, if any, related to
some of the environmental matters discussed above. The Company has not recorded any potential
insurance recoveries related to these liabilities, as receipts are not yet assured. There can
be no assurance that additional environmental matters will not arise in the future.
Commercial Litigation
The following is a significant commercial case involving the Company.
Smead et al. v. Sensient Flavors Inc. et al.
On April 14, 2008, the Companys subsidiary Sensient Flavors Inc., now known as Sensient
Flavors LLC (Sensient Flavors), certain other flavor manufacturers, a flavor industry trade
association and its management company were sued in Milwaukee County Circuit Court in
Milwaukee, Wisconsin, by a former employee of International Flavors & Fragrances, Inc. (IFF),
Richard Smead, and his spouse, Kathy Smead. Mr. Smead claims that while working in various
positions at IFF he was exposed to butter flavors and/or their constituents allegedly sold by
Sensient Flavors and the other manufacturer defendants, which caused him to suffer severe and
permanent injury to his respiratory system and other damages. Mrs. Smeads claim is for loss
of consortium. The allegations of this complaint are virtually identical to those contained in
other complaints that have been filed against Sensient Flavors in other jurisdictions over the
presence of diacetyl in butter flavoring for use in microwave popcorn production.
9
The Company believes that plaintiffs claims are without merit and will vigorously defend this
case. The Company has responded to the Complaint, denying all liability and joining numerous
motions to dismiss that have been filed by some of the other flavor manufacturers. Briefing on
those motions is complete and the parties are awaiting a decision from the Court. A preliminary
analysis of Sensient Flavors sales records suggests that it never sold any butter flavoring to
IFF. This case is in the very early stages and no trial date has been set.
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.
10
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
OVERVIEW
Revenue for the third quarter of 2008 was $318.6 million, an increase of 8.3% from $294.3
million recorded in the prior year third quarter. For the nine months ended September 30, 2008,
revenue was $958.8 million, an increase of 8.5% from the comparable period in 2007. Revenue for
the Flavors & Fragrances segment increased by 7.0% and 7.6% for the quarter and nine months
ended September 30, 2008, respectively, over the comparable periods last year. Revenue for the
Color segment increased by 12.7% and 10.5% for the quarter and nine months ended September 30,
2008, respectively, over the comparable periods last year. Corporate and Other revenue
increased by 12.6% and 14.7% for the quarter and nine months ended September 30, 2008,
respectively, over the comparable periods last year. Additional information on group results
can be found in the Segment Information section.
For the three months ended September 30, 2008 and 2007, the gross profit margin was 30.1% and
30.2%, respectively. For the nine months ended September 30, 2008 and 2007, the gross profit
margin was 30.6% and 30.5%, respectively. In both the quarter and nine months, increased
selling prices offset the impact of higher energy and raw material costs.
Selling and administrative expenses as a percent of revenue were 17.3% in both the quarters
ended September 30, 2008 and 2007. For the nine months ended September 30, 2008, selling
and administrative expenses as a percent of revenue improved 30 basis points to 17.5% as
revenue increased at a rate greater than the increase in selling and administrative expenses.
Operating income for the quarter ended September 30, 2008, was $40.9 million, an increase of
7.1% from $38.1 million for the third quarter of 2007. Operating income for the nine months
ended September 30, 2008, was $125.3 million compared to $112.3 million for the comparable
period in 2007. The change in operating income for each period was due to the revenue, margin
and expense changes discussed above.
Favorable foreign exchange rates increased revenue and operating profit by 2.4% and 1.6%,
respectively, for the three months ended September 30, 2008, over the same quarter of 2007.
For the nine months ended September 30, 2008, foreign exchange rates increased revenue by 4.7%
and operating income by 5.4% over the comparable period last year.
Interest expense for the quarter ended September 30, 2008, was $8.0 million, a decrease of 7.7%
from the prior years quarter. Interest expense for the nine months ended September 30, 2008,
was $25.0 million compared to $27.4 million in the prior year period. The decreases in the
quarter and year-to-date period were the result of lower interest rates combined with lower
average debt balances.
The effective income tax rates were 26.7% and 29.5% for the quarters ended September 30, 2008
and 2007, respectively. The effective income tax rates were 30.0% and 30.1% for the nine months
ended September 30, 2008 and 2007, respectively. The effective tax rates for the three and nine
month periods in both years were reduced by changes in estimates associated with the
finalization of prior year income tax returns and the resolution of prior years tax matters.
These reductions were partially offset by a tax rate change for a foreign operation for the
three and nine months ended September 30, 2007. Management expects the effective tax rate for
the remainder of 2008 to be 32.5%, excluding the income tax expense or benefit related to
discrete items, which will be reported in the quarter in which they occur.
SEGMENT INFORMATION
Beginning in the first quarter of 2008, the Companys operations in China, previously reported
in the Flavors & Fragrances Group, are reported in the Corporate and Other segment. Results for
2007 have been restated to reflect this change.
Flavors & Fragrances
Revenue for the Flavors & Fragrances segment in the third quarter of 2008 increased $13.5
million, or 7.0%, to $206.5 million from $193.0 million for the same period last year. The
increase in revenue was primarily due to higher revenue in North America ($7.9 million) and
improved pricing on sales of fragrances ($1.1 million).
11
Favorable foreign currency translation also increased revenue ($4.3 million). The increase in
North America was primarily related to higher prices and increased volumes.
For the quarter ended September 30, 2008, operating income increased $2.3 million, or 8.0%, to
$31.6 million from $29.2 million last year. The increase was primarily attributable to higher
profit in North America as a result of the higher revenue. Operating income as a percent of
revenue was 15.3%, an increase of 20 basis points from the comparable quarter last year,
primarily due to the reasons provided above.
For the nine months ended September 30, 2008, revenue for the Flavors & Fragrances segment was
$616.1 million, an increase of $43.7 million, or 7.6%, from $572.3 million reported in the same
period last year. The increase in revenue was primarily due to higher volumes and prices in
North America ($16.9 million) and Europe ($2.2 million). Favorable foreign currency translation
also increased revenue ($25.7 million). These increases were partially offset by lower volume in
Latin America ($1.5 million).
Operating income for the nine months ended September 30, 2008, increased $9.3 million, or 10.9%,
to $94.3 million from $85.0 million last year. The increase in operating income was primarily
due to improvements in North America ($7.0 million) and Europe ($1.1 million). Favorable foreign
currency translation also increased operating profit ($2.2 million). These improvements were
partially offset by the impact of lower volumes in Latin America ($1.5 million). The increases
in North America and Europe were primarily due to improved pricing and higher volumes in
dehydrated flavors and other flavors partially offset by higher energy and raw material costs.
Operating income as a percent of revenue was 15.3%, an increase of 40 basis points from the
comparable period last year, primarily due to the reasons provided above.
Color
Revenue for the Color segment for the third quarter of 2008 was $102.7 million, an increase of
$11.6 million, or 12.7%, from $91.1 million reported in the prior years comparable period. The
increase in revenue was primarily due to both higher volumes and prices of food and beverage
colors ($3.6 million), cosmetic colors ($2.4 million), technical colors ($1.9 million) and
pharmaceutical colors ($0.8 million). Favorable foreign currency translation also increased
revenue ($2.9 million).
Operating income for the quarter ended September 30, 2008, was $17.7 million, an increase of
$2.0 million, or 12.6%, from $15.8 million reported in the comparable period last year. The
increase was primarily due to higher profit in technical colors ($1.5 million) partially offset
by lower profit from sales of food and beverage colors due to unfavorable product mix ($0.5
million). Favorable foreign currency translation also increased operating profit ($0.6
million). The higher profit in technical colors was due to the impact of increased sales
combined with lower costs and the favorable product mix. Operating income as a percent of
revenue of 17.3% was equal to last years third quarter.
For the nine months ended September 30, 2008, revenue for the Color segment increased $29.7
million, or 10.5%, to $312.8 million compared to $283.1 million in 2007. The increase in
revenue was primarily due to increased sales of food and beverage colors ($5.8 million),
cosmetic colors ($5.2 million), pharmaceutical colors ($1.9 million) and technical colors ($2.1
million). Favorable foreign currency translation also increased revenue ($14.7 million). The
revenue increases described above were due to both higher prices and volume increases.
Operating income for the nine months ended September 30, 2008, increased $5.5 million, or 11.0%,
to $55.5 million from $50.0 million in the comparable period last year. The increase was
primarily due to the impact of increased prices, higher volumes and favorable product mix in
technical colors ($3.0 million), and increased prices and higher volumes of pharmaceutical
colors ($0.6 million). Favorable foreign currency translation also increased operating profit
($3.5 million). These items were partially reduced by the lower profit in food in beverage
colors ($1.4 million) primarily due to unfavorable product mix. Operating income as a percent
of revenue was 17.8%, an increase of 10 basis points from the comparable period last year,
primarily due to the reasons provided above.
LIQUIDITY AND FINANCIAL CONDITION
The Companys ratio of debt to total capital improved to 35.9% as of September 30, 2008, from
38.4% as of December 31, 2007. The improvement resulted from an increase in equity, primarily
from current year earnings, and a decrease in total debt funded by cash provided by operating
activities. The Companys debt to EBITDA ratio has improved to 2.3 as of September 30, 2008
from 2.6 as of December 31, 2007.
12
Net cash provided by operating activities was $66.3 million for the nine months ended September
30, 2008, compared to $80.7 million for the comparable period last year. The decrease in cash
provided by operating activities was primarily due to a larger increase in net working capital
this year compared to 2007 partially offset by higher earnings. The increase in working capital
was primarily due to strategic purchases of key raw materials and higher accounts receivable as
a result of strong sales.
Net cash used in investing activities was $31.1 million and $23.6 million for the nine months
ended September 30, 2008 and 2007, respectively. Capital expenditures were $34.4 million and
$25.5 million for the nine months ended September 30, 2008 and 2007, respectively.
Net cash used in financing activities was $35.5 million and $55.6 million for the nine months
ended September 30, 2008 and 2007, respectively. Net repayments of debt were $25.1 million and
$44.1 million for the first nine months of 2008 and 2007, respectively. For purposes of the
cash flow statement, net changes in debt exclude the impact of foreign exchange rates.
Dividends of $26.4 million and $23.5 million were paid during the nine months ended September
30, 2008 and 2007, respectively, reflecting the Companys increase in the dividend to $0.55 per
share in the first nine months of 2008 compared to $0.50 in the same period of 2007. The
Company increased its quarterly dividend to $0.19 per share effective for the quarterly dividend
paid on September 2, 2008, from the previous rate of $0.18 per share which had been in effect
since the third quarter of 2007. For the first nine months of 2008 and 2007, the net cash
provided by operating activities was sufficient to fund capital expenditures, pay dividends and
reduce borrowings.
The Companys financial position remains strong. Its expected cash flows from operations and
existing lines of credit can be used to meet future cash requirements for operations, capital
expenditures and dividend payments to shareholders.
In October 2008, the Company completed a new $105 million term loan agreement with five banks.
The term loan allows the Company to make one or more borrowings on or before April 1, 2009. The
proceeds from the term loan will be used to retire debt that matures in April 2009. The term
loan matures on June 15, 2012. For additional information on the term loan, refer to Note 9 on
page 7.
CONTRACTUAL OBLIGATIONS
There have been no material changes in the Companys contractual obligations during the
quarter ended September 30, 2008. For additional information about contractual obligations,
refer to page 23 of the Companys 2007 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, 2007.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements as of September 30, 2008.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Companys critical accounting policies during
the quarter ended September 30, 2008. For additional information about critical accounting
policies, refer to pages 21 and 22 of the Companys 2007 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, 2007.
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 September 30, 2008. For additional information about market risk, refer to pages 22 and
23 of the Companys 2007 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, 2007.
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 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
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 September 30, 2008, 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 Company and 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,
including energy; industry and economic factors related to the Companys 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; terminations and
other changes in customer relationships; industry and customer acceptance of price increases;
currency exchange rate fluctuations; 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, 2007; 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.
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
2006, 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. All
outstanding motions are scheduled to be resolved at a November 18, 2008 status conference.
Deposition discovery is currently stayed; however, pursuant to the Courts October 3, 2008
Letter Order, deposition notices may be served on or after November 3, 2008, and the depositions
themselves may be scheduled on or after December 8, 2008.
Sensient Colors intends to vigorously defend its interests in the litigation. It is evaluating,
among other things, the pursuit of additional PRPs and additional challenges to the EPAs right
to recover its claimed response costs. A portion of Sensient Colors legal defense costs is
being paid by insurers with a reservation of coverage rights. Litigation to resolve coverage
issues is pending.
15
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. Limited discovery has occurred. 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. 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. Fact discovery was completed in mid-July, and expert and rebuttal expert reports
have been exchanged. Depositions of experts are on-going.
Sensient Colors has advised the Court and the other parties in this litigation of the
developments in the Superfund Claim as described above. Sensient Colors recently served
subpoenas and deposition notices upon several current and former EPA officials, and will
re-depose the DEP witnesses regarding such issues. EPA, though not a party to the Pleasant
Gardens action, has filed a motion to quash the subpoenas of the current and former EPA
officials. Sensient Colors will oppose this motion, which has a return date of November 21,
2008. Under the current case management order, fact and expert discovery is to be completed by
December 19, 2008, with trial to begin on March 16, 2009.
Smead et al. v. Sensient Flavors Inc. et al.
On April 14, 2008, the Companys subsidiary Sensient Flavors Inc., now known as Sensient
Flavors LLC (Sensient Flavors), certain other flavor manufacturers, a flavor industry trade
association and its management company were sued in Milwaukee County Circuit Court in
Milwaukee, Wisconsin, by a former employee of International Flavors & Fragrances, Inc. (IFF),
Richard Smead, and his spouse, Kathy Smead. Mr. Smead claims that while working in various
positions at IFF he was exposed to butter flavors and/or their constituents allegedly sold by
Sensient Flavors and the other manufacturer defendants, which caused him to suffer severe and
permanent injury to his respiratory system and other damages. Mrs. Smeads claim is for loss
of consortium. The allegations of this complaint are virtually identical to those contained in
other complaints that have been filed against Sensient Flavors in other jurisdictions over the
presence of diacetyl in butter flavoring for use in microwave popcorn production.
The Company believes that plaintiffs claims are without merit and will vigorously defend this
case. The Company has responded to the Complaint, denying all liability and joining numerous
motions to dismiss that have been filed by some of the other flavor manufacturers. Briefing on
those motions is complete and the parties are awaiting a decision from the Court. A preliminary
analysis of Sensient Flavors sales records suggests that it never sold any butter flavoring to
IFF. This case is in the very early stages and no trial date has been set.
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 6. EXHIBITS
See Exhibit Index following this report.
16
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: November 7, 2008 |
By: |
/s/ John L. Hammond
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John L. Hammond, Vice President, |
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Secretary & General Counsel |
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Date: November 7, 2008 |
By: |
/s/ Richard F. Hobbs
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Richard F. Hobbs, Vice President |
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& Chief Financial Officer |
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17
SENSIENT TECHNOLOGIES CORPORATION
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
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|
Exhibit |
|
Description |
|
Incorporated by Reference From |
|
Filed Herewith |
10.1*
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|
Form of Amended
and Restated Change
of Control
Employment and
Severance Agreement
for Executive
Officers
(Executive Change
in Control
Agreement)
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|
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X |
|
|
|
|
|
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10.2*
|
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Amended and
Restated Executive
Employment Contract
dated as of October
27, 2008 between
the Company and
Kenneth P. Manning
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X |
|
|
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|
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10.3*
|
|
Directors Deferred
Compensation Plan,
as amended and
restated effective
as of January 1,
2005
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X |
|
|
|
|
|
|
|
10.4(a) *
|
|
Executive Income
Deferral Plan, as
amended and
restated effective
as of December 31,
2004 (frozen
portion)
|
|
|
|
X |
|
|
|
|
|
|
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10.4(b) *
|
|
Executive Income
Deferral Plan, as
amended and
restated effective
as of January 1,
2005 (non-frozen
portion)
|
|
|
|
X |
|
|
|
|
|
|
|
10.5(a) *
|
|
Management Income
Deferral Plan, as
amended and
restated effective
as of December 31,
2004 (frozen
portion)
|
|
|
|
X |
|
|
|
|
|
|
|
10.5(b) *
|
|
Management Income
Deferral Plan, as
amended and
restated effective
as of January 1,
2005 (non-frozen
portion)
|
|
|
|
X |
|
|
|
|
|
|
|
10.6(a) *
|
|
Supplemental
Benefit Plan, as
amended and
restated effective
as of December 31,
2004 (frozen
portion)
|
|
|
|
X |
|
|
|
|
|
|
|
10.6(b) *
|
|
Supplemental
Benefit Plan, as
amended and
restated effective
as of January 1,
2005 (non-frozen
portion)
|
|
|
|
X |
|
|
|
|
|
|
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10.7*
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Management
Incentive Plan for
Corporate
Management
|
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|
|
X |
|
|
|
|
|
|
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10.8*
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Management
Incentive Plan for
Group/Division
Management
|
|
|
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X |
|
|
|
|
|
|
|
10.9*
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Management
Incentive Plan for
Group Presidents
|
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|
|
X |
|
|
|
|
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|
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10.10*
|
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Incentive
Compensation Plan
for Elected
Corporate Officers
|
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|
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X |
18
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|
Exhibit |
|
Description |
|
Incorporated by Reference From |
|
Filed Herewith |
10.11
|
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Amendment No. 1 to
the Sensient
Technologies
Corporation 2002
Stock Option Plan
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X |
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10.12
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Amendment No. 1. to
the Sensient
Technologies
Corporation 2007
Restricted Stock
Plan
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X |
|
|
|
|
|
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31
|
|
Certifications of
the Companys
Chairman & Chief
Executive Officer
and Vice President
& Chief Financial
Officer pursuant to
Rule 13a-14(a) of
the Exchange Act
|
|
|
|
X |
|
|
|
|
|
|
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32
|
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Certifications of
the Companys
Chairman & Chief
Executive Officer
and Vice President
& Chief Financial
Officer pursuant to
18 United States
Code § 1350
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X |
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* |
|
These copies of the plans and agreements being filed reflect changes which, taken together, are
not considered material. The amendments to the plans, agreements and trust were adopted by
resolution of the Sensient Board of Directors; therefore, rather than filing of an amendment
document, the Company is filing copies of the documents as amended. |
19