================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2003 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-7626 SENSIENT TECHNOLOGIES CORPORATION --------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-0561070 - ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-5304 ---------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (414) 271-6755 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ------ ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ------ ------- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date. Class Outstanding at July 31, 2003 - --------------------------------------- ---------------------------- Common Stock, par value $0.10 per share 46,904,379 shares ================================================================================
SENSIENT TECHNOLOGIES CORPORATION INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Condensed Statements of Earnings - Three and Six Months Ended June 30, 2003 and 2002. 1 Consolidated Condensed Balance Sheets - June 30, 2003 and December 31, 2002. 2 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002. 3 Notes to Consolidated Condensed Financial Statements. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 9 Item 4. Controls and Procedures. 9 PART II. OTHER INFORMATION: Item 2. Changes in Securities and Use of Proceeds 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K. 11 Signatures. 12 Exhibit Index. 13 </TABLE>
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ------------------------------ ------------------------------ 2003 2002 2003 2002 ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> Revenue $261,928 $239,576 $497,025 $452,699 Cost of products sold 177,033 161,243 334,626 303,769 Selling and administrative expenses 46,202 39,615 88,772 77,677 ------------ ------------- ------------ ------------ Operating income 38,693 38,718 73,627 71,253 Interest expense 7,572 7,563 14,817 15,179 ------------ ------------- ------------ ------------ Earnings before income taxes 31,121 31,155 58,810 56,074 Income taxes 9,452 9,970 16,679 17,944 ------------ ------------- ------------ ------------ Net earnings $21,669 $21,185 $42,131 $38,130 ============ ============= ============ ============ Average number of common shares outstanding: Basic 46,824 47,609 46,939 47,478 ============ ============= ============ ============ Diluted 47,163 48,152 47,278 47,912 ============ ============= ============ ============ Earnings per common share: Basic $.46 $.44 $.90 $.80 ============ ============= ============ ============ Diluted $.46 $.44 $.89 $.80 ============ ============= ============ ============ Dividends per common share $.1500 $.1325 $.2900 $.2650 ============ ============= ============ ============ </TABLE> See accompanying notes to consolidated condensed financial statements. -1-
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) (Unaudited) <TABLE> <CAPTION> June 30, December 31, 2003 2002 ----------- ----------- <S> <C> <C> ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 7,618 $ 2,103 Trade accounts receivable, net 183,043 160,155 Inventories 287,563 269,701 Prepaid expenses and other current assets 46,453 43,619 ----------- ----------- TOTAL CURRENT ASSETS 524,677 475,578 ----------- ----------- OTHER ASSETS 92,513 85,679 GOODWILL 402,500 384,241 INTANGIBLE ASSETS, NET 13,387 13,235 PROPERTY, PLANT AND EQUIPMENT: Land and buildings 202,563 182,464 Machinery and equipment 506,811 462,925 ----------- ----------- 709,374 645,389 Less accumulated depreciation (345,709) (314,151) ----------- ----------- 363,665 331,238 ----------- ----------- TOTAL ASSETS $ 1,396,742 $ 1,289,971 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Trade accounts payable $ 67,740 $ 55,546 Accrued salaries, wages and withholdings from employees 11,274 14,197 Other accrued expenses 64,466 65,069 Income taxes 26,713 27,526 Short-term borrowings 75,569 34,618 Current maturities of long-term debt 12,300 12,374 ----------- ----------- TOTAL CURRENT LIABILITIES 258,062 209,330 DEFERRED INCOME TAXES 13,724 10,942 OTHER LIABILITIES 16,023 21,962 ACCRUED EMPLOYEE AND RETIREE BENEFITS 37,684 36,672 LONG-TERM DEBT 530,583 511,707 SHAREHOLDERS' EQUITY: Common stock 5,396 5,396 Additional paid-in capital 72,156 72,390 Earnings reinvested in the business 649,808 621,525 Treasury stock, at cost (142,344) (137,074) Unearned portion of restricted stock (2,467) (2,951) Accumulated other comprehensive income (loss) (41,883) (59,928) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 540,666 499,358 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,396,742 $ 1,289,971 =========== =========== </TABLE> See accompanying notes to consolidated condensed financial statements. -2-
SENSIENT TECHNOLOGIES CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, -------------------- 2003 2002 -------- -------- <S> <C> <C> Net cash provided by operating activities $ 17,843 $ 50,830 -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (37,281) (13,269) Acquisition of new businesses (net of cash acquired) (4,107) (43,374) Proceeds from sale of assets 2,498 4,901 Decrease (increase) in other assets 21 (1,325) -------- -------- Net cash used in investing activities (38,869) (53,067) -------- -------- Cash flows from financing activities: Proceeds from additional borrowings 46,104 7,084 Reduction in debt (533) (4,393) Purchase of treasury stock (9,668) - Dividends paid (13,847) (12,611) Proceeds from options exercised and other 4,055 9,643 -------- -------- Net cash provided by (used in) financing activities 26,111 (277) -------- -------- Effect of exchange rate changes on cash and cash equivalents 430 233 -------- -------- Net increase (decrease) in cash and cash equivalents 5,515 (2,281) Cash and cash equivalents at beginning of period 2,103 2,317 -------- -------- Cash and cash equivalents at end of period $ 7,618 $ 36 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 14,655 $ 15,687 Income taxes 12,849 12,714 Liabilities assumed in acquisitions $ -- $ 10,539 </TABLE> See accompanying notes to consolidated condensed financial statements. -3-
SENSIENT TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of June 30, 2003 and December 31, 2002, and the results of operations and cash flows for the six months ended June 30, 2003 and 2002. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. Expenses are charged to operations in the year incurred. However, for interim reporting purposes, certain expenses are charged to operations based on an estimate rather than as expenses are actually incurred. Certain amounts as previously presented have been reclassified to conform to the current period presentation. Refer to the notes in the Company's annual consolidated financial statements for the year ended December 31, 2002, for additional details of the Company's financial condition and a description of the Company's accounting policies, which have been continued without change. 2. Inventories At June 30, 2003 and December 31, 2002, inventories included finished and in-process products totaling $210.8 million and $195.9 million, respectively, and raw materials and supplies of $76.8 million and $73.8 million, respectively. 3. Segment Information Operating results and the related assets by segment for the periods presented are as follows: <TABLE> <CAPTION> (In thousands) Flavors & Corporate & Fragrances Color Other Consolidated ---------- -------- ----------- ------------ <S> <C> <C> <C> <C> Three months ended June 30, 2003: - --------------------------------- Revenues from external customers $148,096 $ 97,826 $ 16,006 $261,928 Intersegment revenues 6,095 3,668 -- 9,763 -------- -------- -------- -------- Total revenue $154,191 $101,494 $ 16,006 $271,691 ======== ======== ======== ======== Operating income (loss) $ 22,256 $ 21,631 $ (5,194) $ 38,693 Interest expense -- -- 7,572 7,572 -------- -------- -------- -------- Earnings (loss) before income taxes $ 22,256 $ 21,631 $(12,766) $ 31,121 ======== ======== ======== ======== Three months ended June 30, 2002: - --------------------------------- Revenues from external customers $142,006 $ 82,170 $ 15,400 $239,576 Intersegment revenues 5,344 5,075 -- 10,419 -------- -------- -------- -------- Total revenue $147,350 $ 87,245 $ 15,400 $249,995 ======== ======== ======== ======== Operating income (loss) $ 23,731 $ 20,559 $ (5,572) $ 38,718 Interest expense -- -- 7,563 7,563 -------- -------- -------- -------- Earnings (loss) before income taxes $ 23,731 $ 20,559 $(13,135) $ 31,155 ======== ======== ======== ======== </TABLE> -4-
<TABLE> <CAPTION> (In thousands) Flavors & Corporate & Fragrances Color Other Consolidated ---------- ---------- ----------- ------------ <S> <C> <C> <C> <C> Six months ended June 30, 2003: - ------------------------------- Revenues from external customers $ 282,062 $ 183,979 $ 30,984 $ 497,025 Intersegment revenues 11,657 7,083 -- 18,740 ---------- ---------- ---------- ---------- Total revenue $ 293,719 $ 191,062 $ 30,984 $ 515,765 ========== ========== ========== ========== Operating income (loss) $ 42,284 $ 41,827 $ (10,484) $ 73,627 Interest expense -- -- 14,817 14,817 ---------- ---------- ---------- ---------- Earnings (loss) before income taxes $ 42,284 $ 41,827 $ (25,301) $ 58,810 ========== ========== ========== ========== Assets $ 655,620 $ 588,960 $ 152,162 $1,396,742 ========== ========== ========== ========== Six months ended June 30, 2002: - ------------------------------- Revenues from external customers $ 270,883 $ 152,667 $ 29,149 $ 452,699 Intersegment revenues 10,349 10,466 -- 20,815 ---------- ---------- ---------- ---------- Total revenue $ 281,232 $ 163,133 $ 29,149 $ 473,514 ========== ========== ========== ========== Operating income (loss) $ 42,668 $ 38,348 $ (9,763) $ 71,253 Interest expense -- -- 15,179 15,179 ---------- ---------- ---------- ---------- Earnings (loss) before income taxes $ 42,668 $ 38,348 $ (24,942) $ 56,074 ========== ========== ========== ========== Assets $ 562,224 $ 499,711 $ 119,207 $1,181,142 ========== ========== ========== ========== </TABLE> 4. Acquisitions During the first six months of 2003, the Company acquired certain assets of Kyowa Koryo Kagaku Kabushiki Kaisha, a former Japanese flavor producer, for $4.1 million (net of cash acquired). The Company has not completed the purchase price allocation related to the acquisition. During the first six months of 2002, the Company acquired three businesses for cash in an aggregate amount of $43.4 million (net of cash acquired). The businesses acquired were ECS Specialty Inks and Dyes, a producer and marketer of inks for specialty printing applications, the flavors and essential oil operations of C. Melchers GmbH & Company, and SynTec GmbH, a manufacturer of specialty dyes and chemicals for the imaging industry. The Company may be required to pay up to 4.6 million Euro (approximately $5.3 million) of additional cash consideration for the 2002 acquisitions subject to specific performance targets in the first two years following the acquisitions. 5. Shareholders' Equity Disclosures During the six months ended June 30, 2003, the Company repurchased 0.5 million shares of its common stock for an aggregate price of $9.7 million. The Company did not repurchase any shares of its common stock during the six months ended June 30, 2002. Comprehensive income is comprised of net earnings, foreign currency translation and unrealized gains and losses on cash flow hedges. Total comprehensive income for the three months ended June 30, 2003 and 2002 was $39.6 million and $27.7 million, respectively. Total comprehensive income for the six months ended June 30, 2003 and 2002 was $60.2 million and $44.9 million, respectively. 6. Stock Plans The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Stock options are granted at prices equal to the fair value of the Company's common stock on the dates of grant. Accordingly, no significant compensation cost has been recognized for the grant of stock options under the Company's stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant -5-
date as prescribed by SFAS No. 123, net earnings and earnings per common share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net earnings: As reported $ 21,669 $ 21,185 $ 42,131 $ 38,130 Add: reported stock compensation expense - net of tax 126 147 258 253 Less: fair value stock compensation expense - net of tax (643) (394) (1,262) (1,094) ---------- ---------- ---------- ---------- Pro forma net earnings $ 21,152 $ 20,938 $ 41,127 $ 37,289 ========== ========== ========== ========== Earnings per common share: Basic as reported $ .46 $ .44 $ .90 $ .80 Less: net impact of fair value stock expense - net of tax (.01) -- (.02) (.01) ---------- ---------- ---------- ---------- Basic pro forma $ .45 $ .44 $ .88 $ .79 Diluted as reported $ .46 $ .44 $ .89 $ .80 Less: net impact of fair value stock expense - net of tax (.01) (.01) (.02) (.02) ---------- ---------- ---------- ---------- Diluted pro forma $ .45 $ .43 $ .87 $ .78 </TABLE> 7. Cash Flows from Operating Activities Cash flows from operating activities are detailed below: <TABLE> <CAPTION> Six Months Ended June 30, ------------------------- 2003 2002 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 42,131 $ 38,130 Adjustments to arrive at net cash provided by operating activities: Depreciation and amortization 22,203 19,709 Gain on sale of assets (1,551) (315) Changes in operating assets and liabilities (net of effects of acquisitions of businesses) (44,940) (6,694) -------- -------- Net cash provided by operating activities $ 17,843 $ 50,830 ======== ======== </TABLE> 8. Guarantees In connection with the sale of substantially all of the Company's Yeast business on February 23, 2001, the Company has provided the buyer of these operations with indemnification against certain potential liabilities as is customary in transactions of this nature. The period provided for indemnification against most types of claims has now expired, but for specific types of claims including, but not limited to tax and environmental liabilities, the amount of time provided for indemnification is either five years or the applicable statute of limitations. The maximum amount of the Company's liability related to these provisions is capped at approximately 35% of the consideration received in the transaction. In cases where the Company believes it is probable that payments will be required under these provisions, a liability was recognized at the time of the asset sale. The Company believes that the probability of incurring payments under these provisions in excess of the amount of the liability recorded is remote. -6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Revenue for the quarter ended June 30, 2003 increased by 9.3% to $261.9 million from $239.6 million for the comparable quarter of 2002. For the six months ended June 30, 2003, revenue increased by 9.8% to $497.0 million. Revenue for the Flavors & Fragrances segment increased by 4.6% for the quarter and by 4.4% for the six months ended June 30, 2003 over the comparable periods last year. The Color segment increased revenue by 16.3% for the quarter and by 17.1% for the six months ended June 30, 2003 over the comparable periods last year. Additional information on group results can be found in the Segment Information section. The gross profit margin was 32.4% and 32.7% for the three months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003 and 2002, the gross profit margin was 32.7% and 32.9%, respectively. Selling and administrative expenses as a percent of revenue were 17.6% and 16.5% for the three months ended June 30, 2003 and 2002, respectively. Selling and administrative expenses as a percent of revenue were 17.9% and 17.2% for the six months ended June 30, 2003 and 2002, respectively. The increase was primarily attributable to expenses related to personnel changes and additions to manage the expanded size and scope of the Company's businesses after the recent acquisitions. Operating income for the three months ended June 30, 2003 was $38.7 million, which was consistent with the prior year. Operating income for the six months ended June 30, 2003 was $73.6 million, an increase of 3.3% from $71.3 million for the comparable period last year. Favorable foreign exchange rates increased both revenue and operating income by approximately 6%, for the three month and six month periods ended June 30, 2003 over the comparable period last year. Interest expense for the three months ended June 30, 2003 was consistent with the prior year at $7.6 million. For the six months ended June 30, 2003, interest expense was $14.8 million, a decrease of 2.4% versus the comparable period last year. The decrease was a result of lower interest rates more than offsetting higher average debt balances. The effective income tax rate was 30.4% and 32.0% for the three months ended June 30, 2003 and 2002, respectively. The effective income tax rate was 28.4% and 32.0% for the six months ended June 30, 2003 and 2002, respectively. The effective tax rate for the three and six months ended June 30, 2003 was reduced by the favorable settlement of certain prior year tax matters and other nominal adjustments. Management expects the effective tax rate for the remainder of 2003 to be between 31% and 32%. SEGMENT INFORMATION Flavors & Fragrances - For the three months ended June 30, 2003, the Flavors & Fragrances segment reported a 4.6% increase in revenue, to $154.2 million compared to $147.4 million for the same period last year. Favorable foreign exchange rates resulted in a 6.3% increase in revenue. Excluding exchange rates, revenue decreased 1.7%, or $2.5 million, primarily the result of declines in the flavors business in Mexico ($0.5 million) and the fragrance business in Spain ($1.5 million). Operating income in the quarter ended June 30, 2003 was $22.3 million compared to $23.7 million last year. Excluding the favorable effect of exchange rates ($1.2 million), the decrease was attributable equally to the businesses in Mexico and Spain previously mentioned. Operating income as a percent of revenue was 14.4%, a decrease of 170 basis points from the comparable quarter last year, primarily due to the reasons stated above. For the six months ended June 30, 2003, the Flavors & Fragrances segment reported a 4.4% increase in revenue, to $293.7 million compared to $281.2 million for the same period last year. Favorable foreign exchange rates and acquisitions resulted in a 5.8% and 1.3% increase in revenue, respectively. Excluding exchange rates and acquisitions, revenue decreased 2.7%, or $7.5 million, primarily as a result of soft U.S. demand for flavors ($6.9 million) and lower sales of fragrance products in Spain ($1.9 million) partially offset -7-
by revenue growth in Canada ($1.3 million). Operating income for the six months ended June 30, 2003 was $42.3 million compared to $42.7 million last year. Favorable foreign exchange rates and acquisitions resulted in a 4.4% and 1.6% increase in operating income, respectively. Excluding the effect of exchange rates ($1.8 million) and acquisitions ($0.7 million), the $2.9 million decrease was attributable to declines in Spain ($1.9 million) and Mexico ($1.2 million). Operating income as a percent of revenue was 14.4%, a decrease of 80 basis points from the comparable period last year, for the same reasons mentioned above. Color - For the three months ended June 30, 2003, revenue for the Color segment increased by $14.2 million, or 16.3% to $101.5 million. Favorable foreign exchange rates and acquisitions resulted in a 6.0% and 2.0% increase in revenue, respectively. Excluding exchange rates and acquisitions, revenue increased 8.3% or $7.3 million, primarily the result of increased Technical Colors sales ($3.1 million) and higher sales in Latin America ($2.0 million). Operating income for the three months ended June 30, 2003 was $21.6 million versus $20.6 million from the comparable period last year. Excluding the favorable effect of exchange rates ($1.1 million) and acquisitions ($0.3 million), the resulting decrease in operating income was attributable to transitional expenses required to grow the business and to pursue new product opportunities in the North American Food and Technical Colors businesses. Operating income as a percent of revenue was 21.3%, a decrease of 230 basis points from the comparable quarter last year, primarily due to the reasons provided above. For the six months ended June 30, 2003, revenue for the Color segment increased by $27.9 million, or 17.1% to $191.1 million. Favorable foreign exchange rates and acquisitions resulted in a 5.6% and 3.7% increase in revenue, respectively. Excluding exchange rates and acquisitions, revenue increased 7.8% or $12.7 million, primarily the result of increased Technical Colors and North American Food Colors sales ($5.3 million and $1.9 million, respectively) and increased sales in Latin America ($3.5 million). Excluding exchange rates and acquisitions, each Color business segment grew revenue during the three and six months ended June 30, 2003. Operating income for the six months ended June 30, 2003 was $41.8 million versus $38.3 million from the comparable period last year. Excluding the favorable effect of exchange rates ($2.1 million) and acquisitions ($1.4 million), operating income was unchanged compared to last year. Operating income as a percent of revenue was 21.9%, a decrease of 160 basis points from the comparable period last year, primarily attributable to transitional expenses required to grow the business and to pursue new product opportunities in the North American Food and Technical Colors businesses. FINANCIAL CONDITION The Company's ratio of debt to total capital was 53.4% as of June 30, 2003, up from 52.8% as of December 31, 2002. The increase resulted from an increase in debt needed to fund capital expenditures and treasury stock purchases. Net cash provided by operating activities was $17.8 million for the six months ended June 30, 2003, compared to $50.8 million for the six months ended June 30, 2002. The decrease in cash provided by operating activities was primarily due to increased levels of inventories and receivables. Net cash decreased $9 million from the increase in receivables from the growth in revenue. Net cash decreased $19 million from the increase in inventories, with $9.8 million related to dehydrated product inventories and the remainder primarily a result of inventories increased from manufacturing consolidation plans for three different locations, which are all expected to be substantially completed by the end of 2003. Net cash used in investing activities was $38.9 million for the six months ended June 30, 2003 compared to $53.1 million in the comparable period last year. Net cash used in investing activities in 2003 included capital expenditures of $37.3 million and acquisitions of $4.1 million. Cash used in investing activities in 2002 included acquisitions of $43.4 million and capital expenditures of $13.3 million. The increase in capital expenditures is related primarily to European projects. Management expects capital expenditures for 2003 to be between $60 million and $70 million based on current exchange rates. Net cash provided by financing activities was $26.1 million for the six months ended June 30, 2003, compared to $0.3 million of net cash used in the comparable period in the prior year. Net borrowings were $45.6 million in 2003 compared to net borrowings of $2.7 million in 2002. During 2003, the borrowings were used to fund capital expenditures, treasury stock purchases and acquisitions. During 2002, net borrowings -8-
were used to fund acquisitions. Dividends of $13.8 million and $12.6 million were paid during the six months ended June 30, 2003 and 2002, respectively. The Company increased its quarterly cash dividend per share from $.1325 to $.14 per share effective in December 2002. In addition, the Company raised its quarterly dividend to 15 cents per share effective in April 2003. As a result of these increases, the annual dividend has grown from $.53 to $.60 per share since the third quarter of 2002. The Company's financial position remains strong. Its expected cash flows from operations and existing lines of credit can be used to meet future cash requirements for operations, capital expansion programs and dividend payments to shareholders. CRITICAL ACCOUNTING POLICIES In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., management is required to make estimates and assumptions that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk, and financial condition. The Company believes, given current facts and circumstances, its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining the net realizable value of accounts receivable, inventories, property, plant and equipment, and prepaid expenses. In addition to these estimates and judgments, management believes the Company's most critical accounting estimates and assumptions are in the following areas: Goodwill Valuation The Company reviews the carrying value of goodwill annually utilizing several valuation methodologies, including a discounted cash flow model. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions, could negatively affect the reporting segment's fair value and result in an impairment charge. However, the current fair values of the reporting segments are significantly in excess of carrying values, and accordingly management believes that only significant changes in the cash flow assumptions would result in impairment. Income Taxes The Company files income tax returns and estimates its income tax expense in each of the taxing jurisdictions in which it operates. The Company is subject to a tax audit in each of these jurisdictions, which could result in changes to the estimated tax expense. The amount of these changes would vary by jurisdiction and would be recorded when known. These changes could be significant to the Company's financial statements. Management has recorded valuation allowances to reduce its deferred tax assets to the amount that is more likely than not to be realized. In doing so, management has considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. An adjustment to the recorded valuation allowance as a result of changes in facts or circumstances could result in a significant change in the Company's tax expense. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the quarter ended June 30, 2003. For additional information on market risk, refer to pages 25 and 26 of the Company's 2002 Annual Report, portions of which were filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES The Company maintains a system of disclosure controls and procedures that is designed to assure that information, which is required to be disclosed by the Company, is accumulated and communicated to management in a timely manner. Management has reviewed this system of disclosure controls and -9-
procedures as of the end of the period covered by this report, and has concluded that the current system of controls and procedures is effective. The Company maintains a system of internal controls and procedures for financial reporting. Since the date of management's most recent evaluation, there were no significant changes in internal controls or in other factors that could significantly affect internal controls. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements that reflect management's current assumptions and estimates of future economic circumstances, industry conditions, Company performance and financial results. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that could cause actual events to differ materially from those expressed in those statements. A variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results. These factors and assumptions include the pace and nature of new product introductions by the Company's customers; execution of the Company's acquisition program and results of newly acquired businesses; the Company's ability to successfully implement its growth strategies; industry and economic factors related to the Company's domestic and international business; growth in markets for products in which the Company competes; industry acceptance of price increases; currency exchange rate fluctuations; and the matters discussed above under Item 2 including the critical accounting policies described therein. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. -10-
PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS At a meeting held on July 17, 2003, the Board of Directors authorized the redemption of the rights issued pursuant to the Company's Shareholder Rights Plan. Under the rights plan, one right is attached to each outstanding share of common stock. The rights will be redeemed at a price of $.01 per right, payable in cash. The redemption payment will be payable on September 3, 2003 to shareholders of record on August 25, 2003, along with the $.15 per share quarterly dividend payment. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 2003 Annual Meeting of Shareholders, held on April 24, 2003, the following actions were taken: - The following Directors were elected for terms of office expiring April 2006: <TABLE> <CAPTION> Votes For Votes Withheld --------- -------------- <S> <C> <C> John F. Bergstrom 41,050,488 962,671 William V. Hickey 39,868,159 2,144,999 Kenneth P. Manning 39,971,309 2,041,849 </TABLE> Pursuant to the terms of the Company's Proxy Statement, proxies received were voted, unless authority was withheld, in favor of the nominees. The terms of office of the following Directors continued after the meeting: Richard A. Abdoo, Michael E. Batten, Dr. Fergus M. Clydesdale, James A. D. Croft, Alberto Fernandez, Robert J. O'Toole and Essie Whitelaw. - A proposal by the Board of Directors to ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors to conduct the annual audit of the consolidated financial statements of the Company and its subsidiaries for the year ending December 31, 2003 was approved by the shareholders. The shareholders cast 39,657,203 votes in favor of this proposal, 2,163,501 votes against, and there were 192,455 votes to abstain. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. (See Exhibit Index following this report.) (b) Reports on Form 8-K. A report on Form 8-K was filed on April 17, 2003 to disclose earnings for the quarter ended March 31, 2003; a report on Form 8-K was filed on July 16, 2003 to disclose earnings for the quarter ended June 30, 2003; and a report on Form 8-K was filed on July 17, 2003 to announce the redemption of the Company's shareholder rights plan. -11-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SENSIENT TECHNOLOGIES CORPORATION Date: August 13, 2003 By: /s/ John L. Hammond ---------------------------------------- John L. Hammond, Vice President, Secretary & General Counsel Date: August 13, 2003 By: /s/ Richard F. Hobbs ---------------------------------------- Richard F. Hobbs, Vice President, Chief Financial Officer & Treasurer -12-
SENSIENT TECHNOLOGIES CORPORATION EXHIBIT INDEX QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003 <TABLE> <CAPTION> Exhibit Description Incorporated by Reference From Filed Herewith - ------- ----------- ------------------------------ -------------- <S> <C> <C> <C> 10.1 Amendment No. 2 to the Sensient Technologies X Corporation Directors' Deferred Compensation Plan. 31 Certification of Sensient's Chairman, President & X Chief Executive Officer and Vice President, Chief Financial Officer & Treasurer pursuant to Rule 13a-14(a) of the Exchange Act. 32 Certification of Sensient's Chairman, President & X Chief Executive Officer and Vice President, Chief Financial Officer & Treasurer pursuant to 18 United States Codess.1350 </TABLE> -13-