SENSIENT TECHNOLOGIES CORP — Interim / Quarterly Report 2005

May 9, 2005

10-Q 1 c94947e10vq.htm QUARTERLY REPORT e10vq PAGEBREAK

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly
period ended: March 31, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 1-7626

SENSIENT TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin	39-0561070
(State or other jurisdiction of	(I.R.S. Employer Identification
incorporation or organization)	Number)

777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-5304

(Address of principal executive offices)

Registrant’s telephone number, including area code: (414) 271-6755

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

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 April 30, 2005
Common Stock, par value $0.10 per share	47,241,646 shares

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SENSIENT TECHNOLOGIES CORPORATION INDEX

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		Page No.
PART I. FINANCIAL INFORMATION:
Item 1.	Financial Statements:
	Consolidated Condensed Statements of Earnings - Three Months Ended March 31, 2005 and 2004.	1
	Consolidated Condensed Balance Sheets - March 31, 2005 and December 31, 2004.	2
	Consolidated Condensed Statements of Cash Flows - Three Months Ended March 31, 2005 and 2004.	3
	Notes to Consolidated Condensed Financial Statements.	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	11
Item 4.	Controls and Procedures.	11
PART II. OTHER INFORMATION:
Item 1.	Legal Proceedings.	13
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 6.	Exhibits.	14
	Signatures.	15
	Exhibit Index.	16
Amended and Restated Articles of Incorporation
Amended and Restated By-Laws
Certifications
Certifications

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In thousands except per share amounts) (Unaudited)

	Three Months
	Ended March 31,
	2005	2004
Revenue	$ 250,877	$ 254,140
Cost of products sold	176,297	179,775
Selling and administrative expenses (see Note 7)	49,702	45,782
Operating income	24,878	28,583
Interest expense	8,724	7,363
Earnings before income taxes	16,154	21,220
Income taxes	3,323	6,260
Net earnings	$ 12,831	$ 14,960
Average number of common shares outstanding:
Basic	46,735	46,475
Diluted	47,167	46,738
Earnings per common share:
Basic	$ .27	$ .32
Diluted	$ .27	$ .32
Dividends per common share	$ .15	$ .15

See accompanying notes to consolidated condensed financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)

	March 31, — 2005	December 31,
	(Unaudited)	2004 *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 4,578	$	2,243
Trade accounts receivable, net	171,814		172,912
Inventories	317,980		328,191
Prepaid expenses and other current assets	36,085		32,898
TOTAL CURRENT ASSETS	530,457		536,244
OTHER ASSETS	64,824		66,352
INTANGIBLE ASSETS, NET	16,812		17,904
GOODWILL	440,991		452,427
PROPERTY, PLANT AND EQUIPMENT:
Land	32,204		33,203
Buildings	226,087		230,488
Machinery and equipment	521,852		530,922
Construction in progress	43,650		40,446
	823,793		835,059
Less accumulated depreciation	(422,746	)	(419,408	)
	401,047		415,651
TOTAL ASSETS	$ 1,454,131	$	1,488,578
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$ 64,741	$	75,066
Accrued salaries, wages and withholdings from employees	11,902		13,591
Other accrued expenses	63,653		58,133
Income taxes	16,400		18,392
Short-term borrowings	67,974		69,774
Current maturities of long-term debt	20,152		20,269
TOTAL CURRENT LIABILITIES	244,822		255,225
DEFERRED INCOME TAXES	9,175		10,470
OTHER LIABILITIES	4,417		4,461
ACCRUED EMPLOYEE AND RETIREE BENEFITS	36,529		34,571
LONG-TERM DEBT	507,885		525,153
SHAREHOLDERS’ EQUITY:
Common stock	5,396		5,396
Additional paid-in capital	72,136		72,117
Earnings reinvested in the business	726,392		720,625
Treasury stock, at cost	(139,656	)	(140,507	)
Unearned portion of restricted stock	(5,109	)	(5,500	)
Accumulated other comprehensive (loss) income	(7,856	)	6,567
TOTAL SHAREHOLDERS’ EQUITY	651,303		658,698
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$ 1,454,131	$	1,488,578

See accompanying notes to consolidated condensed financial statements.

• Condensed from audited financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

	Three Months
	Ended March 31,
	2005	2004
Net cash provided by operating activities	$ 20,285	$	24,826
Cash flows from investing activities:
Acquisition of property, plant and equipment	(6,500	)	(9,635	)
Decrease in other assets	184		2,078
Net cash used in investing activities	(6,316	)	(7,557	)
Cash flows from financing activities:
Proceeds from additional borrowings	18,767		19,470
Debt and capital lease payments	(24,110	)	(29,013	)
Dividends paid	(7,063	)	(7,009	)
Proceeds from options exercised	891		326
Net cash used in financing activities	(11,515	)	(16,226	)
Effect of exchange rate changes on cash and cash equivalents	(119	)	(276	)
Net increase in cash and cash equivalents	2,335		767
Cash and cash equivalents at beginning of period	2,243		3,250
Cash and cash equivalents at end of period	$ 4,578	$	4,017
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$ 2,686	$	2,704
Income taxes	5,710		3,068

See accompanying notes to consolidated condensed financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

| 1. |
| --- |
| In the opinion of Sensient Technologies Corporation (the “Company”), the accompanying unaudited
consolidated condensed financial statements contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the financial position of the Company as of
March 31, 2005 and December 31, 2004, and the results of operations and cash flows for the three
months ended March 31, 2005 and 2004. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full year. |
| Expenses are charged to operations in the year incurred. However, for reporting purposes,
certain expenses are charged to operations based on an estimate rather than as expenses are
actually incurred. |
| Certain amounts as previously presented have been reclassified to conform to the current period
presentation. |
| Refer to the notes in the Company’s annual consolidated financial statements for the year ended
December 31, 2004, for additional details of the Company’s financial condition and a description
of the Company’s accounting policies, which have been continued without change except for the
item described below. |
| 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. The Securities and Exchange Commission deferred the
required implementation of SFAS No. 123R (revised 2004) to fiscal years beginning after June 15,
2005. The impact of the adoption of the revised statement in 2006 is anticipated to reduce net
earnings by approximately $0.03 per share. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123,
net earnings and earnings per common share would have been reduced to the pro forma amounts
indicated below: |

	Three Months
	Ended March 31,
(In thousands except per share information)	2005	2004
Net earnings:
As reported	$ 12,831	$	14,960
Add: reported stock compensation
expense – net of tax	242		180
Less: fair value stock compensation
expense – net of tax	(1,588	)	(663	)
Pro forma net earnings	$ 11,485	$	14,477
Earnings per common share:
Basic as reported	$ .27	$	.32
Less: net impact of fair value stock
compensation expense – net of tax	(.02	)	(.01	)
Basic pro forma	$ .25	$	.31
Diluted as reported	$ .27	$	.32
Less: net impact of fair value stock
compensation expense – net of tax	(.03	)	(.01	)
Diluted pro forma	$ .24	$	.31

The pro forma expense for the three months ended March 31, 2005, includes $1.0 million after-tax related to accelerated amortization of compensation expense for retirement eligible participants. Stock compensation expense for retirement eligible participants is reported in pro forma net earnings over six months. Previously, this expense was recognized over the vesting period, which is three years.

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2.
Operating results and the related assets by segment for the periods presented are as
follows:

(In thousands)	Flavors & — Fragrances	Color	Corporate — & Other		Consolidated
Three months ended March 31, 2005:
Revenues from external customers	$ 147,106	$ 85,856	$ 17,915		$ 250,877
Intersegment revenues	6,470	4,204	387		11,061
Total revenue	$ 153,576	$ 90,060	$ 18,302		$ 261,938
Operating income (loss)	$ 20,105	$ 14,764	$ (9,991	)	$ 24,878
Interest expense	—	—	8,724		8,724
Earnings (loss) before income taxes	$ 20,105	$ 14,764	$ (18,715	)	$ 16,154
Assets at March 31, 2005	$ 703,349	$ 624,417	$ 126,365		$ 1,454,131
Three months ended March 31, 2004:
Revenues from external customers	$ 145,663	$ 91,618	$ 16,859		$ 254,140
Intersegment revenues	5,901	2,523	—		8,424
Total revenue	$ 151,564	$ 94,141	$ 16,859		$ 262,564
Operating income (loss)	$ 17,812	$ 15,649	$ (4,878	)	$ 28,583
Interest expense	—	—	7,363		7,363
Earnings (loss) before income taxes	$ 17,812	$ 15,649	$ (12,241	)	$ 21,220
Assets at March 31, 2004	$ 679,203	$ 618,375	$ 138,824		$ 1,436,402

3.	Inventories
	At March 31, 2005 and December 31, 2004, inventories included finished and in-process products
totaling $241.6 million and $242.8 million, respectively, and raw materials and supplies of
$76.4 million and $85.4 million, respectively.
4.	Retirement Plans
	The Company’s components of annual benefit cost for the defined benefit plans for the
periods presented are as follows:

	Three Months Ended
	March 31,
(In thousands)	2005	2004
Service cost	$ 263	$	231
Interest cost	446		421
Expected return on plan assets	(83	)	(83	)
Amortization of prior service cost	320		320
Amortization of actuarial (gain)/loss	24		19
Settlement expense	15		14
Defined benefit expense	$ 985	$	922

During the three months ended March 31, 2005, the Company made contributions to its defined benefit pension plans of $0.4 million. Total contributions to Company defined benefit pension plans are expected to be $1.6 million in 2005.

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5.	Shareholders’ Equity
	The Company did not repurchase any shares of its common stock during the three months ended
March 31, 2005 and March 31, 2004.
	Comprehensive income (loss) is comprised of net earnings, foreign currency translation and
unrealized gains and losses on cash flow hedges. Total comprehensive income (loss) for the
three months ended March 31, 2005 and 2004 was ($1.6) million and $6.6 million, respectively.
6.	Cash Flows from Operating Activities
	Cash flows from operating activities are detailed below:

(In thousands)	Three Months Ended March 31, — 2005	2004
Cash flows from operating activities:
Net earnings	$ 12,831	$	14,960
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization	12,011		12,247
Changes in operating assets and liabilities, net of
effects of acquisitions of businesses	(4,557	)	(2,381	)
Net cash provided by operating activities	$ 20,285	$	24,826

| 7. |
| --- |
| Litigation |
| The Company has accrued $4.5 million ($2.8 million after-tax, or $.06 per share) in the
first quarter of 2005 related to an Interim Award of Arbitrators and associated costs in
the matter of Kraft Foods North America, Inc. v. Sensient Colors Inc. This expense was
recorded in Selling, General and Administrative Expense in the Corporate & Other Segment.
Although the arbitrators in this matter determined that Sensient products forming the basis
for the action performed as specified, the award requires the enforcement of a previously
disputed settlement proposal. Under this settlement, Sensient will make a one-time up
front payment and will receive multi-year contract extensions expected to total
approximately $80 million in purchases. The award, which was issued March 24, 2005, is
expected to be finalized in the second quarter of 2005. |
| Additional information on this matter and any other significant commercial cases pending
against the Company is disclosed in Part II. Item 1. Legal Proceedings. |
| Guarantees |
| In connection with the sale of substantially all of the Company’s Yeast business on
February 23, 2001, the Company has provided the buyer of these operations with
indemnification against certain potential liabilities as is customary in transactions of
this nature. The period provided for indemnification against most types of claims has
now expired, but for specific types of claims, including but not limited to tax and
environmental liabilities, the amount of time provided for indemnification is either five
years or the applicable statute of limitations. The maximum amount of the Company’s
liability related to certain of these provisions is capped at approximately 35% of the
consideration received in the transaction. Liability related to certain matters,
including claims relating to pre-closing environmental liabilities, is not capped. In
cases where the Company believed it is probable that payments would be required under
these provisions, the Company has recognized a liability. The Company believes that the
probability of incurring payments under these provisions in excess of the amount of the
liability recorded is remote. |

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| Environmental Matters |
| --- |
| The Company is involved in two significant environmental cases, which are described in Part II.
Item 1. Legal Proceedings. The Company is also involved in other site closure and related
environmental remediation and compliance activities at manufacturing sites primarily related to
a 2001 acquisition for which reserves for environmental matters were established as of the date
of purchase. Actions that are legally required or necessary to prepare the sites for sale are
currently being performed. |
| The Company records liabilities related to environmental remediation obligations when
estimated future expenditures are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or as circumstances change. Estimated
future expenditures are discounted to their present value when the timing and amount of
future cash flows are fixed and readily determinable. Recoveries of remediation costs
from other parties, if any, are recognized as assets when their receipt is assured. The
Company has not recorded any potential recoveries related to these matters, as receipts
are not yet assured. As of March 31, 2005, the liabilities related to environmental
remediations could range from $3.4 million to $17.1 million. As of March 31, 2005, the
Company has accrued $4.2 million, of which $3.8 million is related to the environmental
reserves established in connection with the 2001 acquisition discussed above. This
accrual represents management’s best estimate of these liabilities. Although costs could
be significantly higher, it is the opinion of Company management that the possibility
that costs in excess of those accrued and disclosed will have a material adverse impact
on the Company’s consolidated financial statements is remote. Further, there can be no
assurance that additional environmental matters will not arise in the future. |

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

| OVERVIEW |
| --- |
| Revenue for the quarter ended March 30, 2005, was $250.9 million compared to $254.1 million
for the comparable quarter in 2004. Revenue for the Flavors & Fragrances segment increased
1.3% for the quarter ended March 31, 2005, over the comparable period last year. Revenue
for the Color segment decreased 4.3% for the quarter ended March 31, 2005, over the
comparable period last year. Revenue for Asia Pacific increased 8.6% for the quarter.
Additional information on group results can be found in the Segment Information section. |
| The gross profit margin increased 40 basis points to 29.7% for the first three months of
2005 from 29.3% for the comparable period in 2004. Approximately one-half of the margin
increase is due to lower costs in the dehydrated flavors business. The remainder is
primarily due to the benefits of the cost reduction programs in Color. |
| Selling and administrative expenses as a percent of revenue were 19.8% for the three months
ended March 31, 2005, versus 18.0% for the 2004 comparable period. The increase is
primarily due to a one-time $4.5 million expense related to an interim order in an
arbitration with a customer which was recorded in the Corporate and Other segment (for more
information see Note 7 to the consolidated condensed financial statements). This item was
partially offset by benefits from the prior year restructuring programs and reduced
employee-related costs. |
| Operating income for the quarter ended March 31, 2005, was $24.9 million compared to $28.6
million for the comparable period in 2004. The change was due to the revenue, margin and
expense changes discussed above. |
| Favorable foreign exchange rates increased revenue and operating income by approximately
2.2% and 2.9%, respectively, for the three months ended March 31, 2005, over the comparable
period in the prior year. |
| Interest expense was $8.7 million for the three months ended March 31, 2005, and $7.4
million for the same quarter in 2004. The increase was due to higher average rates
partially offset by a reduction in average debt balances. |
| The effective income tax rate was 20.6% and 29.5% for the three months ended March 31, 2005
and 2004, respectively. The effective tax rate for the three months ended March 31, 2005,
was reduced by the revaluation of deferred tax liabilities in connection with a rate
reduction in a foreign country and finalization of prior year income tax returns. The
effective tax rate for the three months ended March 31, 2004, was reduced by the settlement
of prior year items. The effective tax rate is expected to be approximately 30% for the
remainder of 2005, excluding the income tax expense or benefit related to discrete items,
which will be reported separately in the quarter in which they occur. |
| SEGMENT INFORMATION |
| Flavors & Fragrances – |
| Revenue for the Flavors & Fragrances segment increased 1.3% to $153.6 million for the
quarter ended March 31, 2005, compared to $151.6 million for the same period last year.
Favorable foreign exchange rates resulted in a 2.4% increase in revenue. Excluding
exchange rates, revenue decreased 1.1%, or $1.6 million, because of decreased sales of
fragrances ($1.0 million) and dehydrated flavors ($0.6 million). |
| Operating income in the quarter ended March 31, 2005, increased 12.9% to $20.1 million
compared to $17.8 million last year. Excluding the favorable effect of exchange rates
(1.9% or $0.3 million), operating income increased $2.0 million, primarily attributable to
higher results for traditional flavors in North America and Europe ($1.3 million) and in
the dehydrated flavors business ($0.9 million). Higher profit in traditional flavors was
primarily due to lower selling, general and administrative costs. Increased profit in the
dehydrated flavors business was caused by lower cost of sales and stable pricing.
Operating income as a percent of revenue was 13.1%, an increase of 130 basis points from
the comparable quarter last year. |

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| Color – |
| --- |
| For the three months ended March 31, 2005, revenue for the Color segment was $90.1 million
compared to $94.1 million in the prior year. Excluding the favorable effect of exchange
rates (2.1% or $2.0 million), revenue decreased 6.5%, or $6.1 million, primarily due to
lower sales of technical colors ($8.9 million) partially offset by increased food and
beverage colors ($2.7 million) and cosmetic colors and ingredients ($0.6 million). The
decrease in technical colors of $8.9 million is primarily attributable to the previously
disclosed winding up of a supply agreement with an original equipment manufacturer.
Revenue from food and beverage colors and cosmetic colors and ingredients increased
primarily because of higher volumes. |
| Operating income for the three months ended March 31, 2005, was $14.8 million versus $15.6
million for the comparable period last year. Excluding the favorable effect of exchange
rates ($0.5 million), operating income decreased $1.3 million. The lower operating profit
is primarily attributed to lower volumes in technical colors ($3.3 million) and the effect
of a 2004 reduction of purchase accounting reserves ($1.8 million) related to lower than
expected environmental costs associated with the closure of a manufacturing site. Declines
in these areas were partially offset by increased volume and improved manufacturing costs
for food and beverage colors ($3.7 million) and continued growth in the cosmetic color
business ($0.2 million). Operating income as a percent of revenue was 16.4%, a decrease of
20 basis points from the comparable quarter last year, primarily due to the reasons
provided above. |
| FINANCIAL CONDITION |
| The Company’s ratio of debt to total capital improved to 47.8% as of March 31, 2005, from
48.3% as of December 31, 2004. The improvement resulted primarily from a $19.2 million
reduction in debt levels since December 31, 2004. |
| Net cash provided by operating activities was $20.3 million for the quarter ended March 31,
2005, compared to $24.8 million for the quarter ended March 31, 2004. The decrease in cash
provided by operating activities was primarily due to a tax refund received in the first
quarter of 2004. |
| Net cash used in investing activities was $6.3 million for the three months ended March 31,
2005, compared to $7.6 million in the comparable period last year. Net cash used in
investing activities in 2005 included capital expenditures of $6.5 million. Net cash used
in investing activities in 2004 included capital expenditures of $9.6 million. |
| Net cash used in financing activities was $11.5 million for the three months ended March
31, 2005, compared to $16.2 million in the comparable period last year. During the first
quarters of 2005 and 2004, net cash provided by operating activities was sufficient to fund
capital expenditures, pay dividends and reduce borrowings. Net repayments of debt were
$5.3 million and $9.5 million for the three months ended March 31, 2005 and 2004,
respectively. In addition to net debt repayments, foreign exchange rates and the change in
the fair market value of interest rate swaps reduced the reported debt on the balance sheet
by $13.9 million from December 31, 2004, to March 31, 2005. Dividends of $7.1 million and
$7.0 million were paid during the three months ended March 31, 2005 and 2004, respectively. |
| The Company believes that its financial position remains strong. The Company believes
that, for the foreseeable future, its expected cash flows from operations and existing
lines of credit can be used to meet future cash requirements for operations, capital
expenditures and dividend payments to shareholders. |
| ISSUER PURCHASES OF EQUITY SECURITIES |
| The Company did not purchase any shares of Company stock during the three months ended
March 31, 2005 and 2004. On April 27, 2001, the Company approved a share repurchase
program under which it is authorized to repurchase up to 5.0 million shares of Company
stock. As of March 31, 2005, 4.3 million shares were available under this authorization.
The Company’s share repurchase program has no expiration date. |

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| CONTRACTUAL OBLIGATIONS |
| --- |
| The Company is subject to certain contractual obligations, including long-term debt,
operating leases and manufacturing purchases. The following table summarizes the Company’s
significant contractual obligations as of March 31, 2005: |
| Payments due by period |

(In thousands)	Total	< 1 year	1-3 years	3-5 years	> 5 years
Long-term debt	$ 528,037	$ 20,152	$ 316,308	$ 186,080	$ 5,497
Interest payments on long-term debt	94,960	31,488	46,037	17,163	272
Operating lease obligations	32,143	8,667	11,637	4,616	7,222
Pension obligations	28,442	1,454	6,857	5,705	14,426
Manufacturing purchase commitments	69,591	29,529	21,626	9,492	8,944
Total contractual obligations	$ 753,173	$ 91,290	$ 402,465	$ 223,056	$ 36,361

| CRITICAL ACCOUNTING POLICIES |
| --- |
| In preparing the financial statements in accordance with accounting principles generally
accepted in the U.S., management is required to make estimates and assumptions that have an
impact on the assets, liabilities, revenue and expense amounts reported. These estimates
can also affect supplemental information disclosures of the Company, including information
about contingencies, risk and financial condition. The Company believes, given current
facts and circumstances, that its estimates and assumptions are reasonable, adhere to
accounting principles generally accepted in the U.S., and are consistently applied.
Inherent in the nature of an estimate or assumption is the fact that actual results may
differ from estimates and estimates may vary as new facts and circumstances arise. The
Company makes routine estimates and judgments in determining the net realizable value of
accounts receivable, inventories, property, plant and equipment, and prepaid expenses.
Management believes the Company’s most critical accounting estimates and assumptions are in
the following areas: |
| Goodwill Valuation |
| The Company reviews the carrying value of goodwill annually utilizing several valuation
methodologies, including a discounted cash flow model. Changes in estimates of future cash
flows caused by items such as unforeseen events or changes in market conditions could
negatively affect the reporting segment’s fair value and result in an impairment charge.
However, the current fair values of the reporting segments are significantly in excess of
carrying values, and accordingly management believes that only significant changes in the
cash flow assumptions would result in impairment. The Company performed its annual
evaluation of goodwill and indefinite life intangibles assets for impairment during the
third quarter of 2004 and concluded that no impairments existed. |
| Income Taxes |
| The Company estimates its income tax expense in each of the taxing jurisdictions in which
it operates. The Company is subject to a tax audit in each of these jurisdictions, which
could result in changes to the estimated tax expense. The amount of these changes will
vary by jurisdiction and will be recorded when known. These changes could impact the
Company’s financial statements. Management has recorded valuation allowances to reduce its
deferred tax assets to the amount that is more likely than not to be realized. In doing
so, management has considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance. An adjustment to the recorded valuation
allowance as a result of changes in facts or circumstances could result in a significant
change in the Company’s tax expense. |
| Commitments and Contingencies |
| The Company is subject to litigation and other legal proceedings arising in the ordinary
course of its businesses or arising under provisions related to the protection of the
environment. Estimating liabilities and costs associated with these matters requires the
judgment of both management and Company counsel. When it is probable that the Company has
incurred a liability associated with claims or pending or threatened litigation matters and
the Company’s exposure is reasonably estimable, the Company records a charge against
earnings. The ultimate resolution of any exposure to the Company may change as further
facts and circumstances become known. |

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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 March 31, 2005. For additional information about market risk, refer to pages 24 and 25 of the Company’s 2004 Annual Report, portions of which were filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

| Disclosure Controls. The Company maintains a system of disclosure controls and procedures
that is designed to ensure that all information the Company is required to disclose is
accumulated and communicated to management in a timely manner. Management has reviewed
this system of disclosure controls and procedures, including the new internal control
procedures discussed below, as of the end of the period covered by this report, under the
supervision of and with the participation of the Company’s Chairman, President and Chief
Executive Officer and its Vice President, Chief Financial Officer and Treasurer. Based on
that review, the Company has concluded that the current system of disclosure controls and
procedures is effective. |
| --- |
| Internal Control Over Financial Reporting. The Company also maintains a system of internal
control over financial reporting. As noted in its 2004 Annual Report to Shareholders, a
material weakness in internal control was identified during the preparation of the
Company’s 2004 financial statements. The material weakness related to inadequate support
for management’s estimates regarding the impairment of a receivable and the recording of an
income tax benefit. In each instance, the documentation was not sufficient to support the
Company’s initial accounting treatment and the Company recorded adjustments that had the
effect of lowering its net earnings for the fourth quarter and the year ended December 31,
2004. |
| In response to the material weakness, the Company has implemented a number of procedures to
strengthen its internal control processes. These procedures include: |

| • | A detailed policy to ensure that the Company promptly identifies, documents and
communicates to the Chief Accounting Officer and the Chief Financial Officer any
unusual or nonrecurring transactions or circumstances that could have more than an
inconsequential impact on the Company’s annual or interim financial statements.
Examples include changes in or updates to accounting estimates, or judgments and
corrections of accounting errors. The policy requires that the Corporate
Controller’s department perform and document any necessary research and that the
Company document and report its conclusions and accounting treatment to the audit
committee at least quarterly in advance of the Company’s public filings of interim
or annual financial statements. |
| --- | --- |
| • | A detailed policy to ensure that the Company promptly identifies and evaluates
contingent income tax liabilities and that all income tax accounts are reconciled
and reviewed by tax department personnel at least quarterly to identify and quantify
changes that could have more than an inconsequential impact on the Company’s annual
or interim financial statements. The policy requires that prior to recognizing any
income tax liability or making any other significant income tax adjustments, the
proposed adjustments and supporting documentation will be reviewed by the Chief
Accounting Officer and the Chief Financial Officer. Any significant adjustments in
the tax accounts will also be reported to the audit committee at least quarterly in
advance of the Company’s public filings of interim or annual financial statements. |

Management has verified that the procedures outlined above are in place at March 31, 2005, and operating as intended for the reporting period ended March 31, 2005. As a result, the Company believes that the material weakness identified at the end of 2004 has been remediated and the new procedures have strengthened its disclosure controls and procedures, as well as its internal control over financial reporting.

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| FORWARD-LOOKING STATEMENTS |
| --- |
| This document contains forward-looking statements that reflect management’s current
assumptions and estimates of future economic circumstances, industry conditions, Company
performance and financial results. Forward-looking statements include statements in the
future tense and statements including the terms “expect,” “believe,” “anticipate,” and
other similar terms which express expectations as to future events or conditions. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for such
forward-looking statements. Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties and other factors that could
cause actual events to differ materially from those expressed in those statements. A
variety of factors could cause the Company’s actual results and experience to differ
materially from the anticipated results. These factors and assumptions include the pace and
nature of new product introductions by the Company’s customers; results of newly acquired
businesses; the Company’s ability to successfully implement its growth strategies; the
outcome of the Company’s various productivity-improvement and cost-reduction efforts;
changes in costs of raw materials, including energy; industry and economic factors related
to the Company’s domestic and international business; competition from other suppliers of
color and flavors and fragrances; growth or contraction in markets for products in which
the Company competes; changes in customer relationships; industry acceptance of price
increases; currency exchange rate fluctuations; results of litigation or other proceedings;
and the matters discussed above under Item 2 including the critical accounting policies
described therein. The Company does not undertake to publicly update or revise its
forward-looking statements even if experience or future changes make it clear that any
projected results expressed or implied therein will not be realized. |

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

| Clean Air Act NOV |
| --- |
| On June 24, 2004, the United States Environmental Protection Agency (the “EPA”) issued
a Notice of Violation/Finding of Violation (“NOV”) to Lesaffre Yeast Corporation
(“Lesaffre”) for alleged violations of the Wisconsin air emission requirements. The
NOV generally alleges that Lesaffre’s Milwaukee, Wisconsin facility violated air
emissions limits for volatile organic compounds during certain periods from 1999
through 2003. Some of these violations allegedly occurred before Lesaffre purchased
Red Star Yeast & Products (“Red Star Yeast”) from the Company. |
| In connection with the sale of Red Star Yeast on February 23, 2001, the Company
provided Lesaffre and certain of its affiliates with indemnification against
environmental claims attributable to the operation, activities or ownership of Red
Star Yeast prior to February 23, 2001, the closing date of the sale. See Note 7 to
the consolidated condensed financial statements. The Company has not received a claim
for indemnity from Lesaffre with respect to this matter. The Company met with the EPA
and Lesaffre to discuss the NOV (and appropriate means to help resolve the matter) in
September 2004 and expects to resolve any obligation it may have directly with the EPA
during 2005. |
| Superfund Claim |
| On July 6, 2004, the EPA notified the Company’s Sensient Colors Inc. subsidiary that it may
be a potentially responsible party (“PRP”) under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) for activities at the General Color Company
Superfund Site in Camden, New Jersey. The EPA requested reimbursement of $10.9 million in
clean-up costs, plus interest. Sensient Colors Inc. advised the EPA that this site had
been expressly excluded from the Company’s 1988 stock purchase of H. Kohnstamm & Company,
Inc. (now Sensient Colors Inc.). The selling shareholders had retained ownership of and
liability for the site, and some became owners of General Color Company, which continued to
operate there until the mid-1990s. The Company’s legal defense costs are being paid by an
insurer with a reservation of coverage rights. The Company continues to assess the
existence and solvency of other PRPs, additional insurance coverage, the nature of the
alleged contamination, and the extent to which the EPA’s activities satisfy the
requirements for reimbursement under CERCLA, as well as the legal sufficiency of excluding
this site from the 1988 transaction. In a letter to the EPA dated January 31, 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 subsequently informed the
Company that it is unwilling to discuss these legal challenges without prior conditions and
may refer this matter to the Department of Justice, which would evaluate the referral for
potential civil litigation under applicable environmental laws. |
| Kraft Foods North America, Inc. v. Sensient Colors Inc. |
| On April 11, 2003, Kraft Foods North America, Inc. (“Kraft”) filed notice of its
intention to arbitrate before the American Arbitration Association in Chicago,
Illinois certain claims against Sensient Colors Inc. (“Sensient Colors”), a subsidiary
of Sensient Technologies Corporation, in the amount of $6.5 million. Kraft asserted a
claim against Sensient Colors for breach of contract and breach of warranty arising
out of the sale of colorants to Kraft for use in food products for young children
because they caused stains on the clothes, furniture and skin of the consumers. Kraft
also asserted a claim against Sensient Colors based on its alleged breach of a
settlement agreement. The evidentiary portion of the arbitration was conducted in
August 2004 and January 2005. An Interim Award of Arbitrators (“Award”) was issued on
March 24, 2005. Although the arbitrators determined that the Sensient products
forming the basis for the action performed as specified, the Award requires the
enforcement of the previously disputed settlement proposal. Under this settlement,
Sensient will make a one-time up front payment of $4 million. Sensient will receive
multi-year contract extensions expected to total approximately $80 million in
purchases. The Award is expected to be finalized in the second quarter of 2005. |

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| Remmes v. Sensient Flavors, Inc. et al |
| --- |
| In June 2004, the Company and certain other flavor manufacturers were sued in Iowa
state court by Kevin Remmes, who alleged that while working at American Popcorn
Company of Sioux City, Iowa, he was exposed to butter flavoring vapors that caused
injury to his lungs and respiratory system. The Company, among others, has sold and
continues to sell butter flavoring used in the manufacture of
microwave popcorn to American Popcorn Company. The suit has been removed to Federal
District Court for the Northern District of Iowa, Western Division. The Company
believes that plaintiff’s claims are without merit and has begun a vigorous defense.
The Company expects this matter to be set for trial in 2006. |
| The Company is involved in various other claims and litigation arising in the
normal course of business. In the judgment of management, the ultimate resolution
of these actions will not materially affect the consolidated financial statements
of the Company except as described above. |

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company’s 2005 Annual Meeting of Shareholders, held on April 21, 2005, the following actions were taken:

• The following Directors were elected for three-year terms of office:

Expiring in April 2008
Hank Brown	42,925,241	1,123,385
James A.D. Croft	42,896,406	1,152,220
Alberto Fernandez	43,022,338	1,026,288

| | 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: Michael E. Batten, John F.
Bergstrom, Dr. Fergus M. Clydesdale, William V. Hickey, Kenneth P. Manning and
Essie Whitelaw. However, as disclosed below, since the proposed amendment to
the Company’s Articles of Incorporation to eliminate the classification of the
Board of Directors was approved by the shareholders, the terms of all of the
Directors will expire at the 2006 Annual Meeting of Shareholders. |
| --- | --- |
| • | The shareholders approved a proposal by the Board of Directors to
amend the Sensient Technologies Corporation Amended and Restated Articles of
Incorporation to eliminate the classification of the Company’s Board of
Directors. The shareholders cast 42,513,927 votes in favor of this proposal,
1,284,891 votes against, and there were 249,807 votes to abstain. |
| • | The shareholders approved a proposal by the Board of Directors to
ratify the appointment of Deloitte & Touche LLP as the Company’s independent
auditors to conduct the annual audit of the consolidated financial statements
of the Company and its subsidiaries for the year ending December 31, 2005.
The shareholders cast 42,603,479 votes in favor of this proposal, 1,276,376
votes against, and there were 168,771 votes to abstain. |

ITEM 6. EXHIBITS

See Exhibit Index following this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SENSIENT TECHNOLOGIES CORPORATION
Date: May 9, 2005	By: /s/ John L. Hammond
	John L. Hammond, Vice President,
	Secretary & General Counsel
Date: May 9, 2005	By: /s/ Richard F. Hobbs
	Richard F. Hobbs, Vice President,
	Chief Financial Officer & Treasurer

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SENSIENT TECHNOLOGIES CORPORATION

EXHIBIT INDEX QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005

Exhibit	Description	Filed Herewith
3.1	Amended and
Restated Articles
of Incorporation
adopted January 21,
1999 as amended as
of April 21, 2005	X
3.2	Amended and
Restated By-Laws of
Sensient
Technologies
Corporation as
amended as of April
21, 2005	X
31	Certifications of
the Company’s
Chairman, President
& Chief Executive
Officer and Vice
President, Chief
Financial Officer &
Treasurer pursuant
to Rule 13a-14(a)
of the Exchange Act	X
32	Certifications of
the Company’s
Chairman, President
& Chief Executive
Officer and Vice
President, Chief
Financial Officer &
Treasurer pursuant
to 18 United States
Code §
1350	X

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