þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Wisconsin | 39-0561070 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification | |
Number) |
Large accelerated filerþ | Accelerated filero | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
Class | Outstanding at | |
Common Stock, par value $0.10 per share |
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EX-31 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
ITEM 1. | FINANCIAL STATEMENTS |
Three Months | Six Months | Three Months | Nine Months | |||||||||||||||||||||||||||||
Ended June 30, | Ended June 30, | Ended September 30, | Ended September 30, | |||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
Revenue | $ | 333,969 | $ | 303,959 | $ | 648,045 | $ | 586,783 | $ | 340,868 | $ | 303,179 | $ | 988,913 | $ | 889,962 | ||||||||||||||||
Cost of products sold | 229,008 | 209,269 | 448,138 | 405,563 | 234,592 | 210,103 | 682,730 | 615,666 | ||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||
Selling and administrative expenses | 57,815 | 51,433 | 114,106 | 99,579 | 58,516 | 54,104 | 172,622 | 153,683 | ||||||||||||||||||||||||
Operating income | 47,146 | 43,257 | 85,801 | 81,641 | 47,760 | 38,972 | 133,561 | 120,613 | ||||||||||||||||||||||||
Interest expense | 5,488 | 5,650 | 10,266 | 12,896 | 5,224 | 5,483 | 15,490 | 18,379 | ||||||||||||||||||||||||
Earnings before income taxes | 41,658 | 37,607 | 75,535 | 68,745 | 42,536 | 33,489 | 118,071 | 102,234 | ||||||||||||||||||||||||
Income taxes | 12,973 | 11,788 | 23,383 | 21,319 | 13,319 | 10,660 | 36,702 | 31,979 | ||||||||||||||||||||||||
Net earnings | $ | 28,685 | $ | 25,819 | $ | 52,152 | $ | 47,426 | $ | 29,217 | $ | 22,829 | $ | 81,369 | $ | 70,255 | ||||||||||||||||
Average number of common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 49,047 | 48,301 | 48,937 | 48,223 | 49,277 | 48,447 | 49,051 | 48,299 | ||||||||||||||||||||||||
Diluted | 49,365 | 48,554 | 49,244 | 48,453 | 49,565 | 48,750 | 49,352 | 48,553 | ||||||||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | .58 | $ | .53 | $ | 1.07 | $ | .98 | $ | .59 | $ | .47 | $ | 1.66 | $ | 1.45 | ||||||||||||||||
Diluted | $ | .58 | $ | .53 | $ | 1.06 | $ | .98 | $ | .59 | $ | .47 | $ | 1.65 | $ | 1.45 | ||||||||||||||||
Dividends per common share | $ | .20 | $ | .19 | $ | .39 | $ | .38 | $ | .20 | $ | .19 | $ | .59 | $ | .57 | ||||||||||||||||
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June 30, | September 30, | |||||||||||||||
2010 | December 31, | 2010 | December 31, | |||||||||||||
(Unaudited) | 2009 | (Unaudited) | 2009 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 13,911 | $ | 12,219 | $ | 12,406 | $ | 12,219 | ||||||||
Trade accounts receivable, net | 216,486 | 200,186 | 229,183 | 200,186 | ||||||||||||
Inventories | 367,573 | 390,011 | 393,362 | 390,011 | ||||||||||||
Prepaid expenses and other current assets | 47,873 | 55,693 | 43,390 | 55,693 | ||||||||||||
TOTAL CURRENT ASSETS | 645,843 | 658,109 | 678,341 | 658,109 | ||||||||||||
OTHER ASSETS | 35,887 | 38,349 | 34,990 | 38,349 | ||||||||||||
INTANGIBLE ASSETS, NET | 12,791 | 13,621 | 13,302 | 13,621 | ||||||||||||
GOODWILL | 421,261 | 455,995 | 446,951 | 455,995 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||||||
Land | 45,389 | 49,429 | 49,087 | 49,429 | ||||||||||||
Buildings | 276,554 | 293,200 | 289,732 | 293,200 | ||||||||||||
Machinery and equipment | 601,593 | 630,420 | 634,218 | 630,420 | ||||||||||||
Construction in progress | 30,548 | 20,211 | 33,052 | 20,211 | ||||||||||||
954,084 | 993,260 | 1,006,089 | 993,260 | |||||||||||||
Less accumulated depreciation | (558,189 | ) | (567,643 | ) | (587,255 | ) | (567,643 | ) | ||||||||
395,895 | 425,617 | 418,834 | 425,617 | |||||||||||||
TOTAL ASSETS | $ | 1,511,677 | $ | 1,591,691 | $ | 1,592,418 | $ | 1,591,691 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Trade accounts payable | $ | 90,018 | $ | 88,915 | $ | 98,736 | $ | 88,915 | ||||||||
Accrued salaries, wages and withholdings from employees | 20,089 | 22,568 | 25,770 | 22,568 | ||||||||||||
Other accrued expenses | 51,387 | 64,789 | 54,167 | 64,789 | ||||||||||||
Income taxes | 6,807 | 692 | 7,748 | 692 | ||||||||||||
Short-term borrowings | 39,652 | 39,181 | 26,651 | 39,181 | ||||||||||||
TOTAL CURRENT LIABILITIES | 207,953 | 216,145 | 213,072 | 216,145 | ||||||||||||
OTHER LIABILITIES | 24,072 | 27,203 | 27,054 | 27,203 | ||||||||||||
ACCRUED EMPLOYEE AND RETIREE BENEFITS | 51,259 | 50,796 | 53,308 | 50,796 | ||||||||||||
LONG-TERM DEBT | 349,485 | 388,852 | 333,625 | 388,852 | ||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Common stock | 5,396 | 5,396 | 5,396 | 5,396 | ||||||||||||
Additional paid-in capital | 88,404 | 85,504 | 89,482 | 85,504 | ||||||||||||
Earnings reinvested in the business | 955,868 | 922,963 | 975,260 | 922,963 | ||||||||||||
Treasury stock, at cost | (96,808 | ) | (103,878 | ) | (92,327 | ) | (103,878 | ) | ||||||||
Accumulated other comprehensive loss | (73,952 | ) | (1,290 | ) | (12,452 | ) | (1,290 | ) | ||||||||
TOTAL SHAREHOLDERS’ EQUITY | 878,908 | 908,695 | 965,359 | 908,695 | ||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,511,677 | $ | 1,591,691 | $ | 1,592,418 | $ | 1,591,691 | ||||||||
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Six Months | Nine Months | |||||||||||||||
Ended June 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net cash provided by operating activities | $ | 64,186 | $ | 55,445 | $ | 110,545 | $ | 98,583 | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisition of property, plant and equipment | (19,853 | ) | (19,602 | ) | (33,024 | ) | (30,933 | ) | ||||||||
Proceeds from sale of assets | 76 | 4 | 88 | 4 | ||||||||||||
Other investing activity | (340 | ) | (366 | ) | ||||||||||||
Other investing activities | 408 | (615 | ) | |||||||||||||
Net cash used in investing activities | (20,117 | ) | (19,964 | ) | (32,528 | ) | (31,544 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from additional borrowings | 126,253 | 216,138 | 128,671 | 216,608 | ||||||||||||
Debt payments | (147,965 | ) | (228,695 | ) | (190,574 | ) | (256,991 | ) | ||||||||
Dividends paid | (19,247 | ) | (18,476 | ) | (29,072 | ) | (27,743 | ) | ||||||||
Proceeds from options exercised and other equity transactions | 7,768 | 4,522 | 13,414 | 8,452 | ||||||||||||
Net cash used in financing activities | (33,191 | ) | (26,511 | ) | (77,561 | ) | (59,674 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (9,186 | ) | (1,879 | ) | (269 | ) | (4,785 | ) | ||||||||
Net increase in cash and cash equivalents | 1,692 | 7,091 | 187 | 2,580 | ||||||||||||
Cash and cash equivalents at beginning of period | 12,219 | 8,498 | 12,219 | 8,498 | ||||||||||||
Cash and cash equivalents at end of period | $ | 13,911 | $ | 15,589 | $ | 12,406 | $ | 11,078 | ||||||||
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1. | Accounting Policies |
In the opinion of Sensient Technologies Corporation (the “Company”), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company as of |
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. |
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. |
Refer to the notes in the Company’s annual consolidated financial statements for the year ended December 31, 2009, 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. | Fair Value |
Accounting Standards Codification (“ASC”) 820,Fair Value Measurements and Disclosures, defines fair value for financial assets and liabilities, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. As of |
The carrying values of the Company’s cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and short term borrowings approximated fair values as of |
3. | Debt |
In November 2009, the Company entered into an agreement to issue U.S. dollar denominated debt totaling $110 million through a private placement of notes with a group of four financial institutions. These notes were issued on May 3, 2010, and have a fixed coupon rate of 4.91% with a final maturity date of May 3, 2017. Proceeds from the sale of the notes have been used to repay existing indebtedness and for general corporate purposes. |
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4. | Segment Information |
Operating results by segment for the periods and at the dates presented are as follows: |
Flavors & | Corporate | Flavors & | Corporate | |||||||||||||||||||||||||||||
(In thousands) | Fragrances | Color | & Other | Consolidated | Fragrances | Color | & Other | Consolidated | ||||||||||||||||||||||||
Three months ended June 30, 2010: | ||||||||||||||||||||||||||||||||
Three months ended September 30, 2010: | ||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 199,024 | $ | 108,225 | $ | 26,720 | $ | 333,969 | $ | 201,571 | $ | 109,331 | $ | 29,966 | $ | 340,868 | ||||||||||||||||
Intersegment revenue | 6,023 | 4,754 | 381 | 11,158 | 5,633 | 3,919 | 1,007 | 10,559 | ||||||||||||||||||||||||
Total revenue | $ | 205,047 | $ | 112,979 | $ | 27,101 | $ | 345,127 | $ | 207,204 | $ | 113,250 | $ | 30,973 | $ | 351,427 | ||||||||||||||||
Operating income (loss) | $ | 33,223 | $ | 20,880 | $ | (6,957 | ) | $ | 47,146 | $ | 32,150 | $ | 20,036 | $ | (4,426 | ) | $ | 47,760 | ||||||||||||||
Interest expense | — | — | 5,488 | 5,488 | — | — | 5,224 | 5,224 | ||||||||||||||||||||||||
Earnings (loss) before income taxes | $ | 33,223 | $ | 20,880 | $ | (12,445 | ) | $ | 41,658 | $ | 32,150 | $ | 20,036 | $ | (9,650 | ) | $ | 42,536 | ||||||||||||||
Three months ended June 30, 2009: | ||||||||||||||||||||||||||||||||
Three months ended September 30, 2009: | ||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 193,663 | $ | 89,305 | $ | 20,991 | $ | 303,959 | $ | 189,996 | $ | 90,261 | $ | 22,922 | $ | 303,179 | ||||||||||||||||
Intersegment revenue | 3,892 | 4,419 | 226 | 8,537 | 4,809 | 3,899 | 369 | 9,077 | ||||||||||||||||||||||||
Total revenue | $ | 197,555 | $ | 93,724 | $ | 21,217 | $ | 312,496 | $ | 194,805 | $ | 94,160 | $ | 23,291 | $ | 312,256 | ||||||||||||||||
Operating income (loss) | $ | 34,249 | $ | 15,001 | $ | (5,993 | ) | $ | 43,257 | $ | 30,678 | $ | 14,573 | $ | (6,279 | ) | $ | 38,972 | ||||||||||||||
Interest expense | — | — | 5,650 | 5,650 | — | — | 5,483 | 5,483 | ||||||||||||||||||||||||
Earnings (loss) before income taxes | $ | 34,249 | $ | 15,001 | $ | (11,643 | ) | $ | 37,607 | $ | 30,678 | $ | 14,573 | $ | (11,762 | ) | $ | 33,489 | ||||||||||||||
Flavors & | Corporate | Flavors & | Corporate | |||||||||||||||||||||||||||||
(In thousands) | Fragrances | Color | & Other | Consolidated | Fragrances | Color | & Other | Consolidated | ||||||||||||||||||||||||
Six months ended June 30, 2010: | ||||||||||||||||||||||||||||||||
Nine months ended September 30, 2010: | ||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 384,958 | $ | 212,438 | $ | 50,649 | $ | 648,045 | $ | 586,529 | $ | 321,769 | $ | 80,615 | $ | 988,913 | ||||||||||||||||
Intersegment revenue | 10,791 | 8,497 | 723 | 20,011 | 16,424 | 12,416 | 1,730 | 30,570 | ||||||||||||||||||||||||
Total revenue | $ | 395,749 | $ | 220,935 | $ | 51,372 | $ | 668,056 | $ | 602,953 | $ | 334,185 | $ | 82,345 | $ | 1,019,483 | ||||||||||||||||
Operating income (loss) | $ | 60,407 | $ | 38,988 | $ | (13,594 | ) | $ | 85,801 | $ | 92,557 | $ | 59,024 | $ | (18,020 | ) | $ | 133,561 | ||||||||||||||
Interest expense | — | — | 10,266 | 10,266 | — | — | 15,490 | 15,490 | ||||||||||||||||||||||||
Earnings (loss) before income taxes | $ | 60,407 | $ | 38,988 | $ | (23,860 | ) | $ | 75,535 | $ | 92,557 | $ | 59,024 | $ | (33,510 | ) | $ | 118,071 | ||||||||||||||
Six months ended June 30, 2009: | ||||||||||||||||||||||||||||||||
Nine months ended September 30, 2009: | ||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 374,387 | $ | 172,982 | $ | 39,414 | $ | 586,783 | $ | 564,383 | $ | 263,243 | $ | 62,336 | $ | 889,962 | ||||||||||||||||
Intersegment revenue | 7,716 | 7,832 | 474 | 16,022 | 12,525 | 11,731 | 843 | 25,099 | ||||||||||||||||||||||||
Total revenue | $ | 382,103 | $ | 180,814 | $ | 39,888 | $ | 602,805 | $ | 576,908 | $ | 274,974 | $ | 63,179 | $ | 915,061 | ||||||||||||||||
Operating income (loss) | $ | 64,206 | $ | 28,732 | $ | (11,297 | ) | $ | 81,641 | $ | 94,884 | $ | 43,305 | $ | (17,576 | ) | $ | 120,613 | ||||||||||||||
Interest expense | — | — | 12,896 | 12,896 | — | — | 18,379 | 18,379 | ||||||||||||||||||||||||
Earnings (loss) before income taxes | $ | 64,206 | $ | 28,732 | $ | (24,193 | ) | $ | 68,745 | $ | 94,884 | $ | 43,305 | $ | (35,955 | ) | $ | 102,234 | ||||||||||||||
5. | Inventories |
At |
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6. | 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 | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
Service cost | $ | 469 | $ | 311 | $ | 944 | $ | 615 | $ | 473 | $ | 321 | $ | 1,417 | $ | 936 | ||||||||||||||||
Interest cost | 709 | 747 | 1,427 | 1,470 | 720 | 860 | 2,147 | 2,330 | ||||||||||||||||||||||||
Expected return on plan assets | (323 | ) | (271 | ) | (654 | ) | (522 | ) | (332 | ) | (353 | ) | (986 | ) | (875 | ) | ||||||||||||||||
Amortization of prior service cost | 753 | 456 | 1,506 | 911 | 753 | 457 | 2,259 | 1,368 | ||||||||||||||||||||||||
Amortization of actuarial loss | 118 | 52 | 236 | 102 | 118 | 66 | 354 | 168 | ||||||||||||||||||||||||
Defined benefit expense | $ | 1,726 | $ | 1,295 | $ | 3,459 | $ | 2,576 | $ | 1,732 | $ | 1,351 | $ | 5,191 | $ | 3,927 | ||||||||||||||||
During the three and |
7. | Comprehensive Income |
Comprehensive income is comprised of the following: |
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
Net earnings | $ | 28,685 | $ | 25,819 | $ | 52,152 | $ | 47,426 | $ | 29,217 | $ | 22,829 | $ | 81,369 | $ | 70,255 | ||||||||||||||||
Currency translation adjustments | (46,428 | ) | 46,665 | (72,551 | ) | 19,685 | 61,110 | 17,590 | (11,441 | ) | 37,274 | |||||||||||||||||||||
Net unrealized (loss) gain on cash flow hedges | (440 | ) | (60 | ) | (111 | ) | 60 | |||||||||||||||||||||||||
Net unrealized gain (loss) on cash flow hedges | 390 | (178 | ) | 279 | (118 | ) | ||||||||||||||||||||||||||
Net comprehensive (loss) income | $ | (18,183 | ) | $ | 72,424 | $ | (20,510 | ) | $ | 67,171 | ||||||||||||||||||||||
Net comprehensive income | $ | 90,717 | $ | 40,241 | $ | 70,207 | $ | 107,411 | ||||||||||||||||||||||||
8. | Cash Flows from Operating Activities |
Cash flows from operating activities are detailed below: |
Six Months Ended | Nine Months Ended | |||||||||||||||
June 30, | September 30, | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net earnings | $ | 52,152 | $ | 47,426 | $ | 81,369 | $ | 70,255 | ||||||||
Adjustments to arrive at net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 21,728 | 21,015 | 32,774 | 31,458 | ||||||||||||
Share-based compensation | 1,515 | 1,047 | 1,557 | 1,087 | ||||||||||||
Loss on assets | 735 | 616 | 1,037 | 1,596 | ||||||||||||
Deferred income taxes | 1,800 | 1,374 | 5,848 | 1,847 | ||||||||||||
Changes in operating assets and liabilities | (13,744 | ) | (16,033 | ) | (12,040 | ) | (7,660 | ) | ||||||||
Net cash provided by operating activities | $ | 64,186 | $ | 55,445 | $ | 110,545 | $ | 98,583 | ||||||||
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9. | Derivative Instruments and Hedging Activity |
The Company may use derivative instruments for the purpose of hedging currency, commodity and interest rate exposures, which exist as part of ongoing business operations. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes. Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged transaction. Hedge accounting, which generally results in the deferral of derivative gains and losses until such time as the underlying transaction is recognized in net earnings, is permitted only if the hedging relationship is expected to be highly effective at the inception of the transaction and on an ongoing basis. Any ineffective portions are recognized in earnings immediately. |
The Company manages its exposure to foreign exchange risk by the use of forward exchange contracts and foreign currency denominated debt to reduce the effect of fluctuating foreign currencies on short-term foreign currency denominated intercompany transactions, non-functional currency raw material purchases, non-functional currency sales and other known foreign currency exposures. These derivatives may or may not be designated as hedges under ASC 815,Derivatives and Hedging.These forward exchange contracts have maturities of less than twelve months. The Company’s primary hedging activities and their accounting treatment are summarized below: |
Forward contracts designated as cash flow hedges— The forward exchange contracts that have been designated as hedges are accounted for as cash flow hedges. The Company had | |||
Forward contracts not designated as cash flow hedges | |||
Net investment hedges— The Company has certain debt denominated in Euros and Swiss Francs. These debt instruments have been designated as partial hedges of the Company’s Euro and Swiss Franc net asset positions. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in OCI. As of |
7
10. | Income Taxes |
The effective income tax rates for the quarters ended |
11. | Subsequent Events |
The Company performed an evaluation of subsequent events through the date these financial statements were issued. |
12. | Commitments and Contingencies |
Environmental Matters |
The Company is involved in various significant environmental matters, which are described below. The Company is also involved in other site closure and related environmental remediation and compliance activities at a manufacturing site related to a 2001 acquisition by the Company for which reserves for environmental matters were established as of the date of purchase. |
In 2004, the Environmental Protection Agency (“EPA”) notified the Company’s subsidiary Sensient Colors Inc. (“Sensient Colors”), formerly H. Kohnstamm & Co., 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 Company has also been involved in a dispute with the owner of Pleasant Gardens, an apartment complex adjacent to the General Color Superfund Site, and with certain agencies of the State of New Jersey relating to the Pleasant Gardens property. From the time it was notified of these claims until late 2009, Sensient vigorously defended its interests in this litigation. Sensient pursued additional PRP’s and it asserted numerous challenges to the recovery of the costs claimed in each matter. In the fourth quarter of 2009, Sensient Colors and its insurers met with the United States and the parties involved in the Pleasant Gardens dispute and ultimately agreed to a settlement in principle to resolve the matters. As a result of the proposed settlements, Sensient’s results for the quarter and year ended December 31, 2009 included pre-tax charges for estimated settlement liabilities and related legal costs, net of insurance reimbursements, of approximately $11.3 million. Additional information on these matters is included in Part II, Item I of this filing. |
Since December 31, 2009, the Company has made payments and received |
Commercial Litigation |
Cherry Blossom Litigation |
In June 2009, Sensient sued one of its product vendors, Cherry Blossom LLC (“Cherry Blossom”), a supplier of processed cherry products in Michigan, when Cherry Blossom prepared to close its facility and refused to return to Sensient raw cherries to which Sensient held title. Sensient sued for conversion, breach of contract, possession of the cherries, and money damages of approximately |
Cherry Blossom counter-claimed against Sensient, primarily relating to ownership of |
8
Cherry Blossom moved for an injunction to prohibit Sensient from using its cherry processing formulas. The |
8
Crossroads Debt, LLC (“Crossroads”), a secured lender to Cherry Blossom, intervened in the case and asserted multiple claims against Cherry Blossom related to Cherry Blossom’s $1.4 million debt to Crossroads. |
Crossroads also asserted cross-claims against Sensient related to offsets Sensient took against its payments to Cherry Blossom for the processed cherry product Sensient purchased from Cherry Blossom. |
Under Sensient’s contract with Cherry Blossom, Cherry Blossom would purchase Sensient’s raw cherries for use in making finished cherry product. Sensient then purchased the finished product from Cherry Blossom at a purchase price reduced by setoffs for the amount Cherry Blossom owed Sensient for raw cherries. Eventually, Cherry Blossom directed Sensient to make payments directly to Crossroads, which Sensient did for about seven months, until Cherry Blossom ceased operations. |
At a mediation on March 24, 2010, Crossroads claimed for the first time that because Sensient paid for the finished cherry product by offsetting antecedent debt, Sensient was not a “buyer in the ordinary course of business” as defined by the Uniform Commercial Code. As a result, Crossroads claimed that Sensient was not entitled to take such offsets because Crossroads claimed it had a perfected senior lien on the offset funds. Crossroads sought the imposition of a constructive trust over $1.4 million of such funds and a judgment requiring their return by Sensient. The total exposure could have exceeded this amount due to interest. |
In addition, Sensient asserted indemnification claims against Crossroads related to a US Department of Labor “hot goods” issue. The US Department of Labor prohibited Sensient from selling in interstate commerce cherries made by Cherry Blossom’s employees and for which Sensient had paid Cherry Blossom because Cherry Blossom failed to pay its employees their wages earned when they processed the cherries. |
Crossroads moved for summary disposition on April 12, 2010, based on the Uniform Commercial Code argument it raised at |
On May 27, 2010, Cherry Blossom filed a bankruptcy petition in U.S. Bankruptcy Court for the Western District of Michigan. Such filing triggered an automatic stay of all litigation pending against Cherry Blossom, including the instant case. The state |
The bankruptcy trustee |
On October 1, 2010, Cherry Blossom moved the Court to approve its sale of the unfinished cherry inventory and finished cherry product to Northpoint LLC. Crossroads and Sensient opposed Cherry Blossom’s motion for two reasons. First, Cherry Blossom had no interest in the inventory and product. Second, Crossroads had already entered into an agreement to sell the inventory and product to Leelanau Fruit Company. The proceeds of the sale to Leelanau will be deposited with the Court and then paid to either Crossroads or Sensient following the Court’s determination as to who has a superior interest in the subject inventory and product. Crossroads, in turn, moved the Court for an order allowing Crossroads and Leelanau to inspect the inventory and product so that the sale to Leelanau may proceed. |
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S.A.M. (Amaral) v. Sensient Technologies Corp., et al. |
On August 5, 2010, the owners and operators of a 135-acre vineyard near the dehydration facility formerly operated by Sensient Dehydrated Flavors, LLC (“SDF”) in Greenfield, California filed a lawsuit in California state court in Monterey, California. The lawsuit names as defendants both Sensient Technologies Corporation (“Sensient”) and SDF and a response to the complaint was filed on October 1. The suit sets out claims for nuisance per se, trespass and negligence per se and alleges almost a million dollars in losses plus punitive damages, all based on the fact that, |
This lawsuit follows an earlier lawsuit (J. Lohr Vineyards and Wines v. Sensient Technologies) (the “Lohr lawsuit”) brought by a larger, adjacent landowner. The Lohr lawsuit was settled in December, 2009, with an agreement that included SDF’s abandonment of onion processing at its Greenfield facility but did not require the payment of any settlement amount to Lohr despite Lohr’s substantial damage claims. The S.A.M. plaintiffs have essentially copied, and seek to rely upon, the factual allegations and expert analyses developed in the Lohr lawsuit before a settlement was reached. The S.A.M. plaintiffs will |
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. |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW |
Revenue for the |
The gross profit margin increased 50 basis points to 31.2% for the quarter ended September 30, 2010, from 30.7% for the same period in 2009. Gross profit margin was increased by higher selling prices in certain products that more than offset higher raw material costs for those products. Gross profit margin also benefited from favorable product mix. For the nine months ended September 30, 2010, the gross profit margin increased 20 basis points to |
certain dehydrated flavors. | ||
Selling and administrative expenses as a percent of revenue were |
increase, partially reduced by the insurance proceeds mentioned above. | ||
Interest expense for the |
The effective income tax rates were 31.3% and 31.8% for the quarters ended September 30, 2010 and 2009, respectively. The effective income tax rates were 31.1% and 31.3% for the |
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SEGMENT INFORMATION | ||
Flavors & Fragrances — | ||
Revenue for the Flavors & Fragrances segment in the |
increased selling prices. | ||
For the |
For the |
The higher revenue in Europe was primarily due to increased volumes and selling prices. | ||
Operating income was |
volumes and selling prices combined with lower raw material costs. The higher profit in Latin America was primarily due to higher selling prices and lower raw material costs. | ||
Color — | ||
Revenue for the Color segment in the |
Operating income for the quarter ended |
The Color Group revenue increased |
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Operating income was |
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revenue discussed above. Operating income as a percent of revenue was |
LIQUIDITY AND FINANCIAL CONDITION |
The Company’s ratio of debt to total capital improved to |
Net cash provided by operating activities was |
Net cash used in investing activities was |
Net cash used in financing activities was |
The Company’s financial position remains strong. |
The Company is in compliance with all of its loan covenants as of September 30, 2010. | ||
The Company completed its annual goodwill impairment test under ASC 350,Intangibles — Goodwill and Other, in the third quarter of 2010. In conducting its annual test for impairment, the Company estimates the fair value for each of its reporting units and compares each of these values to the net book value of each reporting unit. Fair value is estimated using both a discounted cash flow analysis and an analysis of comparable company market values. If the fair value of a reporting unit exceeds its net book value, no impairment exists. The Company has three reporting units that were tested for impairment. The Flavors and Fragrances reporting unit and the Asia Pacific reporting unit have fair values that were over 100% above their respective net book values. The Color reporting unit has a fair value that is over 30% above its net book value. | ||
CONTRACTUAL OBLIGATIONS |
There have been no material changes in the Company’s contractual obligations during the quarter ended |
OFF-BALANCE SHEET ARRANGEMENTS |
The Company had no off-balance sheet arrangements as of |
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CRITICAL ACCOUNTING POLICIES |
There have been no material changes in the Company’s critical accounting policies during the quarter ended |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in the Company’s exposure to market risk during the quarter ended |
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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 Company’s Chairman and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report, of the design and operation of the disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act of 1934. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and its Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. |
Change in Internal Control Over Financial Reporting: |
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, statements referring to any period after |
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PART II. | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS |
Superfund Claim |
In July 2004, the Environmental Protection Agency (“EPA”) notified the Company’s 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 Company’s 1988 stock purchase of H. Kohnstamm & Company, Inc. (now Sensient Colors). The selling shareholders had retained ownership of and liability for the Site, and some became owners of General Color Company, which continued to operate there until the mid-1990s. In a letter to the EPA in January 2005, the Company outlined legal challenges to the recoverability of certain costs and urged the EPA to pursue General Color Company and related parties. The EPA informed Sensient Colors that it was unwilling to discuss these legal challenges without prior conditions. In 2005, a private developer, Westfield Acres Urban Renewal Association II, LP, pursuant to an agreement with the EPA, began redevelopment efforts at the Site (construction of affordable housing) by demolishing buildings thereon. Thereafter, the EPA removed allegedly contaminated soil from the locations where the buildings once stood. |
In March 2007, the United States filed a complaint in the U.S. District Court in New Jersey against Sensient Colors claiming “over $16 million” in response costs allegedly incurred and to be incurred by the EPA pursuant to CERCLA. Sensient Colors moved to dismiss the United States’ complaint, which motion was denied by the Court in October 2007. Sensient Colors timely filed its answer and affirmative defenses to the United States’ complaint, as well as a third-party complaint against current and former owners and/or operators of the Site. The United States moved to strike Sensient Colors’ affirmative defenses. In an August 12, 2008 Opinion and Order, following briefs and oral argument, the Court partly granted and partly denied the United States’ motion, effectively preserving most of Sensient Colors’ affirmative defenses, either as originally pled or with changes outlined by the Court. Sensient Colors promptly filed an amended pleading incorporating the revised affirmative defenses. On July 29, 2008, Sensient Colors filed a third-party complaint adding Kohnstamm Inc. (a Canadian affiliate of General Color Company) and its president Avtar Singh as defendants. |
In late August 2008, in the course of reviewing documents produced by the EPA, Sensient Colors discovered an e-mail exchange between EPA officials that Sensient Colors believes supports many of the legal theories and affirmative defenses advanced by Sensient Colors in the litigation and undermines key United States cost recovery claims. By letter dated August 26, 2008, based on the above document and other evidence adduced in the case, Sensient Colors demanded that the United States dismiss its case with prejudice and reimburse Sensient Colors for attorneys’ fees and costs incurred. In response to the August 26, 2008 letter, the United States withdrew, without prejudice, its then-pending motion to limit the scope of review to EPA’s administrative record and told the Court that it would respond to Sensient’s 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 EPA’s choice of response action to the administrative record. |
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Using the evidence that supports its demand for dismissal, Sensient Colors moved for leave to amend its responsive pleading to include a new affirmative defense, a counterclaim against the United States and the EPA, and third-party claims against certain EPA employees or agents. After briefing, the motion for leave to amend was argued before the magistrate judge on November 18, 2008. On February 13, 2009, the magistrate issued an opinion and order denying Sensient Colors’ motion for leave to amend. Sensient Colors appealed the magistrate’s decision to the district court judge. On July 22, 2009, the district court judge issued a decision affirming the magistrate’s opinion and order, largely on sovereign immunity grounds. |
Sensient Colors also issued subpoenas or deposition notices to numerous current or former EPA officials. Motions were filed to block the depositions of former EPA Administrator Christine Todd Whitman, former EPA |
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Regional Administrator Jane Kenny, and EPA On-Scene Coordinator David Rosoff. On January 28, 2009, the magistrate judge issued an opinion and order denying or delaying Sensient Color’s ability to conduct the foregoing depositions. Sensient Colors exercised its right to appeal the magistrate’s decision to the district court judge. On July 22, 2009, the district court judge issued a decision reversing the magistrate and ordering the depositions of Kenny and Rosoff to proceed. |
On May 8, 2009, Sensient Colors filed a motion for summary judgment seeking dismissal with prejudice of the United States’ claims. |
Prior to arguing the summary judgment motion and to scheduling the depositions of the current and former EPA officials, the United States and Sensient Colors agreed to meet with each other, with the parties involved in the Pleasant Gardens dispute described below and with interested insurers to determine if a resolution short of trial was possible. The parties met and ultimately agreed to a settlement in principle to resolve the matter by specified payments among the parties and their insurers. As a result of the proposed settlements, Sensient’s results for the quarter and year ended December 31, 2009 included pre-tax charges for estimated settlement liabilities and related legal costs, net of insurance reimbursements, of approximately $11.3 million. In July 2010, the U.S. District Court in New Jersey approved the consent decree with the United States. Sensient Colors and the third-party defendants |
third-party claims, which were then dismissed by the Court pursuant to Consent Orders. On August 4, 2010, the Court closed the case. | ||
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 |
Sensient Colors advised the Court and the other parties in this litigation of the developments in the Superfund Claim as described above. Sensient Colors took supplemental depositions of several DEP officials and served subpoenas upon five current or former EPA officials. The United States, though not a party to the Pleasant Gardens case, initially sought to quash those subpoenas before the Pleasant Gardens court. On November 17, 2008, the United States removed the subpoenas and related proceedings to federal court. At an initial court conference on the removed proceedings on February 19, 2009, the federal magistrate judge asked for additional briefing on the issue of the government’s standing to seek to quash the state court subpoenas. In |
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September 2009, the federal magistrate judge ordered that former EPA officials could be deposed but only as to “individual” and not “official” matters. Sensient Colors appealed this decision to the district court judge. |
On January 8, 2009, the state court judge recused himself from the Pleasant Gardens case (as well as the related insurance coverage case) because of a conflict of interest and the Pleasant Gardens case was reassigned to another judge. In light of the recusal and reassignment, the new judge re-scheduled the trial to commence no earlier than June 1, 2009, and indicated that depending on how certain outstanding discovery issues were resolved, the trial might be deferred further. On April 20, 2009, the court further extended the pretrial schedule and set a trial date for October 5, 2009. On July 24, 2009, Sensient Colors filed a motion for summary judgment on the grounds that the DEP’s proposed remedy was arbitrary and capricious. At a conference held on September 18, 2009, the state court judge ordered that discovery be completed before |
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November 15, 2009, that dispositive motions be heard on December 11, 2009, and that the trial commence on February 8, 2010. The judge also ordered that mediation occur before November 15, 2009. |
As described above, Sensient Colors met with the parties to the Pleasant Gardens litigation, to the Superfund claims described above and their respective insurers, and they ultimately agreed to a settlement to resolve the matter by specified payments among the parties and their insurers. As a result of the settlements, Sensient’s results for the quarter and year ended December 31, 2009, included pre-tax charges for estimated settlement liabilities and related legal costs, net of insurance reimbursements, of approximately $11.3 million. The settlement of the Pleasant Gardens litigation was memorialized in a consent decree that was approved by the Superior Court of New Jersey after an opportunity for public comment. |
The Agency and the NJSDA have been remediating the Property with reimbursement from the funds held by the Court in escrow. Should the remediation cost less than the escrowed amount, the balance of the escrow should be paid to Sensient Colors. | ||
Commercial Litigation |
Cherry Blossom Litigation | ||
In June 2009, Sensient sued one of its product vendors, Cherry Blossom LLC (“Cherry Blossom”), a supplier of processed cherry products in Michigan, when Cherry Blossom prepared to close its facility and refused to return to Sensient raw cherries to which Sensient held title. Sensient sued for conversion, breach of contract, possession of the cherries, and money damages of approximately |
claim. | ||
Cherry Blossom counter-claimed against Sensient, primarily relating to ownership of |
Crossroads Debt, LLC (“Crossroads”), a secured lender to Cherry Blossom, intervened in the case and asserted multiple claims against Cherry Blossom related to Cherry Blossom’s $1.4 million debt to Crossroads. |
Crossroads also asserted cross-claims against Sensient related to offsets Sensient took against its payments to Cherry Blossom for the processed cherry product Sensient purchased from Cherry Blossom. |
Under Sensient’s contract with Cherry Blossom, Cherry Blossom would purchase Sensient’s raw cherries for use in making finished cherry product. Sensient then purchased the finished product from Cherry Blossom at a purchase price reduced by setoffs for the amount Cherry Blossom owed Sensient for raw cherries. Eventually, Cherry Blossom directed Sensient to make payments directly to Crossroads, which Sensient did for about seven months, until Cherry Blossom ceased operations. |
At a mediation on March 24, 2010, Crossroads claimed for the first time that because Sensient paid for the finished cherry product by offsetting antecedent debt, Sensient was not a “buyer in the ordinary course of business” as defined by the Uniform Commercial Code. As a result, Crossroads claimed that Sensient was not entitled to take such offsets because Crossroads claimed it had a perfected senior lien on the offset funds. Crossroads sought the imposition of a constructive trust over $1.4 million of such funds and a judgment requiring their return by Sensient. The total exposure could have exceeded this amount due to interest. |
In addition, Sensient asserted indemnification claims against Crossroads related to a US Department of Labor “hot goods” issue. The US Department of Labor prohibited Sensient from selling in interstate commerce cherries made by Cherry Blossom’s employees and for which Sensient had paid Cherry Blossom because Cherry Blossom failed to pay its employees their wages earned when they processed the cherries. |
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Crossroads moved for summary disposition on April 12, 2010, based on the Uniform Commercial Code argument it raised at |
On May 27, 2010, Cherry Blossom filed a bankruptcy petition in U.S. Bankruptcy Court for the Western District of Michigan. Such filing triggered an automatic stay of all litigation pending against Cherry Blossom, including the instant case. The state court determined that the automatic stay in Cherry Blossom’s bankruptcy case did not prevent |
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Sensient’s favor. The |
The bankruptcy trustee | ||
On October 1, 2010, Cherry Blossom moved the Court to approve its sale of the unfinished cherry inventory and finished cherry product to Northpoint LLC. Crossroads and Sensient opposed Cherry Blossom’s motion for two reasons. First, Cherry Blossom had no interest in the inventory and product. Second, Crossroads had already entered into an agreement to sell the inventory and product to Leelanau Fruit Company. The proceeds of the sale to Leelanau will be deposited with the Court and then paid to either Crossroads or Sensient following the Court’s determination as to who has a superior interest in the subject inventory and product. Crossroads, in turn, moved the Court for an order allowing Crossroads and Leelanau to inspect the inventory and product so that the sale to Leelanau may proceed. |
now scheduled to be sold to Leelanau. | ||
S.A.M. (Amaral) v. Sensient Technologies Corp., et al. | ||
On August 5, 2010, the owners and operators of a 135-acre vineyard near the dehydration facility formerly operated by Sensient Dehydrated Flavors, LLC (“SDF”) in Greenfield, California filed a lawsuit in California state Court in Monterey, California. The lawsuit names as defendants both Sensient Technologies Corporation (“Sensient”) and SDF and a response to the complaint was filed on October 1. The suit sets out claims for nuisance per se, trespass and negligence per se and alleges almost a million dollars in losses plus punitive damages, all based on the fact that, between the summer of 2007 and early October, 2009, SDF was processing onions that allegedly caused an “onion taint” in the grapes and wine produced from the plaintiffs’ vineyard. While SDF had an air permit covering its operations, its Monterey County use permit specifically named only chili peppers, celery and parsley, but not onions, as commodities that could be dehydrated at the Greenfield facility. SDF’s effort to modify the Greenfield facility’s use permit to specifically include the processing of onions was blocked by local vineyard owners, and SDF has since closed its Greenfield facility and consolidated its onion dehydration operations at its fully-permitted and more efficient facility at Livingston, California. | ||
This lawsuit follows an earlier lawsuit (J. Lohr Vineyards and Wines v. Sensient Technologies) (the “Lohr lawsuit”) brought by a larger, adjacent landowner. The Lohr lawsuit was settled in December, 2009, with an agreement that included SDF’s abandonment of onion processing at its Greenfield facility but did not require the payment of any settlement amount to Lohr despite Lohr’s substantial damage claims. The S.A.M. plaintiffs have essentially copied, and seek to rely upon, the factual allegations and expert analyses developed in the Lohr lawsuit before a settlement was reached. The S.A.M. plaintiffs will not, however, be receiving any assistance from Lohr. Sensient and SDF believe the S.A.M. plaintiffs’ claims are without merit and intend to pursue a vigorous defense. No trial date has been set yet in this case. | ||
The Company is involved in various other claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information from Company counsel, the ultimate resolution of these actions will not materially affect the consolidated financial statements of the Company except as described above. |
ITEM 1A. | RISK FACTORS |
See “Risk Factors” in Item 1A of the Company’s annual report on Form 10-K for the year ended December 31, 2009. |
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SENSIENT TECHNOLOGIES CORPORATION | ||||
Date: | By: | /s/ John L. Hammond | ||
John L. Hammond, Senior Vice President, | ||||
General Counsel & Secretary | ||||
Date: | By: | /s/ Richard F. Hobbs | ||
Richard F. Hobbs, Senior Vice | ||||
President & Chief Financial Officer | ||||
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Incorporated by Reference | ||||||
Exhibit | Description | From | Filed Herewith | |||
10.1 | Separation Agreement with Former Officer | X | ||||
31 | Certifications of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act | X | ||||
32 | Certifications of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer pursuant to 18 United States Code § 1350 | X |
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