UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     For the quarterly period ended March 31, 2004

OR

     For the transition period from _______ to _______

Commission file number 000-31167

Genencor International, Inc.

925 Page Mill Road
Palo Alto, California 94304
(650) 846-7500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

     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 report(s), and (2) has been subject to such filing requirements for the past 90 days

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

TABLE OF CONTENTS

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     Unless otherwise specified, all references to the “Company,” “we,” “us,” “our,” and “ourselves” refer to Genencor International, Inc. or Genencor International, Inc. and its subsidiaries collectively, as appropriate in the context of the disclosure.

     This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements concerning plans, objectives, goals, strategies, future events or performance and all other statements which are other than statements of historical fact, including without limitation, statements containing the words “believes,” “anticipates,” “expects,” “estimates,” “intends,” “plans,” “projects,” “will,” “may,” “might,” and words of a similar nature. The forward-looking statements contained in this Report reflect the Company’s current beliefs and expectations on the date of this Report. Actual results, performance or outcomes may differ materially from those expressed in the forward-looking statements. Some of the important factors which, in the view of the Company, could cause actual results to differ from those expressed in the forward-looking statements are discussed in Part I, Item 2 of this Report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The Company disclaims any obligation to update any forward-looking statement to reflect facts or circumstances after the date hereof.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(Amounts in thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated unaudited financial statements.

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated unaudited financial statements.

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

The accompanying notes are an integral part of the condensed consolidated unaudited financial statements.

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

1 — Basis of Presentation

     The condensed consolidated unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes for the year ended December 31, 2003, as included in the Company’s Annual Report on Form 10-K. These interim financial statements have been prepared in conformity with the rules and regulations of the U.S. Securities and Exchange Commission. Certain disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations pertaining to interim financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for fair presentation of the interim financial statements have been included therein. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.

2 — New Accounting Pronouncements

     In December 2003, the Financial Accounting Standards Board (FASB) issued a revision of Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised Statement provides required disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency in financial statements. The revised Statement replaces existing year-end and interim disclosure requirements. This Statement was in effect for the Company’s fiscal year ending December 31, 2003 and for quarters beginning thereafter for domestic plans, and will be effective for fiscal years ending after June 15, 2004 for the Company’s foreign plans.

     In January 2004, the FASB issued FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” This Position permits employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act). Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the sponsor of such a plan to change previously reported information. The Company’s financial statements do not reflect any implications of the Act due to the level of uncertainty about the forthcoming guidance.

3 — Pension Plans

     A summary of the components of net periodic pension cost, a non-cash item, for the three months ended March 31 is as follows:

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4 — Earnings Per Share

     SFAS No. 128, “Earnings per Share,” requires the disclosure of basic and diluted earnings per share. Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. In arriving at net income available to holders of common stock, undeclared and unpaid dividends on redeemable preferred stock of $1,819 were deducted from net income for each quarter presented.

     Diluted earnings per common share reflects the potential dilution that could occur if dilutive securities and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income available to holders of common stock of the Company. As a result of stock options outstanding under the Company’s 2002 Omnibus Incentive Plan and its predecessor plan, the Company’s Stock Option and Stock Appreciation Right Plan, there were dilutive securities for the three months ended March 31, 2004 and 2003. The weighted-average impact of these has been reflected in the calculation of diluted earnings per common share for the respective periods presented.

     The following table reflects the calculation of basic and diluted earnings per common share for the three months ended March 31:

5 — Stock-Based Compensation

     The Company adopted the provisions of SFAS No. 148. The Company uses the intrinsic value method to account for stock-based employee compensation in accordance with Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees.”

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     On a pro forma basis, had compensation cost for the Company’s stock option plans been determined based on the weighted average fair value at the grant date, the Company’s net income and earnings per share would have been reduced to the pro forma amounts shown below:

     The pro forma figures in the preceding table may not be representative of pro forma amounts in future quarters.

6 — Inventories

     Inventories consist of the following:

     The Company sustained damage to its finished bioproducts inventory in the second quarter of 2003 as a result of an accident in a third party warehouse in Rotterdam, the Netherlands. At the end of the first quarter of 2004, the Company reached a final settlement of its accident-related claim with its insurer totaling approximately $21,000. This final settlement resulted in a net gain of $8,290 for the quarter. Of the total settlement, Genencor has received cash payments of approximately $9,350 from its insurer through March 31, 2004.

7 — Goodwill and Other Intangible Assets

     In accordance with the provisions of SFAS No. 142, the Company does not amortize goodwill or other intangible assets with indefinite useful lives. The Company has identified such other indefinite-lived intangible assets to include certain previously acquired technology. The Company periodically evaluates its indefinite-lived intangible assets for impairment in accordance with the provisions of SFAS No. 142. The Company also has other intangible assets, such as patents, licenses, and customer lists, which will continue to be amortized using the straight-line method. These assets are expected to have no residual value once they are fully amortized.

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     The following table summarizes the changes in each major class of intangible assets from January 1, 2004 through March 31, 2004:

     Estimated fiscal year amortization expense is as follows:

8 —Stockholders’ Equity

     Accumulated other comprehensive loss consists of the following:

     The change in the marketable securities valuation adjustment for the three months ended March 31, 2004 of $550 ($873 pre-tax) relates to unrealized holding gains on the Company’s available-for-sale securities.

9 — Income Taxes

     The effective income tax rate for the three months ended March 31, 2004 was 20% compared to 32% for the three months ended March 31, 2003, which reflects the Company’s assessment of its annual effective income tax rate. Factors affecting the Company’s estimated annual effective income tax rate include increased research and development expenditures in the United States, the statutory income tax rates and mix of earnings among tax jurisdictions, amortization of certain intangible assets and other items which are not deductible for tax purposes, and research and experimentation tax credits. In addition, the estimated annual effective rate in the three months ended March 31, 2003 included the effect of estimated valuation allowances, since the Company did not anticipate having the ability to utilize certain tax credits.

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10 — Fees and Royalty Revenues

     The decrease in fees and royalty revenues of $2,799 for the three months ended March 31, 2004 from the three months ended March 31, 2003 was primarily due to the completion of the initial stages of our strategic alliance for the development of new biomaterials with the Dow Corning Corporation.

11 — Segment Reporting

     In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” segments were determined based on products and services provided by each segment. Accounting policies for the segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Performance of the segments is evaluated based on operating income of the segment. No items below operating income are allocated to the segments. The Company accounts for transactions, if any, between the segments as though they were transactions with third parties at approximate market prices. There were no material inter-segment transactions in the periods presented. The Company’s managerial financial reporting reflects two operating segments: Bioproducts and Health Care.

     The Bioproducts segment develops and delivers products and services to the industrial, consumer and agri-processing markets to a global customer base. All of the Company’s current product revenues are derived from this segment.

     The Health Care segment is focused on expanding the Company’s current technology and product platforms into the health care market. This segment is primarily engaged in the performance of research and development, the securing of intellectual property and the establishment of strategic investments and collaborations.

     The following table provides information by business segment:

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     The following table provides a reconciliation of segment information to total consolidated information:

12 — Technology Transfer

     During March 2004, the Company sold its therapeutic vaccine program to Innogenetics N.V. Upon transfer of certain intellectual property, contractual relationships and technologies to Innogenetics, the Company expects to recognize license fees in the second or third quarter of 2004 totaling $10,000. The Company expects to receive further payments as development milestones are achieved. Once products are commercialized, the Company would also receive royalty payments on further product sales.

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

     The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements included in our 2003 Annual Report on Form 10-K and the condensed consolidated unaudited financial statements and related notes included elsewhere in this Report.

Executive Summary

      Leveraging over twenty years of experience, we use our molecular technologies to develop products and deliver services for varied markets, some on a global basis. Since our research and commercial expertise and competencies are at the molecular level we can produce products and deliver services to many different types of industries. Our current revenues result primarily from the sale of enzyme products as ingredients or processing aids to the cleaning, textiles, sweeteners, fuel ethanol and food, feed and specialties markets, and from research funding, fees and royalties. In the three months ended March 31, 2004, we expended $11.0 million on our Bioproducts research and development programs. In addition to developing products for our current Bioproduct markets, we are now involved in Bioproduct research projects and programs that are directed toward providing new products and services in the emerging fields of biomaterials, biochemicals and nanobiotechnology. Furthermore, we expended $5.9 million in the first quarter of 2004 on our Health Care programs. We believe that this diversification of our research and development expenditures will increase the probability of achieving success in our commercial portfolio and result in increased value for our stockholders.

      Overall, for the three months ended March 31, 2004, net income available to common stockholders was $11.2 million, or $0.18 per diluted share, compared to $4.7 million or $0.08 per diluted share during the same period in 2003. Product revenues increased by 2% to $91.5 million, compared to $90.0 million in the first quarter of 2003. Total revenues for the three months ended March 31, 2004 were $94.4 million, compared to $95.7 million for the same period in 2003. Fees and royalty revenues were $2.8 million in the first quarter as compared to $5.6 million in the prior year. For the three months ended March 31, 2004, we generated $16.9 million in operating income and $6.3 million in cash flow from operations. We also invested $3.7 million in purchases of property, plant and equipment and made the third of five annual installment payments of $28.0 million on our senior debt during the quarter.

      Our Bioproducts segment continues to generate all of our product revenues. In the three months ended March 31, 2004, product revenue growth was 2%, reflecting the benefits of foreign currency translation and the impact of on-going profitability improvement initiatives, including the selective pruning of specific product lines. First quarter revenue growth was also impacted by the timing of certain customer orders and our integration and rationalization of our year-end 2002 acquisition of the brewing and enzyme business of Rhodia Food UK Limited, including the disposition of non-enzyme product lines in mid-2003. We manufacture our products at our eight Bioproducts manufacturing facilities located in the United States, Finland, Belgium, China and Argentina. We conduct our sales and marketing activities through our direct sales organizations in the United States, the Netherlands, Singapore, Japan, China, United Kingdom and Argentina and through other distribution channels in selected markets and geographies. For the three months ended March 31, 2004, we derived approximately 55% of our revenues from our foreign operations.

      During the first quarter, we also made significant progress on new applications within the Bioproducts segment. In the area of biodefense, we obtained an exclusive license from the U.S. Army Edgewood Chemical and Biological Center for the manufacture and sale of enzymes to decontaminate certain organophosphate-based nerve agents, such as sarin. While neutralizing chemical agents, these enzymes are non-toxic, non-corrosive and environmentally benign. We believe these products may generate initial revenues later this year. In addition, working closely with the Health Protection Agency in the United Kingdom, we have made significant progress in the development of an e