Sensient Technologies - 10-Q quarterly report FY

The fair values of the Company’s derivatives are recorded in the Company’s consolidated balance sheet as follows:

The effect of the Company’s cash flow hedges on the Company’s Statement of Earnings is as follows:

Over the next twelve months, the Company expects to reclassify $106,000 from OCI into net earnings.

Revenue for the first quarter of 2009 was $282.8 million, a decrease of 8.0% from $307.4 million recorded in the prior year first quarter. The impact of foreign exchange rates reduced consolidated revenue by 9.4% in the current quarter. Revenue for the Flavors & Fragrances segment decreased 4.5% for the quarter ended March 31, 2009, from the comparable quarter last year. First quarter revenue for the Color segment decreased 15.3% from the first quarter of 2008. Corporate and Other revenue decreased 10.9% for the quarter ended March 31, 2009, from the comparable quarter last year. The impact of foreign exchange rates decreased revenue for the Flavors & Fragrances Group by 8.7%, the Color Group by 10.7% and Corporate and Other by 10.5%. Additional information on group results can be found in the Segment Information section.

The gross profit margin decreased 50 basis points to 30.6% for the quarter ended March 31, 2009, from 31.1% for the same period in 2008. The Color Group experienced increased raw material costs in the quarter that were not fully offset by increases in selling prices. The Group expects to realize increases in selling prices and improvements in raw material costs beginning in the second quarter.

Selling and administrative expenses as a percent of revenue were 17.0% in the first quarter of 2009 compared to 18.2% in the comparable 2008 quarter. The decrease is due to the Company’s continued focus on controlling selling and administrative expenses combined with lower expense for performance based compensation.

Operating income for the quarter ended March 31, 2009, was $38.4 million, a decrease of 3.2% from $39.6 million for the first quarter of 2008. The impact of foreign exchange rates reduced operating income by 11.6% in the quarter. The change in operating income was due to the revenue, margin and expense changes discussed above. Additional information can be found in the Segment Information section.

Interest expense for the first quarter of 2009 was $7.2 million, a decrease of 15.5% from the prior year’s quarter. The decrease in the quarter was the result of lower average debt balances and lower interest rates.

The effective income tax rates were 30.6% and 33.4% for the quarters ended March 31, 2009 and 2008, respectively. The effective tax rate for the first quarter of 2009 was reduced by changes in estimates associated with the finalization of prior year foreign income tax returns. The effective tax rate for the first quarter of 2008 was increased by changes in estimates associated with the finalization of prior year income tax returns. Management expects the effective tax rate for the remainder of 2009 to be 32.5%, excluding the income tax expense or benefit related to discrete items, which will be reported separately in the quarter in which they occur.

Beginning in the first quarter of 2009, the Company’s operations in Japan, previously reported in Flavors & Fragrances Group, are reported with the Asia Pacific Group. The Asia Pacific Group is included in the Corporate and Other segment. Results for 2008 have been restated to reflect this change.

Revenue for the Flavors & Fragrances segment in the first quarter of 2009 decreased 4.5% to $184.5 million from $193.2 million for the same period last year. The unfavorable impact of foreign exchange rates reduced Group revenue by $16.8 million, or 8.7%, in the quarter. Excluding the impact of foreign exchange rates, increased revenue was reported in North America ($4.6 million), Europe ($2.0 million) and Latin America ($1.5 million) primarily as a result of higher selling prices and volumes in certain markets including Canada and Europe.

For the quarter ended March 31, 2009, operating income increased 4.0% to $30.0 million from $28.8 million last year. The increase was primarily attributable to higher profit in North America ($1.6 million), Europe ($0.7 million) and Latin America ($0.7 million). The unfavorable impact of exchange rates decreased operating income by approximately $2.3 million, or 8.1%. The increased profit in the above markets was primarily due to improved pricing partially offset by higher raw material and energy costs. Operating income as a percent of revenue was 16.2%, an increase of 130 basis points from the comparable quarter last year, primarily due to the reasons provided above.

Revenue for the Color segment for the first quarter of 2009 was $87.1 million compared to $102.8 million reported in the prior year’s first quarter. The decrease in revenue was primarily due to the unfavorable effect of foreign exchange rates ($11.0 million), lower sales of technical colors ($3.2 million) and lower sales of cosmetic colors ($1.7 million). Sales of food and beverage colors were up slightly in the quarter. The lower sales of technical and cosmetic colors were primarily due to lower volumes as a result of the current economic conditions.

Operating income for the quarter ended March 31, 2009, was $13.7 million versus $18.5 million in the comparable period last year. The decrease was primarily due to the unfavorable impact of foreign exchange rates ($2.1 million), lower profit from the sale of food and beverage colors ($1.8 million) and lower profit in cosmetic colors ($0.6 million). The lower profit in food and beverage colors was primarily driven by increased raw material costs. The Group expects margins will improve over the remainder of 2009 as a result of increased selling prices and reduced raw material costs. Operating income as a percent of revenue was 15.8% compared to 18.0% in the prior year’s quarter.

The Company’s ratio of debt to total capital improved to 36.7% as of March 31, 2009, from 37.0% as of December 31, 2008. The improvement was due to lower outstanding debt balances partially offset by lower equity.

Net cash provided by operating activities was $17.5 million for the quarter ended March 31, 2009, compared to $9.7 million for the comparable period last year. The increase in cash provided by operating activities was primarily due to less cash required to fund working capital increases in the first quarter of 2009 compared to the same period in 2008.

Net cash used in investing activities was $8.9 million and $10.6 million for the three months ended March 31, 2009 and 2008, respectively. Capital expenditures were $8.8 million and $12.1 million for the quarters ended March 31, 2009 and 2008, respectively.

Net cash used in financing activities was $9.0 million in the first quarter of 2009 compared to net cash provided by financing activities of $2.9 million for the quarter ended March 31, 2008. In the first quarter of 2009, net repayments on debt were $2.0 million compared to net proceeds from additional borrowings of debt $6.0 million for the first three months of 2008. For purposes of the cash flow statement, net changes in debt exclude the impact of foreign exchange rates. Dividends of $9.2 million and $8.6 million were paid during the three months ended March 31, 2009 and 2008, respectively, reflecting the Company’s higher dividend of $0.19 per share in the first quarter of 2009 compared to $0.18 per share in the same period in 2008. In the first quarter of 2009, the Company’s cash provided from operations was able to fund capital expenditures and pay dividends.

The Company’s financial position remains strong. In the first quarter of 2009, the Company borrowed under its term loan that was completed in October 2008. The proceeds from this term loan were used to retire maturing debt. The Company expects that its 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.

There have been no material changes in the Company’s contractual obligations during the quarter ended March 31, 2009. For additional information about contractual obligations, refer to page 23 of the Company’s 2008 Annual Report, portions of which were filed as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The Company had no off-balance sheet arrangements as of March 31, 2009.

There have been no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2009. For additional information about critical accounting policies, refer to pages 21 and 22 of the Company’s 2008 Annual Report, portions of which were filed as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

There have been no material changes in the Company’s exposure to market risk during the quarter ended March 31, 2009. For additional information about market risk, refer to pages 22 and 23 of the Company’s 2008 Annual Report, portions of which were filed as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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: There has been no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the Company’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 March 31, 2009, and statements including the terms “expect,” “believe,” “anticipate” and other similar terms that express expectations as to future events or conditions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that could cause actual events to differ materially from those expressed in those statements. A variety of factors could cause the 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; 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 and energy; industry and economic factors related to the Company’s domestic and international business; competition from other suppliers of color, flavors and fragrances; growth or contraction in markets for products in which the Company competes; terminations and other changes in customer relationships; industry and customer acceptance of price increases; currency exchange rate fluctuations; cost and availability of credit; results of litigation, environmental investigations or other proceedings; complications as a result of existing or future information technology system applications and hardware; the matters discussed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008; 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.

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 2006, a private developer, Westfield Acres Urban Renewal Association II, LP, pursuant to an agreement with the EPA, began redevelopment efforts at the Site (construction of affordable housing) by demolishing buildings thereon. Thereafter, the EPA removed allegedly contaminated soil from the locations where the buildings once stood.

In March 2007, the United States filed a complaint in the U.S. District Court in New Jersey against Sensient Colors claiming “over $16 million” in response costs allegedly incurred and to be incurred by the EPA pursuant to CERCLA. Sensient Colors moved to dismiss the United States’ complaint, which motion was denied by the Court in October 2007. Sensient Colors timely filed its answer and affirmative defenses to the United States’ complaint, as well as a third-party complaint against current and former owners and/or operators of the Site. The United States moved to strike Sensient Colors’ affirmative defenses. In an August 12, 2008 Opinion and Order, following briefs and oral argument, the Court partly granted and partly denied the United States’ motion, effectively preserving most of Sensient Colors’ affirmative defenses, either as originally pled or with changes outlined by the Court. Sensient Colors promptly filed an amended pleading incorporating the revised affirmative defenses. On July 29, 2008, Sensient Colors filed a third-party complaint adding Kohnstamm Inc. (a Canadian affiliate of General Color Company) and its president Avtar Singh as defendants.

In late August 2008, in the course of reviewing documents produced by the EPA, Sensient Colors discovered an e-mail exchange between EPA officials that Sensient Colors believes supports many of the legal theories and affirmative defenses advanced by Sensient Colors in the litigation and undermines key United States cost recovery claims. By letter dated August 26, 2008, based on the above document and other evidence adduced in the case, Sensient Colors demanded that the United States dismiss its case with prejudice and reimburse Sensient Colors for attorneys’ fees and costs incurred. In response to the August 26, 2008 letter, the United States withdrew, without prejudice, its then-pending motion to limit the scope of review to 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.

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 has appealed the magistrate’s decision to the district court judge, the appeal is fully briefed, and the district judge has scheduled oral argument on June 17, 2009.

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 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 has exercised its right to appeal the magistrate’s decision to the district court judge. That appeal is fully briefed and will also be heard on June 17, 2009.

Sensient Colors intends to vigorously defend its interests in the litigation. It is evaluating, among other things, the pursuit of additional PRPs and additional challenges to the EPA’s right to recover its claimed response costs. A portion of Sensient Colors’ legal defense costs is being paid by insurers with a reservation of coverage rights. Litigation to resolve coverage issues is pending.

The owner of Pleasant Gardens (“Property”), an apartment complex adjacent to the General Color Superfund Site, filed a complaint in New Jersey state court in November 2003 against H. Kohnstamm & Co. (now Sensient Colors), the Company, General Color Company, and unknown defendants. Plaintiff seeks to hold defendants liable, in an unspecified amount, for damages related to the alleged contamination of the Property. Plaintiff voluntarily dismissed the Company without prejudice. Sensient Colors filed an answer denying liability and asserting affirmative defenses. Limited discovery has occurred. In November 2006, the Camden Redevelopment Agency (“Agency”) filed condemnation litigation against plaintiff (and other purported interested parties) to take the Property. Sensient Colors is not a party to the condemnation litigation. In advance of its filing, the Agency notified plaintiff that its appraiser had assessed the fair market value of the Property at $7.7 million and that its environmental consultant had estimated the costs for environmental cleanup, purportedly to meet requirements of the New Jersey Department of Environmental Protection (“DEP”), at $7.5 million. Sensient Colors and plaintiff have pursued a reduction in the scope and cost of the Agency’s proposed environmental cleanup in meetings with the DEP, the Agency and another party involved in the condemnation, the New Jersey Schools Construction Corporation (“NJSCC”). To the extent that there is a reduction in the condemnation value of the Property due to the Agency’s remediation of contamination for which Sensient Colors is allegedly responsible, such reduction may become a part of the damages claimed by plaintiff. In March 2007, plaintiff filed an amended complaint naming the Agency, the NJSCC and the DEP as additional defendants in furtherance of this effort. In April 2007, Sensient Colors filed its answer to the amended complaint, including cross claims against these newly added parties. The Agency, the DEP and the New Jersey Schools Development Authority (“NJSDA”) (which replaced the NJSCC as a state agency effective August 7, 2007) each filed answers, cross-claims and counter-claims; Sensient Colors has responded to all three cross-claims. Document discovery was completed in July 2008, and expert and rebuttal expert reports have been exchanged. Depositions are on-going.

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. Briefing on the issue of standing and on the merits of the motion to quash has been completed and the parties await a decision from the magistrate judge.

On January 8, 2009, the 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 are resolved, the trial may be deferred further. On April 20, 2009 the court further extended the pretrial schedule and set a trial date of October 5, 2009.

The Company is involved in various 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.

See “Risk Factors” in Item 1A of the Company’s annual report on Form 10-K for the year ended
December 31, 2008.

At the Company’s 2009 Annual Meeting of Shareholders, held on April 23, 2009, the following actions were taken:

See Exhibit Index following this report.