SXT

Business Context and Reporting Period

Company: Sensient Technologies Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2009
Business Overview: The Company operates in three primary segments: Flavors & Fragrances, Color, and Corporate & Other. Beginning in Q1 2009, operations in Japan were reclassified from Flavors & Fragrances to Corporate & Other.

Key Financial Metrics

Margins: Gross profit margin for Q2 2009 was 31.2% (up 60 basis points from 30.6% in Q2 2008). Operating income margin for the six months ended June 30, 2009, was approximately 13.9%.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenue decreased 8.7% in Q2 and 8.3% for the six months ended June 30, 2009, compared to the prior year. Foreign exchange rates negatively impacted revenue by 8.2% in the quarter and 8.8% year-to-date.
• Segment Performance:
  • Flavors & Fragrances: Revenue decreased 6.6% (Q2) and 5.6% (6mo). Operating income increased slightly due to higher pricing in North America and Latin America, offsetting volume declines in Europe.
  • Color: Revenue decreased 12.7% (Q2) and 13.9% (6mo). Operating income declined significantly due to lower volumes in non-food colors driven by economic conditions and higher raw material costs.
• Interest Expense: Decreased 33.4% in Q2 2009 ($5.7M vs $8.5M) due to lower interest rates and reduced average debt balances.
• Debt Restructuring: In March 2009, the Company borrowed $105 million under a term loan to repay revolving credit facility amounts. In April 2009, public debt was retired using revolving credit facility proceeds.

Guidance, Outlook, and Risks

• Outlook: Management expects the Color Group margins to improve in the remainder of 2009 due to increased selling prices and reduced raw material costs. The Company expects an effective tax rate of 32.5% for the remainder of 2009, excluding discrete items.
• Liquidity: The debt-to-total capital ratio improved to 34.7% from 37.0% at year-end 2008. Management believes cash flows from operations and existing credit lines are sufficient to meet future requirements.
• Legal Contingencies (Environmental):
  • Superfund Claim: The EPA claims over $16 million in response costs for the General Color Company Superfund Site. Sensient Colors is vigorously defending, citing that the site was excluded from the 1988 acquisition. A motion for summary judgment is pending.
  • Pleasant Gardens Litigation: A property owner adjacent to the Superfund site seeks unspecified damages for contamination. Trial is scheduled for October 5, 2009.
  • Reserves: Estimated liabilities for environmental matters range from $0.7 million to $29.0 million. The Company has accrued $1.0 million as of June 30, 2009.
• Risk Factors: Key risks include foreign exchange fluctuations, raw material cost volatility, economic conditions affecting non-food color sales, and the outcome of ongoing environmental litigation.

Investor Verification Checklist

• Environmental Liability Exposure: Verify the status of the Superfund claim and Pleasant Gardens litigation, as potential liabilities could exceed the current $1.0 million accrual.
• Foreign Exchange Impact: Assess the sensitivity of future earnings to currency fluctuations, which reduced revenue by ~8-9% in the first half of 2009.
• Color Segment Recovery: Monitor the Color segment's ability to offset volume declines in non-food colors with price increases and cost reductions as projected by management.
• Debt Maturity Profile: Review the terms of the $105 million term loan (maturing June 2012) and the Company's leverage ratio to ensure compliance with covenants.
• Raw Material Costs: Confirm trends in raw material costs, which have pressured margins in the Color segment despite higher selling prices.