SENSIENT TECHNOLOGIES CORP — Interim / Quarterly Report 2006

Nov 8, 2006

10-Q 1 c09767e10vq.htm FORM 10-Q e10vq PAGEBREAK

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-7626

SENSIENT TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

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

777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-5304 (Address of principal executive offices)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

Class	Outstanding at October 31, 2006
Common Stock, par value $0.10 per share	46,466,551 shares

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SENSIENT TECHNOLOGIES CORPORATION INDEX

PART I. FINANCIAL INFORMATION:
Item 1.	Financial Statements:
	Consolidated Condensed Statements of Earnings — Three and Nine Months Ended September 30, 2006 and 2005.	1
	Consolidated Condensed Balance Sheets — September 30, 2006 and December 31, 2005.	2
	Consolidated Condensed Statements of Cash Flows — Nine Months Ended September 30, 2006 and 2005.	3
	Notes to Consolidated Condensed Financial Statements.	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	15
Item 4.	Controls and Procedures.	15
PART II. OTHER INFORMATION:
Item 1.	Legal Proceedings.	16
Item 1A.	Risk Factors.	17
Item 6.	Exhibits.	17
	Signatures.	18
	Exhibit Index.	19
Waiver Regarding Restricted Stock Grant Agreements
Certifications Pursuant to Rule 13a-14(a)
Certifications Pursuant to Section 1350

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In thousands except per share amounts)

(Unaudited)

	Three Months — Ended September 30,		Nine Months — Ended September 30,
	2006	2005	2006	2005
Revenue	$ 280,878	$ 256,416	$ 826,014	$ 771,043
Cost of products sold	197,274	183,267	577,470	543,674
Selling and administrative expenses	50,063	45,663	149,100	144,399
Operating income	33,541	27,486	99,444	82,970
Interest expense	9,091	8,820	26,779	26,446
Earnings before income taxes	24,450	18,666	72,665	56,524
Income taxes	7,473	4,538	21,607	13,702
Net earnings	$ 16,977	$ 14,128	$ 51,058	$ 42,822
Average number of common shares outstanding:
Basic	45,909	46,910	45,856	46,834
Diluted	46,217	47,170	46,102	47,173
Earnings per common share:
Basic	$ .37	$ .30	$ 1.11	$ .91
Diluted	$ .37	$ .30	$ 1.11	$ .91
Dividends per common share	$ .15	$ .15	$ .45	$ .45

See accompanying notes to consolidated condensed financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

	September 30, — 2006	December 31,
	(Unaudited)	2005 *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 4,400	$	7,068
Trade accounts receivable, net	183,373		163,724
Inventories	317,219		313,513
Prepaid expenses and other current assets	37,221		36,039
TOTAL CURRENT ASSETS	542,213		520,344
OTHER ASSETS	54,721		63,384
INTANGIBLE ASSETS, NET	14,635		14,964
GOODWILL	441,291		420,201
PROPERTY, PLANT AND EQUIPMENT:
Land	36,041		33,351
Buildings	240,871		232,301
Machinery and equipment	539,258		532,852
Construction in progress	29,157		13,779
	845,327		812,283
Less accumulated depreciation	(464,619	)	(437,060	)
	380,708		375,223
TOTAL ASSETS	$ 1,433,568	$	1,394,116
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$ 78,056	$	77,080
Accrued salaries, wages and withholdings from employees	19,660		15,249
Other accrued expenses	54,700		53,432
Income taxes	15,335		21,610
Short-term borrowings	25,915		63,218
Current maturities of long-term debt	65,405		207,341
TOTAL CURRENT LIABILITIES	259,071		437,930
DEFERRED INCOME TAXES	2,887		4,881
OTHER LIABILITIES	4,440		3,974
ACCRUED EMPLOYEE AND RETIREE BENEFITS	46,433		41,980
LONG-TERM DEBT	436,385		283,123
SHAREHOLDERS’ EQUITY:
Common stock	5,396		5,396
Additional paid-in capital	68,171		71,582
Earnings reinvested in the business	766,745		736,544
Treasury stock, at cost	(151,863	)	(152,727	)
Nonvested stock	—		(5,965	)
Accumulated other comprehensive loss	(4,097	)	(32,602	)
TOTAL SHAREHOLDERS’ EQUITY	684,352		622,228
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$ 1,433,568	$	1,394,116

See accompanying notes to consolidated condensed financial statements.

• Condensed from audited financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months
	Ended September 30,
	2006	2005
Net cash provided by operating activities	$ 80,857	$	91,900
Cash flows from investing activities:
Acquisition of property, plant and equipment	(24,526	)	(22,342	)
Proceeds from sale of fixed assets and investments	3,164		982
Decrease in other assets	1,408		616
Net cash used in investing activities	(19,954	)	(20,744	)
Cash flows from financing activities:
Proceeds from additional borrowings	24,881		40,540
Debt and capital lease payments	(66,367	)	(91,713	)
Purchase of treasury stock	(4,563	)	—
Dividends paid	(20,857	)	(21,240	)
Proceeds from options exercised	2,961		3,855
Net cash used in financing activities	(63,945	)	(68,558	)
Effect of exchange rate changes on cash and cash equivalents	374		(261	)
Net (decrease) increase in cash and cash equivalents	(2,668	)	2,337
Cash and cash equivalents at beginning of period	7,068		2,243
Cash and cash equivalents at end of period	$ 4,400	$	4,580

See accompanying notes to consolidated condensed financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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 September 30, 2006 and December 31, 2005, the results of operations for the three
and nine months ended September 30, 2006 and 2005, and cash flows for the nine months ended
September 30, 2006 and 2005. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full year.
	The preparation of financials statements in conformity with U.S. generally accepted accounting
principles 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.
	Certain amounts as previously presented have been reclassified to conform to the current period
presentation. The effect of these reclassifications is not material to the consolidated
condensed financial statements.
	Refer to the notes in the Company’s annual consolidated financial statements for the year ended
December 31, 2005, for additional details of the Company’s financial condition and a description
of the Company’s accounting policies, which have been continued without change except for the
item discussed in Note 2.
	In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No.
48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The new standard
will be effective for the Company in the first quarter of 2007. The impact of FIN 48 on the
Company’s financial results is currently being evaluated.
	In September 2006, the FASB issued Statement No. 158 (“SFAS No. 158”), “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans.” This statement requires the
Company to recognize the overfunded or underfunded status of a defined benefit postretirement
plan as an asset or liability in the balance sheet and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income. Additionally, SFAS
No. 158 requires the Company to measure the funded status of a plan as of the date of its fiscal
year end. The requirement to recognize the funded status of a defined benefit postretirement
plan and the related disclosure requirements are effective for the Company as of December 31,
2006, while the requirement to measure the funded status as of fiscal year-end is not effective
for the Company until December 31, 2008. The impact of SFAS No. 158 on the Company’s financial
results is currently being evaluated.
2.	Stock-Based Compensation
	The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“Share-Based Payment,” on January 1, 2006. SFAS No. 123(R) requires stock-based compensation to
be expensed over the vesting period of the awards based on the grant-date fair value. The
Company elected to adopt using the modified prospective transition method which does not result
in the restatement of previously issued financial statements. Under the provisions of SFAS No.
123(R), expense is recognized on all awards granted or modified after the date of adoption and
unvested awards at the date of adoption.
	Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance with
Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.”
Accordingly, no compensation expense had been recognized for stock options because all options
granted had an exercise price equal to the market value of the underlying stock on the grant
date.
	The Company has various stock plans under which employees and directors may be granted options
to purchase common stock at 100% of the market price on the day the options are granted. As of
September 30, 2006, there are 1.6 million shares available to be granted as future stock options
under existing stock plans. Stock options become exercisable over a three-year vesting period,
or earlier upon retirement, and
expire 10

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| years from the date of grant. Expense for stock options is recognized over three
years from the date of grant or over the period from the date of grant until the participant is
retirement-eligible, whichever is less. |
| --- |
| The Company estimated the fair value of stock options using the Black-Scholes option pricing
model. Grants during the first nine months of 2006 and 2005 had weighted-average fair values of
$4.50 and $5.59, respectively. Significant assumptions used in estimating the fair value of
awards granted during the nine months ended September 30, 2006 and 2005 are as follows: |

Dividend yield	3.3 %	2.8 %
Volatility	27.3 %	29.1 %
Risk-free interest rate	4.9 %	4.1 %
Expected term (years)	5.3	5.1

| The Company’s stock plans also provide for the awarding of nonvested stock. Expense for shares
of nonvested stock is recognized over five years from the date of grant or during the period
from the date of grant until the participant attains age 65, whichever is less. During the
period of restriction, the holder of nonvested stock has voting rights and is entitled to
receive all dividends and other distributions paid with respect to the stock. |
| --- |
| Total pre-tax stock-based compensation recognized in the Consolidated Condensed Statements of
Earnings was $0.9 million and $0.5 million for the quarters ended September 30, 2006 and 2005,
respectively. Tax related benefits of $0.3 million and $0.2 million were also recognized for
the quarters ended September 30, 2006 and 2005, respectively. Total pre-tax stock-based
compensation recognized in the Consolidated Condensed Statements of Earnings was $3.3 million
and $1.4 million for the nine months ended September 30, 2006 and 2005, respectively. Tax
related benefits of $1.1 million and $0.5 million were also recognized for the nine months ended
September 30, 2006 and 2005, respectively. Amounts recorded in 2005 primarily represent
expenses related to nonvested stock awards because no expense was recognized for stock options.
Cash received from the exercise of stock options was $3.0 million and $3.9 million for the nine
months ended September 30, 2006 and 2005, respectively, and is reflected in cash flows from
financing activities in the Consolidated Condensed Statements of Cash Flows. |
| As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s earnings before income
taxes and net earnings for the quarter ended September 30, 2006, are $0.2 million and $0.1
million lower, respectively, than if the Company had continued to account for stock-based
compensation under APB No. 25. For the quarter ended September 30, 2006, there is no impact on
basic or diluted earnings per share as a result of adopting SFAS No. 123(R). For the nine
months ended September 30, 2006, earnings before income taxes and net earnings were $0.9 million
and $0.7 million lower, respectively, as a result of adopting SFAS No. 123(R). Basic and
diluted earnings per share for the nine months ended September 30, 2006, are $.02 and $.01
lower, respectively, than if the Company had continued to account for stock-based compensation
under APB No. 25. |
| The following table illustrates the pro forma effect on net earnings and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation for the quarter and nine months ended September 30, 2005: |

	Three Months — Ended	Ended
	September 30,	September 30,
(in thousands except per share information)	2005	2005
Net earnings, as reported	$ 14,128	$	42,822
Add:
reported stock compensation expense — net of tax	307		875
Less: fair
value of stock compensation expense — net of tax	(467	)	(2,875	)
Pro forma net earnings	$ 13,968	$	40,822
Earnings per share:
Basic as reported	$ 0.30	$	0.91
Basic pro forma	$ 0.30	$	0.87
Diluted as reported	$ 0.30	$	0.91
Diluted pro forma	$ 0.30	$	0.87

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| The pro forma expense for the nine months ended September 30, 2005, included $1.0 million
after-tax compensation expense for stock options related to accelerated amortization for
retirement eligible participants, as the Company’s stock compensation plans provide for
full vesting of option awards at retirement. Beginning in the first quarter of 2005,
stock compensation expense for retirement eligible participants was reported in pro forma
net earnings over the lesser of three years or until the participant achieves early
retirement age. Previously, this expense was recognized over the vesting period, which
was three years. |
| --- |
| The following table summarizes the transactions involving the stock option plans for the
nine months ended September 30, 2006: |

		Weighted-	Average
		Average	Remaining		Aggregate
		Exercise	Life		Intrinsic
(In thousands except exercise price and life)	Options	Price	(Years)		Value
Outstanding at January 1, 2006	3,231	$	20.62	5.8	$ 376
Granted	103		19.20
Exercised	(178	)	15.99
Cancelled	(129	)	20.62
Outstanding at September 30, 2006	3,027	$	20.85	5.6	$ 923
Exercisable at September 30, 2006	2,351	$	20.95	4.8	$ 660

| The aggregate intrinsic values of stock options exercised during the nine months ended
September 30, 2006 and 2005, were $773,000 and $647,000, respectively. |
| --- |
| As of September 30, 2006, total remaining unearned compensation, net of expected
forfeitures, related to unvested stock options was $1.0 million, which will be amortized
over the weighted-average remaining service period of 1.7 years. |
| The following table summarizes the nonvested stock activity for the nine months ended
September 30, 2006: |

		Average		Aggregate — Intrinsic
(In thousands except fair value)	Shares	Fair Value		Value
Outstanding at January 1, 2006	456	$	20.26	$ 8,164
Granted	6		20.25
Vested	(6	)	20.64
Outstanding at September 30, 2006	456	$	20.25	$ 8,920

| The fair value of the nonvested shares at the date of grant is amortized over the vesting
period but not exceeding age 65 of the participant. As of September 30, 2006, total
remaining unearned compensation related to nonvested stock was $3.7 million, which will
be amortized over the weighted-average remaining service period of 2.9 years. |
| --- |
| SFAS No. 123(R) requires the cash flows from the excess tax benefits the Company realizes
on the exercise of stock options to be presented as cash flows from financing activities
in the Consolidated Condensed Statements of Cash Flows. Previously, the entire tax
benefit related to the exercise of stock options was reported as cash flows from
operating activities. The prior year statement of cash flows has not been restated. The
tax benefits on the exercise of stock options for the quarter and nine months ended
September 30, 2005, presented as cash flows from operating activities, were not material. |

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1. Segment Information

Operating results by segment for the periods and at the dates presented are as follows:

(In thousands)	Flavors & — Fragrances	Color	Corporate — & Other		Consolidated
Three months ended September 30,
2006:
Revenue from external customers	$ 185,802	$ 84,888	$ 10,188		$ 280,878
Intersegment revenue	3,760	2,232	215		6,207
Total revenue	$ 189,562	$ 87,120	$ 10,403		$ 287,085
Operating income (loss)	$ 27,443	$ 13,879	$ (7,781	)	$ 33,541
Interest expense	—	—	9,091		9,091
Earnings (loss) before income taxes	$ 27,443	$ 13,879	$ (16,872	)	$ 24,450
Three months ended September 30,
2005:
Revenue from external customers	$ 167,262	$ 79,240	$ 9,914		$ 256,416
Intersegment revenue	3,356	2,876	489		6,721
Total revenue	$ 170,618	$ 82,116	$ 10,403		$ 263,137
Operating income (loss)	$ 20,246	$ 13,137	$ (5,897	)	$ 27,486
Interest expense	—	—	8,820		8,820
Earnings (loss) before income taxes	$ 20,246	$ 13,137	$ (14,717	)	$ 18,666

(In thousands)	Flavors & — Fragrances	Color	Corporate — & Other		Consolidated
Nine months ended September 30,
2006:
Revenue from external customers	$ 538,179	$ 258,139	$ 29,696		$ 826,014
Intersegment revenue	10,196	8,663	933		19,792
Total revenue	$ 548,375	$ 266,802	$ 30,629		$ 845,806
Operating income (loss)	$ 77,456	$ 45,560	$ (23,572	)	$ 99,444
Interest expense	—	—	26,779		26,779
Earnings (loss) before income taxes	$ 77,456	$ 45,560	$ (50,351	)	$ 72,665
Nine months ended September 30,
2005:
Revenue from external customers	$ 491,698	$ 250,972	$ 28,373		$ 771,043
Intersegment revenue	9,813	10,318	2,392		22,523
Total revenue	$ 501,511	$ 261,290	$ 30,765		$ 793,566
Operating income (loss)	$ 63,567	$ 42,593	$ (23,190	)	$ 82,970
Interest expense	—	—	26,446		26,446
Earnings (loss) before income taxes	$ 63,567	$ 42,593	$ (49,636	)	$ 56,524

| 4. |
| --- |
| At September 30, 2006 and December 31, 2005, inventories included finished and in-process
products totaling $230.2 million and $234.1 million, respectively, and raw materials and
supplies of $87.0 million and $79.4 million, respectively. |

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5.	Debt
	On June 27, 2006, the Company entered into an agreement with a group of investors for the
issuance of the U.S. dollar equivalent of approximately $152 million in senior notes
denominated in both U.S. dollars and in Euros. The majority of the notes bear interest
at fixed rates ranging from 5.78% to 5.85% for the Euro-denominated notes and 7.17% to
7.31% for the U.S.-dollar denominated notes. Approximately $103 million of the notes are
due in 2011 and the remainder in 2013. Proceeds from the issuance, which will be
received by the Company on November 28, 2006, will be used to refinance maturing debt.
Accordingly, that maturing debt has been classified as long-term in the consolidated
condensed balance sheet.
6.	Minority Interest Investment
	In the second quarter of 2006, the Company sold its minority interest in a non-core
investment to the majority shareholder, resulting in a pretax gain of approximately $1.2
million ($0.7 million after tax, or $.01 per share). The gain is recorded as a reduction
of selling and administrative expenses in the Corporate and Other segment.
7.	Restructuring Charges
	In the fourth quarter of 2005, the Company announced a cost reduction plan intended to
improve profitability and mitigate the impact of higher costs within its businesses. The
plan also addressed the need to close facilities and reduce headcount. The Company
recorded restructuring and other charges of $12.8 million ($9.8 million after tax, or
$0.21 per share) in the fourth quarter of 2005 primarily related to the cost reduction
plan. During the nine months ended September 30, 2006, approximately $4.8 million of
payments, primarily for severance, have been applied to the restructuring and other
charges reserve. The majority of the remaining payments are anticipated to be made in
the next 12 to 18 months.
	A rollforward of the restructuring and other charges reserve is included below:

(In thousands) — December 31, 2005	$ 5,639
Amounts paid	(4,768	)
September 30, 2006	$ 871

8.
The Company’s components of annual benefit cost for the defined benefit plans for the
periods presented are as follows:

	Three Months Ended
	September 30,			September 30,
(In thousands)	2006	2005		2006		2005
Service cost	$ 277	$	264	$	830	$	789
Interest cost	579		586		1,738		1,759
Expected return on plan assets	(199	)	(202	)	(596	)	(607	)
Amortization of prior service cost	484		320		1,452		961
Amortization of actuarial loss	84		54		251		164
Settlement expense	—		9		—		26
Defined benefit expense	$ 1,225	$	1,031	$	3,675	$	3,092

During the three and nine months ended September 30, 2006, the Company made contributions to its defined benefit pension plans of $0.7 million and $1.9 million, respectively. Total contributions to Company defined benefit pension plans are expected to be $2.2 million in 2006.

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| 9. |
| --- |
| Comprehensive income is comprised of net earnings, foreign currency translation, minimum
pension liability and unrealized gains and losses on cash flow hedges. Total
comprehensive income for the three months ended September 30, 2006 and 2005 was $30.1
million and $12.2 million, respectively. Total comprehensive income for the nine months
ended September 30, 2006 and 2005 was $79.6 million and $11.4 million, respectively. The
primary difference between net income and comprehensive income is due to foreign currency
translation. For the quarter and nine months ended September 30, 2006, foreign currency
translation increased comprehensive income by $13.2 million and $38.7 million,
respectively. For the quarter and nine months ended September 30, 2005, foreign currency
translation decreased comprehensive income by $0.2 million and $30.7 million,
respectively. |

10.
Cash flows from operating activities are detailed below:

	Nine Months Ended
	September 30,
(In thousands)	2006	2005
Cash flows from operating activities:
Net earnings	$ 51,058	$	42,822
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization	32,635		34,070
Stock-based compensation	3,250		1,337
Loss (gain) on fixed assets and investments	720		(488	)
Changes in operating assets and liabilities	(6,806	)	14,159
Net cash provided by operating activities	$ 80,857	$	91,900

| 11. |
| --- |
| Guarantees |
| In connection with the sale of substantially all of the Company’s Yeast business on February 23,
2001, the Company provided the buyer with indemnification against certain potential liabilities
as is customary in transactions of this nature. The period provided for indemnification against
most types of claims has now expired, but for specific types of claims, including but not
limited to tax and environmental liabilities, the amount of time provided for indemnification is
the applicable statute of limitations. The maximum amount of the Company’s liability related to
certain of these provisions is capped at approximately 35% of the consideration received in the
transaction. Liability related to certain matters, including claims relating to pre-closing
environmental liabilities, is not capped. In cases where the Company believes it is probable
that payments will be required under these provisions and the amounts can be estimated, the
Company has recognized a liability. |
| Environmental Matters |
| The Company is involved in various significant environmental matters, which are described below.
The Company is also involved in other site closures and related environmental remediation and
compliance activities at manufacturing sites primarily related to a 2001 acquisition by the
Company for which reserves for environmental matters were established as of the date of
purchase. Actions that are legally required or necessary to prepare the sites for sale are
substantially complete. |
| Clean Air Act NOV |
| On June 24, 2004, the United States Environmental Protection Agency (the “EPA”) issued a Notice
of Violation/Finding of Violation (“NOV”) to Lesaffre Yeast Corporation (“Lesaffre”) for alleged
violations of the Wisconsin air emission requirements. The NOV generally alleges that
Lesaffre’s Milwaukee, Wisconsin facility violated air emissions limits for volatile organic
compounds during certain periods from 1999 through 2003. Some of these violations allegedly
occurred before Lesaffre purchased Red Star Yeast & Products (“Red Star Yeast”) from the
Company. |
| On June 30, 2005, the EPA issued a second NOV to Lasaffre and Sensient which alleged that
certain operational changes were made during Sensient’s ownership of the Milwaukee facility
without complying with new-source |

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| review procedures and without the required air pollution
control permit. The Company has raised significant legal defenses in response to the June 2005
NOV. |
| --- |
| The Company has met with the EPA in an attempt to resolve the NOVs. In September 2005, as
follow-up to one of those meetings, the Company submitted information to refute the allegations
of the June 30, 2005 NOV and requested that the NOV be withdrawn. The Company is awaiting the
EPA’s response to that submission. |
| In connection with the sale of Red Star Yeast, the Company provided Lesaffre and certain of its
affiliates with indemnification against environmental claims attributable to the operation,
activities or ownership of Red Star Yeast prior to February 23, 2001, the closing date of the
sale. The Company has not received a claim for indemnity from Lesaffre with respect to this
matter. In December 2005, Lesaffre closed the Milwaukee plant. The Company informed the EPA of
this development. |
| Superfund Claim |
| On July 6, 2004, the EPA notified the Company’s Sensient Colors Inc. subsidiary that it may be a
potentially responsible party (“PRP”) under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) for activities at the General Color Company Superfund
Site in Camden, New Jersey. The EPA requested reimbursement of $10.9 million in clean-up costs,
plus interest. Sensient Colors Inc. advised the EPA that this site had been expressly excluded
from the Company’s 1988 stock purchase of H. Kohnstamm & Company, Inc. (now Sensient Colors
Inc.). The selling shareholders had retained ownership of and liability for the site, and some
became owners of General Color Company, which continued to operate there until the mid-1990s.
The Company’s legal defense costs are being paid, in part, by an insurer with a reservation of
coverage rights. Litigation to resolve coverage rights is pending. The Company continues to
assess the existence and solvency of other PRPs, additional insurance coverage, the nature of
the alleged contamination, and the extent to which the EPA’s activities satisfy the requirements
for reimbursement under CERCLA, as well as issues surrounding the manner in which the 1988
transaction was structured. In a letter to the EPA dated January 31, 2005, the Company outlined
legal challenges to the recoverability of certain costs and urged the EPA to pursue General
Color Company and related parties. The EPA subsequently informed the Company that it is
unwilling to discuss these legal challenges without prior conditions. The Department of Justice
must evaluate any referral by EPA for potential civil litigation under applicable environmental
laws. |
| Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co., et al. |
| The owner of Pleasant Gardens, 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 Inc.), 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 plaintiff’s property. Plaintiff voluntarily dismissed the Company
without prejudice. Sensient Colors Inc. filed an answer denying liability and asserting
affirmative defenses. Limited discovery has occurred. This area of Camden is now being
redeveloped by a public agency, which agency has notified plaintiff of its intent to condemn the
Pleasant Gardens property in connection therewith. To the extent that there is a reduction in
the sale or condemnation value of the Pleasant Gardens property due to the agency’s remediation
of contamination for which Sensient Colors Inc is allegedly responsible, such reduction may
become a part of the damages claimed by plaintiff. |
| As of September 30, 2006, the liabilities related to environmental matters are estimated to be
between $1.4 million and $15.8 million. As of September 30, 2006, the Company has accrued $2.5
million for environmental matters, of which $2.0 million is related to the environmental
reserves established in connection with the 2001 acquisition discussed above. This accrual
represents management’s best estimate of these liabilities; however, the actual liabilities may
be above the levels reserved or estimated, in which case the Company would need to take charges
or establish reserves in later periods. Also, the Company has not been able to make a
reasonable estimate of the liabilities, if any, related to some of the environmental matters
discussed above. The Company has not recorded any potential insurance recoveries related to
these liabilities, as receipts are not yet assured. There can be no assurance that additional
environmental matters will not arise in the future. |

Commercial Litigation
There are three significant commercial cases pending against the Company, which are disclosed
below.
Remmes v. Sensient Flavors Inc. et al.
In June 2004, the Company and certain other flavor manufacturers were sued in Iowa state court
by Kevin

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| Remmes, who alleged that while working at American Popcorn Company of Sioux City, Iowa,
he was exposed to butter flavoring vapors that caused injury to his respiratory system. The
Company, among others, sold butter flavoring used in the manufacture of microwave popcorn to
American Popcorn Company. The suit was removed to Federal District Court for the Northern
District of Iowa, Western Division. Plaintiff subsequently filed an Amended Complaint adding a
flavor industry trade association and its management company as defendants. Two of the three
counts in the Amended Complaint were ultimately dismissed by the
Court and the final count was the subject of a
motion for summary judgment.
On November 7, 2006, the Court issued a Settlement Order indicating
that the case is settled and is to be removed from the trial calender
and closed for statistical purposes. Neither the Company nor its
insurers were required to make any payment to any party as part of
the settlement. |
| --- |
| Fults et al. v. Sensient Flavors Inc. et al. |
| In August 2005, the Company and certain other flavoring manufacturers were sued in the City of
St. Louis, Missouri, Circuit Court by Elizabeth Fults (as administrator for the Estate of Dixie
Asbury), Nancy Lee Dudley and Jill Roth, all of whom allege that they suffered damage as a
result of work-related exposure to butter flavoring vapors at the Gilster-Mary Lee microwave
popcorn plant in McBride, Missouri. At present, it does not appear that the Company ever sold
butter flavoring products to this facility. Defendants filed a motion for change of venue from
St. Louis to Perry County, Missouri, which was granted by the Court. Additional motions for
change of venue and change of judge were subsequently filed by plaintiffs and as a consequence,
a firm scheduling order has not yet been entered. Once these procedural issues are finalized,
the Company intends to file a motion to dismiss and will vigorously defend its interests in this
case. |
| Kuiper et al. v. Sensient Flavors Inc. et al . |
| In late January 2006, the Company, certain other flavor manufacturers, and a flavor industry
trade association and its management company were sued in the Federal District Court for the
Northern District of Iowa, Western Division, by Ronald Kuiper and his spouse, Conley Kuiper.
Mr. Kuiper claims that while working at American Popcorn Company of Sioux City, Iowa, he was
exposed to butter flavoring vapors that caused injury to his respiratory system. Ms. Kuiper’s
claim is for loss of consortium. The allegations of this Complaint are virtually identical to
those contained in the Remmes Complaint. Plaintiffs’ counsel moved to consolidate the Kuiper
case with the Remmes case for discovery purposes; but the Court denied the motion on procedural
grounds. The Company believes that plaintiffs’ claims are without merit and is vigorously
defending this case. A trial ready date of November 5, 2007, has been set in this matter. |
| 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 third quarter of 2006 was $280.9 million, an increase of 9.5% from $256.4
million recorded in the prior year third quarter. For the nine months ended September 30,
2006, revenue was $826.0 million, an increase of 7.1% from the comparable period in 2005.
Revenue for the Flavors & Fragrances segment increased by 11.1% and 9.3% for the quarter
and nine months ended September 30, 2006, respectively, over the comparable periods last
year. Revenue for the Color segment increased by 6.1% and 2.1% for the quarter and nine
months ended September 30, 2006, over the comparable periods last year. Revenue for Asia
Pacific was flat for the quarter and decreased by 0.4% for the nine months ended September
30, 2006, from the comparable period last year. Additional information on group results
can be found in the Segment Information section. |
| The gross profit margin increased to 29.8% for the three months ended September 30, 2006,
from 28.5% for the same period in 2005. Increased volumes and higher selling prices,
especially in North America Flavors, more than offset the impact of higher raw material and
energy costs. For the nine months ended September 30, 2006 and 2005, the gross profit
margin was 30.1% and 29.5%, respectively, and was impacted by the same items described for
the quarter. |
| Selling and administrative expenses as a percent of revenue were 17.8% in both quarters
ended September 30, 2006 and 2005. Benefits from the 2005 cost reduction program were
offset by a loss sustained due to typhoon related property damage in the Philippines in the
third quarter of 2006 and higher benefit costs including an increase in expense for
performance-based incentives and stock-based compensation. For the nine months ended
September 30, 2006 and 2005, selling and administrative expenses as a percent of revenue
were 18.1% and 18.7%, respectively. In addition to the items in the third quarter of 2006
noted above, expense comparisons for the nine month period are impacted by a $4.5 million
expense in the first quarter of 2005 related to an arbitration order and a gain of $1.2
million in the second quarter of 2006 on the sale of a non-core minority interest
investment. |
| Operating income for the quarter ended September 30, 2006, was $33.5 million, an increase
of 22.0% from $27.5 million for the third quarter of 2005. Operating income for the nine
months ended September 30, 2006, was $99.4 million compared to $83.0 million for the
comparable period in 2005. The change in operating income for each period was due to the
revenue, margin and expense changes discussed above. |
| Favorable foreign exchange rates increased revenue and operating profit by 1.9% and 2.4%,
respectively, for the three months ended September 30, 2006, over the same quarter of 2005.
For the nine months ended September 30, 2006, foreign exchange rates increased revenue by
0.2% and operating income by 1.4% over the comparable period last year. |
| Interest expense for the quarter ended September 30, 2006, was $9.1 million, an increase of
3.1% over the prior year’s quarter. Interest expense for the nine months ended September
30, 2006, was $26.8 million compared to $26.4 million in the 2005 comparable period. The
increase in both periods was a result of higher average rates partially offset by a
reduction in average debt balances. |
| The effective income tax rates were 30.6% and 24.3% for the quarter ended September 30,
2006 and 2005, respectively. The effective income tax rates were 29.7% and 24.2% for the
nine months ended
September 30, 2006 and 2005, respectively. The effective tax rates for the three and nine
months ended September 30, 2006, were reduced by changes in estimates associated with the
finalization of prior year income tax returns and the resolution of prior years’ tax
matters. For the nine months ended September 30, 2006, these reductions were partially
offset by a higher rate on the gain on the sale of a minority interest investment. The
effective tax rates for the three and nine months ended September 30, 2005, were reduced by
the revaluation of deferred tax liabilities in connection with a rate reduction in a
foreign country and changes in estimates associated with the finalization of prior year
income tax returns and the resolution of prior years’ tax matters. Management expects the
effective tax rate for the remainder of 2006 to be 31.5%, excluding the income tax expense
or benefit related to discrete items, which will be reported separately in the quarter in
which they occur. |

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| SEGMENT INFORMATION |
| --- |
| Flavors & Fragrances — |
| Revenue for the Flavors & Fragrances segment in the third quarter of 2006 increased 11.1%
to $189.6 million from $170.6 million for the same period last year. The increase in
revenue was primarily due to higher volumes and prices in the U.S. ($14.5 million) and in
the fragrances product line ($2.9 million) combined with the favorable impact of foreign
exchange rates ($3.4 million). |
| For the quarter ended September 30, 2006, operating income increased 35.5% to $27.4 million
from $20.2 million last year. The increase was primarily attributable to higher profit in
the U.S. ($4.4 million), Europe ($1.4 million) and Latin America ($1.0 million), combined
with the favorable impact of exchange rates ($0.3 million). The increase in the U.S. was
primarily due to improved pricing and higher volumes in dehydrated flavors and other
flavors, and favorable product mix partially offset by higher raw material and energy
costs. The increase in Europe and Latin America was primarily due to lower costs.
Operating income as a percent of revenue was 14.5%, an increase of 260 basis points from
the comparable quarter last year, primarily due to the reasons provided above. |
| For the nine months ended September 30, 2006, revenue for the Flavors & Fragrances segment
was $548.4 million, an increase of 9.3% from $501.5 million reported in the same period
last year. The increase in revenue was primarily due to higher volumes and improved
pricing in the U.S. ($38.5 million), Latin America ($1.3 million) and in the fragrances
product line ($6.7 million), higher volumes in Asia ($1.1 million) and the favorable impact
of foreign exchange rates ($2.2 million). |
| Operating income for the nine months ended September 30, 2006, increased 21.8% to $77.5
million from $63.6 million last year. The increase in operating income was primarily due
to improvements in the U.S. ($9.3 million), Europe ($2.5 million), Latin America ($1.2
million) and the favorable impact of foreign exchange rates ($1.2 million). The increase
in the U.S. was primarily due to improved pricing and higher volumes in dehydrated flavors
and other flavors, and favorable product mix partially offset by higher raw material and
energy costs. The increases in Europe and Latin America were primarily attributable to
lower costs. Operating income as a percent of revenue was 14.1%, an increase of 140 basis
points from the comparable period last year, primarily due to the reasons provided above. |
| Color — |
| Revenue for the Color segment for the third quarter of 2006 was $87.1 million, an increase
of 6.1% from $82.1 million reported in the prior year’s comparable period. The increase in
revenue was primarily due to higher volumes of food and beverage colors in Latin America
($2.2 million) and Europe ($1.3 million), higher volumes of cosmetic colors worldwide ($1.5
million) and the favorable effect of foreign exchange rates ($1.4 million), partially
offset by lower sales of technical colors ($1.2 million). The decrease in sales of
technical colors primarily related to lower demand for inkjet inks and paper dyes. |
| Operating income for the quarter ended September 30, 2006, was $13.9 million versus $13.1
million in the comparable period last year. The increase was primarily due to higher
profit from sales of food and beverage colors in Latin America ($0.3 million) and Europe
($0.2 million) and cosmetic colors worldwide ($0.6 million), net of changes in other
markets. The improved profit in Latin America and Europe relates to benefits from the 2005
cost reduction program and favorable volume. The higher profit in the
cosmetic colors
business was primarily attributable to higher volume. Operating income as a percent of
revenue was 15.9%, compared with the prior year’s 16.0%. |
| For the nine months ended September 30, 2006, revenue for the Color segment was $266.8
million compared to $261.3 million in 2005. The increase in revenue was primarily due to
increased sales volume of food and beverage colors in all markets ($7.5 million) and
increased volumes of cosmetic colors ($3.8 million) partially offset by lower sales of
technical colors ($4.7 million) and the unfavorable effect of foreign exchange rates ($1.0
million). The decline in technical colors was primarily due to lower demand for inkjet
inks and paper dyes. |
| Operating income for the nine months ended September 30, 2006, increased 7.0% to $45.6
million from $42.6 million in the comparable period last year. The increase was primarily
due to higher profit from sales of food and beverage colors ($2.2 million) and cosmetic
colors ($1.9 million) partially offset by reduced profit in the technical colors business
($1.2 million). The year-to-date changes in profit in the
food and beverage business relates to higher volume and the 2005 cost reduction program.
The higher profit in the |

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cosmetic colors business was primarily attributable to higher volume. The reduced profit in technical colors business was due to lower demand for inkjet inks and paper dyes. Operating income as a percent of revenue was 17.1%, an increase of 80 basis points from the comparable quarter last year, primarily due to the reasons provided above.

| FINANCIAL CONDITION |
| --- |
| The Company’s ratio of debt to total capital improved to 43.5% as of September 30, 2006,
from 47.1% as of December 31, 2005. The improvement resulted from an increase in equity
($62.1 million) combined with a reduction in total debt levels ($26.0 million) since
December 31, 2005. |
| Cash provided by operating activities was $80.9 million for the nine months ended September
30, 2006, compared to $91.9 million for the comparable period last year. The increase in
net earnings was more than offset by an unfavorable comparison of the changes in working
capital. The majority of the unfavorable working capital comparison is due to accounts
receivable ($15.0 million) and income taxes ($2.5 million). Accounts receivable increased
in 2006 as expected due to higher sales but in 2005 there was a decrease in accounts
receivable due to collecting balances as a result of the December 2004 termination of a
supply agreement. The impact of income taxes was primarily the result of higher domestic
tax payments in 2006. |
| Net cash used in investing activities was $20.0 million for the nine months ended September
30, 2006, compared to $20.7 million in the comparable period last year. Capital
expenditures were $24.5 million and $22.3 million for the nine months ended September 30,
2006 and 2005, respectively. For the nine months ended September 30, 2006, proceeds were
received from the sale of fixed assets and investments of $3.2 million primarily related to
the sale of a non-core minority interest investment. |
| Net cash used in financing activities was $63.9 million for the nine months ended September
30, 2006, compared to $68.6 million in the prior year period. During 2006 and 2005, the
net cash provided from operating activities was sufficient to fund capital expenditures,
pay dividends and reduce borrowings. Net repayments of debt were $41.5 million and $51.2
million in the nine months ended September 30, 2006 and 2005, respectively. For purposes
of the cash flow statement, net changes in debt exclude the impact of foreign exchange
rates. Dividends of $20.9 million and $21.2 million were paid during the nine months ended
September 30, 2006 and 2005, respectively. |
| The Company’s financial position remains strong. Its expected cash flows from operations
and existing lines of credit can be used to meet future cash requirements for operations,
capital expenditures and dividend payments to shareholders. In June 2006, the Company
entered into an agreement with a group of investors for the issuance of the U.S. dollar
equivalent of approximately $152 million in senior notes denominated in both U.S. dollars
and in Euros. Proceeds from the issuance, which will be received by the Company in
November 2006, will be used to refinance maturing debt. |
| CONTRACTUAL OBLIGATIONS |
| There have been no material changes in the Company’s contractual obligations during the
quarter ended September 30, 2006. For additional information about contractual
obligations, refer to page 23 of the Company’s 2005 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, 2005. |
| CRITICAL ACCOUNTING POLICIES |
| There have been no material changes in the Company’s critical accounting policies during
the quarter ended September 30, 2006. For 2006, the Company changed its method of
accounting for stock-based compensation; see Note 2 in the Notes to the Consolidated
Condensed Financial Statements. For additional information about critical accounting
policies, refer to pages 21 and 22 of the Company’s 2005 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, 2005. |

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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 September 30, 2006. For additional information about market risk, refer to pages 22 and 23 of the Company’s 2005 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, 2005.

ITEM 4. CONTROLS AND PROCEDURES

| Disclosure Controls and Procedures: The Company carried out an evaluation, under the
supervision and with the participation of management, including the Company’s Chairman,
President and Chief Executive Officer and its Vice President and Chief Financial Officer,
of the effectiveness, as of the end of the period covered by this report, 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, President and Chief Executive Officer and its
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. |
| --- |
| Internal Control Over Financial Reporting: There have not been any changes in the
Company’s internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent quarter that have
materially affected, or are reasonably likely to materially affect, the Company’s 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 September 30, 2006, 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 and flavors and fragrances; growth or contraction in markets for
products in which the Company competes; terminations and other changes in customer
relationships; industry acceptance of price increases; currency exchange rate fluctuations;
results of litigation, environmental investigations or other proceedings; the matters
discussed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005; and the matters discussed above under Item 2 including the critical
accounting policies described therein. The Company does not undertake to publicly update
or revise its forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized. |

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

| Clean Air Act NOV |
| --- |
| On June 24, 2004, the United States Environmental Protection Agency (the “EPA”) issued a
Notice of Violation/Finding of Violation (“NOV”) to Lesaffre Yeast Corporation (“Lesaffre”)
for alleged violations of the Wisconsin air emission requirements. The NOV generally
alleges that Lesaffre’s Milwaukee, Wisconsin facility violated air emissions limits for
volatile organic compounds during certain periods from 1999 through 2003. Some of these
violations allegedly occurred before Lesaffre purchased Red Star Yeast & Products (“Red
Star Yeast”) from the Company. |

| On June 30, 2005, the EPA issued a second NOV to Lasaffre and Sensient which alleged that
certain operational changes were made during Sensient’s ownership of the Milwaukee facility
without complying with new-source review procedures and without the required air pollution
control permit. The Company has raised significant legal defenses in response to the June
2005 NOV. |
| --- |
| The Company has met with the EPA in an attempt to resolve the NOVs. In September 2005, as
follow-up to one of those meetings, the Company submitted information to refute the
allegations of the June 30, 2005 NOV and requested that the NOV be withdrawn. The Company
is awaiting the EPA’s response to that submission. |
| In connection with the sale of Red Star Yeast, the Company provided Lesaffre and certain of
its affiliates with indemnification against environmental claims attributable to the
operation, activities or ownership of Red Star Yeast prior to February 23, 2001, the
closing date of the sale. The Company has not received a claim for indemnity from Lesaffre
with respect to this matter. In December 2005, Lesaffre closed the Milwaukee plant. The
Company informed the EPA of this development. |
| Superfund Claim |
| On July 6, 2004, the EPA notified the Company’s Sensient Colors Inc. subsidiary that it may
be a potentially responsible party (“PRP”) under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) for activities at the General Color Company
Superfund Site in Camden, New Jersey. The EPA requested reimbursement of $10.9 million in
clean-up costs, plus interest. Sensient Colors Inc. advised the EPA that this site had
been expressly excluded from the Company’s 1988 stock purchase of H. Kohnstamm & Company,
Inc. (now Sensient Colors Inc.). The selling shareholders had retained ownership of and
liability for the site, and some became owners of General Color Company, which continued to
operate there until the mid-1990s. The Company’s legal defense costs are being paid, in
part, by an insurer with a reservation of coverage rights. Litigation to resolve coverage
rights is pending. The Company continues to assess the existence and solvency of other
PRPs, additional insurance coverage, the nature of the alleged contamination, and the
extent to which the EPA’s activities satisfy the requirements for reimbursement under
CERCLA, as well as issues surrounding the manner in which the 1988 transaction was
structured. In a letter to the EPA dated January 31, 2005, the Company outlined legal
challenges to the recoverability of certain costs and urged the EPA to pursue General Color
Company and related parties. The EPA subsequently informed the Company that it is
unwilling to discuss these legal challenges without prior conditions. The Department of
Justice must evaluate any referral by EPA for potential civil litigation under applicable
environmental laws. |
| Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co., et al. |
| The owner of Pleasant Gardens, 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 Inc.), 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 plaintiff’s property. Plaintiff voluntarily dismissed the
Company without prejudice. Sensient Colors Inc. filed an answer denying liability and
asserting affirmative defenses. Limited discovery has occurred. This area of Camden is
now being redeveloped by a public agency, which agency has notified plaintiff of its intent
to condemn the Pleasant Gardens property in connection therewith. To the extent that there
is a reduction in the sale or condemnation value of the Pleasant Gardens property due to
the agency’s
remediation of contamination for which Sensient Colors Inc is allegedly responsible, such
reduction may become a part of the damages claimed by plaintiff. |

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| Remmes v. Sensient Flavors Inc. et al. |
| --- |
| In June 2004, the Company and certain other flavor manufacturers were sued in Iowa state
court by Kevin Remmes, who alleged that while working at American Popcorn Company of Sioux
City, Iowa, he was exposed to butter flavoring vapors that caused injury to his respiratory
system. The Company, among others, sold butter flavoring used in the manufacture of
microwave popcorn to American Popcorn Company. The suit was removed to Federal District
Court for the Northern District of Iowa, Western Division. Plaintiff subsequently filed an
Amended Complaint adding a flavor industry trade association and its management company as
defendants. Two of the three counts in the Amended Complaint were
ultimately dismissed by the Court and the
final count was the subject of a motion for summary judgment.
On November 7, 2006, the Court issued a Settlement Order indicating
that the case is settled and is to be removed from the trial calender
and closed for statistical purposes. Neither the Company nor its
insurers were required to make any payment to any party as part of
the settlement. |

| Fults et al. v. Sensient Flavors Inc. et al. |
| --- |
| In August 2005, the Company and certain other flavoring manufacturers were sued in the City
of St. Louis, Missouri, Circuit Court by Elizabeth Fults (as administrator for the Estate
of Dixie Asbury), Nancy Lee Dudley and Jill Roth, all of whom allege that they suffered
damage as a result of work-related exposure to butter flavoring vapors at the Gilster-Mary
Lee microwave popcorn plant in McBride, Missouri. At present, it does not appear that the
Company ever sold butter flavoring products to this facility. Defendants filed a motion
for change of venue from St. Louis to Perry County, Missouri, which was granted by the
Court. Additional motions for change of venue and change of judge were subsequently filed
by plaintiffs and as a consequence, a firm scheduling order has not yet been entered. Once
these procedural issues are finalized, the Company intends to file a motion to dismiss and
will vigorously defend its interests in this case. |
| Kuiper et al. v. Sensient Flavors Inc. et al . |
| In late January 2006, the Company, certain other flavor manufacturers, and a flavor
industry trade association and its management company were sued in the Federal District
Court for the Northern District of Iowa, Western Division, by Ronald Kuiper and his spouse,
Conley Kuiper. Mr. Kuiper claims that while working at American Popcorn Company of Sioux
City, Iowa, he was exposed to butter flavoring vapors that caused injury to his respiratory
system. Ms. Kuiper’s claim is for loss of consortium. The allegations of this Complaint
are virtually identical to those contained in the Remmes Complaint. Plaintiffs’ counsel
moved to consolidate the Kuiper case with the Remmes case for discovery purposes; but the
Court denied the motion on procedural grounds. The Company believes that plaintiffs’
claims are without merit and is vigorously defending this case. A trial ready date of
November 5, 2007, has been set in this matter. |

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, 2005.

ITEM 6. EXHIBITS

See Exhibit Index following this report.

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SIGNATURES

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

	SENSIENT TECHNOLOGIES CORPORATION
Date: November 8, 2006	By: /s/ John L. Hammond John L. Hammond, Vice President, Secretary & General Counsel
Date: November 8, 2006	By: /s/ Richard F. Hobbs Richard F. Hobbs, Vice
President & Chief Financial
Officer

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SENSIENT TECHNOLOGIES CORPORATION

EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

Exhibit	Description	Filed Herewith
10.1(h)(2)	Waiver Regarding
Restricted Stock
Grant Agreements	X
31	Certifications of
the Company’s
Chairman, President
& Chief Executive
Officer and Vice
President & Chief
Financial Officer
pursuant to Rule
13a-14(a) of the
Exchange Act	X
32	Certifications of
the Company’s
Chairman, President
& Chief Executive
Officer and Vice
President & Chief
Financial Officer
pursuant to 18
United States Code
§ 1350	X

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