SENSIENT TECHNOLOGIES CORP — Interim / Quarterly Report 2007

May 9, 2007

10-Q 1 c14954e10vq.htm QUARTERLY REPORT 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: March 31, 2007*

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 April 30, 2007
Common Stock, par value $0.10 per share	47,007,947 shares

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SENSIENT TECHNOLOGIES CORPORATION INDEX

PART I. FINANCIAL INFORMATION:
Item 1.	Financial Statements:
	Consolidated Condensed Statements of Earnings
— Three Months Ended March 31, 2007 and 2006	1
	Consolidated Condensed Balance Sheets
— March 31, 2007 and December 31, 2006	2
	Consolidated Condensed Statements of Cash Flows
— Three Months Ended March 31, 2007 and 2006	3
	Notes to Consolidated Condensed Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition
and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	11
Item 4.	Controls and Procedures	11
PART II. OTHER INFORMATION:
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 6	Exhibits	14
	Signatures	15
	Exhibit Index	16
Amended and Restated By-Laws
Section 302 Certifications
Section 1350 Certifications

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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 March 31,
	2007	2006
Revenue	$ 285,268	$ 262,924
Cost of products sold	199,120	183,485
Selling and administrative expenses	51,936	48,664
Operating income	34,212	30,775
Interest expense	9,252	8,708
Earnings before income taxes	24,960	22,067
Income taxes	7,614	6,449
Net earnings	$ 17,346	$ 15,618
Average number of common shares outstanding:
Basic	46,402	45,805
Diluted	46,909	45,972
Earnings per common share:
Basic	$ .37	$ .34
Diluted	$ .37	$ .34
Dividends per common share	$ .16	$ .15

See accompanying notes to consolidated condensed financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)

	March 31, — 2007	December 31,
	(Unaudited)	2006 *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 4,927	$	5,035
Trade accounts receivable, net	196,621		178,307
Inventories	330,074		333,070
Prepaid expenses and other current assets	36,894		35,290
TOTAL CURRENT ASSETS	568,516		551,702
OTHER ASSETS	47,924		47,208
INTANGIBLE ASSETS, NET	14,215		14,507
GOODWILL	450,434		449,194
PROPERTY, PLANT AND EQUIPMENT:
Land	40,051		39,762
Buildings	244,354		243,734
Machinery and equipment	571,381		567,057
Construction in progress	19,757		20,225
	875,543		870,778
Less accumulated depreciation	(488,124	)	(479,322	)
	387,419		391,456
TOTAL ASSETS	$ 1,468,508	$	1,454,067
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$ 77,411	$	80,916
Accrued salaries, wages and withholdings from employees	13,778		24,539
Other accrued expenses	52,999		49,620
Income taxes	5,864		14,309
Short-term borrowings	101,646		91,226
TOTAL CURRENT LIABILITIES	251,698		260,610
OTHER LIABILITIES	16,921		4,090
ACCRUED EMPLOYEE AND RETIREE BENEFITS	45,263		43,957
LONG-TERM DEBT	437,012		441,306
SHAREHOLDERS’ EQUITY:
Common stock	5,396		5,396
Additional paid-in capital	70,960		70,420
Earnings reinvested in the business	782,276		774,677
Treasury stock, at cost	(144,092	)	(147,662	)
Accumulated other comprehensive income	3,074		1,273
TOTAL SHAREHOLDERS’ EQUITY	717,614		704,104
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$ 1,468,508	$	1,454,067

• Condensed from audited financial statements.

See accompanying notes to consolidated condensed financial statements.

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SENSIENT TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

	Three Months
	Ended March 31,
	2007	2006
Net cash provided by operating activities	$ 5,095	$	20,782
Cash flows from investing activities:
Acquisition of property, plant and equipment	(6,827	)	(4,383	)
Proceeds from sale of assets	1,418		64
Decrease in other assets	252		512
Net cash used in investing activities	(5,157	)	(3,807	)
Cash flows from financing activities:
Proceeds from additional borrowings	24,679		22,624
Debt payments	(19,744	)	(32,455	)
Purchase of treasury stock	—		(4,563	)
Dividends paid	(7,481	)	(6,949	)
Proceeds from options exercised	2,514		—
Net cash used in financing activities	(32	)	(21,343	)
Effect of exchange rate changes on cash and cash equivalents	(14	)	152
Net decrease in cash and cash equivalents	(108	)	(4,216	)
Cash and cash equivalents at beginning of period	5,035		7,068
Cash and cash equivalents at end of period	$ 4,927	$	2,852

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 March 31, 2007 and December 31, 2006, the results of operations for the three
months ended March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007
and 2006. 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.
	Refer to the notes in the Company’s annual consolidated financial statements for the year ended
December 31, 2006, 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 3.
2.	Share-Based Compensation
	The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“Share-Based Payment,” on January 1, 2006, using the modified prospective transition method.
The Company recognized $1.5 million and $1.3 million of share-based compensation expense for the
quarters ended March 31, 2007 and 2006, respectively.
	The Company estimated the fair value of stock options using the Black-Scholes option pricing
model. Grants during the first quarters of 2007 and 2006 had weighted-average fair values of
$5.73 per share and $4.39 per share, respectively. Significant assumptions used in estimating
the fair value of awards granted during the quarters ended March 31, 2007 and 2006 are as
follows:

Dividend yield	2.7 %	3.3 %
Volatility	26.0 %	27.4 %
Risk-free interest rate	4.7 %	4.8 %
Expected term (years)	5.0	5.2

| 3. |
| --- |
| On January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This
interpretation prescribes the minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 also provides guidance
on the measurement, classification and derecognition of tax positions. As a result of
the adoption of FIN 48, the Company recognized an increase in the liability for
unrecognized tax benefits of approximately $2.3 million, which was accounted for as a
reduction to the January 1, 2007 balance of retained earnings. The Company’s liability
for unrecognized tax benefits at January 1, 2007, recorded in accordance with FIN 48, was
approximately $13.3 million. The amount of the unrecognized tax benefits that would
affect the effective tax rate, if recognized, was approximately $11.4 million. The
Company continues to recognize interest and penalties related to the unrecognized tax
benefits in income tax expense. Approximately $2.0 million of interest and penalties is
reported as an
income tax liability as of January 1, 2007. The liability for unrecognized tax benefits
is reported in other liabilities on the consolidated condensed balance sheet at March 31,
2007. |
| The Company believes that it is reasonably possible that the total amount of unrecognized
tax benefits will decrease by approximately $3.3 million during 2007. The potential
decrease relates to various tax matters |

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| | for which the statute of limitations may expire
in 2007. The amount that is ultimately recognized in the financial statements will be
dependent upon various factors including potential examinations, settlements and other
unanticipated items that may occur during the year. With limited exceptions, the Company
is no longer subject to federal, state and local, or non-U.S. income tax examinations by
tax authorities for years before 2002. |
| --- | --- |
| 4. | 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 March 31, 2007:
Revenue from external customers	$ 180,698	$ 92,786	$ 11,784		$ 285,268
Intersegment revenue	3,576	3,244	280		7,100
Total revenue	$ 184,274	$ 96,030	$ 12,064		$ 292,368
Operating income (loss)	$ 26,174	$ 17,232	$ (9,194	)	$ 34,212
Interest expense	—	—	9,252		9,252
Earnings (loss) before income taxes	$ 26,174	$ 17,232	$ (18,446	)	$ 24,960
Three months ended March 31, 2006:
Revenue from external customers	$ 167,483	$ 85,797	$ 9,644		$ 262,924
Intersegment revenue	3,031	3,359	360		6,750
Total revenue	$ 170,514	$ 89,156	$ 10,004		$ 269,674
Operating income (loss)	$ 22,893	$ 15,845	$ (7,963	)	$ 30,775
Interest expense	—	—	8,708		8,708
Earnings (loss) before income taxes	$ 22,893	$ 15,845	$ (16,671	)	$ 22,067

5.	Inventories
	At March 31, 2007 and December 31, 2006, inventories included finished and in-process products
totaling $235.7 million and $235.9 million, respectively, and raw materials and supplies of
$94.4 million and $97.2 million, respectively.
6.	Retirement Plans
	The Company’s components of annual benefit cost for the defined benefit plans for the
periods presented are as follows:

(In thousands)	Three Months Ended March 31, — 2007	2006
Service cost	$ 262	$	277
Interest cost	597		579
Expected return on plan assets	(159	)	(199	)
Amortization of prior service cost	484		320
Amortization of actuarial loss	48		84
Defined benefit expense	$ 1,232	$	1,061

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| | During the three months ended March 31, 2007, the Company made contributions to its
defined benefit pension plans of $0.5 million. Total contributions to Company defined
benefit pension plans are expected to be $3.9 million in 2007. |
| --- | --- |
| 7. | Comprehensive Income |
| | Comprehensive income is comprised of the following: |

(In thousands)	Three Months Ended March 31, — 2007	2006
Net earnings	$ 17,346	$ 15,618
Currency translation adjustments	1,711	2,930
Net unrealized (loss) gain on cash flow hedges	90	(133	)
Net comprehensive income	$ 19,147	$ 18,415

8.
Cash flows from operating activities are detailed below:

	Three Months Ended
	March 31,
(In thousands)	2007	2006
Cash flows from operating activities:
Net earnings	$ 17,346	$	15,618
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization	11,201		10,973
Stock-based compensation	1,488		1,336
Gain on assets	(538	)	(78	)
Deferred income taxes	1,190		982
Changes in operating assets and liabilities	(25,592	)	(8,049	)
Net cash provided by operating activities	$ 5,095	$	20,782

| 9. |
| --- |
| 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 Notices of Violation |
| 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 alleges 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 |

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| the allegations
of the June 30, 2005 NOV and requested that the NOV be withdrawn. In December 2005, Lesaffre
closed the Milwaukee plant. The Company informed the EPA of this development. |
| --- |
| On December 18, 2006, the EPA initiated an administrative proceeding to assess a penalty for the
alleged violations covered by the two NOVs. The EPA named Lesaffre as a respondent in that
proceeding. The EPA did not name Sensient as a respondent in that proceeding. The EPA proposed
a penalty covering both NOVs of $488,000. |
| 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. On December 20, 2006, Lesaffre formally requested indemnification from Sensient for the
portion of the civil penalty arising from the June 30, 2005 NOV. In January 2007, Sensient
agreed to be responsible for and undertake the defense of the claim related to the June 30, 2005
NOV. Lesaffre agreed to be responsible for and undertake the defense of the claim related to
the June 24, 2004 NOV. |
| In March 2007, Sensient reached a settlement with the EPA under which it agreed to pay an
administrative penalty of $125,000 to resolve the liability in connection with the claim related
to the June 30, 2005 NOV. The settlement documents are currently under review. Once finalized
and entered, the settlement documents will resolve Sensient’s involvement with respect to the
EPA NOV matters. |
| 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 “Site”). The EPA requested reimbursement of $10.9 million in
clean-up costs, plus interest. Sensient Colors Inc. 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 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 Sensient Colors Inc. that it was
unwilling to discuss these legal challenges without prior conditions. In 2006, the EPA issued a
news release stating that 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. Documents received
pursuant to a Freedom of Information Act request indicate that the EPA incurred additional
alleged response costs of approximately $4 million. |
| On March 16, 2007, the United States filed a complaint in the U.S. District Court in New Jersey
against Sensient Colors Inc. claiming “over $16 million” in response costs allegedly incurred
and to be incurred by the EPA pursuant to CERCLA. Sensient Colors Inc. intends to vigorously
defend its interests in the litigation and is evaluating, among other things, motions to
dismiss, the pursuit of additional PRPs, and the EPA’s right to recover its claimed response
costs. A response to the complaint is due by May 21, 2007. 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. |
| Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co., et al. |
| The owner of Pleasant Gardens (the “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 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 the
Property. Plaintiff voluntarily dismissed the Company without prejudice. Sensient Colors Inc.
filed an answer denying liability and asserting affirmative defenses. Limited discovery has
occurred. In November 2006, the Camden Redevelopment Agency (the “Agency”) filed condemnation
litigation against plaintiff (and other purported interested parties) to take the Property.
Sensient Colors Inc. 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 (“the DEP”), at $7.5 million. Sensient Colors Inc. 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 |

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| another party involved in the condemnation, the New Jersey
Schools Construction Corporation (“the NJSCC”). On March 29, 2007, plaintiff filed an amended
complaint naming the Agency, the NJSCC and the DEP as additional defendants in furtherance of
this effort. On April 20, 2007, Sensient Colors Inc. filed its answer to the amended complaint,
including cross claims against these newly added parties. 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 Inc. is allegedly responsible, such reduction may become
a part of the damages claimed by plaintiff. |
| --- |
| As of March 31, 2007, the liabilities related to environmental matters are estimated to be
between $1.6 million and $28.1 million. As of March 31, 2007, the Company has accrued $2.5
million for environmental matters, of which $1.9 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 |
| The following are significant commercial cases involving the Company. |
| 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. Both plaintiffs and defendants filed motions for change of
venue from the City of St. Louis, Missouri, to neighboring counties. These motions were granted
and the matter was moved to Cape Girardeau County, Missouri state court. Once these procedural
issues were resolved, the Company conducted focused discovery on the question of whether
plaintiffs could prove that any of the Company’s products were ever sold to the McBride
facility. According to the Company’s records, no such sales had ever taken place. Ultimately,
the plaintiffs agreed and voluntarily dismissed the case without prejudice. |
| Kuiper et al. v. Sensient Flavors Inc. et al . In late January 2006, the Company and 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 the 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 another complaint that was filed against the Company, involving another
worker at the same facility, that was ultimately settled with the Company paying nothing to the
plaintiff. 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 quarter ended March 31, 2007, was $285.3 million, an increase of 8.5% from
$262.9 million recorded in the prior year first quarter. Revenue for the Flavors &
Fragrances segment increased 8.1% for the first quarter of 2007 over the prior year first
quarter. Revenue for the Color segment increased 7.7% for the quarter ended March 31, 2007
over the comparable period last year. Revenue for Asia Pacific increased 20.6% for the
first quarter of 2007 from the prior year first quarter. Additional information on the
Flavors & Fragrances Group and Color Group results can be found in the Segment Information
section. |
| The gross profit margin was 30.2% in the first quarter of 2007, which was equal to the
margin in the first quarter of 2006. Higher selling prices in the first quarter of 2007
offset the impact of increased raw material costs. |
| Selling and administrative expenses as a percent of revenue decreased to 18.2% for the
quarter ended March 31, 2007, from 18.5% in the first quarter of 2006. Revenue increased
at a higher rate than the increase in selling and administrative expenses in the first
quarter of 2007 from the prior year first quarter. |
| Operating income for the quarter ended March 31, 2007, was $34.2 million, an increase of
11.2% from $30.8 million for the first quarter of 2006. The change in operating income was
primarily due to the higher revenue discussed above. |
| Favorable foreign exchange rates increased revenue and operating profit by 3.1% and 3.3%,
respectively, for the three months ended March 31, 2007, over the same quarter of 2006. |
| Interest expense for the first quarter of 2007 was $9.3 million, an increase of 6.2% over
the prior year first quarter. The increase was a result of higher average rates partially
offset by a reduction in the average debt balance. |
| The effective income tax rates were 30.5% and 29.2% for the quarter ended March 31, 2007
and 2006, respectively. The effective tax rates for both periods were reduced by the
resolution of prior years’ tax matters. Management expects the effective tax rate for the
remainder of 2007 to be 33%, excluding the income tax expense or benefit related to
discrete items, which will be reported separately in the quarter in which they occur. |
| SEGMENT INFORMATION |
| Flavors & Fragrances – Revenue for the Flavors & Fragrances segment in the quarter ended March 31, 2007, increased
8.1% to $184.3 million from $170.5 million for the same period last year. The increase in
revenue was primarily due to higher volumes and prices of dehydrated flavors in North
America ($5.1 million), higher volumes and prices in Latin America ($1.0 million), higher
volumes in Asia ($1.0 million) and in the fragrances product line ($1.8 million), and the
favorable impact of foreign exchange rates ($4.5 million). |
| For the first quarter of 2007, operating income increased 14.3% to $26.2 million from $22.9
million last year. The increase was primarily attributable to higher profit in North
America ($2.3 million), Latin America ($0.4 million) and Europe ($0.7 million). The
increase in North America was primarily due to improved pricing and higher volumes of
dehydrated flavors and favorable energy costs, partially offset by higher raw material and
other costs. The increase in Latin America was primarily due to improved pricing and
higher volumes. The increase in Europe was primarily due to lower costs. Operating income
as a percent of revenue was 14.2%, an increase of 80 basis points from the comparable
quarter last year, primarily due to the reasons provided above. |
| Color – Revenue for the Color segment for the first quarter of 2007 increased 7.7% to $96.0 million
from $89.2 million reported in the prior year’s comparable period. The increase in revenue
was primarily due to higher
volumes of food and beverage colors worldwide ($4.2 million), higher volumes of cosmetic
colors worldwide ($1.9 million) and the favorable effect of foreign exchange rates ($3.0
million), partially offset by lower sales |

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| of technical colors ($2.4 million). The decrease
in sales of technical colors is primarily related to lower demand for inkjet inks and
industrial colors. |
| --- |
| For the three months ended March 31, 2007, operating income was $17.2 million, an increase
of 8.8% from $15.8 reported in the comparable period last year. The increase was primarily
due to the impact of higher volumes of food and beverage colors ($0.7 million) and cosmetic
colors ($0.8 million) and the favorable effect of foreign exchange rates ($0.7 million),
partially offset by the impact of lower technical color sales ($0.7 million). Operating
income as a percent of revenue was 17.9%, compared with the prior year’s 17.8%. |
| FINANCIAL CONDITION |
| The Company’s ratio of debt to total capital improved to 42.9% as of March 31, 2007, from
43.1% as of December 31, 2006. The improvement resulted from an increase in equity ($13.5
million) partially offset by an increase in total debt ($6.1 million) since December 31,
2006. |
| Cash provided by operating activities was $5.1 million for the three months ended March 31,
2007, compared to $20.8 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 and accrued salaries and wages. The impact of accounts receivable was primarily
related to the higher sales in the quarter and the impact of accrued salaries and wages was
primarily related to incentive and benefit plan payments earned in 2006. |
| Net cash used in investing activities was $5.2 million and $3.8 million for the quarter
ended March 31, 2007 and 2006, respectively. Capital expenditures were $6.8 million and
$4.4 million for the three months ended March 31, 2007 and 2006, respectively. |
| Net cash used in financing activities was $0.03 million for the three months ended March
31, 2007, compared to $21.3 million in the prior year period. Net borrowings of debt were
$4.9 million for the first quarter of 2007 compared to net repayments of $9.8 million in
the prior year quarter. For purposes of the cash flow statement, net changes in debt
exclude the impact of foreign exchange rates. Dividends of $7.5 million and $6.9 million
were paid during the quarters ended March 31, 2007 and 2006, respectively. During the
first quarter of 2007, the Company had to borrow to supplement cash provided from
operations to fund capital expenditures and pay dividends but expects that cash from
operations will improve for the remainder of 2007. During 2006, the net cash provided from
operating activities was sufficient to fund capital expenditures, pay dividends and reduce
borrowings. |
| 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. |
| CONTRACTUAL OBLIGATIONS |
| There have been no material changes in the Company’s contractual obligations during the
quarter ended March 31, 2007. For additional information about contractual obligations,
refer to pages 23 and 24 of the Company’s 2006 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, 2006. |
| CRITICAL ACCOUNTING POLICIES |
| There have been no material changes in the Company’s critical accounting policies during
the quarter ended March 31, 2007, except for the implementation of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes.” See Note 3 in the Notes to the Consolidated Condensed Financial Statements
for additional information on the implementation of FIN 48. For additional information
about critical accounting policies, refer to page 22 of the Company’s
2006 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, 2006. |

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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 March 31, 2007. For additional information about market risk, refer to pages 22 and 23 of the Company’s 2006 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, 2006.

ITEM 4. CONTROLS AND PROCEDURES

| Evaluation of Disclosure Controls and Procedures: The Company carried out an evaluation,
under the supervision and with the participation of management, including the Company’s
Chairman, 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
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,
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. |
| --- |
| 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. |
| 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 March 31, 2007, 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 and 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, including 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 and customer 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, 2006; 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 Notices of Violation |
| --- |
| 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 alleges 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.
In December 2005, Lesaffre closed the Milwaukee plant. The Company informed the EPA of
this development. |
| On December 18, 2006, the EPA initiated an administrative proceeding to assess a penalty
for the alleged violations covered by the two NOVs. The EPA named Lesaffre as a respondent
in that proceeding. The EPA did not name Sensient as a respondent in that proceeding. The
EPA proposed a penalty covering both NOVs of $488,000. |
| 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. On December 20, 2006, Lesaffre formally requested
indemnification from Sensient for the portion of the civil penalty arising from the June
30, 2005 NOV. In January 2007, Sensient agreed to be responsible for and undertake the
defense of the claim related to the June 30, 2005 NOV. Lesaffre agreed to be responsible
for and undertake the defense of the claim related to the June 24, 2004 NOV. |
| In March 2007, Sensient reached a settlement with the EPA under which it agreed to pay an
administrative penalty of $125,000 to resolve the liability in connection with the claim
related to the June 30, 2005 NOV. The settlement documents are currently under review.
Once finalized and entered, the settlement documents will resolve Sensient’s involvement
with respect to the EPA NOV matters. |
| 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 “Site”). The EPA requested reimbursement of
$10.9 million in clean-up costs, plus interest. Sensient Colors Inc. 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 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 Sensient Colors Inc. that it was unwilling to discuss these legal challenges
without prior conditions. In 2006, the EPA issued a news release stating that 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. Documents received pursuant to a
Freedom of Information Act request indicate that the EPA incurred additional alleged
response costs of approximately $4 million. |
| On March 16, 2007, the United States filed a complaint in the U.S. District Court in New
Jersey against Sensient Colors Inc. claiming “over $16 million” in response costs allegedly
incurred and to be incurred by the EPA pursuant to CERCLA. Sensient Colors Inc. intends to
vigorously defend its interests in the |

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| litigation and is evaluating, among other things,
motions to dismiss, the pursuit of additional PRPs, and the EPA’s right to recover its
claimed response costs. A response to the complaint is due by May 21, 2007. 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. |
| --- |
| Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co., et al. |
| The owner of Pleasant Gardens (the “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 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 the Property. Plaintiff
voluntarily dismissed the Company without prejudice. Sensient Colors Inc. filed an answer
denying liability and asserting affirmative defenses. Limited discovery has occurred. In
November 2006, the Camden Redevelopment Agency (the “Agency”) filed condemnation litigation
against plaintiff (and other purported interested parties) to take the Property. Sensient
Colors Inc. 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 (“the DEP”), at $7.5 million. Sensient Colors Inc. 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 (“the NJSCC”). On March 29,
2007, plaintiff filed an amended complaint naming the Agency, the NJSCC and the DEP as
additional defendants in furtherance of this effort. On April 20, 2007, Sensient Colors
Inc. filed its answer to the amended complaint, including cross claims against these newly
added parties. 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 Inc. is
allegedly responsible, such reduction may become a part of the damages claimed by
plaintiff. |
| 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. Both plaintiffs and defendants filed
motions for change of venue from the City of St. Louis, Missouri, to neighboring counties.
These motions were granted and the matter was moved to Cape Girardeau County, Missouri
state court. Once these procedural issues were resolved, the Company conducted focused
discovery on the question of whether plaintiffs could prove that any of the Company’s
products were ever sold to the McBride facility. According to the Company’s records, no
such sales had ever taken place. Ultimately, the plaintiffs agreed and voluntarily
dismissed the case without prejudice. |
| Kuiper et al. v. Sensient Flavors Inc. et al . |
| In late January 2006, the Company and 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 the 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 another complaint that was filed
against the Company, involving another worker at the same facility, that was ultimately
settled with the Company paying nothing to the plaintiff. 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 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, 2006.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company’s 2007 Annual Meeting of Shareholders, held on April 26, 2006, the following actions were taken:

• The following Directors were each elected for a one-year term of office:

Hank Brown	43,615,656	1,176,962
Dr. Fergus M. Clydesdale	42,963,105	1,829,513
James A.D. Croft	42,632,603	2,160,015
William V. Hickey	38,933,104	5,859,514
Kenneth P. Manning	43,126,506	1,666,112
Peter M. Salmon	43,773,361	1,019,257
Dr. Elaine R. Wedral	43,771,840	1,020,778
Essie Whitelaw	42,514,087	2,278,531

Pursuant to the terms of the Company’s Proxy Statement, proxies received were voted, unless authority was withheld, in favor of the nominees.

| • | The shareholders approved a proposal by the Board of Directors to
ratify the appointment of Ernst & Young LLP as the Company’s independent
auditors to conduct the annual audit of the consolidated financial statements
of the Company and its subsidiaries for the year ending December 31, 2007.
The shareholders cast 44,009,114 votes in favor of this proposal, 727,513
votes against, and there were 55,991 votes to abstain. |
| --- | --- |
| • | The Sensient Technologies Corporation 2007 Restricted Stock Plan
was also approved. The shareholders cast 28,760,549 votes in favor of this
proposal, 12,814,001 votes against, and there were 245,652 votes to abstain
and 2,972,416 broker non-votes. |

ITEM 6. EXHIBITS

See Exhibit Index following this report.

14

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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.

Date:	May 9, 2007	SENSIENT TECHNOLOGIES CORPORATION — By:	/s/ John L. Hammond
		John L. Hammond,
		Vice President, Secretary & General Counsel
Date:	May 9, 2007	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 MARCH 31, 2007

Exhibit	Description	Filed Herewith
3.2	Amended and
Restated By-Laws of
Sensient
Technologies
Corporation as
amended as of April
26, 2007	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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