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Rating Action:

MOODY'S DOWNGRADES SENSIENT TECHNOLOGIES' SENIOR UNSECURED DEBT TO Baa2; OUTLOOK STABLE.

19 Dec 2003
MOODY'S DOWNGRADES SENSIENT TECHNOLOGIES' SENIOR UNSECURED DEBT TO Baa2; OUTLOOK STABLE.

Approximately $150 Million In Debt Securities Affected

New York, December 19, 2003 -- Moody's Investors Service today downgraded Sensient Technologies' senior unsecured debt to Baa2 from Baa1, and assigned a stable outlook to those ratings.

The downgrade is based upon: (1) Sensient's weakening operating performance; (2) the steady rise in the company's leverage due to high capital spending, acquisitions, share repurchases, and recent working capital increases; (3) the increased level of price competition and reduced profitability in key parts of its business; and (4) the company's challenges in adapting to a changing industry environment. Given its reduced financial flexibility due to higher leverage, Sensient has been unable to absorb weaker operating performance without a deterioration in its credit profile.

The stable outlook reflects Moody's expectation that Sensient will (a) stabilize its operating performance; (b) scale back spending on share repurchases and acquisitions, and (c) improve its working capital management in order to improve debt protection measures to levels appropriate for a Baa2 credit of its size and business profile. There is limited scope in Sensient's rating for additional leverage. Should the company resume material acquisitions or share repurchases, or should its operating performance continue to weaken, its ratings could come under additional downward pressure.

Sensient's credit profile has been negatively impacted by a confluence of factors. The company has spent $166 million on acquisitions since 2000 to redirect its businesses portfolio toward what it felt were higher growth businesses. These acquisitions were partially funded by $139 million in asset sales. It also significantly stepped up its capital expenditures and temporarily increased working capital investment in 2003 in order to more effectively consolidate its past acquisitions and build a new manufacturing and research facility in Europe. Yet while this significant business transformation was occurring, the company repurchased over $120 million of its equity and paid out $98 million in dividends. Debt increased by $111 million since 2000.

Also over the past few years, Sensient's operating environment has become more challenging. The consolidation of food and consumer products companies has resulted in a slowdown in new product introductions -- dampening opportunities for Sensient to seek new flavors or colors business with major manufacturers. Additionally, as food and consumer products companies have looked for ways to reduce their own costs, they have pushed back on suppliers -- such as Sensient -- by either seeking pricing concessions or switching to lower-margin ingredients. Both of these factors have negatively impacted volumes and profits in key parts of Sensient's business. For example, in Sensient's colors segment, Q3 2003 revenues and operating income fell 7.7% and 22% respectively if the favorable impacts of acquisitions and foreign exchanges movements are excluded. From a consolidated basis, reported 3rd quarter operating income declined 7.6%, but fell 11.1% if favorable foreign exchange movements are excluded. Moody's expects the challenging industry environment to continue into the foreseeable future.

As a result of Sensient's higher debt and weaker operating performance, the company's retained cash flow/debt (before working capital changes) decreased from 17% at 12/31/02 to approximately 14% for the 12 months ending 9/30/03. We expect debt to decline modestly in coming quarters as working capital levels reduce, as costs from recent facilities rationalization decline, as cost control programs continue, and as enhanced sales initiatives start to take hold. Yet given Moody's outlook for a continuing challenging industry environment, Sensient's overall credit metrics will fit more comfortably within the Baa2 rating category.

Sensient's Baa2 ratings are supported by its solid market position in the global colors and flavors industries, the diversity of its product line (albeit in the specialized flavor and color product segment) and its geographic diversity. Sensient holds number one or two global market positions in specific categories such as synthetic food colors, natural food colors, cosmetic colors, and inkjet inks. Over 65% of Sensient's revenues are generated in the relatively stable food, beverage, and dairy industry. And while 65% of revenues are generated in North America, a solid 25% is generated in Europe and the UK.

Ratings downgraded as follows:

$150,000,000 senior unsecured notes due 4/1/2009 rated to Baa2 from Baa1

$300,000,000 senior unsecured shelf rated to (P)Baa2 from (P)Baa1

Sensient Technologies Corporation, headquartered in Milwaukee, Wisconsin, is a leading global supplier of colors, flavors, and fragrances.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peter H. Abdill, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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