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Rating Action:

MOODY'S DOWNGRADES SENSIENT TECHNOLOGIES' SENIOR UNSECURED RATING TO Ba1; OUTLOOK STABLE.

21 Jun 2004
MOODY'S DOWNGRADES SENSIENT TECHNOLOGIES' SENIOR UNSECURED RATING TO Ba1; OUTLOOK STABLE.

Approximately $150 Million In Debt Securities Affected

New York, June 21, 2004 -- Moody's Investors Service today downgraded Sensient Technologies' senior unsecured debt to Ba1 from Baa2, and assigned a stable rating outlook.

The downgrade is based upon: (1) Sensient's weakening operating performance; (2) the increased level of price competition and reduced profitability in key parts of its business and the company's difficulty in effectively adapting to a changing industry environment; (3) weak free cash flow, debt protection measures and financial flexibility for its rating category and business profile; and (4) the very low probability that Sensient can reduce leverage and improve its debt protection measures over the rating horizon to levels acceptable for its previous rating.

Over the past few years Sensient's credit profile has been negatively impacted by several key factors, including acquisitions, share repurchases, and a changing industry environment. 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 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 $118 million since 2000.

Also over the past few years, Sensient's operating environment has become more challenging. Competition, both foreign and domestic, has increased. 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 colors and flavors business. Both of Sensient's business segments have shown weak operating performance over the past year. Segment operating profit in the flavors and fragrance segment were down 2.1% in 2003 but down over 11% in the first quarter of 2004. Even more dramatic is Sensient's color business where segment operating earnings fell 11.3% in 2003, and were down 22.5% during the first quarter of 2004. 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, free cash flow has been negative, and leverage has continued to climb. Adjusted retained cash flow to adjusted debt has fallen from over 16% in 2002 to about 14.3% for the 12-months ended March 2004. 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 start to take hold. Yet given Moody's outlook for a continuing challenging industry environment, we believe Sensient's overall credit metrics fit more comfortably within the Ba1 rating category. Moody's also notes Sensient's somewhat limited financial flexibility under its committed bank credit facilities. While the company has adequate headroom under bank financial covenants, the excess of committed facilities over uncommitted short term debt is modest given the company's current operating challenges and weak working capital management. Should internal cash flows be weaker than expected or unforeseen cash needs arise, liquidity could become tight.

Sensient's Ba1 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 67% of Sensient's revenues are generated in the relatively stable food, beverage, and dairy industry. And while 61% of revenues are generated in North America, a solid 29% is generated in Europe and the UK. The rating also reflects the company's high leverage, very low (and at times negative) free cash flow, weak operating performance and declining margins, as well as the difficulties it has had in adapting its business model to a more competitive operating environment.

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 Ba1 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. For Sensient to maintain its Ba1 rating and prevent further a downgrade, we would expect it to generate retained cash flow to debt of at least 15%, and free cash flow to debt of at least 6%. While there is no upward rating pressure at this time, an upgrade over the intermediate term would require the company to stabilize its operating margins, strengthen its competitive position within the industry, and further reduce leverage such that retained cash flow to debt exceeds 20% and free cash flow to debt exceeds 10%.

Ratings downgraded as follows:

$150,000,000 senior unsecured notes due 4/1/2009 to Ba1 from Baa2

$300,000,000 senior unsecured shelf rated to (P)Ba1 from (P)Baa2

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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