Another Strong Quarter for Sigma - Analyst Blog

Sigma-Aldrich Corp. (SIAL) delivered third quarter earnings of 83 cents, which surpassed both the Zacks Consensus Estimate of 73 cents and prior-year earnings per share (EPS) of 80 cents.

The company incurred restructuring and impairment costs of 7 cents in the reported quarter leading to reported EPS of 76 cents compared with reported EPS of 70 cents in the year ago quarter which included a 10 cents adverse impact from currency exchange rates.

Revenues rose 5% year over year to $563 million and surpassed the Zacks Consensus Estimate of $539 million. Excluding a 2% negative impact from foreign currency rates, organic growth came in at 7%. In the international arena, Asia Pacific and Latin America reported strong results with reported and organic growth of 24% and 18%, respectively.

In the company's focus markets of China, India and Brazil, sales collectively spiked 32% and 28% on a reported and organic basis, respectively. The research initiatives in analytical, biology and materials science products undertaken by the company also led to the growth in sales figures.

Specialty Fine Chemicals (“SAFC”) led the revenue growth resulting in an increase of 12% to $167 million. On an organic basis, sales grew 14% driven by strong demand of its Supply Solutions, Bioscience and Hitech products. Specialty Fine Chemicals' booked orders for future delivery were flat compared with the prior quarter and increased 5% compared with the year-ago quarter.

Revenues in the Research business grew 3% to $396 million and shot up 5% on an organic basis due to an increase in unit volumes. In addition, Sigma's award winning website also contributed to the improvement in sales of research products and led to a 49% year-over-year increase in the third quarter of 2010.

In the third quarter of 2010, each of SIAL's research business units drove organic sales growth that either exceeded or was equivalent to the growth achieved in the first half of fiscal 2010. This was due to the company's strong presence in the non-European international markets.

Sigma-Aldrich's operating margin jumped 260 basis points to 25.4%. After including restructuring costs of $4 million and impairment costs of $7 million, the operating margin in the third quarter was 23.4%.  Sigma has a longer-term goal to improve operating margins in the range of 26% to 27% range and the restructuring costs incurred were in line with the company's plans.

Financial Position

In the first nine months of 2010, net cash provided by operating activities was $397 million versus $362 million in the year-ago period. This increase is attributable to higher net income. Capital expenditures in the first nine months of 2010 reduced 26% to $65 million compared with the year-ago period.

The company repaid $100 million of its debt and returned $134 million to shareholders through share repurchases and a 10% increase in the quarterly dividend rate. The company's debt-to-capital ratio improved to 20% at the end of the third quarter of 2010 from 26% at the end of the prior year.

Outlook

For the full year 2010, the company reaffirmed its guidance for organic sales to increase in a mid-single digit range. At current exchange rates, currency is not expected to have a significant impact on full year reported sales. The company remains confident of its research initiative programs in analytical, biology and materials science, and its ongoing efforts to bring out new growth avenues in fine chemicals, international markets and e-commerce and which is expected to drive sales growth.

Sigma also increased its prior expectations of free cash flow for 2010 in excess of $360 million from in excess of $350 million previously.  The company expects capital expenditures of approximately $110 million versus its earlier expectation of approximately $120 million.

The company also raised its forecast for diluted adjusted earnings per share for 2010 in the range of $3.20 to $3.28 from $3.05 to $3.20 previously, reflecting the continued strong sales performance, a more favorable currency rate benefit from prior expectations and the benefits from cost management activities. This EPS outlook excludes the impact of restructuring and impairment charges and the impact of any acquisitions.