SIAL (MM)

Sigma-Aldrich Corporation (SIAL) delivered second-quarter earnings of 93 cents, surpassing the Zacks Consensus Estimate by a penny and prior-year earnings per share (EPS) of 81 cents.

The company incurred restructuring costs of 2 cents per share, leading to adjusted earnings of 91 cents per share versus the prior-year earnings of 79 cents per share.

Revenue

Reported sales in the second quarter of 2011 were $637 million, increasing 15% year over year, outperforming the Zacks Consensus Estimate of $621 million. Excluding 8% impact from currency exchange rates and 1% from acquisitions, second-quarter organic sales growth came in at 6%.  

Second-quarter sales for the company's Research business grew 6% on a currency-adjusted basis, driven by research initiatives in analytical chemistry, biology, traditional chemistry and materials science, coupled with a 2% acquisition benefit to expand its analytical chemistry offering.

Revenues in Research business surged to $454 million versus $397million in the year-ago quarter and shot up 4% on an organic basis, driven primarily by growth in the Asia Pacific-Latin American markets.

SAFC posted revenues of $183 million, an increase of $26 million over the prior year, reflecting an organic growth of 10%. SAFC sales were led by double-digit growth in Bioscience and Hitech products.

The operating income margin in the second quarter was 25.1%. Gross margin of 52.0% was down 100 basis points over the 2010 level.

Financial Position

At the end of the second quarter of 2011, net cash provided by operating activities was $254 million versus $247 million in the prior-year quarter. Free cash flow was $210 million at the end of June 30, 2011, flat as compared to June 30, 2010. Capital expenditure was $44 million in the first half of 2011 versus $37 million in the first half of 2010.

The company repaid $23 million of its debt and returned $65 million to shareholders through share repurchases and dividends and utilized $75 million to fund acquisitions. The company's debt-to-capital ratio plunged to 19% at the end of the second quarter of 2011 from 21% at the end of December 2010.

Outlook

For full-year 2011, the company expects its organic sales to grow in the mid-single digit range. At current exchange rates, currency is expected to increase reportable sales for full year by approximately 5%.

The company is on route to execute its strategic initiatives to drive sales of its Research business and to emphasize on growth opportunities in fine chemicals, in its international markets and via e-commerce.

The company recently completed the acquisitions of Cerilliant Corporation Resource Technology Corporation and Vetec Quimica Fina Ltda in Brazil. These companies are expected to contribute approximately 1% to 2% to overall sales growth.

With the acquisition of Vetec in the second quarter, the company expanded its Research business. Vetec added to Sigma-Aldrich’s portfolio more than 3,000 products and also its 30 years of expertise in the development, purification and packaging of high quality chemicals for laboratory and manufacturing applications.

The company also affirmed its diluted adjusted EPS (excluding restructuring charges) outlook in the range of $3.60 to $3.75 for 2011.

The effective tax rate is anticipated to be approximately 29% to 30%, including a benefit from the U.S. R&D tax credit comparable to that realized in 2010. Net cash provided by operating activities is expected to exceed $520 million. Capital expenditures are expected to be approximately $120 million. Free cash flow is expected to exceed $400 million.

Our Take

St. Louis, Missouri-based Sigma-Aldrich Corporation is a leading life sciences and high technology company. It develops, manufactures and distributes various biochemicals and organic chemicals.

Apart from acquisitions, in order to boost its growth, Sigma-Aldrich plans to increase its focus on marketing, business development, R&D while continuing with its efforts to improve process and operations management.

Rising costs remain a key concern. Moreover, we are concerned regarding higher SG&A expenses, which are rising due to a pick-up in sales force, additions and continued marketing programs. We believe operating expenses will advance as the company increases discretionary spending on items, such as advertising, which would hamper Sigma’s operating margin. Although Sigma Aldrich foresees an improvement in operating margin, driven by internal efficiency programs that the company plans to execute through 2014, we believe it would be offset by higher investment in R&D, geographical expansion and e-commerce. We currently maintain a Zacks #4 Rank (short-term Sell recommendation) on Sigma and a long-term Neutral recommendation.

Sigma-Aldrich faces stiff competition from Bayer AG (BAYRY) and privately held companies Brenntag AG and VWR International, LLC.

 
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