Sigma-Aldrich Corporation (

SIAL

)

Q3 2010 Earnings Call Transcript

October 21, 2010 11:00 am ET

Executives

Kirk Richter – Treasurer and IR

Rakesh Sachdev – SVP, CFO, and Chief Administrative Officer

Jai Nagarkatti – Chairman, President, and CEO

Analysts

Dan Leonard – Leerink Swann

Quintin Lai – Robert W. Baird

John Roberts – Buckingham Research

Jon Groberg – Macquarie

Mike Sison – KeyBanc

Tracy Marshbanks – First Analysis

Isaac Ro – Goldman Sachs

Dmitry Silversteyn – Longbow Research

Derik de Bruin – UBS

Paul Knight – CLSA

Brandon Couillard – Jefferies

Presentation

Operator

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Good morning. My name is Elizabeth, and I will be your conference operator today. Today's conference is being recorded. At this time, I would like to welcome everyone to the Sigma-Aldrich third quarter 2010 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) I will now turn the call over to Mr. Kirk Richter, Treasurer and Investor Relations contact. Please go ahead, sir.

Kirk Richter

Thank you. And also, I'll add my good morning and welcome to the Sigma-Aldrich third quarter 2010 earnings conference call. With me today are Jai Nagarkatti, our Chairman, President and CEO; and, Rakesh Sachdev, our Senior Vice President, Chief Financial Officer, and Chief Administrative Officer.

After my introductory comments, Rakesh will review our third quarter 2010 performance and our outlook for all of 2010. Jai will follow that with an update on the activities that contributed to our third quarter results and are expected to drive our performance for the final quarter of 2010 and in the future. After completing those reviews, we'll open up the call for your questions and comments.

We will be using a slide presentation as part of today's call. That presentation can be viewed by accessing our Investor Relations Web site on sigma-aldrich.com.

Before we begin these reviews, I do need to remind you that today's comments will include forward-looking statements about future activities and our expectations for sales, earnings, cash flow and other possible future results. While we believe that these expectations are based on reasonable assumptions, actual results may differ materially due to any number of factors, including the risk factors listed in our annual report on Form 10-K for the year ended December 31st, 2009 and in the cautionary statement that is included in today's release and in our slides. We've no plans to update these forward-looking statements after this conference.

Also we do provide information on non-GAAP financial measures covered that are in today's conference. That information, which consists of currency-adjusted sales growth, profit and EPS results on both an adjusted and reported basis, and free cash flow reconciled to net cash provided by operating activities, is also contained in today's earnings release, which is posted on our Web site and in the appendix to today's presentation that begins with slide 13.

Now I'll ask Rakesh to begin our review. Rakesh?

Rakesh Sachdev

Thanks, Kirk, and good morning to all those who are attending the call today. Our third quarter sales of $563 million, a reported increase of 5% over last year's third quarter; our organic growth, excluding a currency impact, was 7% equivalent to our second quarter organic growth rate; consistent year-over-year organic growth of about 5% in our research business; and, double-digit organic growth in our fine chemicals business contributed to our growth in the quarter.

Our third quarter net income of $93 million is an 8% increase on a reported basis from last year's third quarter. Our reported diluted EPS for the third quarter was $0.76, an increase of 9% over last year. Excluding $0.02 of restructuring and $0.05 of impairment costs, adjusted diluted EPS was $0.83, a 19% increase over last year's third quarter.

Currency had a positive impact of $0.04 on our third quarter earnings. With the recent improvement in exchange rates, currency is not likely to have a major impact on our fourth quarter diluted EPS.

The $0.02 restructuring charge relates to the consolidation of some of our facilities and a planned and previously announced workforce reduction. These restructuring actions are intended to increase the efficiencies of our operations and lower our overall fixed cost structure. We expect to record additional costs approximating $15 million related to these actions during the balance of 2010 and 2011. We expect that the benefit of these restructuring actions, when fully implemented, should add about $0.10 to our annual EPS. The $0.05 impairments costs relates to the reduction in the value of one of our long-term investments to reflect current market value.

Finally, our free cash flow in the third quarter of $122 million was a 6% improvement over that achieved in last year's third quarter.

Our sales for the first nine months of 2010 have grown organically by 6%. And we have achieved adjusted net income and diluted EPS of 20%, compared with last year. Our year-to-date free cash flow continued to be a record, increasing 21% over last year's first nine months.

Now let's review our sales performance for the third quarter and for the first nine months of 2010 in more detail. All three of our research businesses showed positive momentum in the third quarter led by our analytical and material science product groups that grew in double digits. The increase in analytical products comes from the environmental, food and beverage, and biopharmaceutical sectors. Material science sales are benefiting from new product offerings as well as new enhanced marketing efforts to promote this group of products.

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