Sigma-Aldrich (SIAL)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET


Rakesh Sachdev - Chief Executive Officer, President and Director

Kirk A. Richter - Interim Chief Financial Officer, Vice President and Treasurer

Sondra Brown -


S. Brandon Couillard - Jefferies & Company, Inc., Research Division

Summit Roshan - KeyBanc Capital Markets Inc., Research Division

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Jonathan P. Groberg - Macquarie Research

Daniel Arias - UBS Investment Bank, Research Division

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Julian Cochran - Leerink Swann LLC, Research Division

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Unknown Analyst -



Good day, ladies and gentlemen, and welcome to the Sigma-Aldrich Quarter 3 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Ms. Sondra Brown. Ma'am, you may begin.

Sondra Brown

Good morning, and welcome to Sigma-Aldrich Third Quarter 2011 Earnings Conference Call. This is Sondra Brown, Director of Investor Relations. With me today are Rakesh Sachdev, our President and CEO; and Kirk Richter, our Vice President, Treasurer Interim Chief Financial Officer. In today's call, Kirk will lead us with a review of our third quarter performance. Rakesh will follow that discussion with an update on the activities that contributed to our third quarter results and our outlook for all of 2011. 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 on our Investor Relations website at

Before beginning view, I wish to remind you that today's comments include forward-looking statements about future activities and our expectations for sales, earnings, cash flow and other possible future results. While we believe 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 31, 2010, and in the cautionary statement that is included in today's release and in our slides. We have no plans to update these forward-looking statements after this conference.

Also in today's conference call, we are providing information on non-GAAP financial measures. That information, which consists of currency and acquisition-adjusted sales growth, operating income and related margins, net income 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 website and in the appendix to today's presentation that begins with Slide 15. With that, Kirk Richter will lead us through our third quarter results. Kirk?

Kirk A. Richter

Thank you, Sondra and good morning to all of you. Our Q3 sales were $626 million, a reported increase of 11% over last year's third quarter. Our organic sales growth, which excludes the impact of changes in foreign currency exchange rates and acquisitions, was 4%. Our Research and SAFC businesses contributed to this growth at 4% and 2%, respectively. I'll review those increases shortly. Acquisitions added another 2% and changes in foreign currency exchange rates contributed 5% to the overall increase in reported sales over the prior year.

Our third quarter net income of $117 million is a 26% increase over last year's third quarter. Reported diluted EPS was $0.95, a gain of 25% over the prior year. On a comparable basis, excluding restructuring charges, adjusted net income of $118 million and adjusted diluted EPS of $0.96 increased by 15% and 16%, respectively, over the 2010 levels. We are now largely complete with the restructuring activities we announced late in 2009. These activities resulted in $1 million or $0.01 per share charge of after-tax restructuring in the quarter. We expect no additional restructuring charges in the fourth quarter of 2011 related to these programs.

In the third quarter of 2010, we recorded restructuring charges of $3 million or $0.02 per share, and impairment charges of $7 million or $0.05 per share. As a result of the efficiencies that we have begun to achieve from these restructuring actions, our EPS will benefit by about $0.10 as compared with the run rate prior to the actions some of which was realized this year. Our Q3 free cash flow of $90 million was $32 million less than the amount generated in the third quarter of 2010 but greater than the $77 million generated in the second quarter of 2011. Higher net income was offset by a planned working capital increase in inventories to support sales growth in select markets and to enhance customer service levels.

Now looking at our results for the first 9 months of 2011, our sales grew organically by 6%. In addition to growing our sales largely in line with expectation, we continue to be pleased with our double-digit growth in earnings in each of the first 3 quarters of 2011. Our adjusted net income was $354 million, and adjusted diluted EPS of $2.88 for the 9 months achieved 20% and 16% growth on a reported and adjusted basis, respectively. Free cash flow was down from the 2010 levels due to our planned increase in inventory but remained at a healthy $300 million with increased net income offset by working capital increases. Major uses of that cash include the repurchase of 2.1 million shares which returned $134 million to shareholders, acquisitions of $75 million, capital expenditures of $73 million and $65 million for dividends.

Now let's review our sales performance for the third quarter and first 9 months of 2011 in more detail. The 4% organic growth in Q3 for our research business matched our first-half performance and largely met our expectations in the current market environment. Our research sales in the U.S and Europe grew organically in the low single digits, while the Asia-Pacific and Latin America research business increased to near double digits, consistent with our performance in 2011's first half. Our acquisitions of Vetec Resource Technology Solution and Cerilliant contributed 3% and currency added 6% to the reported research sales growth in Q3.

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