International Flavors & Fragrances Inc. (IFF) reported encouraging results for the second quarter of 2010. Adjusted net income soared 33.6% year over year to $68.7 million, or 85 cents per share compared with $51.4 million or 65 cents per share in the second quarter of 2009. Earnings per share (EPS) surpassed the Zacks Consensus Estimate of 82 cents.
Adjusted results for the second quarter 2010 excluded roughly 2 cents per share charge related to the company’s ongoing restructuring activities in Europe. In the reported quarter GAAP EPS was 83 cents compared with 60 cents in the year-ago quarter.
Revenue
In the second quarter, net sales were $665.8 million, up 17.2% year – over – year from $568.3 million in the comparable quarter of 2009 and 17.0% on a constant currency basis. Results also exceeded the Zacks Consensus Estimate of $620.0 million. The increase in revenue was attributable to new business wins and higher sales volumes in Europe, Africa, the Middle East (EAME) and Greater Asia.
Adjusted results for the second quarter 2010 excluded roughly 2 cents per share charge related to the company’s ongoing restructuring activities in Europe. In the reported quarter GAAP EPS was 83 cents compared with 60 cents in the year-ago quarter.
Revenue
In the second quarter, net sales were $665.8 million, up 17.2% year – over – year from $568.3 million in the comparable quarter of 2009 and 17.0% on a constant currency basis. Results also exceeded the Zacks Consensus Estimate of $620.0 million. The increase in revenue was attributable to new business wins and higher sales volumes in Europe, Africa, the Middle East (EAME) and Greater Asia.
The company operates in two segments: Flavors and Fragrances. Revenue from the Flavors business in the second quarter increased 12.8% year – over – year to $304.3 million and accounted for 45.7% of the total revenue. Constant currency growth was 11.0% year over year. Revenue from the Fragrances business, roughly 54.3% of total revenue, was $361.5 million, up 21.1% year over year. Constant currency growth was 23.0% year over year.
From a geographical perspective, revenue from North America increased 13.0% year over year, while results from EAME registered an escalation of 20.0%, or 25.0% on a constant currency basis. Revenue from Latin America grew by 15.0% or 13.0% on constant currency and from Greater Asia soared by 19.0% or 15.0% on constant currency.
Margins
The company maintained a strict cost control in the quarter. Gross margin moved up by 270 basis points (bps) to 42.8% based on higher volumes and sales mix, and lower input costs. Research and development expense as a percentage of sales moved up by 60 basis points to 8.4% and selling and administrative increased by 130 basis points to 18.0%.
Adjusted operating margin in the quarter was 16.5% compared with 15.6% in the year-ago quarter. Interest expense declined by 14.2% to $12.1 million in the quarter.
Balance Sheet
Exiting the second quarter, International Flavors & Fragrances had cash and cash equivalents of approximately $110.6 million compared with $89.9 million in the first quarter of 2010. Long-term debt, net of current portions rose slightly to $934.6 million from $934.1 million in the first quarter of 2010.
Cash Flow
Cash flow from operating activities in the quarter was $95.2 million versus $101.9 million in the second quarter of 2009. Capital spending went up by 121.1% year over year to $24.1 million compared with $10.9 million in the second quarter of 2009.
During the quarter, the company paid dividends totaling $19.8 million.
Outlook
Management was cautious about the outlook for the second half of 2010 and expects diminishing benefits from restocking activities. Revenue on a constant currency basis is expected to return to more normalized levels. Foreign currency impact might hurt results.
Our Take
International Flavors & Fragrances is one of the leading companies engaged in the creation and manufacturing of fragrance and flavor products in the United States and internationally. We believe that the company’s success will be driven by its substantial geographical presence and product mix. Also, the company’s accomplishments in research and intense consumer insight will augment its growth momentum. In addition the company’s strategy of reducing operating costs is expected to yield higher margins.
From a geographical perspective, revenue from North America increased 13.0% year over year, while results from EAME registered an escalation of 20.0%, or 25.0% on a constant currency basis. Revenue from Latin America grew by 15.0% or 13.0% on constant currency and from Greater Asia soared by 19.0% or 15.0% on constant currency.
Margins
The company maintained a strict cost control in the quarter. Gross margin moved up by 270 basis points (bps) to 42.8% based on higher volumes and sales mix, and lower input costs. Research and development expense as a percentage of sales moved up by 60 basis points to 8.4% and selling and administrative increased by 130 basis points to 18.0%.
Adjusted operating margin in the quarter was 16.5% compared with 15.6% in the year-ago quarter. Interest expense declined by 14.2% to $12.1 million in the quarter.
Balance Sheet
Exiting the second quarter, International Flavors & Fragrances had cash and cash equivalents of approximately $110.6 million compared with $89.9 million in the first quarter of 2010. Long-term debt, net of current portions rose slightly to $934.6 million from $934.1 million in the first quarter of 2010.
Cash Flow
Cash flow from operating activities in the quarter was $95.2 million versus $101.9 million in the second quarter of 2009. Capital spending went up by 121.1% year over year to $24.1 million compared with $10.9 million in the second quarter of 2009.
During the quarter, the company paid dividends totaling $19.8 million.
Outlook
Management was cautious about the outlook for the second half of 2010 and expects diminishing benefits from restocking activities. Revenue on a constant currency basis is expected to return to more normalized levels. Foreign currency impact might hurt results.
Our Take
International Flavors & Fragrances is one of the leading companies engaged in the creation and manufacturing of fragrance and flavor products in the United States and internationally. We believe that the company’s success will be driven by its substantial geographical presence and product mix. Also, the company’s accomplishments in research and intense consumer insight will augment its growth momentum. In addition the company’s strategy of reducing operating costs is expected to yield higher margins.
However, the cyclical nature of the flavors and fragrances industry might be a major hindrance to the company’s growth. Moreover, the intense competition within the industry reduces both top-line and bottom-line results. Prime competitors of the company include Danisco A/S, Firmenich SA, and Givaudan SA.
We currently maintain a Neutral recommendation on the stock, which is supported by Zacks #3 (Hold) Rank.
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