Sigma-Aldrich (SIAL) Q3 Earnings Meet Estimates, Profit Dips

Lab chemical and life sciences company Sigma-Aldrich (SIAL) saw its profit slip in third-quarter 2014 as higher charges offset a rise in its top line in the quarter.

Sigma-Aldrich reported a profit of $108 million or 90 cents per share in the quarter, roughly a 9% fall from $119 million or 98 cents per share reported a year ago.

Excluding charges associated with restructuring, and merger and acquisition activities, earnings were $1.06 per share in the reported quarter compared with $1.05 per share a year ago. It matched the Zacks Consensus Estimate. The company recorded charges of $19 million (or 16 cents per share) in the reported quarter versus $8 million (or 7 cents per share) a year ago.

Revenues and Margins

Sales for the quarter went up around 4% year over year to $690 million on gains across the board, but fell shy of the Zacks Consensus Estimate of $691 million. Organic sales gain in the quarter was also 4%. Sales were supported by continued healthy momentum in the company’s Applied unit.

Operating income, as reported, fell roughly 3% from the year-ago quarter to $154 million. Adjusted operating margin for the reported quarter was 25.9%, increasing from 25.3% a year ago despite unfavorable currency translation impact.

Segment Highlights

The Research Business division’s sales went up 2% year over year to $347 million in the quarter. Sales also rose 2% organically. Research sales rose on gains across Academic, Pharma and Dealers segments in the quarter. Academic sales growth was positive in the U.S. while emerging market saw strong gains, especially in China.

Applied unit’s sales rose 10% both reported and organic basis to $170 million. The gain was driven by double-digit rise in diagnostics and testing business and strong growth in the Industrial segment.

Revenues from the SAFC Commercial segment were up 2% (4% organically) to $173 million with divestments reducing sales by 2%. Growth was driven by a double-digit rise in the Life Science Services segment and a mid single-digit gain in the Hitech unit.

Financials

Sigma-Aldrich exited the quarter with cash and cash equivalents of $886 million, up 29% year over year. Long-term debt was flat year over year at $300 million. Operating cash flow was essentially flat year over year at $484 million for the first nine months of 2014.

While Sigma-Aldrich did not repurchase shares in the reported quarter, it bought back 900,000 shares during the first nine months of 2014 for $85 million.

Acquisition by Merck KGaA

On Sep 22, 2014, Sigma-Aldrich announced that Germany’s Merck KGaA has agreed to buy it for $17 billion. Under the deal terms, Merck KGaA will buy all of the outstanding shares of Sigma-Aldrich for $140 per share in cash.

The merger will create a big player in the $130 billion global life science industry. The integrated company will be able to cater life science customers globally with a highly attractive set of established brands and an efficient supply chain that can facilitate the delivery of over 300,000 products. The customers will benefit from the offering of a vast array of complementary products and capabilities.

The deal has been cleared by Sigma-Aldrich’s board and is subjected to the approval of the company’s shareholders. The transaction, which is also subject to regulatory clearances and other closing conditions, is expected to close in mid-2015.

Outlook

Sigma-Aldrich did not provide guidance for 2014 given its proposed acquisition by Merck KGaA. The company sees sales for the fourth quarter to be roughly $25-$30 million less than its earlier guidance and adjusted earnings per share to be around 5 cents less than its previous expectations due to significant changes in currency exchange rates following Jun 30, 2014. The company will continue to provide update on the impact of currency swings on its results.

Sigma-Aldrich, earlier this month, agreed to acquire antibody reagents and kits maker Cell Marque Corporation to strengthen its diagnostic health capabilities. The company expects the transaction to close by the end of 2014 and be neutral to mildly accretive to its earnings per share next year.

Sigma-Aldrich currently carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the chemicals space include Westlake Chemical Corp. (WLK), Globe Specialty Metals, Inc. (GSM) and LyondellBasell Industries N.V. (LYB). While Westlake sports a Zacks Rank #1 (Strong Buy), both Globe Specialty Metals and LyondellBasell hold a Zacks Rank #2 (Buy).