International Flavors & Fragrances Inc. (IFF Quick QuoteIFF - Free Report) reported better-than-expected results for second-quarter 2017. Its adjusted earnings came in at $1.50 per share, surpassing the Zacks Consensus Estimate of $1.44 by 4.2%. Also, the bottom line grew 2% from the year-ago tally of $1.47.

Excluding the negative 6% impact from foreign currency movements, the company’s adjusted earnings increased nearly 8% year over year. The bottom-line growth was driven by improved revenue generation and lower shares outstanding.

The quarter’s net sales totaled $842.9 million, marginally below the Zacks Consensus Estimate of $843.3 million. However, the top line surpassed the year-ago quarter’s tally by 6% on the back of improved segmental performance and roughly 6% gains from acquired assets. On a constant currency basis, revenues climbed 8% from the prior-year period.

From a geographical perspective, revenues in North America increased 19% year over year while revenues in Europe, Africa and the Middle East were up 6% or rose 11% on a constant currency basis. Revenues from Latin American operations grew 3% year over year or inched up just 1% on a constant currency. Sales in Greater Asia were down 3% or slipped roughly 1% on a constant currency basis.

Segmental Revenues

International Flavors & Fragrances operates in two segments: Flavors and Fragrances.

Revenues generated from the Flavors business totaled $414.3 million, rising 9.2% year over year. It accounted for nearly 49.2% of net sales. On a constant currency basis, Flavors revenues rose 11% year over year.

The Fragrances business’ revenues were $428.5 million, up 3.5% year over year. It represented 50.8% of net sales in the quarter. On a constant currency basis, revenues grew 5% year over year.

Margins

International Flavors & Fragrances’ adjusted gross profit increased 4.8% year over year, representing 45.6% of net sales versus 46.2% in the year-ago quarter. Fall in gross margin was due to 9% rise of cost of sales more than offsetting growth in revenues.

Research and development expenses, as a percentage of sales, inched up 30 basis points (bps) to 8.3% while selling and administrative expenses decreased 80 bps to 15.9%.

Adjusted operating margin was 20.4% compared with 20.9% in the year-ago quarter. Interest expenses grew 17% year over year to $17.6 million.

Balance Sheet and Cash Flow

Exiting the second quarter, International Flavors & Fragrances’ cash and cash equivalents increased to $491.4 million from $300.1 million recorded in the preceding quarter. Also, long-term debt was $1,636.3 million, down 37.9% from $1,186.4 million in the previous quarter.

In the first half 2017, the company’s net cash from operating activities totaled $57.9 million, down 66.4% from the year-ago period. Capital spending grew 6.7% year over year to $46.2 million.

Roughly $101.2 million were paid as dividends in the first half while $53.2 million were spent for repurchasing treasury stocks.

Outlook

For 2017, International Flavors & Fragrances anticipates net sales to grow 7.5−8.5% on a currency neutral basis. Adverse foreign currency movements are likely to negatively impact sales by 1%.  

Operating profit is likely to grow 5.5−6.5%. Excluding the impact of 1.5% forex woes, adjusted operating profit will increase 4.0−5.0%.

Earnings per share will likely increase 6.5−7.5%. Excluding 2.5% negative forex impact, adjusted earnings will likely rise 4−5%.

In the quarters ahead, the company anticipates gaining from its acquired businesses as well as from its multi-year productivity program, enabling the company to check on costs, make strategic investments and expand businesses globally.

Zacks Rank & Key Picks

With a market capitalization of $10.63 billion, International Flavors & Fragrances presently carries a Zacks Rank #2 (Buy). Others stocks worth considering in the industry include Kraton Corporation , KMG Chemicals, Inc. and Ferro Corporation . While Kraton Corporation sports a Zacks Rank #1 (Strong Buy), both KMG Chemicals and Ferro Corporation carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kraton Corporation’s bottom-line estimates for 2017 and 2018 improved over the last 60 days. In the last quarter, the company reported better-than-expected results, with a positive earnings surprise of 49.09%.

KMG Chemicals witnessed upward earnings estimate revisions for fiscal 2018, over the past 60 days. The company posted an average positive earnings surprise of 12.54% for the trailing four quarters.

Ferro Corporation delivered a positive average earnings surprise of 16.17% for the last four quarters. Its earnings estimates for 2017 and 2018 were revised upward over the past 60 days.

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