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International Flavors & Fragrances Inc. (IFF - Analyst Report) reported encouraging results for the third quarter of 2010. Adjusted net income soared 21.0% year over year to $79.1 million, or 98 cents per share compared with $65.4 million or 82 cents per share in the third quarter of 2009. Earnings per share (EPS) surpassed the Zacks Consensus Estimate of 86 cents.

Adjusted results for the third quarter 2010 excluded roughly 3 cents per share charge related to the company’s ongoing restructuring activities in Europe. GAAP EPS was 95 cents compared with 66 cents in the year-ago quarter.


Net sales were $673.3 million, up 10.0% year over year from $612.6 million in the comparable quarter of 2009 and 13.0% on a constant currency basis. Results exceeded the Zacks Consensus Estimate of $644.0 million. The increase in revenue was attributable to new business wins and higher sales volumes in all geographical regions. 

The company operates in two segments: Flavors and Fragrances.

Revenue from the Flavors business in the third quarter increased 9.0% year over year to $300.5 million and accounted for 44.6% of the total revenue. Constant currency growth was 10.0% year over year. Revenue from the Fragrances business, roughly 55.4% of total revenue, was $372.7 million, up 11% year over year.  Constant currency growth was 15.0% year over year.

From a geographical perspective, revenue from North America increased 10.0% year over year, while results from EAME registered an escalation of 3%, or 13.0% on a constant currency basis. Revenue from Latin America grew by 19.0% or 18.0% on constant currency and from Greater Asia soared by 14.0% or 12.0% on constant currency. 


The company maintained a strict cost control in the quarter. Gross margin moved up by 170 basis points (bps) to 42.3% based on higher volumes and sales mix, and moderating input costs. Research and development expense as a percentage of sales declined by 20 basis points to 7.9% and selling and administrative decreased by 30 basis points to 16.2%.

Adjusted operating margin in the quarter was 18.3% compared with 16.9% in the year-ago quarter. Interest expense declined by 9.3% year over year to $12.2 million in the quarter due to lower outstanding debt balance.

Balance Sheet

Exiting the third quarter, International Flavors & Fragrances had cash and cash equivalents of approximately $114.9 million versus $110.6 million in the second quarter of 2010. Long-term debt, net of current portions declined to 810.7 million from $934.6 million in the previous quarter.   

Cash Flow

Cash flow from operating activities in the quarter was $80.7 million, down from $112.5 million in the third quarter of 2009. Capital spending went up by 48.1% year over year to $16.6 million compared with $11.2 million in year-ago quarter.

During the quarter, the company paid dividends totaling $20.0 million.


Management expects that results in the fourth quarter will be primarily driven by strong local currency sales, which are approaching normalized levels. Despite setbacks from subsiding inventory restocking, new business wins are expected to be the potential growth drivers.

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. 

We currently maintain a Neutral recommendation on the stock.

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