International Flavors & Fragrances Inc.’s third-quarter profits surpassed analysts’ expectations despite the settlement of a dispute with Spanish authorities that raised its effective tax rate and cut sharply into the bottom line.

This story first appeared in the November 7, 2012 issue of WWD. Subscribe Today.

In the three months ended Sept. 30, the New York-based firm reported net income of $16.4 million, or 20 cents a diluted share, down 80.1 percent from $82.2 million, or $1, in the year-ago quarter. On an adjusted basis, omitting special items including the settlement, adjusted earnings per share were $1.08, 4 cents above the consensus estimate of $1.04. The $72.4 million tax settlement elevated the company’s effective tax rate to 86.6 percent of pretax income, up from 26.9 percent in the 2011 period.

Sales fell short of estimates, declining 0.7 percent to $709 million, from $713.8 million in last year’s quarter, versus analysts’ estimates of $731.1 million in revenue. While flavor sales were flat at $340.7 million, fragrances declined 1.3 percent to $368.3 million. At constant currency, sales increased 5 percent.

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The company reduced its cost of goods sold 6.4 percent, to $407.4 million, helping to boost gross margin to 42.5 percent of sales from 39 percent a year ago.

Doug Tough, chairman and chief executive officer of IFF, noted that the fragrance compounds business grew 9 percent in local currencies, with fine and beauty care up 10 percent and functional fragrance up 8 percent.

“We saw strong momentum in every region and end-use category, with the exception of fragrance ingredients,” Tough said.

For the nine months, net income fell 23.3 percent to $186 million, or $2.26 a diluted share, as sales declined 0.1 percent to $2.14 billion.