INTERNATIONAL FLAVORS & FRAGRANCES INC annual report, FY2022

International Flavors & Fragrances Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing. IFF is a global creator and manufacturer of food, beverage, health and bioscience, scent, pharmaceutical and specialty ingredients. Reportable segments were Nourish, Health & Biosciences, Scent and Pharma Solutions.

Financial Performance and Position

Metric	2022	2021	Change
Net sales	$12.440 billion	$11.656 billion	Up 7%
Gross profit	$4.151 billion	$3.735 billion	Up 11%
Gross margin	33.4%	32.0%	Up 140 basis points
Operating profit	$(1.326) billion	$585 million	Declined materially
Net income attributable to IFF shareholders	$(1.871) billion	$270 million	Declined materially
Diluted EPS	$(7.32)	$1.10	Declined materially
Operating cash flow	$397 million	$1.437 billion	Down 72%
Capital expenditures	$504 million	$393 million	Up 28%
Segment Adjusted Operating EBITDA	$2.455 billion	$2.425 billion	Up 1%

Reported sales growth was primarily driven by pricing, partly offset by volume declines, portfolio changes and foreign exchange. The 2022 comparison includes a full twelve months of Nutrition & Biosciences results, while 2021 included only eleven months. Approximately $568 million of 2022 sales represented incremental N&B sales for January that were not included in the comparable 2021 period.

Segment sales: Nourish $6.829 billion, up 9%; Health & Biosciences $2.339 billion, essentially flat; Scent $2.301 billion, up 2% reported and 8% currency neutral; Pharma Solutions $971 million, up 20%.
Segment Adjusted Operating EBITDA: Nourish $1.176 billion, Health & Biosciences $634 million, Scent $423 million and Pharma Solutions $222 million. Consolidated margin declined to 19.7% from 20.8%.
Major unusual charges: $2.250 billion goodwill impairment in Health & Biosciences and $120 million impairment of long-lived assets, primarily related to Russia and Ukraine operations. These charges were significant drivers of the reported loss.
Other expense pressures: Interest expense increased to $336 million from $289 million due to higher interest rates, increased borrowings and higher factoring costs. Income taxes were $239 million, producing a reported effective tax rate of negative 14.7%, primarily affected by nondeductible goodwill impairment and divestiture-related tax effects.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents were $483 million on the balance sheet, or approximately $535 million including $52 million classified within assets held for sale. Cash, cash equivalents and restricted cash totaled $552 million.
Total debt was approximately $10.970 billion, with $10.373 billion classified as long-term debt. Net debt for covenant purposes was $10.452 billion.
Credit-adjusted EBITDA was $2.523 billion and the covenant net debt-to-credit-adjusted-EBITDA ratio was 4.14x. IFF was in compliance with its debt covenants at year-end.
The $2.0 billion revolving credit facility had $100 million outstanding and approximately $902 million of borrowing capacity at year-end. The facility matures in 2026.
Senior notes and term loans include approximately $300 million of principal due within twelve months, plus $187 million of commercial paper outstanding. Future interest payments on notes were estimated at $4.006 billion, including $258 million due within twelve months.
Operating cash flow covered only part of capital expenditures and dividends in 2022. IFF paid $810 million of dividends and maintained its dividend at $3.20 per share for the year. The share repurchase program expired on November 1, 2022, and repurchases had been suspended since 2018.
Management stated that cash balances, operating cash flow and available credit facilities are expected to fund operating, investing and financing requirements. Planned 2023 capital spending was approximately 4.4% of sales.

Material Changes Versus the Prior Comparable Period

Sales and gross profit increased, but reported profitability deteriorated sharply because of the $2.250 billion goodwill impairment, $120 million long-lived-asset impairment, higher interest expense and other transformation-related costs.
Operating cash flow fell from $1.437 billion to $397 million, primarily because of increased working capital, especially inventories and accounts payable movements. Inventory increased to $3.151 billion from $2.516 billion.
IFF completed the $1.254 billion sale of its Microbial Control business on July 1, 2022, receiving net cash proceeds of $1.169 billion and recognizing an approximately $11 million pretax gain.
IFF acquired Health Wright Products for approximately $157 million, including estimated contingent consideration, to expand health and nutrition formulation capabilities.
During the fourth quarter, IFF announced an agreement to sell a portion of its Savory Solutions business. The transaction was expected to close in the second quarter of 2023, subject to customary conditions.
IFF announced a restructuring program expected to generate approximately $100 million of run-rate savings, including approximately $75 million targeted for 2023, at expected one-time costs of approximately $70 million. The program was expected to be completed by the end of 2023.
IFF continued its manufacturing footprint optimization. Twenty-two sites had been closed, with approximately 30 closures targeted by the end of 2023.
Standard & Poor’s downgraded IFF’s local currency long-term credit rating from BBB to BBB- on October 13, 2022. The company reported no debt rating downgrade triggers that would accelerate senior unsecured debt maturities.

Guidance, Outlook, Commentary and Risks

Management did not provide a single clear consolidated 2023 sales or earnings guidance figure in the supplied filing text. The filing describes expectations for pricing actions, cost discipline, margin recovery, portfolio optimization, continued innovation, capital spending of approximately 4.4% of sales and restructuring savings.

Macroeconomic pressure: Inflation in raw materials, transportation and energy, particularly European energy costs, could pressure margins. Price increases may reduce demand, volumes or market share.
Supply chain and geopolitical exposure: IFF sources approximately 30,000 raw materials globally and remains exposed to supply disruptions, climate events, energy costs, foreign exchange and the Russia-Ukraine conflict. Sales to Russia were approximately 2% of 2022 sales and sales to Ukraine were less than 1%.
Integration and transformation: The N&B integration, strategic transformation, restructuring, operating-model changes and portfolio divestitures may produce additional costs, execution risk, employee turnover or delayed synergies.
Goodwill sensitivity: Health & Biosciences goodwill was approximately $4.321 billion after the impairment and had only about 3% excess fair value over carrying value at November 30, 2022. Lower growth or margins, or higher discount rates, could lead to further impairment.
Debt and interest rates: Leverage, variable-rate borrowings, refinancing requirements and the LIBOR transition could increase borrowing costs or reduce financial flexibility.
Regulatory and product risks: The company faces food, pharmaceutical, environmental, product-quality, data-protection, anti-corruption and sanctions requirements. Certain Avicel microcrystalline cellulose grades were found to be out of specification; payments related to the matter were approximately $34 million and the company had a $19 million accrual at year-end.
Contingencies: IFF disclosed litigation, tax, environmental and other claims. Aggregate reasonably possible losses in excess of accrued liabilities were estimated at $0 to approximately $46 million, but actual outcomes could differ materially.

Important Facts for Investors to Verify

Whether 2023 restructuring savings and manufacturing footprint reductions are achieved on schedule and at the projected cost.
Whether Health & Biosciences stabilizes sufficiently to avoid additional goodwill impairment.
2023 operating cash flow, inventory reduction and working-capital performance relative to the $397 million generated in 2022.
Debt maturities, refinancing plans, covenant headroom and the effect of higher interest rates on interest expense.
Completion terms and proceeds for the Savory Solutions and Flavor Specialty Ingredients divestitures.
Underlying volume trends after separating pricing, foreign exchange, acquisitions and divestitures from organic performance.
Progress on N&B integration, margin recovery and realization of expected synergies.
Resolution and potential additional exposure related to Avicel product-quality matters, litigation, tax disputes and environmental proceedings.