International Flavors & Fragrances Inc. — 2020 Q3 Form 10-Q
Reporting period: Unaudited results for the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. IFF operates through its Taste and Scent segments; prior-year segment information was recast after the 2020 reporting-structure reorganization.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $1,268.1 million | $1,267.3 million | $3,814.2 million | $3,856.3 million |
| Gross profit | $524.4 million | $533.1 million | $1,572.1 million | $1,610.6 million |
| Gross margin | 41.4% | 42.1% | 41.2% | 41.8% |
| Operating profit | $150.3 million | $184.7 million | $465.9 million | $548.5 million |
| Operating margin | 11.9% | 14.6% | 12.2% | 14.2% |
| Net income attributable to IFF | $84.8 million | $127.1 million | $295.6 million | $372.3 million |
| Diluted EPS | $0.75 | $1.13 | $2.64 | $3.30 |
| Operating cash flow | Not separately provided | Not separately provided | $415.0 million | $383.0 million |
- Q3 sales were flat on a reported basis and increased 1% on a currency-neutral basis. Taste sales declined 2% reported and 1% currency-neutral; Scent sales increased 4% on both bases.
- Q3 adjusted operating profit was $193.4 million, or 15.2% of sales, versus $200.9 million, or 15.9%, in the prior-year quarter. Nine-month adjusted operating profit was $573.8 million versus $619.6 million.
- Q3 earnings pressure reflected unfavorable price versus input costs, lower volumes in COVID-19-affected categories, unfavorable mix, higher raw-material costs, and increased selling and administrative expenses.
- Nine-month operating cash flow improved despite lower earnings, principally because of working-capital movements. Capital expenditures were $124.1 million, compared with $160.4 million in the prior-year period.
Liquidity, debt and capital allocation
- At September 30, 2020, cash and cash equivalents were $469.8 million, compared with $606.8 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $483.5 million.
- Total debt was $4.332 billion, including $3.891 billion of long-term debt and $441.0 million of current borrowings. Net debt was $3.862 billion.
- IFF repaid the $300 million 2020 Notes during Q3 and issued $200 million under the 2022 Term Loan. The company reported $628 million of borrowing capacity under its revolving credit facility and was in compliance with debt covenants.
- Net debt to adjusted EBITDA, as defined in the credit agreements, was 3.44x at September 30, 2020, versus a 4.0x maximum through the end of 2020.
- Nine-month dividends paid were $240.3 million. The quarterly dividend declared was $0.77 per share. Share repurchases remained suspended, with $279.7 million remaining under the approved program.
- Management expects 2020 capital spending of approximately 4% of sales, down from 5% in 2019, and believes cash balances and available credit will be sufficient for operating, investing and financing needs.
Material changes and unusual items
- COVID-19 reduced demand for Taste products used in retail food service and for Fine Fragrances, while Consumer Fragrances remained strong. Manufacturing facilities generally remained operational, but the company incurred higher labor, shipping, cleaning and raw-material costs.
- Q3 included $37.5 million of N&B transaction and integration costs; nine-month costs totaled $86.3 million. These costs were excluded from management’s non-GAAP adjusted results.
- Frutarom integration, restructuring, acquisition-related, compliance and legal-defense costs also reduced reported operating profit. Restructuring charges were $1.5 million in Q3 and $8.3 million for the nine months, versus $3.7 million and $22.4 million, respectively, in 2019.
- The company recognized $5.7 million of Brazilian indirect-tax recovery income during the first nine months, recorded as a reduction of selling and administrative expenses.
- Other expense was $9.9 million in Q3 and $4.8 million for the nine months, compared with other income of $5.7 million and $15.1 million in the prior-year periods, primarily reflecting foreign-exchange losses.
Outlook, transaction and risks
- IFF expected the DuPont Nutrition & Biosciences transaction to close in early 2021. IFF shareholders approved the share issuance, and the applicable Hart-Scott-Rodino waiting period had expired. DuPont shareholders were expected to receive approximately 55.4% of the combined company on a fully diluted basis.
- The transaction involves a $7.3 billion special cash payment to DuPont. N&B issued $6.25 billion of senior unsecured notes and entered into $1.25 billion of term-loan facilities; following closing, the obligations are expected to be guaranteed by IFF or assumed by IFF.
- Management expected approximately $145 million of Frutarom synergies and total Frutarom integration initiative costs of approximately $40 million to $50 million. Approximately 35 manufacturing sites are expected to close, with most closures targeted by the end of 2021.
- Management stated that the timing and extent of recovery in retail food service and Fine Fragrance demand remained uncertain. A prolonged pandemic could cause further supply-chain disruption, customer credit deterioration, margin pressure, liquidity effects and impairment of goodwill, intangibles or other assets.
- Material contingencies include securities litigation and Israeli investigations relating to alleged improper payments associated with Frutarom, Brazilian tax disputes, potential zoning-related impacts at Chinese facilities, and a possible $521.5 million termination fee under the N&B merger agreement in specified circumstances.
Investor verification points
- Verify the closing status, financing, final consideration and post-closing leverage of the DuPont N&B transaction.
- Assess whether COVID-19 demand recovery, particularly in retail food service and Fine Fragrances, supports management’s volume and margin expectations.
- Reconcile GAAP results with adjusted results and evaluate the recurring versus transaction, integration, restructuring and legal costs.
- Monitor debt covenant headroom, refinancing requirements, interest costs and the expected increase in leverage after the N&B transaction.
- Review developments in Frutarom-related litigation, anti-corruption investigations, Brazilian tax matters and Chinese plant-zoning contingencies.
- Evaluate cash conversion, receivables factoring, inventory increases and the sustainability of dividends alongside planned capital expenditures.