IFF

Business Context and Reporting Period

Company: International Flavors & Fragrances Inc. (IFF)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: IFF is a leading creator and manufacturer of flavor and fragrance compounds for consumer products, organized into two primary segments: Flavors and Fragrances. The company operates globally, serving food, beverage, personal care, and household product industries.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($1,187,211) minus Total Current Liabilities ($408,409).

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 11% in Q2 2009 and 9% in the first six months of 2009 compared to the prior year. This was driven by a 7% decline in Flavors sales and a 14% decline in Fragrances sales.
• Currency Impact: Foreign currency parity negatively impacted reported sales by approximately 7% in Q2 and 6% in the first half of 2009 due to a stronger U.S. dollar.
• Profitability Pressure: Net income fell 28% in Q2 and 23% in the first six months. Cost of goods sold as a percentage of sales increased to 59.9% (Q2) and 60.1% (6 months) from 58.5% and 58.7% respectively, due to higher input costs, lower volumes, and weaker product mix.
• Restructuring: The company recorded a net pre-tax restructuring charge of $4.1 million in Q2 2009, primarily related to the elimination of approximately 70 positions in the Fragrance business.
• Segment Performance:
  • Flavors: Operating profit margin improved to 20.2% in Q2 2009 from 19.6% in 2008, despite volume declines, due to cost recovery efforts.
  • Fragrances: Operating profit margin declined to 11.7% in Q2 2009 from 16.3% in 2008, driven by lower volumes in Fine Fragrances and Ingredients.

Guidance, Outlook, and Risks

• Outlook: Management expects gross additions to property, plant, and equipment to approximate $70 million for the full year 2009. Cash flows from operations and credit facility availability are expected to fund capital spending and requirements for at least the next 18 months.
• Dividends: The quarterly cash dividend was increased to $0.25 per share, a 9% increase from the prior year.
• Share Repurchases: The company repurchased 75,000 shares for $2 million in the first six months of 2009, a significant reduction from the $30 million spent in the comparable 2008 period. Approximately $266.8 million remains available under the repurchase program.
• Risks and Contingencies:
  • Litigation: 15 actions involving 352 claimants are pending regarding alleged respiratory illness from flavor ingredients (microwave popcorn cases). Management believes accrued liabilities are adequate and does not expect a material adverse effect.
  • Environmental: IFF is a Potentially Responsible Party (PRP) at ten waste sites. Estimated future costs are less than $5 million.
  • Debt Covenants: The company is compliant with its debt covenants, maintaining a Net Debt to Adjusted EBITDA ratio of 2.51 to 1 (limit is 3.25 to 1).

Investor Verification Checklist

• Currency Sensitivity: Verify the extent of the U.S. dollar's strength impact on future quarters, as it significantly reduced reported sales.
• Input Cost Inflation: Monitor raw material costs, which constitute 70% of COGS, and the company's ability to pass these costs to customers.
• Fragrance Segment Recovery: Assess the timeline for volume recovery in the Fine Fragrance and Ingredients categories, which drove the margin compression.
• Litigation Exposure: Review updates on the 15 pending respiratory illness lawsuits to ensure the accrued liability remains sufficient.
• Debt Servicing: Confirm continued compliance with the 3.25:1 Net Debt/EBITDA covenant given the current economic environment.