IFF 2022 First-Quarter 10-Q Summary
Business Context and Reporting Period
International Flavors & Fragrances Inc. (IFF) filed its unaudited Form 10-Q for the quarter ended March 31, 2022. IFF develops and manufactures food, beverage, health and bioscience, scent, pharmaceutical and related specialty ingredients through four reportable segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions.
Year-over-year comparability is affected by the February 1, 2021 merger with DuPont’s Nutrition & Biosciences business. The first quarter of 2022 includes a full quarter of N&B results, while the first quarter of 2021 includes only two months. January 2022 sales included approximately $568 million attributable to N&B.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $3,226 million | $2,465 million | 31% |
| Gross profit | $1,145 million | $754 million | 52% |
| Gross margin | 35.5% | 30.6% | +490 bps |
| Operating profit | $341 million | $4 million | Not meaningful |
| Net income attributable to IFF stockholders | $244 million | $(42) million | Turned profitable |
| Diluted EPS | $0.96 | $(0.21) | Turned profitable |
| Adjusted operating EBITDA | $702 million | $569 million | 23% |
| Adjusted operating EBITDA margin | 21.8% | 23.1% | -130 bps |
| Cash flow from operations | $(4) million | $358 million | Declined |
Segment sales were $1,731 million for Nourish, $661 million for Health & Biosciences, $585 million for Scent, and $249 million for Pharma Solutions. Segment adjusted operating EBITDA was $329 million, $192 million, $116 million, and $65 million, respectively.
At March 31, 2022, cash and cash equivalents were $657 million, total debt was approximately $11.7 billion, and long-term debt was $10.738 billion. Commercial paper increased to $631 million from $324 million at December 31, 2021. Net debt for covenant purposes was $11.038 billion, and the net debt to Credit Adjusted EBITDA ratio was 4.18x. IFF reported compliance with its debt covenants and had $842 million of available capacity under its revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Reported sales increased 31%, driven by the additional January N&B results, pricing, and volume growth. Scent increased 3% reported, or 6% on a currency-neutral basis.
- Gross margin expanded because pricing and volume growth more than offset higher costs, although adjusted EBITDA margin declined because of higher commodity, transportation, energy and other input costs.
- Operating profit and net income improved substantially from the prior-year period, which included $182 million of N&B inventory step-up costs and $89 million of N&B transaction-related costs.
- Interest expense rose to $72 million from $65 million, partly reflecting additional N&B debt. The average cost of debt declined to 2.5% from 3.8%.
- Operating cash flow fell to an outflow of $4 million from $358 million of inflow, primarily because of increases in receivables and inventories and lower incentive compensation accruals.
- Inventories increased to $2.795 billion from $2.516 billion at year-end, while trade receivables increased to $2.160 billion from $1.906 billion.
- Foreign currency translation produced a $199 million after-tax loss in other comprehensive income, compared with a $417 million loss in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific full-year revenue or earnings forecast in the filing. IFF expects 2022 capital spending of approximately 5.0% of sales, compared with 3.4% in 2021, net of potential grants and reimbursements. Management expects operating cash flow and existing credit availability to fund investments, dividends and debt service.
- Inflation, raw-material costs, transportation, energy prices and supply-chain disruptions may continue to pressure margins. Management is pursuing pricing actions and cost discipline to recover margins.
- COVID-19 continues to create potential risks involving demand, manufacturing, logistics, input availability and asset impairments.
- IFF maintains operations in Russia and Ukraine and has limited Russia-related production and supply to essential needs. Russia and Ukraine each represented approximately 2% and less than 1% of sales, respectively, in the first quarter. IFF recorded approximately $20 million of expected credit losses on related receivables; no asset impairment was identified as of March 31, 2022.
- IFF expects to sell its Microbial Control business for approximately $1.282 billion in the third quarter of 2022. Assets of $1.141 billion and liabilities of $87 million were classified as held for sale at March 31, 2022.
- On April 1, 2022, IFF acquired Health Wright Products for approximately $131 million, including approximately $123 million paid at closing, plus estimated contingent consideration of approximately $44 million.
- Other unusual items included $30 million of business divestiture costs, $18 million of integration costs, $4 million of employee separation costs, and a favorable one-time tax benefit related to a bilateral advance pricing agreement.
- The company has approximately $31 million accrued for the Avicel product-quality matter, after approximately $30 million of payments, and states that total exposure could increase.
- Pending litigation, tax disputes, China plant-zoning matters, and other contingencies could produce losses beyond recorded amounts. The aggregate range of reasonably possible losses in excess of accrued liabilities for disclosed third-party contingencies was estimated at zero to approximately $35 million.
Important Facts for Investors to Verify
- Separate underlying organic performance from the timing effect of the N&B merger when assessing year-over-year growth.
- Verify whether pricing actions offset inflation and whether adjusted EBITDA margins recover from the 21.8% first-quarter level.
- Monitor working-capital usage, inventory levels and the ability to convert earnings into operating cash flow.
- Track leverage, commercial-paper balances, interest-rate exposure and compliance with debt covenants.
- Confirm the timing, proceeds and accounting impact of the planned Microbial Control divestiture.
- Assess potential additional credit losses or asset impairments related to Russia and Ukraine.
- Follow the Health Wright integration, contingent consideration and purchase-price allocation.
- Review the Avicel matter, Frutarom-related litigation and investigations, Brazil tax disputes, and China facility contingencies.