Business Context and Reporting Period
International Flavors & Fragrances Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2021. IFF creates and manufactures food, beverage, health and biosciences, scent, pharmaceutical and related specialty solutions.
On February 1, 2021, IFF completed its merger with DuPont’s Nutrition & Biosciences (“N&B”) business. The quarter includes N&B results from the closing date; the March 31, 2020 comparison excludes N&B. IFF also changed to a calendar-year fiscal year and reorganized into Nourish, Health & Biosciences, Scent and Pharma Solutions.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2.465 billion | $1.347 billion | Up 83% |
| Gross profit | $754 million | $566 million | Up 33% |
| Gross margin | 30.6% | 42.0% | Down 1,140 bps |
| Operating profit | $4 million | $196 million | Down $192 million |
| Net income attributable to IFF | $(42) million | $124 million | Decline of $166 million |
| Diluted EPS | $(0.21) | $1.15 | Down $1.36 |
| Adjusted operating EBITDA | $569 million | $303 million | Up 88% |
| Adjusted operating EBITDA margin | 23.1% | 22.5% | Up 60 bps |
| Operating cash flow | $358 million | $17 million | Up $341 million |
| Capital expenditures | $93 million | $49 million | Up $44 million |
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $872 million at March 31, 2021, compared with $650 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $881 million.
- Total debt was $11.958 billion, including $11.330 billion of long-term debt and $628 million of short-term borrowings. The increase primarily reflects debt assumed in the N&B merger.
- Net debt was $11.086 billion, and the covenant net debt-to-credit-adjusted EBITDA ratio was 4.32x. IFF was in compliance with its debt covenants.
- The company had $1.098 billion of available capacity under its revolving credit facility and $6.295 billion of additional available lines of credit. It expects operating cash flow and existing facilities to fund operations, capital investments, dividends and debt service.
- Working capital was $2.913 billion at March 31, 2021, versus $1.156 billion at December 31, 2020. Receivables sold through factoring programs totaled approximately $304 million.
Material Changes Versus the Prior Comparable Period
- Sales increased by $1.118 billion, primarily because N&B contributed approximately $1.076 billion from the February 1 closing date, supplemented by volume growth in Nourish, Health & Biosciences and Scent.
- Gross margin contracted because N&B has a different product mix from IFF’s historical portfolio. Q1 2021 also included $182 million of N&B inventory step-up costs.
- Amortization of acquisition-related intangibles increased to $152 million from $48 million, and interest expense increased to $65 million from $32 million because of the merger-related debt and acquired intangible assets.
- Reported selling and administrative expense increased to $451 million from $230 million, including $89 million of N&B transaction-related costs and $37 million of N&B integration-related costs.
- Reported results included a $54 million pretax loss and a $42 million net loss attributable to IFF stockholders. Excluding disclosed non-GAAP items, adjusted net income attributable to IFF was $214 million, or $1.03 diluted EPS, versus $147 million, or $1.30, in Q1 2020.
- Segment sales and adjusted operating EBITDA were: Nourish $1.308 billion and $270 million; Health & Biosciences $426 million and $128 million; Scent $569 million and $128 million; and Pharma Solutions $162 million and $43 million.
Guidance, Outlook, Commentary and Risks
- Management expected 2021 capital spending of approximately 4.5% of sales, compared with approximately 4% in 2020.
- IFF expects to achieve approximately $145 million of Frutarom synergies. The Frutarom manufacturing optimization program targets approximately 35 site closures, with most closures targeted by the end of 2022; 22 sites had closed through March 31, 2021.
- Management stated that all manufacturing facilities remained open despite COVID-19, but continued pandemic effects could create volatility in retail, travel, consumer purchasing and consumption patterns and could increase impairment risk for goodwill, intangible assets and other long-lived assets.
- Key risks include integration of N&B and Frutarom, elevated leverage, raw-material, energy and transportation costs, supply-chain disruption, foreign-currency volatility, regulatory and anti-corruption matters, cybersecurity, environmental obligations, tax disputes, litigation and potential impairment charges.
- At March 31, 2021, IFF had $1.985 billion of bank guarantees, commercial guarantees, standby letters of credit and surety bonds. Management estimated reasonably possible losses in excess of accrued liabilities for third-party contingencies at $0 to approximately $28 million, while noting that ultimate losses could differ materially.
- The U.S. securities class action relating to alleged Frutarom disclosures was dismissed as to IFF, its officers and Frutarom on March 30, 2021; plaintiffs filed an appeal on April 28, 2021. Related Israeli proceedings and an Israeli investigation concerning former Frutarom executives remained ongoing.
- In the second quarter of 2021, IFF agreed to divest its fruit preparation business to Frulact. Closing was expected in the third quarter, subject to customary conditions and regulatory approvals, and was not expected to materially affect results.
Most Important Facts to Verify
- Confirm the final purchase price allocation for N&B, including goodwill, intangible assets, deferred taxes, contingencies and lease valuations; the Q1 allocation remained preliminary.
- Assess post-merger leverage, debt maturities, interest costs and compliance with progressively tighter leverage covenants.
- Separate recurring operating performance from $182 million of inventory step-up costs, $89 million of transaction costs, $37 million of integration costs and other non-GAAP adjustments.
- Evaluate whether the lower gross margin is primarily a permanent effect of N&B’s product mix or can improve through integration and synergies.
- Monitor COVID-19 effects, raw-material inflation, supply-chain conditions, currency movements and possible goodwill or intangible-asset impairments.
- Review the status and potential exposure of Frutarom-related litigation, Israeli proceedings, the investigation and tax or other government contingencies.