Business Context and Reporting Period
International Flavors & Fragrances Inc. (IFF) is a global producer of food, beverage, health and biosciences, scent, fragrance, cosmetic ingredient and pharmaceutical solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. IFF reports four segments: Nourish, Health & Biosciences, Scent and Pharma Solutions.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $2.820 billion | $3.063 billion | $8.776 billion | $9.596 billion |
| Gross profit / margin | $924 million / 32.8% | $1.001 billion / 32.7% | $2.821 billion / 32.1% | $3.282 billion / 34.2% |
| Operating profit (loss) | $150 million | $(1.985) billion | $426 million | $(1.431) billion |
| Net income (loss) attributable to IFF | $25 million | $(2.197) billion | $43 million | $(1.846) billion |
| Diluted EPS | $0.10 | $(8.60) | $0.16 | $(7.22) |
| Segment adjusted operating EBITDA | $506 million / 17.9% | $612 million / 20.0% | $1.519 billion / 17.3% | $2.014 billion / 21.0% |
Operating results benefited from the absence of the $2.250 billion Health & Biosciences goodwill impairment recorded in 2022 and the absence of the $120 million long-lived asset impairment recorded in 2022. Interest expense increased to $110 million in the quarter and $337 million for the nine months, versus $83 million and $232 million, respectively.
Operating cash flow was $795 million for the first nine months, compared with $189 million in 2022. Capital expenditures were $390 million, dividends paid were $619 million, and financing activities used $1.293 billion of cash. Cash, cash equivalents and restricted cash totaled $662 million at September 30, 2023; cash and cash equivalents, including $23 million classified within assets held for sale, totaled $652 million for management’s liquidity analysis.
Total debt was approximately $10.3 billion, including $9.159 billion of long-term debt and $1.142 billion of current borrowings and current debt. Net debt used for covenant purposes was $9.673 billion, and the covenant net debt-to-credit-adjusted-EBITDA ratio was 4.57x. IFF reported $1.447 billion of available borrowing capacity under its $2.0 billion revolving facility and was in compliance with all debt covenants.
Material Changes Versus Prior Comparable Period
- Q3 sales declined 8% on both a reported and currency-neutral basis; nine-month sales declined 9% reported and 6% currency-neutral.
- Q3 gross margin was broadly stable, but the nine-month margin declined 210 basis points to 32.1%, primarily reflecting lower volumes, portfolio changes, unfavorable manufacturing absorption and inventory-related costs.
- Q3 segment adjusted operating EBITDA declined 17% to $506 million; nine-month EBITDA declined 25% to $1.519 billion. Nourish was the largest source of deterioration, while Scent and Health & Biosciences improved in Q3.
- Nourish sales declined 15% in Q3 and 11% for the nine months. Health & Biosciences sales rose 1% in Q3 but declined 16% year to date. Scent sales increased 4% in Q3 and 3% year to date. Pharma Solutions sales declined 7% in Q3 and 1% year to date.
- Working-capital reduction, particularly a $489 million inventory cash benefit, was a major driver of improved operating cash flow. Inventories declined from $3.151 billion at December 31, 2022 to $2.549 billion at September 30, 2023.
- IFF completed the sale of a portion of Savory Solutions for net cash proceeds of approximately $821 million and the Flavor Specialty Ingredients business for net cash proceeds of approximately $185 million. Each transaction generated an approximately $10 million pretax loss, subject to post-closing adjustments.
- On September 19, 2023, IFF extended covenant relief for its term loans and revolving facility through December 31, 2025, with progressively tighter leverage limits and a quarterly common-stock dividend cap of $0.81 per share during the relief period.
Guidance, Outlook, Commentary and Risks
- Management expects 2023 capital spending of approximately 4.1% of sales, net of potential grants and reimbursements. The filing does not provide a clear quantitative full-year sales or earnings guidance figure.
- Management expects operating cash flow, planned divestiture proceeds and available credit facilities to fund operations, capital investment, dividends and debt service.
- The company is pursuing a restructuring program focused primarily on headcount reductions and efficiency. It recorded $61 million of restructuring charges through nine months and reported approximately 605 actual and planned headcount reductions.
- IFF announced the planned sale of its Cosmetic Ingredients business. The business was classified as held for sale at September 30, 2023, and the transaction was expected to close in the first quarter of 2024. Assets held for sale totaled $482 million and related liabilities totaled $49 million.
- Major risks include substantial indebtedness and higher interest costs, leverage covenant requirements, inflation and raw-material, energy and transportation costs, supply-chain disruption, foreign-exchange volatility, weak consumer-product demand, and geopolitical developments involving Russia, Ukraine and Israel.
- European Commission, U.K. Competition and Markets Authority and U.S. Department of Justice investigations are examining potential anticompetitive conduct involving IFF’s fragrance businesses. The company cannot predict the duration or outcome.
- Putative antitrust class actions have been filed in Canada and the United States against IFF and other fragrance companies. IFF states that potential effects on results, liquidity or financial condition cannot currently be determined.
- Other contingencies include tax disputes, environmental matters, product claims and litigation. The estimated aggregate range of reasonably possible losses in excess of accrued liabilities for third-party contingencies was $0 to approximately $65 million.
- The company paid approximately $46 million through September 30, 2023 related to out-of-specification Avicel pharmaceutical products and had no remaining accrual for that matter, although additional claims could increase exposure.
Most Important Facts for Investors to Verify
- Whether volume trends and manufacturing absorption improve, particularly in Nourish and Pharma Solutions.
- Progress against the restructuring program, cost-savings objectives and inventory normalization plan.
- Execution and proceeds from the Cosmetic Ingredients divestiture and any related tax or post-closing adjustments.
- Compliance with the stepped leverage covenants through 2025 and the effect of higher interest rates on debt service.
- Liquidity after dividends, capital expenditures, debt repayments and further portfolio actions.
- Developments in the fragrance antitrust investigations and related class actions, including any material reserves or settlements.
- Potential impairment of goodwill and other intangible assets, especially given the company’s substantial goodwill balance and prior impairment history.
- The accuracy of the reported lease-related balance-sheet corrections and derivative fair-value adjustments described in the filing.