International Flavors & Fragrances Inc. — 2019 Form 10-K Summary
Business context and reporting period
IFF is a global producer of taste, scent, fragrance ingredients, cosmetic actives, natural health ingredients and specialty ingredients, serving approximately 38,000 customers in about 200 countries. The business reported three segments in 2019: Taste, Scent and Frutarom; beginning in fiscal 2020, nearly all of Frutarom was combined with Taste.
The filing covers the fiscal year ended December 31, 2019. The fiscal year contained 53 weeks, compared with 52 weeks in 2018. Results include a full year of Frutarom operations, versus only the period after its October 4, 2018 acquisition in the prior year.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $5.140 billion | $3.978 billion | +29.2% |
| Gross profit | $2.113 billion | $1.683 billion | +25.6% |
| Gross margin | 41.1% | 42.3% | Down 120 bps |
| Operating profit | $665.3 million | $583.9 million | +13.9% |
| Operating margin | 12.9% | 14.7% | Down 174 bps |
| Adjusted operating profit | $793.1 million | $677.4 million | +17.1% |
| Adjusted operating margin | 15.4% | 17.0% | Down 160 bps |
| Net income attributable to IFF | $455.9 million | $337.3 million | +35.2% |
| Diluted EPS | $4.00 | $3.79 | +5.5% |
| Operating cash flow | $699.0 million | $437.6 million | +59.8% |
| Capital expenditures | $236.0 million | $170.1 million | +38.7% |
Fourth-quarter 2019 sales were $1.284 billion, compared with $1.219 billion in fourth-quarter 2018. Fourth-quarter net income attributable to IFF stockholders was $83.5 million, or $0.70 diluted EPS, compared with $13.0 million, or $0.09 diluted EPS, in the prior-year quarter. Fourth-quarter results included $18.4 million of N&B transaction-related costs and other integration, restructuring and acquisition-related items.
2019 sales growth was driven primarily by the full-year contribution from Frutarom. On a reported basis, Taste sales declined 0.3%, Scent sales increased 2.2%, and Frutarom sales were $1.485 billion. Currency-neutral consolidated sales growth was 32%, while foreign exchange reduced reported sales growth by approximately 3%.
Cash and cash equivalents were $606.8 million at year-end, including $578.7 million held outside the United States. Total debt was $4.382 billion, down from $4.553 billion in 2018, and net debt was $3.776 billion. The company had $1.0 billion available under its revolving credit facility, no commercial paper outstanding and a debt-covenant net debt-to-adjusted EBITDA ratio of 3.22x. The current ratio was 1.9.
IFF paid $313.5 million in dividends during 2019 and declared dividends of $2.96 per share. Share repurchases remained suspended.
Material changes versus the prior comparable period
- Frutarom contributed a full year of operations in 2019, materially increasing sales, assets, goodwill, amortization and debt-related costs.
- Gross and operating margins declined because of lower Frutarom margins, higher raw-material costs and unfavorable price-versus-input-cost dynamics, partly offset by productivity savings.
- Operating cash flow improved substantially due to higher earnings and lower working capital requirements, particularly accounts receivable.
- Amortization of acquisition-related intangibles increased to $193.1 million from $75.9 million.
- Restructuring and other charges increased to $29.8 million from $5.1 million, primarily from the Frutarom Integration Initiative and the 2019 Severance Program.
- The effective tax rate declined to 17.4% from 24.1%, mainly because of a more favorable earnings mix and the absence of a 2018 deemed-repatriation charge.
- IFF adopted the new lease standard in 2019, recording approximately $308.3 million of right-of-use assets and $313.3 million of operating lease liabilities.
Guidance, outlook, commentary and risks
- Management expects 2020 capital spending of approximately 4% to 5% of sales, net of potential government grants and reimbursements.
- IFF expects approximately $145 million of Frutarom synergies and reported approximately $50 million of cost synergies realized in 2019.
- The Frutarom Integration Initiative targets approximately 35 manufacturing-site closures over two years, with most targeted before the end of fiscal 2020. Total program costs are expected to be approximately $65 million; $10.4 million had been expensed through 2019.
- The 2019 Severance Program involved approximately 330 headcount reductions and is expected to cost approximately $25 million in total.
- The company expects the DuPont Nutrition & Biosciences transaction to close in early 2021, subject to shareholder, regulatory and other conditions. DuPont shareholders are expected to receive approximately 55.4% of the combined company, and DuPont is entitled to a $7.3 billion special cash payment, subject to adjustments.
- Financing commitments for the N&B transaction include a $1.25 billion term-loan facility and a remaining $6.25 billion bridge facility. Following closing, the obligations are expected to be guaranteed by or assumed by IFF.
- If the N&B transaction is not completed in specified circumstances, IFF may owe a $521.5 million termination fee or up to $75 million of reimbursed transaction expenses.
- Key risks include integration execution, leverage and refinancing needs, raw-material and supply-chain volatility, foreign currency exposure, competition, customer concentration, regulatory and environmental compliance, cybersecurity, litigation, tax matters and goodwill impairment.
- Improper payments by former Frutarom businesses in Russia and Ukraine were substantiated. IFF reported remedial actions, affected sales below 1% of 2019 consolidated sales and no material financial impact from the reviews. Related securities class actions were pending at year-end.
- Goodwill totaled $5.5 billion, including $4.3 billion related to Frutarom. No impairment was recorded in 2019, but two Frutarom reporting units had less than 10% excess fair value over carrying value, making them sensitive to weaker growth, margins or higher discount rates.
- IFF recognized an $8.0 million Brazilian tax recovery in fourth-quarter 2019. Additional amounts may be recorded in 2020 depending on the final ruling regarding the applicable calculation method.
- The filing identifies the COVID-19 outbreak in China as a potential operational and financial risk; the extent of its impact was uncertain as of the filing date.
Most important facts for investors to verify
- Whether Frutarom integration produces the targeted $145 million of synergies without further margin deterioration or material restructuring costs.
- Progress on manufacturing-site closures, capital spending and the expected 2020 cost structure.
- Ability to reduce debt and maintain compliance with tightening leverage covenants before and after the N&B transaction.
- Status, financing, regulatory approvals, shareholder approval, closing timing and potential termination costs for the N&B transaction.
- Performance of the Taste and Scent businesses excluding acquisition effects, including pricing versus raw-material inflation and volume trends.
- Potential goodwill impairment, particularly for the Savory and Taste Frutarom reporting units with limited valuation headroom.
- Developments in the securities litigation, compliance remediation and any additional liabilities inherited from Frutarom.
- Final resolution and cash realization of the Brazilian tax recovery, as well as other tax audits and uncertain tax positions.