Business Context and Reporting Period
International Flavors & Fragrances Inc. (IFF) filed this unaudited Form 10-Q for the three and six months ended June 30, 2022. IFF develops and manufactures food, beverage, health and biosciences, scent, pharmaceutical and related specialty ingredients through four reportable segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions.
Results include the Nutrition & Biosciences (N&B) business for the full quarter and six-month period in 2022, compared with three months and five months, respectively, in the 2021 periods. Accordingly, six-month comparisons are not fully comparable.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $3,307 million | $3,089 million | $6,533 million | $5,554 million |
| Gross profit / margin | $1,136 million / 34.4% | $910 million / 29.5% | $2,281 million / 34.9% | $1,664 million / 30.0% |
| Operating profit / margin | $213 million / 6.4% | $110 million / 3.6% | $554 million / 8.5% | $114 million / 2.1% |
| Net income attributable to IFF shareholders | $107 million | $28 million | $351 million | $(14) million |
| Diluted EPS | $0.43 | $0.11 | $1.38 | $(0.06) |
| Adjusted operating EBITDA | $700 million / 21.2% margin | $679 million / 22.0% margin | $1,402 million / 21.5% margin | $1,248 million / 22.5% margin |
| Cash flow from operations | Not separately reported for the quarter | $(100) million | $698 million |
Second-quarter sales increased 7% on a reported basis and 11% on a currency-neutral basis. Management attributed the increase primarily to price increases across the businesses; foreign exchange reduced reported sales growth by approximately 4%.
Segment second-quarter sales were Nourish $1,818 million, Health & Biosciences $665 million, Scent $580 million, and Pharma Solutions $244 million. Segment adjusted operating EBITDA increased for Nourish and Pharma Solutions but declined for Health & Biosciences and Scent.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $569 million at June 30, 2022, versus $711 million at December 31, 2021; cash, cash equivalents and restricted cash totaled $573 million.
- Total debt was $12.112 billion, including $1.749 billion classified as short-term borrowings; long-term debt was $10.363 billion.
- Commercial paper totaled $792 million and borrowings under the $2.0 billion revolving credit facility totaled $350 million. Available revolving-facility capacity was $317 million, and the company was in compliance with covenants.
- The covenant net debt-to-credit-adjusted-EBITDA ratio was 4.38 to 1.0 at June 30, 2022, compared with a maximum permitted leverage ratio of 4.50 to 1.0 at that time.
- Operating cash flow was negative $100 million, primarily reflecting increases in receivables and inventories. Investing cash flow was negative $346 million, including $236 million of capital expenditures and $123 million paid for acquisitions.
- Financing cash flow was positive $377 million, including $402 million of dividends paid and increased short-term borrowings.
- Management expected 2022 capital spending of approximately 5.0% of sales, compared with 3.4% in 2021. Share repurchases remained suspended, with $280 million remaining under the approved program.
Material Changes Versus the Prior Comparable Period
- Gross margin expanded 490 basis points in both the quarter and six-month period, benefiting from pricing and the absence of $195 million of N&B inventory step-up costs recorded in the 2021 second quarter.
- Operating profit rose to $213 million from $110 million in the quarter and to $554 million from $114 million in the six-month period. The six-month comparison benefited from the 2021 N&B inventory step-up and transaction costs.
- Adjusted operating EBITDA increased 3% in the quarter and 12% in the six-month period, but margins declined 80 basis points and 100 basis points, respectively, due principally to input-cost pressure and segment mix.
- Second-quarter Scent adjusted operating EBITDA declined 21% and Health & Biosciences declined 3%, while Nourish increased 13% and Pharma Solutions increased 21% on a reported basis.
- Operating cash flow deteriorated from positive $698 million to negative $100 million for the first six months, driven primarily by working-capital investment.
- Goodwill declined from $16.414 billion at year-end 2021 to $16.071 billion at June 30, 2022, primarily due to foreign exchange; other intangible assets declined from $10.506 billion to $9.867 billion.
Guidance, Outlook, Commentary and Unusual Items
- The filing does not provide a clear numerical revenue or earnings forecast for full-year 2022. Management discussed expectations regarding pricing, inflation, input costs, foreign exchange, supply chains, cash flow and capital spending.
- Management stated that all manufacturing facilities remained open, but COVID-19, supply-chain disruption, transportation constraints, energy costs and commodity inflation could continue to pressure margins and operating results.
- IFF recorded a $120 million impairment charge on Russian asset groups, comprising approximately $92 million of intangible assets and $28 million of property, plant and equipment. It also recorded approximately $11 million of expected credit losses related to Russia and Ukraine receivables.
- The company completed its $157 million acquisition of Health Wright Products on April 1, 2022, including estimated contingent consideration of $31 million.
- The Microbial Control business was classified as held for sale at June 30, 2022 and was sold on July 1, 2022 for approximately $1.277 billion of net cash proceeds. IFF repaid the $350 million revolving-credit borrowing on July 6 and approximately $900 million of commercial paper by August 5.
- On August 4, 2022, IFF amended its term-loan and revolving-credit agreements, delaying certain leverage-ratio step-downs; the first step-down moved from the fourth quarter of 2022 to the third quarter of 2023.
- Restructuring and other charges were $7 million in the quarter and $9 million year to date. The Frutarom integration program had closed 22 of approximately 30 targeted manufacturing sites as of June 30, 2022.
- Other risks include substantial indebtedness, foreign-exchange volatility, potential asset impairments, litigation and tax matters, regulatory and anti-corruption investigations, product-quality claims, and geopolitical risks.
- The company disclosed approximately $25 million outstanding under bank guarantees and standby letters of credit, $103 million under commercial guarantees, and an estimated range of reasonably possible losses in excess of accrued liabilities of up to approximately $40 million for third-party contingencies. The Avicel product-quality matter had approximately $25 million accrued at June 30, 2022, with total exposure potentially higher.
Investor Verification Priorities
- Reconcile reported growth with the non-comparable N&B periods and separate pricing, volume, acquisition and foreign-exchange effects.
- Assess whether pricing actions can offset commodity, energy, transportation and other inflationary costs, particularly in Scent and Health & Biosciences.
- Verify post-quarter debt reduction from the Microbial Control divestiture and the effect of the amended leverage covenants on liquidity.
- Monitor working-capital requirements, inventory levels and the sustainability of operating cash flow after the first-half $100 million use.
- Evaluate further impairment, credit-loss and operational risks associated with Russia and Ukraine, COVID-19 and global supply chains.
- Track execution of the Microbial Control divestiture, Health Wright integration, N&B and Frutarom synergies, and planned manufacturing-site closures.
- Review unresolved litigation, Israeli investigations, Brazil tax disputes, Avicel claims and China facility relocation or zoning matters.