International Flavors & Fragrances Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
IFF is a global producer of food, beverage, health, biosciences, scent and pharmaceutical solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021. Effective February 1, 2021, IFF completed its merger with Nutrition & Biosciences, Inc. (“N&B”), issuing 141.7 million IFF shares. Accordingly, 2021 results include N&B from February 1, while 2020 comparative results do not. IFF now reports four segments: Nourish, Health & Biosciences, Scent and Pharma Solutions.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,071 million | $1,268 million | $8,625 million | $3,814 million |
| Gross profit / margin | $1,090 million / 35.5% | $524 million / 41.3% | $2,754 million / 31.9% | $1,572 million / 41.2% |
| Operating profit / margin | $298 million / 9.7% | $150 million / 11.8% | $412 million / 4.8% | $466 million / 12.2% |
| Net income attributable to IFF | $194 million | $85 million | $180 million | $296 million |
| Diluted EPS | $0.76 | $0.75 | $0.75 | $2.64 |
| Adjusted operating EBITDA | $648 million / 21.1% | $276 million / 21.8% | $1,896 million / 22.0% | $818 million / 21.4% |
| Cash flow from operations | Not separately presented for the quarter | $1,126 million | $415 million |
Q3 reported sales increased 142%, primarily from $1.640 billion of N&B sales and volume growth. Scent sales increased 10% reported and 9% currency neutral. For the first nine months, reported sales increased 126%, including $4.409 billion from N&B.
Higher raw-material costs, N&B product mix and the N&B inventory fair-value step-up reduced margins. Nine-month cost of goods sold included $363 million of N&B inventory step-up expense. Q3 interest expense rose to $74 million from $35 million, primarily due to merger-related debt.
Liquidity, cash flow and debt
- September 30 cash and cash equivalents were $672 million, compared with $650 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $795 million.
- Nine-month operating cash flow was $1.126 billion, versus $415 million in the prior-year period. Capital expenditures were $242 million, and management expected full-year 2021 capital spending of approximately 4.5% of sales.
- Net cash used in financing activities was $1.022 billion, including $466 million of dividends and $628 million of long-term debt repayments. The company issued $200 million of commercial paper during Q3.
- Total debt was approximately $11.526 billion, including $10.818 billion of long-term debt. Net debt for covenant purposes was $10.870 billion, and the net debt-to-credit-adjusted EBITDA ratio was 4.10x.
- IFF reported $1.718 billion of available capacity under its $2.0 billion revolving credit facility and $1.428 billion of additional available lines of credit. The company was in compliance with its debt covenants at September 30, 2021.
Material changes versus the prior comparable period
- The N&B merger substantially increased revenue, assets, goodwill, intangible assets, debt and share count. Goodwill increased to $16.590 billion from $5.593 billion at December 31, 2020, and other intangible assets increased to $10.959 billion from $2.727 billion.
- Debt increased materially from $4.413 billion at December 31, 2020 to $11.526 billion at September 30, 2021, primarily from debt assumed in the N&B transaction.
- Operating profit declined 12% for the first nine months despite 126% sales growth, reflecting acquisition-related amortization, inventory step-up costs, higher raw-material costs, transaction and integration expenses, and increased interest expense.
- Nine-month net income attributable to IFF declined 39% and diluted EPS declined to $0.75 from $2.64. The comparison is substantially affected by the merger, purchase accounting and nonrecurring items.
- Accumulated other comprehensive loss increased to $1.180 billion, primarily because of $493 million of foreign-currency translation losses.
Guidance, outlook, risks and unusual items
- Management stated that operating cash flow and available credit facilities are expected to be sufficient for investing, financing and debt-service needs. No specific consolidated revenue or earnings guidance was provided in the filing text.
- IFF agreed to sell its Microbial Control business for approximately $1.274 billion, expected to close in Q2 2022. The business was classified as held for sale with $1.125 billion of assets and $78 million of liabilities at September 30, 2021.
- The fruit preparation business sale closed October 1, 2021. Approximately $115 million of proceeds received before quarter-end was recorded as restricted cash.
- The N&B purchase price allocation remained preliminary. Valuations of certain tangible assets, intangible assets, tax items, leases, contingencies and goodwill allocations were not finalized and could change.
- COVID-19 disruptions had lessened, but management continued to cite uncertainty from new variants, supply-chain constraints, raw-material, energy and transportation inflation, logistics costs, currency movements and potential impairment risk.
- Other unusual items included $34 million of restructuring charges, $91 million of N&B transaction costs, $77 million of N&B integration costs, $28 million of employee separation costs and $363 million of N&B inventory step-up costs for the first nine months.
- IFF accrued approximately $35 million for a voluntary recall of certain out-of-specification Avicel pharmaceutical excipient products; exposure could increase as customer claims develop.
- Potential contingencies include Frutarom-related litigation and investigations, tax disputes, environmental and zoning matters in China, and other claims. The company estimated reasonably possible losses in excess of accrued liabilities at $0 to approximately $57 million for disclosed third-party contingencies.
Most important facts for investors to verify
- Whether N&B integration delivers expected synergies and whether purchase-accounting adjustments, amortization and restructuring costs decline as planned.
- Progress and closing economics of the Microbial Control and fruit preparation divestitures, including tax effects and use of proceeds.
- Debt reduction, covenant headroom and the company’s ability to sustain dividends while managing approximately $11.5 billion of debt.
- Margin recovery prospects in light of raw-material, transportation and supply-chain inflation and the lower post-merger gross margin.
- Finalization of the N&B purchase price allocation, including goodwill, intangible valuations, deferred taxes and contingencies.
- Developments involving the Avicel recall, Frutarom investigations and litigation, Brazilian tax matters, and China facility zoning risks.
- Comparability of future results, since 2021 includes N&B while 2020 does not; adjusted and reported measures should be reviewed together.