International Flavors & Fragrances Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. All periods were 52 weeks. The filing includes fourth-quarter and full-year results; it is an annual Form 10-K rather than a standalone quarterly filing.
Business context
IFF creates and supplies flavor and fragrance compounds for food, beverage, personal care, household, pharmaceutical and oral-care products. Operations span 32 countries, more than 100 customer markets and approximately 5,600 employees. Flavors represented 48% of 2011 sales and Fragrances 52%; emerging markets contributed approximately 46% of sales.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2,788.0 million | $2,622.9 million | +6.3% |
| Gross profit | $1,104.7 million | $1,092.6 million | +1.1% |
| Gross margin | 39.6% | 41.7% | Down 210 bps |
| Operating profit | $427.7 million | $416.4 million | +2.7% |
| Operating margin | 15.3% | 15.9% | Down 60 bps |
| Net income | $266.9 million | $263.6 million | +1.3% |
| Diluted EPS | $3.26 | $3.26 | Flat |
| Operating cash flow | $189.2 million | $315.1 million | Down $125.9 million |
| Capital expenditures | $127.5 million | $106.3 million | +19.9% |
| Total debt at year-end | $894.9 million | $921.6 million | Down $26.7 million |
| Cash and equivalents | $88.3 million | $131.3 million | Down $43.1 million |
Adjusted operating profit, excluding restructuring and the Mane patent settlement, was $474.4 million, or 17.0% of sales, compared with $426.4 million, or 16.3%, in 2010. The effective tax rate increased to 28.6% from 26.7%. The current ratio was 2.3 at year-end.
- Flavors: Sales of $1,347.3 million, up 12.0%; reported operating profit of $249.3 million and adjusted operating profit of $284.2 million.
- Fragrances: Sales of $1,440.7 million, up 1.5%; reported operating profit of $215.3 million and adjusted operating profit of $226.6 million.
- Regional sales: EAME $957.0 million, Greater Asia $744.8 million, North America $678.8 million and Latin America $407.5 million.
- Research and development: $219.8 million, or 7.9% of sales.
- Dividends: $90.3 million paid; annual dividend declared was $1.16 per share, compared with $1.04 in 2010.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Net sales | $644.4 million | $629.9 million |
| Gross profit | $244.4 million | $252.3 million |
| Net income | $24.4 million | $55.6 million |
| Diluted EPS | $0.30 | $0.68 |
Fourth-quarter 2011 net income included $6.9 million of after-tax restructuring costs and $29.8 million of after-tax costs related to the Mane patent litigation settlement.
Material changes versus the prior comparable period
- Sales increased 6% on a reported basis and 4% in local currency. Currency translation contributed approximately 2 percentage points to reported growth.
- Flavors delivered 9% local-currency growth, while Fragrances declined 1% in local currency after 16% growth in 2010. Fragrances was pressured by weak Fine Fragrance demand and a 9% local-currency decline in Ingredients.
- Raw-material costs increased approximately 10% year over year, causing cost of goods sold to rise to 60.4% of sales from 58.3% and reducing gross margin.
- Cost discipline, lower incentive compensation and lower global expenses partly offset gross-margin pressure. S&A declined to 15.9% of sales from 17.1%.
- Operating cash flow fell substantially because of higher incentive-compensation payments, higher tax payments and the $40 million Mane settlement payment.
- The Company repaid $123.7 million of long-term debt, while revolving-credit borrowings increased. Net debt rose to $795.6 million from $777.4 million because the cash balance declined.
Guidance, outlook, commentary and unusual items
- Management expected 2012 local-currency sales growth toward the low end of its long-term 4%–6% target because of weak global GDP growth. First-quarter 2012 comparisons were expected to be particularly difficult.
- Management expected further raw-material inflation early in 2012, but planned additional pricing and cost-savings actions to close the 2011 pricing gap.
- Capital spending was expected to approximate 5% of sales in 2012, focused on emerging markets and Flavors.
- The December 2011 restructuring eliminated 72 positions and realigned the Fragrances business. Management expected approximately $9 million of pre-tax savings in 2012.
- On December 29, 2011, IFF settled the Mane patent litigation for approximately $40 million in cash, recorded a $33.5 million expense, discontinued Cooler 1 products and agreed to limits on MMS content in Cooler 2 products.
- Spain tax disputes involved assessments of €23.1 million for 2002–2003 and €61.6 million for 2004–2006. IFF recorded $49.6 million of uncertain-tax-position reserves related to the Spanish income-tax cases and had aggregate reserves for uncertain tax positions, interest and penalties of $80.4 million.
- The Company had $110 million of bank guarantees and standby letters of credit at year-end, including $61.8 million related to Spanish tax disputes. A further €61.6 million guarantee was posted in January 2012.
- The Company reported compliance with all debt covenants. Its revolving credit facility provided approximately $785 million of additional borrowing capacity, subject to covenant limitations, and matures in 2016.
- Management stated that operating cash flow and available credit facilities were sufficient to meet investing and financing needs for at least the next 18 months.
Principal risks and contingencies
- Raw-material, energy and transportation inflation; crop, weather and availability risks for natural ingredients.
- Weak consumer spending, European economic uncertainty, competitive pricing and potential volume erosion from price increases.
- Customer concentration: the 25 largest customers represented 53% of sales, and the largest customer represented 11%.
- Global currency, political, regulatory, tax, supply-chain, environmental, cybersecurity and operational risks.
- Pension and postretirement obligations increased materially; retirement liabilities were $315.6 million at year-end versus $222.0 million in 2010.
- Environmental liabilities at ten third-party sites were estimated at less than $5 million, although future costs could differ.
Most important facts for investors to verify
- Whether pricing and cost-savings actions offset continued raw-material inflation and restore gross margins.
- Whether the Fragrances turnaround, restructuring savings and emerging-market investments produce the expected improvement.
- The timing and ultimate cash impact of the Spanish tax assessments, related guarantees and additional potential assessments for 2007–2011.
- Operating cash-flow recovery after the 2011 settlement, incentive-compensation payments and higher taxes.
- Debt maturities, covenant headroom and the Company’s ability to fund capital spending, dividends and pension obligations.
- Customer concentration, demand weakness in Fine Fragrance and Ingredients, and the effect of currency movements on reported results.