IFF

Business Context and Reporting Period

Company: International Flavors & Fragrances Inc. (IFF)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: IFF is a leading creator and manufacturer of flavor and fragrance compounds for consumer products, organized into two segments: Flavors and Fragrances. The company operates globally, serving food, beverage, personal care, and household product industries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 6% year-over-year. On a constant currency basis, sales would have declined only 2%. The Flavors segment sales declined 3% (up 2% excluding currency), while Fragrances sales declined 9% (down 5% excluding currency).
• Profitability Pressure: Net income decreased 16%. Gross margin compressed as Cost of Goods Sold (COGS) rose to 60.3% of sales from 58.9% in 2008, driven by lower volume absorption and product mix.
• Cash Flow Reversal: Operating cash flow turned negative ($14.4 million outflow) compared to a $7.6 million inflow in Q1 2008. This was primarily due to changes in working capital (increased receivables and decreased payables) and the absence of a $18 million swap termination receipt in the prior year.
• Segment Performance:
  • Flavors: Operating profit was $52.8 million (19.9% margin), down from $56.9 million (20.8% margin). North America saw 6% growth, offset by declines in EAME and Greater Asia.
  • Fragrances: Operating profit was $36.0 million (12.3% margin), down from $46.9 million (14.5% margin). Declines were driven by lower volumes and unfavorable mix, particularly in Fine & Beauty Care.
• Restructuring: No restructuring charges were recorded in Q1 2009, compared to $6.2 million in Q1 2008.

Guidance, Outlook, and Risks

• Capital Allocation: The company increased its quarterly dividend to $0.25 per share (a 9% increase). Share repurchases slowed significantly to 75,000 shares ($2 million) in Q1 2009 compared to 0.7 million shares ($30 million) in Q1 2008.
• Liquidity and Debt: Total debt remains stable at approximately $1.2 billion. The company maintains a Net Debt to Adjusted EBITDA ratio of 2.54 to 1, well within the 3.25 to 1 covenant limit. Approximately $310 million remains available under the revolving credit facility.
• Unusual Items:
  • Interest expense increased to $19.8 million (from $18.2 million) due to a $4 million charge related to closing a cross-currency interest rate swap.
  • Foreign exchange had a negative impact on reported sales due to a strengthening U.S. dollar.
• Risks and Contingencies:
  • Litigation: 15 actions involving 368 claimants regarding respiratory illness from flavoring exposure are pending. Management believes accrued liabilities are adequate and outcomes will not be material.
  • Environmental: Estimated future costs for environmental remediation at ten sites are less than $5 million.
  • Economic Conditions: The company faces risks from global economic disruption, declining consumer confidence, and currency volatility.

Investor Verification Checklist

• Working Capital Trends: Verify the sustainability of the shift from positive to negative operating cash flow and the drivers behind the increase in trade receivables.
• Currency Impact: Assess the sensitivity of future earnings to U.S. dollar strength, given the significant negative FX impact on Q1 2009 sales.
• Margin Recovery: Monitor management's ability to offset lower volume absorption and input costs through pricing and cost recovery efforts to restore gross margins.
• Debt Covenants: Confirm continued compliance with the Net Debt/Adjusted EBITDA covenant (currently 2.54x) amidst potential earnings volatility.
• Legal Exposure: Review updates on the 15 pending respiratory illness lawsuits to ensure no material increase in accrued liabilities is required.