IFF

Business Context and Reporting Period

Company: International Flavors & Fragrances Inc. (IFF)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: IFF is a leading creator and manufacturer of flavor and fragrance compounds for consumer products, organized into two primary segments: Flavors and Fragrances. The company operates globally, serving food, beverage, personal care, and household product industries.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($1,239,409) minus Total Current Liabilities ($420,672).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6% in the third quarter and 7% for the nine-month period compared to 2007. Reported growth was bolstered by a weaker U.S. dollar; at comparable exchange rates, sales would have increased only 2%.
• Profitability: Net income for the nine months ended September 30, 2008, decreased 9.6% to $180.7 million from $199.9 million in the prior year. Operating margins were pressured by higher raw material, freight, and energy costs.
• Interest Expense: Interest expense surged to $54.8 million for the nine months of 2008 (vs. $25.3 million in 2007) due to higher borrowings from the 2007 share repurchase program and increased interest rates.
• Segment Performance:
  • Flavors: Sales grew 9% (Q3) and 12% (9M), driven by new wins and price increases, particularly in Latin America.
  • Fragrances: Sales grew 4% (Q3) and 4% (9M). North American fine fragrance sales declined significantly due to weak economic conditions.
• Restructuring: The company incurred $6.8 million in pre-tax restructuring charges in the first nine months of 2008 related to a global shared service center initiative, eliminating 127 positions.

Guidance, Outlook, and Risks

• Outlook: Management expects gross additions to property, plant, and equipment to approximate $80 million for the full year 2008. The company anticipates annual savings of approximately $5 million from restructuring actions beginning in 2009.
• Liquidity: Despite global credit market turmoil, IFF maintains strong operating cash flows and a revolving credit facility with approximately $430 million in available capacity. Management believes liquidity is sufficient for the next 18 months.
• Dividends: A quarterly dividend of $0.25 per share was declared in October 2008, a 9% increase from the prior quarter.
• Risks and Contingencies:
  • Global Economic Conditions: Volatility in credit markets and recessionary pressures may reduce consumer spending and customer orders.
  • Raw Materials: Continued volatility in energy and commodity prices impacts cost of goods sold.
  • Legal Proceedings: The company faces numerous lawsuits regarding respiratory injuries linked to butter flavoring (e.g., Benavides, Barker cases). Management believes adequate provisions have been made and does not expect a material adverse effect, though outcomes are uncertain.
  • Environmental: IFF is a Potentially Responsible Party (PRP) at nine waste sites; estimated future costs are less than $5 million.

Investor Verification Checklist

• Debt Servicing: Verify the impact of the $500 million Senior Unsecured Notes issued in 2007 on future interest coverage ratios, given the rise in interest rates.
• North American Fragrance Demand: Monitor the trend of declining fine fragrance sales in North America to assess if this is a temporary economic dip or a structural shift.
• Raw Material Costs: Track the ability to pass on higher input costs (materials, energy, freight) to customers to protect operating margins.
• Legal Exposure: Review updates on the "butter flavor" litigation to ensure accrued liabilities remain sufficient against potential verdicts.
• Share Repurchase Program: Confirm the status of the remaining $268.7 million capacity under the July 2007 share repurchase plan and the company's intent to utilize it given current market conditions.