IFF

Business Context and Reporting Period

Company: International Flavors & Fragrances Inc. (IFF)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 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, with significant exposure to currency fluctuations and raw material costs.

Key Financial Metrics

Note: Q1 2007 debt figures are derived from the text stating a $412 million increase from Q1 2007 to Q1 2008 ($1,224M - $412M).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5% year-over-year. Reported growth was driven by a weaker U.S. dollar; at comparable exchange rates, sales would have increased only 1%.
  • Flavors: Sales increased 12% (8% organic growth), led by a 37% increase in Latin America.
  • Fragrances: Sales were flat year-over-year. Growth in Greater Asia was offset by weakness in North America.
• Profitability: Net income decreased 11% to $55.9 million, despite flat operating profit. This decline was primarily due to a significant increase in interest expense ($18.2M vs $8.3M) and restructuring charges.
  • Interest Expense: Doubled due to higher borrowings incurred for the 2007 accelerated share repurchase program.
  • Restructuring: The company incurred $6.2 million in pre-tax charges related to the elimination of 123 positions to centralize finance functions.
• Cash Flow: Operating cash flow improved to $7.6 million from $3.1 million, aided by an $18 million receipt from the termination of an interest rate swap. However, total cash and equivalents dropped significantly from $151.5 million (Dec 2007) to $60.5 million (Mar 2008) due to financing activities and investing outflows.

Guidance, Outlook, and Risks

• Outlook: Management expects gross additions to property, plant, and equipment to approximate $90 million in 2008. Annual savings from restructuring actions are expected to approximate $5 million beginning in 2009.
• Dividends: The quarterly dividend was increased to $0.23 per share (a 10% increase from the prior year).
• Share Repurchases: The company continues its $750 million repurchase program. In Q1 2008, it purchased 0.7 million shares for $30 million. An Accelerated Share Repurchase (ASR) program initiated in 2007 is expected to complete by the end of Q2 2008.
• Risks and Contingencies:
  • Litigation: The company faces numerous lawsuits regarding respiratory injuries from butter flavoring (e.g., Benavides, Arles, Parker 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.
  • Accounting Changes: Adoption of EITF 06-4 resulted in a $9.6 million cumulative effect adjustment to retained earnings and an estimated additional annual expense of $1 million.

Investor Verification Checklist

• Currency Impact: Verify the extent to which reported sales growth is driven by foreign exchange translation versus organic volume growth (reported 5% vs. 1% organic).
• Interest Burden: Assess the sustainability of the doubled interest expense ($18.2M) resulting from the 2007 share buyback financing.
• Restructuring Execution: Monitor the realization of the projected $5 million in annual savings from the centralization of finance functions.
• Litigation Exposure: Review updates on the butter flavoring litigation cases to ensure the accrued liabilities remain adequate given the volume of pending suits.
• ASR Completion: Track the final settlement of the $450 million Accelerated Share Repurchase program to determine the final share count and cost basis.