Business Context and Reporting Period
International Flavors & Fragrances Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. Although the request references 2021 Q4, the filing is an annual report rather than a standalone quarterly filing. IFF creates and manufactures food, beverage, health and bioscience, scent, pharmaceutical and specialty ingredient solutions.
On February 1, 2021, IFF completed its merger with Nutrition & Biosciences, Inc. (“N&B”), issuing shares representing approximately 55.4% of IFF on a fully diluted basis and assuming substantial N&B debt. The 2021 results include N&B from the closing date; 2020 results do not include N&B and are therefore not directly comparable. IFF reports four segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions.
Financial Performance and Liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $11.656 billion | $5.084 billion | +129% |
| Gross profit | $3.735 billion | $2.086 billion | +79% |
| Gross margin | 32.0% | 41.0% | Down 900 bps |
| Operating profit | $585 million | $566 million | +3% |
| Operating margin | 5.0% | 11.1% | Down 610 bps |
| Net income attributable to IFF | $270 million | $363 million | Down 26% |
| Diluted EPS | $1.10 | $3.21 | Down 66% |
| Adjusted operating EBITDA | $2.425 billion | $1.055 billion | +130% |
| Adjusted operating EBITDA margin | 20.8% | 20.8% | Flat |
| Cash flow from operations | $1.437 billion | $714 million | +101% |
Reported sales increased primarily because N&B contributed approximately $6.084 billion after the merger. Excluding the merger effect, the filing cites volume growth in Nourish, Health & Biosciences and Scent, plus pricing increases in Nourish. Segment sales were $6.264 billion for Nourish, $2.329 billion for Health & Biosciences, $2.254 billion for Scent, and $809 million for Pharma Solutions.
Gross margin declined because of higher raw-material, transportation and energy costs and the lower-margin product mix added through N&B. GAAP earnings were also affected by $732 million of acquisition-related amortization, $368 million of N&B inventory step-up costs, $101 million of N&B integration costs, $91 million of N&B transaction costs and other unusual items. Adjusted net income attributable to IFF was $799 million, or $3.28 per diluted share, compared with $498 million, or $4.38 per diluted share, in 2020.
At December 31, 2021, cash and cash equivalents were $711 million, compared with $650 million at year-end 2020. Working capital was $3.354 billion, up from $1.156 billion, primarily because of the N&B merger. Capital expenditures were $393 million, compared with $192 million in 2020. Financing cash outflows were $1.304 billion, including $667 million of dividends and $828 million of long-term debt repayments.
Total debt was $11.400 billion, including $10.768 billion of long-term debt and $324 million of commercial paper. Net debt for covenant purposes was $10.707 billion, and the net debt-to-credit-adjusted EBITDA ratio was 4.11x. IFF had no borrowings under its $2.000 billion revolving credit facility and reported approximately $1.025 billion of borrowing capacity under applicable covenant limitations. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- The N&B merger materially expanded sales, assets, employees, operating segments and debt, making reported year-over-year comparisons difficult.
- Goodwill increased to $16.414 billion from $5.593 billion, and other intangible assets increased to $10.506 billion from $2.727 billion.
- Net debt and interest expense increased substantially as a result of debt assumed in the N&B transaction. Interest expense rose to $289 million from $132 million.
- Operating cash flow more than doubled, but operating cash flow as a percentage of sales decreased to 12.3% from 14.0% because of the larger, lower-margin combined business and working-capital needs.
- Foreign currency translation reduced other comprehensive income by $848 million, contributing to a comprehensive loss attributable to IFF stockholders of $455 million.
- The company completed the sale of its fruit preparation business for approximately $115 million of net cash proceeds and classified the Microbial Control business as held for sale.
- Management completed one manufacturing-site closure in 2021 and expects approximately 30 total site closures under its footprint-optimization program by the end of 2022.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear numerical 2022 revenue or earnings guidance figure. Management expects 2022 capital spending to be approximately 5.0% of sales, net of potential government grants and reimbursements. Management states that operating cash flow, cash balances and available credit facilities should be sufficient for expected operating, investing, financing and debt-service needs.
IFF expects the sale of Microbial Control to close in the second quarter of 2022 for approximately $1.273 billion, subject to customary closing conditions. The business had $1.122 billion of assets and $101 million of liabilities classified as held for sale at year-end. The filing also discloses a February 16, 2022 agreement to acquire Health Wright Products, LLC; financial terms were not provided in the filing text.
- Key operating pressures include inflation in raw materials, energy, transportation and labor; supply-chain disruptions; customer pricing resistance; and potential volume erosion.
- COVID-19 continued to create risks involving demand, employee availability, logistics, raw-material access and operating costs.
- Integration of N&B and realization of expected synergies remain significant execution risks. IFF also continues to pursue approximately $145 million of expected Frutarom synergies.
- High leverage, refinancing requirements, variable-rate debt and the transition away from LIBOR could increase financing costs or restrict strategic flexibility.
- Goodwill and intangible assets are substantial. IFF recorded no goodwill impairment in 2021, but the filing states that weaker projections, margins or business performance could result in material future impairment charges.
- The company disclosed an out-of-specification Avicel pharmaceutical excipient issue. Costs were approximately $21 million through year-end 2021, with a current accrual of approximately $40 million; additional customer claims could increase exposure.
- Legal and regulatory matters include Frutarom-related securities and Israeli proceedings, anti-corruption investigations, environmental and tax contingencies, and product-liability claims. Management estimated reasonably possible losses in excess of accrued liabilities at up to approximately $42 million for third-party contingencies, but cautioned that ultimate losses could differ materially.
- Frank Clyburn became CEO on February 14, 2022, creating an additional management-transition risk identified in the filing.
Most Important Facts for Investors to Verify
- Reconcile the reported 129% sales growth and 26% decline in GAAP net income to the timing and accounting effects of the N&B merger.
- Assess whether pricing, productivity actions and synergies can offset inflation, supply-chain costs and the 2021 gross-margin decline.
- Review debt maturities, refinancing plans, covenant headroom and the effect of interest-rate and LIBOR-related changes.
- Validate the expected timing, proceeds and tax consequences of the Microbial Control divestiture.
- Monitor goodwill and intangible-asset impairment sensitivity, particularly for Nourish, Health & Biosciences and Pharma Solutions.
- Track the Avicel matter, Frutarom-related litigation and investigations, tax disputes, environmental matters and other contingent liabilities.
- Confirm 2022 sales, earnings, cash-flow and capital-spending guidance in subsequent filings or company disclosures, because this filing does not provide clear numerical revenue or earnings guidance.