Business Context and Reporting Period
International Flavors & Fragrances Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. IFF develops and manufactures food, beverage, health and bioscience, scent, pharmaceutical and related specialty ingredients. Reportable segments are Nourish, Health & Biosciences, Scent and Pharma Solutions.
Financial Performance and Liquidity
<>| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $3,027 million | $3,226 million | Down 6% reported; down 2% currency neutral |
| Gross profit | $964 million | $1,145 million | Down 16% |
| Gross margin | 31.8% | 35.5% | Down 370 basis points |
| Operating profit | $131 million | $341 million | Down 62% |
| Operating margin | 4.3% | 10.6% | Down 630 basis points |
| Net income attributable to IFF | $(9) million | $244 million | Down 104% |
| Diluted earnings per share | $(0.04) | $0.96 | Down $1.00 |
| Operating cash flow | $127 million | $(4) million | Improved by $131 million |
| Segment Adjusted Operating EBITDA | $503 million | $702 million | Down 28%; margin 16.6% versus 21.8% |
Segment sales were $1,653 million for Nourish, $513 million for Health & Biosciences, $608 million for Scent and $253 million for Pharma Solutions. Scent and Pharma Solutions grew on a reported basis, while Nourish declined 5% and Health & Biosciences declined 22%.
Cash, cash equivalents and restricted cash totaled $617 million at March 31, 2023. Cash and cash equivalents were $590 million on the balance sheet, or $594 million including cash classified within assets held for sale. Total debt was $11.291 billion, including $588 million of commercial paper; current borrowings and the current portion of long-term debt totaled $1.483 billion. The company reported covenant net debt of $10.715 billion and a net debt-to-credit-adjusted-EBITDA ratio of 4.62x.
IFF had no outstanding borrowings under its $2.0 billion revolving credit facility at quarter-end and reported $1.465 billion of available capacity. It paid $206 million of dividends during the quarter and declared a quarterly dividend of $0.81 per share. Capital expenditures were $175 million in the quarter.
Material Changes Versus the Prior Comparable Period
- Sales decreased primarily because of lower volumes, unfavorable foreign exchange and the portfolio impact of the Microbial Control divestiture and Health Wright Products acquisition, partly offset by pricing actions.
- Gross profit and margins declined because of lower volumes, portfolio mix and unfavorable manufacturing absorption associated with an inventory reduction program.
- Interest expense increased to $111 million from $72 million because of higher interest rates, higher term-loan costs, increased commercial paper borrowings and higher factoring costs.
- Restructuring and other charges increased to $52 million from $2 million, primarily due to the 2023 restructuring program. Approximately 600 actual and planned headcount reductions were associated with that program.
- Other expense was $6 million versus $16 million of other income in the prior year, reflecting foreign-exchange losses and a loss related to liquidating a Russian business.
- The effective tax rate rose to 157.1% from 13.7%, primarily because of tax expenses related to planned divestitures and changes in the mix of income and losses for which tax benefits were limited by valuation allowances.
- Operating cash flow improved mainly because of working-capital benefits, including a $219 million inventory-related cash benefit, partly offset by lower earnings and accounts-payable changes.
Guidance, Outlook, Commentary and Risks
- Management expects 2023 capital spending to be approximately 4.1% of sales, net of potential grants and reimbursements.
- Management expects operating cash flow, proceeds from planned divestitures and available credit facilities to fund operations, capital investments, dividends and debt service. The filing does not provide a clear full-year revenue or earnings guidance figure.
- Two businesses were classified as held for sale: a portion of Savory Solutions, expected to close in the second quarter of 2023, and Flavor Specialty Ingredients, expected to close in the third quarter. Assets held for sale totaled $1.202 billion and related liabilities totaled $216 million.
- On March 23, 2023, IFF amended its term-loan and revolving-credit agreements, extending covenant relief through December 31, 2024, subject to declining leverage thresholds. The amendments also replace LIBOR with Term SOFR for applicable U.S. dollar borrowings and restrict share repurchases during the relief period, subject to exceptions.
- On May 1, 2023, IFF repaid $300 million of 2023 Notes at maturity, funded by a $400 million revolving-credit draw.
- IFF faces investigations by the European Commission, U.K. Competition and Markets Authority, U.S. Department of Justice and Swiss competition authorities concerning potential anticompetitive conduct in its fragrance businesses. The company cannot predict the scope, duration or outcome.
- New antitrust-related putative class actions were filed in Canada and the United States in March and April 2023. Potential losses cannot currently be estimated.
- Other exposures include Russia-Ukraine operations and credit risk, supply-chain and inflationary pressures, foreign-exchange volatility, substantial indebtedness, product-quality claims, environmental matters, tax disputes, potential asset impairments and litigation.
- For the Avicel product-quality matter, payments were approximately $34 million and the company had a $19 million accrual at March 31, 2023; additional claims could increase exposure.
Important Facts for Investors to Verify
- Whether volume trends and manufacturing absorption improve after the inventory-reduction program, particularly in Nourish and Health & Biosciences.
- Progress and final proceeds from the planned Savory Solutions and Flavor Specialty Ingredients divestitures.
- Compliance with the staged leverage covenant thresholds and the effect of higher interest rates on debt service and factoring costs.
- The outcome and potential financial impact of the fragrance antitrust investigations and related class actions.
- Whether restructuring actions deliver the expected cost savings and whether additional charges are incurred.
- Cash conversion, capital spending, dividend funding and debt repayment following the May 2023 maturity repayment.
- Changes in the $19 million Avicel accrual, the $0–$50 million disclosed range of reasonably possible losses in excess of accrued liabilities, and other contingent exposures.