International Flavors & Fragrances Inc. — FY2014 Form 10-K Summary
Business context and reporting period
IFF creates and supplies flavor and fragrance compounds and ingredients for food, beverages, personal care, household products, fine fragrances, and related industries. The company operates through Flavors and Fragrances segments in 32 countries and serves customers in more than 100 countries. Fiscal 2014 ended December 31, 2014 and comprised 53 weeks, versus 52 weeks in 2013; management stated that the additional week was not material.
- 2014 sales mix: Flavors 47%; Fragrances 53%.
- Regional sales: Europe, Africa and Middle East 34%; Greater Asia 28%; North America 22%; Latin America 16%.
- Emerging markets represented 50% of sales and grew 6% in local currency.
- The 25 largest customers represented 53% of sales; the largest customer represented 12%.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $3,088.5 million | $2,952.9 million | +4.6% |
| Gross profit | $1,362.2 million | $1,284.2 million | +6.1% |
| Gross margin | 44.1% | 43.5% | +60 bps |
| Operating profit | $592.3 million | $516.3 million | +14.7% |
| Operating margin | 19.2% | 17.5% | +170 bps |
| Net income | $414.5 million | $353.5 million | +17.3% |
| Diluted EPS | $5.06 | $4.29 | +17.9% |
| Cash flow from operations | $518.4 million | $407.6 million | +27.2% |
- Reported and local-currency sales increased 5%; Aromor contributed approximately 1% of growth.
- Flavors sales increased 2.4% to $1,457.1 million; segment profit was $331.3 million, with a 22.7% margin, unchanged from 2013.
- Fragrances sales increased 6.6% to $1,631.5 million; segment profit rose to $335.4 million, and margin increased to 20.6% from 18.5%.
- R&D expense was $253.6 million, or 8.2% of sales, down from 8.8% in 2013. Selling and administrative expense was 16.7% of sales versus 17.1%.
- Adjusted operating profit was $601.3 million, or 19.5% of sales, excluding specified restructuring, operational-improvement, and accelerated-depreciation items.
- Capital expenditures were $143.2 million, or 4.6% of sales. Net investing cash outflow was $221.3 million, including the Aromor acquisition.
- Cash and cash equivalents were $478.6 million at year-end, including $249.1 million held outside the United States. The current ratio was 3.3.
- Total debt was $942.3 million, compared with $932.8 million in 2013; net debt was $458.5 million. No borrowings were outstanding under the $950 million revolving credit facility, with $940.4 million available.
- The company paid $133.2 million in dividends and repurchased $88.2 million of stock during 2014. Dividends declared increased to $1.72 per share from $1.46.
Material changes versus the prior comparable period
- Profitability improved primarily from sales growth, gross-margin expansion, productivity initiatives, cost discipline, and lower incentive compensation expense.
- Fragrances drove most of the segment-profit improvement, particularly through Fragrance Ingredients and Consumer Fragrances.
- Fragrance Ingredients sales increased 18%, substantially aided by the acquisition of Aromor, completed in January 2014 for approximately $102.6 million in cash.
- IFF closed its Augusta, Georgia fragrance-ingredients facility and consolidated production elsewhere. Total 2014 charges related to the closure were $13.8 million, including $10.3 million of accelerated depreciation; 43 positions were eliminated.
- The effective tax rate declined to 24.5% from 27.1%, partly due to earnings mix, lower loss provisions, and a $3.8 million tax benefit from a favorable Spanish dividend-withholding ruling.
- Comprehensive income declined to $266.8 million from $364.5 million, primarily because of foreign-currency translation losses and pension and postretirement liability adjustments.
Guidance, outlook, risks and unusual items
- For 2015, management expected local-currency sales growth in line with the long-term 4%-6% target, operating-profit growth at the low end of its range, and high-single-digit EPS growth.
- Management expected 2015 input costs to increase approximately 1%, as higher prices for naturals were expected to outweigh later benefits from lower oil-based derivative costs.
- 2015 capital spending was expected to be 4%-5% of sales, net of potential government grants and reimbursements.
- Principal risks include raw-material, energy and transportation inflation; crop availability and pricing; foreign-exchange volatility; international political, regulatory and economic conditions; emerging-market execution; customer concentration; supply-chain disruption; product-quality and regulatory compliance; competition; cyber and information-technology disruption; pension funding; tax audits; litigation; and the ability to realize savings from facility rationalization.
- Outstanding contingencies included Spanish and Brazilian tax matters, environmental claims, and ZoomEssence trade-secret litigation. Management did not consider the ZoomEssence matter material at year-end. The estimated reasonably possible loss range for disclosed contingencies was $0-$31 million, excluding a separately reserved approximately $13 million Spanish capital-tax matter.
- Environmental exposure at nine third-party sites was estimated at less than $5 million, although future costs could differ.
- Contractual obligations totaled approximately $1.733 billion, including borrowings, interest, leases, pension funding, postretirement obligations, and purchase commitments.
- Management stated that operating cash flow and existing credit facilities should be sufficient for investing and financing needs for at least the next 18 months. Internal controls over financial reporting were assessed as effective, and PricewaterhouseCoopers issued an unqualified opinion.
Important facts for investors to verify
- Reconcile reported, local-currency, and adjusted sales and profit growth, including the effect of the 53rd fiscal week and Aromor.
- Assess the sustainability of margin gains after excluding restructuring, rationalization, accelerated-depreciation, tax, and other unusual items.
- Monitor raw-material inflation, pricing recovery, volume erosion on existing business, and the effect of currency movements on 2015 results.
- Review debt maturities, including $125 million due in 2016 and $250 million due in 2017, and continued compliance with the 3.25-to-1 net-debt-to-adjusted-EBITDA covenant.
- Evaluate pension and postretirement deficits, required 2015 contributions, and sensitivity to discount rates and asset returns.
- Track Spanish and Brazilian tax disputes, related bank guarantees and pledged assets, environmental matters, and the ZoomEssence litigation.
- Verify customer concentration and the potential effect of losing core-supplier status or experiencing volume declines at major customers.