INTERNATIONAL FLAVORS & FRAGRANCES INC annual report, FY2023

International Flavors & Fragrances Inc. — FY2023 Form 10-K Summary

Business context and reporting period

IFF is a global creator and manufacturer of food, beverage, health and bioscience, scent, pharmaceutical and specialty ingredients. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a quarterly filing. IFF operates through four segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions. Approximately 72% of 2023 sales were outside the United States, and no customer represented more than 10% of sales.

Key financial metrics

Metric	2023	2022	Change
Net sales	$11.479 billion	$12.440 billion	Down 8% reported; down 6% currency neutral
Gross profit	$3.681 billion	$4.151 billion	Down 11%
Gross margin	32.1%	33.4%	Down 130 basis points
Operating profit/(loss)	$(2.110) billion	$(1.326) billion	Higher loss
Net loss attributable to IFF	$(2.567) billion	$(1.871) billion	Higher loss
Diluted loss per share	$(10.05)	$(7.32)	Higher loss
Segment Adjusted Operating EBITDA	$1.980 billion	$2.455 billion	Down 19%
Segment Adjusted Operating EBITDA margin	17.2%	19.7%	Down 250 basis points
Cash flow from operations	$1.439 billion	$397 million	Improved materially
Capital expenditures	$503 million	$504 million	Broadly stable

Segment sales: Nourish $6.060 billion, down 11%; Health & Biosciences $2.081 billion, down 11%; Scent $2.393 billion, up 4%; and Pharma Solutions $945 million, down 3%.
Segment Adjusted Operating EBITDA: Nourish $732 million, down 38%; Health & Biosciences $588 million, down 7%; Scent $461 million, up 9%; and Pharma Solutions $199 million, down 10%.
Cash and liquidity: Cash and cash equivalents were $703 million on the balance sheet, or approximately $729 million including cash classified within assets held for sale. The company had no commercial paper outstanding and no borrowings under its $2.0 billion revolving credit facility; reported borrowing capacity under the facility was approximately $1.548 billion.
Debt: Total debt was $10.071 billion, while covenant net debt was $9.367 billion. The covenant net debt-to-credit-adjusted-EBITDA ratio was 4.51x, and IFF reported compliance with its debt covenants at year-end.
Dividends: IFF paid $826 million in dividends during 2023, equal to $3.24 per share declared. Debt agreements restrict cash dividends above $0.81 per share per quarter during the covenant-relief period and prohibit share repurchases, subject to exceptions.
Working capital: Inventories declined to $2.477 billion from $3.151 billion, contributing substantially to the improvement in operating cash flow.

Material changes versus the prior comparable period

Sales declined primarily because of lower volumes, unfavorable currency translation and the net effect of portfolio changes, partly offset by pricing actions.
Gross margin contracted because of lower volumes, portfolio mix and unfavorable manufacturing absorption associated with inventory reductions. Nourish also recorded an approximately $72 million inventory write-down related to locust bean kernel.
R&D expense increased to $636 million, or 5.5% of sales, from $603 million, or 4.8% of sales. Selling and administrative expense increased to $1.787 billion, including higher legal fees related to fragrance investigations.
IFF recorded a $2.623 billion goodwill impairment charge in the Nourish reporting unit, compared with a $2.250 billion impairment charge in Health & Biosciences in 2022. The Nourish impairment reflected weaker projections, inflation and higher interest rates.
Restructuring and other charges increased to $68 million from $12 million. The 2023 restructuring program included approximately 680 actual and planned headcount reductions.
Portfolio optimization continued: IFF completed the divestiture of part of Savory Solutions for approximately $821 million of net proceeds and the Flavor Specialty Ingredients business for approximately $200 million of net proceeds. The Cosmetic Ingredients business was classified as held for sale and was expected to be divested in the first quarter of 2024.
Operating cash flow increased sharply because of reductions in inventories and receivables, despite lower earnings before non-cash adjustments.
Interest expense increased to $380 million from $336 million due primarily to higher interest rates and borrowing-related costs.
The company corrected prior-year balance-sheet and disclosure errors, including lease, goodwill, deferred tax and derivative-related amounts. Investors should use the revised 2022 figures presented in the filing.

Guidance, outlook, management commentary and unusual items

Management expects 2024 capital spending to be approximately 4.9% of sales, net of potential government grants and reimbursements.
Management stated that operating cash flow, planned divestiture proceeds and available credit facilities are expected to support operations, debt service, investments and the capital return program over the next 12 months and beyond. This outlook remains dependent on operating performance, financing access and successful portfolio actions.
The company’s strategic transformation emphasizes growth, cost and productivity initiatives, a redesigned operating model, portfolio optimization and debt reduction. Capital allocation is primarily focused on debt repayment while maintaining investment-grade credit quality and continuing dividends at the Board’s discretion.
On February 1, 2024, IFF repaid the remaining $270 million outstanding under its 2024 Term Loan Facility. On February 6, 2024, J. Erik Fyrwald became Chief Executive Officer following the departure of Frank K. Clyburn Jr.
IFF continues to face antitrust and competition investigations involving its fragrance businesses by authorities including the European Commission, U.K. Competition and Markets Authority, U.S. Department of Justice and Swiss Competition Commission. The filing states that the duration and outcome cannot currently be predicted.
Putative antitrust class actions have been filed in Canada and the United States against IFF and other fragrance companies. The filing does not provide a clear estimate of potential exposure.
The company reported no material cybersecurity incident through the filing date, but identified cybersecurity, data protection and artificial-intelligence risks as potentially material future risks.
Russia- and Ukraine-related sales were approximately 1% of total sales each or less, and Israel-related sales were approximately 1% of sales. IFF limited Russian production and supply to products meeting essential needs.
Other unusual items included a $22 million pretax gain from the relocation of a China facility, approximately $23 million of losses related to business divestitures and a $72 million inventory write-down.

Principal risks and contingencies

High leverage, variable-rate debt, upcoming maturities and covenant restrictions could constrain liquidity, dividends, share repurchases, investment and strategic flexibility.
Demand, volumes and margins remain exposed to inflation, customer destocking, pricing resistance, input costs, energy and transportation costs, foreign exchange and recessionary conditions.
Supply-chain disruption, geopolitical conflicts, climate events, raw-material availability and specialized manufacturing sites could affect production and profitability.
Goodwill and intangible assets remain significant: goodwill was $10.635 billion and other intangible assets were $8.357 billion at December 31, 2023. Several reporting units had less than 25% excess fair value over carrying value, creating impairment sensitivity.
Legal, regulatory and antitrust matters could result in additional costs, penalties, damages or reputational harm. The company estimated reasonably possible losses in excess of recorded liabilities for other third-party contingencies at $0 to approximately $75 million, but litigation outcomes remain uncertain.
IFF may incur additional restructuring, integration, divestiture separation, stranded-cost and dis-synergy expenses as it executes its transformation and portfolio optimization.
Pension and postretirement funding requirements, environmental compliance, product quality, product recalls, tax audits and the potential tax indemnification obligations related to the N&B transaction remain additional contingencies.

Facts an investor should verify

Whether sales volumes, pricing, margins and Segment Adjusted Operating EBITDA stabilize or improve in 2024, particularly in Nourish and Health & Biosciences.
Progress toward reducing leverage and meeting the stepped covenant thresholds through December 2025.
Cash proceeds, closing conditions and debt repayment treatment for the Cosmetic Ingredients divestiture.
Developments in the fragrance antitrust investigations and related class actions, including any reserves or settlements.
Goodwill impairment sensitivity, especially for Health & Biosciences, Fragrance Ingredients and Pharma Solutions, which had limited excess fair value.
Whether operating cash flow remains strong after the inventory reduction benefit normalizes and whether capital spending approximates the stated 2024 expectation.
The effect of the CEO transition, restructuring program and portfolio changes on customer relationships, employee retention and execution of the strategic transformation.