International Flavors & Fragrances Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The 2015 fiscal year comprised 52 weeks; 2014 comprised 53 weeks. The filing was signed March 1, 2016. IFF is a global creator and manufacturer of flavors, fragrances, cosmetic active ingredients and related delivery systems, operating through Flavors and Fragrances segments in approximately 150 countries.
Business Context
- 2015 sales were approximately $3.0 billion, with Flavors representing 48% and Fragrances 52% of sales.
- Sales by destination were 31% Europe, Africa and Middle East; 28% Greater Asia; 24% North America; and 17% Latin America. Emerging markets represented 51% of sales.
- The 25 largest customers represented 52% of sales; the largest customer represented 12% of sales.
- IFF launched its Vision 2020 strategy, emphasizing innovation, market leadership, customer partnerships and acquisitions. The company targeted $500 million to $1 billion of incremental sales from acquisitions by 2020.
- IFF acquired Ottens Flavors for approximately $198.9 million and Lucas Meyer Cosmetics for approximately $312.0 million during 2015.
Financial Performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $3,023.2 million | $3,088.5 million | Down 2.1% |
| Currency-neutral sales growth | 5% | Not clearly provided in comparable format | Acquisitions contributed approximately 2% |
| Gross profit | $1,351.6 million | $1,362.2 million | Down 0.8% |
| Gross margin | 44.7% | 44.1% | Up 60 basis points |
| Operating profit | $588.3 million | $592.3 million | Down $4.0 million |
| Operating margin | 19.5% | 19.2% | Up 30 basis points |
| Adjusted operating profit | $612.1 million | $601.3 million | Up 1.8% |
| Adjusted operating margin | 20.2% | 19.5% | Up 70 basis points |
| Net income | $419.2 million | $414.5 million | Up 1.1% |
| Diluted EPS | $5.16 | $5.06 | Up 2.0% |
| Cash flow from operations | $433.6 million | $518.4 million | Down $84.8 million |
| Capital expenditures | $101.0 million | $143.2 million | Down $42.2 million |
Segment Results
- Flavors: Sales of $1,443.0 million, down 1% reported and up 6% currency neutral. Segment profit was $318.5 million, or 22.1% of sales, versus $331.3 million, or 22.7%, in 2014.
- Fragrances: Sales of $1,580.2 million, down 3% reported and up 4% currency neutral. Segment profit was $321.8 million, or 20.4% of sales, versus $335.4 million, or 20.6%, in 2014.
- R&D expense was $246.1 million, or 8.1% of sales, compared with $253.6 million, or 8.2%, in 2014.
- The effective tax rate was 22.2%, compared with 24.5% in 2014. The 2015 rate benefited from favorable tax rulings and settlements.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $182.0 million at December 31, 2015, down from $478.6 million at year-end 2014, primarily reflecting acquisition spending.
- Total debt was $1,070.2 million, compared with $942.3 million in 2014. Net debt, as defined for covenant purposes, was $885.0 million.
- Debt included $125.0 million of 6.14% notes due in 2016, $250.0 million of notes due in 2017, additional notes due in 2019, 2022, 2023 and 2027, and $131.2 million drawn under the revolving credit facility.
- The company had $790.7 million of additional borrowing capacity under its credit facility and reported a net debt-to-adjusted EBITDA ratio of 1.24 to 1, below the 3.25 to 1 covenant limit.
- Management stated that operating cash flow and existing credit facilities were sufficient for investing and financing needs for at least the next 18 months.
- Dividends paid were $158.9 million; dividends declared were $2.06 per share. The company repurchased $122.2 million of stock during 2015 and had approximately $236.7 million remaining under its repurchase authorization at year-end.
- Management expected 2016 capital spending to be approximately 5% of sales, subject to potential government grants and reimbursements.
Material Changes Versus the Prior Comparable Period
- Reported sales declined because a stronger U.S. dollar reduced sales by approximately 7%; currency-neutral sales increased 5%.
- Foreign currency changes adversely affected operating profit by approximately 6% and operating profit by approximately $33 million versus 2014.
- Gross and operating margins improved despite reported sales pressure, primarily due to productivity initiatives, favorable mix and lower incentive compensation.
- Operating cash flow declined because of higher pension contributions, increased working-capital requirements and higher cash needs for taxes, employee benefits and prepaid items.
- Goodwill and intangible assets increased to $1.247 billion from $752.0 million, primarily because of the Ottens Flavors and Lucas Meyer acquisitions.
- Debt increased by $127.9 million, largely reflecting acquisition funding and a draw on the revolving credit facility.
- Fourth-quarter 2015 sales were $715.6 million, net income was $79.2 million and diluted EPS was $0.98, compared with fourth-quarter 2014 sales of $756.1 million, net income of $90.1 million and diluted EPS of $1.10. The 2014 fourth quarter included an extra fiscal week.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2016 currency-neutral operating profit growth to be in the mid-single digits, including acquisitions, while cautioning that macroeconomic conditions, emerging-market weakness and the stronger U.S. dollar would remain challenging.
- Management expected pre-tax savings of approximately $7 million to $9 million from 2015 restructuring initiatives once fully implemented in the second half of 2017, with approximately half expected in 2016. The initiatives affected approximately 150 positions and had a total expected cost of approximately $10 million.
- Raw-material conditions were relatively benign in 2015. Higher prices for naturals, including citrus and vanilla, were expected to be partly offset by benefits from oil-based derivatives.
- Chinese authorities identified odor-emission compliance issues at several facilities. One Flavors facility was temporarily idled, another modified its production schedule, and IFF invested approximately $6.5 million in odor-abatement equipment. IFF also approved an approximately $45 million second flavors facility in China.
- 2015 included $18.3 million of acquisition-related costs, $7.6 million of restructuring charges, $7.2 million of accelerated contingent consideration related to Aromor, and $10.5 million of benefit from reversal of a Spanish capital tax provision. These items affect comparability with 2014.
- Environmental exposure at eight third-party sites was estimated at less than $5 million, although the company noted that future costs could increase.
- Other contingencies included Brazilian tax matters supported by approximately $25.1 million of guarantees and pledged assets, bank guarantees and standby letters of credit totaling approximately $36.2 million, and the ZoomEssence trade-secret litigation. Management did not consider the ZoomEssence matter material at filing; the estimated reasonably possible loss range for the matters discussed was $0 to $31 million.
- Key ongoing risks include foreign-exchange volatility, customer concentration and supplier consolidation, raw-material availability and pricing, emerging-market conditions, acquisition integration, cybersecurity, regulatory and environmental compliance, litigation, pension funding and impairment of goodwill or intangible assets.
Investor Verification Priorities
- Verify the sustainability of currency-neutral growth after separating acquisition contributions from organic growth.
- Assess whether the 2016 mid-single-digit operating-profit outlook remains achievable given currency, emerging-market, customer inventory and product-rationalization pressures.
- Review acquisition integration, preliminary purchase-price allocations for Lucas Meyer, goodwill and intangible-asset amortization, and potential impairment sensitivity.
- Monitor the 2016 maturity of $125 million of senior notes, refinancing plans and compliance with credit-facility covenants.
- Track working-capital trends and whether operating cash flow recovers after the 2015 decline.
- Evaluate the financial and operational impact of the China odor-compliance matter, planned capital projects and manufacturing rationalization.
- Review the restructuring program’s implementation costs, timing and expected $7 million to $9 million of annual savings.
- Reconcile reported GAAP results to adjusted operating profit, adjusted margins and adjusted tax rates, particularly the favorable Spanish tax items and acquisition-related charges.