Business Context and Reporting Period
International Flavors & Fragrances Inc. filed its Form 10-K for the fiscal year ended December 31, 2020. The 2020 fiscal year comprised 52 weeks, compared with 53 weeks in 2019. Historical results cover IFF’s legacy Taste and Scent segments and do not include Nutrition & Biosciences, Inc. (N&B), which was acquired on February 1, 2021.
IFF develops and manufactures flavor compounds, fragrance compounds, fragrance ingredients, cosmetic actives, natural health ingredients and related specialty products. Approximately 80% of 2020 sales were generated outside the United States. The 25 largest customers represented approximately 39% of sales, while no individual customer exceeded 10%.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $5.084 billion | $5.140 billion | (1.1%) reported; flat currency neutral |
| Gross profit | $2.086 billion | $2.113 billion | Decreased |
| Gross margin | 41.0% | 41.1% | (10) bps |
| Operating profit | $566.5 million | $665.3 million | (14.9%) |
| Operating margin | 11.1% | 12.9% | (180) bps |
| Adjusted operating profit | $729.7 million | $793.1 million | Decreased |
| Adjusted operating margin | 14.4% | 15.4% | (100) bps |
| Net income attributable to IFF | $363.2 million | $455.9 million | Decreased |
| Diluted EPS | $3.21 | $4.00 | (19.8%) |
| Operating cash flow | $714.1 million | $699.0 million | Increased |
| Capital expenditures | $191.8 million | $236.0 million | Decreased |
Taste sales declined 3% reported and 2% currency neutral to $3.110 billion, with segment profit decreasing to $436.4 million from $482.4 million. Scent sales increased 2% reported and 3% currency neutral to $1.974 billion, with segment profit increasing to $357.3 million from $349.4 million.
Cash and cash equivalents were $649.5 million at year-end 2020, compared with $606.8 million at year-end 2019. Total debt was $4.414 billion, producing reported net debt of approximately $3.764 billion. The company reported approximately $627 million of revolver borrowing capacity under the pre-N&B facility, with no revolver borrowings outstanding, and a covenant net debt-to-adjusted EBITDA ratio of 3.43x.
IFF paid $322.6 million of dividends during 2020, and declared dividends of $3.04 per share. Share repurchases remained suspended. Working capital was approximately $1.2 billion at year-end, compared with $1.4 billion in 2019.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable on a currency-neutral basis, but COVID-19 reduced demand in food service, fine fragrances and certain retail-related categories.
- Consumer Fragrances and products supporting fabric and home care demand benefited from pandemic-related consumption patterns.
- Operating profit and EPS declined primarily because of lower volumes, unfavorable price-versus-input-cost performance, mix, higher selling and administrative expenses, and transaction and integration costs.
- 2020 included $96.6 million of N&B integration-related costs and $28.1 million of N&B transaction-related costs. Total identified items affecting operating profit were approximately $163.2 million.
- Research and development spending increased to $356.9 million, or 7.0% of sales, from 6.7% of sales in 2019. Selling and administrative expenses increased to 18.7% of sales from 17.0%.
- Operating cash flow increased despite lower earnings, principally due to working-capital changes, incentive compensation and accrued expenses.
- IFF announced 11 site closures during 2020 and expected approximately nine additional manufacturing-site closures by the end of 2021. The broader Frutarom integration initiative targets approximately 35 site closures, with total program costs expected to be approximately $63 million through 2022.
Guidance, Outlook, Risks and Unusual Items
On February 1, 2021, IFF completed the N&B transaction, issuing 141.7 million IFF shares, or approximately 55.4% of fully diluted shares after the transaction, and assuming or guaranteeing substantial N&B debt. N&B issued $6.25 billion of senior unsecured notes and borrowed $1.25 billion under term loan facilities to fund a $7.3 billion special cash payment to DuPont. The filing does not provide a complete preliminary purchase-price allocation for N&B.
Management expects 2021 capital spending to be approximately 4.5% of sales, net of potential grants and reimbursements. Management states that operating cash flow and available credit facilities are expected to fund investing, financing and debt-service requirements, but the post-N&B capital structure will be substantially more leveraged.
- COVID-19 may continue to affect demand, supply-chain costs, transportation, manufacturing, customer credit and asset valuations. The filing does not provide a firm earnings or revenue forecast.
- Key post-transaction risks include integration execution, realization of expected synergies, replacement of services previously provided by DuPont, customer and supplier retention, and substantially higher indebtedness.
- Raw-material, energy and transportation costs remain volatile. Natural products represented approximately 60% of raw-material spending, increasing exposure to crop conditions, climate effects and supply disruptions.
- Goodwill was $5.593 billion at year-end, including approximately $1.21 billion in the Savory reporting unit and $851.4 million in Natural Product Solutions. These units had only approximately 5% and 1% excess fair value, respectively, over carrying value in the 2020 impairment analysis.
- IFF disclosed securities litigation and Israeli proceedings relating principally to the Frutarom acquisition and alleged improper payments. An Israeli governmental investigation into former Frutarom executives was also disclosed. The filing does not provide a clear estimate of ultimate exposure.
- Other risks include regulatory and environmental compliance, product liability, cybersecurity, foreign exchange, pension funding, tax audits, LIBOR transition, Brexit and potential impairment of acquired assets.
- Contingencies include bank guarantees and letters of credit of approximately $48.7 million, Brazilian tax matters, and an estimated range of reasonably possible losses in excess of accrued liabilities of $0 to approximately $28.3 million for third-party contingencies.
Most Important Facts for Investors to Verify
- Reconcile the post-February 1, 2021 N&B debt, guarantees, financing terms, purchase accounting and resulting leverage with subsequent 2021 filings.
- Track actual N&B revenue, adjusted operating performance, integration costs and realized cost and revenue synergies against management expectations.
- Monitor goodwill headroom in Savory and Natural Product Solutions and the risk of impairment if growth, margins or discount rates deteriorate.
- Assess whether COVID-19-related volume weakness, raw-material inflation and pricing actions affect Taste and Fine Fragrance margins.
- Review debt maturities, covenant calculations, refinancing requirements and the transition from LIBOR-based borrowing rates.
- Follow the Frutarom-related securities litigation, Israeli investigation, alleged improper payments and associated legal or compliance costs.
- Verify the sustainability of operating cash flow after factoring activity, dividends, capital spending, pension contributions and increased post-transaction debt service.