International Flavors & Fragrances Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The filing was signed May 10, 2011. IFF operates through Flavors and Fragrances business segments and sells globally.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $714.3 million | $653.9 million | +9% |
| Operating profit | $133.4 million | $104.6 million | +28% |
| Income before taxes | $115.6 million | $89.1 million | +30% |
| Net income | $84.0 million | $63.8 million | +32% |
| Diluted EPS | $1.03 | $0.80 | +$0.23 |
| Operating margin | 18.7% | 16.0% | +270 bps |
| Net margin | 11.8% | 9.8% | +200 bps |
| Operating cash flow | $(34.9) million | $32.4 million | $(67.3) million |
| Capital expenditures | $19.4 million | $13.0 million | +$6.4 million |
| Cash and equivalents | $112.0 million | $89.8 million | Prior-year comparison |
| Total debt at period end | $972.1 million | $1,014.9 million | Prior-year comparison |
Compared with December 31, 2010, cash declined from $131.3 million to $112.0 million, while total debt increased from $921.6 million to $972.1 million, primarily because of higher short-term borrowings to fund working capital. Working capital increased to $754 million from $664 million.
Cost of goods sold declined to 58.4% of sales from 58.7%; research and development remained 8.0%; and selling and administrative expenses declined to 14.9% from 16.5%. The effective tax rate was 27.3%, compared with 28.4%.
- Flavors: Sales of $338.6 million, up 13% reported and 12% in local currency. Operating profit was $79.0 million, or 23.3% of sales, versus $61.6 million, or 20.5%.
- Fragrances: Sales of $375.7 million, up 6% reported and 7% in local currency. Operating profit was $68.7 million, or 18.3% of sales, versus $56.0 million, or 15.8%. Excluding $5.0 million of prior-year restructuring charges, the comparable margin was 17.2%.
- Geography: Emerging-market local-currency sales growth was 12% overall. Foreign-country sales totaled $551 million, compared with $503 million in the prior-year quarter.
Material changes versus the prior comparable period
- Sales growth was driven primarily by net new customer wins and price realization, with approximately 80% of local-currency growth attributed to new wins.
- Profitability improved through operating leverage, stronger mix, pricing, margin-recovery initiatives and benefits from the European manufacturing rationalization.
- Higher input costs had not yet fully affected reported results; management expected those costs to begin affecting results in the next few quarters.
- Operating cash flow shifted to a $34.9 million outflow from a $32.4 million inflow, reflecting higher incentive compensation, taxes, trade-payable payments, receivables and inventory.
- Other expense increased to $6.1 million from $2.8 million, primarily due to higher foreign-exchange losses.
- Restructuring charges declined to $28 thousand from $5.0 million. A further approximately $4 million pension-related charge was expected in the second quarter of 2011 in connection with the Drogheda facility restructuring.
- The quarterly dividend increased to $0.27 per share from $0.25. No open-market share repurchases occurred.
Guidance, outlook, risks and unusual items
Management did not provide explicit full-year revenue or earnings guidance in the filing. It expected 2011 gross additions to property, plant and equipment to approximate 4%–5% of sales and expected cash flows from operations and available credit facilities to fund normal capital spending and other expected cash requirements for at least the next 18 months.
At March 31, 2011, IFF had $110 million borrowed under its revolving facility, overall borrowing capacity of $830 million and stated drawdown capacity of $805 million. The company was in compliance with its covenants; net debt to adjusted EBITDA was 1.64 to 1 against a maximum covenant ratio of 3.25 to 1.
- Key operating risks include accelerating raw-material and energy costs, customer pricing pressure, foreign-exchange volatility, interest-rate movements, economic conditions and access to credit.
- Tax exposures included $66 million of gross unrecognized tax benefits and $11 million of accrued interest and penalties. European tax positions remain subject to audit and challenge.
- Sixteen popcorn-flavor-related actions involving 269 claimants were pending. Management believed adequate provision and insurance coverage existed and did not expect a material adverse aggregate effect, but litigation outcomes remain uncertain.
- A patent dispute involving V. Mane Fils could result in damages, an injunction or restrictions affecting certain flavor products. IFF denied liability and was defending the claims.
- IFF was identified as a potentially responsible party at ten environmental sites and estimated its share of future costs at less than $5 million.
- The company expected approximately $3.8 million, net of tax, of derivative losses in accumulated other comprehensive income to be reclassified into earnings within the following 12 months, subject to currency movements.
Most important facts for investors to verify
- Whether pricing and new customer wins continue to offset accelerating raw-material costs and customer cost-reduction demands.
- The sustainability of the improved Flavors and Fragrances operating margins after restructuring benefits are lapped.
- Working-capital needs, operating cash conversion and the extent of further short-term borrowing.
- The timing and amount of the expected approximately $4 million second-quarter restructuring-related pension charge.
- Developments in the European tax audits, patent litigation and popcorn-flavor claims, including insurance recoveries and accrued liabilities.
- Compliance with debt covenants and continued availability under the revolving credit facility.