International Flavors & Fragrances(IFF) - 2024 Q2 - Quarterly Report

PART I - Financial Information This section presents IFF's unaudited consolidated financial statements, including income, balance sheets, cash flows, and detailed notes, alongside management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents IFF's unaudited consolidated financial statements for the three and six months ended June 30, 2024 and 2023, including statements of income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, business divestitures, debt, and other financial instruments Consolidated Statements of Income and Comprehensive Income (Loss) IFF reported a significant increase in net income attributable to shareholders for both the three and six months ended June 30, 2024, primarily driven by a gain on business disposals and improved operating profit, despite a slight decrease in net sales Consolidated Statements of Income and Comprehensive Income (Loss) (Amounts in Millions, except per share amounts): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Sales | $2,889 | $2,929 | $5,788 | $5,956 | | Gross Profit | $1,068 | $933 | $2,092 | $1,897 | | Operating Profit | $191 | $145 | $390 | $276 | | Income Before Income Taxes | $183 | $50 | $298 | $64 | | Net Income Attributable to IFF Shareholders | $170 | $27 | $230 | $18 | | Net Income Per Share - Diluted | $0.66 | $0.11 | $0.90 | $0.07 | | Comprehensive Income (Loss) Attributable to IFF Shareholders | $46 | $86 | $(189) | $359 | Consolidated Balance Sheets As of June 30, 2024, IFF's total assets decreased slightly compared to December 31, 2023, primarily due to reductions in goodwill and other intangible assets, partially offset by a significant increase in assets held for sale. Total liabilities also decreased, leading to a slight reduction in total shareholders' equity Consolidated Balance Sheets (Dollars in Millions): | Asset/Liability/Equity | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | ASSETS | | | | Total Current Assets | $8,149 | $6,293 | | Property, Plant and Equipment, net | $3,763 | $4,240 | | Goodwill | $9,282 | $10,635 | | Other Intangible Assets, net | $6,881 | $8,357 | | Total Assets | $29,543 | $30,978 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total Current Liabilities | $3,425 | $3,758 | | Total Other Liabilities | $11,827 | $12,578 | | Total Shareholders' Equity | $14,254 | $14,611 | | Total Liabilities and Shareholders' Equity | $29,543 | $30,978 | Consolidated Statements of Shareholders' Equity Shareholders' equity decreased from $14,642 million at January 1, 2024, to $14,291 million at June 30, 2024, primarily due to other comprehensive losses and cash dividends declared, partially offset by net income Consolidated Statements of Shareholders' Equity (Dollars in Millions): | Metric | Balance at January 1, 2024 | Net Income | Other Comprehensive (Loss) | Cash Dividends Declared | Stock-based Compensation | Other | Balance at June 30, 2024 | | :--------------------------------------- | :------------------------- | :--------- | :------------------------- | :---------------------- | :----------------------- | :---- | :----------------------- | | Total Shareholders' Equity | $14,642 | $230 | $(419) | $(204) | $43 | $2 | $14,291 | - Cash dividends declared per common share were $0.40 for the three months ended June 30, 2024, and $0.80 for the six months ended June 30, 2024[8] Consolidated Statements of Cash Flows Net cash provided by operating activities decreased for the six months ended June 30, 2024, compared to the prior year, while cash provided by investing activities increased significantly due to business divestitures. Cash used in financing activities also increased, primarily due to higher debt repayments Consolidated Statements of Cash Flows (Dollars in Millions): | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | $336 | $375 | | Net Cash Provided by Investing Activities | $664 | $552 | | Net Cash Used in Financing Activities | $(1,023) | $(866) | | Net Change in Cash, Cash Equivalents and Restricted Cash | $(61) | $100 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $674 | $652 | Notes to Consolidated Financial Statements The notes provide detailed explanations of IFF's accounting policies, significant transactions, and financial instrument disclosures, including information on business divestitures, goodwill impairment, debt, and market risk management NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IFF is a leading creator and manufacturer of food, beverage, health & biosciences, scent, and pharma solutions. The interim financial statements are unaudited and prepared in accordance with GAAP, with certain prior year adjustments made to interest expense and other income without impacting net income. The company also details its cash, cash equivalents, and restricted cash balances, accounts receivable factoring activities, and inventory composition - IFF is a leading creator and manufacturer of food, beverage, health & biosciences, scent, and pharma solutions and complementary adjacent products[10] - The Company revised Interest expense and Other income, net for the three and six months ended June 30, 2023, with no impact on net income, reflecting adjustments to cash pooling arrangements[12] Cash, Cash Equivalents and Restricted Cash (Dollars in Millions): | Category | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $671 | $703 | | Cash and cash equivalents in Assets held for sale | $3 | $26 | | Restricted cash | $0 | $6 | | Total Cash, cash equivalents and restricted cash | $674 | $735 | - The Company sold approximately $882 million of receivables under factoring agreements for the six months ended June 30, 2024, incurring costs of $14 million[15] Inventories (Dollars in Millions): | Category | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Raw materials | $779 | $779 | | Work in process | $310 | $406 | | Finished goods | $1,071 | $1,292 | | Total Inventories | $2,160 | $2,477 | - The Company entered into a supply chain financing (SCF) program in Q4 2023, expected to be available to U.S. suppliers in H2 2024, with no outstanding amounts as of June 30, 2024[19][20] - IFF is evaluating the impact of new FASB ASUs on income tax and segment reporting disclosures, effective for fiscal years beginning after December 15, 2024 (income tax) and December 15, 2023 (segment reporting)[21] NOTE 2. NET INCOME PER SHARE Net income per share significantly increased for both basic and diluted measures for the three and six months ended June 30, 2024, compared to the prior year, reflecting higher net income attributable to IFF shareholders Net Income Per Share (Amounts in Millions, except per share amounts): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income Attributable to IFF Shareholders | $170 | $27 | $230 | $18 | | Weighted Average Common Shares Outstanding (Basic) | 255 | 255 | 255 | 255 | | Net Income Per Share - Basic | $0.67 | $0.11 | $0.90 | $0.07 | | Net Income Per Share - Diluted | $0.66 | $0.11 | $0.90 | $0.07 | - The Company declared quarterly dividends of $0.40 per share for Q2 2024 and $0.80 per share for the six months ended June 30, 2024[22] NOTE 3. BUSINESS DIVESTITURES AND ASSETS AND LIABILITIES HELD FOR SALE IFF completed the divestiture of its Cosmetic Ingredients business in April 2024, recognizing a pre-tax gain of $365 million. Additionally, the Pharma Solutions business was classified as 'held for sale' in Q2 2024, resulting in a non-cash goodwill impairment charge of $64 million and a loss of $282 million to adjust its carrying value to fair value less cost to sell - Divestiture of Cosmetic Ingredients business completed on April 2, 2024, yielding approximately $841 million in cash proceeds and a pre-tax gain of $365 million[24][26] - Pharma Solutions business classified as 'held for sale' in Q2 2024, with the transaction expected to close in Q2 2025[29][31] - A non-cash goodwill impairment charge of $64 million was recorded for the Pharma Solutions disposal group[31] - A loss of $282 million was recorded in Q2 2024 to adjust the carrying value of the Pharma Solutions disposal group to its fair value less cost to sell[31] Assets and Liabilities Held for Sale (Dollars in Millions): | Category | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total assets held-for-sale | $2,815 | $506 | | Total liabilities held-for-sale | $231 | $46 | NOTE 4. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges significantly decreased for the six months ended June 30, 2024, to $5 million, compared to $59 million in the prior year, primarily due to lower severance costs from the 2023 Restructuring Program and N&B Merger Restructuring Liability Restructuring and Other Charges (Dollars in Millions): | Category | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Total Restructuring and other charges | $5 | $59 | | Nourish segment charges | $3 | $32 | | Health & Biosciences segment charges | $1 | $11 | | Scent segment charges | $1 | $14 | | Pharma Solutions segment charges | $0 | $2 | - The 2023 Restructuring Program has resulted in approximately 670 actual and planned headcount reductions since inception, with $73 million expensed[37] NOTE 5. STOCK COMPENSATION PLANS Total stock-based compensation expense increased for both the three and six months ended June 30, 2024, with $45 million expensed for the six-month period Stock-Based Compensation Expense (Dollars in Millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Equity-based awards | $25 | $20 | $43 | $32 | | Liability-based awards | $1 | $0 | $2 | $0 | | Total stock-based compensation expense | $26 | $20 | $45 | $32 | | Total stock-based compensation expense, after tax | $21 | $16 | $36 | $26 | - As of June 30, 2024, there was approximately $112 million of total unrecognized compensation cost related to non-vested awards[42] NOTE 6. SEGMENT INFORMATION IFF operates through four segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions. Consolidated net sales decreased slightly, but Segment Adjusted Operating EBITDA increased across most segments for both the three and six months ended June 30, 2024, driven by volume increases, favorable pricing, and productivity gains, despite divestiture impacts Net Sales by Segment (Dollars in Millions): | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Nourish | $1,478 | $1,564 | $2,974 | $3,217 | | Health & Biosciences | $558 | $522 | $1,089 | $1,035 | | Scent | $603 | $592 | $1,248 | $1,200 | | Pharma Solutions | $250 | $251 | $477 | $504 | | Consolidated | $2,889 | $2,929 | $5,788 | $5,956 | Segment Adjusted Operating EBITDA (Dollars in Millions): | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Nourish | $232 | $181 | $448 | $389 | | Health & Biosciences | $165 | $145 | $324 | $276 | | Scent | $137 | $117 | $294 | $222 | | Pharma Solutions | $54 | $67 | $100 | $126 | | Total | $588 | $510 | $1,166 | $1,013 | Net Sales by Region (Dollars in Millions): | Region | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Europe, Africa and Middle East | $972 | $970 | $1,949 | $2,040 | | Greater Asia | $681 | $673 | $1,363 | $1,361 | | North America | $876 | $910 | $1,742 | $1,815 | | Latin America | $360 | $376 | $734 | $740 | | Consolidated | $2,889 | $2,929 | $5,788 | $5,956 | NOTE 7. EMPLOYEE BENEFITS Net periodic benefit cost for U.S. pension plans was negligible, while non-U.S. plans incurred $8 million for the six months ended June 30, 2024. The Company expects to contribute $5 million to U.S. pension plans and $23 million to non-U.S. pension plans in 2024 Net Periodic Benefit (Income) Cost (Dollars in Millions): | Metric | Six Months Ended June 30, 2024 (U.S. Plans) | Six Months Ended June 30, 2023 (U.S. Plans) | Six Months Ended June 30, 2024 (Non-U.S. Plans) | Six Months Ended June 30, 2023 (Non-U.S. Plans) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Net periodic benefit (income) cost | $1 | $(2) | $8 | $4 | - The Company expects to contribute $5 million to U.S. pension plans and $23 million to non-U.S. pension plans during 2024[49] NOTE 8. OTHER (EXPENSE) INCOME, NET Other expense (income), net, shifted from income in 2023 to an expense in 2024, primarily due to increased foreign exchange losses, partially offset by higher interest income Other (Expense) Income, Net (Dollars in Millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Foreign exchange losses | $(33) | $(18) | $(41) | $(33) | | Interest income | $3 | $1 | $6 | $1 | | Pension-related benefit | $1 | $5 | $3 | $10 | | Other (expense) income, net | $(15) | $11 | $(16) | $8 | NOTE 9. INCOME TAXES The effective tax rate for the three and six months ended June 30, 2024, significantly decreased to 6.0% and 21.8% respectively, primarily due to tax impacts on business divestitures and changes in the mix of earnings. The Company has $130 million in unrecognized tax benefits and $49 million in accrued interest and penalties - Effective tax rate for Q2 2024 was 6.0% (vs. 46.0% in Q2 2023) and for H1 2024 was 21.8% (vs. 70.3% in H1 2023), driven by business divestitures and earnings mix[53] - As of June 30, 2024, the Company had $130 million of unrecognized tax benefits and $49 million of accrued interest and penalties[53] - A deferred tax liability of approximately $175 million is recorded for the effect of repatriating funds to the U.S. from non-U.S. subsidiaries[53] NOTE 10. PROPERTY, PLANT AND EQUIPMENT, NET Total Property, plant and equipment, net, decreased to $3,763 million as of June 30, 2024, from $4,240 million at December 31, 2023. Depreciation expense also decreased for both the three and six-month periods Property, Plant and Equipment, Net (Dollars in Millions): | Asset Type | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total Property, plant and equipment | $6,143 | $6,642 | | Accumulated depreciation | $(2,380) | $(2,402) | | Total Property, plant and equipment, net | $3,763 | $4,240 | - Depreciation expense was $93 million for Q2 2024 (vs. $115 million in Q2 2023) and $203 million for H1 2024 (vs. $220 million in H1 2023)[54] NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Goodwill decreased to $9,282 million as of June 30, 2024, primarily due to transfers to assets held for sale and foreign exchange impacts, including a $64 million impairment related to the Pharma Solutions disposal group. Other intangible assets, net, also decreased, with amortization expense declining Goodwill by Segment (Dollars in Millions): | Segment | Balance at January 1, 2024 | Transferred to assets held for sale | Foreign exchange | Balance at June 30, 2024 | | :--------------------------------------- | :------------------------- | :---------------------------------- | :--------------- | :----------------------- | | Nourish | $3,489 | $(55) | $(45) | $3,389 | | Health & Biosciences | $4,391 | $0 | $(49) | $4,342 | | Scent | $1,490 | $0 | $(12) | $1,478 | | Pharma Solutions | $1,265 | $(1,172) | $(20) | $73 | | Total | $10,635 | $(1,227) | $(126) | $9,282 | - A $64 million impairment related to the Pharma Solutions disposal group was recognized[56] Other Intangible Assets, Net (Dollars in Millions): | Asset Type | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total carrying value | $9,468 | $10,947 | | Total accumulated amortization | $(2,587) | $(2,590) | | Other intangible assets, net | $6,881 | $8,357 | - Amortization expense was $153 million for Q2 2024 (vs. $172 million in Q2 2023) and $321 million for H1 2024 (vs. $343 million in H1 2023)[58] NOTE 12. OTHER CURRENT ASSETS AND LIABILITIES, AND OTHER ASSETS Prepaid expenses and other current assets decreased to $728 million, while other assets increased to $805 million as of June 30, 2024. Other current liabilities decreased to $762 million, primarily due to lower accrued income taxes and earn outs payable Prepaid Expenses and Other Current Assets (Dollars in Millions): | Category | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total | $728 | $875 | Other Assets (Dollars in Millions): | Category | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total | $805 | $764 | Other Current Liabilities (Dollars in Millions): | Category | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total | $762 | $977 | NOTE 13. DEBT Total debt decreased to $9,379 million as of June 30, 2024, from $10,071 million at December 31, 2023, primarily due to significant debt repayments, including the 2024 Term Loan Facility and 2024 Euro Notes. The 2026 Term Loan Facility was reclassified to short-term debt due to the Pharma Solutions divestiture Debt (Dollars in Millions): | Debt Type | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Total debt | $9,379 | $10,071 | | Total Long-term debt | $8,596 | $9,186 | - The Company made a $270 million repayment on the 2024 Term Loan Facility and a €500 million repayment on the 2024 Euro Notes in Q1 2024[69] - The 2026 Term Loan Facility balance was reclassified from long-term to short-term debt due to the planned sale of the Pharma Solutions disposal group[68] - For the six months ended June 30, 2024, gross issuances of commercial paper were $3.298 billion and repayments were $3.109 billion[65] NOTE 14. LEASES Total operating lease cost decreased for both the three and six months ended June 30, 2024, compared to the prior year. Cash paid for operating leases also saw a slight decrease Lease Expenses (Dollars in Millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating lease cost | $44 | $56 | $92 | $105 | | Finance lease cost | $3 | $2 | $6 | $4 | Supplemental Cash Flow Information Related to Leases (Dollars in Millions): | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Operating cash flows for operating leases | $60 | $64 | | Operating cash flows for finance leases | $1 | $0 | | Financing cash flows for finance leases | $5 | $4 | | Right-of-use assets obtained (Operating leases) | $44 | $57 | | Right-of-use assets obtained (Finance leases) | $8 | $6 | NOTE 15. FINANCIAL INSTRUMENTS IFF uses derivative instruments, including foreign currency forward contracts and cross currency swaps, to manage exchange rate and commodity price risks. As of June 30, 2024, derivative assets decreased while derivative liabilities remained significant, primarily due to cross currency swaps in a liability position - IFF uses Level 2 valuation techniques for financial instruments, primarily based on observable market data like Term SOFR swap curves and forward rates[73] Fair Values of Financial Instruments (Dollars in Millions): | Instrument | June 30, 2024 (Carrying Value) | June 30, 2024 (Fair Value) | December 31, 2023 (Carrying Value) | December 31, 2023 (Fair Value) | | :--------------------------------------- | :----------------------------- | :------------------------- | :--------------------------------- | :----------------------------- | | Cash and cash equivalents | $671 | $671 | $703 | $703 | | Derivative assets | $4 | $4 | $41 | $41 | | Derivative liabilities | $147 | $147 | $165 | $165 | | Commercial paper | $189 | $189 | $0 | $0 | | Total Long-term debt (various notes and term loans) | $8,596 (sum of individual notes/loans) | $7,719 (sum of individual notes/loans) | $9,186 (sum of individual notes/loans) | $8,271 (sum of individual notes/loans) | - As of June 30, 2024, IFF had twelve EUR/USD cross currency swaps with a notional value of $1.400 billion, in a liability position with an aggregate fair value of $115 million[75] Notional Amount of Derivative Instruments (Dollars in Millions): | Instrument | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Foreign currency contracts | $(3,318) | $(1,400) | | Commodity contracts | $5 | $7 | | Cross currency swaps | $1,400 | $1,400 | NOTE 16. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss (AOCI) increased to $(2,315) million as of June 30, 2024, from $(1,896) million at January 1, 2024, primarily due to foreign currency translation adjustments Changes in Accumulated Other Comprehensive (Loss) Income (Dollars in Millions): | Component | Balance at January 1, 2024 | OCI before reclassifications | Reclassifications due to business divestitures | Amounts reclassified from AOCI | Net current period OCI (loss) | Balance at June 30, 2024 | | :--------------------------------------- | :------------------------- | :--------------------------- | :--------------------------------------------- | :----------------------------- | :---------------------------- | :----------------------- | | Foreign Currency Translation Adjustments | $(1,652) | $(425) | $4 | $0 | $(421) | $(2,073) | | Gains (Losses) on Derivatives Qualifying as Hedges | $1 | $(6) | $0 | $0 | $(6) | $(5) | | Pension and Postretirement Liability Adjustment | $(245) | $4 | $0 | $4 | $8 | $(237) | | Total | $(1,896) | $(427) | $4 | $4 | $(419) | $(2,315) | NOTE 17. COMMITMENTS AND CONTINGENCIES IFF has various guarantees, letters of credit, and lines of credit totaling approximately $1.876 billion, in addition to its Revolving Credit Facility. The Company is involved in several legal proceedings, including class action lawsuits and antitrust investigations by the EC, CMA, DOJ, and Swiss Competition Commission related to its fragrance businesses. A provision of €15.9 million was recognized for a settlement with the EC regarding message deletion - As of June 30, 2024, IFF had approximately $216 million in bank guarantees, letters of credit, and surety bonds, with $56 million outstanding[94] - The Company had a total capacity of approximately $1.876 billion in lines of credit, in addition to the $1.696 billion under the Revolving Credit Facility, as of June 30, 2024[95] - IFF is facing class action lawsuits in Israel, Canada, and the U.S. related to the Frutarom acquisition and alleged anticompetitive conduct in fragrance businesses[98] - The European Commission, UK Competition and Markets Authority, U.S. Department of Justice, and Swiss Competition Commission are investigating potential anticompetitive conduct in IFF's fragrance businesses[101] - A provision of €15.9 million was recognized in H1 2024 for a settlement with the EC related to the deletion of messages by a former Scent employee, which does not conclude the antitrust investigation[101] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of IFF's business, a detailed analysis of financial performance for the second quarter and first six months of 2024 compared to 2023, and discussions on liquidity, capital resources, critical accounting policies, and non-GAAP financial measures. Key highlights include increased operating profit and net income, driven by divestiture gains and productivity, despite slight sales declines and ongoing geopolitical impacts OVERVIEW IFF has expanded its global leadership in high-value ingredients and solutions across Food & Beverage, Home & Personal Care, and Health & Wellness markets, organized into four segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions. The company uses currency neutral calculations for performance analysis and monitors impacts from geopolitical conflicts, including the Israel-Hamas and Russia-Ukraine wars, which are not expected to have a material impact on consolidated financial statements - IFF's business segments include Nourish, Health & Biosciences, Scent, and Pharma Solutions, covering a wide range of consumer product applications[108] - The Cosmetic Ingredients business was divested on April 2, 2024, and the Pharma Solutions business is in the process of being sold, with an agreement entered into on March 19, 2024[108] - Currency neutral calculations are used to remove the impact of foreign currency exchange rate changes for performance analysis[109] - Sales to Israeli and Ukrainian customers were less than 1% of total sales for both periods. Sales to Russian customers were approximately 2% of total sales for Q2 2024 and 1% for H1 2024[111][112] RESULTS OF OPERATIONS IFF's financial performance for Q2 and H1 2024 showed a slight decrease in reported net sales but an increase in currency-neutral sales, driven by volume growth and favorable pricing, offset by divestiture impacts. Gross profit and operating profit significantly improved due to lower costs and divestiture gains Consolidated Financial Performance (Dollars in Millions, except per share amounts): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Sales | $2,889 (1% decrease) | $2,929 | $5,788 (3% decrease) | $5,956 | | Gross Profit | $1,068 (14% increase) | $933 | $2,092 (10% increase) | $1,897 | | Operating Profit | $191 (32% increase) | $145 | $390 (41% increase) | $276 | | Net Income | $172 (NMF increase) | $27 | $233 (NMF increase) | $19 | | Diluted EPS | $0.66 (NMF increase) | $0.11 | $0.90 (NMF increase) | $0.07 | | Gross Margin | 37.0% | 31.9% | 36.1% | 31.9% | | Operating Margin | 6.6% | 5.0% | 6.7% | 4.6% | - Currency neutral sales increased 2% in Q2 2024 and were flat in H1 2024, primarily driven by volume increases, offset by divestiture impacts of approximately $134 million (Q2) and $288 million (H1)[113][134] SECOND QUARTER 2024 IN COMPARISON TO SECOND QUARTER 2023 In Q2 2024, net sales decreased 1% on a reported basis but increased 2% currency neutral. Gross profit rose 14% due to volume, pricing, and productivity. Operating profit increased 32%, significantly boosted by a $368 million gain on business disposals (Cosmetic Ingredients business) and lower interest expense, despite a $282 million loss on assets held for sale (Pharma Solutions) and a $64 million goodwill impairment Sales Performance by Segment (Q2 2024 vs. Q2 2023): | Segment | Reported % Change | Currency Neutral % Change | | :--------------------------------------- | :---------------- | :------------------------ | | Nourish | -5% | -2% | | Health & Biosciences | 7% | 9% | | Scent | 2% | 7% | | Pharma Solutions | 0% | 0% | | Total | -1% | 2% | - Nourish sales decreased due to divestiture of Savory Solutions business ($89 million impact) and price decreases, partially offset by volume increases[118] - Health & Biosciences sales increased due to volume growth[118] - Scent sales increased due to volume and price increases, partially offset by divestitures of FSI and Cosmetic Ingredients businesses ($45 million impact)[118] - Pharma Solutions sales were flat, with volume increases offset by price decreases[118] - Cost of goods sold decreased 9% due to lower raw material costs, manufacturing expenses, and divestiture impacts ($86 million)[118] - R&D expenses increased 7% to $173 million, primarily due to higher incentive compensation[118] - S&A expenses increased 11% to $493 million, driven by incentive compensation, professional/legal fees, and regulatory provisions[118] - Amortization of acquisition-related intangibles decreased 11% to $153 million due to divestitures and Pharma Solutions assets classified as held for sale[120] - Impairment of goodwill was $64 million, related to the Pharma Solutions disposal group[121] - Restructuring and other charges decreased 71% to $2 million due to lower severance costs[122] - Interest expense decreased 22% to $79 million due to lower debt outstanding[123] - Gains on business disposals increased to $(368) million (a gain) primarily from the Cosmetic Ingredients business divestiture[124] - Loss on assets classified as held for sale was $282 million for the Pharma Solutions disposal group[125] - Other expense (income), net, shifted to an expense of $15 million from income of $(11) million, primarily due to higher foreign exchange losses[125] - Effective tax rate decreased to 6.0% from 46.0%, driven by increased pre-tax income and tax impacts on business divestitures[126] Segment Adjusted Operating EBITDA and Margin (Q2 2024 vs. Q2 2023): | Segment | Q2 2024 EBITDA | Q2 2023 EBITDA | Q2 2024 Margin | Q2 2023 Margin | | :--------------------------------------- | :------------- | :------------- | :------------- | :------------- | | Nourish | $232 (28% increase) | $181 | 15.7% | 11.6% | | Health & Biosciences | $165 (14% increase) | $145 | 29.6% | 27.8% | | Scent | $137 (17% increase) | $117 | 22.7% | 19.8% | | Pharma Solutions | $54 (19% decrease) | $67 | 21.6% | 26.7% | | Consolidated | $588 | $510 | 20.4% | 17.4% | FIRST SIX MONTHS 2024 IN COMPARISON TO FIRST SIX MONTHS 2023 For the first six months of 2024, reported sales decreased 3%, but currency-neutral sales were flat. Gross profit increased 10%, and operating profit rose 41%. Net income significantly improved, driven by the gain on the Cosmetic Ingredients business divestiture, lower costs, and improved segment performance, despite the goodwill impairment and loss on assets held for sale Sales Performance by Segment (H1 2024 vs. H1 2023): | Segment | Reported % Change | Currency Neutral % Change | | :--------------------------------------- | :---------------- | :------------------------ | | Nourish | -8% | -4% | | Health & Biosciences | 5% | 7% | | Scent | 4% | 10% | | Pharma Solutions | -5% | -6% | | Total | -3% | 0% | - Nourish sales decreased due to the divestiture of Savory Solutions business ($223 million impact) and price decreases, partially offset by volume increases[134] - Health & Biosciences sales increased due to price and volume increases[134] - Scent sales increased due to price increases in Fragrance Compounds and volume increases, partially offset by divestitures of FSI and Cosmetic Ingredients businesses ($65 million impact)[134] - Pharma Solutions sales decreased due to price and volume decreases in the Pharma segment, despite growth in industrial markets[137] - Cost of goods sold decreased 9% due to divestiture impacts ($195 million), lower raw material costs, and manufacturing expenses[138] - R&D expenses increased 5% to $339 million, primarily due to higher incentive compensation[139] - S&A expenses increased 9% to $0.983 billion, driven by incentive compensation, operating expenses, and legal fees for investigations[140] - Amortization of acquisition-related intangibles decreased 6% to $321 million due to divestitures and Pharma Solutions assets classified as held for sale[141] - Impairment of goodwill was $64 million, related to the Pharma Solutions disposal group[142] - Restructuring and other charges decreased 92% to $5 million due to lower severance costs[143] - Interest expense decreased 19% to $162 million due to lower debt outstanding[144] - Gains on business disposals increased to $(368) million (a gain) primarily from the Cosmetic Ingredients business divestiture[145] - Loss on assets classified as held for sale was $282 million for the Pharma Solutions disposal group[146] - Other expense (income), net, shifted to an expense of $16 million from income of $(8) million, primarily due to increased foreign exchange losses[146] - Effective tax rate decreased to 21.8% from 70.3%, driven by increased pre-tax income and tax impacts on business divestitures[147] Segment Adjusted Operating EBITDA and Margin (H1 2024 vs. H1 2023): | Segment | H1 2024 EBITDA | H1 2023 EBITDA | H1 2024 Margin | H1 2023 Margin | | :--------------------------------------- | :------------- | :------------- | :------------- | :------------- | | Nourish | $448 (15% increase) | $389 | 15.1% | 12.1% | | Health & Biosciences | $324 (17% increase) | $276 | 29.8% | 26.7% | | Scent | $294 (32% increase) | $222 | 23.6% | 18.5% | | Pharma Solutions | $100 (21% decrease) | $126 | 21.0% | 25.0% | | Consolidated | $1,166 | $1,013 | 20.1% | 17.0% | Liquidity IFF's cash and cash equivalents decreased to $674 million at June 30, 2024. Operating cash flows decreased, while investing cash flows increased due to business divestitures. Financing cash flows increased due to higher debt repayments. The company's capital allocation strategy focuses on maintaining an investment-grade rating, investing in the business, paying dividends, and repaying debt - Cash and cash equivalents were $674 million at June 30, 2024, including $3 million in assets held for sale[155] - Cash flows from operating activities decreased to $336 million for H1 2024 (from $375 million in H1 2023), primarily due to increased working capital[156] - Cash flows from investing activities increased to $664 million for H1 2024 (from $552 million in H1 2023), driven by lower capital spending and higher net proceeds from business divestitures[157] - Cash flows used in financing activities increased to $1,023 million for H1 2024 (from $866 million in H1 2023), primarily due to higher repayments of long-term debt[158] - Capital spending in 2024 is expected to be approximately 5.0% of sales, up from 4.4% in 2023[157] - Dividends totaling $309 million were paid in H1 2024, with a cash dividend of $0.40 per share declared for Q2 2024[158] Capital Resources IFF anticipates sufficient cash flows from operations, divestiture proceeds, and existing credit facilities to meet its financial needs. The company was in compliance with all debt covenants as of June 30, 2024, with a net debt to credit adjusted EBITDA ratio of 3.98 to 1.0, below the covenant limit of 4.75x for Q2 2024. Amendments to credit agreements provide financial covenant relief through December 31, 2025, with restrictions on share repurchases and dividends - Operating cash flow, proceeds from planned business divestitures, and existing credit facilities are expected to be sufficient to meet investing and financing needs[160] - As of June 30, 2024, IFF was in compliance with all financial and other debt covenants, with a net debt to credit adjusted EBITDA ratio of 3.98 to 1.0, below the covenant limit of 4.75x for the fiscal quarter[162] - Financial covenant relief period extends through December 31, 2025, with leverage ratio limits decreasing over time[161] - During the relief period, share repurchases are prohibited, and cash dividends on common stock are capped at $0.81 per share per fiscal quarter[161] - Available capacity under the $2.000 billion Revolving Credit Facility was $1.696 billion as of June 30, 2024[161] Credit Adjusted EBITDA and Net Debt (Dollars in Millions): | Metric | Twelve Months Ended June 30, 2024 | | :--------------------------------------- | :-------------------------------- | | Net loss | $(2,355) | | Interest expense | $341 | | Income taxes | $65 | | Depreciation and amortization | $1,103 | | Specified items | $3,030 | | Non-cash items | $11 | | Credit Adjusted EBITDA | $2,195 | | Total debt | $9,404 | | Cash and cash equivalents | $674 | | Net debt | $8,730 | | Net debt to Credit Adjusted EBITDA ratio | 3.98 to 1.0 | Critical Accounting Policies and Use of Estimates There have been no significant changes to critical accounting policies, except for the goodwill impairment assessment related to the Pharma Solutions disposal group. The fair value of this disposal group was estimated based on the sale price, including earn-outs valued using a Monte Carlo simulation with Level 3 unobservable inputs - Goodwill impairment assessment for the Pharma Solutions disposal group involved estimating fair value based on sale price and earn-outs, using a Monte Carlo simulation with Level 3 unobservable inputs[167] - A 10% increase or decrease in the fair value of contingent consideration would not materially impact the impairment charge[167] New Accounting Standards Refer to Note 1 for a discussion of recent accounting pronouncements, including ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), which IFF is currently evaluating for impact - Refer to Note 1 for details on recent accounting pronouncements, including ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting)[168] Non-GAAP Financial Measures IFF uses non-GAAP financial measures such as currency neutral metrics, adjusted operating EBITDA, adjusted operating EBITDA margin, and net debt to credit adjusted EBITDA to provide additional insights into underlying operating results and debt covenant compliance. These measures are supplemental and not intended to replace GAAP presentations - Non-GAAP measures include currency neutral metrics, adjusted operating EBITDA, adjusted operating EBITDA margin, and net debt to credit adjusted EBITDA[169] - Adjusted operating EBITDA excludes depreciation, amortization, interest, other income/expense, restructuring charges, and certain non-recurring items[169] - Net debt to credit adjusted EBITDA is used for debt covenant compliance and may differ from adjusted operating EBITDA calculations[169] Cautionary Statement Under the Private Securities Litigation Reform Act of 1995 This section outlines various forward-looking statements and significant risks and uncertainties that could cause actual results to differ materially from projections. Key risks include substantial indebtedness, ability to execute strategic transformations, legal and regulatory outcomes, inflationary pressures, supply chain disruptions, geopolitical events, and the ability to attract and retain key employees - Forward-looking statements are based on current assumptions and expectations, but actual results may differ due to inherent risks and uncertainties[170] - Key risks include substantial indebtedness, ability to execute strategic transformation, legal/regulatory outcomes, inflationary trends, supply chain disruptions, geopolitical developments (Russia-Ukraine, Israel-Hamas wars), and ability to attract/retain key employees[170][171] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk There are no material changes in market risk from the 2023 Form 10-K, except for cross currency swap agreements. A hypothetical 10% change in the U.S. dollar's value against the Euro would alter the fair value of cross currency swaps by approximately $145 million - No material changes in market risk from 2023 Form 10-K, except for cross currency swap agreements[173] - A hypothetical 10% decrease or increase in the U.S. dollar's value against the Euro would change the estimated fair value of cross currency swaps by approximately $145 million[173] ITEM 4. Controls and Procedures The CEO and CFO have evaluated the effectiveness of IFF's disclosure controls and procedures as of June 30, 2024, concluding they are effective. There have been no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2024[174] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2024[175] PART II - Other Information This section provides updates on legal proceedings, confirms no material changes to risk factors, and lists other required disclosures and exhibits ITEM 1. Legal Proceedings Updates on legal proceedings are provided in Note 18 to the Consolidated Financial Statements, which details ongoing litigation and investigations - Updates on legal proceedings are provided in Note 18 to the Consolidated Financial Statements[177] ITEM 1A. Risk Factors There have been no material changes to the risk factors disclosed in the 2023 Form 10-K - No material changes to risk factors disclosed in the 2023 Form 10-K[178] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the quarter - No unregistered sales of equity securities or use of proceeds[179] ITEM 5. Other Information No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2024 - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during Q2 2024[180] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, XBRL documents, and interactive data files - Exhibits include certifications (Sections 302 and 1350 of Sarbanes-Oxley Act) and XBRL documents[181] Signatures The report was duly signed on August 6, 2024, by J. Erik Fyrwald (CEO), Glenn Richter (EVP, CFO & Business Transformation Officer), and Beril Yildiz (SVP, Corporate Controller & Chief Accounting Officer) - The report was signed by J. Erik Fyrwald (CEO), Glenn Richter (CFO), and Beril Yildiz (Chief Accounting Officer) on August 6, 2024[184]