International Flavors & Fragrances(IFF) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The N&B merger significantly transformed the company's financials, tripling assets and doubling Q3 net sales, though nine-month net income declined due to merger-related expenses Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in millions) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $7,132 | $3,060 | | Goodwill | $16,590 | $5,593 | | Other intangible assets, net | $10,959 | $2,727 | | Total Assets | $40,252 | $13,555 | | Total Current Liabilities | $3,579 | $1,904 | | Long-term debt | $10,818 | $3,779 | | Total Liabilities | $18,674 | $7,135 | | Total Shareholders' Equity | $21,473 | $6,322 | - The significant increase in assets, liabilities, and equity is primarily due to the merger with DuPont's N&B business, which was completed on February 1, 2021[19] Consolidated Statements of Income and Comprehensive (Loss) Income Statement of Income Highlights (in millions, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $3,071 | $1,268 | $8,625 | $3,814 | | Gross profit | $1,090 | $524 | $2,754 | $1,572 | | Operating profit | $298 | $150 | $412 | $466 | | Net income attributable to IFF | $194 | $85 | $180 | $296 | | Net income per share - diluted | $0.76 | $0.75 | $0.75 | $2.64 | - While Q3 net income increased significantly year-over-year, the nine-month net income decreased from $296 million in 2020 to $180 million in 2021, reflecting higher operating costs and merger-related expenses post-acquisition of N&B[8] Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended September 30 (in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,126 | $415 | | Net cash provided by (used in) investing activities | $75 | $(119) | | Net cash used in financing activities | $(1,022) | $(418) | | Net change in cash, cash equivalents and restricted cash | $135 | $(140) | - Operating cash flow more than doubled, driven by higher earnings and adjustments for non-cash items like depreciation, amortization, and inventory step-up amortization related to the N&B merger. Investing activities provided cash due to $193 million received from the N&B merger[11] Notes to Consolidated Financial Statements The notes detail the N&B merger's $16 billion purchase, increased debt, new segment reporting, and ongoing litigation and divestiture plans Note 3. Acquisitions - On February 1, 2021, IFF completed its merger with DuPont's Nutrition & Biosciences (N&B) business in a Reverse Morris Trust transaction. The N&B business contributed approximately $1.64 billion in net sales for Q3 2021 and $4.41 billion for the first nine months of 2021[48][50] N&B Merger Purchase Price (in millions) | Component | Value | | :--- | :--- | | Fair value of common stock issued | $15,929 | | Fair value for replacement equity awards | $25 | | Total purchase consideration | $15,954 | - The preliminary purchase price allocation resulted in the recognition of $11.8 billion in goodwill and $9.3 billion in identifiable intangible assets, primarily customer relationships and technological know-how[55][59][60] Note 5. Goodwill and Other Intangible Assets, Net Goodwill Movement by Segment - Nine Months Ended Sep 30, 2021 (in millions) | Segment | Balance at Dec 31, 2020 | Acquisitions (N&B) | Other | Balance at Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Nourish | $4,859 | $2,702 | $(1,146) | $6,415 | | Health & Biosciences | $0 | $6,651 | $139 | $6,790 | | Scent | $734 | $910 | $227 | $1,871 | | Pharma Solutions | $0 | $1,539 | $(25) | $1,514 | | Total | $5,593 | $11,802 | $(805) | $16,590 | - Total goodwill increased from $5.6 billion to $16.6 billion, with the N&B merger accounting for an $11.8 billion increase[74] Note 7. Debt - Total debt increased from $4.4 billion at year-end 2020 to $11.5 billion as of September 30, 2021, primarily due to the assumption of debt from the N&B merger[81] - As part of the N&B merger, IFF assumed $1.25 billion from a Term Loan Facility and $6.25 billion in a series of Senior Notes incurred by N&B prior to the transaction[83] Note 11. Segment Information - Following the N&B merger, the company reorganized into four reportable segments: Nourish, Health & Biosciences (H&B), Scent, and Pharma Solutions[113] Net Sales by Segment (in millions) | Segment | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Nourish | $1,662 | $712 | $4,638 | $2,174 | | Health & Biosciences | $618 | $31 | $1,683 | $99 | | Scent | $580 | $525 | $1,699 | $1,541 | | Pharma Solutions | $211 | $0 | $605 | $0 | Segment Adjusted Operating EBITDA (in millions) | Segment | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Nourish | $327 | $148 | $921 | $466 | | Health & Biosciences | $151 | $10 | $469 | $29 | | Scent | $130 | $118 | $375 | $323 | | Pharma Solutions | $40 | $0 | $131 | $0 | Note 15. Commitments and Contingencies - The company is facing a putative securities class action in the U.S. and two similar motions in Israel related to alleged false and misleading statements concerning the Frutarom acquisition and improper payments made by Frutarom businesses[160][162] - The Israeli Securities Authority and Israel Police have commenced an investigation into Frutarom and certain former executives regarding suspected bribery and other violations[165] - The company has accrued approximately $35 million related to a voluntary recall of certain grades of its Avicel® PH NF microcrystalline cellulose product due to elevated conductivity levels[177] Note 17. Assets Held for Sale - In Q3 2021, the company entered an agreement to sell its Microbial Control business unit for approximately $1.274 billion, with the transaction expected to close in Q2 2022. Assets and liabilities of this business are now classified as held for sale[182][184] - The company also entered an agreement to divest its fruit preparation business, which is part of the Nourish segment. The transaction closed on October 1, 2021[186] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 142% Q3 sales growth to the N&B merger, despite gross margin decline, while operating cash flow significantly increased and debt covenants were met Results of Operations (Third Quarter 2021 vs. 2020) - Q3 2021 sales increased 142% to $3.071 billion, driven by $1.640 billion in incremental sales from the N&B merger and volume increases across Nourish, Health & Biosciences, and Scent segments[200][205] - Gross profit margin decreased from 41.3% to 35.5% due to higher raw material costs and the product portfolio mix of the newly acquired N&B business[201][211] - Adjusted Operating EBITDA increased 135% to $648 million, though the margin slightly decreased from 22% to 21% of sales due to higher cost of goods sold[202] Results of Operations (First Nine Months 2021 vs. 2020) - For the first nine months, sales increased 126% to $8.625 billion, with $4.409 billion attributable to the N&B merger[227] - Operating profit for the nine-month period decreased 12% to $412 million from $466 million in the prior year, primarily due to merger-related costs such as N&B inventory step-up ($363 million) and increased amortization ($547 million vs $145 million)[204][233][238] - The effective tax rate increased to 22.1% from 16.9% year-over-year, mainly due to an unfavorable mix of earnings and higher repatriation costs[241] Liquidity and Capital Resources - Cash flow from operations for the first nine months of 2021 was $1.126 billion, a significant increase from $415 million in the same period of 2020, driven by higher cash earnings and changes in working capital[253] - The company was in compliance with all debt covenants as of September 30, 2021, with a Net Debt/Credit Adjusted EBITDA ratio of 4.10 to 1.0[268] - Capital allocation strategy prioritizes maintaining an investment-grade rating, investing in the business, paying dividends, and repaying debt. The share repurchase program remains suspended[261][262] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk from the 2020 Form 10-K, except for increased USD fixed-rate debt exposure, where a 10% interest rate change would impact fair value by $874 million - The fair value of the company's USD fixed-rate debt was $8.742 billion at September 30, 2021. A hypothetical 10% change in interest rates would alter this fair value by approximately $874 million[300] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures are effective as of the end of the reporting period[301] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[303] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 15 for details on legal proceedings, including matters related to the Frutarom acquisition and other contingencies - For information regarding legal proceedings, the report refers to Note 15 of the Consolidated Financial Statements[306] Item 1a. Risk Factors No material changes to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - There have been no material changes with respect to the risk factors disclosed in the company's 2020 Form 10-K[307]