International Flavors & Fragrances(IFF) - 2023 Q1 - Quarterly Report

PART I - Financial Information Financial Statements For the three months ended March 31, 2023, the company reported a net loss of $8 million, a significant downturn from the $246 million net income in the same period of 2022, with total assets remaining stable at approximately $35.5 billion and cash flow from operations improving to $127 million from a $4 million use of cash in the prior year, primarily due to better working capital management Consolidated Balance Sheets As of March 31, 2023, total assets were $35.47 billion, a slight increase from $35.41 billion at year-end 2022, driven by higher cash and goodwill, partially offset by a decrease in inventories, while total liabilities increased to $17.62 billion from $17.63 billion, mainly due to a significant rise in short-term borrowings and commercial paper, with long-term debt decreasing Consolidated Balance Sheet Highlights (as of March 31, 2023 vs. Dec 31, 2022) | Account | March 31, 2023 ($M) | December 31, 2022 ($M) | | :--- | :--- | :--- | | Total Current Assets | 7,442 | 7,432 | | Goodwill | 13,458 | 13,355 | | Other intangible assets, net | 8,968 | 9,082 | | Total Assets | 35,470 | 35,407 | | Total Current Liabilities | 4,874 | 3,728 | | Long-term debt | 9,220 | 10,373 | | Total Liabilities | 17,621 | 17,634 | | Total Shareholders' Equity | 17,790 | 17,714 | Consolidated Statements of (Loss) Income and Comprehensive Income For the first quarter of 2023, the company reported a net loss of $8 million, compared to a net income of $246 million in the same period of 2022, driven by a 6% decrease in net sales to $3.03 billion and a significant drop in operating profit from $341 million to $131 million, impacted by higher restructuring charges and interest expenses Q1 2023 vs Q1 2022 Income Statement | Metric | Q1 2023 ($M) | Q1 2022 ($M) | | :--- | :--- | :--- | | Net sales | 3,027 | 3,226 | | Gross profit | 964 | 1,145 | | Operating profit | 131 | 341 | | Income before taxes | 14 | 285 | | Net (loss) income | (8) | 246 | | Net (loss) income attributable to IFF | (9) | 244 | | Diluted EPS | $(0.04) | $0.96 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $127 million for the first quarter of 2023, a significant improvement from the $4 million used in the prior-year period, mainly due to positive changes in inventories, while net cash used in investing activities increased to $167 million due to higher capital expenditures, and net cash from financing activities was $78 million, down from $95 million, reflecting changes in short-term borrowing activities Q1 2023 vs Q1 2022 Cash Flow Summary | Cash Flow Activity | Q1 2023 ($M) | Q1 2022 ($M) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 127 | (4) | | Net cash used in investing activities | (167) | (121) | | Net cash provided by financing activities | 78 | 95 | | Net change in cash | 65 | (54) | Notes to Consolidated Financial Statements The notes detail significant accounting policies, business divestitures, and restructuring activities, including the ongoing integration of N&B, a new restructuring program initiated in late 2022, and planned divestitures of the Savory Solutions and Flavor Specialty Ingredients businesses, with the company also amending its debt agreements to extend covenant relief and transition from LIBOR to SOFR, and facing new antitrust investigations in the U.S. and Europe - The company has six reporting units for goodwill testing: Nourish, Fragrance Compounds, Fragrance Ingredients, Cosmetic Actives, Health & Biosciences, and Pharma Solutions[37] - In December 2022, the company initiated a new restructuring program focused on headcount reduction, incurring $57 million in severance charges in Q1 2023 for approximately 600 actual and planned reductions[52] - The company has entered into agreements to sell a portion of its Savory Solutions business and its Flavor Specialty Ingredients business, with both transactions expected to close in 2023, and the related assets and liabilities, valued at $1.2 billion and $216 million respectively, are now classified as held for sale[151][153][154] Management's Discussion and Analysis of Financial Condition and Results of Operations In Q1 2023, sales decreased 6% to $3.03 billion (down 2% currency-neutral) due to volume declines and the divestiture of the Microbial Control business, partially offset by price increases, while gross margin contracted to 31.8% from 35.5% due to lower volumes and unfavorable manufacturing absorption, operating profit fell 62% to $131 million, the company's leverage ratio was 4.62 to 1.0, within its amended covenant of 5.25x, and management expects capital spending to be approximately 4.1% of sales for 2023 Results of Operations First quarter 2023 sales fell 6% to $3.03 billion, driven by volume decreases and a net negative impact of $111 million from portfolio changes, while gross profit declined 16% to $964 million, with margin compression from 35.5% to 31.8%, operating profit plummeted 62% to $131 million, heavily impacted by a $50 million increase in restructuring charges and a $39 million rise in interest expense, and the company reported a net loss of $8 million compared to a $246 million net income in the prior year Q1 2023 vs Q1 2022 Performance Summary | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $3,027 M | $3,226 M | (6)% | | Gross Profit | $964 M | $1,145 M | (16)% | | Operating Profit | $131 M | $341 M | (62)% | | Net (Loss) Income | $(8) M | $246 M | (103)% | | Diluted EPS | $(0.04) | $0.96 | (104)% | - The decrease in sales was primarily driven by volume decreases and the net impact of the divestiture of the Microbial Control business unit and acquisition of Health Wright Products, Inc., which was approximately $111 million[168][172] - Interest expense increased by 54% to $111 million due to higher effective interest rates on term loans and increased commercial paper borrowings[171][183] Segment Performance Analysis In Q1 2023, Scent was the only segment with reported sales growth (4%), while Health & Biosciences sales fell 22%, heavily impacted by a portfolio change, Nourish sales declined 5%, and Pharma Solutions grew 2%, with all segments experiencing a decline in Segment Adjusted Operating EBITDA and margin compression, primarily due to lower volumes, unfavorable manufacturing absorption, and currency headwinds, and Nourish EBITDA saw the largest drop at 37% Q1 2023 Sales Growth by Segment | Segment | Reported % Change | Currency Neutral % Change | | :--- | :--- | :--- | | Nourish | -5% | 0% | | Health & Biosciences | -22% | -19% | | Scent | 4% | 8% | | Pharma Solutions | 2% | 4% | | Total | -6% | -2% | Q1 2023 Segment Adjusted Operating EBITDA | Segment | Q1 2023 EBITDA ($M) | Q1 2022 EBITDA ($M) | Margin Q1 2023 | Margin Q1 2022 | | :--- | :--- | :--- | :--- | :--- | | Nourish | 208 | 329 | 12.6% | 19.0% | | Health & Biosciences | 131 | 192 | 25.5% | 29.0% | | Scent | 105 | 116 | 17.3% | 19.8% | | Pharma Solutions | 59 | 65 | 23.3% | 26.1% | | Total | 503 | 702 | 16.6% | 21.8% | Liquidity and Capital Resources The company's liquidity position improved, with cash from operations increasing to $127 million in Q1 2023 from a $4 million use in Q1 2022, driven by better working capital management, and as of March 31, 2023, the company was in compliance with all debt covenants, with a net debt to credit adjusted EBITDA ratio of 4.62 to 1.0, below the amended covenant threshold of 5.25 to 1.0, having amended its credit agreements in March 2023 to extend covenant relief through 2024 and transition from LIBOR to SOFR - Cash flow from operations improved to $127 million in Q1 2023 from a use of $4 million in Q1 2022, mainly due to a decrease in working capital, particularly inventories[194] - On March 23, 2023, the company amended its credit agreements to extend the covenant relief period through December 31, 2024, with a consolidated leverage ratio not to exceed 5.25x for fiscal quarters ending on or before June 30, 2023[201][202] Debt Covenant Compliance (as of March 31, 2023) | Metric | Value | | :--- | :--- | | Net Debt | $10,715 M | | Credit Adjusted EBITDA (LTM) | $2,320 M | | Net Debt to Credit Adjusted EBITDA Ratio | 4.62 to 1.0 | | Covenant Maximum | 5.25 to 1.0 | Quantitative and Qualitative Disclosures about Market Risk There were no material changes in market risk from the 2022 Form 10-K, with the exception of new cross-currency swap agreements, which are used to hedge net European investments and had a net liability fair value of $41 million as of March 31, 2023, where a hypothetical 10% change in the USD/EUR exchange rate would alter their fair value by approximately $146 million - The company entered into cross-currency swap agreements to mitigate foreign currency risk on its net European investments, and as of March 31, 2023, these swaps had a net liability fair value of $41 million[225] - A hypothetical 10% increase or decrease in the value of the U.S. dollar against the Euro would result in a change of approximately $146 million in the estimated fair value of the cross-currency swaps[225] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2023, with no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[226] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal controls[228] PART II - Other Information Legal Proceedings This section refers to Note 16 of the Consolidated Financial Statements for updates on legal proceedings, with key developments including new putative class action lawsuits filed in Q1 2023 against IFF and competitors in Canada and the U.S. alleging antitrust violations, and in March 2023, IFF's facilities were inspected by European and UK authorities, and the company received a subpoena from the U.S. DOJ related to potential anticompetitive conduct in its fragrance businesses - In March and April 2023, three putative class action lawsuits were filed against IFF and competitors in Canada and the U.S. alleging violations of competition and antitrust laws[131] - On March 7, 2023, the European Commission, UK CMA, and U.S. DOJ initiated investigations into potential anticompetitive conduct related to IFF's fragrance businesses, including unannounced inspections of IFF facilities[133] Risk Factors The company updated its risk factors to highlight the potential negative impact from legal uncertainties, specifically addressing the new antitrust and competition investigations in the United States and Europe, as well as related class action lawsuits in the U.S. and Canada, noting it is unable to predict the outcome or potential financial impact of these matters - The company is subject to new antitrust and competition investigations in the United States and Europe[233] - Class action lawsuits have been filed against IFF and competitors in the United States and Canada, alleging violations of antitrust laws[233] - The company states it is currently unable to predict the scope, duration, or outcome of these investigations and lawsuits, or their potential impact on financial results[233] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[237] Exhibits This section lists all exhibits filed with the Form 10-Q, with notable exhibits including amendments to the Term Loan and Revolving Credit Agreements dated March 23, 2023, an Amended and Restated Executive Severance Policy, and required certifications from the CEO and CFO under the Sarbanes-Oxley Act - Filed amendments to the Term Loan Credit Agreement (Amendments No. 3 & 4) and the Revolving Credit Agreement (Amendments No. 2 & 3), both dated March 23, 2023[240] - Includes certifications by CEO Frank Clyburn and CFO Glenn Richter pursuant to Section 302 of the Sarbanes-Oxley Act[240]