International Flavors & Fragrances(IFF) - 2023 Q4 - Annual Report

PART I ITEM 1. Business IFF is a global leader in creating and manufacturing solutions for food, beverage, health & biosciences, scent, and pharma industries, emphasizing innovation, R&D, and ESG - IFF is a leading creator and manufacturer of food, beverage, health & biosciences, scent, and pharma solutions, holding global leadership positions in Food & Beverage, Home & Personal Care, and Health & Wellness markets[12] - The business is structured into four segments: Nourish, Health & Biosciences, Scent, and Pharma Solutions, each offering specialized ingredients and solutions[14] - IFF maintains a strong R&D infrastructure with 880 granted U.S. patents and 431 pending U.S. patent applications, employing approximately 3,700 people globally in R&D activities as of December 31, 2023[35][37][38] - The company has a comprehensive ESG roadmap, 'Do More Good Plan,' with ambitious 2030 goals across Environmental, Social, Governance, and Sustainable Solutions, earning recognitions like the Dow Jones Sustainability Index and EcoVadis Platinum rating[52][57] - J. Erik Fyrwald was appointed Chief Executive Officer effective February 6, 2024, succeeding Frank K. Clyburn Jr[76][77][89] 2023 Sales Distribution | Category | Percentage of Sales | | :--- | :--- | | Global consumer products companies | 46% | | Small and mid-sized companies | 54% | | Top 25 largest customers | 32% | | U.S. sales | 28% | | No single customer > 10% of sales | Yes | ITEM 1A. Risk Factors IFF faces substantial debt, strategic execution challenges, legal uncertainties, inflationary pressures, geopolitical events, and AI-related risks - Ongoing strategic transformation and portfolio optimization, including divestitures (e.g., Microbial Control, Savory Solutions, Flavor Specialty Ingredients, Cosmetic Ingredients), carry risks of complex implementation, unanticipated issues, and failure to realize full benefits or manage associated costs[101][102] - The company is subject to antitrust and competition investigations in the U.S. and Europe, along with related class-action lawsuits, which could negatively impact results of operations, liquidity, or financial condition[104][675][677] - Inflationary trends, high input costs (raw materials, transportation, energy), and geopolitical developments (Russia-Ukraine war, Israel-Hamas war, Red Sea disruptions) pose significant risks to business and financial results, potentially leading to increased costs, supply chain disruptions, and reduced demand[108][110][115][116] - The increasing use of Artificial Intelligence (AI) in operations and by third-party partners introduces risks such as unauthorized data disclosure, intellectual property infringement, inaccurate analyses, and increased cybersecurity risks, alongside potential benefits if capitalized effectively[142][143][144] - Goodwill impairment charges were $2.623 billion in 2023 (Nourish segment) and $2.250 billion in 2022 (Health & Biosciences segment), driven by declines in projections, inflation, and increased interest rates[162][315][316] Key Financial Risk Factors (as of December 31, 2023) | Risk Factor | Detail | | :--- | :--- | | Total Debt | $10.071 billion | | Leverage Ratio Covenant (March 31, 2024) | Not to exceed 5.25x | | Dividend Restriction | Max $0.81 per share per fiscal quarter (total $3.24/year) | | Lien Creation Restriction | Max of greater of $300 million or 3.65% of Consolidated Net Tangible Assets | ITEM 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[200] ITEM 1C. Cybersecurity IFF maintains a comprehensive cybersecurity program with an Incident Response Plan, ERM integration, and dedicated leadership, overseen by the Board - IFF's cybersecurity risk management includes a comprehensive Incident Response Plan, integration with the Enterprise Risk Management (ERM) program, and alignment with the U.S. National Institute of Standards and Technology (NIST) Cybersecurity Framework[201][202][203] - The Chief Information Officer (CIO) and Chief Information Security Officer (CISO) lead the Information Security (InfoSec) team, which includes a Cyber Fusion Center, Infrastructure Security, Identity and Access Management, Application Security, and Data Security[203] - The Board of Directors, particularly the Audit Committee, oversees InfoSec risks, receiving quarterly updates on material security risks, incidents, and legal developments[210][211] - Despite ongoing efforts, the company cannot assure that future cybersecurity incidents will not materially affect its business, results of operations, and financial condition[209] ITEM 2. Properties IFF operates approximately 190 facilities across 40 countries, geographically diverse and adequate for current business needs - As of December 31, 2023, IFF had approximately 190 manufacturing facilities, creative centers, and application laboratories in about 40 countries[48] - The company's principal executive offices are located in New York, New York, and Wilmington, Delaware[74][216] Properties by Region (as of December 31, 2023) | Region | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | Europe, Africa & the Middle East | 54 | 101 | 155 | | North America | 20 | 51 | 71 | | Greater Asia | 32 | 46 | 78 | | Latin America | 21 | 22 | 43 | | Total | 127 | 220 | 347 | ITEM 3. Legal Proceedings IFF is involved in various legal claims and actions, including antitrust investigations and related class action lawsuits, detailed in Note 19 - IFF is subject to various claims and legal actions in the ordinary course of business, with material legal proceedings described in Note 19 of the Form 10-K[217] - Risks related to legal proceedings, including ongoing antitrust and competition investigations and class action lawsuits, are detailed in Item 1A, 'Risk Factors'[217] ITEM 4. Mine Safety Disclosures This item is not applicable to IFF - This item is not applicable[218] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities IFF common stock trades on NYSE (IFF), with 3,249 shareholders as of Feb 21, 2024; no equity repurchases in Q4 2023 - IFF's common stock is traded on the New York Stock Exchange (NYSE) under the ticker symbol 'IFF'[3] - As of February 21, 2024, there were 255,314,909 shares of common stock outstanding and 3,249 shareholders of record[6][221] - The declaration and payment of future dividends are subject to the Board of Directors' discretion and various factors, and the Board may reduce, suspend, or discontinue payments at any time[103][220] - No issuer purchases of equity securities were made during the quarter ended December 31, 2023[222] Cumulative Total Return (2018-2023, $100 invested on Dec 31, 2018) | Year-end Data | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | International Flavors & Fragrances | $100.00 | $98.30 | $85.19 | $120.59 | $86.40 | $69.58 | | S&P 500 Index | $100.00 | $131.49 | $155.68 | $200.37 | $164.08 | $207.21 | | S&P 500 Consumer Staples Index | $100.00 | $127.61 | $141.32 | $167.65 | $166.61 | $167.47 | | S&P 500 Specialty Chemicals Index | $100.00 | $118.26 | $138.57 | $178.80 | $129.71 | $150.65 | ITEM 6. [Reserved] This item is reserved and contains no content ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews IFF's financial condition and operations, detailing sales decline, goodwill impairment, and cash flow dynamics post-N&B merger - The N&B Business merger in February 2021 significantly expanded IFF's global leadership in high-value ingredients and solutions across Food & Beverage, Home & Personal Care, and Health & Wellness markets[226][227] - As of December 31, 2023, IFF was in compliance with all debt covenants, with a net debt to credit adjusted EBITDA ratio of 4.51 to 1.0, below the maximum permitted ratio of 5.25x for Q1 2024[289] Key Financial Performance (2023 vs. 2022) | Metric | 2023 (Millions USD) | 2022 (Millions USD) | Change (Reported) | Change (Currency Neutral) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $11,479 | $12,440 | -8% | -6% | | Gross profit | $3,681 | $4,151 | -11% | N/A | | Operating (loss) profit | $(2,110) | $(1,326) | 59% (loss increased) | N/A | | Net (loss) income attributable to IFF shareholders | $(2,567) | $(1,871) | 37% (loss increased) | N/A | | Diluted EPS | $(10.05) | $(7.32) | 37% (loss increased) | N/A | Segment Net Sales Performance (2023 vs. 2022) | Segment | 2023 (Millions USD) | 2022 (Millions USD) | Reported Change | Currency Neutral Change | | :--- | :--- | :--- | :--- | :--- | | Nourish | $6,060 | $6,829 | -11% | -9% | | Health & Biosciences | $2,081 | $2,339 | -11% | -10% | | Scent | $2,393 | $2,301 | 4% | 6% | | Pharma Solutions | $945 | $971 | -3% | -3% | | Consolidated | $11,479 | $12,440 | -8% | -6% | Goodwill Impairment Charges | Year | Segment | Amount (Millions USD) | | :--- | :--- | :--- | | 2023 | Nourish | $2,623 | | 2022 | Health & Biosciences | $2,250 | Cash Flow Summary (Millions USD) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Operating Activities | $1,439 | $397 | $1,437 | | Investing Activities | $574 | $745 | $(18) | | Financing Activities | $(1,851) | $(1,229) | $(1,304) | ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk IFF manages market risks from currency fluctuations and interest rate changes using forward contracts and swaps, with a centralized monitoring system - IFF is exposed to currency fluctuation risk due to global operations, particularly in the European Union, Great Britain, Mexico, Brazil, China, India, Indonesia, Australia, Russia, and Japan[330] - The company uses foreign currency forward contracts (maturities up to 12 months) to manage exchange rate risk on foreign currency denominated monetary assets and liabilities[332][644] - Cross-currency swap agreements are used to mitigate foreign currency risk for net European investments, with 12 outstanding EUR/USD swaps as of December 31, 2023, in a liability position with an aggregate fair value of $161 million[333][653] Market Risk Sensitivity (as of December 31, 2023) | Risk Type | Hypothetical Change | Estimated Fair Value Change | | :--- | :--- | :--- | | Foreign Currency Forward Contracts | +/- 10% exchange rates | +/- $153 million | | Cross Currency Swaps | +/- 10% USD vs. Euro | +/- $152 million | | EUR Fixed Rate Debt | +/- 10% foreign exchange rates | +/- $143 million | | USD Fixed Rate Debt | +/- 10% interest rates | +/- $623 million | | Variable Rate Debt (Outstanding: $895 million) | +/- 1% interest rates | +/- $6 million annual interest expense | ITEM 8. Financial Statements and Supplementary Data This item refers to the consolidated financial statements and supplementary data, indexed on page 50 - The consolidated financial statements and supplementary data are provided starting on page 50[337][359] ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure matters - There are no changes in or disagreements with accountants on accounting and financial disclosure[338] ITEM 9A. Controls and Procedures IFF's management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes - The CEO and CFO concluded that IFF's disclosure controls and procedures were effective as of December 31, 2023[340] - No material changes in internal control over financial reporting occurred during the fourth quarter[342] - Management assessed and determined that internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[345] - PricewaterhouseCoopers LLP audited and confirmed the effectiveness of IFF's internal control over financial reporting as of December 31, 2023[346] ITEM 9B. Other Information No directors or executive officers adopted or terminated Rule 10b5-1 trading plans during Q4 2023 - No directors or executive officers adopted or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during Q4 2023[347] ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company has no disclosures regarding foreign jurisdictions that prevent inspections - There are no disclosures regarding foreign jurisdictions that prevent inspections[348] PART III ITEM 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the IFF 2024 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the IFF 2024 Proxy Statement[350] - IFF has adopted Codes of Conduct for all employees, including the CEO and CFO, and for directors and executive officers, with any waivers requiring Board or Audit Committee approval and public disclosure[351][352] ITEM 11. Executive Compensation Executive compensation details, excluding pay versus performance, are incorporated by reference from the IFF 2024 Proxy Statement - Executive compensation details, except for pay versus performance information, are incorporated by reference from the IFF 2024 Proxy Statement[354] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the IFF 2024 Proxy Statement - Security ownership information for beneficial owners and management is incorporated by reference from the IFF 2024 Proxy Statement[355] ITEM 13. Certain Relationships and Related Transactions and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the IFF 2024 Proxy Statement - Details on certain relationships, related transactions, and director independence are incorporated by reference from the IFF 2024 Proxy Statement[356] ITEM 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the IFF 2024 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the IFF 2024 Proxy Statement[357] PART IV ITEM 15. Exhibits and Financial Statement Schedules This section lists all financial statements, notes, and exhibits, including the auditor's report and detailed financial disclosures - The section includes the Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements (Income, Balance Sheets, Cash Flows, Shareholders' Equity), and extensive Notes to Consolidated Financial Statements[359] - PricewaterhouseCoopers LLP audited the consolidated financial statements and internal control over financial reporting, expressing unqualified opinions for the period ended December 31, 2023[363][364] - A critical audit matter identified was the goodwill impairment assessments for Nourish, Health & Biosciences, and Pharma Solutions reporting units, due to significant management judgment and auditor effort in evaluating key assumptions[371][372] - The company corrected prior year financial statements for errors related to operating lease assets/liabilities, goodwill, deferred income tax liabilities, derivative fair values, and factored receivables[385][386][387][388] - In 2023, IFF incurred $68 million in restructuring and other charges, primarily severance costs from the 2023 Restructuring Program, which included approximately 680 headcount reductions[258][451] - Key acquisitions include Health Wright Products, Inc. in 2022, and the significant merger with DuPont's N&B Business in 2021, which was accounted for as a purchase with IFF as the acquirer[454][462] - Divestitures in 2023 included the Flavor Specialty Ingredients business (Scent segment) for $205 million cash proceeds and a portion of the Savory Solutions business (Nourish segment) for $840 million cash proceeds[469][473] - As of December 31, 2023, IFF had $10.071 billion in total debt, with $885 million classified as short-term borrowings; the company repaid $270 million of its 2024 Term Loan Facility on February 1, 2024[510][549][550] - The effective tax rate in 2023 was (1.8)%, compared to (14.7)% in 2022, primarily due to book-to-tax differences from goodwill impairment, lower tax charges on divestitures, and a deferred tax benefit from internal restructuring[264][553] - The company has ongoing legal proceedings, including class action lawsuits related to alleged antitrust conduct in its fragrance businesses and an investigation by the EC, CMA, and DOJ[675][677] - As of December 31, 2023, assets held for sale totaled $506 million and liabilities held for sale totaled $46 million, primarily related to the Cosmetic Ingredients business expected to close in Q1 2024[697] Consolidated Statements of (Loss) Income and Comprehensive Loss (Millions USD) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $11,479 | $12,440 | $11,656 | | Gross profit | $3,681 | $4,151 | $3,735 | | Operating (loss) profit | $(2,110) | $(1,326) | $585 | | Net (loss) income attributable to IFF shareholders | $(2,567) | $(1,871) | $270 | | Diluted EPS | $(10.05) | $(7.32) | $1.10 | | Comprehensive loss attributable to IFF shareholders | $(2,265) | $(2,646) | $(455) | Consolidated Balance Sheets (Millions USD) | Asset/Liability | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $6,293 | $7,432 | | Property, plant and equipment, net | $4,240 | $4,203 | | Goodwill | $10,635 | $13,373 | | Other intangible assets, net | $8,357 | $9,082 | | Total Assets | $30,978 | $35,522 | | Total Current Liabilities | $3,758 | $3,728 | | Long-term debt | $9,186 | $10,373 | | Total Liabilities and Shareholders' Equity | $30,978 | $35,522 | Consolidated Statements of Cash Flows (Millions USD) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,439 | $397 | $1,437 | | Net cash provided by (used in) investing activities | $574 | $745 | $(18) | | Net cash used in financing activities | $(1,851) | $(1,229) | $(1,304) | | Cash, cash equivalents and restricted cash at end of year | $735 | $552 | $716 | ITEM 16. Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[710] SIGNATURES SIGNATURES This section contains the required signatures for the Form 10-K report, certifying its accuracy and completeness as of February 28, 2024 - The report is signed by J. Erik Fyrwald (CEO), Glenn Richter (CFO), Beril Yildiz (Chief Accounting Officer), and the Board of Directors, dated February 28, 2024[713][714]