INTERNATIONAL FLAVORS & FRAGRANCES INC.
(UNLESS INDICATED OTHERWISE, DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
OVERVIEW
Company background
We are a leading innovator of sensory experiences that move the world. Our
creative capabilities, global footprint, regulatory and technological know-how
provide us a competitive advantage in meeting the demands of our global,
regional and local customers around the world. The 2018 acquisition of Frutarom
solidified our position as an industry leader across an expanded portfolio of
products, resulting in a broader customer base across small, mid-sized and large
companies and an expansion to new adjacencies that provides a platform for
significant cross-selling opportunities.
In the first quarter of fiscal year 2020, we began operating our business across
two segments, Taste and Scent. As part of this new operating model, nearly all
of the former Frutarom business segment was consolidated with the Taste segment.
As a leading creator of flavor offerings, we help our customers deliver on the
promise of delicious and healthy foods and drinks that appeal to consumers. Our
Taste business comprises a diversified portfolio across flavor compounds, savory
solutions, inclusions and nutrition and specialty ingredients. While we are a
global leader, our flavor compounds are more regional in nature, with different
formulas that reflect local taste preferences. Consequently, we manage our
flavor compounds geographically, creating products in our regional creative
centers which allow us to satisfy local taste preferences, while also helping to
ensure regulatory compliance and production standards. The savory solutions,
inclusions and nutrition and specialty
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ingredients products were included in the legacy Frutarom businesses during 2019
and are managed globally under the Taste business segment beginning in the first
quarter of 2020.
Our global Scent business creates fragrance compounds and fragrance ingredients
that are integral elements in the world's finest perfumes and best-known
household and personal care products. We believe our unique portfolio of natural
and synthetic ingredients, global footprint, innovative technologies and
know-how, deep consumer insight and customer intimacy make us a market leader in
scent.
Impact of COVID-19 Pandemic
On March 11, 2020 , the World Health Organization designated the recent novel
coronavirus ("COVID-19") as a global pandemic. Various policies and initiatives
have been implemented around the world to reduce the global transmission of
COVID-19, including the closure of non-essential businesses, reduced travel, the
closure of retail establishments, the promotion of social distancing and remote
working policies. IFF has been designated an essential business in most
locations given that both its Taste and Scent products are used in the
manufacture of food products as well as the manufacture of a range of cleaning
and hygiene products. Accordingly, although there have been minimal disruptions,
most of IFF's manufacturing facilities remain open and continue to manufacture
products.
Health and Safety of our People and Consumers
Employee safety is our first priority, and as a result, we executed our
preparedness plans at our manufacturing facilities. We have taken several
measures to protect our people, including upgrading cleaning protocols, remote
working arrangements, temperature screenings, the use of personal protective
equipment including face masks, increased sanitization measures, imposing
visitor and travel restrictions, and taking precautions to minimize contact
among employees, as part of social distancing, by grouping our professionals
into smaller pods and separating their work shifts.
We have implemented other contingency plans, with office-based employees working
remotely where possible. We have crisis management teams in place monitoring the
rapidly evolving situation and recommending risk mitigation actions as deemed
necessary. We are also working closely with our contract manufacturers,
distributors, contractors and other external business partners.
Customer Demand
In the first quarter of 2020, we experienced increased demand in our flavors
compounds and consumer fragrance product categories in response to COVID-19. Two
areas where demand has declined significantly starting in March 2020 are: 1)
flavors used in retail food services, and 2) our fine fragrances and cosmetic
actives product categories. These declines are primarily a result of travel and
shelter-in-place restrictions and the closure of retail outlets. Operating
profit margin is expected to decline year-over-year in the second quarter of
2020 as a result of decreased sales in these higher margin categories and
incremental costs in all categories related to COVID-19. We expect demand to
return for fine fragrances and cosmetic actives but the timing is uncertain and
depends on how the COVID-19 situation evolves. The ultimate timing and impact of
this demand volatility will depend on the duration and scope of the COVID-19
pandemic, overall economic conditions and consumer preferences.
Facilities and Supply Chain
To date, we have incurred some additional costs but there has been minimal
disruption to our supply chain network, including the supply of our ingredients,
raw materials or other sourced materials. It is possible that more significant
disruptions could occur if the COVID-19 pandemic continues to impact markets
around the world. The disruption we continue to experience primarily relates to
distribution of certain raw materials and transport logistics in markets where
governments have implemented the strictest regulations including Italy , Spain
and India . As a result, some shipments for some orders have been delayed.
In effected locations, we continue to receive shipments from our suppliers and
are taking steps to minimize any disruptions on this segment of our supply chain
including increasing inventory levels to meet anticipated customer demand in the
second and third quarters of 2020. Although almost all of our manufacturing
facilities remain operational, we anticipate additional costs to be incurred
from labor, shipping, and cleaning as well as higher raw material costs, related
to potential COVID-19 supply chain disruptions.
Our manufacturing plants continue to operate world-wide in compliance with the
orders and restrictions imposed by government authorities in each of our
locations, and we are working with our customers to meet their specific shipment
needs. Our manufacturing plants and offices in China were required to close for
a limited period of time in February 2020 , and a portion of our manufacturing
plants in India , Vietnam , and Israel and offices in India , Vietnam , Malaysia and
Canada were required to reduce operations as a result of government measures
taken to contain the outbreak. All of IFF's other
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manufacturing facilities are currently operational. However, some of IFF's R&D
and creative applications centers are closed or operating on limited schedules.
To provide for business continuity, we have contracts with third party
laboratories that can conduct adequate testing.
The overall impact of COVID-19 on our consolidated results of operations for the
first quarter of 2020 was not significant and primarily limited to increased
demand in our flavors compounds and consumer fragrance product categories
partially offset by declines in flavors used in retail food services and our
fine fragrances and cosmetic actives product categories. However, the impact
that COVID-19 will have on our consolidated results of operations throughout
2020 remains uncertain. Based on the length and severity of COVID-19, we may
experience continued volatility as a result of retail and travel, consumer
shopping and consumption behavior. We will continue to evaluate the nature and
extent of these potential impacts to our business, consolidated results of
operations, segment results, liquidity and capital resources.
Pending Transaction with Nutrition & Biosciences, Inc.
On December 15, 2019 , we entered into definitive agreements with DuPont de
Nemours, Inc. ("DuPont"), including an Agreement and Plan of Merger, pursuant to
which DuPont will transfer its nutrition and biosciences business (the "N&B
Business") to Nutrition & Biosciences, Inc. , a Delaware corporation and wholly
owned subsidiary of DuPont ("N&B"), and N&B will merge with and into a wholly
owned subsidiary of IFF in exchange for a number of shares of IFF common stock,
par value $0.125 per share ("IFF Common Stock") (collectively, the "DuPont N&B
Transaction"). In connection with the transaction, DuPont will receive a
one-time $7.3 billion special cash payment (the "Special Cash Payment"), subject
to certain adjustments. As a result of the DuPont N&B Transaction, holders of
DuPont's common stock will own approximately 55.4% of the outstanding shares of
IFF on a fully diluted basis. We believe that the combination of IFF and the N&B
Business will create a global leader in high-value ingredients and solutions in
the global Food & Beverage, Home & Personal Care and Health & Wellness markets.
We expect that the companies' complementary product portfolios will give the
combined company leadership positions across key Taste, Texture, Scent,
Nutrition, Enzymes, Cultures, Soy Proteins and Probiotics categories.
Completion of the DuPont N&B Transaction is subject to various closing
conditions, including, among other things, (1) approval by IFF's shareholders of
the issuance of IFF Common Stock in connection with the transaction; (2) the
effectiveness of the registration statements to be filed with the Securities and
Exchange Commission pursuant to the Merger Agreement; and (3) the expiration of
the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (which waiting period has expired), and obtaining
certain other consents, authorizations, orders or approvals from governmental
authorities. We expect that the transaction will close in early 2021.
Financial Performance Overview
Sales
Sales in the first quarter of 2020 increased 4% on a reported basis and 6% on a
currency neutral basis (which excludes the effects of changes in currency).
Taste sales increased 3% on a reported basis and 5% on a currency neutral basis.
Scent achieved sales growth of 5% on a reported basis and 7% on a currency
neutral basis in the first quarter of 2020. Consolidated reported and currency
neutral sales growth was driven by new wins (net of losses) and volume increases
in both Taste and Scent, including increased shipments in certain product
categories to support customer demand related to the COVID-19 pandemic,
partially offset by Fine Fragrances sales declines in March 2020 due to global
stay-at-home and travel restrictions.
Exchange rate variations had an unfavorable impact on net sales for the first
quarter of 2020 of 2%. The effect of exchange rates can vary by business and
region, depending upon the mix of sales priced in U.S. dollars as compared to
other currencies.
Gross Margin
Gross margin increased to 42.0% in the first quarter of 2020 from 40.9% in the
2019 period, principally driven by increased volumes on existing business, new
wins (net of losses) and the impact of cost savings and productivity
initiatives, partially offset by higher raw materials costs.
Operating profit
Operating profit increased $32.4 million to $196.2 million (14.6% of sales) in
the 2020 first quarter compared to $163.9 million (12.6% of sales) in the
comparable 2019 period. Foreign currency had a 2.0% unfavorable impact on
operating profit in the first quarter of 2020 compared to a 1.3% unfavorable
impact on operating profit in the 2019 period. Adjusted operating profit was
$222.3 million (16.5% of sales) for the first quarter of 2020, an increase from
$204.7 million (15.8% of sales) for the first quarter of 2019, principally
driven by increased volumes on existing business, new wins (net of losses) and
cost saving and productivity initiatives, partially offset by higher raw
materials costs.
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Cash flows
Cash, cash equivalents and restricted cash decreased $175.6 million in the three
months ended March 31, 2020 , as compared to a decrease of $151.4 million in the
three months ended March 31, 2019 .
Cash flows provided by operations for the three months ended March 31, 2020 was
$16.9 million or 1.3% of sales, compared to cash flows provided by operations of
$47.2 million or 3.6% of sales for the three months ended March 31, 2019 . The
decrease in cash provided by operating activities during 2020 was principally
driven by higher net working capital (principally related to accounts receivable
and accounts payable).
Overall cash, cash equivalents and restricted cash were also affected by
exchange rates changes, which resulted in a $42.5 million reduction in cash for
the three months ended March 31, 2020 compared to an increase of $3.9 million
for the three months ended March 31, 2019 . The impact of exchange rate
fluctuations was partially offset by lower capital expenditures in the current
year and the 2019 Acquisition Activity.
RESULTS OF OPERATIONS
Three Months Ended
March 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2020 2019 Change
Net sales $ 1,347,317 $ 1,297,402 4 %
Cost of goods sold 781,450 766,143 2 %
Gross profit 565,867 531,259
Research and development (R&D) expenses 85,909 90,596 (5 )%
Selling and administrative (S&A) expenses 229,714 213,182 8 %
Amortization of acquisition-related intangibles 48,350 47,625 2 %
Restructuring and other charges, net 4,918 16,174 (70 )%
Losses (gains) on sales of fixed assets 754 (188 ) NMF
Operating profit 196,222 163,870
Interest expense 32,140 36,572 (12 )%
Other loss (income), net 10,574 (7,278 ) NMF
Income before taxes 153,508 134,576
Taxes on income 26,297 23,362 13 %
Net income $ 127,211 $ 111,214
Net income attributable to noncontrolling interests 2,604 2,385 9 %
Net income attributable to IFF stockholders $ 124,607 $ 108,829 14 %
Diluted EPS $ 1.15 $ 0.96 19 %
Gross margin 42.0 % 40.9 %
R&D as a percentage of sales 6.4 % 7.0 %
S&A as a percentage of sales 17.0 % 16.4 %
Operating margin 14.6 % 12.6 %
Adjusted operating margin 16.5 % 15.8 %
Effective tax rate 17.1 % 17.4 %
Segment net sales
Taste $ 830,322 $ 804,802 3 %
Scent 516,995 492,600 5 %
Consolidated $ 1,347,317 $ 1,297,402
NMF: Not meaningful
Cost of goods sold includes the cost of materials and manufacturing expenses.
R&D includes expenses related to the development of new and improved products
and technical product support. S&A expenses include expenses necessary to
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FIRST QUARTER 2020 IN COMPARISON TO FIRST QUARTER 2019 Sales Sales for the first quarter of 2020 totaled$1.3 billion , an increase of 4% on a reported basis and 6% on a currency neutral basis as compared to the prior year quarter. The 2019 Acquisition Activity contributed 1% on both a reported and currency neutral basis. Sales growth was primarily driven by new wins (net of losses) and volume increases in both Taste and Scent, including increased shipments to support customer demand related to the COVID-19 pandemic, partially offset by Fine Fragrances sales declines inMarch 2020 due to global stay-at-home and travel restrictions. Sales Performance by Segment % Change in Sales - First Quarter 2020 vs. First Quarter 2019 Reported Currency Neutral Taste 3 % 5 % Scent 5 % 7 % Total 4 % 6 %
_______________________
(1) Currency neutral sales growth is calculated by translating prior year sales
at the exchange rates for the corresponding 2020 period.
Taste
Taste sales in 2020 increased 3% on a reported basis and 5% on a currency neutral basis versus the prior year period. Performance was driven by sales growth in Savory Solutions primarily from new wins (net of losses), and growth in Flavors across all regions. Scent Scent sales in 2020 increased 5% on a reported basis and 7% on a currency neutral basis. Sales growth in the Scent business unit was led by Consumer Fragrances primarily driven by new wins (net of losses), followed by Fragrance Ingredients primarily driven by volume increases on existing business. Fine Fragrance declined versus the prior year period, as the temporary disruption of consumer access to retail markets due to COVID-19 led to a deceleration in performance late in the quarter. Cost of Goods Sold Cost of goods sold, as a percentage of sales, decreased 110 bps to 58.0% in the first quarter of 2020 compared to 59.1% in the first quarter of 2019, principally driven by increased volumes on existing business and the impact of cost savings and productivity initiatives, partially offset by higher raw material prices. Research and Development (R&D) Expenses Overall R&D expenses, as a percentage of sales, decreased to 6.4% in the first quarter of 2020 versus 7.0% in the first quarter of 2019. The decrease as a percentage of sales in 2020 was principally due to an increase in sales over the prior year and a reduction in employee related expenses. Selling and Administrative (S&A) Expenses S&A expenses increased$16.5 million to$229.7 million (17.0% of sales), in the first quarter of 2020 compared to$213.2 million (16.4% of sales) in the first quarter of 2019. Adjusted S&A expense increased by$13.2 million to$210.1 million (15.6% of sales) in 2020 compared to$196.9 million (15.2% of sales) in 2019. The increase in S&A expenses and adjusted S&A expenses was due to employee related expenses, including incentive compensation. During the first quarter of 2020, we recognized$5.7 million in income related to the expected recoveries of previously paid indirect taxes inBrazil . The income was recorded as a reduction in S&A expenses. 29 -------------------------------------------------------------------------------- Restructuring and Other Charges Frutarom Integration Initiative In connection with the acquisition of Frutarom, we began to execute an integration plan that, among other initiatives, seeks to optimize its manufacturing network. As part of the Frutarom Integration Initiative, we expect to close approximately 35 manufacturing sites over the next twelve months with most of the closures targeted to occur before the end of fiscal 2021. During the three months endedMarch 31, 2020 , we announced the closure of four facilities, of which two facilities are inEurope ,Africa andMiddle East , one facility inLatin America , and one facility inNorth America . Since the inception of the initiative to date, the Company has expensed$15.3 million . Total costs for the program are expected to be approximately$60 million including cash and non-cash items. Amortization of Acquisition-Related Intangibles Amortization expenses increased to$48.4 million in the first quarter of 2020 compared to$47.6 million in the first quarter of 2019 principally due to the 2019 Acquisition Activity. Operating Results by Business Unit We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and other charges, net; Global expenses (as discussed in Note 11 to the Consolidated Financial Statements) and certain non-recurring items, net; Interest expense; Other (expense) income, net; and Taxes on income. See Note 9 to the Consolidated Financial Statements for the reconciliation to Income before taxes. Three Months Ended March 31, (DOLLARS IN THOUSANDS) 2020 2019 Segment profit: Taste$ 137,347 $ 131,402 Scent 105,395 89,953 Global expenses (20,393 ) (16,667 ) Operational Improvement Initiatives - (406 ) Frutarom Integration Related Costs (3,650 ) (14,897 ) Restructuring and Other Charges, net (4,918 ) (16,174 ) (Losses) gains on sale of assets (754 ) 188 Frutarom Acquisition Related Costs (813 ) (9,529 ) Compliance Review & Legal Defense Costs (649 ) - N&B Transaction Related Costs (5,199 ) - N&B Integration Related Costs (10,144 ) - Operating profit$ 196,222 $ 163,870 Profit margin: Taste 16.5 % 16.3 % Scent 20.4 % 18.3 % Consolidated 14.6 % 12.6 % Taste Segment Profit Taste segment profit increased$5.9 million to$137.3 million in the first quarter of 2020 (16.5% of segment sales) from$131.4 million (16.3% of sales) in the comparable 2019 period. The increase principally reflected volume increases on existing business, new wins (net of losses), and the impact of cost savings initiatives, partially offset by higher raw materials costs. Scent Segment Profit Scent segment profit increased$15.4 million to$105.4 million in the first quarter of 2020 (20.4% of segment sales) from$90.0 million (18.3% of sales) in the comparable 2019 period. The increase principally reflected volume increases on existing business and the impact of cost savings and productivity initiatives, partially offset by price increases on raw materials. 30 -------------------------------------------------------------------------------- Global Expenses Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the first quarter of 2020, Global expenses were$20.4 million compared to$16.7 million during the first quarter of 2019. The increase was principally driven by lower gains from our currency hedging program, and to a lesser extent, higher incentive compensation expense in 2019. Interest Expense Interest expense decreased to$32.1 million in the first quarter of 2020 compared to$36.6 million in the 2019 period. This decrease was primarily driven by repayments on the Term Loan and TEUs. Average cost of debt was 2.9% for the 2020 period compared to 3.2% for the 2019 period. Income Taxes The effective tax rate for the three months endedMarch 31, 2020 was 17.1% compared with 17.4% for the three months endedMarch 31, 2019 . Adjusted effective tax rate for the three months endedMarch 31, 2020 was 16.2%. compared to 18.5% for the first quarter of 2019. The decrease in the both the effective tax rate and the adjusted effective tax rate was largely due to lower repatriation costs and the reversal of loss provisions, partially offset by an unfavorable mix of earnings. Liquidity and Capital Resources Cash and Cash Equivalents We had cash and cash equivalents of$433.2 million atMarch 31, 2020 compared to$606.8 million atDecember 31, 2019 , of which$323.0 million of the balance atMarch 31, 2020 was held outsidethe United States . Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated tothe United States . Effective utilization of the cash generated by our international operations is a critical component of our strategy. We regularly repatriate cash from our non-U.S. subsidiaries to fund financial obligations in theU.S. As we repatriate these funds to theU.S. we will be required to pay income taxes in certainU.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. Accordingly, as ofMarch 31, 2020 , we had a deferred tax liability of$42.6 million for the effect of repatriating the funds to theU.S. , attributable to various non-U.S. subsidiaries. There is no deferred tax liability associated with non-U.S. subsidiaries where we intend to indefinitely reinvest the earnings to fund local operations and/or capital projects. Restricted Cash Restricted cash of$15.1 million relates, principally, to amounts escrowed related to certain payments to be made to former Frutarom option holders in future periods. As ofMarch 31, 2020 , a portion of this balance,$5.4 million , is classified as a noncurrent asset. Cash Flows Provided By Operating Activities Cash flows provided by operations for the three months endedMarch 31, 2020 was$16.9 million or 1.3% of sales, compared to cash provided by operations of$47.2 million or 3.6% of sales for the three months endedMarch 31, 2019 . The decrease in cash provided by operating activities during 2020 was principally driven by higher net working capital (principally related to accounts receivable and accounts payable). Working capital (current assets less current liabilities) totaled$1.4 billion at bothMarch 31, 2020 andDecember 31, 2019 . During the quarter, we have received requests from certain customers for extensions in payment terms. As a result, we have increased our allowances for bad debts and will continue to monitor the reserve. We have various factoring agreements in theU.S. andThe Netherlands under which we can factor up to approximately$100 million in receivables. Under all of the arrangements, we sell the receivables on a non-recourse basis to unrelated financial institutions and account for the transactions as a sale of receivables. The applicable receivables are removed from our Consolidated Balance Sheet when the cash proceeds are received. 31 -------------------------------------------------------------------------------- As ofMarch 31, 2020 , the Company had removed approximately$200 million of receivables. The impact on cash provided by operations from participating in these programs decreased approximately$5 million for the three months endedMarch 31, 2020 . The cost of participating in these programs was approximately$1 million for the three months endedMarch 31, 2020 . Cash Flows Used In Investing Activities Net investing activities during the first three months of 2020 used$42.7 million compared to$90.3 million in the prior year period. Additions to property, plant and equipment were$48.3 million during the first three months of 2020 compared to$57.6 million in the first three months of 2019. The decrease in cash used in investing activities was attributable to acquisition activities in the 2019 period. In light of the logistical difficulties resulting from the COVID-19 pandemic and to preserve our liquidity, where possible we have evaluated and re-prioritized our capital projects. We expect that capital spending in 2020 will be about 4% of sales (net of potential grants and other reimbursements from government authorities), down from 5% in 2019. Frutarom Integration Initiative We expect to incur costs related to the Frutarom Integration Initiative. Initially, integration projects will primarily be focused on driving cost synergies in the manufacturing and creative networks, procurement and overhead functions. Restructuring costs associated with these initiatives are expected to include employee-related cash costs, including severance, retirement and other termination benefits, fixed asset write-downs and contract termination and other costs. In addition, other costs associated with the Frutarom Integration Initiative are expected to include advisory and personnel costs for managing and implementing integration projects. Total restructuring costs for the program are expected to be approximately$60 million including cash and non-cash items. During the first three months of 2020, we incurred$4.9 million in costs related to the closure of 4 sites. The costs principally related to severance and fixed asset write-downs, with the remainder comprising costs such as contract termination and relocation. Additionally, during the first three months of 2020, we recorded$3.6 million in advisory services, retention bonuses and performance stock awards costs related to the integration of the Frutarom acquisition. As a result of the outbreak of COVID-19 and the related uncertainty and complexity of the environment, we now expect that some restructuring activities and their related charges will extend into 2021 rather than being completed at the end of 2020 as previously planned. We continue to target to achieve those savings by the end of 2021, although it is possible the full realization could occur in 2022 because of the impact of COVID-19. We expect to achieve$145 million of synergy targets, and realized approximately$50 million of cost synergies in 2019. As of the first quarter 2020, we have realized approximately$15 million of cost synergies year-to-date. Cash Flows Used In Financing Activities Cash used in financing activities in the first three months of 2020 was$107.2 million compared to$112.2 million in the prior year period. The decrease in cash used in financing activities was principally driven by lower repayments of debt, offset by purchases of redeemable noncontrolling interests in the current year. We paid dividends totaling$80.0 million in the 2020 period. We declared a cash dividend per share of$0.75 in the first quarter of 2020 that was paid onApril 6, 2020 to all shareholders of record as ofMarch 26, 2020 . Our capital allocation strategy seeks to maintain our investment grade rating while investing in the business and continuing to pay dividends and repaying debt. We make capital investments in our businesses to support our operational needs and strategic long term plans. We are committed to maintaining our history of paying a dividend to investors which is determined by our Board of Directors at its discretion based on various factors. We currently have a board approved stock repurchase program with a total remaining value of$279.7 million . As ofMay 7, 2018 , we have suspended our share repurchases. 32 -------------------------------------------------------------------------------- Effect of exchange rate changes on cash, cash equivalents and restricted cash Overall cash, cash equivalents and restricted cash were also affected by exchange rates changes, which resulted in a$42.5 million reduction in cash for the three months endedMarch 31, 2020 compared to an increase of$3.9 million for the three months endedMarch 31, 2019 . Capital Resources Operating cash flow provides the primary source of funds for capital investment needs, dividends paid to shareholders and debt service repayments. We anticipate that cash flows from operations and availability under our existing credit facilities will be sufficient to meet our investing and financing needs. We regularly assess our capital structure, including both current and long-term debt instruments, as compared to our cash generation and investment needs in order to provide ample flexibility and to optimize our leverage ratios. We believe our existing cash balances are sufficient to meet our debt service requirements. Pending Transaction withNutrition & Biosciences, Inc. In conjunction with the DuPont N&B Transaction, IFF and N&B have engagedMorgan Stanley Senior Funding, Inc. andCredit Suisse Loan Funding LLC as joint lead arrangers and bookrunners to structure, arrange and syndicate the financings that will be required to close the transaction. Specifically, N&B will be the initial borrower under a$1.25 billion 3-year/5-year senior unsecured term loan facility and, to the extent necessary, a$6.25 billion tranche of the 364-Day senior unsecured bridge facility, which will be used to finance the Special Cash Payment to DuPont in connection with the separation and to pay related fees and expenses. N&B may access the bond markets in advance of closing the merger to pre-fund the transaction and replace all or a portion of the Bridge Facility. Following the consummation of the DuPont N&B Transaction, all obligations of N&B will be guaranteed by IFF, or at the election of N&B and IFF, assumed by IFF. Upon completion of our combination with N&B, DuPont shareholders will own approximately 55.4% of the shares of IFF, and existing IFF shareholders will own approximately 44.6% of the shares of IFF. A proxy statement is expected to be filed with theSEC pursuant to which IFF shareholders will be asked to approve the share issuance required to effect the N&B Transaction. The Credit Facility and Term Loan contain various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers, including the requirement for us to maintain, at the end of each fiscal quarter, a ratio of net debt for borrowed money to adjusted EBITDA in respect of the previous 12-month period, of not more than 4.5 to 1.0, which shall be reduced to 4.25 to 1.0 as of the end ofSeptember 30, 2019 , 4.0 to 1.0 as of the end ofMarch 31, 2020 and to 3.5 to 1.0 as of the end ofMarch 31, 2021 . After the expected closing date of the pending N&B transaction in the first quarter of 2021, the Company's maximum permitted ratio of Net Debt to Consolidated EBITDA shall be 4.50 to 1.0, stepping down to 3.50 to 1.0 over time (with a step-up if the Company consummates certain qualified acquisitions). As ofMarch 31, 2020 we had no outstanding borrowings under our$1 billion Credit Facility and$240 million outstanding for the Term Loan. The amount that we are able to draw down under the Credit Facility is limited by financial covenants as described in more detail below. As ofMarch 31, 2020 , our draw down capacity was$790 million under the Credit Facility. AtMarch 31, 2020 , we were in compliance with all financial and other covenants, including the net debt to adjusted EBITDA ratio. AtMarch 31, 2020 our Net Debt/adjusted EBITDA(1) ratio was 3.33 to 1.0 as defined by the credit facility agreements, well below the financial covenants of existing outstanding debt. _______________________ (1) Adjusted EBITDA and Net Debt, which are non-GAAP measures used for these
covenants, are calculated in accordance with the definition in the debt
agreements. In this context, these measures are used solely to provide
information on the extent to which we are in compliance with debt covenants
and may not be comparable to adjusted EBITDA and Net Debt used by other
companies. Reconciliations of adjusted EBITDA to net income and net debt to
total debt are as follows:
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(DOLLARS IN MILLIONS) Twelve Months Ended March 31, 2020 Net income $ 471.7 Interest expense 133.7 Income taxes 100.1 Depreciation and amortization 322.1 Specified items (1) 105.8 Non-cash items (2) 38.9 Adjusted EBITDA $ 1,172.3
(1) Specified items for the 12 months ended
consisted of operational improvement initiatives, acquisition related costs,
Frutarom integration related costs, restructuring and other charges, net, FDA
mandated product recall, Frutarom acquisition related costs, compliance
review & legal defense costs, N&B transaction related costs and N&B
integration related costs.
(2) Non-cash items represent all other adjustments to reconcile net income to net
cash provided by operations as presented on the Statement of Cash Flows,
including gain on disposal of assets and stock-based compensation.
(DOLLARS IN MILLIONS) March 31, 2020 Total debt$ 4,332.5 Adjustments: Cash and cash equivalents 433.2 Net debt$ 3,899.3 Senior Notes As ofMarch 31, 2020 , we had$4.05 billion aggregate principal amount outstanding in senior unsecured notes, with$1.75 billion principal amount denominated in EUR and$2.30 billion principal amount denominated in USD. The notes bear interest ranging from 0.50% per year to 5.00% per year, with maturities fromSeptember 2020 toSeptember 2048 . Of these notes,$300 million in aggregate principal amount of our 3.40% senior notes will mature inSeptember 2020 . Contractual Obligations We expect to contribute a total of$4.4 million to ourU.S. pension plans and a total of$20.9 million to our Non-U.S. plans during 2020. During the three months endedMarch 31, 2020 , there were no contributions made to the qualifiedU.S. pension plans,$3.9 million of contributions were made to the non-U.S. pension plans, and$1.5 million of benefit payments were made with respect to our non-qualifiedU.S. pension plan. We also expect to contribute$3.8 million to our postretirement benefits other than pension plans during 2020. During the three months endedMarch 31, 2020 ,$1.0 million of contributions were made to postretirement benefits other than pension plans. As discussed in Note 15 to the Consolidated Financial Statements, atMarch 31, 2020 , we had entered into various guarantees and had undrawn outstanding letters of credit from financial institutions. These arrangements reflect ongoing business operations, including commercial commitments, and governmental requirements associated with audits or litigation that are in process with various jurisdictions. Based on the current facts and circumstances, these arrangements are not reasonably likely to have a material impact on our consolidated financial condition, results of operations, or cash flows. New Accounting Standards Please refer to Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements. Non-GAAP Financial Measures We use non-GAAP financial measures in this Form 10-Q, including: (i) currency neutral metrics, (ii) adjusted gross margin, (iii) adjusted operating profit and adjusted operating margin, (iv) adjusted selling and administrative expenses, and (v) adjusted effective tax rate. We also provide the non-GAAP measures adjusted EBITDA and net debt solely for the purpose of providing information on the extent to which the Company is in compliance with debt covenants contained in its debt agreements. Our non-GAAP financial measures are defined below. These non-GAAP financial measures are intended to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance 34 -------------------------------------------------------------------------------- with GAAP and is not intended to represent a presentation in accordance with GAAP. In discussing our historical and expected future results and financial condition, we believe it is meaningful for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of the Company's results under GAAP and may not be comparable to other companies' calculation of such metrics. Currency neutral metrics eliminate the effects that result from translating international currency toU.S. dollars. We calculate currency neutral numbers by comparing current year results to the prior year results restated at exchange rates in effect for the current year based on the currency of the underlying transaction. Adjusted gross margin exclude operational improvement initiatives, Frutarom integration related costs, and Frutarom acquisition related costs. Adjusted selling and administrative expenses exclude Frutarom integration related costs, Frutarom acquisition related costs, compliance review & legal defense costs, N&B transaction related costs, and N&B integration related costs. Adjusted operating profit and adjusted operating margin exclude operational improvement initiatives, Frutarom integration related costs, restructuring and other charges, net, losses (gains) on sale of assets, Frutarom acquisition related costs, compliance review & legal defense costs, N&B transaction related costs, and N&B integration related costs. Adjusted effective tax rate exclude operational improvement initiatives, Frutarom integration related costs, restructuring and other charges, net, losses (gains) on sale of assets, Frutarom acquisition related costs, compliance review & legal defense costs, N&B transaction related costs, and N&B integration related costs . Net Debt to Combined Adjusted EBITDA is the leverage ratio used in our credit agreement and defined as Net Debt (which is long-term debt less cash and cash equivalents) divided by Combined Adjusted EBITDA. However, as Adjusted EBITDA for these purposes was calculated in accordance with the provisions of the credit agreement, it may differ from the calculation used for other purposes.
A. Reconciliation of Non-GAAP Metrics
Reconciliation of Gross Profit
Three Months Ended March 31,
(DOLLARS IN THOUSANDS) 2020 2019
Reported (GAAP) $ 565,867 $ 531,259
Operational Improvement Initiatives (a) - 406
Frutarom Integration Related Costs (b) 149
156
Frutarom Acquisition Related Costs (d) 513 7,850 Adjusted (Non-GAAP)$ 566,529 $ 539,671 Reconciliation of Selling and Administrative Expenses Three Months Ended March 31, (DOLLARS IN THOUSANDS) 2020 2019 Reported (GAAP)$ 229,714 $ 213,182 Frutarom Integration Related Costs (b) (3,279 ) (14,557 ) Frutarom Acquisition Related Costs (d) (300 ) (1,679 ) Compliance Review & Legal Defense Costs (e) (649 )
-
N&B Transaction Related Costs (f) (5,199 )
-
N&B Integration Related Costs (g) (10,144 ) - Adjusted (Non-GAAP)$ 210,143 $ 196,946 35
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Reconciliation of Operating Profit
Three Months Ended March 31,
(DOLLARS IN THOUSANDS) 2020 2019
Reported (GAAP) $ 196,222 $ 163,870
Operational Improvement Initiatives (a) - 406
Frutarom Integration Related Costs (b) 3,650
14,897
Restructuring and Other Charges, net (c) 4,918
16,174
Losses (Gains) on Sale of Assets 754 (188 ) Frutarom Acquisition Related Costs (d) 813
9,529
Compliance Review & Legal Defense Costs (e) 649
-
N&B Transaction Related Costs (f) 5,199
-
N&B Integration Related Costs (g) 10,144 - Adjusted (Non-GAAP)$ 222,349 $ 204,688
Reconciliation of Net Income
Three Months Ended
2020 2019
(DOLLARS IN THOUSANDS Income before Taxes on Net Income
Diluted EPS Income before Taxes on Net Income Diluted EPS EXCEPT PER SHARE taxes income (i) Attributable to IFF (k) taxes income (i) Attributable to IFF AMOUNTS) (j) (j) Reported (GAAP)$ 153,508 $ 26,297 $ 124,607$ 1.15 $ 134,576 $ 23,362 $ 108,829 $ 0.96 Operational Improvement Initiatives (a) - - - - 406 142 264 - Frutarom Integration Related Costs (b) 3,650 815 2,835
0.02 14,897 3,349 11,548 0.10
Restructuring and Other Charges, net (c) 4,918 1,034 3,884 0.03 16,174 4,031 12,143
0.11
Losses (Gains) on Sale of Assets 754 189 565 - (188 ) (43 ) (145 ) - Frutarom Acquisition Related Costs (d) 213 (1,634 ) 1,847 0.02 9,529 1,530 7,999 0.07 Compliance Review & Legal Defense Costs (e) 649 135 514 - - - -
-
N&B Transaction Related Costs (f) 5,199 - 5,199 0.05 - - -
-
N&B Integration Related Costs (g) 10,144 2,168 7,976 0.07 - - - - Redemption value adjustment to EPS (h) - - - (0.05 ) - - - - Adjusted (Non-GAAP)$ 179,035 $ 29,004 $ 147,427
$ 1.30 $ 175,394 $ 32,371 $ 140,638 $ 1.24 36
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(a) Represents accelerated depreciation related to a plant relocation in
For 2020, costs primarily related to advisory services, retention bonuses
and performance stock awards. For 2019, costs principally related to
advisory services. (c) For 2020, represents costs primarily related to the Frutarom Integration
Initiative. For 2019, represents costs primarily related to the Frutarom
Integration Initiative and the 2019 Severance Charges program. (d) Represents transaction-related costs and expenses related to the
acquisition of Frutarom. For 2020, amount primarily includes earn-out
payments, net of adjustments, amortization for inventory "step-up" costs
and transaction costs principally related to the 2019 Acquisition Activity.
For 2019, amount primarily includes amortization for inventory "step-up"
costs and transaction costs. (e) Costs related to reviewing the nature of inappropriate payments and review
of compliance in certain other countries. In addition, includes legal costs
for related shareholder lawsuits.
(f) Represents transaction costs and expenses related to the pending
transaction with
value of certain redeemable noncontrolling interests over their existing
carrying value. (i) The income tax expense (benefit) on non-GAAP adjustments is computed in
accordance with ASC 740 using the same methodology as the GAAP provision of
income taxes. Income tax effects of non-GAAP adjustments are calculated
based on the applicable statutory tax rate for each jurisdiction in which
such charges were incurred, except for those items which are non-taxable or
are subject to a valuation allowance for which the tax expense (benefit)
was calculated at 0%. For fiscal years 2020 and 2019, these non-GAAP
adjustments were not subject to foreign tax credits, but to the extent that
such factors are applicable to any future non-GAAP adjustments we will take
such factors into consideration in calculating the tax expense (benefit).
(j) For 2020 and 2019, net income is reduced by income attributable to
noncontrolling interest of $2.6M and $2.4M , respectively.
(k) The sum of these items does not foot due to rounding.
B. Foreign Currency Reconciliation
Three Months Ended
March 31,
2020 2019
Operating Profit:
% Change - Reported (GAAP) 19.7% (6.3)%
Items impacting comparability (11.1)% 19.4%
% Change - Adjusted (Non-GAAP) 8.6%
13.1%
Currency Impact 2.0%
1.3%
% Change Year-over-Year - Currency Neutral Adjusted (Non-GAAP)* 10.6%
14.4%
_______________________
* Currency neutral amount is calculated by translating prior year amounts at the exchange rates used for the corresponding 2020 period. Currency neutral operating profit also eliminates the year-over-year impact of cash flow hedging.
37
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Cautionary Statement Under the Private Securities Litigation Reform Act of 1995
Statements in this Form 10-Q, that are not historical facts or information, are
"forward-looking statements" within the meaning of The Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
management's current assumptions, estimates and expectations and include
statements concerning (i) the impacts of COVID-19 and our plans to respond to
its implications, (ii) the proposed combination with DuPont's Nutrition &
Biosciences business ("N&B"), (iii) our ability to achieve the anticipated
benefits of the Frutarom acquisition, including $145 million of expected
synergies,, (iv), (v) expected capital expenditures in 2020, (vi) expected costs
associated with our various restructuring activities, (vii) our margin
expectations for 2020, (viii) expected cash flow and availability of capital
resources to fund our operations and meet our debt service requirements, (ix)
our ability to continue to generate value for, and return cash to, our
shareholders, and (x) anticipated contributions to our pension plans and other
post-retirement programs in 2020. These forward-looking statements should be
evaluated with consideration given to the many risks and uncertainties inherent
in our business that could cause actual results and events to differ materially
from those in the forward-looking statements. Certain of such forward-looking
information may be identified by such terms as "expect", "anticipate",
"believe", "intend", "outlook", "may", "estimate", "should", "predict" and
similar terms or variations thereof. Such forward-looking statements are based
on a series of expectations, assumptions, estimates and projections about the
Company, are not guarantees of future results or performance, and involve
significant risks, uncertainties and other factors, including assumptions and
projections, for all forward periods. Our actual results may differ materially
from any future results expressed or implied by such forward-looking statements.
Such factors include, among others, the following:
• disruption in the development, manufacture, distribution or sale of our
products from Covid-19 and other public health crises;
• risks related to the integration of the Frutarom business, including
whether we will realize the benefits anticipated from the acquisition in
the expected time frame;
• unanticipated costs, liabilities, charges or expenses resulting from the
Frutarom acquisition;
• our ability to realize expected cost savings and increased efficiencies of
the Frutarom integration and our ongoing optimization of our manufacturing
facilities;
• our ability to successfully establish and manage acquisitions,
collaborations, joint ventures or partnership;
• the increase in our leverage resulting from the additional debt incurred
to pay a portion of the consideration for Frutarom and its impact on our
liquidity and ability to return capital to its shareholders;
• our ability to successfully market to our expanded and diverse Taste
customer base;
• our ability to effectively compete in our market and develop and introduce
new products that meet customers' needs;
• our ability to retain key employees;
• changes in demand from large multi-national customers due to increased
competition and our ability to maintain "core list" status with customers;
• our ability to successfully develop innovative and cost-effective products
that allow customers to achieve their own profitability expectations;
• disruption in the development, manufacture, distribution or sale of our
products from natural disasters, international conflicts, terrorist acts,
labor strikes, political crisis, accidents and similar events;
• the impact of a disruption in our supply chain, including the inability to
obtain ingredients and raw materials from third parties;
• volatility and increases in the price of raw materials, energy and
transportation;
• the impact of a significant data breach or other disruption in our
information technology systems, and our ability to comply with data
protection laws in the U.S. and abroad;
• our ability to comply with, and the costs associated with compliance with,
regulatory requirements and industry standards, including regarding
product safety, quality, efficacy and environmental impact;
• our ability to react in a timely and cost-effective manner to changes in
consumer preferences and demands, including increased awareness of health
and wellness;
• our ability to meet consumer, customer and regulatory sustainability
standards;
• our ability to benefit from our investments and expansion in emerging markets;
38
--------------------------------------------------------------------------------• the impact of currency fluctuations or devaluations in the principal
foreign markets in which we operate;
• economic, regulatory and political risks associated with our international
operations;
• the impact of global economic uncertainty on demand for consumer products;
• our ability to comply with, and the costs associated with compliance with,
• our ability to successfully manage our working capital and inventory balances;
• the impact of the failure to comply with
and anti-bribery laws and regulations, including the
Practices Act;
• any impairment on our tangible or intangible long-lived assets, including
goodwill associated with the acquisition of Frutarom;
• our ability to protect our intellectual property rights;
• the impact of the outcome of legal claims, regulatory investigations and
litigation;
• changes in market conditions or governmental regulations relating to our
pension and postretirement obligations;
• the impact of changes in federal, state, local and international taxlegislation or policies, including the Tax Cuts and Jobs Act, with respect
to transfer pricing and state aid, and adverse results of tax audits,
assessments, or disputes;
• the impact of the
• the impact of the phase out of the London Interbank Office Rate (LIBOR) on
interest expense;
• risks associated with our pending combination with N&B, including business
uncertainties and contractual restrictions while the transaction is
pending, costs incurred in connection with the transaction, our ability to
pursue alternative transactions, and the impact if we fail to complete the
transaction; and
• risks associated with the integration of N&B if we are successful in
completing the transaction, including whether we will realize the
anticipated synergies and other benefits of the transaction.
We intend our forward-looking statements to speak only as of the time of such
statements and do not undertake or plan to update or revise them as more
information becomes available or to reflect changes in expectations, assumptions
or results. We can give no assurance that such expectations or forward-looking
statements will prove to be correct. An occurrence of, or any material adverse
change in, one or more of the risk factors or risks and uncertainties referred
to in this report or included in our other periodic reports filed with the SEC
could materially and adversely impact our operations and our future financial
results.
Any public statements or disclosures made by us following this report that
modify or impact any of the forward-looking statements contained in or
accompanying this report will be deemed to modify or supersede such outlook or
other forward-looking statements in or accompanying this report.
The foregoing list of important factors does not include all such factors, nor
necessarily present them in order of importance. In addition, you should consult
other disclosures made by the Company (such as in our other filings with the SEC
or in company press releases) for other factors that may cause actual results to
differ materially from those projected by the Company. Please refer to Part I.
Item 1A., Risk Factors of the 2019 Form 10-K for additional information
regarding factors that could affect our results of operations, financial
condition and cash flow.
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