01—Abstract
Summary
Summary of the 10-K filed February 26, 2009. Cited figures are marked; the original filing is the authoritative source.
International Flavors & Fragrances Inc. (IFF) reported 2008 net sales of $2.39 billiona, up 5% from $2.28 billion in 2007, with flavors sales rising 9% to $1.09 billion and fragrances rising 2% to $1.30 billion.
Net income was $229.6 millionb, or $2.87 per diluted share, compared with $247.1 million, or $2.82 per diluted share, in 2007. The filing attributes the sales gain partly to a weaker U.S. dollar; at comparable exchange rates, sales would have increased 2%. Gross margin pressure is visible: cost of goods sold rose to 59.4% of sales from 58.2%, driven by higher input costs and lower manufacturing absorption, mainly in North American fragrance compounds.
Interest expense more than doubled to $74.0 millionc from $41.5 million, reflecting borrowings used for 2007 share repurchases, and the effective tax rate fell to 18.1% from 24.8%. Balance sheet and cash flow data show increased financial leverage. Operating cash flow fell to $220.6 million from $314.1 million, mainly due to working capital and higher interest payments.
Total debt was $1.26 billiond at year-end 2008, and shareholders' equity declined to $573.1 million from $617.2 million, reflecting share repurchases and a $116.9 million negative foreign currency translation adjustment. The company reports Net Debt/Adjusted EBITDA of 2.34 to 1 against a covenant maximum of 3.25 to 1, and states it was in compliance with all covenants at December 31, 2008. The filing also notes that the Chief Financial Officer position was held on an interim basis.
The filing highlights risks from the economic downturn and tighter credit markets, reduced consumer spending, raw material price volatility (natural products are about 50% of raw material purchases), currency fluctuation, and litigation. The company faces ongoing lawsuits by plaintiffs alleging respiratory illness from exposure to butter flavorings, with 18 actions involving 392 claimants pending. Management states it does not expect these matters to have a material adverse effect, and environmental PRP exposure at ten sites is estimated at less than $5 million.
02—Key points
Key Highlights
- Net sales rose 5% to $2,389 million in 2008; flavors grew 9% and fragrances grew 2%.
- Diluted EPS was $2.87 in 2008, up from $2.82 in 2007, while net income fell slightly to $229.6 million from $247.1 million.
- Cost of goods sold increased to 59.4% of sales from 58.2%, citing higher input costs and lower manufacturing absorption.
- Interest expense rose to $74.0 million from $41.5 million, tied to 2007 share repurchases financed with debt.
- Operating cash flow fell to $220.6 million from $314.1 million, mainly due to working capital and higher interest payments.
- Total debt was $1,255.7 million at year-end 2008; the company reported Net Debt/Adjusted EBITDA of 2.34 to 1 versus a 3.25 to 1 covenant maximum.
- Restructuring and other charges were $18.2 million in 2008, including the global shared service center and a performance improvement plan eliminating 218 positions.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 26, 2009Financial Statements
| Revenue | $2.39B |
| Cost of Revenue | $1.42B |
| Gross Profit | $970.93M |
| R&D Expenses | $196.86M |
| SG&A Expenses | $400.72M |
| Operating Expenses | $2.11B |
| Interest Expense | $74.01M |
| Net Income | $229.63M |
| EPS (Basic) | $2.89 |
| EPS (Diluted) | $2.86 |
05—Questions
Frequently Asked Questions
How did IFF's sales and profitability perform in 2008?
Net sales increased 5% to $2,389 million, with flavors up 9% and fragrances up 2%. Net income was $229.6 million, or $2.87 per diluted share, compared with $247.1 million, or $2.82 per diluted share, in 2007. The filing notes that a weaker U.S. dollar helped reported sales; at comparable exchange rates, sales would have risen 2%.
What pressures affected margins and cash flow?
Cost of goods sold rose to 59.4% of sales from 58.2%, mainly due to higher input costs and lower absorption of manufacturing expenses in North American fragrance compounds. Operating cash flow declined to $220.6 million from $314.1 million, primarily due to increased working capital and higher interest payments tied to $500 million of Senior Notes issued for share repurchases.
How is IFF's leverage and debt position?
Total debt was $1,255.7 million at December 31, 2008, compared with $1,212.6 million a year earlier. Net Debt/Adjusted EBITDA was 2.34 to 1 as defined by the debt agreements, below the 3.25 to 1 maximum covenant, and the company stated it was in compliance with all covenants at year-end. Shareholders' equity fell to $573.1 million from $617.2 million.
What are the main risks identified in the filing?
Key risks include the volatile global economy and tight credit markets, reduced consumer spending, raw material price and availability (natural products are about 50% of purchases), currency fluctuations, and litigation. The company faces lawsuits alleging respiratory illness from flavor exposure, with 18 actions involving 392 claimants pending, but management does not expect a material adverse effect.
What is management's capital allocation and dividend approach?
Cash dividends declared were $0.96 per share in 2008, up from $0.88 in 2007, and the quarterly rate was raised 9% to $.25 per share in July 2008. Management intends to pay dividends approximating 30 to 35% of yearly earnings. The company repurchased 0.7 million shares for $30 million in 2008 and had $268.7 million remaining under its repurchase program at December 31, 2008.
06—Continue