01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
International Flavors & Fragrances Inc. (IFF) reported 2012 net sales of $2,821.4 milliona, up 1% from $2,788.0 million in 2011, with local currency sales growth of 4% (5% like-for-like, excluding the exit of low margin sales activities).
Operating profit rose to $486.6 millionb (17.2% of sales) from $427.7 million (15.3%), and gross margin improved to 41.7% from 39.6%. Diluted net income per share was $3.09, versus $3.26 in 2011, as net income fell to $254.1 million from $266.9 million. The decline in earnings per share reflects a $72.4 million after-tax charge tied to the overall Spanish tax settlement, which lifted the effective tax rate to 42.7% from 28.6%.
The company operates two segments, Flavors (49% of 2012 sales) and Fragrances (51%), with emerging markets representing 47% of sales and growing 8% in local currency. Management expects 2013 local currency growth at the lower end of its long-term 4%-6% target range, citing macroeconomic uncertainty and continued pressure in Fragrance Ingredients. Cash flow from operations was $323.8 millionc, including a $105.5 million outflow for the Spanish tax settlement, and cash and cash equivalents rose to $324.4 million.
Total debt was $1,031.2 milliond at year-end, and the Board authorized a $250 million share repurchase program to run through 2014. Key risks disclosed include raw material price volatility, the ongoing Spanish tax disputes over 2002-2003 assessments and capital tax claims, competition from Givaudan, Firmenich and Symrise, and dependence on large customers, with the 25 largest customers accounting for 53% of sales and the largest customer for 11%.
02—Key points
Key Highlights
- Net sales of $2,821.4 million in 2012, up 1% reported and 4% in local currency; Flavors sales $1,378.4 million and Fragrances sales $1,443.1 million
- Operating profit of $486.6 million (17.2% of sales) versus $427.7 million (15.3%) in 2011; gross margin rose to 41.7% from 39.6%
- Diluted EPS of $3.09 versus $3.26 in 2011, reflecting $72.4 million after-tax charges from the overall Spanish tax settlement; effective tax rate was 42.7%
- Emerging markets represented 47% of 2012 sales and grew 8% in local currency; Greater Asia and Latin America were key growth regions
- Cash flow from operations of $323.8 million, including a $105.5 million Spanish tax settlement payment; cash and equivalents of $324.4 million at year-end
- Total debt of $1,031.2 million at December 31, 2012; the New Facility carried a 1.41% rate and the company was in covenant compliance with a net debt to adjusted EBITDA ratio of 1.20 to 1
- Board authorized a $250 million share repurchase program in December 2012, expected to be completed by the end of 2014; dividends declared were $1.30 per share for 2012
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, International Flavors & Fragrances kept $0.09.
- Revenue$2.82B100.0%
- Cost of revenue−$1.65B58.3%
- Gross profit$1.18B41.7%
- Operating costs−$688.9M24.4%
- Operating income$486.6M17.2%
- Interest, other & tax−$232.5M8.2%
- Net income$254.1M9.0%
Where FY2012 revenue went
$2.82B- Cost of revenue: $1.65B, 58% of revenue
- SG&A: $453.5M, 16% of revenue
- Net income: $254.1M, 9.0% of revenue
- R&D: $233.7M, 8.3% of revenue
- Interest, other & tax: $232.5M, 8.2% of revenue
Kept 9.0% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $2.82B$2.79B | +1.2% |
| Cost of Revenue | $1.65B$1.68B | −2.2% |
| Gross Profit | $1.18B$1.10B | +6.4% |
| R&D Expenses | $233.71M$219.78M | +6.3% |
| SG&A Expenses | $453.54M$443.97M | +2.2% |
| Operating Expenses | $2.38B$2.41B | −1.5% |
| Operating Income | $486.62M$427.73M | +13.8% |
| Interest Expense | $41.75M$44.64M | −6.5% |
| Net Income | $254.13M$266.87M | −4.8% |
| EPS (Basic) | $3.11$3.30 | −5.8% |
| EPS (Diluted) | $3.09$3.26 | −5.2% |
| Shares Outstanding (Basic) | 81.11M80.46M | +0.8% |
| Shares Outstanding (Diluted) | 81.83M81.47M | +0.4% |
05—Questions
Frequently Asked Questions
Why did diluted EPS decline in 2012 even though operating profit increased?
Diluted EPS fell to $3.09 from $3.26, while operating profit rose to $486.6 million from $427.7 million. The main drag was the $72.4 million after-tax charge tied to the overall Spanish tax settlement, which pushed the effective tax rate to 42.7% from 28.6%. Net income also declined, to $254.1 million from $266.9 million.
What is the outlook for 2013 local currency sales growth?
Management believes local currency growth in 2013, including the negative impact from exiting low margin sales activities, will be at the lower end of its long-term financial targets. The filing cites continued macroeconomic and fiscal volatility in key markets and ongoing pressure in the commodity components of Fragrance Ingredients. It expects the negative impact from exiting low margin sales to effectively end at the end of the first half of 2013.
How concentrated is the company's customer base?
The 25 largest customers accounted for 53% of 2012 sales. The largest customer accounted for 11% of sales in 2012, 11% in 2011 and 10% in 2010, and these sales were largely in the Fragrances business.
What are the main outstanding Spanish tax matters?
The Spanish tax authorities upheld assessments for the 2003 fiscal year on February 7, 2013, and the company has filed a notice of intent to appeal, while the 2002 assessment remains pending. Assessments aggregate Euro 22.2 million ($29.3 million) including interest. The company also faces capital tax claims of Euro 9.3 million ($12.3 million) and a pending dividend withholding case of Euro 3.1 million ($4.1 million). Management does not currently believe any pending tax assessments would have a material impact on its financial condition.
How is the company investing in growth?
IFF cited a $100 million investment in Asia, including a new manufacturing facility in Singapore opened in 2012 and a flavors facility in China expected to open in the first half of 2013. It also announced a $50 million investment in its Gebze, Turkey facility. Capital spending was $126 million in 2012, or 4.5% of sales, and the company expects capital spending to approach 5% of sales in 2013.
06—Continue