01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
International Flavors & Fragrances Inc. (IFF) reported 2016 net sales of $3.12 billiona, up 3% on a reported basis and 5% on a currency neutral basis, with acquisitions contributing approximately 2% to both growth rates.
Gross margin rose to 44.9% from 44.7%, but operating profit declined $21.0 million to $567.4 millionb (18.2% of sales) from $588.3 million (19.5%), largely due to $48.5 million of net legal charges principally related to a litigation accrual. Excluding specified items, adjusted operating profit was $623.0 million (20.0% of sales). Net income was $405.0 million, or $5.05 per diluted share, versus $5.16 in 2015.
Operating cash flow increased to $535.4 millionc from $433.6 million, principally due to lower core working capital requirements and lower pension contributions. The company operates two segments, Flavors (48% of 2016 sales) and Fragrances (52%), and generates 51% of sales from emerging markets. Its 25 largest customers accounted for 52% of sales, and its largest customer for 12%.
Management expects challenging market conditions to continue in 2017, with a stronger U.S. dollar and the reset of incentive compensation expected to pressure currency neutral operating profit growth. In February 2017, IFF announced a multi-year productivity program with cumulative pre-tax cash charges of $30 to $35 milliond and expected annual run-rate savings of $40 to $45 million by 2019. The company also completed the acquisitions of David Michael in October 2016 (about $242.0 million) and Fragrance Resources in January 2017 (about $150.5 million).
At year-end 2016, total debt was $1,325.4 million and cash was $324.0 million. The company's Vision 2020 strategy targets $500 million to $1.0 billion of sales growth through acquisitions. The filing also discloses a $50 million reserve recorded in 2016 related to the ZoomEssence litigation, and a plan to relocate certain fragrance ingredients facilities in China.
02—Key points
Key Highlights
- Net sales rose 3% to $3.12 billion in 2016 (5% currency neutral), with acquisitions contributing about 2 percentage points.
- Reported operating profit fell to $567.4 million (18.2% of sales) from $588.3 million, driven by $48.5 million of net legal charges; adjusted operating margin was 20.0%.
- Diluted EPS was $5.05 in 2016, compared with $5.16 in 2015; net income was $405.0 million.
- Operating cash flow increased to $535.4 million from $433.6 million, reflecting lower core working capital needs and lower pension contributions.
- Emerging markets represented 51% of 2016 sales; the 25 largest customers accounted for 52% of sales and the largest customer for 12%.
- The company announced a 2017 productivity program with $30 to $35 million of cumulative pre-tax cash charges and expected run-rate savings of $40 to $45 million by 2019.
- Management expects challenging economic conditions in 2017, a stronger U.S. dollar, and incentive compensation reset to pressure currency neutral operating profit growth.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, International Flavors & Fragrances kept $0.13.
- Revenue$3.12B100.0%
- Cost of revenue−$1.72B55.2%
- Gross profit$1.40B44.8%
- Operating costs−$842.6M27.0%
- Operating income$553.0M17.7%
- Interest, other & tax−$147.9M4.7%
- Net income$405.0M13.0%
Where FY2016 revenue went
$3.12B- Cost of revenue: $1.72B, 55% of revenue
- SG&A: $572.5M, 18% of revenue
- Net income: $405.0M, 13% of revenue
- R&D: $258.9M, 8.3% of revenue
- Interest, other & tax: $147.9M, 4.7% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $3.12B$3.02B | +3.1% |
| Cost of Revenue | $1.72B$1.67B | +2.9% |
| Gross Profit | $1.40B$1.35B | +3.3% |
| R&D Expenses | $258.86M$246.10M | +5.2% |
| SG&A Expenses | $572.52M$494.52M | +15.8% |
| Operating Income | $552.96M$588.35M | −6.0% |
| Interest Expense | $52.99M$46.06M | +15.0% |
| Net Income | $405.03M$419.25M | −3.4% |
| EPS (Basic) | $5.07$5.19 | −2.3% |
| EPS (Diluted) | $5.05$5.16 | −2.1% |
| Shares Outstanding (Basic) | 79.65M80.45M | −1.0% |
| Shares Outstanding (Diluted) | 79.98M80.89M | −1.1% |
05—Questions
Frequently Asked Questions
How did IFF perform in 2016 compared with 2015?
Net sales were $3.12 billion, up 3% on a reported basis and 5% on a currency neutral basis. Gross margin increased to 44.9% from 44.7%. Operating profit declined to $567.4 million from $588.3 million, mainly because of $48.5 million in net legal charges. Net income was $405.0 million, or $5.05 per diluted share, compared with $5.16 in 2015.
What drove the decline in operating profit?
The filing attributes the decline mainly to $48.5 million of net legal charges, principally related to a litigation accrual, along with $12.2 million of acquisition-related costs and $7.8 million of gains on asset sales. Excluding these and other specified items, adjusted operating profit was $623.0 million, or 20.0% of sales, versus $612.1 million (20.2%) in 2015.
How concentrated is IFF's customer base?
During 2016, the 25 largest customers accounted for 52% of sales, and the largest customer accounted for 12% of sales in each of the last three fiscal years. Large customers are increasingly using core supplier lists, which the filing says can pressure margins.
What is IFF's outlook and what major initiatives are underway?
Management believes market conditions will remain challenging in 2017, and expects a stronger U.S. dollar and incentive compensation reset to pressure currency neutral operating profit growth. The February 2017 productivity program is expected to cost $30 to $35 million and reduce about 370 positions, with run-rate savings of $40 to $45 million by 2019.
What are the main acquisition and debt developments?
IFF acquired David Michael for about $242.0 million in October 2016 and Fragrance Resources for about $150.5 million in January 2017. It issued Euro 500.0 million of 1.75% senior notes due 2024 in March 2016. Total debt was $1,325.4 million at December 31, 2016, against $324.0 million of cash, and the company had $950 million of available capacity under its credit facility.
06—Continue