01—Abstract
Summary
Summary of the 10-K filed February 26, 2019. Cited figures are marked; the original filing is the authoritative source.
International Flavors & Fragrances Inc. (IFF) reported net sales of $3,977,539 thousanda for 2018, up from $3,398,719 thousand in 2017, a 17.0% increase on a reported basis and 15% on a currency neutral basis.
The increase was driven in large part by the October 4, 2018 acquisition of Frutarom Industries Ltd., which contributed $359.6 millionb of net sales and $27.4 million of segment profit. Net income attributable to IFF stockholders was $337,302 thousand, or $3.79 per diluted share, compared with $295,665 thousand, or $3.72 per diluted share, in 2017. Operating profit rose to $583.9 million, though operating margin declined to 14.7% from 16.3%, reflecting Frutarom acquisition costs of $89.6 million and unfavorable price versus input costs, including the BASF supply disruption.
The Frutarom acquisition was valued at approximately $7 billionc and was funded with about $3.3 billion of new debt and $2.3 billion of equity, including 14.9 million shares issued to Frutarom shareholders. Total debt rose to $4,553.1 million at December 31, 2018 from $1,639.2 million a year earlier, and total assets increased to $12,889.4 million. Goodwill and intangible assets reached $8,417.7 million, and the company disclosed that the Frutarom goodwill could be subject to impairment if its benefits are not realized.
Management stated its capital allocation priority is debt repayment to maintain an investment grade rating, and it suspended share repurchases until its deleveraging target is met. Net debt to adjusted EBITDA was 3.56 to 1 under credit agreement definitions.
Looking ahead, management expects raw material cost pressures and supply chain disruptions, mainly in the Scent business, to reduce currency neutral operating profit growth in 2019, and expects capital spending of about 5-6%d of sales in 2019. The company also noted risks from the expected UK departure from the European Union in 2019 and the lease accounting standard ASU 2016-02, which is expected to have a material impact on its balance sheet.
02—Key points
Key Highlights
- Net sales rose 17% to $3.98 billion in 2018 on a reported basis and 15% currency neutral, with Frutarom contributing approximately 11 percentage points of reported growth.
- Diluted EPS was $3.79 in 2018 versus $3.72 in 2017, while operating margin fell to 14.7% from 16.3% due to $89.6 million of Frutarom acquisition costs and higher input costs.
- The approximately $7 billion Frutarom acquisition, completed October 4, 2018, was funded by about $3.3 billion of new debt and $2.3 billion of equity, lifting total debt to $4.55 billion.
- Goodwill and intangible assets reached $8.42 billion at year-end 2018, with $6.9 billion related to Frutarom, creating potential future impairment exposure.
- Emerging markets represented 48% of 2018 sales, and no other geographic market outside the U.S. (about 25% of sales) exceeded 6% of sales.
- Share repurchases were suspended following the Frutarom acquisition until the company meets its deleveraging target; net debt to adjusted EBITDA was 3.56 to 1.
- Management expects higher raw material costs and supply chain disruptions, mainly in the Scent business, to pressure currency neutral operating profit growth in 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, International Flavors & Fragrances kept $0.08.
- Revenue$3.98B100.0%
- Cost of revenue−$2.29B57.7%
- Gross profit$1.68B42.3%
- Operating costs−$1.10B27.6%
- Operating income$583.9M14.7%
- Interest, other & tax−$246.6M6.2%
- Net income$337.3M8.5%
Where FY2018 revenue went
$3.98B- Cost of revenue: $2.29B, 58% of revenue
- SG&A: $707.5M, 18% of revenue
- Net income: $337.3M, 8.5% of revenue
- R&D: $311.6M, 7.8% of revenue
- Other operating costs: $79.8M, 2.0% of revenue
- Interest, other & tax: $246.6M, 6.2% of revenue
Kept 8.5% as net incomeOther operating costs $79.8M · 2.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 26, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $3.98B$3.40B | +17.0% |
| Cost of Revenue | $2.29B$1.93B | +19.1% |
| Gross Profit | $1.68B$1.47B | +14.3% |
| R&D Expenses | $311.58M$295.47M | +5.5% |
| SG&A Expenses | $707.46M$570.14M | +24.1% |
| Operating Income | $583.88M$552.63M | +5.7% |
| Interest Expense | $132.56M$65.36M | +102.8% |
| Net Income | $337.30M$295.67M | +14.1% |
| EPS (Basic) | $3.81$3.73 | +2.1% |
| EPS (Diluted) | $3.79$3.72 | +1.9% |
| Shares Outstanding (Basic) | 87.55M79.07M | +10.7% |
| Shares Outstanding (Diluted) | 88.12M79.37M | +11.0% |
05—Questions
Frequently Asked Questions
How did the Frutarom acquisition affect IFF's 2018 financial results?
Frutarom contributed net sales of $359.6 million and segment profit of $27.4 million from October 4, 2018 through year-end. The acquisition added approximately 11% to reported sales growth. However, IFF recorded Frutarom acquisition-related costs of $89.6 million in operating profit, and the effective tax rate was 24.1%, compared with 44.9% in 2017, which was affected by 2017 U.S. tax reform charges.
How is IFF financing its debt after the Frutarom acquisition?
The company borrowed approximately $3.3 billion of new debt, including $2.8 billion of senior unsecured notes, $350 million of term loans, and $139.5 million of amortizing notes tied to tangible equity units. Total debt was $4,553.1 million at December 31, 2018, with $48.6 million classified as current. The company repaid $250 million of its 2007 senior notes and reported a $38.8 million loss on extinguishment of debt. Management says debt repayment is its primary capital allocation priority.
What are the main risks identified for investors in the 2018 filing?
Key risks include the ability to realize anticipated Frutarom synergies and integrate its operations, potential goodwill impairment of the Frutarom reporting unit, higher leverage and its effect on credit ratings, price volatility of natural raw materials (about half of raw material purchases), and exposure to emerging markets and currency fluctuations. The filing also cites risks from the BASF supply disruption, product recall or regulatory issues, and the UK's expected exit from the European Union.
What is the company's outlook for 2019?
Management expects market conditions to remain volatile but to show slight improvements compared with recent years. It expects higher raw material costs across a range of categories to continue for several quarters, and supply chain disruptions may reduce currency neutral operating profit growth in 2019. Capital spending is expected to be about 5-6% of sales, and R&D as a percentage of sales is expected to decline from about 8% due to the Frutarom sales base.
How is IFF's customer base changing after the acquisition?
Based on 2018 combined sales, approximately 65% of customers are small and mid-sized companies, compared with 35% global consumer products companies. The 25 largest customers accounted for 37% of 2018 combined sales, down from 47% of reported sales, and the largest customer was 7% of combined sales. The acquisition added approximately 39,000 small and mid-sized customers.
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