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IFF's full-year 2013 local currency sales increased 5% to $3 billion, reflecting 10% growth in emerging markets and 2% growth in the developed markets. Reported net income for the full year totaled $353.5 million.
"On a like-for-like basis (LFL), which excludes the exit of flavors low-margin sales activities, local currency sales increased 6%," the company says.
Emerging markets grew 10% last year, accounting for 49% of sales.
The fragrances business unit reported that revenue for the full year increased 6% to $1.5 billion. The fragrances segment contributed 52% of the company’s consolidated revenue in 2013, up from 51% in 2012. Local currency sales increased 6% for the full year, supported by double-digit growth in Greater Asia and Latin America and solid growth in EAME.
The flavors business unit reported that revenue for the full year increased 3% to $1.4 billion. The flavors segment contributed 48% of the company’s total consolidated revenue. Local currency sales increased 4% for the full year. Growth from new business wins offset a slight sales decline on existing business and the exit of low-margin sales activities. Excluding the impact of exiting these low-margin sales activities, LFL growth would have been 6%, driven by positive growth in every region, including double-digit growth in Latin America, and high single-digit growth in Greater Asia and EAME. Full year flavor sales were supported by strong growth in the emerging markets, which accounted for 51% of flavors total sales, and continued to outpace the growth in the developed markets.
On an LFL basis, which excludes the exit of low-margin sales activities, local currency sales increased 6%. Gross margins, as a percent of sales, increased 180 basis points to 43.5% from 41.7% in 2012. Excluding previously announced restructuring charges and operational improvement initiative costs, adjusted gross margins increased 210 basis points to 43.8% from 41.7% in the prior year. The improved performance reflects moderating input costs combined with other strategic initiatives to improve efficiency. RSA expenses, as a percent of sales, were 25.9% compared with 24.4% in 2012. Excluding the impact of the 2013 Spanish capital tax charge included in administrative expense, adjusted RSA, as a percent of sales, increased 110 points to 25.5% from 24.4% in 2012 primarily as a result of higher incentive compensation accruals. Operating profit totaled $516 million in 2013 compared with $487 million in 2012. Excluding the Spanish capital tax charge and restructuring costs from the current year’s results as well as previously announced restructuring charges from the prior year’s results, the adjusted operating profit would have increased 11%, or $52 million, to $540 million in 2013 from $488 million in 2012. Adjusted operating profit margins increased 100 basis points to 18.3% from 17.3% in 2012. Interest expense increased by $5 million year-over-year, primarily reflecting new long-term borrowings from the company's senior note offering in the second quarter of 2013 to take advantage of attractive borrowing rates and maintain efficiency and flexibility in IFF's capital structure. The effective tax rate was 27.1% in 2013 compared to a rate of 42.7% in the prior year. Excluding the impact of the 2012 and 2013 items previously noted, including the 2012 Spanish income tax settlement and the 2013 pre-tax Spanish capital tax charge, the adjusted effective tax rate in 2013 was 25.7% compared with 26.4% in the prior year. The year-over-year reduction reflects the reinstatement of the U.S. federal R&D tax credit in 2013, partially offset by a higher cost of repatriation.
The current year’s net income included charges of $22.9 million related to a Spanish capital tax charge and other costs associated with the recently announced restructuring and operational improvement programs. These charges were partially offset by an $8.5 million after-tax net gain on the sale of non-operating assets. Excluding these charges from 2012 and 2013 operating results, adjusted net income increased 12% in 2013 to $368.0 million.
Cash flows from operations for the full year were $407.6 million, or 13.8% of sales. The 2013 cash flow from operations included $48 million of cash payments related to the Spanish tax cases and incremental U.S. pension contributions. The prior year cash flow from operations included a $105.5 million cash payment due to the Spanish income tax settlement. Excluding these payments from the company’s operating cash flow, adjusted cash flow from operations would have increased 6% from $429 million in 2012 to $456 million in 2013.
Fourth Quarter 2013
Reflecting strong flavor and fragrance sales and growth in emerging markets, IFF fourth quarter 2013 revenue increased 7% to $725 million compared to the prior year. A full 50% of consolidated IFF sales were achieved in emerging markets, according to the company.
The fragrance unit reported that revenue increased 8% to $382 million in the fourth quarter of 2013 compared with $354 million in the fourth quarter of 2012. Local currency sales growth of 7% in the fourth quarter of 2013 benefited from strong growth in the emerging and developed markets, and follows 13% growth in the fourth quarter of 2012.
The flavors business unit reported that revenue increased 5%, or $16.5 million, to $343.0 million in the fourth quarter. Local currency sales increased 7% in the fourth quarter, driven by double-digit growth in the emerging markets, which accounted for 53% of flavors sales. Sales growth this quarter was supported by growth from new business wins and increased volume on existing business.
For the period, IFF reported that net income for the quarter totaled $61.5 million, compared to net income of $68.1 million in the prior year quarter. Net income in the fourth quarter of 2013 included a $9.1 million after-tax Spanish capital tax charge, a $1.9 million after-tax loss on the sale of a non-operating asset, and other costs associated with previously announced restructuring or improvement initiatives. Excluding the Spanish capital tax charge and other costs included in the reconciliation of income table from the current year’s results, adjusted net income increased 11% to $75.5 million from $68.1 million in the prior year quarter.
Local currency sales increased 7%, supported by 12% growth in Greater Asia and 10% growth in both Latin America and EAME.
Gross profit margins, as a percent of sales, improved to 43.2% from 42.2% in the fourth quarter of 2012.
Excluding previously announced restructuring and other improvement initiative costs from cost of goods sold, the adjusted gross profit margin increased 160 basis points to 43.8% from 42.2% in the prior year quarter. The improved performance reflects moderating input costs combined with the implementation of the company's strategic initiatives, including mix, innovation and cost reductions.
Research, selling and administrative (RSA) expenses, as a percent of sales, were 30.1% in the fourth quarter of 2013 compared with 27.6% in the fourth quarter of 2012. The current quarter RSA expense includes a $13 million pre-tax charge related to the Spanish capital tax case. Excluding the impact of the Spanish capital tax charge, adjusted RSA, as a percent of sales, increased 70 basis points to 28.3% compared with 27.6% in the prior year quarter, reflecting increased investment in R&D, increased incentive compensation accruals resulting from the company's strong full year 2013 performance, as well as $5 million to $6 million of non-structural expenses.
Operating profit in the fourth quarter totaled $94.9 million, compared with $99.2 million in the prior year quarter. Excluding $17.2 million of expenses primarily related to the Spanish capital tax case and other costs, adjusted operating profit increased approximately $13 million, or 13%, to $112 million from $99.2 million in the prior year quarter. Operating profit benefited from strong sales growth and gross margin enhancements, which offset higher RSA and incentive compensation accruals related to IFF's strong 2013 performance. Adjusted operating profit margin increased 80 basis points to 15.4% from 14.6% in the prior year quarter.
“We are very pleased with our fourth quarter performance, which benefited significantly from the diversity of our businesses and end-use categories in both the developed and emerging markets,” said Doug Tough, chairman and CEO of IFF. “The emerging markets continue to be a primary driver of our topline growth, and accounted for half of our consolidated sales and a majority of our top line local currency sales increase. This strong, continued growth further validates our emerging market strategy and is yet one more data point that underpins our commitment to these markets.”
He added, “We once again delivered local currency sales growth and adjusted operating profit improvements that exceeded our long-term targets, while continuing to make important investments in our people and portfolio to strengthen our company and position IFF for continued success.”