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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998
Commission file number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
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(Exact Name of Registrant as specified in its charter)
NEW YORK 13-1432060
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
521 WEST 57TH STREET, NEW YORK, N.Y. 10019-2960
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Number of shares outstanding as of August 10, 1998: 107,199,495
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
6/30/98 12/31/97
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ASSETS
Current Assets:
Cash & Cash Equivalents ................................ $ 150,055 $ 216,994
Short-term Investments ................................. 11,908 43,452
Trade Receivables ...................................... 296,161 242,791
Allowance For Doubtful Accounts ........................ (8,279) (8,101)
Inventories: Raw Materials ............................. 211,032 193,136
Work in Process ........................... 6,908 13,593
Finished Goods ............................ 157,804 153,345
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Total Inventories ......................... 375,744 360,074
Other Current Assets ................................... 68,968 80,249
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Total Current Assets ................................... 894,557 935,459
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Property, Plant & Equipment, At Cost ...................... 825,491 810,901
Accumulated Depreciation .................................. (377,197) (364,392)
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448,294 446,509
Other Assets .............................................. 41,798 40,293
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Total Assets .............................................. $1,384,649 $1,422,261
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Loans ............................................. $ 16,280 $ 10,490
Accounts Payable-Trade ................................. 62,095 57,832
Dividends Payable ...................................... 39,856 40,407
Income Taxes ........................................... 64,591 56,070
Other Current Liabilities .............................. 98,245 100,062
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Total Current Liabilities .............................. 281,067 264,861
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Other Liabilities:
Deferred Income Taxes .................................. 20,664 23,139
Long-term Debt ......................................... 3,900 5,114
Retirement and Other Liabilities ....................... 131,253 128,659
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Total Other Liabilities ................................... 155,817 156,912
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Shareholders' Equity:
Common Stock (115,761,840 shares issued in '98
and in '97) ......................................... 14,470 14,470
Capital in Excess of Par Value ......................... 136,495 137,418
Restricted Stock ....................................... (7,874) (9,000)
Retained Earnings ...................................... 1,205,117 1,166,348
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment ................... (52,129) (36,851)
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1,296,079 1,272,385
Treasury Stock, at cost -- 8,324,845 shares in '98
and 6,630,911 in '97 ................................ (348,314) (271,897)
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Total Shareholders' Equity ............................. 947,765 1,000,488
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Total Liabilities and Shareholders' Equity ................ $1,384,649 $1,422,261
========== ==========
See Notes to Consolidated Financial Statements
2
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands except per share amounts)
3 Months Ended 6/30
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1998 1997
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Net Sales .......................................... $365,253 $381,470
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Cost of Goods Sold ................................. 195,270 204,055
Research and Development Expenses .................. 24,445 23,496
Selling and Administrative Expenses ................ 60,520 57,001
Interest Expense ................................... 459 618
Other (Income) Expense, Net ........................ (1,584) (2,497)
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279,110 282,673
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Income Before Taxes on Income ...................... 86,143 98,797
Taxes on Income .................................... 30,236 35,488
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Net Income ......................................... 55,907 63,309
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Other Comprehensive Income:
Foreign Currency Translation Adjustments ........ (4,331) (13,145)
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Comprehensive Income ............................... $ 51,576 $ 50,164
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Earnings Per Share -- Basic ........................ $0.52 $0.58
Earnings Per Share -- Diluted ...................... $0.52 $0.57
Dividends Paid Per Share ........................... $0.37 $0.36
6 Months Ended 6/30
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1998 1997
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Net Sales .......................................... $738,664 $764,283
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Cost of Goods Sold ................................. 393,477 411,348
Research and Development Expenses .................. 48,295 47,069
Selling and Administrative Expenses ................ 117,893 113,331
Interest Expense ................................... 918 1,177
Other (Income) Expense, Net ........................ (4,856) (6,568)
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555,727 566,357
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Income Before Taxes on Income ...................... 182,937 197,926
Taxes on Income .................................... 64,404 71,373
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Net Income ......................................... 118,533 126,553
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Other Comprehensive Income:
Foreign Currency Translation Adjustments ........ (15,278) (43,272)
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Comprehensive Income ............................... $103,255 $ 83,281
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Earnings Per Share -- Basic ........................ $1.10 $1.16
Earnings Per Share -- Diluted ...................... $1.10 $1.15
Average Number of Shares Outstanding -- Basic ...... 107,825 109,170
Average Number of Shares Outstanding -- Diluted .... 108,241 109,599
Dividends Paid Per Share ........................... $0.74 $0.72
See Notes to Consolidated Financial Statements
3
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
6 Months Ended 6/30
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................... $ 118,533 $ 126,553
Adjustments to Reconcile to Net Cash
Provided by Operations:
Depreciation ................................... 23,960 24,765
Deferred Income Taxes .......................... 2,216 (2,071)
Changes in Assets and Liabilities:
Current Receivables .......................... (55,415) (80,435)
Inventories .................................. (19,453) 5,522
Current Payables ............................. 15,377 26,421
Other, Net ................................... 3,591 360
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Net Cash Provided by Operations .................... 88,809 101,115
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Sales/Maturities of
Short-term Investments ........................... 30,898 14,573
Purchases of Short-term Investments ................ 0 (4,900)
Additions to Property, Plant & Equipment,
Net of Minor Disposals ........................... (30,961) (24,131)
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Net Cash Used in Investing Activities .............. (63) (14,458)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Dividends Paid to Shareholders ................ (80,315) (79,021)
Increase in Bank Loans ............................. 6,136 3,979
Decrease in Long-term Debt ......................... (1,082) (1,008)
Proceeds From Issuance of Stock Under
Stock Option Plans ............................... 3,503 7,389
Purchase of Treasury Stock ......................... (80,843) (59,752)
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Net Cash Used in Financing Activities .............. (152,601) (128,413)
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Effect of Exchange Rate Changes on Cash
and Cash Equivalents ............................. (3,084) (11,085)
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Net Change in Cash and Cash Equivalents ............ (66,939) (52,841)
Cash and Cash Equivalents at Beginning of Year ..... 216,994 261,370
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Cash and Cash Equivalents at End of Period ......... $ 150,055 $ 208,529
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Interest Paid ...................................... $ 850 $ 1,090
Income Taxes Paid .................................. $ 48,455 $ 46,816
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes, and management's discussion and analysis of results of operations
and financial condition included in the Company's 1997 Annual Report to
Shareholders. In the opinion of the Company's management, all normal recurring
adjustments necessary for a fair statement of the results for the interim
periods have been made.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS 130), Reporting Comprehensive Income, which is effective
for both interim and annual periods ending after December 15, 1997. FAS 130
establishes standards for the reporting and display of comprehensive income and
its components, and requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement, and display the
accumulated balance of other comprehensive income separately in the statement of
financial position. Taxes which would result from dividend distributions by
subsidiary companies are provided to the extent such dividends are anticipated;
no provision is made for additional taxes on undistributed earnings of
subsidiary companies which are intended to be permanently invested. As a result,
no income tax effect is attributable to the currency translation component of
Comprehensive Income. Prior year amounts have been reclassified for
comparability purposes.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (FAS 131), Disclosures about Segments of an Enterprise and
Related Information, which is effective for periods ending after December 15,
1997. This statement need not be applied to interim financial statements in the
initial year of application. FAS 131 establishes standards for the way public
business enterprises report information about operating segments in reports to
shareholders. The Company's 1998 Annual Report to Shareholders will reflect the
adoption of this standard.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 1999. FAS 133 establishes accounting and reporting
standards for derivative instruments, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company is currently studying the implications of FAS 133.
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 1997 Annual Report to Shareholders, the Company
undertook a program to expand and streamline its aroma chemical production
facilities during 1996. The aroma chemical streamlining resulted in a
nonrecurring pretax charge to second quarter 1996 earnings of $49,707,000
($31,315,000 after tax or $.29 per share). Utilization of the reserve in 1998
and the remaining reserve balance at June 30, 1998 were as follows:
5
Balance at Utilized Balance at
12/31/97 in 1998 6/30/98
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Employee related ................. $ 2,024,000 $ 966,000 $ 1,058,000
Closing manufacturing plants ..... 15,978,000 6,933,000 9,045,000
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Total ............................ $18,002,000 $7,899,000 $10,103,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OPERATIONS
Worldwide net sales for the second quarter of 1998 were $365,253,000, compared
to $381,470,000 in the 1997 second quarter. For the first six months of 1998,
net sales totaled $738,664,000, compared to $764,283,000 for the six month
period in 1997. Sales in the second quarter and the first six months of 1998
were unfavorably affected on translation of local currency sales into the
stronger U.S. dollar; the unfavorable currency effect approximated 3% in the
second quarter, and 4% for the six month period. In addition, the ongoing
economic disruption in the Far East adversely affected the Company's results,
partially offsetting local currency gains realized in other operating areas of
the world.
Net income for the second quarter of 1998 totaled $55,907,000 compared to
$63,309,000 in the prior year second quarter; net income for the first six
months of 1998 totaled $118,533,000 compared to $126,553,000 for the comparable
1997 period. Basic and diluted earnings per share for the quarter were both $.52
compared to $.58 and $.57, respectively, in the prior year second quarter; basic
and diluted earnings per share for the first six months of 1998 both totaled
$1.10 compared to $1.16 and $1.15, respectively, for the comparable 1997 period.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first half 1998 and 1997 are detailed below.
FIRST HALF
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1998 1997
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Cost of Goods Sold ........................ 53.3% 53.8%
Research and Development Expenses ......... 6.5% 6.2%
Selling and Administrative Expenses ....... 16.0% 14.8%
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 1997 Annual Report to Shareholders, the Company
undertook a program to expand and streamline its aroma chemical production
facilities during 1996. The aroma chemical streamlining resulted in a
nonrecurring pretax charge to second quarter 1996 earnings of $49,707,000
($31,315,000 after tax or $.29 per share). Utilization of the reserve in 1998
and the remaining reserve balance at June 30, 1998 were as follows:
Balance at Utilized Balance at
12/31/97 in 1998 6/30/98
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Employee related ................ $ 2,024,000 $ 966,000 $ 1,058,000
Closing manufacturing plants .... 15,978,000 6,933,000 9,045,000
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Total ........................... $18,002,000 $7,899,000 $10,103,000
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6
The effective tax rates for the second quarter and first six months of 1998 were
35.1% and 35.2%, respectively, as compared to 35.9% and 36.1% for the comparable
periods in 1997. The lower effective tax rate reflects the effects of lower tax
rates in various tax jurisdictions in which the Company operates.
FINANCIAL CONDITION
The financial condition of the Company continued to be strong. Cash, cash
equivalents and short-term investments totaled $161,963,000 at June 30, 1998. At
June 30, 1998, working capital was $613,490,000 compared to $670,598,000 at
December 31, 1997. Gross additions to property, plant and equipment during the
first half of 1998 were $32,084,000.
In the first half of 1998, the Company repurchased approximately 1.8 million
shares of common stock under its existing share repurchase program. At June 30,
1998, approximately 2.9 million shares of common stock had been repurchased
under the plan authorized in September 1996.
In January 1998, the Company's cash dividend was increased to an annual rate of
$1.48 per share from $1.44 in 1997, and $.37 per share was paid to shareholders
in both the first and second quarters of 1998. The Company anticipates that its
growth, capital expenditure programs and share repurchase program will be funded
from internal sources.
The accumulated comprehensive income component of Shareholders' Equity,
comprised principally of the cumulative translation adjustment, at June 30,
1998, was ($52,129,000) compared to ($36,851,000) at December 31, 1997. Changes
in the component result from translating the net assets of the majority of the
Company's foreign subsidiaries into U.S. dollars at current exchange rates as
required by the Statement of Financial Accounting Standards No. 52 on accounting
for foreign currency translation.
7
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) 1998 Annual Meeting
At the annual meeting of Registrant's shareholders held Thursday, May 14, 1998,
at which 99,138,110 shares, or 91.9%, of Registrant's Common Stock were
represented in person or by proxy, the 11 nominees for director of Registrant,
as listed in Registrant's proxy statement dated March 30, 1998 previously filed
with the Commission, were duly elected to Registrant's Board of Directors. There
was no solicitation of proxies in opposition to these nominees. Subsequently,
however, Brian D. Chadbourne resigned effective as of June 1, 1998 as a director
and Senior Vice-President of Registrant.
(b) 1999 Annual Meeting - Notice to Shareholders
If any shareholder of Registrant intends to present a proposal at the next
annual meeting of shareholders of Registrant but not to include the proposal in
the Registrant's Proxy Statement and form of proxy with respect to that meeting
and fails to notify the Registrant of such proposal prior to February 13, 1999,
then the management proxies will be allowed to use their discretionary voting
authority when the proposal is raised at the annual meeting, without any
discussion of the matter in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number
10(a) Agreement dated July 2, 1998 between Registrant and Brian D.
Chadbourne, former director and Senior Vice-President of
Registrant.
27.1 Financial Data Schedule (EDGAR version only).
27.2 Financial Data Schedule for the years ended December 31, 1995 and
1996 (EDGAR version only) which have been restated for the
adoption of Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which requires a dual presentation of basic
and diluted earnings per share.
27.3 Financial Data Schedule for the three months ended March 31,
1996, the six months ended June 30, 1996 and the nine months
ended September 30, 1996 (EDGAR version only) which have been
restated for the adoption of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, which requires a dual
presentation of basic and diluted earnings per share.
27.4 Financial Data Schedule for the three months ended March 31,
1997, the six months ended June 30, 1997 and the nine months
ended September 30, 1997 (EDGAR version only) which have been
restated for the adoption of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, which requires a dual
presentation of basic and diluted earnings per share.
(b) Reports on Form 8-K
Registrant filed no report on Form 8-K during the quarter for which
this report on Form 10-Q is filed.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: August 14, 1998 By: /s/ DOUGLAS J. WETMORE
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Douglas J. Wetmore, Vice-President and Chief
Financial Officer
Dated: August 14, 1998 By: /s/ STEPHEN A. BLOCK
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Stephen A. Block, Vice-President Law and Secretary