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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 September 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 November 6, 1998: 106,107,545
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
9/30/98 12/31/97
----------- -----------
Assets
Current Assets:
Cash & Cash Equivalents $ 142,138 $ 216,994
Short-term Investments 912 43,452
Trade Receivables 296,461 242,791
Allowance For Doubtful Accounts (8,504) (8,101)
Inventories: Raw Materials 233,736 193,136
Work in Process 7,267 13,593
Finished Goods 161,074 153,345
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Total Inventories 402,077 360,074
Other Current Assets 67,184 80,249
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Total Current Assets 900,268 935,459
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Property, Plant & Equipment, At Cost 878,923 810,901
Accumulated Depreciation (404,155) (364,392)
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474,768 446,509
Other Assets 42,056 40,293
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Total Assets $ 1,417,092 $ 1,422,261
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Bank Loans $ 28,572 $ 10,490
Accounts Payable-Trade 63,830 57,832
Dividends Payable 39,448 40,407
Income Taxes 59,929 56,070
Other Current Liabilities 106,006 100,062
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Total Current Liabilities 297,785 264,861
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Other Liabilities:
Deferred Income Taxes 23,102 23,139
Long-term Debt 3,131 5,114
Retirement and Other Liabilities 135,068 128,659
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Total Other Liabilities 161,301 156,912
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Shareholders' Equity:
Common Stock (115,761,840 shares issued) 14,470 14,470
Capital in Excess of Par Value 136,406 137,418
Restricted Stock (7,312) (9,000)
Retained Earnings 1,215,918 1,166,348
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment (13,468) (36,851)
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1,346,014 1,272,385
Treasury Stock, at cost - 9,388,545 shares in '98
and 6,630,911 in '97 (388,008) (271,897)
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Total Shareholders' Equity 958,006 1,000,488
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Total Liabilities and Shareholders' Equity $ 1,417,092 $ 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 9/30
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1998 1997
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Net Sales $349,846 $356,242
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Cost of Goods Sold 193,176 191,978
Research and Development Expenses 24,655 23,068
Selling and Administrative Expenses 58,256 54,913
Interest Expense 477 737
Other (Income) Expense, Net (1,447) (2,349)
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275,117 268,347
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Income Before Taxes on Income 74,729 87,895
Taxes on Income 24,480 31,180
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Net Income 50,249 56,715
Other Comprehensive Income:
Foreign Currency Translation Adjustments 38,661 (17,801)
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Comprehensive Income $ 88,910 $ 38,914
======== ========
Earnings Per Share - Basic $0.47 $0.52
Earnings Per Share - Diluted $0.47 $0.52
Average Number of Shares Outstanding - Basic (000's) 106,872 109,113
Average Number of Shares Outstanding - Diluted (000's) 107,054 109,844
Dividends Paid Per Share $0.37 $0.36
9 Months Ended 9/30
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1998 1997
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Net Sales $1,088,510 $1,120,525
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Cost of Goods Sold 586,653 603,326
Research and Development Expenses 72,950 70,137
Selling and Administrative Expenses 176,149 168,244
Interest Expense 1,395 1,914
Other (Income) Expense, Net (6,303) (8,917)
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830,844 834,704
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Income Before Taxes on Income 257,666 285,821
Taxes on Income 88,884 102,553
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Net Income 168,782 183,268
Other Comprehensive Income:
Foreign Currency Translation Adjustments 23,383 (61,073)
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Comprehensive Income $ 192,165 $ 122,195
========== ==========
Earnings Per Share - Basic $1.57 $1.68
Earnings Per Share - Diluted $1.57 $1.67
Average Number of Shares Outstanding - Basic (000's) 107,507 109,113
Average Number of Shares Outstanding - Diluted (000's) 107,845 109,844
Dividends Paid Per Share $1.11 $1.08
See Notes to Consolidated Financial Statements
3
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
9 Months Ended 9/30
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1998 1997
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Cash Flows From Operating Activities:
Net Income $ 168,782 $ 183,268
Adjustments to Reconcile to Net Cash
Provided by Operations:
Depreciation 36,291 37,511
Deferred Income Taxes 5,350 2,285
Changes in Assets and Liabilities:
Current Receivables (39,841) (64,215)
Inventories (29,178) (8,489)
Current Payables 13,616 25,716
Other, Net 3,260 6,096
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Net Cash Provided by Operations 158,280 182,172
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Cash Flows From Investing Activities:
Proceeds From Sales/Maturities of Short-term Investments 41,896 17,691
Purchases of Short-term Investments 0 (8,341)
Additions to Property, Plant & Equipment,
Net of Minor Disposals (56,651) (37,101)
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Net Cash Used in Investing Activities (14,755) (27,751)
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Cash Flows From Financing Activities:
Cash Dividends Paid to Shareholders (120,171) (118,321)
Increase in Bank Loans 17,038 166
Decrease in Long-term Debt (1,888) (1,908)
Proceeds From Issuance of Stock Under Stock Option Plans 3,899 14,124
Purchase of Treasury Stock (121,022) (63,689)
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Net Cash Used in Financing Activities (222,144) (169,628)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents 3,763 (12,704)
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Net Change in Cash and Cash Equivalents (74,856) (27,911)
Cash and Cash Equivalents at Beginning of Year 216,994 261,370
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Cash and Cash Equivalents at End of Period $ 142,138 $ 233,459
========= =========
Interest Paid $ 1,284 $ 1,814
Income Taxes Paid $ 75,243 $ 83,821
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 September 30, 1998 were as follows:
5
BALANCE AT UTILIZED BALANCE AT
12/31/97 IN 1998 9/30/98
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Employee related $ 2,024,000 $ 1,288,000 $ 736,000
Closing manufacturing plants 15,978,000 10,853,000 5,125,000
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Total $18,002,000 $12,141,000 $ 5,861,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OPERATIONS
Worldwide net sales for the third quarter of 1998 were $349,846,000, compared to
$356,242,000 in the 1997 third quarter. For the first nine months of 1998, net
sales totaled $1,088,510,000, compared to $1,120,525,000 for the nine month
period in 1997. In the current quarter, the Company achieved solid growth in
fragrance sales in North America, and double-digit sales growth in Latin America
fragrances. North America flavor sales rebounded sharply with an 11% sales
increase. These strong sales gains, however, were not sufficient to offset the
effects of the ongoing economic slowdown in the Far East and economic
difficulties in Russia and Latin America; the economic difficulties in Latin
America primarily impacted flavor sales. As a result, local currency sales for
the third quarter, as well as the nine months, were flat with the previous year.
Net income for the third quarter of 1998 totaled $50,249,000 compared to
$56,715,000 in the prior year third quarter; net income for the first nine
months of 1998 totaled $168,782,000 compared to $183,268,000 for the comparable
1997 period. Basic and diluted earnings per share for the current quarter were
both $.47, compared to $.52 in the prior year third quarter. Basic and diluted
earnings per share for the first nine months of 1998 both totaled $1.57,
compared to $1.68 and $1.67, 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 NINE MONTHS
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1998 1997
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Cost of Goods Sold 53.9% 53.8%
Research and Development Expenses 6.7% 6.3%
Selling and Administrative Expenses 16.2% 15.0%
Cost of goods sold and Research and Development expenses, as a percentage of net
sales, remained comparable over the two periods. Selling and
Administrative expenses increased as a percentage of sales primarily due to
costs of the Company's Year 2000 program, as well as certain costs incurred in
connection with preparation for the conversion to the Euro currency, effective
January 1, 1999, and the Company's ongoing project to implement the enterprise
requirements planning ("ERP") software package, SAP.
6
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 September 30, 1998 were as follows:
BALANCE AT UTILIZED BALANCE AT
12/31/97 IN 1998 9/30/98
----------- ----------- -----------
Employee related $ 2,024,000 $ 1,288,000 $ 736,000
Closing manufacturing plants 15,978,000 10,853,000 5,125,000
----------- ----------- -----------
Total $18,002,000 $12,141,000 $ 5,861,000
=========== =========== ===========
The effective tax rates for the third quarter and first nine months of 1998 were
32.8% and 34.5%, respectively, as compared to 35.5% and 35.9% for the comparable
periods in 1997. The lower effective 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 $143,050,000 at September 30,
1998. At September 30, 1998, working capital was $602,483,000 compared to
$670,598,000 at December 31, 1997. Gross additions to property, plant and
equipment during the first nine months of 1998 were $58,074,000.
In the first nine months of 1998, the Company repurchased approximately 2.9
million shares of common stock under its existing share repurchase program. At
September 30, 1998, approximately 4.0 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 each of the first three 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 September 30,
1998, was ($13,468,000) 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
YEAR 2000
The Company has instituted a comprehensive program to address its "Year 2000"
needs (the "Y2K Program"). The Y2K Program is currently on schedule to be
completed prior to January 1, 2000, and in most cases no later than September
30, 1999. The Y2K Program has been designed to evaluate and, if necessary, to
repair or replace those computer programs and embedded computer chips that are
significant to the Company and that use only the last two digits to refer to a
year ("Y2K Code"), so that such Y2K Code will be "Year 2000 Compliant," that is,
will recognize dates beginning in the Year 2000. For purposes of the Y2K
Program, Y2K Code is that which the Company concludes could, if not made Year
2000 Compliant, materially affect the Company's operations and ability to
service its customers, or create a safety or environmental risk. In addition to
dealing with the Company's Y2K Code, the Y2K Program also is designed to
identify and evaluate the Year 2000 readiness of the Company's key suppliers of
inventory and non-inventory goods and services, and of the Company's significant
customers.
The Y2K Program as it relates to the Company's computer programs and embedded
technology has five phases: (1) assessing computer programs and embedded
technology to identify Y2K Code; (2) assigning priorities to the identified Y2K
Code; (3) repairing or replacing Y2K Code to make such Y2K Code Year 2000
Compliant; (4) testing the repaired or replaced Y2K Code; and (5) developing and
implementing, if necessary, contingency plans to address the possibility that
the Company or third parties, whose operations or business could affect the
Company, do not become Year 2000 Compliant. The Company has engaged certain
outside consultants with recognized expertise in assessing and dealing with Year
2000 needs, principally Computer Sciences Corporation, to assist in the
management of the Y2K Program and in the repair and testing of certain Y2K Code.
The Y2K Program focuses on Y2K Code in three principal areas: (1)
infrastructure; (2) applications software; and (3) facility operations, where
the great majority of embedded technology is found. The infrastructure area
involves hardware and systems software other than applications software. As
hardware and systems software is repaired, upgraded or replaced, it is tested
to assure that it is Year 2000 Compliant. The Company expects the
infrastructure portion of the Y2K Program to be completed by June 1999.
Significant portions of the Company's application software will be replaced by
new software, principally SAP, an ERP software package. At September 30, 1998,
the global design for the SAP project was substantially complete, and the first
implementation, encompassing the Company's North American operations, is
anticipated to take place on May 1, 1999, its scheduled date under the SAP
project plans. Applications software Y2K Code not being replaced as part of the
SAP project is being repaired, upgraded or replaced (where an upgrade or
replacement is available from the supplier of such software) to make such Y2K
Code Year 2000 Compliant. This portion of the Y2K Program is expected to be
completed by September 30, 1999, consistent with the schedule established by the
Y2K Program.
Facility operations include hardware, software and associated embedded computer
chips used in the operation of facilities owned by the Company, including,
but not limited to, equipment used in manufacturing and research and
development, as well as security and other systems that may have
8
date sensitive operating controls. The Company is currently completing the
assessment of these systems to identify Y2K Code. This portion of the Y2K
Program is on schedule, and the Company expects it to be completed in the fourth
quarter of 1999.
The Company has identified its key suppliers of inventory and non-inventory
goods and services and has contacted them, in writing and in some cases through
face-to-face discussions, to ascertain the extent of their Year 2000 Compliance.
Similarly, the Company has also been communicating with significant customers
about their and the Company's Year 2000 Compliance plans and progress. This
portion of the Y2K Program is expected to be completed in the third quarter of
1999.
The total cost to the Company of the Y2K Program is expected to approximate $45
million of which $17 million has been expended at September 30, 1998. Of the Y2K
Program costs, approximately $21 million represents capital expenditures
associated with replacement hardware, software and associated items. The
remaining amount, approximately $24 million, represents the costs of
repair, testing and related efforts, and is being expensed as incurred. Of the
$17 million spent as of September 30, 1998, $8 million related to capital and
the balance of $9 million was expensed. These amounts do not include the
estimated cost of the SAP project.
The failure to make Y2K Code Year 2000 Compliant could result in an interruption
in, or failure of, certain business activities or operations, which could
materially and adversely affect the Company's results of operations, liquidity
and/or financial condition. The Company currently expects that the Company's Y2K
Code will be Year 2000 Compliant on or before December 31, 1999. Due to the
general uncertainty about the overall extent of the Year 2000 problem, however,
including, but not limited to, uncertainty about the extent of Year 2000
Compliance of the Company's suppliers and customers, the Company is unable
currently to determine whether the consequences of the failure of entities other
than the Company to be Year 2000 Compliant will have a material impact on the
Company's results of operations, liquidity or financial condition.
Subject to the above uncertainties, however, the Company believes that, with the
completion of the Y2K Program as scheduled, and with the implementation of SAP,
the likelihood of material interruptions of the Company's normal business should
be reduced. Notwithstanding the Company's belief, the Company is currently
unable to predict, and thus to describe, its most likely worst case Year 2000
scenario. To address the possibility that the Company or its suppliers,
customers, or other third parties are not successful in becoming Year 2000
Compliant, the Company has commenced development of contingency plans for the
critical aspects of its operations. Such plans will be designed to avoid or
mitigate potential serious disruptions in the Company's business and will be
refined and modified as the Company monitors and evaluates the progress of its
Y2K Program.
EURO CURRENCY ADOPTION
As part of the European Economic and Monetary Union (EMU), a single currency
(the "Euro") will replace the national currencies of most of the European
countries in which the Company conducts business. The conversion rates between
the Euro and the participating nations' currencies will be fixed irrevocably as
of January 1, 1999, with the participating national currencies being removed
9
from circulation between January 1, and June 30, 2002 and replaced by Euro notes
and coinage. During the "transition period" from January 1, 1999 through
December 31, 2001, public and private entities as well as individuals may pay
for goods and services using either checks, drafts, or wire transfers
denominated in Euro or the participating country's national currency.
The Company expects its systems and processes to be Euro "compliant" (able to
receive Euro denominated payments and able to invoice in Euro as requested by
suppliers and customers, respectively) by January 1, 1999 in the affected
countries. Conversion of its systems and processes to the Euro is currently
underway. The effects of the Euro conversion on the Company's revenues, costs
and competitive position, while currently still being assessed, are not expected
to be significant. The cost of systems and business process conversion is not
expected to be material.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Management's Discussion and Analysis which are not historical
facts or information are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to risks and
uncertainties that could cause IFF's actual results to differ materially from
those expressed or implied by such forward-looking statements. Risks and
uncertainties with respect to IFF's business include general economic and
business conditions, the price and availability of raw materials, the ability of
the Company and third parties, including customers or suppliers, to adequately
address the Year 2000, and political and economic uncertainties, including the
fluctuation or devaluation of currencies in countries in which IFF does
business.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number
10(a) Agreement dated June 23, 1998 between Registrant and
Carlos A. Lobbosco, Vice-President of Registrant.
10(b) Agreement dated July 27, 1998 between Registrant and
Stuart R. Maconochie, Vice-President of Registrant.
10(c) Agreement dated September 2, 1998 between Registrant and
David G. Bluestein, former director and Senior
Vice-President of Registrant.
27 Financial Data Schedule (EDGAR version only).
(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.
11
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: November 13, 1998 By: /s/ DOUGLAS J. WETMORE
---------------------------------------------
Douglas J. Wetmore, Vice-President and Chief
Financial Officer
Dated: November 13, 1998 By: /s/ STEPHEN A. BLOCK
---------------------------------------------
Stephen A. Block, Vice-President Law and Secretary