SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2001 Commission file number 1-4858
------------------------------------------------------------------
INTERNATIONAL FLAVORS & FRAGRANCES INC.
---------------------------------------
(Exact Name of Registrant as specified in its charter)
New York 13-1432060
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) identification No.)
521 West 57th Street, New York, N.Y. 10019-2960
- --------------------------------------------- -------------------
(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 |_|
Number of shares outstanding as of November 6, 2001: 94,823,475
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
9/30/01 12/31/00
----------- -----------
Assets
Current Assets:
Cash & Cash Equivalents $ 66,384 $ 128,869
Short-term Investments 406 369
Trade Receivables 377,753 343,294
Allowance For Doubtful Accounts (15,400) (11,074)
Inventories: Raw Materials 220,003 243,327
Work in Process 16,244 21,212
Finished Goods 183,716 170,773
----------- -----------
Total Inventories 419,963 435,312
Deferred Income Taxes 59,555 62,057
Other Current Assets 52,689 60,113
----------- -----------
Total Current Assets 961,350 1,018,940
----------- -----------
Property, Plant & Equipment, At Cost 1,065,035 1,141,301
Accumulated Depreciation (488,084) (461,427)
----------- -----------
576,951 679,874
----------- -----------
Intangible Assets, net 773,779 755,923
Other Assets 62,554 34,296
----------- -----------
Total Assets $ 2,374,634 $ 2,489,033
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Bank Loans $ 38,480 $ 43,633
Commercial Paper 267,676 809,352
Accounts Payable-Trade 76,235 75,021
Dividends Payable 14,274 14,614
Income Taxes 33,877 61,073
Other Current Liabilities 207,970 175,324
----------- -----------
Total Current Liabilities 638,512 1,179,017
----------- -----------
Other Liabilities:
Deferred Income Taxes 64,980 103,151
Long-term Debt 944,610 417,402
Retirement and Other Liabilities 185,859 158,204
----------- -----------
Total Other Liabilities 1,195,449 678,757
----------- -----------
Shareholders' Equity:
Common Stock 12 1/2 cent par value; authorized
500,000,000 shares; issued 115,761,840 shares 14,470 14,470
Capital in Excess of Par Value 127,892 133,041
Restricted Stock (1,481) --
Retained Earnings 1,248,397 1,204,561
Accumulated Other Comprehensive Income (Loss):
Cumulative Translation Adjustment (160,470) (77,578)
Accumulated Gains on Derivatives
Qualifying as Hedges 900 --
----------- -----------
1,229,708 1,274,494
Treasury Stock, at cost - 20,582,615 shares in '01
and 18,335,796 in '00 (689,035) (643,235)
----------- -----------
Total Shareholders' Equity 540,673 631,259
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,374,634 $ 2,489,033
=========== ===========
See Notes to Consolidated Financial Statements
2
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands except per share amounts)
(Unaudited)
3 Months Ended 9/30
-----------------------------
2001 2000
---- ----
Net Sales $ 462,719 $ 339,591
----------- -----------
Cost of Goods Sold 268,631 191,499
Research and Development Expenses 31,596 28,666
Selling and Administrative Expenses 72,545 62,181
Amortization of Goodwill and Other Intangibles 11,491 --
Nonrecurring Charges 8,869 7,685
Interest Expense 16,545 4,195
Other (Income) Expense, Net (1,864) 2,614
----------- -----------
407,813 296,840
----------- -----------
Income Before Taxes on Income 54,906 42,751
Taxes on Income 21,351 13,824
----------- -----------
Net Income 33,555 28,927
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments (5,306) (27,915)
Accumulated Gains on Derivatives
Qualifying as Hedges 2,676 --
----------- -----------
Comprehensive Income $ 30,925 $ 1,012
=========== ===========
Net Income Per Share - Basic $0.35 $0.29
Net Income Per Share - Diluted $0.35 $0.29
Average Number of Shares Outstanding - Basic 95,467 99,833
Average Number of Shares Outstanding - Diluted 96,746 99,833
Dividends Paid Per Share $0.15 $0.38
9 Months Ended 9/30
-----------------------------
2001 2000
---- ----
Net Sales $ 1,424,596 $ 1,078,262
----------- -----------
Cost of Goods Sold 822,276 599,738
Research and Development Expenses 102,504 82,423
Selling and Administrative Expenses 239,391 185,684
Amortization of Goodwill and Other Intangibles 34,246 --
Nonrecurring Charges 30,069 17,039
Interest Expense 56,479 9,406
Other (Income) Expense, Net (1,098) 2,488
----------- -----------
1,283,867 896,778
----------- -----------
Income Before Taxes on Income 140,729 181,484
Taxes on Income 53,897 59,865
----------- -----------
Net Income 86,832 121,619
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments (82,892) (43,143)
Accumulated Gains on Derivatives
Qualifying as Hedges 900 --
----------- -----------
Comprehensive Income (Loss) $ 4,840 $ 78,476
=========== ===========
Net Income Per Share - Basic $0.90 $1.19
Net Income Per Share - Diluted $0.89 $1.19
Average Number of Shares Outstanding - Basic 96,069 102,152
Average Number of Shares Outstanding - Diluted 97,022 102,169
Dividends Paid Per Share $0.45 $1.14
See Notes to Consolidated Financial Statements
3
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
9 Months Ended 9/30
-------------------------
2001 2000
--------- ---------
Cash Flows From Operating Activities:
Net Income $ 86,832 $ 121,619
Adjustments to Reconcile to Net Cash
Provided by Operations:
Depreciation and Amortization 93,183 44,732
Deferred Income Taxes (8,381) (12,743)
Changes in Assets and Liabilities:
Current Receivables (40,191) (14,694)
Inventories 3,543 37,947
Current Payables (11,963) 16,424
Other, Net (6,324) 17,939
--------- ---------
Net Cash Provided by Operations 116,699 211,224
--------- ---------
Cash Flows From Investing Activities:
Proceeds from Investments 8,229 1,614
Purchases of Investments (19,786) (1,111)
Additions to Property, Plant & Equipment (33,893) (49,425)
Proceeds from Disposal of Assets 5,718 4,696
--------- ---------
Net Cash Used in Investing Activities (39,732) (44,226)
--------- ---------
Cash Flows From Financing Activities:
Cash Dividends Paid to Shareholders (43,336) (117,600)
Increase in Bank Loans 1,171 18,257
Net Change in Commercial Paper Outstanding (541,677) 143,895
Net Proceeds from Long-term Debt 549,379 13,747
Repayments of Long-term Debt (48,679) (1,538)
Proceeds From Issuance of Stock Under Stock Option Plans 2,494 1,319
Purchase of Treasury Stock (55,954) (177,074)
--------- ---------
Net Cash Used in Financing Activities (136,602) (118,994)
--------- ---------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (2,850) (3,319)
--------- ---------
Net Change in Cash and Cash Equivalents (62,485) 44,685
Cash and Cash Equivalents at Beginning of Year 128,869 62,135
--------- ---------
Cash and Cash Equivalents at End of Period $ 66,384 $ 106,820
========= =========
Interest Paid $ 48,717 $ 7,238
Income Taxes Paid $ 75,737 $ 68,502
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 2000 Annual Report to
Shareholders. These interim statements are unaudited. In the opinion of the
Company's management, all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods have been made.
New Accounting Pronouncements:
Statement of Financial Accounting Standards No. 141 (FAS 141), Business
Combinations, was issued in June 2001. FAS 141 establishes accounting and
reporting standards for business combinations. The provisions of FAS 141 will
apply to all business combinations initiated after June 30, 2001.
Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and
Other Intangible Assets, was issued in June 2001 and is effective for fiscal
years beginning after December 15, 2001. FAS 142 eliminates goodwill
amortization and requires an evaluation of goodwill impairment upon adoption of
this standard, as well as subsequent evaluations on an annual basis, and more
frequently if circumstances indicate a possible impairment. Impairment, if any,
resulting from the initial application of the new standard will be classified as
a cumulative effect of a change in accounting principle. Subsequent impairments,
if any, would be classified as an operating expense. Under this standard, other
intangible assets that meet certain criteria will qualify for recognition on the
balance sheet and will continue to be amortized in the income statement.
Intangible assets with indefinite lives are not amortized and will be evaluated
on an annual basis, and more frequently if circumstances indicate a possible
impairment.
The Company is currently evaluating the impact of adoption of FAS 142 on its
recorded amount of goodwill and other intangible assets. Based on the
preliminary acquisition accounting at September 30, 2001, adoption of this
standard would eliminate annual amortization expense associated with goodwill of
approximately $33.0 million. Although this standard will increase the Company's
results of operations in the future due to the elimination of goodwill
amortization, any future impairment would result in a charge as discussed above.
Statement of Financial Accounting Standards No. 143 (FAS 143), Accounting
for Asset Retirement Obligations, was issued in June 2001. FAS 143 establishes
accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets. FAS 143 is effective for fiscal years
beginning after June 15, 2002 and the Company is evaluating the impact if any of
adopting this Standard.
Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting for
the Impairment or Disposal of Long-Lived Assets was issued in August 2001. FAS
144 establishes accounting and reporting standards for impairment of long-lived
assets to be disposed of. FAS 144 is effective for fiscal years beginning after
December 15, 2001. The impact of adopting this Standard is not expected to be
material.
Derivative Instruments and Hedging Activities:
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging
Activities. 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 effect of
adopting this Standard was not material.
5
The Company enters into various interest rate swaps with the objective of
managing and optimizing its interest rate exposure. On May 7, 2001, the Company
realized a net gain of $3.5 million on the $700.0 million notional amount of
U.S. Treasury lock hedges, which had been taken out in anticipation of the
issuance of the 6.45% Notes due 2006. These swaps were designated as qualified
cash flow hedges and the net gain is being amortized over the life of the Notes.
Following the five-year Notes offering, the Company entered into a $700.0
million notional amount swap on May 18, 2001 to effectively convert the 6.45%
coupon interest rate on the Notes to a short-term rate based upon three-month
LIBOR (London Interbank Borrowing Rate) plus an interest mark-up. Since notional
amount, fixed interest rate and the interest setting periods match the $700.0
million Note and coupon dates, the swap was designated as a fully effective,
qualified fair value hedge. During the third quarter the Company amended the
swap on four occasions, which changed the short-term LIBOR basis and the spread.
As a result of market conditions and these changes in the swaps, the
counter-party paid and the Company received in cash, $19.9 million, including
accrued swap interest of $3.3 million, during the quarter. The settlement,
excluding the accrued swap interest, will be amortized over the remaining life
of the Notes. As a result of these actions, the Company has reduced the
effective interest rate at September 30, 2001 on the 6.45% Notes to
approximately 4.8%. The Company has recorded the swap and the debt at fair value
resulting in an increase to Long-term Debt of $28.1 million and the recording of
corresponding swap assets of $15.2 million to Other Current Assets and $12.9
million to Other Assets. The Company has also designated this new swap as a
fully effective, qualified fair value hedge. The Company currently has no
ineffective interest rate swaps nor did it have any ineffective interest rate
swaps at September 30, 2001.
The Company enters into foreign currency forward contracts with the objective of
reducing exposure to cash flow volatility arising from foreign currency
fluctuations associated with certain foreign currency receivables and payables.
The notional amount and maturity dates of these contracts match those of the
underlying receivables or payables. The Company also enters into foreign
currency forward contracts to reduce cash flow volatility associated with
anticipated purchases of certain raw materials used in operations. At September
30, 2001, the Company had outstanding foreign currency forward contracts of
approximately $100.4 million. The Company has designated these contracts as
qualified fair value and cash flow hedges. Accordingly, the effective portion of
the gain or loss on the derivative instrument is reported as a component of
other comprehensive income and recognized in earnings in the same period or
periods during which the hedged transaction affects earnings. The Company had no
ineffective foreign currency forward contracts at September 30, 2001.
Nonrecurring and Other Charges:
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2000 Annual Report to Shareholders, in October 2000,
the Company announced a reorganization, including management changes, further
consolidation of production facilities and related actions. In connection with
this program, the Company recorded a nonrecurring charge of $8.9 million ($5.7
million after tax) in the third quarter 2001, related primarily to employee
separation costs and other reorganization activities. $4.1 million of this
charge related to a non-cash asset write-off. The majority of the pretax
nonrecurring charges recorded in the third quarter 2001 relate to operations in
North America, including corporate, ($5.4 million), Latin America ($1.4 million)
and Asia-Pacific ($2.1 million). For the first nine months of 2001, the Company
recorded nonrecurring charges of $30.1 million ($19.1 million after tax). The
year to date 2001 nonrecurring charges by area were North America, including
corporate, ($14.7 million), Asia-Pacific ($8.6 million), Europe ($2.0 million),
CAME ($2.2 million) and Latin America ($2.6 million). During the first nine
months 2001, approximately 320 employees have been affected by the program. The
total pretax cost of actions taken in connection with the reorganization,
including $31.9 million recorded in 2000, is expected to approximate $90.0
million to $100.0 million through the end of 2002. Certain costs associated with
the merger and the integration of BBA operations are accounted for as part of
the acquisition cost, and do not affect current earnings.
6
Movements in the accruals related to the nonrecurring charges were as follows
(in thousands):
Employee - Asset-Related
Related and Other Total
----------------------------------------
Balance December 31, 2000 $ 24,379 $ 2,053 $ 26,432
Additional Charges 10,083 19,986 30,069
Cash Costs in 2001 (13,159) (18,017) (31,176)
-------- -------- --------
Balance September 30, 2001 $ 21,303 $ 4,022 $ 25,325
======== ======== ========
The balance of the accrual is expected to be utilized in 2001 and 2002 in
connection with the final decommissioning and disposal of affected equipment and
as severance and other benefit obligations to affected employees are satisfied.
There have been no reversals of previously established reserves.
Segment Information:
The Company acquired Bush Boake Allen ("BBA"), effective November 3, 2000, and
BBA operating results are included in the Company's consolidated results from
that date.
As previously announced, effective January 1, 2001 the Company was reorganized
into five geographic regions with an individual manager responsible for each
region. The five regions include North America, Europe, the newly-constituted
Central Asia, Middle East ("CAME"), Latin America and Asia-Pacific; previously
Europe and CAME had been combined as one geographic region - Europe, Africa and
the Middle East ("EAME"). North and Latin America and Asia-Pacific were
unaffected by the geographic reorganization.
The Company's reportable segment information, based on geographic region,
follows. Certain prior year amounts have been reclassified for comparative
purposes to reflect the separation of EAME into the regions of Europe and CAME.
The Company evaluates the performance of its geographic areas based on operating
profit, excluding interest expense, other income and expense, certain
unallocated expenses, amortization of goodwill and other intangibles, the
effects of nonrecurring items and accounting changes, and income tax expense.
Three Months Ended September 30, 2001
- --------------------------------------------------------------------------------------------------------------------------------
North Latin Asia-
(Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $160,050 $155,233 $18,777 $63,978 $64,681 $ -- $462,719
Transfers between areas 21,421 35,077 168 590 4,210 (61,466) --
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $181,471 $190,310 $18,945 $64,568 $68,891 $(61,466) $462,719
================================================================================================================================
Operating profit $ 26,847 $ 37,787 $ 3,341 $14,936 $15,746 $ 143 $ 98,800
===================================================================================================================
Corporate and other unallocated
expenses (8,853)
Amortization of goodwill and
other intangibles (11,491)
Nonrecurring charges (8,869)
Interest expense (16,545)
Other income (expense), net 1,864
--------
Income before taxes on income $ 54,906
================================================================================================================================
7
Three Months Ended September 30, 2000
- --------------------------------------------------------------------------------------------------------------------------------
North Latin Asia-
(Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $112,994 $125,051 $5,762 $47,533 $48,251 $ -- $339,591
Transfers between areas 12,904 29,047 -- 555 4,153 (46,659) --
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $125,898 $154,098 $5,762 $48,088 $52,404 $(46,659) $339,591
================================================================================================================================
Operating profit $ 11,890 $ 38,389 $1,033 $ 7,351 $ 9,039 $ 214 $ 67,916
===================================================================================================================
Corporate and other unallocated
expenses (10,671)
Nonrecurring charges (7,685)
Interest expense (4,195)
Other income (expense), net (2,614)
--------
Income before taxes on income $ 42,751
================================================================================================================================
Nine Months Ended September 30, 2001
- --------------------------------------------------------------------------------------------------------------------------------
North Latin Asia-
(Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $481,813 $493,692 $59,124 $187,226 $202,741 $ -- $1,424,596
Transfers between areas 65,423 107,668 2,511 1,247 12,777 (189,626) --
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $547,236 $601,360 $61,635 $188,473 $215,518 $(189,626) $1,424,596
================================================================================================================================
Operating profit $ 70,857 $123,207 $11,188 $ 42,217 $ 48,662 $ (904) $ 295,227
===================================================================================================================
Corporate and other unallocated
expenses (34,802)
Amortization of goodwill and
other intangibles (34,246)
Nonrecurring charges (30,069)
Interest expense (56,479)
Other income (expense), net 1,098
----------
Income before taxes on income $ 140,729
================================================================================================================================
Nine Months Ended September 30, 2000
- --------------------------------------------------------------------------------------------------------------------------------
North Latin Asia-
(Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $348,940 $401,176 $16,853 $160,547 $150,746 $ -- $1,078,262
Transfers between areas 40,520 91,647 4 1,323 10,346 (143,840) --
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $389,460 $492,823 $16,857 $161,870 $161,092 $(143,840) $1,078,262
================================================================================================================================
Operating profit $ 46,272 $128,699 $ 3,325 $ 30,417 $ 31,361 $ 537 $ 240,611
===================================================================================================================
Corporate and other unallocated
expenses (30,194)
Nonrecurring charges (17,039)
Interest expense (9,406)
Other income (expense), net (2,488)
----------
Income before taxes on income $ 181,484
================================================================================================================================
Net Income Per Share:
Options to purchase 3,404,047 and 4,414,882 shares were outstanding for the
third quarter and the first nine months of 2001, respectively, and for 6,047,955
and 5,181,829 for the third quarter and first nine months of 2000, respectively,
but were not included in the computation of diluted net income per share because
the options' exercise prices were greater than the average market price of the
common shares in the respective periods.
8
Comprehensive Income:
The accumulated comprehensive income component of Shareholders' Equity,
comprised principally of the cumulative translation adjustment, at September 30,
2001, was ($159.6 million) compared to ($77.6 million) at December 31, 2000.
Changes in the cumulative translation adjustment 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. Included in the cumulative translation adjustment at September 30,
2001 is the effect of the previously disclosed change in functional currency for
certain subsidiaries from the U.S. dollar to local currency, effective January
1, 2001. Accumulated gains on derivatives qualifying as hedges totaled $0.9
million at September 30, 2001 and are also included in the accumulated
comprehensive income component of Shareholders' Equity.
Acquisition of Bush Boake Allen Inc.:
On November 3, 2000, the Company acquired all of the outstanding shares of Bush
Boake Allen Inc. ("BBA") for $48.50 per share in cash; total consideration paid,
including transaction costs, approximated $970.0 million.
The acquisition was accounted for under the purchase method and,
accordingly, the purchase price has been preliminarily allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. Final determination of the purchase price, as well as its
allocation to the net assets acquired, is not complete as of September 30, 2001
pending the final valuation of tangible and intangible assets acquired. Such
valuation was substantially complete in November and will be reflected in the
fourth quarter. The excess of the purchase price over the estimated value of
tangible and identified intangible assets acquired is recorded as goodwill, and
is being amortized on a straight-line basis over 20 years. Other intangible
assets include patents, trademarks and other intellectual property owned or
developed by BBA, the value of which is being amortized over periods ranging
from 7 to 20 years. At September 30, 2001, goodwill and other intangible assets,
net of accumulated amortization, was $773.8 million compared to $755.9 million
at December 31, 2000. The increase in goodwill and other intangible assets
relates to further quantification of certain liabilities assumed in connection
with the merger, primarily associated with the integration of the BBA operations
into the Company.
The Company has established accruals relating primarily to employee separation
costs, facility closure costs and other actions relating to the integration of
certain BBA operations into IFF. Costs associated with these integration actions
are recognized as a component of the purchase accounting resulting in an
adjustment to goodwill; such costs do not directly impact current earnings.
Movements in the accruals related to the acquisition accounting effects were as
follows (in thousands):
Employee - Asset-Related
Related and Other Total
---------------------------------------
Balance December 31, 2000 $ 4,103 $ 10,330 $ 14,433
Additional Charges 41,588 25,353 66,941
Cash Costs in 2001 (23,096) (17,006) (40,102)
-------- -------- ---------
Balance September 30, 2001 $ 22,595 $ 18,677 $ 41,272
======== ======== =========
The following unaudited pro-forma results of operations give effect to the BBA
acquisition as if it had occurred as of January 1, 2000. These pro-forma results
do not purport to be indicative of the results that would have actually been
obtained if the BBA acquisition had occurred as of the beginning of the period
presented or that may be obtained in the future.
3 Months Ended 9 Months Ended
(Dollars in thousands except per share amounts) 9/30/00 9/30/00
------------------------------------------------------------------------------------------------
Net sales $459,804 $1,436,511
Net income 19,055 84,803
Net income per share-basic $0.19 $0.83
Net income per share-diluted $0.19 $0.83
9
Restricted Stock:
In January 2001, the Company awarded approximately 190,000 IFF Stock Units
("Units") to eligible employees in exchange for surrender of their "under water"
stock options. The Units vest, in four equal installments, over not more than a
seven-year period, upon the Company's Common Stock attaining successively higher
market price targets beginning at $22.50 per share, and earn dividend
equivalents as and when cash dividends are paid. Compensation expense is
recognized over the Units' vesting period. In the first nine months of 2001, the
first two market price targets were achieved and, accordingly, 50% of these
Units vested. Compensation expense of $1.6 million was recognized and is
included in operating expenses. The remaining unvested Units are reported as
Restricted Stock on the Company's Consolidated Balance Sheet.
Borrowings:
At September 30, 2001, the Company's total debt outstanding was $1,250.8
million, consisting of $916.5 million long-term debt, $306.2 million short-term
debt and $28.1 million in a mark to market adjustment on the interest rate swaps
included in long-term debt. Long-term debt included $700.0 million of 6.45%
Notes due May 15, 2006, which were issued May 2, 2001 in the U.S. 144A private
placement market and on October 17 exchanged for new certificates that have been
registered under the Securities Act of 1933, as amended, for a like principal
amount of the Company's issued and outstanding 6.45% Notes due 2006 from the
registered holders thereof. As a result of the interest rate swaps discussed in
the Notes to Consolidated Financial Statements, the Company's effective interest
rate on the 6.45% Notes is 4.8%. The Company has in place a five-year EURO 140
million credit facility underwritten by a major European financial institution.
The facility has a four-year fixed term component and a five-year revolving
credit component. The Company's intent is to have the borrowing in place for the
full term of the agreement. Long-term debt included $105.9 million (EURO 115.0
million) under this facility. Interest on this debt will not exceed the
applicable LIBOR base rate plus 1.4%. The Company also borrowed 11.8 billion Yen
($99.1 million) in the U.S. from a major financial institution. This bank
borrowing has been classified as long-term as the Company expects to convert
this to a 7-year note held by its Japanese subsidiary. The remainder of the
long-term debt is primarily in the Asia-Pacific region. Proceeds from the
issuance of long-term debt were used to reduce commercial paper outstanding.
Short-term debt included $267.7 million of commercial paper outstanding at
September 30, 2001 at an average interest rate of 3.71%. Commercial paper
maturities at September 30, 2001 did not extend beyond November 2, 2001.
Additional short-term bank borrowings of $38.5 million were held in various
countries, primarily in the Europe, Latin America and Asia-Pacific regions.
The Company has resyndicated its revolving credit facility, which is used
primarily as a backstop for the U.S. commercial paper program. Effective
September 26, 2001, the Company replaced all prior facilities with a $500.0
million credit facility. This facility contains $300.0 million five-year and
$200.0 million 364-day portions. There were no amounts drawn under this
facility. The Company compensates the banks participating in this credit
facility in the form of fees, the amounts of which are not significant.
Intangible Assets, net:
(Dollars in thousands) 9/30/01 12/31/00
----------------------------------------------------
Goodwill $658,862 $563,897
Trademarks and other 160,829 199,058
-------- --------
819,691 762,955
Accumulated amortization 45,912 7,032
-------- --------
$773,779 $755,923
======== ========
Changes in the value of intangibles reflect adjustments of the preliminary
allocation of the BBA purchase price as recorded at December 31, 2000.
Reclassifications:
Certain reclassifications have been made to the prior year's financial
statements to conform to 2001 classifications.
Subsequent Events:
On October 8, 2001 the Company announced an agreement in principle for the J.M.
Smucker Company to acquire its United States and Brazilian formulated fruit and
vegetable preparation businesses. The businesses have combined annual sales of
$28 million. The products are sold primarily to bakeries and dairies for the
manufacture of yogurts and baked goods. The transaction was completed on October
22, 2001, with proceeds used to reduce commercial paper borrowings.
10
On October 25, 2001, the Company announced that its management is exploring the
strategic alternatives for its fruit and vegetable preparation business in
Europe and has engaged an investment banker to assist in this process. This
business manufactures processed fruit and other natural product preparations
that are used in a wide variety of food products, including baked goods and
dairy products. Annual sales are approximately $70 million.
Item 2. Management's Discussion and Analysis of Results of Operations and
- -------------------------------------------------------------------------
Financial Condition
- -------------------
Operations
- ----------
Worldwide net sales for the third quarter of 2001 were $462.7 million, compared
to reported sales in the third quarter 2000 of $339.6 million. The Company
acquired BBA effective November 3, 2000; BBA's sales and operating results are
included in the Company's consolidated results. On a pro-forma basis, third
quarter 2000 sales of the combined Company totaled $459.8 million.
On a local currency basis, consolidated third quarter 2001 sales increased
approximately 3% in comparison to the third quarter 2000 pro-forma sales.
However, the local currency sales gains were unfavorably impacted on translation
into the continuing strong U.S. dollar, resulting in an increase of 1% in
reported dollars on a pro-forma basis. For the quarter, there was an approximate
5% unfavorable exchange effect on translating European results into the U.S.
dollar, and a 6% unfavorable effect on translation of Asia-Pacific results.
Local currency sales increases were strongest in North America and Latin America
with growth of 4% and 9%, respectively. Asia-Pacific was flat in local currency
reflecting weak economic conditions in Japan as well as political uncertainties
in the Philippines and Indonesia. European sales declined 1% for the quarter
reflecting continued weakness in the major European markets.
For the first nine months of 2001, worldwide net sales totaled $1,424.6 million,
compared to prior year comparable period reported sales of $1,078.3 million. On
a pro-forma basis, net sales for the nine-month period ended September 30, 2000
totaled $1,436.5 million. Local currency sales for the nine months ended
September 30, 2001 were strongest in Latin America where sales increased 3%.
North America, Europe and Asia-Pacific each achieved a 2% increase in local
currency. CAME sales declined 3% in relation to the comparable 2000 period. Had
exchange rates been the same for the first nine months of 2001 and 2000, on a
pro-forma basis, sales would have increased 2%.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the third quarter 2001 and 2000, respectively, are detailed below.
The pro-forma information presented in the table below reflects operating
expenses as a percent of sales as though the acquisition of BBA had taken place
as of January 1, 2000.
Third Quarter
-------------
IFF Alone Pro-Forma
2001 2000 2000
---- ---- ----
Cost of Goods Sold 58.1% 56.4% 58.3%
Research and Development Expenses 6.8% 8.4% 7.7%
Selling and Administrative Expenses 15.7% 18.3% 18.4%
The above table reflects the reclassification of shipping and handling costs for
2000 (both reported and pro-forma) from Selling expense to Cost of goods sold in
accordance with guidance established by Emerging Issues Task Force Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs." The amount
reclassified in the third quarter 2000 was $4.0 million.
Cost of goods sold, as a percentage of net sales, decreased from the prior year
pro-forma percentage due to integration savings offset somewhat by lower gross
profit margins resulting from a change in product mix.
Research and development expenses in the quarter decreased as a percentage of
sales.
11
Selling and administrative expenses on a pro-forma basis declined in the third
quarter as the benefits of the BBA integration were realized.
Net income for the third quarter of 2001 totaled $33.6 million compared to
reported net income of $28.9 million in the third quarter of 2000. The results
for 2001 and 2000 include the effects of certain nonrecurring charges discussed
below. Excluding such charges, net income for the third quarter 2001 and 2000
was $39.2 million and $33.7 million, respectively. On a pro-forma basis, third
quarter 2000 net income totaled $19.1 million including nonrecurring charges,
and $23.8 million excluding such charges.
The effective tax rate for the third quarter of 2001 was 38.9% compared to the
reported 32.3% for the third quarter 2000. The pro-forma effective tax rate was
39.1% for the third quarter 2000. The higher effective tax rate in 2001 compared
to the 2000 reported rate results from the amortization of goodwill which is not
deductible for purposes of determination of the Company's taxable income.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first nine months 2001 and 2000, respectively, are detailed
below. The pro-forma information presented in the table below reflects operating
expenses as a percent of sales as though the acquisition of BBA had taken place
as of January 1, 2000.
First Nine Months
-----------------
IFF Alone Pro-Forma
2001 2000 2000
---- ---- ----
Cost of Goods Sold 57.7% 55.6% 57.6%
Research and Development Expenses 7.2% 7.6% 7.2%
Selling and Administrative Expenses 16.8% 17.2% 17.9%
The above table reflects the reclassification of shipping and handling costs for
2000 (both reported and pro-forma) from Selling expense to Cost of goods sold in
accordance with guidance established by Emerging Issues Task Force Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs." The amount
reclassified in the first nine months of 2000 was $11.9 million.
Cost of goods sold, as a percentage of net sales, did not vary significantly
from the prior year pro-forma results.
Research and development expenses for the nine-month period were on target
compared to the pro-forma expenses. Selling and administrative expenses on a
pro-forma basis declined in the nine-month period as the benefits of the BBA
integration were realized.
Net income for the first nine months of 2001 totaled $86.8 million compared to
net income in the first nine months of 2000 of $121.6 million. The amounts for
the first nine months of 2001 and 2000 include the effects of certain
nonrecurring charges discussed below. Excluding such charges, net income for the
first nine months of 2001 and 2000 was $105.9 million and $132.6 million,
respectively. Pro-forma net income for the first nine months of 2000 was $84.8
million including nonrecurring charges, and $95.8 million excluding such
charges.
The effective tax rate was 38.3% for the first nine months of 2001 compared to a
reported 33.0% for the first nine months 2000, and the pro-forma effective tax
rate was 38.5% for the first nine months of 2000. The higher effective tax rate
in 2001 compared to the 2000 reported rate results from the amortization of
goodwill which is not deductible for purposes of determination of the Company's
taxable income.
12
Nonrecurring and Other Charges:
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2000 Annual Report to Shareholders, in October 2000,
the Company announced a reorganization, including management changes, further
consolidation of production facilities and related actions. In connection with
this program, the Company recorded a nonrecurring charge of $8.9 million ($5.7
million after tax) in the third quarter 2001, related primarily to employee
separation costs and other reorganization activities. $4.1 million of this
charge related to a non-cash asset write-off. The majority of the pretax
nonrecurring charges recorded in the third quarter 2001 relate to operations in
North America, including corporate, ($5.4 million), Latin America ($1.4 million)
and Asia-Pacific ($2.1 million). For the first nine months of 2001, the Company
recorded nonrecurring charges of $30.1 million ($19.1 million after tax). The
year to date 2001 nonrecurring charges by area were North America, including
corporate, ($14.7 million), Asia-Pacific ($8.6 million), Europe ($2.0 million),
CAME ($2.2 million) and Latin America ($2.6 million). During the first nine
months 2001, approximately 320 employees have been affected by the program. The
total pretax cost of actions taken in connection with the reorganization,
including $31.9 million recorded in 2000, is expected to approximate $90.0
million to $100.0 million through the end of 2002. Certain costs associated with
the merger and the integration of BBA operations are accounted for as part of
the acquisition cost, and do not affect current earnings.
Movements in the accruals related to the nonrecurring charges were as follows
(in thousands):
Employee - Asset-Related
Related and Other Total
--------------------------------------
Balance December 31, 2000 $ 24,379 $ 2,053 $ 26,432
Additional Charges 10,083 19,986 30,069
Asset Write-offs and Cash Costs
in 2001 (13,159) (18,017) (31,176)
-------- -------- --------
Balance September 30, 2001 $ 21,303 $ 4,022 $ 25,325
======== ======== ========
The balance of the accrual is expected to be utilized in 2001 and 2002 in
connection with the final decommissioning and disposal of affected equipment and
as severance and other benefit obligations to affected employees are satisfied.
There have been no reversals of previously established reserves.
Acquisition of Bush Boake Allen Inc.:
On November 3, 2000, the Company acquired all of the outstanding shares of Bush
Boake Allen Inc. ("BBA") for $48.50 per share in cash; total consideration paid,
including transaction costs, approximated $970.0 million.
The acquisition was accounted for under the purchase method and, accordingly,
the purchase price has been preliminarily allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Final determination of the purchase price, as well as its
allocation to the net assets acquired, is not complete as of September 30, 2001
pending the final valuation of tangible and intangible assets acquired. Such
valuation was substantially complete in November and will be reflected in the
fourth quarter. The excess of the purchase price over the estimated value of
tangible and identified intangible assets acquired is recorded as goodwill, and
is being amortized on a straight-line basis over 20 years. Other intangible
assets include patents, trademarks and other intellectual property owned or
developed by BBA, the value of which is being amortized over periods ranging
from 7 to 20 years. At September 30, 2001, goodwill and other intangible assets,
net of accumulated amortization, was $773.8 million compared to $755.9 million
at December 31, 2000. The increase in goodwill and other intangible assets
relates to further quantification of certain liabilities assumed in connection
with the merger, primarily associated with the integration of the BBA operations
into the Company.
The Company has established accruals relating primarily to employee separation
costs, facility closure costs and other actions relating to the integration of
certain BBA operations into IFF. Costs associated with these integration actions
are recognized as a component of the purchase accounting resulting in an
adjustment to goodwill; such costs do not directly impact current earnings.
13
Movements in the accruals related to the acquisition accounting effects were as
follows (in thousands):
Employee - Asset-Related
Related and Other Total
---------------------------------------
Balance December 31, 2000 $ 4,103 $ 10,330 $ 14,433
Additional Charges 41,588 25,353 66,941
Asset Write-offs and Cash Costs
in 2001 (23,096) (17,006) (40,102)
-------- -------- ---------
Balance September 30, 2001 $ 22,595 $ 18,677 $ 41,272
======== ======== =========
Pro-Forma Financial Data:
The following unaudited pro-forma income statement gives effect to the BBA
acquisition as if it had occurred as of January 1, 2000. These pro-forma results
do not purport to be indicative of the results that would have actually been
obtained if the BBA acquisition had occurred as of the beginning of the period
presented or that may be obtained in the future.
Pro-Forma
3 Months Ended 9 Months Ended
(Amounts in thousands) 9/30/00 9/30/00
- ----------------------------------------------------------------------------------------
Net Sales $ 459,804 $1,436,511
---------- ----------
Cost of Goods Sold 268,021 827,756
Research and Development Expenses 35,435 103,183
Selling and Administrative Expenses 84,700 257,068
Amortization of Goodwill and Other Intangibles 10,548 31,644
Nonrecurring Charges 7,685 17,039
Interest Expense 20,878 59,590
Other (income) expense, net 1,234 2,375
---------- ----------
428,501 1,298,655
---------- ----------
Income Before Taxes on Income 31,303 137,856
Taxes on Income 12,248 53,053
---------- ----------
Net Income $ 19,055 $ 84,803
========== ==========
Net Income per share-basic $0.19 $0.83
Net Income per share-diluted $0.19 $0.83
The Company's pro-forma reportable segment information, based on geographic
area, for the three months ended September 30, 2000 follows. The pro-forma
reportable segment information gives effect to the BBA acquisition as if it had
occurred as of January 1, 2000.
- --------------------------------------------------------------------------------------------------------------------------------
Pro-Forma (includes BBA) North Latin Asia-
2000 (Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $156,048 $159,898 $21,248 $53,392 $69,218 $ -- $459,804
Transfers between areas 19,085 36,049 233 555 4,164 (60,086) --
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $175,133 $195,947 $21,481 $53,947 $73,382 $(60,086) $459,804
================================================================================================================================
Operating profit $ 19,327 $ 41,041 $ 4,274 $ 7,809 $12,470 $ 275 $ 85,196
===================================================================================================================
Corporate and other unallocated
expenses (13,548)
Amortization of goodwill and
other intangibles (10,548)
Nonrecurring charges (7,685)
Interest expense (20,878)
Other income (expense), net (1,234)
--------
Income before taxes on income $ 31,303
================================================================================================================================
14
The Company's pro-forma reportable segment information, based on geographic
area, for the nine months ending September 30, 2000 follows. The pro-forma
reportable segment information gives effect to the BBA acquisition as if it had
occurred as of January 1, 2000.
- --------------------------------------------------------------------------------------------------------------------------------
Pro-Forma (includes BBA) North Latin Asia-
2000 (Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $475,029 $506,516 $63,972 $177,081 $213,913 $ -- $1,436,511
Transfers between areas 59,819 112,823 766 1,323 10,381 (185,112) --
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $534,848 $619,339 $64,738 $178,404 $224,294 $(185,112) $1,436,511
================================================================================================================================
Operating profit $ 67,998 $136,221 $12,754 $ 31,283 $ 41,380 $ 720 $ 290,356
===================================================================================================================
Corporate and other unallocated
expenses (41,852)
Amortization of goodwill and
other intangibles (31,644)
Nonrecurring charges (17,039)
Interest expense (59,590)
Other income (expense), net (2,375)
----------
Income before taxes on income $ 137,856
================================================================================================================================
Financial Condition
- -------------------
Cash, cash equivalents and short-term investments totaled $66.8 million at
September 30, 2001. Working capital, at September 30, 2001 was $322.8 million
compared to $409.9 million at December 31, 2000, excluding commercial paper used
to finance the BBA acquisition. Gross additions to property, plant and equipment
during the third quarter and first nine months of 2001 were $13.7 million and
$33.9 million, respectively.
At September 30, 2001, the Company's outstanding commercial paper had an
effective interest rate of 3.71%. Commercial paper maturities did not extend
beyond November 2, 2001. Long-term debt increased $549.4 million in the first
nine months of 2001 due to the issuance of $700.0 million of 6.45% five-year
notes in the 144A private placement market on May 2, 2001 offset by commercial
paper classified as noncurrent at December 31, 2000. On October 17, 2001, the
Company exchanged the five-year notes for new certificates that have been
registered under the Securities Act of 1933, as amended, for a like principal
amount of the Company's issued and outstanding 6.45% Notes due 2006 from the
registered holders thereof. As a result of the interest rate swaps discussed in
the Notes to Consolidated Financial Statements, the Company's effective interest
rate on the 6.45% Notes is 4.8%. The Company has in place a five-year EURO 140
million credit facility underwritten by a major European financial institution.
The facility has a four-year fixed term component and a five-year revolving
credit component. The Company's intent is to have borrowing in place for the
full term of the agreement. Long-term debt included $105.9 million (EURO 115.0
million) under this facility. Interest on this debt will not exceed the
applicable LIBOR base rate plus 1.4%. Proceeds from long-term debt were used to
reduce commercial paper outstanding. The company also borrowed 11.8 billion Yen
($99.1 million) in the U.S. from a major financial institution. This bank
borrowing has been classified as long-term as the company intends to convert
this to a 7-year note to be held by its Japanese subsidiary. As discussed in
Note 8 of the Notes to the Consolidated Financial Statements in the Company's
2000 Annual Report to Shareholders, the Company classified $400.0 million of
commercial paper as noncurrent in the December 31, 2000 consolidated balance
sheet.
The Company has resyndicated its revolving credit facility, which is used
primarily as a backstop for the U.S. commercial paper program. Effective
September 26, 2001, the Company replaced all prior facilities with a $500.0
million credit facility. This facility contains $300.0 million five-year and
$200.0 million 364-day portions. There were no amounts drawn under this
facility. The Company compensates the banks participating in this credit
facility in the form of fees, the amounts of which are not significant.
In each of January, April and July 2001, the Company paid a quarterly cash
dividend of $.15 per share to shareholders. The Company repurchased
approximately 2.4 million shares in the first nine months of 2001. Repurchases
will be made from time to time on the open market or through private
transactions as market and business conditions warrant. The repurchased shares
will be available for use in connection with the Company's employee benefit
plans and for other general corporate purposes. At September 30, 2001, the
Company has approximately $74.6 million available under its September 2000
repurchase plan.
The Company anticipates that its financing requirements will be funded from
internal sources and credit facilities currently in place.
15
Subsequent Events:
On October 8, 2001 the Company announced an agreement in principle for the J.M.
Smucker Company to acquire its United States and Brazilian formulated fruit and
vegetable preparation businesses. The businesses have combined annual sales of
$28 million. The products are sold primarily to bakeries and dairies for the
manufacture of yogurts and baked goods. The transaction was completed on October
22, 2001, with proceeds used to reduce commercial paper borrowings.
On October 25, 2001, the Company announced that its management is exploring the
strategic alternatives for its fruit and vegetable preparation business in
Europe and has engaged an investment banker to assist in this process. This
business manufactures processed fruit and other natural product preparations
that are used in a wide variety of food products, including baked goods and
dairy products. Annual sales are approximately $70 million.
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 the Company's actual results to differ materially
from those expressed or implied by such forward-looking statements. Risks and
uncertainties with respect to the Company's business include general economic
and business conditions, interest rates, the price and availability of raw
materials, and political and economic uncertainties, including the fluctuation
or devaluation of currencies in countries in which the Company does business.
The Company intends its forward-looking statements to speak only as of the time
of such statements, and does not undertake to update or revise them as more
information becomes available.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
There are no material changes from the disclosures in Form 10-K filed with the
Securities and Exchange Commission as of December 31, 2000.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
10(a) 364-day Credit Agreement dated as of September 26, 2001 among
the Company, as Borrower, certain Initial Lenders, Citibank
N.A., as Administrative Agent, and Salomon Smith Barney Inc.,
as Arranger.
10(b) Five Year Credit Agreement dated as of September 26, 2001
among the Company, as Borrower, certain Initial Lenders,
Citibank N.A., as Administrative Agent, and Salomon Smith
Barney Inc., as Arranger.
10(c) Credit agreement dated as of September 27, 2001 by and between
the Company and Bank of Tokyo-Mitsubishi Trust Company.
(b) Reports on Form 8-K
Registrant filed the following reports on Form 8-K since the
beginning of the quarter for which this report on Form 10-Q is
filed:
. Report on Form 8-K dated October 5, 2001 containing the
Company's position and statement related to a purported class
action filed in Jasper County, Missouri.
17
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 14, 2001 By: /S/ DOUGLAS J. WETMORE
----------------------------------------------
Douglas J. Wetmore, Senior Vice President and
Chief Financial Officer
Dated: November 14, 2001 By: /S/ STEPHEN A. BLOCK
----------------------------------------------
Stephen A. Block, Senior Vice President,
General Counsel and Secretary
EXHIBIT INDEX
Number Description
------ -----------
10(a) 364-day Credit Agreement dated as of September 26, 2001 among
the Company, as Borrower, certain Initial Lenders, Citibank
N.A., as Administrative Agent, and Salomon Smith Barney Inc., as
Arranger
10(b) Five Year Credit Agreement dated as of September 26, 2001 among
the Company, as Borrower, certain Initial Lenders, Citibank
N.A., as Administrative Agent, and Salomon Smith Barney Inc., as
Arranger
10(c) Credit Agreement dated as of September 27, 2001 by and between
the Company and Bank of Tokyo-Mitsubishi Trust Company