Exhibit 13
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ANNUAL REPORT FOR 2001
Relationships.
2001 Annual Report
IFF International Flavors & Fragrances Inc.
IFF. Reinvention.
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Industry leaders reach and remain at the top of their businesses through a
process of constant reinvention. They know that true leadership means never
being satisfied with the status quo. Never resting on one's laurels. Always
staying a few steps ahead of consumers' changing tastes and preferences.
Maintaining the relationships - inside and outside the company - that will
ensure their innovations have the desired impact in the marketplace. At IFF, our
continuous renewal is built on four strategic cornerstones: Creativity;
Innovation; Global, Regional and Local Expertise; and Customer Service.
Excellence in all four of these areas is what will allow us to reaffirm our
place as the undisputed leader in the flavors and fragrances industry. It is
also the foundation for our future growth.
Innovation.
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At IFF, we are in the business of making magic. Of finding that precise place
where art and science meet to create something that captivates the senses,
energizes the body and soothes the soul. What's more, we know that magic can
happen anywhere. In water. In space. And everywhere in between. If it's out
there, we'll find it. And we'll find a way to bring it to consumers the world
over.
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Global...
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With IFF's new organizational structure, no customer is too big or too small.
Wherever our customers want and need us to be, that's where we'll be.
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Regional...
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It is not enough to provide seamless, efficient, consistent service worldwide.
We also need deep insight into the vastly differing tastes and habits of
consumers in each of the markets we serve.
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Local expertise.
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IFF understands that even in a global company, all business is local. That is
why we live and work in the communities we serve. And that is why we're
committed corporate citizens. After all, our colleagues are also our consumers.
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Creativity.
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Creativity hardly ever happens in a vacuum. The greatest ideas may take seed in
the mind of an individual, but they bloom best when nurtured by others. Teamwork
and collaboration are at the heart of IFF's success. That means scientists
partnering with perfumers and flavorists. Living legends coaching our newcomers.
Relationships built across oceans, time zones, languages barriers and cultures.
IFF working hand in glove with customers from idea generation to marketplace
launch.
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Service.
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Superior service is absolutely fundamental to IFF's success. When we talk about
getting back to the basics that made us industry pioneers, customer service is
the first and last word. What constitutes service excellence? On-time delivery,
to be sure. But just as important are innovation, consumer insight, efficiency
and true creative partnership.
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IFF. Reinvention.
Creativity:
Vision. Consumer insights and benefits. Health and well-being. Raising the bar.
Trend-setting leadership. Rising stars. Sensory science. Strategic alliances.
Research and development. Value added. Mentors, teachers and partners. Winning
together in the marketplace. Reinvention.
Innovation:
Hydroponics. Botanical collection. Naturals. Training and development. Perfumery
school. Project Foresight. Open communication. Teamwork. One IFF. Space rose.
Technology. Enhancing the senses. Reinvention.
Global, Regional and Local Expertise:
Environmental, health and safety leadership. Regional creativity centers.
Developed and emerging markets. Corporate philanthropy. Global sourcing and
supply chain. Delivering consumer preferences. Reinvention.
Customer Service:
Operational excellence. Satisfaction levels. Creative partnerships. The Pursuit
of Excellence. Integration. Leadership. Continuous improvement. Celebrating our
successes. Keeping our promises. Rewarding Results. Reinvention.
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To Our Shareholders:
2001 was a year of tremendous change for IFF. After announcing a global
reorganization and the acquisition of Bush Boake Allen (BBA) nearly
simultaneously in the fall of 2000, many wondered if we had bitten off more than
we could chew. I must say that the same concern crossed my mind as well.
But the truth is that we needed to reinvent IFF if we were to reaffirm our
industry preeminence. Even if we could have selected an "easier" time to merge
with BBA, that is not how acquisitions work. We took advantage of an excellent
opportunity to strengthen our business and, frankly, the task of integrating two
large organizations has been an ideal catalyst for change that was long overdue
at our Company.
2001 Achievements - Making Progress
IFF had three critical goals for 2001:
- -- To successfully reorganize our Company and integrate BBA.
- -- To improve customer service and increase our win rate.
- -- To implement company-wide incentive plans that align co-worker and
shareholder interests.
I am happy to report that we have made significant progress on all fronts.
Reorganization and Integration
We are on track to deliver our anticipated reorganization and integration
savings. We have taken great strides toward rationalizing our global facilities
and have consolidated 16 operations during the year. Production been transferred
as planned with virtually no disruption in service and no diminution in quality.
Indeed, many locations are already showing the benefits expected from our
stronger operational team. This process will accelerate in 2002, and surviving
operations will be more productive, with capacity utilization and return on
assets improving markedly.
We have already seen substantial savings from our efforts through the year and
continued progress is expected in 2002. Achieving these savings is critical,
particularly given the difficult global economic climate. Even more important,
however, is the fact that our reorganization and integration have enabled us to
go to market and service our customers as One IFF.
Customer Service - Winning in the Marketplace
Professionally speaking, 2001 will stand out for me as the year IFF got back to
basics and remembered that "The Customer is King." And the proof is in the
pudding. Service levels are up dramatically. Satisfaction levels are way up,
too.
It is important to note that there was nothing inherent in our business model
that was preventing us from providing excellent service. It's all about
attitude. And it's all about understanding that it is the customer that counts.
Our customers have noticed our change in attitude, our team spirit, and they
like what they see.
Is our customer service as good as it needs to be? Not yet. But our improved
record, combined with a renewed focus on Research & Development, is leading to
increased win rates - especially in those parts of the business that needed it
most - North American Flavors and global Fine Fragrances.
Aligning Co-worker and Shareholder Interests
For the first time ever, through a global initiative we rolled out called
Rewarding Results, every one of our co-workers is focused on delivering
shareholder value. From the factory floor to the executive suite, everyone has a
chance to earn a bonus based on a combination of individual and company-wide
performance. This year's incentive compensation has been tied to three
fundamental metrics - underlying volume growth, gross profit improvement, and
improved operating cash flow - all of which help drive shareholder value.
We also launched our Global Employee Stock Purchase Plan. Response has been
quite strong, and more of our colleagues than ever are now shareholders.
The Road Ahead - Moving in the Right Direction
Despite a global recession, the effects of which were exacerbated by the
terrible events of September 11, 2001, IFF delivered on its promises and
finished out the year on solid footing. We saw very modest underlying volume
growth, but we did deliver an impressive 25%+ increase in earnings over 2000 pro
forma results.
When we set out to rebuild IFF, we know the process would take three to five
years. With that as a reference, I look at 2001 as a very good beginning. Our
improved win rate and increased customer satisfaction levels bode well for IFF.
What's more, we are confident that the actions we have been taking to streamline
our business and realize operational efficiencies will provide a solid
foundation on which to chart our future success.
For 2002, our critical objectives will be completing our reorganization and
integration and redoubling efforts to drive top-line growth. These tasks
certainly will not be easy. Ongoing weakness in the global economy will continue
to have an impact on our Fine Fragrances business, at least through the first
half of the year. But, let's remember that two-thirds of our business is in
everyday household, personal care and packaged food products that are impacted
much less in recessionary times.
2002 will bring still more change to IFF, but I am confident that our Company is
headed in the right direction. And I am confident that we are up to the task.
As we move forward, I make the following committments:
- - To our customers: to make further progress on delivering the best products
and services you need to drive your own success, and to deliver them when,
where and how you want them.
- - To our co-workers: to reaffirm our preeminence through The Pursuit of
Excellence.
- - To our shareholders: to maximize value by completing our integration at the
same time as we aggressively explore traditional and nontraditional avenues
to drive top-line growth.
Together, I know we can reach our goals. Thank you for your support.
Finally, Carlos Lobbosco, our Executive Vice President of Global Business
Development and Board member, is retiring after 27 years of outstanding service
to IFF. While IFF will not be the same after Carlos leaves, it is a testimony to
his management strength and long-term planning that he is leaving behind such a
capable team of Global Category and Regional Managers. On behalf of the Company
and all of its shareholders, I express our deep gratitude to Carlos Lobbosco for
his distinguished service to IFF.
Sincerely,
/s/ Richard A. Goldstein
Richard A. Goldstein
Chairman of the Board and
Chief Executive Officer
IFF. Teams.
[ 1 ] [ 2 ]
[ 3 ] [ 4 ]
[ 5 ] [ 6 ]
1. (from left to right)
Stephen A. Block
Senior Vice President
General Counsel and Secretary
Douglas J. Wetmore
Senior Vice President and
Chief Financial Officer
2. (from left to right)
Roberto J. Gordon
Vice President
Global Business Development -
Fragrances
Neil Humphreys
Vice President
Global Business Development -
Flavors
Nicolas Mirzayantz
Vice President
Global Business Development -
Fine Fragrances and Toiletries
3. (from left to right)
Clint D. Brooks, Ph.D.
Vice President
Research & Development
pictured with a senior perfumer
4. (from left to right)
Gail S. Belmuth
Vice President
Corporate Communications
Steven J. Heaslip
Vice President
Global Human Resources
5. (from left to right)
Richard A. Goldstein
Chairman and
Chief Executive Officer
D. Wayne Howard
Executive Vice President
Global Operations
6. (from left to right)
Carlos A. Lobbosco
Executive Vice President
Global Business Development
Julian W. Boyden
Executive Vice President
[ 1 ]
[ 2 ]
[ 3 ]
1. (from left to right)
Yves Calderone Junior Perfumer
Lois Evans Vice President and Senior Perfumer
Bruno Jovanovic Apprentice Perfumer
Christine Baillifard Perfumer
Sophie Walster Apprentice Perfumer
Carlos Benaim Vice President and Senior Perfumer
Jean-Marc Chaillan Perfumer
Sherri Sebastian Apprentice Perfumer
Mary Shroff Perfumer
Pascal Gaurin Junior Perfumer
Sophia Grojsman Corporate Vice President and Senior Perfumer
Yves Cassar Perfumer
Dennis Maroney Perfumer
Joe Ramasammy Junior Perfumer
2. (from left to right)
Bob Peterson Manager Process Flavor Creation
Brian Grainger Director, Flavor Creation
Gary Conklin Senior Flavorist
Carmellita Ventura Perez Flavorist
Dave Heltzel Flavorist
Dennis Kujawski Senior Flavorist
John Yurecko Senior Flavorist
Richard Bobula Flavorist
John Wright VP Global Technical Business Development
Richard Vuich Senior Process Flavorist
Marion Sudol Senior Flavorist
Patty Valente Senior Flavorist
Marie Wright Senior Flavorist
Tobjy Thompson Senior Flavorist
Pei Fen Wu Flavorist
Mario Grabowski Trainee Flavorist
Martin Ongteco Trainee Flavorist
Kevin Miller Senior Flavorist
3. (back row from left to right)
Lynne Pipe Senior Perfumer
Veronique Tropini Trainee Perfumer
Fred Tabak Vice President and Senior Perfumer
Remco de Meijiere Senior Perfumer
Philip Hausel Vice President and Senior Perfumer
Hubert Smyrek Perfumer
Jan van Elst Vice President and Senior Perfumer
Jan Fockenbrock Perfumer
(in front from left to right)
Gaby Joustra Perfumer
Nathalie Le Cann Perfumer
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IFF WORLDWIDE LOCATIONS
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Sales Creative
Office Manufacturing Laboratory
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NORTH AMERICA
Canada/Toronto o o o
USA/Augusta, GA o
USA/Carrollton, TX o o o
USA/Chicago, IL o o o
USA/Hazlet, NJ o o o
USA/Jacksonville, FL o o o
USA/Menomonee Falls, WI o
USA/New York, NY* o o
USA/Salem, OR o o
USA/South Brunswick, NJ o o o
USA/Union Beach, NJ o o
LATIN AMERICA
Argentina/Garin o o o
Brazil/Rio de Janeiro o
Brazil/Sao Paulo o o
Brazil/Taubate o o
Columbia/Bogota o o
Mexico/Tlalnepantla (Mexico City) o o o
ASIA-PACIFIC
Australia/Melbourne o o o
Australia/Castle Hill (Sydney) o o
China/Beijing o
China/Guangzhou o o o
China/Hong Kong o
China/Shanghai o o
China/Xin'anjiang (Hangzhou) o o
Indonesia/Jakarta o o o
Japan/Gotemba o
Japan/Osaka o
Japan/Tokyo o o
Korea/Seoul o o
New Zealand/Auckland o o o
Phillippines/Manila o o o
Singapore o o
Singapore/Jurong o o
Thailand/Bangkok o o o
INDIAN SUBCONTINENT
India/Bangalore o
India/Calcutta o
India/Chennai o o o
India/Chittoor o
India/Delhi o
India/Mumbai o o
Pakistan/Karachi o o o
EUROPE
Bulgaria/Sofia o
Czech Republic/Prague o
Egypt/Cairo o o o
France/Bois-Colombes (Paris) o o
France/Dijon o o o
France/Grasse o o o
Germany/Emmerich/Rhein o o o
Germany/Hamburg o
Ireland/Drogheda o
Israel/Tel Aviv o
Italy/Milan o o
The Netherlands/Hilversum o o
The Netherlands/Tilburg o
Norway/Oslo o
Poland/Warsaw o o
Russia/Moscow o
Slovakia/Bratislava o
South Africa/Johannesburg o o o
Spain/Barcelona o o
Spain/Benicarlo o o
Spain/Madrid o
Sweden/Knislinge o o
Switzerland/Reinach-Aargau o o o
Turkey/Istanbul o o
United Kingdom/Haverhill o o o
United Kingdom/London o
United Kingdom/Long Melford o o
United Kingdom/Witham o o
Zimbabwe/Harare o
*Global Headquarters
Names in () indicate nearest large city
IFF International Flavors & Fragrances Inc.
Global Headquarters
521 West 57th Street New York, NY 10019
T 212 765 5500 www.iff.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
International Flavors & Fragrances Inc.
(All dollars in millions except per share amounts)
OPERATIONS
The Company acquired Bush Boake Allen (BBA) effective November 3, 2000; BBA
operating results are included in the Company's consolidated results from that
date. Consolidated sales as reported and pro-forma sales for IFF and BBA
combined, as applicable, for 2001, 2000 and 1999 were as follows (pro-forma
sales are prepared as though the Company and BBA had been combined on January
1,1999):
Reported Percent Reported Percent Reported
Consolidated sales 2001 Change 2000 Change 1999
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Flavors $ 835.7 40% $ 597.7 1% $ 590.3
Fragrances 1,008.1 17% 865.1 2% 849.2
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Total net sales $ 1,843.8 26% $ 1,462.8 2% $ 1,439.5
==================================================================================
Reported Percent Pro-forma Percent Pro-forma
Consolidated sales 2001 Change 2000 Change 1999
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Flavors $ 835.7 (1%) $ 846.7 (4%) $ 879.0
Fragrances 1,008.1 (2%) 1,033.9 (2%) 1,052.4
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Total net sales $ 1,843.8 (2%) $ 1,880.6 (3%) $ 1,931.4
==================================================================================
Excluding BBA, 2000 flavor, fragrance and worldwide net sales were
$558.6, $838.3 and $1,396.9, respectively.
Sales outside the United States represented approximately 70% of total
sales in 2001, 2000 and 1999. The following table shows sales on a geographic
basis, including BBA from date of acquisition:
Percent Percent
Sales by Destination 2001 Change 2000 Change 1999
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North America $ 597.1 31% $ 455.4 1% $ 452.6
Europe 576.6 22% 471.7 (4%) 492.4
Central Asia, Middle East (CAME) 127.4 59% 80.1 10% 72.8
Latin America 256.5 9% 234.9 1% 232.9
Asia-Pacific 286.2 30% 220.7 17% 188.8
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Total net sales $ 1,843.8 26% $ 1,462.8 2% $ 1,439.5
==================================================================================
During 2001, the Company's sales increased 26% in comparison to 2000
reported sales. Sales for 2001 declined 2% in comparison to 2000 pro-forma
sales. Reported sales were unfavorably impacted by the continuing strong U.S.
dollar, most notably against the Euro and the major European currencies, the
Japanese Yen and the Australian dollar. Had dollar exchange rates remained the
same during 2001 and 2000, sales would have increased 1% for the full year 2001
in comparison to the prior year pro-forma sales.
Reported sales for 2001 were also impacted by the disposition of
certain non-core operations, specifically the Company's North American and
Brazilian fruit preparations businesses, and a portion of the aroma chemicals
business acquired in the BBA transaction. These dispositions, part of IFF's
previously announced reorganization plan, occurred during the fourth quarter
2001. In 2000, these businesses had net sales of $81.0; in 2001, for the period
owned by the Company, sales were $61.0. Excluding revenue from these busi-
nesses in both 2000 and 2001, sales growth for the full year 2001 would have
been approximately 1% higher. Disposal of these businesses did not materially
impact the Company's earnings.
Compared to 2000 pro-forma results, 2001 fragrance sales were led by
Latin America, with an increase of 2%. Asia-Pacific fragrance sales were flat in
local currency while North America, Europe and CAME reported local currency
sales declines of 3%, 2% and 8%, respectively. The global economic environment,
further aggravated by the events of September 11, 2001, impacted fine fragrance
sales. Fragrance sales were also impacted by lower global demand for aroma
chemicals. Flavor sales, in local currency, were strongest in North America,
Asia-Pacific and Europe, with respective increases of 3%, 3% and 2%. Flavor
sales in Latin America declined 9% from the prior year, while CAME flavor sales
were down 4% for the year. The North America performance reflects the benefits
of the IFF/BBA integration and improved demand for our products. The Europe
increase is a result of new wins and a stable performance in our existing prod-
uct portfolio. Latin America declined as a result of double-digit decreases in
Brazil and Argentina, reflecting the weak economic conditions in these
countries. Excluding the fruit preparation and aroma chemicals businesses
disposed of during the year from both 2001 and 2000 sales, North America flavor
sales in 2001 would have increased approximately 6% in comparison to 2000, Latin
America flavors would have decreased 6% and Europe fragrances would have
decreased 1% in local currency in relation to 2000.
Excluding BBA, 2000 sales by destination and related comparison to
1999 were: North America $433.1 (4% decline), Europe $451.1
(8% decline), CAME $72.9 (flat), Latin America $231.3 (1% decline) and
Asia-Pacific $208.5 (10% increase).
During 2000, excluding BBA, the Company's sales declined 3% in
comparison to 1999. Reported sales were unfavorably impacted by the strong U.S.
dollar, most notably against the Euro and the major Western European currencies;
had dollar exchange rates remained the same during 2000 and 1999, reported sales
would have increased 2% for the full year 2000. Local currency fragrance sales
growth was strongest in North America, Europe, Asia-Pacific and CAME with 3%,
6%, 8% and 14% increases, respectively. Latin America sales declined 2%
reflecting the slow economic environment in much of that region. Europe,
Asia-Pacific, Latin America and CAME flavors reported local currency sales
increases of 2%, 9%, 2% and 10%, respectively. North America flavor sales
declined 12% reflecting the slow business conditions facing many of the
Company's customers in that region.
Although the Company's reported sales and earnings are affected by the
weakening or strengthening of the U.S. dollar, this has no long-term effect on
the underlying strength of our business.
The percentage relationship of cost of goods sold and other oper-
ating expenses to sales was as follows. The pro-forma information presented
reflects the final acquisition accounting adjustments completed in 2001.
Pro-forma
2001 2000 1999 2000
Cost of goods sold 57.7% 56.9% 56.0% 58.5%
Research and
development
expenses 7.3% 7.7% 7.2% 7.3%
Selling and
administrative
expenses 17.0% 17.7% 17.2% 18.1%
=========================================
The increases in cost of sales in 2001 compared to 2000, and 2000
compared to 1999, are primarily attributable to the acquisition of BBA and
unfavorable absorption of manufacturing costs in North America due to poor sales
performance in that region. Excluding BBA, cost of goods sold would have
represented approximately 56.4% of sales in 2000. The improvement in 2001 in
comparison to 2000 pro-forma cost of sales reflects cost savings resulting from
the integration of the Company's operations with those acquired in the BBA
transaction, as well as improved expense absorption in North America flavors
reflecting the stronger sales performance in that region.
Research and development expenses are for the development of new and
improved products, technical product support, compliance with governmental
regulations and help in maintaining relationships with customers who are often
dependent on technical advances. These activities contribute in a significant
way to the Company's business. Research and development expenses declined
slightly as a percentage of sales in 2001 as a result of the integration of the
Company's and BBA's research efforts and facilities. Notwithstanding the
decrease in 2001, the Company anticipates these expenses to approximate 8% of
sales in 2002 as new research initiatives are undertaken. Excluding BBA,
research and development expenses would have represented approximately 7.8% of
sales in 2000.
Selling and administrative expenses are necessary to support the
Company's sales and operating levels. In 2001, selling and administrative
expenses decreased as a percentage of sales resulting from savings attributable
to the integration of the Company's sales and administrative functions with
those of BBA.
In 2000, selling and administrative expenses increased primarily due
to increased depreciation and other costs associated with new computer systems
and equipment, as well as certain costs incurred in connection with an
employment contract. These additional costs were partially offset by elimination
of $14.2 of costs incurred in 1999 in connection with the Company's Y2K program.
In 1999, administrative expenses also included approximately $6.0 in costs
associated with the final settlement of certain employment contracts and $2.3
relating to nonrecurring charges (discussed below). Administrative expenses for
1999 also included certain costs incurred in connection with the Company's
project to implement the enterprise requirements planning (ERP) software
package, SAP. Excluding BBA, selling and administrative expenses would have
represented approximately 17.8% of sales in 2000.
Segment profit, excluding corporate and other unallocated expenses,
amortization of goodwill and other intangibles, and the effect of nonrecurring
charges, was $380.4 in 2001, $291.7 in 2000 and $321.4 in 1999. Pro-forma
segment profit for IFF and BBA combined for 2000 was $348.9. In 2001, segment
profit increased primarily due to savings resulting from the integration of
BBA in all expense categories. In 2000, segment profit declined primarily due to
the decline in gross margin on sales, and increased selling and adminis-
tration, and research and development expenditures. In 1999, segment profit
reflected the effects of the Y2K-related expenses. The Company recorded
nonrecurring charges totaling $30.1, $41.3 and $32.9 in 2001, 2000 and 1999,
respectively. In 2000, BBA operations contributed $9.3 to segment profit, before
amortization of goodwill and other intangibles, for the period from November 3,
2000 through year-end. Operating profit totaled $255.6, $211.5 and $248.3 in
2001, 2000 and 1999, respectively.
Interest expense totaled $70.4, $25.1 and $5.2 in 2001, 2000 and 1999,
respectively. Pro-forma interest expense totaled $81.2 in 2000. The increase in
interest expense in 2001 in comparison to 2000 is directly attributable to the
debt incurred for the BBA acquisition. Interest expense in 2001 decreased
compared to the pro-forma 2000
figures, reflecting the downward trend in interest rates during 2001 and
reduction in overall debt outstanding. Interest expense in 2000 attributable to
the acquisition of BBA approximated $10.6. Interest expense in 2000, excluding
interest cost arising on the BBA acquisition, increased in comparison to 1999
mainly due to the higher level of borrowings incurred in connection with the
Company's share repurchase programs.
Other (income) expense, net was $2.6 income in 2001, $2.3 expense in
2000, and $0.3 income in 1999. The increase in other income in 2001 is primarily
the result of favorable exchange gains in comparison to 2000. The decrease in
other income in 2000 compared to 1999 was primarily due to lower interest
income and lower exchange gains.
The worldwide effective tax rate for 2001 was 38.2%, compared to 33.2%
for 2000 and 33.5% for 1999. The pro-forma effective tax rate for 2000 was
39.5%. The higher effective tax rate in 2001 compared to 2000 primarily results
from the non-deductibility of the goodwill amortization for purposes of
determining the Company's taxable income. The 2001 effective tax rate declined
from the 2000 pro-forma rate primarily due to higher than anticipated tax
benefits associated with reorganization costs in 2001.
On November 3, 2000, the Company acquired all of the outstanding
shares of BBA for $48.50 per share in cash; total consideration paid, including
transaction costs, was $970.0. The transaction was accounted for as a purchase
business combination.
The purchase price has been allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition.
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. The excess of the purchase price over the
estimated value of tangible and identified intangible assets acquired is
recorded as goodwill, and was amortized on a straight-line basis over 20 years
for periods through December 31, 2001. At December 31, 2001 and 2000, goodwill
and other intangible assets, net of accumulated amortization, totaled $795.9 and
$755.9, respectively. Amortization of goodwill and other intangibles in 2001 was
$46.1 and $7.0 in 2000.
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. The increase in goodwill and other intangible assets between
2000 and 2001 resulted from further quantification of certain liabilities
assumed in connection with the merger, primarily those associated with the
integration of the BBA operations into the Company; such costs were not yet
quantified nor accounted for at December 31, 2000.
Movements in acquisition accounting accruals were as follows:
Asset-
Employee- Related
Related and Other Total
- --------------------------------------------------------------------------------
Balance December 31, 2000 $ 4.1 $ 6.2 $ 10.3
Additional charges 41.0 25.0 66.0
Cash and other costs in 2001 (31.3) (21.3) (52.6)
---------------------------------
Balance December 31, 2001 $ 13.8 $ 9.9 $ 23.7
==================================
The BBA acquisition was initially financed through the issuance of
commercial paper. During 2001, the Company put in place permanent debt
financing. At December 31, 2001, long-term debt includes $700.0 of 6.45% Notes
due May 15, 2006. The Company also put in place a five-year Euro 140.0 million
credit facility underwritten by a major European financial institution. The
facility has four-year and five-year fixed term components and a five-year
revolving credit component; during its term, interest on this debt will not
exceed the applicable London InterBank Offered Rate (LIBOR) base rate plus 1.4%.
At December 31, 2001, long-term debt includes $101.5 (Euro 115.0 million) under
this facility. In November 2001, the Company's Japanese subsidiary issued $115.3
(Yen 15.15 billion) in seven-year and ten-year senior guaranteed notes bearing
interest of 2.4% per year. At December 31, 2001, the Company had $204.2 of
commercial paper outstanding. Additional details on borrowings are contained in
Note 8 of the Notes to the Consolidated Financial Statements.
The Company expects to achieve annual cost savings of approximately
$70.0 as a result of synergies and efficiencies to be generated in connection
with the integration of BBA and IFF. Approximately $40.0 of these savings were
realized in 2001, with the remainder to be realized in 2002.
These savings will be achieved primarily through the consolidation
of facilities, optimization of capacity, reduced selling, general and
administrative expenses, and supply chain rationalization. Based on information
and plans formulated to date, the Company expects the integration to result in
approximately $75.0 to $80.0 in implementation costs, relating primarily to
employee separation and facility closure costs, and approximately $45.0 to $50.0
of capital spending associated with the consolidation of manufacturing facili-
ties. A substantial portion of these implementation costs have been reflected as
an adjustment to the cost of the BBA acquisition.
In October 2000, the Company announced a reorganization, including
management changes, further consolidation of production facilities and related
actions. Henceforth, the Company will be organized under two global umbrellas of
business development and operations. Business development will drive the top
line growth of the Company and will include consumer and market research,
product category strategy, product development, global sales and marketing, and
technical application. Operations will be responsible for effective utilization
of capital, increasing productivity and managing inventory levels and cycle
times. In addition, effective January 1, 2001, the Company assigned a single
manager responsibility for each of its major geographical regions - North
America, Europe, Asia-Pacific, Latin America and the newly constituted Central
Asia and Middle East.
The total pretax cost of actions taken in connection with the 2000
reorganization is expected to approximate $90.0 to $100.0 through the end of
2002. The reorganization is expected to yield annual savings by the year 2003
in the range of $25.0 to $30.0. An element of the savings is expected to be
reinvested in the business, although a substantial portion is expected to
contribute to improved earnings.
In June 1999, the Company announced a program to streamline its
operations worldwide by improving operating efficiencies and asset utilization.
The program included the closure of selected manufacturing, distribution and
sales facilities in all geographic areas in which the Company operates. In
addition, the Company planned to consolidate and align production in its
remaining manufacturing locations. Under this program, the Company achieved
annualized savings of approximately $15.0; a portion of the savings was
reinvested in the business.
In connection with the 2000 reorganization and the 1999 program, the
Company initiated two separate voluntary retirement incentive programs for
United States-based employees meeting certain eligibility requirements. Those
eligible employees who elected to take the incentive received additional credit,
for pension purposes, in terms of age and service, as well as other benefits.
Approximately 150 employees accepted enhanced retirement benefits under these
two programs, resulting in nonrecurring pretax charges of $23.8 in 2000. In
addition, during 2000, the Company recognized additional nonrecurring charges
of $17.5, essentially all of which related to employee separation costs and
other reorganization activities.
Total nonrecurring charges recorded in 2001 and 2000 were $30.1 ($19.1
after tax, or approximately $.20 per share) and $41.3 ($26.8 after tax, or
approximately $.27 per share), respectively. The 2001 nonrecurring charges by
region were: North America (including corporate) $14.7, Asia-Pacific $8.6,
Europe $2.0, CAME $2.2 and Latin America $2.6. Essentially all of the pretax
charges recorded in 2000 related to United States-based operations. There were
no significant non-cash related elements of the 2001 or 2000 charges.
In 1999, in connection with the program to streamline operations, the
Company recorded total pretax charges of $40.9 ($27.2 after tax, or
approximately $.26 per share); non-cash charges approximated $11.7. Certain
elements of these charges, relating primarily to accelerated depreciation on
assets to be disposed of, were recognized in cost of goods sold ($1.2) and
selling and administrative expenses ($2.3). In addition, $4.5 associated
primarily with facility closure was included in other income and expense. The
balance of the charges, representing employee separation and asset-related
costs, were recorded as nonrecurring charges in the Consolidated Statement of
Income.
Movements in liabilities related to nonrecurring charges were as
follows:
Asset-
Employee- Related
Related and Other Total
- --------------------------------------------------------------------------------
Original liabilities $ 22.9 $ 10.0 $ 32.9
Cash and other costs in 1999 (13.3) (8.4) (21.7)
----------------------------------
Balance December 31,1999 9.6 1.6 11.2
Additional charges 37.1 4.2 41.3
Cash and other costs in 2000 (22.3) (3.8) (26.1)
----------------------------------
Balance December 31, 2000 24.4 2.0 26.4
Additional charges 10.1 20.0 30.1
Cash and other costs in 2001 (27.5) (21.3) (48.8)
----------------------------------
Balance December 31, 2001 $ 7.0 $ .7 $ 7.7
==================================
The balance of the liabilities is expected to be utilized in 2002 in
connection with the final decommissioning and disposal of affected equipment
and as severance obligations to affected employees are satisfied. Approximately
700 employees will be affected by the programs.
In October 2001, the Company sold its formulated fruit and vegetable
preparation businesses in the United States and Brazil. Sales for the business
in the United States and Brazil up to the October sale date were approximately
$23.0 with operating profit of less than $3.0. The products are sold primarily
to bakeries and dairies for the manufacture of yogurts and baked goods. Proceeds
from the sale, which were not material, were used to reduce current borrowings.
In October 2001, the Company announced its intention to explore
strategic alternatives for its fruit and vegetable preparation business in
Europe. This business manufactures processed fruit and other natural
preparations used in a wide variety of foods, including baked goods and dairy
products. Annual sales and operating profit approximate $70.0 and $7.0,
respectively. As of March 21, 2002, the Company has made no final decision as to
which strategic alternative to pursue.
In December 2001, the Company sold its aroma chemicals business
located in Widnes, the United Kingdom. This business was acquired as part of the
BBA purchase. Sales for this unit up to the December sale date were $36.7 and 80
employees were affected by the sale. Operating profit for the unit in 2001 was
less than $1.5. Proceeds from the sale, which were not material, were used to
reduce current borrowings. No gain or loss was recognized as a result of this
transaction.
NEW ACCOUNTING STANDARDS
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 to reported results.
In December 1999, the Securities and Exchange Commission issued SEC
Staff Accounting Bulletin No.101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the Staff's views regarding revenue
recognition. The Company adopted the guidelines of SAB 101 in 2000 without
material effect.
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, which
eliminate pooling of interests accounting, 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
the Standard, as well as subsequent annual valuations, or 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.
Adoption of FAS 142 will eliminate annual goodwill amortization
expense of approximately $33.0 (approximately $0.35 per share). Although this
Standard will increase the Company's results of operations in the future due to
the elimination of goodwill amortization, any impairment would result in a
charge as discussed above. The Company is in the process of assessing the impact
of adopting FAS 142 but does not believe it has a material impairment of
goodwill upon adoption.
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. The Company is evaluating the impact, if
any, of adopting this Standard but does not believe the effect of adoption of
this Standard will be material.
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 Company is evaluating the
impact, if any, of adopting this Standard but does not believe the effect of
adoption will be material to reported results.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $48.9 at December 31,
2001, compared to $129.2 and $63.0 at December 31, 2000 and 1999, respectively.
Short-term investments are high-quality, readily marketable instruments. Working
capital, excluding in 2000 the commercial paper used to finance the BBA
acquisition which was later refinanced with long-term debt, totaled $336.1 at
year-end 2001, compared to $409.9 and $465.7 at December 31, 2000 and 1999,
respectively. Gross additions to property, plant and equipment were $52.0, $60.7
and $103.8 in 2001, 2000 and 1999, respectively, and are expected to approximate
$90.0 in 2002.
During 2001, the Company reduced its debt outstanding by approximately
$110.0. At December 31, 2001, the Company's outstanding commercial paper
totaled $204.2 at an average interest rate of 2.9%, compared to $1,209.4 at
December 31, 2000 at an average interest rate of 7.4%. Commercial paper
maturities did not extend beyond January 24, 2002. All commercial paper is
classified as short-term at December 31, 2001. The Company reduced its U.S.
revolving credit agreement to $500.0 at December 31, 2001 from $1,300.0 at
December 31, 2000. This revolving credit agreement is composed of a $200.0
364-day facility and a $300.0 five-year facility. The revolving credit agreement
is used as a backstop for the U.S. commercial paper program; there were no
borrowings under this agreement in 2001. The Company compensates the banks
participating in these credit facilities in the form of fees, the amounts of
which are not material.
At December 31, 2000, $300.0 of the then $1,300.0 credit facility was
available to be extended as long-term debt at the election of the Company.
Accordingly, $300.0 of commercial paper outstanding was classified as long-term
debt at December 31, 2000. In addition, the Company had entered into a financing
agreement with a major European financial institution that, in part, provided
for $100.0 of long-term debt to be issued with maturities in 2005 and 2006.
Proceeds from this financing agreement were used to reduce outstanding
commercial paper. In 2000, to reflect this intent the Company classified $100.0
of commercial paper as noncurrent in the December 31, 2000 consolidated balance
sheet.
In April 2000, the Company announced a plan to repurchase up to 7.5
million shares of its common stock. In September 2000, the Company announced an
additional plan to increase its existing share repurchase program by an
additional $100.0. 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. The Company
completed the April 2000 program during 2001. At December 31, 2001,
approximately 1.1 million shares of common stock had been repurchased under the
September 2000 program. Under these plans, the Company purchased $71.2, $201.0
and $46.3 of treasury stock in 2001, 2000 and 1999, respectively. At December
31, 2001, the Company had a remaining share repurchase authorization of
approximately $70.0.
The Company anticipates that its financing requirements will be funded
from internal sources and credit facilities currently in place.
The Company paid dividends to shareholders totaling $57.6, $155.5 and
$161.2 in 2001, 2000 and 1999, respectively. The dividend rate per share in
2001, 2000 and 1999 was, respectively, $0.60, $1.29 and $1.52. In September
2000, the Board of Directors authorized a reduction in the Company's quarterly
dividend by 60%, to $0.15 per share, beginning with the fourth quarter 2000
dividend. The dividend amount per share remains unchanged from that date.
The Cumulative translation adjustment component of Accumulated other
comprehensive income was ($156.3) at December 31, 2001, compared to ($77.6) at
December 31, 2000. This decrease results primarily from the change to local
currency reporting effective January 1, 2001 for certain subsidiaries that
operated in U.S. dollars or which operated in a highly inflationary environment.
The decrease also resulted from the continued strength of the U.S. dollar
against other currencies.
Compliance with existing governmental requirements regulating the
discharge of materials into the environment has not materially affected the
Company's operations, earnings or competitive position. In 2001, the Company
spent approximately $4.0 on capital projects and about $12.3 in operating
expenses and governmental charges for the purpose of complying with such
regulations. Expenditures for these purposes will continue for the foreseeable
future. In addition, the Company is party to a number of proceedings brought
under the Comprehensive Environmental Response, Compensation and Liability Act
or similar state statutes. It is expected that the impact of any judgements in
or voluntary settlements of such proceedings will not be material to the
Company's financial condition, results of operations or liquidity.
MARKET RISK
The Company enters into various interest rate swaps to manage its
interest rate exposure. The Company realized a net gain of $3.5 on a $700.0
notional amount of U.S. Treasury lock hedges, 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
notional amount swap to effectively convert the 6.45% coupon interest rate on
the Notes to a short-term rate based upon LIBOR plus an interest markup. The
swap was designated as a fully effective, qualified fair value hedge. During the
year, the Company amended the swap on four occasions, which changed the LIBOR
basis and the related spread. As a result of market conditions and these changes
in the swaps, the counterparty paid the Company $19.9, including accrued swap
interest of $3.3. The net gains on settlement are being amortized over the
remaining term of the Notes. As a result of these transactions, the effective
interest rate at December 31, 2001 on the 6.45% Notes approximated 3.7%. The
Company has recorded the swap and the debt at fair value resulting in an
increase to long-term debt of $8.3 and the recognition of a corresponding swap
asset.
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 and anticipated purchases of raw materials. The notional amount and
maturity dates of these contracts match those of the underlying transactions. At
December 31, 2001, the Company had outstanding foreign currency forward
contracts of approximately $97.3. 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 December 31, 2001.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported assets, liabilities, revenues and expenses; actual results may
differ from such estimates. The diversity of the Company's products, customers,
geographic operations, sources of supply and markets reduces the risk that any
one event would have a severe impact on the Company's operating results. The
Company recognizes revenue when products are shipped and title and risk of loss
transfer to the customer. The greatest complexity of the Company's business is
in the area of the research and development and creation of new products, all
costs for which are expensed as incurred.
Those areas that require the greatest degree of management judgement or
deemed most critical to the Company's financial reporting involve:
o The ongoing assessment of the valuation of inventory, given the large
number of natural ingredients employed, the quality of which may be
diminished over time, if not used;
o The valuation of tangible and intangible assets acquired in business
combinations;
o Recoverability and realization of assets, most notably in lesser developed
areas of the world where fluctuating currencies and frequently unsettled
economic conditions can create uncertainty;
o The determination of financial instruments employed as effective hedges of
cash flows or market risk exposures; and
o The areas of environmental liabilities, where frequently changing rules
and regulations require constant reassessment of related practices as well
as underlying costs.
Management believes that full consideration has been given to all relevant
circumstances that the Company may be currently subject to, and the financial
statements accurately reflect management's best estimate of the results of
operations, financial condition and cash flows of the Company for the years
presented.
EURO CURRENCY ADOPTION
As part of the European Economic and Monetary Union, a single currency (the
"Euro") has replaced the national currencies of many of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies were fixed irrevocably as of January
1,1999, with the participating national currencies scheduled to be removed 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 paid for goods and
services using either checks, drafts, or wire transfers denominated in Euros or
the participating country's national currency. The Company's systems and
processes were "Euro Capable" (able to enter into Euro-denominated transactions)
on January 1,1999. The effects of the Euro conversion on the Company's revenues,
costs and competitive position have not been significant. The costs of the
systems and business process conversions were not 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 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.
REPORT OF MANAGEMENT
The accompanying consolidated financial statements of International Flavors &
Fragrances Inc. have been prepared by management in conformity with accounting
principles generally accepted in the United States of America and necessarily
include amounts that are based on management's best estimates and judgement.
The audit report on the Company's financial statements by PricewaterhouseCoopers
LLP, independent accountants, is based on the result of their audits, which were
performed in accordance with generally accepted auditing standards.
The Company maintains an internal control structure and related
systems, policies and procedures designed to provide reasonable assurance that
assets are safeguarded and transactions are properly recorded and executed in
accordance with management's authorization so that the accounting records can be
relied upon for the preparation of financial statements. The Company's control
system is enhanced through a formal Code of Conduct that establishes standards
for professional conduct and integrity for employees worldwide. The Company also
has an internal audit function that evaluates and formally reports to management
and the Audit Committee of the Board of Directors on the adequacy and
effectiveness of controls, policies and procedures.
The Audit Committee of the Board of Directors is composed entirely of
non-employee directors. The Committee meets periodically and independently
throughout the year with management, the internal auditors and the independent
accountants to discuss the Company's internal accounting controls, auditing
and financial reporting matters. The internal auditors and independent
accountants have unrestricted access to the Audit Committee.
It is management's opinion that IFF's policies and procedures and the
system of internal controls currently in place provide reasonable assurance that
operations are managed in a responsible and professional manner and with the
highest standard of business conduct.
[SIGNATURE] [SIGNATURE]
Richard A. Goldstein Douglas J. Wetmore
Chairman of the Board and Chief Executive Officer Senior Vice President
and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of International Flavors & Fragrances
Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of
International Flavors & Fragrances Inc. and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, the Company changed its method of accounting
for derivative instruments and hedging activities effective January 1, 2001.
[SIGNATURE]
New York, New York
January 28, 2002
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
International Flavors & Fragrances Inc.
Year Ended December 31,
----------------------
(Dollars in thousands except per share amounts) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income
Net sales $ 1,843,766 $ 1,462,795 $ 1,439,499
-------------------------------------------------------
Cost of goods sold 1,063,433 831,653 806,382
Research and development expenses 135,248 112,671 103,794
Selling and administrative expenses 313,335 258,653 248,047
Amortization of goodwill and other intangibles 46,089 7,032 --
Nonrecurring charges 30,069 41,273 32,948
Interest expense 70,424 25,072 5,154
Other (income) expense, net (2,609) 2,314 (291)
-------------------------------------------------------
1,655,989 1,278,668 1,196,034
-------------------------------------------------------
Income before taxes on income 187,777 184,127 243,465
Taxes on income 71,775 61,122 81,465
-------------------------------------------------------
Net income 116,002 123,005 162,000
Other comprehensive income:
Foreign currency translation adjustments (78,688) (20,443) (48,005)
Accumulated losses on derivatives qualifying as hedges (2,261) -- --
Minimum pension liability adjustment (20,009) -- --
-------------------------------------------------------
Comprehensive income $ 15,044 $102,562 $ 113,995
=======================================================
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 1.21 $ 1.22 $ 1.53
-------------------------------------------------------
Net income per share - diluted $ 1.20 $ 1.22 $ 1.53
=======================================================
(Dollars in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Retained Earnings
At beginning of year $ 1,204,561 $ 1,211,790 $ 1,210,620
Net income 116,002 123,005 162,000
-------------------------------------------------------
1,320,563 1,334,795 1,372,620
Cash dividends declared 57,219 130,234 160,830
-------------------------------------------------------
At end of year $ 1,263,344 $ 1,204,561 $ 1,211,790
=======================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET
International Flavors & Fragrances Inc.
(Dollars in thousands) December 31,
----------------------------------
Assets 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 48,521 $ 128,869
Short-term investments 384 369
Receivables:
Trade 328,858 343,294
Allowance for doubtful accounts (10,835) (11,074)
Other 22,335 32,094
Inventories 415,984 435,312
Deferred income taxes 77,449 62,057
Prepaid expenses 13,665 28,019
----------------------------------
Total Current Assets 896,361 1,018,940
Property, Plant and Equipment, net 532,473 679,874
Intangible Assets, net 795,920 755,923
Other Assets 43,297 34,296
----------------------------------
Total Assets $ 2,268,051 $ 2,489,033
==================================
December 31,
----------------------------------
Liabilities and Shareholders' Equity 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Bank loans and current portion of long-term debt $ 23,716 $ 43,633
Commercial paper 204,229 809,352
Accounts payable 85,659 75,021
Accrued payrolls and bonuses 39,227 43,375
Dividends payable 14,215 14,614
Income taxes 49,841 61,073
Other current liabilities 143,327 131,949
----------------------------------
Total Current Liabilities 560,214 1,179,017
----------------------------------
Other Liabilities:
Long-term debt 939,404 417,402
Deferred income taxes 44,553 103,151
Retirement and other liabilities 199,710 158,204
----------------------------------
Total Other Liabilities 1,183,667 678,757
----------------------------------
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 126,170 133,041
Restricted stock (1,440) --
Retained earnings 1,263,344 1,204,561
Accumulated other comprehensive income:
Cumulative translation adjustment (156,266) (77,578)
Accumulated losses on derivatives qualifying as hedges (2,261) --
Minimum pension liability adjustment (20,009) --
----------------------------------
1,224,008 1,274,494
Treasury stock, at cost - 20,996,954 shares in 2001 and (698,851) (643,235)
18,335,796 shares in 2000
Note receivable from officer (987) --
----------------------------------
Total Shareholders' Equity 524,170 631,259
----------------------------------
Total Liabilities and Shareholders' Equity $ 2,268,051 $ 2,489,033
==================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
International Flavors & Fragrances Inc.
Year Ended December 31,
-------------------------------------------------
(Dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 116,002 $ 123,005 $ 162,000
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 123,493 69,344 56,369
Deferred income taxes (18,113) (30,496) (4,191)
Changes in assets and liabilities:
Current receivables 8,925 15,261 (35,354)
Inventories (1,207) 64,591 (33,955)
Current payables (20,076) 22,017 40,719
Other, net (27,519) 5,388 10,230
-------------------------------------------------
Net cash provided by operations 181,505 269,110 195,818
-------------------------------------------------
Cash flows from investing activities:
Proceeds from investments 8,250 1,566 1,073
Purchases of investments (19,786) (1,111) (955)
Investments in acquired businesses, net of cash received -- (953,295) --
Additions to property, plant and equipment (52,016) (60,696) (103,835)
Proceeds from disposal of assets 14,900 11,301 1,925
-------------------------------------------------
Net cash used in investing activities (48,652) (1,002,235) (101,792)
-------------------------------------------------
Cash flows from financing activities:
Cash dividends paid to shareholders (57,618) (155,502) (161,249)
Net change in bank loans (13,088) 5,164 1,599
Net change in commercial paper outstanding (605,123) 746,152 63,200
Proceeds from long-term debt 580,545 413,747 --
Repayments of long-term debt (49,705) (1,903) (859)
Proceeds from issuance of stock under stock option plans 6,842 1,387 4,290
Purchase of treasury stock (71,234) (200,953) (46,298)
-------------------------------------------------
Net cash provided by (used in) financing activities (209,381) 808,092 (139,317)
-------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (3,820) (8,233) (7,534)
-------------------------------------------------
Net change in cash and cash equivalents (80,348) 66,734 (52,825)
Cash and cash equivalents at beginning of year 128,869 62,135 114,960
-------------------------------------------------
Cash and cash equivalents at end of year $ 48,521 $ 128,869 $ 62,135
=================================================
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Flavors & Fragrances Inc.
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is the leading creator and manufacturer of flavors and fragrances
used by others to impart or improve flavor or fragrance in a wide variety of
consumer products. The Company's products are sold principally to manufacturers
of perfumes and cosmetics, hair and other personal care products, soaps and
detergents, cleaning products, dairy, meat and other processed foods, beverages,
snacks and savory foods, confectionery, sweet and baked goods, and
pharmaceutical and oral care products.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all subsidiaries.
Revenue Recognition
Revenue is recognized when products are shipped and title and risk of loss
transfer to the customer.
Currency Translation
The assets and liabilities of non-U.S. subsidiaries that operate in a local
currency environment are translated into U.S. dollars at year-end exchange
rates. Income and expense items are translated at average exchange rates during
the year. Cumulative translation adjustments are shown as a separate component
of shareholders' equity.
For periods through December 31, 2000, certain subsidiaries that
operated in U.S. dollars, or that operated in a highly inflationary environment,
inventory and property, plant and equipment were translated using the exchange
rates at the time of acquisition. All other assets and liabilities were
translated at year-end exchange rates. Except for inventories charged to cost of
goods sold and depreciation, which were remeasured for historical rates of
exchange, all income and expense items were translated at average exchange rates
during the year. Gains and losses as a result of remeasurements were included in
income.
Effective January 1, 2001, substantially all subsidiaries operate in a
local currency environment.
Research and Development
All costs associated with research and development are charged to expense as
incurred.
Inventories
Inventories are stated at the lower of cost (generally on an average basis) or
market.
Cash Equivalents
Highly liquid investments with maturities of three months or less at date of
purchase are considered to be cash equivalents.
Long-Lived Assets
Property, plant and equipment are recorded at cost. Depreciation is calculated
on a straight-line basis, principally over the following estimated useful
lives: buildings and improvements, 10 to 40 years; machinery, equipment and
software, 3 to 10 years; and leasehold improvements, the shorter of 10 years or
the remaining life of the lease.
When properties are retired or otherwise disposed of, the asset and
related accumulated depreciation are removed from the accounts with any
resultant gain or loss included in income.
Identifiable intangible assets include patents, trademarks and other
intellectual property that are valued at acquisition through independent
appraisals, and are amortized on a straight-line basis over periods ranging from
7 to 20 years. Goodwill arising from business acquisitions is amortized
through December 31, 2001 on a straight-line basis over its estimated useful
life, generally 20 years.
Long-lived assets, including intangibles, are periodically reviewed
for impairment when events or changes in business conditions indicate that
their full carrying value may not be recovered. An estimate of undiscounted
future cash flows produced by an asset or group of assets is compared to the
carrying value to determine whether an impairment exists. If assets are
determined to be impaired, the loss is measured based on an estimate of fair
value using various valuation techniques, including a discounted estimate of
future cash flows.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, based on tax laws as currently
enacted. Additional taxes which would result from distributions by subsidiary
companies to the parent are provided to the extent such dividends are
anticipated. No provision is made for additional taxes on undistributed earnings
of subsidiary companies that are intended to be permanently invested in such
subsidiaries. As a result, no income tax is attributable to the currency
translation component of other comprehensive income.
Retirement Benefits
Current service costs of retirement plans and postretirement health care and
life insurance benefits are accrued currently. Prior service costs resulting
from improvements in these plans are amortized over periods ranging from 10 to
20 years.
Financial Instruments
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques, as appropriate.
Unless otherwise disclosed, the fair values of financial instruments approximate
their recorded values.
Risk Management Contracts
In the normal course of business, the Company uses forward exchange contracts to
manage its exposure to fluctuations in foreign currency exchange rates. The
Company also enters into various interest rate swaps with the objective of
managing its interest rate exposure.
The Company designates and assigns the financial instruments as hedges
of forecasted transactions, specific assets, or specific liabilities. When
hedged assets or liabilities are sold or extinguished or the hedged forecasted
transactions are no longer expected to occur, the Company recognizes the gain or
loss on the designated hedging financial instruments.
Unrealized losses on forward contracts are recorded as other current
liabilities and the accrued differential for interest rate swaps is recorded as
other assets in the balance sheet. Unrealized gains on forward contracts and the
accrued differential for interest rate swaps to be paid under the agreements are
included in other current liabilities. Realized gains and losses from hedges
are classified in the income statement consistent with the accounting treatment
of the items hedged. The Company accrues the differential for interest rate
swaps to be paid or received under the agreements as adjustments to net interest
expense over the lives of the swaps. Gains and losses on the termination of
effective swap agreements, prior to their original maturity, are deferred and
amortized to net interest expense over the remaining term of the underlying
hedged transactions.
Risks and Uncertainties
The diversity of the Company's products, customers and geographic operations
significantly reduces the risk that a severe impact will occur in the near term
as a result of changes in its customer base, competition, sources of supply or
markets. It is unlikely that any one event would have a severe impact on the
Company's operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results may differ from those estimates.
Software Costs
The Company capitalizes direct internal and external development costs
associated with internal-use software. Neither preliminary evaluation costs nor
costs associated with the software after implementation are capitalized.
Shipping and Handling Costs
Net sales include shipping and handling charges billed to customers. Cost of
goods sold include all costs incurred in connection with shipping and
handling.
New Accounting Standards
In December 1999, the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin No.101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the Staff's views regarding revenue
recognition. The Company adopted the guidelines of SAB 101 in 2000 without
material effect.
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 to reported results.
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,
which eliminate pooling of interests accounting, 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 the Standard, as well as subsequent annual valuations, or 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.
Adoption of FAS 142 will eliminate annual goodwill amortization
expense 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 impairment would result in a charge as discussed above. The
Company is in the process of assessing the impact of adopting FAS 142 but does
not believe it has a material impairment of goodwill upon adoption.
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. The Company
is evaluating the impact, if any, of adopting this Standard, but does not
believe the effect of adoption of this Standard will be material.
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 Company is evaluating the
impact, if any, of adopting this Standard, but does not believe the effect of
adoption will be material to reported results.
Net Income Per Share
Net income per share is based on the weighted average number of shares
outstanding. A reconciliation of the number of shares used in the computations
of basic and diluted net income per share is as follows:
Number of Shares
------------------------------------
(Shares in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Basic EPS 95,770 101,073 105,748
Dilution under stock plans 1,049 20 195
------------------------------------
Diluted EPS 96,819 101,093 105,943
====================================
Net income used in the computation of basic and diluted net income per
share is not affected by the assumed issuance of stock under the Company's stock
plans.
Options to purchase 4,138,020, 5,430,857 and 2,946,607 shares were
outstanding in 2001, 2000 and 1999, 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 years.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to 2001 classifications.
NOTE 2. NONRECURRING AND OTHER CHARGES
In October 2000, the Company announced a reorganization, including
management changes, further consolidation of production facilities and related
actions. Henceforth, the Company will be organized under two global umbrellas of
business development and operations. Business development will drive the top
line growth of the Company and will include consumer and market research,
product category strategy, product development, global sales and marketing, and
technical application. Operations will be responsible for effective utilization
of capital, increasing productivity and managing inventory levels and cycle
times. In addition, effective January 1, 2001, the Company assigned a single
manager responsibility for each of its major geographical regions - North
America, Europe, Asia-Pacific, Latin America and the newly constituted Central
Asia and Middle East.
The total pretax cost of actions taken in connection with the 2000
reorganization is expected to approximate $90.0 million to $100.0 million
through the end of 2002. The reorganization is expected to yield annual savings
by the year 2003 in the range of $25.0 million to $30.0 million. An element of
the savings is expected to be reinvested in the business, although a substantial
portion is expected to contribute to improved earnings.
In June 1999, the Company announced a program to streamline its
operations worldwide by improving operating efficiencies and asset utilization.
The program included the closure of selected manufacturing, distribution and
sales facilities in all geographic areas in which the Company operates. In
addition, the Company planned to consolidate and align production in its
remaining manufacturing locations. Under this program, the Company achieved
annualized savings of approximately $15.0 million; a portion of the savings was
reinvested in the business.
In connection with the 2000 reorganization and the 1999 program, the
Company initiated two separate voluntary retirement incentive programs for
United States-based employees meeting certain eligibility requirements. Those
eligible employees who elected to take the incentive received additional credit,
for pension purposes, in terms of age and service, as well as other benefits.
Approximately 150 employees accepted enhanced retirement benefits under these
two programs, resulting in nonrecurring pretax charges of $23.8 million in
2000. In addition, during 2000, the Company recognized additional nonrecurring
charges of $17.5 million, essentially all of which related to employee
separation costs and other reorganization activities.
Total nonrecurring charges recorded in 2001 and 2000 were $30.1
million ($19.1 million after tax) and $41.3 million ($26.8 million after tax),
respectively. The 2001 nonrecurring charges by region 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. Essentially all of
the pretax charges recorded in 2000 related to United States-based operations.
There were no significant non-cash related elements of the 2001 or 2000
charges.
In 1999, in connection with the program to streamline operations, the
Company recorded total pretax charges of $40.9 million ($27.2 million after
tax); non-cash charges approximated $11.7 million. Certain elements of these
charges, relating primarily to accelerated depreciation on assets to be disposed
of, were recognized in cost of goods sold ($1.2 million) and selling and
administrative expenses ($2.3 million). In addition, $4.5 million associated
primarily with facility closure was included in other income and expense. The
balance
of the charges, representing employee separation and asset-related costs, were
recorded as nonrecurring charges in the Consolidated Statement of Income.
Movements in liabilities related to nonrecurring charges were as
follows:
Asset-
Employee- Related
(Dollars in thousands) Related and Other Total
- -------------------------------------------------------------------------------
Original liabilities $ 22,951 $ 9,997 $ 32,948
Cash and other costs in 1999 (13,329) (8,411) (21,740)
------------------------------------------
Balance December 31,1999 9,622 1,586 11,208
Additional charges 37,095 4,178 41,273
Cash and other costs in 2000 (22,338) (3,711) (26,049)
------------------------------------------
Balance December 31, 2000 24,379 2,053 26,432
Additional charges 10,083 19,986 30,069
Cash and other costs in 2001 (27,474) (21,294) (48,768)
------------------------------------------
Balance December 31, 2001 $ 6,988 $ 745 $ 7,733
==========================================
The balance of the liabilities is expected to be utilized in 2002 in
connection with the final decommissioning and disposal of affected equipment
and as severance obligations to affected employees are satisfied. Approximately
700 employees will be affected by the programs.
NOTE 3. ACQUISITIONS AND DIVESTITURES
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. BBA operating results
are included in the Company's consolidated results from November 3, 2000.
The acquisition was accounted for as a purchase business combination
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on their fair values at the date of acquisition.
The Company completed the final determination of the purchase price during 2001.
The excess of the purchase price over the estimated value of tangible and
identified intangible assets acquired is recorded as goodwill. 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.
As a result of finalizing acquisition accounting during 2001, the
Company increased tangible assets by $5.2 million, goodwill by $105.0 million
and decreased intangible assets by $22.8 million.
The following unaudited pro-forma results of operations give effect to
the BBA acquisition as if it had occurred as of the beginning of each of the
periods presented. These pro-forma results reflect the final acquisition
accounting adjustments completed in 2001.
(Dollars in thousands except per share amounts) 2000 1999
- --------------------------------------------------------------------------------
Net sales $ 1,880,612 $ 1,931,380
Net income 80,953 95,364
Net income per share - basic $ 0.80 $ 0.90
Net income per share - diluted $ 0.80 $ 0.90
================================
(Dollars in thousands) 2001
- --------------------------------------------------------------------------------
Allocation of purchase price:
Fair value of assets acquired,
including goodwill, net of cash $1,253,044
Cash paid for common stock and transaction costs (970,000)
----------
Liabilities assumed $ 283,044
==========
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 acquisition accounting accruals were as follows:
Asset-
Employee- Related
(Dollars in thousands) Related and Other Total
- --------------------------------------------------------------------------------
Balance December 31, 2000 $ 4,103 $ 6,230 $ 10,333
Additional charges 41,012 24,961 65,973
Cash and other costs in 2001 (31,259) (21,325) (52,584)
--------------------------------------
Balance December 31, 2001 $ 13,856 $ 9,866 $ 23,722
======================================
In April 2000, the Company acquired Laboratoire Monique Remy (LMR), a
leader in the creation and commercialization of natural raw materials for
fragrances and flavors. Results of LMR are included in the consolidated results
of the Company from acquisition date. Neither the acquisition nor financial
results of LMR were material to the Company's consolidated operating results,
financial position or cash flows.
In October 2001, the Company sold its formulated fruit and vegetable
preparation businesses in the United States and Brazil. Sales for the business
in the United States and Brazil up to the October sale date were approximately
$23.0 million with operating profit of less than $3.0 million. The products are
sold primarily to bakeries and dairies for the manufacture of yogurts and baked
goods. Proceeds from the sale, which were not material, were used to reduce
current borrowings.
In October 2001, the Company announced its intention to explore
strategic alternatives for its fruit and vegetable preparation business
in Europe. This business manufactures processed fruit and other natural
preparations used in a wide variety of foods, including baked goods and dairy
products. Annual sales and operating profit approximate $70.0 million and $7.0
million, respectively. As of March 21, 2002, the Company has made no final
decision as to which strategic alternative to pursue.
In December 2001, the Company sold its aroma chemicals business
located in Widnes, the United Kingdom. This business was acquired as part of the
BBA purchase. Sales for this unit up to the December sale date were $36.7
million and 80 employees were affected by the sale. Operating profit for the
unit in 2001 was less than $1.5 million. Proceeds from the sale, which were not
material, were used to reduce current borrowings. No gain or loss was recognized
as a result of this transaction.
NOTE 4. MARKETABLE SECURITIES
Marketable securities are included in cash equivalents and short-term
investments, as appropriate. At December 31, 2001 and 2000, marketable
securities totaling $0.1 million and $9.9 million, respectively, were
available for sale and recorded at fair value that approximated cost. Realized
gains and losses on the sale of marketable securities were not material.
NOTE 5. INVENTORIES
December 31,
---------------------------
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Raw materials $ 212,270 $ 243,327
Work in process 10,853 21,212
Finished goods 192,861 170,773
---------------------------
$ 415,984 $ 435,312
===========================
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
December 31,
---------------------------
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Land $ 36,747 $ 35,416
Buildings and improvements 278,603 345,070
Machinery, equipment and software 620,116 709,315
Construction in progress 40,164 51,500
---------------------------
975,630 1,141,301
Accumulated depreciation 443,157 461,427
---------------------------
$ 532,473 $ 679,874
===========================
NOTE 7. INTANGIBLE ASSETS, NET
December 31,
---------------------------
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Goodwill $690,509 $563,897
Trademarks and other 163,251 199,058
---------------------------
853,760 762,955
Accumulated amortization 57,840 7,032
---------------------------
$795,920 $755,923
===========================
NOTE 8. BORROWINGS
Debt consists of the following at December 31:
Rate Maturities 2001 2000
- --------------------------------------------------------------------------------
Commercial paper (U.S.) $ 204,229 $ 809,352
Bank loans 21,916 43,633
Current portion of
long-term debt 1,800 --
---------------------------
Total current debt 227,945 852,985
---------------------------
U.S. dollars 6.45% 2006 698,800 300,000
Euro facility 4.79% 2005-06 101,500 100,000
Japanese Yen notes 2.45% 2008-11 115,300 --
Japanese Yen notes 1.74% 2005 9,100 10,600
Other 2003 6,404 6,802
---------------------------
931,104 417,402
Interest rate swap 8,300 --
---------------------------
Total long-term debt 939,404 417,402
---------------------------
Total debt $1,167,349 $1,270,387
===========================
The Company uses commercial paper to supplement long-term borrowings.
At December 31, 2001, outstanding commercial paper had an effective interest
rate of 2.9% compared to 7.4% at December 31, 2000. Commercial paper maturities
did not extend beyond January24, 2002. Commercial paper usage in 2001 decreased
as long-term financing was put in place and as debt was reduced.
The Euro borrowings are under a Euro 140.0 million facility that has
four-year and five-year fixed term components and a five-year revolving credit
component. In May 2001, the Company issued $700.0 million of 6.45% notes; the
notes mature May 15, 2006. In November 2001, the Company issued Yen 15.15
billion in seven-year and ten-year notes. Long-term debt was increased by $8.3
million for adjustments related to the amortization of swap gains and the
mark-to-market valuation of certain interest rate swaps the Company has
entered into.
The Company reduced its U.S. revolving credit agreement to $500.0
million at December 31, 2001from $1,300.0 million at December 31, 2000. This
revolving credit agreement is composed of a $200.0 million 364-day facility and
a $300.0 million five-year facility.
The revolving credit agreement is used as a backstop for the U.S. commercial
paper program; there were no borrowings under this agreement in 2001. The
Company compensates the banks participating in these credit facilities in the
form of fees, the amounts of which are not material.
Of the Company's revolving credit facilities available at December 31,
2000, $300.0 million was available to be extended as long-term debt at the
Company's election. Accordingly, the Company classified this as long-term at
December 31, 2000. In addition, the Company classified $100.0 million as
long-term at December 31, 2000 representing the Euro facility entered into in
the first quarter 2001.
Short-term bank loans were outstanding in several foreign countries
and averaged $36.4 million in 2001, compared with $31.7 million in 2000 and
$58.0 million in 1999. The highest levels were $69.0 million in 2001, $55.3
million in 2000 and $84.9 million in 1999. This excludes $970.0 million of
short-term U.S. bank bridge financing used solely for the November 3, 2000
acquisition of BBA and replaced by commercial paper before December 31, 2000.
The 2001 weighted average interest rate of these foreign bank loans, based on
balances outstanding at the end of each month, was 7% and the average rate on
loans outstanding at December 31, 2001 was 5%. These rates compare with 8% and
8%, respectively, in 2000 and 9% and 8%, respectively, in 1999.
Annual maturities on long-term debt outstanding at December 31, 2001
are as follows: 2002, $1.8 million; 2003, $6.4 million; 2005, $76.0 million;
2006, $734.6 million. At December 31, 2001, the estimated fair value of the
$700.0 million 6.45% notes, including the interest rate swaps, was $708.3
million. The estimated fair value of the remaining long-term debt at December
31, 2001 and 2000, based on borrowing rates currently available to the Company
with similar terms and maturities, approximated the recorded amount.
Cash payments for interest were $77.2 million in 2001, $19.6 million
in 2000 and $4.6 million in 1999. At December 31, 2001, the Company and its
subsidiaries had unused lines of credit approximating $106.0 million in addition
to those credit facilities serving as backstop to the Company's commercial paper
program.
NOTE 9. INCOME TAXES
(Dollars in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
U.S. income (loss) before taxes $ (59,390) $ (33,183) $ 19,061
Foreign income before taxes 247,167 217,310 224,404
------------------------------------
Total income before taxes $ 187,777 $ 184,127 $ 243,465
====================================
The following table shows the components of current and deferred
income tax expense by taxing jurisdiction, both domestic and foreign:
(Dollars in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Current
Federal $ 7,507 $ (640) $ 5,064
State and local 3,816 381 204
Foreign 78,565 91,877 80,388
------------------------------------
89,888 91,618 85,656
------------------------------------
Deferred
Federal (17,836) (20,543) (8,773)
State and local (5,821) (1,484) 546
Foreign 5,544 (8,469) 4,036
------------------------------------
(18,113) (30,496) (4,191)
------------------------------------
Total income taxes $ 71,775 $ 61,122 $ 81,465
====================================
At December 31, 2001 and 2000, gross deferred tax assets were $115.7
million and $113.5 million, respectively; gross deferred tax liabilities were
$82.8 million and $154.6 million, respectively. No valuation allowance was
required for deferred tax assets. The principal components of deferred tax
assets (liabilities) were:
(Dollars in thousands) 2001 2000
- -------------------------------------------------------------------------------
Employee and retiree benefits $ 69,000 $ 52,300
Inventory 2,500 12,700
Tax credit carryforwards 5,200 13,200
Property, plant and equipment (8,000) (47,600)
Trademarks and other (52,400) (65,700)
Other, net 16,600 (6,000)
---------------------
$ 32,900 $(41,100)
=====================
The Company's tax credit carryforwards consist primarily of foreign
tax credits that will expire, if unused, beginning in 2005.
A reconciliation between the U.S. federal income tax rate and the
effective tax rate is:
2001 2000 1999
- --------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Difference in effective tax rate on
foreign earnings and remittances (1.4) (0.3) (1.0)
State and local taxes (0.7) (0.4) 0.2
Goodwill 6.0 0.9 --
Other, net (0.7) (2.0) (0.7)
-------------------------------
Effective tax rate 38.2% 33.2% 33.5%
===============================
Income taxes paid were $88.6 million in 2001, $81.0 million in 2000
and $74.8 million in 1999.
Undistributed earnings of foreign subsidiaries for which no deferred
taxes have been provided totaled $587.7 million at December 31, 2001. Any
additional U.S. taxes payable on these foreign earnings, if remitted, would be
substantially offset by credits for foreign taxes already paid.
NOTE 10. SHAREHOLDERS' EQUITY
Net charges to capital in excess of par value resulted from the exercise of
stock options, the return of restricted stock and the award of IFF Stock Units.
Transactions in treasury shares resulted in net charges to capital in excess of
par value of $2.0 million, $1.4 million and $6.9 million in 1999, 2000 and 2001,
respectively.
The following table shows treasury shares acquired and, as
appropriate, the use of treasury shares for stock plans:
Number
(Dollars in thousands) of Shares Amount
- --------------------------------------------------------------------------------
Balance January 1, 1999 9,715,775 $ 400,602
Acquisitions 1,268,633 46,473
Used for stock plans (144,493) (5,948)
Return of restricted stock 100,000 3,981
------------------------------
Balance December 31, 1999 10,939,915 445,108
Acquisitions 7,475,178 201,251
Used for stock plans (79,297) (3,124)
------------------------------
Balance December 31, 2000 18,335,796 643,235
Acquisitions 3,019,100 71,653
Used for stock plans (357,942) (16,037)
------------------------------
Balance December 31, 2001 20,996,954 $ 698,851
==============================
Under an employment contract dated January 1,1997, the Company awarded
250,000 restricted shares of the Company's common stock. Under that contract,
the restrictions would expire, subject to performance goals, over a five-year
period; compensation expense was recognized over the restricted period. As a
result of the termination of that contract, those shares for which restrictions
would have lapsed in 2000-2001 were forfeited and have been returned to treasury
stock. The amount shown for common stock used for stock plans in 2000 and 2001
includes 4,000 shares and 3,750 shares issued, respectively, as annual
compensation awards to non-employee directors of the Company.
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 2001, the first two market price
targets were achieved and, accordingly, 50% of such Units vested. On vesting,
compensation expense of $1.7 million was recognized and included in operating
expenses. The remaining unvested Units are reported as Restricted Stock on the
Company's Consolidated Balance Sheet.
Changes in other comprehensive income were (in thousands):
Balance January 1, 1999 $ (9,130)
Translation adjustments (48,005)
---------
Balance December 31, 1999 (57,135)
Translation adjustments (20,443)
---------
Balance December 31, 2000 (77,578)
Translation adjustments (78,688)
Accumulated losses on derivatives
qualifying as hedges (2,261)
Minimum pension liability adjustment (net of tax) (20,009)
---------
Balance December 31, 2001 $(178,536)
=========
On March 9, 2000, the Company adopted a shareholder protection
rights agreement (the "Rights Agreement") and declared a dividend of one right
on each share of common stock outstanding on March 24, 2000 or issued
thereafter.
Under the Rights Agreement, as amended, until a person or group
acquires 15% or more of the Company's common stock or commences a tender offer
that would result in such person's or group's owning 15% or more, the rights are
evidenced by the common stock certificates, automatically trade with the
common stock and are not exercisable.
Thereafter, if the Company is involved in a merger or sells more than
50% of its assets or earning power, each right entitles its holder to purchase a
certain number of shares for a specified exercise price. Also, under certain
circumstances, the Company's Board of Directors has the option to redeem or
exchange one share of common stock for each right. Finally, in the event a new
Board of Directors is elected in a successful proxy contest, (i) the rights may
not be redeemed and no business combination with the Company can be effected for
180 days thereafter unless certain procedures are followed to ensure (A) that
steps are taken to maximize shareholder value, or (B) that any decision to
redeem the rights, if challenged, would meet an "entire fairness" test; and
(ii) the Rights Agreement may not be amended during such 180-day period. To
establish "entire fairness" in connection with a redemption, the new Board must
be able to demonstrate that all aspects of the redemption decision were fair,
including the redemption procedure and the financial terms of the redemption.
The Rights Agreement expires in March 2010.
Dividends paid per share were $0.60, $1.29 and $1.52 in 2001, 2000 and
1999, respectively.
NOTE 11. STOCK OPTIONS
The Company has various stock option plans under which the Company's
officers, directors and key employees may be granted options to purchase the
Company's common stock at 100% of the market price on the day the option is
granted.
Options granted prior to May 2001 generally become exercisable no
earlier than two years after the date of grant and expire 10 years after the
date of grant, except for options granted to two senior
executives in 2000 and certain other options granted to foreign employees, which
may be exercised immediately. Options granted in November 2000, however,
constituting approximately 35% of options outstanding (as of December 31, 2001),
generally become exercisable in four equal installments as corresponding market
price targets for the Company's Common Stock of $22.50, $27.00, $31.50 and
$36.00 are attained, and expire seven years after the date of grant or sooner if
certain price levels (which differ among individuals) are achieved.
Options granted after May 1, 2001 generally become exercisable no
earlier than one year from the date of grant and expire 10 years after the date
of grant, except for options granted to certain foreign employees, which may be
exercised immediately.
During 2001, options to purchase common stock were granted at exercise
prices ranging from $21.03 to $30.87 per share. At December 31, 2001, the price
range for shares under option was $17.94 to $49.88; options for 3,465,760 shares
were exercisable at that date. During 2001, 288,400 shares of common stock under
option were exercised at a price of $17.94. During 2001, eligible employees
surrendered 989,100 options in exchange for IFF Stock Units. The options
surrendered are a component of the 2001 options terminated figure in the table
below.
Stock option transactions were:
Shares of Common Stock Weighted
-------------------------- Average
Available Under Exercise
for Option Option Price
- --------------------------------------------------------------------------------
Balance January 1, 1999 2,507,048 4,035,919 $ 43.21
Granted (846,000) 846,000 38.99
Exercised -- (144,493) 30.89
Terminated 157,252 (157,252) 45.36
Lapsed (160,296) -- --
---------------------------------------
Balance December 31, 1999 1,658,004 4,580,174 42.69
Granted (5,761,502) 5,761,502 24.13
Exercised -- (75,297) 21.46
Terminated 661,422 (661,422) 43.85
Lapsed (54,500) -- --
Increase under 2000 plans 9,450,000 -- --
---------------------------------------
Balance December 31, 2000 5,953,424 9,604,957 31.55
Granted (2,042,000) 2,042,000 27.06
Exercised -- (288,400) 17.94
Terminated 2,997,188 (2,997,188) 38.00
Lapsed (113,143) -- --
Reserved for Units (83,888) -- --
---------------------------------------
Balance December 31, 2001 6,711,581 8,361,369 $ 28.37
=======================================
The following table summarizes information concerning currently
outstanding and exercisable options:
Range of Exercise Prices
------------------------
$10-$30 $30-$50
- --------------------------------------------------------------------------------
Number outstanding 5,058,001 3,303,368
Weighted average remaining contractual
life, in years 7.4 6.5
Weighted average exercise price $21.72 $38.55
----------------------
Number exercisable 1,361,848 2,103,912
Weighted average exercise price $17.96 $39.97
======================
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date, consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No.123, Accounting for Stock-Based Compensation, the Company's net
income and basic earnings per share would have been reduced by approximately
$14.1 million ($.15 per share) in 2001, $12.0 million ($.12 per share) in 2000
and $5.4 million ($.05 per share) in 1999. These pro-forma amounts may not be
representative of future disclosures because the estimated fair value of stock
options is amortized to expense over the vesting period, and additional options
may be granted in future years.
Using the Black-Scholes option valuation model, the estimated fair
values of options granted during 2001, 2000 and 1999 were $8.09, $5.50 and
$7.65, respectively. The Black-Scholes model was developed for use in estimating
the fair value of traded options that have no vesting restrictions. In addition,
such models require the use of subjective assumptions, including expected stock
price volatility. In management's opinion, such valuation models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Principal assumptions used in applying the Black-Scholes model were as
follows:
2001 2000 1999
- --------------------------------------------------------------------------------
Risk-free interest rate 4.6% 6.2% 5.7%
Expected life, in years 5 5 5
Expected volatility 32.2% 26.9% 22.5%
Expected dividend yield 2.2% 3.8% 3.8%
==============================
NOTE 12. SEGMENT INFORMATION
The Company manages its operations by major geographical region. Flavors and
fragrances have similar economic and operational characteristics including
research and development, the nature of the creative and production processes,
the type of customers, and the methods by which products are distributed.
Accounting policies used for segment reporting are the same as those described
in Note 1. The Company evaluates the performance of its geographic regions 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
("segment profit"). Transfers between geographic areas are accounted for at
prices that approximate arm's length market prices. Unallocated assets are
principally cash, short-term investments, intangible assets, including goodwill,
and other corporate assets.
Effective January 1, 2001, the Company was reorganized into five
geographic regions with an individual manager responsible for
each region. The five regions are: North America, Europe, Central Asia, Middle
East (CAME), Latin America and Asia-Pacific; previously Europe and CAME had been
combined as one geographic region. North and Latin America and Asia-Pacific were
unaffected by the geographic reorganization. The North America region includes
the United States and Canada.
North Latin Asia-
2001 (Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 616,806 $639,500 $75,758 $245,517 $ 266,185 $ -- $1,843,766
Transfers between areas 83,115 140,290 2,623 1,678 16,620 (244,326) --
----------------------------------------------------------------------------------------
Total sales $ 699,921 $779,790 $78,381 $247,195 $ 282,805 $(244,326) $1,843,766
========================================================================================
Segment profit $ 91,208 $157,199 $14,339 $ 53,876 $ 60,975 $ 2,777 $ 380,374
========================================================================
Corporate and other
unallocated expenses (48,624)
Amortization of goodwill and
other intangibles (46,089)
Nonrecurring charges (30,069)
Interest expense (70,424)
Other income (expense), net 2,609
----------
Income before taxes on income $ 187,777
==========
Segment assets $ 588,187 $492,958 $42,227 $139,359 $ 207,647 $ (46,581) $1,423,797
========================================================================
Unallocated assets 844,254
----------
Total assets $2,268,051
==========
North Latin Asia-
2000 (Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 470,953 $542,729 $22,143 $220,287 $ 206,683 $ -- $1,462,795
Transfers between areas 55,610 122,948 4 1,936 13,779 (194,277) --
----------------------------------------------------------------------------------------
Total sales $ 526,563 $665,677 $22,147 $222,223 $ 220,462 $(194,277) $1,462,795
========================================================================================
Segment profit $ 48,503 $158,080 $ 4,330 $ 39,063 $ 39,999 $ 1,762 $ 291,737
========================================================================
Corporate and other
unallocated expenses (31,919)
Amortization of goodwill and
other intangibles (7,032)
Nonrecurring charges (41,273)
Interest expense (25,072)
Other income (expense), net (2,314)
----------
Income before taxes on income $ 184,127
==========
Segment assets $ 600,007 $570,435 $51,564 $175,161 $ 228,901 $ (31,737) $1,594,331
========================================================================
Unallocated assets 894,702
----------
Total assets $2,489,033
==========
North Latin Asia-
1999 (Dollars in thousands) America Europe CAME America Pacific Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 476,496 $550,342 $24,493 $212,770 $ 175,398 $ -- $1,439,499
Transfers between areas 62,432 124,924 3 756 13,540 (201,655) --
----------------------------------------------------------------------------------------
Total sales $ 538,928 $675,266 $24,496 $213,526 $ 188,938 $(201,655) $1,439,499
========================================================================================
Segment profit $ 69,555 $171,831 $ 5,812 $ 41,288 $ 31,503 $ 1,439 $ 321,428
========================================================================
Corporate and other
unallocated expenses (40,152)
Nonrecurring charges (32,948)
Interest expense (5,154)
Other income (expense), net 291
----------
Income before taxes on income $ 243,465
==========
Segment assets $ 519,054 $463,675 $23,586 $194,140 $ 176,222 $ (61,314) $1,315,363
========================================================================
Unallocated assets 86,132
----------
Total assets $1,401,495
==========
Capital Expenditures Depreciation and Amortization
----------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
North America $18,531 $30,586 $ 57,306 $ 33,784 $26,691 $16,811
Europe 19,452 14,030 19,607 26,740 20,626 24,890
CAME 1,480 794 1,620 1,409 763 384
Latin America 1,559 4,806 14,585 4,628 5,154 6,322
Asia-Pacific 4,571 7,500 7,595 7,749 5,975 5,353
Unallocated assets 6,423 2,980 3,122 49,183 10,135 2,609
----------------------------------------------------------------------------------------
Consolidated $52,016 $60,696 $103,835 $123,493 $69,344 $56,369
========================================================================================
Europe operating profit for 1999 includes charges totaling $3.5
million relating to accelerated depreciation on assets to be disposed. In
1999, corporate and other unallocated expenses include approximately $6.0
million in costs associated with the final settlement of certain employment
contracts.
Sales of fragrance products were $1,008.1 million, $865.1 million and
$849.2 million in 2001, 2000 and 1999, respectively. Sales of flavor products
were $835.7 million, $597.7 million and $590.3 million in 2001, 2000 and 1999,
respectively. Sales in the United States, based on the final country of
destination of the Company's products, were $570.5 million, $435.1 million and
$434.6 million in 2001, 2000 and 1999, respectively. No other individual country
of destination exceeded 8% of consolidated sales. Sales to the Company's largest
customer accounted for 10% and 11% in 2000 and 1999. No customer accounted for
10% or more of sales in 2001. Total long-lived assets consists of net property,
plant and equipment and net intangible assets and amounted to $1,328.4 million,
$1,435.8 million and $523.9 million at December 31, 2001, 2000 and 1999,
respectively; of the respective totals, $1,071.1 million, $1,055.5 million and
$238.8 million were located in the United States. No other individual country
had long-lived assets that exceeded 10% of total long-lived assets.
Net foreign exchange gains of $1.9 million in 2001, losses of $1.9
million in 2000 and gains of $0.6 million in 1999 are included in other income.
NOTE 13. RETIREMENT BENEFITS
The Company and most of its subsidiaries have pension and/or other retirement
benefit plans covering substantially all employees. Pension benefits are
generally based on years of service and on compensation during the final years
of employment. Plan assets consist primarily of equity securities and corporate
and government fixed income securities. Substantially all pension benefit
costs are funded as accrued; however, such funding is limited, where applicable,
to amounts deductible for income tax purposes. Certain other retirement benefits
are provided by balance sheet accruals. Contributions to defined contribution
plans are mainly determined as a percentage of profits. Effective January 1,
2001, contributions to the Company's United States defined contribution plan
match 50% of the employee's pre-tax contributions, up to plan limits.
In addition to pension benefits, certain health care and life
insurance benefits are provided to qualifying United States employees upon
retirement from the Company. Such coverage is provided through insurance plans
with premiums based on benefits paid. The Company does not generally provide
health care and life insurance coverage for retired employees of foreign
subsidiaries; however, such benefits are provided in most foreign countries by
government-sponsored plans, and the cost of these programs is not significant to
the Company.
Pension expense included the following components:
U.S. Plans Non-U.S. Plans
--------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned $ 7,293 $ 5,104 $ 6,384 $ 9,552 $ 6,051 $ 6,687
Interest cost on projected benefit obligation 18,351 14,151 12,832 24,306 9,471 9,084
Expected return on plan assets (23,082) (16,757) (14,614) (27,691) (10,688) (11,086)
Net amortization and deferrals (1,347) (1,414) (15) 679 777 665
--------------------------------------------------------------------
Defined benefit plans 1,215 1,084 4,587 6,846 5,611 5,350
Defined contribution and other retirement plans 2,368 2,386 2,386 2,425 3,173 2,357
--------------------------------------------------------------------
Total pension expense $ 3,583 $ 3,470 $ 6,973 $ 9,271 $ 8,784 $ 7,707
====================================================================
Expense recognized for postretirement benefits included the following
components:
(Dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned $1,722 $1,500 $1,832
Interest on benefit obligation 5,377 4,104 3,672
Net amortization and deferrals 508 13 33
-------------------------------------------------
Total postretirement benefit expense $7,607 $5,617 $5,537
=================================================
Changes in pension and postretirement benefit obligations were:
U.S. Pension Plans Non-U.S. Pension Plans Postretirement Benefits
------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 250,354 $ 174,235 $ 333,691 $ 173,756 $ 68,832 $ 50,345
Service cost for benefits earned 7,293 5,104 9,552 6,051 1,722 1,500
Interest cost on projected benefit obligation 18,351 14,151 24,306 9,471 5,377 4,104
Actuarial (gain) loss (8,027) 15,230 (6,476) (781) 9,651 16,501
Plan amendments -- 6,199 -- -- -- (2,132)
Plan participants' contributions -- -- 90 88 105 1
Benefits paid (13,572) (9,705) (13,336) (7,076) (4,083) (3,933)
Acquisitions -- 30,910 16,496 167,853 1,902 1,505
Special termination benefits 2,248 14,230 382 -- -- 941
Translation adjustments -- -- (13,315) (15,671) -- --
------------------------------------------------------------------------
Benefit obligation at end of year $ 256,647 $ 250,354 $ 351,390 $ 333,691 $ 83,506 $ 68,832
========================================================================
Changes in pension plan assets were:
U.S. Plans Non-U.S. Plans
------------------------------------------------------------
(Dollars in thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 287,375 $ 267,484 $ 347,346 $ 164,912
Actual return on plan assets (19,487) (389) (34,497) 13,695
Employer contributions 1,873 1,293 8,729 5,724
Plan participants' contributions -- -- 90 88
Acquisitions -- 28,692 -- 185,236
Benefits paid (13,572) (9,705) (13,336) (7,076)
Translation adjustments -- -- (13,339) (15,233)
------------------------------------------------------------
Fair value of plan assets at end of year $ 256,189 $ 287,375 $ 294,993 $ 347,346
============================================================
The funded status of pension and postretirement plans at December 31 was:
U.S. Pension Plans Non-U.S. Pension Plans Postretirement Benefits
-------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation $ (458) $ 37,021 $(56,397) $ 13,655 $(83,506) $(68,832)
Remaining balance of unrecognized net (asset)
liability established at adoption of FAS 87 (928) (1,571) 811 1,046 -- --
Unrecognized prior service cost 9,101 9,908 3,802 4,397 (1,842) (1,984)
Unrecognized net (gain) loss (24,654) (60,707) 53,421 (2,032) 23,540 14,575
-------------------------------------------------------------------------
Net asset (liability) $(16,939) $(15,349) $ 1,637 $ 17,066 $(61,808) $(56,241)
=========================================================================
Pension assets and liabilities included in the Consolidated Balance Sheet at
December 31 were:
U.S. Plans Non-U.S. Plans
-----------------------------------------------------------------
(Dollars in thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 6,408 $ 7,170 $ 281 $ 23,450
Accrued benefit liability (23,650) (22,519) (30,869) (6,384)
Accumulated other comprehensive income 303 -- 27,940 --
Intangible asset -- -- 4,285 --
=================================================================
Principal weighted average actuarial assumptions used to determine the above
pension data were:
U.S. Plans Non-U.S. Plans
-----------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Discount rate 7.2% 7.5% 5.9% 6.2%
Weighted average rate of compensation increase 4.5% 4.5% 3.2% 3.1%
Long-term rate of return on plan assets 9.0% 9.0% 7.5% 8.3%
=================================================================
Principal actuarial assumptions used to determine the above postretirement data
were:
2001 2000
- ----------------------------------------------------------------------------------
Discount rate 7.2% 7.5%
Current medical cost trend rate 10.0% 8.0%
Ultimate medical cost trend rate 5.0% 5.0%
Medical cost trend rate decreases to
ultimate rate in year 2007 2007
====================
The effect of a 1% increase in the assumed medical rate of inflation
would increase the accumulated postretirement benefit obligation, and the
annual postretirement expense, by approximately $12.6 million and $1.3 million,
respectively; a 1% decrease in the rate would decrease the obligation and
expense by approximately $9.4 million and $0.9 million, respectively.
During 2000, the Company initiated two separate voluntary retirement
incentive programs for United States-based employees meeting certain eligibility
requirements. Those eligible employees who elected to take the incentive will
receive additional credit, for pension purposes, in terms of age and service, as
well as other benefits. Approximately 150 employees accepted enhanced retirement
benefits under these two programs and costs relating thereto are reflected as
special termination benefits above. The special termination benefit of $2.2
million recognized during 2001 represents the liability on account of social
security supplemental benefit payments to be made to those participants who
elected to retire under the most recent window program implemented during 2001.
The Company recorded a minimum pension liability of $27.0 million at
December 31, 2001, as required by Financial Accounting Standards Board Statement
No. 87. The adjustment is reflected in other comprehensive income and other
long-term liabilities, as appropriate, and is prescribed when the accumulated
benefit obligation in the plan exceeds the fair value of the underlying
pension plan assets and accrued pension liabilities. The adjustment relates
entirely to foreign plans in the United Kingdom, the Netherlands and Japan.
NOTE 14. FINANCIAL INSTRUMENTS
The Company enters into various interest rate swaps to manage its interest rate
exposure. The Company realized a net gain of $3.5 million on a $700.0 million
notional amount of U.S. Treasury lock hedges, 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 to effectively convert the 6.45% coupon interest
rate on the Notes to a short-term rate based upon LIBOR plus an interest markup.
The swap was designated as a fully effective, qualified fair value hedge. During
the year, the Company amended the swap on four occasions, which changed the
LIBOR basis and the related spread. As a result of market conditions and these
changes in the swaps, the counterparty paid the Company $19.9 million, including
accrued swap interest of $3.3 million. The net gains on settlement are being
amortized over the remaining term of the Notes. As a result of these
transactions, the effective interest rate at December 31, 2001 on the 6.45%
Notes approximated 3.7%. The Company has recorded the swap and the debt at fair
value resulting in an increase to long-term debt of $8.3 million and the
recording of a corresponding swap asset.
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 and anticipated purchases of raw materials. The notional amount and
maturity dates of these contracts match those of the underlying transactions. At
December 31, 2001, the Company had outstanding foreign currency forward
contracts of approximately $97.3 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 December 31,
2001.
NOTE 15. CONCENTRATIONS OF CREDIT RISK
The Company has no significant concentrations of risk in financial instruments.
Temporary cash investments are made in a well-diversified portfolio of
high-quality, liquid obligations of government, corporate and financial
institutions. There are also limited concentrations of credit risk with
respect to trade receivables because of the large number of customers spread
across many industries and geographic areas.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancellable operating leases for office and
warehouse facilities are $2.2 million in 2002, $2.1 million in 2003, $1.1
million in 2004, $0.9 million in 2005 and nothing thereafter. The
corresponding rental expense amounted to $2.2 million in 2001; rental expense
was not significant in 2000 and 1999.
There are various lawsuits and claims pending against the Company.
Management believes that any liability resulting from those actions or claims
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
NOTE 17. RELATED-PARTY TRANSACTIONS
At December 31, 2001, the Company held a note receivable from an officer of the
Company. This note receivable bears interest, determined and payable
quarterly, at the higher of a market rate for such a loan by a third-party
lender or the Company's weighted average cost of borrowed funds. The applicable
rate as of December 31, 2001 was 4.1%. The note is collateralized by 55,000
shares of common stock and is due in full on the earlier of November 14, 2007,
termination of employment as an executive officer, or when and if the market
value of the collateral is less than 110% of the outstanding principal balance
of the loan. This note receivable is reflected as a reduction of stockholders'
equity.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Income Per Share(b)
--------------------------------
(Dollars in thousands
except per share amounts) Net Sales Gross Profit Net Income(a) Basic Diluted
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
First $ 483,661 $ 369,912 $199,522 $165,235 $ 20,272 $ 43,776 $ 0.21 $ 0.42 $ 0.21 $ 0.42
Second 478,216 368,759 208,710 165,197 33,005 48,916 0.34 0.48 0.34 0.48
Third 462,719 339,591 194,088 148,092 33,555 28,927 0.35 0.29 0.35 0.29
Fourth(c) 419,170 384,533 178,013 152,618 29,170 1,386 0.31 0.01 0.30 0.01
-----------------------------------------------------------------------------------------------------
$1,843,766 $1,462,795 $780,333 $631,142 $116,002 $123,005 $ 1.21 $ 1.22 $ 1.20 $ 1.22
=====================================================================================================
(a) Net income for the 2001 first, second and third quarters includes the
after-tax effects of certain charges of $7,762, $5,663 and $5,676,
respectively. Net income for the 2000 first, third and fourth quarters
includes the after-tax effects of certain charges of $6,248, $4,765 and
$15,752, respectively. See Note 2 of the Notes to Consolidated Financial
Statements for further discussion.
(b) The sum of the 2000 quarters' earnings per share does not equal the
year-to-date earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting requirements.
(c) The Company acquired Bush Boake Allen (BBA) effective November 3, 2000, and
the BBA operating results are included in the Company's consolidated
results from that date.
STOCK PRICES
The Company's common stock is traded principally on the New York Stock Exchange.
The high and low stock prices for each quarter during the last two years were:
2001 2000
--------------------------------------------------------------------------
Quarter High Low High Low
First $ 22.76 $ 19.75 $ 37.94 $ 28.75
Second 28.20 21.25 37.81 28.81
Third 31.60 24.97 30.94 17.38
Fourth 31.69 24.10 20.81 14.69
==========================================================================
FIVE-YEAR SUMMARY
International Flavors & Fragrances Inc.
(Dollars in thousands except per share amounts) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income Data
Net sales $ 1,843,766 $1,462,795 $ 1,439,499 $ 1,407,349 $ 1,426,791
---------------------------------------------------------------------
Cost of goods sold 1,063,433 831,653 806,382 777,764 787,533
Research and development expenses 135,248 112,671 103,794 98,438 94,411
Selling and administrative expenses 313,335 258,653 248,047 224,393 212,678
Amortization of goodwill and other intangibles 46,089 7,032 -- -- --
Nonrecurring charges(a)(b)(c) 30,069 41,273 32,948 -- --
Interest expense 70,424 25,072 5,154 2,042 2,420
Other (income) expense, net (2,609) 2,314 (291) (6,356) (10,442)
---------------------------------------------------------------------
1,655,989 1,278,668 1,196,034 1,096,281 1,086,600
---------------------------------------------------------------------
Income before taxes on income 187,777 184,127 243,465 311,068 340,191
Taxes on income 71,775 61,122 81,465 107,283 121,962
---------------------------------------------------------------------
Net income $ 116,002 $ 123,005 $ 162,000 $ 203,785 $ 218,229
---------------------------------------------------------------------
% of net sales 6.3 8.4 11.3 14.5 15.3
% of average shareholders' equity 20.1 16.5 18.0 20.9 21.0
Net income per share - basic $ 1.21 $ 1.22 $ 1.53 $ 1.90 $ 2.00
Net income per share - diluted $ 1.20 $ 1.22 $ 1.53 $ 1.90 $ 1.99
---------------------------------------------------------------------
Average number of shares (thousands) 95,770 101,073 105,748 107,122 109,065
---------------------------------------------------------------------
Consolidated Balance Sheet Data
Cash and short-term investments $ 48,905 $ 129,238 $ 62,971 $ 115,999 $ 260,446
Receivables, net 340,358 364,314 303,418 283,480 268,534
Inventories 415,984 435,312 415,269 403,961 360,074
Property, plant and equipment, net 532,473 679,874 523,916 498,784 446,509
Intangible assets, net 795,920 755,923 -- -- --
Total assets 2,268,051 2,489,033 1,401,495 1,388,064 1,422,261
Bank loans and commercial paper 227,945 852,985 92,474 29,072 10,490
Long-term debt 939,404 417,402 3,832 4,341 5,114
Shareholders' equity 524,170 631,259 858,497 945,051 1,000,488
---------------------------------------------------------------------
Other Data
Current ratio 1.6 0.9 2.3 3.1 3.5
Gross additions to property, plant and equipment $ 52,016 $ 60,696 $ 103,835 $ 91,690 $ 59,284
Depreciation and amortization charged to income 123,493 69,344 56,369 49,006 50,278
Cash dividends declared 57,219 130,234 160,830 159,513 158,453
Per share $ 0.60 $ 1.29 $ 1.52 $ 1.49 $ 1.45
Number of shareholders of record at year-end 3,394 3,741 4,209 4,653 4,991
Number of employees at year-end 5,929 6,614 4,682 4,669 4,639
=====================================================================
(a) Nonrecurring charges ($19,101 after tax) in 2001 resulted from the
Company's reorganization program as well as certain costs associated with
the integration of BBA.
(b) Nonrecurring charges ($26,765 after tax) in 2000 resulted from the
Company's reorganization program as well as certain costs associated with
the integration of BBA.
(c) Nonrecurring charges ($21,910 after tax) in 1999 resulted from the
Company's program to streamline its operations worldwide.
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
Margaret Hayes Adame J. Michael Cook Carlos A. Lobbosco William D. Van Dyke, III
President Chairman and Executive Vice President Senior Vice President
Fashion Group International Chief Executive Officer Emeritus Global Business Development Salomon Smith Barney Inc.
Deloitte & Touche, LLP
Gunter Blobel, M.D., Ph.D. Arthur C. Martinez Douglas J. Wetmore
Nobel Prize-winning Peter A. Georgescu Chairman and Senior Vice President and
Rockefeller University Professor Chairman Emeritus Chief Executive Officer Emeritus Chief Financial Officer
associated with Howard Young & Rubicam, Inc. Sears, Roebuck and Co.
Hughes Medical Institute
Richard A. Goldstein Henry P. van Ameringen
James R. Cantalupo Chairman of the Board and President
President and Chief Executive Officer van Ameringen Foundation, Inc.
Vice Chairman Emeritus
McDonald's Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS GLOBAL VICE PRESIDENTS AND
REGIONAL MANAGERS
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Richard A. Goldstein Clint D. Brooks, Ph.D. GLOBAL Joel W. Shane
Chairman of the Board Vice President VICE PRESIDENTS Vice President
and Chief Executive Officer Research & Development Derek J. Bennett Global Business
Vice President Development - Aroma
Julian W. Boyden Steven J. Heaslip Global Operations - Chemicals and Ingredients
Executive Vice President Vice President Fragrances
Global Human Resources Thomas J. Skatrud
D. Wayne Howard Roberto J. Gordon Vice President
Executive Vice President James P. Huether Vice President Global Operations - Flavors
Global Operations Controller Global Business
Development - Fragrances REGIONAL MANAGERS
Carlos A. Lobbosco Charles D. Weller Arun Bewoor
Executive Vice President Treasurer Steve Huang, Ph.D. Group Country Manager
Global Business Vice President Indian Subcontinent
Development VICE PRESIDENTS Global Operations - Aroma
Sophia Grojsman Chemicals and Ingredients Robert Burns
Stephen A. Block Jose A. Rodriguez Vice President
Senior Vice President Neil Humphreys Asia-Pacific
General Counsel and Vice President
Secretary Global Business James H. Dunsdon
Development - Flavors Vice President
Douglas J. Wetmore North America
Senior Vice President and Bruce S. Leskanic
Chief Financial Officer Vice President Robert J. Edelman
Supply Chain Strategy Vice President
Gail S. Belmuth Europe
Vice President Nicolas Mirzayantz
Corporate Communications Vice President Graciela M. Ferro
Global Business Vice President
Development - Fine Latin America
Fragrances and Toiletries