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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission File Number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-1432060
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
521 WEST 57TH STREET, NEW YORK, N.Y. 10019
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (212) 765-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, par value New York Stock Exchange
12 1/2(cent) per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [X] No [ ].
For the purpose of reporting the following market value of Registrant's
outstanding common stock, the term "affiliate" refers to persons, entities or
groups which directly or indirectly control, are controlled by, or are under
common control with the Registrant and does not include individual executive
officers or directors or under 10% shareholders. The aggregate market value of
Registrant's common stock not held by affiliates as of June 30, 2003 was
$2,988,954,273.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of February 1, 2004:
93,985,484 shares of Common Stock, par value 12 1/2(cent) per share
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be sent to shareholders in
connection with the 2004 Annual Meeting (the "IFF 2004 Proxy Statement") are
incorporated by reference in Part III of this Form 10-K.
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INTERNATIONAL FLAVORS & FRAGRANCES INC.
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business 3
ITEM 2. Properties 9
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 11
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Security Holder Matters 12
ITEM 6. Selected Financial Data 13
ITEM 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 31
ITEM 8. Financial Statements and Supplementary Data 31
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
ITEM 9A. Controls and Procedures 32
PART III
ITEM 10. Directors and Executive Officers of the Registrant 33
ITEM 11. Executive Compensation 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 33
ITEM 13. Certain Relationships and Related Transactions 33
ITEM 14. Principal Accountant Fees and Services 33
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34
SIGNATURES 65
2
PART I
ITEM 1. BUSINESS.
International Flavors & Fragrances Inc., incorporated in New York in 1909
(the "Registrant" or "Company"), is a leading creator and manufacturer of flavor
and fragrance products used by other manufacturers to impart or improve flavor
or fragrance in a wide variety of consumer products. Fragrance products are sold
principally to manufacturers of perfumes, cosmetics, toiletries, hair care
products, deodorants, soaps, detergents and air care products; flavor products
are sold principally to manufacturers of prepared foods, beverages, dairy foods,
pharmaceuticals and confectionery products.
The present worldwide scope of the Company's business is in part the result
of the 1958 combination of (i) the business conducted prior to the combination
primarily in the United States by the Company under the name van
Ameringen-Haebler, Inc. ("VAH") with (ii) the business conducted prior to the
combination primarily in Europe by N. V. Polak & Schwarz's Essencefabrieken, a
Dutch corporation ("P & S"). The P & S enterprise, founded in Holland in 1889,
was also engaged in the manufacture and sale of flavor and fragrance products,
with operations in a number of countries where VAH was not an important factor.
In October 2000, the Company implemented a global reorganization under the
broad umbrellas of Business Development and Operations, rather than separate
divisions for flavors and fragrances. The responsibilities of Business
Development, whose purpose is to drive top line growth of the Company, include
category strategy, consumer research, product development, global sales and
marketing, research and development coordination and technical application. The
responsibilities of Operations, whose focus is on product delivery, product
planning and increasing productivity, include global supply chain,
manufacturing, customer service, quality control, logistics and distribution.
The Company has a Regional Manager covering each major geographical region of
the world. The Regional Managers work with and are supported by both Business
Development and Operations. The financial information concerning reporting
segments is presented in the accompanying financial statements.
In November 2000, the Company acquired Bush Boake Allen Inc. ("BBA"), an
international flavor, fragrance and aroma chemical company with worldwide annual
sales of $499 million. This acquisition enhanced the Company's position as a
global leader in flavor markets, strengthened the Company's already leading
global fragrance position, expanded the Company's product line and customer
base, particularly in certain emerging markets, and broadened and enhanced the
Company's management pool.
The Company currently has 34 manufacturing facilities with the major
manufacturing facilities located in the United States, France, Great Britain,
Ireland, The Netherlands, Spain, Switzerland, Argentina, Brazil, Mexico, India,
Australia, China, Indonesia, Japan and Singapore. The remaining manufacturing
facilities are located in 9 other countries. The Company maintains its own sales
and distribution facilities in 34 countries and is represented by sales agents
in other countries. The Company's principal executive offices are located at 521
West 57th Street, New York, New York 10019 (212-765-5500). Except as the context
otherwise indicates, the term "the Company" as used in this report refers to the
Registrant and its subsidiaries.
Markets
Fragrance products are used by customers in the manufacture of consumer
products such as soaps, detergents, cosmetic creams, lotions and powders,
lipsticks, after-shave lotions, deodorants, hair preparations, candles, air
fresheners and all-purpose cleaners, as well as in other consumer products
designed solely to appeal to the sense of smell, such as perfumes and colognes.
The cosmetics industry, including perfume and toiletries manufacturers, is one
of the Company's two largest fragrance customer groups. Most of the major United
States companies in this industry are customers of the Company, and five of the
largest United States cosmetics companies are among its principal customers. The
household products industry, including soaps and detergents, is the other
important
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fragrance customer group. Four of the largest United States household product
manufacturers are major customers of the Company. In the three years ended
December 31, 2003, sales of fragrance products accounted for approximately 54%,
55% and 55%, respectively, of the Company's total sales on a reported basis.
Flavor products are sold principally to the food and beverage industries
for use in consumer products such as soft drinks, candies, baked goods,
desserts, prepared foods, dietary foods, dairy products, drink powders,
pharmaceuticals, snack foods and alcoholic beverages. Two of the Company's
largest customers for flavor products are major producers of prepared foods and
beverages in the United States. In the three years ended December 31, 2003,
sales of flavor products accounted for approximately 46%, 45% and 45%,
respectively, of the Company's total sales on a reported basis.
Products
The Company's principal fragrance and flavor products consist of compounds
of large numbers of ingredients blended under proprietary formulas created by
its perfumers and flavorists. Most of these compounds contribute the total
fragrance or flavor to the consumer products in which they are used. This
fragrance or flavor characteristic is often a major factor in the public
selection and acceptance of the consumer end product. A smaller number of
compounds is sold to manufacturers who further blend them to achieve the
finished fragrance or flavor in their products. The Company produces thousands
of compounds, and new compounds are constantly being created in order to meet
the many and changing characteristics of its customers' end products. Most of
the fragrance and flavor compounds are created and produced for the exclusive
use of particular customers. The Company's products are sold in solid and liquid
forms and in amounts ranging from a few pounds to many tons, depending upon the
nature of the product.
The ingredients used by the Company in its compounds are both synthetic and
natural. The Company manufactures most of the synthetic ingredients. While the
major part of the Company's production of synthetic ingredients is used by it in
its compounds, a substantial portion is sold to others. The natural ingredients
are derived from flowers, fruits and other botanical products as well as from
animal products. They contain varying numbers of organic chemicals, which are
responsible for the fragrance or flavor of the natural product. The natural
products are purchased for the larger part in processed or semi-processed form.
Some are used in compounds in the state in which they are purchased and others
after further processing. Natural products, together with various chemicals, are
also used as raw materials for the manufacture of synthetic ingredients by
chemical processes. The Company's flavor products also include extracts and
seasonings derived from various fruits, vegetables, nuts, herbs and spices as
well as microbiologically-derived ingredients.
Market Developments
The demand for consumer products utilizing flavors and fragrances has been
stimulated and broadened by changing social habits resulting from various
factors such as increases in personal income, employment of women, teenage
population, leisure time, health concerns and urbanization and by the continued
growth in world population. In the fragrance field, these developments have
expanded the market for hair care, candles and air care products and deodorant
and personal wash products with finer fragrance quality, as well as the market
for colognes, toilet waters, men's toiletries and other products beyond
traditional luxury items such as perfumes. In the flavor field, similar market
characteristics have stimulated the demand for products such as convenience
foods, soft drinks and low-cholesterol and low-fat food products that must
conform to expected tastes. New and improved methods of packaging, application
and dispensing have been developed for many consumer products that utilize some
of the Company's flavor or fragrance products. These developments have called
for the creation by the Company of many new compounds and ingredients compatible
with the newly introduced materials and methods of application used in consumer
end products.
Product Development and Research
The development of new flavor and fragrance products is a complex artistic
and technical process calling upon the combined knowledge and skill of the
Company's creative perfumers and flavorists and
4
its scientists. With extensive experience, the perfumers and flavorists
continuously advance their skills for creating fragrances or flavors best suited
to the market requirements of the customers' products.
Scientists from various disciplines work in project teams with the
perfumers and flavorists to develop flavor and fragrance products with consumer
preferred performance characteristics. Scientific expertise includes: natural
products research, plant science, organic chemistry, analytical chemistry,
biochemistry, microbiology, process engineering, food science, material science,
and sensory science. Analytical and sensory science is applied to understand the
complex interactions of the many ingredients in a consumer product in order to
optimize the flavor or fragrance performance at all points of use. Material
science technology is applied to create controlled release and delivery systems
to enhance flavor and fragrance performance in consumer products. An important
contribution to the creation of new fragrance and flavor products is the
discovery and development of new ingredients having improved fragrance or flavor
value. The ingredients research program discovers molecules found in natural
substances and creates new molecules that are subsequently tested for their
fragrance or flavor value. The new molecules that meet rigorous requirements for
commercial development are subsequently transferred to manufacturing operations
for production.
Creative and technical product development is conducted in 35 fragrance and
flavor laboratories in 24 countries. The Company maintains a research and
development center at Union Beach, New Jersey. The Company spent $159,286,000 in
2003, $144,027,000 in 2002 and $135,248,000 in 2001 on its research and
development activities. These expenditures are currently expected to increase in
2004 to approximately $179,000,000. Of the amount expended in 2003 on such
activities, 64% was for fragrances and the balance was for flavors. The Company
employed 1,099 persons in 2003 and 1,097 persons in 2002 in such activities.
The business of the Company is not materially dependent upon any patents,
trademarks or licenses.
Distribution
Most of the Company's sales are through its own sales force, operating from
6 sales offices in the United States and 52 sales offices in 33 foreign
countries. Sales in other countries are made through sales agents and
distributors. For the year ended December 31, 2003, 29% of the Company's sales
were to customers in North America, 40% in Europe, 16% in Asia Pacific, 12% in
Latin America and 3% in the India Region. For additional information with
respect to the management of the Company's operations by major geographical
region, see Note 13 of the Notes to the Company's Consolidated Financial
Statements.
During 2003 the Company's 30 largest customers accounted for approximately
53% of its sales, its four largest customers and their affiliates accounted for
about 9%, 8%, 6% and 4%, respectively, of its sales, and no other single
customer accounted for more than 3% of sales.
Governmental Regulation
Manufacture and sale of the Company's products are subject to regulation in
the United States by the Food and Drug Administration, the Agriculture
Department, the Bureau of Alcohol, Tobacco and Firearms, the Environmental
Protection Agency, the Occupational Safety and Health Administration, the Drug
Enforcement Administration and state authorities. Foreign subsidiaries are
subject to similar regulation in a number of countries. 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. The Company expects to spend in 2004 approximately
$5,500,000 in capital projects and $14,000,000 in operating expenses and
governmental charges for the purpose of complying with such requirements. The
Company currently expects that in 2005 capital expenditures, operating expenses
and governmental charges for such purpose will not be materially different from
those expected for 2004.
Raw Material Purchases
More than 5,000 different raw materials are purchased from many sources all
over the world. The principal natural raw material purchases consist of
essential oils, extracts and concentrates derived
5
from fruits, vegetables, flowers, woods and other botanicals, animal products
and raw fruits. The principal synthetic raw material purchases consist of
organic chemicals. The Company believes that alternate sources of materials are
available to enable it to maintain its competitive position in the event of any
interruption in the supply of raw materials from present sources.
Competition
The Company has more than 50 competitors in the United States and world
markets. While no single factor is responsible, the Company's competitive
position is based principally on the creative skills of its perfumers and
flavorists, the technological advances resulting from its research and
development, the quality of its customer service, the support provided by its
marketing and application groups, and its understanding of consumers. The
Company believes that it is one of the largest companies producing and marketing
on an international basis a wide range of fragrance and flavor products of the
types manufactured for sale to manufacturers of consumer products. In particular
countries and localities, the Company faces competition from numerous companies
specializing in certain product lines, among which are some companies larger
than the Company and some more important in a particular product line or lines.
Most of the Company's customers do not buy all their fragrance or flavor
products from the same supplier, and some customers make their own fragrance or
flavor compounds with ingredients supplied by the Company or others.
Employee Relations
The Company at December 31, 2003 employed 5,454 persons, of whom 1,540 were
employed in the United States. The Company has never experienced a work stoppage
or strike and considers that its employee relations are satisfactory.
EXECUTIVE OFFICERS OF REGISTRANT:
YEAR
FIRST
BECAME
NAME OFFICE AND OTHER BUSINESS EXPERIENCE(2) AGE OFFICER
- --------------------------------- ----------------------------------------------- ----- --------
Richard A. Goldstein(1) ......... Chairman of the Board and Chief Executive 62 2000
Officer since June 2000; President and Chief
Executive Officer of Unilever United States,
Inc. and Business Group President of Unilever
North American Foods, a home, personal care
and food products company, prior thereto;
Director, Legacy Hotels; Director, Fiduciary
Trust Company International; Director, The
Interpublic Group of Companies, Inc.;
Director, Continuum Health Partners, Inc.
D. Wayne Howard ................. Executive Vice President, Global Operations 48 2000
since September 2000; Vice President, Supply
Chain Strategy of Nordstrom, Inc., a retailer,
from January 2000 to August 2000; Vice
President, Strategic Sourcing, North America
of Unilever North American Foods, prior
thereto.
Clint D. Brooks ................. Senior Vice President, Research and 52 2000
Development since December 2002; Vice
President, Research and Development from
October 2000 to December 2002; Director of
Chemical Sciences, Abbott Laboratories, a
pharmaceutical company, prior thereto.
6
YEAR
FIRST
BECAME
NAME OFFICE AND OTHER BUSINESS EXPERIENCE(2) AGE OFFICER
- ---------------------------- -------------------------------------------------- ----- --------
James H. Dunsdon ........... Senior Vice President, Global Business 57 2003
Development Flavors and Functional
Fragrances effective March 31, 2004; Vice
President North America Region since
January 2003; Regional Vice President, North
America from January 2001 to January 2003;
Executive Vice President BBA, prior thereto.
Steven J. Heaslip .......... Senior Vice President, Human Resources since 46 2001
December 2002; Vice President, Human
Resources from September 2001 to December
2002; Senior Vice President, Human
Resources, Elizabeth Arden, a manufacturer
of prestige beauty products, prior thereto.
Dennis M. Meany ............ Senior Vice President, General Counsel and 56 2004
Secretary since January 2004; Associate
General Counsel from November 2000 to
December 2003; Vice President, General
Counsel and Secretary of BBA prior thereto.
Douglas J. Wetmore ......... Senior Vice President and Chief Financial 46 1992
Officer since September 2000; Vice President
and Chief Financial Officer from April 1998 to
September 2000; Controller prior thereto.
Gail S. Belmuth ............ Vice President, Corporate Communications since 40 2001
June 2001; President and COO of Banner
McBride North America, a change
management consulting firm, from May 2000
to May 2001; Managing Director,
Burson-Marsteller, a public relations firm,
prior thereto.
Arun Bewoor ................ Vice President, India Region since January 2003; 59 2003
Managing Director of IFF India Ltd and
Regional Vice President, India Region from
June 2002 to January 2003; Managing
Director, Bush Boake Allen India Ltd., prior
thereto.
Robert Burns ............... Vice President, Asia Pacific Region since 46 2003
January 2003; Regional Vice President, Asia
Pacific from January 2001 to January 2003;
Managing Director, IFF Australia from
January 1999 to December 2000; Managing
Director/ Vice President Flavors, IFF
Indonesia, prior thereto.
7
YEAR
FIRST
BECAME
NAME OFFICE AND OTHER BUSINESS EXPERIENCE(2) AGE OFFICER
- ---------------------------- ----------------------------------------------- ----- --------
Rob J. M. Edelman .......... Vice President, Europe Region since January 42 2003
2003; Regional Vice President, Europe from
January 2001 to January 2003; Vice President
and Director of Marketing and Sales, Aroma
Chemicals from July 1999 to December 2000;
Managing Director, PFW Aroma Chemicals
B.V., an aroma chemicals manufacturing
company, prior thereto.
Graciela M. Ferro .......... Vice President, Latin America Region since 49 2003
January 2003; Regional Vice President, Latin
America from October 2000 to January 2003;
Vice President, Latin America, LATAM Area
Manager, Fragrance Division and IFF
Argentina affiliate Manager from October
1999 to October 2000; Vice President, Latin
America, IFF Argentina Affiliate Manager
from August 1998 to October 1999; Regional
Account Manager for the Unilever, Latin
America Account, prior thereto.
Neil Humphreys(3) .......... Vice President, Global Business Development, 57 2002
Flavors and Functional Fragrances since
December 2002; Vice President, Global
Business Development, Flavors from January,
2001 to December 2002; Vice President,
Regional Manager, Asia Pacific, Flavors from
July 1998 to January 2001; Senior Vice
President, Asia Pacific, Givaudan-Roure, a
flavor, fragrance and aroma chemical
manufacturing company, prior thereto.
Nicolas Mirzayantz ......... Vice President, Global Business Development, 41 2002
Fine Fragrance and Toiletries since December
2002; Vice President, Global Business
Development, Fine Fragrances and Toiletries
since January 2001; Fragrances General
Manager, IFF France from January 1999 to
January 2001; Vice President, Commercial and
Creative Director, IFF France, prior thereto.
(1) Member of Executive Committee of the Board of Directors.
(2) Employed by the Company or an affiliated company for the last five years,
except as otherwise indicated.
(3) Retiring effective March 31, 2004.
Available Information
The Company makes available free of charge on or through its website,
www.iff.com, all materials that it files electronically with the SEC, including
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after electronically filing such materials with, or
furnishing them to, the SEC. During the period covered by this Form 10-K, the
Company made all such materials available through its website as soon as
reasonably practicable after filing such materials with the SEC.
8
You may also read and copy any materials filed by the Company with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC
20549, and you may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet website, www.sec.gov, that contains reports, proxy and information
statements and other information that the Company files electronically with the
SEC.
A copy of the Company's Corporate Governance Guidelines, its Code of
Business Conduct and Ethics, and the charters of the Executive Committee, Audit
Committee, Compensation Committee, and Nominating and Governance Committee of
the Board of Directors are posted on the Company's website, www.iff.com and are
available in print to any shareholder who requests copies by contacting Dennis
M. Meany, Senior Vice President, General Counsel and Secretary, at the Company's
principal executive office set forth above.
ITEM 2. PROPERTIES.
The principal manufacturing and research properties of the Company are as
follows:
LOCATION OPERATION
- -------- ---------
UNITED STATES
Augusta, GA .................... Production of fragrance chemical ingredients.
Carrollton, TX(1) .............. Production of flavor compound.
Hazlet, NJ (1) ................. Production of fragrance compounds; fragrance laboratories.
Jacksonville, FL ............... Production of fragrance chemical ingredients.
New York, NY(1) ................ Fragrance laboratories.
South Brunswick, NJ(1) ......... Production of flavor compounds and ingredients;
flavor laboratories.
Union Beach, NJ ................ Research and development center.
FRANCE
Bois-Colombes .................. Fragrance laboratories.
Dijon .......................... Production of fragrance compounds and ingredients, flavor compounds
and ingredients and fruit preparations; flavor laboratories.
Grasse ......................... Production of flavor and fragrance ingredients; fragrance laboratories.
GREAT BRITAIN
Haverhill ...................... Production of flavor compounds and ingredients, and fragrance chemical
ingredients; flavor laboratories.
IRELAND
Drogheda ....................... Production of fragrance compounds.
NETHERLANDS
Hilversum ...................... Flavor and fragrance laboratories.
Tilburg ........................ Production of flavor compounds and ingredients and fragrance
compounds.
SPAIN
Benicarlo ...................... Production of fragrance chemical ingredients.
SWITZERLAND
Reinach-Aargau ................. Production of fruit preparations.
ARGENTINA
Garin .......................... Production of flavor compounds and ingredients and fragrance
compounds; flavor laboratories.
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LOCATION OPERATION
- -------- ---------
BRAZIL
Rio de Janeiro ........... Production of fragrance compounds.
Sao Paulo ................ Fragrance laboratories.
Taubate .................. Production of flavor compounds and ingredients; flavor laboratories.
MEXICO
Tlalnepantla ............. Production of flavor and fragrance compounds; flavor and fragrance
laboratories.
INDIA
Chennai(2) ............... Production of flavor compounds and ingredients and fragrance
compounds; flavor laboratories.
AUSTRALIA
Melbourne ................ Production of flavor compounds and flavor ingredients.
CHINA
Guangzhou(1) ............. Production of flavor and fragrance compounds; flavor laboratories.
Shanghai(1) .............. Flavor and fragrance laboratories.
Xin'anjiang .............. Production of fragrance chemical ingredients.
INDONESIA
Jakarta(3) ............... Production of flavor compounds and ingredients and fragrance
compounds and ingredients; flavor and fragrance laboratories.
JAPAN
Gotemba .................. Production of flavor compounds.
Tokyo .................... Flavor and fragrance laboratories.
SINGAPORE
Jurong(3) ................ Production of flavor and fragrance compounds.
Science Park (1) ......... Flavor and fragrance laboratories.
- ----------
(1) Leased.
(2) The Company has approximately a 93.1% interest in the subsidiary company
that owns this facility.
(3) Land is leased and building is partially leased and partially owned.
The principal executive offices of the Company and its New York laboratory
facilities are located at 521 West 57th Street, New York City.
ITEM 3. LEGAL PROCEEDINGS.
On September 7, 2001, the Company was named as a defendant in a purported
class action brought against it in the Circuit Court of Jasper County, Missouri,
on behalf of employees of a plant owned and operated by Gilster-Mary Lee Corp.
in Jasper, Missouri. The plaintiffs are alleging that they sustained respiratory
injuries in the workplace due to the use by Gilster-Mary Lee of a BBA and IFF
flavor. All BBA and IFF flavors meet the requirements of the U. S. Food and Drug
Administration and are safe for handling and use by workers in food
manufacturing plants when used according to specified safety procedures. Based
on the preliminary report issued by the National Institute for Occupational
Safety and Health (NIOSH), it appears any injuries the plaintiffs may have
suffered are related to inadequate workplace conditions.
On January 15, 2004, the court denied class action status through an order
requiring each plaintiff case to be heard separately. Trial proceedings in the
initial case commenced in March 2004. While the outcome of any litigation cannot
be predicted with certainty, in light of the merits of its defense and
10
the availability of insurance, the Company does not expect this litigation to
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.
On March 31, 2003, the Company and another flavor supplier were named
defendants in a lawsuit by a number of workers at a popcorn factory in Marion,
Ohio, alleging respiratory illness due to the use of butter flavors supplied by
the Company and the other flavor manufacturer. The action was brought in the
Court of Common Pleas, Cuyahoga County, Ohio, and subsequently transferred to
the Court of Common Pleas of Hamilton County, Ohio.
This case is currently in the preliminary stages of discovery. While the
outcome of any litigation cannot be predicted with certainty, in light of the
merits of its defenses and the availability of insurance, the Company does not
expect this litigation to have a material adverse effect on the Company's
financial condition, results of operation or liquidity.
Over the past 20 years, various Federal and State authorities and private
parties have claimed that the Company is a potentially responsible party as a
generator of waste materials for alleged pollution at a number of waste sites
operated by third parties located principally in New Jersey and seek to recover
costs incurred and to be incurred to clean up the sites.
The waste site claims and suits usually involve million dollar amounts, and
most of them are asserted against many potentially responsible parties. Remedial
activities typically consist of several phases carried out over a period of
years. Most site remedies begin with investigation and feasibility studies,
followed by physical removal, destruction, treatment or containment of
contaminated soil and debris, and sometimes by groundwater monitoring and
treatment. To date, the Company's financial responsibility for some sites has
been settled through agreements granting the Company, in exchange for one or
more cash payments made or to be made, either complete release of liability or,
for certain sites, release from further liability for early and/or later
remediation phases, subject to certain "re-opener" clauses for later-discovered
conditions. Settlements in respect of some sites involve, in part, payment by
the Company, and other parties, of a percentage of the site's future remediation
costs over a period of years.
The Company believes that the amounts it has paid and anticipates paying in
the future for clean-up costs and damages at all sites are not and will not be
material to the Company's financial condition, results of operations or
liquidity, because of the involvement of other large potentially responsible
parties at most sites, because payment will be made over an extended time period
and because, pursuant to an agreement reached in July 1994 with three of the
Company's liability insurers, defense costs and indemnity amounts payable by the
Company in respect of the sites will be shared by the insurers up to an agreed
amount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
(a) Market Information.
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:
2003 2002
--------------------------- -------------------------
QUARTER HIGH LOW HIGH LOW
- ---------------- ------------ ------------ ----------- -----------
First .......... $ 36.61 $ 29.39 $ 35.95 $ 27.33
Second ......... 33.60 30.37 37.45 30.61
Third .......... 33.45 29.18 32.90 26.05
Fourth ......... 35.75 31.01 35.90 32.08
(b) Approximate Number of Equity Security Holders.
(B)
(A) NUMBER OF RECORD HOLDERS AS
TITLE OF CLASS OF DECEMBER 31, 2003
-------------- --------------------
Common stock, par value 12 1/2(cent)per share 3,655
(c) Dividends.
Cash dividends declared per share for each quarter since January 2002 were
as follows:
2004 2003 2002
--------- --------- ---------
First ................................... $ .16 $ .15 $ .15
Second .................................. .16 .15
Third ................................... .16 .15
Fourth .................................. .16 .15
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ITEM 6. SELECTED FINANCIAL DATA.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET INCOME PER SHARE(b)
----------------------------------------
NET SALES GROSS PROFIT NET INCOME(a) BASIC(b) DILUTED(b)
------------------------ -------------------- ------------------ -------------------- -------------------
QUARTER 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
- ------- ---------- ---------- -------- -------- -------- -------- ------- ------- ------- -------
First .......... $ 466,224 $ 445,844 $195,777 $185,980 $ 32,017 $ 41,947 $0.34 $0.44 $0.34 $0.44
Second ......... 482,611 476,336 207,376 203,724 51,398 45,401 0.55 0.48 0.54 0.47
Third .......... 480,886 462,777 202,695 201,702 51,071 49,599 0.55 0.52 0.54 0.52
Fourth ......... 471,799 424,292 203,216 182,008 38,111 38,997 0.41 0.41 0.40 0.41
---------- ---------- -------- -------- -------- -------- ----- ----- ----- -----
$1,901,520 $1,809,249 $809,064 $773,414 $172,597 $175,944 $1.84 $1.86 $1.83 $1.84
========== ========== ======== ======== ======== ======== ===== ===== ===== =====
- ----------
(a) Net income for the 2003 first, second, third and fourth quarters includes
the after-tax effects of certain charges of $13,477, $4,433, $2,397 and
$7,207, respectively. Net income for the 2002 second and third quarters
includes the after-tax effects of certain charges of $6,091 and $1,654,
respectively. See Note 2 of the Notes to Consolidated Financial Statements
for further discussion.
(b) The sum of the 2003 quarters' basic and diluted net income per share and
the 2002 quarters' basic net income per share does not equal the earnings
per share for the full year 2003 and 2002, respectively, due to changes in
average shares outstanding.
13
INTERNATIONAL FLAVORS & FRAGRANCES INC.
FIVE-YEAR SUMMARY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2003 2002 2001 2000 1999
--------------- ------------- ------------- --------------- -------------
CONSOLIDATED STATEMENT OF INCOME DATA
Net sales ..................................... $ 1,901,520 $1,809,249 $1,843,766 $ 1,462,795 $1,439,499
----------- ---------- ---------- ----------- ----------
Cost of goods sold ............................ 1,092,456 1,035,835 1,063,433 831,653 806,382
Research and development expenses ............. 159,286 144,027 135,248 112,671 103,794
Selling and administrative expenses ........... 308,951 305,156 313,335 258,653 248,047
Amortization of goodwill and other
intangibles .................................. 12,632 12,632 46,089 7,032 -
Restructuring and other
charges(a)(b)(c)(d)(e) ....................... 42,421 11,737 30,069 41,273 32,948
Interest expense .............................. 28,477 37,036 70,424 25,072 5,154
Other (income) expense, net ................... 5,437 (3,591) (2,609) 2,314 (291)
----------- ---------- ---------- ----------- ----------
1,649,660 1,542,832 1,655,989 1,278,668 1,196,034
----------- ---------- ---------- ----------- ----------
Income before taxes on income ................. 251,860 266,417 187,777 184,127 243,465
Taxes on income ............................... 79,263 90,473 71,775 61,122 81,465
----------- ---------- ---------- ----------- ----------
Net income .................................... $ 172,597 $ 175,944 $ 116,002 $ 123,005 $ 162,000
----------- ---------- ---------- ----------- ----------
Percentage of net sales ...................... 9.1 9.7 6.3 8.4 11.3
Percentage of average shareholders'
equity ..................................... 26.2 32.0 20.1 16.5 18.0
Net income per share -- basic ................. $1.84 $1.86 $1.21 $1.22 $1.53
Net income per share -- diluted ............... $1.83 $1.84 $1.20 $1.22 $1.53
----------- ---------- ---------- ----------- ----------
Average number of shares (thousands) .......... 93,718 94,511 95,770 101,073 105,748
----------- ---------- ---------- ----------- ----------
CONSOLIDATED BALANCE SHEET DATA
Cash and short-term investments ............... $ 12,555 $ 15,165 $ 48,905 $ 129,238 $ 62,971
Receivables, net .............................. 339,725 338,607 340,358 364,314 303,418
Inventories ................................... 454,631 421,603 415,984 435,312 415,269
Property, plant and equipment, net ............ 510,612 520,499 532,473 679,874 523,916
Intangible assets, net ........................ 799,413 794,079 795,920 755,923 -
Total assets .................................. 2,306,892 2,232,694 2,268,051 2,489,033 1,401,495
Bank loans and commercial paper ............... 194,304 49,663 227,945 852,985 92,474
Long-term debt ................................ 690,231 1,007,085 939,404 417,402 3,832
Shareholders' equity .......................... 742,631 574,678 524,170 631,259 858,497
----------- ---------- ---------- ----------- ----------
OTHER DATA
Current ratio ................................. 1.7 2.4 1.6 0.9 2.3
Gross additions to property, plant and
equipment .................................... $ 65,955 $ 81,815 $ 52,016 $ 60,696 $ 103,835
Depreciation and amortization expense ......... 86,721 84,458 123,493 69,344 56,369
Cash dividends declared ....................... 59,032 56,749 57,219 130,234 160,830
Per share .................................... $0.63 $0.60 $0.60 $1.29 $1.52
Number of shareholders of record at
year-end ..................................... 3,655 3,875 3,394 3,741 4,209
Number of employees at year-end ............... 5,454 5,728 5,929 6,614 4,682
=========== ========== ========== =========== ==========
- ----------
(a) Restructuring and other charges ($27,514 after tax) in 2003 resulted from
the Company's reorganization program.
(b) Restructuring and other charges ($7,745 after tax) in 2002 resulted from
the Company's reorganization program.
(c) Restructuring and other charges ($19,101 after tax) in 2001 resulted from
the Company's reorganization program.
(d) Restructuring and other charges ($26,765 after tax) in 2000 resulted from
the Company's reorganization program.
(e) Restructuring and other charges ($21,910 after tax) in 1999 resulted from
the Company's program to streamline its operations worldwide.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative on the Company's
operating performance, financial condition and liquidity and should be read in
conjunction with the accompanying financial statements. It includes the
following sections:
o EXECUTIVE OVERVIEW
o SALES COMMENTARY
o OPERATING RESULTS
o ACQUISITIONS AND DIVESTITURES
o RESTRUCTURING AND OTHER CHARGES
o FINANCIAL CONDITION
o MARKET RISK
o CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
o NEW ACCOUNTING STANDARDS
o NON-GAAP FINANCIAL MEASURES
o CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
EXECUTIVE OVERVIEW
The Company is a leading creator and manufacturer of flavor and fragrance
compounds used to impart or improve the flavor or fragrance in a wide variety of
consumer products. The precise size of the global market for flavors and
fragrances is difficult to determine because the industry is highly fragmented,
both geographically and along product lines; there are few publicly traded
companies in the industry, limiting publicly available data; certain customers
maintain in-house capabilities fulfilling at least a portion of their flavor or
fragrance needs; and the quality and depth of market information in developing
regions of the world is limited. However, analysts generally estimate the flavor
and fragrance market to be $11-$12 billion of which IFF represents 16%; the
Company's nearest sized competitor is of similar size. The five largest
companies in the industry represent 60 - 65% of the global market.
Fragrance compounds are used in perfumes, cosmetics, toiletries, hair care
products, deodorants, soaps, detergents and softeners as well as air care
products. Major fragrance customers include the cosmetics industry, including
perfume and toiletries manufacturers, and the household products industry,
including manufacturers of soaps, detergents, household cleaners and air
fresheners. Flavor products are sold to the food and beverage industries for use
in consumer products such as prepared foods, beverages, dairy food and
confectionery products. The Company is also a leading manufacturer of synthetic
ingredients used in making fragrances. Approximately 50% of the Company's
ingredient production is consumed internally; the balance of production is sold
to third party customers.
Changing social habits resulting from such factors as increases in personal
income and dual-earner households, leisure time, health concerns, urbanization
and population growth stimulate demand for consumer products utilizing flavors
and fragrances. These developments expand the market for products with finer
fragrance quality, as well as the market for colognes and toiletries. Such
developments also stimulate demand for convenience foods, soft drinks and
low-cholesterol and low-fat food products that must conform to expected tastes.
These developments necessitate the creation and development of flavors and
fragrances and ingredients that are compatible with newly introduced materials
and methods of application used in consumer products.
15
Flavors and fragrances are generally:
o created for the exclusive use of a specific customer;
o sold in solid or liquid form, in amounts ranging from a few kilograms
to many tons depending on the nature of the end product in which they
are used;
o a small percentage of the volume and cost of the end product sold to
the consumer; and
o a major factor in consumer selection and acceptance of the product.
Flavors and fragrances have similar economic and operational
characteristics, including research and development, the nature of the creative
and production processes, the manner in which products are distributed and the
type of customer; many customers purchase both flavors and fragrances from the
Company.
A breakdown of sales by principal product category is depicted in the
following graph.
2003 Sales by Category
[GRAPH OMITTED]
Ingredients 13%
Fruit 5%
Flavor compounds 40%
Fine fragrance and toiletries 15%
Functional fragrances 27%
The Company's five largest customers comprise 29% of consolidated sales and
its top thirty customers 53% of sales; these sales percentages have been fairly
constant for several years. A key factor for success is inclusion on major
customers' core supplier lists opening opportunities to win new business. The
Company is currently on the majority of core supplier lists of its major
customers.
The flavor and fragrance industry is impacted by macroeconomic factors in
all product categories and geographic regions. In addition, pricing pressure
placed on the Company's customers by large and powerful retailers and
distributors is inevitably passed along to the Company, and its competitors.
Success and growth in the industry is dependent upon creativity and innovation
in meeting the many and varied needs of the customers' products in a
cost-efficient and effective manner, and a consistently high level of timely
service and delivery. Leadership in innovation and creativity serves to mitigate
the impact of pricing pressure.
The Company produces more than 35,000 unique compounds annually of which
60% are flavors and 40% fragrances. In addition, the Company continually creates
new compounds to meet the many and varied characteristics and needs of its
customers' end products. No individual compound represents more than 1.5% of net
sales. The development of fragrances and flavors is a complex artistic and
technical process calling upon the combined knowledge and talents of creative
perfumers and flavorists and application and research chemists. An important
contribution to the creation of new fragrances and flavors is the development of
new ingredients. The Company bears essentially all costs incurred in connection
with the creation and development of new flavors and fragrances and such
formulae are protected under trade secrecy. The Company is not materially
dependent on any patents, trademarks or licenses.
16
The Company's strategic focus in the three year period 2001 - 2003 has
been:
o To integrate Bush Boake Allen Inc. (BBA), acquired in November 2000,
and the Company, and to reorganize the integrated organization under
two global umbrellas of business development and operations. Business
Development encompasses consumer and market research, product category
strategy, product development, global sales and marketing and technical
application. Operations are responsible for the customer supply chain.
Reorganization was necessary to streamline the Company's operations,
eliminating costs and improving asset utilization, in view of
persistent price pressure from many of the Company's customers.
o To improve customer service, in terms of both on-time deliveries and
responsiveness to new product development initiatives, and to improve
the win rate for new business with the Company's customers.
o To critically evaluate the profitability and growth potential of the
Company's product portfolio.
o To revitalize and redirect research and development initiatives to
those areas considered to be most likely, in the long-term, to yield
the greatest value to the Company's customers and shareholders.
In the three year period ended December 2003, considerable progress against
these strategic initiatives has been made. The BBA integration was completed
quickly and associated savings exceeded the $70 million anticipated at the time
the acquisition was announced. Customer service levels have improved to the
point where on time deliveries exceed the 95% level, with further improvement
targeted; as a result, the Company has been placed back on a number of core
supplier lists it had not been on. The Company exited certain non-core
businesses, contributing to improved returns on sales and invested capital. The
quality and depth of the Company's research and development efforts has improved
significantly. In 2003, the Company patented fifteen new, commercially-viable
ingredients for use in flavors and fragrances; these ingredients will begin to
be commercialized in flavor and fragrance compounds in 2004.
Moving forward, the Company remains committed to:
o Continuous improvement in operations and customer service supported by
the global implementation of an enterprise requirements planning
software package (SAP), and related initiatives.
o Research and development efforts in those aspects of flavors and
fragrances and associated delivery mechanisms which the Company has
identified as most likely to drive profitable future growth. The
Company anticipates that much of this research will be conducted
internally, but such efforts may be augmented by joint research
undertakings and through acquisition of technology.
The next stage in setting strategic initiatives will require establishing
priorities and making choices in order to provide the best opportunity for
continuous improvement in shareholder value.
SALES COMMENTARY
Net sales for 2003, 2002 and 2001 were as follows:
PERCENT PERCENT
NET SALES 2003 CHANGE 2002 CHANGE 2001
- ---------------------------- ----------- --------- ----------- -------- -----------
Flavors .................... $ 866.5 7% $ 809.0 (3%) $ 835.7
Fragrances ................. 1,035.0 3% 1,000.2 (1%) 1,008.1
--------- --------- ---------
Total net sales ......... $ 1,901.5 5% $ 1,809.2 (2%) $ 1,843.8
========= ========= =========
In 2003, sales were favorably affected by the weakening of the U.S.
dollar, most notably in comparison to the Euro, the Pound Sterling, the
Australian dollar and the Japanese Yen; had
17
exchange rates remained the same during 2003 and 2002, net sales would have
declined 2%. In 2002, sales were favorably affected by the weakening of the U.S.
dollar, most notably against the Euro, the Japanese Yen and the Australian
dollar; had exchange rates remained the same during 2002 and 2001, net sales
would have declined 3%.
The Company manages its operations by major geographical region;
management considers destination sales to be a key measure of performance.
Approximately 70% of the Company's sales are outside the United States.
Although the Company's reported sales and earnings are affected by the
weakening or strengthening of the U.S. dollar, this has not had a long-term
effect on the underlying strength of the Company's business.
2003 Sales by Destination
[GRAPH OMITTED]
North America 29%
Europe 40%
Asia Pacific 16%
Latin America 12%
India 3%
The following table summarizes reported sales on a geographic basis:
PERCENT PERCENT
SALES BY DESTINATION 2003 CHANGE 2002 CHANGE 2001
- ---------------------------- ----------- --------- ----------- ---------- -----------
North America .............. $ 550.1 (4%) $ 570.9 (4%) $ 597.1
Europe ..................... 761.7 13% 671.4 2% 658.1
Asia Pacific ............... 311.9 7% 290.9 2% 286.2
Latin America .............. 223.6 (2%) 227.5 (11%) 256.5
India ...................... 54.2 12% 48.5 6% 45.9
--------- --------- ---------
Total net sales ......... $ 1,901.5 5% $ 1,809.2 (2%) $ 1,843.8
========= ========= =========
The Company acquired BBA effective November 3, 2000. BBA sales and
operating results have been included in the Company's consolidated results from
that date. In conjunction with the integration of IFF and BBA, and as part of a
restructuring of the Company's operations, certain non-core businesses
(hereinafter referred to as the "non-core businesses") were disposed of during
2002 and 2001. These non-core businesses included the Company's fruit
preparations business in North and Latin America, its North American
concentrates business and a portion of the aroma chemicals business acquired in
the BBA transaction. The non-core businesses had combined net sales of $9.4 and
$83.8 in 2002 and 2001, respectively, in the periods they were owned by the
Company. The non-core businesses were disposed of in a series of separately
negotiated transactions with third parties; disposal of these businesses did
not materially impact the Company's operating results.
18
Pro-forma sales, excluding all sales associated with the non-core
businesses from 2002 and 2001, and the basis on which the Company measures its
performance, would have been:
PERCENT PRO-FORMA PERCENT PRO-FORMA
NET SALES 2003 CHANGE 2002 CHANGE 2001
- ---------------------------- ----------- --------- ----------- --------- ------------
Flavors .................... $ 866.5 8% $ 799.6 1% $ 788.7
Fragrances ................. 1,035.0 3% 1,000.2 3% 971.3
--------- --------- ---------
Total net sales ......... $ 1,901.5 6% $ 1,799.8 2% $ 1,760.0
========= ========= =========
These pro-forma sales on a geographic basis would have been:
PERCENT PRO-FORMA PERCENT PRO-FORMA
SALES BY DESTINATION 2003 CHANGE 2002 CHANGE 2001
- ---------------------------- ----------- --------- ----------- --------- ------------
North America .............. $ 550.1 (2%) $ 561.7 1% $ 554.9
Europe ..................... 761.7 13% 671.4 7% 627.8
Asia Pacific ............... 311.9 7% 290.8 3% 283.7
Latin America .............. 223.6 (2%) 227.4 (9%) 249.4
India ...................... 54.2 12% 48.5 10% 44.2
--------- --------- ---------
Total net sales ......... $ 1,901.5 6% $ 1,799.8 2% $ 1,760.0
========= ========= =========
2003 in Comparison to 2002
In 2003, net sales increased 6% in comparison to 2002 pro-forma sales; had
exchange rates remained the same during both years, 2003 sales would have
declined 2%. Regional sales performance in 2003 was as follows:
o North America flavor and fragrance sales declined 1% and 6%,
respectively; in total the region declined 4%. Sales were impacted by
weak economic conditions for much of the year, weak demand for fine
fragrance, and the effect of ongoing customer efforts to reduce
inventory levels. Fine fragrance, functional fragrance and chemical
sales declined 8%, 4% and 8%, respectively. Excluding $9.4 of sales
attributable to non-core businesses disposed of from the 2002
comparative, flavor sales increased 3%. The flavor performance resulted
from several new product introductions.
o Local currency sales in Europe decreased 3%. The dollar increase
benefited from the stronger Euro and Pound Sterling on translation of
local currency results into the U.S. dollar. The local currency sales
performance reflected persistent economic weakness throughout the
European region. Local currency fragrance sales in Europe declined 5%,
resulting in an increase of 12% in dollars; fragrance sales were
weakest in aroma chemicals and functional fragrances, which declined
12% and 4%, respectively. Local currency sales in fine fragrance
increased 3%, benefiting from several new product introductions. Flavor
sales declined 1% in local currency, although this resulted in a 15%
increase in dollar sales.
o Asia Pacific sales increased 1% in local currency; the dollar increase
benefited from the stronger Japanese Yen and, to a lesser extent, the
Australian dollar on translation of local currency results into the
U.S. dollar. Flavor sales declined 2% in local currency while
increasing 4% in dollars. Fragrance sales increased 7% in local
currency and 12% in dollars; the fragrance growth was driven by a
number of new product introductions throughout the region, most notably
in Thailand, Greater China and Indonesia. Sales were strongest in
Thailand, Vietnam, Indonesia and Greater China, with local currency
increases of 25%, 14%, 9% and 6%, respectively. These strong
performances were partially offset by persistent weakness in Japan and
the Philippines where local currency sales declined 7% and 18%,
respectively.
o Latin America flavor sales increased 9%. The flavor sales performance
was driven by increases of 80%, 31% and 19% in Central America,
Argentina and Brazil, respectively, reflecting the benefit of new
product introductions and, in Argentina, an improved economic
environment.
19
Fragrance sales declined 5% with Central America, Mexico and Brazil
declining 15%, 6% and 8%, respectively; Argentina fragrance sales
increased 22%, benefiting from improved economic conditions.
o India sales increased 9% in local currency. The performance was led by
an 11% local currency increase in flavor sales; local currency
fragrance sales grew 7%. India sales performance benefited from many
new product introductions as well as the continued strength of the
Indian and neighboring economies.
2002 in Comparison to 2001
In 2002, pro-forma sales increased 2% in comparison to 2001 pro-forma
sales; had exchange rates remained the same during both years, 2002 pro-forma
sales would have increased 1%. Regional sales performance in 2002 was as
follows:
o North America flavor and fragrance sales declined 7% and 1%,
respectively. The flavor sales decline resulted primarily from the sale
of non-core businesses in both 2002 and 2001. Excluding sales of $9.4
and $42.2 attributable to these businesses in 2002 and 2001,
respectively, pro-forma flavor sales increased 4% and fragrance sales
were flat for the year, resulting in a 1% increase for the region. The
pro-forma flavor sales growth was driven by new product introductions.
Fragrance sales were flat in all product categories.
o Local currency sales in Europe decreased 2%. The reported dollar
increase benefited from the stronger Euro on translation of local
currency results into the U.S. dollar. Local currency sales were
unfavorably affected by the loss of sales attributable to non-core
businesses disposed of in 2001. Excluding $30.3 of sales attributable
to these non-core businesses from the 2001 comparative, local currency
fragrance sales increased 7% and sales for the region increased 3%. On
a pro-forma basis, local currency fragrance sales were strongest in
aroma chemicals and fine fragrances, which increased 20% and 6%,
respectively; functional fragrance sales were flat. Local currency
flavor sales declined 3% although this resulted in a 1% increase in
dollar sales.
o Asia Pacific sales increased 2% in local currency. Excluding $2.5 of
sales attributable to non-core businesses from the 2001 comparative,
sales increased 3%. Flavor sales increased 4% in both local currency
and dollars; fragrance sales were flat in local currency and increased
1% in dollars. Sales performance was strongest in Vietnam, Thailand,
South Korea and Greater China, with respective local currency increases
of 49%, 14%, 10% and 6%. These strong performances were substantially
offset by persistent weakness in Japan and Indonesia, where local
currency sales declined 6% and 7%, respectively.
o Latin America sales performance was affected by the loss of sales
attributable to non-core businesses disposed of in 2001, although the
primary cause of the decline was the economic weakness that persisted
throughout much of the region; excluding $7.1 of sales attributable to
non-core businesses from the 2001 comparative, sales declined 9%.
Flavor sales decreased 16% while fragrances declined 6%. Modest growth
in Mexico and Central America was more than offset by declines of 46%
and 7% in Argentina and Brazil, respectively.
o India sales increased 5% in local currency. Excluding $1.7 of sales
attributable to non-core businesses from the 2001 comparative, sales
increased 10%. The performance was led by an 11% local currency
increase in fragrance sales; local currency flavors sales grew 7%.
India flavor and fragrance sales benefited from many new product
introductions.
20
OPERATING RESULTS
The percentage relationship of cost of goods sold and other operating
expenses to reported sales is detailed in the following table.
2003 2002 2001
---------- ---------- ----------
Cost of goods sold ........................... 57.5% 57.3% 57.7%
Research and development expenses ............ 8.4% 8.0% 7.3%
Selling and administrative expenses .......... 16.2% 16.9% 17.0%
==== ==== ====
Cost of goods sold includes the cost of materials and manufacturing
expenses; 65% - 70% is the cost of raw materials. Research 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 technological advances; such activities
contribute significantly to the Company's business. Selling and administrative
expenses support the Company's sales and operating levels.
Segment profit, which excludes certain unallocated expenses, amortization
of goodwill, and the effect of restructuring and other charges, was $370.3 in
2003, $355.1 in 2002 and $367.4 in 2001. The Company recorded restructuring and
other charges of $42.4, $11.7 and $30.1 in 2003, 2002 and 2001, respectively.
Operating profit totaled $285.8, $299.9 and $255.6 in 2003, 2002 and 2001,
respectively.
2003 in Comparison to 2002
In 2003, cost of goods sold as a percentage of sales remained comparable
with 2002 levels. Product mix, mainly due to weakness in sales of higher margin
fine fragrances, had a negative impact on margins. However, the impact of
unfavorable sales mix was substantially offset by reduced manufacturing
expenses. The reduction in these expenses resulted from realizing the full year
benefit derived from the closure of various plants in the prior year; such
closures were directly related to the integration of BBA into IFF. In addition,
the Company undertook certain restructuring activities in 2003, eliminating 171
manufacturing positions; these actions saved approximately $3.5 in 2003,
contributing 10 basis points to margin improvement.
Research and development expenses increased to 8.4% of sales, consistent
with the Company's stated intention to expand its research initiatives. The
Company anticipates that research and development expenses will approximate 8.0
- - 8.5% of sales for the next several years.
Selling and administrative expenses declined to 16.2% of sales. The
Company undertook certain restructuring activities in 2003, eliminating
duplicate layers of management and certain corporate positions affecting 150
selling and administrative positions; these actions saved approximately $6.2,
contributing 40 basis points in 2003.
In 2003, costs of goods sold and selling and administrative expenses
include $1.5 and $4.0, respectively, incurred in connection with the
implementation of SAP; these costs relate to training and data conversion and
are charged to operating expenses as incurred. Such costs are expected to
continue in 2004 at the same level; implementation costs will begin to decline
in 2005 as the project nears completion.
2002 in Comparison to 2001
Cost of goods sold as a percentage of sales declined slightly from 2001
levels. The decline resulted from improvement in product mix, mainly due to the
disposal of the non-core businesses, and the closure of certain manufacturing
facilities in connection with the integration of BBA. In addition, the Company
undertook certain restructuring activities, eliminating 127 manufacturing
positions; these actions saved approximately $3.7 in 2002, contributing 20
basis points to margin improvement in 2002. These savings were partially offset
by increased manufacturing expenses related to the Company's implementation of
SAP and related initiatives, and the impact of the economic and currency
disruption in Latin America which reduced the absorption of fixed manufacturing
expenses and thus impacted profitability in that region. Total SAP-related
costs in manufacturing expenses approximated $1.7 in 2002; there were no
similar expenses in 2001.
21
Research and development expenses increased as a percentage of sales in
2002, consistent with the Company's intention to increase its research
initiatives.
Selling and administrative expenses as a percentage of sales declined in
2002 compared to 2001 levels. The decline is a result of savings attributable
to the integration of the Company's sales and administrative functions with
those of BBA. In addition, the Company undertook certain restructuring
activities, eliminating duplicate layers of management and certain corporate
positions and affecting 21 selling and administrative positions; these actions
saved approximately $0.8 in 2002. In 2002, selling and administrative expenses
include $2.9 related to the implementation of SAP; there were no such expenses
in 2001.
Interest Expense
Interest expense totaled $28.5, $37.0 and $70.4 in 2003, 2002 and 2001,
respectively. Interest expense declined in each year as a result of reduced
borrowing levels, a general decline in interest rates and the Company's
interest rate and debt management initiatives. The average interest rate was
3.0%, 3.4% and 5.4% in 2003, 2002 and 2001, respectively. More information on
debt and interest rate management is contained in Note 9 and Note 15 of the
Notes to the Consolidated Financial Statements.
Other (Income) Expense, Net
Other (income) expense, net was $5.4 expense in 2003, $3.6 income in 2002
and $2.6 income in 2001. In 2003, the Company repurchased $200.7 of long-term
notes otherwise scheduled to mature in May 2006; purchases were made through a
series of open market transactions, funded with commercial paper. The Company
incurred a net loss of $4.2 in connection with the debt repurchase, which is
included in Other (income) expense, net. Further details on the repurchase are
contained in Note 9 of the Notes to the Consolidated Financial Statements.
The increase in other income in 2002 compared to 2001 was principally due
to favorable exchange results; exchange gains were $1.6, $2.3 and $1.9 in 2003,
2002 and 2001, respectively.
Income Taxes
The effective tax rate for 2003 was 31.5%, compared to 34.0% for 2002 and
38.2% for 2001. The lower rate in 2003 is the result of tax planning
initiatives and the benefits of combining various IFF and BBA legal entities
into a single tax structure. In 2003, the tax rate also benefited from
restructuring and other charges, most of which were incurred in higher tax
jurisdictions. The lower rate in 2002 resulted from the discontinuance of
goodwill amortization; such goodwill was not deductible for purposes of
determination of the Company's taxable income. The Company anticipates that its
effective tax rate in 2004 will approximate 31.5%.
ACQUISITIONS AND DIVESTITURES
In 2003, the Company acquired 70% of the outstanding shares of Celessence
International Ltd. (Celessence), a company engaged in the development and
distribution of encapsulation and delivery systems for use in fragrance and
other applications for $6.4. The acquisition was accounted for as a purchase
business combination. The principal Celessence asset is a process technology
patent included in other intangible assets that is being amortized over its
estimated remaining useful life. Celessence results, which are not material,
are included in the consolidated results of the Company from acquisition date.
Final allocation of the purchase price is not complete as of December 31, 2003
pending final valuation of the intangible asset.
In November 2000, the Company acquired BBA; total consideration paid,
including transaction costs, was $970.0. At acquisition date, BBA owned
approximately 73% of its Indian subsidiary, BBA India Limited (BBAIL). During
2002, the Company acquired additional BBAIL shares, raising its ownership to
93%; cost of the acquired shares was $11.8. More details on the BBA acquisition
are contained in Note 3 of the Notes to the Consolidated Financial Statements.
The Company established accruals relating to the integration of BBA
operations. Costs associated with these integration activities, relating mainly
to employee separation and facility closures, were recorded as a component of
purchase accounting; such costs did not directly impact current earnings.
22
Movements in acquisition accounting accruals were:
ASSET-
EMPLOYEE- RELATED
RELATED AND OTHER TOTAL
----------- ----------- ----------
Balance January 1, 2001 ........... $ 4.1 $ 6.2 $ 10.3
Additional charges ................ 41.0 25.0 66.0
Cash and other costs .............. (31.3) (21.3) (52.6)
------- ------- -------
Balance December 31, 2001 ......... 13.8 9.9 23.7
Cash and other costs .............. (7.8) (8.8) (16.6)
------- ------- -------
Balance December 31, 2002 ......... 6.0 1.1 7.1
Cash and other costs .............. (3.6) (1.1) (4.7)
------- ------- -------
Balance December 31, 2003 ......... $ 2.4 $ - $ 2.4
======= ======= =======
The remaining liability will be utilized in 2004 as severance obligations
are satisfied.
At December 31, 2003 and 2002, goodwill and other intangible assets, net
of accumulated amortization, totaled $799.4 and $794.1, respectively. The
principal changes in goodwill and intangible assets relate to the acquisition
of Celessence. Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible
Assets. FAS 142 eliminates the amortization of goodwill and indefinite-lived
intangibles and requires an evaluation of potential impairment upon adoption,
and at least annually thereafter. FAS 142 also prescribes that other
indefinite-lived intangibles be included with goodwill. In 2002, certain
intangibles were reclassified as indefinite-lived intangibles in accordance
with the provisions of FAS 142. The Company completed its annual assessments in
2003 and 2002, concluding that it has no impairment of goodwill or other
intangible assets. Additional details are contained in Note 7 of the Notes to
the Consolidated Financial Statements.
The Company sold its concentrate business based in Oregon in June 2002 and
recorded a restructuring and other charge of $4.3 related to employee
separation and other disposal costs. Sales for the business up to the date of
disposition were $9.4; operating profit was not significant.
In October 2001, the Company sold its formulated fruit and vegetable
preparation businesses in the United States and Brazil and recorded a
restructuring and other charge of $7.4 related to employee separation and other
disposal costs. Sales for the business up to the date of disposition were
$23.0, with operating profit of approximately $2.2.
In December 2001, the Company sold the U.K.-based aroma chemicals business
acquired as part of the BBA purchase. Sales for the business up to the date of
disposition were $36.7, with operating profit of approximately $1.5. No gain or
loss was recognized as a result of this transaction.
Proceeds from the sales, which were not material, were used to reduce
borrowings.
RESTRUCTURING AND OTHER CHARGES
Since 1999, the Company has undertaken a series of actions associated with
the closure of Company facilities and elimination of various employee
positions.
The actions undertaken in 1999 were initiated under a cost-cutting program
intended to streamline the Company's operations worldwide. The principal
locations affected were the United States, the United Kingdom, the Netherlands
and France, with lesser impact in various locations in Asia Pacific and Latin
America; as a result the Company recorded pre-tax charges of $40.9. Elements of
the charges relating to accelerated depreciation on assets to be disposed of
were recorded in cost of goods sold ($1.2), selling and administrative expenses
($2.3) and other income and expense ($4.5). The remaining actions related to
employee separation and asset-related costs associated with both write-down and
disposal actions resulted in restructuring and other charges of $32.9. Under
these actions, 222 employees left the Company.
As an element of the cost-cutting program, the Company offered a voluntary
early retirement incentive to certain U.S.-based employees in the fourth
quarter of 1999 with notification of acceptance
23
in the first quarter of 2000; 71 employees accepted, resulting in a pre-tax
charge of $9.3 in 2000. The early retirement program completed the cost-cutting
program undertaken in 1999 at an overall cost of $50.2.
In mid-2000, senior management changed, after which the Company conducted
a comprehensive analysis of its business development, research and development,
and operating activities and associated staffing levels. In October 2000, the
Company announced a significant reorganization entailing the elimination of
multiple layers of management, closure of certain manufacturing facilities to
improve capacity utilization, and the intended disposal of certain non-core
businesses. On completion, the reorganization was expected to yield annual
savings approximating $25.0 to $30.0, a portion of which was to be reinvested
in the business.
At the time the plan was announced, it was anticipated that such actions
would take place over the ensuing 24 months and incur expected costs of $90.0 -
$100.0. The integration of BBA into IFF, and the reorganization, proceeded
concurrently.
An element of the reorganization was a second voluntary early retirement
program extended to U.S.-based employees, which 85 employees accepted,
resulting in pre-tax charges of $14.5. An additional 41 employees were
terminated by eliminating duplicate management positions at corporate, regional
and affiliate locations, resulting in the Company recording pre-tax charges of
$17.5. In total, 197 employees were severed and the Company recorded pre-tax
charges totaling $41.3, comprised of:
o The first early retirement plan - $9.3;
o The second early retirement plan - $14.5; and
o Other reorganization costs - $17.5.
During 2001, the Company sold its fruit preparation business in the United
States and Brazil to a third party, and closed IFF operations in Hong Kong,
South Africa, Chile, Venezuela, Kenya, Texas and Oregon. As a result, 465
employees were severed and the Company recorded pre-tax charges totaling $30.1;
$10.1 related to employee terminations and $20.0 related to location closures
and asset write-downs.
During 2002, the Company closed IFF operations in Australia, discontinued
fragrance compounding in Japan and sold its fruit concentrate business to a
third party. As a result, 148 employees were severed and the Company recorded
pre-tax charges of $11.7; $4.3 related to employee severance and $7.4 related
to location closures and asset write-downs.
In 2003, the Company completed the reorganization activities. These steps
could only be undertaken upon completion of the integration of IFF and BBA
which was completed in the fourth quarter of 2002. The actions eliminated
duplicate employment functions and processes, including several senior
corporate positions as well as regional and local levels. The Company
eliminated 321 positions and recorded pre-tax charges of $42.4; $38.0 related
to employee terminations and $4.4 related to location closures and asset
write-downs. The 2003 asset-related charges relate principally to final
quantification of costs for previous actions taken.
With respect to all restructuring and other charges:
o Separation costs for the employees relate primarily to severance,
outplacement and other benefit costs;
o Asset write-down charges relate to establishment of the new carrying
value for assets held for sale or disposal; and
o Other costs include lease termination costs and other reorganization
expenses incurred to effect either the employee separation or location
closure.
Since October 2000, the Company recorded pre-tax charges of $116.1 in
comparison to the $90.0-$100.0 forecast at the time the plan was announced.
The increase was due to additional actions taken in the final stages of the
reorganization and the impact the weaker U.S. dollar had on the translation of
the cost of actions undertaken outside the United States.
24
The charges discussed above exclude all charges associated with the
integration of BBA into IFF where such costs were incurred in connection with
the closure of BBA facilities or the elimination of BBA employees; all such
costs were accounted for in the acquisition accounting as detailed in Note 3 of
the Notes to the Consolidated Financial Statements.
Positions eliminated by region in each of the three years in the period
ended December 31, 2003 were:
2003 2002 2001
------ ------ -----
North America ................................... 81 91 197
Europe .......................................... 97 42 62
Asia Pacific .................................... 120 15 145
Latin America ................................... 19 - 61
India ........................................... 4 - -
--- --- ---
Total ........................................... 321 148 465
=== === ===
Charges by region in each of the three years in the period ended December
31, 2003 were:
2003 2002 2001
---------- ---------- ----------
North America .......................... $ 20.2 $ 5.6 $ 14.7
Europe ................................. 16.9 5.8 4.2
Asia Pacific ........................... 3.6 0.3 8.6
Latin America .......................... 1.3 - 2.6
India .................................. 0.4 - -
------- ------- -------
$ 42.4 $ 11.7 $ 30.1
======= ======= =======
Movements in related accruals in each of the three years in the period
ended December 31, 2003 were:
ASSET-
EMPLOYEE- RELATED
RELATED AND OTHER TOTAL
----------- ----------- ----------
Balance January 1, 2001 ........... $ 24.4 $ 2.0 $ 26.4
Additional charges ................ 10.1 20.0 30.1
Cash and other costs .............. (27.5) (21.3) (48.8)
------- ------- -------
Balance December 31, 2001 ......... 7.0 0.7 7.7
Additional charges ................ 4.3 7.4 11.7
Cash and other costs .............. ( 7.9) ( 7.7) (15.6)
------- ------- -------
Balance December 31, 2002 ......... 3.4 0.4 3.8
Additional charges ................ 38.0 4.4 42.4
Cash and other costs .............. (21.8) ( 3.3) (25.1)
------- ------- -------
Balance December 31, 2003 ......... $ 19.6 $ 1.5 $ 21.1
======= ======= =======
The balance of the employee-related liabilities will be utilized by 2006
as obligations to affected employees are satisfied; the asset-related charges
will be utilized in 2004 on final decommissioning and disposal of the affected
equipment.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $12.6 at
December 31, 2003 compared to $15.2 and $48.9 at December 31, 2002 and 2001,
respectively. Working capital totaled $376.6 at year-end 2003, compared to
$507.3 and $336.1 at December 31, 2002 and 2001, respectively. Gross additions
to property, plant and equipment were $66.0, $81.8 and $52.0 in 2003, 2002 and
2001, respectively, and are expected to approximate $90.0 in 2004.
25
At December 31, 2003, the Company had $884.5 of debt outstanding,
including deferred gains and mark-to-market adjustments on interest rate swap
transactions approximating $38.0. Debt includes $499.3 of 6.45% Notes, maturing
in May 2006. At December 2002, the Company had $700.0 of such Notes
outstanding. During 2003, the Company repurchased $200.7 of the Notes. All
repurchases were funded with commercial paper. The repurchases were intended to
take full advantage of the Company's strong cash flows and to enable the
Company to reduce long-term debt prior to the Notes' scheduled maturity in
2006. Interest expense will be reduced as a result of the shift to commercial
paper borrowing. Based on current borrowing rates, the Company expects to save
approximately $4.0 annually in interest expense as a benefit of replacing the
Notes with commercial paper; interest expense savings in 2003 approximated
$2.9. The Company does not anticipate additional repurchases of Notes prior to
their scheduled maturity.
In 2002, the Company entered into a five-year Euro 350.0 (approximately
$440.0 at December 31, 2003) multi-currency revolving credit agreement. Prior
to the third quarter of 2003, the five-year Euro facility was characterized as
long-term debt; the Company employs this facility as a European-wide working
capital facility. At December 31, 2003, the Company had no borrowings under
this facility.
In 2002, the Company exercised an option under its existing $500.0 U.S.
revolving credit facility and cancelled the $200.0 364-day portion of the
agreement. The remaining $300.0 revolving credit facility extends to September
2006. The revolving credit agreement serves as backstop for the Company's
commercial paper program; there have been no borrowings under this agreement.
The Company compensates participating banks in the form of fees, the amounts of
which are not material. At December 31, 2003, outstanding commercial paper
totaled $162.9 at an average interest rate of 1.2% compared to $38.0 at
December 31, 2002 at an average interest rate of 1.6%. Commercial paper
maturities did not extend beyond January 22, 2004.
In 2003, the Company sold its New York corporate headquarters to an
unrelated third party for $91.0 in cash, concurrently, entering into a
long-term lease with respect to the space it occupies (approximately 40% of the
building). The gain realized on the sale, after transaction costs, of $52.7,
has been deferred and is being credited to income over the initial 27.5-year
lease term.
In 2002, the Company entered into agreements for the sale and leaseback of
its Hazlet and South Brunswick, New Jersey facilities to an unrelated third
party for $48.0 in cash. Concurrently, the Company entered into a long-term
lease with respect to the facilities. The gain realized on the sale, after
transaction costs, of $26.7, has been deferred and is being credited to income
over the initial 22-year lease term.
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 increased
its share repurchase program by $100.0. The Company completed the April 2000
program during 2001 and the September 2000 program in 2002. In October 2002,
the Company announced a new share repurchase program of $100.0. Under these
plans, the Company purchased 1.8 million shares, 2.3 million shares, and 3.0
million shares in 2003, 2002 and 2001, respectively, at a total cost of $55.4,
$72.3 and $71.2, respectively. Average per share cost of the shares acquired in
2003, 2002 and 2001 was $31.66, $31.52 and $23.60, respectively. Repurchases
are made on the open market or through private transactions. At December 31,
2003, the Company had $42.0 remaining under its October 2002 repurchase plan,
representing approximately 1.2 million shares based on a stock price of $35 per
share. Repurchased shares are available for use in connection with the
Company's employee benefit plans and for other general corporate purposes.
The dividend paid per share in 2003, 2002 and 2001 was $.62, $.60 and
$.60, respectively. In January and April 2003, the Company paid a quarterly
cash dividend of $.15 per share to shareholders. In May 2003, the Company
increased the annual dividend to $.64 per share, effective with the dividend
paid in July 2003. The Company's intention is to pay dividends approximating
30% to 35% of yearly earnings. The Company paid dividends totaling $58.2, $56.8
and $57.6 in 2003, 2002 and 2001, respectively.
The cumulative translation adjustment component of Accumulated other
comprehensive income was ($45.2) at December 31, 2003, compared to ($138.2) at
December 31, 2002. The change results
26
principally from the weakening of the U.S. dollar against the Euro. The Minimum
pension liability adjustment component of Accumulated other comprehensive
income was ($82.8) at December 31, 2003, compared to ($75.0) at December 31,
2002. This change reflects lower pension asset values coupled with a reduction
in the discount rate assumptions used to calculate pension liabilities. The
accumulated loss on derivatives qualifying as hedges was ($3.7) at December 31,
2003 compared to a gain of $0.7 at December 31, 2002.
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 2003, the Company
spent approximately $2.9 on capital projects and about $14.7 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 judgments in
or voluntary settlements of such proceedings will not be material to the
Company's financial condition, results of operations or liquidity.
The following table indicates the amount of payments due within the time
periods specified below under long-term debt, current portion of long-term debt
included in Bank loans and current portion of long-term debt, capital leases,
operating leases and purchase obligations reflected on the Company's December
31, 2003 financial statements:
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS(1) TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
- --------------------------------- ----------- ----------- ----------- ----------- ----------
Borrowings (See Note 9) ......... $ 653.6 $ 0.8 $ 511.3 $ 124.5 $ 17.0
Operating leases(2) ............. 276.1 18.2 29.3 20.8 207.8
Purchase obligations(3) ......... 9.7 0.2 9.5 - -
-------- ------- -------- -------- --------
Total ........................ $ 939.4 $ 19.2 $ 550.1 $ 145.3 $ 224.8
======== ======= ======== ======== ========
- ----------
(1) Pension funding obligations are included in Note 14 Retirement Benefits.
(2) Operating leases include facility and other lease commitments executed in
the normal course of the Company's operations. Additional details
concerning the Company's United States facilities are contained in Note 8
and details concerning the Company's worldwide aggregate lease facilities
are contained in Note 17.
(3) Purchase obligations are those commitments not recorded on the balance
sheet.
The Company anticipates that all financing requirements will be funded
from operations and credit facilities currently in place. Cash flows from
operations are sufficient to fund the Company's anticipated capital spending,
dividends and other requirements including debt reduction; the Company
anticipates reducing borrowings by approximately $100.0 in 2004; in comparison,
borrowings were reduced by approximately $145.0 and $165.0 in 2003 and 2002,
respectively. The Company may dispose of additional non-core assets; any
related net proceeds will be used primarily to reduce borrowings.
MARKET RISK
The Company is exposed to market risk from foreign currency exchange
rates, interest rates and commodity price fluctuations. The Company evaluates
and manages volatility relating to these exposures on a global basis to take
advantage of netting opportunities that may exist. Identified net exposures are
managed employing a number of techniques including but not limited to
borrowings in local currencies and the use of certain derivative instruments.
The Company operates on a global basis and, accordingly, is exposed to
currency fluctuation related to the manufacture and sale of its products in
currencies other than the U.S. dollar. The major foreign currencies involve the
markets in the European Union, Mexico, Brazil, China, Indonesia, Australia and
Japan, although all regions in the world are subject to foreign currency
fluctuations versus the U.S. dollar and other cross-currency rates. The Company
actively monitors its foreign
27
currency exposures in all major markets in which it operates, and employs a
variety of techniques to mitigate the impact of exchange rate fluctuations,
including foreign currency hedging activities. The Company enters into foreign
currency forward contracts with the objective of reducing exposure to cash flow
volatility associated with foreign currency receivables and payables, and with
anticipated purchases of certain raw materials used in operations. These
contracts, the counterparties to which are major international financial
institutions, generally involve the exchange of one currency for a second
currency at a future date, and have maturities which do not exceed six months.
The notional amount and maturity dates of such contracts match those of the
underlying transactions. At December 31, 2003 and 2002, the Company had
outstanding foreign currency forward contracts with notional amounts
approximating $178.0 and $131.4, respectively. The Company has designated these
contracts as qualified fair value and cash flow hedges, as appropriate.
Accordingly, the effective portion of any gain or loss on a derivative
instrument reported as a cash flow hedge is reported as a component of
Accumulated 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,
2003 or 2002.
The Company employs various interest rate swaps and debt issuances with
the objective of managing and optimizing its interest rate exposure.
In 2001, the Company entered into certain interest swap agreements
effectively converting the fixed coupon rate on its 6.45% Notes to a variable
short-term rate based on the London InterBank Offered Rate (LIBOR) plus an
interest markup. In response to changes in market conditions and the value of
the swaps, and in 2003, in connection with the Company's debt repurchase, the
Company periodically amended the swap agreements, changing the related interest
spread. As a result of these amendments, the counterparty paid the Company
$11.6, $56.5 and $19.9 in 2003, 2002 and 2001, respectively, including accrued
interest of $3.7, $6.5 and $3.3, respectively. The net realized gains on the
swaps have been deferred, classified as a separate component of debt, and are
amortized as a reduction in interest expense over the remaining term of the
Notes. At December 31, 2003, the Company had terminated all swap agreements
related to the Notes; as a result, the interest rate on the Notes, including
amortization of the deferred swap gains, was 3.6% at December 31, 2003. The
effective rate on the Notes at December 31, 2002 and 2001 was 3.4% and 3.7%,
respectively.
In 2002, the Company entered into certain interest swap agreements
effectively converting the fixed rate on its long-term Japanese Yen borrowings
to a variable short-term rate based on the Japanese Yen LIBOR rate plus an
interest markup. These swaps are designated as qualified fair value hedges.
During 2003 the Company amended the swaps and the counterparty paid the Company
$3.0, including accrued interest of $0.5. These net gains have been deferred,
and are classified as a separate component of debt and are being amortized over
the remaining term of the debt. To the extent the Company has not received cash
or otherwise amended or settled any swap agreements, any applicable
mark-to-market adjustment relating to that swap is included as a separate
component of debt. The Company had no ineffective interest rate swaps at
December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to use judgment and 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 research and development
and creation of new products, for which all costs are expensed as incurred.
Those areas requiring the greatest degree of management judgment or deemed
most critical to the Company's financial reporting involve:
o The periodic assessment of potential impairment of intangible assets
acquired in business combinations;
28
o The evaluation of potential environmental and legal liabilities, where
frequently changing rules, regulations and circumstances require
constant reassessment of related practices and anticipated costs;
o Determination of the various assumptions employed in the valuation of
pension and retiree health care expense and associated obligations;
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 ongoing assessment of the valuation of inventory, given the large
number of natural ingredients employed, the quality of which may be
diminished over time; and
o The determination of financial instruments employed as effective hedges
of cash flows or market risk exposures.
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.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 146 (FAS 146),
Accounting for Costs Associated with Exit or Disposal Activities was issued in
June 2002. FAS 146 establishes accounting and reporting standards for exit or
disposal activities initiated after December 31, 2002, and requires such costs
to be recognized when the liability is incurred and not at project initiation.
The Company adopted the provisions of FAS 146 without material impact to
reported results.
SFAS No. 148 (FAS 148), Accounting for Stock-Based Compensation --
Transition and Disclosure was issued in December 2002. FAS 148 provides
alternate methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The Company has
elected to continue to use the intrinsic method of accounting for stock-based
awards to employees. No expense has been recognized for stock-based
compensation other than for restricted stock awards.
The Financial Accounting Standards Board issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, and No. 46,
Consolidation of Variable Interest Entities. The Company has no investments in
entities to which these interpretations apply.
SFAS No. 149 (FAS 149), Amendment of Statement 133 on Derivative
Instruments and Hedging Activities was issued in April 2003. FAS 149 amends and
clarifies financial accounting and reporting for derivative instruments under
FAS 133. The Company adopted this standard without material impact to reported
results.
SFAS No. 132 (FAS 132), Employers' Disclosures about Pensions and Other
Postretirement Benefits was revised in December 2003. The revised version is
effective for fiscal years ending after December 15, 2003. FAS 132, as revised,
requires enhanced disclosures about defined benefit pension and other
postretirement benefit plan assets, obligations, cash flows, and net cost. The
Company has complied with the expanded disclosure requirements prescribed by
the revised standard.
NON-GAAP FINANCIAL MEASURES
The discussion of the Company's historical results and its commentary
regarding expected future results include and, where indicated, exclude the
impact of sales attributable to certain non-core businesses disposed of in 2002
and 2001, the impact of certain charges related to the Company's reorganization
activities and the effects of exchange rate fluctuations. Such information is
supplemental to information presented in accordance with generally accepted
accounting principles (GAAP) and is not intended to represent a presentation in
accordance with GAAP. In discussing its
29
historical and expected future results and financial condition, the Company
believes it is meaningful for investors to be made aware of and to assist in a
better understanding of, on a period-to-period basis, the impact of sales
attributable to certain non-core businesses disposed of in 2002 and 2001, the
impact of exchange rate fluctuations and the impact such specifically
identified charges have on operating results and financial condition. In
addition, management considers each of these non-GAAP measures to evaluate
performance on a comparative period-to-period basis.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Annual Report, which are not historical facts or
information, are "forward-looking statements" within the meaning of The Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's reasonable current assumptions and expectations. Certain
of such forward-looking information may be identified by such terms as
"expect," "believe," "may," "will," and similar terms or variations thereof.
All information concerning future revenues, tax rates or benefits, interest
savings, and other future financial results or financial position, constitutes
forward-looking information. Such forward-looking statements involve risks,
uncertainties and other factors, which may cause the actual results of the
Company to be materially different from any future results expressed or implied
by such forward-looking statements, and there can be no assurance that actual
results will not differ materially from management's expectations. Such factors
include, among others, the following: general economic and business conditions
in the Company's markets, including economic, population health and political
uncertainties; interest rates; the price and availability of raw materials; the
Company's ability to implement its business strategy, including the achievement
of anticipated cost savings, profitability and growth targets; the impact of
currency fluctuation or devaluation in the Company's principal foreign markets
and the success of the Company's hedging and risk management strategies; the
impact of possible pension funding obligations and increased pension expense on
the Company's cash flow and results of operations; and the effect of legal and
regulatory proceedings, as well as restrictions imposed on the Company, its
operations or its representatives by foreign governments. 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 or to reflect changes in expectations, assumptions or results.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In 2001, the Company entered into certain interest swap agreements
effectively converting the fixed coupon rate on its 6.45% Notes to a variable
short-term rate based on the London InterBank Offered Rate (LIBOR) plus an
interest markup. In response to changes in market conditions and the value of
the swaps and, in 2003, in connection with the Company's debt repurchase, the
Company periodically amended the swap agreements, changing the related interest
spread. As a result of these amendments, the counterparty paid the Company
$11.6 million, $56.5 million and $19.9 million in 2003, 2002 and 2001,
respectively, including accrued interest of $3.7 million, $6.5 million and $3.3
million, respectively. The net realized gains on the swaps have been deferred,
classified as a separate component of debt, and are amortized as a reduction in
interest expense over the remaining term of the Notes. At December 31, 2003,
the Company had terminated all swap agreements related to the Notes; as a
result, the interest rate on the Notes, including amortization of the deferred
swap gains, was 3.6% at December 31, 2003. The effective rate on the Notes at
December 31, 2002 and 2001 was 3.4% and 3.7%, respectively.
In 2002, the Company entered into certain interest swap agreements
effectively converting the fixed rate on its long-term Japanese Yen borrowings
to a variable short-term rate based on the Japanese Yen LIBOR rate plus an
interest markup. These swaps are designated as qualified fair value hedges.
During 2003, the Company amended the swap and the counterparty paid the Company
$3.0 million, including accrued interest of $0.5 million. These net gains have
been deferred, are classified as a separate component of debt and are being
amortized over the remaining term of the debt. To the extent the Company has
not received cash or otherwise amended or settled any swap agreement, any
applicable mark-to-market adjustment relating to that swap is included as a
separate component of debt. The Company had no ineffective interest rate swaps
at December 31, 2003.
The Company has executed a 10-year Yen U.S. dollar currency swap related
to the purchase and sale of products between the U.S. and Japan. The annual
notional value of this swap is approximately $5.0 million. Gains and losses
related to this swap are recorded currently, and the mark-to-market adjustment
related to the value of the swap is reflected as a component of Accumulated
other comprehensive income.
The Company enters into foreign currency forward contracts with the
objective of reducing exposure to cash flow volatility associated with foreign
currency receivables and payables, and with anticipated purchases of certain
raw materials used in operations. These contracts, the counterparties to which
are major international financial institutions, generally involve the exchange
of one currency for a second currency at a future date, and have maturities not
exceeding six months. The notional amount and maturity dates of such contracts
match those of the underlying transactions. At December 31, 2003 and 2002, the
Company had outstanding foreign currency forward contracts with notional
amounts of $178.0 million and $131.4 million, respectively. The Company has
designated these contracts as qualified fair value and cash flow hedges, as
appropriate. The Company had no ineffective foreign currency forward contracts
at December 31, 2003 or 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See index to Financial Statements on page 34. See Item 6 for supplemental
data on page 13 and 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
31
ITEM 9A. CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer, with
the assistance of other members of the Company's management, have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Annual Report on Form 10-K. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective.
The Company's Chief Executive Officer and Chief Financial Officer have
also concluded that there have not been any changes in the Company's internal
control over financial reporting during the Company's fourth quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to directors and nominees of the Company is set
forth under the caption "Election of Directors" in the IFF 2004 Proxy Statement
and is incorporated by reference herein. The information under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" that appears in the
IFF 2004 Proxy Statement is also incorporated by reference herein. See Part I,
Item 1 of this Form 10-K for information relating to the Company's Executive
Officers.
The Company has adopted a Code of Business Conduct and Ethics (the "Code
of Ethics") that applies to the Company's chief executive officer, principal
financial officer, principal accounting officer, and to all other Company
directors, officers and employees. The Code of Ethics is available on the
Company's website www.iff.com. A waiver from any provision of the Code of
Ethics in favor of a director or executive officer may only be granted by the
Board and any such waiver will be publicly disclosed. The Company will disclose
substantive amendments to, and any waivers from, the Code of Ethics granted to
the Company's chief executive officer, principal financial officer or principal
accounting officer, as well as any other executive officer or director, on the
Company's Internet website: www.iff.com.
The information regarding the Company's Audit Committee and its designated
audit committee financial expert is set forth under the caption "Board and
Committee Meetings" in the IFF 2004 Proxy Statement and such information is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is set forth under the
captions "Summary Compensation Table", "Option/SAR Grants in 2003", "Aggregated
Option Exercises in 2003 and Option/SAR Values at December 31, 2003",
"Directors' Compensation", "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements", "Compensation Committee Interlocks and
Insider Participation and Other Related Party Matters", "Executive Separation
Policy" and "Pension Plans" in the IFF 2004 Proxy Statement and such
information is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of management and certain
beneficial owners is set forth under the caption "Security Ownership" in the
IFF 2004 Proxy Statement and such information is incorporated by reference
herein. The information relating to the Company's equity plans is set forth
under the caption "Equity Compensation Plans" in the IFF 2004 Proxy Statement
and such information is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related transactions
is set forth under the caption "Compensation Committee Interlocks and Insider
Participation" in the IFF 2004 Proxy Statement and such information is
incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information regarding principal accountant fees and services and the
Company's pre-approval policies and procedures for audit and non-audit services
provided by the Company's independent accountant are set forth under the
captions "Principal Accountant Fees and Services" and "Audit Committee
Pre-Approval Policies and Procedures" in the IFF 2004 Proxy Statement and such
information is incorporated by reference herein.
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS: The following consolidated financial
statements, related notes, management's report and independent auditors report
are included in this report:
Report of Management ........................................................................... 34
Report of Independent Auditors ................................................................. 35
Consolidated Statement of Income for the three years ended December 31, 2003 ................... 36
Consolidated Balance Sheet--December 31, 2003 and 2002 ......................................... 37
Consolidated Statement of Cash Flows for the three years ended December 31, 2003 ............... 38
Consolidated Statement of Shareholders' Equity for the three years ended December 31, 2003...... 39
Notes to Consolidated Financial Statements ..................................................... 40-59
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 judgment. The
audit report on the Company's financial statements by PricewaterhouseCoopers
LLP, independent auditors, 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 Business Conduct and Ethics 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
auditors to discuss the Company's internal accounting controls, auditing and
financial reporting matters. The internal auditors and independent auditors 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.
/s/ Richard A. Goldstein /s/ Douglas J. Wetmore
- ------------------------ ----------------------
Richard A. Goldstein Douglas J. Wetmore
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
The Company's Chief Executive Officer will timely provide the NYSE with
the certification required by NYSE Rule 303A(12). The Company's Chief Executive
Officer and Chief Financial Officer have each filed with the Securities
Exchange Commission required certifications regarding the quality of the
Company's public disclosures.
34
REPORT OF INDEPENDENT AUDITORS
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, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of
International Flavors & Fragrances Inc. and its subsidiaries at December 31,
2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003 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 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
New York, New York
January 27, 2004
35
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- ------------------------------------------------- --------------- ------------- -------------
Net sales ....................................... $ 1,901,520 $1,809,249 $1,843,766
Cost of goods sold .............................. 1,092,456 1,035,835 1,063,433
Research and development expenses ............... 159,286 144,027 135,248
Selling and administrative expenses ............. 308,951 305,156 313,335
Amortization .................................... 12,632 12,632 46,089
Restructuring and other charges ................. 42,421 11,737 30,069
Interest expense ................................ 28,477 37,036 70,424
Other (income) expense, net ..................... 5,437 (3,591) (2,609)
----------- ---------- ----------
1,649,660 1,542,832 1,655,989
----------- ---------- ----------
Income before taxes on income ................... 251,860 266,417 187,777
Taxes on income ................................. 79,263 90,473 71,775
----------- ---------- ----------
Net income ...................................... $ 172,597 $ 175,944 $ 116,002
=========== ========== ==========
2003 2002 2001
----------- ---------- ----------
Net income per share - basic .................... $1.84 $1.86 $1.21
Net income per share - diluted .................. $1.83 $1.84 $1.20
See Notes to Consolidated Financial Statements
36
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(DOLLARS IN THOUSANDS) -------------------------------
ASSETS 2003 2002
- -------------------------------------------------------------------------- -------------- --------------
Current Assets:
Cash and cash equivalents ................................................ $ 12,081 $ 14,858
Short-term investments ................................................... 474 307
Receivables: .............................................................
Trade ................................................................... 336,980 327,306
Allowance for doubtful accounts ......................................... (16,212) (12,933)
Other ................................................................... 18,957 24,234
Inventories .............................................................. 454,631 421,603
Deferred income taxes .................................................... 66,070 67,176
Prepaid expenses ......................................................... 29,691 24,198
---------- ----------
Total Current Assets .................................................... 902,672 866,749
Property, Plant and Equipment, net ....................................... 510,612 520,499
Goodwill, net ............................................................ 647,226 642,655
Intangible Assets, net ................................................... 152,187 151,424
Other Assets ............................................................. 94,195 51,367
---------- ----------
Total Assets ............................................................. $2,306,892 $2,232,694
========== ==========
DECEMBER 31,
(DOLLARS IN THOUSANDS) -------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
- -------------------------------------------------------------------------- -------------- --------------
Current Liabilities:
Bank loans and current portion of long-term debt ......................... $ 31,371 $ 11,684
Commercial paper ......................................................... 162,933 37,979
Accounts payable ......................................................... 104,028 104,007
Accrued payrolls and bonuses ............................................. 41,032 36,250
Dividends payable ........................................................ 14,996 14,138
Income taxes ............................................................. 27,826 38,496
Other current liabilities ................................................ 143,859 116,943
---------- ----------
Total Current Liabilities ............................................... 526,045 359,497
---------- ----------
Other Liabilities:
Long-term debt ........................................................... 690,231 1,007,085
Deferred gains ........................................................... 73,439 24,834
Retirement liabilities ................................................... 210,031 197,111
Other liabilities ........................................................ 64,515 69,489
---------- ----------
Total Other Liabilities ................................................. 1,038,216 1,298,519
---------- ----------
Commitments and Contingencies (Note 17)
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 ........................................... 95,138 109,735
Restricted stock ......................................................... (3,952) (5,723)
Retained earnings ........................................................ 1,496,104 1,382,539
Accumulated other comprehensive income: ..................................
Cumulative translation adjustment ....................................... (45,188) (138,175)
Accumulated (losses) gains on derivatives qualifying as hedges (net of
tax) .................................................................. (3,678) 733
Minimum pension liability adjustment (net of tax) ....................... (82,815) (75,038)
---------- ----------
1,470,079 1,288,541
Treasury stock, at cost - 22,032,132 shares in 2003 and 21,507,668 shares
in 2002 ................................................................. (727,448) (712,876)
Note receivable from officer ............................................. - (987)
---------- ----------
Total Shareholders' Equity .............................................. 742,631 574,678
---------- ----------
Total Liabilities and Shareholders' Equity ............................... $2,306,892 $2,232,694
========== ==========
See Notes to Consolidated Financial Statements
37
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 172,597 $ 175,944 $ 116,002
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization .................................. 86,721 84,458 123,493
Deferred income taxes .......................................... (11,565) (6,381) (18,113)
Changes in assets and liabilities: .............................
Current receivables ........................................... 35,956 15,452 8,925
Inventories ................................................... 7,690 17,259 (1,207)
Current payables .............................................. (32,252) (27,623) (20,076)
Other, net .................................................... 10,449 (15,765) (27,519)
---------- ---------- ----------
Net cash provided by operations ................................. 269,596 243,344 181,505
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments ...................................... 33 257 8,250
Purchases of investments ....................................... (161) (176) (19,786)
Acquisitions and purchase of minority interest ................. (6,400) (11,791) -
Additions to property, plant and equipment ..................... (65,955) (81,815) (52,016)
Proceeds from disposal of assets ............................... 97,675 64,634 14,900
---------- ---------- ----------
Net cash provided by (used in) investing activities ............. 25,192 (28,891) (48,652)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to shareholders ............................ (58,174) (56,826) (57,618)
Net change in bank loans ....................................... 12,551 (14,774) (13,088)
Net change in commercial paper outstanding ..................... 124,954 (166,250) (605,123)
Proceeds from long-term debt ................................... 35,984 282,329 580,545
Repayments of long-term debt ................................... (386,399) (251,837) (49,705)
Proceeds from issuance of stock under stock option and .........
employee stock purchase plans ................................. 26,278 29,579 6,842
Purchase of treasury stock ..................................... (55,447) (72,273) (71,234)
---------- ---------- ----------
Net cash used in financing activities ........................... (300,253) (250,052) (209,381)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents..... 2,688 1,936 (3,820)
---------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ......................... (2,777) (33,663) (80,348)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 14,858 48,521 128,869
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 12,081 $ 14,858 $ 48,521
========== ========== ==========
See Notes to Consolidated Financial Statements
38
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED NOTE TOTAL
CAPITAL IN OTHER TREASURY STOCK RECEIVABLE COMPRE-
COMMON EXCESS OF RESTRICTED RETAINED COMPREHENSIVE --------------------------- FROM HENSIVE
(DOLLARS IN THOUSANDS) STOCK PAR VALUE STOCK EARNINGS INCOME SHARES COST OFFICER INCOME
- ----------------------- ------- ----------- ---------- -------- ------------- ---------------- ---------- ----------- ----------
Balance at January 1,
2001 ................. $14,470 $ 133,041 $ - $1,204,561 $ (77,578) (18,335,796) $(643,235) $ -
Net income ............ 116,002 $116,002
Cumulative translation
adjustment ........... (78,688) (78,688)
Accumulated losses on
derivatives qualifying
as hedges (net of
tax) ................. (2,261) (2,261)
Minimum pension
liability adjustment
(net of tax) ......... (20,009) (20,009)
--------
Total comprehensive
income ............... $15,044
========
Cash dividends
declared .............. (57,219) 187,056 9,623 (987)
Stock options .......... (3,941)
Reacquired shares ...... (3,019,100) (71,234)
Restricted stock award . (2,930) (3,065) 170,886 5,995
Amortization ........... 1,625
------- -------- --------- --------- --------- ---------- --------- --------
Balance at December 31,
2001................... 14,470 126,170 (1,440) 1,263,344 (178,536) (20,996,954) (698,851) (987)
------- -------- --------- --------- --------- ---------- --------- --------
Net income ............. 175,944 $175,944
Cumulative translation
adjustment ............ 18,091 18,091
Accumulated gains on
derivatives qualifying
as hedges (net of
tax) .................. 2,994 2,994
Minimum pension
liability adjustment
(net of tax) .......... (55,029) (55,029)
--------
Total comprehensive
income ................ $142,000
========
Cash dividends
declared .............. (56,749)
Stock options .......... (15,652) 1,582,486 51,581
Reacquired shares ...... (2,293,200) (72,273)
Restricted stock award . (783) (5,884) 200,000 6,667
Amortization ........... 1,601
------- -------- ---------- --------- --------- ---------- --------- --------
Balance at December 31,
2002................... 14,470 109,735 (5,723) 1,382,539 (212,480) (21,507,668) (712,876) (987)
------- -------- ---------- --------- --------- ---------- --------- --------
Net income ............. 172,597 $172,597
Cumulative translation
adjustment ............ 92,987 92,987
Accumulated losses on
derivatives qualifying
as hedges (net of
tax) .................. (4,411) (4,411)
Minimum pension
liability adjustment
(net of tax) .......... (7,777) (7,777)
--------
Total comprehensive
income ................ $253,396
========
Cash dividends
declared .............. (59,032)
Stock options .......... (14,597) 1,226,836 40,875 987
Reacquired shares ...... (1,751,300) (55,447)
Amortization ........... 1,771
------- -------- ---------- ---------- ---------- ----------- ---------- --------
Balance at December 31,
2003................... $14,470 $ 95,138 $(3,952) $1,496,104 $ (131,681) (22,032,132) $(727,448) $ -
======= ======== ========== ========== ========== =========== ========== ========
See Notes to Consolidated Financial Statements
39
INTERNATIONAL FLAVORS & FRAGRANCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES Preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
and accompanying disclosures. These estimates are based on management's best
knowledge of current events and actions the Company may undertake in the future.
Actual results may ultimately differ from estimates, although management does
not believe such changes will materially affect the financial statements in any
individual year.
NATURE OF OPERATIONS The Company is a leading creator and manufacturer of
flavor and fragrance compounds used 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. All intercompany balances and
transactions have been eliminated. To the extent any subsidiary is not
wholly-owned, any related minority interest is included in Other liabilities and
applicable (income) expense attributable to the minority interest is included in
Other (income) expense, net.
REVENUE RECOGNITION Revenue is recognized when products are shipped and
title and risk of loss transfer to the customer.
FOREIGN CURRENCY TRANSLATION The assets and liabilities of non-U.S.
subsidiaries 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.
RESEARCH AND DEVELOPMENT All costs associated with research and development
are expensed as incurred.
INVENTORIES Inventories are stated at the lower of cost (generally on an
average basis) or market.
CASH EQUIVALENTS Cash equivalents include highly liquid investments with
maturities of three months or less at date of purchase.
PROPERTY, PLANT AND EQUIPMENT 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 estimated life of the improvements or the remaining term of the lease,
whichever is shorter.
The Company reviews its long-lived assets 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.
GOODWILL AND OTHER INTANGIBLE ASSETS Identifiable intangible assets include
patents, trademarks and other intellectual property valued at acquisition
primarily through independent appraisals, and are amortized on a straight-line
basis over periods ranging from 7 to 20 years. Through December 31, 2001,
goodwill arising from business acquisitions was amortized on a straight-line
basis over its estimated useful life, which was generally 20 years.
40
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142 (FAS 142), Goodwill and Other Intangible
Assets. FAS 142 eliminates the amortization of goodwill and indefinite-lived
intangibles and requires an evaluation of potential impairment upon adoption,
and at least annually thereafter. FAS 142 also prescribes that other
indefinite-lived intangibles be included with goodwill.
Fair values for goodwill and indefinite-lived intangibles are determined
based on discounted cash flows, market multiples or appraised values, as
appropriate.
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
anticipated. No provision is made for additional taxes on undistributed earnings
of subsidiary companies that are intended to be permanently invested in such
subsidiaries. No income tax benefit 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 plan improvements are amortized over periods
ranging from 10 to 20 years.
FINANCIAL INSTRUMENTS The Company enters into derivative instruments with
terms that match the underlying exposure being hedged. The Company's derivative
instruments are considered highly effective and the net gain or loss from hedge
ineffectiveness is not material.
The Company's derivative instruments that qualify for hedge accounting are
primarily designated as either fair value hedges or cash flow hedges. For fair
value hedges, changes in the value of the derivative as well as the offsetting
changes in fair value of the hedged item are recognized in earnings each period.
For cash flow hedges, changes in value of the derivative are recorded in other
comprehensive income and are recognized in earnings when the offsetting effect
of the hedged item is recognized in earnings.
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.
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 SFAS No. 146 (FAS 146), Accounting for Costs
Associated with Exit or Disposal Activities was issued in June 2002. FAS 146
establishes accounting and reporting standards for exit or disposal activities
initiated after December 31, 2002, and requires such costs to be recognized when
the liability is incurred and not at project initiation. The Company adopted the
provisions of FAS 146 without material impact to reported results.
SFAS No. 148 (FAS 148), Accounting for Stock-Based Compensation -
Transition and Disclosure was issued in December 2002. FAS 148 provides
alternate methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The Company has
elected to continue to use the intrinsic method of accounting for stock-based
awards to employees. No expense has been recognized for stock-based compensation
other than for restricted stock awards.
The Financial Accounting Standards Board issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, and No. 46,
Consolidation of Variable Interest Entities. The Company has no investments in
entities to which these interpretations apply.
41
SFAS No. 149 (FAS 149), Amendment of Statement 133 on Derivative
Instruments and Hedging activities was issued in April 2003. FAS 149 amends and
clarifies financial accounting and reporting for derivative instruments under
FAS 133. The Company adopted this standard without material impact to reported
results.
SFAS No. 132 (FAS 132), Employers' Disclosures about Pensions and Other
Postretirement Benefits was revised in December 2003. The revised version is
effective for fiscal years ending after December 15, 2003. FAS 132, as revised,
requires enhanced disclosures about defined benefit pension and other
postretirement benefit plan assets, obligations, cash flows, and net cost. The
Company has complied with the expanded disclosure requirements prescribed by
the revised standard.
NET INCOME PER SHARE Net income per share is based on the weighted
average number of shares outstanding. A reconciliation of shares used in the
computations of basic and diluted net income per share is as follows:
NUMBER OF SHARES
-------------------------------
(SHARES IN THOUSANDS) 2003 2002 2001
- ------------------------------------ -------- -------- ---------
Basic .............................. 93,718 94,511 95,770
Dilution under stock plans ......... 701 1,362 1,049
------ ------ ------
Diluted ............................ 94,419 95,873 96,819
====== ====== ======
Net income used in the computation of net income per share is unaffected
by the assumed issuance of stock under the Company's stock plans.
Options to purchase 4,440,455, 3,505,414 and 4,138,020 shares were
outstanding in 2003, 2002 and 2001, respectively, but not included in the
computation of diluted net income per share because the exercise prices were
greater than the average market price of the common shares in the respective
years.
STOCK PLANS The Company has stock-based compensation plans which are
described more fully in Note 12. The Company applies the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for these plans. No compensation expense for employee stock options
is reflected in net earnings, as all options granted under such plans had an
exercise price not less than the market value of the common stock on the date
of the grant. Net income includes compensation expense related to restricted
stock. The following table illustrates the effect on net income and net income
per share if the Company had applied the fair value recognition provisions of
FAS No. 123 for the years ended December 31, 2003, 2002 and 2001:
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- ---------------------------------------------------------- ------------- ------------- -------------
Net income, as reported .................................. $ 172,597 $ 175,944 $ 116,002
Deduct:
Total stock-based employee compensation expense
determined under fair value method for all stock option
awards, net of related tax effects .................... 15,404 16,008 14,092
--------- --------- ---------
Pro-forma
net income ............................................ $ 157,193 $ 159,936 $ 101,910
========= ========= =========
Net income per share:
Basic -- as reported .................................... $1.84 $1.86 $1.21
Basic -- pro-forma ...................................... $1.68 $1.69 $1.06
Diluted -- as reported .................................. $1.83 $1.84 $1.20
Diluted -- pro-forma .................................... $1.66 $1.67 $1.05
===== ===== =====
These pro-forma amounts may not be representative of future results
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.
42
RECLASSIFICATIONS Certain reclassifications have been made to the prior
years' financial statements to conform to 2003 classifications.
NOTE 2. RESTRUCTURING AND OTHER CHARGES
In October 2000, the Company announced a reorganization including
management changes, consolidation of production facilities and related actions.
Costs incurred include separation-related costs, asset write-downs and other
costs directly related to the restructuring effort.
The actions taken in 2003 completed the reorganization activities as
contemplated under the plan announced in October 2000. The restructuring and
other charges exclude all costs incurred in connection with the integration of
BBA and the Company; such costs were treated as an element of the acquisition
cost.
During 2003, the Company recorded pre-tax charges of $42.4 million; $38.0
million related to employee terminations and $4.4 million related to location
closures and asset write-downs. The Company eliminated 321 positions; positions
by region are as follows: North America, including corporate 81, Europe 97,
Asia Pacific 120, Latin America 19 and India 4. The $4.4 million asset-related
charges primarily relate to updates on costs for previously commenced actions.
During 2002, the Company recorded pre-tax charges of $11.7 million; $4.3
million related to employee terminations and $7.4 million related to location
closures and asset write-downs. The Company eliminated 148 positions; positions
by region are as follows: North America, including corporate 91, Europe 42 and
Asia Pacific 15. The $7.4 million asset-related charges includes $4.0 million
related to a non-cash asset write-off associated with the disposition of the
Company's fruit concentrates business in North America.
During 2001, the Company recorded pre-tax charges of $30.1 million; $10.1
million related to employee terminations and $20.0 million related to location
closures and asset write-downs. The Company eliminated 465 positions; positions
by region are as follows: North America, including corporate 197, Europe 62,
Asia Pacific 145 and Latin America 61. There were no significant non-cash
related elements in the 2001 charges.
Separation costs for the employees relate primarily to severance,
outplacement and other benefit costs. Asset-related and other charges relate to
establishment of the new carrying value for assets held for sale or disposal
and other costs including lease termination costs and other reorganization
expenses incurred to effect the location closure.
Charges by region in each of the three years in the period ended December
31, 2003 were:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- ------------------------ ---------- --------- ----------
North America .......... $20,172 $ 5,565 $14,722
Europe ................. 16,936 5,814 4,172
Asia Pacific ........... 3,576 358 8,542
Latin America .......... 1,296 - 2,633
India .................. 441 - -
------- ------- -------
$42,421 $11,737 $30,069
======= ======= =======
43
Movements in related accruals were:
ASSET-
EMPLOYEE- RELATED
(DOLLARS IN THOUSANDS) RELATED AND OTHER TOTAL
- ----------------------------------- ----------- ----------- ------------
Balance January 1, 2001 ........... $ 24,379 $ 2,053 $ 26,432
Additional charges ................ 10,083 19,986 30,069
Cash and other costs .............. (27,474) (21,294) (48,768)
--------- --------- ---------
Balance December 31, 2001 ......... 6,988 745 7,733
Additional charges ................ 4,340 7,397 11,737
Cash and other costs .............. (7,899) (7,721) (15,620)
--------- --------- ---------
Balance December 31, 2002 ......... 3,429 421 3,850
Additional charges ................ 37,989 4,432 42,421
Cash and other costs .............. (21,809) (3,334) (25,143)
--------- --------- ---------
Balance December 31, 2003 ......... $ 19,609 $ 1,519 $ 21,128
========= ========= =========
The balance of the employee-related liabilities will be utilized by 2006
as obligations are satisfied; the asset-related charges will be utilized in
2004 on final decommissioning and disposal of the affected equipment.
NOTE 3. ACQUISITIONS AND DIVESTITURES
In 2003, the Company acquired 70% of the outstanding shares of Celessence
International Ltd. (Celessence), a company engaged in the development and
distribution of encapsulation and delivery systems for use in fragrance and
other applications for $6.4 million. The acquisition was accounted for as a
purchase business combination. The principal Celessence asset is a process
technology patent included in other intangible assets that is being amortized
over its estimated remaining useful life. Celessence results, which are not
material, are included in the consolidated results of the Company from
acquisition date. Final allocation of the purchase price is not complete as of
December 31, 2003 pending final valuation of the intangible asset.
In November 2000, the Company acquired BBA; total consideration paid,
including transaction costs, was $970.0 million. At acquisition date, BBA owned
approximately 73% of its Indian subsidiary, BBA India Limited (BBAIL). During
2002, the Company acquired additional BBAIL shares, raising its ownership
interest to 93%; cost of the acquired shares was $11.8 million.
Minority interests, which in the aggregate, are not material, are included
in Other liabilities.
The BBA acquisition was accounted for as a purchase business combination;
the purchase price was allocated to assets acquired and liabilities assumed
based on their fair values at the date of acquisition. The excess of the
purchase price over the estimated value of tangible and identified intangible
assets acquired was recorded as goodwill.
The Company established accruals relating to the integration of BBA
operations. Costs associated with these integration activities, relating mainly
to employee separation and facility closures, were recorded as a component of
purchase accounting; such costs did not directly impact current earnings.
44
Movements in acquisition accounting accruals were:
ASSET-
EMPLOYEE- RELATED
(DOLLARS IN THOUSANDS) RELATED AND OTHER TOTAL
- ----------------------------------- ----------- ----------- ------------
Balance January 1, 2001 ........... $ 4,103 $ 6,230 $ 10,333
Additional charges ................ 41,012 24,961 65,973
Cash and other costs .............. (31,259) (21,325) (52,584)
--------- --------- ---------
Balance December 31, 2001 ......... 13,856 9,866 23,722
Cash and other costs .............. (7,850) (8,797) (16,647)
--------- --------- ---------
Balance December 31, 2002 ......... 6,006 1,069 7,075
Cash and other costs .............. (3,576) (1,069) (4,645)
--------- --------- ---------
Balance December 31, 2003 ......... $ 2,430 $ - $ 2,430
========= ========= =========
The remaining liability will be utilized in 2004 as severance obligations
are satisfied.
The Company sold its concentrate business based in Oregon in June 2002 and
recorded a restructuring and other charge of $4.3 million related to employee
separation and other disposal costs. Sales for the business up to the date of
disposition were $9.4 million; operating profit was not significant.
In October 2001, the Company sold its formulated fruit and vegetable
preparation businesses in the United States and Brazil and recorded a
restructuring and other charge of $7.4 million related to employee separation
and other disposal costs. Sales for the business up to the date of disposition
were $23.0 million, with operating profit of approximately $2.2 million.
In December 2001, the Company sold the U.K.-based aroma chemicals business
acquired as part of the BBA purchase. Sales for the business up to the date of
disposition were $36.7 million, with operating profit of approximately $1.5
million. No gain or loss was recognized as a result of this transaction.
Proceeds from the sales, which were not material, were used to reduce
current borrowings.
NOTE 4. MARKETABLE SECURITIES
Marketable securities are included in cash equivalents or short-term
investments, as appropriate. At December 31, 2003 and 2002, marketable
securities totaling $0.1 million and $0.1 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) 2003 2002
- ------------------------- ----------- -----------
Raw materials ........... $233,313 $222,161
Work in process ......... 15,815 12,680
Finished goods .......... 205,503 186,762
-------- --------
$454,631 $421,603
======== ========
45
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
-------------------------
(DOLLARS IN THOUSANDS) 2003 2002
- ------------------------------------------- ------------ ----------
Land ...................................... $ 38,370 $ 35,249
Buildings and improvements ................ 218,381 221,899
Machinery, equipment and software ......... 699,148 630,252
Construction in progress .................. 54,498 62,814
--------- --------
1,010,397 950,214
Accumulated depreciation .................. 499,785 429,715
--------- --------
$ 510,612 $520,499
========= ========
NOTE 7. INTANGIBLE ASSETS, NET
Effective January 1, 2002, the Company adopted FAS 142; adoption
eliminated annual goodwill amortization expense of $32.8 million.
During 2003 and 2002, the Company performed its impairment assessment and
concluded there was no impairment.
The principle changes in goodwill and intangible assets in 2003 relate to
the acquisition of Celessence.
DECEMBER 31, 2003
--------------------------
GROSS
CARRYING ACCUMULATED
(DOLLARS IN THOUSANDS) VALUE AMORTIZATION
- -------------------------------------------- ---------- -------------
Goodwill ................................... $688,760 $41,534
Other indefinite-lived intangibles ......... 19,200 1,184
Trademarks and other ....................... 174,699 40,528
-------- -------
Total ...................................... $882,659 $83,246
======== =======
DECEMBER 31, 2002
--------------------------
GROSS
CARRYING ACCUMULATED
(DOLLARS IN THOUSANDS) VALUE AMORTIZATION
- -------------------------------------------- ---------- -------------
Goodwill ................................... $684,189 $41,534
Other indefinite-lived intangibles ......... 19,200 1,184
Trademarks and other ....................... 161,162 27,754
-------- -------
Total ...................................... $864,551 $70,472
======== =======
46
The following table reflects the net income per share effect of adopting
FAS 142.
YEAR ENDED DECEMBER 31,
---------------------------------------------
(DOLLARS IN THOSANDS
EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- -------------------------------- ------------- ------------- -------------
Reported net income ............ $ 172,597 $ 175,944 $ 116,002
Add back:
Goodwill amortization ......... - - 32,774
--------- --------- ---------
Adjusted net income ............ $ 172,597 $ 175,944 $ 148,776
========= ========= =========
BASIC NET INCOME
PER SHARE
Reported net income ............ $1.84 $1.86 $1.21
Goodwill amortization .......... - - 0.34
--------- --------- ---------
Adjusted net income ............ $1.84 $1.86 $1.55
========= ========= =========
DILUTED NET INCOME
PER SHARE
Reported net income ............ $1.83 $1.84 $1.20
Goodwill amortization .......... - - 0.34
--------- --------- ---------
Adjusted net income ............ $1.83 $1.84 $1.54
========= ========= =========
Amortization expense for the year ended December 31, 2003 was $12.6
million; estimated annual amortization from 2004 to 2006 is $14.8 million,
$13.4 million in 2007 and $6.7 million in 2008.
NOTE 8. SALE AND LEASEBACK TRANSACTIONS
In 2003, the Company sold its New York corporate headquarters to an
unrelated third party for $91.0 million in cash, concurrently, entering into a
long-term lease with respect to the space it occupies (approximately 40% of the
building). The lease is classified as an operating lease in accordance with
SFAS No. 13 (FAS 13), Accounting for Leases. The gain realized on the sale,
after transaction costs, of $52.7 million, has been deferred and is being
credited to income over the initial 27.5-year lease term.
In 2002, the Company entered into agreements for the sale and leaseback of
its Hazlet and South Brunswick, New Jersey facilities to an unrelated third
party for $48.0 million in cash. Concurrently, the Company entered into a
long-term lease with respect to the facilities. The leases are classified as
operating leases in accordance with FAS 13. The gain realized on the sale,
after transaction costs, of $26.7 million, has been deferred and is being
credited to income over the initial 22-year lease term.
The Company has cumulative deferred gains on disposition of real estate
totaling $76.4 million and $26.0 million at December 31, 2003 and 2002,
respectively. At December 31, 2003 and 2002, $73.4 million and $24.8 million,
respectively, are reflected in the accompanying balance sheet under the caption
Deferred gains, with the respective remaining amounts included as a component
of Other current liabilities.
47
NOTE 9. BORROWINGS
Debt consists of the following at December 31:
(DOLLARS IN THOUSANDS) RATE MATURITIES 2003 2002
- --------------------------------------------------------- ---------- ------------ ----------- ------------
Commercial paper (U.S.) ................................. $162,933 $ 37,979
Bank loans .............................................. 30,610 10,979
Current portion of long-term debt ....................... 761 705
-------- ----------
Total current debt ...................................... 194,304 49,663
-------- ----------
U.S. dollars ............................................ 6.45% 2006 498,675 699,112
Euro facility ........................................... 2.55% - 106,018
Japanese Yen notes ...................................... 2.45% 2008-11 141,516 126,824
Japanese Yen notes ...................................... 1.74% 2005 11,172 10,012
Other ................................................... 2005 861 1,587
-------- ----------
652,224 943,553
Deferred realized gains on interest rate swaps .......... 39,685 57,868
FAS 133 adjustment ...................................... (1,678) 5,664
-------- ----------
Total long-term debt .................................... 690,231 1,007,085
-------- ----------
Total debt .............................................. $884,535 $1,056,748
======== ==========
At December 31, 2003, outstanding commercial paper had an effective
interest rate of 1.2% compared to 1.6% at December 31, 2002. Commercial paper
maturities did not extend beyond January 22, 2004.
In 2002, the Company entered into a five-year Euro 350.0 million
(approximately $440.0 million at December 31, 2003), multi-currency revolving
credit facility. Prior to July 2002, the Company had a Euro 140.0 million
facility which was cancelled and all borrowings were repaid. Prior to the third
quarter of 2003, the five-year Euro facility was characterized as long-term
debt; the Company currently employs this facility as a European-wide working
capital facility. At December 31, 2003, the Company had no borrowings under
this facility.
In 2001, the Company issued $700.0 million of 6.45% Notes; the Notes
mature May 15, 2006. During 2003, the Company repurchased $200.7 million of
these Notes in a series of open-market transactions. As a result of premiums
paid for the Notes repurchased, the Company incurred pre-tax losses, included
in Other (income) expense, net of $4.2 million.
In 2002, the Company exercised an option under its existing $500.0 million
U.S. revolving credit facility and cancelled the $200.0 million 364-day portion
of the agreement. The remaining $300.0 million revolving credit facility
extends to September 2006. The revolving credit agreement is used as backstop
for the Company's commercial paper program; there have been no borrowings under
this agreement. The Company compensates participating banks in the form of
fees, the amounts of which are not material.
Short-term bank loans, in addition to the five-year Euro facility, were
outstanding in several foreign countries and averaged $22.7 million in 2003,
compared with $16.7 million in 2002. The highest levels were $37.4 million in
2003, $52.2 million in 2002 and $69.0 million in 2001, respectively. The 2003
weighted average interest rate of these foreign bank loans, based on balances
outstanding at the end of each month, was 4% and the average rate on loans
outstanding at December 31, 2003 was 4%. These rates compare with 5% and 4%,
respectively, in 2002 and 7% and 5%, respectively, in 2001.
Annual maturities on long-term debt outstanding at December 31, 2003 are
as follows: 2004, $0.8 million; 2005, $12.0 million; 2006, $499.3 million;
2008, $124.5 million; 2009, $0; and thereafter, $17.0 million. At December 31,
2003, the estimated fair value of the $499.3 million 6.45% Notes, including
deferred gains on interest rate swaps, was $533.7 million. The estimated fair
value of the remaining long-term debt at December 31, 2003 and 2002, based on
borrowing rates currently available to the Company with similar terms and
maturities, approximated the recorded amount.
48
The Company has various interest rate swaps, the market value of which is
included in the caption FAS 133 adjustment. Interest rate swaps that have been
monetized and will be amortized over the life of the debt are reported as
Deferred realized gains on interest rate swaps.
Cash payments for interest were $44.6 million in 2003, $61.6 million in
2002 and $77.2 million in 2001; such cash payments exclude the benefit of cash
payments the Company received under its various interest rate swap agreements
of $11.6 million, $56.5 million and $19.9 million in 2003, 2002 and 2001,
respectively.
At December 31, 2003 and 2002, the Company and its subsidiaries had unused
lines of credit approximating $532.0 million and $368.0 million, respectively,
in addition to the facility serving as backstop to the Company's commercial
paper program.
NOTE 10. INCOME TAXES
The following tables show the components of consolidated income before
taxes, and current and deferred income tax expense by taxing jurisdiction, both
domestic and foreign:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- ------------------------------------ ------------- ------------ -------------
U.S. loss before taxes ............. $ (53,200) $ (8,918) $ (59,390)
Foreign income before
taxes ............................. 305,060 275,335 247,167
--------- -------- ---------
Total income before taxes .......... $ 251,860 $266,417 $ 187,777
========= ======== =========
(DOLLARS IN THOUSANDS) 2003 2002 2001
- ---------------------------- ------------ ------------ ------------
Current
Federal ................... $ 4,762 $ 18,452 $ 7,507
State and local ........... 902 1,884 3,816
Foreign ................... 85,164 76,518 78,565
--------- --------- ---------
90,828 96,854 89,888
--------- --------- ---------
Deferred
Federal ................... (18,497) (19,496) (17,836)
State and local ........... (2,660) (2,591) (5,821)
Foreign ................... 9,592 15,706 5,544
--------- --------- ---------
(11,565) (6,381) (18,113)
--------- --------- ---------
Total income taxes ......... $ 79,263 $ 90,473 $ 71,775
========= ========= =========
At December 31, 2003 and 2002, gross deferred tax assets were $154.1
million and $146.8 million, respectively; gross deferred tax liabilities were
$77.7 million and $77.2 million, respectively. No valuation allowance was
required for deferred tax assets. At December 31, 2003 and 2002, non-current
deferred tax assets of $10.3 million and $2.5 million, respectively, were
included in Other assets. The principal components of deferred tax assets
(liabilities) were:
49
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------- ------------ ------------
Employee and retiree benefits ......... $ 67,700 $ 71,700
Inventory ............................. 5,400 5,800
Tax credit carryforwards .............. 18,700 13,800
Property, plant and equipment ......... 10,900 (8,200)
Trademarks and other .................. (37,600) (41,500)
Interest .............................. 10,000 17,400
Foreign earnings ...................... (25,100) (19,400)
Other, net ............................ 26,400 30,000
--------- ---------
$ 76,400 $ 69,600
========= =========
Of the tax credit carryforwards, $7.6 million will expire, if unused,
beginning in 2006; the remaining $11.1 million can be carried forward
indefinitely.
A reconciliation between the U.S. federal income tax rate and the
effective tax rate is:
2003 2002 2001
---------- ---------- ----------
Statutory tax rate ........................................................ 35.0% 35.0% 35.0%
Difference in effective tax rate on foreign earnings and remittances ...... (1.4) 0.1 (1.4)
State and local taxes ..................................................... (0.5) (0.2) (0.7)
Goodwill .................................................................. - - 6.0
Other, net ................................................................ (1.6) (0.9) (0.7)
---- ---- ----
Effective tax rate ........................................................ 31.5% 34.0% 38.2%
==== ==== ====
Income taxes paid were $96.9 million in 2003, $100.3 million in 2002 and
$88.6 million in 2001.
Undistributed earnings of foreign subsidiaries for which no deferred taxes
have been provided totaled $635.4 million and $576.6 million at December 31,
2003 and 2002, respectively. The portion of these foreign earnings which the
Company intends to permanently reinvest in its foreign operations totaled
$117.3 million and $66.8 million at December 31, 2003 and 2002, respectively.
No federal income or foreign withholding tax has been provided on these
permanently reinvested foreign earnings. Any additional U.S. taxes payable on
the remaining foreign earnings, if remitted, would be substantially offset by
credits for foreign taxes already paid.
NOTE 11. SHAREHOLDERS' EQUITY
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 vesting period. In 2001, the first two market price targets
were achieved and compensation expense of $1.7 million was recognized. In 2002,
the third price target of $31.50 was achieved and the Company recognized
compensation expense of $0.8 million. The remaining unvested Units are reported
as Restricted stock on the Company's Consolidated Balance Sheet.
On August 1, 2002, the Company's Board of Directors granted an award of
200,000 restricted shares of the Company's common stock. Entitlement to all or
a portion of the award is subject to the Company achieving certain levels of
shareholder return compared to those of a specified group of companies, over
the three-, four- and five-year periods commencing August 1, 2002. Compensation
expense relating to the award is recognized over the restriction period.
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
50
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 $0.62, $0.60 and $0.60 in 2003, 2002 and
2001, respectively.
The Accumulated other comprehensive income balance includes Cumulative
translation adjustments of ($45.2) million and ($138.2) million, Accumulated
(losses) gains on derivatives qualifying as hedges of ($3.7) million and $0.7
million, and Minimum pension liability of ($82.8) million and ($75.0) million,
in 2003 and 2002, respectively. Amounts are shown net of tax, where
appropriate.
NOTE 12. STOCK PLANS
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 8% of
options outstanding (as of December 31, 2003), 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. The November 2002 options vest six
years and nine months after date of grant, based only on continued employment,
regardless of whether the prescribed price targets have been met.
Options granted after May 1, 2001 generally become exercisable no earlier
than one year from the date of grant and expire 10 years after grant date,
except for options granted to certain foreign employees, which may be exercised
immediately.
During 2003, options were granted at exercise prices ranging from $29.86
to $32.39 per share. At December 31, 2003, the price range for shares under
option was $17.94 to $49.88; options for 5,146,449 shares were exercisable at
that date.
The Company has a Global Employee Stock Purchase Plan (GESPP) that was
established in January 2001. Eligible employees may purchase a limited number
of shares of the Company's common stock at a discount of 15% of the market
value on the grant date. The purchase date is one year after grant. Shares
purchased under the GESPP in 2003 and 2002 were 188,862 and 206,541,
respectively.
51
Stock plan transactions were:
SHARES OF COMMON STOCK WEIGHTED
--------------------------------- AVERAGE
AVAILABLE UNDER EXERCISE
FOR GRANT OPTION PRICE
--------------- --------------- -----------
Balance
January 1, 2001 ...................... 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
Granted ............................... (2,899,950) 2,899,950 32.19
Exercised ............................. - (1,356,964) 18.42
Terminated ............................ 154,947 (154,947) 31.40
Lapsed ................................ (1,735,856) (87,500) 34.57
Reserved for Units .................... (50,710) - -
Increase under existing plans ......... 4,500,000 - -
Restricted Stock award ................ (200,000) - -
---------- ---------- --------
Balance
December 31, 2002 .................... 6,480,012 9,661,908 30.66
Granted ............................... (2,668,600) 2,668,600 30.08
Exercised ............................. - (1,034,528) 20.81
Terminated ............................ 754,658 (754,658) 33.38
Lapsed ................................ (107,883) (117,750) 36.31
Reserved for Units .................... (37,229) - -
---------- ---------- --------
Balance
December 31, 2003 .................... 4,420,958 10,423,572 $ 31.18
========== ========== ========
The following table summarizes information concerning currently
outstanding and exercisable options:
RANGE OF EXERCISE PRICES
-------------------------------
$10-$30 $30-$50
-------------- --------------
Number outstanding ............................................ 5,173,089 5,250,483
Weighted average remaining contractual life, in years ......... 8.1 6.8
Weighted average exercise price ............................... $ 26.81 $ 35.49
----------- -----------
Number exercisable ............................................ 1,857,595 3,288,854
Weighted average exercise price ............................... $ 25.70 $ 37.16
=========== ===========
Using the Black-Scholes option valuation model, the estimated fair values
of options granted during 2003, 2002 and 2001 were $7.84, $10.07 and $8.09,
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.
52
Principal assumptions used in applying the Black-Scholes model were:
2003 2002 2001
--------- --------- ---------
Risk-free interest rate .......... 2.6% 4.5% 4.6%
Expected life, in years .......... 5 5 5
Expected volatility .............. 31.7% 33.7% 32.2%
Expected dividend yield .......... 2.0% 1.8% 2.2%
==== ==== ====
The Company has a share repurchase program. In October 2002, the Board of
Directors authorized the Company to purchase $100.0 million in shares under
that program. At December 31, 2003, the Company had authorization for $42.0
million remaining under this plan. The repurchased shares are used in
connection with the above stock option programs and for general corporate
purposes.
NOTE 13. 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 identical to 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, the effects of restructuring
and other 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 and other corporate assets.
The Company is divided into five geographic regions for management
purposes: North America, Latin America, Europe, Asia Pacific and India.
The Company's reportable segment information, based on geographic region,
follows:
2003 NORTH LATIN ASIA
(DOLLARS IN THOUSANDS) AMERICA EUROPE INDIA AMERICA PACIFIC ELIMINATIONS CONSOLIDATED
- ------------------------------------------ ----------- ----------- ---------- ----------- ----------- -------------- -------------
Sales to unaffiliated customers .......... $583,224 $782,680 $42,209 $208,714 $284,693 $ - $1,901,520
Transfers between regions ................ 77,471 155,305 939 683 22,512 (256,910) -
-------- -------- ------- -------- -------- ---------- ----------
Total sales .............................. $660,695 $937,985 $43,148 $209,397 $307,205 $ (256,910) $1,901,520
======== ======== ======= ======== ======== ========== ==========
Segment profit ........................... $ 67,758 $209,073 $10,728 $ 32,907 $ 50,326 $ (490) $ 370,302
======== ======== ======= ======== ======== ==========
Corporate and other unallocated
expenses ................................ (42,107)
Restructuring and other charges .......... (42,421)
Interest expense ......................... (28,477)
Other income (expense), net .............. (5,437)
----------
Income before taxes on income ............ $ 251,860
==========
Segment assets ........................... $785,619 $978,020 $59,512 $156,809 $385,515 $ (101,945) $2,263,530
======== ======== ======= ======== ======== ==========
Unallocated assets ....................... 43,362
----------
Total assets ............................. $2,306,892
==========
53
2002 NORTH LATIN ASIA
(DOLLARS IN THOUSANDS) AMERICA EUROPE INDIA AMERICA PACIFIC ELIMINATIONS CONSOLIDATED
- ------------------------------------------ ----------- ----------- ---------- ----------- ----------- -------------- -------------
Sales to unaffiliated customers .......... $592,974 $695,384 $37,626 $216,938 $266,327 $ - $1,809,249
Transfers between regions ................ 86,089 127,830 1,766 1,022 17,126 (233,833) -
-------- -------- ------- -------- -------- ---------- ----------
Total sales .............................. $679,063 $823,214 $39,392 $217,960 $283,453 $ (233,833) $1,809,249
======== ======== ======= ======== ======== ========== ==========
Segment profit ........................... $ 81,888 $161,720 $ 9,311 $ 48,596 $ 52,619 $ 983 $ 355,117
======== ======== ======= ======== ======== ==========
Corporate and other unallocated
expenses ................................ (43,518)
Restructuring and other charges .......... (11,737)
Interest expense ......................... (37,036)
Other income (expense), net .............. 3,591
----------
Income before taxes on income ............ $ 266,417
==========
Segment assets ........................... $789,642 $883,050 $55,088 $159,425 $357,908 $ (67,265) $2,177,848
======== ======== ======= ======== ======== ==========
Unallocated assets ....................... 54,846
----------
Total assets ............................. $2,232,694
==========
2001 NORTH LATIN ASIA
(DOLLARS IN THOUSANDS) AMERICA EUROPE INDIA AMERICA PACIFIC ELIMINATIONS CONSOLIDATED
- ------------------------------------------ ----------- ----------- ---------- ----------- ----------- -------------- -------------
Sales to unaffiliated customers .......... $616,806 $682,574 $32,684 $245,517 $266,185 $ - $1,843,766
Transfers between regions ................ 83,115 134,862 2,698 1,678 16,620 (238,973) -
-------- -------- ------- -------- -------- ---------- ----------
Total sales .............................. $699,921 $817,436 $35,382 $247,195 $282,805 $ (238,973) $1,843,766
======== ======== ======= ======== ======== ========== ==========
Segment profit ........................... $ 86,928 $158,175 $ 7,857 $ 52,907 $ 58,798 $ 2,691 $ 367,356
======== ======== ======= ======== ======== ==========
Corporate and other unallocated
expenses ................................ (48,624)
Amortization of goodwill ................. (33,071)
Restructuring and other charges .......... (30,069)
Interest expense ......................... (70,424)
Other income (expense), net .............. 2,609
----------
Income before taxes on income ............ $ 187,777
==========
Segment assets ........................... $836,208 $803,011 $55,572 $197,365 $340,134 $ (41,916) $2,190,374
======== ======== ======= ======== ======== ==========
Unallocated assets ....................... 77,677
----------
Total assets ............................. $2,268,051
==========
CAPITAL EXPENDITURES DEPRECIATION AND AMORTIZATION
------------------------------------ ------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001 2003 2002 2001
- ---------------------------- ---------- ---------- ---------- ---------- ---------- ----------
North America .............. $21,153 $23,129 $18,531 $43,063 $41,852 $ 33,784
Europe ..................... 21,565 29,688 20,441 29,909 26,418 27,616
India ...................... 2,318 555 491 938 962 533
Latin America .............. 4,919 3,206 1,559 3,368 3,768 4,628
Asia Pacific ............... 11,322 8,445 4,571 7,112 6,842 7,749
Unallocated assets ......... 4,678 16,792 6,423 2,331 4,616 49,183
------- ------- ------- ------- ------- --------
Consolidated ............... $65,955 $81,815 $52,016 $86,721 $84,458 $123,493
======= ======= ======= ======= ======= ========
Sales of fragrance products were $1,035.0 million, $1,000.2 million and
$1,008.1 million in 2003, 2002 and 2001, respectively. Sales of flavor products
were $866.5 million, $809.0 million and $835.7 million in 2003, 2002 and 2001,
respectively. Sales in the United States, based on the final country of
destination of the Company's products, were $520.3 million, $544.3 million and
$570.5 million in 2003, 2002 and 2001, respectively. No other country of
destination exceeded 8% of consolidated sales. No customer accounted for 10% or
more of sales in 2003, 2002 or 2001. Total long-lived assets consists of net
property, plant and equipment and net intangible assets and amounted to
$1,310.0 million, $1,314.6 million and $1,328.4 million at December 31, 2003,
2002 and 2001, respectively; of the respective
54
totals, $998.4 million, $1,029.6 million and $1,071.1 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 $1.6 million in 2003, $2.3 million in 2002
and $1.9 million in 2001 are included in Other (income) expense, net.
NOTE 14. 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.
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) 2003 2002 2001 2003 2002 2001
- ------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Service cost for benefits earned ......... $ 8,466 $ 7,874 $ 7,293 $ 8,226 $ 7,327 $ 9,552
Interest cost on projected benefit
obligation .............................. 19,771 19,091 18,351 23,564 21,339 24,306
Expected return on plan assets ........... (21,875) (23,506) (23,082) (24,418) (23,455) (27,691)
Net amortization and deferrals ........... 709 (306) (1,347) 5,843 2,923 679
Special termination benefits ............. 1,300 - - 1,223 - -
--------- --------- --------- --------- --------- ---------
Defined benefit plans .................... 8,371 3,153 1,215 14,438 8,134 6,846
Defined contribution and other
retirement plans ........................ 2,533 3,121 2,368 3,217 3,227 2,425
--------- --------- --------- --------- --------- ---------
Total pension expense .................... $ 10,904 $ 6,274 $ 3,583 $ 17,655 $ 11,361 $ 9,271
========= ========= ========= ========= ========= =========
Weighted-average actuarial
assumptions used to determine
pension data:
Discount rate ............................ 6.25% 6.75% 7.25% 5.24% 5.48% 5.90%
Expected return on plan assets ........... 8.50% 9.00% 9.00% 7.35% 7.53% 7.50%
Rate of compensation increase ............ 3.75% 4.00% 4.50% 2.52% 2.80% 3.25%
========= ========= ========= ========= ========= =========
The expected return on plan assets was determined based on an asset
allocation model using the current benchmark allocation, real rates of return by
asset class and an anticipated inflation rate. The benchmark asset allocation
was approximately 5%-10% employed in cash and fixed income investments expected
to yield 1.5%; 20%-25% employed in corporate and government bonds expected to
yield 1.7%-2.2%; and 65%-70% in equity investments with a long-term expected
yield of 8.0% to 8.9%. The inflation rate assumed in the model was 2.2%. The
plan has employed a similar asset allocation strategy for the prior 15 years and
has achieved a compound annual return of approximately 10.1% during this period.
Discount rates used in determining future pension obligations of individual
plans are based on a review of long-term bonds that receive a high rating by a
recognized rating agency. The rate of compensation increase is based on plan
experience.
55
The Company's pension plan asset allocation for U.S. plans at December 31,
2003 and 2002, and target allocation for 2004 is:
PERCENTAGE PERCENTAGE
OF PLAN OF PLAN
TARGET ASSETS AT ASSETS AT
ALLOCATION DECEMBER 31, DECEMBER 31,
ASSET CATEGORY 2004 2003 2002
- ----------------------------------------------- ------------ -------------- -------------
Equity investments ............................ 65%-70% 78% 66%
Corporate and government bonds ................ 20%-25% 11% 13%
Other cash and short-term investments ......... 5%-10% 11% 21%
--- ---
Total ......................................... 100% 100%
=== ===
Equity investments include the Company's common stock in the amounts of
$18.1 million (7.2% of total plan assets) and $18.2 million (8.3% of total plan
assets) at December 31, 2003 and 2002, respectively.
In 2003, the percentage of assets held in equities increased solely from
strong market performance relative to fixed income investments. There has been
no change in the Company's long-term target allocation.
Expense recognized for postretirement benefits other than pensions
included the following components:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------- --------- --------- ---------
Service cost for benefits earned .............. $ 2,751 $2,034 $1,722
Interest on benefit obligation ................ 6,220 5,545 5,377
Net amortization and deferrals ................ 1,044 532 508
------- ------ ------
Total postretirement benefit expense .......... $10,015 $8,111 $7,607
======= ====== ======
Changes in pension and postretirement benefit obligations were:
U.S. PENSION PLANS NON-U.S. PENSION PLANS POSTRETIREMENT BENEFITS
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS) 2003 2002 2003 2002 2003 2002
- --------------------------------------------- ----------- ----------- ----------- ----------- ------------ ----------
Benefit obligation at beginning of year ..... $ 287,777 $ 256,647 $ 414,777 $ 351,390 $ 92,283 $ 83,506
Service cost for benefits earned ............ 8,466 7,874 8,226 7,327 2,751 2,034
Interest cost on projected
benefit obligation ......................... 19,771 19,091 23,564 21,339 6,220 5,545
Actuarial loss .............................. 22,196 18,934 21,764 7,921 12,545 6,488
Plan amendments ............................. - 631 - - (24,539) -
Plan participants' contributions ............ - - 1,105 106 220 165
Benefits paid ............................... (16,712) (15,400) (20,110) (18,025) (4,485) (5,455)
Curtailments ................................ - - (1,776) - - -
Special termination benefits ................ 1,300 - 1,223 - - -
Translation adjustments ..................... - - 65,170 44,719 - -
--------- --------- --------- --------- --------- --------
Benefit obligation at end of year ........... $ 322,798 $ 287,777 $ 513,943 $ 414,777 $ 84,995 $ 92,283
========= ========= ========= ========= ========= ========
56
Changes in pension plan assets were:
U.S. PLANS NON-U.S. PLANS
------------------------- -------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2003 2002
- -------------------------------------------------------- ----------- ----------- ----------- -----------
Fair value of plan assets at beginning of year ......... $ 219,956 $ 256,189 $ 314,165 $ 294,993
Actual return on plan assets ........................... 36,836 (31,143) 37,850 (34,702)
Employer contributions ................................. 10,014 10,310 24,697 35,792
Plan participants' contributions ....................... - - 1,105 106
Benefits paid .......................................... (16,712) (15,400) (20,110) (18,025)
Translation adjustments ................................ - - 53,491 36,001
--------- --------- --------- ---------
Fair value of plan assets at end of year ............... $ 250,094 $ 219,956 $ 411,198 $ 314,165
========= ========= ========= =========
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) 2003 2002 2003 2002 2003 2002
- ------------------------------------- ------------- ------------- -------------- -------------- ------------- -------------
Plan assets (less than) projected
benefit obligation ................. $ (72,704) $ (67,821) $ (102,745) $ (100,612) $ (84,995) $ (92,283)
Remaining balance of unrecognized
net (asset) liability established at
adoption of FAS 87 ................. - (286) 363 676 - -
Unrecognized prior service cost
(benefit) .......................... 8,002 8,867 3,776 3,861 (25,584) (1,700)
Unrecognized net loss ............... 56,563 49,458 147,193 128,115 40,096 29,250
--------- --------- ---------- ---------- --------- ---------
Net asset (liability) ............... $ (8,139) $ (9,782) $ 48,587 $ 32,040 $ (70,483) $ (64,733)
========= ========= ========== ========== ========= =========
Pension assets and liabilities included in the Consolidated Balance Sheet
at December 31 were:
U.S. PLANS NON-U.S. PLANS
--------------------------- ---------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2003 2002
- ------------------------------------------------ ------------ ------------ ------------ ------------
Prepaid benefit cost ........................... $ - $ - $ 45,052 $ 30,950
Accrued benefit liability ...................... (50,223) (41,289) (84,708) (86,413)
Accumulated other comprehensive income ......... 34,082 23,301 86,440 85,693
Intangible asset ............................... 8,002 8,206 1,803 1,810
--------- --------- --------- ---------
Net amount recognized .......................... $ (8,139) $ (9,782) $ 48,587 $ 32,040
========= ========= ========= =========
At December 31, 2003, $43.6 million of the Non-U.S. prepaid benefit cost
is included in Other assets with the remaining amount included in prepaid
expenses on the Consolidated Balance Sheet.
At the end of 2003 and 2002, the projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets for the U.S. pension plans
and pension plans outside the U.S., where the accumulated benefit obligation
exceeds the assets, were:
U.S. PLANS NON-U.S. PLANS
------------------------- -------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2003 2002
- ---------------------------------------- ----------- ----------- ----------- -----------
Projected benefit obligation ........... $322,798 $287,777 $341,144 $294,085
Accumulated benefit obligation ......... 300,317 261,245 322,230 277,013
Fair value of plan assets .............. 250,094 219,956 238,046 191,071
======== ======== ======== ========
57
Information about the expected cash flows for the U.S. pension plan
follows:
EMPLOYER CONTRIBUTIONS
(DOLLARS IN THOUSANDS) PENSION BENEFITS
- ---------------------------------- -----------------
2004 (expected) ................ $3,800
======
Expected employer contributions include $1.8 million in benefit payments.
Principal actuarial assumptions used to determine the above postretirement
data were:
2003 2002
---------- ----------
Discount rate ....................................... 6.25% 6.75%
Current medical cost trend rate ..................... 9.00% 10.00%
Ultimate medical cost trend rate .................... 4.75% 5.00%
Medical cost trend rate decreases to ultimate rate in
year ............................................... 2010 2009
==== =====
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 $15.6 million and $1.9 million,
respectively; a 1% decrease in the rate would decrease the obligation and
expense by approximately $12.3 million and $1.5 million, respectively.
The special termination benefits in 2003 are the result of termination
agreements in the U.S. and Europe providing for enhanced retirement benefits to
eligible employees. The curtailment amount in the non-U.S. plans reflects the
required adjustment for the Netherlands plan.
The Company amended its postretirement medical and life insurance plan in
2003. The plan changes require retirees to increase their contribution amounts
over a three-year period to a rate equal to active employees and for all
retiree prescription co-payments to increase to the amounts currently paid by
active employees.
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. Following the
guidance of the Financial Accounting Standards Board, the Company has elected
to defer recognition of this Act at this time. The accumulated postretirement
benefit obligation and net periodic postretirement benefit cost do not reflect
the effect of the Act on the plan. Specific authoritative guidance on the
accounting for the federal subsidy is pending and guidance, when issued, could
require a change to previously reported information.
The Company recorded an additional minimum pension liability of $93.7
million and $94.2 million at December 31, 2003 and 2002, respectively, as
required by Financial Accounting Standards Board Statement No. 87. The
adjustment is reflected in Retirement liabilities 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 to plans in the United States, the United Kingdom, Ireland and Japan.
NOTE 15. FINANCIAL INSTRUMENTS
In 2001, the Company entered into certain interest swap agreements
effectively converting the fixed coupon rate on its 6.45% Notes to a variable
short-term rate based on the London InterBank Offered Rate (LIBOR) plus an
interest markup. In response to changes in market conditions and the value of
the swaps and, in 2003, in connection with the Company's debt repurchase, the
Company periodically amended the swap agreements, changing the related interest
spread. As a result of these amendments, the counterparty paid the Company
$11.6 million, $56.5 million and $19.9 million in 2003, 2002 and 2001,
respectively, including accrued interest of $3.7 million, $6.5 million and $3.3
million, respectively. The net realized gains on the swaps have been deferred,
classified as a separate component of debt, and are amortized as a reduction in
interest expense over the remaining term of the Notes. At December 31, 2003,
the Company had terminated all swap agreements related to the
58
Notes; as a result, the interest rate on the Notes, including amortization of
the deferred swap gains, was 3.6% at December 31, 2003. The effective rate on
the Notes at December 31, 2002 and 2001 was 3.4% and 3.7%, respectively.
In 2002, the Company entered into certain interest swap agreements
effectively converting the fixed rate on its long-term Japanese Yen borrowings
to a variable short-term rate based on the Japanese Yen LIBOR rate plus an
interest markup. These swaps are designated as qualified fair value hedges.
During 2003, the Company amended the swap and the counterparty paid the Company
$3.0 million, including accrued interest of $0.5 million. These net gains have
been deferred, are classified as a separate component of debt and are being
amortized over the remaining term of the debt. To the extent the Company has
not received cash or otherwise amended or settled any swap agreement, any
applicable mark-to-market adjustment relating to that swap is included as a
separate component of debt. The Company had no ineffective interest rate swaps
at December 31, 2003.
The Company has executed a 10-year Yen U.S. dollar currency swap related
to the purchase and sale of products between the U.S. and Japan. The annual
notional value of this swap is approximately $5.0 million. Gains and losses
related to this swap are recorded currently, and the mark-to-market adjustment
related to the value of the swap is reflected as a component of Accumulated
other comprehensive income.
The Company enters into foreign currency forward contracts with the
objective of reducing exposure to cash flow volatility associated with foreign
currency receivables and payables, and with anticipated purchases of certain
raw materials used in operations. These contracts, the counterparties to which
are major international financial institutions, generally involve the exchange
of one currency for a second currency at a future date, and have maturities not
exceeding six months. The notional amount and maturity dates of such contracts
match those of the underlying transactions. At December 31, 2003 and 2002, the
Company had outstanding foreign currency forward contracts with notional
amounts of $178.0 million and $131.4 million, respectively. The Company has
designated these contracts as qualified fair value and cash flow hedges, as
appropriate. The Company had no ineffective foreign currency forward contracts
at December 31, 2003 or 2002.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
The Company has no significant concentrations of risk in financial
instruments. Temporary 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 regions.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancellable operating leases for
office and warehouse facilities are $15.3 million in 2004, $13.8 million in
2005, $12.0 million in 2006, $10.1 million in 2007, $10.1 million in 2008 and
thereafter thru 2030, the aggregate lease obligations are $209.9 million. The
corresponding rental expense amounted to $20.7 million, $12.1 million and $2.2
million in 2003, 2002 and 2001, respectively.
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 18. RELATED-PARTY TRANSACTIONS
At December 31, 2002, the Company held a note receivable from an executive
officer, resulting from the exercise of a stock option. This note bore
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, 2002 was 3.3%. The note
was collateralized by 55,000 shares of common stock. In 2003, the loan was
repaid in full along with related interest, and the 55,000 shares of common
stock securing the loan were released.
59
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following schedule is included
in Part IV of this Annual Report on Form 10-K:
Schedule II--Valuation and Qualifying Accounts and Reserves for the three years ended
December 31, 2003 ...................................................................... S-1
Report of Independent Auditors on Financial Statement Schedule .......................... 64
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(a)(3) EXHIBITS
NUMBER
- ------
2 Agreement and Plan of Merger dated as of September 25, 2000 among
Registrant, Bush Boake Allen Inc. and B Acquisition Corp.
incorporated by reference to Exhibit 2.1 to Registrant's Report
on Form 8-K dated September 25, 2000.
3(i) Restated Certificate of Incorporation of Registrant, incorporated
by reference to Exhibit 10(g) to Registrant's Report on Form 10-Q
dated August 12, 2002.
3(ii) By-laws of Registrant, as amended through March 9, 2004.
4.1 Shareholders Protection Rights Agreement dated as of March 21,
2000 between Registrant and The Bank of New York, as Rights
Agent, incorporated by reference to Exhibit 4 to Registrant's
Report on Form 8-K dated March 22, 2000.
4.1a First Amendment dated as of September 26, 2000, to Shareholder
Protection Rights Agreement, incorporated by reference to Exhibit
4 to Registrant's Report on Form 8-K dated September 26, 2000.
4.1b Letter Agreement between the Registrant and Wachovia Bank,
National Association ("Wachovia") dated as of October 31, 2002
appointing Wachovia as Successor Rights Agent pursuant to the
Shareholder Protection Rights Agreement dated as of March 21,
2000 and amended as of September 26, 2000, incorporated by
reference to Exhibit 4(a) to Registrant's Report on Form 10-Q
dated November 12, 2002.
4.2 Specimen Certificates of Registrant's Common Stock bearing legend
notifying of Shareholder Protection Rights Agreement,
incorporated by reference to Exhibit 4(b) to Registrant's
Registration Statement on Form S-3 filed on September 29, 2000
(Reg. No. 333-46932).
4.3 Indenture, dated as of May 1, 2001, between International Flavors
& Fragrances Inc. and Bank One Trust Company, N. A., as Trustee,
incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-4 dated June 26, 2001 (Reg. No.
333-63910).
4.4 First Supplemental Indenture, dated as of May 7, 2001, between
International Flavors & Fragrances Inc. and Bank One Trust &
Company, N. A., as Trustee, incorporated by reference to Exhibit
4.2 to Registrant's Registration Statement on Form S-4 dated June
26, 2001 (Reg. No. 333-63910).
4.5 Form of 6.45% Note due 2006 (included in 4.4), incorporated by
reference to Exhibit 4.2.1 to Registrant's Registration Statement
on Form S-4 dated June 26, 2001 (Reg. No. 333-63910).
60
NUMBER
- ------
4.6 Registration Rights Agreement, dated May 7, 2001, among
International Flavors & Fragrances Inc. and Salomon Smith Barney
Inc., Banc One Capitals Markets, Inc., First Union Securities, Inc.
and Tokyo-Mitsubishi International plc, as representatives of the
Initial Purchasers, incorporated by reference to Exhibit 4.3 to
Registrant's Registration Statement on Form S-4 dated June 26, 2001
(Reg. No. 333-63910).
*10.1 Memorandum of Understanding between Registrant and Richard A.
Goldstein, Chairman of the Board and Chief Executive Officer of
Registrant, approved by Registrant's Board of Directors on April 13,
2000, incorporated by reference to Exhibit 10(a) to Registrant's
Report on Form 10-Q dated August 14, 2000.
*10.2 Promissory Note dated June 29, 1999 between Registrant and Nicolas
Mirzayantz, Vice President, Global Business Development, Fine
Fragrance and Toiletries.
*10.3 Performance Incentive Award Agreement in respect of a performance
incentive award of 200,000 restricted shares of Company Common Stock
approved by the Company's Board of Directors on August 1, 2002,
granted to Richard A. Goldstein, Chairman of the Board and Chief
Executive Officer of the Company, incorporated by reference to
Exhibit 10(a) to Registrant's Report on Form 10-Q dated November 12,
2002.
*10.4 Retirement Agreement dated as of March 31, 2003, as amended, between
Julian W. Boyden, former Executive Vice President of the Company,
and the Company, incorporated by reference to Exhibit 10 (a) to
Registrant's Report on Form 10-Q dated August 12, 2003 and to
Exhibit 10(a) to Registrant's Report on Form 10-Q dated May 13,
2003.
*10.5 Retirement Agreement dated as of March 31, 2003, between Stephen A.
Block, Senior Vice President, General Counsel and Secretary of the
Company, and the Company, incorporated by reference to Exhibit 10(b)
to Registrant's Report on Form 10-Q dated May 13, 2003.
*10.6 Separation Agreement dated as of March 31, 2003 between Robert J.
Gordon, former Vice President, Global Account Sales of the Company,
and the Company, incorporated by reference to Exhibit 10(b) to
Registrant's Report on Form 10-Q dated August 12, 2003.
*10.7 Supplemental Retirement Plan adopted by Board of Directors on
October 29, 1986, including amendments effective January 1, 2001,
incorporated by reference to Exhibit 10(c) to Registrant's Report on
Form 10-Q dated May 13, 2003.
*10.8 2000 Stock Award and Incentive Plan adopted by the Registrant's
Board of Directors on March 9, 2000, as amended and restated through
March 9, 2004.
*10.9 2000 Supplemental Stock Award Plan adopted by the Registrant's Board
of Directors on November 14, 2000, as amended and restated through
March 9, 2004.
*10.10 Registrant's Executive Death Benefit Plan effective July 1, 1990,
incorporated by reference to Exhibit 10(c) to Registrant's Report on
Form 10-Q dated May 14, 1997.
*10.11 Registrant's "Vision 2001 Compensation Program" adopted by
Registrant's Board of Directors on December 12, 2000, incorporated
by reference to Exhibit 10(k) to Registrant's Report on Form 10-K
for the fiscal year ended December 31, 2000.
*10.12 Registrant's Executive Separation Policy, as amended through
February 13, 2001, incorporated by reference to Exhibit 10(a) to
Registrant's Report on Form 10-Q dated August 12, 2002.
61
NUMBER
- ------
*10.13 Registrant's Employee Stock Option Plan adopted in 1992,
incorporated by reference to Exhibit 10.11 to Registrant's Report
on Form 10-K for fiscal year ended December 31, 2002.
*10.14 1997 Employee Stock Option Plan as amended by Registrant's Board
of Directors on February 8, 2000, incorporated by reference to
Exhibit 10(ll) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1999.
*10.15 Registrant's Global Employee Stock Purchase Plan adopted by
Registrant's Board of Directors on November 14, 2000,
incorporated by reference to Exhibit B to Registrant's Proxy
Statement dated March 30, 2001.
*10.16 Deferred Compensation Plan adopted by the Company's Board of
Directors on December 12, 2000, incorporated by reference to
Exhibit 99 to the Company's Registration Statement on Form S-8
dated May 16, 2001 (Reg. No. 333-61072)
10.17 Trust Agreement dated October 4, 2000 among Registrant, First
Union National Bank and Buck Consultants Inc. approved by
Registrant's Board of Directors on September 12, 2000,
incorporated by reference to Exhibit 10(b) to Registrant's Report
on Form 10-Q dated November 14, 2000.
*10.18 Stock Option Plan for Non-Employee Directors, incorporated by
reference to Exhibit 10(h) to Registrant's Report on Form 10-Q
dated May 14, 1997.
*10.19 2000 Stock Option Plan for Non-Employee Directors adopted by
Registrant's Board of Directors on February 8, 2000, incorporated
by reference to Exhibit A to the Registrant's Proxy Statement
dated March 29, 2000.
*10.20 Director Charitable Contribution Program adopted by the Board of
Directors on February 14, 1995, incorporated by reference to
Exhibit 10(j) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1994
*10.21 Resolutions approving Non-Employee Directors' Annual Stock Grant
Program adopted by Registrant's Board of Directors on September
12, 2000, incorporated by reference to Exhibit 99(c) to
Registrant's Registration Statement on Form S-3 filed on
September 29, 2000 (Reg. No. 333-46932).
10.22 Five Year Credit Agreement dated as of September 26, 2001 among
the Company, as Borrower, certain Initial Lenders, Citibank N.A.,
as Administrative Agent, and Salomon Smith Barney Inc., as
Arranger, incorporated by reference to Exhibit 10(b) to
Registrant's Report on Form 10-Q dated November 14, 2001.
10.22a Amendment No. 1 dated as of June 10, 2002 to the Five Year Credit
Agreement dated as of September 26, 2001 among the Company, as
Borrower, certain Initial Lenders and Citibank N.A., as
Administration Agent, incorporated by reference to Exhibit 10 (c)
to Registrant's Report on Form 10-Q dated August 12, 2002.
10.23 Multi-currency Revolving Credit Facility Agreement dated July 19,
2002, among International Flavor & Fragrances (Luxembourg)
S.A.R.L., as Borrower, the Company, as Guarantor, certain
Original Lenders, Barclays Bank PLC, as Agent, ABN AMRO Bank NV
and Barclays Capital, as Arrangers, incorporated by references to
Exhibit 10(b) to Registrant's Report on Form 10-Q dated August
12, 2002.
21 List of Principal Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
62
NUMBER
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31.1 Certification of Richard A. Goldstein, Chairman of the Board and
Chief Executive Officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a).
31.2 Certification of Douglas J. Wetmore, Senior Vice President and
Chief Financial Officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a).
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed
by Richard A. Goldstein, Chairman of the Board and Chief Executive
Officer of the Registrant and Douglas J. Wetmore, Senior Vice
President and Chief Financial Officer of the Registrant.
- ----------
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
The Company furnished to the SEC a Current Report on Form 8-K on October
23, 2003 for the purpose of furnishing a press release announcing the Company's
financial results for the third quarter and nine months ended September 30,
2003.
63
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of International Flavors & Fragrances Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 27, 2004 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 15(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 27, 2004
64
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(Registrant)
By /s/ Douglas J. Wetmore
-----------------------------
Douglas J. Wetmore
Senior Vice President and
Chief Financial Officer
Dated: March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
Principal Executive Officer:
/s/ Richard A. Goldstein
-------------------------
Richard A. Goldstein
Chairman of the Board
and
Chief Executive Officer
Principal Financial and Accounting Officer:
/s/ Douglas J. Wetmore
-------------------------
Douglas J. Wetmore
Senior Vice President
and
Chief Financial Officer
Directors:
/s/ Richard A. Goldstein
-------------------------
RICHARD A. GOLDSTEIN
/s/ Margaret Hayes Adame
-------------------------
MARGARET HAYES ADAME
/s/ Gunter Blobel
-------------------------
GUNTER BLOBEL
/s/ J. Michael Cook
-------------------------
J. MICHAEL COOK
/s/ Peter A. Georgescu
-------------------------
PETER A. GEORGESCU
/s/ Alexandra A. Herzan
-------------------------
ALEXANDRA A. HERZAN
/s/ Arthur C. Martinez
-------------------------
ARTHUR C. MARTINEZ
/s/ Burton M. Tansky
-------------------------
BURTON M. TANSKY
/s/ William D. Van Dyke, III
----------------------------
WILLIAM D. VAN DYKE, III
65
INTERNATIONAL FLAVORS & FRAGRANCES INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
For the Year Ended
December 31, 2003
-------------------------
Additions
charged Trans-
Balance at to costs Accounts lation Balance
beginning and written adjust- at end of
of period expenses off ments period
---------- --------- -------- ------- ---------
Allowance for doubtful accounts $12,933 $3,146 $1,846 $1,979 $16,212
======= ====== ====== ====== =======
For the Year Ended
December 31, 2002
-------------------------
Additions
charged Trans-
Balance at to costs Accounts lation Balance
beginning and written adjust- at end of
of period expenses off ments period
---------- --------- -------- ------- ---------
Allowance for doubtful accounts $10,835 $4,067 $2,707 $738 $12,933
======= ====== ====== ==== =======
For the Year Ended
December 31, 2001
-------------------------
Additions
charged Trans-
Balance at to costs Accounts lation Balance
beginning and written adjust- at end of
of period expenses off ments period
---------- --------- -------- ------- ---------
Allowance for doubtful accounts $11,074 $2,947 $2,306 $(880) $10,835
======= ====== ====== ====== =======
S-1