10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-4858
INTERNATIONAL FLAVORS &
FRAGRANCES INC.
(Exact name of registrant as
specified in its charter)
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NEW YORK
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13-1432060
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer Identification
No.)
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521 WEST 57TH STREET, NEW YORK, N.Y.
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10019
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code
(212) 765-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value
12
1/2¢
per share
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New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
For the purpose of reporting the following market value of
registrants 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, directors or less than 10%
shareholders. The aggregate market value of registrants
common stock not held by affiliates as of June 30, 2008 was
$3,068,755,579.
As of February 9, 2009, there were 78,695,619 shares
of the registrants common stock, par value
121/2¢
per share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants proxy statement for the 2009
Annual Meeting (the IFF 2009 Proxy Statement) are
incorporated by reference in Part III of this
Form 10-K.
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
TABLE OF
CONTENTS
2
PART I
International Flavors & Fragrances Inc., incorporated
in New York in 1909, and its subsidiaries (the
Registrant, IFF, we,
us, and our), 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, personal
care products, hair care products, deodorants, soaps,
detergents, fabric care and air care products; our flavor
products are sold principally to manufacturers of prepared
foods, beverages, pharmaceuticals, dairy and confectionery
products as well as the food service industry.
We currently have 31 manufacturing facilities with the major
manufacturing facilities located in the United States, Great
Britain, Ireland, the Netherlands, Spain, Argentina, Brazil,
Mexico, Australia, China, India, Indonesia, Japan and Singapore.
The remaining manufacturing facilities are located in 8 other
countries. We maintain our own sales and distribution facilities
in 31 countries and are represented by sales agents and
distributors in other countries. Our principal executive offices
are located at 521 West 57th Street, New York, New
York 10019
(212-765-5500).
MARKETS
Our 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 our largest customers for
flavor products are major producers of prepared foods and
beverages in the United States. In the three years ended
December 31, 2008, 2007 and 2006, sales of flavor products
accounted for 46%, 44% and 43%, respectively, of our total sales.
Our fragrance products are used by customers in the manufacture
of various consumer goods in the home and personal care markets.
The home market consists of laundry detergents, fabric care,
candles, air fresheners and all-purpose cleaners. The personal
care market consists of perfumes, colognes, after-shave lotions,
skin care, lipsticks, deodorants and hair preparations. Most of
the major global and regional manufacturers in each of these
categories are our customers. Five of the largest global
companies are among our principal customers. In the three years
ended December 31, 2008, 2007 and 2006, sales of fragrance
products accounted for 54%, 56% and 57%, respectively, of our
total sales.
See Note 12, Segment Information, for information
concerning the two business segments, Flavors and Fragrances,
and our geographic regions, which is incorporated by reference.
PRODUCTS
Our principal fragrance and flavor products consist of compounds
of large numbers of ingredients blended in proprietary formulas
created by our 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 consumer selection
and acceptance of the consumer end product. A smaller number of
compounds are sold to manufacturers who further blend them to
achieve the finished fragrance or flavor in their products. We
produce thousands of compounds, and new compounds are constantly
being created in order to meet the many and changing
characteristics of our customers end products. Most of the
fragrance and flavor compounds are created and produced for the
exclusive use of particular customers. Our products are sold in
powder and liquid forms and in amounts ranging from a few pounds
to many tons, depending upon the nature of the product.
The ingredients that we use in our compounds are both synthetic
and natural. We manufacture a substantial portion of the
synthetic ingredients. While a majority of our synthetic
ingredients production is used in our compounds, a substantial
portion is also sold to others. 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 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
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synthetic ingredients by chemical processes. Our 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, dual-earner households, teenage population,
leisure time, urbanization, health and wellness concerns,
including increased demand for nature based products and by the
continued growth of emerging markets. 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, mens 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-fat and organic food products that must conform to
expected tastes. New and improved methods of packaging, applying
and dispensing have been developed for many consumer products
that utilize some of our flavor or fragrance products. These
developments have called for the creation of new compounds and
ingredients compatible with the newly introduced materials and
methods of application.
PRODUCT
DEVELOPMENT AND RESEARCH
The development of new flavors and fragrances is a complex
technical and artistic process calling upon the combined
knowledge and skill of our creative perfumers and flavorists,
and our 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 flavors and fragrances 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 32
fragrance and flavor laboratories in 24 countries. We maintain a
research and development center at Union Beach, New Jersey. We
spent $213 million in 2008, $199 million in 2007 and
$186 million in 2006 on our research and development
activities or about 9% of our revenues each year. We expect
these expenditures to remain at approximately 9% of our revenues
in 2009. Of the amount expended in 2008 on such activities, 64%
was for fragrances and the balance was for flavors. We employed
1,146 persons in 2008 and 1,132 persons in 2007 in
such activities.
Our business is not materially dependent upon any patents,
trademarks or licenses.
DISTRIBUTION
Distribution for both the flavors and fragrances business units
is similar in that most of our sales are through our own sales
force. The flavors business operates from two sales offices in
the United States and 37 sales offices in 29 foreign countries,
while the fragrances business operates from two sales offices in
the United States and 35 sales offices in 28 foreign countries.
Sales in additional countries are made through agents and
distributors. For the year ended December 31, 2008, 38% of
our sales were to customers in Europe, Africa and Middle East
(EAME), 25% in North America, 23% in Greater Asia
and 14% in Latin America.
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During 2008, our 30 largest customers accounted for 56% of our
sales. Sales to one customer accounted for 11% of our sales in
2008 and 2007. These sales were largely in the fragrance
business unit. No single customer accounted for more than 10% of
our sales in 2006.
GOVERNMENTAL
REGULATION
The manufacture and sale of our 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. In particular, the European Union will require
extensive chemical registration and testing over the next
10 years. Compliance with existing governmental
requirements regulating the discharge of materials into the
environment has not materially affected our operations, earnings
or competitive position. In 2009, we expect to spend
approximately $5 7 million on capital projects
and approximately $20 million in operating expenses and
governmental charges for the purpose of complying with such
requirements.
RAW
MATERIAL PURCHASES
We purchase roughly 10,000 different raw materials from many
sources all over the world. The principal natural raw materials
consist of essential oils, extracts and concentrates derived
from fruits, vegetables, flowers, woods and other botanicals,
animal products and raw fruits. The principal synthetic raw
material purchases consist of organic chemicals. We believe that
alternate materials or alternate sources of materials are
available to enable us to maintain our competitive position in
the event of any interruption in the supply of raw materials
from present sources.
COMPETITION
We have more than 50 competitors in the world markets. IFF is
one of the top four companies, which together represent 70% of
the flavors and fragrances industry. While no single factor is
responsible, our competitive position is based principally on
the creative skills of our perfumers and flavorists, the
technological advances resulting from our research and
development activities, the quality of our customer service, the
support provided by our marketing and application groups, and
our understanding of consumers. We believe that we are one of
the largest companies producing and marketing, on an
international basis, a wide range of fragrance and flavor
products for sale to manufacturers of consumer products. In
particular countries and localities, we face competition from
numerous companies specializing in certain product lines, among
which are some companies larger than us and some more important
in a particular product line or lines. Most of our customers do
not buy all of their fragrance or flavor products from the same
supplier, and some customers make their own fragrance or flavor
compounds with ingredients supplied by us or others.
EMPLOYEE
RELATIONS
At December 31, 2008, we employed approximately
5,300 persons, of whom approximately 1,400 were employed in
the United States. We have not experienced a work stoppage or
strike and consider our employee relations to be satisfactory.
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EXECUTIVE
OFFICERS OF REGISTRANT:
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Year
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First
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Became
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Name
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Office and Other Business Experience(1)
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Age
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Officer
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Robert M. Amen
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Chairman of the Board and Chief Executive Officer since July
2006; President, International Paper prior thereto.
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59
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2006
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Nicolas Mirzayantz
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Group President, Fragrances since January 2007; Senior Vice
President, Fine Fragrance and Beauty Care and Regional Manager,
North America Region from April, 2005 to December 2006; Senior
Vice President, Fine Fragrance and Beauty Care from October 2004
to March 2005; Vice President, Global Business Development, Fine
Fragrance and Toiletries prior thereto.
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46
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2002
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Hernan Vaisman
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Group President, Flavors since January 2007; Vice President,
Latin America Region from October 2004 to December 2006;
Regional Finance Director, Latin America Region, prior thereto.
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50
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2004
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Beth Ford
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Executive Vice President, Supply Chain since October 2008;
Executive Vice President and Chief Operating Officer, Hachette
Book Group from September 2007 to September 2008; Senior Vice
President, Global Operations and Information Technology,
Scholastic, Inc. prior thereto.
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2008
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Steven J. Heaslip
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Senior Vice President, Human Resources since December 2002.
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2001
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Dennis M. Meany
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Senior Vice President, General Counsel and Secretary since
January 2004.
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2004
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Richard A. OLeary
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Interim Chief Financial Officer since July 2008; Vice
President, Corporate Development since July 2007; Finance
Director, International Papers Brazilian affiliate from
August 2004 to June 2007; Finance Director, International
Papers Shorewood Packaging Unit prior thereto.
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2007
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Joseph Faranda
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Vice President and Chief Marketing Officer since March 2005;
Vice President, Strategic Marketing, The Home Depot, Inc. prior
thereto.
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2005
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Kimberly A. Hendricks
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Controller since July 2007; Vice President, Finance, JLG
Industries, Inc. from January 2006 to February 2007; Vice
President, Finance, Bristol-Myers Squibb Company prior thereto.
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2007
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(1) |
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Employed by us or an affiliated company for the last five years,
except as otherwise indicated. |
We make available free of charge on or through the Investor
Relations link on our website, www.iff.com, all materials
that we file electronically with the SEC, including our 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,
we made all such materials available through our website as soon
as reasonably practicable after filing such materials with the
SEC.
You may also read and copy any materials filed by us with the
SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington, DC 20549, and you may
obtain information on the operation of the Public Reference Room
by calling the SEC in the U.S. 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 we file electronically
with the SEC.
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A copy of our Corporate Governance Guidelines, Code of Business
Conduct and Ethics, and the charters of the Audit Committee,
Compensation Committee, and Nominating and Governance Committee
of the Board of Directors are posted on the Investor Relations
section of our 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 our principal executive office set forth above.
ITEM 1A. RISK
FACTORS.
The following are some important factors that could cause the
Companys actual results to differ materially from those
referred to or implied in any forward-looking statement. These
are in addition to the risks and uncertainties discussed
elsewhere in this Annual Report of
Form 10-K
and in the Companys other filings with the Securities and
Exchange Commission.
The
current volatility in global economic conditions and the
financial markets may adversely affect our industry, business
and results of operations.
The volatility and disruption to the capital and credit markets
since mid-2008 has rapidly impacted global economic conditions,
resulting in significant recessionary pressures and declines in
consumer confidence and economic growth. These conditions have
led to economic contractions in the developed economies and
reduced growth rates in the emerging markets. Despite fiscal and
monetary intervention, it is possible that further declines in
consumer spending and global growth rates may occur in the
foreseeable future. Reduced consumer spending may cause changes
in customer order patterns including order cancellations, and
changes in the level of inventory at our customers, which may
adversely affect our industry, business and results of
operations. The impact of the credit crisis and economic
slowdown will vary by region and country. The diversity of our
geographic customer and operating footprint limits our reliance
and exposure to any single economy.
These conditions have also resulted in a substantial tightening
of the credit markets, including lending by financial
institutions and in the commercial paper market, both of which
are sources of credit for our borrowing and liquidity. This
tightening of the credit markets has increased the cost of
capital and reduced the availability of credit. Based on our
latest discussions, we believe that the financial institutions
syndicated under our revolving credit facility are able to
fulfill their commitments as of our filing date. It is difficult
to predict how long the current economic and capital and credit
market conditions will continue, whether they will continue to
deteriorate and which aspects of our products or business could
be adversely affected. However, if current levels of economic
and capital and credit market disruption and volatility continue
or worsen, there can be no assurance that we will not experience
an adverse impact, which may be material, on our business, the
cost of and access to capital and credit markets, and our
results of operations. In addition, we monitor the financial
condition of our customers on a regular basis based on public
information or data provided directly to us. If the financial
condition of one of our major customers was negatively impacted
by market conditions or liquidity, we could be adversely
impacted in terms of accounts receivable
and/or
inventory specifically attributable to them.
Failure
to maintain the integrity of our raw materials, supply chain and
finished goods may adversely impact sales and our results of
operations.
The manufacture and sale of our products are subject to various
regulatory requirements in each of the countries in which our
products are manufactured and sold. In addition, we are subject
to product safety and compliance requirements established by the
industry or similar oversight bodies. We use a variety of
strategies, methodologies and tools to identify current products
standards, assess relative risks in our supply chain that can
impact product integrity, monitor internal and external
performance, test raw materials and finished goods to minimize
the likelihood of product non-compliance. If a non-compliance
event went undetected, we could be subject to customer claims,
penalties, litigation costs
and/or
settlements, remediation costs or loss of sales.
Competitive
factors may negatively impact our sales and
marketability.
The market for flavors and fragrances is fragmented and highly
competitive. IFF competes with many companies and some of our
competitors specialize in one or more of our product segments
while others participate
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in many of the same segments. In addition, some of our
competitors may have greater financial and technical resources.
Increased competition by existing or future competitors,
including aggressive price competition, could result in the need
for us to reduce prices or increase spending and this could have
an impact on sales and profitability.
We are
subject to economic and social changes which may impact
sales.
Demand for consumer products using flavors and fragrances has
been stimulated and broadened by changing social habits
resulting from factors such as increases in personal income,
dual-earner households, teenage population, leisure time, health
concerns and urbanization and by the continued growth in world
population. Changes in any number of external economic factors,
or changes in social or consumer preferences, could adversely
impact our results of operations. Approximately 60% of our sales
occur in the developed markets of North America, Western Europe
and Australasia with the remainder in emerging markets.
Accordingly, the impact on our operations will depend upon
consumer spending on products for which we supply the flavor or
fragrance in these global markets.
Results
may be negatively impacted by the price, quality and
availability of raw materials.
Raw materials are purchased from many sources from all over the
world, including essential oils, extracts and concentrates
derived from fruits, vegetables, flowers, woods and other
botanicals, animal products, raw fruits and organic chemicals.
Disruptions in the supply or quality of ingredients or rising
prices for ingredients purchased could adversely impact our
results of operations and profitability. Historically, we have
experienced the greatest amount of volatility in natural
products that represent approximately 50% of raw material
purchases. Availability and pricing of these products can be
impacted by crop size and quality, demand balance or alternative
land use. To mitigate our sourcing risk, we maintain strategic
stock levels covering multiple periods for critical items
and/or time
purchases to capitalize on favorable market conditions.
Results
may be negatively impacted by the inability to implement our
business strategy, including the achievement of anticipated cost
savings, profitability or growth targets.
We are committed to those particular business strategies and
market segments that have been identified as likely to drive
profitable future growth and improve operations and customer
service. If we are unable to successfully and timely implement
these strategies, it would adversely impact our financial
condition and results of operations.
Results
may be negatively affected by the impact of currency fluctuation
or devaluation in principal foreign markets and the
effectiveness of hedging and risk management
strategies.
Our operations are conducted in many countries, the results of
which are reported in the local currency and then translated
into U.S. dollars at applicable exchange rates. The
exchange rates between these currencies and the U.S. dollar
have fluctuated and may continue to do so in the future. We
employ a variety of techniques to reduce the impact of exchange
rate fluctuations, including sourcing strategies and a limited
number of foreign currency hedging activities. However,
volatility in currency exchange rates may adversely impact our
reported results of operations, financial condition or liquidity.
Results
may be negatively impacted by the outcome of uncertainties
related to litigation.
We are involved in a number of legal claims. While we believe
that related insurance coverage is adequate with respect to such
claims, we cannot predict the ultimate outcome of such
litigation. In addition, we cannot provide assurance that future
events will not require an increase in the amount accrued for
any such claims, or require accrual for one or more claims that
has not been previously accrued.
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Results
and cash flows may be negatively impacted by future pension
funding and other postretirement obligations.
We establish assumptions concerning discount rates and actuarial
assumptions regarding pension funding and other postretirement
benefit obligations based on current market conditions, plan
participants, asset returns, interest rates and other factors.
Changes in pension and other postretirement benefits, plan
assets, and associated expenses may occur in the future due to
changes in capital markets, employee demographics and actuarial
assumptions. These changes may adversely impact our financial
condition, results of operations or liquidity.
Results
may be negatively impacted by the effect of legal and regulatory
requirements, as well as restrictions imposed on operations by
foreign and domestic governmental entities.
The manufacture and sale of our 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. In
addition, we are subject to product safety and compliance
requirements established by the industry or similar oversight
bodies. Our foreign operations are subject to similar
substantial governmental regulation and oversight standards in a
number of countries, including extensive requirements within the
European Union. Costs or investments necessary to maintain
compliance with existing or future governmental regulations may
adversely impact our financial condition, results of operations
or liquidity.
We may
face risks associated with events which may affect the world
economy.
World events such as terrorist attacks, or regional conflicts
have and may in the future weaken world economies. Any resulting
weaknesses in these economies may adversely affect our business
or the businesses of our customers, with a resultant negative
impact on our financial condition, results of operations or
liquidity.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS.
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None.
Our principal properties are as follows:
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Location
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Operation
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United States
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Augusta, GA
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Production of fragrance ingredients.
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Carrollton, TX(1)
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Production of flavor compounds; flavor laboratories.
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Hazlet, NJ(1)
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Production of fragrance compounds; fragrance laboratories.
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Jacksonville, FL
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Production of fragrance ingredients.
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New York, NY(1)
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Fragrance laboratories.
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South Brunswick, NJ(1)
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Production of flavor compounds and ingredients; flavor
laboratories.
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Union Beach, NJ
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Research and development center.
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France
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Neuilly(1)
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Fragrance laboratories.
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Grasse
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Production of flavor and fragrance ingredients; fragrance
laboratories.
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Great Britain
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Haverhill
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Production of flavor compounds and ingredients, and fragrance
ingredients; flavor laboratories.
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Ireland
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Drogheda
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Production of fragrance compounds.
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9
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Location
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Operation
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Netherlands
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Hilversum
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Flavor and fragrance laboratories.
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Tilburg
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Production of flavor compounds and ingredients, and fragrance
compounds.
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Spain
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Benicarlo
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Production of fragrance ingredients.
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Argentina
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Garin
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Production of flavor compounds and ingredients, and fragrance
compounds; flavor laboratories.
|
Brazil
|
|
|
Rio de Janeiro
|
|
Production of fragrance compounds.
|
São 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
|
|
|
Dandenong
|
|
Production of flavor compounds and flavor ingredients.
|
China
|
|
|
Guangzhou(4)
|
|
Production of flavor and fragrance compounds.
|
Shanghai(6)
|
|
Flavor and fragrance laboratories.
|
Xinanjiang(5)
|
|
Production of fragrance ingredients.
|
Zhejiang
|
|
Production of fragrance 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(6)
|
|
Production of flavor and fragrance compounds.
|
Science Park(1)
|
|
Flavor and fragrance laboratories.
|
|
|
|
(1) |
|
Leased. |
|
(2) |
|
We have a 93.4% interest in the subsidiary company that owns
this facility. |
|
(3) |
|
Land is leased and building is partially leased and partially
owned. |
|
(4) |
|
Land is leased and building and machinery and equipment are
owned. |
|
(5) |
|
We have a 90% interest in the subsidiary company that leases the
land and owns the buildings and machinery. |
|
(6) |
|
Building is leased and machinery and equipment are owned. |
Our principal executive offices and New York laboratory
facilities are located at 521 West 57th Street, New
York City.
10
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS.
|
We are subject to various claims and legal actions in the
ordinary course of our business. For purposes of reporting these
actions, Bush Boake Allen (BBA), a wholly-owned
subsidiary of IFF,
and/or IFF
are referred to as the Company.
In September 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
(Benavides case). The plaintiffs alleged that
they sustained respiratory injuries in the workplace due to the
use by Gilster-Mary Lee of a BBA
and/or IFF
flavor.
In January 2004, the Court ruled that class action status was
not warranted. As a result of this decision, each of the 47
plaintiff cases was to be tried separately. Subsequently, 8
cases were tried to a verdict, 4 verdicts resulted for the
plaintiffs and 4 verdicts resulted for the Company, all of which
were appealed by the losing party. Subsequently all plaintiff
cases related to the Benavides case, including those on
appeal, were settled.
Eighteen actions based on similar claims of alleged respiratory
illness due to workplace exposure to flavor ingredients are
currently pending against the Company and other flavor suppliers
and related companies.
In May 2004, the Company and another flavor supplier were named
defendants, and subsequently 14 third and fourth party
defendants were added, in a lawsuit by 4 former workers and
their spouses at a Ridgeway, Illinois factory in an action
brought in the Circuit Court for the Second Judicial Circuit,
Gallatin County, Illinois (Barker case) and another
concerning 8 other workers and 5 spouses at this same plant was
filed in July 2004 and is pending in this same Court against the
same defendants (Batteese case). In August 2005, the
Company and 16 other companies were named defendants in a
lawsuit by 3 former employees of the Gilster-Mary Lee facility
in McBride, Missouri in the Missouri Circuit Court,
32nd Judicial Circuit (Fults case). In August 2006,
the Company and 3 other flavor and chemical suppliers were named
defendants in a lawsuit by 34 current and former employees
and/or a
neighbor of the Gilster-Mary Lee facility in Jasper, Missouri in
the Missouri Circuit Court of Jasper County (Arles case)
and 5 other current and former employees in the same Court
(Bowan case). In November 2006, the Company, 15 other
flavor and chemical suppliers, a trade association and a third
party defendant company were named defendants in a lawsuit filed
in the Circuit Court of Cook County, Illinois by 1 plaintiff
allegedly injured by exposure to butter flavor and other
substances at various facilities in which he worked
(Solis case).
In January 2007, the Company and another flavor supplier were
named defendants in a lawsuit in Hamilton County, Ohio Court of
Common Pleas by 103 current and former employees (plus 43
spousal loss of consortium claims) of two separate Marion, Ohio
factories (Aldrich case). In June 2007, the Company and
another flavor supplier were named defendants in a lawsuit filed
in Hamilton County, Ohio Court of Common Pleas by 28 current and
former employees (plus 7 spousal loss of consortium claims) of a
Marion, Ohio facility (Arnold case). In July 2007, the
Company and another flavor manufacturer were named defendants in
a lawsuit filed in Hamilton County, Ohio Court of Common Pleas
by 55 current and former workers (plus 19 spousal loss of
consortium claims) of two Marion, Ohio facilities
(Adamson case). In July 2007, the Company was joined as a
defendant in a case filed in June 2005 against 7 companies
and a trade association in the 8th Judicial District Court
of Montana by the widow of the former owner/operator of a
popcorn business in Montana (Yatsko case).
In March 2008, the Company and another flavor supplier were
named defendants in two lawsuits in the Hamilton County, Ohio
Court of Common Pleas, one by 12 current and former employees
and 4 spouses of such employees of a popcorn plant in Marion,
Ohio (Ferguson case) and the other by 14 current and
former employees and 6 spouses of such employees of the same
plant (Brown case). In April 2008, the Company and 7
other flavor suppliers, a trade association and a trade
association management company were named defendants in a
lawsuit in the Circuit Court for Milwaukee County, Wisconsin by
one former employee of a Company facility and his spouse
(Smead case). The Company has been dismissed from this
case. In May 2008, the Company and 8 other companies were named
defendants in a lawsuit in the District Court of Colorado by a
consumer of microwave popcorn and his spouse (Watson
case). In August 2008, the Company and 8 other flavor and
material suppliers were named defendants in a lawsuit by 27
plaintiffs (including spouses) in the Hamilton County Court of
Common Pleas (Auld case). In September 2008, the Company,
two other flavor companies and 4 other companies were named
defendants in a lawsuit in the U.S. District Court for the
Eastern District of Washington by a consumer of microwave
popcorn
11
and his spouse (Newkirk case). In September 2008, the
Company, another flavor manufacturer and 2 chemical suppliers
were named defendants in a lawsuit by 1 plaintiff in the
Missouri Circuit Court of Jasper County (Meredith case).
In September 2008, the Company, another flavor company and a
microwave popcorn manufacturer were named defendants in a
lawsuit by 1 plaintiff and her spouse in the Missouri Circuit
Court of Jasper County (McNary case). In October 2008,
the Company, 2 other flavor compounders, 2 chemical companies, a
microwave popcorn manufacturer and a distributor were named
defendants in a lawsuit by a consumer of microwave popcorn and
her spouse in the Circuit Court of Jackson County, Missouri
(Khouri case).
The Company believes that all IFF and BBA flavors at issue in
these matters 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. These procedures are detailed in instructions
that IFF and BBA provided to all their customers for the safe
handling and use of their flavors. It is the responsibility of
IFFs customers to ensure that these instructions, which
include the use of appropriate engineering controls, such as
adequate ventilation, prior handling procedures and respiratory
protection for workers, are followed in the workplace.
At each balance sheet date, or more frequently as conditions
warrant, the Company reviews the status of each pending claim,
as well as its insurance coverage for such claims with due
consideration given to potentially applicable deductibles,
retentions and reservation of rights under its insurance
policies, and the advice of its outside legal counsel with
respect to all these matters. While the ultimate outcome of any
litigation cannot be predicted, management believes that
adequate provision has been made with respect to all known
claims. Based on information presently available and in light of
the merits of its defenses and the availability of insurance,
the Company does not expect the outcome of the above cases,
singly or in the aggregate, to have a material adverse effect on
the Companys financial condition, results of operation or
liquidity. There can be no assurance that future events will not
require the Company to increase the amount it has accrued for
any matter or accrue for a matter that has not been previously
accrued. See Note 16 to the Consolidated Financial
Statements.
Over the past approximately 20 years, various federal and
state authorities and private parties have claimed that the
Company is a Potentially Responsible Party (PRP) 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 have sought to recover costs incurred and to be
incurred to clean up the sites.
The Company has been identified as a PRP at ten facilities
operated by third parties at which investigation
and/or
remediation activities may be ongoing. The Company analyzes its
liability on a regular basis. The Company accrues for
environmental liabilities when they are probable and estimable.
The Company estimates its share of the total future cost for
these sites to be less than $5 million.
While joint and several liability is authorized under federal
and state environmental laws, the Company believes 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 Companys financial condition, results of operations
or liquidity. This conclusion is based upon, among other things,
the involvement of other PRPs at most sites, the status of
proceedings, including various settlement agreements and consent
decrees, the extended time period over which payments will
likely be made and an agreement reached in July 1994 with three
of the Companys liability insurers pursuant to which
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.
12
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Market
Information.
Our 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First
|
|
$
|
47.20
|
|
|
$
|
39.48
|
|
|
$
|
50.77
|
|
|
$
|
46.00
|
|
Second
|
|
|
46.44
|
|
|
|
39.06
|
|
|
|
52.75
|
|
|
|
47.14
|
|
Third
|
|
|
44.47
|
|
|
|
38.27
|
|
|
|
53.93
|
|
|
|
47.45
|
|
Fourth
|
|
|
39.33
|
|
|
|
24.90
|
|
|
|
54.20
|
|
|
|
47.32
|
|
Approximate
Number of Equity Security Holders.
|
|
|
|
|
(B)
|
(A)
|
|
Number of Shareholders of Record
|
Title of Class
|
|
as of December 31, 2008
|
|
Common stock, par value
121/2¢
per share
|
|
3,167
|
Dividends.
Cash dividends declared per share for each quarter ending after
January 1, 2007 were as follows:
|
|
|
|
|
|
|
|
|
Quarter
|
|
2008
|
|
|
2007
|
|
|
First
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
Second
|
|
|
0.23
|
|
|
|
0.21
|
|
Third
|
|
|
0.25
|
|
|
|
0.23
|
|
Fourth
|
|
|
0.25
|
|
|
|
0.23
|
|
Performance
graph.
Total
Return To
Shareholders(1)
(Includes reinvestment of dividends)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Return Percentage
|
|
|
|
Years Ending
|
|
Company Name/Index
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
International Flavors & Fragrances
|
|
|
24.89
|
|
|
|
-20.21
|
|
|
|
49.64
|
|
|
|
-0.36
|
|
|
|
-36.64
|
|
S&P 500 Index
|
|
|
10.88
|
|
|
|
4.91
|
|
|
|
15.79
|
|
|
|
5.49
|
|
|
|
-37.00
|
|
Peer Group
|
|
|
8.71
|
|
|
|
4.43
|
|
|
|
18.29
|
|
|
|
22.26
|
|
|
|
-16.14
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed Returns
|
|
|
|
Years Ending
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Name/Index
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
International Flavors & Fragrances
|
|
$
|
100
|
|
|
$
|
124.89
|
|
|
$
|
99.65
|
|
|
$
|
149.12
|
|
|
$
|
148.58
|
|
|
$
|
94.14
|
|
S&P 500 Index
|
|
|
100
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
Peer Group
|
|
|
100
|
|
|
|
108.71
|
|
|
|
113.52
|
|
|
|
134.29
|
|
|
|
164.18
|
|
|
|
137.68
|
|
|
|
|
|
|
Peer Group
Companies(2)
|
|
|
|
|
|
Alberto Culver Company
|
|
Hormel Foods Corp.
|
|
Unilever NV
|
Avon Products
|
|
Kellogg Co.
|
|
W.M. Wrigley Jr Com.
|
Campbell Soup Co.
|
|
Estee Lauder Companies, Inc.
|
|
(included through 2007)
|
Church & Dwight Inc.
|
|
McCormick & Company, Inc.
|
|
YUM Brands, Inc.
|
Clorox Company
|
|
McDonalds Corp.
|
|
|
Coca-Cola
Company
|
|
Nestle SA
|
|
|
Colgate-Palmolive Co.
|
|
Pepsico Inc.
|
|
|
ConAgra Foods, Inc.
|
|
Procter & Gamble Co.
|
|
|
General Mills Inc.
|
|
Revlon Inc.
|
|
|
H.J. Heinz Co.
|
|
Sara Lee Corp.
|
|
|
Hershey Company
|
|
Sensient Technologies Corp.
|
|
|
|
|
|
(1) |
|
The Cumulative Shareholder Return assumes that the value of an
investment in our Common Stock and each index was $100 on
December 31, 2003, and that all dividends were reinvested. |
|
(2) |
|
Due to the international scope and breadth of our business, we
believe that a Peer Group comprised of international public
companies, which are representative of the customer group to
which we sell our products is the most appropriate group against
which to compare shareholder returns. |
14
Issuer
Purchases of Equity Securities.
The following table presents the approximate dollar value of
shares that still could have been purchased for the quarter
ended December 31, 2008 as part of a publicly announced
repurchase program. There were no shares repurchased during the
fourth quarter of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
|
|
|
Shares Purchased as
|
|
|
that may yet be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
purchased under
|
|
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Announced Program
|
|
|
the
Program(1)
|
|
|
October 1 - 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
268,732,316
|
|
November 1 - 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
268,732,316
|
|
December 1 - 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
268,732,316
|
|
Total shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Approximate Dollar Value of Shares that May Yet Be
Purchased Under the Program reflects our $750 million
share repurchase program less the $450 million purchased
under the previously announced ASR program and any open market
purchases made under the program. The July 2007 repurchase
program is also subject to a 15% limitation, under which we
still have the ability to repurchase approximately
2 million shares. There is no stated expiration for the
July 2007 share repurchase program. |
|
|
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
|
|
|
Diluted
|
|
Quarter
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
First
|
|
$
|
596,605
|
|
|
$
|
566,101
|
|
|
$
|
245,482
|
|
|
$
|
236,719
|
|
|
$
|
55,948
|
|
|
$
|
62,689
|
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.69
|
|
|
$
|
0.69
|
|
Second
|
|
|
636,126
|
|
|
|
573,726
|
|
|
|
263,781
|
|
|
|
246,058
|
|
|
|
67,032
|
|
|
|
78,372
|
|
|
|
0.84
|
|
|
|
0.88
|
|
|
|
0.83
|
|
|
|
0.87
|
|
Third
|
|
|
617,538
|
|
|
|
583,313
|
|
|
|
246,739
|
|
|
|
244,138
|
|
|
|
57,684
|
|
|
|
58,844
|
|
|
|
0.74
|
|
|
|
0.68
|
|
|
|
0.73
|
|
|
|
0.67
|
|
Fourth
|
|
|
539,103
|
|
|
|
553,498
|
|
|
|
214,632
|
|
|
|
225,299
|
|
|
|
48,964
|
|
|
|
47,223
|
|
|
|
0.63
|
|
|
|
0.59
|
|
|
|
0.62
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,389,372
|
|
|
$
|
2,276,638
|
|
|
$
|
970,634
|
|
|
$
|
952,214
|
|
|
$
|
229,628
|
|
|
$
|
247,128
|
|
|
$
|
2.91
|
|
|
$
|
2.86
|
|
|
$
|
2.87
|
|
|
$
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net Income in the 2008 first and fourth quarters included $4,555
and $8,082 of restructuring costs; the first quarter also
included a benefit of $1,612 from insurance recovery related to
a 2005 product contamination matter; Net Income in the second,
third and fourth quarters of 2008 included $2,217, $1,374 and
$211, respectively, of employee separation and implementation
costs. Net Income in the 2008 first, second and fourth quarters
also include tax benefits of $2,106, $3,897 and $17,067. Net
Income in the 2007 second and fourth quarters includes the gains
on sale of assets of $3,686 and $4,033, respectively; the third
quarter includes the effect of a pension curtailment charge of
$3,685. Net Income in the 2007 second quarter also includes a
tax benefit of $9,718; see Note 9 to the Consolidated
Financial Statements for further discussion. |
|
(b) |
|
The sum of the 2008 and 2007 quarters Net Income per share
does not equal the earnings per share for the full year due to
changes in average shares outstanding. |
15
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
FIVE-YEAR SUMMARY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,389,372
|
|
|
$
|
2,276,638
|
|
|
$
|
2,095,390
|
|
|
$
|
1,993,393
|
|
|
$
|
2,033,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold(b)
|
|
|
1,418,738
|
|
|
|
1,324,424
|
|
|
|
1,211,259
|
|
|
|
1,168,992
|
|
|
|
1,160,235
|
|
Research and development
expenses(b)
|
|
|
212,695
|
|
|
|
199,023
|
|
|
|
185,692
|
|
|
|
179,812
|
|
|
|
175,173
|
|
Selling and administrative
expenses(b)
|
|
|
381,841
|
|
|
|
375,287
|
|
|
|
351,923
|
|
|
|
339,323
|
|
|
|
341,306
|
|
Amortization of intangibles
|
|
|
6,153
|
|
|
|
12,878
|
|
|
|
14,843
|
|
|
|
15,071
|
|
|
|
14,830
|
|
Curtailment loss
|
|
|
|
|
|
|
5,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges,
net(a)
|
|
|
18,212
|
|
|
|
|
|
|
|
2,680
|
|
|
|
23,319
|
|
|
|
31,830
|
|
Interest expense
|
|
|
74,008
|
|
|
|
41,535
|
|
|
|
25,549
|
|
|
|
23,956
|
|
|
|
24,002
|
|
Other (income) expense, net
|
|
|
(2,797
|
)
|
|
|
(11,136
|
)
|
|
|
(9,838
|
)
|
|
|
(3,268
|
)
|
|
|
5,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,108,850
|
|
|
|
1,947,954
|
|
|
|
1,782,108
|
|
|
|
1,747,205
|
|
|
|
1,752,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
280,522
|
|
|
|
328,684
|
|
|
|
313,282
|
|
|
|
246,188
|
|
|
|
281,002
|
|
Taxes on income
|
|
|
50,894
|
|
|
|
81,556
|
|
|
|
86,782
|
|
|
|
53,122
|
|
|
|
84,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,628
|
|
|
$
|
247,128
|
|
|
$
|
226,500
|
|
|
$
|
193,066
|
|
|
$
|
196,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales
|
|
|
9.6
|
|
|
|
10.9
|
|
|
|
10.8
|
|
|
|
9.7
|
|
|
|
9.6
|
|
Percentage of average shareholders equity
|
|
|
38.6
|
|
|
|
32.5
|
|
|
|
24.9
|
|
|
|
21.1
|
|
|
|
23.7
|
|
Net income per share basic
|
|
$
|
2.91
|
|
|
$
|
2.86
|
|
|
$
|
2.50
|
|
|
$
|
2.06
|
|
|
$
|
2.08
|
|
Net income per share diluted
|
|
$
|
2.87
|
|
|
$
|
2.82
|
|
|
$
|
2.48
|
|
|
$
|
2.04
|
|
|
$
|
2.05
|
|
Average number of shares (thousands)
|
|
|
79,032
|
|
|
|
86,541
|
|
|
|
90,443
|
|
|
|
93,584
|
|
|
|
94,143
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
178,828
|
|
|
$
|
152,075
|
|
|
$
|
115,112
|
|
|
$
|
272,897
|
|
|
$
|
32,995
|
|
Receivables, net
|
|
|
439,768
|
|
|
|
450,579
|
|
|
|
405,302
|
|
|
|
368,519
|
|
|
|
358,361
|
|
Inventories
|
|
|
479,567
|
|
|
|
484,222
|
|
|
|
446,606
|
|
|
|
430,794
|
|
|
|
457,204
|
|
Property, plant and equipment, net
|
|
|
496,856
|
|
|
|
508,820
|
|
|
|
495,124
|
|
|
|
499,145
|
|
|
|
501,334
|
|
Goodwill and intangible assets, net
|
|
|
726,683
|
|
|
|
732,836
|
|
|
|
745,716
|
|
|
|
772,651
|
|
|
|
789,676
|
|
Total
assets(d)
|
|
|
2,749,913
|
|
|
|
2,726,314
|
|
|
|
2,478,904
|
|
|
|
2,638,196
|
|
|
|
2,363,294
|
|
Bank borrowings, overdrafts and current portion of long-term debt
|
|
|
101,982
|
|
|
|
152,473
|
|
|
|
15,897
|
|
|
|
819,392
|
|
|
|
15,957
|
|
Long-term debt
|
|
|
1,153,672
|
|
|
|
1,060,168
|
|
|
|
791,443
|
|
|
|
131,281
|
|
|
|
668,969
|
|
Shareholders
equity(b)(c)(d)
|
|
|
573,111
|
|
|
|
617,197
|
|
|
|
905,168
|
|
|
|
915,347
|
|
|
|
910,487
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio(e)
|
|
|
2.6
|
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
1.0
|
|
|
|
2.4
|
|
Gross additions to property, plant and equipment
|
|
$
|
85,395
|
|
|
$
|
65,614
|
|
|
$
|
58,282
|
|
|
$
|
93,433
|
|
|
$
|
70,607
|
|
Depreciation and amortization expense
|
|
|
75,986
|
|
|
|
82,788
|
|
|
|
89,733
|
|
|
|
91,928
|
|
|
|
90,996
|
|
Cash dividends declared
|
|
|
75,902
|
|
|
|
76,465
|
|
|
|
68,956
|
|
|
|
68,397
|
|
|
|
64,789
|
|
per share
|
|
$
|
0.960
|
|
|
$
|
0.880
|
|
|
$
|
0.765
|
|
|
$
|
0.730
|
|
|
$
|
0.685
|
|
Number of shareholders of record at year-end
|
|
|
3,167
|
|
|
|
3,248
|
|
|
|
3,393
|
|
|
|
3,207
|
|
|
|
3,419
|
|
Number of employees at year-end
|
|
|
5,338
|
|
|
|
5,315
|
|
|
|
5,087
|
|
|
|
5,160
|
|
|
|
5,212
|
|
|
|
|
(a)
|
|
Restructuring and other charges
($12,583 after tax) in 2008, ($1,982 after tax) in 2006,
($15,857 after tax) in 2005, and ($20,370 after tax) in 2004,
were the result of various reorganization programs of the
Company.
|
|
(b)
|
|
2006 2008 amounts
include equity compensation expense in accordance with
FAS 123(R). See Note 11 to the Consolidated Financial
Statements for additional details.
|
|
(c)
|
|
The 2006 amounts reflect adoption
of FAS 158. See Note 13 to the Consolidated Financial
Statements for additional details.
|
|
(d)
|
|
The 2007 amounts reflect adoption
of FIN 48. See Note 9 to the Consolidated Financial
Statements for additional details.
|
|
(e)
|
|
Current ratio is equal to current
assets divided by current liabilities.
|
16
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
(Unless
indicated otherwise, dollars in millions except per share
amounts)
Organization
of Information
Managements Discussion and Analysis provides a narrative
on our operating performance, financial condition and liquidity
and should be read in conjunction with the accompanying
financial statements. It includes the following sections:
|
|
|
|
|
Executive Overview
|
|
|
|
Sales Commentary
|
|
|
|
Consolidated Operating Results
|
|
|
|
Goodwill and Intangible Assets
|
|
|
|
Restructuring and Other Charges
|
|
|
|
Income Taxes
|
|
|
|
Postretirement Benefits
|
|
|
|
Financial Condition
|
|
|
|
Critical Accounting Policies and Use of Estimates
|
|
|
|
New Accounting Standards
|
|
|
|
Non-GAAP Financial Measures
|
|
|
|
Cautionary Statement Under the Private Securities Litigation
Reform Act of 1995
|
Executive
Overview
We are 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 a limited number of publicly traded companies in the
industry; certain customers maintain in-house capabilities
fulfilling a portion of their flavor or fragrance needs; and the
quality and depth of market information in developing regions of
the world is limited. Analysts generally estimate the global
market to be $14 billion of which IFF represents 16%; the
largest competitor in the industry has approximately a 25%
market share. IFF is one of the top four companies, which
together represent 70% of the flavors and fragrances industry.
IFF is organized into two units that reflect our flavor and
fragrance businesses. Approximately 46% of our 2008 net
sales were flavor compounds. Flavor compounds are sold to the
food and beverage industries for use in consumer products such
as prepared foods, beverages, dairy, food and confectionery
products. The remaining 54% of sales, representing the fragrance
business unit, were in three fragrance categories: functional
fragrances, including fragrance compounds for personal care
(e.g., soaps) and household products (e.g., detergents and
cleaning agents); fine fragrance and beauty care, including
perfumes, colognes and toiletries; and ingredients, consisting
of natural and synthetic ingredients that can be combined with
other materials to create unique functional and fine fragrance
compounds. Major fragrance customers include the cosmetics
industry, including perfume and toiletries manufacturers, and
the household products industry, including manufacturers of
soaps, detergents, fabric care, household cleaners and air
fresheners. Approximately 55% of our ingredient production is
consumed internally; the balance is sold to third party
customers.
Changing social habits resulting from such factors as increases
in personal income, 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-
17
fat and organic 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.
Flavors and fragrances are generally:
|
|
|
|
|
created for the exclusive use by a specific customer;
|
|
|
|
sold in powder or liquid form, in amounts ranging from a few
pounds to several tons depending on the nature of the end
product in which they are used;
|
|
|
|
a small percentage of the volume and cost of the end product
sold to the consumer; and
|
|
|
|
a major factor in consumer selection and acceptance of the
product.
|
The flavors and fragrances industry is impacted by macroeconomic
factors in all product categories and geographic regions. Such
factors include the impact of currency on the price of raw
materials and operating costs as well as on translation of
reported results. In addition, IFF is susceptible to margin
pressures due to customers cost improvement programs and
input cost increases. However, these pressures can often be
mitigated through a combination of product reformulation,
sourcing strategies and material substitution plus internal cost
containment efforts, and the development of innovative and
streamlined solutions and processes.
We produce more than 33,000 unique compounds, of which
approximately 60% are flavors and 40% fragrances. We continually
create new compounds to meet the changing characteristics and
needs of our customers end products. No single compound
represents more than 2% of net sales. Development of flavors and
fragrances 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 element of creation is the development of new
ingredients. We bear essentially all costs incurred in
connection with the creation and development of new flavors and
fragrances and such formulae are generally protected under trade
secrecy. We are not materially dependent on any patents,
trademarks or licenses.
IFFs success in the flavors and fragrances industry is
driven by our ability to create unique sensory experiences that
meet evolving consumer needs and expectations. These solutions
are delivered in a cost-efficient manner in conjunction with
world-class customer service.
STRATEGIC
DRIVERS
We are well positioned to increase shareholder value by
executing the following key drivers: targeting strategically
important global and regional customers in both developed and
emerging markets; attracting, developing and retaining top
talent; and fostering a culture of innovation and continuous
improvement. Our goal is to deliver differentiated solutions
that enable our customers brands to win in the marketplace.
Customers
We believe there is a great deal of opportunity to grow sales by
earning a greater share of our customers business across
multiple categories, both in the developed and emerging markets.
We use our proprietary tools of consumer insight to understand
the connections between the consumer, the product, and the
brand. This enables us to create flavors and fragrances that
resonate with consumers and drive brand loyalty.
People
As a leading creator of flavors and fragrances, our ability to
succeed is highly dependent on our greatest asset
our people. We continue to invest considerable time and
resources in developing our leaders to build IFF for the
long-term.
Innovation
IFF continues to focus on creating innovative processes,
technologies and delivery systems, which includes a significant
financial commitment to research and development. We see
potential to gain market share by providing
18
unique solutions to our customers that enable their brands to
win in the marketplace. In addition, by streamlining internal
processes, we are better able to allocate resources to
appropriate initiatives.
As implementation of our strategy progresses, setting strategic
initiatives requires regular establishment and reassessment of
priorities and necessitates choices in order to provide the best
opportunity for continuous improvement in shareholder value.
Sales
Commentary
A breakdown of sales by principal product category is depicted
in the graph below.
2008
Sales by Category
Our five largest customers comprise 32% of consolidated sales
and our top 30 customers 56%; these percentages have remained
fairly constant for several years, although sales to larger
customers are trending higher. We have one customer that
accounts for 11% of our sales. A key factor for commercial
success is inclusion on the strategic customers core
supplier lists, opening opportunities to win new business. We
are on the core supplier lists of a majority of our strategic
customers.
Net sales by business unit for 2008, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
Net Sales
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Flavors
|
|
$
|
1,092
|
|
|
|
9
|
%
|
|
$
|
1,006
|
|
|
|
12
|
%
|
|
$
|
895
|
|
Fragrances
|
|
|
1,297
|
|
|
|
2
|
%
|
|
|
1,271
|
|
|
|
6
|
%
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,389
|
|
|
|
5
|
%
|
|
$
|
2,277
|
|
|
|
9
|
%
|
|
$
|
2,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Sales by Destination
We currently manage our operations by business unit but consider
destination sales a supplemental performance measure. Although
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 our business.
19
Net sales by destination for 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
Sales by Destination
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
EAME(1)
|
|
$
|
898
|
|
|
|
6
|
%
|
|
$
|
850
|
|
|
|
12
|
%
|
|
$
|
758
|
|
North America
|
|
|
601
|
|
|
|
-4
|
%
|
|
|
630
|
|
|
|
3
|
%
|
|
|
612
|
|
Greater Asia
|
|
|
556
|
|
|
|
13
|
%
|
|
|
491
|
|
|
|
12
|
%
|
|
|
439
|
|
Latin America
|
|
|
334
|
|
|
|
9
|
%
|
|
|
306
|
|
|
|
7
|
%
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales, as reported
|
|
$
|
2,389
|
|
|
|
5
|
%
|
|
$
|
2,277
|
|
|
|
9
|
%
|
|
$
|
2,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Europe, Africa and Middle East |
2008
in Comparison to 2007
Sales totaled $2,389 million for 2008, up 5% from 2007;
Flavor and Fragrance sales increased 9% and 2%, respectively.
2008 sales benefited from the generally weaker U.S. dollar
and at comparable exchange rates would have increased 2% over
the prior year.
Flavors
Business Unit
Flavor sales increased 9% for 2008 based on new wins across all
regions, particularly in the beverage category, led by a 21%
increase in Latin America. Excluding the impact of currencies,
sales growth for the Flavors business was 6%.
Fragrances
Business Unit
Fragrance sales increased 2%. Excluding the impact of
currencies, Fragrance sales declined 1% as strong growth in
emerging markets was offset by weakness in the U.S. market.
New product introductions of fragrance compounds were offset by
volume declines primarily in the U.S. and EAME. Ingredient
sales benefited from price increases, partially offset by volume
declines as part of a product rationalization initiative and
weaker economies in the U.S. and EAME.
Sales
By Region and Category
Regional and product category sales performance for 2008
compared to the prior year, in reported dollars and local
currency, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
Percent Change in Sales by Region of Destination
|
|
|
|
|
|
Fine &
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Beauty Care
|
|
|
Functional
|
|
|
Ingredients
|
|
|
Frag.
|
|
|
Flavors
|
|
|
Total
|
|
|
North America
|
|
Reported
|
|
|
-14
|
%
|
|
|
-10
|
%
|
|
|
-2
|
%
|
|
|
-10
|
%
|
|
|
2
|
%
|
|
|
-4
|
%
|
EAME
|
|
Reported
|
|
|
2
|
%
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
Local Currency
|
|
|
-4
|
%
|
|
|
2
|
%
|
|
|
-1
|
%
|
|
|
-1
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
Latin America
|
|
Reported
|
|
|
7
|
%
|
|
|
-2
|
%
|
|
|
17
|
%
|
|
|
3
|
%
|
|
|
21
|
%
|
|
|
9
|
%
|
Greater Asia
|
|
Reported
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
11
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
Local Currency
|
|
|
17
|
%
|
|
|
12
|
%
|
|
|
7
|
%
|
|
|
12
|
%
|
|
|
10
|
%
|
|
|
11
|
%
|
Total
|
|
Reported
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
9
|
%
|
|
|
5
|
%
|
|
|
Local Currency
|
|
|
-3
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
-1
|
%
|
|
|
6
|
%
|
|
|
2
|
%
|
|
|
|
|
|
North America flavors new product introductions of
$22 million and some benefit from price increases were
largely offset by volume declines. Weak economic conditions and
significant slowdown in customer order activity led to volume
declines in fine and functional fragrance compounds and
ingredients. Fine fragrance sales were also negatively impacted
by customer inventory corrections in the first half of the year.
|
20
|
|
|
|
|
Flavors sales in EAME were up as new product introductions of
$22 million were partially offset by volume declines. Fine
and functional fragrance new product introductions of
$18 million and $15 million were offset by volume
declines. Price increases in ingredients were offset by volume
declines.
|
|
|
|
Latin America flavors sales were strong throughout the region,
driven mainly by new product introductions of $19 million.
Fragrance sales growth was driven by new product introductions
of $10 million offset by volume decreases, primarily in
functional. Ingredients sales benefited from higher volumes
coupled with price increases.
|
|
|
|
Greater Asia sales growth in Flavors was driven by new product
introductions of $16 million plus volume and price
increases. Fragrance sales benefited from new product
introductions of $25 million, partially offset by volume
declines.
|
2007
in Comparison to 2006
Sales totaled $2,277 million, up 9% from 2006; flavor and
fragrance sales increased 12% and 6%, respectively. 2007 sales
benefited from the generally weaker U.S. dollar and at
comparable exchange rates would have increased 5% over the prior
year.
Flavors
Business Unit
Flavors delivered strong sales performance across all
regions most notably in Latin America, Greater Asia
and Europe and in virtually all categories,
particularly beverages and savory.
Fragrance
Business Unit
Total Fragrance sales increased by 6% for the year and were
driven by continued growth in Fine and Beauty Care of 8% and
Ingredients of 9%, despite a decline in Ingredients pricing.
Foreign exchange accounted for 4% of the sales increase.
Sales
By Region and Category
Regional and product category sales performance for 2007
compared to the prior year, in reported dollars and local
currency, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
Percent Change in Sales by Region of Destination
|
|
|
|
|
|
Fine &
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Beauty Care
|
|
|
Functional
|
|
|
Ingredients
|
|
|
Frag.
|
|
|
Flavors
|
|
|
Total
|
|
|
North America
|
|
Reported
|
|
|
4
|
%
|
|
|
-1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
EAME
|
|
Reported
|
|
|
8
|
%
|
|
|
12
|
%
|
|
|
17
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
Local Currency
|
|
|
0
|
%
|
|
|
4
|
%
|
|
|
8
|
%
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
Latin America
|
|
Reported
|
|
|
11
|
%
|
|
|
-7
|
%
|
|
|
3
|
%
|
|
|
-1
|
%
|
|
|
27
|
%
|
|
|
7
|
%
|
Greater Asia
|
|
Reported
|
|
|
16
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
|
|
Local Currency
|
|
|
13
|
%
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
Total
|
|
Reported
|
|
|
8
|
%
|
|
|
3
|
%
|
|
|
9
|
%
|
|
|
6
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
Local Currency
|
|
|
4
|
%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
9
|
%
|
|
|
5
|
%
|
|
|
|
|
|
North America fine fragrance growth was driven by new product
introductions of $20 million partially offset by volume
declines. Ingredients volume growth was partially offset by
pricing declines. The decline in Functional fragrances was
mainly volume related. Flavors sales growth was driven by new
product introductions of $20 million mainly in the beverage
and savory categories.
|
|
|
|
EAME flavor sales growth resulted mainly from new product
introductions of $25 million. Functional fragrance growth
was strong primarily due to new product introductions of
$23 million partially offset by volume declines and to a
lesser extent lower pricing. The growth in fine fragrance
related to new product
|
21
|
|
|
|
|
introductions of $28 million was offset by volume declines.
Ingredients sales growth was volume related, partially offset by
lower pricing.
|
|
|
|
|
|
Latin America sales growth reflects strong performances in both
flavors and fine fragrances. Flavors growth was driven by new
product introductions of $21 million. Fine fragrances sales
growth is largely attributable to new product introductions of
$9 million. Functional fragrance performance was primarily
volume related in the fabric care category; we saw some reversal
of this trend in the fourth quarter as a result of new product
introductions. Ingredients sales performance was largely due to
volume increases partially offset by price declines.
|
|
|
|
Greater Asia sales growth was driven by new product
introductions of $35 million in flavors. Fragrance sales
growth was driven by fine fragrances as a result of new product
introductions of $4 million.
|
Consolidated
Operating Results
The percentage relationship of cost of goods sold and other
operating expenses to reported sales is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods sold
|
|
|
59.4%
|
|
|
|
58.2%
|
|
|
|
57.8%
|
|
Research and development expenses
|
|
|
8.9%
|
|
|
|
8.7%
|
|
|
|
8.9%
|
|
Selling and administrative expenses
|
|
|
16.0%
|
|
|
|
16.5%
|
|
|
|
16.8%
|
|
Cost of goods sold includes the cost of materials and
manufacturing expenses; raw materials generally constitute 70%
of the total. Research and development expenses are for the
development of new and improved products, technical product
support, compliance with governmental regulations, and help in
maintaining relationships with customers who are often dependent
on technological advances. Selling and administrative expenses
support our sales and operating levels.
2008
in Comparison to 2007
Cost of goods sold, as a percentage of sales, was 59.4% compared
with 58.2% in 2007. This increase was mainly the result of
higher input costs and lower absorption of manufacturing
expenses, most notably in North America fragrance compounds.
These factors were partially offset by internal efficiencies,
reformulation and material substitution efforts. Product mix,
notably lower sales of fine and beauty care compounds, also
impacted cost of goods sold as a percentage of sales.
Research and development expense, as a percentage of sales, was
8.9%. This increase over the prior year period reflects
increasing investments in customer applications and basic
research.
Selling and administrative expenses, as a percentage of sales,
was 16.0% in the current period compared to 16.5% in the prior
year period. The 2008 results included the benefit of a
$3 million insurance recovery related to a 2005 product
contamination matter offset by $3 million of employee
separation costs. The 2007 results included $4 million of
business transformation costs that enabled us to better leverage
our global SAP software platforms. The decline in selling and
administrative expenses, as a percentage of sales, is mainly
attributable to lower incentive compensation. This was partially
offset by $2 million related to the implementation of our
global shared service center.
Interest
Expense
Interest expense totaled $74 million compared to
$42 million in 2007, due to higher borrowings incurred in
connection with the 2007 share repurchase activities as
well as a wider spread between the LIBOR (London InterBank Offer
Rate) and EURIBOR (European InterBank Offer Rate) interest rates
applicable to our interest rate swaps. Average cost of debt was
6.1% for 2008 compared to 4.5% in 2007.
22
Other
(Income) Expense, Net
Other income was $3 million in 2008 as compared to
$11 million in 2007. Other income in 2007 included
$11 million related to gains on asset sales.
Income
Taxes
The effective tax rate was 18.1% in 2008 as compared to a rate
of 24.8% in the prior year. The lower tax rate in the current
year primarily reflects the benefit of higher tax settlements
related to prior years and a higher proportion of earnings in
lower tax jurisdictions. The 2008 rate includes a
$23 million benefit, primarily tax settlements related to
prior years; the 2007 rate includes $10 million of similar
benefits.
Operating
Results by Business Unit
We evaluate the performance of business units based on operating
profit before gains/losses on the disposition of assets,
interest expense, other income (expense), net and income taxes.
See Note 12 to our Consolidated Financial Statements for
the reconciliation to Income before taxes.
Flavors
Business Unit
In 2008, Flavors operating profit totaled $198 million, or
18.1% as a percentage of sales, compared to $187 million or
18.6% in 2007. The 2008 amount includes $3.5 million of
restructuring expenses. Excluding the restructuring charge,
profitability was comparable year over year as strong sales
growth augmented by lower incentive compensation expense was
partially offset by unfavorable product mix.
Fragrance
Business Unit
In 2008, Fragrance operating profit of $199 million, or
15.3% as a percentage of sales, declined from the
$210 million or 16.5% reported in 2007. The 2008 amount
includes $4.4 million of restructuring expenses. The
decline in profit was driven by unfavorable absorption of
manufacturing expenses from the shortfall in sales in North
America, as well as unfavorable mix, with declining fine
fragrance sales, partially offset by lower incentive
compensation expense.
Global
Expenses
Global expenses represent corporate and headquarters-related
expenses which include legal, finance, human resources and other
administrative expenses that are not allocated to an individual
business unit, as well as gains on asset sales and a pension
curtailment charge. In 2008, Global expenses were
$45 million as compared to $27 million in 2007. In
2008, Global expenses included approximately $10 million of
restructuring charges, $3 million of employee separation
costs and $2 million of implementation costs related to our
global shared service center, partially offset by a
$3 million insurance recovery related to a 2005 product
contamination. Global expenses in 2007 included a
$6 million curtailment loss related to changes to the
U.S. defined benefit pension plan and $11 million
related to the gains on asset sales.
2007
in Comparison to 2006
Cost of goods sold, as a percentage of sales, was 58.2% compared
with 57.8% in 2006. This increase was mainly as a result of
product mix, notably higher sales of fragrance ingredients and
flavor compounds. Lower selling prices for fragrance
ingredients, some impact of higher material costs and under
absorption of manufacturing costs at a new fragrance ingredient
facility in China, which scaled up production in 2007, also
contributed to the increase. The average cost of raw materials
increased 2-3% over the prior year.
Research and Development expense, as a percentage of sales, was
8.7%, comparable to the prior year levels.
Selling and administrative expenses, as a percentage of sales,
was 16.5% in the period compared to 16.8% in the prior year
period, reflecting good cost control and the benefit of
headcount reductions that occurred in the first half of 2006.
Selling and administrative expenses in 2007 include
$4 million of business transformation costs to
23
enable us to better leverage our global SAP software platform.
The 2006 results also included the benefit of a $3 million
insurance recovery related to a 2005 product contamination
matter; excluding the insurance recovery, 2006 Selling and
administrative expenses would have been 16.9% of sales for the
year.
Interest
Expense
In 2007, interest expense totaled $42 million, increasing
63% compared to 2006, due to higher borrowings incurred in
connection with share repurchase activities. See Note 10 to
the Consolidated Financial Statements for further discussion of
the share repurchase activities. Average cost of debt was 4.5%
for 2007 compared to 3.3% in 2006.
Other
(Income) Expense, Net
Other (income) expense, net in 2007 increased $1 million
over the prior year, mainly due to favorable exchange results
and higher interest income as a result of higher interest rates.
Other income included $11 million and $15 million, in
2007 and 2006, respectively, primarily related to gains on asset
sales.
Income
Taxes
The effective tax rate was 24.8% in 2007 as compared to a rate
of 27.7% in the prior year. Both the 2007 and 2006 rates
benefited from favorable tax rulings with respect to prior
years; excluding the benefit of these rulings from both years,
the 2007 effective tax rate would have been 27.8% compared to a
rate of 28.8% for 2006. The lower effective tax rate for the
current year was largely the result of a greater percentage of
consolidated pre-tax earnings in lower tax jurisdictions.
Operating
Results by Business Unit
We evaluate the performance of business units based on operating
profit before gains/losses on the disposition of assets,
interest expense, other income (expense), net and income taxes.
See Note 12 to our Consolidated Financial Statements for
the reconciliation to Income before taxes.
Flavors
Business Unit
In 2007, Flavors operating profit of $187 million, or 18.6%
as a percentage of sales, increased as compared to
$153 million or 17.1% in 2006. The amount reported in 2006
benefited from a $3 million insurance recovery related to a
2005 product contamination matter; excluding the insurance
recovery from the prior year comparative, Flavors profitability
would have increased an additional 30 basis points over
2006. This profitability improvement was primarily driven by
margin improvement enabled by strong sales growth, favorable
product mix, increased absorption of manufacturing expenses and
good cost control.
Fragrance
Business Unit
In 2007, Fragrance operating profit of $210 million or
16.5%, as a percentage of sales, declined from the
$212 million or 17.7% reported in 2006. Profitability was
negatively impacted by lower selling prices of fragrance
ingredients, higher material costs and underabsorption of
manufacturing costs related to scaling up the China facility in
2007.
Global
Expenses
Global expenses represent corporate and headquarters-related
expenses which include legal, finance, human resources and other
administrative expenses that are not allocated to an individual
business unit, as well as gains on asset sales and a pension
curtailment charge. In 2007, Global expenses increased
$9 million to $27 million from $18 million
incurred in 2006. In 2007, Global expenses included
approximately $6 million of curtailment loss as a result of
changes to the U.S. defined benefit pension plan and
approximately $11 million related to gains on asset sales.
The 2006 expenses included approximately $15 million of
other income primarily related to gains on asset sales.
24
Goodwill
and Intangible Assets
At December 31, 2008 and 2007, goodwill and other
intangible assets, net of accumulated amortization, totaled
$727 million and $733 million, respectively.
Additional details are contained in Note 4 to the
Consolidated Financial Statements.
We perform a goodwill impairment test on at least an annual
basis, or more frequently in certain circumstances, by assessing
the fair value of our reporting units based upon both discounted
cash flow and comparison of multiples of comparable companies.
We deem goodwill to be impaired if the carrying amount of the
reporting unit exceeds the estimated fair value. We completed
our annual assessments in 2008 and 2007, concluding there was no
impairment of goodwill.
Other intangible assets include patents, trademarks and other
intellectual property, valued at acquisition, primarily through
independent appraisals, which are amortized on a straight-line
basis over periods ranging from 6 to 20 years. We review
our other intangible assets for impairment when events or
changes in business conditions indicate that their full carrying
value may not be recovered.
Restructuring
and Other Charges
Restructuring and other charges primarily consist of separation
costs for employees including severance, outplacement and other
benefit costs.
In 2008, as part of our business transformation initiative to
enable us to better leverage our global SAP software platform,
we implemented a plan to centralize transaction processing in a
global shared service center that resulted in the elimination of
127 positions globally, largely in the finance area. As a result
of these actions, we recognized a pre-tax charge of
approximately $7 million in 2008 related to employee
separation costs and $2 million in implementation costs.
The implementation costs were included in selling and
administrative expenses in 2008. In addition, we incurred a
pre-tax charge of approximately $12 million in the fourth
quarter 2008 principally related to a performance improvement
plan covering 91 positions across a variety of activities
globally. Annual savings from these two initiatives is expected
to be approximately $14 million beginning in 2009.
The 2006 charge primarily related to employee separation
expenses, in connection with the consolidation of our
operations, principally in Europe and North America.
Positions eliminated and charges, net of reversal by business
segment in 2008 and 2006 are detailed in the table below; there
were no such actions undertaken in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges
|
|
|
|
|
|
|
(In Thousands)
|
|
|
Positions Eliminated
|
|
|
|
2008
|
|
|
2006
|
|
|
2008
|
|
|
2006
|
|
|
Flavors
|
|
$
|
3,538
|
|
|
$
|
(463
|
)
|
|
|
36
|
|
|
|
19
|
|
Fragrances
|
|
|
4,396
|
|
|
|
2,639
|
|
|
|
38
|
|
|
|
29
|
|
Global
|
|
|
10,278
|
|
|
|
504
|
|
|
|
144
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,212
|
|
|
$
|
2,680
|
|
|
|
218
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Movements in related accruals in each of the three years in the
period ended December 31, 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Employee-
|
|
|
and
|
|
|
|
|
(In Millions)
|
|
Related
|
|
|
Other
|
|
|
Total
|
|
|
Balance January 1, 2006
|
|
$
|
30
|
|
|
$
|
4
|
|
|
$
|
34
|
|
Additional charges
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
3
|
|
Cash and other costs
|
|
|
(21
|
)
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
13
|
|
|
|
2
|
|
|
|
15
|
|
Cash and other costs
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Additional charges, net of reversal
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Cash and other costs
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining employee-related liabilities are expected to be
utilized by 2010 as obligations are satisfied.
Income
Taxes
Effective utilization of the cash generated by our international
operations is a critical component of our tax strategy.
Strategic dividend repatriation from foreign subsidiaries
creates U.S. taxable income, which enables us to recognize
deferred tax assets.
Pursuant to FAS 109, we establish a valuation allowance for
net deferred tax assets if, based on the weight of the available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Historically, we
have provided a full valuation allowance against deferred tax
assets resulting from state net operating losses and state
credits, as well as selective
non-U.S. affiliates
net operating losses. The changes in the valuation allowances
from December 31, 2007 are primarily attributable to the
current period net operating losses and currency translation
adjustments.
Postretirement
Benefits
In 2007, we recorded a curtailment loss of $5.9 million to
recognize a portion of the unrecognized prior service costs
associated with years of service no longer expected to be
rendered and credited as service under the plans as a result of
an amendment to the U.S. salaried qualified and
non-qualified pension plans. We also introduced an enhanced
defined contribution plan for those employees affected by the
pension curtailment that became effective January 1, 2008.
These events resulted in approximately $4 million of annual
savings.
The global credit crisis has significantly increased volatility
in the financial markets. The financial returns of our
investment trusts during 2008 have been in-line with the markets
by asset class. We had little exposure to financial equities and
had no direct investments in sub-prime related assets. We do not
expect the recent market declines to have a significant impact
on our overall funding position as well as the timing and level
of contributions.
Financial
Condition
Cash, cash equivalents and short-term investments totaled
$179 million at December 31, 2008 compared to
$152 million and $115 million at December 31,
2007 and 2006, respectively. Working capital totaled
$710 million at year-end 2008 compared to $613 million
at December 31, 2007. The 2008 increase in working capital
was primarily related to decreases in short-term borrowings and
accrued bonuses. The 2007 working capital amount was reduced by
$39 million from the amount previously reported to conform
to the 2008 presentation of deferred taxes assets and
liabilities. Gross additions to property, plant and equipment
were $85 million, $66 million and $58 million in
2008, 2007 and 2006, respectively, and are expected to
approximate $100 million in 2009.
26
Our financial condition continues to be strong, as evidenced by
substantial cash flow from operations and substantial drawdown
capacity of approximately $415 million on our multi-year
revolving credit facility. Operating cash flow provides the
primary source of funds for operating and capital needs as well
as dividends paid to shareholders and share repurchase
activities. We anticipate that cash flows from operations and
availability under our existing credit facilities are sufficient
to fund our capital spending and other cash requirements for at
least the next eighteen months.
Operating cash flow in 2008 was $221 million compared to
$314 million and $282 million in 2007 and 2006,
respectively. The decline in operating cash flow in 2008
compared to the prior year was primarily attributable to
increased working capital, and higher interest payments
principally related to $500 million of Senior Unsecured
Notes we issued to repurchase stock as discussed below.
Net investing activities in 2008 utilized $90 million
compared to $51 million and $48 million in 2007 and
2006, respectively. The increase in investing activities was
primarily related to higher capital spending and lower proceeds
from asset dispositions.
In 2007 and 2006, we realized sizeable cash proceeds from the
sale of assets. In both years, the proceeds related to the sale
of land and buildings; to the extent such assets had been
written down in connection with previous restructuring
activities, any gain or loss on disposition was accounted for as
part of the restructuring activities. All transactions were with
third party investors and we retained no ownership interest in
any of the disposed assets.
Compliance with existing governmental requirements regulating
the discharge of materials into the environment has not
materially affected our operations, earnings or competitive
position. In 2008 and 2007, we spent $4 million and
$3 million, respectively, on capital projects and
$19 million and $18 million, respectively, 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, we are
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 our financial condition, results of
operations or liquidity.
The dividend paid per share in 2008, 2007 and 2006 was $.94,
$.86 and $.74, respectively. In January, April and July 2008, we
paid a quarterly cash dividend of $.23 per share to
shareholders. In July 2008, we announced a 9% increase in our
quarterly dividend rate to $.25 per share effective with the
dividend payable in October 2008. We paid dividends totaling
$75 million, $77 million and $67 million in 2008,
2007 and 2006. Our current intention is to pay dividends
approximating 30 35% of yearly earnings; however,
the payment of dividends is determined by the Board of Directors
(Board) at its discretion based on various factors,
and no assurance can be provided as to future dividends.
We supplement short-term liquidity with access to capital
markets, mainly through bank credit facilities and issuance of
commercial paper. In 2005, IFF, including certain subsidiaries,
entered into a revolving credit agreement (the
Facility) with certain banks. The Facility provides
for a five-year U.S. $350 million
(Tranche A) and Euro 400 million
(Tranche B) multi-currency revolving credit
facility. Tranche A is available to IFF for commercial
paper backstop and general corporate purposes; Tranche B is
available to both IFF and the European subsidiaries for general
corporate purposes. Borrowings under the Facility bear interest
at an annual rate of LIBOR (or in relation to any
Euro-denominated loans, EURIBOR) plus a margin, currently
20 basis points, linked to our credit rating. We pay a
commitment fee on the aggregate unused commitments and a
utilization fee based on amounts outstanding under the Facility;
such fees are not material. The Facility expires on
November 23, 2012. During 2008 and 2007, the maximum amount
of outstanding commercial paper was $30 million and
$18 million, respectively.
At December 31, 2008, we had $1,256 million of debt
outstanding which is comparable to the $1,213 million
outstanding at December 31, 2007. In November 2008, ¥
13.3 billion of our Japanese Yen borrowings were replaced
with a three-year bank loan. In connection with this refinancing
the related interest rate swaps expired. In October 2008, we
closed out a $250 million USD LIBOR to EURIBOR interest
rate swap and a $250 million fixed to floating interest
rate swap at no cost. Additionally, in February 2009 we
terminated a $300 million USD LIBOR to
27
EURIBOR interest rate swap which required us to make a payment
of $16 million. See Quantitative and Qualitative
Disclosures About Market Risk (Item 7A below) for
additional information regarding these transactions.
In July 2007, our Board authorized us to repurchase up to 15% or
$750 million worth of our then outstanding common stock,
whichever is less. In September 2007, under the July 2007 Plan,
we entered into two agreements to purchase shares of our common
stock under a $450 million accelerated share repurchase
(ASR) program. The ASR concluded in June 2008. Total
aggregate shares repurchased under the ASR program were
9.7 million shares at an average purchase price of $46.53.
The ASR was primarily funded through the issuance of
$500 million of Senior Unsecured Notes (Senior
Notes 2007) in four series under a Note
Purchase Agreement. See Note 8, Borrowings, to the
Consolidated Financial Statements for additional information
regarding these notes.
The Facility and Yen loan contain the most restrictive covenants
requiring us to maintain, at the end of each fiscal quarter, a
ratio of net debt for borrowed money to adjusted EBITDA in
respect of the previous
12-month
period of not more than 3.25 to 1.
At December 31, 2008, we were in compliance with all
financial and other covenants. At December 31, 2008 our Net
Debt/ Adjusted EBITDA(1) was 2.34 to 1 as defined by the debt
agreements.
Failure to comply with the financial and other covenants under
these agreements would constitute default and would allow the
lenders to accelerate the maturity of all indebtedness under the
related agreement. If such acceleration were to occur, we would
not have sufficient liquidity available to repay the
indebtedness. We would likely have to seek amendments under the
agreements for relief from the financial covenants or repay the
debt with proceeds from the issuance of new debt or equity,
and/or asset
sales, if necessary. We may be unable to amend the agreements or
raise sufficient capital to repay such obligations in the event
the maturities are accelerated.
|
|
|
(1) |
|
Adjusted EBITDA and Net Debt, which are non-GAAP measures
used for these covenants, are calculated in accordance with the
definition in the debt agreements. In this context, these
measures are used solely to provide information on the extent to
which we are in compliance with debt covenants and may not be
comparable to adjusted EBITDA and Net Debt used by other
companies. A reconciliation of adjusted EBITDA to net income and
net debt to total debt are as follows: |
|
|
|
|
|
|
|
|
|
|
|
12 Months Ended December 31,
|
|
(In Millions)
|
|
2008
|
|
|
2007
|
|
|
Net Income
|
|
$
|
229.6
|
|
|
$
|
247.1
|
|
Interest expense
|
|
|
74.0
|
|
|
|
41.5
|
|
Income taxes
|
|
|
50.9
|
|
|
|
81.6
|
|
Depreciation
|
|
|
69.8
|
|
|
|
69.9
|
|
Amortization
|
|
|
6.2
|
|
|
|
12.9
|
|
Specified items
|
|
|
22.9
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
453.4
|
|
|
$
|
458.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In Millions)
|
|
2008
|
|
|
2007
|
|
|
Total Debt
|
|
$
|
1,255.7
|
|
|
$
|
1,212.6
|
|
FAS 133 Fair Value Adjustment
|
|
|
16.9
|
|
|
|
0.2
|
|
Cash and Cash Equivalents
|
|
|
178.5
|
|
|
|
151.5
|
|
|
|
|
|
|
|
|
|
|
Net Debt
|
|
$
|
1,060.3
|
|
|
$
|
1,060.9
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, we repurchased
.7 million shares of our common stock at a cost of
$30 million on the open market. For the year ended
December 31, 2007, we repurchased 2.6 million shares
of our common stock in the open market at a cost of
$127 million, plus an additional 7.6 million shares
under the ASR.
28
At December 31, 2008, we had contractual payment
obligations due within the time periods as specified in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and
|
|
Contractual Obligations
|
|
Total
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
thereafter
|
|
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings(1)
|
|
$
|
1,238
|
|
|
$
|
102
|
|
|
$
|
270
|
|
|
$
|
241
|
|
|
$
|
625
|
|
Interest on
borrowings(1)
|
|
|
517
|
|
|
|
65
|
|
|
|
121
|
|
|
|
95
|
|
|
|
236
|
|
Operating
leases(2)
|
|
|
286
|
|
|
|
26
|
|
|
|
45
|
|
|
|
36
|
|
|
|
179
|
|
Purchase
commitments(3)
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension funding
obligations(4)
|
|
|
40
|
|
|
|
17
|
|
|
|
6
|
|
|
|
6
|
|
|
|
11
|
|
Postretirement
obligations(4)
|
|
|
65
|
|
|
|
5
|
|
|
|
11
|
|
|
|
12
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,166
|
|
|
$
|
235
|
|
|
$
|
453
|
|
|
$
|
390
|
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 8 to the Consolidated Financial Statements for a
further discussion of our various borrowing facilities. |
|
(2) |
|
Operating leases include facility and other lease commitments
executed in the normal course of the business. Additional
details concerning the United States facilities are contained in
Note 7 of the Notes to the Consolidated Financial
Statements and further details concerning worldwide aggregate
operating leases are contained in Note 16 of the Notes to
the Consolidated Financial Statements. |
|
(3) |
|
Purchase obligations and capital project commitments are not
recorded on our consolidated balance sheet. |
|
(4) |
|
See Note 13 to the Consolidated Financial Statements for a
further discussion of our retirement plans. Anticipated funding
obligations are based on current actuarial assumptions. Minimum
funding requirements reported in the above table do not extend
beyond 2018. |
Critical
Accounting Policies and Use of Estimates
Our accounting policies are more fully described in Note 1
to the Consolidated Financial Statements. As disclosed in
Note 1, the preparation of financial statements in
conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make
estimates and assumptions that affect reported amounts and
accompanying disclosures. These estimates are based on
managements best judgment of current events and actions
that we may undertake in the future. Actual results may
ultimately differ from estimates.
Those areas requiring the greatest degree of management judgment
or deemed most critical to our financial reporting involve:
The periodic assessment of potential impairment of
intangible assets acquired in business
combinations. We currently have net
intangible assets, including goodwill, of $727 million.
Goodwill is evaluated for impairment annually. In assessing
goodwill, management uses the most current actual and forecasted
operating data available, and current market based assumptions.
A two-step approach is employed. The first step involves
estimating the value of reporting units based on the present
value of estimated future cash flows. The second step, if
necessary, is to measure the value of the impairment loss, if
any. Managements most subjective assumptions relate to the
estimated/projected sales and operating growth values employed
in the forecast.
The analysis and evaluation of income
taxes. We account for taxes in accordance
with Statement of Financial Accounting Standard No. 109,
Accounting for Income Taxes
(FAS 109). Under FAS 109, deferred tax
assets and liabilities are determined based on temporary
differences between financial reporting and tax bases of assets
and liabilities, based on tax laws as currently enacted. The
provision for income taxes is based on statutory income taxes
rates and planning opportunities available in the various tax
jurisdictions where we operate. Significant judgment is required
in determining income tax provisions and tax positions. We may
be challenged upon review by the applicable taxing authority and
positions taken by us may not be sustained. We regularly update
these accruals in light of changing facts and circumstances.
29
In 2007, we adopted SFAS No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
FAS 109 (FIN 48). As a result of adopting
FIN 48, we recognized a $1 million increase in Other
liabilities for unrecognized tax benefits and a corresponding
cumulative effect adjustment to Retained earnings. Also as
prescribed by FIN 48, certain tax related amounts in the
Consolidated Balance Sheet are classified differently than in
prior periods. Amounts receivable from various tax jurisdictions
are now included in Other current assets and tax reserves
previously classified as accrued taxes on income are now
included in Other liabilities.
The evaluation of potential legal and environmental
liabilities, where changing circumstances, rules and regulations
require regular reassessment of related practices and
anticipated costs. We are subject to certain
legal claims regarding products and other matters, as well as
environmental-related matters. Significant management judgment
is involved in determining when it is probable that a liability
has been incurred and the extent to which it can be reasonably
estimated.
We regularly assess potential liabilities with respect to all
legal claims based on the most recent available information, in
consultation with outside counsel handling the defense of such
matters. To the extent a liability is deemed to have been
incurred and can be reasonably estimated, we recognize a
corresponding liability; if the reasonably estimated liability
is a range, we recognize that amount considered most likely, or
in the absence of such a determination, the minimum reasonably
expected liability. To the extent such claims are covered by
various insurance policies, we separately evaluate the
likelihood of recovery and account for any related insurance
receivable. Management judgments involve determination as to
whether a liability has been incurred, the reasonably estimated
amount of that liability, and any potential insurance recovery.
We regularly evaluate potential environmental exposure in terms
of total estimated cost and the viability of other potentially
responsible parties (PRPs) associated with our
exposure. Recorded liabilities are adjusted periodically as
remediation efforts progress and additional information becomes
available. Critical management assumptions relate to expected
total costs to remediate and the financial viability of
PRPs to share such costs.
Determination of the various assumptions employed in the
valuation of pension and retiree health care expense and
associated obligations. Amounts recognized in
the Consolidated Financial Statements related to pension and
other postretirement benefits are determined from actuarial
valuations. Inherent in such valuations are assumptions
including expected return on plan assets, discount rates at
which the liabilities could be settled, rates of increase in
future compensation levels, mortality rates and health care cost
trend rates. These assumptions are updated annually and are
disclosed in Note 13 to the Consolidated Financial
Statements. In accordance with GAAP, actual results that differ
from the assumptions are accumulated and amortized over future
periods and, therefore, affect expense recognized and
obligations recorded in future periods.
With respect to the U.S. plans, 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: 10 20% in cash and fixed income
investments expected to yield 1.0%; 10 20% employed
in corporate and government bonds expected to yield 2.1%; and
65 75% in equity investments with a long-term
expected yield of 8.5 9.3%. The inflation rate
assumed in the model was 2.5%. The plan has achieved a
compounded annual rate of return of approximately 9% over the
previous 20 years. The expected annual rate of return for
the
non-U.S. plans
employs a similar set of criteria adapted for local investments,
inflation rates and in certain cases specific government
requirements. The discount rate used for determining future
pension obligations for each individual plan is based on a
review of long-term bonds that receive a high rating from a
recognized rating agency. Additionally, for the U.S. plans,
the discount rate was based on the internal rate of return for a
portfolio of Moodys Aa3-rated high quality bonds with
maturities that are consistent with the projected future benefit
payment obligations of the plan. The rate of compensation
increase for all plans and the medical cost trend rate for the
applicable U.S. plans are based on plan experience.
Management establishes the assumptions concerning discount rates
and actuarial assumptions based on current market conditions,
including asset returns and other factors applicable under the
circumstances. Changes in pension and other post-employment
benefits, and associated expenses, may occur in the future due
30
to changes in these assumptions. The impact that a .25% decrease
in the discount rate or a 1% change in the medical cost trend
rate would have on our pension and other post-employment benefit
expense, as applicable, is discussed in Note 13 to the
Consolidated Financial Statements.
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. We maintain between 40% and 55% of our
inventory as raw materials, providing the greatest degree of
flexibility in manufacture and use. Materials are evaluated
based on shelf life, known uses and anticipated demand based on
forecasted customer order activity and changes in product/sales
mix. Management policy provides for an ongoing assessment of
inventory with adjustments recorded when an item is deemed to be
slow moving or obsolete.
Determination of various assumptions employed in the
calculation of equity compensation
expense. Amounts recognized in the
Consolidated Financial Statements related to equity compensation
are determined based on the number of awards and type of award
as well as specific assumptions regarding expected life, stock
price volatility, risk free interest rate, termination rates,
exercise multiple and the dividend yield. These assumptions are
employed in the Binomial model used to value certain awards.
Management establishes the assumptions based on current market
conditions and historical trends related to the equity awards.
Developing the assumptions used in the Binomial model requires
significant judgment on our part and, generally, may involve
analyzing available historical data, considering whether
historical data is relevant to predicting future behavior,
making appropriate adjustments to historical data for future
expectations, supplementing or replacing company-specific
historical data with data from other supportable sources and
appropriately weighting each of the inputs. These assumptions
are evaluated at each grant date. If factors change and we
employ different assumptions for estimating share-based
compensation expense in future periods or if we decide to use a
different valuation model, the future periods may differ
significantly from what we have recorded in the current period
and could materially affect operating income, net income and net
income per share.
We believe that we have considered relevant circumstances that
we may be currently subject to, and the financial statements
accurately reflect our best estimate of the results of our
operations, financial condition and cash flows for the years
presented. We have discussed the decision process and selection
of these critical accounting policies with the Audit Committee
of the Board of Directors.
New
Accounting Standards
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141 (revised 2007),
Business Combinations (FAS 141(R)).
FAS 141(R) requires the measurement at fair value of assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree as of the acquisition date.
SFAS 141(R) also requires that acquisition related costs
and costs to restructure be expensed as incurred. We do not
expect the adoption of FAS 141(R), which is effective for
fiscal years beginning on or after December 15, 2008, to
have an impact on our Consolidated Financial Statements. A
significant impact may, however, result from any future business
acquisitions.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(FAS 160). FAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB No. 51s
consolidation procedures for consistency with the requirements
of FAS 141(R). This statement is effective for fiscal years
beginning on or after December 15, 2008 and shall be
applied prospectively as of the beginning of the year of
adoption. We do not expect the adoption of FAS 160 to have
a significant impact on our Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(FAS 161). FAS 161 amends and expands the
disclosure requirements of SFAS No. 133 with the
intent to provide users of financial statements with an enhanced
understanding of: (i) how and why an entity uses derivative
instruments; (ii) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its
related interpretations and (iii) how derivative
31
instruments and related hedged items affect an entitys
financial position statements. This statement is effective for
fiscal years beginning after November 15, 2008, with early
application encouraged. We are currently evaluating the impact
of FAS 161 on the disclosures in our Consolidated Financial
Statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(FAS 162). FAS 162 identifies the sources
of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements
presented in conformity with generally accepted accounting
principles in the United States of America. FAS 162 will be
effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board (PCAOB) amendments to
AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
We are currently evaluating the potential impact of
FAS 162, but do not believe its adoption will have a
material impact on our Consolidated Financial Statements.
In June 2008, the FASB issued FASB Staff Position
(FSP) Emerging Issues Task Force (EITF)
No. 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1),
which classifies unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) as participating securities
and requires them to be included in the computation of earnings
per share pursuant to the two-class method described in
SFAS No. 128, Earnings per Share. This
Staff Position is to be applied retrospectively and is effective
for financial statements issued for fiscal years beginning after
December 15, 2008. We have issued Purchase Restricted Stock
(PRS) to certain eligible employees. The unvested
portion of such PRS contains a nonforfeitable right to dividends
paid by us, and as such, are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method. We are currently evaluating the potential
impact of FSP
EITF 03-6-1,
but do not believe its adoption will have a material impact on
our Consolidated Financial Statements.
In December 2008, the FASB issued FSP
FAS No. 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets (FSP
FAS 132(R)-1). FSP FAS 132(R)-1 expands the
disclosure requirements of FAS No. 132(R) with the
intent to provide users of financial statements with an enhanced
understanding of: (i) how investment allocation decisions
are made, including the investment policies and strategies used,
(ii) the major categories of plan assets, (iii) the
inputs and valuation techniques used to measure the fair value
of plan assets, (iv) the effect of fair value measurements
using significant unobservable inputs (Level 3) on
changes in plan assets and (v) significant concentrations
of risk within plan assets. This statement is to be applied
prospectively, effective for fiscal years ending after
December 15, 2009, with early application permitted. We are
currently evaluating the impact of FSP FAS 132(R)-1 on the
disclosures in our Consolidated Financial Statements.
Non-GAAP Financial
Measures
Among the items in GAAP earnings but excluded for purposes of
determining adjusted earnings are: benefits of favorable tax
rulings relating to prior years; employee separation and
restructuring charges, the benefit of an insurance recovery,
costs for the implementation of the global shared services plan
in 2008 and the gain on the sale of land, a curtailment charge
resulting from changes made to our U.S. defined benefit
pension plan in 2007. In addition, in certain instances, we
exclude the effects of exchange rate fluctuations when
discussing our historical performance. Such information is
supplemental to information presented in accordance with GAAP
and is not intended to represent a presentation in accordance
with GAAP. In discussing our historical and expected future
results and financial condition, we believe it is meaningful for
investors to be made aware of and to be assisted in a better
understanding of, on a period-to-period comparative basis, of
financial amounts both including and excluding these identified
items, as well as the impact of exchange rate fluctuations on
operating results and financial condition. We believe such
additional non-GAAP information provides investors with an
overall perspective of the period-to-period performance of our
core business. In addition, management internally reviews each
of these non-GAAP measures to evaluate performance on a
comparative period-to-period basis in terms of absolute
performance, trends and expected future performance with respect
to our core continuing business. A material limitation of these
non-GAAP measures is that such measures do not reflect actual
GAAP amounts, restructuring charges, employee separation costs
and implementation costs include actual cash outlays, an
insurance recovery is an actual cash recovery and benefits from
favorable tax rulings reflect actual accounting and cash
benefits realized; and we compensate for such limitations by
presenting the accompanying reconciliation to the most directly
comparable
32
GAAP measure. These non-GAAP measures may not be comparable to
similarly titled measures used by other companies.
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
managements current assumptions, estimates and
expectations. Certain of such forward-looking information may be
identified by such terms as expect,
anticipate, believe,
outlook, guidance, may and
similar terms or variations thereof. All information concerning
future revenues, tax rates or benefits, interest and other
savings, earnings and other future financial results or
financial position, constitutes forward-looking information.
Such forward-looking statements involve significant risks,
uncertainties and other factors. Actual results of the Company
may differ materially from any future results expressed or
implied by such forward-looking statements. Such factors
include, among others, the following: general economic and
business conditions in the Companys markets, especially
given the current disruption in global economic conditions,
including economic and recessionary pressures; energy and
commodity prices; decline in consumer confidence and spending;
significant fluctuations in the value of the U.S. dollar;
population health and political uncertainties, and the
difficulty in projecting the short and long-term effects of
global economic conditions; rising interest rates; continued
volatility and deterioration of the capital and credit markets,
including continued disruption in the commercial paper market,
and any adverse impact on our cost of and access to capital and
credit; fluctuations in the price, quality and availability of
raw materials; the Companys 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 Companys
principal foreign markets, especially given the current
disruptions to such currency markets, and the impact on the
availability, effectiveness and cost of the Companys
hedging and risk management strategies; the outcome of
uncertainties related to litigation; the impact of possible
pension funding obligations and increased pension expense on the
Companys 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 U.S. and foreign governments. The
Company intends its forward-looking statements to speak only as
of the time of such statements and does not undertake or plan to
update or revise them as more information becomes available or
to reflect changes in expectations, assumptions or results.
Any public statements or disclosures by IFF following this
report that modify or impact any of the forward-looking
statements contained in or accompanying this report will be
deemed to modify or supersede such outlook or other
forward-looking statements in or accompanying this report.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
We operate on a global basis and are exposed to currency
fluctuation related to the manufacture and sale of our products
in currencies other than the U.S. dollar. The major foreign
currencies involve the markets in the European Union, Great
Britain, Mexico, Brazil, China, Indonesia, Australia and Japan,
although all regions are subject to foreign currency
fluctuations versus the U.S. dollar. We actively monitor
our foreign currency exposures in all major markets in which we
operate, and employ a variety of techniques to mitigate the
impact of exchange rate fluctuations, including foreign currency
hedging activities. We enter 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. The
gain or loss on the hedging instrument is recorded in earnings
at the same time as the transaction being hedged is recorded in
earnings. In February 2003, we executed a
10-year Yen
- U.S. dollar currency swap related to the monthly sale and
purchase of products between the U.S. and Japan, which is
designated as a cash flow hedge. The annual notional value of
this swap is approximately $5 million. The associated asset
or liability on the open hedge instrument is recorded in Current
assets or Current liabilities, as applicable. 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 (AOCI).
33
In addition to the foreign exchange forward contracts noted
above, we use
non-U.S. dollar
borrowings and foreign exchange swap agreements, to hedge the
foreign currency exposures of our net investment in certain
foreign affiliates, primarily in the European Union. These
foreign exchange swap agreements are designated as hedges of net
investments. In September 2007 and January 2006, we entered into
a $250 million and a $300 million Cross Currency
Interest Rate Swap, respectively, to hedge a portion of our
consolidated EUR net investment. The derivative was structured
as a swap of floating USD LIBOR to floating EURIBOR, with both
floating interest rates reset and paid semi-annually. Because
the derivative is structured as a floating to floating swap, the
only value, other than that derived from changes in the spot
Foreign Exchange (FX) rate, are interest rate accruals which are
reset semi-annually. These accruals are netted and booked in
current earnings. Mark-to-market changes due to differences in
the underlying FX rate are recorded in AOCI and provide an
offset to the cumulative translation adjustment of the
underlying Euro net investments being hedged. Effectiveness is
assessed quarterly. At maturity, or if the swaps are terminated
early, any gain or loss will not be recorded to earnings, but
will be recorded to AOCI until the EUR net investment is
divested. In October 2008, we closed out the $250 million
USD LIBOR to EURIBOR interest rate swap at no cost. In February
2009 we terminated the $300 million USD LIBOR to EURIBOR
interest rate swap which required us to make a payment of
$16 million.
We use derivative instruments as part of our interest rate risk
management strategy. The derivative instruments used are
comprised principally of fixed to floating rate interest rate
swaps. In September 2007, we entered into a $250 million
interest rate swap agreement effectively converting the fixed
rate on our long-term U.S. dollar borrowings to a variable
short-term rate based on USD LIBOR rate plus markup. In March
2008, we realized an $18 million gain on termination of
this swap, which has been deferred and is being amortized as a
reduction to interest expense over the remaining term of the
related debt. During 2008, we entered into a similar interest
rate swap and then in October 2008 we liquidated this position
at no cost.
In addition, in 2005, we entered into certain interest rate swap
agreements effectively converting the fixed rate on our
long-term Japanese Yen borrowings to a variable short-term rate
based on the Japanese Yen TIBOR rate plus markup. These swaps
are designated as qualified fair value hedges. In November 2008,
the portion of these swaps related to the 13.3 billion Yen
notes refinanced, expired. Swap contracts are generally held to
maturity and are intended to create an appropriate balance of
fixed and floating rate debt. To the extent we have 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 following table summarizes our derivatives outstanding as of
December 31, 2008. These swaps were all effective under
FAS 133.
|
|
|
|
|
|
|
Notional Amount
|
|
300,000,000
|
|
1,818,000,000
|
|
50,000,000
|
Currency
|
|
USD
|
|
JPY
|
|
USD
|
Description
|
|
Cross Currency Interest Rate Swap (USD/EUR)
|
|
Interest Rate Swap
|
|
10 Year Cross Currency Swap (JPY/USD)
|
Hedged risk
|
|
Foreign Exchange
Risk(1)
|
|
The risk of changes in fair value attributable to interest rate
risk(2)
|
|
The variability of cash flows attributable to foreign exchange
risk(3)
|
Method used to test for effectiveness:
|
|
|
(1) |
|
Quarterly hedge effectiveness is tested using the forward rate
method. We use a hypothetical derivative on an after-tax basis,
and ensure that the hedged amount is less then the designated
Euro net investment. We ensure that the terms of the hedging
instrument have not changed and perform a review of counterparty
creditworthiness. |
|
(2) |
|
Changes in fair value attributable to the risk being hedged are
expected to be completely offset by the hedging derivative
because the critical terms of the Interest Rate Swap and the
hedged debt match (i.e., the currency, notional amount, timing
and date of interest payments). Quarterly hedge effectiveness
testing includes ensuring the terms of the hedging instrument
and the debt have not changed and reviewing counterparty
creditworthiness. |
34
|
|
|
(3) |
|
Changes in cash flow attributable to the risk being hedged are
expected to be completely offset by the hedging derivative
because the critical terms of the Cross Currency Swap and the
forecasted transaction match (i.e., the currency, notional
amount and timing). Quarterly hedge effectiveness testing
includes reviewing counterparty creditworthiness, ensuring the
probability of hedged forecasted transactions has not changed
and ensuring the terms of the hedging instrument have not
changed. |
We have established a centralized reporting system to evaluate
the effects of changes in interest rates, currency exchange
rates and other relevant market risks. Our risk management
procedures include the monitoring of interest rate and foreign
exchange exposures and hedge positions utilizing statistical
analyses of cash flows, market value and sensitivity analysis.
However, the use of these techniques to quantify the market risk
of such instruments should not be construed as an endorsement of
their accuracy or the accuracy of the related assumptions.
Market exposures are evaluated using a sensitivity model that is
intended to measure the potential 10% loss in interest rate and
foreign exchange financial instruments, assuming adverse market
conditions occur. Historical interest rates and foreign exchange
rates are used to estimate the volatility and correlation of
future rates.
The estimated maximum potential
one-day loss
in fair value of interest rate or foreign exchange rate
instruments, calculated using the sensitivity model, is not
material to our consolidated financial position, results of
operations or cash flows in 2008, 2007 and 2006. The estimated
maximum yearly loss in earnings due to interest rate or foreign
exchange rate instruments, calculated utilizing the sensitivity
model, is not material to our results of operations in 2008,
2007 and 2006. Actual results in the future may differ
materially from these projected results due to actual
developments in the global financial markets.
The foreign currency and interest rate swap contracts existing
during 2008 and 2007 were entered into for the purpose of
seeking to mitigate the risk of certain specific adverse
currency and interest rate risks. As a result of these financial
instruments, we reduced financial risk in exchange for foregoing
any gain (reward) that might have occurred if the markets moved
favorably. In using these contracts, management exchanged the
risks of the financial markets for counterparty risk.
Counterparty risk arises from the inability of a counterparty to
meet its obligations. To mitigate counterparty risk, we entered
into derivative contracts with major leading financial
institutions that have credit ratings equal to or better than
our credit rating.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
See index to Consolidated Financial Statements on page 38.
See Item 6 on page 15 for supplemental quarterly data.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures and Changes in Internal
Control over Financial Reporting.
Our Chief Executive Officer and Interim Chief Financial Officer,
with the assistance of other members of our management, have
evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual
Report on
Form 10-K.
Based on such evaluation, our Chief Executive Officer and
Interim Chief Financial Officer have concluded that our
disclosure controls and procedures are effective as of the end
of the period covered by this Annual Report on
Form 10-K.
We have established controls and procedures designed to ensure
that information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Commissions rules and forms and is accumulated and
communicated to management, including the principal executive
officer and the principal financial officer, to allow timely
decisions regarding required disclosure.
35
Our Chief Executive Officer and Interim Chief Financial Officer
have concluded that there have not been any changes in our
internal control over financial reporting during the fourth
quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
The registered public accounting firm that audited the financial
statements included in the annual report containing the
disclosure required by this Item has issued an attestation
report on the effectiveness of our internal controls over
financial reporting. The attestation report issued by
PricewaterhouseCoopers LLP is included in Part IV of this Annual
Report on Form 10-K and is incorporated herein by reference.
Managements
Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework.
Based on this assessment, management determined that, as of
December 31, 2008, our internal control over financial
reporting was effective.
PricewaterhouseCoopers LLP, our independent registered public
accounting firm, has audited the effectiveness of our internal
control over financial reporting as of December 31, 2008 as
stated in their report which is included herein.
Certifications
to NYSE and SEC
Our Chief Executive Officer certification was timely filed with
the NYSE as required by NYSE Rule 303A(12). We have filed
the required Sarbanes-Oxley Section 302 certifications of
the Chief Executive Officer and Interim Chief Financial Officer
regarding the quality of our public disclosures as exhibits to
our most recently filed
Form 10-K.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
The information relating to our directors and nominees is set
forth under the caption Election of Directors in the
IFF 2009 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 2009 Proxy Statement is
also incorporated by reference herein. See Part I,
Item 1 of this
Form 10-K
for information relating to our Executive Officers.
We have adopted a Code of Business Conduct and Ethics (the
Code of Ethics) that applies to our Chief Executive
Officer, principal financial officer, principal accounting
officer, and to all of our other directors, officers and
employees. The Code of Ethics is available at the Investor
Relations / Corporate Governance section on our
36
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 or the Audit Committee of the Board
and any such waiver will be publicly disclosed. We will disclose
substantive amendments to and any waivers from the Code of
Ethics provided to our Chief Executive Officer, principal
financial officer or principal accounting officer, as well as
any other executive officer or director, at the Investor
Relations / Corporate Governance section on our
Internet website, www.iff.com. We utilize a worldwide
Hotline administered by Global Compliance Services to assist our
employees in identifying and reporting issues that might
compromise the health, safety, or reputation, of our employees
or shareholders.
The information regarding our Audit Committee and designated
audit committee financial experts is set forth under the
captions Board and Committee Memberships and
Audit Committee in the IFF 2009 Proxy Statement and
such information is incorporated by reference herein.
The information concerning procedures by which shareholders may
recommend director nominees is set forth under Director
Candidates in the IFF 2009 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 Executive Compensation and
Directors Compensation in the IFF 2009 Proxy
Statement and such information is incorporated by reference
herein; except that the information under the caption
Compensation Committee Report shall be deemed
furnished with this report and shall not be deemed
filed with this report, nor deemed incorporated by
reference into any filing under the Securities Act of 1933
except only as may be expressly set forth in any such filing by
specific reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
The information relating to security ownership of management and
certain beneficial owners is set forth under the caption
Beneficial Ownership Table in the IFF 2009 Proxy
Statement and such information is incorporated by reference
herein. The information relating to our equity plans is set
forth under the caption Equity Compensation Plans in
the IFF 2009 Proxy Statement and such information is
incorporated by reference herein.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The information regarding certain relationships and related
party transactions and director independence is set forth under
the caption Independence of Directors and Committee
Members and Related Person Matters in the IFFs 2009
Proxy Statement and such information is incorporated by
reference herein.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
The information regarding fees and services of the independent
registered public accounting firm (independent
accountant) and our pre-approval policies and procedures
for audit and non-audit services provided by our independent
accountant are set forth under the captions Principal
Accountant Fees and Services and Audit Committee
Pre-Approval Policies and Procedures in the IFF 2009 Proxy
Statement and such information is incorporated by reference
herein.
37
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a)(1) FINANCIAL STATEMENTS: The following consolidated
financial statements, related notes, and independent registered
public accounting firms report are included in this report
on
Form 10-K:
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
38
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of International
Flavors & Fragrances Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under item 15(a)(1) present fairly, in
all material respects, the financial position of International
Flavors & Fragrances Inc. and its subsidiaries at
December 31, 2008 and December 31, 2007, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for these
financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements Report
on Internal Control Over Financial Reporting, appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included 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. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 9 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007. As discussed in
Note 13 to the consolidated financial statements, the
Company changed the manner in which it accounts for defined
benefit pension and other postretirement plans effective
December 31, 2006.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 26, 2009
39
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
CONSOLIDATED
STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
2,389,372
|
|
|
$
|
2,276,638
|
|
|
$
|
2,095,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,418,738
|
|
|
|
1,324,424
|
|
|
|
1,211,259
|
|
Research and development expenses
|
|
|
212,695
|
|
|
|
199,023
|
|
|
|
185,692
|
|
Selling and administrative expenses
|
|
|
381,841
|
|
|
|
375,287
|
|
|
|
351,923
|
|
Amortization of intangibles
|
|
|
6,153
|
|
|
|
12,878
|
|
|
|
14,843
|
|
Curtailment loss
|
|
|
|
|
|
|
5,943
|
|
|
|
|
|
Restructuring and other charges, net
|
|
|
18,212
|
|
|
|
|
|
|
|
2,680
|
|
Interest expense
|
|
|
74,008
|
|
|
|
41,535
|
|
|
|
25,549
|
|
Other (income) expense, net
|
|
|
(2,797
|
)
|
|
|
(11,136
|
)
|
|
|
(9,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,108,850
|
|
|
|
1,947,954
|
|
|
|
1,782,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
280,522
|
|
|
|
328,684
|
|
|
|
313,282
|
|
Taxes on income
|
|
|
50,894
|
|
|
|
81,556
|
|
|
|
86,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
229,628
|
|
|
|
247,128
|
|
|
|
226,500
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(116,856
|
)
|
|
|
(1,136
|
)
|
|
|
15,515
|
|
Losses (gains) on derivatives qualifying as hedges
|
|
|
(1,989
|
)
|
|
|
622
|
|
|
|
141
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
92,831
|
|
Pension and Postretirement liability adjustment
|
|
|
(61,913
|
)
|
|
|
53,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
48,870
|
|
|
$
|
299,653
|
|
|
$
|
334,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income per share basic
|
|
$
|
2.91
|
|
|
$
|
2.86
|
|
|
$
|
2.50
|
|
Net income per share diluted
|
|
$
|
2.87
|
|
|
$
|
2.82
|
|
|
$
|
2.48
|
|
See Notes to Consolidated Financial Statements
40
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
178,467
|
|
|
$
|
151,471
|
|
Short-term investments
|
|
|
361
|
|
|
|
604
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
412,127
|
|
|
|
412,221
|
|
Allowance for doubtful accounts
|
|
|
(11,156
|
)
|
|
|
(11,694
|
)
|
Other
|
|
|
38,797
|
|
|
|
50,052
|
|
Inventories
|
|
|
479,567
|
|
|
|
484,222
|
|
Deferred income taxes
|
|
|
23,695
|
|
|
|
24,663
|
|
Prepaid expenses
|
|
|
39,210
|
|
|
|
44,554
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,161,068
|
|
|
|
1,156,093
|
|
Property, Plant and Equipment, net
|
|
|
496,856
|
|
|
|
508,820
|
|
Goodwill
|
|
|
665,582
|
|
|
|
665,582
|
|
Other Intangible Assets, net
|
|
|
61,101
|
|
|
|
67,254
|
|
Deferred income taxes
|
|
|
160,661
|
|
|
|
109,086
|
|
Other Assets
|
|
|
204,645
|
|
|
|
219,479
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,749,913
|
|
|
$
|
2,726,314
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Bank borrowings, overdrafts and current portion of long-term debt
|
|
$
|
101,982
|
|
|
$
|
152,473
|
|
Accounts payable
|
|
|
114,997
|
|
|
|
130,992
|
|
Accrued payrolls and bonuses
|
|
|
40,456
|
|
|
|
64,271
|
|
Dividends payable
|
|
|
19,666
|
|
|
|
18,628
|
|
Deferred income taxes
|
|
|
1,788
|
|
|
|
4,547
|
|
Restructuring and other charges
|
|
|
14,821
|
|
|
|
2,654
|
|
Other current liabilities
|
|
|
157,331
|
|
|
|
169,878
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
451,041
|
|
|
|
543,443
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,153,672
|
|
|
|
1,060,168
|
|
Deferred gains
|
|
|
58,632
|
|
|
|
61,659
|
|
Retirement liabilities
|
|
|
276,231
|
|
|
|
171,991
|
|
Other liabilities
|
|
|
237,226
|
|
|
|
271,856
|
|
|
|
|
|
|
|
|
|
|
Total Other Liabilities
|
|
|
1,725,761
|
|
|
|
1,565,674
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock
121/2¢
par value; authorized 500,000,000 shares; issued
115,761,840 shares as of December 31, 2008 and 2007;
and outstanding 78,661,062 and 80,995,228 shares as of
December 31, 2008 and 2007
|
|
|
14,470
|
|
|
|
14,470
|
|
Capital in excess of par value
|
|
|
106,073
|
|
|
|
54,995
|
|
Retained earnings
|
|
|
2,222,641
|
|
|
|
2,078,937
|
|
Accumulated other comprehensives (loss) income:
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
(149,846
|
)
|
|
|
(32,990
|
)
|
Accumulated losses on derivatives qualifying as hedges
|
|
|
(3,832
|
)
|
|
|
(1,843
|
)
|
Pension and Postemployment liability adjustment
|
|
|
(171,427
|
)
|
|
|
(109,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,018,079
|
|
|
|
2,004,055
|
|
Treasury stock, at cost 37,100,778 and
34,766,612 shares as of December 31, 2008 and 2007
|
|
|
(1,444,968
|
)
|
|
|
(1,386,858
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
573,111
|
|
|
|
617,197
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
2,749,913
|
|
|
$
|
2,726,314
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
41
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,628
|
|
|
$
|
247,128
|
|
|
$
|
226,500
|
|
Adjustments to reconcile to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
75,986
|
|
|
|
82,788
|
|
|
|
89,733
|
|
Deferred income taxes
|
|
|
7,261
|
|
|
|
(6,343
|
)
|
|
|
(12,423
|
)
|
Gain on disposal of assets
|
|
|
(2,160
|
)
|
|
|
(13,791
|
)
|
|
|
(22,836
|
)
|
Equity based compensation
|
|
|
17,246
|
|
|
|
18,168
|
|
|
|
18,185
|
|
Curtailment loss
|
|
|
|
|
|
|
5,943
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current receivables
|
|
|
(39,879
|
)
|
|
|
(32,974
|
)
|
|
|
(27,153
|
)
|
Inventories
|
|
|
(19,736
|
)
|
|
|
(12,406
|
)
|
|
|
9,492
|
|
Current payables
|
|
|
(30,585
|
)
|
|
|
22,298
|
|
|
|
38,087
|
|
Changes in other assets
|
|
|
(24,966
|
)
|
|
|
(2,088
|
)
|
|
|
(20,396
|
)
|
Changes in other liabilities
|
|
|
7,818
|
|
|
|
5,339
|
|
|
|
(17,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
220,613
|
|
|
|
314,062
|
|
|
|
281,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(85,395
|
)
|
|
|
(65,614
|
)
|
|
|
(58,282
|
)
|
Proceeds from disposal of assets
|
|
|
2,848
|
|
|
|
16,959
|
|
|
|
27,235
|
|
Proceeds from investments
|
|
|
|
|
|
|
10,471
|
|
|
|
|
|
Purchase of investments
|
|
|
(7,198
|
)
|
|
|
(13,170
|
)
|
|
|
(17,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(89,745
|
)
|
|
|
(51,354
|
)
|
|
|
(48,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to shareholders
|
|
|
(74,865
|
)
|
|
|
(76,600
|
)
|
|
|
(67,381
|
)
|
Net change in bank borrowings and overdrafts
|
|
|
2,902
|
|
|
|
(129,648
|
)
|
|
|
(48,714
|
)
|
Net proceeds from long-term debt
|
|
|
139,167
|
|
|
|
498,569
|
|
|
|
373,637
|
|
Repayments of long-term debt
|
|
|
(139,364
|
)
|
|
|
|
|
|
|
(499,300
|
)
|
Proceeds from issuance of stock under stock plans
|
|
|
7,353
|
|
|
|
50,116
|
|
|
|
110,867
|
|
Excess tax benefits on share-based payments
|
|
|
133
|
|
|
|
6,568
|
|
|
|
4,653
|
|
Purchase of treasury stock
|
|
|
(29,995
|
)
|
|
|
(577,001
|
)
|
|
|
(270,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(94,669
|
)
|
|
|
(227,996
|
)
|
|
|
(397,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(9,203
|
)
|
|
|
2,251
|
|
|
|
5,982
|
|
Net change in cash and cash equivalents
|
|
|
26,996
|
|
|
|
36,963
|
|
|
|
(158,037
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
151,471
|
|
|
|
114,508
|
|
|
|
272,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
178,467
|
|
|
$
|
151,471
|
|
|
$
|
114,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
87,340
|
|
|
$
|
36,017
|
|
|
$
|
31,701
|
|
Income taxes
|
|
$
|
50,280
|
|
|
$
|
60,405
|
|
|
$
|
79,442
|
|
See Notes to Consolidated Financial Statements
42
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
CONSOLIDATED
STATEMENT OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
(DOLLARS IN THOUSANDS)
|
|
Stock
|
|
|
Par Value
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Shares
|
|
|
Cost
|
|
|
Balance at December 31, 2005
|
|
$
|
14,470
|
|
|
$
|
71,894
|
|
|
$
|
1,752,055
|
|
|
$
|
(150,355
|
)
|
|
|
(23,047,349
|
)
|
|
$
|
(772,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
226,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,515
|
|
|
|
|
|
|
|
|
|
Losses on deriviatives qualifying as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment; net of tax: $42,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,831
|
|
|
|
|
|
|
|
|
|
Adoption of FAS 158 minimum pension liability adjustment;
net of tax: $4,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,549
|
|
|
|
|
|
|
|
|
|
Pension and postemployment liability adjustment; net of
tax: $(76,742)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162,553
|
)
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(68,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
3,346,326
|
|
|
|
116,050
|
|
Reacquired shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,891,152
|
)
|
|
|
(270,998
|
)
|
Vested restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,632
|
|
|
|
1,597
|
|
Restricted stock award
|
|
|
|
|
|
|
24,143
|
|
|
|
|
|
|
|
|
|
|
|
217,905
|
|
|
|
7,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
14,470
|
|
|
$
|
96,635
|
|
|
$
|
1,909,599
|
|
|
$
|
(196,872
|
)
|
|
|
(26,344,638
|
)
|
|
$
|
(918,664
|
)
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
247,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 adoption adjustment
|
|
|
|
|
|
|
|
|
|
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
Losses on deriviatives qualifying as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622
|
|
|
|
|
|
|
|
|
|
Pension liability and post-retirement adjustment; net of
tax: $25,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,039
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(76,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
4,121
|
|
|
|
|
|
|
|
|
|
|
|
1,332,595
|
|
|
|
48,483
|
|
Reacquired shares
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,198,877
|
)
|
|
|
(532,001
|
)
|
Vested restricted stock units
|
|
|
|
|
|
|
(16,126
|
)
|
|
|
|
|
|
|
|
|
|
|
234,388
|
|
|
|
7,874
|
|
Stock based compensation
|
|
|
|
|
|
|
15,365
|
|
|
|
|
|
|
|
|
|
|
|
209,920
|
|
|
|
7,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
14,470
|
|
|
$
|
54,995
|
|
|
$
|
2,078,937
|
|
|
$
|
(144,347
|
)
|
|
|
(34,766,612
|
)
|
|
$
|
(1,386,858
|
)
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
229,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EITF 06-4
adoption adjustment; net of tax: $(5,529)
|
|
|
|
|
|
|
|
|
|
|
(10,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,856
|
)
|
|
|
|
|
|
|
|
|
Losses on deriviatives qualifying as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,989
|
)
|
|
|
|
|
|
|
|
|
Pension liability and post-retirement adjustment; net of
tax: $(34,159)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,913
|
)
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(75,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
157,376
|
|
|
|
6,295
|
|
Reacquired shares
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
(2,762,058
|
)
|
|
|
(74,995
|
)
|
Vested restricted stock units
|
|
|
|
|
|
|
(10,003
|
)
|
|
|
|
|
|
|
|
|
|
|
165,277
|
|
|
|
6,826
|
|
Stock based compensation
|
|
|
|
|
|
|
16,380
|
|
|
|
|
|
|
|
|
|
|
|
105,239
|
|
|
|
3,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
14,470
|
|
|
$
|
106,073
|
|
|
$
|
2,222,641
|
|
|
$
|
(325,105
|
)
|
|
|
(37,100,778
|
)
|
|
$
|
(1,444,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
43
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1.
|
NATURE OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of Operations We are 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. Our 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.
Use of Estimates The 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
managements best knowledge of current events and actions
we may undertake in the future. Actual results may ultimately
differ from estimates.
Principles of Consolidation The consolidated
financial statements include our accounts and those of our
subsidiaries. Significant intercompany balances and transactions
have been eliminated. To the extent a subsidiary is not
wholly-owned, any related minority interest is included in Other
liabilities; applicable (income) expense attributable to the
minority interest is included in Other (income) expense, net.
Revenue Recognition We recognize revenue when
the earnings process is complete. This generally occurs when
(i) products are shipped to the customer in accordance with
the terms of sale, (ii) title and risk of loss have been
transferred and (iii) collectibility is reasonably assured.
Net sales are reduced, at the time revenue is recognized, by
accruing for applicable discounts, rebates and sales allowances
based on historical experience. Related accruals are included in
accrued liabilities.
Foreign Currency Translation We translate the
assets and liabilities of
non-U.S. subsidiaries
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 research and
development costs are expensed as incurred.
Cash Equivalents Cash equivalents include
highly liquid investments with maturities of three months or
less at date of purchase.
Other Receivables Other receivables consist
primarily of Value Added Tax (VAT) receivables in the various
countries in which we operate. VAT receivables are recorded when
goods are received and are normally recoverable within
30 days.
Inventories Inventories are stated at the
lower of cost (on weighted average basis) or market. Our
inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
235,324
|
|
|
$
|
237,943
|
|
Work in process
|
|
|
10,975
|
|
|
|
10,707
|
|
Finished goods
|
|
|
233,268
|
|
|
|
235,572
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
479,567
|
|
|
$
|
484,222
|
|
|
|
|
|
|
|
|
|
|
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 and equipment, 3 to 10 years;
information technology hardware and software, 3 to 7 years;
and leasehold improvements which are included in buildings and
improvements, the estimated life of the improvements or the
remaining term of the lease, whichever is shorter. We
periodically evaluate whether current events or circumstances
indicate that the carrying value of our depreciable assets may
not be recoverable.
44
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill and Other Intangible Assets Goodwill
represents the difference between the total purchase price and
the fair value of identifiable assets and liabilities acquired
in business acquisitions.
We perform a goodwill impairment test on at least an annual
basis or more frequently in certain circumstances, by assessing
the fair value of our reporting units based upon both discounted
cash flows and comparison of multiples of comparable companies.
We deem goodwill to be impaired if the carrying amount of the
reporting unit exceeds the estimated fair value. We completed
our goodwill impairment assessment, which indicated no
impairment of goodwill.
Other intangible assets include patents, trademarks and other
intellectual property valued at acquisition, and amortized on a
straight-line basis over periods ranging from 6 to 20 years.
We review our 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 impairment exists. If
assets are determined to be impaired, the loss is measured based
on an estimate of fair value using various valuation techniques,
including a discounted estimate of future cash flows.
Income Taxes Deferred income taxes reflect the
impact of temporary differences between the amount of assets and
liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, based on tax laws as
currently enacted. Additional taxes which would result from
distributions by subsidiary companies to the parent are provided
to the extent anticipated. No provision is made for additional
taxes on undistributed earnings of subsidiary companies that are
intended to be indefinitely invested in such subsidiaries. No
income tax benefit is attributed to the currency translation
component of Accumulated other comprehensive income
(AOCI).
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 We use derivative
financial instruments to manage interest and foreign currency
exposures. The gain or loss on the hedging instrument is
recorded in earnings at the same time as the transaction being
hedged is recorded in earnings. The associated asset or
liability related to the open hedge instrument is recorded in
Current assets or Current liabilities, as applicable.
We record all derivative instruments on the balance sheet at
fair value. Changes in a derivatives fair value are
recognized in earnings unless specific hedge criteria are met.
If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in the
consolidated statement of earnings. If the derivative is
designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in AOCI
and are subsequently recognized in the consolidated statement of
earnings when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges, if
any, are recognized as a charge or credit to earnings.
Software Costs We capitalize direct internal
and external development costs for certain significant projects
associated with internal-use software and amortize these costs
over 7 years. Neither preliminary evaluation costs nor
costs associated with the software after implementation are
capitalized. Costs related to projects that are not significant
are expensed as incurred.
Shipping and Handling Costs Net sales include
shipping and handling charges billed to customers. Cost of goods
sold includes all costs incurred in connection with shipping and
handling.
45
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Basic
|
|
|
79,032
|
|
|
|
86,541
|
|
|
|
90,443
|
|
Dilution under stock plans
|
|
|
932
|
|
|
|
1,092
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
79,964
|
|
|
|
87,633
|
|
|
|
91,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income used in the computation of net income per share is
unaffected by the assumed issuance of stock under our stock
plans.
Options to purchase 798,000, 248,000 and 309,000 shares
were outstanding at December 31, 2008, 2007, and 2006,
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-Based Compensation We have stock-based
compensation plans which are described more fully in
Note 11 to the Consolidated Financial Statements. We
adopted the provisions of SFAS No. 123(R)
Share-Based Payment (FAS 123R)
using the modified prospective method, which requires
measurement of compensation cost of all stock-based awards at
fair value on the date of grant and recognition of compensation
expense over the service periods for awards expected to vest.
Under this transition method, 2006 compensation cost includes
the portion vesting in the year for (1) all share-based
payments granted prior to, but not vested, as of January 1,
2006, based on the grant date fair value estimated in accordance
with the original provisions of FAS 123 Accounting
for Stock-Based Compensation (FAS 123),
and (2) all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of FAS 123R.
The cost of employee stock options will be recognized on a
straight-line attribution basis over their respective vesting
periods, net of estimated forfeitures.
New
Accounting Standards
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141 (revised 2007),
Business Combinations (FAS 141(R)).
FAS 141 (R) requires the measurement at fair value of
assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree as of the acquisition date.
SFAS 141(R) also requires that acquisition related costs
and costs to restructure be expensed as incurred. We do not
expect the adoption of FAS 141(R), which is effective for
fiscal years beginning on or after December 15, 2008, to
have an impact on our Consolidated Financial Statements. A
significant impact may, however, result from any future business
acquisitions.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(FAS 160). FAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB No. 51s
consolidation procedures for consistency with the requirements
of FAS 141(R). This statement is effective for fiscal years
beginning on or after December 15, 2008 and shall be
applied prospectively as of the beginning of the year of
adoption. We do not expect the adoption of FAS 160 to have
a significant impact on our Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(FAS 161). FAS 161 amends and expands the
disclosure requirements of SFAS No. 133 with the
intent to provide users of financial statements with an enhanced
understanding of: (i) how and why an entity uses derivative
instruments; (ii) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its
related interpretations and (iii) how derivative
instruments and related hedged items affect an entitys
financial position statements. This statement is effective for
46
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fiscal years beginning after November 15, 2008, with early
application encouraged. We are currently evaluating the impact
of FAS 161 on the disclosures in our Consolidated Financial
Statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(FAS 162). FAS 162 identifies the sources
of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements
presented in conformity with generally accepted accounting
principles in the United States of America. FAS 162 will be
effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board (PCAOB) amendments to
AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
We are currently evaluating the potential impact of
FAS 162, but do not believe its adoption will have a
material impact on our Consolidated Financial Statements.
In June 2008, the FASB issued FASB Staff Position
(FSP) Emerging Issues Task Force (EITF)
No. 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1),
which classifies unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) as participating securities
and requires them to be included in the computation of earnings
per share pursuant to the two-class method described in
SFAS No. 128, Earnings per Share. This
Staff Position is to be applied retrospectively and is effective
for financial statements issued for fiscal years beginning after
December 15, 2008. We have issued Purchase Restricted Stock
(PRS) to certain eligible employees. The unvested
portion of such PRS contains a nonforfeitable right to dividends
paid by us, and as such, are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method. We are currently evaluating the potential
impact of FSP
EITF 03-6-1,
but do not believe its adoption will have a material impact on
our Consolidated Financial Statements.
In December 2008, the FASB issued FSP
FAS No. 132(R)-1,
Employers Disclosures about Postretirement Benefit
Plan Assets (FSP
FAS 132(R)-1).
FSP
FAS 132(R)-1
expands the disclosure requirements of FAS No. 132(R)
with the intent to provide users of financial statements with an
enhanced understanding of: (i) how investment allocation
decisions are made, including the investment policies and
strategies used, (ii) the major categories of plan assets,
(iii) the inputs and valuation techniques used to measure
the fair value of plan assets, (iv) the effect of fair
value measurements using significant unobservable inputs
(Level 3) on changes in plan assets and
(v) significant concentrations of risk within plan assets.
This statement is to be applied prospectively, effective for
fiscal years ending after December 15, 2009, with early
application permitted. We are currently evaluating the impact of
FSP
FAS 132(R)-1
on the disclosures in our Consolidated Financial Statements.
Accounting
Changes:
Fair
Value Measurements (SFAS 157)
We adopted SFAS No. 157, Fair Value
Measurements (FAS 157), as of
January 1, 2008. FAS 157 defines fair value, expands
disclosure requirements around fair value and specifies a
hierarchy of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect our market
assumptions. These two types of inputs create the following fair
value hierarchy:
|
|
|
|
|
Level 1 Quoted prices for identical
instruments in active markets.
|
|
|
|
Level 2 Quoted prices for similar
instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
|
|
|
|
Level 3 Valuations derived from valuation
techniques in which one or more significant inputs or
significant value drivers are unobservable.
|
47
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This hierarchy requires us to use observable market data, when
available, and to minimize the use of unobservable inputs when
determining fair value.
FAS 157 requires that we consider our own credit risk when
measuring fair value. Adoption of FAS 157 has also resulted
in some other changes to valuation techniques used when
determining fair value, most notably changes to the way that the
probability of default of a counterparty is factored in. The
change in fair value of these liabilities due to such changes in
our own credit risk (or instrument-specific credit risk) was
immaterial.
EITF
No. 06-4
In March 2006, the FASB issued EITF
No. 06-4,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements
(EITF 06-4).
EITF 06-4
clarifies that for an endorsement split-dollar life insurance
arrangement, an employer should recognize a liability for future
benefits and related compensation expense if the employer has
effectively agreed to provide a benefit to an employee that
extends to postretirement periods. EITF
No. 06-4
is effective for fiscal years beginning after December 15,
2007. The transition provisions require entities to recognize
the effects of applying
EITF 06-4
through either (a) a change in accounting principle through
a cumulative-effect adjustment to retained earnings or to other
components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or
(b) a change in accounting principle through retrospective
application to all prior periods.
We adopted
EITF 06-4
on January 1, 2008. As a result of the adoption of
EITF 06-4,
we recognized a cumulative effect of a change in accounting
principle adjustment of $10 million, net of related
deferred income taxes of $5.5 million, which decreased
beginning retained earnings in the shareholders equity
component of the accompanying Consolidated Balance Sheet for the
year ended December 31, 2008. We estimate additional
expense of approximately $1 million per year as a result of
this change in accounting.
Reclassifications and revisions Certain
reclassifications have been made to the prior years
financial statements to conform to the 2008 presentation. In
addition, current assets decreased $34 million, non-current
assets increased $34 million, current liabilities increased
$5 million, non-current liabilities decreased
$5 million for 2007 primarily to properly reflect our
current and long-term deferred tax assets and liabilities that
were previously shown as net deferred tax assets on the
Consolidated Balance Sheet.
|
|
NOTE 2.
|
RESTRUCTURING
AND OTHER CHARGES
|
In 2008, as part of our business transformation initiative to
enable us to better leverage our global SAP software platform,
we implemented a plan to centralize transaction processing in a
global shared service center that resulted in the elimination of
127 positions globally, largely in the finance area. As a result
of these actions, we recognized a pre-tax charge of
approximately $7 million in 2008 related to employee
separation costs and $2 million in implementation costs.
The implementation costs were included in selling and
administrative expenses in 2008. In addition, we incurred a
pre-tax charge of $12 million in the fourth quarter 2008
principally related to a performance improvement plan covering
91 positions across a variety of activities globally.
The balance of the employee-related liabilities is expected to
be utilized by the end of 2010 as obligations are satisfied.
In 2005, we eliminated positions in manufacturing, selling,
research and administration functions, principally in our
European and North American operating regions. As a result of
these actions, restructuring charges, relating primarily to
employee separation expenses, of $3 million were recognized
in 2006.
48
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Movements in related accruals were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-
|
|
|
|
|
|
|
Employee-
|
|
|
Related and
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
Related
|
|
|
Other
|
|
|
Total
|
|
|
Balance January 1, 2006
|
|
$
|
29,516
|
|
|
$
|
4,933
|
|
|
$
|
34,449
|
|
Additional charges
|
|
|
3,840
|
|
|
|
(1,160
|
)
|
|
|
2,680
|
|
Cash and other costs
|
|
|
(20,495
|
)
|
|
|
(1,346
|
)
|
|
|
(21,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
12,861
|
|
|
|
2,427
|
|
|
|
15,288
|
|
Cash and other costs
|
|
|
(10,273
|
)
|
|
|
(2,361
|
)
|
|
|
(12,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
2,588
|
|
|
|
66
|
|
|
|
2,654
|
|
Additional charges, net of reversal
|
|
|
18,212
|
|
|
|
|
|
|
|
18,212
|
|
Cash and other costs
|
|
|
(6,045
|
)
|
|
|
|
|
|
|
(6,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
$
|
14,755
|
|
|
$
|
66
|
|
|
$
|
14,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Asset Type
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
25,467
|
|
|
$
|
27,998
|
|
Buildings and Improvements
|
|
|
234,746
|
|
|
|
242,181
|
|
Machinery and Equipment
|
|
|
635,138
|
|
|
|
641,902
|
|
Information Technology
|
|
|
219,656
|
|
|
|
213,936
|
|
CIP
|
|
|
56,901
|
|
|
|
39,065
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,171,908
|
|
|
$
|
1,165,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
Asset Type
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Buildings and Improvements
|
|
$
|
99,449
|
|
|
$
|
107,960
|
|
Machinery and Equipment
|
|
|
400,517
|
|
|
|
391,880
|
|
Information Technology
|
|
|
175,086
|
|
|
|
156,422
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
675,052
|
|
|
$
|
656,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
Asset Type
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
25,467
|
|
|
$
|
27,998
|
|
Buildings and Improvements
|
|
|
135,297
|
|
|
|
134,221
|
|
Machinery and Equipment
|
|
|
234,621
|
|
|
|
250,022
|
|
Information Technology
|
|
|
44,570
|
|
|
|
57,514
|
|
CIP
|
|
|
56,901
|
|
|
|
39,065
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
496,856
|
|
|
$
|
508,820
|
|
|
|
|
|
|
|
|
|
|
49
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS, NET
|
Goodwill by operating segment for 2008 and 2007 is as follows:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
Amount
|
|
|
Flavors
|
|
$
|
319,479
|
|
Fragrances
|
|
|
346,103
|
|
|
|
|
|
|
Total
|
|
$
|
665,582
|
|
|
|
|
|
|
Trademark and other intangible assets consist of the following
amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Gross carrying value
|
|
$
|
165,406
|
|
|
$
|
165,406
|
|
Accumulated amortization
|
|
|
104,305
|
|
|
|
98,152
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,101
|
|
|
$
|
67,254
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2008,
2007 and 2006 was $6 million, $13 million and
$15 million, respectively; estimated annual amortization is
$6 million in 2009 and $6 million in each year from
2010 to 2013.
Other assets consist of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Pension assets
|
|
$
|
98,815
|
|
|
$
|
111,400
|
|
Other
|
|
|
105,830
|
|
|
|
108,079
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
204,645
|
|
|
$
|
219,479
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6.
|
OTHER
CURRENT LIABILITIES
|
Other current liabilities consist of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Workers compensation and general liability
|
|
$
|
22,383
|
|
|
$
|
28,900
|
|
Interest payable
|
|
|
21,569
|
|
|
|
19,764
|
|
Current pension and other retiree accruals
|
|
|
6,961
|
|
|
|
15,531
|
|
Rebates and incentives
|
|
|
5,490
|
|
|
|
11,822
|
|
Commissions and professional fees payable
|
|
|
7,452
|
|
|
|
9,825
|
|
Other
|
|
|
93,476
|
|
|
|
84,036
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
157,331
|
|
|
$
|
169,878
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7.
|
SALE AND
LEASEBACK TRANSACTIONS
|
In connection with the disposition of certain real estate in
prior years, we entered into long-term operating leases covering
the facilities disposed of. The leases are classified as
operating leases in accordance with SFAS No. 13,
Accounting for Leases, and the gains realized have
been deferred and are being credited to
50
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income over the initial lease term. Such deferred gains totaled
$62 million and $65 million at December 31, 2008
and 2007, respectively, of which $59 million and
$62 million, respectively, are reflected in the
accompanying balance sheet under the caption Deferred gains,
with the remainder included as a component of Other current
liabilities.
Debt consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
Rate
|
|
|
Maturities
|
|
|
2008
|
|
|
2007
|
|
|
Bank borrowings and overdrafts
|
|
|
|
|
|
|
|
|
|
$
|
51,982
|
|
|
$
|
35,671
|
|
Current portion of long-term debt
|
|
|
5.89%
|
|
|
|
|
|
|
|
50,000
|
|
|
|
116,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current debt
|
|
|
|
|
|
|
|
|
|
|
101,982
|
|
|
|
152,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes 2007
|
|
|
6.38%
|
|
|
|
2017-27
|
|
|
|
500,000
|
|
|
|
500,000
|
|
Senior Notes 2006
|
|
|
6.06%
|
|
|
|
2011-16
|
|
|
|
325,000
|
|
|
|
375,000
|
|
Bank borrowings
|
|
|
3.21%
|
|
|
|
2012
|
|
|
|
141,575
|
|
|
|
169,057
|
|
Japanese Yen loan 2008
|
|
|
2.21%
|
|
|
|
2011
|
|
|
|
149,758
|
|
|
|
|
|
Japanese Yen notes
|
|
|
2.81%
|
|
|
|
2011
|
|
|
|
20,422
|
|
|
|
15,927
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
33
|
|
Deferred realized gains on interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
16,893
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
|
1,153,672
|
|
|
|
1,060,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
$
|
1,255,654
|
|
|
$
|
1,212,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issued by us generally has terms of
30 days or less; there were no outstanding commercial paper
borrowings at December 31, 2008 or 2007.
In November 2008, we entered into a credit agreement denominated
in Japanese Yen in the original principal amount of
¥13.3 billion due on November 21, 2011
(Japanese Yen Loan 2008). We used the
proceeds of this loan to repay our then existing 2.400%
(Japanese Yen) Guaranteed Senior Notes, Series A, which
matured on such date. The Japanese Yen Loan 2008
bears interest at a rate based on the TIBOR (Tokyo InterBank
Offering Rate) plus an applicable margin as determined based on
our credit rating.
In 2005, IFF, including certain subsidiaries, entered into a
revolving credit agreement (the Facility) with
certain banks. The Facility provides for a five-year US
$350 million (Tranche A) and
Euro 400 million (Tranche B)
multi-currency revolving credit facility. Tranche A is
available to IFF for commercial paper backstop and general
corporate purposes; Tranche B is available to both IFF and
the European subsidiaries for general corporate purposes.
Borrowings under the Facility bear interest at an annual rate of
LIBOR (London InterBank Offer Rate) (or in relation to any
Euro-denominated loans, EURIBOR, European InterBank Offer Rate)
plus a margin, currently 20 basis points, linked to our
credit rating. We pay a commitment fee on the aggregate unused
commitments and a utilization fee based on amounts outstanding
under the Facility; such fees are not material. As permitted by
the Facility, in 2007, the termination dates were extended by
one year until November 23, 2012. The Facility contains
various affirmative and negative covenants, including the
requirement for us to maintain, at the end of each fiscal
quarter, a ratio of net debt for borrowed money to adjusted
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) in respect of the previous
12-month
period of not more than 3.25 to 1. We have complied with this
covenant at all times. As the Facility is a multi-year revolving
credit agreement, we classify the portion we expect to have
outstanding longer than 12 months as long-term debt. At
December 31, 2008, approximately $142 million of bank
borrowings on the Tranche B was classified as long-term
debt, and the remaining $38 million was classified as
current portion of long-term debt.
51
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Short-term bank loans primarily in the form of overdrafts, in
addition to the Facility, were outstanding in several countries
and averaged $19 million in 2008, compared with
$26 million in 2007. The highest levels were
$52 million in 2008, $66 million in 2007, and
$31 million in 2006. The 2008 weighted average interest
rate of these bank loans, based on balances outstanding at the
end of each month, was 4.8% and the average rate on balances
outstanding at December 31, 2008 was 6.0%. These rates
compare with 4.6% and 5.1%, respectively, in 2007, and 3.9% and
4.7%, respectively, in 2006.
On September 27, 2007, we issued $500 million of
Senior Unsecured Notes (Senior Notes
2007) in four series under the Note Purchase Agreement
(NPA): (i) $250 million in aggregate
principal amount of 6.25% Series A Senior Notes due
September 27, 2017, (ii) $100 million in
aggregate principal amount of 6.35% Series B Notes due
September 27, 2019, (iii) $50 million in
aggregate principal amount of 6.50% Series C Notes due
September 27, 2022, and (iv) $100 million in
aggregate principal amount of 6.79% Series D Notes due
September 27, 2027. Proceeds of the offering were used
primarily to fund an accelerated repurchase of IFF stock.
In 2006, we issued $375 million of Senior Unsecured Notes
(Senior Notes - 2006) in four series under another
NPA: (i) $50 million in aggregate principal amount of
5.89% Series A Senior Notes due July 12, 2009,
(ii) $100 million in aggregate principal amount of
5.96% Series B Notes due July 12, 2011,
(iii) $100 million in aggregate principal amount of
6.05% Series C Notes due July 12, 2013, and
(iv) $125 million in aggregate principal amount of
6.14% Series D Notes due July 12, 2016. Proceeds of
the offering were used primarily to repay commercial paper
borrowings used to fund our maturing debt.
Maturities on debt outstanding at December 31, 2008 are:
2009, $102 million; 2011, $270 million; 2012,
$141 million; 2013, $100 million; 2014 and thereafter,
$625 million. There is no debt maturing in 2010. The
estimated fair value of our long-term debt at December 31,
2008 and 2007 approximated the recorded value, except that our
Senior Notes 2007 had an estimated fair value of
approximately $450 million at December 31, 2008. The
fair value of our long-term debt was calculated using discounted
cash flows applying interest rates of recent issuances of debt
with similar terms and maturities for companies with comparable
credit risk.
In 2002, we entered into certain interest rate swap agreements
effectively converting the fixed rate on our long-term Japanese
Yen borrowings to a variable short-term rate based on the
Japanese Yen TIBOR rate plus a markup. These swaps were
designated as qualified fair value hedges. Prior to 2006 we
amended the swaps and the counterparty paid us amounts
aggregating $4 million, including accrued interest. Such
gains have been deferred and are being amortized over the
remaining term of the debt. In November 2008, the portion of
these swaps related to the 13.3 billion Yen notes
refinanced expired.
In March 2008, we realized an $18 million gain on the
termination of an interest rate swap, which has been deferred
and is being amortized as a reduction to interest expense over
the remaining term of the related debt. The balance of this
deferred gain was $17 million at December 31, 2008.
52
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Earnings before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. loss before taxes
|
|
$
|
(90,819
|
)
|
|
$
|
(53,159
|
)
|
|
$
|
(31,309
|
)
|
Foreign income before taxes
|
|
|
371,341
|
|
|
|
381,843
|
|
|
|
344,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before taxes
|
|
$
|
280,522
|
|
|
$
|
328,684
|
|
|
$
|
313,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(8,363
|
)
|
|
$
|
9,315
|
|
|
$
|
2,869
|
|
State and local
|
|
|
(94
|
)
|
|
|
(1,417
|
)
|
|
|
4,240
|
|
Foreign
|
|
|
52,090
|
|
|
|
80,001
|
|
|
|
92,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,633
|
|
|
|
87,899
|
|
|
|
99,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,634
|
|
|
|
(13,648
|
)
|
|
|
(10,080
|
)
|
State and local
|
|
|
(1,766
|
)
|
|
|
(1,047
|
)
|
|
|
(747
|
)
|
Foreign
|
|
|
7,393
|
|
|
|
8,352
|
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,261
|
|
|
|
(6,343
|
)
|
|
|
(12,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
50,894
|
|
|
$
|
81,556
|
|
|
$
|
86,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the U.S. Federal statutory income
tax rate to our actual effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Difference in effective tax rate on foreign earnings and
remittances
|
|
|
(16.0
|
)
|
|
|
(9.2
|
)
|
|
|
(8.4
|
)
|
State and local taxes
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
1.1
|
|
Other, net
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
18.1
|
%
|
|
|
24.8
|
%
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rate reflects the benefit from having
significant operations outside the U.S. that are taxed at rates
that are lower than the U.S. federal rate of 35%. The 2008 and
2007 effective tax rates were also favorably impacted by the
reversals of previously established tax accruals of
$26 million and $10 million, respectively; such
accruals were no longer required based on rulings obtained from
applicable
non-U.S. tax
jurisdictions.
53
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the deferred tax assets and liabilities
included on the balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Employee and retiree benefits
|
|
$
|
115,672
|
|
|
$
|
83,500
|
|
Credit and net operating loss carryforwards
|
|
|
180,038
|
|
|
|
181,400
|
|
Property, plant and equipment
|
|
|
2,235
|
|
|
|
8,356
|
|
Other, net
|
|
|
40,742
|
|
|
|
7,566
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
338,687
|
|
|
|
280,822
|
|
Valuation allowance
|
|
|
(178,921
|
)
|
|
|
(171,600
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
159,766
|
|
|
|
109,222
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Trademarks and other
|
|
|
(14,299
|
)
|
|
|
(14,900
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
145,467
|
|
|
$
|
94,322
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets in 2007 of $94 million is less
than the $145 previously reported as $19 million was
reclassed to Prepaid expenses and the remaining $32 million
to Other Assets. See Note 1 to the Consolidated Financial
Statements, Reclassifications and Revisions, for
additional information.
In 2007, as a result of adopting the FASB issued Interpretation
No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, we recognized a
$1 million increase in other liabilities for unrecognized
tax benefits and a corresponding cumulative effect adjustment to
Retained earnings. Also as prescribed by FIN 48, certain
tax related amounts in the Consolidated Balance Sheet are
classified differently than in prior periods. Amounts receivable
from various tax jurisdictions have been reclassified to Other
liabilities.
A reconciliation of the total of unrecognized tax benefits at
the beginning and end of 2007 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
2007
|
|
|
2008
|
|
|
Balance of unrecognized tax benefits at beginning of year
|
|
$
|
71,968
|
|
|
$
|
80,645
|
|
Gross amount of increases in unrecognized tax benefits as a
result of positions taken during a prior year
|
|
|
7,941
|
|
|
|
4,265
|
|
Gross amount of decreases in unrecognized tax benefits as a
result of positions taken during a prior year
|
|
|
(5,756
|
)
|
|
|
(2,200
|
)
|
Gross amount of increases in unrecognized tax benefits as a
result of positions taken during the current year
|
|
|
13,117
|
|
|
|
8,394
|
|
The amounts of decreases in unrecognized benefits relating to
settlements with taxing authorities
|
|
|
(6,549
|
)
|
|
|
(31,877
|
)
|
Reduction in unrecognized tax benefits due to the lapse of
applicable statute of limitation
|
|
|
(76
|
)
|
|
|
(1,611
|
)
|
|
|
|
|
|
|
|
|
|
Balance of unrecognized tax benefits at end of year
|
|
$
|
80,645
|
|
|
$
|
57,616
|
|
|
|
|
|
|
|
|
|
|
The amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate is $57 million.
We have consistently recognized interest and penalties related
to unrecognized tax benefits as a component of income tax
expense. At December 31, 2008 and 2007, we had accrued
$8 million and $9 million, respectively, of interest
and penalties classified as Other liabilities.
54
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net operating loss carryforwards were $172 million and
$169 million at December 31, 2008 and 2007,
respectively. If unused, $2 million will expire between
2009 and 2028. The remainder, totaling $170 million, may be
carried forward indefinitely. Tax credit carryforwards were
$8 million and $12 million at December 31, 2008
and December 31, 2007, respectively. If unused, the credit
carryforwards will expire between 2009 and 2028.
Of the $180 million deferred tax asset for net operating
loss carryforwards and credits at December 31, 2008, we
consider it unlikely that a portion of the tax benefit will be
realized. Accordingly, a $172 million and $6 million
valuation allowance has been established against these deferred
tax assets, respectively.
Tax benefits credited to Shareholders equity totaled less
than $1 million and $7 million for 2008 and 2007,
respectively.
U.S. income taxes and foreign withholding taxes associated
with the repatriation of earnings of foreign subsidiaries were
not provided on a cumulative total of $683 million of
undistributed earnings of foreign subsidiaries. We intend to
reinvest these earnings indefinitely in our foreign
subsidiaries. Any additional U.S. taxes payable on the
remaining foreign earnings, if remitted, would be substantially
offset by credits for foreign taxes already paid.
We have several tax audits in process and have open tax years
with various significant taxing jurisdictions that range
primarily from 2002 to 2007. Based on currently available
information, we do not believe the ultimate outcome of these tax
audits and other tax positions related to open tax years, when
finalized, will have a material adverse effect on our financial
position, results of operations or cash flows.
|
|
NOTE 10.
|
SHAREHOLDERS
EQUITY
|
In July 2007, our Board authorized us to repurchase up to 15% or
$750 million worth of our then outstanding common stock,
whichever is less (the July 2007 Plan). In September
2007, under the July 2007 Plan, we entered into two agreements
to purchase shares of our common stock under a $450 million
accelerated share repurchase (ASR) program. The ASR
concluded in June 2008. Total aggregate shares repurchased under
the ASR program were 9.7 million shares at an average
purchase price of $46.53 per share.
On March 9, 2000, we 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 our common stock or commences a tender
offer that would result in such persons or groups
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 we are involved in a merger or sell more than 50%
of our assets or earnings power, each right entitles its holder
to purchase a certain number of shares for a specified exercise
price. Also, under certain circumstances, our Board has the
option to redeem or exchange one share of common stock for each
right. Finally, in the event a new Board is elected in a
successful proxy contest, (i) the rights may not be
redeemed and no business combination with us 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 declared per share were $0.96, $0.88 and $0.765 in
2008, 2007 and 2006, respectively.
55
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 11.
|
STOCK
COMPENSATION PLANS
|
We have various equity plans under which our officers, senior
management, other key employees and directors may be granted
options to purchase IFF common stock or other forms of
equity-based awards. Beginning in 2004, we granted Restricted
Stock Units (RSUs) as the principal element of
our equity compensation for all eligible U.S.-based employees
and a majority of eligible overseas employees. Vesting of the
RSUs for officers and senior management has been
performance and time based, and for the remainder of eligible
employees, vesting is solely time based; the vesting period is
primarily three years from date of grant. For a small group of
employees, primarily overseas, we continue to grant stock
options.
On January 1, 2006, we adopted FAS 123(R), and thereby
recognized the cost of all employee stock options on a
straight-line attribution basis over their respective vesting
periods, net of estimated forfeitures. Total stock-based
compensation expense included in our Consolidated Statement of
Income for 2008, 2007 and 2006 was $17 million
($11 net of tax), $18 million ($12 net of tax),
$18 million ($12 net of tax), respectively.
Under our 2000 Stock Award and Incentive Plan (2000
SAIP) the issuance of 9 million shares was authorized
by the Board and approximately 2 million shares available
under a previous plan were rolled into the 2000 SAIP making the
total number of available shares approximately 11 million
to satisfy awards. At December 31, 2008,
3,346,043 shares were subject to outstanding awards and
988,188 shares remained available for future awards.
In 2006, our Board approved a Long-Term Incentive Plan
(LTIP) for senior management under our 2000 SAIP for
the years 2006 2008 (Cycle VI). Under
Cycle VI, each participant has a range of awards that would be
paid out 50% in cash and 50% in IFF stock at the end of the
three-year cycle. The portion that would be paid in equity would
not be determined until the end of the LTIP cycle. Because the
number of shares is not fixed at the time of the award we
account for these awards as liability based awards and recognize
compensation expense on a straight-line basis over the
three-year period based on the fair value of our stock at the
end of each year and the expected payout based on the percent of
performance achieved to date. Cycle VI concluded at the end of
2008 and an aggregate 116,247 shares of common stock were
issued in February 2009.
Beginning with the LTIP
2007-2009
cycle and thereafter, the targeted payout is 50% cash and 50%
IFF stock at the end of the three-year cycle and provides for
segmentation in which one-fourth of the award vests during each
twelve-month period, with the final one-fourth segment vesting
over the full three-year period. These awards are earned based
on the achievement of defined EPS targets and our performance
ranking of total shareholder return as a percentile of the
S&P 500. When the award is granted, 50% of the target
dollar value of the award is converted to a number of
notional shares based on the closing price on the
date the grant is approved by the Board. Because the award vests
over the three-year cycle, the graded-vesting attribution method
is used to recognize compensation expense over the cycle.
In 2006, our Board approved the Equity Choice Program (the
Program) for senior management under our 2000 SAIP.
Under the Program, eligible employees can choose from among
three equity alternatives and will be granted such equity awards
up to certain dollar awards depending on the participants
grade level. A participant may choose among (1) Purchase
Restricted Stock (PRS), (2) Stock Settled
Appreciation Rights (SSARs) or
(3) RSUs. The balance of employees who are not
eligible under the Program receive RSUs or, as noted
above, options.
Purchase
Restricted Stock
PRS provides for the participant to purchase restricted shares
of IFF stock at 50% of the fair market value on the grant date
of the award. The shares vest on the third anniversary of the
grant date, are subject to employment and other specified
conditions, and pay dividends if and when paid by us. Holders of
PRS have, in most instances, all of the rights of stockholders,
except that they may not sell, assign, pledge or otherwise
encumber such shares. RSUs
56
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provide no such rights. We issued 102,812 shares of PRS in
2008 for an aggregate purchase price of $2 million and
209,920 shares in 2007 for $5 million.
Stock
Options and SSARs
Stock options granted vest in periods ranging from one to three
years and have a maximum term of ten years. SSARs become
exercisable on the third anniversary of the grant date and have
a maximum term of seven years. We awarded 299,307 SSARs
and no stock options in 2008. In 2007 we awarded stock options
and SSARs of 188,000 and 66,493, respectively.
We use the Binomial lattice-pricing as our valuation model for
estimating the fair value of options granted. In applying the
Binomial model, we utilize historical information to estimate
expected term and forfeitures within the model. The expected
term of an option is based on historical employee exercise
behavior, vesting terms and a contractual life of primarily ten
years for options and seven years for SSARs. The risk-free
interest rate for periods within the expected term of the award
is based on the U.S. Treasury yield curve in effect at the
time of grant. Expected volatility is based on an average of
implied and historical volatility of the price of our common
stock over the calculated expected term. We anticipate paying
cash dividends in the future and therefore use an expected
dividend yield in the valuation model; the cash dividend in
effect at the time of grant was employed in this calculation.
Principal assumptions used in applying the Binomial model in
2008, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
3.2
|
%
|
|
|
4.7
|
%
|
|
|
5.0
|
%
|
Expected volatility
|
|
|
25.7
|
%
|
|
|
21.7
|
%
|
|
|
21.7
|
%
|
Expected dividend yield
|
|
|
2.2
|
%
|
|
|
1.6
|
%
|
|
|
2.1
|
%
|
Expected life, in years
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Termination rate
|
|
|
0.46
|
%
|
|
|
0.40
|
%
|
|
|
0.94
|
%
|
Exercise multiple
|
|
|
1.52
|
|
|
|
1.35
|
|
|
|
1.47
|
|
Stock option and SSAR activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Options/
|
|
|
|
Shares Subject to
|
|
|
Average Exercise
|
|
|
SSARs
|
|
(SHARE AMOUNTS IN THOUSANDS)
|
|
Options/SSARs
|
|
|
Price
|
|
|
Exercisable
|
|
|
Balance at December 31, 2007
|
|
|
2,491
|
|
|
$
|
35.66
|
|
|
|
1,725
|
|
Granted
|
|
|
299
|
|
|
|
40.19
|
|
|
|
|
|
Exercised
|
|
|
(147
|
)
|
|
|
31.35
|
|
|
|
|
|
Cancelled
|
|
|
(221
|
)
|
|
|
35.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
2,422
|
|
|
$
|
35.86
|
|
|
|
1,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average exercise price of our options and
SSARs exercisable at December 31, 2008, 2007 and 2006
were $33.48, $33.21, and $32.75, respectively. The following
tables summarize information concerning currently outstanding
and exercisable options and SSARs:
Stock options and SSARs outstanding at December 31,
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Average
|
|
|
Intrinsic Value
|
|
Price Range
|
|
(in thousands)
|
|
|
(in years)
|
|
|
Exercise Price
|
|
|
(in thousands)
|
|
|
$15-$25
|
|
|
1
|
|
|
|
1.9
|
|
|
$
|
17.94
|
|
|
|
|
|
$26-$30
|
|
|
511
|
|
|
|
3.7
|
|
|
|
29.22
|
|
|
|
|
|
$31-$35
|
|
|
1,080
|
|
|
|
4.5
|
|
|
|
33.67
|
|
|
|
|
|
$36-$40
|
|
|
281
|
|
|
|
6.2
|
|
|
|
37.46
|
|
|
|
|
|
$41-$45
|
|
|
344
|
|
|
|
6.3
|
|
|
|
42.18
|
|
|
|
|
|
$46-$55
|
|
|
205
|
|
|
|
8.4
|
|
|
|
51.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,422
|
|
|
|
|
|
|
$
|
35.86
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and SSARs exercisable as of
December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Average
|
|
|
Intrinsic Value
|
|
Price Range
|
|
(in thousands)
|
|
|
(in years)
|
|
|
Exercise Price
|
|
|
(in thousands)
|
|
|
$15-$25
|
|
|
1
|
|
|
|
1.9
|
|
|
$
|
17.94
|
|
|
|
|
|
$26-$30
|
|
|
511
|
|
|
|
3.7
|
|
|
|
29.22
|
|
|
|
|
|
$31-$35
|
|
|
836
|
|
|
|
3.6
|
|
|
|
33.22
|
|
|
|
|
|
$36-$40
|
|
|
164
|
|
|
|
5.3
|
|
|
|
38.51
|
|
|
|
|
|
$41-$45
|
|
|
60
|
|
|
|
6.2
|
|
|
|
42.12
|
|
|
|
|
|
$46-$55
|
|
|
53
|
|
|
|
8.4
|
|
|
|
51.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625
|
|
|
|
|
|
|
$
|
33.48
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options and
SSARs granted during 2008, 2007 and 2006 were $9.93,
$11.50 and $7.66, respectively. The total intrinsic value of
options exercised during 2008, 2007 and 2006 totaled
$2 million, $23 million, and $35 million,
respectively.
As of December 31, 2008, there was $3.4 million of
total unrecognized compensation cost related to non-vested stock
options and SSAR awards granted; such cost is expected to be
recognized over a weighted average period of 1.8 years. The
total fair value of outstanding vested shares during the years
ended December 31, 2008, 2007 and 2006 was
$14 million, $16 million and $26 million,
respectively.
Restricted
Stock and Units
We may grant restricted shares and RSUs to eligible
employees. Such restricted shares and RSUs are subject to
forfeiture if certain employment conditions are not met.
RSUs generally vest 100% at the end of three years with no
performance criteria; however, RSUs granted to all
officers and senior management in 2005 contained a performance
restriction since achieved and vested at the end of their
three-year term. The fair value of the RSUs is equal to
the market price of our stock at date of grant and is amortized
to expense ratably over the vesting period.
58
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted stock and RSU activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
(SHARE AMOUNT IN THOUSANDS)
|
|
Shares
|
|
|
Value Per Share
|
|
|
Balance at December 31, 2007
|
|
|
1,290
|
|
|
$
|
42.81
|
|
Granted
|
|
|
459
|
|
|
|
34.40
|
|
Vested
|
|
|
(279
|
)
|
|
|
36.23
|
|
Forfeited
|
|
|
(62
|
)
|
|
|
36.61
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
1,408
|
|
|
$
|
33.34
|
|
|
|
|
|
|
|
|
|
|
The total fair value of RSUs which vested during the year
ended December 31, 2008 was $10 million.
As of December 31, 2008, there was $16 million of
total unrecognized compensation cost related to non-vested RSU
awards granted under the equity incentive plans; such cost is
expected to be recognized over a weighted average period of
2.3 years.
Pre-tax compensation expense for the year ended
December 31, 2006 included a cumulative effect gain of
$1 million from the adoption of FAS 123(R), which was
recorded in operating expenses.
|
|
NOTE 12.
|
SEGMENT
INFORMATION
|
We are organized into two business segments, Flavors and
Fragrances; these segments align with the internal structure
used to manage these businesses. Flavor compounds are sold to
the food and beverage industries for use in consumer products
such as prepared foods, beverages, dairy, food and confectionery
products. The Fragrance business unit, is comprised of three
fragrance categories: functional fragrances, including fragrance
compounds for personal care (e.g., soaps) and household products
(e.g., detergents and cleaning agents); fine fragrance and
beauty care, including perfumes, colognes and toiletries; and
ingredients, consisting of synthetic ingredients that can be
combined with other materials to create unique functional and
fine fragrance compounds. Major fragrance customers include the
cosmetics industry, including perfume and toiletries
manufacturers, and the household products industry, including
manufacturers of soaps, detergents, fabric care, household
cleaners and air fresheners.
We evaluate the performance of business units based on operating
profit before interest expense, other income (expense), net and
income taxes. The Global expense caption represents corporate
and headquarters-related expenses which include legal, finance,
human resources and other administrative expenses that are not
allocated to individual business units. In addition, in the year
ended December 31, 2008 Global expenses include
approximately $2 million of implementation costs related to
the global shared service project, $3 million for employee
separation costs and $10 million of restructuring costs
offset by a $3 million benefit from an insurance recovery
related to a prior year product contamination matter. In the
year ended December 31, 2007, Global expenses include a
pension curtailment charge of $6 million. Unallocated
assets are principally cash, short-term investments and other
corporate and headquarters-related assets.
Our reportable segment information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Flavors
|
|
$
|
1,092,544
|
|
|
$
|
1,005,544
|
|
|
$
|
894,775
|
|
Fragrances
|
|
|
1,296,828
|
|
|
|
1,271,094
|
|
|
|
1,200,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,389,372
|
|
|
$
|
2,276,638
|
|
|
$
|
2,095,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Flavors
|
|
$
|
197,838
|
|
|
$
|
187,275
|
|
|
$
|
153,099
|
|
Fragrances
|
|
|
198,681
|
|
|
|
209,812
|
|
|
|
212,240
|
|
Global Expenses
|
|
|
(44,786
|
)
|
|
|
(26,976
|
)
|
|
|
(18,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
351,733
|
|
|
$
|
370,111
|
|
|
$
|
346,854
|
|
Interest expense
|
|
|
(74,008
|
)
|
|
|
(41,535
|
)
|
|
|
(25,549
|
)
|
Miscellaneous other income (expense) (1)
|
|
|
2,797
|
|
|
|
108
|
|
|
|
(8,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
280,522
|
|
|
$
|
328,684
|
|
|
$
|
313,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Miscellaneous other income (expense) does not agree to the
amounts on the Consolidated Statement of Income as gains on
assets are included in the operating income of the business
segments. |
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
Segment assets
|
|
|
|
|
|
|
|
|
Flavors
|
|
$
|
1,131,783
|
|
|
$
|
1,005,423
|
|
Fragrances
|
|
|
1,390,979
|
|
|
|
1,301,554
|
|
Global Assets
|
|
|
227,151
|
|
|
|
419,337
|
|
|
|
|
|
|
|
|
|
|
Consolidated Segment assets
|
|
$
|
2,749,913
|
|
|
$
|
2,726,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
Depreciation and Amortization
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Flavors
|
|
$
|
31,858
|
|
|
$
|
24,794
|
|
|
$
|
19,175
|
|
|
$
|
29,816
|
|
|
$
|
33,468
|
|
|
$
|
35,785
|
|
Fragrances
|
|
|
50,523
|
|
|
|
36,335
|
|
|
|
34,689
|
|
|
|
44,203
|
|
|
|
47,668
|
|
|
|
52,652
|
|
Unallocated assets
|
|
|
3,014
|
|
|
|
4,485
|
|
|
|
4,418
|
|
|
|
1,967
|
|
|
|
1,652
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
85,395
|
|
|
$
|
65,614
|
|
|
$
|
58,282
|
|
|
$
|
75,986
|
|
|
$
|
82,788
|
|
|
$
|
89,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
(DOLLARS IN MILLIONS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
EAME(1)
|
|
$
|
898
|
|
|
$
|
850
|
|
|
$
|
758
|
|
North America
|
|
|
601
|
|
|
|
630
|
|
|
|
612
|
|
Greater Asia
|
|
|
556
|
|
|
|
491
|
|
|
|
439
|
|
Latin America
|
|
|
334
|
|
|
|
306
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,389
|
|
|
$
|
2,277
|
|
|
$
|
2,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Europe, Africa and Middle East |
Net sales to external customers are attributed to individual
regions based upon the destination of product delivery. Total
long-lived assets consist of net property, plant and equipment
and net intangible assets and amounted to $1,224 million,
$1,242 million and $1,241 million at December 31,
2008, 2007 and 2006, respectively. Of this total
$847 million, $850 million, and $867 million were
located in the United States. Sales to one customer
60
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accounted for 11% of total sales in 2008 and 2007. No single
customer accounted for more than 10% of our sales in 2006.
|
|
NOTE 13.
|
POSTRETIREMENT
BENEFITS
|
We, including some of our 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; such funding is limited,
where applicable, to amounts deductible for income tax purposes.
Certain other retirement benefits are provided by balance sheet
accruals.
We sponsor a qualified defined contribution plan covering
substantially all U.S. employees. Under this plan, we match
100% of participants contributions up to 4% of
compensation and 75% of participants contributions from
over 4% to 8%. Employees that are still eligible to accrue
benefits under the defined benefit plan are limited to a 50%
match up to 6% of the participants compensation.
In addition to pension benefits, certain health care and life
insurance benefits are provided to qualifying United States
employees upon retirement from IFF. Such coverage is provided
through insurance plans with premiums based on benefits paid. We
do not generally provide health care or life insurance coverage
for retired employees of foreign subsidiaries; such benefits are
provided in most foreign countries by government-sponsored
plans, and the cost of these programs is not significant to us.
The plan assets and benefit obligations of our defined benefit
pension plans are measured at December 31 of each year.
In 2006, we adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. The initial impact of the
standard due to unrecognized prior service costs or credits and
net actuarial gains or losses as well as subsequent changes in
the funded status is recognized as a component of accumulated
other comprehensive income AOCI in Shareholders equity.
61
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned
|
|
$
|
4,569
|
|
|
$
|
10,312
|
|
|
$
|
9,941
|
|
|
$
|
10,266
|
|
|
$
|
11,633
|
|
|
$
|
12,739
|
|
Interest cost on projected benefit obligation
|
|
|
23,883
|
|
|
|
23,953
|
|
|
|
21,716
|
|
|
|
36,270
|
|
|
|
35,595
|
|
|
|
29,391
|
|
Expected return on plan assets
|
|
|
(25,101
|
)
|
|
|
(24,266
|
)
|
|
|
(21,919
|
)
|
|
|
(51,256
|
)
|
|
|
(52,604
|
)
|
|
|
(39,767
|
)
|
Net amortization and deferrals
|
|
|
4,618
|
|
|
|
6,590
|
|
|
|
7,436
|
|
|
|
3,020
|
|
|
|
6,071
|
|
|
|
8,753
|
|
Settlement and curtailment
|
|
|
|
|
|
|
5,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
7,969
|
|
|
|
22,532
|
|
|
|
17,174
|
|
|
|
(1,700
|
)
|
|
|
695
|
|
|
|
11,116
|
|
Defined contribution and other retirement plans
|
|
|
6,220
|
|
|
|
4,923
|
|
|
|
3,527
|
|
|
|
4,367
|
|
|
|
4,086
|
|
|
|
3,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension expense
|
|
$
|
14,189
|
|
|
$
|
27,455
|
|
|
$
|
20,701
|
|
|
$
|
2,667
|
|
|
$
|
4,781
|
|
|
$
|
14,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in
AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain
|
|
$
|
116,274
|
|
|
|
|
|
|
|
|
|
|
$
|
29,264
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
(4,164
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,361
|
)
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
Initial net asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in AOCI (before tax effects)
|
|
$
|
112,109
|
|
|
|
|
|
|
|
|
|
|
$
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts expected to be recognized in net periodic cost in
2009 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
(DOLLARS IN THOUSANDS)
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
Benefits
|
|
|
Loss recognition
|
|
$
|
5,868
|
|
|
$
|
2,431
|
|
|
$
|
2,459
|
|
Prior service cost recognition
|
|
|
471
|
|
|
|
509
|
|
|
|
(4,719
|
)
|
Net initial obligation/(asset) recognition
|
|
|
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Actuarial
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
Assumption Used to Determine Expense
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.78
|
%
|
|
|
4.95
|
%
|
|
|
4.57
|
%
|
Expected return on plan assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
7.02
|
%
|
|
|
7.06
|
%
|
|
|
6.99
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
2.98
|
%
|
|
|
2.54
|
%
|
|
|
2.46
|
%
|
62
INTERNATIONAL
FLAVORS & FRAGRANCES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the postretirement benefit obligation and plan
assets, as applicable, are detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
Postretirement Benefits
|
|
(DOLLARS IN THOUSANDS)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Benefit obligation at beginning of year
|
|
$
|
394,954
|
|
|
$
|
378,670
|
|
|
$
|
661,372
|
|
|
$
|
680,950
|
|
|
$
|
118,487
|
|
|
$
|
104,495
|
|
Service cost for benefits earned
|
|
|
4,569
|
|
|
|
10,312
|
|
|
|
10,266
|
|
|
|
11,633
|
|
|
|
2,694
|
|
|
|
2,628
|
|
Interest cost on projected benefit obligation
|
|
|
23,883
|
|
|
|
23,953
|
|
|
|
36,270
|
|
|
|
35,595
|
|
|
|
7,079
|
|
|
|
5,869
|
|
Actuarial (gain) loss
|
|
|
1,963
|
|
|
|
16,525
|
|
|
|
(77,117
|
)
|
|
|
(72,582
|
)
|
|
|
3,915
|
|
|
|
(5,980
|
)
|
Plan amendments
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,582
|
)
|
|
|
|
|
Adjustments for expense/tax contained in service cost
|
|
|
|
|
|
|
|
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
|
|
2,040
|
|
|
|
1,093
|
|
|
|
1,087
|
|
Benefits paid
|
|
|
(20,920
|
)
|
|
|
(19,903
|
)
|
|
|
(27,564
|
)
|
|
|
(27,925
|
)
|
|
|
(6,851
|
)
|
|
|
(5,402
|
)
|
Medicare Rx subsidy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
240
|
|
Curtailments
|
|
|
|
|
|
|
(14,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
(104,735
|
)
|
|
|
31,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
404,902
|
|
|
$
|
394,954
|
|
|
$
|
499,004
|
|
|
$
|
661,372
|
|
|
$
|
106,166
|
|
|
$
|
102,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
349,231
|
|
|
$
|
336,057
|
|
|
$
|
756,027
|
|
|
$
|
694,295
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(89,210
|
)
|
|
|
29,397
|
|
|
|
(56,858
|
)
|
|
|
39,120
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
9,050
|
|
|
|
3,680
|
|
|
|
22,279
|
|
|
|
18,680
|
|
|
|
|
|
|
|
|
|
Participants contributions
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
|
|
2,040
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(20,920
|
)
|
|
&nb |