WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2005
Commission file number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(Exact name of registrant as specified in its charter)
New York
- -------------------------------------- 13-1432060
(State or other jurisdiction of ----------------------------------
incorporation or organization) (IRS Employer
Identification No.)
521 West 57th Street, New York, N.Y. 10019-2960
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [|X|] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [|X|] No[ ]
Number of shares outstanding as of April 29, 2005: 94,189,825
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)
ASSETS 3/31/05 12/31/04
- --------------------------------------------------------------------------------------- ------------ -------------
Current Assets
Cash and cash equivalents $ 22,813 $ 32,596
Short-term investments 362 399
Trade receviables 391,013 353,442
Allowance for doubtful accounts (16,948) (17,663)
Inventories: Raw materials 189,317 197,782
Work in process 15,961 12,759
Finished goods 236,520 246,663
------------- -------------
Total Inventories 441,798 457,204
Deferred income taxes 72,093 79,267
Other current assets 62,120 56,125
------------- -------------
Total Current Assets 973,251 961,370
------------- -------------
Property, Plant and Equipment, at cost 1,023,693 1,031,478
Accumulated depreciation (531,972) (530,144)
------------- -------------
491,721 501,334
------------- -------------
Goodwill 647,566 647,566
Intangibles Assets, net 138,342 142,110
Other Assets 122,465 110,914
------------ -------------
Total Assets $ 2,373,345 $ 2,363,294
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY 3/31/05 12/31/04
- ---------------------------------------------------------------------------------------- ------------- -------------
Current Liabilities:
Bank borrowings, overdrafts and current portion of long-term debt $ 23,777 $ 15,957
Commercial paper 44,977 -
Accounts payable 109,449 103,978
Accrued payrolls and bonuses 7,856 53,452
Dividends payable 16,518 16,571
Income taxes 27,562 30,339
Restructuring and other charges 25,215 38,312
Other current liabilities 157,305 140,913
------------- -------------
Total Current Liabilities 412,659 399,522
------------- -------------
Other Liabilities:
Long-term debt 660,862 668,969
Deferred gains 69,676 70,428
Retirement liabilities 225,914 226,695
Other Liabilities 101,726 87,193
------------- -------------
Total Other Liabilities 1,058,178 1,053,285
------------- -------------
Commitments and Contingencies (Note 10)
Shareholder's Equity:
Common stock 12 1/2 cents par value; authorized 500,000,000 shares;
issued 115,761,840 shares 14,470 14,470
Capital in excess of par value 76,928 79,498
Restricted stock (736) (870)
Retained earnings 1,663,411 1,627,386
Accumulated other comprehensive income:
Cumulative translation adjustment (18,636) 8,227
Accumulated losses on derivatives qualifying as hedges (net of tax) (6,536) (5,694)
Minimum pension liability adjustment (net of tax) (110,705) (110,705)
------------- -------------
1,618,196 1,612,312
Treasury stock, at cost - 21,336,816 shares in 2005 and 21,088,993 shares in 2004 (715,688) (701,825)
------------- -------------
Total Shareholder's Equity 902,508 910,487
------------- -------------
Total Liabilities and Shareholder's Equity $ 2,373,345 $ 2,363,294
============= =============
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
3 Months Ended 3/31
----------------------------
2005 2004
------------- -------------
Net Sales $ 523,052 $ 535,015
------------- -------------
Cost of goods sold 308,397 306,786
Research and development expenses 44,753 44,648
Selling and administrative expenses 84,744 89,726
Amortization 3,768 3,699
Interest expense 5,576 6,457
Other (income) expense, net (556) 1,425
------------- -------------
446,682 452,741
------------- -------------
Income before taxes on income 76,370 82,274
Taxes on income 23,827 25,916
------------- -------------
Net income 52,543 56,358
Other comprehensive income:
Foreign currency translation adjustments (26,863) (11,424)
Accumulated losses on derivatives qualifying as hedges (net of tax) (842) (6,416)
------------- -------------
Comprehensive income $ 24,838 $ 38,518
============= =============
Net Income per share - basic $0.56 $0.60
Net Income per share - diluted $0.55 $0.59
Average number of shares outstanding - basic 94,325 94,033
Average number of shares outstanding - diluted 96,025 95,126
Dividends declared per share $0.175 $0.160
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
3 Months Ended March 31,
2005 2004
---------------- --------------
Cash flows from operating activities:
Net income $ 52,543 $ 56,358
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 22,889 22,984
Deferred income taxes 11,695 5,387
Gain on disposal of assets (753) (753)
Changes in assets and liabilities:
Current receivables (48,257) (50,260)
Inventories 5,284 (64)
Current payables (29,451) (6,819)
Changes in other assets, net (21,554) (7,307)
Changes in other liabilities, net (6,406) 1,749
------------- ------------
Net cash (used in) provided by operations (14,010) 21,275
------------- ------------
Cash flows from investing activities:
Net change in short-term investments 35 -
Additions to property, plant and equipment (15,687) (12,244)
Proceeds from disposal of assets 166 542
------------- ------------
Net cash used in investing activities (15,486) (11,702)
------------- ------------
Cash flows from financing activities:
Cash dividends paid to shareholders (16,571) (14,996)
Net change in bank borrowings and overdrafts 18,084 7,559
Net change in commercial paper outstanding 44,977 (16,001)
Proceeds from long-term debt 2,291 -
Repayments of long-term debt (11,654) (4,471)
Proceeds from issuance of stock under stock option and
employee stock purchase plans 13,552 28,981
Purchase of treasury stock (29,986) (10,781)
------------- ------------
Net cash provided by (used in) financing activities 20,693 (9,709)
------------- ------------
Effect of exchange rate changes on cash and cash equivalents (980) (149)
------------- ------------
Net change in cash and cash equivalents (9,783) (285)
Cash and cash equivalents at beginning of year 32,596 12,081
------------- ------------
Cash and cash equivalents at end of period $ 22,813 $ 11,796
============= ============
Interest paid $ 674 $ 1,524
Income taxes paid $ 9,484 $ 12,599
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes and management's discussion and analysis of results of operations
and financial condition included in the Company's 2004 Annual Report on Form
10-K. These interim statements are unaudited. In the opinion of the Company's
management, all adjustments necessary for a fair presentation of the results for
the interim periods have been made.
Note 1. New Accounting Pronouncements:
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment
("FAS 123 (R)"), was issued in December 2004. The standard is effective for the
first annual reporting period beginning after June 15, 2005. FAS 123 (R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees. The Statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. The Company has three alternatives available for
implementation and is evaluating which alternative it will choose as well as the
impact of adopting this standard under each alternative.
Note 2. Stock Plans:
The Company applies the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for its stock plans. No compensation
expense for stock options is reflected in net earnings, as all options granted
under such plans had an exercise price not less than the market value of the
common stock on the date of grant. Net income, as reported, includes pre-tax
compensation expense related to restricted stock and restricted stock units
("RSU's") of $2.5 million in the quarter ended March 31, 2005 and $0.9 million
for equity-based awards other than RSU's in the first quarter ended March 31,
2004.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 for the periods presented:
Three Months Ended March 31,
----------------------------
(Dollars in thousands except per share amounts) 2005 2004
- -------------------------------------------------------- ----------- ----------
Net income, as reported $ 52,543 $ 56,358
Deduct: Total stock-based employee compensation expense
determined under fair value method for all stock option
awards, net of related tax effects 1,884 4,577
---------- ----------
Pro-forma net income $ 50,659 $ 51,781
========== ==========
Net income per share:
Basic - as reported $0.56 $0.60
Basic - pro-forma $0.54 $0.55
Diluted - as reported $0.55 $0.59
Diluted - pro-forma $0.53 $0.54
These pro-forma amounts may not be representative of future results because the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
The Company granted RSU's in March 2005 as an element of its equity compensation
plans for all eligible U.S. - based employees and a majority of eligible
overseas employees. Vesting of the RSU's for the Company's senior management is
both performance and time based, and for the remainder of the eligible
employees, vesting is time based; the vesting period is generally three years
from date of grant. For a small group of primarily overseas employees, the
Company continues to issue stock options.
Note 3. Net Income Per Share:
Net income per share is based on the weighted average number of shares
outstanding. A reconciliation of the shares used in the computation of basic and
diluted net income is as follows:
Three Months Ended March 31,
----------------------------
(Shares in thousands) 2005 2004
- ---------------------------------------- -------- ----------
Basic 94,325 94,033
Assumed conversion under stock plans 1,700 1,093
-------- ----------
Diluted 96,025 95,126
======== ==========
Stock options to purchase 552,862 and 902,750 shares were outstanding for the
first quarter of 2005 and 2004, respectively, but were not included in the
computation of diluted net income per share for the respective periods because
the options' exercise prices were greater than the average market price of the
common shares in the respective periods.
Note 4. Segment Information:
The Company manages its operations by major geographical region. Flavors and
fragrances have similar economic and operational characteristics including
research and development, the nature of the creative and production processes,
the type of customers, and the methods by which products are distributed.
Accounting policies used for segment reporting are identical to those described
in Note 1 of the Notes to the Consolidated Financial Statements included in the
Company's 2004 Annual Report on Form 10-K.
The Company evaluates the performance of its geographic regions based on segment
profit which is income before taxes on income, excluding interest expense, other
income and expense and the effects of restructuring and other charges and
accounting changes. The Company is divided into five geographic regions for
management purposes: North America, Europe, India, Latin America and Asia
Pacific. The global expenses caption represents corporate and
headquarters-related expenses which include legal, finance, human resource and
other administrative expenses that are not allocable to an individual geographic
region. Transfers between geographic areas are accounted for at prices that
approximate arm's-length market prices.
The Company's reportable segment information follows:
2005 (Dollars in thousands) North Latin Asia Global Elimina- Consolid-
America Europe India America Pacific Expenses tions ated
- ------------------------------- --------- ---------- ---------- ---------- --------- --------- ----------- -----------
Sales to unaffiliated customers $ 155,096 $ 211,796 $ 16,176 $ 57,962 $ 82,022 $ - $ 523,052
Transfers between areas 21,303 46,883 1 318 9,933 (78,438) -
---------------------------------------------------------------------------------------------------
Total sales $ 176,399 $ 258,679 $ 16,177 $ 58,280 $ 91,955 $ (78,438) $ 523,052
===================================================================================================
Operating profit $ 14,629 $ 55,374 $ 4,079 $ 5,564 $ 14,265 $ (12,033) $ (488) $ 81,390
======================================================================================
Interest expense (5,576)
Other income (expense), net 556
-------------
Income before taxes on income $ 76,370
=============
2004 (Dollars in thousands) North Latin Asia Global Elimina- Consolid-
America Europe India America Pacific Expenses tions ated
- ------------------------------- --------- ---------- ---------- ---------- --------- --------- ----------- -----------
Sales to unaffiliated customers $ 163,047 $ 225,436 $ 13,791 $ 53,737 $ 79,004 $ - $ 535,015
Transfers between areas 20,887 47,604 3 287 5,641 (74,422) -
---------------------------------------------------------------------------------------------------
Total sales $ 183,934 $ 273,040 $ 13,794 $ 54,024 $ 84,645 $ (74,422) $ 535,015
===================================================================================================
Operating profit $ 19,481 $ 63,951 $ 3,247 $ 5,756 $ 12,958 $ (16,297) $ 1,060 $ 90,156
======================================================================================
Interest expense (6,457)
Other income (expense), net (1,425)
-------------
Income before taxes on income $ 82,274
=============
Note 5. Restructuring and Other Charges:
As described in the Company's 2004 Annual Report on Form 10-K, the Company
announced a significant reorganization, including management changes,
consolidation of production facilities and related actions.
Movements in the liabilities related to the restructuring charges, included in
restructuring and other charges or other liabilities as appropriate, were (in
millions):
Asset-
Employee- Related
Related and Other Total
------------ ------------- ------------
Balance December 31, 2004 $ 28.2 $ 14.9 $ 43.1
Cash and other costs (10.4) (2.7) (13.1)
------------ ------------ ------------
Balance March 31, 2005 $ 17.8 $ 12.2 $ 30.0
============ ============ =============
The balance of the employee-related liabilities are expected to be utilized by
2006 as obligations are satisfied; the asset-related charges are expected to be
utilized in 2006 on final decommissioning and disposal of the affected
equipment.
Note 6. Comprehensive Income:
Changes in the accumulated other comprehensive income component of shareholders'
equity were as follows:
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
losses on Minumum
derivatives Pension
Translation qualifying as Obligation,
2005 (Dollars in thousands) adjustments hedges, net of tax net of tax Total
- ------------------------------- ----------------------------------------------------------------------------------------
Balance December 31, 2004 $ 8,227 $ (5,694) $ (110,705) $ (108,172)
Change (26,863) (842) - (27,705)
----------------------------------------------------------------------------------------
Balance March 31, 2005 $ (18,636) $ (6,536) $ (110,705) $ (135,877)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
losses on Minumum
derivatives Pension
Translation qualifying as Obligation,
2004 (Dollars in thousands) adjustments hedges, net of tax net of tax Total
- ------------------------------- ----------------------------------------------------------------------------------------
Balance December 31, 2003 $ (45,188) $ (3,678) $ (82,815) $ (131,681)
Change (11,424) (6,416) - (17,840)
----------------------------------------------------------------------------------------
Balance March 31, 2004 $ (56,612) $ (10,094) $ (82,815) $ (149,521)
- ------------------------------------------------------------------------------------------------------------------------
Note 7. Borrowings:
Debt consists of the following:
(Dollars in Thousands) Rate Maturities March 31, 2005 December 31, 2004
- ------------------------------------------------------- ------------- ------------ ---------------------- ----------------------
Commercial paper (U.S.) $ 44,977 $ -
Bank borrowings and overdrafts 23,391 3,651
Current portion of long-term debt 386 12,306
---------------------- ----------------------
Total current debt 68,754 15,957
---------------------- ----------------------
U.S. dollars 6.45% 2006 499,004 498,938
Japanese Yen notes 2.45% 2008-11 141,325 146,126
Other 2006 55 102
---------------------- ----------------------
640,384 645,166
Deferred realized gain on interest rate swaps 19,963 24,104
FAS 133 adjustment 515 (301)
---------------------- ----------------------
Total long-term debt 660,862 668,969
---------------------- ----------------------
Total debt $ 729,616 $ 684,926
====================== ======================
At March 31, 2005, commercial paper maturities did not extend beyond April 12,
2005 and the weighted average interest rate on total borrowings was 3.2%
compared to 3.1% at December 31, 2004.
The Company, upon maturity, repaid the Yen 1.2 billion (approximately $11.7
million) notes in February 2005.
Note 8. Intangible Assets, net:
The following tables reflect the carrying values for Intangible assets and
Accumulated amortization at March 31, 2005 and December 31, 2004.
March 31, 2005 March 31, 2005
(Dollars in thousands) Gross Carrying Value Accumulated Amortization
- ----------------------------------- --------------------- ------------------------
Other indefinite-lived intangibles $ 19,200 $ 1,184
Trademarks and other 179,452 59,126
--------- --------
Total $ 198,652 $ 60,310
========= ========
December 31, 2004 December 31, 2004
(Dollars in thousands) Gross Carrying Value Accumulated Amortization
- ----------------------------------- -------------------- ------------------------
Other indefinite-lived intangibles $ 19,200 $ 1,184
Trademarks and other 179,452 55,358
--------- --------
Total $ 198,652 $ 56,542
========= ========
Based on current balances, amortization expense is estimated to be $3.8 million
per quarter for 2005, $3.7 million per quarter for 2006 through the third
quarter of 2007, $2.4 million in the fourth quarter of 2007 and $1.7 million per
quarter in 2008 and 2009.
Goodwill by operating segment as of March 31, 2005 and December 31, 2004 is as
follows:
(Dollars in thousands)
- ----------------------------
North America $ 211,265
Europe 252,462
India Region 28,502
Latin America 47,859
Asia Pacific 107,478
----------------
Total $ 647,566
================
There were no changes to Goodwill since December 31, 2004.
Note 9. Retirement Benefits:
As described in Note 14 of the Notes to the Consolidated Financial Statements
included in the Company's 2004 Annual Report on Form 10-K, the Company and most
of its subsidiaries have pension and/or other retirement benefit plans covering
substantially all employees.
For the quarters ended March 31, 2005 and 2004, pension expense included the
following components:
U.S. Plans Non-U.S. Plans
------------------------------- ------------------------------
(Dollars in thousands) 2005 2004 2005 2004
- -------------------------------------------------------- -------------- -------------- ------------- --------------
Service cost for benefits earned $ 2,390 $ 2,391 $ 2,662 $ 2,336
Interest cost on projected benefit obligation 5,200 5,070 7,431 6,683
Expected return on plan assets (5,243) (5,203) (8,419) (7,208)
Net amortization and deferrals 1,191 591 2,190 1,726
-------------- -------------- ------------- -----------
Defined benefit plans 3,538 2,849 3,864 3,537
Defined contribution and other retirement plans 790 688 817 746
-------------- -------------- ------------- -----------
Total pension expense $ 4,328 $ 3,537 $ 4,681 $ 4,283
============== ============== ============= ===========
The Company expects to contribute $15.0 million to its U.S. pension plans in
2005. In the quarter ended March 31, 2005, no contributions were made to the
Company's qualified plan and $0.7 million contributions for benefit payments
were made to a non-qualified plan.
The Company expects to contribute $36.6 million to its non-U.S. pension plans in
2005. In the quarter ended March 31, 2005, $18.7 million of contributions were
made to these plans. The majority of these contributions are reported in Other
Assets on the Consolidated Balance Sheet.
For the quarters ended March 31, 2005 and 2004, expense recognized for
postretirement benefits other than pensions included the following components:
(Dollars in thousands) 2005 2004
- --------------------------------- ----------- -----------
Service cost for benefits earned $ 622 $ 645
Interest on benefit obligation 1,226 1,304
Net amortization and deferrals (107) (52)
----------- -----------
Total postretirement benefit expense $ 1,741 $ 1,897
=========== ===========
The Company expects to contribute $3.5 million to its postretirement benefit
plans in 2005. In the quarter ended March 31, 2005, $1.0 million of
contributions were made.
Note 10. Commitments and Contingencies:
The Company is party to a number of lawsuits and claims related primarily to
flavoring supplied by the Company to manufacturers of butter flavor popcorn. The
Company assesses the merits of each claim and the related potential financial
impact. The Company recorded its expected liability with respect to these claims
in Other Liabilities and expected recoveries from its insurance carrier group in
Other Assets; amounts recorded are not material. The Company believes that
realization of the insurance receivable is probable due to the terms of the
insurance policies, the financial strength of the insurance carrier group and
the payment experience to date of the carrier group as it relates to these
claims. Although the outcome of any litigation cannot be assured, the Company
believes the ultimate resolution of these claims will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
Note 11. Reclassifications:
Certain reclassifications have been made to the prior year's financial
statements to conform to 2005 classifications.
Item 2. Management's Discussion and Analysis of Results of Operations and
- ------- -----------------------------------------------------------------
Financial Condition
-------------------
Operations
- ----------
First quarter 2005 sales totaled $523 million, declining 2% in comparison to the
prior year quarter. Reported sales for the 2005 quarter benefited from the
strengthening of various currencies in relation to the U.S. dollar; had exchange
rates remained constant, sales for the quarter would have decreased 4% in
comparison to the prior year quarter. Fragrance sales increased 4% while flavor
sales decreased 9%; on a local currency basis, fragrance sales grew 1% while
flavor sales declined 11%. Flavor sales in the 2005 quarter were impacted by the
disposition, in the second half of 2004, of the Company's European fruit
preparations business. On an as-adjusted basis, excluding $24.6 million in sales
attributable to the European fruit business from the 2004 first quarter results,
2005 flavor sales would have increased 1% in dollars and declined 1% in local
currency. On the same as-adjusted basis, consolidated sales would have increased
2% in reported dollars and been flat in local currency. Flavor sales, most
notably in North America and Europe, were also unfavorably impacted by lower
selling prices for naturals, mainly vanilla.
Sales performance by region for the 2005 quarter compared to the prior year
quarter follows:
- North America flavor and fragrance sales declined 7% and 3%, respectively;
in total, regional sales declined 5%. Aroma chemical sales increased 8%,
while fine and functional fragrance sales declined 5% and 7%, respectively.
New fragrance wins for the quarter were $1.9 million reducing the impact of
erosion and volume in exiting products. Flavor sales had a difficult
comparative with the first quarter of 2004 when sales grew 18%. New flavor
wins of $2.0 million partially offset the effects of product erosion and
decline due to price and volume impacts.
- European fragrance sales increased 8% while flavor sales declined 22%; in
total, regional sales declined 5%. Reported sales benefited from the
strength of the Euro and Pound Sterling; local currency sales declined 10%.
Local currency fragrance sales increased 3%; fine fragrance sales increased
17%, driven mainly by new wins of $5.7 million and volume increases of $3.0
million, offset by respective decreases of 6% and 4% in functional
fragrances and aroma chemicals. Local currency flavor sales declined 26%,
mainly as a result of the disposition of the Company's European fruit
preparations business. On an as-adjusted basis, excluding sales
attributable to the European fruit business from the 2004 results, 2005
flavor sales would have increased 4% in dollars and been flat in local
currency.
- Local currency sales in Asia Pacific increased 2%, resulting in a 4%
increase in reported dollar sales. In total $2.5 million, almost 3%, of the
increased sales performance was driven by new flavor or fragrance wins.
Fragrance sales increased 3% in dollars and 2% in local currency. Local
currency fragrance growth was led by a 4% increase in fine fragrances and a
12% increase in aroma chemicals; functional fragrance local currency sales
declined 3%. Local currency flavor sales increased 2%, resulting in a 5%
increase in reported dollars. For the region, the Philippines, Vietnam and
Indonesia were strongest, with respective local currency flavor sales
increases of 9%, 32% and 27%. This strong growth was partially offset by
weakness in Japan, South Korea and Australia which declined 5%, 22% and
9%, respectively.
- Latin American sales increased 5% with fragrance and flavor sales
increasing 5% and 6%, respectively. For the region, sales growth was
strongest in Argentina, Brazil and Mexico which grew 14%, 7% and 6%,
respectively. Fragrance sales were strongest in Argentina, Brazil and
Central America, with respective increases of 16%, 7% and 18%. Fragrance
sales growth was led by a 12% increase in fine fragrance sales and a 4%
increase in functional fragrances; aroma chemical sales declined 7%. Flavor
sales were led by 36%, 11% and 8% increases in Mexico, Argentina and
Brazil, respectively. New product introductions in all categories were $6.5
million exceeding the impacts of product erosion and volume.
- India sales increased 13% in local currency and 14% in reported dollars.
Local currency fragrance sales increased 10% resulting in a 12% increase in
dollars. Flavor sales increased 17% in both local currency and dollars. In
both flavors and fragrances, the sales performance reflected the benefit of
new product introductions.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first quarter 2005 and 2004 are detailed below.
First Three Months
-------------------------
2005 2004
----------- -----------
Costs of Goods Sold 59.0% 57.3%
Research and Development Expenses 8.6% 8.3%
Selling and Adminstrative Expenses 16.2% 16.8%
Cost of goods sold, as a percentage of net sales increased in the quarter and
was mainly attributable to increased raw material costs and customer resistance
to price increases, as well as declining selling prices for naturals, most
notably vanilla. Cost of goods sold was also impacted by lower expense
absorption attributable to the facility closure in Dijon and the cost of
transfer of related production to other manufacturing locations; production at
the Dijon facility ceased in March.
Research and development expenses, as a percentage of sales, were in line with
planned spending. These expenses are expected to approximate 9.0% of sales on a
full year basis. Selling, General and Administrative ("SG&A") expenses, as a
percentage of sales, decreased to 16.2% from 16.8%. SG&A expenses include $2.5
million of RSU expense; however, this added expense was offset mainly by lower
accruals under the Company's various incentive plans than those recorded in the
prior year quarter based on the first quarter's sales and operating performance.
Interest expense declined 14% from the prior year quarter as a result of lower
debt levels in the 2005 quarter compared to the prior year quarter. The weighted
average interest rate on total borrowings during the first quarter 2005 was 3.2%
compared to 3.0% in the 2004 first quarter.
The effective tax rate for the first quarter of 2005 was 31.2% compared to 31.5%
for the comparable 2004 quarter. This tax rate does not contemplate the effect,
if any, that may arise as a result of repatriation from overseas subsidiaries as
envisioned under the American Jobs Creation Act of 2004; the Company expects to
determine the amounts and sources, if any, of foreign earnings to be repatriated
in the second half of 2005.
Restructuring and Other Charges
- -------------------------------
As described in the Company's 2004 Annual Report on Form 10-K, the Company
announced a significant reorganization, including management changes,
consolidation of production facilities and related actions.
Movements in the liabilities related to the restructuring charges, included in
restructuring and other charges or other liabilities as appropriate, were (in
millions):
Asset-
Employee- Related
Related and Other Total
------------ -------------- -------------
Balance December 31, 2004 $ 28.2 $ 14.9 $ 43.1
Cash and other costs (10.4) (2.7) (13.1)
------------ ------------- -------------
Balance March 31, 2005 $ 17.8 $ 12.2 $ 30.0
============ ============ =============
The balance of the employee-related liabilities are expected to be utilized by
2006 as obligations are satisfied; the asset-related charges are expected to be
utilized in 2006 on final decommissioning and disposal of the affected
equipment.
Financial Condition
- -------------------
Cash, cash equivalents and short-term investments totaled $23.2 million at March
31, 2005. Working capital at March 31, 2005 was $560.6 million compared to
$561.8 million at December 31, 2004. Gross additions to property, plant and
equipment during the first quarter were $15.7 million. The Company expects
additions to property, plant and equipment to approximate $90.0 to $95.0 million
for the full year 2005 as it completes work on its new chemical facility in
China and its new creative center in India.
At March 31, 2005, the Company's outstanding commercial paper had an average
interest rate of 2.7%. Commercial paper maturities did not extend beyond April
12, 2005. Bank loans and the current portion of long-term debt is $23.8 million
at March 31, 2005.
In January 2005, the Company paid a quarterly cash dividend of $.175 per share
to shareholders; an increase from the prior year quarter of $.16 per share.
Under the share repurchase program of $100.0 million (approximately 2.8 million
shares at the current market price) authorized in July 2004, the Company
repurchased approximately 0.7 million shares in the first quarter of 2005 at a
cost of $30.0 million. Repurchases will be made from time to time on the open
market or through private transactions as market and business conditions
warrant. The repurchased shares will be available for use in connection with the
Company's employee benefit plans and for other general corporate purposes. At
March 31, 2005, the Company had $45.6 million remaining under this repurchase
plan.
The Company anticipates that its financing requirements will be funded from
internal sources and credit facilities currently in place. Cash flows from
operations are expected to be sufficient to fund the Company's anticipated
normal capital spending, dividends and other expected requirements for at least
the next twelve to eighteen months. Debt includes $499.3 million of 6.45% Notes
which mature in May 2006. The Company is developing plans for both short-term
financing and the potential issuance of additional notes or other long-term
instruments when the Notes mature.
Non-GAAP Financial Measures
- ---------------------------
The discussion of the Company's 2005 first quarter results exclude the effects
of exchange rate fluctuations and certain non-core businesses disposed of in
2004. Such information, contained in an 8-K filed on April 27, 2005, is
supplemental to information presented in accordance with generally accepted
accounting principles (GAAP) and is not intended to represent a presentation in
accordance with GAAP. In discussing its historical and expected future results
and financial condition, the Company believes 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, the relative impact that exchange rate
fluctuations and the non-core businesses disposed of in 2004 may have on the
Company's operating results and financial condition. In addition, management
reviews the non-GAAP financial performance measure to evaluate performance on a
comparative period-to-period basis in terms of absolute performance and trend
performance related to the Company's core business.
Cautionary Statement Under The Private Securities Litigation Reform Act of 1995
- -------------------------------------------------------------------------------
Statements in this Quarterly Report, which are not historical facts or
information, are "forward-looking statements" within the meaning of The Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's reasonable current assumptions and expectations. Such
forward-looking statements which may be identified by such words as "expect,"
"anticipate," "outlook," "guidance," "may," and similar forward-looking
terminology, involve significant risks, uncertainties and other factors, which
may cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking statements, and
there can be no assurance that actual results will not differ materially from
management's expectations. Such factors include, among others, the following:
general economic and business conditions in the Company's markets, including
economic, population health and political uncertainties; weather, geopolitical
and region specific uncertainties; interest rates; the price, quality and
availability of raw materials; the Company's ability to implement its business
strategy, including the achievement of anticipated cost savings, profitability,
growth and market share targets; the impact of currency fluctuation or
devaluation in the Company's principal foreign markets and the success of the
Company's hedging and risk management strategies; the impact of possible pension
funding obligations and increased pension expense on the Company's cash flow and
results of operations; and the effect of legal and regulatory proceedings, as
well as restrictions imposed on the Company, its operations or its
representatives by foreign governments; and the fact that the outcome of
litigation is highly uncertain and unpredictable and there can be no assurance
that the triers of fact or law, at either the trial level or at any appellate
level, will accept the factual assertions, factual defenses or legal positions
of the Company or its factual or expert witnesses in any such litigation or
other proceedings. The Company intends its forward-looking statements to speak
only as of the time of such statements and does not undertake to update or
revise them as more information becomes available or to reflect changes in
expectations, assumptions or results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
There are no material changes in market risk from the information provided in
the Company's 2004 Annual Report on Form 10-K.
Item 4. Controls and Procedures
- -------------------------------
The Company's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Company's management, have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective.
The Company's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Company's internal control
over financial reporting during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
------------------
The Company is subject to various claims and legal actions in the ordinary
course of its business.
Since September 2001 the Company has been involved in actions where plaintiffs
allege respiratory injuries in the workplace due to the use by their employers
of an International Flavors & Fragrances Inc. ("IFF") and/or Bush Boake Allen
Inc. ("BBA") flavor. See the Company's 2004 Annual Report on Form 10-K under
"Legal Proceedings". In March 2005, one additional action was filed against the
Company and 11 other companies by 1 former employee of one of the defendants in
the Circuit Court of Cook County, Illinois alleging respiratory injuries
suffered in that defendant's workplace due to its use of butter flavors supplied
by certain of the defendants. As regards the cases pending in the Circuit Court
of Jasper County, Missouri, on March 25, 2005, a jury verdict in favor of one of
the plaintiffs and his spouse was entered, awarding $15 million in compensatory
damages. IFF believes that the verdict is not supported by the evidence or the
law and intends to appeal this decision.
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 provide to all its customers for the safe handling and use of their
flavors. It is the responsibility of the Company's customers to ensure that
these instructions, which include the use of appropriate engineering controls,
such as adequate ventilation, proper handling procedures and respiratory
protection for workers, are followed in the workplace.
At each balance sheet date the Company reviews the status of each of these
claims, as well as its insurance coverage for such claims with due consideration
of potentially applicable deductibles, retentions and reservations of rights
under its insurance policies, and the advice of its outside legal counsel with
respect to all of these matters. The ultimate outcome of any litigation cannot
be predicted with certainty; management believes that adequate provision has
been made with respect to such pending claims. In addition, 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
Company's financial condition, results of operation or liquidity. There can be
no assurance, however, that future events will not require the Company to
increase the amount it has accrued for any matter or accrue for a matter that
had not been previously accrued because it was not considered probable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------------------------------------------------------------
(c) Issuer Purchases of Equity Securities
-------------------------------------
Total Number of Shares Maximum Dollar Value of Shares
Total Number of Purchased as Part of that may yet be purchased under
Shares Purchased Average Price Publicly Announced Program the Program
(1) Paid per Share (1)
------------------- ------------------ ------------------------------ ---------------------------------
January 1 - 31, 2005 280,000 $41.46 280,000 $ 63,933,134
February 1 - 28, 2005 210,000 $42.07 210,000 $ 55,098,412
March 1 - 31, 2005 235,000 $40.60 235,000 $ 45,556,513
(1) An aggregate of 725,000 shares of common stock were repurchased during the
first quarter of 2005 under a repurchase program announced in July 2004. Under
the program, the Board of Directors approved the repurchase by the Company of up
to $100.0 million of its common stock.
Item 6. Exhibits
--------
31.1 Certification of Richard A. Goldstein pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Douglas J. Wetmore pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of Richard A. Goldstein and Douglas J. Wetmore
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: May 5, 2005 By: /s/ DOUGLAS J. WETMORE
-----------------------------
Douglas J. Wetmore, Senior Vice President
and Chief Financial Officer
Dated: May 5, 2005 By: /s/ DENNIS M. MEANY
-----------------------------
Dennis M. Meany, Senior Vice President,
General Counsel and Secretary
EXHIBIT INDEX
Number Description
----- -----------
31.1 Certification of Richard A. Goldstein pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Douglas J. Wetmore pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Richard A. Goldstein and Douglas J. Wetmore
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
CERTIFICATION
-------------
I, Richard A. Goldstein, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of International
Flavors & Fragrances Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: May 5, 2005
By: /s/ Richard A. Goldstein
-------------------------------
Name: Richard A. Goldstein
Title: Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
-------------
I, Douglas J. Wetmore, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of International Flavors
& Fragrances Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: May 5, 2005
By: /s/ Douglas J. Wetmore
-------------------------------
Name: Douglas J. Wetmore
Title: Senior Vice President and
Chief Financial Officer
Exhibit 32
CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of International Flavors &
Fragrances Inc. (the "Company") for the quarterly period ended March 31, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Richard A. Goldstein, as Chief Executive Officer of the Company, and
Douglas J. Wetmore, as Chief Financial Officer, each hereby certifies, pursuant
to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Richard A. Goldstein
- ----------------------------------
Name: Richard A. Goldstein
Title: Chairman of the Board and
Chief Executive Officer
Dated: May 5, 2005
By: /s/ Douglas J. Wetmore
- -------------------------------
Name: Douglas J. Wetmore
Title: Senior Vice President and
Chief Financial Officer
Dated: May 5, 2005