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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
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(Exact Name of Registrant as specified in its charter)
NEW YORK 13-1432060
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
521 WEST 57TH STREET, NEW YORK, N.Y. 10019
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 765-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------- -----------------------
Common Stock, par value 12 1/2 (cent) per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The Registrant denies that any of its common stock is held by an
"affiliate" of the Registrant within the meaning of Rule 405 of the Securities
and Exchange Commission. See "Stock Ownership" in proxy statement incorporated
by reference herein. The aggregate market value of all of the outstanding voting
stock of Registrant as of March 20, 1998 was $5,083,757,536.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 20, 1998.
107,878,144 SHARES OF COMMON STOCK, PAR VALUE 12 1/2 (CENT) PER SHARE
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III [Items 10, 11, 12 and 13] is hereby
incorporated by reference from the Registrant's definitive proxy statement for
the 1998 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
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PART I
ITEM 1. BUSINESS.
International Flavors & Fragrances Inc., incorporated in New York in 1909,
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, soaps and detergents, and flavor products to
manufacturers of prepared foods, beverages, dairy foods, pharmaceuticals and
confectionery products.
The present world-wide scope of the Company's business is in part the
result of the combination in December 1958 of the business theretofore conducted
primarily in the United States by the Company under the name van
Ameringen-Haebler, Inc. ("VAH") with the business conducted primarily in Europe
by N. V. Polak & Schwarz's Essencefabrieken, a Dutch corporation ("P & S"). The
P & S enterprise, founded in Holland in 1889, was also engaged in the
manufacture and sale of flavor and fragrance products, with operations in a
number of countries where VAH was not an important factor.
The major manufacturing facilities of the Company are located in the United
States, Holland, France, Germany, Great Britain, Ireland, Spain, Switzerland,
Argentina, Brazil, Mexico, Australia, China, Hong Kong, Indonesia and Japan.
Manufacturing facilities are also located in seven other countries. The Company
maintains its own sales and distribution facilities in 33 countries and is
represented by sales agents in additional countries. The Company's principal
executive offices are located at 521 West 57th Street, New York, New York 10019
(Tel. No. 212-765-5500). Except as the context otherwise indicates, the term
"the Company" as used herein refers to the Registrant and its subsidiaries.
MARKETS
Fragrance products are used by customers in the manufacture of such
consumer products as soaps, detergents, cosmetic creams, lotions and powders,
lipsticks, after-shave lotions, deodorants, hair preparations and air
fresheners, as well as in other consumer products designed solely to appeal to
the sense of smell, such as perfumes and colognes. The cosmetics industry,
including perfumes and toiletries, is one of the Company's two largest customer
groups. Most of the major United States companies in this industry are customers
of the Company, and five of the largest United States cosmetics companies are
among its principal customers. The household products industry, including soaps
and detergents, is the other important customer group. Four of the largest
United States household product manufacturers are major customers of the
Company. In the five years ended December 31, 1997, sales of fragrance products
accounted for approximately 59%, 59%, 57%, 57% and 58%, respectively, of the
Company's total sales.
Flavor products are sold principally to the food and beverage industries
for use in such consumer products as soft drinks, candies, baked goods,
desserts, prepared foods, dietary foods, dairy products, drink powders,
pharmaceuticals and alcoholic beverages. Two of the Company's largest customers
for flavor products are major producers of prepared foods and beverages in the
United States. In the five years ended December 31, 1997, sales of flavor
products accounted for approximately 41%, 41%, 43%, 43% and 42%, respectively,
of the Company's total sales.
PRODUCTS
The Company's principal fragrance and flavor products consist of compounds
of large numbers of ingredients blended by it under formulas created by its
perfumers and flavorists. Most of these compounds contribute the total fragrance
or flavor to the consumer products in which they are used. This fragrance or
flavor characteristic is often a major factor in the public selection and
acceptance of the consumer end product. A smaller amount of compounds is sold to
manufacturers who further blend them to achieve the finished fragrance or flavor
in their consumer products. Thousands of compounds are produced by the Company,
and new compounds are constantly being created in order to meet the many and
changing characteristics of its customers' end products. Most of the fragrance
compounds and many of the flavor compounds are created and produced for the
exclusive use of particular customers. The Company's flavor products also
include extractives, concentrated juices and concentrates derived from various
fruits, vegetables, nuts, herbs and spices as well as microbiologically derived
ingredients. The Company's products are sold in solid and liquid forms and in
amounts ranging from a few pounds to many tons, depending upon the nature of the
product.
The ingredients used by the Company in its compounds are both synthetic and
natural. Most of the synthetic ingredients are manufactured by the Company.
While the major part of the Company's production of synthetic
1
ingredients is used by it in its compounds, a substantial portion is sold to
others. The natural ingredients are derived from flowers, fruits and other
botanical products as well as from animal products. They contain varying numbers
of organic chemicals, which are responsible for the fragrance or flavor of the
natural product. The natural products are purchased for the larger part in
processed or semi-processed form. Some are used in compounds in the state in
which they are purchased and others after further processing. Natural products,
together with various chemicals, are also used as raw materials for the
manufacture of synthetic ingredients by chemical processes.
MARKET DEVELOPMENTS
The demand for consumer products utilizing flavors and fragrances has been
stimulated and broadened by changing social habits resulting from such factors
as increases in personal income, employment of women, teen-age population,
leisure time, health concerns and urbanization and by the continued growth in
world population. In the fragrance field, these developments have expanded the
market for colognes, toilet waters, deodorants, soaps with finer fragrance
quality, men's toiletries and other products beyond traditional luxury items
such as perfumes. In the flavor field, similar market characteristics have
stimulated the demand for such products as convenience foods, soft drinks and
low-cholesterol and low-fat food products that must conform to expected tastes.
New and improved methods of packaging, application and dispensing have been
developed for many consumer products which utilize some of the Company's flavor
or fragrance products. These developments have called for the creation by the
Company of many new compounds and ingredients compatible with the newly
introduced materials and methods of application used in consumer end products.
PRODUCT DEVELOPMENT AND RESEARCH
The development of new fragrance and flavor compounds is a complex artistic
and technical process calling upon the combined knowledge and talents of the
Company's creative perfumers and flavorists and its application chemists and
research chemists. Through long experience the perfumers and flavorists develop
and refine their skill for creating fragrances or flavors best suited to the
market requirements of the customers' products.
An important contribution to the creation of new fragrance and flavor
products is the development in the Company's research laboratories of new
ingredients having fragrance or flavor value. The principal functions of the
fragrance research program are to isolate and synthesize fragrance components
found in natural substances and through chemical synthesis to develop new
materials and better techniques for utilization of such materials. The principal
functions of the flavor research program are to isolate and produce natural
flavor ingredients utilizing improved processes.
The work of the perfumers and flavorists is conducted in 30 fragrance and
flavor laboratories in 24 countries. The Company maintains a research center at
Union Beach, New Jersey. The Company spent $94,411,000 in 1997, $93,545,000 in
1996 and $90,846,000 in 1995 on its research and development activities, all of
which were financed by the Company. These expenditures are expected to increase
in 1998 to approximately $100,000,000. Of the amount expended in 1997 on such
activities, 58% was for fragrances and the balance was for flavors. The Company
employed 811 persons in 1997 and 778 persons in 1996 in such activities.
The business of the Company is not materially dependent upon any patents,
trademarks or licenses.
DISTRIBUTION
Most of the Company's sales are made through its own sales force, operating
from eight sales offices in the United States and 43 sales offices in 32 foreign
countries. Sales in other countries are made through sales agencies. For the
year ended December 31, 1997, 30% of the Company's sales were to customers in
North America, 33% in Western Europe and 37% in the rest of the world. See Note
10 of the Notes to the Consolidated Financial Statements for other information
with respect to the Company's international operations.
The Company estimates that during 1997 its 30 largest customers accounted
for about 53% of its sales, its four largest customers and their affiliates
accounted for about 11%, 6%, 5% and 4%, respectively, of its sales, and no other
single customer accounted for more than 3% of sales.
GOVERNMENTAL REGULATION
Manufacture and sale of the Company's products are subject to regulation in
the United States by the Food and Drug Administration, the Agriculture
Department, the Alcohol, Tobacco and Firearms Bureau of the Treasury
2
Department, the Environmental Protection Agency, the Occupational Safety and
Health Administration and state authorities. The foreign subsidiaries are
subject to similar regulation in a number of countries. Compliance with existing
governmental requirements regulating the discharge of materials into the
environment has not materially affected the Company's operations, earnings or
competitive position. The Company expects to spend in 1998 approximately
$4,800,000 in capital projects and $11,800,000 in operating expenses and
governmental charges for the purpose of complying with such requirements. The
Company expects that in 1999 capital expenditures, operating expenses and
governmental charges for such purpose will not be materially different.
RAW MATERIAL PURCHASES
Some 5,000 different raw materials are purchased from many sources all over
the world. The principal natural raw material purchases consist of essential
oils, extracts and concentrates derived from fruits, vegetables, flowers, woods
and other botanicals, animal products and raw fruits. The principal synthetic
raw material purchases consist of organic chemicals. The Company believes that
alternate sources of materials are available to enable it to maintain its
competitive position in the event of any interruption in the supply of raw
materials from present sources.
COMPETITION
The Company has more than 50 competitors in the United States and world
markets. While no single factor is responsible, the Company's competitive
position is based principally on the creative skills of its perfumers
and flavorists, the technological advances resulting from its research and
development and the customer service and support provided by its marketing and
application groups. Although statistics are not available, the Company believes
that it is one of the four largest companies producing and marketing on an
international basis a wide range of fragrance and flavor products of the types
manufactured by it for sale to manufacturers of consumer products. In particular
countries and localities, the Company faces the competition of numerous
companies specializing in certain product lines, among which are some larger
than the Company and some more important in a particular product line or lines.
Most of the Company's customers do not buy all their fragrance or flavor
products from the same supplier, and some customers make their own fragrance or
flavor compounds with ingredients supplied by the Company or others.
EMPLOYEE RELATIONS
The Company at December 31, 1997 employed approximately 4,640 persons, of
whom about 1,480 were employed in the United States, 510 in Holland, 270 in
England, 260 in France and 2,120 elsewhere. The Company has never experienced a
work stoppage or strike and it considers that its employee relations are
satisfactory.
3
ITEM 2. PROPERTIES.
The principal manufacturing and research properties of the Company are as
follows:
LOCATION OPERATION
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UNITED STATES
New York, NY ................................ Fragrance laboratories.
Augusta, GA ................................. Production of fragrance chemical ingredients.
Hazlet, NJ .................................. Production of fragrance compounds; fragrance laboratories.
South Brunswick, NJ ......................... Production of flavor ingredients and compounds and
fruit preparations; flavor laboratories.
Union Beach, NJ ............................. Research and development center.
Salem, OR ................................... Production of fruit and vegetable concentrates, fruit and
vegetable preparations and flavor ingredients.
Menomonee Falls, WI ......................... Production of flavor compounds, flavor ingredients,
bacterial cultures and fruit preparations.
HOLLAND
Hilversum ................................... Flavor and fragrance laboratories.
Tilburg ..................................... Production of flavor and fragrance compounds and
flavor ingredients.
FRANCE
Bois-Colombes ............................... Flavor and fragrance laboratories.
Dijon ....................................... Production of fragrance compounds, flavor ingredients and
compounds and fruit preparations.
GERMANY
Emmerich/Rhein .............................. Production of fruit preparations and flavor ingredients
and compounds; flavor laboratories.
GREAT BRITAIN
Haverhill ................................... Production of flavor compounds and ingredients, fruit
preparations and fragrance chemical ingredients; flavor
laboratories.
IRELAND
Drogheda .................................... Production of fragrance compounds.
SPAIN
Benicarlo ................................... Production of fragrance chemical ingredients.
SWITZERLAND
Reinach-Aargau .............................. Production of fruit preparations and flavor ingredients
and compounds; flavor laboratories.
ARGENTINA
Garin ....................................... Production of fruit preparations and flavor ingredients and
compounds; production of fragrance compounds; flavor laboratories.
BRAZIL
Rio de Janeiro .............................. Production of flavor ingredients and compounds, fruit
preparations and fragrance compounds; flavor laboratories.
Sao Paulo ................................... Fragrance laboratory.
Taubate ..................................... Production of flavor compounds.
MEXICO
Tlalnepantla ................................ Production of flavor compounds, fruit preparations and fragrance
compounds; flavor and fragrance laboratories.
AUSTRALIA
Dee Why ..................................... Production of flavor compounds; flavor and fragrance laboratories.
4
LOCATION OPERATION
-------- ---------
CHINA
Guangzhou ................................... Production of flavor and fragrance compounds; flavor
laboratories.
Xin'anjiang ................................. Production of fragrance chemical ingredients.
HONG KONG ..................................... Production of fragrance compounds; fragrance laboratories.
INDONESIA
Jakarta ..................................... Production of flavor and fragrance compounds and ingredients;
flavor and fragrance laboratories.
JAPAN
Tokyo ....................................... Flavor and fragrance laboratories.
Gotemba ..................................... Production of flavor and fragrance compounds.
The principal executive offices of the Company and its New York laboratory
facilities are located at 521 West 57th Street, New York City. Such offices and
all of the above facilities of the Company are owned in fee, except those in
Wisconsin, China, Hong Kong, and the Indonesian landsite, which are leased. The
Company believes that the remaining facilities meet its present needs, but that
additional facilities will be required to meet anticipated growth in sales.
ITEM 3. LEGAL PROCEEDINGS.
Various Federal and State authorities and private parties claim that the
Company is a potentially responsible party as a generator of waste materials for
alleged pollution at a total of 10 waste sites operated by third parties located
principally in New Jersey and Pennsylvania. The governmental authorities seek to
recover costs incurred and to be incurred to clean up the sites. The private
suits generally seek damages for alleged injuries and, in one case now settled,
a waste site's owners/operators sought contribution and indemnification for
their share of remedial action costs incurred and to be incurred at the site.
The waste site claims and suits usually involve million dollar amounts, and
most of them are asserted against many potentially responsible parties. Remedial
activities typically consist of several phases carried out over a period of
years. Most site remedies begin with investigation and feasibility studies,
followed by physical removal, destruction, treatment or containment of
contaminated soil and debris, and sometimes by groundwater monitoring and
treatment. To date, the Company's financial responsibility for some sites has
been settled through agreements granting the Company, in exchange for one or
more cash payments made or to be made, either complete release of liability or,
for certain sites, release from further liability for early and/or later
remediation phases, subject to certain "re-opener" clauses for later-discovered
conditions. Settlements in respect of some sites involve, in part, payment by
the Company, and other parties, of a percentage of the site's future remediation
costs over a period of years.
The Company believes that the amounts it has paid and probably will have to
pay for clean-up costs and damages at all sites are and will not be material to
the Company's financial condition, results of operations or liquidity, because
of the involvement of other large potentially responsible parties at most sites,
because payment will be made over an extended time period and because, pursuant
to an agreement reached in July 1994 with three of the Company's liability
insurers, defense costs and indemnity amounts payable by the Company in respect
of the sites will be shared by the insurers up to an agreed amount.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF REGISTRANT:
YEAR FIRST
BECAME
NAME OFFICE AND OTHER BUSINESS EXPERIENCE(2) AGE OFFICER
---- -------------------------------------- --- ----------
Eugene P. Grisanti(1) ....... President; Chairman of the Board 68 1964
David G. Bluestein .......... Senior Vice-President since November 1997; 52 1997
Director since January 1998; Duracell
International, Inc., a battery manufacturer,
President North America, 1994-1997, President
International Development Markets prior thereto
Brian D. Chadbourne ......... Senior Vice-President and Director since 45 1996
January 1997; Vice-President
September-December 1996; President and Chief
Executive Officer, Keebler Company, a baked goods
manufacturer, a subsidiary of United Biscuits plc
1993-1996; Managing Director,
United Biscuits plc prior thereto
Stephen A. Block ............ Vice-President, Law and Secretary 53 1993
Eric Campbell ............... Vice-President since 1996; Director, Human 51 1996
Resources, Avon Products, Inc., direct marketer
of cosmetic products, from 1991 to 1995
Robert G. Corbett ........... Vice-President since May 1997; employed by 43 1997
the Company in other positions prior thereto
Ronald S. Fenn .............. Vice-President 60 1986
Judith C. Giordan ........... Vice-President since November 1997; Research 44 1997
and development executive with The Pepsi-Cola
Co., affiliate of PepsiCo, Inc., soft drink and
snack food manufacturer, from 1996 to 1997, and Henkel
Corporation, consumer product and specialty
chemical manufacturer, from 1989 to 1996
Thomas H. Hoppel(3) ......... Vice-President and Chief Financial Officer; Director 67 1976
Carlos A. Lobbosco .......... Vice-President 58 1993
Lewis G. Lynch, Jr. ......... Vice-President 62 1975
Stuart R. Maconochie ........ Vice-President 58 1989
Rudolf Merz ................. Vice-President 58 1982
Timothy Schaffner ........... Vice-President since May 1997; employed by the 48 1997
Company in other positions prior thereto
Douglas J. Wetmore(3) ....... Controller 40 1992
James P. Huether ............ Treasurer since 1996; employed by the Company 41 1996
in other positions prior thereto
- -----------
(1) Chairman of Executive Committee of the Board of Directors.
(2) Employed by the Company or an affiliated company for the last five years,
except as otherwise indicated.
(3) On March 31, 1998, Mr. Hoppel is retiring as an officer and director and
Mr. Wetmore is resigning as Controller. Mr. Wetmore will assume the office
of Vice-President and Chief Financial Officer of the Company on April 1,
1998.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
(a) Market Information.
The Company's common stock is traded principally on the New York Stock
Exchange. The high and low stock prices for each quarter during the last two
years were:
1997 1996
-------------- --------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First .......................... $47.13 $42.50 $51.88 $47.13
Second ......................... 52.50 40.00 50.75 44.63
Third .......................... 53.44 48.50 47.88 41.00
Fourth ......................... 51.88 45.06 47.13 40.75
(b) Approximate Number of Equity Security Holders.
(A) (B)
NUMBER OF RECORD HOLDERS AS
TITLE OF CLASS OF DECEMBER 31, 1997
-------------- --------------------
Common stock, par value 12 1/2 (cent) per share 4,991
(c) Dividends.
Cash dividends declared per share for each quarter since January 1996 were
as follows:
1998 1997 1996
---- ---- ----
First ................... $.37 $.36 $.34
Second .................. .36 .34
Third ................... .36 .34
Fourth .................. .37 .36
ITEM 6. SELECTED FINANCIAL DATA.
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales ............................ $1,426,791 $1,436,053 $1,439,487 $1,315,237 $1,188,645
========== ========== ========== ========== ==========
Net income* .......................... $ 218,229 $ 189,894 $ 248,817 $ 226,022 $ 202,471
========== ========== ========== ========== ==========
Earnings per share:
Net income per share--basic .......... $2.00 $1.71 $2.24 $2.03 $1.78
========== ========== ========== ========== ==========
Net income per share--diluted ........ $1.99 $1.70 $2.22 $2.02 $1.77
========== ========== ========== ========== ==========
Total assets ......................... $1,422,261 $1,506,913 $1,534,269 $1,399,725 $1,225,257
========== ========== ========== ========== ==========
Long-term debt ....................... $ 5,114 $ 8,289 $ 11,616 $ 14,342 --
========== ========== ========== ========== ==========
Cash dividends declared per share .... $1.45 $1.38 $1.27 $1.12 $1.02
========== ========== ========== ========== ==========
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* Reflects nonrecurring charge ($31,315 after tax) in 1996 resulting from the
Registrant's plan to expand and streamline its worldwide aroma chemical
production facilities.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Operations
In 1997, worldwide net sales were $1,426,791,000 compared to $1,436,053,000
and $1,439,487,000 in 1996 and 1995, respectively. Sales of fragrance products
were $821,592,000, $813,918,000 and $819,263,000 in 1997, 1996 and 1995,
respectively. Fragrance sales increased 1% in 1997 in comparison to 1996,
following a decrease of 1% in 1996 in comparison to 1995. Flavor sales were
$605,199,000, $622,135,000 and $620,224,000 in 1997, 1996 and 1995,
respectively. Flavor sales decreased 3% in 1997 in comparison to 1996, while
1996 sales were essentially flat in comparison to 1995.
Sales outside the United States represented approximately 70% of total
sales in 1997, 1996 and 1995. The following table shows net sales on a
geographic basis:
PERCENT PERCENT
SALES BY DESTINATION (DOLLARS IN THOUSANDS) 1997 CHANGE 1996 CHANGE 1995
- ------------------------------------------- ---- ------ ---- ------ ----
North America .............................. $ 423,876 -1% $ 427,219 -2% $ 437,227
Western Europe ............................. 472,787 -6% 501,166 -4% 520,382
Other Areas ................................ 530,128 4% 507,668 5% 481,878
---------- ---------- ----------
Total net sales .......................... $1,426,791 -1% $1,436,053 0% $1,439,487
========== ========== ==========
During 1997, the strongest sales growth, for both flavors and fragrances,
was achieved in the European area, particularly Eastern Europe and the Middle
East. In 1997, reported sales were unfavorably impacted by the stronger U.S.
dollar; had the dollar exchange rates remained the same during 1997 and 1996,
sales would have increased approximately 4% worldwide. Sales were also affected,
mainly in the fourth quarter, by the economic slowdowns in the Far East and
Brazil. While the economic conditions in the Far East are expected to continue
for at least the first half of 1998, sales in the countries most affected by the
currency devaluations and economic slowdown represent only about 7% of the
Company's consolidated sales. Such circumstances are not expected to materially
impact the Company's results of operations, liquidity or financial condition.
In 1996, fragrance sales were affected by slow customer reordering patterns
in Europe and the United States, as well as a temporary slowdown in new product
introductions. Flavor sales were affected by the downsizing and restructuring of
some of the Company's major U.S. food customers, as well as the unusually cool
and wet summer in Europe and the United States which resulted in lower flavor
sales to the beverage, ice cream and yogurt industries. Both fragrance and
flavor sales were strongest in the Far East and Latin America. Sales were
unfavorably impacted by translation of European currencies into a stronger U.S.
dollar; if the dollar exchange rate remained the same during 1996 and 1995,
sales would have increased approximately 1% worldwide.
Although the Company's reported sales and earnings are affected by the
weakening or strengthening of the U.S. dollar, this has no long-term effect on
the underlying strength of our business.
The percentage relationship of cost of goods sold and other operating
expenses to sales were as follows:
1997 1996 1995
---- ---- ----
Cost of goods sold .......... 54.2% 54.2% 51.9%
Research and development
expenses ................... 6.6% 6.5% 6.3%
Selling and administrative
expenses ................... 15.9% 15.6% 15.1%
Cost of goods sold includes the cost of materials purchased and internal
manufacturing expenses. In both 1997 and 1996, margins on sales and cost of
goods sold were unfavorably affected by highly competitive conditions for aroma
chemicals, which caused the Company to reduce selling prices for certain
chemicals in order to maintain its markets. In addition, as noted below, the
Company incurred certain duplicate manufacturing costs in 1997 and 1996 in
connection with the phasing out of its Union Beach production facility.
Research and development expenses have consistently been between 6% and 7%
of sales. The expenses are for the development of new and improved products,
technical product support, compliance with governmental
8
regulations and help in maintaining our relationships with our customers who are
often dependent on technical advances. These activities contribute in a
significant way to the Company's business.
Selling and administrative expenses are necessary to support the Company's
sales and operating levels and have remained relatively constant as a percentage
of net sales.
Operating profit, as shown in Note 10 of the Notes to the Consolidated
Financial Statements, was $338,339,000 in 1997, $296,456,000 in 1996 and
$390,702,000 in 1995. In 1997 and 1996, in comparison to 1995, operating profit
was unfavorably impacted by the lower gross margins on sales. In 1996, operating
profit included a nonrecurring charge of $49,707,000.
Interest expense amounted to $2,420,000, $2,740,000 and $3,160,000 in 1997,
1996 and 1995, respectively. This expense relates primarily to bank loans taken
out by some of the Company's subsidiaries and may be significantly affected by
very high interest rates in countries where local bank borrowing is used as a
hedge against devaluations. Interest expense decreased in 1997 compared to 1996,
and 1996 compared to 1995, due to lower average interest rates on borrowings,
partially offset by somewhat higher average bank loans outstanding. More details
on bank loans and long-term debt are contained in Note 6 of the Notes to the
Consolidated Financial Statements.
Other income was $10,442,000 in 1997, compared to $11,405,000 in 1996 and
$12,871,000 in 1995. The decrease in other income in 1997 compared to 1996, and
1996 compared to 1995, was primarily due to lower interest income due to lower
average interest rates, partially offset by lower exchange losses.
Net income in 1997 totaled $218,229,000, a decrease of $2,980,000 or 1%
from the prior year. Net income in 1996 totaled $221,209,000. This amount
excludes the effect of the one-time charge to second quarter 1996 earnings for
streamlining the Company's aroma chemical operations; including this charge, net
income was $189,894,000, a decrease of $58,923,000 from the prior year. Net
income in 1995 was $248,817,000.
During 1996, the Company undertook a program to expand and streamline its
worldwide aroma chemical production facilities. This program included the
phase-out of production at the Company's Union Beach, New Jersey plant at the
end of 1997, and the closure of smaller capacity facilities in Mexico City,
Mexico and Rio de Janeiro, Brazil during 1996. A substantial portion of the
volume produced at Union Beach was transferred to the Company's state-of-the-art
facility in Augusta, Georgia. In addition, production capacity in Benicarlo,
Spain was expanded.
These steps improved the Company's production capabilities, achieved cost
efficiencies in the United States as well as internationally, and maintained and
extended the Company's leadership position in the aroma chemical market. These
steps will also assure that the Company will have sufficient aroma chemical
supply to meet its own and its customers' needs for the foreseeable future.
The closures affected approximately 220 employees. At December 31, 1997,
essentially all of the employees affected by the closures had left the Company.
The aroma chemical streamlining resulted in a nonrecurring pretax charge to
second quarter 1996 earnings of $49,707,000 ($31,315,000 after tax or $.29 per
share). Of the charge, approximately $33,000,000 represented asset writedowns
and other non-cash related costs. Cost savings from this program have been
specifically identified and are expected to generate annual efficiencies and
savings in manufacturing expense of approximately $20,000,000, of which a
substantial portion will affect 1998 results.
The reserve established as a result of the nonrecurring charge, and
movements therein during 1996 and 1997, are as follows:
EMPLOYEE PLANT
(DOLLARS IN THOUSANDS) RELATED CLOSURE TOTAL
--------------------- ------- ------- -----
Original reserve ................. $10,629 $39,078 $49,707
Utilized in 1996 ................. 560 6,446 7,006
------- ------- -------
Balance December 31, 1996 ........ 10,069 32,632 42,701
Utilized in 1997 ................. 8,045 16,654 24,699
------- ------- -------
Balance December 31, 1997 ........ $ 2,024 $15,978 $18,002
======= ======= =======
9
Prior to the closure of Union Beach, the phased transfer of production to
Augusta resulted in some duplication of operating expenses which affected both
operating margins and earnings.
Effective January 1, 1997, the Company adopted Statement of Position 96-1
(SOP 96-1), Accounting for Environmental Remediation Liabilities, issued by the
American Institute of Certified Public Accountants. SOP 96-1 establishes
guidance for when environmental liabilities should be recorded and the factors
to be considered in determining amounts recognized. The effect of adopting this
standard was not material to the Company.
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 (FAS 128), Earnings per Share. FAS 128 simplifies the rules of computing
earnings per share and prescribes that companies present basic and diluted
earnings per share amounts, as defined, on the face of the income statement.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under FAS 121,
long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or circumstances indicate that their carrying value
may not be recoverable. The effect of adopting this Standard was not material to
the Company.
Under Statement of Financial Accounting Standards No. 123 (FAS 123),
Accounting for Stock-Based Compensation, companies can elect, but are not
required, to recognize compensation expense for all stock-based awards using a
fair-value methodology. The Company adopted the disclosure-only provisions of
this Standard in 1996. More details on the Company's stock-based compensation
are contained in Note 9 of the Notes to the Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (FAS 130) and 131 (FAS 131), Reporting
Comprehensive Income, and Disclosures about Segments of an Enterprise and
Related Information, respectively, and in February 1998, Statement of Financial
Accounting Standards No. 132 (FAS 132), Employers' Disclosures about Pensions
and Other Postretirement Benefits. FAS 130 establishes standards for the
reporting and display of comprehensive income and its components, and requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement, and display the accumulated balance of other
comprehensive income separately in the statement of financial position. FAS 131
establishes standards for the way public business enterprises report information
about operating segments in reports to shareholders. FAS 132 standardizes
employer disclosures about pension and other postretirement plans; the Standard
does not change the measurement or recognition of such plans. All Standards are
effective for periods beginning after December 15, 1997. The Company is
currently evaluating the Standards and the reporting implications thereof.
Compliance with existing governmental requirements regulating the discharge
of materials into the environment has not materially affected the Company's
operations, earnings or competitive position. In 1997, the Company spent
approximately $2,600,000 on capital projects and about $14,600,000 in operating
expenses and governmental charges for the purpose of complying with such
regulations. Expenditures for these purposes will continue for the foreseeable
future. In addition, the Company is party to a number of proceedings brought
under the Comprehensive Environmental Response, Compensation and Liability Act
or similar state statutes. It is expected that the impact of any judgments in or
voluntary settlements of such proceedings will not be material to the Company's
financial condition, results of operations or liquidity.
Many computer systems experience problems handling dates beyond the year
1999. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
computing infrastructure, including computerized devices, could contain
date-sensitive software that could cause the devices to fail to operate or to
operate inconsistently. The Company has completed the process of identifying the
systems and infrastructure that could be affected by the Year 2000 issue and has
developed a plan to resolve the issue. The plan includes both the renovation and
replacement of equipment, modification of software and replacement of software
systems with new systems that provide additional strategic information as well
as recognize four-digit dates. The Company expects to timely implement the
systems and programming changes necessary to address the Year 2000 issues and
does not believe that the cost of such actions will have a material adverse
effect on the Company's results of operations, liquidity or financial condition.
There can be no assurance, however, that there will
10
not be a delay in, or increased costs associated with, the implementation of
such changes, and the Company's ability to implement such changes could have an
unfavorable impact on future results of operations.
Financial Condition
The financial condition of the Company continued to be strong during 1997.
Cash, cash equivalents and short-term investments totaled $260,446,000 at
December 31, 1997, compared to $317,983,000 and $296,933,000 at December 31,
1996 and 1995, respectively. Short-term investments held by the Company are
high-quality, readily marketable instruments. Working capital totaled
$670,598,000 at year-end 1997, compared to $725,892,000 and $759,576,000 at
December 31, 1996 and 1995, respectively. Gross additions to property, plant and
equipment were $59,284,000, $80,782,000 and $96,196,000 in 1997, 1996 and 1995,
respectively, and are expected to approximate $90,000,000 in 1998.
In September 1996, the Company announced a plan to repurchase up to an
additional 7.5 million shares of its common stock. An existing program to
purchase 7.5 million shares, which had been in effect since 1992, was completed
in the first quarter of 1997. 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
December 31, 1997, approximately 1.1 million shares of common stock had been
repurchased under the 1996 program.
The Company has almost no long-term debt and anticipates that its growth
and capital expenditure programs, and the above share repurchase plan, will
continue to be funded from internal sources.
During 1997, the Company paid dividends to shareholders totaling
$157,674,000, while $150,864,000 was paid in 1996, and $138,048,000 in 1995. In
January 1998, the cash dividend was increased to an annual rate of $1.48 per
share, from $1.44 in 1997; the annual cash dividend was $1.36 in 1996. The
Company believes these increases in dividends to its shareholders can be made
without limiting future growth and expansion.
The Statement of Financial Accounting Standards No. 52 on accounting for
foreign currency translation requires translation of the net assets of the
majority of the Company's foreign subsidiaries into U.S. dollars at current
exchange rates. The cumulative translation adjustment component of Shareholders'
Equity was ($36,851,000) at December 31, 1997, compared to $47,555,000 at
December 31, 1996.
Statements in this Management's Discussion and Analysis which are not
historical facts or information are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, and are subject
to risks and uncertainties that could cause the Company's actual results to
differ materially from those expressed or implied by such forward-looking
statements. Risks and uncertainties with respect to the Company's business
include general economic and business conditions, the price and availability of
raw materials, and political and economic uncertainties, including the
fluctuation or devaluation of currencies in countries in which the Company does
business.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS:
PAGE NO.
--------
Consolidated Statements of Income and Retained Earnings for
the three years ended December 31, 1997 13
Consolidated Balance Sheet--December 31, 1997 and 1996 14
Consolidated Statement of Cash Flows for the three years
ended December 31, 1997 15
Notes to Consolidated Financial Statements 16
Report of Independent Accountants 27
Financial Statement Schedules:
VIII-- Valuation and Qualifying Accounts and Reserves for the
three years ended December 31, 1997 S-1
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
QUARTERLY FINANCIAL DATA (UNAUDITED)
NET INCOME PER SHARE
-------------------------------
NET SALES GROSS PROFIT NET INCOME BASIC DILUTED
------------------ ----------------- ---------------- ------------- -------------
QUARTER 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
First .... $ 382,813 $ 382,767 $175,520 $178,696 $ 63,244 $ 66,164 $0.58 $0.60 $0.58 $0.59
Second ... 381,470 374,397 177,415 172,590 63,309 29,703 0.58 0.26 0.57 0.26
Third .... 356,242 354,865 164,264 161,097 56,715 53,115 0.52 0.48 0.52 0.48
Fourth ... 306,266 324,024 136,447 144,854 34,961 40,912 0.32 0.37 0.32 0.37
---------- ---------- -------- -------- -------- -------- ----- ----- ----- -----
$1,426,791 $1,436,053 $653,646 $657,237 $218,229 $189,894 $2.00 $1.71 $1.99 $1.70
========== ========== ======== ======== ======== ======== ===== ===== ===== =====
The second quarter of 1996 reflects a nonrecurring charge to expand and
streamline the Company's worldwide aroma chemical production facilities, as
discussed in Note 2 of the Notes to the Consolidated Financial Statements.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
12
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF INCOME
Net sales ..................................... $1,426,791 $1,436,053 $1,439,487
---------- ---------- ----------
Cost of goods sold ............................ 773,145 778,816 746,971
Research and development expenses ............. 94,411 93,545 90,846
Selling and administrative expenses ........... 227,066 223,547 217,658
Nonrecurring charge ........................... -- 49,707 --
Interest expense .............................. 2,420 2,740 3,160
Other (income) expense, net ................... (10,442) (11,405) (12,871)
---------- ---------- ----------
1,086,600 1,136,950 1,045,764
---------- ---------- ----------
Income before taxes on income ................. 340,191 299,103 393,723
Taxes on income ............................... 121,962 109,209 144,906
---------- ---------- ----------
NET INCOME ................................... $ 218,229 $ 189,894 $ 248,817
========== ========== ==========
NET INCOME PER SHARE--BASIC .................. $2.00 $1.71 $2.24
========== ========== ==========
NET INCOME PER SHARE--DILUTED ................ $1.99 $1.70 $2.22
========== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
At beginning of year ......................... $1,106,572 $1,069,421 $ 961,847
Net income .................................. 218,229 189,894 248,817
---------- ---------- ----------
1,324,801 1,259,315 1,210,664
Cash dividends declared ...................... 158,453 152,743 141,243
---------- ---------- ----------
At end of year ............................... $1,166,348 $1,106,572 $1,069,421
========== ========== ==========
See Notes to Consolidated Financial Statements
13
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 216,994 $ 261,370
Short-term investments ............................................. 43,452 56,613
Receivables:
Trade ............................................................. 242,791 253,484
Allowance for doubtful accounts ................................... (8,101) (8,733)
Other ............................................................. 33,844 24,557
Inventories ........................................................ 360,074 369,078
Prepaid and deferred charges ....................................... 46,405 49,987
----------- -----------
Total Current Assets .............................................. 935,459 1,006,356
PROPERTY, PLANT AND EQUIPMENT, NET .................................... 446,509 467,797
OTHER ASSETS .......................................................... 40,293 32,760
----------- -----------
Total Assets .......................................................... $ 1,422,261 $ 1,506,913
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans ......................................................... $ 10,490 $ 18,929
Accounts payable ................................................... 57,832 57,681
Accrued payrolls and bonuses ....................................... 19,410 19,565
Dividends payable .................................................. 40,407 39,628
Income taxes ....................................................... 56,070 56,832
Other current liabilities .......................................... 80,652 87,829
----------- -----------
Total Current Liabilities ......................................... 264,861 280,464
----------- -----------
OTHER LIABILITIES:
Long-term debt ..................................................... 5,114 8,289
Deferred income taxes .............................................. 23,139 16,941
Retirement and other liabilities ................................... 128,659 124,682
----------- -----------
Total Other Liabilities ........................................... 156,912 149,912
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 12 1/2 (cent) par value; authorized 500,000,000
shares; issued 115,761,840 shares ................................. 14,470 14,470
Capital in excess of par value ..................................... 137,418 138,480
Restricted stock ................................................... (9,000) --
Retained earnings .................................................. 1,166,348 1,106,572
Cumulative translation adjustment .................................. (36,851) 47,555
----------- -----------
1,272,385 1,307,077
Treasury stock, at cost -- 6,630,911 shares in 1997 and
5,790,323 shares in 1996 .......................................... (271,897) (230,540)
----------- -----------
Total Shareholders' Equity ........................................ 1,000,488 1,076,537
----------- -----------
Total Liabilities and Shareholders' Equity ............................ $ 1,422,261 $ 1,506,913
=========== ===========
See Notes to Consolidated Financial Statements
14
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 218,229 $ 189,894 $ 248,817
Adjustments to reconcile to net cash provided by operations:
Nonrecurring charge .................................................................... -- 49,707 --
Depreciation ........................................................................... 50,278 47,764 40,702
Deferred income taxes .................................................................. 8,201 (2,271) 6,444
Changes in assets and liabilities:
Current receivables ................................................................... (32,949) (2,433) (16,475)
Inventories ........................................................................... (20,524) 30,179 (43,505)
Current payables ...................................................................... 11,473 (14,530) 6,121
Other, net ............................................................................ 4,440 9,689 2,234
--------- --------- ---------
Net cash provided by operations .......................................................... 239,148 307,999 244,338
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales/maturities of short-term
investments ............................................................................ 23,056 44,646 160,128
Purchases of short-term investments ..................................................... (9,851) (57,289) (130,780)
Additions to property, plant and equipment, net of
minor disposals ........................................................................ (58,211) (79,425) (94,483)
--------- --------- ---------
Net cash used in investing activities .................................................... (45,006) (92,068) (65,135)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to shareholders ..................................................... (157,674) (150,864) (138,048)
(Decrease) increase in bank loans ....................................................... (7,305) 7,144 2,246
Decrease in long-term debt .............................................................. (2,357) (2,230) (2,571)
Proceeds from issuance of stock under stock option plans ................................ 15,356 9,622 8,581
Purchase of treasury stock .............................................................. (70,988) (59,763) (41,386)
--------- --------- ---------
Net cash used in financing activities .................................................... (222,968) (196,091) (171,178)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............................. (15,550) (9,900) 12,824
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................. (44,376) 9,940 20,849
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................................... 261,370 251,430 230,581
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................................. $ 216,994 $ 261,370 $ 251,430
========= ========= =========
See Notes to Consolidated Financial Statements
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is the leading creator and manufacturer of flavors and
fragrances used by others to impart or improve flavor or fragrance in a wide
variety of consumer products. Fragrance products are sold principally to makers
of perfumes and cosmetics, hair and other personal care products, soaps and
detergents, household and other cleaning products and area fresheners. Flavors
are sold primarily to makers of dairy, meat and other processed foods,
beverages, snacks and savory foods, confectionery, sweet and baked goods,
pharmaceutical and oral care products and animal foods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all subsidiaries.
CURRENCY TRANSLATION
The assets and liabilities of non-U.S. subsidiaries which operate in a
local currency environment are translated into U.S. dollars at year-end exchange
rates. Income and expense items are translated at average exchange rates during
the year. Accumulated translation adjustments are shown as a separate component
of shareholders' equity.
For those subsidiaries which operate in U.S. dollars, or which operate in a
highly inflationary environment, inventory and property, plant and equipment are
translated using the approximate exchange rates at the time of acquisition. All
other assets and liabilities are translated at year-end exchange rates. Except
for inventories charged to cost of goods sold and depreciation, which are
remeasured for historical rates of exchange, all income and expense items are
translated at average exchange rates during the year. Gains and losses as a
result of remeasurements are included in income.
INVENTORIES
Inventories are stated at the lower of cost (generally on an average basis)
or market.
CASH EQUIVALENTS
Highly liquid investments with maturities of three months or less at date
of purchase are considered to be cash equivalents.
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 30 years; machinery and
equipment, 3 to 10 years; and leasehold improvements, the shorter of 10 years or
the remaining life of the lease.
When properties are retired or otherwise disposed of, the asset and related
accumulated depreciation are removed from the accounts and the resultant gain or
loss is included in income.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under FAS 121,
long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or circumstances indicate that their carrying value
may not be recoverable. The effect of adopting this standard was not material to
the Company.
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
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED}
currently enacted. Additional taxes which would result from dividend
distributions by subsidiary companies to the parent company are provided to the
extent such dividends are anticipated. No provision is made for additional taxes
on undistributed earnings of subsidiary companies which are intended to be
permanently invested in such subsidiaries.
RETIREMENT BENEFITS
Current service costs of retirement plans and postretirement health care
and life insurance benefits are accrued currently. Prior service costs resulting
from improvements in these plans are amortized over periods ranging from 10 to
20 years.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques, as appropriate. Unless
otherwise disclosed, the fair values of financial instruments approximate their
recorded values.
RISKS AND UNCERTAINTIES
The diversity of the Company's products, customers and geographic
operations significantly reduces the risk that a severe impact will occur in the
near term as a result of changes in its customer base, competition, sources of
supply or markets. It is unlikely that any one event would have a severe impact
on the Company's operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, the Company adopted Statement of Position 96-1
(SOP 96-1), Accounting for Environmental Remediation Liabilities, issued by the
American Institute of Certified Public Accountants. SOP 96-1 establishes
guidance for when environmental liabilities should be recorded and the factors
to be considered in determining amounts recognized. The effect of adopting this
standard was not material to the Company.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (FAS 130) and 131 (FAS 131), Reporting
Comprehensive Income, and Disclosures about Segments of an Enterprise and
Related Information, respectively, and in February 1998, Statement of Financial
Accounting Standards No. 132 (FAS 132), Employers' Disclosures about Pensions
and Other Postretirement Benefits. FAS 130 establishes standards for the
reporting and display of comprehensive income and its components, and requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement, and display the accumulated balance of other
comprehensive income separately in the statement of financial position. FAS 131
establishes standards for the way public business enterprises report information
about operating segments in reports to shareholders. FAS 132 standardizes
employer disclosures about pension and other postretirement plans; the Standard
does not change the measurement or recognition of such plans. All Standards are
effective for periods beginning after December 15, 1997. The Company is
currently evaluating the Standards and the reporting implications thereof.
NET INCOME PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 (FAS 128), Earnings per Share. FAS 128 simplifies the rules of computing
earnings per share and prescribes that companies present basic and diluted
earnings per share amounts, as defined, on the face of the income statement. Net
income per share is based on
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED}
the weighted average number of shares outstanding. A reconciliation of the
number of shares used in the computations for basic and diluted net income per
share is as follows:
NUMBER OF SHARES
-------------------------------
(SHARES IN THOUSANDS) 1997 1996 1995
--------------------- ------- ------- -------
Basic EPS ......................... 109,065 110,773 111,262
Dilution under stock plans ........ 560 613 891
------- ------- -------
Diluted EPS ....................... 109,625 111,386 112,153
======= ======= =======
Net income used in the computation of basic and diluted net income per
share is not affected by the assumed issuance of stock under the Company's stock
plans and is therefore the same for both calculations.
Options to purchase 944,959, 1,107,000 and 399,250 shares at prices ranging
from $47.00 to $49.88 per share were outstanding in 1997, 1996 and 1995,
respectively, but were not included in the computation of diluted net income per
share because the options' exercise prices were greater than the average market
price of the common shares in the respective years.
NOTE 2. NONRECURRING CHARGE
During 1996, the Company undertook a program to expand and streamline its
worldwide aroma chemical production facilities. This program included the
phaseout of production at the Company's Union Beach, New Jersey plant at the end
of 1997, and the closure of smaller capacity facilities in Mexico City, Mexico
and Rio de Janeiro, Brazil during 1996. A substantial portion of the volume
produced at Union Beach was transferred to the Company's state-of-the-art
facility in Augusta, Georgia. In addition, production capacity in Benicarlo,
Spain was expanded.
The closures affected approximately 220 employees. At December 31, 1997,
essentially all of the employees affected by the closures had left the Company.
The aroma chemical streamlining resulted in a nonrecurring pretax charge to
second quarter 1996 earnings of $49,707,000 ($31,315,000 after tax or $.29 per
share). Of the charge, approximately $33,000,000 represented asset writedowns
and other non-cash related costs.
The reserve established as a result of the nonrecurring charge, and
movements therein during 1996 and 1997, are as follows:
EMPLOYEE PLANT
(DOLLARS IN THOUSANDS) RELATED CLOSURE TOTAL
------- ------- -------
Original reserve .................. $10,629 $39,078 $49,707
Utilized in 1996 .................. 560 6,446 7,006
------- ------- -------
Balance December 31, 1996 ......... 10,069 32,632 42,701
Utilized in 1997 .................. 8,045 16,654 24,699
------- ------- -------
Balance December 31, 1997 ......... $ 2,024 $15,978 $18,002
======= ======= =======
NOTE 3. MARKETABLE SECURITIES
Marketable securities are included in cash equivalents and short-term
investments, as appropriate. At December 31, 1997 and 1996, marketable
securities totaling $122,931,000 and $177,868,000, respectively, were available
for sale and recorded at fair value which approximated cost. Realized gains and
losses on the sale of marketable securities were not material.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED}
NOTE 4. INVENTORIES
DECEMBER 31,
------------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Raw materials ............................... $193,136 $211,124
Work in process ............................. 13,593 24,644
Finished goods .............................. 153,345 133,310
-------- --------
$360,074 $369,078
======== ========
NOTE 5. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
------------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Land ........................................ $ 29,676 $ 34,965
Buildings and improvements .................. 271,407 283,016
Machinery and equipment ..................... 471,456 511,271
Construction in progress .................... 38,362 48,972
-------- --------
810,901 878,224
Accumulated depreciation .................... 364,392 410,427
-------- --------
$446,509 $467,797
======== ========
NOTE 6. BORROWINGS
Bank loans (all foreign) averaged $19,639,000 in 1997, $15,007,000 in 1996
and $12,124,000 in 1995. The highest levels were $28,736,000 in 1997,
$18,925,000 in 1996 and $17,131,000 in 1995. The 1997 weighted average annual
interest rate on these loans (based on balances outstanding at the end of each
month) was approximately 7% and the average rate on loans outstanding at
December 31, 1997 was 10%. These rates compare to 9% and 7%, respectively, in
1996, and 13% and 8%, respectively, in 1995.
Long-term debt (all foreign) consists of various loans from financial
institutions, with interest rates ranging between 2.1% to 2.5%, and with terms
of between five and seven years. Aggregate payments for the next five years of
long-term debt outstanding at December 31, 1997 are $2,106,000 in 1998,
$1,429,000 in 1999 and $752,000 annually through 2002. At December 31, 1997 and
1996, the estimated fair value of long-term debt, based on borrowing rates
currently available to the Company with similar terms and maturities,
approximated the recorded amount.
Cash payments for interest were $2,330,000 in 1997, $2,688,000 in 1996 and
$3,326,000 in 1995.
At December 31, 1997, the Company and its subsidiaries had available unused
lines of bank credit aggregating approximately $76,500,000.
NOTE 7. INCOME TAXES
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. income before taxes ....... $ 63,719 $ 19,860 $101,764
Foreign income before taxes .... 276,472 279,243 291,959
-------- -------- --------
Total income before taxes ...... $340,191 $299,103 $393,723
======== ======== ========
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED}
The following table shows the components of current and deferred income tax
expense by taxing jurisdiction, both domestic and foreign:
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Current
Federal ...................... $ 18,149 $ 15,138 $ 26,806
State and local .............. 2,210 2,835 5,600
Foreign ...................... 93,402 93,507 106,056
-------- -------- --------
113,761 111,480 138,462
-------- -------- --------
Deferred
Federal ...................... 6,478 (10,640) 1,418
State and local .............. 235 (2,356) (339)
Foreign ...................... 1,488 10,725 5,365
-------- -------- --------
8,201 (2,271) 6,444
-------- -------- --------
Total income taxes ......... $121,962 $109,209 $144,906
======== ======== ========
At December 31, 1997 and 1996, gross deferred tax assets were $61,300,000
and $67,100,000, respectively; gross deferred tax liabilities were $55,400,000
and $55,200,000, respectively. No valuation allowance was required for deferred
tax assets. The principal components of deferred tax assets (liabilities) were:
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Employee and retiree benefits .............. $ 35,400 $ 33,000
Inventory .................................. 9,100 10,700
Property, plant and equipment .............. (25,400) (24,100)
Other, net ................................. (13,200) (7,700)
-------- --------
$ 5,900 $ 11,900
======== ========
A reconciliation between the U.S. federal income tax rate and the effective
tax rate is:
1997 1996 1995
---- ---- ----
Statutory tax rate ....................... 35.0% 35.0% 35.0%
Difference in effective tax rate on
foreign earnings and remittances ........ 0.8 1.8 2.1
State and local taxes .................... 0.5 0.1 0.9
Other, net ............................... (0.4) (0.4) (1.2)
---- ---- ----
Effective tax rate ....................... 35.9% 36.5% 36.8%
==== ==== ====
Income taxes paid were $110,594,000 in 1997, $124,435,000 in 1996 and
$139,523,000 in 1995.
Undistributed earnings of foreign subsidiaries for which no deferred taxes
have been provided approximated $482,000,000 at December 31, 1997. Any
additional U.S. taxes payable on these foreign earnings, if remitted, would be
substantially offset by credits for foreign taxes already paid.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED}
NOTE 8. SHAREHOLDERS' EQUITY
The following table shows treasury shares acquired and, as appropriate, the
use of treasury shares for stock plans:
NUMBER
OF
SHARES AMOUNT
--------- --------
(DOLLARS IN THOUSANDS)
Balance January 1, 1995 ................... 4,297,540 $156,058
Acquisitions .............................. 877,738 42,251
Used for stock plans ...................... (367,273) (13,453)
--------- --------
Balance December 31, 1995 ................. 4,808,005 184,856
Acquisitions .............................. 1,407,667 62,815
Used for stock plans ...................... (425,349) (17,131)
--------- --------
Balance December 31, 1996 ................. 5,790,323 230,540
Acquisitions .............................. 1,633,034 73,869
Used for stock plans ...................... (792,446) (32,512)
--------- --------
Balance December 31, 1997 ................. 6,630,911 $271,897
========= ========
Transactions in treasury shares resulted in net charges to Capital in
excess of par value of $3,546,000, $3,996,000 and $1,062,000 in 1995, 1996 and
1997, respectively.
Under an employment contract dated January 1, 1997, the Company granted an
award of 250,000 restricted shares of the Company's common stock. The
restrictions expire, subject to certain performance goals, over a five-year
period. Compensation expense is recognized over the restricted period.
Changes in the cumulative translation adjustment were (in thousands):
Balance January 1, 1995 $ 41,798
Translation adjustments 33,251
--------
Balance December 31, 1995 75,049
Translation adjustments (27,494)
--------
Balance December 31, 1996 47,555
Translation adjustments (84,406)
--------
Balance December 31, 1997 $(36,851)
========
On February 13, 1990, the Company adopted a shareholder protection rights
agreement (the "Rights Agreement") and declared a dividend of one right on each
share of common stock outstanding on February 28, 1990 or issued thereafter.
Until a person or group acquires 20% or more of the Company's common stock
or commences a tender offer that will result in such person or group owning 20%
or more, the rights will be evidenced by the common stock certificates, will
automatically trade with the common stock and will not be exercisable.
Thereafter, separate rights certificates will be distributed and each right will
entitle its holder to purchase one share of common stock for an exercise price
of $66.67.
If any person or group acquires 20% or more of the Company's common stock,
then 10 business days thereafter (the "Flip-in Date") each right (other than
rights beneficially owned by holders of 20% or more of the common stock or
transferees thereof, which rights become void) will entitle its holder to
purchase, for the exercise price, a number of shares of common stock having a
market value of twice the exercise price.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED}
If the Company is involved in a merger or sells more than 50% of its assets
or earning power, each right will entitle its holder to purchase, for the
exercise price, a number of shares of common stock of the acquiring company
having a market value of twice the exercise price. If any person or group
acquires between 20% and 50% of common stock, the Company's Board of Directors
may, at its option, exchange one share of common stock for each right. The
rights may be redeemed by the Board of Directors for $0.0033 per right prior to
the Flip-in Date. The rights will expire on February 28, 2000, unless previously
redeemed by the Board in accordance with the terms of the Rights Agreement.
Dividends paid per share were $1.44, $1.36 and $1.24 in 1997, 1996 and
1995, respectively.
NOTE 9. STOCK OPTIONS
The Company has various stock option plans under which the Company's
officers, directors and key employees may be granted options to purchase the
Company's common stock at 100% of the market price on the day the option is
granted.
Stock option transactions were:
SHARES OF COMMON STOCK WEIGHTED
---------------------- AVERAGE
AVAILABLE UNDER EXERCISE
FOR OPTION OPTION PRICE
---------- ------ --------
Balance January 1, 1995 ............... 1,609,367 2,906,704 $32.24
Granted ............................... (804,500) 804,500 49.88
Exercised ............................. -- (367,273) 27.08
Terminated ............................ 58,299 (58,299) 34.40
--------- ---------
Balance December 31, 1995 ............. 863,166 3,285,632 37.09
Granted ............................... (639,500) 639,500 48.06
Exercised ............................. -- (425,349) 29.78
Terminated ............................ 13,428 (13,428) 38.21
--------- ---------
Balance December 31, 1996 ............. 237,094 3,486,355 39.98
Granted ............................... (781,250) 781,250 43.38
Exercised ............................. -- (542,446) 33.61
Terminated ............................ 94,485 (94,485) 39.67
Increase under 1997 plan .............. 3,500,000 -- --
--------- ---------
Balance December 31, 1997 ............. 3,050,329 3,630,674 $41.67
========= =========
The following table summarizes information concerning currently outstanding
and exercisable options:
RANGE OF EXERCISE PRICES
------------------------
$10-$30 $30-$50
------- ---------
Number outstanding ........................... 273,691 3,356,983
Weighted average remaining contractual
life, in years ............................. 2.7 7.4
Weighted average exercise price .............. $24.39 $43.07
Number exercisable ........................... 273,691 1,301,093
Weighted average exercise price .............. $24.39 $39.26
During 1997, options to purchase common stock were granted at exercise
prices ranging from $43.25 to $48.31 per share. At December 31, 1997, the price
range for shares under option was $19.30 to $49.88; options for 1,574,784 shares
were exercisable at that date. During 1997, 542,446 shares of common stock under
option were exercised at prices ranging from $13.67 to $49.88.
Except for certain options granted to foreign employees which can be
exercised immediately, options generally become exercisable no earlier than two
years from the date of grant. All options expire ten years after date of grant.
22
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date, consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, the Company's net income and basic
earnings per share would have been reduced by approximately $3,500,000 ($.03 per
share) in 1997, $2,700,000 ($.02 per share) in 1996 and $1,200,000 ($.01 per
share) in 1995. These pro forma amounts may not be representative of future
disclosures because the estimated fair value of stock options is amortized to
expense over the vesting period, and additional options may be granted in future
years.
Using the Black-Scholes option valuation model, the estimated fair values
of options granted during 1997, 1996 and 1995 were $8.19, $9.98 and $10.89,
respectively. The Black-Scholes model was developed for use in estimating the
fair value of traded options which have no vesting restrictions. In addition,
such models require the use of subjective assumptions, including expected stock
price volatility. In management's opinion, such valuation models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Principal assumptions used in applying the Black-Scholes model were as
follows:
1997 1996 1995
----- ----- -----
Risk-free interest rate ................. 6.6% 6.6% 6.4%
Expected life, in years ................. 5 5 5
Expected volatility ..................... 16.4% 16.8% 17.6%
Expected dividend yield ................. 3.3% 2.8% 2.5%
NOTE 10. INTERNATIONAL OPERATIONS
1997 (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------
UNITED WESTERN OTHER
STATES EUROPE FOREIGN ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
Sales to unaffiliated customers $438,767 $566,386 $421,638 $ -- $1,426,791
Transfers between areas 68,907 107,572 17,022 (193,501) --
-------- -------- -------- --------- ----------
Total sales $507,674 $673,958 $438,660 $(193,501) $1,426,791
======== ======== ======== ========= ==========
Operating profit $ 70,307 $179,015 $ 89,893 $ (876) $ 338,339
======== ======== ======== =========
Unallocated expenses (6,170)
Interest expense (2,420)
Other income (expense), net 10,442
----------
Income before taxes on income $ 340,191
==========
Identifiable assets $444,796 $440,117 $345,717 $ (53,363) $1,177,267
======== ======== ======== =========
Unallocated assets 244,994
----------
Total assets $1,422,261
==========
1996 (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------
UNITED WESTERN OTHER
STATES EUROPE FOREIGN ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
Sales to unaffiliated customers $439,695 $589,279 $407,079 $ -- $1,436,053
Transfers between areas 65,020 101,122 12,745 (178,887) --
-------- -------- -------- --------- ----------
Total sales $504,715 $690,401 $419,824 $(178,887) $1,436,053
======== ======== ======== ========= ==========
Operating profit $ 29,984 $189,263 $ 78,616 $ (1,407) $ 296,456
======== ======== ======== =========
Unallocated expenses (6,018)
Interest expense (2,740)
Other income (expense), net 11,405
----------
Income before taxes on income $ 299,103
==========
Identifiable assets $449,124 $463,892 $351,628 $ (63,086) $1,201,558
======== ======== ======== =========
Unallocated assets 305,355
----------
Total assets $1,506,913
==========
23
1995 (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------
UNITED WESTERN OTHER
STATES EUROPE FOREIGN ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
Sales to unaffiliated customers ........ $450,644 $604,036 $384,807 $ -- $1,439,487
Transfers between areas ................ 72,959 96,642 15,143 (184,744) --
-------- -------- -------- --------- ----------
Total sales .......................... $523,603 $700,678 $399,950 $(184,744) $1,439,487
======== ======== ======== ========= ==========
Operating profit ....................... $106,739 $203,131 $ 84,269 $ (3,437) $ 390,702
======== ======== ======== =========
Unallocated expenses ................... (6,690)
Interest expense ....................... (3,160)
Other income (expense), net ............ 12,871
----------
Income before taxes on income ........ $ 393,723
==========
Identifiable assets .................... $492,751 $437,589 $378,209 $ (58,753) $1,249,796
======== ======== ======== =========
Unallocated assets ..................... 284,473
----------
Total assets ......................... $1,534,269
==========
In 1996, operating profit (United States, Other Foreign and Consolidated)
reflects the nonrecurring charge of $49,707,000 for expanding and streamlining
the Company's aroma chemical production facilities.
Transfers between geographic areas are accounted for at prices which
approximate arm's length market prices. Unallocated assets are principally cash
and short-term investments. Net foreign exchange gains of $1,231,000 in 1997,
and net losses of $668,000 in 1996 and $2,535,000 in 1995 are included in other
income.
Worldwide sales to the Company's largest customer amounted to 11%, 12% and
11% of worldwide net sales in 1997, 1996 and 1995, respectively.
NOTE 11. RETIREMENT BENEFITS
The Company and most of its subsidiaries have pension and/or other
retirement benefit plans covering substantially all employees. Pension benefits
are generally based on years of service and on compensation during the final
years of employment. Plan assets consist primarily of equity securities and
corporate and government fixed income securities. Substantially all pension
benefit costs are funded as accrued; however, such funding is limited, where
applicable, to amounts deductible for income tax purposes. Certain other
retirement benefits are provided by balance sheet accruals. Contributions to
defined contribution plans are mainly determined as a percentage of profits.
Pension expense included the following components:
U.S. PLANS NON-U.S. PLANS
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Service cost for benefits earned ....... $ 3,914 $ 4,516 $ 4,449 $ 5,819 $ 5,379 $ 4,993
Interest cost on projected benefit
obligation ............................ 10,623 10,180 8,954 9,989 10,572 10,333
Actual return on plan assets ........... (37,598) (22,871) (24,674) (10,621) (11,128) (9,769)
Net amortization and deferrals ......... 25,984 11,916 14,700 495 312 348
------- ------- ------- ------- ------- -------
Defined benefit plans .................. 2,923 3,741 3,429 5,682 5,135 5,905
Defined contribution and other
retirement plans ...................... 2,360 2,297 2,288 1,655 3,447 2,332
------- ------- ------- ------- ------- -------
Total pension expense .................. $ 5,283 $ 6,038 $ 5,717 $ 7,337 $ 8,582 $ 8,237
======= ======= ======= ======= ======= =======
24
The funded status of pension plans at December 31 was:
U.S. PLANS NON-U.S. PLANS
--------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Actuarial present value of benefit obligation:
Vested benefit obligation ................................... $133,257 $105,921 $120,537 $113,370
Non-vested benefit obligation ............................... 6,923 6,604 2,890 4,587
-------- -------- -------- --------
Accumulated benefit obligation .............................. $140,180 $112,525 $123,427 $117,957
======== ======== ======== ========
Projected benefit obligation ................................. $158,736 $133,968 $153,758 $156,827
Plan assets at fair value .................................... 202,417 164,334 148,067 148,094
-------- -------- -------- --------
Plan assets in excess of (less than) projected benefit
obligation .................................................. 43,681 30,366 (5,691) (8,733)
Unrecognized net (gain) loss ................................. (33,907) (23,232) 2,744 4,999
Remaining balance of unrecognized net (asset) liability
established at adoption of FAS 87 ........................... (3,477) (3,897) 1,526 2,042
-------- -------- -------- --------
Net pension asset (liability) ................................ $ 6,297 $ 3,237 $ (1,421) $ (1,692)
======== ======== ======== ========
Principal actuarial assumptions used to determine the pension data were:
U.S. PLANS NON-U.S. PLANS
-------------- --------------------------
1997 1996 1997 1996
---- ---- ---------- ----------
Discount rate ............................................ 7.2% 8.0% 4.5%--8.0% 4.5%--8.0%
Weighted average rate of compensation increase ........... 4.5% 4.5% 3.0%--6.0% 3.0%--6.0%
Long-term rate of return on plan assets .................. 8.0% 8.0% 3.5%--8.5% 3.5%--8.0%
In addition to pension benefits, certain health care and life insurance
benefits are provided to all United States employees upon retirement from the
Company. Such coverage is provided through insurance plans with premiums based
on benefits paid. The Company does not generally provide health care and life
insurance coverage for retired employees of foreign subsidiaries; however, such
benefits are provided in most foreign countries by government-sponsored plans,
and the cost of these programs is not significant to the Company.
Expense recognized for postretirement benefits other than pensions included
the following components:
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
Service cost for benefits earned ................ $1,070 $1,368 $1,176
Interest on benefit obligation .................. 3,097 3,377 3,079
Net amortization and deferrals .................. (9) 138 --
------ ------ ------
Total benefit expense ......................... $4,158 $4,883 $4,255
====== ====== ======
The components of the benefit obligation of the U.S. plan, included in
Retirement and other liabilities, at December 31 were:
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
Retirees ..................................... $23,118 $18,204
Active employees eligible to retire .......... 6,012 9,948
Other active employees ....................... 17,678 17,787
------- -------
Accumulated benefit obligation ............... 46,808 45,939
Unrecognized net loss ........................ (597) (2,858)
------- -------
Net benefit liability ...................... $46,211 $43,081
======= =======
25
Principal actuarial assumptions used to determine the above data were:
1997 1996
---- ----
Discount rate ................................................. 7.2% 8.0%
Initial medical cost trend rate ............................... 8.0% 8.8%
Ultimate medical cost trend rate .............................. 5.0% 5.0%
Medical cost trend rate decreases to ultimate rate in year .... 2001 2001
The effect of a one percent increase in the assumed medical rate of
inflation would increase the accumulated postretirement benefit obligation by
approximately $7,300,000; the annual service and interest cost would not be
materially affected.
NOTE 12. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company sometimes uses forward exchange contracts to reduce its
exposure to fluctuations in foreign currency exchange rates. These contracts,
the counterparties to which are major international financial institutions,
generally involve the exchange of one currency for a second currency at a future
date, and have maturities which do not exceed six months. Gains and losses on
such contracts are recognized in income as incurred, effectively offsetting the
losses and gains on the foreign currency transactions that are hedged. At
December 31, 1997 and 1996, the value of outstanding foreign currency exchange
contracts was not material.
The Company has no significant concentrations of risk in financial
instruments. Temporary cash investments are made in a well-diversified portfolio
of high-quality, liquid obligations of government, corporate and financial
institutions. There are also limited concentrations of credit risk with respect
to trade receivables because of the large number of customers spread across many
industries and geographic areas.
NOTE 13. CONTINGENT LIABILITIES
There are various lawsuits and claims pending against the Company.
Management believes that any liability resulting from those actions or claims
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
26
REPORT OF INDEPENDENT ACCOUNTANTS
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 8 on page 12 present fairly, in all material respects, the
financial position of International Flavors & Fragrances Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 29, 1998
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See Item 8 on page 12.
(b) No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1997.
(c) Exhibits.
(d) Not applicable.
NUMBER
------
3 Restated Certificate of Incorporation of Registrant,
incorporated by reference to Exhibit 3 to Registrant's
Report on Form 10-K for fiscal year ended December 31, 1993
(File No. 1-4858).
3(b) By-laws of Registrant, incorporated by reference to Exhibit
3(b) to Registrant's Report on Form 10-K for fiscal year
ended December 31, 1993 (File No. 1-4858).
3(c) Amendment to By-laws adopted December 12, 1996, incorporated
by reference to Exhibit 3(c) to Registrant's Report on Form
10-K for the fiscal year ended December 31, 1996 (File No.
1-4858).
3(d) Amendment to By-laws adopted May 8, 1997, incorporated by
reference to Exhibit 3(a) to Registrant's Report on Form
10-Q dated August 13, 1997 (File No. 1-4858).
4(a) Shareholder Protection Rights Agreement dated as of February
20, 1990 between Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to Exhibit 4(a) to
Registrant's Report on Form 10-Q dated May 14, 1997 (File
No. 1-4858).
4(b) Amendment No. 1 dated as of April 6, 1990 to Shareholder
Protection Rights Agreement, incorporated by reference to
Exhibit 4(b) to Registrant's Report on Form 10-Q dated May
14, 1997 (File No. 1-4858).
4(c) Amendment No. 2 dated as of March 8, 1994 to Shareholder
Protection Rights Agreement, incorporated by reference to
Exhibit 4(c) to Registrant's Report on Form 10-K for fiscal
year ended December 31, 1993 (File No. 1-4858).
4(d) Specimen certificates of Registrant's Common Stock bearing
legend notifying of Shareholder Protection Rights Agreement,
incorporated by reference to Exhibit 4(d) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
9 Not applicable.
10(a) Agreement dated as of January 1, 1997 between Registrant and
Eugene P. Grisanti, Chairman and President of Registrant,
incorporated by reference to Exhibit 10(a) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(b) Form of Executive Severance Agreement approved by
Registrant's Board of Directors on February 14, 1989
incorporated by reference to Exhibit 10(b) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(c) Registrant's Executive Death Benefit Plan effective July 1,
1990, incorporated by reference to Exhibit 10(c) to
Registrant's Report on Form 10-Q dated May 14, 1997 (File
No. 1-4858).
10(d) Supplemental Retirement Investment Plan adopted by
Registrant's Board of Directors on November 14, 1989
incorporated by reference to Exhibit 10(d) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(e) Supplemental Retirement Plan adopted by Board of Directors
on October 29, 1986, incorporated by reference to Exhibit
10(e) to Registrant's Report on Form 10-Q dated May 14, 1997
(File No. 1-4858).
10(f) Restated Management Incentive Compensation Plan of
Registrant, incorporated by reference to Exhibit A to the
Registrant's Proxy Statement dated March 28, 1995 (File No.
1-4858).
10(h) Stock Option Plan for Non-Employee Directors, incorporated
by reference to Exhibit 10(h) to Registrant's Report on Form
10-Q dated May 14, 1997 (File No. 1-4858).
28
NUMBER
------
10(i) Registrant's Directors' Deferred Compensation Plan adopted
by Registrant's Board of Directors on September 15, 1981,
incorporated by reference to Exhibit 10(i) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(j) Director Charitable Contribution Program adopted by the
Board of Directors on February 14, 1995 incorporated by
reference to Exhibit 10(j) to Registrant's Report on Form
10-K for the fiscal year ended December 31, 1994 (File No.
1-4858).
10(k) Agreement dated as of July 22, 1996 between Registrant and
Hugh R. Kirkpatrick, former Senior Vice-President and
Director of Registrant incorporated by reference to Exhibit
10(k) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996 (File No. 1-4858).
10(l) 1997 Employee Stock Option Plan, incorporated by reference
to Exhibit A to the Registrant's Proxy Statement dated March
27, 1997.
10(m) Agreement dated June 19, 1997 between Registrant and Hendrik
C. van Baaren, former Senior Vice-President and Director of
Registrant.
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 List of Principal Subsidiaries. See page E-1 of this Form
10-K.
22 Not applicable.
23 Consent of Price Waterhouse LLP. See page 31 of this Form
10-K.
24 Powers of Attorney authorizing George Rowe, Jr. and Stephen
A. Block to sign this report and amendments thereto on
behalf of certain directors and officers of the Registrant.
27 Financial Data Schedule (EDGAR version only).
28 Not applicable.
99 None.
29
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED HEREUNTO DULY AUTHORIZED.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(REGISTRANT)
By /s/ THOMAS H. HOPPEL
----------------------------------------
THOMAS H. HOPPEL
VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
Dated: March 30, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
PRINCIPAL EXECUTIVE OFFICER:
EUGENE P. GRISANTI
President and Chairman of the Board
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
THOMAS H. HOPPEL By /s/ STEPHEN A. BLOCK
----------------------------------------
Vice-President and Chief Financial STEPHEN A. BLOCK
Officer and Director ATTORNEY-IN-FACT
DIRECTORS:
MARGARET HAYES ADAME
DAVID G. BLUESTEIN
BRIAN D. CHADBOURNE March 30, 1998
ROBIN CHANDLER DUKE
RICHARD M. FURLAUD
HERBERT G. REID
GEORGE ROWE, JR.
STANLEY M. RUMBOUGH, JR.
HENRY P. VAN AMERINGEN
WILLIAM D. VAN DYKE, III
ORIGINAL POWERS OF ATTORNEY AUTHORIZING GEORGE ROWE, JR. AND STEPHEN A.
BLOCK, AND EACH OF THEM, TO SIGN THIS REPORT ON BEHALF OF CERTAIN DIRECTORS AND
OFFICERS OF THE REGISTRANT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
30
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 33-66756 and
No. 33-47856) and the Registration Statement on Form S-8 (No. 33-54423) of
International Flavors & Fragrances Inc. of our report dated January 29, 1998
appearing on page 27 of this Form 10-K.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
March 27, 1998
31
SCHEDULE VIII
INTERNATIONAL FLAVORS & FRAGRANCES INC. AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED DECEMBER 31, 1997
ADDITIONS TRANS-
BALANCE AT CHARGED TO LATION BALANCE
BEGINNING COSTS AND ACCOUNTS ADJUST- AT END
OF PERIOD EXPENSES WRITTEN OFF MENTS OF PERIOD
--------- ---------- --------- ------- ---------
Allowance for doubtful
accounts ................ $8,733 $1,506 $1,304 ($ 834) $8,101
====== ====== ====== ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1996
ADDITIONS TRANS-
BALANCE AT CHARGED TO LATION BALANCE
BEGINNING COSTS AND ACCOUNTS ADJUST- AT END
OF PERIOD EXPENSES WRITTEN OFF MENTS OF PERIOD
--------- -------- ----------- ----- ---------
Allowance for doubtful
accounts ................ $8,602 $1,564 $1,290 ($ 143) $8,733
====== ====== ====== ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1995
ADDITIONS TRANS-
BALANCE AT CHARGED TO LATION BALANCE
BEGINNING COSTS AND ACCOUNTS ADJUST- AT END
OF PERIOD EXPENSES WRITTEN OFF MENTS OF PERIOD
--------- -------- ----------- ----- ---------
Allowance for doubtful
accounts ................. $7,448 $1,632 $ 700 $ 222 $8,602
====== ====== ====== ====== ======
S-1
EXHIBIT 21
LIST OF REGISTRANT'S PRINCIPAL SUBSIDIARIES
There is furnished below a list of the principal subsidiaries of
Registrant. All the voting stock of each subsidiary, other than directors'
qualifying shares, if any, is wholly owned by Registrant or a subsidiary of
Registrant, except that International Flavors & Fragrances I.F.F. (France)
S.a.r.1. is owned 70% by International Flavors & Fragrances I.F.F. (Nederland)
B.V. and 30% by Registrant, I.F.F. Essencias e Fragrancias Ltda. is owned 63% by
Registrant and 37% by International Flavors & Fragrances I.F.F. (Nederland)
B.V., and International Flavours & Fragrances I.F.F. (Great Britain) Ltd. is
owned 49% by International Flavors & Fragrances I.F.F. (Nederland) B.V. and 51%
by Aromatics Holdings Limited.
ORGANIZED UNDER
NAME OF COMPANY LAWS OF
--------------- ---------------
International Flavors & Fragrances Inc. ...................... New York
International Flavors & Fragrances I.F.F. (Nederland) B.V. . The Netherlands
Aromatics Holdings Limited ............................... Ireland
IFF-Benicarlo, S.A. .................................... Spain
International Flavours & Fragrances (China) Ltd. ....... China
Irish Flavours and Fragrances Limited .................. Ireland
International Flavours & Fragrances I.F.F. (Great
Britain) Ltd. ........................................ England
International Flavors & Fragrances I.F.F. (Italia)
S.r.l. ............................................... Italy
International Flavors & Fragrances I.F.F.
(Deutschland) G.m.b.H. ................................. Germany
International Flavors & Fragrances I.F.F.
(Switzerland) A.G. ..................................... Switzerland
International Flavors & Fragrances I.F.F. (France)
S.a.r.l. ............................................... France
International Flavors & Fragrances (Hong Kong) Ltd. ...... Hong Kong
International Flavors & Fragrances (Japan) Ltd. .......... Japan
International Flavors & Fragrances S.A.C.I. ................ Argentina
I.F.F. Essencias e Fragrancias Ltda. ....................... Brazil
International Flavours & Fragrances (Australia) Pty. Ltd. .. Australia
P.T. Essence Indonesia ..................................... Indonesia
International Flavors & Fragrances (Mexico) S.A. de C.V. ... Mexico
International Flavors & Fragrances I.F.F. (Espana) S.A. .... Spain
ALVA Insurance Limited ..................................... Bermuda
IFF Concentrates Inc. ...................................... Oregon
Auro Tech, Inc. ............................................ Wisconsin
IFF Fruit Specialties Inc. ................................. Wisconsin
E-1
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------ -----------
3 Restated Certificate of Incorporation of Registrant,
incorporated by reference to Exhibit 3 to Registrant's
Report on Form 10-K for fiscal year ended December 31, 1993
(File No. 1-4858).
3(b) By-laws of Registrant, incorporated by reference to Exhibit
3(b) to Registrant's Report on Form 10-K for fiscal year
ended December 31, 1993 (File No. 1-4858).
3(c) Amendment to By-laws adopted December 12, 1996, incorporated
by reference to Exhibit 3(c) to Registrant's Report on Form
10-K for the fiscal year ended December 31, 1996 (File No.
1-4858).
3(d) Amendment to By-laws adopted May 8, 1997, incorporated by
reference to Exhibit 3(a) to Registrant's Report on Form
10-Q dated August 13, 1997 (File No. 1-4858).
4(a) Shareholder Protection Rights Agreement dated as of February
20, 1990 between Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to Exhibit 4(a) to
Registrant's Report on Form 10-Q dated May 14, 1997 (File
No. 1-4858).
4(b) Amendment No. 1 dated as of April 6, 1990 to Shareholder
Protection Rights Agreement, incorporated by reference to
Exhibit 4(b) to Registrant's Report on Form 10-Q dated May
14, 1997 (File No. 1-4858).
4(c) Amendment No. 2 dated as of March 8, 1994 to Shareholder
Protection Rights Agreement, incorporated by reference to
Exhibit 4(c) to Registrant's Report on Form 10-K for fiscal
year ended December 31, 1993 (File No. 1-4858).
4(d) Specimen certificates of Registrant's Common Stock bearing
legend notifying of Shareholder Protection Rights Agreement,
incorporated by reference to Exhibit 4(d) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
9 Not applicable.
10(a) Agreement dated as of January 1, 1997 between Registrant and
Eugene P. Grisanti, Chairman and President of Registrant,
incorporated by reference to Exhibit 10(a) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(b) Form of Executive Severance Agreement approved by
Registrant's Board of Directors on February 14, 1989
incorporated by reference to Exhibit 10(b) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(c) Registrant's Executive Death Benefit Plan effective July 1,
1990, incorporated by reference to Exhibit 10(c) to
Registrant's Report on Form 10-Q dated May 14, 1997 (File
No. 1-4858).
10(d) Supplemental Retirement Investment Plan adopted by
Registrant's Board of Directors on November 14, 1989
incorporated by reference to Exhibit 10(d) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(e) Supplemental Retirement Plan adopted by Board of Directors
on October 29, 1986, incorporated by reference to Exhibit
10(e) to Registrant's Report on Form 10-Q dated May 14, 1997
(File No. 1-4858).
10(f) Restated Management Incentive Compensation Plan of
Registrant, incorporated by reference to Exhibit A to the
Registrant's Proxy Statement dated March 28, 1995 (File No.
1-4858).
10(h) Stock Option Plan for Non-Employee Directors, incorporated
by reference to Exhibit 10(h) to Registrant's Report on Form
10-Q dated May 14, 1997 (File No. 1-4858).
EXHIBIT DESCRIPTION
------ -----------
10(i) Registrant's Directors' Deferred Compensation Plan adopted
by Registrant's Board of Directors on September 15, 1981,
incorporated by reference to Exhibit 10(i) to Registrant's
Report on Form 10-Q dated May 14, 1997 (File No. 1-4858).
10(j) Director Charitable Contribution Program adopted by the
Board of Directors on February 14, 1995 incorporated by
reference to Exhibit 10(j) to Registrant's Report on Form
10-K for the fiscal year ended December 31, 1994 (File No.
1-4858).
10(k) Agreement dated as of July 22, 1996 between Registrant and
Hugh R. Kirkpatrick, former Senior Vice-President and
Director of Registrant incorporated by reference to Exhibit
10(k) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996 (File No. 1-4858).
10(l) 1997 Employee Stock Option Plan, incorporated by reference
to Exhibit A to the Registrant's Proxy Statement dated March
27, 1997.
10(m) Agreement dated June 19, 1997 between Registrant and Hendrik
C. van Baaren, former Senior Vice-President and Director of
Registrant.
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 List of Principal Subsidiaries. See page E-1 of this Form
10-K.
22 Not applicable.
23 Consent of Price Waterhouse LLP. See page 31 of this Form
10-K.
24 Powers of Attorney authorizing George Rowe, Jr. and Stephen
A. Block to sign this report and amendments thereto on
behalf of certain directors and officers of the Registrant.
27 Financial Data Schedule (EDGAR version only).
28 Not applicable.
99 None.