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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission file number 1-4858
-------------------------------------------------------------
INTERNATIONAL FLAVORS & FRAGRANCES INC.
---------------------------------------
(Exact Name of Registrant as specified in its charter)
New York 13 -1432060
_____________________________________ _____________________
(State or other jurisdiction of incorporation (IRS Employer
or organization) identification No.)
521 West 57th Street, New York, N.Y. 10019-2960
_____________________________________ _____________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
____________ _____________
Number of shares outstanding as of July 31, 2002: 94,743,937
PART I. FINANCIAL INFORMATION 1
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)
6/30/02 12/31/01
--------------------- ---------------------
Assets
- ------
Current Assets:
Cash & Cash Equivalents $ 34,115 $ 48,521
Short-term Investments 361 384
Trade Receivables 381,362 328,858
Allowance For Doubtful Accounts (11,535) (10,835)
Inventories: Raw Materials 216,238 212,270
Work in Process 9,354 10,853
Finished Goods 180,903 192,861
--------------------- ---------------------
Total Inventories 406,495 415,984
Deferred Income Taxes 54,570 77,449
Other Current Assets 60,015 36,000
--------------------- ---------------------
Total Current Assets 925,383 896,361
--------------------- ---------------------
Property, Plant & Equipment, At Cost 959,956 975,630
Accumulated Depreciation (439,224) (443,157)
--------------------- ---------------------
520,732 532,473
--------------------- ---------------------
Intangible Assets, net 783,284 795,920
Other Assets 56,305 43,297
--------------------- ---------------------
Total Assets $ 2,285,704 $ 2,268,051
===================== =====================
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Bank Loans and Current Portion of Long-term Debt $ 17,056 $ 23,716
Commercial Paper 145,845 204,229
Accounts Payable-Trade 97,469 85,659
Dividends Payable 14,242 14,215
Income Taxes 53,709 49,841
Other Current Liabilities 163,469 182,554
--------------------- ---------------------
Total Current Liabilities 491,790 560,214
--------------------- ---------------------
Other Liabilities:
Deferred Income Taxes 6,730 44,553
Long-term Debt 978,837 939,404
Retirement and Other Liabilities 228,832 199,710
--------------------- ---------------------
Total Other Liabilities 1,214,399 1,183,667
--------------------- ---------------------
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 104,751 126,170
Restricted Stock (598) (1,440)
Retained Earnings 1,322,261 1,263,344
Accumulated Other Comprehensive Income (Loss):
Cumulative Translation Adjustment (144,672) (156,266)
Accumulated Gains (Losses) on Derivatives
Qualifying as Hedges 968 (2,261)
Minimum pension liability adjustment (20,009) (20,009)
--------------------- ---------------------
1,277,171 1,224,008
Treasury Stock, at cost - 20,957,669 shares in '02
and 20,996,954 in '01 (696,669) (698,851)
Note Receivable from Officer (987) (987)
--------------------- ---------------------
Total Shareholders' Equity 579,515 524,170
--------------------- ---------------------
Total Liabilities and Shareholders' Equity $ 2,285,704 $ 2,268,051
===================== =====================
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC. 2
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
3 Months Ended 6/30
-----------------------------------------------------------
2002 2001
---- ----
Net Sales $ 476,336 $ 478,216
--------------------- ---------------------
Cost of Goods Sold 272,612 269,506
Research and Development Expenses 35,022 35,502
Selling and Administrative Expenses 78,921 81,001
Amortization of Goodwill and Other Intangibles 3,158 11,400
Nonrecurring Charges 9,242 8,780
Interest Expense 9,294 17,634
Other (Income) Expense, Net (807) 1,006
--------------------- ---------------------
407,442 424,829
--------------------- ---------------------
Income Before Taxes on Income 68,894 53,387
Taxes on Income 23,493 20,382
--------------------- ---------------------
Net Income 45,401 33,005
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments 21,552 (8,793)
Accumulated (Losses) on Derivatives
Qualifying as Hedges (1,167) (179)
--------------------- ---------------------
Comprehensive Income $ 65,786 $ 24,033
===================== =====================
Net Income Per Share - Basic $0.48 $0.34
Net Income Per Share - Diluted $0.47 $0.34
Average Number of Shares Outstanding - Basic 94,572 95,756
Average Number of Shares Outstanding - Diluted 96,029 96,735
Dividends Paid Per Share $0.15 $0.15
6 Months Ended 6/30
-----------------------------------------------------------
2002 2001
---- ----
Net Sales $ 922,180 $ 961,877
--------------------- ---------------------
Cost of Goods Sold 532,476 553,645
Research and Development Expenses 70,192 70,908
Selling and Administrative Expenses 154,307 166,846
Amortization of Goodwill and Other Intangibles 6,316 22,755
Nonrecurring Charges 9,242 21,200
Interest Expense 19,721 39,934
Other (Income) Expense, Net (2,772) 766
--------------------- ---------------------
789,482 876,054
--------------------- ---------------------
Income Before Taxes on Income 132,698 85,823
Taxes on Income 45,350 32,546
--------------------- ---------------------
Net Income 87,348 53,277
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments 11,594 (77,586)
Accumulated Gains (Losses) on Derivatives
Qualifying as Hedges 3,229 (1,776)
--------------------- ---------------------
Comprehensive Income (Loss) $ 102,171 $ (26,085)
===================== =====================
Net Income Per Share - Basic $0.92 $0.55
Net Income Per Share - Diluted $0.91 $0.55
Average Number of Shares Outstanding - Basic 94,553 96,370
Average Number of Shares Outstanding - Diluted 96,106 97,161
Dividends Paid Per Share $0.30 $0.30
See Notes to Consolidated Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC. 3
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
6 Months Ended 6/30
----------------------------------------------------------
2002 2001
--------------------- --------------------
Cash Flows From Operating Activities:
- -------------------------------------
Net Income $ 87,348 $ 53,277
Adjustments to Reconcile to Net Cash
Provided by Operations:
Depreciation and Amortization 42,398 62,330
Deferred Income Taxes (8,247) (2,031)
Changes in Assets and Liabilities:
Current Receivables (49,123) (52,108)
Inventories 25,884 (260)
Current Payables (9,969) (31,353)
Other, Net (2,031) (3,108)
--------------------- --------------------
Net Cash Provided by Operations 86,260 26,747
--------------------- --------------------
Cash Flows From Investing Activities:
- -------------------------------------
Proceeds from Investments 32 5,420
Purchases of Investments (13) (15,546)
Additions to Property, Plant and Equipment (41,623) (20,160)
Proceeds from Disposal of Assets 56,724 2,522
--------------------- --------------------
Net Cash Provided by (Used) in Investing Activities 15,120 (27,764)
--------------------- --------------------
Cash Flows From Financing Activities:
- -------------------------------------
Cash Dividends Paid to Shareholders (28,404) (28,979)
Decrease in Bank Loans (9,148) (14,648)
Net Decrease in Commercial Paper Outstanding (58,384) (386,880)
Net Proceeds from Long-term Debt 1,896 429,013
Repayments of Long-term Debt (4,697) (20,926)
Proceeds From Issuance of Stock Under Stock Option
and Employee Stock Purchase Plans 26,087 1,151
Purchase of Treasury Stock (44,532) (39,967)
--------------------- --------------------
Net Cash Used in Financing Activities (117,182) (61,236)
--------------------- --------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 1,396 (5,927)
--------------------- --------------------
Net Change in Cash and Cash Equivalents (14,406) (68,180)
Cash and Cash Equivalents at Beginning of Year 48,521 128,869
--------------------- --------------------
Cash and Cash Equivalents at End of Period $ 34,115 $ 60,689
===================== ====================
Interest Paid $ 31,000 $ 33,895
Income Taxes Paid $ 42,944 $ 58,150
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes, and management's discussion and analysis of results of operations
and financial condition included in the Company's 2001 Annual Report to
Shareholders. These interim statements are unaudited. In the opinion of the
Company's management, all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods have been made.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement requires the recording of costs
associated with exit or disposal activities at their fair values only once a
liability exists. Under previous guidance, certain exit costs were accrued when
management committed to an exit plan, which may have been before an actual
liability arose. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Company has entered into a series of swaps for a $700.0 million notional
amount which effectively converts the fixed 6.45% coupon interest rate on the
Notes to a variable short-term rate based upon the London InterBank Offered Rate
(LIBOR) plus an interest markup. During the second quarter the Company amended
the swap, which changed the short-term LIBOR basis and the related spread. As a
result of market conditions and the change in the value of the swap, the
counter-party paid the Company $1.2 million, including accrued swap interest of
$.4 million. The net gain on settlement is being amortized over the remaining
term of the Notes. These swaps are designated as qualified cash flow hedges. The
Company had no ineffective interest rate swaps at June 30, 2002.
The Company enters into foreign currency forward contracts with the objective of
reducing exposure to cash flow volatility associated with foreign currency
receivables and payables, and with anticipated purchases of certain raw
materials used in operations. The notional amount and maturity dates of such
contracts match those of the underlying transactions. At June 30, 2002, the
Company had outstanding foreign currency forward contracts of approximately
$96.0 million. The Company has designated these contracts as qualified fair
value and cash flow hedges. Accordingly, the effective portion of the gain or
loss on the derivative instrument is reported as a component of other
comprehensive income and recognized in earnings in the same period or periods
during which the hedged transaction affects earnings. The Company had no
ineffective foreign currency forward contracts at June 30, 2002.
SALE AND LEASEBACK TRANSACTION:
During June 2002, the Company entered into agreements for the sale and leaseback
of its Hazlet and South Brunswick, New Jersey facilities. Under the terms of the
sale agreement, the Company sold the land, building and associated improvements
at these facilities to an unrelated third party for $48.0 million in cash. The
leases are classified as operating leases in accordance with Statement of
Financial Accounting Standards No. 13, "Accounting for Leases." The net book
value of these assets approximated $20.3 million. The book value and associated
depreciation of the related assets have been removed from the Company's accounts
and the gain realized on the sale, approximating $26.7 million, has been
deferred. The deferred gain will be credited to income over the 22-year
operating lease term. At June 30, 2002, the unamortized portion of the deferred
gain is included in the balance sheet captions "Retirement and Other
Liabilities" in the amount of $25.5 million and "Other Current Liabilities" in
the amount of $1.2 million. The operating lease agreements provide for renewal
options of up to 30 years. Payments under the leases approximate $4.2 million
annually and commenced in July 2002. Total lease obligations for 2002 are $2.1
million and for 2003 to 2006 are $4.2 million annually and the aggregate lease
obligation is $92.4 million.
NET INCOME PER SHARE:
Stock options to purchase 2,676,834 and 2,698,918 shares were outstanding for
the second quarter and the first six months of 2002, respectively, and 5,291,376
and 4,920,300 shares for the second quarter and first six months of 2001,
respectively, but were not included in the computation of diluted net income per
share for the respective periods because the options' exercise prices were
greater than the average market price of the common shares in the respective
periods.
5
SEGMENT INFORMATION:
Effective January 1, 2001, the Company was reorganized into five geographic
regions with a single manager responsible for each region. The five regions
were: North America, Latin America, Asia-Pacific, Europe and Central Asia,
Middle East ("CAME"). Effective January 1, 2002, the CAME region was
reconstituted as, and renamed the "India Region" (India, Pakistan and other
countries in the Indian Subcontinent). Certain operations formerly included in
CAME are, from January 1, 2002, included with Europe. North and Latin America
and Asia-Pacific were unaffected by the geographic reorganization.
The Company's reportable segment information, based on geographic region,
follows. Certain prior year amounts have been reclassified for comparative
purposes to reflect the geographic alignment and adoption of FAS 142. The
Company evaluates the performance of its geographic areas based on segment
operating profit, excluding interest expense, other income and expense, certain
unallocated expenses, amortization of goodwill, the effects of nonrecurring
items and accounting changes, and income tax expense.
Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
North India Latin Asia-Pacific
2002 (Dollars in thousands) America Europe Region America Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $159,830 $180,861 $ 10,166 $57,365 $68,114 $ -- $476,336
Transfers between areas 21,085 35,722 748 196 3,582 (61,333) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $180,915 $216,583 $ 10,914 $57,561 $71,696 $(61,333) $476,336
===================================================================================================================================
Segment profit $ 23,091 $ 47,938 $ 2,814 $12,542 $13,122 $ 249 $ 99,756
======================================================================================================================
Corporate and other unallocated
expenses (13,133)
Nonrecurring charges (9,242)
Interest expense (9,294)
Other income (expense), net 807
-------------
Income before taxes on income $ 68,894
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
North India Latin Asia-Pacific
2001 (Dollars in thousands) America Europe Region America Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $164,181 $174,684 $ 8,941 $61,758 $68,652 $ -- $478,216
Transfers between areas 20,637 36,694 2,126 272 4,658 (64,387) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $184,818 $211,378 $ 11,067 $62,030 $73,310 $(64,387) $478,216
===================================================================================================================================
Segment profit $ 24,223 $ 43,082 $ 3,068 $13,615 $16,807 $ 99 $100,894
======================================================================================================================
Corporate and other unallocated
expenses (11,969)
Amortization of goodwill (8,118)
Nonrecurring charges (8,780)
Interest expense (17,634)
Other income (expense), net (1,006)
------------
Income before taxes on income $ 53,387
- -----------------------------------------------------------------------------------------------------------------------------------
6
Six Months Ended June 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------------
North India Latin Asia-Pacific
2002 (Dollars in thousands) America Europe Region America Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $308,439 $346,858 $18,887 $114,605 $133,391 $ -- $922,180
Transfers between areas 42,278 63,134 797 356 7,023 (113,588) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total sales $350,717 $409,992 $19,684 $114,961 $140,414 $(113,588) $922,180
===================================================================================================================================
Segment profit $ 38,311 $ 86,572 $ 4,691 $ 26,398 $ 28,152 $ (151) $183,973
======================================================================================================================
Corporate and other unallocated
expenses (25,084)
Nonrecurring charges (9,242)
Interest expense (19,721)
Other income (expense), net 2,772
------------
Income before taxes on income $ 132,698
- ----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
North India Latin Asia-Pacific
2001 (Dollars in thousands) America Europe Region America Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $321,763 $361,809 $ 16,997 $ 123,248 $138,060 $ -- $961,877
Transfers between areas 44,002 69,760 2,387 657 8,567 (125,373) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total sales $365,765 $431,569 $ 19,384 $ 123,905 $146,627 $(125,373) $961,877
===================================================================================================================================
Segment profit $ 41,852 $ 85,077 $ 4,963 $ 26,792 $ 31,818 $ (639) $189,863
======================================================================================================================
Corporate and other unallocated
expenses (25,949)
Amortization of goodwill (16,191)
Nonrecurring charges (21,200)
Interest expense (39,934)
Other income (expense), net (766)
------------
Income before taxes on income $ 85,823
- ------------------------------------------------------------------------------------------------------------------------------------
NONRECURRING AND OTHER CHARGES: 7
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2001 Annual Report to Shareholders, in October 2000,
the Company announced a reorganization, including management changes, further
consolidation of production facilities and related actions. The total pretax
cost of actions taken in connection with the reorganization, including $31.9
million and $30.1 million recorded in 2000 and 2001, respectively, is expected
to approximate $90.0 million to $100.0 million through the end of 2002. In
connection with this program, the Company recorded a nonrecurring charge of $9.2
million ($6.1 million after tax) in the second quarter 2002, related primarily
to employee separation costs and other reorganization activities. Of these
charges, $4.0 million related to a non-cash asset write-off in North America
related to the disposition of the Company's fruit concentrates business. The
pretax nonrecurring charges recorded in the second quarter 2002 relate to
operations in North America ($4.8 million), Europe ($4.2 million) and
Asia-Pacific ($.2 million). Certain costs associated with the merger and the
integration of Bush Boake Allen Inc. ("BBA") operations were accounted for as
part of the acquisition cost, and did not affect current earnings.
Movements in the liabilities related to the nonrecurring charges were as follows
(in millions):
EMPLOYEE- ASSET-RELATED
RELATED AND OTHER TOTAL
-----------------------------------------------------
Balance December 31, 2001 $ 7.0 $ .7 $ 7.7
Additional charges 1.9 7.3 9.2
Utilized in 2002 (1.8) (4.7) (6.5)
------- ------- ------
Balance June 30, 2002 $ 7.1 $ 3.3 $ 10.4
======= ======= ======
The balance of the liabilities will be utilized by the end of 2003 in connection
with the final dismantling and disposal of affected equipment and as severance
and other benefit obligations to affected employees are satisfied.
The Company has established accruals relating primarily to employee separation
costs, facility closure costs and other actions relating to the integration of
certain BBA operations into IFF. Costs associated with these integration actions
were recognized as a component of the purchase accounting which resulted in an
adjustment to goodwill; such costs did not directly impact current earnings.
Movements in these acquisition accounting accruals were as follows (in
millions):
EMPLOYEE - ASSET-RELATED
RELATED AND OTHER TOTAL
-----------------------------------------------------
Balance December 31, 2001 $13.8 $ 9.9 $23.7
Utilized in 2002 (3.7) (3.0) (6.7)
----- ------ -----
Balance June 30, 2002 $10.1 $ 6.9 $17.0
===== ====== =====
RESTRICTED STOCK:
In January 2001, the Company awarded approximately 190,000 IFF Stock Units
("Units") to eligible employees in exchange for surrender of their "under water"
stock options. The Units vest, in four equal installments, over not more than a
seven-year period, upon the Company's Common Stock attaining successively higher
market price targets beginning at $22.50 per share, and earn dividend
equivalents as and when cash dividends are paid. Compensation expense is
recognized over the Unit's vesting period. In the first quarter of 2002, the
third price target of $31.50 was achieved and the Company recognized
compensation expense of $.8 million which is included in operating expenses. The
remaining unvested Units are reported as Restricted Stock on the Company's
Consolidated Balance Sheet.
8
On August 1, 2002, the Company's Board of Directors granted Richard A.
Goldstein, Chairman and Chief Executive Officer, an award of 200,000 restricted
shares of the Company's common stock. Mr. Goldstein's entitlement to all or a
portion of the award is subject to the Company's achieving certain levels of
shareholder return, compared to those of a specified group of companies, over
the three, four and five year periods commencing August 1, 2002. The
Consolidated Income Statement and Balance Sheet for and at June 30, 2002 does
not reflect this award. The Company will reflect compensation expense over the
restriction period and will recognize the restricted stock issuance from
Treasury stock with a corresponding adjustment to Capital in excess of par
value.
COMPREHENSIVE INCOME:
Changes in the accumulated other comprehensive income component of shareholders'
equity were as follows:
- -------------------------------------------------------------------------------------------------------------------------
Accumulated gains
(losses) on
2002 (Dollars in thousands) derivatives Minimum Pension
Translation qualifying as Obligation, net of
adjustments hedges tax Total
----------------------------------------------------------------------------------
Balance December 31, 2001 $(156,266) $(2,261) $(20,009) $(178,536)
Change 11,594 3,229 - 14,823
----------------------------------------------------------------------------------
Balance June 30, 2002 $(144,672) $ 968 $(20,009) $(163,713)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Accumulated gains
(losses) on
2001 (Dollars in thousands) derivatives Minimum Pension
Translation qualifying as Obligation, net of
adjustments hedges tax Total
----------------------------------------------------------------------------------
Balance December 31, 2000 $ (77,578) $ - $ - $ (77,578)
Change (77,586) (1,776) - (79,362)
----------------------------------------------------------------------------------
Balance June 30, 2001 $(155,164) $(1,776) $ - $(156,940)
- -------------------------------------------------------------------------------------------------------------------------
BORROWINGS:
Debt consists of the following (Dollars in thousands):
Rate Maturities June 30, 2002 December 31, 2001
---- ---------- ------------- -----------------
Commercial paper (U.S.) $ 145,845 $ 204,229
Bank loans 15,148 21,916
Current portion of long-term debt 1,908 1,800
------------------------------------------
Total current debt 162,901 227,945
------------------------------------------
U.S. dollars 6.45% 2006 698,980 698,800
Euro facility 4.79% 2005-06 113,804 101,500
Japanese Yen notes 2.45% 2008-11 125,582 115,300
Japanese Yen notes 1.74% 2005 9,914 9,100
Other 2003-05 3,688 6,404
------------------------------------------
951,968 931,104
Interest rate swaps 26,869 8,300
------------------------------------------
Total long-term debt 978,837 939,404
------------------------------------------
Total debt $1,141,738 $1,167,349
==========================================
At June 30, 2002, commercial paper maturities did not extend beyond July 25,
2002. The weighted average interest rate on total borrowings was 3.3% compared
to 4.1% at December 31, 2001. The Company records capitalized interest on all
projects with a total project value greater than $1.0 million. In the second
quarter and for the six
9
months ended June 30, 2002, $.5 million and $.7 million was capitalized which
reduced interest expense and increased fixed asset additions.
On July 19, 2002, the Company entered into a five-year EURO 350 million, which
approximates $350 million, multi-currency revolving credit facility agreement.
In connection with the execution of this agreement, the Company repaid all
borrowings under its existing EURO 140 million credit facility and cancelled
that facility. In addition, on July 31, 2002 the Company exercised its option
under its $500 million US revolving credit facility and cancelled the $200
million 364-day portion of that agreement. There were no borrowings under the US
agreement.
INTANGIBLE ASSETS, NET:
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142
eliminates goodwill amortization and requires an evaluation of potential
goodwill impairment upon adoption, as well as subsequent annual valuations, or
more frequently if circumstances indicate a possible impairment. The standard
also prescribes that other indefinite lived intangibles be included with
goodwill. Adoption of FAS 142 eliminated annual goodwill amortization expense of
approximately $33 million. The following tables reflect the reclassification of
other indefinite lived intangibles from Trademarks and other to Goodwill at
adoption of FAS 142 and the Earnings per share effect of this change for the
second quarter and six months ended June 30, 2002 and 2001. The amortization for
the second quarter and first six months ended June 30, 2002 was $3.2 million and
$6.3 million, respectively, and the estimated amortization for 2002 and the
subsequent four years is $12.6 million per year. The Company has completed its
assessment of the impact of adopting the impairment provisions of this standard,
and has concluded it has no impairment of goodwill at this time.
June 30, 2002 June 30, 2002
Gross Carrying Value Accumulated Amortization
---------------------- ------------------------
Goodwill $684,189 $41,534
Other indefinite lived intangibles 19,200 1,184
Trademarks and other 144,051 21,438
-------- -------
Total $847,440 $64,156
======== =======
December 31, 2001 December 31, 2001
Gross Carrying Value Accumulated Amortization
-------------------- -------------------------
Goodwill $690,509 $41,534
Other indefinite lived intangibles - -
Trademarks and other 163,251 16,306
-------- -------
Total $853,760 $57,840
======== =======
10
For the three months ended June 30, Six months ended June 30,
----------------------------------- -------------------------
($000's except per share amounts) 2002 2001 2002 2001
- --------------------------------- ---- ---- ---- ----
Reported net income $45,401 $33,005 $87,348 $53,277
Add back: Goodwill amortization - 8,050 - 16,053
------- ------- ------- -------
Adjusted net income $45,401 $41,055 $87,348 $69,330
======= ======= ======= =======
BASIC EARNINGS PER SHARE
- ------------------------
Reported net income $0.48 $0.34 $0.92 $0.55
Goodwill amortization - 0.08 - 0.17
----- ----- ----- -----
Adjusted net income $0.48 $0.43 $0.92 $0.72
===== ===== ===== =====
DILUTED EARNINGS PER SHARE
- --------------------------
Reported net income $0.47 $0.34 $0.91 $0.55
Goodwill amortization - 0.08 - 0.17
----- ----- ----- -----
Adjusted net income $0.47 $0.42 $0.91 $0.71
===== ===== ===== =====
Note: Rounding differences of individual components may cause the total
figures to be off by $.01.
CONTINGENCIES:
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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year's financial
statements to conform to fiscal 2002 classifications.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
- --------------------------------------------------------------------------
OPERATIONS
- ----------
Worldwide net sales for the second quarter of 2002 were $476.3 million, compared
to reported sales in the second quarter 2001 of $478.2 million. The Company
disposed of certain non-core businesses in the fourth quarter 2001. On a
pro-forma basis reflecting the businesses disposed, second quarter 2001 sales
were $462.9 million.
Excluding sales from non-core businesses disposed of during 2001, local currency
sales for the second quarter 2002 increased 2% in comparison to the 2001
quarter. On a similar basis, reported sales increased 3%. Translation was
favorable due to the relative strength of the Euro, and to a lesser extent,the
Japanese Yen and the Australian dollar versus the U.S. dollar.
Excluding sales attributable to businesses disposed during 2001:
o Second quarter sales performance was strongest in India where fragrance
sales jumped 27% in local currency (29% in dollars) and flavor sales
increased 7%.
o Local currency fragrance sales in Europe increased 11% resulting in a 14%
increase in dollar sales. The fragrance increase was somewhat offset by
expected weakness in Europe flavors, where local currency sales declined
3%, resulting in flat dollar sales.
o Asia-Pacific grew 2% in local currency and 3% in reported dollars, despite
persistent weakness in the Japanese economy.
o The North America region grew 1%, led by a strong 4% growth in flavors.
Flavor sales for the 2002 second quarter include only two months of sales
attributable to the fruit concentrates business the Company disposed of in
the quarter. Excluding fruit concentrates from both 2001 and 2002 second
quarter sales, flavor sales would have increased 9% and the region, in
total, would have increased 3% compared to the prior year quarter.
o Latin America declined 6% for the quarter, mainly due to Argentina as well
as slow economies elsewhere in the region.
For the first six months of 2002, worldwide reported net sales totaled $922.2
million, compared to prior year comparable period reported sales of $961.9
million. On a pro-forma basis, excluding businesses disposed of during the
fourth quarter 2001, net sales for the six-month period ended June 30, 2001
totaled $926.9 million. Also on a pro-forma basis, local currency sales for the
six months ended June 30, 2002 were strongest in India where sales increased 7%.
Europe, North America, and Asia-Pacific achieved 2%, 1% and 1% increases,
respectively, in local currency. Latin America sales declined 7% in relation to
the comparable 2001 period. Had exchange rates been the same for the first six
months of 2002 and 2001, on a pro-forma basis, sales would have been essentially
flat.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the second quarter 2002 and 2001 are detailed below. The pro-forma
information presented in the table below reflects operating expenses as a
percent of sales excluding the non-core businesses disposed in the fourth
quarter of 2001.
SECOND QUARTER
--------------
REPORTED PRO-FORMA
2002 2001 2001
---- ---- ----
Cost of Goods Sold 57.2% 56.4% 55.5%
Research and Development Expenses 7.4% 7.4% 7.6%
Selling and Administrative Expenses 16.6% 16.9% 17.4%
12
Cost of goods sold, as a percentage of net sales, increased from the prior year
pro-forma percentage primarily due to the unfavorable mix related to weakness in
the North America and Europe fine fragrance business.
Research and development expenses were in line with expectations. As disclosed
in the Company's 2001 annual report, research and development expenditures are
expected to grow to 8% of sales as the Company expands its various research and
development efforts.
Selling and administrative expenses are reduced from both the pro-forma and
reported 2001 amounts due to the integration and reorganization savings achieved
during the quarter.
Other income in the quarter amounted to $.8 million. Interest expense declined
from 2001 levels due to the general decline in interest rates as well as reduced
borrowing levels.
Net income for the second quarter of 2002, totaled $45.4 million compared to
reported net income in the second quarter 2001 of $33.0 million. The amounts for
the second quarter of 2002 and 2001 include the effects of the nonrecurring
charges discussed below. Excluding these charges, net income for the second
quarter 2002 and 2001 was $51.5 million and $38.7 million, respectively. On a
pro-forma basis excluding the businesses disposed of in the fourth quarter 2001
and the effects of adopting FAS 142 which reduced amortization expense, second
quarter 2001 net income totaled $40.4 million including nonrecurring charges,
and $46.1 million excluding such charges.
The effective tax rate for the second quarter of 2002 was 34.1% compared to
38.2% for the comparable period in 2001. The lower effective rate in 2002
principally results from the discontinuance of goodwill amortization, which was
not deductible for purposes of determination of the Company's taxable income in
2001.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first six months 2002 and 2001 are detailed below. The
pro-forma information presented in the table below reflects operating expenses
as a percent of sales excluding the non-core businesses disposed of in the
fourth quarter of 2001.
FIRST SIX MONTHS
----------------
REPORTED PRO-FORMA
2002 2001 2001
---- ---- ----
Cost of Goods Sold 57.7% 57.6% 56.3%
Research and Development Expenses 7.6% 7.4% 7.6%
Selling and Administrative Expenses 16.7% 17.3% 17.8%
Cost of goods sold, as a percentage of net sales, increased from the prior year
pro-forma percentage primarily due to the unfavorable mix related to weakness in
the North America and Europe fine fragrance business.
Research and development expenses were in line with expectations. As disclosed
in the Company's 2001 annual report, research and development expenditures are
expected to grow to 8% of sales as the Company expands its various research and
development efforts.
Selling and administrative expenses are substantially reduced from both the
pro-forma and reported 2001 amounts due to the integration and reorganization
savings achieved during the first half of 2002.
Other income for the first six months amounted to $2.8 million primarily related
to exchange gains in Argentina. Interest expense declined from 2001 levels due
to the general decline in interest rates as well as reduced borrowing levels.
Net income for the first six months of 2002, totaled $87.3 million compared to
reported net income in the first six months 2001 of $53.3 million. The amounts
for the first six months of 2002 and 2001 include the effects of the
nonrecurring charges discussed below. Excluding these charges, net income for
the first six months 2002 and 2001 was $93.4 million and $66.7 million,
respectively. On a pro-forma basis, excluding the businesses disposed in the
fourth quarter 2001 and the effects of adopting FAS 142, which reduced
amortization expense, six months 2001 net
13
income totaled $67.9 million including nonrecurring charges, and $81.4 million
excluding such charges.
The effective tax rate for the first six months of 2002 was 34.2% compared to
37.9% for the comparable period in 2001. The lower effective rate in 2002
principally results from the discontinuance of goodwill amortization, which was
not deductible for purposes of determination of the Company's taxable income in
2001.
NONRECURRING AND OTHER CHARGES:
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2001 Annual Report to Shareholders, in October 2000,
the Company announced a reorganization, including management changes, further
consolidation of production facilities and related actions. The total pretax
cost of actions taken in connection with the reorganization, including $31.9
million and $30.1 million recorded in 2000 and 2001, respectively, is expected
to approximate $90.0 million to $100.0 million through the end of 2002. In
connection with this program, the Company recorded a nonrecurring charge of $9.2
million ($6.1 million after tax) in the second quarter 2002, related primarily
to employee separation costs and other reorganization activities. Of these
charges, $4.0 million related to a non-cash asset write-off in North America
associated with the disposition of the Company's fruit concentrates business.
The pretax nonrecurring charges recorded in the second quarter 2002 relate to
operations in North America ($4.8 million), Europe ($4.2 million) and
Asia-Pacific ($.2 million). Certain costs associated with the merger and the
integration of BBA operations were accounted for as part of the acquisition
cost, and did not affect current earnings.
Movements in the liabilities related to the nonrecurring charges were as follows
(in millions):
EMPLOYEE - ASSET-RELATED
RELATED AND OTHER TOTAL
-----------------------------------------------------
Balance December 31, 2001 $ 7.0 $ .7 $ 7.7
Additional charge 1.9 7.3 9.2
Utilized in 2002 (1.8) (4.7) (6.5)
------- ------- ------
Balance June 30, 2002 $ 7.1 $ 3.3 $10.4
======= ======= ======
The balance of the liabilities will be utilized by the end of 2003 in connection
with the final dismantling and disposal of affected equipment and as severance
and other benefit obligations to affected employees are satisfied.
The Company has established accruals relating primarily to employee separation
costs, facility closure costs and other actions relating to the integration of
certain BBA operations into IFF. Costs associated with these integration actions
were recognized as a component of the purchase accounting which resulted in an
adjustment to goodwill; such costs did not directly impact current earnings.
Movements in these acquisition accounting accruals were as follows (in
millions):
EMPLOYEE - ASSET-RELATED
RELATED AND OTHER TOTAL
-----------------------------------------------------
Balance December 31, 2001 $13.8 $ 9.9 $23.7
Utilized in 2002 (3.7) (3.0) (6.7)
------ ------- ------
Balance June 30, 2002 $10.1 $ 6.9 $17.0
====== ======= ======
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement requires the recording of costs
associated with exit or disposal activities at their fair values only once a
liability exists. Under previous guidance, certain exit costs were accrued when
management committed to an exit plan, which may have been before an actual
liability arose. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002.
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $34.5 million at June
30, 2002. Working capital, at June 30, 2002 was $433.6 million compared to
$336.1 million at December 31, 2001. Gross additions to property, plant and
equipment during the second quarter and first six months of 2002 were $22.0
million and $41.6 million, respectively.
14
At June 30, 2002, the Company's outstanding commercial paper had an average
interest rate of 2.11%. Commercial paper maturities did not extend beyond July
25, 2002 and amounted to $145.8 million. Bank borrowings and the current portion
of long-term debt were $17.1 million and long-term debt, including $26.9 million
related to the interest rate swaps totaled $978.8 million. The weighted average
interest rate on total borrowings was 3.3%.
In each of January and April of 2002, the Company paid a quarterly cash dividend
of $.15 per share to shareholders. This amount is unchanged from the 2001
dividend. The Company repurchased approximately 0.8 million shares in the second
quarter and 1.4 million shares for the first six months of 2002. 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 June 30, 2002, the Company
had approximately $25 million remaining under its authorized September 2000
repurchase plan.
On July 19, 2002, the Company entered into a five-year EURO 350 million, which
approximates $350 million, multi-currency revolving credit facility agreement.
In connection with the execution of this agreement, the Company repaid all
borrowings under its existing EURO 140 million credit facility and cancelled
that facility. In addition, on July 31, 2002 the Company exercised its option
under its $500 million US revolving credit facility and cancelled the $200
million 364-day portion of that agreement. There were no borrowings under the US
agreement.
The Company anticipates that its financing requirements will be funded from
internal sources and credit facilities currently in place.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- -------------------------------------------------------------------------------
Statements in this Management's Discussion and Analysis which are not historical
facts or information are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to risks and
uncertainties that could cause the Company's actual results to differ materially
from those expressed or implied by such forward-looking statements. Risks and
uncertainties with respect to the Company's business include general economic
and business conditions, interest rates, the price and availability of raw
materials, and political and economic uncertainties, including the fluctuation
or devaluation of currencies in countries in which the Company does business.
The Company intends its forward-looking statements to speak only as of the time
of such statements, and does not undertake to update or revise them as more
information becomes available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
There are no material changes from the disclosures in Form 10-K filed with the
Securities and Exchange Commission as of December 31, 2001.
15
PART II. OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The shareholders of the Company voted on two items at the Annual Meeting of
Shareholders held on May 7, 2002:
1. the election of nine directors; and
2. a proposal to approve an amendment to the Company's 2000 Stock Award
and Incentive Plan.
At the Annual Meeting, at which 81,025,314 shares, or 85.66%, of the
Company's Common Stock, were represented in person or by proxy, the nine
nominees for director were duly elected to the Company's Board of Directors.
There was no solicitation of proxies in opposition to these nominees. Votes were
cast for election of directors as follows:
Nominee Votes For Votes Withheld
- ------- --------- --------------
Margaret Hayes Adame 79,897,291 1,128,023
Gunter Blobel 76,185,469 4,839,845
James R. Cantalupo 80,203,294 822,020
J. Michael Cook 80,211,011 814,303
Peter A. Georgescu 80,219,040 806,274
Richard A. Goldstein 80,224,959 800,355
Arthur C. Martinez 79,891,098 1,134,216
Henry P. van Ameringen 78,643,647 2,381,667
William D. Van Dyke, III 78,346,215 2,679,099
The proposal to approve an amendment to the Company's 2000 Stock Award
and Incentive Plan was approved as follows, the votes being legally sufficient
to adopt the proposal:
Votes Abstained
Votes For Votes Against And Non-Voting
--------- ------------- --------------
67,951,647 12,796,976 276,691
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
10(a) Executive Separation Policy, as amended through February 13, 2001.
10(b) Multi-currency Revolving Credit Facility Agreement dated as of July 19,
2002 among International Flavors & Fragrances (Luxembourg) S.A.R.L., as
Borrower, the Company, as Guarantor, certain Original Lenders, Barclays
Bank PLC, as Agent, ABN AMRO BANK NV and Barclays Capital, as
Arrangers.
10(c) Amendment No. 1 dated as of June 10, 2002 to the Five Year Credit
Agreement dated as of September 26, 2001 among the Company, as
Borrower, certain Initial Lenders and Citibank N.A., as Administrative
Agent.
10(d) 2000 Stock Award and Incentive Plan adopted by the Company's Board of
Directors on March 9, 2000, as amended and restated through May 7,
2002.
10(e) 2000 Supplemental Stock Award Plan adopted by the Company's Board of
Directors on November 14, 2000, as amended and restated through March
12, 2002.
10(f) Deferred Compensation Plan adopted by the Company's Board of Directors
on December 12, 2000, incorporated by reference to Exhibit 99 to the
Company's Registration Statement on Form S-8 dated May 16, 2001.
10(g) Restated Certificate of Incorporation of the Company, filed with the
State of New York Department of State on September 16, 1993.
(b) Reports on Form 8-K.
--------------------
The Company filed the following reports on Form 8-K during the quarter
for which this report on Form 10-Q is filed:
o Report on Form 8-K dated May 22, 2002 containing a description of
a stock option exercise and related share sales program being
implemented by Richard A. Goldstein, Chairman and Chief Executive
Officer of the Company, pursuant to which Mr. Goldstein's direct
ownership of the Company's shares would substantially increase.
o Report on Form 8-K dated June 14, 2002 providing information
updating prior filings regarding a purported class action law suit
brought against the Company in the Circuit Court of Jasper County,
Missouri on behalf of employees of a plant manufacturing microwave
popcorn that is owned and operated by Gilster-Mary Lee Corp.
17
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: August 12, 2002 By: /S/ DOUGLAS J. WETMORE
--------------------------
Douglas J. Wetmore, Senior Vice President and
Chief Financial Officer
Dated: August 12, 2002 By: /S/ STEPHEN A. BLOCK
------------------------
Stephen A. Block, Senior Vice President,
General Counsel and Secretary
EXHIBIT INDEX
-------------
Number Description
- ------ -----------
10(a) Executive Separation Policy, as amended through February 13, 2001.
10(b) Multi-currency Revolving Credit Facility Agreement dated as of July 19,
2002 among International Flavors & Fragrances (Luxembourg) S.A.R.L., as
Borrower, the Company, as Guarantor, certain Original Lenders, Barclays
Bank PLC, as Agent, ABN AMRO BANK NV and Barclays Capital, as
Arrangers.
10(c) Amendment No. 1 dated as of June 10, 2002 to the Five Year Credit
Agreement dated as of September 26, 2001 among the Company, as
Borrower, certain Initial Lenders and Citibank N.A., as Administrative
Agent.
10(d) 2000 Stock Award and Incentive Plan adopted by the Company's Board of
Directors on March 9, 2000, as amended and restated through May 7,
2002.
10(e) 2000 Supplemental Stock Award Plan adopted by the Company's Board of
Directors on November 14, 2000, as amended and restated through March
12, 2002.
10(f) Deferred Compensation Plan adopted by the Company's Board of Directors
on December 12, 2000, incorporated by reference to Exhibit 99 to the
Company's Registration Statement on Form S-8 dated May 16, 2001.
10(g) Restated Certificate of Incorporation of the Company, filed with the
State of New York Department of State on September 16, 1993.