NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These interim statements and related management’s discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our 2019 Annual Report on Form 10-K (“2019 Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. We have historically operated and continue to operate on a 52/53 week fiscal year ending on the Friday closest to the last day of the quarter. For ease of presentation, March 31 and December 31 are used consistently throughout this Form 10-Q and these interim financial statements and related notes to represent the period-end dates. For the 2020 and 2019 quarters, the actual closing dates were April 3 and March 29, respectively. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. When used herein, the terms “IFF,” the “Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc. and its consolidated subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. The inputs into our judgments and estimates consider the current economic implications of COVID-19 on our critical and significant accounting estimates, including estimates associated with future cash flows that are used in assessing the risk of impairment of certain long lived assets. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Company's statement of cash flows periods ended March 31, 2020 and March 31, 2019 to the amounts reported in the Company's balance sheet as at March 31, 2020, December 31, 2019, March 31, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2019
|
|
December 31, 2018
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
433,246
|
|
|
$
|
606,823
|
|
|
$
|
483,504
|
|
|
$
|
634,897
|
|
Restricted cash
|
9,699
|
|
|
17,122
|
|
|
13,625
|
|
|
13,625
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
Restricted cash included in Other assets
|
5,439
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash, cash equivalents and restricted cash
|
$
|
448,384
|
|
|
$
|
623,945
|
|
|
$
|
497,129
|
|
|
$
|
648,522
|
|
Accounts Receivable
The Company has various factoring agreements in the U.S. and The Netherlands under which it can factor up to approximately $100 million in receivables. In addition, the Company has factoring agreements sponsored by certain customers. Under all of the arrangements, the Company sells the receivables on a non-recourse basis to unrelated financial institutions and accounts for the transactions as a sale of receivables. The applicable receivables are removed from the Company's Consolidated Balance Sheet when the cash proceeds are received by the Company.
Through these factoring programs, the Company removed $200.3 million and $205.7 million of receivables from its balance sheet for the periods ended March 31, 2020 and December 31, 2019, respectively.
The impact on cash provided by operations from participating in these programs was a decrease of $5.4 million for the three months ended March 31, 2020 and an increase of $5.2 million for the three months ended March 31, 2019.
The cost of participating in these programs was $1.2 million for both of the periods ending March 31, 2020 and 2019.
Revenue Recognition
The Company recognizes revenue when control of the promised goods is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods. Sales, value added, and other taxes the Company collects are excluded from revenues. The Company receives payment in accordance with standard customer terms.
The following table presents the Company's revenues disaggregated by product categories:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Taste
|
|
|
|
Flavor compounds
|
$
|
576,368
|
|
|
$
|
567,314
|
|
Savory solutions
|
155,764
|
|
|
136,337
|
|
Inclusions
|
30,146
|
|
|
28,633
|
|
Nutrition and specialty ingredients
|
43,955
|
|
|
44,208
|
|
Flavor ingredients
|
24,089
|
|
|
28,310
|
|
Total Taste
|
830,322
|
|
|
804,802
|
|
Scent
|
|
|
|
Fine fragrances
|
94,150
|
|
|
106,074
|
|
Consumer fragrance
|
314,028
|
|
|
283,221
|
|
Fragrance ingredients
|
108,817
|
|
|
103,305
|
|
Total Scent
|
516,995
|
|
|
492,600
|
|
Total revenues
|
$
|
1,347,317
|
|
|
$
|
1,297,402
|
|
Contract Assets
With respect to a small number of contracts for the sale of compounds, the Company has an “enforceable right to payment for performance to date” and as the products do not have an alternative use, the Company recognizes revenue for these contracts over time and records a contract asset using the output method. The output method recognizes revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract.
The following table reflects the balances in the Company's accounts receivable, contract assets, and contract liabilities for the periods ended March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
March 31, 2020
|
|
December 31, 2019
|
Receivables (included in Trade receivables)
|
$
|
961,842
|
|
|
$
|
892,625
|
|
Contract asset - Short term
|
1,951
|
|
|
2,736
|
|
Contract liabilities - Short term
|
11,379
|
|
|
11,107
|
|
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to simplify various aspects related to the cessation of reference rates in certain financial markets that would otherwise create modification accounting or changes in estimate. This guidance is effective for March 12, 2020 through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through March 31, 2020 but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify various aspects related to accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract (a consensus of the FASB Emerging Issues Task Force).” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance effective the first day of its 2020 fiscal year. The adoption did not have an impact on its consolidated financial statements but may impact the Company in the future as and when it enters into cloud computing arrangements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans (Subtopic 715-20)", which modifies the disclosure requirements on company-sponsored defined benefit plans. The ASU is effective for fiscal years beginning after December 15, 2020 on a retrospective basis to all periods presented. Early adoption is permitted. The Company adopted the guidance effective the first day of its 2020 fiscal year. The adoption did not have an impact on its Consolidated Financial Statements and will have a minimal impact on its disclosures in future periods.
Adoption of Standard Related to Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", with subsequent amendments, which requires issuers to measure expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking information to estimate credit losses, which may result in earlier recognition of losses.
The Company adopted the guidance effective the first day of its 2020 fiscal year and performed an evaluation of the applicable criteria, including the aging of its trade receivables, recent write-off history and other factors related to future macroeconomic conditions. As a result of the evaluation, the Company determined that no adjustment would be required to the level of its allowances for bad debts or to the carrying value of any other financial asset.
The Company is exposed to credit losses primarily through its sales of products. To determine the appropriate allowance for expected credit losses, the Company considers certain credit quality indicators, such as aging, collection history, and creditworthiness of debtors. Regional and Global Credit committees review and approve specific customer allowance reserves. The allowance for expected credit losses is primarily based on two primary factors: i) the aging of the different categories of trade receivables, and ii) a specific reserve for accounts identified as uncollectable.
The Company also considers current and future economic conditions in the determination of the allowance. At March 31, 2020, the Company reported $961.8 million of trade receivables, net of allowances of $18.7 million. Based on an aging analysis at March 31, 2020, approximately 87% of our accounts receivable were current based on the payment terms of the invoice. Receivables that are past due by over 365 days account for less than 1% of our accounts receivable.
The following is a rollforward of the Company's allowances for bad debts for the three months ended March 31, 2020:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Allowances for
Bad Debts
|
Balance at December 31, 2019
|
$
|
16,428
|
|
Bad debt expense
|
4,751
|
|
Write-offs
|
(1,301
|
)
|
Foreign exchange
|
(1,150
|
)
|
Balance at March 31, 2020
|
$
|
18,728
|
|
The Company adjusted the amount of the allowances for bad debts as of December 31, 2019 to reflect the correct classification of amounts between the allowances for bad debts and Trade Receivables. The adjustment was for $8.2 million and had the effect of increasing both the allowances for bad debts and Trade Receivables.
During the first quarter of 2020, the Company increased its allowances for bad debts by approximately $3.0 million to reflect higher expected future write-offs of receivables due to the impact of the COVID-19 pandemic and its impact on the liquidity of certain customers.
NOTE 2. NET INCOME PER SHARE
A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
|
2020
|
|
2019
|
Net Income
|
|
|
|
Net income attributable to IFF stockholders
|
$
|
124,607
|
|
|
$
|
108,829
|
|
Add: Reduction in redemption value of redeemable noncontrolling interests in excess of earnings allocated
|
5,806
|
|
|
370
|
|
Net income available to IFF stockholders
|
$
|
130,413
|
|
|
$
|
109,199
|
|
Shares
|
|
|
|
Weighted average common shares outstanding (basic)(1)
|
112,082
|
|
|
111,864
|
|
Adjustment for assumed dilution(2):
|
|
|
|
Stock options and restricted stock awards
|
349
|
|
|
362
|
|
SPC portion of TEUs
|
1,163
|
|
|
1,163
|
|
Weighted average shares assuming dilution (diluted)
|
113,594
|
|
|
113,389
|
|
|
|
|
|
Net Income per Share
|
|
|
|
Net income per share - basic
|
$
|
1.16
|
|
|
$
|
0.97
|
|
Net income per share - diluted
|
1.15
|
|
|
0.96
|
|
_______________________
|
|
(1)
|
For the three months ended March 31, 2020 and 2019, the tangible equity units (“TEUs”) were assumed to be outstanding at the minimum settlement amount for basic earnings per share. See below for details.
|
|
|
(2)
|
Effect of dilutive securities includes dilution under stock plans and incremental impact of TEUs. See below for details.
|
The Company declared a quarterly dividend to its shareholders of $0.75 and $0.73 for the three months ended March 31, 2020 and 2019, respectively.
There were no stock options or stock-settled appreciation rights (“SSARs”) excluded from the computation of diluted net income per share for the three months ended March 31, 2020 and 2019.
The Company issued 16,500,000 TEUs, consisting of a prepaid stock purchase contract ("SPC") and a senior amortizing note, for net proceeds of $800.2 million on September 17, 2018. For purposes of calculating basic net income per share, the SPCs were assumed to be settled at the minimum settlement amount of 0.3134 shares per SPC for March 31, 2020 and 2019, respectively. For purposes of calculating diluted earnings per share, the SPCs were assumed to be settled at a conversion factor not to exceed 0.3839 on March 31, 2020 and 2019, respectively. The SPC conversion factor is based on the 20 day volume-weighted average price (“VWAP”) per share of the Company’s common stock. Per the TEU agreement, the maximum settlement amount is 0.3839 shares per SPC.
The Company has issued shares of purchased restricted common stock and purchased restricted common stock units (collectively “PRSUs”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities. Such securities are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. The Company did not present the two-class method since the difference between basic and diluted net income per share for both unrestricted common shareholders and PRSU shareholders was less than $0.01 per share for each period presented, and the number of PRSUs outstanding as of March 31, 2020 and 2019 was immaterial. Net income allocated to such PRSUs was $0.2 million for both the three months ended March 31, 2020 and 2019.
NOTE 3. ACQUISITIONS
Pending Transaction with Nutrition & Biosciences, Inc.
On December 15, 2019, the Company entered into definitive agreements with DuPont de Nemours, Inc. (“DuPont”), including an Agreement and Plan of Merger, pursuant to which DuPont will transfer its nutrition and biosciences business to Nutrition & Biosciences, Inc., a Delaware corporation and wholly owned subsidiary of DuPont (“N&B”), and N&B will merge with and into a wholly owned subsidiary of IFF in exchange for a number of shares of IFF common stock, par value $0.125 per
share (“IFF Common Stock”) (collectively, the “DuPont N&B Transaction”). In connection with the transaction, DuPont will receive a one-time $7.3 billion special cash payment (the “Special Cash Payment”), subject to certain adjustments. As a result of the DuPont N&B Transaction, holders of DuPont’s common stock will own approximately 55.4% of the outstanding shares of IFF on a fully diluted basis.
Completion of the DuPont N&B Transaction is subject to various closing conditions, including, among other things, (1) approval by IFF’s shareholders of the issuance of IFF Common Stock in connection with the transaction; (2) the effectiveness of the registration statements to be filed with the Securities and Exchange Commission pursuant to the Merger Agreement; and (3) the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (which waiting period has expired), and obtaining certain other consents, authorizations, orders or approvals from governmental authorities. We expect that the transaction will close in early 2021.
On December 15, 2019, IFF and N&B entered into a commitment letter which provides $7.5 billion in an aggregate principal amount of senior unsecured bridge term loans (the "Bridge Loans"). On January 17, 2020, N&B entered into a term loan credit agreement providing for unsecured term loan facilities in an aggregate principal amount of $1.25 billion (the “Term Loan Facilities”), which reduced the commitments under the Bridge Loans commitment letter by a corresponding amount. N&B will be the initial borrower under the remaining $6.25 billion tranche of the 364-day senior unsecured bridge facility (the “Bridge Facility”) (or, if applicable, any replacement debt financing), which, together with the Term Loan Facilities, will be used to finance the Special Cash Payment and to pay related fees and expenses. Following the consummation of the merger, all obligations of N&B with respect to the Term Loan Facilities and the Bridge Facility (if any) or, if applicable, the replacement debt financing, will be guaranteed by IFF (or at the election of N&B and IFF, assumed by IFF).
2019 Acquisition Activity
During the second quarter of 2019, the Company acquired the remaining 50% interest in an equity method investee located in Canada. The purchase of the additional interest increased the Company's ownership of the investee to 100%. The purchase price for the remaining 50% was approximately $37 million, including cash and an accrual for the amount expected to be paid in contingent consideration. The Company began to consolidate the results of the acquired entity from the date on which it acquired the remaining 50% interest during the second quarter of 2019. Goodwill of approximately $30 million and intangible assets of $20 million were recorded in connection with the acquisition.
During the first quarter of 2019, the Company acquired 70% of a company in Europe and increased its ownership of an Asian company from 49% to 60%. The total purchase price for the two acquisitions made in the first quarter of 2019 was $52 million, excluding cash acquired and including $19 million of contingent consideration and deferred payments. The purchase price allocations have been performed and resulted in goodwill of approximately $47 million and intangible assets of $28 million.
During the first quarter of 2020, the Company completed the purchase price allocations for all three of the transactions that were made during 2019. As a result of finalizing the purchase price allocations, adjustments were recorded to increase fixed assets by $13 million and customer relationships and other intangible assets by $5 million and to decrease goodwill by $15 million. The income statement impact of the finalization of purchase accounting was not material.
Pro forma information has not been presented as the entities acquired in 2019 were not material.
NOTE 4. RESTRUCTURING AND OTHER CHARGES, NET
Restructuring and other charges primarily consist of separation costs for employees including severance, outplacement and other benefit ("Severance") costs as well as costs related to plant closures, the costs of accelerated depreciation of fixed assets associated with plants ("Fixed asset write-down") and all other related restructuring ("Other") costs. All restructuring and other charges, net expenses are separately stated on the Consolidated Statement of Comprehensive (Loss) Income.
Frutarom Integration Initiative
In connection with the acquisition of Frutarom, the Company began to execute an integration plan that, among other initiatives, seeks to optimize its manufacturing network. As part of the Frutarom Integration Initiative, the Company expects to close approximately 35 manufacturing sites over the next twelve months with most of the closures targeted to occur before the end of fiscal 2021. During 2019, the Company announced the closure of ten facilities, of which six facilities are in Europe, Africa and Middle East, two facilities in Latin America, and one facility in each North America and Greater Asia regions. During the three months ended March 31, 2020, the Company announced the closure of four facilities, of which two facilities are in Europe, Africa and Middle East, one facility in Latin America, and one facility in North America. Since the inception of the initiative to date, the Company has expensed $15.3 million. Total costs for the program are expected to be approximately $60 million including cash and non-cash items.
2019 Severance Program
During the year ended December 31, 2019, the Company incurred severance charges related to approximately 190 headcount reductions, excluding those previously mentioned under the Frutarom Integration Initiative. The headcount reductions primarily related to the Scent business unit with additional amounts related to headcount reductions in all business units associated with the establishment of a new shared service center in Europe. Since the inception of the program, the Company has expensed $21.3 million to date. Total costs for the program are expected to be approximately $25 million.
2017 Productivity Program
In connection with the 2017 Productivity Program, the Company recorded $24.5 million of charges related to personnel costs and lease termination costs since the program's inception to date. Total costs for the program are expected to be approximately $25 million.
Changes in Restructuring Liabilities
Changes in restructuring liabilities by program during the three months ended March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Balance at
December 31, 2019
|
|
Additional Charges (Reversals), Net
|
|
Non-Cash Charges
|
|
Cash Payments
|
|
Balance at March 31, 2020
|
2017 Productivity Program
|
|
|
|
|
|
|
|
|
|
Severance
|
$
|
1,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(146
|
)
|
|
$
|
960
|
|
Other(1)
|
88
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88
|
|
Frutarom Integration Initiative
|
|
|
|
|
|
|
|
|
|
Severance
|
4,038
|
|
|
1,869
|
|
|
—
|
|
|
(928
|
)
|
|
4,979
|
|
Fixed asset write down
|
—
|
|
|
3,366
|
|
|
(3,366
|
)
|
|
—
|
|
|
—
|
|
Other(1)
|
2,485
|
|
|
(317
|
)
|
|
—
|
|
|
1
|
|
|
2,169
|
|
2019 Severance Plan
|
|
|
|
|
|
|
|
|
|
Severance
|
12,897
|
|
|
—
|
|
|
—
|
|
|
(1,048
|
)
|
|
11,849
|
|
Other(1)
|
471
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
471
|
|
Total restructuring
|
$
|
21,085
|
|
|
$
|
4,918
|
|
|
$
|
(3,366
|
)
|
|
$
|
(2,121
|
)
|
|
$
|
20,516
|
|
_______________________
|
|
(1)
|
Other includes supplier contract termination costs, consulting and advisory fees.
|
Charges by Segment
The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Taste
|
$
|
4,918
|
|
|
$
|
2,553
|
|
Scent
|
—
|
|
|
10,900
|
|
Shared IT & Corporate Costs
|
—
|
|
|
2,721
|
|
Total Restructuring and other charges, net
|
$
|
4,918
|
|
|
$
|
16,174
|
|
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Movements in goodwill during 2020 were as follows:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Goodwill
|
Balance at December 31, 2019
|
$
|
5,497,596
|
|
Measurement period adjustments(1)
|
(15,283
|
)
|
Foreign exchange
|
(214,754
|
)
|
Balance at March 31, 2020
|
$
|
5,267,559
|
|
_______________________
|
|
(1)
|
Measurement period adjustments relate to adjustments recorded in connection with completing the purchase price allocation related to the 2019 Acquisition Activity. See Note 3 for details.
|
Reallocation of goodwill
In the first quarter of 2020, in connection with the reorganization of the Company's reporting structure, certain entities were moved between reporting units. As a result of the movements, Goodwill was reallocated between reporting units as follows:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Increase (decrease) to Goodwill
|
Cosmetic active ingredients
|
$
|
110,788
|
|
Natural Product Solutions
|
(78,945
|
)
|
Fine Ingredients
|
(29,221
|
)
|
Taste
|
(2,622
|
)
|
Total
|
$
|
—
|
|
See Note 11 for further information on the reorganization.
Other Intangible Assets
Other intangible assets, net consisted of the following amounts:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Asset Type
|
|
|
|
Customer relationships
|
$
|
2,561,536
|
|
|
$
|
2,653,446
|
|
Trade names & patents
|
174,134
|
|
|
178,968
|
|
Technological know-how
|
455,226
|
|
|
468,256
|
|
Other
|
22,410
|
|
|
40,362
|
|
Total carrying value
|
3,213,306
|
|
|
3,341,032
|
|
Accumulated Amortization
|
|
|
|
Customer relationships
|
(348,509
|
)
|
|
(302,047
|
)
|
Trade names & patents
|
(30,595
|
)
|
|
(27,213
|
)
|
Technological know-how
|
(137,162
|
)
|
|
(135,269
|
)
|
Other
|
(19,594
|
)
|
|
(24,568
|
)
|
Total accumulated amortization
|
(535,860
|
)
|
|
(489,097
|
)
|
Other intangible assets, net
|
$
|
2,677,446
|
|
|
$
|
2,851,935
|
|
Amortization
Amortization expense was $48.4 million and $47.6 million for the three months ended March 31, 2020 and 2019, respectively.
Amortization expense for the next five years is expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Estimated future intangible amortization expense
|
$
|
135,577
|
|
|
$
|
178,000
|
|
|
$
|
174,245
|
|
|
$
|
174,135
|
|
|
$
|
174,135
|
|
NOTE 6. OTHER ASSETS
Other assets consisted of the following amounts:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
March 31, 2020
|
|
December 31, 2019
|
Operating lease right-of-use assets
|
$
|
287,301
|
|
|
$
|
287,870
|
|
Deferred income taxes
|
96,109
|
|
|
125,552
|
|
Overfunded pension plans
|
89,819
|
|
|
85,657
|
|
Cash surrender value of life insurance contracts
|
43,694
|
|
|
47,578
|
|
Other(a)
|
69,730
|
|
|
61,759
|
|
Total
|
$
|
586,653
|
|
|
$
|
608,416
|
|
_______________________
|
|
(a)
|
Includes finance lease right-of-use assets, restricted cash, land usage rights in China and long term deposits.
|
NOTE 7. DEBT
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Effective Interest Rate
|
|
March 31, 2020
|
|
December 31, 2019
|
2020 Notes(1)
|
3.69
|
%
|
|
$
|
299,598
|
|
|
$
|
299,381
|
|
2021 Euro Notes(1)
|
0.82
|
%
|
|
327,408
|
|
|
334,561
|
|
2023 Notes(1)
|
3.30
|
%
|
|
299,080
|
|
|
299,004
|
|
2024 Euro Notes(1)
|
1.88
|
%
|
|
546,009
|
|
|
558,124
|
|
2026 Euro Notes(1)
|
1.93
|
%
|
|
870,689
|
|
|
890,183
|
|
2028 Notes(1)
|
4.57
|
%
|
|
396,766
|
|
|
396,688
|
|
2047 Notes(1)
|
4.44
|
%
|
|
493,676
|
|
|
493,571
|
|
2048 Notes(1)
|
5.12
|
%
|
|
786,050
|
|
|
785,996
|
|
Term Loan(1)
|
3.65
|
%
|
|
239,665
|
|
|
239,621
|
|
Amortizing Notes(1)
|
6.09
|
%
|
|
70,882
|
|
|
82,079
|
|
Bank overdrafts and other
|
|
|
2,594
|
|
|
3,131
|
|
Deferred realized gains on interest rate swaps
|
|
|
57
|
|
|
57
|
|
Total debt
|
|
|
4,332,474
|
|
|
4,382,396
|
|
Less: Short-term borrowings(2)
|
|
|
(385,569
|
)
|
|
(384,958
|
)
|
Total Long-term debt
|
|
|
$
|
3,946,905
|
|
|
$
|
3,997,438
|
|
_______________________
|
|
(1)
|
Amount is net of unamortized discount and debt issuance costs.
|
|
|
(2)
|
Includes bank borrowings, overdrafts and current portion of long-term debt.
|
NOTE 8. LEASES
The Company has operating leases for corporate offices, manufacturing facilities, research and development facilities, and certain transportation and office equipment, all of which are operating leases. The Company's leases have remaining lease terms of up to 40 years, some of which include options to extend the leases for up to 5 years.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
(DOLLARS IN THOUSANDS)
|
March 31, 2020
|
|
March 31, 2019
|
Operating lease cost
|
$
|
12,443
|
|
|
$
|
12,469
|
|
Finance lease cost
|
753
|
|
|
—
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Three Months Ended
|
(DOLLARS IN THOUSANDS)
|
March 31, 2020
|
|
March 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
$
|
12,331
|
|
|
$
|
11,076
|
|
Operating cash flows for finance leases
|
33
|
|
|
—
|
|
Financing cash flows for finance leases
|
721
|
|
|
—
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
Operating leases
|
10,968
|
|
|
9,249
|
|
Finance leases
|
1,930
|
|
|
452
|
|
NOTE 9. INCOME TAXES
Uncertain Tax Positions
As of March 31, 2020, the Company had $71.4 million of unrecognized tax benefits recorded in Other liabilities and $0.7 million recorded to Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
At March 31, 2020, the Company had accrued interest and penalties of $14.2 million classified in Other liabilities and less than $0.1 million classified in Other current liabilities.
As of March 31, 2020, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $86.4 million associated with tax positions asserted in various jurisdictions, none of which is individually material.
The Company regularly repatriates earnings from non-U.S. subsidiaries. As the Company repatriates these funds to the U.S., they will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. Accordingly, as of March 31, 2020, the Company had a deferred tax liability of $42.6 million for the effect of repatriating the funds to the U.S., attributable to various non-U.S. subsidiaries. There is no deferred tax liability associated with non-U.S. subsidiaries where we intend to indefinitely reinvest the earnings to fund local operations and/or capital projects.
The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review. In addition, the Company has open tax years with various taxing jurisdictions that range primarily from 2010 to 2019. Based on currently available information, the Company does not believe the outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on its results of operations.
The Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, sales and use taxes and property taxes, which are discussed in Note 15.
Effective Tax Rate
The effective tax rate for the three months ended March 31, 2020 was 17.1% compared with 17.4% for the three months ended March 31, 2019. The quarter-over-quarter decrease is primarily due to lower repatriation costs and the reversal of loss provisions, partially offset by an unfavorable mix of earnings.
NOTE 10. STOCK COMPENSATION PLANS
The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRSUs, restricted stock units ("RSUs"), SSARs and Long-Term Incentive Plan awards. Liability-based awards outstanding under the plans are cash-settled RSUs.
Stock-based compensation expense and related tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Equity-based awards
|
$
|
8,624
|
|
|
$
|
7,604
|
|
Liability-based awards
|
(639
|
)
|
|
730
|
|
Total stock-based compensation expense
|
7,985
|
|
|
8,334
|
|
Less: Tax benefit
|
(1,394
|
)
|
|
(1,382
|
)
|
Total stock-based compensation expense, after tax
|
$
|
6,591
|
|
|
$
|
6,952
|
|
NOTE 11. SEGMENT INFORMATION
During the first quarter of 2020, the Company reorganized its reporting structure and combined substantially all of the components of the former Frutarom reportable operating segment into the former Taste reportable operating segment. Prior year amounts have been recast to conform to the current year reporting structure. As a result of the reorganization, the Company is now organized into two reportable operating segments, Taste and Scent; these segments align with the internal structure used to manage these businesses.
Taste is comprised of a diversified portfolio across flavor compounds, savory solutions, inclusions and nutrition and specialty ingredients. Flavor compounds provide unique flavors that are ultimately used by IFF's customers in savory products,
beverages, sweets, and dairy products. Savory solutions include marinades or powder blends of flavors, natural colors, seasonings, functional ingredients and natural anti-oxidants that are primarily designed for the meat and fish industry. Inclusions provide taste and texture by, among other things, combining flavorings with fruit, vegetables, and other natural ingredients for a wide range of food products, such as health snacks, baked goods, cereals, pastries, ice cream and other dairy products. Nutrition and specialty ingredients primarily consist of natural health ingredients, natural food protection, natural colors and flavor ingredients. The flavor ingredients market includes natural flavor extracts, specialty botanical extracts, distillates, essential oils, citrus products, aroma chemicals, and natural gums and resins. Such ingredients are used for food, beverage, and flavors and are often sold directly to food and beverage manufacturers who use them in producing consumer products.
Scent is comprised of (1) Fragrance Compounds, which are ultimately used by our customers in two broad categories: Fine Fragrances, including perfumes and colognes, and Consumer Fragrances, including fragrance compounds for personal care (e.g., soaps), household products (e.g., detergents and cleaning agents) and beauty care, including toiletries; (2) Fragrance Ingredients, consisting of synthetic and natural ingredients that can be combined with other materials to create unique fine fragrance and consumer compounds; and (3) Cosmetic Active Ingredients, consisting of active and functional ingredients, botanicals and delivery systems to support our customers’ cosmetic and personal care product lines. Major fragrance customers include the cosmetics industry, including perfume and toiletries manufacturers, and the household products industry, including manufacturers of soaps, detergents, fabric care, household cleaners and air fresheners.
The Company's Chief Operating Decision Maker evaluates the performance of these reportable operating segments based on segment profit which is defined as operating profit before restructuring, global expenses (as discussed below) and certain non-recurring items, Interest expense, Other income (expense), net and Taxes on income.
The Global expenses caption represents corporate and headquarter-related expenses which include legal, finance, human resources, certain incentive compensation expenses and other R&D and administrative expenses that are not allocated to individual reportable operating segments.
Reportable segment information was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Net sales:
|
|
|
|
Taste
|
$
|
830,322
|
|
|
$
|
804,802
|
|
Scent
|
516,995
|
|
|
492,600
|
|
Consolidated
|
$
|
1,347,317
|
|
|
$
|
1,297,402
|
|
Segment profit:
|
|
|
|
Taste
|
$
|
137,347
|
|
|
$
|
131,402
|
|
Scent
|
105,395
|
|
|
89,953
|
|
Global expenses
|
(20,393
|
)
|
|
(16,667
|
)
|
Operational Improvement Initiatives (a)
|
—
|
|
|
(406
|
)
|
Frutarom Integration Related Costs (b)
|
(3,650
|
)
|
|
(14,897
|
)
|
Restructuring and Other Charges, net (c)
|
(4,918
|
)
|
|
(16,174
|
)
|
(Losses) gains on sale of assets
|
(754
|
)
|
|
188
|
|
Frutarom Acquisition Related Costs (d)
|
(813
|
)
|
|
(9,529
|
)
|
Compliance Review & Legal Defense Costs (e)
|
(649
|
)
|
|
—
|
|
N&B Transaction Related Costs (f)
|
(5,199
|
)
|
|
—
|
|
N&B Integration Related Costs (g)
|
(10,144
|
)
|
|
—
|
|
Operating profit
|
196,222
|
|
|
163,870
|
|
Interest expense
|
(32,140
|
)
|
|
(36,572
|
)
|
Other (loss) income, net
|
(10,574
|
)
|
|
7,278
|
|
Income before taxes
|
$
|
153,508
|
|
|
$
|
134,576
|
|
|
|
|
(a)
|
Represents accelerated depreciation related to a plant relocation in India.
|
|
|
|
(b)
|
Represents costs related to the integration of the Frutarom acquisition. For 2020, costs primarily related to advisory services, retention bonuses and performance stock awards. For 2019, costs principally related to advisory services.
|
(c)
|
For 2020, represents costs primarily related to the Frutarom Integration Initiative. For 2019, represents costs primarily related to the Frutarom Integration Initiative and the 2019 Severance Charges program.
|
(d)
|
Represents transaction-related costs and expenses related to the acquisition of Frutarom. For 2020, amount primarily includes earn-out payments, net of adjustments, amortization for inventory "step-up" costs and transaction costs principally related to the 2019 Acquisition Activity. For 2019, amount primarily includes amortization for inventory "step-up" costs and transaction costs.
|
(e)
|
Costs related to reviewing the nature of inappropriate payments and review of compliance in certain other countries. In addition, includes legal costs for related shareholder lawsuits.
|
(f)
|
Represents transaction costs and expenses related to the pending transaction with Nutrition & Biosciences Inc.
|
(g)
|
Represents costs related to the integration of the pending transaction with Nutrition & Biosciences Inc.
|
Net sales, which are attributed to individual regions based upon the destination of product delivery, were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Europe, Africa and Middle East
|
$
|
543,130
|
|
|
$
|
529,606
|
|
Greater Asia
|
309,508
|
|
|
287,962
|
|
North America
|
303,387
|
|
|
301,059
|
|
Latin America
|
191,292
|
|
|
178,775
|
|
Consolidated
|
$
|
1,347,317
|
|
|
$
|
1,297,402
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Net sales related to the U.S.
|
$
|
270,686
|
|
|
$
|
272,803
|
|
Net sales attributed to all foreign countries
|
1,076,631
|
|
|
1,024,599
|
|
No non-U.S. country had net sales in any period presented greater than 6% of total consolidated net sales.
NOTE 12. EMPLOYEE BENEFITS
Pension and other defined contribution retirement plan expenses included the following components:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
U.S. Plans
|
Three Months Ended March 31,
|
2020
|
|
2019
|
Service cost for benefits earned(1)
|
$
|
400
|
|
|
$
|
474
|
|
Interest cost on projected benefit obligation(2)
|
4,263
|
|
|
5,453
|
|
Expected return on plan assets(2)
|
(7,083
|
)
|
|
(6,983
|
)
|
Net amortization and deferrals(2)
|
1,858
|
|
|
1,275
|
|
Net periodic benefit (income) cost
|
$
|
(562
|
)
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Non-U.S. Plans
|
Three Months Ended March 31,
|
2020
|
|
2019
|
Service cost for benefits earned(1)
|
$
|
5,940
|
|
|
$
|
4,873
|
|
Interest cost on projected benefit obligation(2)
|
3,245
|
|
|
4,435
|
|
Expected return on plan assets(2)
|
(11,614
|
)
|
|
(10,904
|
)
|
Net amortization and deferrals(2)
|
3,834
|
|
|
2,922
|
|
Net periodic benefit (income) cost
|
$
|
1,405
|
|
|
$
|
1,326
|
|
_______________________
|
|
(1)
|
Included as a component of Operating profit.
|
|
|
(2)
|
Included as a component of Other loss (income), net.
|
The Company expects to contribute a total of $4.4 million to its U.S. pension plans and a total of $20.9 million to its Non-U.S. Plans during 2020. During the three months ended March 31, 2020, no contributions were made to the qualified U.S. pension plans, $3.9 million of contributions were made to the non-U.S. pension plans, and $1.5 million of benefit payments were made with respect to the Company's non-qualified U.S. pension plan.
Expense recognized for postretirement benefits other than pensions included the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
Service cost for benefits earned
|
$
|
143
|
|
|
$
|
148
|
|
Interest cost on projected benefit obligation
|
474
|
|
|
578
|
|
Net amortization and deferrals
|
(1,153
|
)
|
|
(1,194
|
)
|
Total postretirement benefit income
|
$
|
(536
|
)
|
|
$
|
(468
|
)
|
The Company expects to contribute $3.8 million to its postretirement benefits other than pension plans during 2020. In the three months ended March 31, 2020, $1 million of contributions were made.
NOTE 13. FINANCIAL INSTRUMENTS
Fair Value
Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
•
|
Level 1 — Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
•
|
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company determines the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the London Interbank Offer Rate ("LIBOR") swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. The Company does not have any instruments classified as Level 3, other than those included in pension asset trusts as discussed in Note 16 of our 2019 Form 10-K.
These valuations take into consideration the Company's credit risk and its counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in its own credit risk (or instrument-specific credit risk) was immaterial as of March 31, 2020.
The carrying values and the estimated fair values of financial instruments at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
(DOLLARS IN THOUSANDS)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
LEVEL 1
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
$
|
433,246
|
|
|
$
|
433,246
|
|
|
$
|
606,823
|
|
|
$
|
606,823
|
|
LEVEL 2
|
|
|
|
|
|
|
|
Credit facilities and bank overdrafts(2)
|
2,594
|
|
|
2,594
|
|
|
3,131
|
|
|
3,131
|
|
Derivatives
|
|
|
|
|
|
|
|
Derivative assets(3)
|
32,892
|
|
|
32,892
|
|
|
3,575
|
|
|
3,575
|
|
Derivative liabilities(3)
|
5,631
|
|
|
5,631
|
|
|
7,415
|
|
|
7,415
|
|
Long-term debt:(4)
|
|
|
|
|
|
|
|
2020 Notes
|
299,598
|
|
|
301,191
|
|
|
299,381
|
|
|
302,700
|
|
2021 Euro Notes
|
327,408
|
|
|
327,667
|
|
|
334,561
|
|
|
338,244
|
|
2023 Notes
|
299,080
|
|
|
303,381
|
|
|
299,004
|
|
|
305,580
|
|
2024 Euro Notes
|
546,009
|
|
|
549,159
|
|
|
558,124
|
|
|
586,825
|
|
2026 Euro Notes
|
870,689
|
|
|
822,800
|
|
|
890,183
|
|
|
945,306
|
|
2028 Notes
|
396,766
|
|
|
418,176
|
|
|
396,688
|
|
|
441,500
|
|
2047 Notes
|
493,676
|
|
|
446,510
|
|
|
493,571
|
|
|
526,106
|
|
2048 Notes
|
786,050
|
|
|
823,569
|
|
|
785,996
|
|
|
919,040
|
|
Term Loan(2)
|
239,665
|
|
|
240,000
|
|
|
239,621
|
|
|
240,000
|
|
Amortizing Notes(5)
|
70,882
|
|
|
71,810
|
|
|
82,079
|
|
|
84,430
|
|
_______________________
|
|
(1)
|
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.
|
|
|
(2)
|
The carrying amount approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.
|
|
|
(3)
|
The carrying amount approximates fair value as the instruments are marked-to-market and held at fair value on the Consolidated Balance Sheet.
|
|
|
(4)
|
The fair value of the Company's long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on its own credit risk.
|
|
|
(5)
|
The fair value of the Amortizing Notes of the TEUs is based on the most recently quoted price for the outstanding securities, adjusted for any known significant deviation in value. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.
|
Derivatives
Forward Currency Forward Contracts
The Company periodically enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with its intercompany loans, foreign currency receivables and payables and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding twelve months and are with counterparties which are major international financial institutions.
Cash Flow Hedges
The Company maintains several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar ("USD") denominated raw material purchases made by Euro ("EUR") functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of Gains (losses) on derivatives qualifying as hedges in the accompanying Consolidated Statement of Income and Comprehensive (Loss) Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized as a component of Cost of goods sold in the
accompanying Consolidated Statement of Income and Comprehensive (Loss) Income in the same period as the related costs are recognized.
Hedges Related to Issuances of Debt
Subsequent to the issuance of the 2021 Euro Notes and 2026 Euro Notes during the third quarter of 2018, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of foreign currency translation adjustments in the accompanying Consolidated Statement of Income and Comprehensive (Loss) Income.
Subsequent to the issuance of the 2024 Euro Notes during the first quarter of 2016, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of foreign currency translation adjustments in the accompanying Consolidated Statement of Income and Comprehensive (Loss) Income.
Cross Currency Swaps
During the third quarter of 2019, the Company entered into four new EUR/USD cross currency swaps that mature through May 2023 covering the same notional amounts of debt. The new swaps qualified as net investment hedges in order to mitigate a portion of the Company's net European investments from foreign currency risk. As of March 31, 2020, these swaps were in a net asset position with an aggregate fair value of $27.7 million which was classified as other current assets. Changes in fair value related to cross currency swaps are recorded in OCI.
The following table shows the notional amount of the Company’s derivative instruments outstanding as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
March 31, 2020
|
|
December 31, 2019
|
Foreign currency contracts
|
$
|
242,904
|
|
|
$
|
473,600
|
|
Cross currency swaps
|
600,000
|
|
|
600,000
|
|
The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy), as reflected in the Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(DOLLARS IN THOUSANDS)
|
Fair Value of
Derivatives
Designated as
Hedging
Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging
Instruments
|
|
Total Fair Value
|
Derivative assets(a)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2,803
|
|
|
$
|
2,421
|
|
|
$
|
5,224
|
|
Cross currency swaps
|
27,668
|
|
|
—
|
|
|
27,668
|
|
|
$
|
30,471
|
|
|
$
|
2,421
|
|
|
$
|
32,892
|
|
Derivative liabilities(b)
|
|
|
|
|
|
Foreign currency contract
|
$
|
—
|
|
|
$
|
5,631
|
|
|
$
|
5,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(DOLLARS IN THOUSANDS)
|
Fair Value of
Derivatives
Designated as
Hedging
Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging
Instruments
|
|
Total Fair Value
|
Derivative assets(a)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1,310
|
|
|
$
|
2,265
|
|
|
$
|
3,575
|
|
Derivative liabilities(b)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
797
|
|
|
$
|
2,431
|
|
|
$
|
3,228
|
|
Interest rate swaps
|
4,187
|
|
|
—
|
|
|
4,187
|
|
Total derivative liabilities
|
$
|
4,984
|
|
|
$
|
2,431
|
|
|
$
|
7,415
|
|
_______________________
|
|
(a)
|
Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheet.
|
|
|
(b)
|
Derivative liabilities are recorded as Other current liabilities in the Consolidated Balance Sheet.
|
The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statement of Income and Comprehensive (Loss) Income for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Location of Gain (Loss) Recognized in Income on Derivative
|
(DOLLARS IN THOUSANDS)
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Foreign currency contracts(1)
|
$
|
(7,663
|
)
|
|
$
|
926
|
|
|
Other (income) expense, net
|
_______________________
|
|
(1)
|
The foreign currency contract net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.
|
The following table shows the effect of the Company’s derivative and non-derivative instruments designated as cash flow and net investment hedging instruments, net of tax, in the Consolidated Statement of Income and Comprehensive (Loss) Income for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized in OCI on
Derivative
|
|
Location of Gain (Loss) Reclassified from
AOCI into Income
|
|
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1,231
|
|
|
$
|
(312
|
)
|
|
Cost of goods sold
|
|
$
|
2,069
|
|
|
$
|
2,372
|
|
Interest rate swaps (1)
|
216
|
|
|
216
|
|
|
Interest expense
|
|
(216
|
)
|
|
(216
|
)
|
Derivatives in Net Investment Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
Cross currency swaps
|
21,351
|
|
|
10,667
|
|
|
N/A
|
|
—
|
|
|
—
|
|
Non-Derivatives in Net Investment Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
2024 Euro Notes
|
9,569
|
|
|
4,206
|
|
|
N/A
|
|
—
|
|
|
—
|
|
2021 Euro Notes & 2026 Euro Notes
|
21,052
|
|
|
9,253
|
|
|
N/A
|
|
—
|
|
|
—
|
|
Total
|
$
|
53,419
|
|
|
$
|
24,030
|
|
|
|
|
$
|
1,853
|
|
|
$
|
2,156
|
|
_______________________
|
|
(1)
|
Interest rate swaps were entered into as pre-issuance hedges for bond offerings.
|
The ineffective portion of the above noted cash flow hedges were not material during the three months ended March 31, 2019.
The Company expects that $4.8 million (net of tax) of derivative gain included in AOCI at March 31, 2020, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in the accumulated balances for each component of other comprehensive (loss) income, including current period other comprehensive (loss) income and reclassifications out of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Foreign
Currency
Translation
Adjustments
|
|
Gains on Derivatives
Qualifying as
Hedges
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
Total
|
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2019
|
$
|
(373,043
|
)
|
|
$
|
2,068
|
|
|
$
|
(345,919
|
)
|
|
$
|
(716,894
|
)
|
OCI before reclassifications
|
(452,278
|
)
|
|
3,300
|
|
|
—
|
|
|
(448,978
|
)
|
Amounts reclassified from AOCI
|
—
|
|
|
(1,853
|
)
|
|
3,517
|
|
|
1,664
|
|
Net current period other comprehensive income (loss)
|
(452,278
|
)
|
|
1,447
|
|
|
3,517
|
|
|
(447,314
|
)
|
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2020
|
$
|
(825,321
|
)
|
|
$
|
3,515
|
|
|
$
|
(342,402
|
)
|
|
$
|
(1,164,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Foreign
Currency
Translation
Adjustments
|
|
Losses
on Derivatives
Qualifying as
Hedges
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
Total
|
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2018
|
$
|
(396,996
|
)
|
|
$
|
4,746
|
|
|
$
|
(309,977
|
)
|
|
$
|
(702,227
|
)
|
OCI before reclassifications
|
42,377
|
|
|
2,059
|
|
|
—
|
|
|
44,436
|
|
Amounts reclassified from AOCI
|
—
|
|
|
(2,156
|
)
|
|
2,593
|
|
|
437
|
|
Net current period other comprehensive income (loss)
|
42,377
|
|
|
(97
|
)
|
|
2,593
|
|
|
44,873
|
|
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2019
|
$
|
(354,619
|
)
|
|
$
|
4,649
|
|
|
$
|
(307,384
|
)
|
|
$
|
(657,354
|
)
|
The following table provides details about reclassifications out of Accumulated other comprehensive loss to the Consolidated Statement of Income and Comprehensive (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Affected Line Item in the
Consolidated Statement
of Income and Comprehensive Income
|
(DOLLARS IN THOUSANDS)
|
2020
|
|
2019
|
|
Gains (losses) on derivatives qualifying as hedges
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2,364
|
|
|
$
|
2,711
|
|
|
Cost of goods sold
|
Interest rate swaps
|
(216
|
)
|
|
(216
|
)
|
|
Interest expense
|
Tax
|
(295
|
)
|
|
(339
|
)
|
|
Provision for income taxes
|
Total
|
$
|
1,853
|
|
|
$
|
2,156
|
|
|
Total, net of income taxes
|
Losses on pension and postretirement liability adjustments
|
|
|
|
|
|
Prior service cost
|
$
|
(4,348
|
)
|
|
$
|
2,836
|
|
|
(a)
|
Actuarial losses
|
(191
|
)
|
|
168
|
|
|
(a)
|
Tax
|
1,022
|
|
|
(5,597
|
)
|
|
Provision for income taxes
|
Total
|
$
|
(3,517
|
)
|
|
$
|
(2,593
|
)
|
|
Total, net of income taxes
|
_______________________
|
|
(a)
|
The amortization of prior service cost and actuarial loss is included in the computation of net periodic benefit cost. Refer to Note 16 of our 2019 Form 10-K for additional information regarding net periodic benefit cost.
|
NOTE 15. COMMITMENTS AND CONTINGENCIES
Guarantees and Letters of Credit
The Company has various bank guarantees and letters of credit which are available for use to support its ongoing business operations and to satisfy governmental requirements associated with pending litigation in various jurisdictions.
At March 31, 2020, the Company had total bank guarantees and standby letters of credit of $47.8 million with various financial institutions. Included in the above aggregate amount was a total of $13.8 million for other assessments in Brazil for various income tax and indirect tax disputes related to fiscal years 1998-2011. There were no material amounts utilized under the standby letters of credit as of March 31, 2020.
In order to challenge the assessments in these cases in Brazil, the Company has been required to, and has separately pledged assets, principally property, plant and equipment, to cover assessments in the amount of $7.7 million as of March 31, 2020.
On December 15, 2019, IFF and N&B entered into a commitment letter which provides $7.5 billion in an aggregate principal amount of senior unsecured bridge term loans. On January 17, 2020, N&B entered into a term loan credit agreement providing for unsecured term loan facilities in an aggregate principal amount of $1.25 billion, which reduced the commitments under the Bridge Loans commitment letter by a corresponding amount. N&B will be the initial borrower under the remaining $6.25 billion tranche of the 364-day senior unsecured bridge facility (or, if applicable, any replacement debt financing), which, together with the Term Loan Facilities, will be used to finance the Special Cash Payment and to pay related fees and expenses. Following the consummation of the merger, all obligations of N&B with respect to the Term Loan Facilities and the Bridge Facility (if any) or, if applicable, the replacement debt financing, will be guaranteed by IFF (or at the election of N&B and IFF, assumed by IFF).
Lines of Credit
The Company has various lines of credit which are available to support its ongoing business operations. As of March 31, 2020, the Company had available lines of credit of $97.4 million with various financial institutions, in addition to the $789.7 million of capacity under the Credit Facility. There were no material amounts drawn down pursuant to these lines of credit as of March 31, 2020.
Litigation
The Company assesses contingencies related to litigation and/or other matters to determine the degree of probability and range of possible loss. A loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly sensitive and requires judgments about future events. On at least a quarterly basis, the Company reviews contingencies related to litigation to determine the adequacy of accruals. The amount of ultimate loss may differ from these estimates and further events may require the Company to increase or decrease the amounts it has accrued on any matter.
Periodically, the Company assesses its insurance coverage for all known claims, where applicable, taking into account aggregate coverage by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with its insurance carriers. The liabilities are recorded at management’s best estimate of the probable outcome of the lawsuits and claims, taking into consideration the facts and circumstances of the individual matters as well as past experience on similar matters. At each balance sheet date, the key issues that management assesses are whether it is probable that a loss as to asserted or unasserted claims has been incurred and if so, whether the amount of loss can be reasonably estimated. The Company records the expected liability with respect to claims in Other liabilities and expected recoveries from its insurance carriers in Other assets. The Company recognizes a receivable when it believes that realization of the insurance receivable is probable under the terms of the insurance policies and its payment experience to date.
Litigation Matters
On August 12, 2019, Marc Jansen filed a putative securities class action against IFF, its Chairman and CEO, and its CFO, in the United States District Court for the Southern District of New York. The lawsuit was filed after IFF disclosed that preliminary results of investigations indicated that Frutarom businesses operating principally in Russia and Ukraine had made improper payments to representatives of customers. On December 26, 2019, the Court appointed a group of six investment funds as lead plaintiff and Pomerantz LLP as lead counsel. On March 16, 2020, lead plaintiff filed an amended complaint, which added Frutarom and certain former officers of Frutarom as defendants. The amended complaint alleges, among other things, that defendants made materially false and misleading statements or omissions concerning IFF’s acquisition of Frutarom,
the integration of the two companies, and the companies’ financial reporting and results. The amended complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and under the Israeli Securities Act-1968, against all defendants, and under Section 20(a) of the Securities Exchange Act of 1934 against the individual defendants, on behalf of a putative class of persons and entities who purchased or otherwise acquired IFF securities on the New York Stock Exchange between May 7, 2018 and August 12, 2019 and persons and entities who purchased or otherwise acquired IFF securities on the Tel Aviv Stock Exchange between October 9, 2018 and August 12, 2019. The amended complaint seeks an award of unspecified compensatory damages, costs, and expenses.
Two motions to approve securities class actions were filed in the Tel Aviv District Court, Israel, in August 2019, similarly alleging, among other things, false and misleading statements largely in connection with IFF’s acquisition of Frutarom and the above-mentioned improper payments. Both assert claims under the U.S. federal securities laws against IFF, its Chairman and CEO, and its former CFO. One also asserts claims under the Israeli Securities Act-1968 against IFF, as well as against Frutarom and certain former Frutarom officers and directors, and asserts claims under the Israeli Companies Act-1999 against certain former Frutarom officers and directors.
On October 29, 2019, IFF and Frutarom filed a claim in the Tel Aviv District Court, Israel, against Ori Yehudai, the former President and CEO of Frutarom, and against certain former directors of Frutarom, challenging the bonus of US $20 million granted to Yehudai in 2018. IFF and Frutarom allege, among other things, that Yehudai was not entitled to receive the bonus because he breached his fiduciary duty by, among other things, knowing of the above-mentioned improper payments and failing to prevent them from being made.
On March 11, 2020, an IFF shareholder filed a motion to approve a class action in Israel against, among others, Frutarom, Yehudai, and Frutarom’s former board of directors, alleging that former minority shareholders of Frutarom were harmed as a result of the US $20 million bonus paid to Yehudai.
China Facilities
Guangzhou Taste plant
During the fourth quarter of 2016, the Company was notified that certain governmental authorities have begun to evaluate a change in the zoning of the Guangzhou Taste plant. The zoning, if changed, would prevent the Company from continuing to manufacture product at the existing plant. The ultimate outcome of any change that the governmental authorities may propose, the timing of such a change, and the nature of any compensation arrangements that might be provided to the Company are uncertain. To address the governmental authorities' requirements, the Company has begun to transfer certain production capabilities from the Guangzhou Taste plant to a newly built facility in Zhangjiagang.
The net book value of the plant in Guangzhou was approximately $59 million as of March 31, 2020.
Guangzhou Scent plant
During the second quarter of 2019, the Company was notified that certain governmental authorities had changed the zoning where the Guangzhou Scent plant is located. The zoning change did not affect the current operations but prevents expansions or other increases in the operating capacity of the plant. The Company believes that it is possible that the zoning may be enforced in the future such that it would not be able to continue manufacturing at the existing site. The ultimate outcome of any change that the governmental authorities may propose, the timing of such a change, and the nature of any compensation arrangements that might be provided to the Company are uncertain.
The net book value of the existing plant was approximately $9 million as of March 31, 2020.
Zhejiang Ingredients plant
In the fourth quarter of 2017, the Company concluded discussions with the government regarding the relocation of its Fragrance Ingredients plant in Zhejiang and, based on the agreements reached, expects to receive total compensation payments up to approximately $50 million. The relocation compensation will be paid to the Company over the period of the relocation which is expected to be through the end of 2021. The Company received a payment of $15 million in both the fourth quarter of 2017 and the second quarter of 2019. The third payment of $13.8 million is expected in the second quarter of 2020 with the fourth and final payment expected in the second half of 2020 upon the final environmental inspection.
Production at the facility ceased during 2019. The net book value of the current plant was approximately $10 million as of March 31, 2020.
Total China Operations
The total net book value of all eight plants in China was approximately $199 million as of March 31, 2020.
If the Company is required to close a plant, or operate one at significantly reduced production levels on a permanent basis, the Company may be required to record charges that could have a material impact on its consolidated financial results of operations, financial position and cash flows in future periods.
Other Contingencies
The Company has contingencies involving third parties (such as labor, contract, technology or product-related claims or litigation) as well as government-related items in various jurisdictions in which it operates pertaining to such items as value-added taxes, other indirect taxes, customs and duties and sales and use taxes. It is possible that cash flows or results of operations, in any period, could be materially affected by the unfavorable resolution of one or more of these contingencies.
The most significant government-related contingencies exist in Brazil. With regard to the Brazilian matters, the Company believes it has valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, the Company is required to, and has provided, bank guarantees and pledged assets in the aggregate amount of $21.5 million. The Brazilian matters take an extended period of time to proceed through the judicial process and there are a limited number of rulings to date.
Pending Transaction with Nutrition & Biosciences, Inc.
The Merger Agreement governing the DuPont N&B Transaction, subjects IFF to various contingent payments to the extent that the transaction is not consummated. Specifically, the Merger Agreement provides DuPont the right to receive a termination fee of $521.5 million, in certain circumstances, including if the agreement is terminated due to the IFF Board changing its recommendation and to reimburse DuPont’s transaction-related expenses in an amount up to $75 million if the Merger Agreement is terminated because IFF’s shareholders do not approve the issuance of IFF Common Stock in connection with the transaction.
Brazil Tax Credits
In early January 2020, the Company was informed of a favorable ruling from the Brazilian tax authorities confirming that the Company was entitled to recover the overpayments of certain indirect taxes (known as PIS/COFINS) for the period from November 2011 to December 2018, plus interest on the amount of the overpayments. The overpayments arose from the inclusion of a value added tax known as ICMS in the calculation of the PIS/COFINS tax. The ruling did not, however, settle the question of whether the Company is eligible to recover overpayments based on the gross or the net amount of ICMS amounts paid on PIS/COFINS. The Company calculated the amount of overpayments using the gross method which yields a higher amount than the application of the net method. A final ruling on the gross versus net amount issued is still pending.
In addition to the $8.0 million recognized in the fourth quarter of 2019, during the first quarter of 2020 the Company recognized $3.5 million as an additional recovery on the existing claim. During the first quarter of 2020, the Company also recognized $2.2 million related to a claim from another of its subsidiaries in Brazil. The income is recognized as a reduction in Selling and administrative expenses.
Other
The Company determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that either a loss is reasonably possible or a loss in excess of accrued amounts is reasonably possible and the amount of losses or range of losses is determinable. For all third party contingencies (including labor, contract, technology, tax, product-related claims and business litigation), the Company currently estimates that the aggregate range of reasonably possible losses in excess of any accrued liabilities is $0 to approximately $10 million. The estimates included in this amount are based on the Company’s analysis of currently available information and, as new information is obtained, these estimates may change. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the matters in question. Thus, the Company’s exposure and ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued or the range disclosed above.
NOTE 16. REDEEMABLE NONCONTROLLING INTERESTS
Through certain subsidiaries of our Frutarom acquisition, there are certain noncontrolling interests that carry redemption features. The noncontrolling interest holders have the right, over a stipulated period of time, to sell their respective interests to Frutarom, and Frutarom has the option to purchase these interests (subject to the same timing). These options carry identical price and conditions of exercise, and will be settled based on the multiple of the average EBITDA of consecutive quarters to be achieved during the period ending prior to the exercise date.
The following table sets forth the details of the Company's redeemable noncontrolling interests:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Redeemable
Noncontrolling Interests
|
Balance at December 31, 2018
|
$
|
81,806
|
|
Acquired through acquisitions during 2019
|
26,224
|
|
Impact of foreign exchange translation
|
(190
|
)
|
Share of profit or loss attributable to redeemable noncontrolling interests
|
1,541
|
|
Redemption value adjustment for the current period
|
(370
|
)
|
Dividends paid
|
5,700
|
|
Balance at March 31, 2019
|
$
|
114,711
|
|
|
|
Balance at December 31, 2019
|
$
|
99,043
|
|
Impact of foreign exchange translation
|
19,255
|
|
Share of profit or loss attributable to redeemable noncontrolling interests
|
1,987
|
|
Redemption value adjustment for the current period
|
(5,806
|
)
|
Measurement period adjustments
|
(1,426
|
)
|
Exercises of redeemable noncontrolling interests
|
(10,340
|
)
|
Balance at March 31, 2020
|
$
|
102,713
|
|
For 2019, the increase in redeemable noncontrolling interests was primarily due to the interests acquired through acquisitions during the first quarter of 2019, as discussed in Note 3.
For 2020, the increase in redeemable noncontrolling interests was primarily due to the impact of foreign exchange translation offset by the exercise of options.