Notes to Consolidated Financial Statements
Note 1. Consolidated Financial Statements:
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
2015
Annual Report on Form 10-K (“
2015
Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q filing 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
2016
and
2015
quarters, the actual closing dates were April 1, and April 3, 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.
Reclassifications and Revisions
Certain prior year amounts have been reclassified to conform with current year presentation. In addition, an adjustment has been made to two line items within net cash provided by operating activities for 2015 to reflect the previously recorded correction of a balance sheet classification associated with accounts payable and accruals. The adjustment was not material to the consolidated statement of cash flows.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which requires changes to several aspects of the accounting for share-based payment transactions, including the treatment of income tax consequences, classification of awards as either equity or liabilities, and classification of certain items on the statement of cash flows. This guidance will be effective for annual and interim periods beginning after December 15, 2016. Early adoption will be permitted for all entities. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.
In February 2016, the FASB issued authoritative guidance which requires changes to the accounting for leases. The new guidance establishes a new lease accounting model, that, for all companies, requires entities to record assets and liabilities related to leases on the balance sheet for certain types of leases. The guidance will be effective for annual and interim periods beginning after December 31, 2018. Early adoption will be permitted for all entities. The Company expects the adoption of this guidance will result in significant increases to assets and liabilities on its consolidated Balance Sheet.
In May 2014, the FASB issued authoritative guidance to clarify the principles to be used to recognize revenue and made subsequent clarifications under the new requirements during March 2016. The guidance is applicable to all entities and is effective for annual and interim periods beginning after December 15, 2017. Adoption as of the original effective date is permitted. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.
Accounts Receivable
The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. The Company accounts for these transactions as sales of receivables, removes the receivables sold from its financial statements, and records cash proceeds when received by the Company. The beneficial impact on cash from operations from participating in these programs decreased approximately
$4.7 million
for the
three
months ended
March 31, 2016
compared to a decrease of approximately
$6.5 million
for the
three
months ended
March 31, 2015
. The cost of participating in these programs was immaterial to our results in all periods.
Note 2. Net Income Per Share:
Net income per share is based on the weighted average number of shares outstanding. A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(SHARES IN THOUSANDS)
|
2016
|
|
2015
|
Basic
|
79,666
|
|
|
80,654
|
|
Assumed dilution under stock plans
|
389
|
|
|
541
|
|
Diluted
|
80,055
|
|
|
81,195
|
|
An immaterial amount of stock-settled appreciation rights (“SSARs”) were excluded from the computation of diluted net income per share for the
three
months ended
March 31, 2016
. There were no stock options or SSARs excluded from the
2015
period.
The Company has issued shares of purchased restricted common stock (“PRS”) 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 PRS shareholders was less than
$0.01
per share for each period presented, and the number of PRS outstanding as of
March 31, 2016
and
2015
was immaterial. Net income allocated to such PRS was
$0.6 million
during each of the
three months ended March 31, 2016
and
2015
.
Note 3. Acquisitions:
2015 Activity
Lucas Meyer
During the third quarter of 2015, the Company completed the acquisition of
100%
of the outstanding shares of Lucas Meyer Cosmetics, a business of Unipex Group ("Lucas Meyer"). The total shares acquired include shares effectively acquired pursuant to put and call option agreements. The acquisition was accounted for under the purchase method. Total consideration was approximately Euro
284.0 million
(
$312.0 million
), including approximately
$4.8 million
of cash acquired. The Company paid Euro
282.0 million
(approximately
$309.7 million
, for this acquisition, which was funded from existing resources, and recorded a liability of approximately Euro
2.0 million
(approximately
$2.2 million
). The purchase price exceeded the fair value of existing net assets by approximately
$289.5 million
. The excess was allocated principally to identifiable intangible assets (approximately
$161.5 million
), goodwill (approximately
$186.8 million
) and approximately
$51.0 million
to deferred taxes. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Separately identifiable intangible assets are principally related to customer relationships, proprietary technology and patents. The intangible assets are being amortized using lives ranging from
10
-
28
years. The purchase price allocation is preliminary pending final valuations of intangible assets, principally related to the valuation of customer relationships, allocation of asset values by legal entity and determination of useful lives.
No pro forma financial information for 2016 is presented as the impact of the acquisition was immaterial to the Consolidated Statement of Comprehensive Income. During the first quarter of 2016, the preliminary purchase price allocation was updated, however, none of the changes were material to the consolidated financial statements. The purchase price allocation is expected to be completed in the second quarter of 2016.
Ottens Flavors
During the second quarter of 2015, the Company completed the acquisition of
100%
of the outstanding shares of Henry H. Ottens Manufacturing Co., Inc. ("Ottens Flavors"). The acquisition was accounted for under the purchase method. The Company paid
$198.9 million
(including
$10.4 million
of cash acquired) for this acquisition, which was funded from existing resources. The purchase price allocation was completed during the fourth quarter of 2015. The impact of the acquisition was not material to the consolidated financial statements.
Note 4. Restructuring and Other Charges, Net:
During the fourth quarter of 2015, the Company established a series of initiatives that are intended to streamline its management structure, simplify decision-making and accountability, better leverage and align its capabilities across the organization and improve efficiency of its global manufacturing and operations network. As a result, in the fourth quarter of 2015, the Company recorded a pre-tax charge of
$7.6 million
, included in restructuring and other charges, net, related to severance and related costs pertaining to approximately
150
positions that will be affected. During the
first
quarter of
2016
, the Company made payments of
$0.9 million
and recorded accelerated depreciation expense of
$0.1 million
. The total cost of the plan is expected to be approximately
$10 million
with the remaining charges relating principally to accelerated depreciation. The Company expects the plan to be fully implemented in the second half of 2017.
Changes in employee-related restructuring liabilities during the
three
months ended
March 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Employee-Related Costs
|
|
Accelerated Depreciation
|
|
Total
|
Balance at December 31, 2015
|
$
|
7,882
|
|
|
$
|
—
|
|
|
$
|
7,882
|
|
Additional charges (reversals), net
|
—
|
|
|
101
|
|
|
101
|
|
Non-cash charges
|
—
|
|
|
(101
|
)
|
|
(101
|
)
|
Payments and other costs
|
(923
|
)
|
|
—
|
|
|
(923
|
)
|
Balance at March 31, 2016
|
$
|
6,959
|
|
|
$
|
—
|
|
|
$
|
6,959
|
|
Note 5. Goodwill and Other Intangible Assets, Net:
Goodwill
Movements in goodwill during
2016
were as follows:
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Goodwill
|
Balance at December 31, 2015
|
$
|
941,389
|
|
Foreign exchange
|
6,812
|
|
Other
|
2,976
|
|
Balance at March 31, 2016
|
$
|
951,177
|
|
Other Intangible Assets
Other intangible assets, net consist of the following amounts:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(DOLLARS IN THOUSANDS)
|
2016
|
|
2015
|
Cost
|
|
|
|
Customer relationships
|
$
|
288,876
|
|
|
$
|
293,799
|
|
Trade names & patents
|
38,871
|
|
|
34,182
|
|
Technological know-how
|
111,886
|
|
|
112,393
|
|
Other
|
25,792
|
|
|
22,711
|
|
Total carrying value
|
465,425
|
|
|
463,085
|
|
Accumulated Amortization
|
|
|
|
Customer relationships
|
(70,214
|
)
|
|
(66,324
|
)
|
Trade names & patents
|
(10,918
|
)
|
|
(10,282
|
)
|
Technological know-how
|
(65,920
|
)
|
|
(65,258
|
)
|
Other
|
(16,285
|
)
|
|
(15,217
|
)
|
Total accumulated amortization
|
(163,337
|
)
|
|
(157,081
|
)
|
|
|
|
|
Other intangible assets, net
|
$
|
302,088
|
|
|
$
|
306,004
|
|
Amortization
Amortization expense was
$6.1 million
and
$1.8 million
for the
three months ended March 31, 2016
and
2015
, respectively. Annual amortization is expected to be
$23.1 million
for the full year
2016
,
$22.5 million
for the year 2017,
$21.9 million
for the year 2018,
$20.5 million
for the year
2019
,
$19.8 million
for the year
2020
and
$15.6 million
for the year
2021
.
Note 6. Borrowings:
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
Rate
|
|
Maturities
|
|
March 31, 2016
|
|
December 31, 2015
|
Senior notes - 2006
|
6.14
|
%
|
|
2016
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
Senior notes - 2007
|
6.40
|
%
|
|
2017-27
|
|
500,000
|
|
|
500,000
|
|
Senior notes - 2013
|
3.20
|
%
|
|
2023
|
|
299,816
|
|
|
299,809
|
|
Euro Senior notes - 2016
(1)
|
1.75
|
%
|
|
2024
|
|
561,070
|
|
|
—
|
|
Credit facility
|
2.67
|
%
|
|
2019
|
|
—
|
|
|
131,196
|
|
Bank overdrafts and other
|
|
|
|
|
14,965
|
|
|
10,909
|
|
Deferred realized gains on interest rate swaps
|
|
|
|
|
2,796
|
|
|
3,279
|
|
|
|
|
|
|
1,503,647
|
|
|
1,070,193
|
|
Less: Current portion of long-term debt
|
|
|
|
|
(133,692
|
)
|
|
(132,349
|
)
|
|
|
|
|
|
$
|
1,369,955
|
|
|
$
|
937,844
|
|
(1)
Amount is net of unamortized discount and debt issuance costs.
On March 14, 2016, the Company issued Euro
500.0 million
(
$556.6 million
) face amount of
1.75%
Senior Notes ("Euro Senior Notes - 2016") due 2024 at a discount of Euro
0.9 million
(
$1.0 million
). The Company received proceeds related to the issuance of these Euro Senior Notes - 2016 of Euro
496.0 million
(
$552.1 million
) which was net of the
$1.0 million
discount and Euro
3.1 million
(
$3.5 million
) underwriting discount (recorded as deferred financing costs). In addition, the Company incurred
$1.3 million
of other deferred financing costs in connection with the expected debt issuance. In connection with the debt issuance, the Company entered into pre-issuance hedging transactions which were settled upon issuance of the debt resulted in a loss of approximately
$3.2 million
as of March 31, 2016. The discount, deferred financing costs and pre-issuance hedge loss are being amortized as interest expense over the 8 year term of the debt. The Euro Senior Notes - 2016 bear interest at a rate of
1.75%
per annum, with interest payable on March 14 of each year, commencing on March 14, 2017. The Euro Senior Notes - 2016 will mature on March 14, 2024.
Upon 30 days’ notice to holders of the Euro Senior Notes - 2016 , the Company may redeem the Euro Senior Notes - 2016 for cash in whole, at any time, or in part, from time to time, prior to maturity, at redemption prices that include accrued and unpaid interest and a make-whole premium, as specified in the Indenture. However, no make-whole premium will be paid for redemptions of the Euro Senior Notes - 2016 on or after December 14, 2023. The Indenture provides for customary events of default and contains certain negative covenants that limit the ability of the Company and its subsidiaries to grant liens on assets, or to enter into sale-leaseback transactions. In addition, subject to certain limitations, in the event of the occurrence of both (1) a change of control of the Company and (2) a downgrade of the Euro Senior Notes - 2016 below investment grade rating by both Moody’s Investors Services, Inc. and Standard & Poor’s Ratings Services within a specified time period, the Company will be required to make an offer to repurchase the Notes at a price equal to
101%
of the principal amount of the Euro Senior Notes - 2016, plus accrued and unpaid interest to the date of repurchase.
During the first quarter of 2016, the Company repaid the full amount outstanding under the credit facility (
$131.2 million
).
Note 7. Income Taxes:
Uncertain Tax Positions
At
March 31, 2016
, the Company had
$22.5 million
of unrecognized tax benefits recorded in Other liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
At
March 31, 2016
, the Company had accrued interest and penalties of
$0.8 million
classified in Other liabilities.
As of
March 31, 2016
, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was
$23.3 million
associated with various tax positions asserted in foreign jurisdictions, none of which is individually material.
The Company regularly repatriates a portion of current year earnings from select non–U.S. subsidiaries. No provision is made for additional taxes on undistributed earnings of subsidiary companies that are intended and planned to be indefinitely invested in such subsidiaries. We intend to, and have plans to, reinvest these earnings indefinitely in our foreign subsidiaries 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, of which the most significant items are discussed below. In addition, the Company has open tax years with
various taxing jurisdictions that range primarily from
2006
to
2015
. Based on currently available information, we do not believe the ultimate outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on our financial position.
The Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, capital tax, sales and use taxes and property taxes, which are discussed in Note 13.
Effective Tax Rate
The effective tax rate for the
three months ended March 31, 2016
was
23.4%
compared with
18.0%
for the
three months ended March 31, 2015
. The quarter-over-quarter increase is largely due to a benefit of
$10.5 million
recorded in the first quarter of 2015, as a result of favorable tax rulings in Spain and another jurisdiction for which reserves were previously recorded, which was partially offset by lower cost of repatriation, lower loss provisions and favorable mix of earnings in the first quarter of 2016.
Note 8. 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 PRS, purchased restricted stock units, restricted stock units ("RSUs"), stock options, 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)
|
2016
|
|
2015
|
Equity-based awards
|
$
|
5,930
|
|
|
$
|
5,387
|
|
Liability-based awards
|
593
|
|
|
1,907
|
|
Total stock-based compensation expense
|
6,523
|
|
|
7,294
|
|
Less: tax benefit
|
(1,973
|
)
|
|
(2,187
|
)
|
Total stock-based compensation expense, after tax
|
$
|
4,550
|
|
|
$
|
5,107
|
|
Note 9. Segment Information:
The Company is organized into
two
operating segments: Flavors and Fragrances. These segments align with the internal structure of the Company used to manage these businesses. Performance of these operating segments is evaluated based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed below) and certain non-recurring items, Interest expense, Other income (expense), net and Taxes on income.
The Global expenses caption below represents corporate and headquarters-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 operating segments.
Reportable segment information is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2016
|
|
2015
|
Net sales:
|
|
|
|
Flavors
|
$
|
372,508
|
|
|
$
|
377,108
|
|
Fragrances
|
410,804
|
|
|
397,799
|
|
Consolidated
|
$
|
783,312
|
|
|
$
|
774,907
|
|
Segment profit:
|
|
|
|
Flavors
|
$
|
91,813
|
|
|
$
|
92,727
|
|
Fragrances
|
89,237
|
|
|
81,598
|
|
Global expenses
|
(13,870
|
)
|
|
(11,564
|
)
|
Restructuring and other charges, net
(1)
|
(101
|
)
|
|
(187
|
)
|
Acquisition and related costs
(2)
|
(1,037
|
)
|
|
(500
|
)
|
Operational improvement initiative costs
(3)
|
(268
|
)
|
|
(281
|
)
|
Spanish capital tax settlement
(4)
|
1,446
|
|
|
—
|
|
Operating profit
|
167,220
|
|
|
161,793
|
|
Interest expense
|
(12,478
|
)
|
|
(11,095
|
)
|
Other income
|
154
|
|
|
5,710
|
|
Income before taxes
|
$
|
154,896
|
|
|
$
|
156,408
|
|
|
|
(1)
|
Restructuring and other charges, net relate to accelerated depreciation costs in Europe recorded in Cost of goods sold.
|
|
|
(2)
|
Acquisition and related costs are associated with the 2015 acquisition of Lucas Meyer as discussed in Note 3, including inventory step-up charges related to the inventory acquired.
|
|
|
(3)
|
Operational improvement initiative costs relate to accelerated depreciation costs in Asia in both the 2016 and 2015 periods.
|
|
|
(4)
|
The Spanish capital tax settlement represents interest received from the Spanish government related to the reversal of the unfavorable ruling the Spanish capital tax case from 2002, which was reversed during the year ended December 31, 2015.
|
Net sales are attributed to individual regions based upon the destination of product delivery. Net sales related to the U.S. for the
three months ended March 31, 2016
and
2015
were
$180.4 million
and
$163.6 million
, respectively. Net sales attributed to all foreign countries in total for the
three months ended March 31, 2016
and
2015
were
$602.9 million
and
$611.3 million
, respectively. No country other than the U.S. had net sales in any period presented greater than
10%
of total consolidated net sales.
Note 10. Employee Benefits:
Pension and other defined contribution retirement plan expenses included the following components:
|
|
|
|
|
|
|
|
|
U.S. Plans
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2016
|
|
2015
|
Service cost for benefits earned
|
$
|
771
|
|
|
$
|
984
|
|
Interest cost on projected benefit obligation
|
6,007
|
|
|
5,953
|
|
Expected return on plan assets
|
(8,069
|
)
|
|
(8,083
|
)
|
Net amortization and deferrals
|
1,387
|
|
|
5,203
|
|
Net periodic benefit cost
|
96
|
|
|
4,057
|
|
Defined contribution and other retirement plans
|
2,402
|
|
|
2,135
|
|
Total expense
|
$
|
2,498
|
|
|
$
|
6,192
|
|
|
|
|
|
Non-U.S. Plans
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2016
|
|
2015
|
Service cost for benefits earned
|
$
|
3,775
|
|
|
$
|
4,383
|
|
Interest cost on projected benefit obligation
|
6,366
|
|
|
6,392
|
|
Expected return on plan assets
|
(11,949
|
)
|
|
(12,950
|
)
|
Net amortization and deferrals
|
3,264
|
|
|
3,486
|
|
Loss due to settlements and special terminations
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
1,456
|
|
|
1,311
|
|
Defined contribution and other retirement plans
|
1,707
|
|
|
1,595
|
|
Total expense
|
$
|
3,163
|
|
|
$
|
2,906
|
|
The Company expects to contribute a total of approximately
$24 million
to its non-U.S. pension plans during
2016
. During the three months ended
March 31, 2016
, there were no contributions made to the qualified U.S. pension plans. In the
three
months ended
March 31, 2016
,
$6.3 million
of contributions were made to the non-U.S. plans and
$1.1 million
of contributions were made to the U.S. non-qualified plans.
Expense recognized for postretirement benefits other than pensions included the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(DOLLARS IN THOUSANDS)
|
2016
|
|
2015
|
Service cost for benefits earned
|
$
|
215
|
|
|
$
|
300
|
|
Interest cost on projected benefit obligation
|
787
|
|
|
1,082
|
|
Net amortization and deferrals
|
(1,355
|
)
|
|
(711
|
)
|
Total postretirement benefit expense
|
$
|
(353
|
)
|
|
$
|
671
|
|
The Company expects to contribute approximately
$5 million
to its postretirement benefits other than pension plans during
2016
. In the
three
months ended
March 31, 2016
,
$1.3 million
of contributions were made.
Note 11. 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 our market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
•
|
Level 1–Quoted prices for
identical
instruments in active markets.
|
|
|
•
|
Level 2–Quoted prices for
similar
instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
•
|
Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
.
|
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the 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. We do not have any instruments classified as Level 1 or Level 3, other than those included in pension asset trusts as discussed in Note 13 of our
2015
Form 10-K.
These valuations take into consideration our credit risk and our counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of
March 31, 2016
.
The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at
March 31, 2016
and
December 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
$
|
528,877
|
|
|
$
|
528,877
|
|
|
$
|
181,988
|
|
|
$
|
181,988
|
|
Credit facilities and bank overdrafts
(2)
|
14,965
|
|
|
14,965
|
|
|
142,105
|
|
|
142,105
|
|
Long-term debt:
(3)
|
|
|
|
|
|
|
|
Senior notes - 2006
|
125,000
|
|
|
126,861
|
|
|
125,000
|
|
|
127,717
|
|
Senior notes - 2007
|
500,000
|
|
|
572,663
|
|
|
500,000
|
|
|
563,855
|
|
Senior notes - 2013
|
299,816
|
|
|
301,249
|
|
|
299,809
|
|
|
290,830
|
|
Senior notes - 2016
|
561,070
|
|
|
578,271
|
|
|
—
|
|
|
—
|
|
|
|
(1)
|
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.
|
|
|
(2)
|
The carrying amount of our credit facilities and bank overdrafts 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 fair value of our long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk.
|
Derivatives
The Company periodically enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with our 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.
During the
three
months ended
March 31, 2016
and the year ended
December 31, 2015
, the Company entered into several forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk. The effective portions of net investment hedges are recorded in Other comprehensive income (“OCI”) as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income. Realized gains (losses) are deferred in accumulated other comprehensive income ("AOCI") where they will remain until the net investments in our European subsidiaries are divested. The outstanding forward currency contracts have remaining maturities of approximately one year. There were no maturities of these forward currency contracts during the
three
months ended
March 31, 2016
.
During the
three
months ended
March 31, 2016
and the year ended
December 31, 2015
, the Company entered into 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 Comprehensive 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 Comprehensive Income in the same period as the related costs are recognized.
During 2015 and 2014, the Company entered into interest rate swap agreements that effectively converted the fixed rate on a portion of our long-term borrowings to a variable short-term rate based on the LIBOR plus an interest markup. These swaps are designated as fair value hedges. Amounts recognized in Interest expense were immaterial for the
three
months ended
March 31, 2016
.
During the first quarter of 2016, the Company entered into and terminated two Euro interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt. These swaps were designated as cash flow hedges. The effective portions of cash flow hedges are recorded in OCI as a component of Losses on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. The Company incurred a loss of Euro
2.9 million
(
$3.2 million
) due to the termination of these swaps. The loss will be amortized as interest expense over the life of the Euro Senior Notes - 2016 as discussed in Note 6.
The following table shows the notional amount of the Company’s derivative instruments outstanding as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
March 31, 2016
|
|
December 31, 2015
|
Foreign currency contracts
|
$
|
298,000
|
|
|
$
|
256,200
|
|
Interest rate swaps
|
$
|
775,000
|
|
|
$
|
775,000
|
|
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 Sheets as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
(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
|
$
|
1,912
|
|
|
$
|
3,340
|
|
|
$
|
5,252
|
|
Interest rate swaps
|
3,692
|
|
|
—
|
|
|
3,692
|
|
|
$
|
5,604
|
|
|
$
|
3,340
|
|
|
$
|
8,944
|
|
Derivative liabilities
(b)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
7,530
|
|
|
$
|
4,174
|
|
|
$
|
11,704
|
|
|
$
|
7,530
|
|
|
$
|
4,174
|
|
|
$
|
11,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(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
|
$
|
6,560
|
|
|
$
|
3,700
|
|
|
$
|
10,260
|
|
Interest rate swaps
|
1,210
|
|
|
—
|
|
|
1,210
|
|
|
$
|
7,770
|
|
|
$
|
3,700
|
|
|
$
|
11,470
|
|
Derivative liabilities
(b)
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2,106
|
|
|
$
|
3,022
|
|
|
$
|
5,128
|
|
|
|
(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 Comprehensive Income for the
three
months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
Amount of Gain (Loss)
Recognized in Income on
Derivative
|
|
Location of Gain (Loss)
Recognized in Income
on Derivative
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
|
Foreign currency contracts
|
$
|
(4,943
|
)
|
|
$
|
9,704
|
|
|
Other expense (income), net
|
Most of these 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 instruments designated as cash flow and net investment hedging instruments in the Consolidated Statements of Comprehensive Income for the
three
months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain
Recognized in OCI on
Derivative (Effective
Portion)
|
|
Location of (Loss) Gain
Reclassified from AOCI into
Income (Effective Portion)
|
|
Amount of (Loss) Gain
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
|
|
Three Months Ended March 31,
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
|
|
2016
|
|
2015
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
(7,003
|
)
|
|
12,014
|
|
|
Cost of goods sold
|
|
2,616
|
|
|
1,023
|
|
Interest rate swaps
(1)
|
(3,175
|
)
|
|
69
|
|
|
Interest expense
|
|
(86
|
)
|
|
(69
|
)
|
Derivatives in Net Investment Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
(2,404
|
)
|
|
4,561
|
|
|
N/A
|
|
—
|
|
|
—
|
|
Total
|
$
|
(12,582
|
)
|
|
$
|
16,644
|
|
|
|
|
$
|
2,530
|
|
|
$
|
954
|
|
(1) Interest rate swaps were entered into as pre-issuance hedges.
No ineffectiveness was experienced in the above noted cash flow hedges during the
three
months ended
March 31, 2016
and
2015
. The ineffective portion of the net investment hedges was not material during the
three
months ended
March 31, 2016
and
2015
.
The Company expects that approximately
$3.0 million
(net of tax) of derivative gains included in AOCI at
March 31, 2016
, 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 12. Accumulated Other Comprehensive Income (Loss):
The following tables present changes in the accumulated balances for each component of other comprehensive income, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
(Losses) Gains on
Derivatives
Qualifying as
Hedges
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
Total
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2015
|
$
|
(297,498
|
)
|
|
$
|
9,401
|
|
|
$
|
(325,342
|
)
|
|
$
|
(613,439
|
)
|
OCI before reclassifications
|
14,077
|
|
|
(7,662
|
)
|
|
—
|
|
|
6,415
|
|
Amounts reclassified from AOCI
|
—
|
|
|
(2,530
|
)
|
|
2,555
|
|
|
25
|
|
Net current period other comprehensive income (loss)
|
14,077
|
|
|
(10,192
|
)
|
|
2,555
|
|
|
6,440
|
|
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2016
|
$
|
(283,421
|
)
|
|
$
|
(791
|
)
|
|
$
|
(322,787
|
)
|
|
$
|
(606,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
(Losses) Gains on
Derivatives
Qualifying as
Hedges
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
Total
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2014
|
$
|
(173,342
|
)
|
|
$
|
12,371
|
|
|
$
|
(379,459
|
)
|
|
$
|
(540,430
|
)
|
OCI before reclassifications
|
(50,515
|
)
|
|
13,037
|
|
|
—
|
|
|
(37,478
|
)
|
Amounts reclassified from AOCI
|
—
|
|
|
(954
|
)
|
|
5,547
|
|
|
4,593
|
|
Net current period other comprehensive income (loss)
|
(50,515
|
)
|
|
12,083
|
|
|
5,547
|
|
|
(32,885
|
)
|
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2015
|
$
|
(223,857
|
)
|
|
$
|
24,454
|
|
|
$
|
(373,912
|
)
|
|
$
|
(573,315
|
)
|
The following table provides details about reclassifications out of accumulated other comprehensive income to the Consolidated Statement of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Three Months Ended March 31, 2015
|
|
Affected Line Item in the
Consolidated Statement
of Comprehensive Income
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
(Losses) gains on derivatives qualifying as hedges
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2,990
|
|
|
$
|
1,169
|
|
|
Cost of goods sold
|
Interest rate swaps
|
(86
|
)
|
|
(69
|
)
|
|
Interest expense
|
|
(374
|
)
|
|
(146
|
)
|
|
Provision for income taxes
|
|
$
|
2,530
|
|
|
$
|
954
|
|
|
Total, net of income taxes
|
(Losses) gains on pension and postretirement liability adjustments
|
|
|
|
|
|
Prior service cost
|
$
|
1,864
|
|
|
$
|
1,166
|
|
|
(a)
|
Actuarial losses
|
(5,160
|
)
|
|
(9,144
|
)
|
|
(a)
|
|
741
|
|
|
2,431
|
|
|
Provision for income taxes
|
|
$
|
(2,555
|
)
|
|
$
|
(5,547
|
)
|
|
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 14 of our
2015
Form 10-K for additional information regarding net periodic benefit cost.
|
Note 13. 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, 2016
, we had total bank guarantees and standby letters of credit of approximately
$40 million
with various financial institutions. Included in the above aggregate amount is a total of
$14.4 million
in bank guarantees which the Company has posted for certain assessments in Brazil for other diverse 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, 2016
.
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 approximately
$12.0 million
as of
March 31, 2016
.
Lines of Credit
The Company has various lines of credit which are available to support its ongoing business operations. At
March 31, 2016
, we had available lines of credit (in addition to the Credit Facility discussed in Note 8 of our
2015
Form 10-K) of approximately
$72.4 million
with various financial institutions. There were no significant amounts drawn down pursuant to these lines of credit as of
March 31, 2016
.
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, we assess our 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 our 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. We record the expected liability with respect to claims in Other liabilities and expected recoveries from our insurance carriers in Other assets. We recognize a receivable when we believe that realization of the insurance receivable is probable under the terms of the insurance policies and our payment experience to date.
Environmental
Over the past
20
years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at
eight
facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than
$5 million
.
While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.
China Facilities
Guangzhou Flavors plant
During 2015, the Company was notified by Chinese authorities of compliance issues pertaining to the emission of odors from several of its plants in China. As a result, the Company's Flavors facility in China was temporarily idled. Accordingly, the Company invested approximately
$6.5 million
in odor-abatement equipment at these facilities to address these issues.
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.
Zhejiang Ingredients plant
The Company has received a request from the Chinese government to relocate its Fragrance Ingredients plant in Zhejiang, China. The Company has made investments in the Ingredients plant to comply with applicable regulations and would prefer to remain at the existing site. The Company is in discussions with the government regarding the intent, purpose and timing of the requested relocation. If we were ultimately required to move, the Company and government authorities would need to agree upon the amount and nature of government compensation. Depending upon the outcome of these discussions, we may be required, at some point, to adjust depreciation or the carrying value of the current site. The current site amounts to less than
5%
of property, plant and equipment, net.
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 we operate 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, we believe we have valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, we are required to, and have provided, bank guarantees and pledged assets in the aggregate amount of
$26.4 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.
In March 2012, ZoomEssence, Inc. filed a complaint against the Company in the U.S. District Court of New Jersey alleging trade secret misappropriation, breach of contract and unjust enrichment in connection with certain spray dry technology disclosed to the Company. In connection with the claims, ZoomEssence is seeking an injunction and monetary damages. ZoomEssence initially sought a temporary restraining order and preliminary injunction, but the Court denied these applications in an order entered on September 27, 2013, finding that ZoomEssence had not demonstrated a likelihood of success on the merits of its claims. The Court subsequently referred the matter to mediation, however the private mediation session did not result in a resolution of the dispute. On November 3, 2014, ZoomEssence amended its complaint against the Company to include allegations of breach of the duty of good faith and fair dealing, fraud in the inducement, and misappropriation of confidential and proprietary information. On November 13, 2014, the Company filed a counterclaim against ZoomEssence alleging trade secret misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, misappropriation of confidential and proprietary information, common law unfair competition, tortious interference with contractual relations, and conversion. The case is currently proceeding through discovery with a trial on the merits anticipated in early 2017. The Company denies the allegations and will vigorously defend and pursue its position in Court. At this stage of the litigation, based on the information currently available to the Company, management does not believe that this matter represents a material loss contingency.
Based on the information available as of
March 31, 2016
, we estimate a range of reasonably possible loss related to the matters above, collectively, is
$0
-
$31 million
.
Separately, the Spanish tax authorities alleged claims for a capital tax, the Appellate Court rejected one of the two bases upon which we based our capital tax position. On January 22, 2014, we filed an appeal and in order to avoid future interest costs in the event our appeal was unsuccessful, we paid Euro
9.8 million
(
$11.2 million
, representing the principal amount) during the first quarter of 2014. On February 24, 2016, we received a favorable ruling on our appeal from the Spanish Supreme Court which overruled a lower court ruling. As a result of this decision, we have reversed the previously recorded provision of Euro
9.8 million
(
$10.5 million
) for the year ended December 31, 2015. During the
first
quarter of
2016
, we recorded additional income of
$1.4 million
related to amounts expected to be received from the authorities. This amount has been reflected as a reduction of administrative expense.