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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003 Commission file number 1-4858
--------------------------------------------------------------
INTERNATIONAL FLAVORS & FRAGRANCES INC.
---------------------------------------
(Exact Name of Registrant as specified in its charter)
New York 13-1432060
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) identification No.)
521 West 57th Street, New York, N.Y. 10019-2960
- ------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------ -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Number of shares outstanding as of May 1, 2003: 93,846,889
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)
03/31/03 12/31/02
----------- -----------
Assets
- ------
Current Assets:
Cash & Cash Equivalents $ 15,866 $ 14,858
Short-term Investments 468 307
Trade Receivables 369,172 327,306
Allowance For Doubtful Accounts (13,822) (12,933)
Inventories: Raw Materials 218,734 222,161
Work in Process 14,855 12,680
Finished Goods 189,283 186,762
----------- -----------
Total Inventories 422,872 421,603
Deferred Income Taxes 70,110 67,176
Other Current Assets 81,306 48,432
----------- -----------
Total Current Assets 945,972 866,749
----------- -----------
Property, Plant & Equipment, At Cost 960,471 950,214
Accumulated Depreciation (448,666) (429,715)
----------- -----------
511,805 520,499
----------- -----------
Goodwill, net 642,655 642,655
Intangible Assets, net 136,890 140,048
Other Assets 53,400 62,743
----------- -----------
Total Assets $ 2,290,722 $ 2,232,694
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Bank Loans and Current Portion of Long-term Debt $ 79,068 $ 11,684
Commercial Paper 215,317 37,979
Accounts Payable-Trade 98,741 104,007
Dividends Payable 14,102 14,138
Income Taxes 38,399 38,496
Other Current Liabilities 170,275 153,193
----------- -----------
Total Current Liabilities 615,902 359,497
----------- -----------
Other Liabilities:
Long-term Debt 793,208 1,007,085
Retirement and Other Liabilities 293,216 291,434
----------- -----------
Total Other Liabilities 1,086,424 1,298,519
----------- -----------
Shareholders' Equity:
Common Stock 12 1/2 cent par value; authorized
500,000,000 shares; issued 115,761,840 shares 14,470 14,470
Capital in Excess of Par Value 106,197 109,735
Restricted Stock (5,385) (5,723)
Retained Earnings 1,400,454 1,382,539
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment (130,145) (138,175)
Accumulated Gains (Loss) on Derivatives
Qualifying as Hedges (Net of tax) (88) 733
Minimum pension liability adjustment (75,038) (75,038)
----------- -----------
1,310,465 1,288,541
Treasury Stock, at cost - 21,726,192 shares in '03
and 21,507,668 in '02 (721,082) (712,876)
Note Receivable from Officer (987) (987)
----------- -----------
Total Shareholders' Equity 588,396 574,678
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,290,722 $ 2,232,694
=========== ===========
See Notes to Consolidated Financial Statements
2
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
3 Months Ended 3/31
-------------------------
2003 2002
--------- ---------
Net Sales $ 466,224 $ 445,844
--------- ---------
Cost of Goods Sold 270,447 259,864
Research and Development Expenses 38,962 35,170
Selling and Administrative Expenses 76,115 75,386
Amortization 3,158 3,158
Nonrecurring Charges 20,389 --
Interest Expense 8,113 10,427
Other (Income) Expense, Net 2,526 (1,965)
--------- ---------
419,710 382,040
--------- ---------
Income Before Taxes on Income 46,514 63,804
Taxes on Income 14,497 21,857
--------- ---------
Net Income 32,017 41,947
Other Comprehensive Income:
Foreign Currency Translation Adjustments 8,030 (9,958)
Accumulated (Losses) Gains on Derivatives
Qualifying as Hedges (Net of Tax) (821) 4,396
--------- ---------
Comprehensive Income $ 39,226 $ 36,385
========= =========
Net Income Per Share - Basic $0.34 $0.44
Net Income Per Share - Diluted $0.34 $0.44
Average Number of Shares Outstanding - Basic 94,158 94,534
Average Number of Shares Outstanding - Diluted 95,281 96,182
Dividends Paid Per Share $0.15 $0.15
See Notes to Consolidated Financial Statements
3
INTERNATIONAL FLAVORS & FRAGRANCES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(unaudited)
3 MONTHS ENDED 3/31
-----------------------
2003 2002
-------- --------
Cash Flows From Operating Activities:
- -------------------------------------
Net Income $ 32,017 $ 41,947
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 21,403 20,474
Deferred income taxes (3,736) 1,889
Changes in assets and liabilities
Current receivables (38,602) (29,923)
Inventories 4,376 5,877
Current payables 11,606 1,483
Other, net (12,738) (5,093)
-------- --------
Net cash provided by operations 14,326 36,654
-------- --------
Cash Flows From Investing Activities:
- -------------------------------------
Proceeds from investments 6 --
Purchases of investments (161) (14)
Additions to property, plant and equipment (11,300) (19,605)
Proceeds from disposal of assets 5,662 5,064
-------- --------
Net cash used in investing activities (5,793) (14,555)
-------- --------
Cash Flows From Financing Activities:
- -------------------------------------
Cash dividends paid to shareholders (14,138) (14,215)
Increase in bank loans 11,295 851
Net change in commercial paper outstanding 177,338 (8,985)
Repayments of long-term debt (169,942) (4,409)
Proceeds from issuance of stock under stock option and
employee stock purchase plans 7,444 8,294
Purchase of treasury stock (19,035) (17,031)
-------- --------
Net cash used in financing activities (7,038) (35,495)
-------- --------
Effect of exchange rates changes on cash and cash equivalents (487) (653)
-------- --------
Net Change in Cash and Cash Equivalents 1,008 (14,049)
Cash and Cash Equivalents at Beginning of Year 14,858 48,521
-------- --------
Cash and Cash Equivalents at End of Year $ 15,866 $ 34,472
======== ========
Interest Paid $ 4,881 $ 3,287
Income Taxes Paid $ 12,356 $ 12,491
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes, and management's discussion and analysis of results of operations
and financial condition included in the Company's 2002 Annual Report to
Shareholders. These interim statements are unaudited. In the opinion of the
Company's management, all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods have been made.
STOCK PLANS:
The Company applies the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock plans. No compensation
expense for stock options is reflected in net earnings, as all options granted
under such plans have an exercise price not less than the market value of the
common stock on the date of grant. The following table illustrates the effect on
net income and net income per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123
for the period presented:
- ----------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts) March 31, March 31,
2003 2002
- ----------------------------------------------------------------------------------------
Net income, as reported $32,017 $41,947
- ----------------------------------------------------------------------------------------
Deduct: Total stock-based employee compensation expense
determined under fair value method for all stock option
awards, net of related tax effects 3,114 5,229
- ----------------------------------------------------------------------------------------
Pro-forma net income $28,903 $36,718
- ----------------------------------------------------------------------------------------
Net income per share:
- ----------------------------------------------------------------------------------------
Basic - as reported $ 0.34 $ 0.44
- ----------------------------------------------------------------------------------------
Basic - pro-forma $ 0.31 $ 0.39
- ----------------------------------------------------------------------------------------
Diluted - as reported $ 0.34 $ 0.44
- ----------------------------------------------------------------------------------------
Diluted - pro-forma $ 0.30 $ 0.38
- ----------------------------------------------------------------------------------------
These pro-forma amounts may not be representative of future disclosures because
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
NET INCOME PER SHARE:
Options to purchase 4,917,152 shares and 2,721,001 shares were outstanding for
the first quarter of 2003 and 2002, respectively, but were not included in the
computation of diluted net income per share because the options' exercise prices
were greater than the average market price of the common shares in the
respective periods.
5
SEGMENT INFORMATION:
The Company's reportable segment information, based on geographic region,
follows. The Company evaluates the performance of its geographic areas based on
operating profit, excluding interest expense, other income and expense, certain
unallocated expenses, the effects of nonrecurring items and accounting changes,
and income tax expense.
- ------------------------------------------------------------------------------------------------------------------------------------
North Latin Asia
2003 (Dollars in thousands) America Europe India America Pacific Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $140,695 $196,369 $10,367 $51,306 $67,487 $ -- $466,224
Transfers between areas 21,314 40,076 248 199 5,004 (66,841) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales $162,009 $236,445 $10,615 $51,505 $72,491 $(66,841) $466,224
- ------------------------------------------------------------------------------------------------------------------------------------
Segment profit $ 14,104 $ 53,869 $ 2,440 $ 9,698 $11,561 $ (1,565) $ 90,107
- -----------------------------------------------------------------------------------------------------------------------
Corporate and other
unallocated expenses (12,565)
Nonrecurring charge (20,389)
Interest expense (8,113)
Other income (expense), net (2,526)
-------------
Income before taxes on income $ 46,514
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
North Latin Asia
2002 (Dollars in thousands) America Europe India America Pacific Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $148,604 $165,985 $8,725 $57,240 $65,290 $ -- $445,844
Transfers between areas 21,193 27,412 49 160 3,441 (52,255) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales $169,797 $193,397 $8,774 $57,400 $68,731 $(52,255) $445,844
- ------------------------------------------------------------------------------------------------------------------------------------
Segment profit $ 15,219 $ 38,639 $1,876 $13,855 $15,028 $ (400) $ 84,217
- -----------------------------------------------------------------------------------------------------------------------
Corporate and other
unallocated expenses (11,951)
Interest expense (10,427)
Other income (expense), net 1,965
-------------
Income before taxes on income $ 63,804
- ------------------------------------------------------------------------------------------------------------------------------------
NONRECURRING AND OTHER CHARGES:
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2002 Annual Report to Shareholders, in October 2000,
the Company announced a significant reorganization, including management
changes, consolidation of production facilities and related actions.
The Company recorded nonrecurring pre-tax charges of $20.4 million in the first
quarter of 2003; essentially all elements of the charges relate to employee
terminations. The Company eliminated over 150 positions, principally in its
North America, Europe and Asia Pacific operating regions. The pre-tax
nonrecurring charges recorded for the first quarter 2003 relate to operations in
North America including corporate ($12.8 million), Europe ($4.9 million), Latin
America ($0.3 million) and Asia Pacific ($2.4 million).
At the time the reorganization was announced, the Company expected to incur
approximately $90 million to $100 million in related pre-tax costs; certain
actions remain to be taken during the course of 2003, and the Company
anticipates that total expected pre-tax costs will now approximate $110 million.
The increase in anticipated costs is due to a combination of additional actions
now contemplated under the reorganization, and the impact of the weaker US
dollar to the extent such actions take place outside the United States. To date,
the Company has recorded approximately $94 million of the expected pre-tax
charges.
6
Movements in the liabilities related to the nonrecurring charges were as follows
(in millions):
EMPLOYEE- ASSET-RELATED
RELATED AND OTHER TOTAL
--------------------------------------------------
Balance December 31, 2002 $ 3.4 $ .4 $ 3.8
Additional charges 19.6 .8 20.4
Cash and other costs (1.8) -- (1.8)
------ ------- ------
Balance March 31, 2003 $ 21.2 $ 1.2 $ 22.4
====== ======= ======
The balance of the liabilities will be utilized by 2005 in connection with the
final decommissioning and disposal of affected equipment and as severance and
other benefit obligations to affected employees are satisfied.
The Company has established accruals relating primarily to employee separation
costs, facility closure costs and other actions relating to the integration of
certain BBA operations into IFF. Costs associated with these integration actions
were recognized as a component of the purchase accounting which resulted in an
adjustment to goodwill; such costs did not directly impact current earnings.
Movements in acquisition accounting accruals were as follows (in millions):
EMPLOYEE- ASSET-RELATED
RELATED AND OTHER TOTAL
--------------------------------------------------
Balance December 31, 2002 $ 6.0 $ 1.1 $ 7.1
Cash and other costs (1.5) (.7) (2.2)
------ ----- -----
Balance March 31, 2003 $ 4.5 $ .4 $ 4.9
====== ===== =====
COMPREHENSIVE INCOME:
Changes in the accumulated other comprehensive income component of shareholders'
equity were as follows:
- ---------------------------------------------------------------------------------------------------------------------
Accumulated
gains(losses) on Minimum Pension
2003 (Dollars in thousands) derivatives Obligation, net of
Translation qualifying as tax
adjustments hedges Total
--------------------------------------------------------------------------------
Balance December 31, 2002 $(138,175) $ 733 $(75,038) $(212,480)
Change 8,030 (821) -- 7,209
--------------------------------------------------------------------------------
Balance March 31, 2003 $(130,145) $ (88) $(75,038) $(205,271)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Accumulated
gains(losses) on Minimum Pension
2002 (Dollars in thousands) derivatives Obligation, net of
Translation qualifying as tax
adjustments hedges Total
--------------------------------------------------------------------------------
Balance December 31, 2001 $(156,266) $(2,261) $(20,009) $(178,536)
Change (9,958) 4,396 -- (5,562)
--------------------------------------------------------------------------------
Balance March 31, 2002 $(166,224) $ 2,135 $(20,009) $(184,098)
- ---------------------------------------------------------------------------------------------------------------------
7
BORROWINGS:
Debt consists of the following (Dollars in thousands):
Rate Maturities March 31, 2003 December 31, 2002
---- ---------- -------------- -----------------
Commercial paper (U.S.) $ 215,317 $ 37,979
Bank loans 20,244 10,979
Current portion of long-term debt 58,824 705
------------------- ---------------------
Total current debt 294,385 49,663
------------------- ---------------------
U.S. dollars 6.45% 2006 498,477 699,112
Euro facility 4.79% 2005-06 101,958 106,018
Japanese Yen notes 2.45% 2008-11 125,721 126,824
Japanese Yen notes 1.74% 2005 9,925 10,012
Other 2004-12 11,898 1,587
------------------- ---------------------
747,979 943,553
Deferred realized gain on interest rate swaps 42,604 57,868
FAS 133 Adjustment 2,625 5,664
------------------- ---------------------
Total long-term debt 793,208 1,007,085
------------------- ---------------------
Total debt $1,087,593 $1,056,748
=================== =====================
At March 31, 2003, commercial paper maturities did not extend beyond May 14,
2003. During the first quarter, the Company repurchased $149 million of its
6.45% Notes that were to mature in 2006. In early April 2003, the Company
repurchased an additional $51 million of the Notes; this amount is included in
the current portion of long-term debt. All repurchases were funded with
commercial paper. At March 31, 2003, the weighted average interest rate on total
borrowings was 3.4% compared to 3.7% at December 31, 2002.
As a result of premiums paid for the notes repurchased in the first quarter
2003, the Company incurred a pre-tax loss of $2.7 million included in Other
(income) expense. The Company will record an additional loss approximating $1.6
million in the second quarter 2003 as a result of the repurchase of notes in
April.
8
INTANGIBLE ASSETS, NET:
The following tables reflect the carrying values for Intangible assets and
Accumulated amortization at December 2002 and March 2003.
March 31, 2003 March 31, 2003
Gross Carrying Value Accumulated Amortization
-------------------- ------------------------
Goodwill $684,189 $41,534
Other indefinite lived intangibles 19,200 1,184
Trademarks and other 149,786 30,912
-------- -------
Total $853,175 $73,630
======== =======
December 31, 2002 December 31, 2002
Gross Carrying Value Accumulated Amortization
-------------------- ------------------------
Goodwill $684,189 $41,534
Other indefinite lived intangibles 19,200 1,184
Trademarks and other 149,786 27,754
------- ------
Total $853,175 $70,472
======== =======
Amortization expense will be $3.2 million per quarter for 2003 to 2006.
Amortization expense will be $3.2 million for the first three quarters and $1.8
million in the fourth quarter in 2007.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year's financial
statements to conform to fiscal 2002 classifications.
SUBSEQUENT EVENT
- ----------------
On May 12, 2003, the Company reached agreement to sell its New York
headquarters; the transaction is expected to close in June 2003, at which time
the Company will enter into a long-term lease with respect to the space it
currently occupies (approximately 40% of the buildings).
Proceeds from the sale, expected to approximate $90 million, will be used to
reduce short-term borrowings. The anticipated gain on sale will be deferred and
amortized as appropriate over the initial lease term, as required under
applicable accounting standards.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- -------------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
OPERATIONS
- ----------
First quarter 2003 sales totaled $466.2 million, increasing 5% in comparison to
the prior year quarter. Sales for the first quarter 2002 included $5.1 million
attributable to non-core businesses that the Company disposed of during 2002;
excluding such sales from the 2002 results, first quarter 2003 sales increased
6% in comparison to the prior year. Reported sales for the 2003 quarter
benefited from the strengthening of various currencies, most notably the Euro,
the Japanese Yen and the Australian dollar, in relation to the U.S. dollar; had
exchange rates remained constant, sales for the first quarter 2003 would have
declined approximately 2% in comparison to the prior year quarter. Excluding
those sales attributable to the non-core businesses from the 2002 results, local
currency sales in the first quarter 2003 declined approximately 1% in comparison
to the prior year quarter.
Excluding, for comparative purposes, the sales attributable to non-core
businesses disposed of during 2002; sales for the first quarter 2003 performance
reflected the following:
o North America flavors and fragrance sales declined by 3% and 7%,
respectively; in total the region declined by 5%, reflecting weak
economic conditions and customer efforts to reduce inventory levels.
o Local currency flavor sales in Europe increased 3%, resulting in a 21%
increase in reported dollar sales; fragrance sales declined 2% in local
currency, resulting in a 17% increase in reported dollar sales. Overall,
the region's sales were flat in local currency and increased 19% in
dollars. The local currency flavor performance reflected the benefit of
new wins. Local currency fragrance sales were impacted by an 11% decline
in aroma chemical sales in comparison to the prior year; in the first
quarter 2002, aroma chemical sales had increased 26% in local currency.
o Local currency sales in Asia Pacific were flat, resulting in a 4%
increase in reported dollar sales. Fragrance sales increased 6% in local
currency and 11% in reported dollars. Local currency flavor sales
declined 6% resulting in flat sales in reported dollars. The flavor sales
performance was impacted by continued economic weakness in Japan,
Indonesia and the Philippines.
o Latin America sales declined 5%, mainly due to persistent weakness in
Brazil, Mexico and Venezuela. Fragrance sales declined 4% while flavor
sales declined 9%.
o India sales increased 18% in local currency and 22% in dollars. This
performance was led by a 20% local currency increase in fragrances;
flavor sales increased 16% in local currency. The performance reflected
the benefit of many new wins in both flavors and fragrances in the
region.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first three months 2003 and 2002 are detailed below.
FIRST THREE MONTHS
------------------
2003 2002
---- ----
Cost of Goods Sold 58.0% 58.3%
Research and Development Expenses 8.4% 7.9%
Selling and Administrative Expenses 16.3% 16.9%
Cost of goods sold, as a percentage of net sales, decreased from the prior year
primarily due to favorable sales mix.
Research and development expenses were somewhat higher due to increased
activities in this area. Research and Development expenses are expected to
approximate 8% of sales on a full year basis. Selling and administrative
expenses declined as a percentage of sales as a result of reorganization
activities.
10
Other expense in the quarter amounted to $2.5 million primarily due to a $2.7
million loss on the repurchase of $149 million of the 6.45% Notes. Other
(income) expense totaled $2.0 million of income in the first quarter of 2002,
primarily due to exchange gains in Argentina; in 2003, there were no significant
exchange gains or losses in the quarter.
Interest expense declined from 2002 due to reduced borrowing levels, the general
decline in interest rates and the continuing benefits of the US dollar and Yen
interest rate swaps the Company has entered into. The average interest on
borrowings during the first quarter 2003 was 3.4% compared to 3.7% in the 2002
first quarter.
The effective tax rate for the first quarter of 2003 was 31.2% compared to 34.3%
for the comparable 2002 quarter. The 2003 effective rate reflects the benefit of
the nonrecurring charges taken in the quarter; many of these charges were taken
in high tax jurisdictions, including the United States. Excluding the tax
benefit of the nonrecurring charges, the effective tax rate for the quarter
would have been 32%.
NONRECURRING AND OTHER CHARGES:
- -------------------------------
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2002 Annual Report to Shareholders, in October 2000,
the Company announced a significant reorganization, including management
changes, consolidation of production facilities and related actions.
The Company recorded nonrecurring pre-tax charges of $20.4 million in the first
quarter of 2003; essentially all elements of the charges relate to employee
terminations. The Company eliminated over 150 positions, principally in its
North America, Europe and Asia Pacific operating regions. The pretax
nonrecurring charges recorded for the first quarter 2003 relate to operations in
North America including corporate ($12.8 million), Europe ($4.9 million), Latin
America ($0.3 million) and Asia Pacific ($2.4 million).
At the time the reorganization was announced, the Company expected to incur
approximated $90 million to $100 million in related pre-tax costs; certain
actions remain to be taken during the course of 2003, and the Company
anticipates that total expected pre-tax costs will now approximate $110 million.
The increase in anticipated costs is due to a combination of additional actions
now contemplated under the reorganization, and the impact of the weaker US
dollar to the extent such actions take place outside the United States. To date,
the Company has recorded approximately $94 million of the expected pre-tax
charges.
Movements in the liabilities related to the nonrecurring charges were as follows
(in millions):
EMPLOYEE- ASSET-RELATED
RELATED AND OTHER TOTAL
---------- ------------- -------
Balance December 31, 2002 $ 3.4 $ .4 $ 3.8
Additional charges 19.6 .8 20.4
Cash and other costs (1.8) -- (1.8)
------- ------ -------
Balance March 31, 2003 $ 21.2 $ 1.2 $ 22.4
======= ====== =======
The balance of the liabilities will be utilized by 2005 in connection with the
final decommissioning and disposal of affected equipment and as severance and
other benefit obligations to affected employees are satisfied.
The Company has established accruals relating primarily to employee separation
costs, facility closure costs and other actions relating to the integration of
certain BBA operations into IFF. Costs associated with these integration actions
were recognized as a component of the purchase accounting which resulted in an
adjustment to goodwill; such costs did not directly impact current earnings.
11
Movements in acquisition accounting accruals were as follows (in millions):
EMPLOYEE- ASSET-RELATED
RELATED AND OTHER TOTAL
---------- ------------- -------
Balance December 31, 2002 $ 6.0 $ 1.1 $ 7.1
Cash and other costs (1.5) (.7) (2.2)
------ ------ ------
Balance March 31, 2003 $ 4.5 $ .4 $ 4.9
====== ====== ======
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $16.3 million at March
31, 2003. Working capital, at March 31, 2003 was $330.1 million compared to
$507.3 million at December 31, 2002. The change in working capital is a direct
result of the repurchase of a portion of the Company's 6.45% five year Notes
which was financed with commercial paper. This transaction is discussed in more
detail below. Gross additions to property, plant and equipment during the first
three months of 2003 were $11.3 million.
At March 31, 2003, the Company's outstanding commercial paper had an average
interest rate of 1.5%. Commercial paper maturities did not extend beyond May 14,
2003. Bank borrowings were $20.2 million.
During the first quarter, the Company repurchased $149 million of its 6.45%
Notes that were to mature in 2006. In early April 2003, the Company repurchased
an additional $51 million of the Notes; this amount is included in the current
portion of long-term debt. All repurchases were funded with commercial paper. At
March 31, 2003, the weighted average interest rate on total borrowings was 3.4%
compared to 3.7% at December 31, 2002.
As a result of premiums paid for the notes repurchased in the first quarter
2003, the Company incurred a pre-tax loss of $2.7 million included in Other
(income) expense. The Company will record an additional loss approximating $1.6
million in the second quarter 2003 as a result of the repurchase of notes in
April.
The Company amended its interest rate swaps on two occasions during the first
quarter 2003. The first amendment reduced the notional amount of the swaps from
$700 million to $500 million in anticipation of the Company's debt repurchase
initiative. The second swap amendment reduced the notional value of the swaps to
$350 million. In May 2003, the Company eliminated all remaining swaps related to
these Notes. On elimination of the floating rate swaps, the interest rate on the
6.45% coupon rate Notes was effectively fixed for the balance of their term at
approximately 3.2%.
In January 2003, the Company paid a quarterly cash dividend of $.15 per share to
shareholders. This amount is unchanged from the 2002 quarterly dividend. The
Company repurchased approximately 0.6 million shares in the first quarter 2003.
Repurchases will be made from time to time on the open market or through private
transactions as market and business conditions warrant. The repurchased shares
will be available for use in connection with the Company's employee benefit
plans and for other general corporate purposes. At March 31, 2003, the Company
had approximately $78.0 million authorized under its October 2002 repurchase
plan.
The Company anticipates that its financing requirements will be funded from
internal sources and credit facilities currently in place.
12
SUBSEQUENT EVENT
- ----------------
On May 12, 2003, the Company reached agreement to sell its New York
headquarters; the transaction is expected to close in June 2003, at which time
the Company will enter into a long-term lease with respect to the space it
currently occupies (approximately 40% of the buildings).
Proceeds from the sale, expected to approximate $90 million, will be used to
reduce short-term borrowings. The anticipated gain on sale will be deferred and
amortized as appropriate over the initial lease term, as required under
applicable accounting standards.
NON-GAAP FINANCIAL MEASURES
- ---------------------------
The foregoing discussion of the Company's current results and its commentary
regarding expected future results include and, where indicated, exclude the
impact of nonrecurring charges and the impact of foreign currency on reported
results. Such information is supplemental to information presented in accordance
with generally accepted accounting principles (GAAP) and is not intended to
represent a presentation in accordance with GAAP. In discussing its historical
and expected future results and financial condition, the Company believes it is
meaningful for investors to be made aware of the impact that foreign currency
and such specifically identified nonrecurring items have on results and
financial condition.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- -------------------------------------------------------------------------------
Statements in this quarterly report, which are not historical facts or
information, are "forward-looking statements" within the meaning of The Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's reasonable current assumptions and expectations. Such
forward-looking statements involve risks, uncertainties and other factors, which
may cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking statements, and
there can be no assurance that actual results will not differ materially from
management's expectations. Such factors include, among others, the following:
general economic and business conditions in the Company's markets, including
economic, population health and political uncertainties; interest rates; the
price and availability of raw materials; the Company's ability to implement its
business strategy, including the achievement of anticipated cost savings,
profitability and growth targets; the impact of currency fluctuation or
devaluation in the Company's principal foreign markets and the success of the
Company's hedging and risk management strategies; the impact of possible pension
funding obligations and increased pension expense on the Company's cash flow and
results of operations; and the effect of legal and regulatory proceedings, as
well as restrictions imposed on the Company, its operations or its
Representatives by foreign governments. The Company intends its forward-looking
statements to speak only as of the time of such statements and does not
undertake to update or revise them as more information becomes available or to
reflect changes in expectations, assumptions or results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
There are no material changes in market risk from the information provided in
the Company's Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chairman and
Chief Executive Officer and Senior Vice President and Chief Financial Officer,
with the assistance of other members of the Company's management, have evaluated
the effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's filings under the
Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect such controls.
13
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
10(a) Retirement Agreement dated as of March 31, 2003 between Julian
W. Boyden, Executive Vice President of the Company, and the
Company.
10(b) Retirement Agreement dated as of March 31, 2003 between
Stephen A. Block, Senior Vice President, General Counsel and
Secretary of the Company, and the Company.
10(c) Supplemental Retirement Plan adopted by the Board of Directors
of the Company on October 29, 1986, including amendments
effective January 1, 2001 conforming it to the Company's
current Pension Plan.
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002,
signed by Richard A. Goldstein, Chairman of the Board and
Chief Executive Officer of the Company, and Douglas J.
Wetmore, Senior Vice President and Chief Financial Officer of
the Company.
(b) Reports on Form 8-K
-------------------
The Company filed the following Reports on Form 8-K since the
beginning of the quarter for which this Report on Form 10-Q is
filed:
o Report on Form 8-K dated January 28, 2003 furnishing
under Item 9 a copy of a Company press release dated
January 27, 2003, regarding the Company's financial
results for the fourth quarter and full year 2002.
o Report on Form 8-K dated April 3, 2003 furnishing under
Items 9 and 12 a copy of a Company press release dated
April 3, 2003, reporting certain information regarding
the Company's reorganization plan and sales and earnings
outlook for the first quarter of 2003.
o Report on Form 8-K dated April 28, 2003 furnishing under
Items 9 and 12 a copy of a Company press release dated
April 28, 2003 regarding the Company's financial results
for the first quarter of 2003.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: May 13, 2003 By: /S/ DOUGLAS J. WETMORE
--------------------------
Douglas J. Wetmore, Senior Vice President and
Chief Financial Officer
Dated: May 13, 2003 By: /S/ STEPHEN A. BLOCK
------------------------
Stephen A. Block, Senior Vice President,
General Counsel and Secretary
15
CERTIFICATION
I, Richard A. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Flavors &
Fragrances Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 13, 2003 By: /S/ Richard A. Goldstein
----------------------------
Name: Richard A. Goldstein
Title: Chairman of the Board and
Chief Executive Officer
16
CERTIFICATION
I, Douglas J. Wetmore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Flavors &
Fragrances Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 13, 2003 By: /S/ Douglas J. Wetmore
--------------------------
Name: Douglas J. Wetmore
Title: Senior Vice President and
Chief Financial Officer
17
EXHIBIT INDEX
Number Description
- ------ -----------
10(a) Retirement Agreement dated as of March 31, 2003 between Julian W.
Boyden, Executive Vice President of the Company, and the Company.
10(b) Retirement Agreement dated as of March 31, 2003 between Stephen A.
Block, Senior Vice President, General Counsel and Secretary of the
Company, and the Company.
10(c) Supplemental Retirement Plan adopted by the Board of Directors of
the Company on October 29, 1986, including amendments effective
January 1, 2001 conforming it to the Company's current Pension Plan.
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, signed by
Richard A. Goldstein, Chairman of the Board and Chief Executive
Officer of the Company, and Douglas J. Wetmore, Senior Vice
President and Chief Financial Officer of the Company.