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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 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 (IRS Employer
of incorporation or organization) Identification No.)
521 WEST 57TH STREET, NEW YORK, N.Y. 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value New York Stock Exchange
12 1/2 cent per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [X] No [ ].
For the purpose of reporting the following market value of Registrant's
outstanding common stock, the term "affiliate" refers to persons, entities or
groups which directly or indirectly control, are controlled by, or are under
common control with the Registrant and does not include individual executive
officers or directors or under 10% shareholders. The aggregate market value of
Registrant's common stock not held by affiliates as of June 30, 2004 was
$3,524,549,371.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of February 28, 2005:
94,522,596 shares of Common Stock, par value 12 1/2 cent per share
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be sent to shareholders in
connection with the 2005 Annual Meeting (the "IFF 2005 Proxy Statement") are
incorporated by reference in Part III of this Form 10-K.
================================================================================
INTERNATIONAL FLAVORS & FRAGRANCES INC.
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business 3
ITEM 2. Properties 9
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters and
Issuer Purchase of Equity Securities 12
ITEM 6. Selected Financial Data 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 34
ITEM 8. Financial Statements and Supplementary Data 34
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 35
ITEM 9A. Controls and Procedures 35
ITEM 9B. Other Information 35
PART III
ITEM 10. Directors and Executive Officers of the Registrant 36
ITEM 11. Executive Compensation 36
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 36
ITEM 13. Certain Relationships and Related Transactions 36
ITEM 14. Independent Registered Public Accounting Firm Fees and Services 36
PART IV
ITEM 15. Exhibits and Financial Statement Schedules 37
SIGNATURES 72
2
PART I
ITEM 1. BUSINESS.
International Flavors & Fragrances Inc., incorporated in New York in
1909 and its subsidiaries (the "Registrant" or "IFF" or the "Company"), is a
leading creator and manufacturer of flavor and fragrance products used by other
manufacturers to impart or improve flavor or fragrance in a wide variety of
consumer products. Fragrance products are sold principally to manufacturers of
perfumes, cosmetics, toiletries, hair care products, deodorants, soaps,
detergents and air care products; flavor products are sold principally to
manufacturers of prepared foods, beverages, dairy foods, pharmaceuticals and
confectionery products, as well as the food service industry.
The present worldwide scope of the Company's business is in part the
result of the 1958 combination of (i) the business conducted prior to the
combination primarily in the United States by the Company under the name van
Ameringen-Haebler, Inc. ("VAH") with (ii) the business conducted prior to the
combination primarily in Europe by N. V. Polak & Schwarz's Essencefabrieken, a
Dutch corporation ("P & S"). The P & S enterprise, founded in Holland in 1889,
was also engaged in the manufacture and sale of flavor and fragrance products,
with operations in a number of countries where VAH was not an important factor.
Additionally, in November 2000, the Company acquired Bush Boake Allen Inc.
("BBA"), an international flavor, fragrance and aroma chemical company.
The Company currently has 31 manufacturing facilities with the major
manufacturing facilities located in the United States, Great Britain, Ireland,
The Netherlands, Spain, Argentina, Brazil, Mexico, India, Australia, China,
Indonesia, Japan and Singapore. The remaining manufacturing facilities are
located in 8 other countries. The Company maintains its own sales and
distribution facilities in 31 countries and is represented by sales agents in
other countries. The Company's principal executive offices are located at 521
West 57th Street, New York, New York 10019 (212-765-5500).
MARKETS
Fragrance products are used by customers in the manufacture of consumer
products such as soaps, detergents, cosmetic creams, lotions and powders,
lipsticks, after-shave lotions, deodorants, hair preparations, candles, air
fresheners and all-purpose cleaners, as well as in other consumer products
designed solely to appeal to the sense of smell, such as perfumes and colognes.
The cosmetics industry, including perfume and toiletries manufacturers, is one
of the Company's two largest fragrance customer groups. Most of the major United
States companies in this industry are customers of the Company, and five of the
largest United States cosmetics companies are among its principal customers. The
household products industry, including soaps and detergents, is the other
important fragrance customer group. Four of the largest United States household
product manufacturers are major customers of the Company. In the three years
ended December 31, 2004, sales of fragrance products accounted for 55%, 54% and
55%, respectively, of the Company's total sales on a reported basis.
Flavor products are sold principally to the food and beverage
industries for use in consumer products such as soft drinks, candies, baked
goods, desserts, prepared foods, dietary foods, dairy products, drink powders,
pharmaceuticals, snack foods and alcoholic beverages. Two of the Company's
largest customers for flavor products are major producers of prepared foods and
beverages in the United States. In the three years ended December 31, 2004,
sales of flavor products accounted for 45%, 46% and 45%, respectively, of the
Company's total sales on a reported basis.
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PRODUCTS
The Company's principal fragrance and flavor products consist of
compounds of large numbers of ingredients blended under proprietary formulas
created by its perfumers and flavorists. Most of these compounds contribute the
total fragrance or flavor to the consumer products in which they are used. This
fragrance or flavor characteristic is often a major factor in the public
selection and acceptance of the consumer end product. A smaller number of
compounds are sold to manufacturers who further blend them to achieve the
finished fragrance or flavor in their products. The Company produces thousands
of compounds, and new compounds are constantly being created in order to meet
the many and changing characteristics of its customers' end products. Most of
the fragrance and flavor compounds are created and produced for the exclusive
use of particular customers. The Company's products are sold in solid and liquid
forms and in amounts ranging from a few pounds to many tons, depending upon the
nature of the product.
The ingredients used by the Company in its compounds are both synthetic
and natural. The Company manufactures a substantial portion of the synthetic
ingredients. While the major part of the Company's production of synthetic
ingredients is used in its compounds, a substantial portion is also sold to
others. The natural ingredients are derived from flowers, fruits and other
botanical products as well as from animal products. They contain varying numbers
of organic chemicals, which are responsible for the fragrance or flavor of the
natural product. The natural products are purchased for the larger part in
processed or semi-processed form. Some are used in compounds in the state in
which they are purchased and others after further processing. Natural products,
together with various chemicals, are also used as raw materials for the
manufacture of synthetic ingredients by chemical processes. The Company's flavor
products also include extracts and seasonings derived from various fruits,
vegetables, nuts, herbs and spices as well as microbiologically-derived
ingredients.
MARKET DEVELOPMENTS
The demand for consumer products utilizing flavors and fragrances has
been stimulated and broadened by changing social habits resulting from various
factors such as increases in personal income, and dual-earner households,
teenage population, leisure time, health concerns and urbanization and by the
continued growth in world population. In the fragrance field, these developments
have expanded the market for hair care, candles and air care products and
deodorant and personal wash products with finer fragrance quality, as well as
the market for colognes, toilet waters, men's toiletries and other products
beyond traditional luxury items such as perfumes. In the flavor field, similar
market characteristics have stimulated the demand for products such as
convenience foods, soft drinks and low-fat food products that must conform to
expected tastes. New and improved methods of packaging, application and
dispensing have been developed for many consumer products that utilize some of
the Company's flavor or fragrance products. These developments have called for
the creation of new compounds and ingredients compatible with the newly
introduced materials and methods of application used in consumer end products.
PRODUCT DEVELOPMENT AND RESEARCH
The development of new flavors and fragrances is a complex artistic and
technical process calling upon the combined knowledge and skill of the Company's
creative perfumers and flavorists, and its scientists. With extensive
experience, the perfumers and flavorists continuously advance their skills for
creating fragrances or flavors best suited to the market requirements of the
customers' products.
Scientists from various disciplines work in project teams with the
perfumers and flavorists to develop fragrance and flavor products with consumer
preferred performance characteristics. Scientific expertise includes: natural
products research, plant science, organic chemistry, analytical chemistry,
biochemistry, microbiology, process engineering, food science, material science,
and sensory science. Analytical and sensory science is applied to understand the
complex interactions of the many ingredients in a consumer product in order to
optimize the flavor or fragrance performance at all points of use. Material
science technology is applied to create controlled release and delivery systems
to enhance flavor and fragrance performance in consumer products. An important
contribution to the creation of new fragrances and flavors is the discovery and
development of new ingredients having improved fragrance or flavor value.
4
The ingredients research program discovers molecules found in natural substances
and creates new molecules that are subsequently tested for their fragrance or
flavor value. The new molecules that meet rigorous requirements for commercial
development are subsequently transferred to manufacturing operations for
production.
Creative and technical product development is conducted in 31 fragrance
and flavor laboratories in 22 countries. The Company maintains a research and
development center at Union Beach, New Jersey. The Company spent $175,173,000 in
2004, $159,286,000 in 2003, and $144,027,000 in 2002 on its research and
development activities. These expenditures are currently expected to increase in
2005 to approximately $190,000,000. Of the amount expended in 2004 on such
activities, 67% was for fragrances and the balance was for flavors. The Company
employed 1,056 persons in 2004 and 1,099 persons in 2003 in such activities.
The business of the Company is not materially dependent upon any
patents, trademarks or licenses.
DISTRIBUTION
Most of the Company's sales are through its own sales force, operating
from 4 sales offices in the United States and 48 sales offices in 30 foreign
countries. Sales in other countries are made through agents and distributors.
For the year ended December 31, 2004, 29% of the Company's sales were to
customers in North America, 39% in Europe, 17% in Asia Pacific, 12% in Latin
America and 3% in the India Region. For additional information with respect to
the Company's operations by major geographical region, see Note 13 of the Notes
to the Company's Consolidated Financial Statements.
During 2004 the Company's 30 largest customers accounted for 53% of its
sales; its five largest customers accounted for about 9%, 8%, 6%, 4%, and 3%
respectively, of its sales, and no other single customer accounted for more than
3% of sales.
GOVERNMENTAL REGULATION
Manufacture and sale of the Company's products are subject to
regulation in the United States by the Food and Drug Administration, the
Agriculture Department, the Bureau of Alcohol, Tobacco and Firearms, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, the Drug Enforcement Administration and state authorities.
Foreign subsidiaries are subject to similar regulation in a number of countries.
Compliance with existing governmental requirements regulating the discharge of
materials into the environment has not materially affected the Company's
operations, earnings or competitive position. The Company expects to spend in
2005 approximately $7,200,000 in capital projects and $14,200,000 in operating
expenses and governmental charges for the purpose of complying with such
requirements.
RAW MATERIAL PURCHASES
More than 5,000 different raw materials are purchased from many sources
all over the world. The principal natural raw material purchases consist of
essential oils, extracts and concentrate derived from fruits, vegetables,
flowers, woods and other botanicals, animal products and raw fruits. The
principal synthetic raw material purchases consist of organic chemicals. The
Company believes that alternate sources of materials are available to enable it
to maintain its competitive position in the event of any interruption in the
supply of raw materials from present sources.
COMPETITION
The Company has more than 50 competitors in the United States and world
markets. While no single factor is responsible, the Company's competitive
position is based principally on the creative skills of its perfumers and
flavorists, the technological advances resulting from its research and
development, the quality of its customer service, the support provided by its
marketing and application groups, and its understanding of consumers. The
Company believes that it is one of the largest companies producing and marketing
on an international basis a wide range of fragrance and flavor products of the
types manufactured for sale to manufacturers of consumer products. In particular
5
countries and localities, the Company faces competition from numerous companies
specializing in certain product lines, among which are some companies larger
than the Company and some more important in a particular product line or lines.
Most of the Company's customers do not buy all their fragrance or flavor
products from the same supplier, and some customers make their own fragrance or
flavor compounds with ingredients supplied by the Company or others.
EMPLOYEE RELATIONS
At December 31, 2004, the Company employed 5,212 persons, of whom 1,513
were employed in the United States. The Company has never experienced a work
stoppage or strike and considers its employee relations to be satisfactory.
EXECUTIVE OFFICERS OF REGISTRANT:
Year
First
Became
Name Office and Other Business Experience (1) Age Officer
- ---- ---------------------------------------- ----- -------
Richard A. Goldstein.................Chairman of the Board and Chief Executive 63 2000
Officer since June 2000; President
and Chief Executive Officer of
Unilever United States, Inc. and
Business Group President of Unilever
North American Foods, a home,
personal care and food products
company, prior thereto; Director,
Legacy Hotels; Director, Fiduciary
Trust Company International;
Director, The Interpublic Group of
Companies, Inc.; Director, Continuum
Health Partners, Inc.
James H. Dunsdon.....................Chief Operating Officer since October 2004; Senior 58 2003
Vice President, Global Business
Development, Flavors and Functional
Fragrances since March 2004; Vice
President North America Region since
January 2003; Regional Vice
President, North America from
January 2001 to January 2003;
Executive Vice President BBA, prior
thereto.
D. Wayne Howard......................Executive Vice President, Global Operations 49 2000
since September 2000; Vice President, Supply
Chain Strategy of Nordstrom, Inc., a retailer,
from January 2000 to August 2000; Vice
President, Strategic Sourcing, North America
of Unilever North American Foods, prior
thereto.
Clint D. Brooks......................Senior Vice President, Research and 53 2000
Development since December 2002;
Vice President, Research and
Development from October 2000 to
December 2002; Director of Chemical
Sciences, Abbott Laboratories, a
pharmaceutical company, prior
thereto.
Steven J. Heaslip.................... Senior Vice President, Human Resources since 47 2001
December 2002; Vice President, Human
Resources from September 2001 to
December 2002; Senior Vice
President, Human Resources,
Elizabeth Arden, a manufacturer of
prestige beauty products, prior
thereto.
6
Year
First
Became
Name Office and Other Business Experience (1) Age Officer
- ---- ---------------------------------------- ----- -------
Dennis M. Meany...................... Senior Vice President, General Counsel and 57 2004
Secretary since January 2004;
Associate General Counsel from
November 2000 to December 2003; Vice
President, General Counsel and
Secretary of BBA, prior thereto.
Nicolas Mirzayantz................... Senior Vice President, Fine Fragrance and 42 2002
Beauty Care since October 2004; Vice
President, Global Business
Development, Fine Fragrance and
Toiletries since December 2002; Vice
President, Global Business
Development, Fine Fragrances and
Toiletries since January 2001;
Fragrances General Manager, IFF
France, prior thereto.
Douglas J. Wetmore................... Senior Vice President and Chief Financial 47 1992
Officer since September 2000; Vice
President and Chief Financial Officer,
prior thereto.
Gail S. Belmuth...................... Vice President, Corporate Communications since 41 2001
June 2001; President and COO of
Banner McBride North America, a
change management consulting firm,
from May 2000 to May 2001; Managing
Director, Burson-Marsteller, a
public relations firm, prior
thereto.
Arun Bewoor.......................... Vice President, India Region since January 2003; 60 2003
Managing Director of IFF India Ltd. and
Regional Vice President, India Region from
June 2002 to January 2003; Managing
Director, BBA India Ltd., prior
thereto.
Rob J. M. Edelman..................... Vice President, Europe Region since January 43 2003
2003; Regional Vice President, Europe from
January 2001 to January 2003; Vice President
and Director of Marketing and Sales, Aroma
Chemicals, prior thereto.
7
Year
First
Became
Name Office and Other Business Experience (1) Age Officer
- ---- ---------------------------------------- ----- -------
Graciela M. Ferro..................... Vice President Sales, Global Accounts since 50 2003
October 2004; Vice President, Latin
America Region since January 2003;
Regional Vice President, Latin
America from October 2000 to January
2003; Vice President, Latin America,
LATAM Area Manager, Fragrance
Division and IFF Argentina affiliate
Manager, prior thereto.
Christopher E. Gibson................. Vice President, North American Region since 48 2004
October 2004; Vice President, Global
Category Manager, Savory Flavors from
January 2001 to October 2004; Vice
President and General Manager,
Seasonings Americas, BBA, prior
thereto.
Hernan Vaisman ...................... Vice President, Latin America Region since 46 2004
October 2004; Regional Financial Director,
Latin American Region from January
2001 to October 2004; Regional
Financial Director, Reckitt
Benckiser plc, prior thereto.
Dennis J. Wall........................ Vice President, Asia Pacific Region since 47 2004
December 2004; Regional Sales
Manager, Asia Pacific Region from
July 2003 to December 2004; Business
Development Manager and Asia Pacific
Region Account Manager for Unilever
from January 2001 to July 2003; Asia
Pacific Region Business Development
Manager, Savory Flavors, prior
thereto.
(1) Employed by the Company or an affiliated company for the last five
years, except as otherwise indicated.
AVAILABLE INFORMATION
The Company makes available free of charge on or through the investor
relations link on its website, www.iff.com, all materials that it files
electronically with the SEC, including its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after electronically
filing such materials with, or furnishing them to, the SEC. During the period
covered by this Form 10-K, the Company made all such materials available through
its website as soon as reasonably practicable after filing such materials with
the SEC.
You may also read and copy any materials filed by the Company with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC
20549, and you may obtain information on the operation of the Public Reference
Room by calling the SEC in the U.S. at 1-800-SEC-0330. In addition, the SEC
maintains an Internet website, www.sec.gov, that contains reports, proxy and
information statements and other information that the Company files
electronically with the SEC.
A copy of the Company's Corporate Governance Guidelines, its Code of
8
Business Conduct and Ethics, and the charters of the Audit Committee,
Compensation Committee, and Nominating and Governance Committee of the Board of
Directors are posted on the Investor Relations section of the Company's website,
www.iff.com and are available in print to any shareholder who requests copies by
contacting Dennis M. Meany, Senior Vice President, General Counsel and
Secretary, at the Company's principal executive office set forth above.
ITEM 2. PROPERTIES.
The principal manufacturing and research properties of the Company are
as follows:
LOCATION OPERATION
- -------- ---------
UNITED STATES
Augusta, GA...................... Production of fragrance chemical ingredients.
Carrollton, TX(1)................ Production of flavor compounds.
Hazlet, NJ (1)................... Production of fragrance compounds; fragrance laboratories.
Jacksonville, FL................. Production of fragrance chemical ingredients.
New York, NY(1).................. Fragrance laboratories.
South Brunswick, NJ(1)........... Production of flavor compounds and ingredients; flavor
laboratories.
Union Beach, NJ.................. Research and development center.
FRANCE
Bois-Colombes.................... Fragrance laboratories.
Grasse........................... Production of flavor and fragrance ingredients; fragrance
laboratories.
GREAT BRITAIN
Haverhill........................ Production of flavor compounds and ingredients, and fragrance
chemical ingredients; flavor laboratories.
IRELAND
Drogheda......................... Production of fragrance compounds.
NETHERLANDS
Hilversum........................ Flavor and fragrance laboratories.
Tilburg.......................... Production of flavor compounds and ingredients and
fragrance compounds.
SPAIN
Benicarlo........................ Production of fragrance chemical ingredients.
ARGENTINA
Garin............................ Production of flavor compounds and ingredients and fragrance
compounds; flavor laboratories.
9
LOCATION OPERATION
- -------- ---------
BRAZIL
Rio de Janeiro.................. Production of fragrance compounds.
Sao Paulo....................... Fragrance laboratories.
Taubate......................... Production of flavor compounds and ingredients; flavor
laboratories.
MEXICO
Tlalnepantla.................... Production of flavor and fragrance compounds; flavor and fragrance
laboratories.
INDIA
Chennai(2)...................... Production of flavor compounds and ingredients and fragrance compounds;
flavor laboratories.
AUSTRALIA
Dandenong (Melbourne)........... Production of flavor compounds and flavor ingredients.
CHINA
Guangzhou(1).................... Production of flavor and fragrance compounds; flavor laboratories.
Shanghai(1)..................... Flavor and fragrance laboratories.
Xin'anjiang..................... Production of fragrance chemical ingredients.
INDONESIA
Jakarta(3)...................... Production of flavor compounds and ingredients and fragrance compounds and
ingredients; flavor and fragrance laboratories.
JAPAN
Gotemba......................... Production of flavor compounds.
Tokyo........................... Flavor and fragrance laboratories.
SINGAPORE
Jurong(3)....................... Production of flavor and fragrance compounds.
Science Park (1)................ Flavor and fragrance laboratories.
- ----------------------
(1) Leased.
(2) The Company has a 93.1% interest in the subsidiary company that owns this
facility.
(3) Land is leased and building is partially leased and partially owned.
The principal executive offices of the Company and its New York
laboratory facilities are located at 521 West 57th Street, New York City.
ITEM 3. LEGAL PROCEEDINGS.
In September 2001, the Company was named as a defendant in a purported
class action brought against it in the Circuit Court of Jasper County, Missouri,
on behalf of employees of a plant owned and operated by Gilster-Mary Lee Corp.
in Jasper, Missouri. The plaintiffs allege that they sustained respiratory
injuries in the workplace due to the use by Gilster-Mary Lee of a BBA and IFF
flavor.
In January 2004, the Court ruled that class action status was not
warranted. As a result of this decision, each of 30 plaintiff cases is to be
tried separately. The Company appealed a March 2004 judgment following a jury
verdict in favor of one plaintiff and his spouse awarding $20 million in
compensatory damages. The Company believes that the verdict is not supported by
the evidence or the law. In April 2004, another case was resolved by
confidential settlement. In June 2004, the trial court found in favor of the
Company in four additional plaintiffs' cases, although in November 2004 a new
trial was ordered on the grounds that a juror failed to disclose sufficient
background information. This order is being appealed by the Company. In July
2004, another case was resolved and, in December 2004 two additional cases were
also resolved, by confidential settlement. In January 2005, 12 additional
parties filed in this matter as plaintiffs.
10
Eight other actions based on similar claims of respiratory illness are
currently pending against the Company and other flavor suppliers. The parties
are in the discovery phase in the action brought against the Company and another
flavor supplier by 22 former and current workers at a popcorn factory in Marion,
Ohio. This case was filed in the Court of Common Pleas, Cuyahoga County, Ohio
and subsequently transferred to the Court of Common Pleas of Hamilton County,
Ohio. In May 2004, the Company and another flavor supplier were named defendants
in a lawsuit by 4 former workers at a Ridgeway, Illinois factory in an action
brought in the Circuit Court for the Second Judicial Circuit, Gallatin County,
Illinois and another concerning 11 other workers at this same plant was filed in
July 2004 in Cook County, Illinois against the Company and another flavor
supplier. In June 2004, the Company and 3 other flavor suppliers were named
defendants in a lawsuit by 1 current worker at a Sioux City, Iowa facility in an
action brought in the Iowa District Court for Woodbury County. This case was
subsequently removed to U.S. District Court for the Northern District of Iowa at
Sioux City and in September 2004, a flavor industry trade association and a
consulting agency were added as defendants. In June 2004, the Company and 3
other flavor suppliers were named defendants in a lawsuit by one plaintiff in an
action brought in the Court of Common Pleas, Hamilton County, Ohio. In June
2004, the Company and 3 other flavor suppliers were named defendants in a
lawsuit by 1 former worker at a Northlake, Illinois facility in an action
brought in the Circuit Court of Cook County, Illinois. In June 2004, the
Company, 4 other flavor suppliers and other unnamed parties were named
defendants in a lawsuit by 1 former worker at an Iowa City, Iowa facility in an
action filed in U.S. District Court for the Northern District of Iowa. In August
2004, the Company and another flavor supplier were named defendants in a lawsuit
by 19 former workers at a Marion, Ohio factory in an action brought in the Court
of Common Pleas, Marion County, Ohio.
The Company believes that all IFF and BBA flavors at issue in these
matters meet the requirements of the U.S. Food and Drug Administration and are
safe for handling and use by workers in food manufacturing plants when used
according to specified safety procedures. These procedures are detailed in
instructions that IFF and BBA provided to all their customers for the safe
handling and use of their flavors. It is the responsibility of IFF's customers
to ensure that these instructions, which include the use of appropriate
engineering controls, such as adequate ventilation, prior handling procedures
and respiratory protection for workers, are followed in the workplace. As
regards to the Missouri cases, based on an Interim Report issued by the National
Institute for Occupational Safety and Health ("NIOSH"), it appears any injuries
the plaintiffs may have suffered are related to inadequate workplace conditions.
An article in the August 1, 2002 New England Journal of Medicine confirmed
NIOSH's preliminary findings that any injuries sustained by the plaintiffs could
have been prevented if safety precautions consistent with those recommended by
the Company had been followed.
At each balance sheet date or more frequently as conditions warrant the
Company reviews the status of each pending claim, as well as its insurance
coverage for such claims with due consideration given to potentially applicable
deductibles, retentions and reservation of rights under its insurance policies,
and the advice of its outside legal counsel and a third party expert in modeling
insurance deductible amounts with respect to all these matters. While the
ultimate outcome of any litigation cannot be predicted with certainty,
management believes that adequate provision has been made with respect to all
known claims. Based on information presently available and in light of the
merits of its defenses and the availability of insurance, the Company does not
expect the outcome of the above cases, singly or in the aggregate, to have an
adverse effect on the Company's financial condition, results of operation or
liquidity. There can be no assurance that future events will not require the
Company to increase the amount it has accrued for any matter or accrue for a
matter that has not been previously accrued. See Note 17 of the Notes to the
Consolidated Financial Statements.
Over the past 20 years, various federal and state authorities and
private parties have claimed that the Company is a potentially responsible party
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 seek to
recover costs incurred and to be incurred to clean up the sites.
The waste site claims and suits usually involve million dollar amounts,
and most of them are asserted against many potentially responsible parties.
Remedial activities typically consist of several phases carried out over a
period of years. Most site remedies begin with investigation and feasibility
studies, followed by physical removal, destruction, treatment or containment of
11
contaminated soil and debris, and sometimes by groundwater monitoring and
treatment. To date, the Company's financial responsibility for some sites has
been settled through agreements granting the Company, in exchange for one or
more cash payments made or to be made, either complete release of liability or,
for certain sites, release from further liability for early and/or later
remediation phases, subject to certain "re-opener" clauses for later-discovered
conditions. Settlements in respect of some sites involve, in part, payment by
the Company and other parties of a percentage of the site's future remediation
costs over a period of years.
The Company believes that the amounts it has paid and anticipates
paying in the future for clean-up costs and damages at all sites are not and
will not be material to the Company's financial condition, results of operations
or liquidity, because of the involvement of other large potentially responsible
parties at most sites, because payment will be made over an extended time period
and because, pursuant to an agreement reached in July 1994 with three of the
Company's liability insurers, defense costs and indemnity amounts payable by the
Company in respect of the sites will be shared by the insurers up to an agreed
amount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information.
The Company's common stock is traded principally on the New York Stock
Exchange. The high and low stock prices for each quarter during the last two
years were:
2004 2003
---------------- -----------------
QUARTER HIGH LOW HIGH LOW
- ------- ----- --- ----- ---
First $38.40 $32.77 $36.61 $29.39
Second 37.87 34.37 33.60 30.37
Third 39.97 35.24 33.45 29.18
Fourth 43.20 36.12 35.75 31.01
(b) Approximate Number of Equity Security Holders.
(B)
(A) NUMBER OF RECORD HOLDERS AS OF
TITLE OF CLASS DECEMBER 31, 2004
-------------- -----------------
Common stock, par value 3,419
12 1/2 cent per share
(c) Dividends.
Cash dividends declared per share for each quarter since January 2003
were as follows:
2005 2004 2003
---- ---- ----
First $0.175 $0.160 $0.150
Second 0.175 0.160
Third 0.175 0.160
Fourth 0.175 0.160
12
(e) Issuer Purchases of Equity Securities
TOTAL NUMBER OF SHARES MAXIMUM DOLLAR VALUE OF
TOTAL NUMBER OF PURCHASED AS PART OF SHARES THAT MAY YET BE
SHARES PURCHASED AVERAGE PRICE PUBLICLY ANNOUNCED PURCHASED UNDER THE
(1) PAID PER SHARE PROGRAMS (2) PROGRAMS (3)
------------------- ------------------- ----------------------------- ---------------------------
October 1 - 31, 2004 195,000 $38.28 195,000 $84,219,439
November 1 - 30, 2004 107,000 $39.40 107,000 $80,003,401
December 1 - 31, 2004 107,200 $41.61 107,200 $75,542,989
(1) An aggregate of 1,801,900 shares of common stock were repurchased
during 2004; 1,172,700 and 629,200 shares of common stock were purchased
under repurchase program announced in October 2002 and July 2004,
respectively.
(2) Under the program announced October 22, 2002, the Board of Directors
approved the repurchase by the Company of up to $100.0 million of its
common stock. This program was completed in August of 2004.
(3) On July 27, 2004, the Board of Directors approved the repurchase of an
additional $100.0 million of its common stock.
13
ITEM 6. SELECTED FINANCIAL DATA
INTERNATIONAL FLAVORS & FRAGRANCES INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET SALES GROSS PROFIT
--------------------------- -------------------------
QUARTER 2004 2003 2004 2003
- ------- ----------- ------------ ---------- -----------
First $ 535,015 $ 466,224 $ 228,229 $ 195,777
Second 524,177 482,611 228,461 207,376
Third 506,229 480,886 217,177 202,695
Fourth 468,232 471,799 199,551 203,216
----------- ------------ ---------- -----------
$2,033,653 $ 1,901,520 $ 873,418 $ 809,064
=========== ============ ========== ===========
NET INCOME PER SHARE(b)
--------------------------------
NET INCOME(a) BASIC(b) DILUTED(b)
---------------------- ---------------- --------------
QUARTER 2004 2003 2004 2003 2004 2003
- ------- ---------- --------- ------- ------- ------- -----
First $ 56,358 $ 32,017 $0.60 $0.34 $0.59 $0.34
Second 56,502 51,398 0.60 0.55 0.59 0.54
Third 42,305 51,071 0.45 0.55 0.44 0.54
Fourth 40,906 38,111 0.43 0.41 0.43 0.40
---------- --------- ------- ------- ------- -----
$ 196,071 $ 172,597 $2.08 $1.84 $2.05 $1.83
========== ========= ======= ======= ======= ======
- ---------------
(a) Net income for the 2004 second, third and fourth quarters includes the
after-tax effects of certain charges of $5,015, $12,690 and $2,665,
respectively. Net income for the 2003 first, second, third and fourth
quarters includes the after-tax effects of certain charges of $13,477,
$4,433, $2,397 and $7,207, respectively. See Note 2 of the Notes to
the Consolidated Financial Statements for further discussion.
(b) The sum of the 2003 quarters' net income per share does not equal the
earnings per share for the full year 2003 due to changes in average
shares outstanding.
14
INTERNATIONAL FLAVORS & FRAGRANCES INC.
FIVE-YEAR SUMMARY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF INCOME DATA
Net Sales $2,033,653 $ 1,901,520 $ 1,809,249 $ 1,843,766 $ 1,462,795
------------- ------------- ------------- ------------- -------------
Cost of goods sold 1,160,235 1,092,456 1,035,835 1,063,433 831,653
Research and development expenses 175,173 159,286 144,027 135,248 112,671
Selling and administrative expenses 341,306 308,951 305,156 313,335 258,653
Amortization of goodwill and other
intangibles 14,830 12,632 12,632 46,089 7,032
Restructuring and other charges (a) 31,830 42,421 11,737 30,069 41,273
Interest expense 24,002 28,477 37,036 70,424 25,072
Other (income) expense, net 5,275 5,437 (3,591) (2,609) 2,314
------------- ------------- ---------------------------- -------------
1,752,651 1,649,660 1,542,832 1,655,989 1,278,668
------------- ------------- ---------------------------- -------------
Income before taxes on income 281,002 251,860 266,417 187,777 184,127
Taxes on income 84,931 79,263 90,473 71,775 61,122
------------- ------------- ------------- ------------- -------------
Net income $ 196,071 $ 172,597 $ 175,944 $ 116,002 $ 123,005
============= ============= ============= ============= =============
Percentage of net sales 9.6 9.1 9.7 6.3 8.4
Percentage of average shareholders' equity 23.7 26.2 32.0 20.1 16.5
Net income per share - basic $2.08 $1.84 $1.86 $1.21 $1.22
Net income per share - diluted $2.05 $1.83 $1.84 $1.20 $1.22
Average number of shares (thousands) 94,143 93,718 94,511 95,770 101,073
Consolidated Balance Sheet Data
Cash and short-term investments $ 32,995 $ 12,555 $ 15,165 $ 48,905 $ 129,238
Receivables, net 358,361 339,725 338,607 340,358 364,314
Inventories 457,204 454,631 421,603 415,984 435,312
Property, plant and equipment, net 501,334 510,612 520,499 532,473 679,874
Goodwill and Intangible assets, net 789,676 799,413 794,079 795,920 755,923
Total assets 2,363,294 2,306,892 2,232,694 2,268,051 2,489,033
Bank borrowings, overdrafts and
current portion of long-term debt 15,957 194,304 49,663 227,945 852,985
Long-term debt 668,969 690,231 1,007,085 939,404 417,402
Shareholders' equity 910,487 742,631 574,678 524,170 631,259
Other Data
Current Ratio 2.4 1.7 2.4 1.6 0.9
Gross additions to property, plant and
equipment $ 70,607 $ 65,955 $ 81,815 $ 52,016 $ 60,696
Depreciation and amortization expense 90,996 86,721 84,458 123,493 69,344
Cash dividends declared 64,789 59,032 56,749 57,219 130,234
per share $0.685 $0.630 $0.600 $0.600 $1.290
Number of shareholders of record at year-end 3,419 3,655 3,875 3,394 3,741
Number of employees at year-end 5,212 5,454 5,728 5,929 6,614
- -----------------
a) Restructuring and other charges ($20,370 after tax) in 2004 resulted from
the Company's reorganization program.
Restructuring and other charges ($27,514 after tax) in 2003 resulted from
the Company's reorganization program.
Restructuring and other charges ($7,745 after tax) in 2002 resulted from
the Company's reorganization program.
Restructuring and other charges ($19,101 after tax) in 2001 resulted from
the Company's reorganization program.
Restructuring and other charges ($26,765 after tax) in 2000 resulted from
the Company's reorganization program.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative on the Company's
operating performance, financial condition and liquidity and should be read in
conjunction with the accompanying financial statements. It includes the
following sections:
o Executive Overview
o Sales Commentary
o Operating Results
o Acquisitions and Divestitures
o Restructuring and Other Charges
o Financial Condition
o Market Risk
o Critical Accounting Policies and Use of Estimates
o New Accounting Standards
o Non-GAAP Financial Measures
o Cautionary Statement Under the Private Securities Litigation Reform
Act of 1995
EXECUTIVE OVERVIEW
The Company is a leading creator and manufacturer of flavor and
fragrance compounds used to impart or improve the flavor or fragrance in a wide
variety of consumer products. The precise size of the global market for flavors
and fragrances is difficult to determine because the industry is highly
fragmented, both geographically and along product lines; there are few publicly
traded companies in the industry; certain customers maintain in-house
capabilities fulfilling a portion of their flavor or fragrance needs; and the
quality and depth of market information in developing regions of the world is
limited. Analysts generally estimate the global market to be $11 - $12 billion
of which IFF represents 16 - 17%; the Company's nearest sized competitor is of
similar size. The five largest companies in the industry combined represent
approximately 60 - 65% of the global market.
Fragrance compounds are used in perfumes, cosmetics, toiletries, hair
care products, deodorants, soaps, detergents and softeners as well as air care
products. Major fragrance customers include the cosmetics industry, including
perfume and toiletries manufacturers, and the household products industry,
including manufacturers of soaps, detergents, household cleaners and air
fresheners. Flavor products are sold to the food and beverage industries for use
in consumer products such as prepared foods, beverages, dairy, food and
confectionery products. The Company is also a leading manufacturer of synthetic
ingredients used in making fragrances. Approximately 55% of the Company's
ingredient production is consumed internally; the balance is sold to third party
customers.
Changing social habits resulting from such factors as increases in
personal income and dual-earner households, leisure time, health concerns,
urbanization and population growth stimulate demand for consumer products
utilizing flavors and fragrances. These developments expand the market for
products with finer fragrance quality, as well as the market for colognes and
toiletries. Such developments also stimulate demand for convenience foods, soft
drinks and low-fat food products that must conform to expected tastes. These
developments necessitate the creation and development of flavors and fragrances
and ingredients that are compatible with newly introduced materials and methods
of application used in consumer products.
16
Flavors and fragrances are generally:
o created for the exclusive use of a specific customer;
o sold in solid or liquid form, in amounts ranging from a few
kilograms to many tons depending on the nature of the end product
in which they are used;
o a small percentage of the volume and cost of the end product sold
to the consumer; and
o a major factor in consumer selection and acceptance of the
product.
Flavors and fragrances have similar economic and operational
characteristics, including research and development, the nature of the creative
and production processes, the manner in which products are distributed and the
type of customer; many of the Company's customers purchase both flavors and
fragrances.
A breakdown of sales by principal product category is depicted in the
following graph. The fruit business was disposed of in 2004; sales depicted
below are for the period the fruit business was owned by the Company.
2004 Sales by Category
[GRAPHIC OMITTED]
[ ] 12% INGREDIENTS
[ ] 3% FRUIT
[ ] 42% FLAVOR COMPOUNDS
[ ] 17% FINE FRAGRANCE AND TOILETRIES
[ ] 26% FUNCTIONAL FRAGRANCES
The Company's five largest customers comprise 30% of consolidated sales and
its top thirty customers 53%; these percentages have been fairly constant for
several years. No one customer accounts for more than 10% of sales. A key factor
for success is inclusion on major customers' core supplier lists opening
opportunities to win new business. The Company is currently on the majority of
core supplier lists of its major customers; participation in such lists is key
to the Company's strategy for future growth.
The flavor and fragrance industry is impacted by macroeconomic factors in
all product categories and geographic regions. In addition, pricing pressure
placed on the Company's customers by large and powerful retailers and
distributors is inevitably passed along to the Company, and its competitors.
Leadership in innovation and creativity mitigates the impact of pricing
pressure. Success and growth in the industry is dependent upon creativity and
innovation in meeting the many and varied needs of the customers' products in a
cost-efficient and effective manner, and with a consistently high level of
timely service and delivery.
The Company produces more than 35,000 unique compounds, of which 60% are
flavors and 40% fragrances. The Company continually creates new compounds to
meet the changing characteristics and needs of its customers' end products. No
individual compound represents more than 1.5% of net sales. Development of
fragrances and flavors is a complex artistic and technical process calling upon
the combined knowledge and talents of creative perfumers and flavorists, and
application and research chemists. An important contribution to the creation of
new fragrances and flavors is the development of new ingredients. The Company
bears essentially all costs incurred in connection with the creation and
development of new flavors and fragrances and such formulae are protected under
trade secrecy. The Company is not materially dependent on any patents,
trademarks or licenses.
17
The Company's strategic focus in the three year period 2002 - 2004 has
been:
o To integrate Bush Boake Allen Inc. ("BBA"), acquired in November
2000, and to reorganize the integrated organization under two
global umbrellas of Business Development and Operations. Business
Development encompasses consumer and market research, product
category strategy, product development, global sales and marketing
and technical application. Operations are responsible for the
customer supply chain.
o To improve customer service, in terms of both on-time deliveries
and responsiveness to new product development initiatives, and to
improve the win rate for new business with the Company's
customers.
o To critically evaluate the profitability and growth potential of
the Company's product portfolio, and to focus on those categories
and customers considered to be the best opportunities for
long-term profitable growth.
o To focus research and development initiatives on those areas
considered to be most likely, in the long-term, to yield the
greatest value to the Company's customers and shareholders.
In the three-year period ended December 31, 2004, considerable progress
against these strategic initiatives was made. The BBA integration was completed
quickly and associated savings exceeded those anticipated at the time the
acquisition was announced. Customer service levels have improved to the point
where on time deliveries exceed the 95% level, with further improvement
targeted. The Company has exited certain non-core businesses, contributing to
improved returns on sales and invested capital; the last of these businesses was
sold in 2004. The quality and depth of the Company's research and development
efforts have improved significantly. In 2003 and 2004, the Company patented
numerous new, commercially-viable ingredients for use in flavors and fragrances;
fifteen were patented in 2003 and nine in 2004. A number of these ingredients
were used in flavor and fragrance compounds in 2004 and in 2005 - 2006 new
product introductions will play an important role in meeting our growth
objectives.
Moving forward, the Company is committed to:
o Continuous improvement in operations and customer service
supported by the global implementation of the enterprise
requirements planning software package ("SAP"), and related
initiatives.
o Research and development efforts in those aspects of flavors and
fragrances and associated delivery mechanisms which the Company
has identified as most likely to drive profitable future growth.
The Company anticipates that much of this research will be
conducted internally, but such efforts may be augmented by joint
research undertakings and through acquisition of technology. An
essential aspect of the overall research efforts is the Company's
continued leadership in sensory science and consumer insight,
enabling the creation of consumer-preferred flavors and
fragrances.
As implementation of the strategy progresses, setting strategic initiatives
requires regular establishment and reassessment of identified priorities and
necessitates choices in order to provide the best opportunity for continuous
improvement in shareholder value.
18
SALES COMMENTARY
Net sales for 2004, 2003 and 2002 were as follows:
PERCENT PERCENT
NET SALES 2004 CHANGE 2003 CHANGE 2002
- --------------------------------------- ------------ -------- ------------ -------- ------------
Flavors $ 910.6 5% $ 866.5 7% $ 809.0
Fragrances 1,123.1 9% 1,035.0 3% 1,000.2
------------ -------- ------------ -------- ------------
Total net sales $ 2,033.7 7% $ 1,901.5 5% $ 1,809.2
============ ======== ============ ======== ============
The Company manages its operations by major geographical region and
considers destination sales to be a key measure of performance. Although the
Company's reported sales and earnings are affected by the weakening or
strengthening of the U.S. dollar, this has not had a long-term effect on the
underlying strength of the Company's business.
2004 Sales by Destination
[GRAPHIC OMITTED]
[ ] 29% NORTH AMERICA
[ ] 39% EUROPE
[ ] 17% ASIA PACIFIC
[ ] 12% LATIN AMERICA
[ ] 3% INDIA
The Company acquired BBA effective November 3, 2000. In conjunction
with the integration of BBA, and as part of restructuring the Company, certain
non-core businesses (hereinafter referred to as the "non-core businesses") have
been disposed of including the fruit preparations businesses in Europe, North
and Latin America; the North American concentrates business and a portion of the
aroma chemicals business acquired in the BBA transaction. The non-core
businesses were disposed of in a series of separately negotiated transactions
with third parties; disposal of these businesses did not materially impact the
Company's operating results. The North American concentrates business was
disposed of in 2002 and the European fruit preparation business in 2004; the
other non-core businesses were disposed of in 2001.
The following table summarizes reported sales on a geographic basis,
and reflects adjustments, as appropriate, to exclude sales attributable to the
non-core businesses; adjusted sales are the basis on which the Company measures
its operating performance:
PERCENT PERCENT
SALES BY DESTINATION 2004 CHANGE 2003 CHANGE 2002
- --------------------------------------------- -------------- ----------- -------------- ---------- --------------
North America $ 598.6 9% $ 550.1 (4%) $ 570.9
Europe 790.3 4% 761.7 13% 671.4
Asia Pacific 342.9 10% 311.9 7% 290.9
Latin America 238.6 7% 223.6 (2%) 227.5
India 63.3 17% 54.2 12% 48.5
-------------- ----------- -------------- ---------- --------------
Total net sales, as reported $2,033.7 7% $1,901.5 5% $1,809.2
Less: European fruit preparations (58.3) - (92.3) - (72.2)
North American concentrates - - - - (9.4)
-------------- ----------- -------------- ---------- --------------
Total net sales, as adjusted $1,975.4 9% $1,809.2 5% $1,727.6
============== =========== ============== ========== ==============
19
Net sales below are adjusted to exclude all sales associated with the
non-core businesses:
AS ADJUSTED PERCENT AS ADJUSTED PERCENT AS ADJUSTED
NET SALES 2004 CHANGE 2003 CHANGE 2002
- --------------------------------------------- -------------- ---------- --------------- ---------- ---------------
Flavors $ 852.3 10% $ 774.2 6% $ 727.4
Fragrances 1,123.1 9% 1,035.0 3% 1,000.2
-------------- ---------- --------------- ---------- ---------------
Total net sales, as adjusted $ 1,975.4 9% $ 1,809.2 5% $ 1,727.6
============== ========== =============== ========== ===============
2004 in Comparison to 2003
In 2004, sales totaled $2,033.7, increasing 7% over 2003. Reported
sales were strongest in fragrances, led by a 13% increase in fine fragrance
sales; sales of aroma chemicals and fragrances used in functional products each
increased 7%. Reported sales benefited from the strengthening of various
currencies in relation to the U.S. dollar; had exchange rates remained constant,
sales would have increased 2% in comparison to the prior year. The sales
performance was impacted by the disposition of the Company's European fruit
preparations business, which was sold to Frutarom Industries Ltd. ("Frutarom")
in the second half of the year. On an as adjusted basis, excluding sales
attributable to the European fruit businesses from the 2004 and 2003 results,
sales would have increased 5% in local currency and 9% in reported dollars.
Flavor and fragrance sales increased in all geographic regions,
although growth in Europe resulted from currency translation; sales performance
by region was as follows:
o North America fragrance sales grew 9% while flavor sales increased
8%; the region grew 9%, mainly driven by new wins. Fragrance sales
increased in all categories, led by a 20% increase in aroma
chemical sales, while fine and functional fragrance sales
increased 6% and 7%, respectively. The aroma chemical sales
increase was volume driven while growth in fine fragrances
resulted from $7.0 in new wins. Functional fragrance sales
realized new wins worth $16.0 partially offset by erosion in
existing products of $6.0. Flavors reported new product
introductions of $30.0 partially offset by volume and erosion in
existing products.
o European fragrance sales increased 8%, although this performance
was partially offset by a 2% decline in flavor sales; in total,
regional sales increased 4%. Reported sales benefited from the
strength of the Euro and Pound Sterling; local currency sales
declined 5%. Local currency fragrance sales declined 2%; fine
fragrance sales increased 5% offset by a 1% decrease in sales of
functional fragrances and a 10% decline in aroma chemical sales.
The fine fragrance performance was driven by a number of new
product wins. Fine and functional fragrances reported new product
introductions of $40.0 partially offset by the effects of erosion
in existing products. Local currency flavor sales declined 10%,
mainly as a result of the disposition of the fruit preparations
business. On an as adjusted basis, excluding sales attributable to
the fruit business for 2004 and 2003, flavor sales would have
increased 2% in local currency and 11% in reported dollars, mainly
due to new wins.
o Local currency sales in Asia Pacific increased 6%, resulting in a
10% increase in reported dollar sales. Local currency fragrance
sales increased 3% in comparison to the prior year, resulting in a
7% increase in reported dollars driven by new wins of $6.0. Local
currency flavor sales increased 7%, resulting in a 13% increase in
reported dollars. The performance reflects the benefit of both new
wins and volume increases in existing products. For the region,
sales growth was strongest in Greater China, Vietnam, Indonesia
and Taiwan, with respective local currency increases of 17%, 47%,
9% and 8%, while Japan sales grew 3%.
o Latin American sales increased 7%; fragrance and flavor sales
increased 9% and 3%, respectively. Sales growth was strongest in
Venezuela, Central America, Argentina and Colombia which grew 33%,
15%, 12% and 9%, respectively. Fragrance sales growth was led by a
23% increase in aroma chemicals, while sales of fine and
functional fragrances increased 12% and 6%, respectively.
Fragrance sales were driven by new wins and volume increases while
the flavor increase was mainly volume driven.
20
o India sales increased 15% in local currency and 17% in reported
dollars. Local currency fragrance sales increased 12%, resulting
in a 16% increase in reported dollars. Flavor sales increased 18%
in local currency, resulting in a 19% increase in reported
dollars. In both flavors and fragrances, the sales performance
reflected the benefit of new wins.
2003 in Comparison to 2002
2003 sales increased 5% over 2002. Had exchange rates remained the same
in both periods, sales would have declined 2%. In 2003, as adjusted sales
increased 5% in comparison to 2002; had exchange rates remained the same during
both years, 2003 as adjusted sales would have declined 2%. Sales performance by
region was as follows:
o North America flavor and fragrance sales declined 1% and 6%,
respectively; in total, the region declined 4%. Sales were
impacted by weak economic conditions for much of the year, weak
demand for fine fragrance, and the effect of ongoing customer
efforts to reduce inventory levels. Fine fragrance, functional
fragrance and chemical sales declined 8%, 4% and 8%, respectively.
Fine fragrance sales were impacted by erosion in certain core
brands, partially offset by new wins which accounted for $9.0 in
increased sales. Excluding $9.4 of sales attributable to non-core
businesses disposed of from the 2002 comparative, flavor sales
increased 3%. The flavor performance benefited from new product
introductions of $21.0.
o Local currency sales in Europe decreased 3%. The dollar increase
benefited from the stronger Euro and Pound Sterling on translation
of local currency results into the U.S. dollar. The local currency
sales performance reflected persistent economic weakness
throughout the European region. Local currency fragrance sales in
Europe declined 5%, resulting in a 12% increase in dollars;
fragrance sales were weakest in aroma chemicals and functional
fragrances, which declined 12% and 4%, respectively. European
chemical volumes declined by 4% with the remainder of the decline
attributable to product mix and lower selling prices. Local
currency fine fragrance sales increased 3%; new wins increased
sales by 11% although this performance was partially offset by
declines in existing fragrance business. Flavor sales declined 1%
in local currency, although this resulted in a 15% increase in
dollar sales.
o Asia Pacific sales increased 1% in local currency; the dollar
increase benefited from the stronger Japanese Yen and Australian
dollar on translation of local currency results into the U.S.
dollar. Flavor sales declined 2% in local currency while
increasing 4% in dollars. Fragrance sales increased 7% in local
currency and 12% in dollars; the fragrance growth was driven by a
number of new product introductions throughout the region, most
notably in Thailand, Greater China and Indonesia. The new wins in
the region accounted for an increase of approximately 10%; however
erosion in the existing products was approximately 3%. Sales were
strongest in Thailand, Vietnam, Indonesia and Greater China, with
local currency increases of 25%, 14%, 9% and 6%, respectively.
These strong performances were partially offset by persistent
weakness in Japan and the Philippines where local currency sales
declined 7% and 18%, respectively.
o Latin America flavor sales increased 9%. The flavor sales
performance was driven by increases of 80%, 31% and 19% in Central
America, Argentina and Brazil, respectively, reflecting the
benefit of new product introductions and, in Argentina, an
improved economic environment. In the region, volume levels
excluding the new products decreased 1%. Fragrance sales declined
5% with Central America, Mexico and Brazil declining 15%, 6% and
8%, respectively; Argentina fragrance sales increased 22%.
o India sales increased 9% in local currency and 12% in reported
dollars. The performance was led by an 11% local currency increase
in flavor sales and 12% in reported dollars; local currency
fragrance sales grew 7% and 12% in reported dollars. India sales
performance benefited from many new product introductions as well
as the continued strength of the Indian and neighboring
21
economies. New wins accounted for two-thirds of the flavor growth
with volume increases responsible for the remainder. Fragrance
growth was driven by new wins.
OPERATING RESULTS
The percentage relationship of cost of goods sold and other operating
expenses to reported sales is detailed in the following table.
2004 2003 2002
------------ ------------ -----------
Cost of goods sold 57.1% 57.5% 57.3%
Research and development expenses 8.6% 8.4% 8.0%
Selling and administrative expenses 16.8% 16.2% 16.9%
Cost of goods sold includes the cost of materials and manufacturing
expenses; raw materials constitute 65 - 70% of the total. Research expenses are
for the development of new and improved products, technical product support,
compliance with governmental regulations, and help in maintaining relationships
with customers who are often dependent on technological advances. Selling and
administrative expenses support the Company's sales and operating levels.
Segment profit, which excludes the effect of restructuring and other
charges, was $342.1 in 2004, $328.2 in 2003 and $311.6 in 2002. The Company
recorded restructuring and other charges of $31.8, $42.4 and $11.7 in 2004, 2003
and 2002, respectively. Operating profit totaled $310.3, $285.8 and $299.9 in
2004, 2003 and 2002, respectively.
2004 in Comparison to 2003
Cost of goods sold as a percentage of sales declined 40 basis points
compared with 2003. The improvement resulted from a combination of improved
sales performance, and better product mix from improved fine fragrance sales and
the disposition of the lower margin European fruit business. The Company
benefited from the elimination of 48 manufacturing positions in North America
and Europe which resulted in savings of approximately $2.1. The benefits of the
improved sales performance and product mix were partially offset by poor
operating performance by the European fruit business for the period of time
owned by the Company, and by weak absorption of expenses resulting from the
transfer of production from the Company's facility in Dijon, France, which is
scheduled to close in 2005, to other manufacturing plants.
Research and development ("R&D") expenses increased to 8.6% of sales,
consistent with the Company's stated intention to expand its research
initiatives. In 2005, R&D expenses are expected to be 9.0 - 9.2% of sales. This
increase is mainly as a result of the elimination of the fruit preparations
business; relative to other parts of the Company's business, fruit preparations
required less R&D as a percentage of sales.
Selling, General and Administrative ("SG&A") expenses, as a percentage
of sales, increased to 16.8% from 16.2%; the increase resulted mainly from
inclusion of $5.0 in equity compensation expense for which there was no
comparable amount in the 2003 results, and higher expense accruals under the
Company's incentive compensation plans, based on the improved sales and
operating performance relative to 2003. The increase in Global Expenses, as
reported in Note 13 of the Notes to the Consolidated Financial Statements, is
mainly related to these expenses. In May 2004, the Company began using
Restricted Stock Units ("RSU's"), rather than stock options, as an element of
the Company's incentive compensation plans for all eligible U.S. - based
employees and a majority of eligible overseas employees; previously, options had
not been expensed as permitted under applicable accounting guidance. Vesting of
the RSU's for the Company's senior management is performance and time based; for
the remainder of eligible employees, vesting is time based (generally over a
three-year period). In 2005, SG&A expenses, as a percentage of sales, are
expected to increase somewhat from 2004 levels, mainly from inclusion of $12.0 -
$14.0 in equity compensation compared to the $5.0 of such expense in 2004. In
2004, cost of goods sold and SG&A include $1.4 and $3.8, respectively, incurred
in connection with the implementation of SAP; these costs relate to training and
data conversion and are charged to operating expenses as incurred. Such costs
are expected to diminish in 2006 as the final implementations of SAP are
22
completed.
Net income for 2004 increased 14% in comparison to the prior year;
excluding the impact of restructuring and other charges in both years (see
"Restructuring and Other Charges"), income increased 8% in comparison to the
prior year.
2003 in Comparison to 2002
Cost of goods sold as a percentage of sales remained comparable with
2002 levels. Product mix, mainly weakness in sales of higher margin fine
fragrances, had a negative impact on margins. However, the impact of unfavorable
sales mix was substantially offset by reduced manufacturing expenses of
approximately $3.5. The reduction in these expenses resulted from realizing the
full year benefit from the closure of various plants in the preceding year; such
closures were directly related to the integration of BBA into IFF. In addition,
the Company undertook certain restructuring activities in 2003, eliminating 171
manufacturing positions; these actions saved approximately $3.5 in 2003.
R&D expenses increased to 8.4% of sales, consistent with the Company's
stated intention to expand its research initiatives.
SG&A declined to 16.2% of sales. The Company undertook certain
restructuring activities in 2003, eliminating duplicate layers of management and
certain corporate positions affecting 150 selling and administrative positions;
these actions saved approximately $6.2 in 2003.
In 2003, cost of goods sold and SG&A include $1.5 and $4.0,
respectively, incurred in connection with the implementation of SAP relating to
training and data conversion which are charged to operating expenses as
incurred.
Interest Expense
Interest expense totaled $24.0, $28.5 and $37.0 in 2004, 2003 and 2002,
respectively. Interest expense declined in each year as a result of reduced
borrowing levels and the Company's interest rate and debt management
initiatives. The average interest rate was 3.2%, 3.0% and 3.4% in 2004, 2003 and
2002, respectively. Interest expense is expected to decline 10 - 12% in 2005 due
to reduced debt levels. More information on debt and interest rate management is
contained in Note 9 and Note 15 of the Notes to the Consolidated Financial
Statements.
Other (Income) Expense, Net
Other (income) expense, net was $5.3 expense in 2004, $5.4 expense in
2003 and $3.6 income in 2002. In 2004, expense resulted primarily from exchange
losses compared to exchange gains in 2003, and other non-operating expenses.
Exchange gains or (losses) were ($2.9), $1.6 and $2.3 in 2004, 2003 and 2002,
respectively. The exchange losses in 2004 were mainly the result of the Company
having U.S. dollar positions in Europe and Latin America which resulted in
exchange losses upon the weakening of the U.S. dollar in comparison to the Euro
and other currencies. In 2003, the Company repurchased $200.7 of long-term notes
otherwise scheduled to mature in May 2006; purchases were made through a series
of open market transactions, funded with commercial paper; as a result, the
Company incurred a net loss of $4.2 which is included in Other (income) expense,
net. Further details on the repurchase are contained in Note 9 of the Notes to
the Consolidated Financial Statements.
Income Taxes
The effective tax rate for 2004 was 30.2%, compared to 31.5% for 2003
and 34.0% for 2002. The declining rate over the three-year period is primarily
the result of tax planning initiatives and the benefit of combining various IFF
and BBA legal entities into a single tax structure. In both 2004 and 2003, the
tax rate also benefited from restructuring and other charges, most of which were
incurred in higher tax jurisdictions. The Company anticipates that its effective
tax rate in 2005 will approximate 31.2%.
23
The American Jobs Creation Act of 2004 (the "Act"), enacted on October
22, 2004, provides for a special one-time tax deduction of 85% of dividends
received on eligible repatriated foreign earnings. The deduction would result in
an approximate 5.25% federal tax rate on these earnings. To qualify for the
deduction, the earnings must be reinvested in the United States pursuant to a
domestic reinvestment plan established by the Chief Executive Officer and
approved by the Board of Directors; certain other criteria in the Act must also
be satisfied. The Company is evaluating whether it will repatriate foreign
earnings under the repatriation provisions of the Act during the year ending
December 31, 2005, and if so, the amount to be repatriated. The range of
reasonably possible amounts the Company is considering for repatriation, which
would be eligible for the temporary deduction, is $250.0 to $500.0. This
repatriation may include amounts currently deemed indefinitely reinvested and
amounts for which deferred taxes have been provided. The Company is awaiting the
issuance of further regulatory guidance and passage of statutory technical
corrections with respect to certain provisions in the Act prior to determining
any amounts it will repatriate. The Company is not yet in a position to
determine the impact of a qualifying repatriation, should it choose to make one,
on its income tax expense for 2005, the amount of its indefinitely reinvested
foreign earnings, or the amount of its deferred tax liability with respect to
foreign earnings. The Company expects to determine the amounts and sources of
foreign earnings to be repatriated, if any, during the second half of 2005.
Acquisitions and Divestitures
In 2004, the Company sold its European fruit preparations business. IFF
had previously announced its intention to divest itself of this business which
manufactures processed fruit and other natural product preparations used in a
wide variety of food products, including baked goods and dairy products. Sales
of fruit preparations in 2004, 2003 and 2002 were $58.3, $92.3 and $72.2;
operating profit was $5.6, $12.4 and $6.3, respectively. IFF completed the sale
of the German and Swiss businesses, comprising 70% of the total fruit business,
in August 2004. The Company completed required consultations with the French
employee works council and sold its French fruit preparations assets to Frutarom
in October 2004. Proceeds from the sale, in total, were $40.0, including
assumption of certain liabilities; cash proceeds were used to reduce borrowings.
In 2003, the Company acquired 70% of the outstanding shares of
Celessence International Ltd. ("Celessence"), a company engaged in the
development and distribution of encapsulation and delivery systems for use in
fragrance and other applications, for $6.4. The acquisition was accounted for as
a purchase business combination. The principal Celessence asset is a process
technology patent included in other intangible assets that is being amortized
over its estimated remaining useful life. Celessence results, which are not
material, are included in the consolidated results of the Company from
acquisition date.
The Company sold its North American concentrate business in June 2002,
recognizing a restructuring and other charge of $4.3 related to employee
separation and other disposal costs. Sales for the business up to the date of
disposition were $9.4; operating profit was not significant.
In November 2000, the Company acquired BBA; total consideration paid,
including transaction costs, was $970.0. At acquisition date, BBA owned
approximately 73% of its Indian subsidiary, BBA India Limited ("BBAIL"). During
2002, the Company acquired additional BBAIL shares, raising its ownership to
93%; cost of the acquired shares was $11.8. More details on the BBA acquisition
are contained in Note 3 of the Notes to the Consolidated Financial Statements.
The Company established accruals relating to the integration of BBA;
associated costs, relating mainly to employee separation and facility closures,
were recorded as a component of purchase accounting and did not directly impact
current earnings.
24
Movements in acquisition accounting accruals were:
ASSET-
EMPLOYEE- RELATED
RELATED AND OTHER TOTAL
------------ -------------- --------------
Balance January 1, 2002 $ 13.8 $ 9.9 $ 23.7
Cash and other costs (7.8) (8.8) (16.6)
------------ -------------- --------------
Balance December 31, 2002 6.0 1.1 7.1
Cash and other costs (3.6) (1.1) (4.7)
------------ -------------- --------------
Balance December 31, 2003 2.4 - 2.4
Cash and other costs (2.4) - (2.4)
------------ -------------- --------------
Balance December 31, 2004 $ - $ - $ -
============ ============== ==============
At December 31, 2004 and 2003, goodwill and other intangible assets,
net of accumulated amortization, totaled $789.7 and $799.4, respectively. The
Company completed its annual assessments in 2004, 2003 and 2002, concluding that
it has no impairment of goodwill or other intangible assets. Additional details
are contained in Note 6 of the Notes to the Consolidated Financial Statements.
RESTRUCTURING AND OTHER CHARGES
Since 1999, the Company has undertaken a series of actions associated
with the closure of Company facilities and elimination of various employee
positions. As an element of this program, the Company offered a voluntary early
retirement incentive to certain U.S. - based employees in the fourth quarter of
1999 with notification of acceptance in the first quarter of 2000; 71 employees
accepted, resulting in a pre-tax charge of $9.3 in 2000.
In mid-2000, senior management changed, after which the Company
conducted a comprehensive analysis of its business development, research and
development, and operating activities and associated staffing levels. In October
2000, the Company announced a significant reorganization entailing the
elimination of multiple layers of management, closure of certain manufacturing
facilities to improve capacity utilization, and the intended disposal of certain
non-core businesses. On completion, the reorganization was expected to yield
annual savings approximating $25.0 to $30.0, a portion of which was to be
reinvested in the business. The integration of BBA into IFF and the
reorganization proceeded concurrently.
An element of the reorganization was a second voluntary early
retirement program extended to U.S. - based employees, which 85 employees
accepted, resulting in pre-tax charges of $14.5. An additional 41 employees were
terminated by eliminating duplicate management positions at corporate, regional
and affiliate locations, resulting in the Company recording pre-tax charges of
$17.5. In total, 197 employees were severed and the Company recorded pre-tax
charges totaling $41.3, comprised of:
o The first early retirement plan -- $9.3;
o The second early retirement plan -- $14.5; and
o Other reorganization costs -- $17.5.
During 2001, the Company sold its fruit preparation business in the
United States and Brazil, and closed IFF operations in Hong Kong, South Africa,
Chile, Venezuela, Kenya, Texas and Oregon. As a result, 465 employees were
severed and the Company recorded pre-tax charges totaling $30.1; $10.1 related
to employee terminations and $20.0 related to location closures and asset
write-downs.
During 2002, the Company closed IFF operations in Australia,
discontinued fragrance compounding in Japan and sold its fruit concentrate
business. As a result, 148 employees were severed and the Company recorded
pre-tax charges of $11.7; $4.3 related to employee severance and $7.4 related to
location closures and asset write-downs.
25
In 2003, the Company further eliminated duplicate employment functions
and processes, including several senior corporate positions as well as those at
global, regional and local levels. The Company eliminated 321 positions and
recorded pre-tax charges of $42.4; $38.0 related to employee terminations and
$4.4 related to location closures and asset write-downs. The 2003 asset-related
charges related principally to final quantification of costs for previous
actions taken.
In 2004, the Company disposed of its European fruit preparations
business. In addition, the Company closed its Canadian manufacturing facility
and committed to the closure of its manufacturing facility in Dijon, France; the
Dijon facility is scheduled to close in 2005, on completion of transfer of
production to other plants. As a result, the Company eliminated 302 positions,
and recognized pre-tax charges of $31.8, of which $25.8 related to employee
terminations and $6.0 to location closures and asset write-downs, and other
related reorganization actions; the asset-related charges were net of gains of
$16.3 related to the sale of the fruit businesses and Canadian facility. An
additional 130 employees will leave the Company in 2005 on closure of Dijon.
With respect to all restructuring and other charges:
o Separation costs for the employees relate primarily to severance,
outplacement and other benefit costs;
o Asset write-down charges relate to establishment of the new
carrying value for assets held for sale or disposal; and
o Other costs include lease termination costs and other
reorganization expenses incurred to effect either the employee
separation or location closure.
The charges above exclude all charges associated with the integration
of BBA where such costs were incurred in connection with the closure of BBA
facilities or the elimination of BBA employees; all such costs were accounted
for in the acquisition accounting as detailed in Note 3 of the Notes to the
Consolidated Financial Statements.
Positions eliminated by region in each of the three years in the period
ended December 31, 2004 were:
2004 2003 2002
------------ -------------- ------------
North America 56 81 91
Europe* 234 97 42
Asia Pacific 11 120 15
Latin America 1 19 -
India - 4 -
------------ -------------- ------------
Total 302 321 148
============ ============== ============
* Europe figures include 194 positions eliminated with the sale of the fruit
business.
Charges by region in each of the three years in the period ended
December 31, 2004 were:
2004 2003 2002
---------- ---------- ------------
North America $ 7.6 $ 20.2 $ 5.6
Europe 23.5 16.9 5.8
Asia Pacific 0.7 3.6 0.3
Latin America - 1.3 -
India - 0.4 -
---------- ---------- ------------
Total $ 31.8 $ 42.4 $ 11.7
========== ========== ============
26
Movements in related accruals in each of the three years in the period
ended December 31, 2004 were:
ASSET-
EMPLOYEE- RELATED
RELATED AND OTHER TOTAL
------------ ------------- ------------
Balance January 1, 2002 $ 7.0 $ 0.7 $ 7.7
Additional charges 4.3 7.4 11.7
Cash and other costs (7.9) (7.7) (15.6)
------------ ------------- ------------
Balance December 31, 2002 3.4 0.4 3.8
Additional charges 38.0 4.4 42.4
Cash and other costs (21.8) (3.3) (25.1)
------------ ------------- ------------
Balance December 31, 2003 19.6 1.5 21.1
Additional charges* 25.8 22.3 48.1
Cash and other costs (17.2) (8.9) (26.1)
------------ ------------- ------------
Balance December 31, 2004 $ 28.2 $ 14.9 $ 43.1
============ ============= ============
* The asset-related charges above exclude gains of $16.3 relating to the sale of
the fruit businesses and Canadian facility which were offset against
restructuring and other charges in determining Restructuring and other charges
reported in 2004 of $31.8.
The balance of the employee-related liabilities are expected to be
utilized by 2006 as obligations to affected employees are satisfied; the
asset-related charges will be utilized in 2006 on final decommissioning and
disposal of the affected equipment.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $33.0 at
December 31, 2004 compared to $12.6 and $15.2 at December 31, 2003 and 2002,
respectively. Working capital totaled $561.8 at year-end 2004, compared to
$376.6 and $507.3 at December 31, 2003 and 2002, respectively. The change in
2004 from 2003 is primarily related to reduced borrowing levels. Gross additions
to property, plant and equipment were $70.6, $66.0 and $81.8 in 2004, 2003 and
2002, respectively, and are expected to approximate $95.0 in 2005.
At December 31, 2004, the Company had $684.9 of debt outstanding,
including deferred gains and mark-to-market adjustments on interest rate swap
transactions of $23.8. Debt includes $499.3 of 6.45% Notes, maturing in May
2006. At December 2002, the Company had $700.0 of Notes outstanding. During
2003, the Company repurchased $200.7 of the Notes. All repurchases were funded
with commercial paper. The repurchases took advantage of the Company's strong
cash flows and enabled the Company to reduce long-term debt prior to the Notes'
scheduled maturity. Interest expense was reduced as a result of the shift to
commercial paper borrowing. In 2003, interest expense declined $2.9, as a result
of the replacement of the Notes with lower cost commercial paper and overseas
borrowings; savings in 2004 approximated $5.5. The Company is developing plans
for both short-term financing and the potential issuance of additional notes or
other long-term instruments when the Notes mature in 2006.
The Company has a $300.0 U.S. based revolving credit facility that will
expire in September 2006. The revolving credit agreement serves as backstop for
the Company's commercial paper program; there have been no borrowings under this
agreement. The Company compensates participating banks in the form of fees, the
amounts of which are not material. At December 31, 2004 there was no outstanding
commercial paper compared to an outstanding balance of $162.9 at December 31,
2003 at an average interest rate of 1.2%.
The Company has a five-year Euro 350.0 (approximately $475.0 at
December 31, 2004), multi-currency revolving credit facility that will expire in
July 2007. The Company employs this facility as a European-wide working capital
facility. The Company compensates participating banks in the form of fees, the
amounts of which are not material. At December 31, 2004 and 2003, the Company
had no borrowings under this facility. See Note 9 of the Notes to the
Consolidated Financial Statement for additional details concerning the Company's
credit facilities.
27
In 2003, the Company sold its New York corporate headquarters to an
unrelated third party for $91.0 in cash; concurrently entering into a long-term
lease with respect to the space it occupies (approximately 40% of the building).
The gain realized on the sale, after transaction costs, of $52.7, has been
deferred and is being credited to income over the initial 27.5 - year lease
term.
In 2002, the Company entered into agreements for the sale and leaseback
of its Hazlet and South Brunswick, New Jersey facilities to an unrelated third
party for $48.0 in cash. Concurrently, the Company entered into a long-term
lease with respect to the facilities. The gain realized on the sale, after
transaction costs, of $26.7, has been deferred and is being credited to income
over the initial 22 - year lease term.
In October 2002 and July 2004, the Company's Board of Directors
authorized share repurchase programs of $100.0 each (approximately 2.4 million
shares at the December 31, 2004 market price). Under various share repurchase
programs, the Company repurchased 1.8 million shares in each of 2004 and 2003
and 2.3 million shares in 2002, at a cost of $66.5, $55.4 and $72.3,
respectively. Average per share cost of shares acquired in 2004, 2003 and 2002
was $36.89, $31.66 and $31.52, respectively. The Company completed the October
2002 repurchase plan in August 2004 and as of December 31, 2004 had repurchased
approximately 0.6 million shares under the July 2004 plan. Repurchases will be
made from time to time on the open market or through private transactions as
market and business conditions warrant. At December 31, 2004, the Company had
$75.5 remaining under the July 2004 plan, representing approximately 1.8 million
shares based on a stock price of $42.00 per share. Repurchased shares will be
available for use in connection with the Company's employee benefit plans and
for other general corporate purposes.
The dividend paid per share in 2004, 2003 and 2002 was $.67, $.62 and
$.60, respectively. In January and April 2004, the Company paid a quarterly cash
dividend of $.16 per share to shareholders. In May 2004, the Company increased
the annual dividend to $.70 per share, effective with the dividend paid in July
2004. The Company's intention is to pay dividends approximating 30 - 35% of
yearly earnings. The Company paid dividends totaling $63.2, $58.2 and $56.8 in
2004, 2003 and 2002, respectively.
The cumulative translation adjustment component of Accumulated other
comprehensive income was $8.2 at December 31, 2004, compared to ($45.2) at
December 31, 2003. The change results principally from the weakening of the U.S.
dollar against the Euro, the Japanese Yen and the Australian dollar. The Minimum
pension liability adjustment component of Accumulated other comprehensive income
was ($110.7) at December 31, 2004, compared to ($82.8) at December 31, 2003.
This change primarily reflects the effects of a reduction in the discount rate
used to calculate pension liabilities. The accumulated loss on derivatives
qualifying as hedges was ($5.7) at December 31, 2004 compared to ($3.7) at
December 31, 2003.
Compliance with existing governmental requirements regulating the
discharge of materials into the environment has not materially affected the
Company's operations, earnings or competitive position. In 2004, the Company
spent $1.1 on capital projects and $14.1 in operating expenses and governmental
charges for the purpose of complying with such regulations. Expenditures for
these purposes will continue for the foreseeable future. In addition, the
Company is party to a number of proceedings brought under the Comprehensive
Environmental Response, Compensation and Liability Act or similar state
statutes. It is expected that the impact of any judgments in or voluntary
settlements of such proceedings will not be material to the Company's financial
condition, results of operations or liquidity.
28
At December 31, 2004, the Company has contractual payment obligations
due within the time periods as specified in the following table:
PAYMENTS DUE
2006- 2008- 2010 AND
CONTRACTUAL OBLIGATIONS TOTAL 2005 2007 2009 THEREAFTER
- ----------------------------------------- ------------ ------------- ------------- ------------ --------------
Borrowings (1) $ 661.5 $ 16.0 $ 499.4 $ 128.6 $ 17.5
Interest on borrowings (1) 64.7 36.0 23.5 4.2 1.0
Operating leases (2) 322.6 22.9 40.0 31.7 228.0
Purchase commitments (3) 31.6 31.5 0.1 - -
Pension funding obligations (4) 67.0 51.6 2.2 2.2 11.0
Post-retirement obligations (4) 38.9 3.5 6.4 7.1 21.9
--------------- ------------- ------------- ------------ --------------
Total $ 1,186.3 $ 161.5 $ 571.6 $ 173.8 $ 279.4
=============== ============= ============= ============ ==============
- ----------
(1) See Note 9 of the Notes to the Consolidated Financial Statements
for a further discussion of the Company's various borrowing
facilities.
(2) Operating leases include facility and other lease commitments
executed in the normal course of the business. Additional details
concerning the United States facilities are contained in Note 8 of
the Notes to the Consolidated Financial Statements and further
details concerning worldwide aggregate operating leases are
contained in Note 17 of the Notes to the Consolidated Financial
Statements.
(3) Purchase obligations and capital project commitments not recorded
on the Company's consolidated balance sheet.
(4) See Note 14 Retirement Benefits of the Notes to the Consolidated
Financial Statements for a further discussion of the Company's
retirement plans. Anticipated funding obligations are based on
current actuarial assumptions. Funding requirements reported in
the above table do not extend beyond 2014.
The Company anticipates that all financing requirements will be funded from
operations and credit facilities in place. The Company expects to be able to
renew its credit facilities at terms comparable to its existing facilities. Cash
flows from operations are currently expected to be sufficient to fund the
Company's anticipated capital spending, dividends and other requirements
including debt reduction for the next 12 - 18 months. The Company anticipates
reducing borrowings by approximately $12.0 in 2005 as long-term debt matures. In
comparison, borrowings were reduced by approximately $185.0 and $145.0 in 2004
and 2003, respectively.
MARKET RISK
The Company is exposed to market risk from foreign currency exchange
rates, interest rates and commodity price fluctuations. The Company evaluates
and manages volatility relating to these exposures on a global basis to take
advantage of netting opportunities that may exist. Identified net exposures are
managed employing a number of techniques including, but not limited to,
borrowings in local currencies and the use of certain derivative instruments.
The Company operates on a global basis and, accordingly, is exposed to
currency fluctuation related to the manufacture and sale of its products in
currencies other than the U.S. dollar. The major foreign currencies involve the
markets in the European Union, Mexico, Brazil, China, Indonesia, Australia and
Japan, although all regions in the world are subject to foreign currency
fluctuations versus the U.S. dollar and other cross-currency rates. The Company
actively monitors its foreign currency exposures in all major markets in which
it operates, and employs a variety of techniques to mitigate the impact of
exchange rate fluctuations, including foreign currency hedging activities. The
Company enters into foreign currency forward contracts with the objective of
reducing exposure to cash flow volatility associated with foreign currency
receivables and payables, and with anticipated purchases of certain raw
materials used in operations. These contracts, the counterparties to which are
major international financial institutions, generally involve the exchange of
one currency for a second currency at a future date, and have maturities
29
which do not exceed six months. The notional amount and maturity dates of such
contracts match those of the underlying transactions. At December 31, 2004 and
2003, the Company had outstanding foreign currency forward contracts with
notional amounts approximating $383.2 and $178.0, respectively. The Company has
designated these contracts as qualified fair value and cash flow hedges, as
appropriate. Accordingly, the effective portion of any gain or loss on a
derivative instrument reported as a cash flow hedge is reported as a component
of Accumulated other comprehensive income and recognized in earnings in the same
period or periods during which the hedged transaction affects earnings. The
Company had no ineffective foreign currency forward contracts at December 31,
2004 or 2003.
The Company employs various interest rate swaps and debt issuances with
the objective of managing and optimizing its interest rate exposure. In 2001,
the Company entered into certain interest swap agreements effectively converting
the fixed coupon rate on its 6.45% Notes to a variable short-term rate based on
the London InterBank Offered Rate ("LIBOR") plus an interest markup. In response
to changes in market conditions and the value of the swaps, and in 2003, in
connection with the Company's debt repurchase, the Company periodically amended
the swap agreements, changing the related interest spread. As a result of these
amendments, the counterparty paid the Company $11.6 and $56.5 in 2003 and 2002,
respectively, including accrued interest of $3.7 and $6.5, respectively. The net
realized gains on the swaps have been deferred, classified as a separate
component of debt, and are amortized as a reduction in interest expense over the
remaining term of the Notes. Prior to December 31, 2003, the Company terminated
all swap agreements related to the Notes; as a result, the interest rate on the
Notes, including amortization of the deferred swap gains, was 3.4% at December
31, 2004. The effective rate on the Notes at December 31, 2003 and 2002 was 3.6%
and 3.4%, respectively.
In 2002, the Company entered into certain interest swap agreements
effectively converting the fixed rate on its long-term Japanese Yen borrowings
to a variable short-term rate based on the Japanese Yen LIBOR rate plus an
interest markup. These swaps are designated as qualified fair value hedges.
During 2003, the Company amended the swaps and the counterparty paid the Company
$3.0, including accrued interest of $0.5. These net gains have been deferred,
are classified as a separate component of debt and are being amortized over the
remaining term of the debt. To the extent the Company has not received cash or
otherwise amended or settled any swap agreements, any applicable mark-to-market
adjustment relating to that swap is included as a separate component of debt.
The Company had no ineffective interest rate swaps at December 31, 2004.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Preparation of financial statements in accordance with accounting
principles generally accepted in the United States ("GAAP") requires management
to make estimates and assumptions that affect reported amounts and accompanying
disclosures. These estimates are based on management's best judgment of current
events and actions that the Company may undertake in the future. Actual results
may ultimately differ from estimates, although management does not believe such
changes will materially affect the financial statements in any individual year.
Those areas requiring the greatest degree of management judgment or
deemed most critical to the Company's financial reporting involve:
The periodic assessment of potential impairment of intangible assets
acquired in business combination. The Company currently has net
intangible assets, including goodwill, of $789.7. Goodwill is
evaluated for impairment annually or more frequently if
circumstances indicate impairment may have occurred. In assessing
its intangible assets, management uses the most current actual and
forecasted operating data available, current market based
assumptions and independent valuation experts. A two step approach
is employed. The first step involves estimating the value of
reporting units based on the present value of estimated future cash
flows. The second step, if necessary, is to measure the value of the
impairment loss, if one is determined to exist. Management's most
subjective assumptions relate to the estimated/projected sales and
operating growth values employed in the forecast.
30
The analysis and evaluation of collectibility of accounts
receivable. The Company sells to large global and regional firms.
The majority of sales are either made-to-order or products that the
Company also employs in its own manufacturing process as a raw
material. Judgment is required in assessing the realization of
receivable balances, including assessment of the creditworthiness of
the customers, and in evaluating varying circumstances that may
impact the financial stability of a customer. Allowances for loss on
collection are established based on currently available relevant
facts, and are reevaluated and adjusted as additional information
becomes available. The Company's historical experience indicates the
allowance recorded has been sufficient to cover any reasonably
expected potential loss with respect to its accounts receivable.
The analysis and evaluation of income taxes. The Company accounts
for taxes in accordance with Statement of Financial Accounting
Standard No. 109, ("FAS 109"), Accounting for Income Taxes. Under
FAS 109, deferred tax assets and liabilities are determined based
on temporary differences between financial reporting and tax
bases of assets and liabilities, applying enacted tax rates
expected to be in effect for the year in which the differences
are expected to reverse. The provision for income taxes is based
on domestic and international statutory income taxes rates and
planning opportunities available in the various tax jurisdictions
where the Company operates. Significant judgment is required in
determining income tax provisions and tax positions. The Company
may be challenged upon review by the applicable taxing authority
and positions taken by the Company may not be sustained. The
Company and its affiliates update these accruals in light of
changing facts and circumstances.
The evaluation of potential legal and environmental liabilities,
where changing circumstances, rules and regulations require
regular reassessment of related practices and anticipated costs.
The Company is subject to certain legal claims regarding products
and other matters, as well as environmental-related matters.
Significant management judgment is involved in determining when
it is probable that a liability has been incurred and the extent
to which the liability can be reasonably estimated.
The Company regularly assesses potential liabilities with respect
to all legal claims based on the most recent available
information, in consultation with outside counsel handling the
defense of such matters, and other relevant independent experts.
To the extent a liability is deemed to have been incurred and can
be reasonably estimated, the Company recognizes a corresponding
liability; if the estimated liability is a range, the Company
recognizes that amount considered most likely, or in the absence
of such a determination, the minimum expected liability. To the
extent such claims are covered by various insurance policies, the
Company separately evaluates the likelihood of recovery and
accounts for any related insurance receivable. Critical
management judgments involve determination as to whether a liability
has been incurred, the extent of that liability, and any
potential recovery under the Company's insurance coverage.
The Company regularly evaluates its potential environmental
exposure in terms of total estimated cost and also with respect
to the viability of the other potentially responsible parties
("PRP's") associated with its exposure. The recorded liabilities
are adjusted periodically as remediation efforts progress and
additional information becomes available. Critical management
assumptions relate to expected total costs to remediate and the
financial viability of PRP's to share such costs.
Determination of the various assumptions employed in the
valuation of pension and retiree health care expense and
associated obligations. Amounts recognized in the Consolidated
Financial Statements related to pension and other postretirement
benefits are determined from actuarial valuations. Inherent in
such valuations are assumptions including expected return on plan
assets, discount rates at which the liabilities could be settled,
rates of increase in future compensation levels, mortality rates
and health care cost trend rates. These assumptions are updated
annually and are disclosed in Note 14 of the Notes to the
Consolidated Financial Statements. In accordance with GAAP,
actual results that differ from the assumptions are accumulated
and amortized over future periods and, therefore, affect expense
recognized and obligations recorded in future periods.
31
With respect to the U.S. plans, the expected return on plan assets
was determined based on an asset allocation model using the current
benchmark allocation, real rates of return by asset class and an
anticipated inflation rate. The benchmark asset allocation was: 5 -
15% in cash and fixed income investments expected to yield 1.6%; 15
- 25% employed in corporate and government bonds expected to yield
1.7 - 2.8%; and 65 - 75% in equity investments with a long-term
expected yield of 8.0 - 9.0%. The inflation rate assumed in the
model was 2.5%. The plan has achieved a compound rate of return of
10.2% over the previous 15 years. The expected rate of return for
the Non-U.S. plans employs a similar set of criteria adapted for
local investments, inflation rates and in certain cases specific
government requirements. Discount rates used to determine future
pension obligations of all plans are based on a review of long-term
bonds that receive a high rating by a recognized rating agency where
the maturity of the bonds reasonably match the demographics of plan
participants. The rate of compensation expense for all plans and the
medical cost trend rate for the applicable U.S. plans are based on
plan experience.
Management establishes the assumptions concerning discount rates and
actuarial assumptions based on current market conditions, including
asset returns and other factors applicable under the circumstances.
Changes in pension and other post-employment benefits, and
associated expenses, may occur in the future due to changes in these
assumptions. The impact that a .25% decrease in the discount rate or
a 1% change in the medical cost trend rate would have on the
Company's pension and other post-employment benefit expense, as
applicable, is discussed in Note 14 of the Notes to the Consolidated
Financial Statements.
The ongoing assessment of the valuation of inventory, given the
large number of natural ingredients employed, the quality of which
may be diminished over time. The Company maintains between 40% and
55% of its inventory as raw materials, providing the greatest degree
of flexibility in manufacture and use. Materials are evaluated based
on shelf life, known uses and anticipated demand based on forecasted
customer order activity and changes in product/sales mix. Management
policy provides for an ongoing assessment of inventory with
adjustments recorded when an item is deemed to be slow moving or
obsolete.
Management believes that full consideration has been given to all
relevant circumstances that the Company may be currently subject to, and the
financial statements accurately reflect management's best estimate of the
results of operations, financial condition and cash flows of the Company for the
years presented. Management has discussed the decision process and selection of
these critical accounting policies with the Audit Committee of the Board of
Directors.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 123 (R) ("FAS
123"), Share-Based Payment was issued in December 2004. The standard is
effective for the first reporting period beginning after June 15, 2005. FAS 123,
as revised, supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. The Company has three options available for implementation and is
evaluating which option it will choose as well as the impact of adopting this
standard under each option.
NON-GAAP FINANCIAL MEASURES
The discussion of the Company's historical results and its commentary
regarding expected future results include and, where indicated, exclude the
impact of sales and operating results attributable to certain non-core
businesses disposed of in 2004 and 2002, the impact of certain restructuring and
other charges as well as the effects of exchange rate fluctuations. Such
information is supplemental to information presented in accordance with 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 and to
be assisted in a better understanding of, on a period-to-period comparative
basis, the relative impact of restructuring and other charges, the impact of
sales and operating results attributable to certain non-core businesses disposed
32
of, and the impact of exchange rate fluctuations on operating results and
financial condition. The Company believes this additional non-GAAP information
provides investors with an overall perspective of the period-to-period
performance of the Company's core business. In addition, management considers
each of these non-GAAP measures to evaluate performance on a comparative
period-to-period basis in terms of absolute performance and trend performance
and expected future performance with respect to its core continuing business.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Annual 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 which
may be identified by such words as "expect," "anticipate," "outlook,"
"guidance," "may," and similar forward-looking terminology, involve significant
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; weather, geopolitical and region specific
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; and the fact that the
outcome of litigation is highly uncertain and unpredictable and there can be no
assurance that the triers of fact or law, at either the trial level or at any
appellate level, will accept the factual assertions, factual defenses or legal
positions of the Company or its factual or expert witnesses in any such
litigation or other proceedings. 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.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In 2001, the Company entered into certain interest swap agreements
effectively converting the fixed coupon rate on its 6.45% Notes to a variable
short-term rate based on the London InterBank Offered Rate ("LIBOR") plus an
interest markup. In response to changes in market conditions and the value of
the swaps and, in 2003, in connection with the Company's debt repurchase, the
Company periodically amended the swap agreements, changing the related interest
spread. As a result of these amendments, the counterparty paid the Company $11.6
million and $56.5 million in 2003 and 2002, respectively, including accrued
interest of $3.7 million and $6.5 million, respectively. The net realized gains
on the swaps have been deferred, classified as a separate component of debt, and
are amortized as a reduction in interest expense over the remaining term of the
Notes. Prior to December 31, 2003, the Company terminated all swap agreements
related to the Notes; as a result, the interest rate on the Notes, including
amortization of the deferred swap gains, was 3.4% at December 31, 2004. The
effective rate on the Notes at December 31, 2003 and 2002 was 3.6% and 3.4%,
respectively.
In 2002, the Company entered into certain interest swap agreements
effectively converting the fixed rate on its long-term Japanese Yen borrowings
to a variable short-term rate based on the Japanese Yen LIBOR rate plus an
interest markup. These swaps are designated as qualified fair value hedges.
During 2003, the Company amended the swaps and the counterparty paid the Company
$3.0 million, including accrued interest of $0.5 million. These net gains have
been deferred, are classified as a separate component of debt and are being
amortized over the remaining term of the debt. To the extent the Company has not
received cash or otherwise amended or settled any swap agreements, any
applicable mark-to-market adjustment relating to that swap is included as a
separate component of debt. The Company had no ineffective interest rate swaps
at December 31, 2004.
The Company has executed a 10-year Yen - U.S. dollar currency swap
related to the purchase and sale of products between the U.S. and Japan. The
annual notional value of this swap is approximately $5.0 million. Gains and
losses related to this swap are recorded currently, and the mark-to-market
adjustment related to the value of the swap is reflected as a component of
Accumulated other comprehensive income.
The Company enters into foreign currency forward contracts with the
objective of reducing exposure to cash flow volatility associated with foreign
currency receivables and payables, and with anticipated purchases of certain raw
materials used in operations. These contracts, the counterparties to which are
major international financial institutions, generally involve the exchange of
one currency for a second currency at a future date, and have maturities not
exceeding six months. The notional amount and maturity dates of such contracts
match those of the underlying transactions. At December 31, 2004 and 2003, the
Company had outstanding foreign currency forward contracts with notional amounts
of $383.2 million and $178.0 million, respectively. The Company has designated
these contracts as qualified fair value and cash flow hedges, as appropriate.
The Company had no ineffective foreign currency forward contracts at December
31, 2004 or 2003.
The Company also uses derivative financial instruments to hedge foreign
currency exposures resulting from firm purchase commitments or anticipated
transactions, and classifies these as cash flow hedges. The Company generally
enters into cash flow hedge contracts for periods ranging from three to twelve
months. The effective portion of the gain or loss on the hedging instrument is
recorded in Accumulated other comprehensive income, and is reclassified into
earnings as the transactions being hedged are recorded. The associated asset or
liability on the open hedge is recorded in Other Assets or other liabilities as
applicable. The foreign exchange gain recorded as a component of Accumulated
other comprehensive income that will be reflected in earnings in 2005 was $1.3
million, net of tax, at December 31, 2004; the prior year comparable amount was
$1.4 million. The ineffective portion of the gain or loss on the hedging
instruments was not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See index to Consolidated Financial Statements on page 37. See Item 6
for supplemental quarterly data on page 14.
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures and Changes in
Internal Control over Financial Reporting.
The Company's Chief Executive Officer 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 of the end
of the period covered by this Annual Report on Form 10-K. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective.
The Company's Chief Executive Officer and Chief Financial Officer have
concluded that there have not been any changes in the Company's internal control
over financial reporting during the Company's fourth quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Management's Report of Management is contained in Part IV of this
Annual Report on Form 10-K and is incorporated herein by reference.
Management's Report on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control -
Integrated Framework.
Based on this assessment, management determined that, as of December
31, 2004, the Company's internal control over financial reporting was effective.
PricewaterhouseCoopers LLP, the Company's independent registered public
accounting firm, has audited management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004 as
stated in their report which is included herein.
ITEM 9B. OTHER INFORMATION.
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to directors and nominees of the Company is
set forth under the caption "Election of Directors" in the IFF 2005 Proxy
Statement and is incorporated by reference herein. The information under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" that appears
in the IFF 2005 Proxy Statement is also incorporated by reference herein. See
Part I, Item 1 of this Form 10-K for information relating to the Company's
Executive Officers.
The Company has adopted a Code of Business Conduct and Ethics (the
"Code of Ethics") that applies to the Company's chief executive officer,
principal financial officer, principal accounting officer, and to all other
Company directors, officers and employees. The Code of Ethics is available on
the Company's website www.iff.com. A waiver from any provision of the Code of
Ethics in favor of a director or Executive Officer may only be granted by the
Board and any such waiver will be publicly disclosed. The Company will disclose
substantive amendments to, and any waivers from, the Code of Ethics provided to
the Company's chief executive officer, principal financial officer or principal
accounting officer, as well as any other executive officer or director, on the
Company's Internet website: www.iff.com.
The information regarding the Company's Audit Committee and its
designated audit committee financial expert is set forth under the caption
"Board and Committee Meetings" in the IFF 2005 Proxy Statement and such
information is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is set forth under
the captions "Summary Compensation Table", "Option/SAR Grants in 2004",
"Aggregated Option Exercises in 2004 and Option/SAR Values at December 31,
2004", "Directors' Compensation", "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements", "Compensation Committee
Interlocks and Insider Participation and Other Related Party Matters",
"Executive Separation Policy" and "Pension Plans" in the IFF 2005 Proxy
Statement and such information is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of management and
certain beneficial owners is set forth under the caption "Security Ownership of
Management, Directors and Certain Other Persons" in the IFF 2005 Proxy Statement
and such information is incorporated by reference herein. The information
relating to the Company's equity plans is set forth under the caption "Equity
Compensation Plans" in the IFF 2005 Proxy Statement and such information is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related party
transactions is set forth under the caption "Compensation Committee Interlocks
and Insider Participation and Other Related Party Matters" in the IFF 2005 Proxy
Statement and such information is incorporated by reference herein.
ITEM 14. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES.
The information regarding the independent registered public accounting
firm ("independent accountant") fees and services and the Company's pre-approval
policies and procedures for audit and non-audit services provided by the
Company's independent accountant are set forth under the captions "Independent
Registered Public Accounting Firm Fees and Services" and "Audit Committee
Pre-Approval Policies and Procedures" in the IFF 2005 Proxy Statement and such
information is incorporated by reference herein.
36
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) FINANCIAL STATEMENTS: The following consolidated financial
statements, related notes, management's report and independent registered
public accounting firm's report are included in this report on Form 10-K:
Report of Management............................................................................................... 38
Report of Independent Registered Public Accounting Firm............................................................ 39-40
Consolidated Statement of Income for the three years ended December 31, 2004....................................... 41
Consolidated Balance Sheet--December 31, 2004 and 2003............................................................. 42
Consolidated Statement of Cash Flows for the three years ended December 31, 2004................................... 43
Consolidated Statement of Shareholders' Equity for the three years ended December 31, 2004......................... 44
Notes to Consolidated Financial Statements......................................................................... 45-66
37
REPORT OF MANAGEMENT
The accompanying Consolidated Financial Statements of International
Flavors & Fragrances Inc. have been prepared by management in conformity with
accounting principles generally accepted in the United States of America and
necessarily include amounts that are based on management's best estimates and
judgment. The report by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, is based on their audits, which were performed in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).
The Company maintains an internal control structure and related
systems, policies and procedures designed to provide reasonable assurance that
assets are safeguarded and transactions are properly recorded and executed in
accordance with management's authorization so that the accounting records can be
relied upon for the preparation of financial statements. The Company's control
system is enhanced through a formal Code of Business Conduct and Ethics that
establishes standards for professional conduct and integrity for employees
worldwide. The Company also has an internal audit function that evaluates and
formally reports to management and the Audit Committee of the Board of Directors
on the adequacy and effectiveness of controls, policies and procedures.
The Audit Committee of the Board of Directors is composed entirely of
independent directors. The Committee periodically meets separately during the
year with management, the internal auditors and the independent registered
public accounting firm to discuss the Company's internal accounting controls,
auditing and financial reporting matters. The internal auditors and independent
registered public accounting firm have unrestricted access to the Audit
Committee.
/s/ Richard A. Goldstein /s/ Douglas J. Wetmore
- ------------------------ ----------------------
Richard A. Goldstein Douglas J. Wetmore
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
The Company's Chief Executive Officer certification was timely filed
with the NYSE as required by NYSE Rule 303A(12). The Company's Chief Executive
Officer and Chief Financial Officer have each filed with the Securities and
Exchange Commission the required certifications regarding the quality of the
Company's public disclosures.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of International Flavors & Fragrances
Inc.:
We have completed an integrated audit of International Flavors & Fragrances
Inc.'s 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
- ---------------------------------
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of International
Flavors & Fragrances Inc. and its subsidiaries at December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of
39
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
March 14, 2005
40
CONSOLIDATED STATEMENT OF INCOME INTERNATIONAL FLAVORS & FRAGRANCES INC.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2004 2003 2002
- ----------------------------------------------- --------------- ---------------- --------------
Net sales $ 2,033,653 $ 1,901,520 $ 1,809,249
--------------- ---------------- --------------
Cost of goods sold 1,160,235 1,092,456 1,035,835
Research and development expenses 175,173 159,286 144,027
Selling and administrative expenses 341,306 308,951 305,156
Amortization of intangibles 14,830 12,632 12,632
Restructuring and other charges 31,830 42,421 11,737
Interest expense 24,002 28,477 37,036
Other (income) expense, net 5,275 5,437 (3,591)
--------------- ---------------- --------------
1,752,651 1,649,660 1,542,832
--------------- ---------------- --------------
Income before taxes on income 281,002 251,860 266,417
Taxes on income 84,931 79,263 90,473
--------------- ---------------- --------------
Net income $ 196,071 $ 172,597 $ 175,944
=============== ================ ==============
2004 2003 2002
--------------- ---------------- --------------
Net income per share - basic $2.08 $1.84 $1.86
Net income per share - diluted $2.05 $1.83 $1.84
See Notes to Consolidated Financial Statements
41
CONSOLIDATED BALANCE SHEET INTERNATIONAL FLAVORS & FRAGRANCES INC.
(DOLLARS IN THOUSANDS) DECEMBER 31,
- ---------------------- -----------------------------
ASSETS 2004 2003
- -------------------------------------------------------------------------------- -------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 32,596 $ 12,081
Short-term investments 399 474
Receivables:
Trade 353,442 336,980
Allowance for doubtful accounts (17,663) (16,212)
Other 22,582 18,957
Inventories 457,204 454,631
Deferred income taxes 79,267 66,070
Prepaid expenses 33,543 29,691
-------------- -------------
Total Current Assets 961,370 902,672
Property, Plant and Equipment, Net 501,334 510,612
Goodwill 647,566 647,226
Intangible Assets, Net 142,110 152,187
Other Assets 110,914 94,195
-------------- -------------
Total Assets $ 2,363,294 $ 2,306,892
============== =============
DECEMBER 31,
-----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
- -------------------------------------------------------------------------------- -------------- -------------
CURRENT LIABILITIES:
Bank borrowings, overdrafts
and current portion of long-term debt $ 15,957 $ 31,371
Commercial paper - 162,933
Accounts payable 103,978 104,028
Accrued payrolls and bonuses 53,452 41,032
Dividends payable 16,571 14,996
Income taxes 30,339 27,826
Restructuring and other charges 38,312 18,788
Other current liabilities 140,913 125,071
-------------- -------------
Total Current Liabilities 399,522 526,045
-------------- -------------
OTHER LIABILITIES:
Long-term debt 668,969 690,231
Deferred gains 70,428 73,439
Retirement liabilities 226,695 210,031
Other liabilities 87,193 64,515
-------------- -------------
Total Other Liabilities 1,053,285 1,038,216
-------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 17)
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 79,498 95,138
Restricted stock (870) (3,952)
Retained earnings 1,627,386 1,496,104
Accumulated other comprehensive income:
Cumulative translation adjustment 8,227 (45,188)
Accumulated losses on derivatives qualifying as hedges (net of tax) (5,694) (3,678)
Minimum pension liability adjustment (net of tax) (110,705) (82,815)
-------------- -------------
1,612,312 1,470,079
Treasury stock, at cost - 21,088,993 shares in 2004 and 22,032,132
shares in 2003 (701,825) (727,448)
-------------- -------------
Total Shareholders' Equity 910,487 742,631
-------------- -------------
Total Liabilities and Shareholders' Equity $ 2,363,294 $ 2,306,892
============== =============
See Notes to Consolidated Financial Statements
42
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR EDNDED DECEMBER 31,
-----------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2002
- ------------------------------------------------------------------------- -------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 196,071 $ 172,597 $ 175,944
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 90,996 86,721 84,458
Deferred income taxes (6,464) (11,565) (6,381)
Gain on disposal of assets (19,774) (1,614) (4,076)
Changes in assets and liabilities:
Current receivables (2,953) 35,956 15,452
Inventories 363 7,690 17,259
Current payables 32,009 (32,252) (27,623)
Changes in other assets, net 7,185 (1,263) (23,280)
Changes in other liabilities, net (1,586) 13,326 11,591
-------------- ------------- --------------
Net cash provided by operations 295,847 269,596 243,344
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in short-term investments 132 (128) 81
Acquisitions and purchase of minority interest - (6,400) (11,791)
Additions to property, plant and equipment (70,607) (65,955) (81,815)
Proceeds from disposal of assets 38,997 97,675 64,634
-------------- ------------- --------------
Net cash (used in) provided by investing activities (31,478) 25,192 (28,891)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to shareholders (63,214) (58,174) (56,826)
Net change in bank borrowings and overdrafts (28,447) 12,551 (14,774)
Net change in commercial paper outstanding (162,933) 124,954 (166,250)
Proceeds from long-term debt - 35,984 282,329
Repayments of long-term debt (759) (386,399) (251,837)
Proceeds from issuance of stock under stock option and
employee stock purchase plans 76,452 26,278 29,579
Purchase of treasury stock (66,469) (55,447) (72,273)
-------------- ------------- --------------
Net cash used in financing activities (245,370) (300,253) (250,052)
-------------- ------------- --------------
Effect of exchange rate changes on cash and cash equivalents 1,516 2,688 1,936
-------------- ------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 20,515 (2,777) (33,663)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,081 14,858 48,521
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,596 $ 12,081 $ 14,858
============== ============= ==============
NON-CASH INVESTING ACTIVITY:
Asset write-down charges associated with the Company's
restructuring activities $ 6,814 $ 2,308 $ 3,956
See Notes to Consolidated Financial Statements
43
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMUL- NOTE TOTAL
CAPITAL IN ATED OTHER TREASURY STOCK RECEIVABLE COMPRE-
COMMON EXCESS OF RESTRICTED RETAINED COMPREHEN- -------------------------- FROM HENSIVE
(DOLLARS IN THOUSANDS) STOCK PAR VALUE STOCK EARNINGS SIVE INCOME SHARES COST OFFICER INCOME
- ---------------------- --------- ---------- ---------- ----------- ----------- ------------- ------------ ---------- ----------
Balance at
January 1, 2002 $ 14,470 $ 126,170 $ (1,440) $1,263,344 $ (178,536) (20,996,954) $ (698,851) $ (987)
Net Income 175,944 $175,944
Cumulative
translation
adjustment 18,091 18,091
Accumulated gains on
derivatives qualifying
as hedges; net of
tax: ($395) 2,994 2,994
Minimum pension liability
adjustment; net of tax:
$25,291 (55,029) (55,029)
---------
Total comprehensive income $142,000
=========
Cash dividends declared (56,749)
Stock options (15,652) 1,582,486 51,581
Reacquired shares (2,293,200) (72,273)
Restricted stock award (783) (5,884) 200,000 6,667
Amortization 1,601
--------- ---------- ---------- ----------- ----------- ------------- ------------ ---------
Balance at Dec. 31, 2002 14,470 109,735 (5,723) 1,382,539 (212,480) (21,507,668) (712,876) (987)
--------- ---------- ---------- ----------- ----------- ------------- ------------ ---------
Net Income 172,597 $172,597
Cumulative translation
adjustment 92,987 92,987
Accumulated losses on
derivatives qualifying
as hedges; net of tax:
($368) (4,411) (4,411)
Minimum pension liability
adjustment; net of tax:
$3,753 (7,777) (7,777)
---------
Total comprehensive income $253,396
=========
Cash dividends declared (59,032)
Stock options (14,597) 1,226,836 40,875 987
Reacquired shares (1,751,300) (55,447)
Amortization 1,771
--------- ---------- ---------- ----------- ----------- ------------- ------------ ---------
Balance at Dec. 31, 2003 14,470 95,138 (3,952) 1,496,104 (131,681) (22,032,132) (727,448) -
--------- ---------- ---------- ----------- ----------- ------------- ------------ ---------
Net Income 196,071 $196,071
Cumulative translation
adjustment 53,415 53,415
Accumulated losses on
derivatives qualifying as
hedges; net of tax: $89 (2,016) (2,016)
Minimum pension liability
adjustment; net of tax:
$11,297 (27,890) (27,890)
---------
Total comprehensive income $219,580
=========
Cash dividends declared (64,789)
Stock options (15,640) 2,745,039 92,092
Reacquired shares (1,801,900) (66,469)
Restricted stock award 387
Amortization 2,695
--------- ---------- ---------- ----------- ----------- ------------- ------------ ---------
Balance at Dec. 31, 2004 $ 14,470 $ 79,498 $ (870) $1,627,386 $ (108,172) (21,088,993) $ (701,825) $ -
========= ========== ========== =========== =========== ============= ============ =========
See Notes to Consolidated Financial Statements
44
INTERNATIONAL FLAVORS & FRAGRANCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES Preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
and accompanying disclosures. These estimates are based on management's best
knowledge of current events and actions the Company may undertake in the future.
Actual results may ultimately differ from estimates, although management does
not believe such changes will materially affect the financial statements in any
individual year.
NATURE OF OPERATIONS The Company is a leading creator and manufacturer of flavor
and fragrance compounds used to impart or improve flavor or fragrance in a wide
variety of consumer products. The Company's products are sold principally to
manufacturers of perfumes and cosmetics, hair and other personal care products,
soaps and detergents, cleaning products, dairy, meat and other processed foods,
beverages, snacks and savory foods, confectionery, sweet and baked goods, and
pharmaceutical and oral care products.
PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the
accounts of the Company and all subsidiaries. All intercompany balances and
transactions have been eliminated. To the extent a subsidiary is not
wholly-owned, any related minority interest is included in Other liabilities and
applicable (income) expense attributable to the minority interest is included in
Other (income) expense, net.
REVENUE RECOGNITION The Company recognizes revenue when the earnings process is
complete. This generally occurs when (i) products are shipped to the customer in
accordance with the terms of sale, (ii) title and risk of loss have been
transferred and (iii) collectibility is reasonably assured. Accruals are made
for sales returns and other allowances based on the Company's historical
experience.
FOREIGN CURRENCY TRANSLATION The assets and liabilities of non-U.S. subsidiaries
are translated into U.S. dollars at year-end exchange rates. Income and expense
items are translated at average exchange rates during the year. Cumulative
translation adjustments are shown as a separate component of Shareholders'
Equity.
RESEARCH AND DEVELOPMENT All costs associated with research and development are
expensed as incurred.
INVENTORIES Inventories are stated at the lower of cost (on an average basis) or
market.
CASH EQUIVALENTS Cash equivalents include highly liquid investments with
maturities of three months or less at date of purchase.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at
cost. Depreciation is calculated on a straight-line basis, principally over the
following estimated useful lives: buildings and improvements, 10 to 40 years;
machinery and equipment, 3 to 10 years; information technology hardware and
software, 3 to 7 years; and leasehold improvements which are included in
buildings and improvements, the estimated life of the improvements or the
remaining term of the lease, whichever is shorter.
The Company reviews its long-lived assets for impairment when events or
changes in business conditions indicate that their full carrying value may not
be recovered. An estimate of undiscounted future cash flows produced by an asset
or group of assets is compared to the carrying value to determine whether an
impairment exists. If assets are determined to be impaired, the loss is measured
based on an estimate of fair value using various valuation techniques, including
a discounted estimate of future cash flows.
GOODWILL AND OTHER INTANGIBLE ASSETS Identifiable intangible assets include
patents, trademarks and other intellectual property valued at acquisition
primarily through independent appraisals, and are amortized on a straight-line
basis over periods ranging from 7 to 20 years. For purposes of assessing
impairment, the fair values for goodwill and indefinite-lived intangibles are
determined based on discounted cash flows, market multiples or appraised values,
as appropriate.
45
INCOME TAXES Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes, based on tax laws as
currently enacted. Additional taxes which would result from distributions by
subsidiary companies to the parent are provided to the extent anticipated. No
provision is made for additional taxes on undistributed earnings of subsidiary
companies that are intended to be indefinitely invested in such subsidiaries.
The assessment of foreign earnings that are intended to be indefinitely
reinvested does not contemplate the potential impact of the repatriation
provisions of the American Jobs Creation Act of 2004. No income tax benefit is
attributable to the currency translation component of Accumulated other
comprehensive income.
RETIREMENT BENEFITS Current service costs of retirement plans and postretirement
health care and life insurance benefits are accrued currently. Prior service
costs resulting from plan improvements are amortized over periods ranging from
10 to 20 years.
FINANCIAL INSTRUMENTS The Company enters into derivative instruments with terms
that match the underlying exposure being hedged. The Company's derivative
instruments are considered highly effective and the net gain or loss from hedge
ineffectiveness is not material. The Company's derivative instruments that
qualify for hedge accounting are primarily designated as either fair value
hedges or cash flow hedges. For fair value hedges, changes in the value of the
derivative as well as the offsetting changes in fair value of the hedged item
are recognized in earnings each period. For cash flow hedges, changes in value
of the derivative are recorded in Accumulated other comprehensive income and are
recognized in earnings when the offsetting effect of the hedged item is
recognized in earnings.
RISKS AND UNCERTAINTIES The diversity of the Company's products, customers and
geographic operations significantly reduces the risk that a severe impact will
occur in the near term as a result of changes in its customer base, competition,
sources of supply or markets. It is unlikely that any one event would have a
severe impact on the Company's operating results.
SOFTWARE COSTS The Company capitalizes direct internal and external development
costs associated with internal-use software. Neither preliminary evaluation
costs nor costs associated with the software after implementation are
capitalized.
SHIPPING AND HANDLING COSTS Net sales include shipping and handling charges
billed to customers. Cost of goods sold include all costs incurred in connection
with shipping and handling.
NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 123(R)
("FAS 123"), Share-Based Payment, was issued in December 2004. The standard is
effective for the first reporting period beginning after June 15, 2005. FAS 123,
as revised, supersedes Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Statement establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. The Company has three options available for
implementation and is evaluating which option it will choose as well as the
impact of adopting this standard under each option.
NET INCOME PER SHARE Net income per share is based on the weighted average
number of shares outstanding. A reconciliation of shares used in the
computations of basic and diluted net income per share is as follows:
NUMBER OF SHARES
------------------------------------------
(SHARES IN THOUSANDS) 2004 2003 2002
- ---------------------------------- ------------- ------------ ------------
Basic 94,143 93,718 94,511
Dilution under stock plans 1,275 701 1,362
------------- ------------ ------------
Diluted 95,418 94,419 95,873
============= ============ ============
46
Net income used in the computation of net income per share is
unaffected by the assumed issuance of stock under the Company's stock plans.
Options to purchase 761,750, 4,440,455 and 3,505,414 shares were
outstanding at December 31, 2004, 2003 and 2002, respectively, but not included
in the computation of diluted net income per share because the exercise prices
were greater than the average market price of the common shares in the
respective years.
STOCK PLANS The Company has stock-based compensation plans which are described
more fully in Note 12. The Company applies the recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
Interpretations in accounting for these plans. No compensation expense for
employee stock options is reflected in net income, as all options granted under
such plans had an exercise price not less than the market value of the common
stock on the date of the grant. Net income, as reported, includes pre-tax
compensation expense related to restricted stock and restricted stock units
("RSU's") of $8.1 million, $1.8 million and $1.6 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
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
FAS No. 123 for the years ended December 31, 2004, 2003 and 2002:
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) 2004 2003 2002
- -------------------------------------------------------------------------- -------------- -------------- --------------
Net Income, as reported $ 196,071 $ 172,597 $ 175,944
Deduct:
Total stock-based employee compensation expense determined
under fair value method for all stock option
awards, net of related tax effects 13,954 15,404 16,008
-------------- -------------- --------------
Pro-forma
net income $ 182,117 $ 157,193 $ 159,936
============== ============== ==============
Net income per share:
Basic -- as reported $2.08 $1.84 $1.86
Basic -- pro-forma $1.93 $1.68 $1.69
Diluted -- as reported $2.05 $1.83 $1.84
Diluted -- pro-forma $1.91 $1.66 $1.67
These pro-forma amounts may not be representative of future results
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.
The Company granted RSU's in May 2004 as an element of its equity
compensation plans for all eligible U.S. - based employees and a majority of
eligible overseas employees. Vesting of the RSU's for the Company's senior
management is both performance and time based, and for the remainder of the
eligible employees, vesting is time based; the vesting period is generally three
years from date of grant.
RECLASSIFICATIONS Certain reclassifications have been made to the prior years'
financial statements to conform to 2004 classifications.
NOTE 2. RESTRUCTURING AND OTHER CHARGES
In 2004, the Company disposed of its European fruit preparations
business. Proceeds from the sale were $40.0 million, including assumption of
certain liabilities. In addition, the Company closed its Canadian manufacturing
facility and committed to the closure of its manufacturing facility in Dijon,
France; the Dijon facility is scheduled to close in 2005 on completion of
transfer of production to other plants. As a result, the Company eliminated 302
positions, and recognized pre-tax charges of $31.8 million, of which $25.8
million related to employee terminations and $6.0 million to location closures
and asset write-downs, and other related reorganization actions; the
asset-related charges were net of gains of $16.3 million related to the sale of
the fruit businesses and Canadian facility.
47
During 2003, the Company recorded pre-tax charges of $42.4 million of
which $38.0 million related to the elimination of 321 employee positions and
$4.4 million related to location closures and asset write-downs. The $4.4
million asset-related charges primarily relate to updates on costs for
previously commenced actions.
During 2002, the Company recorded pre-tax charges of $11.7 million;
$4.3 million related to the elimination of 148 employee positions and $7.4
million related to location closures and asset write-downs. The $7.4 million
asset-related charges includes $4.0 million related to a non-cash asset
write-off associated with the disposition of the Company's fruit concentrates
business in North America.
With respect to all restructuring and other charges:
o Separation costs for the employees relate primarily to severance,
outplacement and other benefit costs;
o Asset write-down charges relate to establishment of the new
carrying value for assets held for sale or disposal; and
o Other costs include lease termination costs and other
reorganization expenses incurred to effect either the employee
separation or location closure.
Charges by region in each of the three years in the period ended
December 31, 2004 were:
(DOLLARS IN THOUSANDS) 2004 2003 2002
- ------------------------------------ ------------ ------------ -------------
North America $ 7,648 $ 20,172 $ 5,565
Europe 23,485 16,936 5,814
Asia Pacific 664 3,576 358
Latin America 33 1,296 -
India - 441 -
------------ ------------ -------------
$ 31,830 $ 42,421 $ 11,737
============ ============ =============
Movements in related accruals were:
EMPLOYEE- ASSET-RELATED
(DOLLARS IN THOUSANDS) RELATED AND OTHER TOTAL
- -------------------------------------------------- --------------- --------------- --------------
Balance January 1, 2002 $ 6,988 $ 745 $ 7,733
Additional charges 4,340 7,397 11,737
Cash and other costs (7,899) (7,721) (15,620)
--------------- --------------- --------------
Balance December 31, 2002 3,429 421 3,850
Additional charges 37,989 4,432 42,421
Cash and other costs (21,809) (3,334) (25,143)
--------------- --------------- --------------
Balance December 31, 2003 19,609 1,519 21,128
Additional charges* 25,828 22,331 48,159
Cash and other costs (17,219) (8,942) (26,161)
--------------- --------------- --------------
Balance December 31, 2004 $ 28,218 $ 14,908 $ 43,126
=============== =============== ==============
* The asset-related charges above exclude gains of $16.3 million relating to the
sale of the fruit businesses and Canadian facility which were offset against
restructuring and other charges in determining Restructuring and other charges
reported in 2004 of $31.8 million.
48
The balance of the employee-related liabilities are expected to be
utilized by 2006 as obligations are satisfied; the asset-related charges are
expected to be utilized in 2006 on final decommissioning and disposal of the
affected equipment.
NOTE 3. ACQUISITIONS AND DIVESTITURES
The Company sold its European fruit preparations businesses during
2004. See Note 2 for a discussion.
In 2003, the Company acquired 70% of the outstanding shares of
Celessence International Ltd. ("Celessence"), a company engaged in the
development and distribution of encapsulation and delivery systems for use in
fragrance and other applications, for $6.4 million. The acquisition was
accounted for as a purchase business combination. The principal Celessence asset
is a process technology patent included in other intangible assets that is being
amortized over its estimated remaining useful life. Celessence results, which
are not material, are included in the consolidated results of the Company from
acquisition date.
In November 2000, the Company acquired BBA; total consideration paid,
including transaction costs, was $970.0 million. At acquisition date, BBA owned
approximately 73% of its Indian subsidiary, BBA India Limited ("BBAIL"). During
2002, the Company acquired additional BBAIL shares, raising its ownership to
93%; cost of the acquired shares was $11.8 million.
The Company sold its North American concentrate business in June 2002
and recorded a restructuring and other charge of $4.3 million related to
employee separation and other disposal costs. Sales for the business up to the
date of disposition were $9.4 million; operating profit was not significant.
The Company established accruals relating to the integration of BBA;
associated costs, relating mainly to employee separation and facility closures,
were recorded as a component of purchase accounting and did not directly impact
current earnings.
Movements in acquisition accounting accruals were:
Asset-
Employee- Related
(DOLLARS IN THOUSANDS) Related and Other Total
- ----------------------------- -------------- ------------- --------------
Balance January 1, 2002 $ 13,856 $ 9,866 $ 23,722
Cash and other costs (7,850) (8,797) (16,647)
-------------- ------------- --------------
Balance December 31, 2002 6,006 1,069 7,075
Cash and other costs (3,576) (1,069) (4,645)
-------------- ------------- --------------
Balance December 31, 2003 2,430 - 2,430
Cash and other costs (2,430) - (2,430)
-------------- ------------- --------------
Balance December 31, 2004 $ - $ - $ -
============== ============= ==============
NOTE 4. INVENTORIES
December 31,
--------------------------------
(DOLLARS IN THOUSANDS) 2004 2003
- ------------------------------------- --------------- ---------------
Raw materials $ 197,782 $ 233,313
Work in process 12,759 15,815
Finished goods 246,663 205,503
--------------- ---------------
Total $ 457,204 $ 454,631
=============== ===============
49
NOTE 5. PROPERTY, PLANT AND EQUIPMENT, NET
COST
-----------------------------------
DECEMBER 31,
-----------------------------------
ASSET TYPE 2004 2003
-------------- -----------------
(DOLLARS IN THOUSANDS)
- ----------------------
Land $ 40,914 $ 38,370
Buildings and improvements 214,328 218,381
Machinery and equipment 523,072 521,062
Information technology hardware and software 185,026 178,086
Construction in progress 68,138 54,498
-------------- -----------------
Total $ 1,031,478 $ 1,010,397
============== =================
ACCUMULATED DEPRECIATION
-----------------------------------
DECEMBER 31,
-----------------------------------
ASSET TYPE 2004 2003
-------------- -----------------
(DOLLARS IN THOUSANDS)
- ----------------------
Land $ - $ -
Buildings and improvements 99,103 100,564
Machinery and equipment 309,449 292,385
Information technology hardware and software 121,592 106,836
Construction in progress - -
-------------- -----------------
Total $ 530,144 $ $499,785
============== =================
NET
-----------------------------------
DECEMBER 31,
-----------------------------------
ASSET TYPE 2004 2003
-------------- -----------------
(DOLLARS IN THOUSANDS)
- ----------------------
Land $ 40,914 $ 38,370
Buildings and improvements 115,225 117,817
Machinery and equipment 213,623 228,677
Information technology hardware and software 63,434 71,250
Construction in progress 68,138 54,498
-------------- -----------------
Total $ 501,334 $ 510,612
============== =================
NOTE 6. INTANGIBLE ASSETS, NET
During the fourth quarter of 2004, 2003 and 2002, the Company performed
its impairment assessments and concluded there was no impairment.
50
DECEMBER 31, 2004
-----------------------------------
GROSS
CARRYING ACCUMULATED
(DOLLARS IN THOUSANDS) VALUE AMORTIZATION
- ----------------------------------------- --------------- -----------------
Other indefinite-lived intangibles $ 19,200 $ 1,184
Trademarks and other 179,452 55,358
--------------- -----------------
Total $ 198,652 $ 56,542
=============== =================
DECEMBER 31, 2003
-----------------------------------
GROSS
CARRYING ACCUMULATED
(DOLLARS IN THOUSANDS) VALUE AMORTIZATION
- ----------------------------------------- --------------- -----------------
Other indefinite-lived intangibles $ 19,200 $ 1,184
Trademarks and other 174,699 40,528
--------------- -----------------
Total $ 193,899 $ 41,712
=============== =================
Goodwill by operating segment is as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2003 CHANGES DECEMBER 31, 2004
- ------------------------------------- ------------------------ -------------- -------------------------
North America $ 211,265 $ - $ 211,265
Europe 252,122 340 252,462
India 28,502 - 28,502
Latin America 47,859 - 47,859
Asia Pacific 107,478 - 107,478
------------------------ -------------- -------------------------
Total $ 647,226 $ 340 $ 647,566
======================== ============== =========================
Amortization expense for the year ended December 31, 2004 was $14.8
million; estimated annual amortization in 2005 and 2006 is $14.8 million, $13.5
million in 2007 and $6.8 million in 2008 and 2009, respectively.
NOTE 7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following amounts:
December 31,
------------------------------
(DOLLARS IN THOUSANDS) 2004 2003
- ----------------------------------------------- -------------- --------------
Commissions and professional fees payable $ 10,877 $ 8,122
Rebates and incentives 12,053 10,838
Current pension and other retiree accruals 13,072 12,872
Other 104,911 93,239
-------------- --------------
Total $ 140,913 $ 125,071
============== ==============
NOTE 8. SALE AND LEASEBACK TRANSACTIONS
In 2003, the Company sold its New York corporate headquarters to an
unrelated third party for $91.0 million in cash, concurrently entering into a
long-term lease with respect to the space it occupies (approximately 40% of the
building). The lease is classified as an operating lease in accordance with SFAS
No. 13 ("FAS 13"), Accounting for Leases. The gain realized on the sale, after
transaction costs, of $52.7 million, has been deferred and is being credited to
income over the initial 27.5 - year lease term.
In 2002, the Company entered into agreements for the sale and leaseback
of its Hazlet and South Brunswick, New Jersey facilities to an unrelated third
party for $48.0 million in cash. Concurrently, the Company entered into a
long-term lease with respect to the facilities. The leases are classified as
operating leases in accordance with FAS 13. The gain realized on the sale, after
transaction costs, of $26.7 million, has been deferred and is being credited to
income over the initial 22 - year lease term.
51
The Company has cumulative deferred gains on disposition of real estate
totaling $73.4 million and $76.4 million at December 31, 2004 and 2003,
respectively. At December 31, 2004 and 2003, $70.4 million and $73.4 million,
respectively, are reflected in the accompanying balance sheet under the caption
Deferred gains, with the remaining amounts included as a component of Other
current liabilities.
NOTE 9. BORROWINGS
Debt consists of the following at December 31:
(DOLLARS IN THOUSANDS) RATE MATURITIES 2004 2003
- ---------------------------------------------------------- ------------- --------------- --------------- -------------
Commercial paper (U.S.) $ - $ 162,933
Bank borrowings and overdrafts 3,651 30,610
Current portion of long-term debt 12,306 761
--------------- -------------
Total current debt 15,957 194,304
--------------- -------------
U.S. dollars 6.45% 2006 498,938 498,675
Japanese Yen notes 2.45% 2008-11 146,126 141,516
Japanese Yen notes 1.74% 2005 - 11,172
Other 2006 102 861
--------------- -------------
645,166 652,224
Deferred realized gains on interest rate swaps 24,104 39,685
FAS 133 adjustment (301) (1,678)
--------------- -------------
Total long-term debt 668,969 690,231
--------------- -------------
Total debt $ 684,926 $ 884,535
=============== =============
Commercial paper issued by the Company generally has terms of 30 days
or less, and in no circumstances in 2003 or 2004 did the maturities extend
beyond 63 days from date of issuance. At December 31, 2004, the Company had no
commercial paper outstanding; at December 31, 2003 commercial paper outstanding
had an effective interest rate of 1.2%.
Bank borrowings and overdrafts are primarily comprised of borrowings
under various bank overdraft facilities where balances fluctuate daily based on
the Company's net cash position.
In 2002, the Company entered into a five-year Euro 350.0 million
(approximately $475.0 million at December 31, 2004), multi-currency revolving
credit facility. The Company employs this facility as a European-wide working
capital facility. At December 31, 2004 and 2003, the Company had no borrowings
under this facility.
Short-term bank loans primarily in the form of overdrafts, in addition
to the five-year Euro facility, were outstanding in several foreign countries
and averaged $22.2 million in 2004, compared with $22.7 million in 2003. The
highest levels were $33.8 million in 2004, $37.4 million in 2003 and $52.2
million in 2002, respectively. The 2004 weighted average interest rate of these
foreign bank loans, based on balances outstanding at the end of each month, was
3.2% and the average rate on loans outstanding at December 31, 2004 was 4.7%.
These rates compare with 4.1% and 3.7%, respectively, in 2003 and 5.0% and 3.9%,
respectively, in 2002.
In 2002, the Company exercised an option under its existing $500.0
million U.S. revolving credit facility and cancelled the $200.0 million 364-day
portion of the agreement. The remaining $300.0 million revolving credit facility
extends to September 2006. The revolving credit agreement serves as backstop for
the Company's commercial paper program; there have been no borrowings under this
agreement. The Company compensates participating banks in the form of fees, the
amounts of which are not material.
52
In 2001, the Company issued $700.0 million of 6.45% Notes; the Notes
mature May 15, 2006. During 2003, the Company repurchased $200.7 million of
these Notes in a series of open-market transactions. As a result of premiums
paid for the Notes repurchased, the Company incurred pre-tax losses, included in
Other (income) expense, net of $4.2 million.
Annual maturities on long-term debt outstanding at December 31, 2004
are as follows: 2005, $12.3 million; 2006, $499.4 million; 2007, $0; 2008,
$128.6 million; 2009, $0; and thereafter, $17.5 million. At December 31, 2004,
the estimated fair value of the $499.3 million 6.45% Notes, including deferred
gains on interest rate swaps, was $520.9 million. The estimated fair value of
the remaining long-term debt at December 31, 2004 and 2003, based on borrowing
rates currently available to the Company with similar terms and maturities,
approximated the recorded amount.
The Company has various interest rate swaps, the market value of which
is included in the caption FAS 133 adjustment. Interest rate swaps that have
been monetized and will be amortized over the life of the debt are reported as
Deferred realized gains on interest rate swaps.
Cash payments for interest were $36.7 million in 2004, $44.6 million in
2003 and $61.6 million in 2002; such cash payments exclude the benefit of cash
payments the Company received under its various interest rate swap agreements of
$11.6 million and $56.5 million in 2003 and 2002, respectively. There were no
new agreements in 2004.
At December 31, 2004 and 2003, the Company and its subsidiaries had
unused lines of credit approximating $590.0 million and $532.0 million,
respectively, in addition to the facility serving as backstop to the Company's
commercial paper program.
The Company is required to maintain a prescribed debt to EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization) ratio of 3.25
to 1. In the event the Company fails to maintain this ratio, the lenders could
terminate the borrowing facilities and demand immediate repayment. The Company
has complied with this covenant at all times.
NOTE 10. INCOME TAXES
The following tables show the components of consolidated income before
taxes, and current and deferred income tax expense by taxing jurisdiction, both
domestic and foreign:
(DOLLARS IN THOUSANDS) 2004 2003 2002
- ------------------------------------------ -------------- -------------- -------------
U.S. loss before taxes $ (42,388) $ (53,200) $ (8,918)
Foreign income before taxes 323,390 305,060 275,335
-------------- -------------- -------------
Total income before taxes $ 281,002 $ 251,860 $ 266,417
============== ============== =============
(DOLLARS IN THOUSANDS) 2004 2003 2002
- ------------------------------------------ -------------- -------------- --------------
Current
Federal $ 6,033 $ 4,762 $ 18,452
State and local (1,288) 902 1,884
Foreign 86,650 85,164 76,518
-------------- -------------- --------------
91,395 90,828 96,854
-------------- -------------- --------------
Deferred
Federal (1,568) (18,497) (19,496)
State and local 293 (2,660) (2,591)
Foreign (5,189) 9,592 15,706
-------------- -------------- --------------
(6,464) (11,565) (6,381)
-------------- -------------- --------------
Total income taxes $ 84,931 $ 79,263 $ 90,473
============== ============== ==============
53
At December 31, 2004 and 2003, gross deferred tax assets were $165.6
million and $154.1 million, respectively; gross deferred tax liabilities were
$72.2 million and $77.7 million, respectively. No valuation allowance was
required for deferred tax assets. At December 31, 2004 and 2003, non-current
deferred tax assets of $14.1 million and $10.3 million, respectively, were
included in Other Assets. The principal components of deferred tax assets
(liabilities) were:
(DOLLARS IN THOUSANDS) 2004 2003
- --------------------------------------------- ------------- ------------
Employee and retiree benefits $ 83,900 $ 67,700
Inventory 6,500 5,400
Tax credit carryforwards 14,400 18,700
Property, plant and equipment 9,100 10,900
Trademarks and other (32,300) (37,600)
Interest 5,500 10,000
Foreign earnings (25,300) (25,100)
Other, net 31,600 26,400
------------- ------------
$ 93,400 $ 76,400
============= ============
Of the tax credit carryforwards, $1.6 million will expire, if unused,
beginning in 2013; the remaining $12.8 million can be carried forward
indefinitely.
A reconciliation between the U.S. federal income tax rate and the
effective tax rate is:
2004 2003 2002
--------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Difference in effective tax rate on foreign earnings and remittances (2.6) (1.4) 0.1
State and local taxes (0.2) (0.5) (0.2)
Other, net (2.0) (1.6) (0.9)
--------- --------- ---------
Effective tax rate 30.2% 31.5% 34.0%
========= ========= =========
Income taxes paid were $75.4 million in 2004, $96.9 million in 2003 and
$100.3 million in 2002.
Undistributed earnings of foreign subsidiaries for which no deferred
taxes have been provided totaled $647.1 million and $635.4 million at December
31, 2004 and 2003, respectively. The portion of these foreign earnings which the
Company intends to indefinitely reinvest in its foreign operations totaled
$228.1 million and $117.3 million at December 31, 2004 and 2003, respectively.
No federal income or foreign withholding tax has been provided on these
indefinitely reinvested foreign earnings. The assessment of foreign earnings
that are intended to be indefinitely reinvested does not contemplate the
potential impact of the repatriation provisions of the American Jobs Creation
Act of 2004 (the "Act"). Any additional U.S. taxes payable on the remaining
foreign earnings, if remitted, would be substantially offset by credits for
foreign taxes already paid.
The Act, enacted on October 22, 2004, provides for a special one-time
tax deduction of 85% of dividends received on eligible repatriated foreign
earnings. The deduction would result in an approximate 5.25% federal tax rate on
these earnings. To qualify for the deduction, the earnings must be reinvested in
the United States pursuant to a domestic reinvestment plan established by the
Company's Chief Executive Officer and approved by the Company's Board of
Directors; certain other criteria in the Act must also be satisfied. The Company
is evaluating whether it will repatriate foreign earnings under the repatriation
provisions of the Act during the year ending December 31, 2005, and if so, the
amount that will be repatriated. The range of reasonably possible amounts that
the Company is considering for repatriation, which would be eligible for the
temporary deduction, is $250 to $500 million. This repatriation may include
amounts currently deemed indefinitely reinvested and amounts for which deferred
taxes have been provided. The Company is awaiting the issuance of further
regulatory guidance and passage of statutory technical corrections with respect
to certain provisions in the Act prior to determining any amounts it will
repatriate.
54
The Company is not yet in a position to determine the impact of a qualifying
repatriation, should it choose to make one, on its income tax expense for 2005,
the amount of its indefinitely reinvested foreign earnings, or the amount of its
deferred tax liability with respect to foreign earnings. The Company expects to
determine the amounts and sources of foreign earnings to be repatriated, if any,
during the second half of 2005.
NOTE 11. SHAREHOLDERS' EQUITY
In January 2001, the Company awarded approximately 190,000 RSU's to
eligible employees in exchange for surrender of their "under-water" stock
options. The Units vested, in four equal installments, upon the Company's common
stock attaining successively higher market price targets beginning at $22.50 per
share, and earned dividend equivalents as and when cash dividends were paid.
Compensation expense was recognized over the vesting period. The first two
market price targets were achieved and compensation expense of $1.7 million was
recognized prior to 2002. In 2002, the third price target of $31.50 was achieved
and the Company recognized compensation expense of $0.8 million. In 2004, the
final price target of $36.00 was achieved and compensation expense of $0.4
million was recognized.
On August 1, 2002, the Company's Board of Directors granted an award of
200,000 restricted shares of the Company's common stock. Entitlement to all or a
portion of the award is subject to the Company achieving certain levels of total
shareholder return compared to those of a specified group of companies, over the
three-, four- and five-year periods commencing August 1, 2002. Compensation
expense relating to the award is recognized over the restriction period.
On March 9, 2000, the Company adopted a shareholder protection rights
agreement (the "Rights Agreement") and declared a dividend of one right on each
share of common stock outstanding on March 24, 2000 or issued thereafter.
Under the Rights Agreement, as amended, until a person or group
acquires 15% or more of the Company's common stock or commences a tender offer
that would result in such person's or group's owning 15% or more, the rights are
evidenced by the common stock certificates, automatically trade with the common
stock and are not exercisable.
Thereafter, if the Company is involved in a merger or sells more than
50% of its assets or earning power, each right entitles its holder to purchase a
certain number of shares for a specified exercise price. Also, under certain
circumstances, the Company's Board of Directors has the option to redeem or
exchange one share of common stock for each right. Finally, in the event a new
Board of Directors is elected in a successful proxy contest, (i) the rights may
not be redeemed and no business combination with the Company can be effected for
180 days thereafter unless certain procedures are followed to ensure (A) that
steps are taken to maximize shareholder value, or (B) that any decision to
redeem the rights, if challenged, would meet an "entire fairness" test; and (ii)
the Rights Agreement may not be amended during such 180-day period. To establish
"entire fairness" in connection with a redemption, the new Board must be able to
demonstrate that all aspects of the redemption decision were fair, including the
redemption procedure and the financial terms of the redemption. The Rights
Agreement expires in March 2010.
Dividends paid per share were $0.67, $0.62 and $0.60 in 2004, 2003 and
2002, respectively.
The Accumulated other comprehensive income balance includes Cumulative
translation adjustments of $8.2 million and ($45.2) million, Accumulated
(losses) gains on derivatives qualifying as hedges of ($5.7) million and ($3.7)
million, and Minimum pension liability of ($110.7) million and ($82.8) million,
at December 31, 2004 and 2003, respectively. Amounts are shown net of tax, where
appropriate.
NOTE 12. STOCK PLANS
The Company has various equity plans under which the Company's
officers, directors and key employees may be granted options to purchase the
Company's common stock at 100% of the market price on the day the option is
granted or may receive other forms of equity-based awards. Prior to 2004, stock
option plans were the primary form of equity compensation. During 2004, the
Company granted RSU's as an element of its incentive compensation plans for all
eligible U.S. - based employees and a majority of eligible overseas employees.
55
Vesting of the RSU's for the Company's senior management is performance and time
based, and for the remainder of eligible employees, vesting is time based; the
vesting period will primarily be three years from date of grant, however vesting
can be adjusted within certain parameters.
Options granted prior to May 2001 generally become exercisable no
earlier than two years after the date of grant and expire 10 years after the
date of grant, except for options granted to two senior executives in 2000 and
certain other options granted to foreign employees, which may be exercised
immediately. Options granted in November 2000, generally became exercisable in
four equal installments as corresponding market price targets for the Company's
common stock of $22.50, $27.00, $31.50 and $36.00 were attained, and expire
seven years after the date of grant or sooner if certain price levels (which
differ among individuals) are achieved. The November 2000 options have vested as
the prescribed price targets have been met.
Options granted after May 1, 2001 generally become exercisable no
earlier than one year from the date of grant and expire 10 years after grant
date, except for options granted to certain foreign employees, which may be
exercised immediately.
During 2004, options were granted at exercise prices ranging from
$34.75 to $35.00 per share. At December 31, 2004, the price range for shares
under option was $17.94 to $49.88; options for 4,995,161 shares were exercisable
at that date.
The Company has a Global Employee Stock Purchase Plan ("GESPP") that
was established in January 2001. Eligible employees may purchase a limited
number of shares of the Company's common stock at a discount of 15% of the
market value on the grant date. The purchase date is one year after grant.
Shares purchased under the GESPP in 2004, 2003 and 2002 were 156,256, 188,862,
and 206,541, respectively.
Stock plan transactions were:
SHARES OF COMMON STOCK WEIGHTED
------------------------------------ AVERAGE
AVAILABLE UNDER EXERCISE OPTIONS
FOR GRANT OPTION PRICE EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 6,711,581 8,361,369 $28.37 3,465,760
Granted (2,899,950) 2,899,950 32.19
Exercised - (1,356,964) 18.42
Terminated 154,947 (154,947) 31.40
Lapsed (1,735,856) (87,500) 34.57
Reserved for Units (50,710) - -
Increase under existing plans 4,500,000 - -
Restricted Stock Award (200,000) - -
-------------------------------------------------------------------------
Balance at December 31, 2002 6,480,012 9,661,908 30.66 4,292,202
Granted (2,668,600) 2,668,600 30.08
Exercised - (1,034,528) 20.81
Terminated 754,658 (754,658) 33.38
Lapsed (107,883) (117,750) 36.31
Reserved for Units (37,229) - -
-------------------------------------------------------------------------
Balance at December 31, 2003 4,420,958 10,423,572 31.18 5,146,449
Granted (212,000) 212,000 34.87
Exercised - (2,565,747) 26.88
Terminated 570,398 (570,398) 35.66
Lapsed (91,749) (80,334) 36.00
Reserved for Units 9,682 - -
Restricted Stock Units Awarded (508,660) - 36.09
-------------------------------------------------------------------------
Balance at December 31, 2004 4,188,629 7,419,093 $32.26 4,995,161
=========================================================================
56
The weighted average exercise prices of the Company's options
exercisable at December 31, 2004, 2003 and 2002 were $32.82, $33.02 and $31.84,
respectively.
The following table summarizes information concerning currently
outstanding and exercisable options:
RANGE OF EXERCISE PRICES $15-$25 $25-$30 $30-$35 $35-$50
- ------------------------ -------------- ---------------- ----------------- --------------
Number outstanding 208,197 3,012,996 3,360,400 837,500
Weighted average remaining contractual life, in years 5.9 7.6 6.8 3.5
Weighed average exercise price $18.21 $28.94 $33.15 $44.12
-------------- ---------------- ----------------- --------------
Number exercisable 194,863 1,668,850 2,389,948 741,500
Weighed average exercise price $18.05 $28.27 $33.33 $45.30
Using the Black-Scholes option valuation model, the estimated fair
values of options granted during 2004, 2003 and 2002 were $9.42, $7.84 and
$10.07, respectively. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Principal assumptions used in applying the Black-Scholes model were:
2004 2003 2002
--------- --------- ----------
Risk-free interest rate 4.0% 2.6% 4.5%
Expected life, in years 5 5 5
Expected volatility 29.6% 31.7% 33.7%
Expected dividend yield 1.9% 2.0% 1.8%
The Board of Directors authorized two share repurchase programs of
$100.0 million in October 2002 and July 2004. The Company completed the 2002
program during 2004. At December 31, 2004, the Company had authorization for
$75.5 million remaining under the July 2004 plan. The repurchased shares are
used in connection with the above equity compensation programs and for other
general corporate purposes.
NOTE 13. SEGMENT INFORMATION
The Company manages its operations by major geographical region.
Flavors and fragrances have similar economic and operational characteristics
including research and development, the nature of the creative and production
processes, the type of customers, and the methods by which products are
distributed. Accounting policies used for segment reporting are identical to
those described in Note 1.
The Company evaluates the performance of its geographic regions based
on segment profit which is income before taxes on income, excluding interest
expense, other income and expense and the effects of restructuring and other
charges and accounting changes. The Company is divided into five geographic
regions for management purposes: North America, Europe, India, Latin America and
Asia Pacific. The global expenses caption represents corporate and
headquarters-related expenses which include legal, finance, human resource and
other administrative expenses that are not allocable to an individual geographic
region. Transfers between geographic areas are accounted for at prices that
approximate arm's-length market prices. Unallocated assets are principally cash,
short-term investments and other corporate and headquarters-related assets.
57
The Company's reportable segment information follows:
2004 NORTH LATIN ASIA GLOBAL ELIMIN- CONSOLID-
(DOLLARS IN THOUSANDS) AMERICA EUROPE INDIA AMERICA PACIFIC EXPENSES ATIONS ATED
- ---------------------- --------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $635,887 $ 812,588 $ 50,537 $219,126 $315,515 $ - $2,033,653
Transfers between areas 79,389 189,514 1,431 846 31,081 (302,261) -
--------------------------------------------------------------------------------------------------
Total sales $715,276 $1,002,102 $ 51,968 $219,972 $346,596 $(302,261) $2,033,653
==================================================================================================
Segment profit $ 73,984 $ 230,878 $ 11,315 $ 27,242 $ 55,273 $(54,261) $ (2,322) $ 342,109
Restructuring and other charges (7,648) (23,485) - (33) (664) (31,830)
--------------------------------------------------------------------------------------------------
Operating profit $ 66,336 $ 207,393 $ 11,315 $ 27,209 $ 54,609 $(54,261) $ (2,322) $ 310,279
=====================================================================================
Interest expense (24,002)
Other income (expense), net (5,275)
------------
Income before taxes on income $ 281,002
============
Segment assets $841,076 $ 880,987 $ 72,634 $185,115 $446,364 $ 65,734 $(128,616) $2,363,294
==================================================================================================
2003 NORTH LATIN ASIA GLOBAL ELIMIN- CONSOLID-
(DOLLARS IN THOUSANDS) AMERICA EUROPE INDIA AMERICA PACIFIC EXPENSES ATIONS ATED
- ---------------------- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $583,224 $ 782,680 $ 42,209 $208,714 $284,693 $ - $1,901,520
Transfers between areas 77,471 155,305 939 683 22,512 (256,910) -
---------------------------------------------------------------------------------------------------
Total sales $660,695 $ 937,985 $ 43,148 $209,397 $307,205 $(256,910) $1,901,520
===================================================================================================
Segment profit $ 67,758 $ 209,073 $ 10,728 $ 32,907 $ 50,326 $(42,107) $ (490) $ 328,195
Restructuring and other charges (20,172) (16,936) (441) (1,296) (3,576) (42,421)
---------------------------------------------------------------------------------------------------
Operating profit $ 47,586 $ 192,137 $ 10,287 $ 31,611 $ 46,750 $(42,107) $ (490) $ 285,774
======================================================================================
Interest expense (28,477)
Other income (expense), net (5,437)
-------------
Income before taxes on income $ 251,860
=============
Segment assets $785,619 $ 978,020 $ 59,512 $156,809 $385,515 $ 43,362 $(101,945) $2,306,892
===================================================================================================
2002 NORTH LATIN ASIA GLOBAL ELIMIN- CONSOLID-
(DOLLARS IN THOUSANDS) AMERICA EUROPE INDIA AMERICA PACIFIC EXPENSES ATIONS ATED
- ---------------------- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $592,974 $ 695,384 $ 37,626 $216,938 $266,327 $ - $1,809,249
Transfers between areas 86,089 127,830 1,766 1,022 17,126 (233,833) -
---------------------------------------------------------------------------------------------------
Total sales $679,063 $ 823,214 $ 39,392 $217,960 $283,453 $(233,833) $1,809,249
===================================================================================================
Segment profit $ 81,888 $ 161,720 $ 9,311 $ 48,596 $ 52,619 $(43,518) $ 983 $ 311,599
Restructuring and other charges (5,565) (5,814) - - (358) (11,737)
---------------------------------------------------------------------------------------------------
Operating profit $ 76,323 $ 155,906 $ 9,311 $ 48,596 $ 52,261 $(43,518) $ 983 $ 299,862
=====================================================================================
Interest expense (37,036)
Other income (expense), net 3,591
--------------
Income before taxes on income $ 266,417
==============
Segment assets $789,642 $883,050 $ 55,088 $159,425 $357,908 $ 54,846 $ (67,265) $2,232,694
===================================================================================================
58
CAPITAL EXPENDITURES DEPRECIATION AND AMORTIZATION
---------------------------------------- -----------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2002 2004 2003 2002
- ---------------------- ------------ ------------ ------------ ------------- ------------ ------------
North America $ 20,733 $ 21,153 $ 23,129 $ 41,429 $ 43,063 $ 41,852
Europe 24,800 21,565 29,688 32,102 29,909 26,418
India 1,217 2,318 555 1,088 938 962
Latin America 3,231 4,919 3,206 3,743 3,368 3,768
Asia Pacific 15,132 11,322 8,445 10,084 7,112 6,842
Unallocated assets 5,494 4,678 16,792 2,550 2,331 4,616
------------ ------------ ------------ ------------- ------------ ------------
Consolidated $ 70,607 $ 65,955 $ 81,815 $ 90,996 $ 86,721 $ 84,458
============ ============ ============ ============= ============ ============
Sales of fragrance products were $1,123.1 million, $1,035.0 million and
$1,000.2 million in 2004, 2003 and 2002, respectively. Sales of flavor products
were $910.6 million, $866.5 million and $809.0 million in 2004, 2003 and 2002,
respectively. Sales in the United States, based on the final country of
destination of the Company's products, were $564.5 million, $520.3 million and
$544.3 million in 2004, 2003 and 2002, respectively. No other country of
destination exceeded 8% of consolidated sales. No customer accounted for 10% or
more of sales in 2004, 2003 or 2002. Total long-lived assets consists of net
property, plant and equipment and net intangible assets and amounted to $1,289.0
million, $1,310.0 million and $1,314.6 million at December 31, 2004, 2003 and
2002, respectively; of the respective totals, $965.6 million, $998.4 million and
$1,029.6 million were located in the United States. No other individual country
had long-lived assets that exceeded 10% of total long-lived assets.
Net foreign exchange losses of $2.9 million in 2004 and gains of $1.6
million and $2.3 million in 2003 and 2002, respectively, are included in Other
(income) expense, net.
NOTE 14. RETIREMENT BENEFITS
The Company and most of its subsidiaries have pension and/or other
retirement benefit plans covering substantially all employees. Pension benefits
are generally based on years of service and on compensation during the final
years of employment. Plan assets consist primarily of equity securities and
corporate and government fixed income securities. Substantially all pension
benefit costs are funded as accrued; however, such funding is limited, where
applicable, to amounts deductible for income tax purposes. Certain other
retirement benefits are provided by balance sheet accruals. Contributions to
defined contribution plans are mainly determined as a percentage of salary.
Contributions to the Company's United States defined contribution plan match 50%
of the employee's pre-tax contributions, up to plan limits.
In addition to pension benefits, certain health care and life insurance
benefits are provided to qualifying United States employees upon retirement from
the Company. Such coverage is provided through insurance plans with premiums
based on benefits paid. The Company does not generally provide health care and
life insurance coverage for retired employees of foreign subsidiaries; however,
such benefits are provided in most foreign countries by government-sponsored
plans, and the cost of these programs is not significant to the Company.
The plan assets and benefit obligations of a majority of the Company's
pension plans are measured at December 31 of each year.
59
Pension expense included the following components:
U.S. PLANS NON-U.S. PLANS
-------------------------------------------- --------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2002 2004 2003 2002
- ---------------------- -------------- ------------- ------------- -------------- ------------- -------------
Service cost for benefits earned $ 8,650 $ 8,466 $ 7,874 $ 9,085 $ 8,226 $ 7,327
Interest cost on projected benefit
obligation 20,225 19,771 19,091 26,313 23,564 21,339
Expected return on plan assets (20,828) (21,875) (23,506) (28,314) (24,418) (23,455)
Net amortization and deferrals 2,160 709 (306) 6,792 5,983 2,923
Settlement and curtailment - - - (3,168) (140) -
Special termination benefits 230 1,300 - 91 1,223 -
-------------- ------------- ------------- -------------- ------------- -------------
Defined benefit plans 10,437 8,371 3,153 10,799 14,438 8,134
Defined contribution and other
retirement plans 2,709 2,533 3,121 3,610 3,217 3,227
-------------- ------------- ------------- -------------- ------------- -------------
Total pension expense $ 13,146 $ 10,904 $ 6,274 $ 14,409 $ 17,655 $ 11,361
============== ============= ============= ============== ============= =============
Weighted-average actuarial assumptions
used to determine pension data:
Discount rate 6.25% 6.75% 6.75% 5.25% 5.48% 5.48%
Expected return on plan assets 8.25% 8.50% 9.00% 6.82% 7.37% 7.53%
Rate of compensation increase 3.75% 4.00% 4.00% 2.52% 2.80% 2.80%
The expected return on plan assets was determined based on an asset
allocation model using the current benchmark allocation, real rates of return by
asset class and an anticipated inflation rate. The benchmark asset allocation
was approximately 5 - 15% employed in cash and fixed income investments expected
to yield 1.6%; 15 - 25% employed in corporate and government bonds expected to
yield 1.7 - 2.8%; and 65 - 75% in equity investments with a long-term expected
yield of 8.0 - 9.0%. The inflation rate assumed in the model was 2.5%. The plan
has employed a similar asset allocation strategy for the prior 15 years and has
achieved a compound annual return of 10.2% during this period. Discount rates
used in determining future pension obligations of individual plans are based on
a review of long-term bonds that receive a high rating by a recognized rating
agency. The rate of compensation increase is based on plan experience.
The Company's pension plan asset allocation for U.S. plans at December
31, 2004 and 2003, and target allocation for 2005 is:
PERCENTAGE OF PLAN ASSETS
TARGET --------------------------------
ALLOCATION DECEMBER DECEMBER
ASSET CATEGORY 2005 31, 2004 31, 2003
- ------------------------------------------------------- -------------- --------------- ---------------
Equity investments 65 - 75% 73% 78%
Corporate and government bonds 15 - 25% 14% 11%
Other cash and short-term investments 5 - 15% 13% 11%
--------------- ---------------
Total 100% 100%
=============== ===============
Equity investments include the Company's common stock in the amounts of
$22.2 million (8.0% of total plan assets) and $18.1 million (7.2% of total plan
assets) at December 31, 2004 and 2003, respectively.
In 2004, the percentage of assets held in equities decreased solely
from market performance relative to fixed income investments. There has been no
change in the Company's long-term target allocation.
60
The Company's pension plan asset allocation for Non-U.S. plans at
December 31, 2004 and target allocation for 2005 is:
PERCENTAGE OF
PLAN ASSETS
TARGET -------------------
ALLOCATION DECEMBER
ASSET CATEGORY 2005 31, 2004
- ------------------------------------------ -------------- -------------------
Equity investments 30 - 40% 37%
Corporate and government bonds 40 - 50% 43%
Other cash and short-term investments 10 - 20% 20%
-------------------
Total 100%
===================
Total Non-U.S. plan assets consist of a blend of various asset mixes
defined by each plan's liability profile and country or statutory requirements.
Each plan maintains its investment policy appropriate to meet its benefit
obligations.
Expense recognized for postretirement benefits other than pensions
included the following components:
(DOLLARS IN THOUSANDS) 2004 2003 2002
- ------------------------------------------ -------------- ---------------- ----------------
Service cost for benefits earned $ 2,141 $ 2,751 $ 2,034
Interest on benefit obligation 4,524 6,220 5,545
Net amortization and deferrals (791) 1,044 532
-------------- ---------------- ----------------
Total postretirement benefit expense $ 5,874 $ 10,015 $ 8,111
============== ================ ================
The following weighted average assumptions were used to determine the
Company's postretirement benefit expense for the years ended December 31:
2004 2003 2002
------------- ---------------- ----------------
Discount rate 6.25% 6.75% 7.25%
Current medical cost trend rate 9.00% 10.00% 10.00%
Ultimate medical cost trend rate 4.75% 5.00% 5.00%
Medical cost trend rate decreases to ultimate rate in year 2010 2009 2007
61
Changes in pension and postretirement benefit obligations were:
U.S. PENSION PLANS NON-U.S. PENSION PLANS POSTRETIREMENT BENEFITS
------------------------------- ------------------------------- ------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003 2004 2003
- ---------------------- --------------- -------------- ---------------- ------------- ------------- ---------
Benefit obligation at beginning of year $ 322,798 $ 287,777 $ 513,943 $ 414,777 $ 84,995 $ 92,283
Service cost for benefits earned 8,650 8,466 9,085 8,226 2,141 2,751
Interest cost on projected
benefit obligation 20,225 19,771 26,313 23,564 4,524 6,220
Actuarial loss 6,535 22,196 53,363 21,764 9,221 12,545
Plan amendments 3,857 - 807 - - (24,539)
Plan participants' contributions - - 1,235 1,105 608 220
Benefits paid (17,234) (16,712) (20,804) (20,110) (5,588) (4,485)
Medicare Rx subsidy - - - - (12,438) -
Divestitures - - (3,060) - - -
Settlements - - (3,277) - - -
Curtailments - - (1,459) (1,776) - -
Special termination benefits 230 1,300 91 1,223 - -
Translation adjustments - - 43,491 65,170 - -
--------------- -------------- ---------------- ------------- ------------- ---------
Benefit obligation at end of year $ 345,061 $ 322,798 $ 619,728 $ 513,943 $ 83,463 $ 84,995
=============== ============== ================ ============= ============= =========
The following weighted average assumptions were used to determine the
Company's pension benefit obligations under the plans at December 31:
U.S. PLANS NON-U.S.PLANS
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Discount rate 6.00% 6.25% 5.03% 5.25%
Rate of compensation increase 3.75% 3.75% 2.41% 2.52%
The following weighted average assumptions were used to determine the
Company's postretirement benefit obligations at December 31:
2004 2003
------------- ----------
Discount rate 6.00% 6.25%
Current medical cost trend rate 9.00% 9.00%
Ultimate medical cost trend rate 4.75% 4.75%
Medical cost trend rate decreases to ultimate rate in year 2011 2010
Changes in pension plan assets were:
U.S. Plans Non-U.S. Plans
--------------------------------- --------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003
- ---------------------- --------------- ---------------- --------------- ---------------
Fair value of plan assets at beginning of year $ 250,094 $ 219,956 $ 411,198 $ 314,165
Actual return on plan assets 25,308 36,836 37,383 37,850
Employer contributions 20,478 10,014 33,017 24,697
Participants contributions - - 1,235 1,105
Divestitures - - (360) -
Settlements - - (3,277) -
Benefits paid (17,234) (16,712) (20,804) (20,110)
Translation adjustments - - 34,993 53,491
--------------- ---------------- --------------- ---------------
Fair value of plan assets at end of year $ 278,646 $ 250,094 $ 493,385 $ 411,198
=============== ================ =============== ===============
62
The funded status of pension and postretirement plans at December 31
was:
U.S. PENSION PLANS NON-U.S. PENSION PLANS POSTRETIREMENT BENEFITS
------------------------------- ------------------------------- ------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003 2004 2003
- ---------------------- --------------- -------------- ---------------- ------------- ------------- ---------
Plan asset (less than) projected
benefit obligation $ (66,415) $ (72,704) $ (126,343) $ (102,745) $ (83,463) $ (84,995)
Post measurement date contributions - - 128 - - -
Remaining balance of unrecognized
net (asset) liability
established at adoption of FAS 87 - - 195 363 - -
Unrecognized prior service cost
(benefit) 11,113 8,002 4,276 3,776 (23,389) (25,584)
Unrecognized net loss 57,204 56,563 197,907 147,193 35,475 40,096
-------------- -------------- ---------------- ------------- ------------- ---------
Net asset (liability) $ 1,902 $ (8,139) $ 76,163 $ 48,587 $ (71,377) $ (70,483)
============= =============== ================ ============== ============== =========
Pension assets and liabilities included in the Consolidated Balance
Sheet at December 31 were:
U.S. PLANS NON-U.S. PLANS
---------------------------- -----------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003
- ---------------------- ------------- ------------- -------------- --------------
Prepaid benefit cost $ - $ - $ 55,989 $ 45,052
Accrued benefit liability (45,427) (50,223) (106,255) (84,708)
Accumulated other comprehensive income 34,987 34,082 124,726 86,440
Intangible asset 12,342 8,002 1,703 1,803
------------- ------------- -------------- --------------
Net amount recognized $ 1,902 $ (8,139) $ 76,163 $ 48,587
============= ============= ============== ==============
At December 31, 2004, of the net amount recognized above, $47.0 million
of the Non-U.S. prepaid benefit cost is included in Other Assets with the
remaining amount included in Prepaid expenses on the Consolidated Balance Sheet.
At the end of 2004 and 2003, the projected benefit obligation ("PBO"),
accumulated benefit obligation ("ABO"), and fair value of plan assets for the
U.S. pension plans and pension plans outside the U.S., where the accumulated
benefit obligation exceeds the assets, were:
U.S. PLANS NON-U.S.PLANS
--------------------------------- --------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003
- ---------------------- --------------- ---------------- --------------- ---------------
Projected benefit obligation $ 345,061 $ 322,798 $ 407,713 $ 341,144
Accumulated benefit obligation 324,073 300,317 391,662 322,230
Fair value of plan assets 278,646 250,094 285,290 238,046
The effect of a .25% decrease in the discount rate on the U.S. pension
plan would be to increase the pension expense in the subsequent year by
approximately $0.8 million. The same change in the discount rate would result in
an increase in the ABO and the additional minimum pension liability ("AML") of
$7.9 million and an increase in the PBO of $8.7 million.
The effect of a .25% decrease in the discount rate on the Non-U.S.
pension plans would be to increase the pension expense in the subsequent year by
approximately $1.8 million. The same change would result in an increase in the
ABO of $25.0 million and the AML of $16.3 million and an increase in the PBO of
$27.1 million.
The special termination benefits in 2003 are the result of termination
agreements in the U.S. and Europe providing for enhanced retirement benefits to
eligible employees.
63
The amounts reported as a curtailment, a settlement and a divestiture in the
2004 Non-U.S. plans is a result of the sale of the Company's fruit businesses to
Frutarom. The curtailment amount in 2003 in the Non-U.S. plans reflects the
required adjustment for the Netherlands plan.
The change in the additional minimum liability included in Other
comprehensive income for U.S. and Non-U.S. pension plans in 2004 and 2003 were
as follows:
U.S. PLANS NON-U.S.PLANS
---------------------------- ----------------------------
DOLLARS IN THOUSANDS) 2004 2003 2004 2003
- --------------------- ------------ -------------- -------------- ------------
Increase in additional minimum pension liability
included in Other comprehensive income $ 905 $ 10,781 $ 38,286 $ 746
The Company recorded in Other comprehensive income an additional
minimum pension liability of $159.7 million ($110.7 net of taxes) and $120.5
million ($82.8 net of taxes) at December 31, 2004 and 2003, respectively, as
required by SFAS No. 87, "Employers' Accounting for Pensions." The additional
minimum pension liability is reflected in Retirement liabilities and is
prescribed when the accumulated benefit obligation in the plan exceeds the fair
value of the underlying pension plan assets and accrued pension liabilities. The
adjustment relates to plans in the United States, the United Kingdom, Ireland
and Japan.
Information about the expected cash flows for the pension plans and
postretirement benefit plans are as follows:
POSTRETIREMENT
(DOLLARS IN THOUSANDS) U.S. PLANS NON-U.S. PLANS BENEFITS
- ---------------------- ------------------- ------------------ --------------------
EMPLOYER CONTRIBUTIONS
2005 (expected) $ 15,000 $ 36,601 $ 3,500
EXPECTED BENEFIT PAYMENTS
2005 16,627 21,640 3,500
2006 17,749 22,521 3,163
2007 18,321 22,926 3,270
2008 19,131 23,797 3,461
2009 19,899 25,953 3,612
2010 - 2014 118,780 147,492 21,917
Expected U.S. pension plan employer contributions include approximately
$2.2 million in benefit payments for a non-qualified plan. Non-U.S. plan
contributions are based on current actuarial assumptions and funding plans in
place.
The effect of a 1% increase in the assumed medical rate of inflation
would increase the accumulated postretirement benefit obligation, and the annual
postretirement expense, by approximately $15.8 million and $1.5 million,
respectively; a 1% decrease in the rate would decrease the obligation and
expense by approximately $12.5 million and $1.1 million, respectively.
The Company amended its postretirement medical and life insurance plan
in 2003. The plan changes require retirees to increase their contribution
amounts over a three-year period to a rate equal to active employees and for all
retiree prescription co-payments to increase to the amounts currently paid by
active employees.
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. In accordance with
the Financial Accounting Standards Board Staff Position No. 106-2 ("FSP FAS
106-2"), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," the Company
accounted for the effects of the Act and recognized the impact of the Medicare
prescription drug subsidy retrospectively from January 1, 2004 beginning July 1,
2004. The subsidy reduced the January 1, 2004 accumulated postretirement benefit
obligation by $12.4 million and the 2004 annual postretirement expense by $1.8
million.
64
The expected benefit payments shown above are net of the Medicare Rx
subsidy. In accordance with FSP FAS 106-2, the following table shows the
expected benefit payments prior to reflecting the subsidy, the expected benefit
payments attributable to the subsidy and the expected benefit payments
reflecting the subsidy.
NOT REFLECTING REFLECTING
(DOLLARS IN THOUSANDS) MEDICARE RX MEDICARE RX MEDICARE RX
- ---------------------- SUBSIDY SUBSIDY SUBSIDY
--------------------- ------------------ --------------------
EXPECTED BENEFIT PAYMENTS
2005 $ 3,500 $ - $ 3,500
2006 3,643 (480) 3,163
2007 3,799 (529) 3,270
2008 4,035 (574) 3,461
2009 4,233 (621) 3,612
2010 - 2014 25,665 (3,748) 21,917
NOTE 15. FINANCIAL INSTRUMENTS
In 2001, the Company entered into certain interest swap agreements
effectively converting the fixed coupon rate on its 6.45% Notes to a variable
short-term rate based on the London InterBank Offered Rate ("LIBOR") plus an
interest markup. In response to changes in market conditions and the value of
the swaps and, in 2003, in connection with the Company's debt repurchase, the
Company periodically amended the swap agreements, changing the related interest
spread. As a result of these amendments, the counterparty paid the Company $11.6
million and $56.5 million in 2003 and 2002, respectively, including accrued
interest of $3.7 million and $6.5 million, respectively. The net realized gains
on the swaps have been deferred, classified as a separate component of debt, and
are amortized as a reduction in interest expense over the remaining term of the
Notes. Prior to December 31, 2003, the Company terminated all swap agreements
related to the Notes; as a result, the interest rate on the Notes, including
amortization of the deferred swap gains, was 3.4% at December 31, 2004. The
effective rate on the Notes at December 31, 2003 and 2002 was 3.6% and 3.4%,
respectively.
In 2002, the Company entered into certain interest swap agreements
effectively converting the fixed rate on its long-term Japanese Yen borrowings
to a variable short-term rate based on the Japanese Yen LIBOR rate plus an
interest markup. These swaps are designated as qualified fair value hedges.
During 2003, the Company amended the swaps and the counterparty paid the Company
$3.0 million, including accrued interest of $0.5 million. These net gains have
been deferred, are classified as a separate component of debt and are being
amortized over the remaining term of the debt. To the extent the Company has not
received cash or otherwise amended or settled any swap agreements, any
applicable mark-to-market adjustment relating to that swap is included as a
separate component of debt. The Company had no ineffective interest rate swaps
at December 31, 2004.
The Company has executed a 10-year Yen - U.S. dollar currency swap
related to the purchase and sale of products between the U.S. and Japan. The
annual notional value of this swap is approximately $5.0 million. Gains and
losses related to this swap are recorded currently, and the mark-to-market
adjustment related to the value of the swap is reflected as a component of
Accumulated other comprehensive income.
The Company enters into foreign currency forward contracts with the
objective of reducing exposure to cash flow volatility associated with foreign
currency receivables and payables, and with anticipated purchases of certain raw
materials used in operations. These contracts, the counterparties to which are
major international financial institutions, generally involve the exchange of
one currency for a second currency at a future date, and have maturities not
exceeding six months. The notional amount and maturity dates of such contracts
match those of the underlying transactions. At December 31, 2004 and 2003, the
Company had outstanding foreign currency forward contracts with notional amounts
of $383.2 million and $178.0 million, respectively. The Company has designated
these contracts as qualified fair value and cash flow hedges, as appropriate.
The Company had no ineffective foreign currency forward contracts at December
31, 2004 or 2003.
65
The Company also uses derivative financial instruments to hedge foreign
currency exposures resulting from firm purchase commitments or anticipated
transactions, and classifies these as cash flow hedges. The Company generally
enters into cash flow hedge contracts for periods ranging from three to twelve
months. The effective portion of the gain or loss on the hedging instrument is
recorded in Accumulated other comprehensive income, and is reclassified into
earnings as the transactions being hedged are recorded. The associated asset or
liability on the open hedge is recorded in Other Assets or Other liabilities as
applicable. The foreign exchange gain recorded as a component of Accumulated
other comprehensive income that will be reflected in earnings in 2005 was $1.3
million, net of tax, at December 31, 2004; the prior year comparable amount was
$1.4 million. The ineffective portion of the gain or loss on the hedging
instruments was not material.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
The Company has no significant concentrations of risk in financial
instruments. Temporary investments are made in a well-diversified portfolio of
high-quality, liquid obligations of government, corporate and financial
institutions. There are also limited concentrations of credit risk with respect
to trade receivables because of the large number of customers spread across many
industries and geographic regions.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under non-cancelable operating leases are
$22.9 million in 2005, $21.3 million in 2006, $18.7 million in 2007, $16.2
million in 2008, $15.5 million in 2009 and thereafter thru 2030, the aggregate
lease obligations are $228.0 million. The corresponding rental expense amounted
to $20.8 million, $20.7 million and $12.1 million in 2004, 2003 and 2002,
respectively. None of the Company's leases contain step rent provisions or
escalation clauses nor do they require capital improvement funding.
The Company is party to a number of lawsuits and claims related
primarily to flavoring supplied by the Company to manufacturers of butter flavor
popcorn. The Company assesses the merits of each claim and the related potential
financial impact. The Company recorded its expected liability with respect to
these claims in Other liabilities and expected recoveries from its insurance
carrier group in Other Assets; amounts recorded are not material. The Company
believes that realization of the insurance receivable is probable due to the
terms of the insurance policies, the financial strength of the insurance carrier
group and the payment experience to date of the carrier group as it relates to
these claims. Although the outcome of any litigation cannot be assured, the
Company believes the ultimate resolution of these claims will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
66
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following schedule is included
in Part IV of this Annual Report on Form 10-K:
Schedule II--Valuation and Qualifying Accounts and Reserves for the three years ended
December 31, 2004............................................................................................... S-1
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule........................... 74
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(a)(3) EXHIBITS
NUMBER
- ------
3(i) Restated Certificate of Incorporation of Registrant,
incorporated by reference to Exhibit 10(g) to Registrant's
Report on Form 10-Q dated August 12, 2002.
3(ii) By-laws of Registrant, incorporated by reference to Exhibit
3(ii) to Registrant's Report on Form 8-K dated September 8,
2004.
4.1 Shareholder's Protection Rights Agreement dated as of March 21,
2000 between Registrant and The Bank of New York, as Rights
Agent, incorporated by reference to Exhibit 4 to Registrant's
Report on Form 8-K dated March 22, 2000.
4.1a First Amendment dated as of September 26, 2000, to Shareholder
Protection Rights Agreement, incorporated by reference to
Exhibit 4 to Registrant's Report on Form 8-K dated September 26,
2000.
4.1b Letter Agreement between the Registrant and Wachovia Bank,
National Association ("Wachovia") dated as of October 31, 2002
appointing Wachovia as Successor Rights Agent pursuant to the
Shareholder Protection Rights Agreement dated as of March 21,
2000 and amended as of September 26, 2000, incorporated by
reference to Exhibit 4(a) to Registrant's Report on Form 10-Q
dated November 12, 2002.
4.2 Specimen Certificates of Registrant's Common Stock bearing
legend notifying of Shareholder Protection Rights Agreement,
incorporated by reference to Exhibit 4(b) to Registrant's
Registration Statement on Form S-3 filed on September 29, 2000.
(Reg. No. 333-46932).
4.3 Indenture, dated as of May 1, 2001, between International
Flavors & Fragrances Inc. and Bank One Trust Company, N.A., as
Trustee, incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-4 dated June 26,
2001 (Reg. No. 333-63910).
4.4 First Supplemental Indenture, dated as of May 7, 2001, between
International Flavors & Fragrances Inc. and Bank One Trust
Company, N.A., as Trustee, incorporated by reference to Exhibit
4.2 to Registrant's Registration Statement on Form S-4 dated
June 26, 2001 (Reg. No. 333-63910).
4.5 Form of 6.45% Note due 2006 (included in 4.4), incorporated by
reference to Exhibit 4.2.1 to Registrant's Registration
Statement on Form S-4 dated June 26, 2001 (Reg. No. 333-63910).
4.6 Registration Rights Agreement, dated May 7, 2001, among
International Flavors & Fragrances Inc. and Salomon Smith Barney
Inc., Banc One Capital Markets, Inc., First Union Securities,
Inc. and Tokyo-Mitsubishi International plc, as representatives
67
of the Initial Purchasers, incorporated by reference to Exhibit
4.3 to Registrant's Registration Statement on Form S-4 dated
June 26, 2001 (Reg. No. 333-63910).
*10.1 Memorandum of Understanding between Registrant and Richard A.
Goldstein, Chairman of the Board and Chief Executive Officer of
Registrant, approved by Registrant's Board of Directors on April
13, 2000, incorporated by reference to Exhibit 10(a) to
Registrant's Report on Form 10-Q dated August 14, 2000.
*10.2 Performance Incentive Award Agreement in respect of a
performance incentive award of 200,000 restricted shares of
Company Common Stock approved by Registrant's Board of
Directors on August 1, 2002, granted to Richard A. Goldstein,
Chairman of the Board and Chief Executive Officer of Registrant,
incorporated by reference to Exhibit 10(a) to Registrant's
Report on Form 10-Q dated November 12, 2002.
*10.3 Supplemental Retirement Plan adopted by Board of Directors on
October 29, 1986, including amendments effective January 1,
2001, incorporated by reference to Exhibit 10(c) to Registrant's
Report on Form 10-Q dated May 13, 2003.
*10.4 2000 Stock Award and Incentive Plan adopted by the Registrant's
Board of Directors on March 9, 2000 as amended and restated
through November 8, 2004.
*10.5 2000 Supplemental Stock Award Plan adopted by the Registrant's
Board of Directors on November 14, 2000 as amended and restated
through November 8, 2004.
*10.6 Registrant's Executive Death Benefit Plan effective July 1,
1990, incorporated by reference to Exhibit 10(c) to Registrant's
Report on Form 10-Q dated May 14, 1997.
*10.7 Registrant's Vision 2001 Compensation Program, as amended,
incorporated by reference to Exhibit 10.2 to Registrant's
Report on Form 8-K dated January 28, 2005"
*10.8 Performance Criteria for Registrant's Annual Incentive Plan for
2004 and applicable to senior management's restricted stock unit
award in 2004 and for the 2003-2005 and 2004-2006 cycles under
Registrant's long term incentive plan incorporated by reference
to Registrant's Report on Form 8-K dated January 28, 2005,
including Exhibit 10.1 thereto.
*10.9 Performance Criteria for Registrant's Annual Incentive Plan for
2005 and applicable to senior management's restricted stock unit
award in 2005 and for the 2005-2007 cycle under Registrant's
long term incentive plan incorporated by reference to Exhibits
10.1, 10.2 and 10.3 to Registrant's Report on Form 8-K dated
March 11, 2005.
*10.10 Form of Non-Employee Directors' Restricted Stock Unit Agreement
under International Flavors & Fragrances Inc. 2000 Stock Award
and Incentive Plan incorporated by reference to Exhibit 10.1 to
Registrant's Report on Form 8-K dated December 15, 2004.
*10.11 Form of U.S. Restricted Stock Units Agreement under
International Flavors & Fragrances Inc. 2000 Stock Award and
Incentive Plan, incorporated by reference to Exhibit 10.8a to
Registrant's Report on Form 8-K dated October 7, 2004.
*10.12 Form of U.S. Performance-Based Restricted Stock Units Agreement
under International Flavors & Fragrances Inc. 2000 Stock Award
and Incentive Plan, incorporated by reference to Exhibit 10.8b
to Registrant's Report on Form 8-K dated October 7, 2004.
*10.13 Form of Employee Stock Option Agreement under International
Flavors & Fragrances Inc. 2000 Stock Award and Incentive Plan,
incorporated by reference to Exhibit 10.1 to Registrant's Report
on Form 10-Q dated November 9, 2004.
68
*10.14 Form of International Flavors & Fragrances Inc. Stock Option
Agreement under 2000 Stock Option Plan for Non-Employee
Directors, incorporated by reference to Exhibit 10.2 to
Registrant's Report on Form 10-Q dated November 9, 2004.
*10.15 Restated and Amended Executive Separation Policy, incorporated
by reference to Exhibit 10.3 to Registrant's Report on Form 8-K
filed December 20, 2004.
*10.16 Registrant's Employee Stock Option Plan of 1992, incorporated by
reference to Exhibit 10.11 to Registrant's Report on Form 10-K
for fiscal year ended December 31, 2002.
*10.17 1997 Employee Stock Option Plan, incorporated by reference to
Exhibit A to Registrant's Proxy Statement dated March 27, 1997.
*10.18 Amendment to 1997 Employee Stock Option Plan as amended by
Registrant's Board of Directors on February 8, 2000,
incorporated by reference to Exhibit 10(ll) to Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1999.
*10.19 Registrant's Global Employee Stock Purchase Plan adopted by
Registrant's Board of Directors on November 14, 2000,
incorporated by reference to Exhibit B to Registrant's Proxy
Statement filed March 28, 2001.
*10.20 Deferred Compensation Plan adopted by Registrant's Board of
Directors on December 12, 2000, incorporated by reference to
Exhibit 99 to Registrant's Registration Statement on Form S-8
dated May 16, 2001 (Reg. No. 333-61072)
*10.21 Trust Agreement dated October 4, 2000 among Registrant, First
Union National Bank and Buck Consultants Inc. approved by
Registrant's Board of Directors on September 12, 2000,
incorporated by reference to Exhibit 10(b) to Registrant's
Report on Form 10-Q dated November 14, 2000.
*10.22 1990 Stock Option Plan for Non-Employee Directors, incorporated
by reference to Exhibit 10(h) to Registrant's Report on Form
10-Q filed May 14, 1997.
*10.23 2000 Stock Option Plan for Non-Employee Directors as amended and
restated as of December 15, 2004, incorporated by reference to
Exhibit 10.2 to Registrant's Report on Form 8-K filed December
20, 2004.
*10.24 Director Charitable Contribution Program adopted by the Board of
Directors on February 14, 1995, incorporated by reference to
Exhibit 10(j) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1994.
*10.25 Resolutions approving Non-Employee Directors' Annual Stock Grant
Program adopted by Registrant's Board of Directors on September
12, 2000, incorporated by reference to Exhibit 99(c) to
Registrant's Registration Statement on Form S-3 filed on
September 29, 2000 (Reg. No. 333-46932).
*10.26 Non-Employee Director Compensation Arrangements, adopted by
Registrant's Board of Directors on December 15, 2004,
incorporated by reference to Registrant's Report on Form 8-K
dated December 15, 2004.
10.27 Five Year Credit Agreement dated as of September 26, 2001 among
Registrant, as Borrower, certain Initial Lenders, Citibank N.A.,
as Administrative Agent, and Salomon Smith Barney Inc., as
Arranger, incorporated by reference to Exhibit 10(b) to
Registrant's Report on Form 10-Q dated November 14, 2001.
10.27a Amendment No. 1 dated as of June 10, 2002 to the Five Year
Credit Agreement dated as of September 26, 2001 among
Registrant, as Borrower, certain Initial Lenders and Citibank
N.A., as Administrative Agent, incorporated by reference to
Exhibit 10(c) to Registrant's Report on Form 10-Q dated August
12, 2002.
10.28 Multi-currency Revolving Credit Facility Agreement dated July
19, 2002, among International Flavors & Fragrances (Luxembourg)
S.A.R.L., as Borrower, Registrant, as Guarantor, certain
Original Lenders, Barclays Bank PLC as Agent, ABN AMRO Bank NV
and Barclays Capital as Arrangers, incorporated by references to
Exhibit 10(b) to Registrant's Report on Form 10-Q dated August
12, 2002.
21 List of Principal Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
69
31.1 Certification of Richard A. Goldstein pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Douglas J. Wetmore pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of Richard A. Goldstein and Douglas J. Wetmore
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
To the Board of Directors of International Flavors & Fragrances Inc.:
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 14, 2005 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 15(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
March 14, 2005
71
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(Registrant)
By /s/ Douglas J. Wetmore
-------------------------
Douglas J. Wetmore
Senior Vice President and
Chief Financial Officer
Dated: March 14, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
Principal Executive Officer:
/s/ Richard A. Goldstein
------------------------
Richard A. Goldstein
Chairman of the Board
and
Chief Executive Officer
Principal Financial and Accounting Officer:
/s/ Douglas J. Wetmore
----------------------
Douglas J. Wetmore
Senior Vice President
and
Chief Financial Officer
Directors:
/s/ Richard A. Goldstein
------------------------
RICHARD A. GOLDSTEIN
/s/ Margaret Hayes Adame
------------------------
MARGARET HAYES ADAME
/s/ Gunter Blobel
-----------------
GUNTER BLOBEL
/s/ J. Michael Cook
-------------------
J. MICHAEL COOK
/s/ Peter A. Georgescu
----------------------
PETER A. GEORGESCU
/s/ Alexandra A. Herzan
-----------------------
ALEXANDRA A. HERZAN
/s/ Henry W. Howell, Jr.
------------------------
HENRY W. HOWELL, JR.
/s/ Arthur C. Martinez
----------------------
ARTHUR C. MARTINEZ
/s/ Burton M. Tansky
--------------------
BURTON M. TANSKY
72
INTERNATIONAL FLAVORS & FRAGRANCES INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
FOR THE YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS TRANSLATION END OF
OF PERIOD EXPENSES WRITTEN OFF ADJUSTMENTS PERIOD
-------------- ------------- ------------ --------------- -------------
Allowance for doubtful accounts $16,212 $3,615 $3,391 $1,227 $17,663
============== ============= ============ =============== =============
FOR THE YEAR ENDED DECEMBER 31, 2003
-------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS TRANSLATION END OF
OF PERIOD EXPENSES WRITTEN OFF ADJUSTMENTS PERIOD
-------------- ------------- ------------ --------------- -------------
Allowance for doubtful accounts $12,933 $3,146 $1,846 $1,979 $16,212
============== ============= ============ =============== =============
FOR THE YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS TRANSLATION END OF
OF PERIOD EXPENSES WRITTEN OFF ADJUSTMENTS PERIOD
-------------- ------------- ------------ --------------- -------------
Allowance for doubtful accounts $10,835 $4,067 $2,707 $738 $12,933
============== ============= ============ =============== =============
S-1