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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
Commission file number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
NEW YORK 13-1432060
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
521 WEST 57TH STREET, NEW YORK, N.Y. 10019-2960
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding as of May 11, 1998: 107,764,894
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<PAGE>
1
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<CAPTION>
3/31/98 12/31/97
----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash & Cash Equivalents ................................ $ 159,286 $ 216,994
Short-term Investments ................................. 12,816 43,452
Trade Receivables ...................................... 288,754 242,791
Allowance For Doubtful Accounts ........................ (8,322) (8,101)
Inventories: Raw Materials ............................. 217,046 193,136
Work in Process ........................... 10,677 13,593
Finished Goods ............................ 139,192 153,345
---------- ----------
Total Inventories ......................... 366,915 360,074
Other Current Assets ................................... 77,093 80,249
---------- ----------
Total Current Assets ................................... 896,542 935,459
---------- ----------
Property, Plant & Equipment, At Cost ...................... 808,232 810,901
Accumulated Depreciation .................................. (364,993) (364,392)
---------- ----------
443,239 446,509
Other Assets .............................................. 41,407 40,293
---------- ----------
Total Assets .............................................. $1,381,188 $1,422,261
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Loans ............................................. $ 10,978 $ 10,490
Accounts Payable-Trade ................................. 65,793 57,832
Dividends Payable ...................................... 39,908 40,407
Income Taxes ........................................... 69,199 56,070
Other Current Liabilities .............................. 86,232 100,062
---------- ----------
Total Current Liabilities .............................. 272,110 264,861
---------- ----------
Other Liabilities:
Deferred Income Taxes .................................. 21,416 23,139
Long-term Debt ......................................... 4,232 5,114
Retirement and Other Liabilities ....................... 130,324 128,659
---------- ----------
Total Other Liabilities ................................... 155,972 156,912
---------- ----------
Shareholders' Equity:
Common Stock (115,761,840 shares issued in '98
and in '97) ......................................... 14,470 14,470
Capital in Excess of Par Value ......................... 137,101 137,418
Restricted Stock ....................................... (8,437) (9,000)
Retained Earnings ...................................... 1,189,066 1,166,348
Accumulated Other Comprehensive Income:
Cumulative Translation Adjustment ................... (47,798) (36,851)
---------- ----------
1,284,402 1,272,385
Treasury Stock, at cost -- 7,951,696 shares in '98
and 6,630,911 in '97 ................................ (331,296) (271,897)
---------- ----------
Total Shareholders' Equity ............................. 953,106 1,000,488
---------- ----------
Total Liabilities and Shareholders' Equity ................ $1,381,188 $1,422,261
========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
2
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands except per share amounts)
3 Months Ended 3/31
---------------------
1998 1997
-------- --------
Net Sales .......................................... $373,411 $382,813
-------- --------
Cost of Goods Sold ................................. 198,207 207,293
Research and Development Expenses .................. 23,850 23,573
Selling and Administrative Expenses ................ 57,373 56,330
Interest Expense ................................... 459 559
Other (Income) Expense, Net ........................ (3,272) (4,071)
-------- --------
276,617 283,684
-------- --------
Income Before Taxes on Income ...................... 96,794 99,129
Taxes on Income .................................... 34,168 35,885
-------- --------
Net Income ......................................... 62,626 63,244
-------- --------
Other Comprehensive Income:
Foreign Currency Translation Adjustments ........ (10,947) (30,127)
-------- --------
Comprehensive Income ............................... $ 51,679 $ 33,117
======== ========
Net Income Per Share -- Basic ...................... $0.58 $0.58
Net Income Per Share -- Diluted .................... $0.58 $0.58
Average Number of Shares Outstanding -- Basic ...... 108,129 109,454
Average Number of Shares Outstanding -- Diluted .... 108,524 109,946
Dividends Paid Per Share ........................... $0.37 $0.36
See Notes to Consolidated Financial Statements
<PAGE>
3
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
3 Months Ended 3/31
------------------------
1998 1997
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................... $ 62,626 $ 63,244
Adjustments to Reconcile to Net Cash
Provided by Operations:
Depreciation ................................... 11,972 12,296
Deferred Income Taxes .......................... 1,636 376
Changes in Assets and Liabilities:
Current Receivables .......................... (51,448) (47,100)
Inventories .................................. (9,577) 1,491
Current Payables ............................. 10,325 11,024
Other, Net ................................... 2,256 1,504
--------- ---------
Net Cash Provided by Operations .................... 27,790 42,835
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Sales/Maturities of
Short-term Investments ........................... 29,999 3,037
Purchases of Short-term Investments ................ 0 (1,746)
Additions to Property, Plant & Equipment,
Net of Minor Disposals ........................... (12,860) (9,620)
--------- ---------
Net Cash Provided by (Used in) Investing
Activities ........................................ 17,139 (8,329)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Dividends Paid to Shareholders ................ (40,407) (39,628)
Increase (Decrease) in Bank Loans .................. 638 (171)
Decrease in Long-term Debt ......................... (892) (884)
Proceeds From Issuance of Stock Under
Stock Option Plans ............................... 1,049 4,588
Purchase of Treasury Stock ......................... (60,765) (45,880)
--------- ---------
Net Cash Used in Financing Activities .............. (100,377) (81,975)
--------- ---------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents ............................. (2,260) (6,646)
--------- ---------
Net Change in Cash and Cash Equivalents ............ (57,708) (54,115)
Cash and Cash Equivalents at Beginning of Year ..... 216,994 261,370
--------- ---------
Cash and Cash Equivalents at End of Period ......... $ 159,286 $ 207,255
========= =========
Interest Paid ...................................... $ 428 $ 533
Income Taxes Paid .................................. $ 17,034 $ 17,555
See Notes to Consolidated Financial Statements
<PAGE>
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes, and management's discussion and analysis of results of operations
and financial condition included in the Company's 1997 Annual Report to
Shareholders. In the opinion of the Company's management, all normal recurring
adjustments necessary for a fair statement of the results for the interim
periods have been made.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS 130), Reporting Comprehensive Income, which is effective
for both interim and annual periods ending after December 15, 1997. FAS 130
establishes standards for the reporting and display of comprehensive income and
its components, and requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement, and display the
accumulated balance of other comprehensive income separately in the statement of
financial position. Taxes which would result from dividend distributions by
subsidiary companies are provided to the extent such dividends are anticipated;
no provision is made for additional taxes on undistributed earnings of
subsidiary companies which are intended to be permanently invested. As a result,
no income tax effect is attributable to the currency translation component of
Comprehensive Income. Prior year amounts have been reclassified for
comparability purposes.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (FAS 131), Disclosures about Segments of an Enterprise and
Related Information, which is effective for periods ending after December 15,
1997. This statement need not be applied to interim financial statements in the
initial year of application. FAS 131 establishes standards for the way public
business enterprises report information about operating segments in reports to
shareholders. The Company's 1998 Annual Report to Shareholders will reflect the
adoption of this standard.
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 1997 Annual Report to Shareholders, the Company
undertook a program to expand and streamline its aroma chemical production
facilities during 1996. The aroma chemical streamlining resulted in a
nonrecurring pretax charge to second quarter 1996 earnings of $49,707,000
($31,315,000 after tax or $.29 per share). Utilization of the reserve in 1998
and the remaining reserve balance at March 31, 1998 were as follows:
Balance at Utilized Balance at
12/31/97 in 1998 3/31/98
----------- ---------- -----------
Employee related .................. $ 2,024,000 $ 761,000 $ 1,263,000
Closing manufacturing plants ...... 15,978,000 4,091,000 11,887,000
----------- ---------- -----------
Total ............................. $18,002,000 $4,852,000 $13,150,000
=========== ========== ===========
<PAGE>
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OPERATIONS
Worldwide net sales for the first quarter of 1998 were $373,411,000, compared to
$382,813,000 in the 1997 first quarter. Sales in the first quarter of 1998 were
affected by the translation of local currency sales gains into the stronger U.S.
dollar. If the dollar exchange rate had remained the same during these periods,
worldwide sales would have increased approximately 2% over the sales reported in
the first quarter of last year. Local sales increases were achieved in all
geographic areas, with the exception of the Far East where they were affected by
the current economic disruption in Southeast Asia. Sales increases were strong
in Europe, in both flavors and fragrances, and solid growth was also achieved in
fragrances in both North and Latin America.
Net income for the first quarter of 1998 totaled $62,626,000 compared to
$63,244,000 in the prior year first quarter. Basic and diluted earnings per
share for the quarter were $.58, the same as the previous year's first quarter.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first quarter 1998 and 1997 remained fairly constant,
especially on an overall basis.
First Quarter
-----------------
1998 1997
---- ----
Cost of Goods Sold ................................... 53.1% 54.1%
Research and Development Expense ..................... 6.4% 6.2%
Selling and Administrative Expense ................... 15.4% 14.7%
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 1997 Annual Report to Shareholders, the Company
undertook a program to expand and streamline its aroma chemical production
facilities during 1996. The aroma chemical streamlining resulted in a
nonrecurring pretax charge to second quarter 1996 earnings of $49,707,000
($31,315,000 after tax or $.29 per share). Utilization of the reserve in 1998
and the remaining reserve balance at March 31, 1998 were as follows:
Balance at Utilized Balance at
12/31/97 in 1998 3/31/98
----------- ---------- -----------
Employee related .................. $ 2,024,000 $ 761,000 $ 1,263,000
Closing manufacturing plants ...... 15,978,000 4,091,000 11,887,000
----------- ---------- -----------
Total ............................. $18,002,000 $4,852,000 $13,150,000
=========== ========== ===========
The effective tax rate for the first quarter 1998 was 35.3% as compared to 36.2%
for the same period in 1997. The lower effective tax rate reflects the effects
of lower tax rates in various tax jurisdictions in which the Company operates.
<PAGE>
6
FINANCIAL CONDITION
The financial condition of the Company continued to be strong. Cash, cash
equivalents and short-term investments totaled $172,102,000 at March 31, 1998.
At March 31, 1998, working capital was $624,432,000 compared to $670,598,000 at
December 31, 1997. Gross additions to property, plant and equipment during the
first quarter of 1998 were $13,115,000. In September 1996, the Company announced
a plan to repurchase up to an additional 7.5 million shares of its common stock.
Repurchases will be made from time to time on the open market or through private
transactions as market and business conditions warrant. The repurchased shares
will be available for use in connection with the Company's employee benefit
plans and for other general corporate purposes. In the first quarter of 1998,
the Company repurchased approximately 1.4 million shares of common stock under
the program. At March 31, 1998, approximately 2.5 million shares of common stock
had been repurchased under the 1996 program.
In January 1998, the Company's cash dividend was increased to an annual rate of
$1.48 per share from $1.44 in 1997, and $.37 per share was paid to shareholders
in the first quarter of 1998. The Company anticipates that its growth, capital
expenditure programs and share repurchase program will be funded from internal
sources.
The accumulated comprehensive income component of Shareholders' Equity,
comprised principally of the cumulative translation adjustment, at March 31,
1998, was ($47,798,000) compared to ($36,851,000) at December 31, 1997. Changes
in the component result from translating the net assets of the majority of the
Company's foreign subsidiaries into U.S. dollars at current exchange rates as
required by the Statement of Financial Accounting Standards No. 52 on accounting
for foreign currency translation.
<PAGE>
7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description
------ -----------
3(a) Amendments to Registrant's By-laws adopted
March 10, 1998.
10(a) Agreement dated February 25, 1998 between
Registrant and Thomas H. Hoppel, former Vice
President, Chief Financial Officer and
Director of Registrant.
27 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K
Registrant filed no report on Form 8-K during the quarter for
which this report on Form 10-Q is filed.
<PAGE>
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: May 14, 1998 By: /s/ DOUGLAS J. WETMORE
----------------------------------
Douglas J. Wetmore, Vice-President
and Chief Financial Officer
Dated: May 14, 1998 By: /s/ STEPHEN A. BLOCK
----------------------------------
Stephen A. Block, Vice-President
Law and Secretary
Exhibit 3 (a)
AMENDMENTS TO REGISTRANT'S BY-LAWS ADOPTED BY REGISTRANT'S
BOARD OF DIRECTORS ON MARCH 10, 1998
RESOLVED that Article II, SECTION 2 OF THE BY-LAWS OF THE CORPORATION, AS
AMENDED, IS HEREBY FURTHER AMENDED, EFFECTIVE APRIL 1, 1998, BY CHANGING THE
WORD "TWELVE" APPEARING THEREIN TO "ELEVEN;" AND
RESOLVED THAT ARTICLE I, SECTION 7 OF THE BY-LAWS OF THE CORPORATION, AS
AMENDED, IS HEREBY FURTHER AMENDED, EFFECTIVE APRIL 1, 1998, BY CHANGING THE
WORD "FIFTY" APPEARING THEREIN TO "SIXTY."
[IFF LETTERHEAD]
February 25, 1998
Mr. Thomas H. Hoppel
273 Grove Avenue
Metuchen New Jersey 08840
CONSULTING AGREEMENT
Dear Tom:
In accordance with our discussion, we propose the following agreement
under which you will act as a consultant to International Flavors & Fragrances
Inc. ("IFF" or the "Company") after your retirement on March 31, 1998.
1. During the period beginning April 1, 1998 and ending March 31, 1999
(the "Consulting Period"), you will serve as a financial consultant to IFF, when
and as requested by the Chairman and President of the Company, in those fields
in which you have special competence and experience. It is understood that
during the Consulting Period you will be free to devote the greater part of your
time to other pursuits. It is further understood that during the Consulting
Period the Chairman and President of the Company may request you to take one or
more trips within or outside the United States under such consultancy. IFF will
reimburse you for all reasonable itemized travel expenses incurred by you on
such trips. As a consultant to IFF you will not hold yourself out to be an
employee or agent of the Company.
2. IFF will pay you a monthly consulting fee at the rate of $l67,500 per
year during the Consulting Period, unless you die or become totally disabled
during the Consulting Period, in which event no further consulting fees will be
payable after the month in which you die or become totally disabled.
3. During the Consulting Period you will retain the right to use the
IFF-provided automobile now in your
<PAGE>
MR. THOMAS H. HOPPEL
FEBURARY 25, 1998
PAGE 2 OF 3 PAGES
possession (the "Company Car") . You agree and acknowledge, however, that,
irrespective of any IFF policy or program, at no time during the Consulting
Period will IFF have any obligation to purchase for you or provide to you a new
automobile. At the expiration or earlier termination for any reason of the
Consulting Period, ownership of the Company Car will be transferred to you. Any
compensation resulting from this transfer will be reported on Form 1099
Miscellaneous for 1999.
4. During the Consulting Period, you will not engage directly or
indirectly in any business which is competitive to that of IFF or any subsidiary
of IFF, domestic or foreign, and you will not accept employment by, perform
consulting services for or otherwise give material assistance to any competitor
of IFF or any of its subsidiaries, or to any person, firm or corporation which,
to your knowledge, intends to become such a competitor. For the purpose of this
paragraph, a business will be deemed "competitive" if its operations (a) are in
the flavor, fragrance or aroma chemical business or (b) interfere (i) with the
availability to IFF or any IFF subsidiary of any commodity of the kind
purchased, acquired or used by IFF or any subsidiary, or (ii) with the demand of
others for products made or sold by IFF or any IFF subsidiary in any locality in
which such availability or demand exists at the time you contemplate your
employment with or services on behalf of such business; and you will be deemed
directly or indirectly to engage in a business if you participate in such
business (x) as a director, officer, employee, partner, individual proprietor,
consultant or representative; (y) as an investor with a beneficial interest in
more than five percent (5%) of the outstanding net equity of such business; or
(z) as a lender who makes loans or advances in an amount in excess of five
percent (5%) of its outstanding net equity.
5. Attached to and made a part of this letter agreement is the security
agreement which you signed on July 30, 1962. Both during and after the
Consulting Period you will continue to abide by the terms and conditions of the
security agreement, as if the word "employment" therein meant "consultancy", but
such obligation will no in way be
<PAGE>
MR. THOMAS H. HOPPEL
FEBURARY 25, 1998
PAGE 3 OF 3 PAGES
construed as a continuation of your IFF employment which will terminate
effective March 31, 1998.
6. This agreement will be construed in accordance with and governed by the
laws of the State of New York, excluding its conflicts-of-laws principles.
If the foregoing terms and conditions are acceptable to you, please so
indicate by signing and returning the extra copy of this letter.
Sincerely,
INTERNATIONAL FLAVORS & FRAGRANCES
INC.
By: /s/ EUGENE P. GRISANTI
----------------------------
Eugene P. Grisanti
Chairman & President
Enclosure
AGREED AND ACCEPTED:
/s/ THOMAS H. HOPPEL
- ------------------------
Thomas H. Hoppel
February 27, 1998
<PAGE>
EMPLOYEE AGREEMENT
INTERNATIONAL FLAVORS & FRAGRANCES, INC.
521 West 57th St., New York 19, N.Y.
(IFF)
In consideration of my employment by IFF or any of its subsidiaries (herein
together called IFF), I hereby agree as follows:
1. I acknowledge that in the course of my employment by IFF, I may have
access to, acquire or gain confidential knowledge or information (i) with
respect to formulae, secret processes, plans, devices, products, know-how and
other data belonging or relating to IFF, or (ii) with respect to the identity of
customers of IFF, and the identity of products and the quantity and prices of
the same ordered by such customers. I acknowledge that all such information is
the sole property of IFF and I shall treat it as set forth below.
2. I shall keep confidential all such knowledge or information described
above and shall not divulge it to others nor use it for my own private purposes
or personal gain, without the express written consent of IFF. This obligation on
my part shall continue during and after the period of my employment by IFF.
3. Upon termination of my employment, or at any time IFF may request, I
shall deliver to IFF all notes, memoranda, records, files or other papers, and
copies thereof, in my custody relating to any such knowledge or information
described above to which I have had access or which I may have developed during
the term of my employment.
4. I shall not, without the prior written permission of IFF, after leaving
the employ of IFF for any reason, work for others, or for my own account, on any
of the secret processes or formulae on which I have worked or to which I have
had access while in the employ of IFF.
5. Any invention, formula, process, product, idea, discovery and
improvement conceived or developed by me within the period of my employment,
relating to any activity engaged in by IFF, shall be the sole and exclusive
property of IFF and I shall promptly communicate to IFF full information with
respect to any of the foregoing conceived or developed by me. I shall execute
and deliver all documents and do all other things as shall be deemed by IFF to
be necessary and proper to effect the assignment of IFF of the sole and
exclusive right, title and interest in and to all such inventions, formulae,
processes, products, ideas, discoveries and improvements, and patent
applications and patents thereon.
7/30/62 THOMAS H. HOPPEL
- ----------------------------- ---------------------------------
(date) (signature)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet & Consolidated Statement of Income and is qualified
in its entirety by reference to such financial statements. Amounts in thousands
of dollars, except per share amounts.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 159,286
<SECURITIES> 12,816
<RECEIVABLES> 288,754
<ALLOWANCES> (8,322)
<INVENTORY> 366,915
<CURRENT-ASSETS> 896,542
<PP&E> 808,232
<DEPRECIATION> (364,993)
<TOTAL-ASSETS> 1,381,188
<CURRENT-LIABILITIES> 272,110
<BONDS> 4,232
0
0
<COMMON> 14,470
<OTHER-SE> 938,636
<TOTAL-LIABILITY-AND-EQUITY> 1,381,188
<SALES> 373,411
<TOTAL-REVENUES> 373,411
<CGS> 198,207
<TOTAL-COSTS> 279,430
<OTHER-EXPENSES> (3,272)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 459
<INCOME-PRETAX> 96,794
<INCOME-TAX> 34,168
<INCOME-CONTINUING> 62,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,626
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
</TABLE>
