IFF 3.31.2015-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
Commission file number 1-4858
 INTERNATIONAL FLAVORS &
FRAGRANCES INC.
(Exact name of registrant as specified in its charter)
 
 
 
New York
 
13-1432060
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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  þ    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
þ
Accelerated filer
¨


 
 
 
 
 
Non-accelerated filer
 
¨


Smaller reporting company
¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨ No  þ
Number of shares outstanding as of April 28, 2015: 80,886,358


 
1
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
443,689

 
$
478,573

Trade receivables (net of allowances of $7,795 and $9,147, respectively)
 
525,260

 
493,768

Inventories: Raw materials
 
258,779

 
275,161

Work in process
 
19,845

 
17,705

Finished goods
 
257,841

 
275,863

Total Inventories
 
536,465

 
568,729

Deferred income taxes
 
17,127

 
27,709

Prepaid expenses and other current assets
 
232,569

 
141,248

Total Current Assets
 
1,755,110

 
1,710,027

Property, plant and equipment, at cost
 
1,713,269

 
1,766,746

Accumulated depreciation
 
(1,021,261
)
 
(1,046,478
)
 
 
692,008

 
720,268

Goodwill
 
675,484

 
675,484

Other intangible assets, net
 
74,717

 
76,557

Deferred income taxes
 
178,948

 
183,047

Other assets
 
130,905

 
129,238

Total Assets
 
$
3,507,172

 
$
3,494,621

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Bank borrowings and overdrafts and current portion of long-term debt
 
$
8,379

 
$
8,090

Accounts payable
 
215,915

 
229,866

Accrued payroll and bonus
 
41,350

 
71,264

Dividends payable
 
37,959

 
37,968

Other current liabilities
 
183,717

 
171,620

Total Current Liabilities
 
487,320

 
518,808

Long-term debt
 
935,170

 
934,232

Deferred gains
 
45,815

 
46,535

Retirement liabilities
 
353,748

 
354,333

Other liabilities
 
113,022

 
118,024

Total Other Liabilities
 
1,447,755

 
1,453,124

Commitments and Contingencies (Note 12)
 

 

Shareholders’ Equity:
 
 
 
 
Common stock 12 1/2¢ par value; authorized 500,000,000 shares; issued 115,995,113 and 115,858,190 shares as of March 31, 2015 and December 31, 2014, respectively; and outstanding 80,902,319 and 80,777,590 shares as of March 31, 2015 and December 31, 2014
 
14,470

 
14,470

Capital in excess of par value
 
135,619

 
140,008

Retained earnings
 
3,441,033

 
3,350,734

Accumulated other comprehensive loss
 
(573,315
)
 
(540,430
)
Treasury stock, at cost - 35,092,794 shares as of March 31, 2015 and 35,080,600 shares as of December 31, 2014
 
(1,450,490
)
 
(1,446,221
)
Total Shareholders’ Equity
 
1,567,317

 
1,518,561

Noncontrolling interest
 
4,780

 
4,128

Total Shareholders’ Equity including noncontrolling interest
 
1,572,097

 
1,522,689

Total Liabilities and Shareholders’ Equity
 
$
3,507,172

 
$
3,494,621


See Notes to Consolidated Financial Statements

 
2
 



INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(AMOUNT IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net sales
 
$
774,907

 
$
770,224

Cost of goods sold
 
428,630

 
428,812

Gross profit
 
346,277

 
341,412

Research and development expenses
 
63,462

 
61,504

Selling and administrative expenses
 
120,835

 
123,733

Restructuring and other charges, net
 
187

 
122

Operating profit
 
161,793

 
156,053

Interest expense
 
11,095

 
11,677

Other (income) expense, net
 
(5,710
)
 
1,443

Income before taxes
 
156,408

 
142,933

Taxes on income
 
28,150

 
36,226

Net income
 
128,258

 
106,707

Other comprehensive income (loss), after tax:
 
 
 
 
Foreign currency translation adjustments
 
(50,515
)
 
(9,396
)
Gains on derivatives qualifying as hedges
 
12,083

 
460

Pension and postretirement net liability
 
5,547

 
4,365

Other comprehensive income (loss)
 
(32,885
)
 
(4,571
)
Total comprehensive income
 
$
95,373

 
$
102,136

Net income per share - basic
 
$
1.58

 
$
1.31

Net income per share - diluted
 
$
1.57

 
$
1.30

Average number of shares outstanding - basic
 
80,654

 
81,053

Average number of shares outstanding - diluted
 
81,195

 
81,732

Dividends declared per share
 
$
0.47

 
$
0.39

See Notes to Consolidated Financial Statements

 
3
 



INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
128,258

 
$
106,707

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
19,985

 
22,830

Deferred income taxes
 
13,932

 
8,246

(Gain) loss on disposal of assets
 
34

 
(811
)
Stock-based compensation
 
5,387

 
4,695

Pension contributions
 
(54,048
)
 
(5,316
)
Changes in assets and liabilities, net of Aromor acquisition:
 
 
 
 
Trade receivables
 
(62,891
)
 
(41,569
)
Inventories
 
13,172

 
(591
)
Accounts payable
 
(3,061
)
 
(11,989
)
Accruals for incentive compensation
 
(27,675
)
 
(62,282
)
Other current payables and accrued expenses
 
20,264

 
1,096

Other assets/liabilities, net
 
(21,881
)
 
13,977

Net cash provided by operating activities
 
31,476

 
34,993

Cash flows from investing activities:
 
 
 
 
Cash paid for acquisition, net of cash received (including $15 million of contingent consideration)
 

 
(102,400
)
Additions to property, plant and equipment
 
(19,381
)
 
(33,836
)
Proceeds from life insurance contracts
 

 
12,308

Maturity of net investment hedges
 

 
(472
)
Proceeds from disposal of assets
 
1,450

 
2,042

Net cash used in investing activities
 
(17,931
)
 
(122,358
)
Cash flows from financing activities:
 
 
 
 
Cash dividends paid to shareholders
 
(37,971
)
 
(31,743
)
Net change in revolving credit facility borrowings and overdrafts
 
265

 
1,309

Proceeds from issuance of stock under stock plans
 
227

 
913

Excess tax benefits on stock-based payments
 
8,597

 
315

Purchase of treasury stock
 
(10,660
)
 
(20,122
)
Net cash used in financing activities
 
(39,542
)
 
(49,328
)
Effect of exchange rate changes on cash and cash equivalents
 
(8,887
)
 
(228
)
Net change in cash and cash equivalents
 
(34,884
)
 
(136,921
)
Cash and cash equivalents at beginning of year
 
478,573

 
405,505

Cash and cash equivalents at end of period
 
$
443,689

 
$
268,584

Interest paid, net of amounts capitalized
 
$
19,697

 
$
20,033

Income taxes paid
 
$
20,634

 
$
18,681

See Notes to Consolidated Financial Statements

 
4
 



Notes to Consolidated Financial Statements
Note 1. Consolidated Financial Statements:
Basis of Presentation
These interim statements and related management’s discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our 2014 Annual Report on Form 10-K (“2014 Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q filing was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. We have historically operated and continue to operate on a 52/53 week fiscal year ending on the Friday closest to the last day of the quarter. For ease of presentation, March 31 and December 31 are used consistently throughout this Form 10-Q and these interim financial statements and related notes to represent the period-end dates. For the 2015 and 2014 quarters, the actual closing dates were April 3 and March 28, respectively. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. When used herein, the terms “IFF,” the “Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc. and its consolidated subsidiaries.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued authoritative guidance which provides a practical expedient related to the measurement date of defined benefit plan assets and obligations. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.
In April 2015, the FASB issued authoritative guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.
In February 2015, the FASB issued authoritative guidance related to Consolidation which will change the analysis that a reporting entity must perform to determine the criteria for consolidating certain types of entities. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.
In May 2014, the FASB issued authoritative guidance to clarify the principles to be used to recognize revenue. The guidance is applicable to all entities and is effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. However, in April 2015, the FASB proposed a one-year deferral of the effective date. Under the proposal, the new guidance will be effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.
Accounts Receivable
The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. The Company accounts for these transactions as sales of receivables, removes the receivables sold from its financial statements, and records cash proceeds when received by the Company. The beneficial impact on cash from operations from participating in these programs decreased approximately $6.5 million for the three months ended March 31, 2015 compared to a decrease of approximately $14.3 million for the three months ended March 31, 2014. The cost of participating in these programs was immaterial to our results in all periods.


 
5
 



Note 2. Net Income Per Share:
Net income per share is based on the weighted average number of shares outstanding. A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows: 
 
Three Months Ended March 31,
(SHARES IN THOUSANDS)
2015
 
2014
Basic
80,654

 
81,053

Assumed dilution under stock plans
541

 
679

Diluted
81,195

 
81,732

There were no stock options or stock-settled appreciation rights (“SSARs”) excluded from the computation of diluted net income per share for the three months ended March 31, 2015 and 2014.
The Company has issued shares of purchased restricted common stock (“PRS”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities. Such securities are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. The Company did not present the two-class method since the difference between basic and diluted net income per share for both unrestricted common shareholders and PRS shareholders was less than $0.01 per share for each period presented, and the number of PRS outstanding as of March 31, 2015 and 2014 was immaterial. Net income allocated to such PRS was $0.6 million and $0.7 million during the three months ended March 31, 2015 and 2014, respectively.
Note 3. Restructuring and Other Charges, Net:
In 2014, the Company closed its fragrance ingredients manufacturing facility in Augusta, Georgia and consolidated production into other Company facilities. In connection with this closure, during 2014 the Company recorded total charges of $13.8 million, consisting of $2.2 million of pre-tax charges related to severance included in Restructuring and other charges, net $10.3 million of non-cash charges related to accelerated depreciation included in Cost of goods sold, and $1.3 million in plant shutdown and other related costs in connection with the Fragrance Ingredients Rationalization. During the three months ended March 31, 2015, the Company recorded an additional $0.2 million of plant shutdown and other related costs included in Restructuring and other charges. As a result of this closure, 43 positions have been eliminated.
Changes in employee-related restructuring liabilities during the three months ended March 31, 2015 related to the Fragrance Ingredients Rationalization were as follows:
 
(DOLLARS IN THOUSANDS)
Employee-Related Costs
 
Accelerated Depreciation
 
Other
 
Total
December 31, 2014
$
759

 
$

 
$

 
$
759

Additional charges, net

 

 
187

 
187

Non-cash charges

 

 

 

Payments and other costs
(258
)
 

 
(187
)
 
(445
)
March 31, 2015
$
501

 
$

 
$

 
$
501

Note 4. Other Intangible Assets, Net:
Other intangible assets, net consist of the following amounts: 
 
March 31,
 
December 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Gross carrying value (1)
$
218,676

 
$
218,676

Accumulated amortization
(143,959
)
 
(142,119
)
Total
$
74,717

 
$
76,557

 
(1) 
Includes patents, trademarks, technological know-how and other intellectual property, valued at acquisition.
Aromor
During the first quarter of 2014, the Company completed the acquisition of 100% of the equity of Aromor Flavors and Fragrances Ltd. ("Aromor"). Aromor is part of the IFF Fragrances Ingredients business. The Company paid $102.6 million (including $0.1 million of cash acquired) for this acquisition, which was funded out of existing cash resources. The purchase

 
6
 



price exceeded the carrying value of existing net assets by approximately $56 million. The excess was allocated principally to identifiable intangible assets (approximately $53 million), goodwill (approximately $10 million) and approximately $9 million to deferred tax liabilities. Separately identifiable intangible assets are principally related to technological know-how. The intangible assets are amortized using lives ranging from 13-19 years. Additionally, the consideration included $15 million related to post-combination contingent consideration, held in escrow, which is being expensed by the Company as it is earned by the selling shareholders.
Amortization
Amortization expense was $1.8 million and $1.2 million for the three months ended March 31, 2015 and 2014, respectively. Annual amortization is expected to be $7.2 million for the years 2015 through 2018, and $6.5 million for the years 2019 and 2020.
Note 5. Borrowings:
Debt consists of the following:
(DOLLARS IN THOUSANDS)
Rate
 
Maturities
 
March 31, 2015
 
December 31, 2014
Senior notes - 2007
6.40
%
 
2017-27
 
$
500,000

 
$
500,000

Senior notes - 2006
6.14
%
 
2016
 
125,000

 
125,000

Senior notes - 2013
3.20
%
 
2023
 
299,789

 
299,782

Bank overdrafts and other
 
 
 
 
14,032

 
12,335

Deferred realized gains on interest rate swaps
 
 
 
 
4,728

 
5,205

 
 
 
 
 
943,549

 
942,322

Less: Current portion of long-term debt
 
 
 
 
(8,379
)
 
(8,090
)
 
 
 
 
 
$
935,170

 
$
934,232

Note 6. Income Taxes:
Uncertain Tax Positions
At March 31, 2015, the Company had $14.8 million of unrecognized tax benefits recorded in Other liabilities and $0.7 million recorded in Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.
At March 31, 2015, the Company had accrued interest and penalties of $0.8 million classified in Other liabilities and $0.5 million recorded in Other current liabilities.
As of March 31, 2015, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $16.8 million associated with various tax positions asserted in foreign jurisdictions, none of which is individually material.
The Company regularly repatriates a portion of current year earnings from select non–U.S. subsidiaries. No provision is made for additional taxes on undistributed earnings of subsidiary companies that are intended and planned to be indefinitely invested in such subsidiaries. We intend to, and have plans to, reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations and/or capital projects.
The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review, of which the most significant items are discussed below. In addition, the Company has open tax years with various taxing jurisdictions that range primarily from 2005 to 2014. Based on currently available information, we do not believe the ultimate outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on our financial position.
The Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, capital tax, sales and use taxes and property taxes, which are discussed in Note 12.
Spanish Tax
As of December 31, 2014, the Company had one outstanding income tax case in Spain relating to fiscal year 2002, which had been previously appealed by the Company. As of December 31, 2014, the Company had fully reserved the original assessment asserted by the Spanish Tax Authority. During the first quarter of 2015, the Company received a favorable ruling on

 
7
 



this appeal and accordingly, reversed the total reserve related to the 2002 fiscal year (with a value of Euro 1.9 million or $2.3 million).
As of March 31, 2015, the Company had an aggregate value of Euro 4.7 million ($5.1 million), which was fully reserved for and reflected in income taxes payable, related to three dividend withholding tax controversies in Spain, all of which have now been resolved. The Company made payments of Euro 3.5 ($3.8 million) in April 2015 related to two of the controversies and expects to make the remaining payment during the second quarter of 2015. As of March 31, 2015, the Company had posted bank guarantees of Euro 4.7 million ($5.1 million) associated with the appeals of these matters.
Effective Tax Rate
The effective tax rate for the three months ended March 31, 2015 was 18.0% compared with 25.3% for the three months ended March 31, 2014. The quarter-over-quarter decrease is largely due to a benefit of $10.5 million recorded in the first quarter of 2015, as a result of favorable tax rulings in Spain and another jurisdiction for which reserves were previously recorded.

Note 7. Stock Compensation Plans:
The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRS, restricted stock units (“RSUs”), stock options, SSARs and Long-Term Incentive Plan awards; liability-based awards outstanding under the plans are cash-settled RSUs.
Stock-based compensation expense and related tax benefits were as follows: 
 
Three Months Ended March 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Equity-based awards
$
5,387

 
$
4,695

Liability-based awards
1,907

 
1,245

Total stock-based compensation expense
7,294

 
5,940

Less: tax benefit
(2,187
)
 
(1,726
)
Total stock-based compensation expense, after tax
$
5,107

 
$
4,214


On May 6, 2015, the shareholders of the Company approved the 2015 Stock Award and Incentive Plan (the "2015 Plan"). The 2015 Plan replaces the 2010 Stock Award and Incentive Plan (the “2010 Plan”). The total number of shares authorized for issuance under the Plan is 1,500,000 shares plus shares that remained available for issuance under the 2010 Plan as of May 6, 2015 and any shares subject to outstanding awards under the 2010 Plan that are cancelled, forfeited or expire.

Note 8. Segment Information:
The Company is organized into two operating segments: Flavors and Fragrances. These segments align with the internal structure of the Company used to manage these businesses. Performance of these operating segments is evaluated based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed below) and certain non-recurring items, Interest expense, Other income (expense), net and Taxes on income.
The Global expenses caption below represents corporate and headquarters-related expenses which include legal, finance, human resources, certain incentive compensation expenses and other R&D and administrative expenses that are not allocated to individual operating segments.







 
8
 



Reportable segment information is as follows: 
 
Three Months Ended March 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Net sales:
 
 
 
Flavors
$
377,108

 
$
366,505

Fragrances
397,799

 
403,719

Consolidated
$
774,907

 
$
770,224

Segment profit:
 
 
 
Flavors
$
92,727

 
$
88,063

Fragrances
81,598

 
87,166

Global expenses
(11,564
)
 
(16,435
)
Restructuring and other charges, net
(187
)
 
(122
)
Acquisition and related costs (1)
(500
)
 

Operational improvement initiative costs (2)
(281
)
 
(2,619
)
Operating profit
161,793

 
156,053

Interest expense
(11,095
)
 
(11,677
)
Other income (expense), net
5,710

 
(1,443
)
Income before taxes
$
156,408

 
$
142,933

 
(1)
Acquisition and related costs are associated with the acquisition of Henry H. Ottens Manufacturing Co., Inc., as discussed in Note 13.
(2)
Operational improvement initiative costs relate to the closing of a smaller facility in Europe and certain manufacturing activities in Asia, while transferring production to larger facilities in each respective region.
Net sales are attributed to individual regions based upon the destination of product delivery. Net sales related to the U.S. for the three months ended March 31, 2015 and 2014 were $164 million and $159 million, respectively. Net sales attributed to all foreign countries in total for the three months ended March 31, 2015 and 2014 were $611 million in both years. No country other than the U.S. had net sales in any period presented greater than 7.1% of total consolidated net sales.


 
9
 



Note 9. Employee Benefits:

Pension and other defined contribution retirement plan expenses included the following components:
U.S. Plans
Three Months Ended March 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Service cost for benefits earned
$
984

 
$
885

Interest cost on projected benefit obligation
5,953

 
6,232

Expected return on plan assets
(8,083
)
 
(6,913
)
Net amortization and deferrals
5,203

 
4,255

Net periodic benefit cost
4,057

 
4,459

Defined contribution and other retirement plans
2,135

 
2,112

Total expense
$
6,192

 
$
6,571

 
 
 
 
Non-U.S. Plans
Three Months Ended March 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Service cost for benefits earned
$
4,383

 
$
3,948

Interest cost on projected benefit obligation
6,392

 
8,412

Expected return on plan assets
(12,950
)
 
(12,481
)
Net amortization and deferrals
3,486

 
2,955

Loss due to settlements and special terminations

 

Net periodic benefit cost
1,311

 
2,834

Defined contribution and other retirement plans
1,595

 
1,177

Total expense
$
2,906

 
$
4,011

The Company expects to contribute a total of approximately $30 million to its non-U.S. pension plans during 2015. During the three months ended March 31, 2015, $35.0 million of contributions were made to the qualified U.S. pension plans. In the three months ended March 31, 2015, $19.1 million of contributions were made to the non-U.S. plans. In the three months ended March 31, 2015, $1.1 million of benefit payments were made with respect to the Company’s non-qualified U.S. pension plan.
Expense recognized for postretirement benefits other than pensions included the following components: 
 
Three Months Ended March 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Service cost for benefits earned
$
300

 
$
323

Interest cost on projected benefit obligation
1,082

 
1,238

Net amortization and deferrals
(711
)
 
(978
)
Total postretirement benefit expense
$
671

 
$
583

The Company expects to contribute approximately $5 million to its postretirement benefits other than pension plans during 2015. In the three months ended March 31, 2015, $1.7 million of contributions were made.

Note 10. Financial Instruments:
Fair Value
Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1–Quoted prices for identical instruments in active markets.
Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 
10
 



Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the LIBOR swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. We do not have any instruments classified as Level 1 or Level 3, other than those included in pension asset trusts as discussed in Note 13 of our 2014 Form 10-K.
These valuations take into consideration our credit risk and our counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of March 31, 2015.

The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at March 31, 2015 and December 31, 2014 consisted of the following: 
 
March 31, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
(DOLLARS IN THOUSANDS)
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
443,689

 
$
443,689

 
$
478,573

 
$
478,573

Credit facilities and bank overdrafts (2)
14,032

 
14,032

 
12,335

 
12,335

Long-term debt: (3)
 
 
 
 
 
 
 
Senior notes - 2007
500,000

 
591,713

 
500,000

 
587,650

Senior notes - 2006
125,000

 
131,786

 
125,000

 
133,137

Senior notes - 2013
299,789

 
304,294

 
299,782

 
296,290

 
(1)
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.
(2)
The carrying amount of our credit facilities and bank overdrafts approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.
(3)
The fair value of our long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk.
Derivatives
We periodically enter into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with our intercompany loans, foreign currency receivables and payables, and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding twelve months and are with counterparties which are major international financial institutions.

During the three months ended March 31, 2015 and the year ended December 31, 2014, we entered into forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk. The effective portions of net investment hedges are recorded in Other comprehensive income (“OCI”) as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income. Realized gains (losses) are deferred in accumulated other comprehensive income ("AOCI") where they will remain until the net investments in our European subsidiaries are divested. The outstanding forward currency contracts have remaining maturities of approximately one year.

During the three months ended March 31, 2015 and the year ended December 31, 2014, we entered into several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar (USD) denominated raw material purchases made by Euro (EUR) functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of Gains/(losses) on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized

 
11
 



as a component of Cost of goods sold in the accompanying Consolidated Statement of Comprehensive Income in the same period as the related costs are recognized.
During 2014, we entered into interest rate swap agreements that effectively converted the fixed rate on a portion of our long-term borrowings to a variable short-term rate based on the LIBOR plus an interest markup. These swaps are designated as fair value hedges. Amounts recognized in Interest expense were immaterial for the three months ended March 31, 2015.
The following table shows the notional amount of the Company’s derivative instruments outstanding as of March 31, 2015 and December 31, 2014: 
(DOLLARS IN THOUSANDS)
March 31, 2015
 
December 31, 2014
Foreign currency contracts
$
297,050

 
$
191,150

Interest rate swaps
$
425,000

 
$
425,000


The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy), as reflected in the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014: 
 
March 31, 2015
(DOLLARS IN THOUSANDS)
Fair Value of
Derivatives
Designated as
Hedging
Instruments
 
Fair Value of
Derivatives Not
Designated as
Hedging
Instruments
 
Total Fair
Value
Derivative assets (a)
 
 
 
 
 
Foreign currency contracts
$
31,972

 
$
17,693

 
$
49,665

Interest rate swaps
2,676

 

 
2,676

 
$
34,648

 
$
17,693

 
$
52,341

Derivative liabilities (b)
 
 
 
 
 
Foreign currency contracts
$
1,193

 
$
9,362

 
$
10,555

 
$
1,193

 
$
9,362

 
$
10,555

 
December 31, 2014
(DOLLARS IN THOUSANDS)
Fair Value of
Derivatives
Designated as
Hedging
Instruments
 
Fair Value of
Derivatives Not
Designated as
Hedging
Instruments
 
Total Fair
Value
Derivative assets (a)
 
 
 
 
 
Foreign currency contracts
$
16,637

 
$
4,398

 
$
21,035

Interest rate swaps
683

 

 
683

 
$
17,320

 
$
4,398

 
$
21,718

Derivative liabilities (b)
 
 
 
 
 
Foreign currency contracts
$
6

 
$
1,055

 
$
1,061

 
(a)
Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheet.
(b)
Derivative liabilities are recorded as Other current liabilities in the Consolidated Balance Sheet.

The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statement of Comprehensive Income for the three months ended March 31, 2015 and 2014 (in thousands): 

Derivatives Not Designated as Hedging Instruments
Amount of Gain (Loss)
Recognized in Income on
Derivative
 
Location of Gain (Loss)
Recognized in Income
on Derivative
 
Three Months Ended March 31,
 
 
 
2015
 
2014
 
 
Foreign currency contracts
$
9,704

 
$
(2,926
)
 
Other (income) expense, net

 
12
 



Most of these net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.
The following table shows the effect of the Company’s derivative instruments designated as cash flow and net investment hedging instruments in the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (in thousands): 
 
Amount of (Loss) Gain
Recognized in OCI on
Derivative (Effective
Portion)
 
Location of (Loss) Gain
Reclassified from AOCI into
Income (Effective Portion)
 
Amount of (Loss) Gain
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
2015
 
2014
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
12,014

 
391

 
Cost of goods sold
 
1,023

 
(753
)
Interest rate swaps (1)
69

 
69

 
Interest expense
 
(69
)
 
(69
)
Derivatives in Net Investment Hedging Relationships:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
4,561

 
(375
)
 
N/A
 

 

Total
$
16,644

 
$
85

 
 
 
$
954

 
$
(822
)
 
(1) Interest rate swaps were entered into as pre-issuance hedges for the $300 million bond offering.

No ineffectiveness was experienced in the above noted cash flow hedges during the three months ended March 31, 2015 and 2014. The ineffective portion of the net investment hedges was not material during the three months ended March 31, 2015 and 2014.
The Company expects that approximately $15.2 million (net of tax) of derivative gains included in AOCI at March 31, 2015, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.

 
13
 



Note 11. Accumulated Other Comprehensive Income (Loss):
The following tables present changes in the accumulated balances for each component of other comprehensive income, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:
 
Foreign
Currency
Translation
Adjustments
 
(Losses) Gains on
Derivatives
Qualifying as
Hedges
 
Pension and
Postretirement
Liability
Adjustment
 
Total
(DOLLARS IN THOUSANDS)
 
 
 
 
 
 
 
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2014
$
(173,342
)
 
$
12,371

 
$
(379,459
)
 
$
(540,430
)
OCI before reclassifications
(50,515
)
 
13,037

 

 
(37,478
)
Amounts reclassified from AOCI

 
(954
)
 
5,547

 
4,593

Net current period other comprehensive income (loss)
(50,515
)
 
12,083

 
5,547

 
(32,885
)
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2015
$
(223,857
)
 
$
24,454

 
$
(373,912
)
 
$
(573,315
)
 
 
Foreign
Currency
Translation
Adjustments
 
(Losses) Gains on
Derivatives
Qualifying as
Hedges
 
Pension and
Postretirement
Liability
Adjustment
 
Total
(DOLLARS IN THOUSANDS)
 
 
 
 
 
 
 
Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2013
$
(104,278
)
 
$
(4,012
)
 
$
(284,421
)
 
$
(392,711
)
OCI before reclassifications
(9,396
)
 
(361
)
 

 
(9,757
)
Amounts reclassified from AOCI

 
821

 
4,365

 
5,186

Net current period other comprehensive income (loss)
(9,396
)
 
460

 
4,365

 
(4,571
)
Accumulated other comprehensive (loss) income, net of tax, as of March 31, 2014
$
(113,674
)
 
$
(3,552
)
 
$
(280,056
)
 
$
(397,282
)


 
14
 



The following table provides details about reclassifications out of accumulated other comprehensive income to the Consolidated Statement of Comprehensive Income: 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
Affected Line Item in the
Consolidated Statement
of Comprehensive  Income
(DOLLARS IN THOUSANDS)
 
 
 
 
 
(Losses) gains on derivatives qualifying as hedges
 
 
 
 
 
Foreign currency contracts
1,169

 
(1,038
)
 
Cost of goods sold
Interest rate swaps
(69
)
 
(69
)
 
Interest expense
 
(146
)
 
286

 
Provision for income taxes
 
$
954

 
$
(821
)
 
Total, net of income taxes
(Losses) gains on pension and postretirement liability adjustments
 
 
 
 
 
Prior service cost
1,166

 
1,111

 
(a) 
Actuarial losses
(9,144
)
 
(7,343
)
 
(a) 
 
2,431

 
1,867

 
Provision for income taxes
 
$
(5,547
)
 
$
(4,365
)
 
Total, net of income taxes
 
(a)
The amortization of prior service cost and actuarial loss is included in the computation of net periodic benefit cost. Refer to Note 13 of our 2014 Form 10-K for additional information regarding net periodic benefit cost.

Note 12. Commitments and Contingencies:
Guarantees and Letters of Credit
The Company has various bank guarantees and letters of credit which are available for use regarding governmental requirements associated with pending litigation in various jurisdictions and to support its ongoing business operations.
At March 31, 2015, we had total bank guarantees and standby letters of credit of approximately $36 million with various financial institutions. Of this amount, Euro 4.7 million ($5.1 million) in bank guarantees are related to governmental requirements on income tax disputes in Spain, as discussed in further detail in Note 9 of our 2014 Form 10-K. Also included in the above aggregate amount is a total of $16.4 million in bank guarantees which the Company has posted for certain assessments in Brazil for other diverse income tax and indirect tax disputes related to fiscal years 1998-2011. There were no material amounts utilized under the standby letters of credit as of March 31, 2015.
In order to challenge the assessments in these cases in Brazil, the Company has been required to, and has separately pledged assets, principally property, plant and equipment, to cover assessments in the amount of approximately $15.5 million as of March 31, 2015.
Lines of Credit
The Company has various lines of credit which are available to support its ongoing business operations. At March 31, 2015, we had available lines of credit (in addition to the Credit Facility discussed in Note 8 of our 2014 Form 10-K) of approximately $74.5 million with various financial institutions. There were no significant amounts drawn down pursuant to these lines of credit as of March 31, 2015.
Litigation
The Company assesses contingencies related to litigation and/or other matters to determine the degree of probability and range of possible loss. A loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly sensitive and requires judgments about future events. On at least a quarterly basis, the Company reviews contingencies related to litigation to determine the adequacy of accruals. The amount of ultimate loss may differ from these estimates and further events may require the Company to increase or decrease the amounts it has accrued on any matter.

 
15
 



Periodically, we assess our insurance coverage for all known claims, where applicable, taking into account aggregate coverage by occurrence, limits of coverage, self-insured retentions and deductibles, historical claims experience and claims experience with our insurance carriers. The liabilities are recorded at management’s best estimate of the probable outcome of the lawsuits and claims, taking into consideration the facts and circumstances of the individual matters as well as past experience on similar matters. At each balance sheet date, the key issues that management assesses are whether it is probable that a loss as to asserted or unasserted claims has been incurred and if so, whether the amount of loss can be reasonably estimated. We record the expected liability with respect to claims in Other liabilities and expected recoveries from our insurance carriers in Other assets. We recognize a receivable when we believe that realization of the insurance receivable is probable under the terms of the insurance policies and our payment experience to date.
Environmental
Over the past 20 years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at eight facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than $5 million.

While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.
Other Contingencies
The Company has contingencies involving third parties (such as labor, contract, technology or product-related claims or litigation) as well as government-related items in various jurisdictions in which we operate pertaining to such items as value-added taxes, other indirect taxes, customs and duties and sales and use taxes. It is possible that cash flows or results of operations, in any period, could be materially affected by the unfavorable resolution of one or more of these contingencies.
The most significant government-related contingencies exist in Brazil. With regard to the Brazilian matters, we believe we have valid defenses for the underlying positions under dispute; however, in order to pursue these defenses, we are required to, and have provided, bank guarantees and pledged assets in the aggregate amount of $31.9 million. The Brazilian matters take an extended period of time to proceed through the judicial process and there are a limited number of rulings to date.
In March 2012, ZoomEssence, Inc. filed a complaint against the Company in the U.S. District Court of New Jersey alleging trade secret misappropriation, breach of contract and unjust enrichment in connection with certain spray dry technology disclosed to the Company. In connection with the claims, ZoomEssence is seeking an injunction and monetary damages. ZoomEssence initially sought a temporary restraining order and preliminary injunction, but the Court denied these applications in an order entered on September 27, 2013, finding that ZoomEssence had not demonstrated a likelihood of success on the merits of its claims. The Court subsequently referred the matter to mediation, however the private mediation session did not result in a resolution of the dispute. On November 3, 2014, ZoomEssence amended its complaint against the Company to include allegations of breach of the duty of good faith and fair dealing, fraud in the inducement, and misappropriation of confidential and proprietary information.  On November 13, 2014, the Company filed a counterclaim against ZoomEssence alleging trade secret misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, misappropriation of confidential and proprietary information,  common law unfair competition, tortious interference with contractual relations, and conversion. The case is currently proceeding through discovery with a trial on the merits anticipated in mid-2016. The Company denies the allegations and will vigorously defend and pursue its position in Court. At this stage of the litigation, based on the information currently available to the Company, management does not believe that this matter represents a material loss contingency.
Based on the information available as of March 31, 2015, we estimate a range of reasonably possible loss related to the matters above, collectively, is $0-$31 million.

 
16
 



Separately, the Spanish tax authorities are alleging claims for a capital tax in a case arising from similar allegations as the income tax cases (discussed in further detail in Note 9 of our 2014 Form 10-K). In connection with the 2002 income tax assessment ruling the Appellate Court rejected one of the two bases upon which we based our capital tax position. However, we believe that we still have a strong basis for our capital tax position and intend to continue to defend these claims. On January 22, 2014, we filed an appeal and in order to avoid future interest costs in the event our appeal is unsuccessful, we paid $11.2 million (representing the principal amount) during the first quarter of 2014. If there is an unfavorable ruling in this case, we estimate a reasonably possible loss of approximately $13 million, which was fully reserved as of March 31, 2015.
Note 13. Subsequent Events:
On May 1, 2015, the Company acquired 100% of the outstanding shares of Henry H. Ottens Manufacturing Co., Inc. Ottens Flavors ("Ottens") for approximately $190 million from existing cash resources. Ottens was acquired in order to strengthen the Flavors business in North America. This acquisition will be accounted for as a business combination and is not expected to have a material impact on the consolidated financial statements.


 
17
 



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We create, manufacture and supply flavors and fragrances for the food, beverage, personal care and household-products industries either in the form of compounds or individual ingredients. Our flavors and fragrance compounds combine a large number of ingredients that are blended, mixed or reacted together to produce proprietary formulas created by our perfumers and flavorists.
Flavors are the key building blocks that impart taste in processed food and beverage products and, as such, play a significant role in determining consumer preference of the end products in which they are used. While we are a global leader, our flavors business is more regional in nature, with different formulas that reflect local tastes and ingredients. As a leading creator of flavors, we help our customers deliver on the promise of delicious and healthy foods and drinks that appeal to consumers. Our flavors compounds are ultimately used by our customers in four end-use categories: (1) Savory, (2) Beverages, (3) Sweet, pharmaceutical and oral care (“Sweet”), and (4) Dairy.
Our fragrances are a key component in the world’s finest perfumes and best-known consumer brands, including beauty care, fabric care, personal wash and home care products. Our Fragrance Compounds are defined into broad market categories, (1) Fine Fragrances and (2) Consumer Fragrances. Consumer Fragrances consists of five end-use categories: (1) Fabric Care, (2) Home Care, (3) Personal Wash, (4) Hair Care and (5) Toiletries. In addition, Fragrance Ingredients, which are used internally and sold to third parties, including customers and competitors, for use in preparation of compounds, are included in the Fragrances business unit.
The flavors and fragrances market is part of a larger market which supplies a variety of ingredients and components that consumer products companies utilize in their products. The broader market includes large multinational companies or smaller regional and local participants which supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients. The flavors and fragrances market is estimated to be at least $18 billion; however the exact size of the global market is not available due to fragmentation of data. We, together with the other top three companies, are estimated to comprise approximately two-thirds of the total estimated sales in the global flavors and fragrances sub-segment of the broader market.
Net sales growth during the first quarter of 2015 was 1% on a reported basis and 6% on a currency neutral basis (which excludes the effects of changes in currency). The currency neutral growth reflects new win performance (net of losses) in both Flavors and Fragrance Compounds partially offset by volume erosion on existing business, as well as additional full shipping days in the first week of the 2015 quarter as compared to the 2014 quarter. For 2015, we continue to expect that currency neutral sales growth will be in line with our long-term targets.
Exchange rate fluctuations had a 500 basis point (bps) unfavorable impact on net sales for the first quarter, driven mainly by the weakening of the Euro against the U.S. dollar. The effect of exchange rates can vary by business and region, depending upon the mix of sales by destination country as well as the relative percentage of local sales priced in U.S. dollars versus local currencies.
Gross margins increased slightly year-over-year. Included in the first quarter of 2015 was $0.3 million of costs associated with operational improvement initiatives, compared to $2.6 million of costs related to restructuring and operational improvement initiatives included in the 2014 period. Excluding these items, gross margin remained consistent with the prior year period. The overall raw material cost base remains elevated, including certain categories where prices remain well above average levels. We believe input costs will increase approximately 1-2% in 2015 as higher prices on certain categories, such as naturals, will more than offset potential benefits associated with oil-based derivatives that are expected to occur later in 2015. We continue to seek improvements in our margins through operational performance and mix enhancement.
On May 1, 2015, the Company acquired Henry H. Ottens Manufacturing Co., Inc. Ottens Flavors for approximately $190 million. This acquisition is not expected to have a material impact on the consolidated financial statements.
FINANCIAL PERFORMANCE OVERVIEW
Reported sales in the first quarter of 2015 increased approximately 1%. In currency neutral terms, sales increased 6% as a result of new win performance in both Flavors and Fragrance Compounds and lower volume erosion on existing business. We continue to benefit from our diverse portfolio of end-use product categories and geographies and had growth in three of four regions and Consumer Fragrances and Flavor Compounds both had positive currency neutral growth. Flavors realized currency neutral growth of 9% for the first quarter of 2015. Our Fragrance business achieved currency neutral growth of 5%. Fragrances performance reflects new win performance in our Consumer Fragrances end-use categories, led by sales in Fabric Care. Overall, our first quarter 2015 results continued to be driven by our strong emerging market presence that represented 51% of

 
18
 



currency neutral sales and experienced 9% currency neutral growth. From a geographic perspective, for the first quarter, all regions delivered currency neutral growth in 2015, led by Latin America (LA), with 14%.
Operating profit increased $5.7 million to $161.8 million (20.9% of sales) in the 2015 first quarter compared to $156.1 million (20.3% of sales) in the comparable 2014 period. The three months ended March 31, 2015 included restructuring charges of $0.2 million, operational improvement initiative costs of $0.3 million and $0.5 million of acquisition and related costs compared to $2.7 million of restructuring and operational improvement initiative costs in the prior year period. Excluding these charges, adjusted operating profit was $162.8 million (21.0% of sales) for the first quarter of 2015 compared to $158.8 million (20.6% of sales) for the first quarter of 2014. Foreign currency changes had an unfavorable impact on operating profit of approximately 7% in the first quarter of 2015.
Other (income) expense, net increased $7.1 million to $5.7 million of income in the first quarter of 2015 compared to $1.4 million of expense in the first quarter of 2014. The year-over-year increase is primarily driven by higher levels of foreign exchange gains during 2015 compared to the 2014 period.
Net income increased by $21.6 million quarter-over-quarter to $128.3 million for the first quarter of 2015.
Although we are in the process of refreshing the key elements of our strategic priorities, we continued to execute against our strategic priorities of leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio during the first quarter of 2015. By maintaining cost discipline and realizing productivity gains across many parts of the business, we believe that we can continue to fund investments in resources and capabilities in emerging markets, R&D and key technologies. In 2015, we believe that capital spending will approach 4-5% of sales as we continue to prioritize investments in emerging markets and Flavors.
Cash flows from operations for the three months ended March 31, 2015 were $31.5 million or 4.1% of sales, compared to cash inflow from operations of $35.0 million or 4.5% of sales for the three months ended March 31, 2014. The decrease in cash flow from operations in 2015 reflects higher net income and lower payments for incentive compensation, which were offset principally by higher pension contributions in the 2015 period.

 
19
 



Results of Operations
 
 
Three Months Ended March 31,
 
 
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
2015
 
2014
 
Change
Net sales
$
774,907

 
$
770,224

 
1
 %
Cost of goods sold
428,630

 
428,812

 
 %
Gross profit
346,277

 
341,412

 
 
Research and development (R&D) expenses
63,462

 
61,504

 
3
 %
Selling and administrative (S&A) expenses
120,835

 
123,733

 
(2
)%
Restructuring and other charges, net
187

 
122

 
53
 %
Operating profit
161,793

 
156,053

 
 
Interest expense
11,095

 
11,677

 
(5
)%
Other expense (income), net
(5,710
)
 
1,443

 
(496
)%
Income before taxes
156,408

 
142,933

 
 
Taxes on income
28,150

 
36,226

 
(22
)%
Net income
$
128,258

 
$
106,707

 
20
 %
Diluted EPS
$
1.57

 
$
1.30

 
21
 %
Gross margin
44.7
%
 
44.3
%
 
40

R&D as a percentage of sales
8.2
%
 
8.0
%
 
20

S&A as a percentage of sales
15.6
%
 
16.1
%
 
(50
)
Operating margin
20.9
%
 
20.3
%
 
60

Adjusted operating margin (1)
21.0
%
 
20.6
%
 
40

Effective tax rate
18.0
%
 
25.3
%
 
(730
)
Segment net sales
 
 
 
 
 
Flavors
$
377,108

 
$
366,505

 
3
 %
Fragrances
397,799

 
403,719

 
(1
)%
Consolidated
$
774,907

 
$
770,224

 
 
 
(1)
Adjusted operating margin excludes the Restructuring and other charges, net of $0.2 million, operational improvement initiative costs of $0.3 million and acquisition and related costs of $0.5 million for the three months ended March 31, 2015 and excludes $2.7 million of restructuring and operational improvement initiative costs for the three months ended March 31, 2014.
Cost of goods sold includes the cost of materials and manufacturing expenses. R&D expenses relate to the development of new and improved products, technical product support and compliance with governmental regulations. S&A expenses include expenses necessary to support our commercial activities and administrative expenses supporting our overall operating activities.

FIRST QUARTER 2015 IN COMPARISON TO FIRST QUARTER 2014
Sales
Sales for the first quarter of 2015 totaled $774.9 million, an increase of 1% from the prior year quarter. Excluding the impact of foreign currency, currency neutral sales increased 6%, as a result of new win performance (net of losses) in both Flavors and Fragrance Compounds and lower volume erosion on existing business. Overall currency neutral growth was driven by 9% growth in emerging markets.

 
20
 



Flavors Business Unit
Flavors reported sales growth was 3%, and currency neutral sales growth was 9% during the first quarter of 2015 compared to the 2014 period. The overall performance primarily reflects new wins and low volume growth. The overall increase was due to double-digit growth in Beverage and mid to high single-digit growth in Savory, Sweet and Dairy. The Flavors business delivered currency neutral growth in all regions, led by LA. Sales in LA were driven by high double-digit gains in Beverage. Sales in Europe, Africa, and the Middle East (EAME) and Greater Asia (GA) were driven by double-digit gains in Beverage and mid to high single-digit growth in Savory, and sales in North America (NOAM) were led by double-digit gains in Beverage, Sweet and Dairy.
Fragrances Business Unit
The Fragrances business experienced a decline of 1% in reported sales but a 5% increase in currency neutral sales for the first quarter of 2015 compared to the first quarter of 2014. The overall increase was primarily driven by double-digit gains in our Fabric Care and Home Care categories, offset by low single-digit declines in Fine Fragrance and Fragrance Ingredients. Our Fragrance Compounds saw currency neutral sales growth of 6%, while Fragrance Ingredients declined 2% over the prior year period.
Sales Performance by Region and Category
 
 
 
% Change in Sales-First Quarter 2015 vs. First Quarter 2014
 
 
Fine Fragrances
 
Consumer Fragrances
 
Ingredients
 
Total Frag.
 
Flavors
 
Total
NOAM
Reported
-14
 %
 
5
 %
 
-20
 %
 
-6
 %
 
10
 %
 
2
 %
EAME
Reported
-13
 %
 
-1
 %
 
-8
 %
 
-7
 %
 
-4
 %
 
-6
 %
 
Currency Neutral (1)
-1
 %
 
13
 %
 
0
 %
 
6
 %
 
9
 %
 
7
 %
LA
Reported
-1
 %
 
13
 %
 
1
 %
 
9
 %
 
15
 %
 
11
 %
 
Currency Neutral (1)
2
 %
 
16
 %
 
-4
 %
 
11
 %
 
21
 %
 
14
 %
GA
Reported
36
 %
 
2
 %
 
8
 %
 
3
 %
 
0
 %
 
2
 %
 
Currency Neutral (1)
38
 %
 
3
 %
 
17
 %
 
6
 %
 
4
 %
 
5
 %
Total
Reported
-10
 %
 
4
 %
 
-8
 %
 
-1
 %
 
3
 %
 
1
 %
 
Currency Neutral (1)
-2
 %
 
9
 %
 
-2
 %
 
5
 %
 
9
 %
 
6
 %
(1)
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 2015 period.

NOAM Flavors sales increased 10% as a result of double-digit gains in Beverage, Sweet and Dairy. NOAM Fragrance sales decreased 6% in the first quarter of 2015, principally due to double-digit declines in Fine Fragrance and Ingredients, that were only partially offset by double-digit growth in Home Care and high single-digit growth in Fabric Care categories.
EAME Flavors currency neutral sales growth of 9% was led by double-digit growth in Beverage, high single-digit growth in Sweet and mid single-digit growth in Savory. EAME Fragrance currency neutral sales increased 6% overall, driven mainly by double-digit growth in Fabric Care and Home Care categories, which were only partially offset by low single-digit declines in Fine Fragrance.
LA Flavors currency neutral sales were up 21% driven by double-digit gains in the Beverage, Sweet, Dairy and Savory categories. LA Fragrances currency neutral sales increased 11% overall, principally led by double-digit gains in Fabric Care and Home Care, which more than offset double-digit declines in Personal Wash and single-digit declines in Fragrance Ingredients.
GA Flavors had currency neutral sales growth of 4% principally from double-digit gains in Beverage and high single-digit gains in Savory. GA Fragrances currency neutral sales growth of 6% was principally driven by double-digit growth in Fragrance Ingredients as well as the Personal Wash, Toiletries and Fine Fragrance categories. In addition, the Hair Care and Home Care categories experienced mid to high single-digit growth.

 
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Cost of Goods Sold
Cost of goods sold, as a percentage of sales, decreased 40 bps to 55.3% in the first quarter of 2015 compared to 55.7% in the first quarter of 2014. Included in cost of goods sold was $0.3 million and $0.4 million of charges related to operational improvement initiative costs in 2015 and 2014, respectively.
Research and Development (R&D) Expenses
Overall R&D expenses, as a percentage of sales, remained consistent with the prior year period at 8.2% in the first quarter of 2015 versus 8.0% in the first quarter of 2014.
Selling and Administrative (S&A) Expenses
S&A expenses decreased $2.9 million to $120.8 million or 15.6%, as a percentage of sales, in the first quarter of 2015 compared to 16.1% in the first quarter of 2014. The $2.9 million decrease is principally due to the impact of currency, which was partially offset by higher amortization and incentive compensation expenses.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and other charges, net, Global expenses (as discussed in Note 8 to our Consolidated Financial Statements) and certain non-recurring items, net, Interest expense, Other income (expense), net and Taxes on income. See Note 8 to our Consolidated Financial Statements for the reconciliation to Income before taxes. 
 
Three Months Ended March 31,
(DOLLARS IN THOUSANDS)
2015
 
2014
Segment profit:
 
 
 
Flavors
$
92,727

 
$
88,063

Fragrances
81,598

 
87,166

Global
(11,564
)
 
(16,435
)
Restructuring and other charges, net
(187
)
 
(122
)
Acquisition and related costs
(500
)
 

Operational improvement initiative costs
(281
)
 
(2,619
)
Operating profit
$
161,793

 
$
156,053

Profit margin
 
 
 
Flavors
24.6
%
 
24.0
%
Fragrances
20.5
%
 
21.6
%
Consolidated
20.9
%
 
20.3
%

Flavors Segment Profit
Flavors segment profit increased approximately 5% to $92.7 million in the first quarter of 2015, or 24.6% as a percentage of sales, compared to $88.1 million, or 24.0% as a percentage of sales, in the comparable 2014 period. The improvement in segment profit and profit margin was driven primarily by strong new win performance and volume growth, which were partially offset by higher incentive compensation as well as unfavorable foreign currency impacts.
Fragrances Segment Profit
Fragrances segment profit declined approximately 6% to $81.6 million in the first quarter of 2015, or 20.5% as a percentage of sales, compared to $87.2 million, or 21.6% as a percentage of sales, in the comparable 2014 period. The decline in segment profit and profit margin was primarily due to unfavorable foreign currency impacts, competitive pressure on Ingredient prices, and rising input costs, which were partially offset by favorable volume growth, productivity initiatives and sales mix.
Global Expenses
Global expenses represent corporate and headquarters-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In the first quarter of 2015,

 
22
 



Global expenses were $11.6 million compared to $16.4 million during the first quarter of 2014. The decrease was principally driven by the favorable impact of our cash flow hedging program.
Restructuring and Other Charges, Net
In 2014, the Company closed its fragrance ingredients manufacturing facility in Augusta, Georgia and consolidated production into other Company facilities. During the first quarter of 2015, the Company recorded $0.2 million of plant shutdown and other related costs included in Restructuring and other charges, net related to this closure. As a result of this closure, 43 positions have been eliminated.
Interest Expense
Interest expense decreased $0.6 million to $11.1 million in the first quarter of 2015 compared to the first quarter of 2014. Average cost of debt was 4.7% for the 2015 three month period compared to 5.0% for the 2014 three month period.
Other (Income) Expense, Net
Other (income) expense, net increased by approximately $7.1 million to $5.7 million of income in the first quarter of 2015 versus $1.4 million of expense in the comparable 2014 period. The year-over-year increase is primarily driven by higher levels of foreign exchange gains on working capital during 2015 compared to the 2014 period.
Income Taxes
The effective tax rate for the three months ended March 31, 2015 was 18.0% compared with 25.3% for the three months ended March 31, 2014. The quarter-over-quarter decrease is largely due to a benefit of $10.5 million recorded in the first quarter of 2015, as a result of favorable tax rulings in Spain and another jurisdiction for which reserves were previously recorded. Excluding the benefit related to the favorable tax rulings, the first quarter 2015 adjusted effective tax rate was 24.7%, or 80 basis points lower than the first quarter 2014 adjusted effective tax rate of 25.5%, due to lower repatriation costs and lower loss provisions in the current quarter.

 Liquidity and Capital Resources
CASH AND CASH EQUIVALENTS
We had cash and cash equivalents of $443.7 million at March 31, 2015 compared to $478.6 million at December 31, 2014, of which $344.0 million of the balance at March 31, 2015 was held outside the United States. Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated to the United States; however, they would be subject to United States federal income taxes, less applicable foreign tax credits. We have not provided U.S. income tax expense on accumulated earnings of our foreign subsidiaries because we have the ability and plan to reinvest the undistributed earnings indefinitely.
Effective utilization of the cash generated by our international operations is a critical component of our tax strategy. Strategic dividend repatriation from foreign subsidiaries creates U.S. taxable income, which enables us to realize deferred tax assets. The Company regularly repatriates, in the form of dividends from its non-U.S. subsidiaries, a portion of its current year earnings to fund financial obligations in the U.S.

CASH FLOWS FROM OPERATING ACTIVITIES
Operating cash flows in the first three months of 2015 were $31.5 million compared to $35.0 million in the first three months of 2014. The decrease in operating cash flows for the first three months of 2015 compared to 2014 is principally driven by higher net income and lower payments for incentive compensation, which were offset principally by higher pension contributions in the 2015 period.
Working capital (current assets less current liabilities) totaled $1,267.8 million at March 31, 2015, compared to $1,191.2 million at December 31, 2014. The Company sold certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. We believe that participating in the factoring programs strengthens our relationships with these customers and provides operational efficiencies. The beneficial impact on cash from operations from participating in these programs decreased approximately $6.5 million for the three months ended March 31, 2015 compared to a decrease of approximately $14.3 million for the three months ended March 31, 2014. The cost of participating in these programs was immaterial to our results in all periods.


 
23
 



CASH FLOWS USED IN INVESTING ACTIVITIES
Net investing activities during the first three months of 2015 utilized $17.9 million compared to $122.4 million in the prior year period. The decrease in cash paid for investing activities is primarily driven by the acquisition of Aromor during the first quarter of 2014 for approximately $102 million.
Additions to property, plant and equipment were $19.4 million during the first three months of 2015 compared to $33.8 million in the first three months of 2014. We expect additions to property, plant and equipment to approach 4-5% of our sales in 2015.
CASH FLOWS USED IN FINANCING ACTIVITIES
Net financing activities in the first three months of 2015 used $39.5 million compared to $49.3 million in the first three months of 2014. The decrease in cash used for financing activities principally reflects lower treasury stock purchases in the first quarter of 2015 as compared to the 2014 period.
At March 31, 2015, we had $943.5 million of debt outstanding compared to $942.3 million outstanding at December 31, 2014.
We paid dividends totaling $38.0 million in the 2015 period. We declared a cash dividend per share of $0.47 in the first quarter of 2015 that was paid on April 7, 2015 to all shareholders of record as of March 27, 2015.
In December 2012, the Board of Directors authorized a $250 million share repurchase program, which commenced in the first quarter of 2013. Based on the total remaining amount of $98.3 million available under the repurchase program, approximately 0.8 million shares, or 1.0% of shares outstanding (based on the market price and shares outstanding as of March 31, 2015) could be repurchased under the program as of March 31, 2015. The purchases will be made from time to time on the open market or through private transactions as market and business conditions warrant. Repurchased shares will be placed into treasury stock. During the three months ended March 31, 2015, we repurchased 98,113 shares on the open market at an aggregate cost of $10.7 million or an average of $108.65 per share. We expect total purchases during 2015 to be less than total purchases made during 2014. The ultimate level of purchases will be a function of the daily purchase limits established in the pre-approved program according to the share price at that time.
CAPITAL RESOURCES
Operating cash flow provides the primary source of funds for capital investment needs, dividends paid to shareholders and debt repayments. We anticipate that cash flows from operations and availability under our existing credit facilities are sufficient to meet our investing and financing needs for at least the next eighteen months. We regularly assess our capital structure, including both current and long-term debt instruments, as compared to our cash generation and investment needs in order to provide ample flexibility and to optimize our leverage ratios. We believe our existing cash balances are sufficient to meet our debt service requirements.
We supplement short-term liquidity with access to capital markets, mainly through bank credit facilities and issuance of commercial paper. We did not issue commercial paper during the first three months of 2015 or 2014.
We expect to contribute a total of approximately $30 million to our non-U.S. pension plans during 2015. During the three months ended March 31, 2015, $35.0 million of contributions were made to the qualified U.S. pension plans. For the three months ended March 31, 2015, we have contributed $19.1 million related to our non-U.S. pension plans and $1.1 million related to our non-qualified U.S. pension plans.
On May 1, 2015, the Company acquired Henry H. Ottens Manufacturing Co., Inc. Ottens Flavors for approximately $190 million, which was funded from existing cash resources.
Under our revolving credit facility, we are required to maintain, at the end of each fiscal quarter, a ratio of net debt for borrowed money to adjusted EBITDA in respect of the previous 12-month period of not more than 3.25 to 1. Based on this ratio, at March 31, 2015 our covenant compliance provided overall borrowing capacity of $1,833 million.
As of March 31, 2015 we had no borrowings under our revolving credit facility. The amount which we are able to draw down on under the facility is limited by financial covenants as described in more detail below. Our drawdown capacity on the facility was $940.4 million at March 31, 2015.
At March 31, 2015, we were in compliance with all financial and other covenants, including the net debt to adjusted EBITDA ratio. At March 31, 2015 our Net Debt/adjusted EBITDA (1) ratio was 0.69 to 1 as defined by the debt agreements, well below the financial covenants of existing outstanding debt. Failure to comply with the financial and other covenants under

 
24
 



our debt agreements would constitute default and would allow the lenders to accelerate the maturity of all indebtedness under the related agreement. If such acceleration were to occur, we would not have sufficient liquidity available to repay the indebtedness. We would likely have to seek amendments under the agreements for relief from the financial covenants or repay the debt with proceeds from the issuance of new debt or equity, and/or asset sales, if necessary. We may be unable to amend the agreements or raise sufficient capital to repay such obligations in the event the maturities are accelerated.
 
(1)
Adjusted EBITDA and Net Debt, which are non-GAAP measures used for these covenants, are calculated in accordance with the definition in the debt agreements. In this context, these measures are used solely to provide information on the extent to which we are in compliance with debt covenants and may not be comparable to adjusted EBITDA and Net Debt used by other companies. Reconciliations of adjusted EBITDA to net income and net debt to total debt are as follows:
 
Twelve Months Ended March 31,
(DOLLARS IN MILLIONS)
2015
 
2014
Net income
$
436.1

 
$
369.5

Interest expense
45.5

 
47.3

Income taxes
126.4

 
131.1

Depreciation and amortization
86.6

 
86.6

Specified items (1)
1.4

 
2.3

Non-cash items (2)
20.4

 
6.6

Adjusted EBITDA
$
716.4

 
$
643.4

 
(1)
Specified items for the 12 months ended March 31, 2015 of $1.4 million consist of restructuring charges.
(2)
Non-cash items, defined as part of Adjusted EBITDA in the terms of the Company’s credit facility agreement dated November 9, 2011 and amended and restated on April 4, 2014, represent all other adjustments to reconcile net income to net cash provided by operations as presented on the Statement of Cash Flows, including gain on disposal of assets, stock-based compensation and pension settlement/curtailment.
 
March 31,
(DOLLARS IN MILLIONS)
2015
 
2014
Total debt
$
943.5

 
$
933.9

Adjustments:
 
 
 
Deferred gain on interest rate swaps
(4.7
)
 
(6.6
)
Cash and cash equivalents
(443.7
)
 
(268.6
)
Net debt
$
495.1

 
$
658.7

As discussed in Note 12 to the Consolidated Financial Statements, at March 31, 2015, we had entered into various guarantees and had undrawn outstanding letters of credit from financial institutions. These arrangements reflect ongoing business operations, including commercial commitments, and governmental requirements associated with audits or litigation that are in process with various jurisdictions. Based on the current facts and circumstances they are not reasonably likely to have a material impact on our consolidated financial condition, results of operations, or cash flows.
As discussed in Notes 6 and 12 to the Consolidated Financial Statements, we had Euro 4.7 million ($5.1 million) in bank guarantees outstanding as of March 31, 2015 related to the tax disputes in Spain. These amounts will be reduced once we make the remaining payments pursuant to the dividend withholding tax cases during the second quarter of 2015.

Cautionary Statement Under the Private Securities Litigation Reform Act of 1995
This Quarterly Report includes “forward-looking statements” under the Federal Private Securities Litigation Reform Act of 1995, including statements regarding the Company’s expectations concerning (i) our ability to meet long-term growth targets in 2015, (ii) our competitive position in the market and financial performance in 2015, (iii) expected cost pressures in 2015, (iv) capital spending in 2015, (v) cash flows to fund future operations and to meet debt service requirements, (vi) expected share repurchases in 2015, and (vii) the ultimate resolution of pending tax matters with the Spanish and Brazilian tax authorities. These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in the Company’s business that could cause actual results and events to differ materially from those in the forward-looking statements. Certain of such forward-looking information may be identified by such terms as "will," “expect,” “anticipate,” “believe,” “outlook,” “may,” “estimate,” “should” and “predict” similar terms or variations thereof. Such forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not

 
25
 



guarantees of future results or performance, and involve significant risks, uncertainties and other factors, including assumptions and projections, for all forward periods. Actual results of the Company may differ materially from any future results expressed or implied by such forward-looking statements. Such factors include, among others, the following:

volatility and increases in the price of raw materials, energy and transportation;
the economic and political risks associated with the Company’s international operations;
the Company's ability to benefit from its investments and expansion in emerging markets;
fluctuations in the quality and availability of raw materials;
our ability to successfully execute acquisitions, collaborations and joint ventures;
changes in consumer preferences and demand for the Company's products or decline in consumer confidence and spending;
the Company’s ability to implement its business strategy, including the achievement of anticipated cost savings, profitability, realization of price increases and growth targets;
the Company’s ability to successfully develop new and competitive products that appeal to its customers and consumers;
the impact of a disruption in the Company's supply chain or its relationship with its suppliers;
the Company's ability to successfully manage inventory and working capital;
the effects of any unanticipated costs and construction or start-up delays in the expansion of any of the Company’s facilities;
the impact of currency fluctuations or devaluations in the Company’s principal foreign markets;
any adverse impact on the availability, effectiveness and cost of the Company’s hedging and risk management strategies;
uncertainties regarding the outcome of, or funding requirements, related to litigation or settlement of pending litigation, uncertain tax positions or other contingencies;
the impact of possible pension funding obligations and increased pension expense, particularly as a result of changes in asset returns or discount rates, on the Company’s cash flow and results of operations;
the Company’s ability to optimize it's manufacturing facilities, including the achievement of expected cost savings and increased efficiencies;
the effect of legal and regulatory proceedings, as well as restrictions imposed on the Company, its operations or its representatives by U.S. and foreign governments;
adverse changes in federal, state, local and foreign tax legislation or adverse results of tax audits, assessments, or disputes;
the Company's ability to attract and retain talented employees;
the direct and indirect costs and other financial impact that may result from any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters, or the responses to or repercussion from any of these or similar events or conditions;
the Company’s ability to quickly and effectively implement its disaster recovery and crisis management plans; and
adverse changes due to accounting rules or regulations.
New risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risks on the Company’s business. Accordingly, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any public statements or disclosures by the Company following this report that modify or impact any of the forward-looking statements contained in or accompanying this report will be deemed to modify or supersede such outlook or other forward-looking statements in or accompanying this report.
The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. Please refer to Part I. Item 1A., Risk Factors, of the 2014 Form 10-K for additional information regarding factors that could affect the Company’s results of operations, financial condition and cash flow.
Non-GAAP Financial Measures
The Company uses non-GAAP financial operating measures in this Quarterly Report, including: (i) currency neutral sales (which eliminates the effects that result from translating its international sales in U.S. dollars), (ii) adjusted operating profit and adjusted operating margin (which excludes the acquisition costs, operational improvement initiative costs and restructuring charges), and (iii) adjusted effective tax rate (which excludes restructuring charges and operational improvement initiative

 
26
 



costs). The Company also provides the non-GAAP measures adjusted EBITDA (which excludes certain specified items and non-cash items as set forth in the Company’s debt agreements) and net debt (which is adjusted for deferred gain on interest rate swaps and cash and cash equivalents) solely for the purpose of providing information on the extent to which the Company is in compliance with debt covenants contained in its debt agreements.
We have included each of these non-GAAP measures in order to provide additional information regarding our underlying operating results and comparable year-over-year performance. 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 our historical and expected future results and financial condition, we believe it is meaningful for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. We believe such additional non-GAAP information provides investors with an overall perspective of the period-to-period performance of our business. In addition, management internally reviews each of these non-GAAP measures to evaluate performance on a comparative period-to-period basis in terms of absolute performance, trends and expected future performance with respect to our business. A material limitation of these non-GAAP measures is that such measures do not reflect actual GAAP amounts; for example, costs associated with operational improvements and restructuring activities involve actual cash outlays. We compensate for such limitations by using these measures as one of several metrics, including GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
International Flavors & Fragrances Inc.
Foreign Currency Reconciliation
Three Months Ended March 31, 2015
 
Operating Profit
% Change - Reported (GAAP)
4%
Items impacting comparability (1)
-2%
% Change - Adjusted (Non-GAAP)
2%
Currency Impact
7%
% Change - Currency Neutral Adjusted (Non-GAAP)**
10%*
_______________________ 
(1) Includes Restructuring and other charges, net of $0.2 million, operational improvement initiative costs of $0.3 million and acquisition and related costs of $0.5 million for the three months ended March 31, 2015 and includes $2.7 million of restructuring and operational improvement initiative costs for the three months ended March 31, 2014.
* The sum of these items do not foot due to rounding.
** Currency neutral amount is calculated by translating prior year sales at the exchange rates used for the corresponding 2015 period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
There are no material changes in market risk from the information provided in the Company’s 2014 Annual Report on Form 10-K.
Item 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer with the assistance of other members of our management, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
We have established controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the principal executive officer and the principal financial officer, to allow timely decisions regarding required disclosure.

 
27
 



The Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in our internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
We are subject to various claims and legal actions in the ordinary course of our business.
Tax Claims
We are currently involved in a legal proceeding with the Spanish tax authorities that challenges tax deductions taken in our Spanish subsidiaries’ tax returns and alleges claims of tax avoidance.
The Spanish tax authorities have also alleged claims related to capital tax positions arising from the business structure adopted by our Spanish subsidiaries. During the fourth quarter of 2013, the Company was notified that the Spanish High Court of Justice ruled against us in regards to the 2002 capital tax case. As a result, the Company recorded a charge of Euro 9.6 million ($13.0 million, or $9.1 million, after tax) for the year ended December 31, 2013. On January 22, 2014, we filed an appeal. In order to avoid future interest costs in the event our appeal is unsuccessful, we paid $11.2 million (representing the principal amount) during the first quarter of 2014. Such amount will be refundable if we prevail in our appeal.
As of March 31, 2015, the Company had an aggregate value of Euro 4.7 million ($5.1 million), which was fully reserved for and reflected in income taxes payable, related to three dividend withholding tax controversies in Spain, all of which have now been resolved. The Company made payments of Euro 3.5 ($3.8 million) in April 2015 related to two of the controversies and expects to make the remaining payment during the second quarter of 2015. As of March 31, 2015, the Company had posted bank guarantees of Euro 4.7 million ($5.1 million) associated with the appeals of these matters.
We do not currently believe that any of our pending tax assessments, even if ultimately resolved against us, would have a material impact on our financial condition.

Environmental
Over the past 20 years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at eight facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than $5 million.
While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.
Other
In March 2012, ZoomEssence, Inc. filed a complaint against the Company in the U.S. District Court of New Jersey alleging trade secret misappropriation, breach of contract and unjust enrichment in connection with certain spray dry technology disclosed to the Company. In connection with the claims, ZoomEssence is seeking an injunction and monetary damages. ZoomEssence initially sought a temporary restraining order and preliminary injunction, but the Court denied these applications in an order entered on September 27, 2013, finding that ZoomEssence had not demonstrated a likelihood of success on the merits of its claims. The Court subsequently referred the matter to mediation, however the private mediation session did not result in a resolution of the dispute. On November 3, 2014, ZoomEssence amended its complaint against the Company to include allegations of breach of the duty of good faith and fair dealing, fraud in the inducement, and

 
28
 



misappropriation of confidential and proprietary information. On November 13, 2014, the Company filed a counterclaim against ZoomEssence alleging trade secret misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, misappropriation of confidential and proprietary information,  common law unfair competition, tortious interference with contractual relations, and conversion. The case is currently proceeding through discovery with a trial on the merits anticipated in mid 2016. The Company denies the allegations and will vigorously defend and pursue its position in Court. At this stage of the litigation, based on the information currently available to the Company, management does not believe that this matter represents a material loss contingency.
We are also a party to other litigations arising in the ordinary course of our business. We do not expect the outcome of these cases, singly or in the aggregate, to have a material effect on our consolidated financial condition.
 


 
29
 



Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
The table below reflects shares of common stock we repurchased during the first quarter of 2015.
 
Period
Total Number of
Shares
Repurchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Approximate Dollar Value
of Shares That May Yet
be Purchased Under the
Program
January 1 - 31, 2015
51,435

 
$
102.07

 
51,435

 
$
103,683,793

February 1 - 28, 2015
21,235

 
111.80

 
21,235

 
101,309,657

March 1 - 31, 2015
25,443

 
119.34

 
25,443

 
98,273,281

Total
98,113

 
$
108.65

 
98,113

 
$
98,273,281

 
(1)
Shares were repurchased pursuant to the repurchase program announced in December 2012, with repurchases beginning in the first quarter of 2013. Repurchases under the program are limited to $250 million in total repurchase price, and the expiration date is December 31, 2016. Authorization of the repurchase program may be modified, suspended, or discontinued at any time.

Item 6.
Exhibits
 
3.2
 
Amended and Restated Bylaws of the Company, effective as of May 6, 2015, incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 8-K filed on May 6, 2015

10.1
 
2015 Stock Award and Incentive Plan, incorporated by reference to Annex 1 of the Company’s definitive proxy statement on Schedule 14A filed with the SEC on March 18, 2015

10.2
 
Amended and Restated Executive Severance Policy, as amended through and including March 11, 2015

10.3
 
Form of Annual Incentive Plan Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.4
 
Form of Long-Term Incentive Plan Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.5
 
Form of Equity Choice Program Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.6
 
Form of Restricted Stock Units Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.7
 
Form of Non-Employee Director Restricted Stock Units Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.8
 
2010 Stock Award and Incentive Plan, as Amended and Restated as of May 6, 2015

31.1
  
Certification of Andreas Fibig pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  
Certification of Richard A. O'Leary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
  
Certification of Andreas Fibig and Richard A. O'Leary pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extensions Schema
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase
101.LAB
  
XBRL Taxonomy Extension Label Linkbase
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase

 
30
 



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 12, 2015
By:
 
/s/ Andreas Fibig
 
 
 
 
 
Andreas Fibig
 
 
 
 
 
Chairman of the Board and Chief Executive Officer
 
 
 
 
 
 
Dated:
 
May 12, 2015
By:
 
/s/ Richard A. O'Leary
 
 
 
 
 
Richard A. O'Leary
 
 
 
 
 
Interim Chief Financial Officer, Vice President and Controller

 
31
 



EXHIBIT INDEX  
Number
  
Description
3.2
 
Amended and Restated Bylaws of the Company, effective as of May 6, 2015, incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 8-K filed on May 6, 2015

10.1
 
2015 Stock Award and Incentive Plan, incorporated by reference to Annex 1 of the Company’s definitive proxy statement on Schedule 14A filed with the SEC on March 18, 2015

10.2
 
Amended and Restated Executive Severance Policy, as amended through and including March 11, 2015

10.3
 
Form of Annual Incentive Plan Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.4
 
Form of Long-Term Incentive Plan Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.5
 
Form of Equity Choice Program Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.6
 
Form of Restricted Stock Units Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.7
 
Form of Non-Employee Director Restricted Stock Units Award Agreement under the International Flavors & Fragrances 2015 Stock Award and Incentive Plan

10.8
 
2010 Stock Award and Incentive Plan, as Amended and Restated as of May 6, 2015

31.1
  
Certification of Andreas Fibig pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  
Certification of Richard A. O'Leary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
  
Certification of Andreas Fibig and Richard A. O'Leary pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extensions Schema
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase
101.LAB
  
XBRL Taxonomy Extension Label Linkbase
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase

 
32
 
IFF Exhibit 3.2



Exhibit 3.2
BY-LAWS
of
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(a New York corporation)
(as adopted March 10, 1964, including all amendments
adopted as of May 6, 2015)

ARTICLE I
Meetings of Shareholders
SECTION 1. Annual Meeting. The annual meeting of the shareholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such place, on such date and at such time as shall be designated from time to time by the Board of Directors.
SECTION 2. Special Meetings. Special meetings of the shareholders, unless otherwise prescribed by the New York Business Corporation Law (the “Business Corporation Law”), may be called at any time by the Chairman of the Board, the Chief Executive Officer or by a majority of the Board of Directors.
SECTION 3. Notice of Meetings; Business to be Presented at Meeting.
(a) Notice of Meeting. Written notice of each meeting of shareholders stating the place, date and hour of the meeting shall be sent to each shareholder entitled to vote at the meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. To the extent that the meeting is a special meeting, such notice shall also indicate the person or persons calling the meeting, or the person(s) directing that the meeting be so called, and shall state the purpose or purposes for which the meeting has been called. Notice of any meeting of shareholders may be sent either in written or electronic form and shall comply with Section 505 of the Business Corporation Law. No business shall be conducted at a meeting of the shareholders except in accordance with the procedures set forth in this Section 3.
(b) Nature of Business at Annual Meetings of Shareholders. No business may be transacted at an annual meeting of shareholders, other than business that is either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (ii) otherwise properly brought before an annual meeting, by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (iii) otherwise properly brought before an annual meeting by any shareholder of the Corporation (A) who is a shareholder of record (x) on the date the shareholder provides the shareholder notice required by Section 3(d)(1), (y) on the record date for the determination of shareholders entitled to vote at such meeting and (z) on the date of such meeting and (B) who complies with the advance notice procedures set forth in Section 3(d).
Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting of shareholders except business brought before such meeting in accordance with the procedures set forth in this Section 3; provided, however, that, once business has been properly brought before the meeting in accordance with such procedures, nothing in this Section 3 shall be deemed to preclude discussion by any shareholder of any such business. If the chair of an annual meeting determines that business was not properly brought before such meeting in accordance with the

1





foregoing procedures, the chair shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.
(c) Director Nominations. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors, (i) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (ii) by any shareholder of the Corporation (A) who is a shareholder of record (x) on the date the shareholder provides the shareholder notice required by Section 3(d)(1), (y) on the record date for the determination of shareholders entitled to vote at such meeting and (z) on the date of such meeting and (B) who complies with the advance notice procedures set forth in Section 3(d).
Notwithstanding anything in these By-Laws to the contrary, except as set forth in Article II, Section 6, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3. If the chair of the meeting determines that a nomination was not made in accordance with the procedures set forth in this Section 3, the chair shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.
(d) Director Nomination or Other Proposal.
(1) Timely Notice. In addition to any other applicable requirements, in order for a shareholder to present any business to be transacted at an annual meeting of shareholders, including any nomination for director to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation and the provisions of this Section 3 shall be the exclusive means for a shareholder to make nominations or submit other business (other than matters properly brought under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). To be timely, a shareholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (i) in the case of an annual meeting, not less than ninety (90) days nor more than one-hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for on a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (ii) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs.
(2) Notice Requirements for Nomination of a Director. If the notice relates to the nomination of a director, to be in proper written form the shareholder’s notice to the Secretary must set forth the following:
(i) as to each person whom the shareholder proposes to nominate for election as a director the following information:
(A) the name, age, business address and residence address of the person;

2





(B) a complete biography or statement of the person’s qualifications, including principal occupation or employment of such person (present and for the past five (5) years), education, work experience, knowledge of the Corporation’s industry, membership on the board of directors of any other corporation currently held or held within the past five (5) years and civic activity;
(C) the class or series and number of shares of capital stock of the Corporation which are “beneficially owned” (as such term is defined by Section 13(d) of the Exchange Act ) or of record by the person and any other ownership interest in shares of the Corporation, whether economic or otherwise, including any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of shares of the Corporation or otherwise directly or indirectly beneficially owned by such person and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of the shares of the Corporation (“Derivative Interests”) (which information shall be supplemented not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date);
(D) the date any shares or Derivative Interests were acquired and the investment intent of such acquisition;
(E) a description of all arrangements or understandings between the shareholder and the proposed nominee and/or any other person or persons pursuant to which the nomination is to be made by the shareholder;
(F) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder; including information with respect to a proposed nominee’s independence as defined under the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”) and New York Stock Exchange and information regarding the proposed nominee’s attributes that the Nominating and Governance Committee of the Board of Directors would need to consider in order to assess whether such proposed nominee would qualify as an “audit committee financial expert” as defined by the rules and regulations promulgated by the SEC;
(G) a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected;
(H) a statement from the proposed nominee that he or she will, if elected, promptly following any subsequent re-election in which such proposed nominee does not receive the required vote, tender an irrevocable resignation in accordance with Article II, Section 5 of these By-Laws; and
(I) a copy of the completed and signed questionnaire, representation and agreement described in Section 3(e) below.
The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as director of the Corporation.
(ii) as to the shareholder giving the notice the following information:

3





(A) the name and address of such record shareholder and the beneficial owner, if any, on whose behalf the nomination is made;
(B) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such shareholder and the beneficial owner, if any;
(C) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record and any other Derivative Interests owned by the shareholder (which information shall be supplemented not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date);
(D) the date any shares or Derivative Interests were acquired and the investment intent of such acquisition;
(E) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder;
(F) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in such shareholder’s notice;
(G) a representation as to whether the shareholder or the beneficial owner, if any, intends, or is part of a group which intends, to (a) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise solicit proxies from shareholders in support of such proposal or nomination; and
(H) any other information relating to such shareholder or the beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder.
(3) Notice Requirements for Other Shareholder Proposals. To the extent that the shareholder’s notice relates to a matter other than the nomination of a director, to be in proper written form, a shareholder’s notice to the Secretary must set forth as to each matter such shareholder proposes to bring before an annual meeting, the following:
(i) a brief description of the business desired to be brought before such meeting and the reasons for conducting such business at such meeting;
(ii) the name and address of such record shareholder and the beneficial owner, if any, on whose behalf the proposal is made;
(iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record and any other Derivative Interests owned by the shareholder and the beneficial owner, if any (which information shall be supplemented not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date);
(iv) the date such shares or Derivative Interests were acquired and the investment intent of such acquisition;

4





(v) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business;
(vi) a representation that such shareholder intends to appear in person or by proxy at the meeting to bring such business before such meeting; and
(vii) a representation as to whether the shareholder or the beneficial owner, if any, intends, or is part of a group which intends, to (a) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise solicit proxies from shareholders in support of such proposal or nomination.
Notwithstanding the foregoing provisions of this Section 3, a shareholder seeking to have a proposal included in the Corporation’s proxy statement shall comply with the requirements of Section 14 of the Exchange Act, including, but not limited to, Rule 14a-8 promulgated thereunder or its successor provision. The Corporation may require any shareholder to furnish such other information as may reasonably be required by the Corporation to determine if the business shall be properly brought before an annual meeting of the shareholders.
(e) Director Nominee Questionnaire; Representation and Agreement Requirement. To be eligible to be a nominee for election or reelection as a director of the Corporation, a proposed nominee must deliver (in accordance with the time periods prescribed in Section 3(d), to the extent applicable) to the Secretary at the principal executive offices of the Corporation a written questionnaire, representation and agreement with respect to the background and qualification of such person (which shall be provided by the Secretary upon written request) that such proposed nominee:
(i) is not and will not become a party to any agreement, arrangement or understanding with any person or entity that has not been disclosed to the Corporation (1) relating to how such proposed nominee will act or vote on any issue in his or her role as a director of the Corporation, (2) that could limit or interfere with such proposed nominee's ability to comply with his or her fiduciary duties as a director of the Corporation or (3) with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service as a director; and
(ii) will be in compliance, and intends to comply in the future, with all applicable policies and guidelines of the Corporation, including, but not limited to, those relating to corporate governance, conflict of interest, confidentiality, stock ownership and trading policies.
SECTION 4. Quorum. At all meetings of the shareholders of the Corporation, the holders of a majority of the shares of capital stock of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of any business except as otherwise provided by law.
SECTION 5. Organization; Adjournment. The Board of Directors may prescribe an order of business for meetings of shareholders. The Chairman of the Board, or in his absence, the Chief Executive Officer, if then a separate officer, shall preside at meetings of the shareholders; provided, however, that the Board of Directors may for any meeting of shareholders designate another officer or officers to preside. If a quorum, determined in accordance with Article I, Section 4 of these By-Laws, shall not be present or represented at any meeting of the shareholders, the chair of the meeting, or if so requested by the chair, the shareholders present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be

5





present or represented. In addition, the chair of any meeting of shareholders shall have the power to adjourn the meeting at the request of the Board of Directors if the Board of Directors determines that adjournment is necessary or appropriate to enable shareholders to consider fully the information which the Board of Directors determines has not been made sufficiently or timely available to shareholders.
SECTION 6. Voting. At each meeting of the shareholders every shareholder of record of the Corporation entitled to vote at such meeting shall be entitled to one vote for each share of Common Stock standing in his or her name on the books of the Corporation; provided, however, that the Board of Directors may fix, in advance, a date not more than sixty (60) nor less than ten (10) days prior to the date of such meeting as the date as of which shareholders entitled to notice of, and to vote at, such meeting shall be determined, and in case the Board of Directors shall fix a date, only shareholders of record on such date shall be entitled to notice of, and to vote at, such meeting. At any meeting of shareholders each shareholder having the right to vote shall be entitled to vote in person or by proxy.
Except with respect to the election of directors, which shall be governed by Article II, Section 3 of these By-Laws, and except as otherwise provided by law, in the Certificate of Incorporation or these By-Laws, all matters will be determined by the vote of the holders of a majority of the votes cast in favor or against the matter. Abstentions and broker non-votes will not count as a vote cast.
SECTION 7. Inspectors of Election. At any meeting of the shareholders, an inspector or inspectors of election may be appointed as provided in the Business Corporation Law and shall have duties as provided in the Business Corporation Law. An inspector of election need not be a shareholder of the Corporation, and any officer of the Corporation may be an inspector of election on any question other than a vote for or against his or her election to any position with the Corporation or any other question in which he or she may be directly interested.

ARTICLE II
Board of Directors
SECTION 1. General Powers. Except as otherwise provided in these By-Laws or in the Certificate of Incorporation, the property, business and affairs of the Corporation shall be managed by the Board of Directors.
SECTION 2. Number and Term. The number of directors shall be ten (10) but the number thereof may, from time to time, be diminished to not less than six (6) by amendment of these By-Laws. As used in these By-Laws, the term “whole Board of Directors” shall mean the total number of directors which the Corporation would have at the time if there were no vacancies. Directors shall be elected to serve until the next annual meeting or until his or her successor shall be duly elected and qualified.
SECTION 3. Election of Directors.
At each meeting of the shareholders for the election of directors at which a quorum is present, the vote required for election of a director by the shareholders shall, except in a Contested Election, be the affirmative vote of a majority of the votes cast “for” the election of a nominee. For purposes of this Section 3, the affirmative vote of a majority of the votes cast shall mean that the number of votes cast “for” a nominee’s election exceeds the number of votes cast “against” that nominee’s election.

6





In a Contested Election, the persons receiving a plurality of the votes cast by the holders of shares of capital stock entitled to vote at such meeting shall be the directors. A “Contested Election” means an election where, as of the record date for such meeting in which the election will be held, there are more nominees for election than positions on the Board of Directors to be filled by election at the meeting; provided that with respect to any nominee proposed or nominated by a shareholder, the Secretary of the Corporation shall have received proper notice under Article I, Section 3 of these By-Laws. For purposes of this Section 3, if plurality voting is applicable to the election of directors at any meeting, the nominees who receive the highest number of votes cast “for,” without regard to votes cast “against” or “withhold,” shall be elected as directors up to the total number of directors to be elected at that meeting. Abstentions and broker non-votes will not count as a vote cast with respect to any election of directors.
SECTION 4. Organization. The Board of Directors may choose one of their number as Chairman of the Board. At each meeting of the Board of Directors, the Chairman of the Board, or, if there shall be no Chairman of the Board or if he or she shall be absent, the Chief Executive Officer of the Corporation, or in case of his or her absence, the Lead Director, or in case of his or her absence, a chair who shall be any director chosen by a majority of the directors present thereat, shall act as chair of such meeting and preside thereat. The Secretary of the Corporation, or in the case of his or her absence, any person whom the chair shall appoint secretary of such meeting, shall act as secretary of such meeting and keep the minutes thereof.
SECTION 5. Resignations.
(a) Any director of the Corporation may resign at any time by giving written notice of his or her resignation to the Board of Directors, the Chief Executive Officer or the Secretary of the Corporation. Subject to Section 5(b), any such resignation shall take effect at the time specified therein or, if the time when the resignation shall become effective is not specified therein, then it shall take effect immediately upon its receipt by such Board of Directors, Chief Executive Officer or Secretary; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
(b) In an election of directors that is not contested, any incumbent director nominee who is not re-elected by the shareholders shall immediately tender his or her resignation to the Board of Directors, subject to acceptance or rejection by the Board of Directors as provided in this Section 5(b). The independent members of the Board of Directors, in accordance with the procedures established by the Board of Directors, shall decide whether to accept such resignation within ninety (90) days after the date the results of the election are certified and the Corporation shall promptly disclose and explain such decision in a document furnished or filed with the SEC. An incumbent director who tenders his or her resignation in accordance with this Section 5(b) will not participate in the deliberations by the Board of Directors with respect to such resignation. If the Board of Directors does not accept the incumbent director’s resignation, he or she shall continue to serve until the next annual meeting of shareholders and until his or her successor is elected and qualified. If the Board of Directors accepts the resignation, or if the nominee who failed to receive the required vote is not an incumbent director, the Board of Directors may fill the resulting vacancy or decrease the size of the Board of Directors in accordance with these By-Laws.
SECTION 6. Vacancies. Vacancies occurring in the Board of Directors for any reason, except the removal of directors without cause by the shareholders, may be filled by the affirmative vote of at least two-thirds (2/3) of the whole Board of Directors. A director elected to fill a vacancy shall be elected to hold office for the unexpired term of his or her

7





predecessor. Newly-created directorships resulting from an increase in the number of directors may be filled by the vote of a majority of the directors then in office, although less than a quorum exists.
SECTION 7. Annual Organization Meeting. After each annual election of directors, the Board of Directors may hold a regular meeting for the purpose of organization and the transaction of other business as soon as practicable on the same day, at the place where other regular meetings of the Board of Directors are held. Notice of such meeting need not be given. Such meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors or in a consent and waiver of notice thereof signed by all the directors.
SECTION 8. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and at such places within or without the State of New York or the United States as the Board of Directors shall from time to time determine.
SECTION 9. Special Meetings; Notice. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the Lead Director, the Chief Executive Officer of the Corporation, or by any two (2) of the directors at the time in office. A notice of each such special meeting stating the time and place thereof shall be given as provided in this Section 9. Except as otherwise provided by law, notice of each meeting shall be given by first class mail, telephone, overnight delivery, electronic mail, facsimile or hand delivery to each director, at his or her residence or usual place of business at least forty-eight (48) hours before the meeting is to be held. Notice of any meeting of the Board of Directors need not, however, be given to any director, if waived by him or her in writing before or after the meeting or if he or she shall attend the meeting without protesting, prior thereto or at its commencement, the lack of notice to him or her. Neither notices of a meeting nor a waiver of notice need specify the purpose of any regular or special meeting of the Board of Directors.
SECTION 10. Quorum and Manner of Acting.
(a) Quorum. A majority of the whole Board of Directors shall be present in person at any meeting of the Board of Directors in order to constitute a quorum for the transaction of business at such meeting and, except as otherwise specifically provided by the Certificate of Incorporation, these By-Laws or by law, the act of a majority of the directors present at any such meeting, at which a quorum is present, shall be the act of the Board of Directors. In the absence of a quorum for any meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given.
(b) Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
(c) Action By Written Consent. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, provided that all Board members individually provide written consent to that action (which may include consent by electronic means); and provided further that if such consent is effected by electronic means, such consent shall include a description of the action being taken and the typed name of the director, which shall constitute the legally binding electronic signature of the director. Such action by written consent will have the same force and effect as a

8





unanimous vote of the Board of Directors. Such written consent and any counterparts thereof will be filed with the minutes of the proceedings of the Board of Directors.
SECTION 11. Committees. By the affirmative vote of a majority of the entire Board of Directors, the Board of Directors may designate from among its members an Executive Committee, an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and other committees, each consisting of one or more members. If an Executive Committee is created, the Chairman of the Board and the Lead Director, if any, shall be members. The Executive Committee will have all the authority of the Board of Directors except as otherwise provided by Section 712 of the Business Corporation Law or other applicable statutes. Any other committees will have such authority as the Board of Directors may provide. The Board of Directors may designate one or more directors as alternate members of any committee to replace absent members. The members of all committees shall be selected by and removed by the Board of Directors. Such committees may meet at stated times or, in accordance with their charters, upon notice to all the members of the committee by the Secretary. Each committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required.
SECTION 12. Removal. Any director may be removed with cause by the affirmative vote of at least two-thirds of the whole Board of Directors or with or without cause by vote of the shareholders at a regular or special meeting, subject to the provisions of the Business Corporation Law.
SECTION 13. Compensation. The directors and the members of any committee of the Board of Directors of the Corporation shall be entitled to be reimbursed for any expenses, including all travel expenses, incurred by them on account of their attendance at any regular or special meeting of the Board of Directors or of such committee, and the Board of Directors may at any time or from time to time by resolution provide that the Corporation shall pay each such director or member of such committee such compensation for his or her services as may be specified in such resolution. Nothing in this Section 13 shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefore.
ARTICLE III
Officers
SECTION 1. Officers; Term of Office . The officers of the Corporation shall be a Chief Executive Officer, one or more Presidents, one or more Vice Presidents (which may include one of more executive vice presidents, senior vice presidents or vice presidents), a Secretary, a Treasurer and such other officers as the Board of Directors may deem necessary or desirable (including one or more assistant secretaries or assistant treasurers). The officers referred to in this paragraph (x) shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held immediately after the annual meeting of shareholders. Any two or more offices may be held by the same person. Each officer shall hold office until his or her successor shall have been duly chosen and shall qualify, or until his or her death or until he or she shall resign, or shall have been removed in the manner hereinafter provided.
SECTION 2. Removal. Any officer of the Corporation may be removed by the Board of Directors with or without cause at any time.
SECTION 3. Resignations. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the Board of Directors or to the Chief Executive Officer or Secretary of the Corporation. Any such

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resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall take effect immediately upon its receipt by such Board of Directors, Chief Executive Officer or Secretary; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 4. Vacancies. A vacancy in any office due to death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these By-Laws for regular appointments or elections to such office.
SECTION 5. The Chief Executive Officer. The Chief Executive Officer, who may also be the Chairman of the Board, shall be the chief executive officer of the Corporation and shall have general supervision of the business of the Corporation and over its several officers, subject, however, to the control of the Board of Directors. He or she shall, in the absence of the Chairman of the Board, preside at all meetings of the shareholders and at all meetings of the Board of Directors. He or she shall see that all orders and resolutions of the Board of Directors are carried into effect. He or she may sign, execute and deliver in the name and on behalf of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors except where the signing, execution or delivery thereof shall be expressly delegated to some other officer or agent of the Corporation or where any of them shall be required by law to be otherwise signed, executed or delivered, and he or she may affix the seal of the Corporation to any instrument which shall require it. He or she shall perform all duties incident to the office of Chief Executive Officer and such other duties as from time to time may be assigned to him or her by the Board of Directors.
SECTION 6. The Presidents and any Vice Presidents. The Presidents and any Vice Presidents shall assist the Chief Executive Officer and shall perform such duties as may be assigned to him or her by the Chief Executive Officer, the Board of Directors or as may be prescribed by these By-Laws.
SECTION 7. The Treasurer. The Treasurer shall have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the Corporation and shall deposit the same in accordance with the instructions of the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. He or she shall perform all the duties incidental to the office of Treasurer and such other duties as may be assigned, from time to time, to him or her by the Chief Executive Officer or the Board of Directors. Upon request of the Board of Directors, he or she shall make such reports to it as may be required at any time.
SECTION 8. The Secretary. The Secretary shall (i) attend all meetings of the Board of Directors and of the shareholders and record all votes, (ii) keep the minutes of all proceedings of the Board of Directors and of the shareholders in a book to be kept for that purpose and for the standing committees when required and (iii) have charge of the stock certificate book and stock ledger and such other books and papers as the Board of Directors may direct. He or she shall give, or cause to be given, notice of all meetings of the shareholders and any meetings the Board of Directors for which notice is required, and shall perform all other duties incident to the office of Secretary and such other duties as may be assigned, from time to time, to him or her by the Chief Executive Officer or the Board of Directors. He or she shall keep in safe custody the seal of the Corporation and, when properly authorized, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his or her signature or by the signature of the Treasurer or an Assistant Secretary.

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ARTICLE IV
Contracts, Checks, Drafts, Bank Accounts, Etc.
SECTION 1. Execution of Contracts, etc. Except as otherwise required by law or by these By-Laws, any officer or officers, agent or agents, may be authorized by the Board of Directors, or in the case of an officer appointed by the Chief Executive Officer, by either the Board of Directors or the Chief Executive Officer to execute and deliver any contract or other instrument in the name of the Corporation and on its behalf.
SECTION 2. Checks, Drafts, etc. All checks, drafts and other orders for the payment of money, bills of lading, warehouse receipts, obligations, bills of exchange and insurance certificates shall be signed in the name and on behalf of the Corporation by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be authorized by the Board of Directors or authorized by the Treasurer acting together with any Elected Officer of the Corporation, which authorization may be general or confined to specific instances.
SECTION 3. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board of Directors, or any officer of the Corporation to whom power in that respect shall have been delegated, shall direct in such banks, trust companies or other depositories as said Board of Directors may select or as may be selected by any officer or officers or agent or agents of the Corporation to whom power in that respect shall have been delegated. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer or agent of the Corporation.
SECTION 4. General and Special Bank Accounts. The Board of Directors may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board of Directors may select, or as may be selected by any officer or officers, agent or agents of the Corporation to whom power in that respect shall have been delegated. The Board of Directors may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-Laws, as it may deem expedient.
ARTICLE V
Shares and Their Transfer
SECTION 1. Certificates for Stock. The shares of stock of the Corporation will be represented by certificates, in such form as the Board of Directors may from time to time prescribe, except that the Board of Directors may provide that some or all of any class or series of shares will be uncertificated shares. No decision to have uncertificated shares will apply to shares represented by a certificate until that certificate has been surrendered to the Corporation.
The certificates representing such shares shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman of the Board, a President or a Vice-President, and by the Treasurer or the Secretary or an Assistant Treasurer or Assistant Secretary of the Corporation and its seal shall be affixed thereto; provided, however, that where such certificate is signed by a transfer agent or registered by a registrar other than the Corporation itself or its employee, if the Board of Directors shall by resolution so authorize, the signatures of such Chairman of the Board, President, or Vice-President, Treasurer, Secretary, Assistant Treasurer or Assistant Secretary and the seal of the Corporation may be by facsimile. In case any officer or officers of the Corporation who shall have signed,

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or whose facsimile signature or signatures has been placed upon a certificate or certificates shall cease to be such officer or officers, whether by reason of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as if the person or persons who signed such certificate or certificates had not ceased to be such officer or officers. A record shall be kept of the respective names of the persons, firms or corporations owning the shares represented by certificates for stock of the Corporation, the number of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled and a new certificate or certificates shall not be issued in exchange for any existing certificate, until such existing certificate shall have been so canceled except in cases provided for in Article V, Section 4 of these By-Laws.
SECTION 2. Stock Ledger; Transfers of Stock. The Secretary shall keep or cause to be kept a stock-book, which may be in electronic form, containing the names, alphabetically arranged, of all persons who are shareholders of the Corporation, showing each shareholder’s place of residence, the number of shares of capital stock owned by each shareholder, and the date when each shareholder became the owner of such shares. Transfers of shares of the capital stock of the Corporation shall be made on the books of the Corporation only by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer clerk or transfer agent appointed as in Article V, Section 3 of these By-Laws, upon (1) surrender of the certificate or certificates for such shares properly endorsed, to the extent that the shares were issued in certificated form or a properly endorsed stock power authorizing the transfer of such shares, and (2) the payment of all taxes thereon. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes with regard to the Corporation.
SECTION 3. Regulations. The Board of Directors may make such rules and regulations, as it may be deem expedient, not inconsistent with these By-Laws, concerning the issue, transfer and registration of shares of the capital stock of the Corporation. It may appoint, or authorize any elected officer or officers to appoint, one or more Transfer Clerks or one or more Transfer Agents or one or more Registrars, and may require all certificates of stock to bear the signature or signatures of any of them.
SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder of any share of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate or his or her legal representatives to give the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board of Directors shall in its uncontrolled discretion determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. The Board of Directors, however, may in its discretion refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of New York in such case made and provided.
ARTICLE VI
Indemnification

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SECTION 1. Right To Indemnification. The Corporation shall indemnify any person made, or threatened to be made, a party to an action or proceeding, whether civil or criminal, by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation, or was serving, at the request of the Corporation, as a director, officer, employee, fiduciary or agent of any other affiliated corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees, incurred by such person as a result of such action or proceeding, or any appeal therein, unless a judgment or other final adjudication adverse to such person establishes that his or her acts, or the acts of the person of whom he or she is the legal representative, were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she, or the person of whom he or she is the legal representative, personally gained in fact a financial profit or other advantage to which he or she, or the other person of whom he or she is the legal representative, was not legally entitled. The Corporation shall advance to such person funds to pay for such expenses, including attorney’s fees, incurred by such person in defending against any such action or proceeding, or any appeal therein, upon receipt of an undertaking by or on behalf of such person to repay such funds to the Corporation if a judgment or other final adjudication adverse to such person establishes that his or her acts, or the acts of the person of whom he or she is the legal representative, were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she, or the person of whom he or she is the legal representative, personally gained in fact a financial profit or other advantage to which he or she, or such person, was not legally entitled.
SECTION 2. Right Of Claimant To Sue. If a claim under Section 1 of this Article VI is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant, or the person of whom he or she is the legal representative, has not met the standard of conduct established in Article VI, Section 1 of these By-Laws, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper because the claimant or such person has met the said standard of conduct, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant or such person has not met such applicable standard of conduct, shall be a defense to action or create a presumption that the claimant or such person has not met such standard of conduct.
SECTION 3. Non-Exclusivity Of Rights. Subject to the limitations contained in Section 1 of this Article VI, the right to indemnification and the payment of expenses conferred in this Article VI shall not be deemed exclusive of any other right to which any person seeking indemnification or advancement or payment of expenses may be entitled, whether under any statute, provision of the Certification of Incorporation, these By-Laws, agreement, vote of shareholders or disinterested directors or otherwise, and the Corporation is hereby authorized to provide further indemnification or advancement rights to any such person whether by separate agreement or by resolution of its directors or shareholders or otherwise.
SECTION 4. Contract Rights; Savings Clause.

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(a) Contract Rights. The rights conferred by this Article VI shall be contract rights and shall vest at the time a person agrees to become a director or officer of the Corporation. Such rights shall continue as to a person who has ceased to be a director or officer of the Corporation and shall extend to the heirs and legal representatives of such person. Any repeal or modification of the Business Corporation Law or the provisions of this Article VI shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a contract right may not be modified retroactively without the consent of such person, except as provided by law.
(b) Savings Clause. Any repeal or modification of the provisions of this Article VI shall not adversely affect any right or protection hereunder of any director or officer in respect of any act or omission occurring prior to the time of such repeal or modification. If any provision of this Article VI is held to be invalid, illegal or unenforceable for any reason whatsoever (i) the validity, legality and enforceability of the remaining provisions of this Article VI (including without limitation, all portions of any paragraphs of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that are not by themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Article VI (including, without limitation, all portions of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
SECTION 5. Business Corporation Law. All references to the Business Corporation Law in this Article VI shall mean such Law as it may from time to time be amended.
SECTION 6. Insurance. The Corporation may purchase and maintain insurance to indemnify officers, directors and others against costs or liabilities incurred by them in connection with the performance of their duties and any activities undertaken by them for, or at the request of, the Corporation, to the fullest extent permitted by the Business Corporation Law.
ARTICLE VII
Seal
The seal of the Corporation shall be in the form of a circle, and shall bear the full name of the Corporation and the year of its incorporation.
ARTICLE VIII
Fiscal Year
The fiscal year of the Corporation shall end with the thirty-first day of December in each year or such other date as the Board shall determine.
ARTICLE IX
Amendments
The Board of Directors shall have the power to amend, repeal or adopt the By-Laws of the Corporation, and the By-Laws may be amended, repealed or adopted by the shareholders entitled at the time to vote in the election of directors.

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IFF 3.31.15 Exhibit 10.1

Exhibit 10.1
International Flavors & Fragrances Inc.
2015 Stock Award and Incentive Plan

1.
Purpose of the Plan
The purpose of the 2015 Stock Award and Incentive Plan is to aid the Company (as defined below) in attracting, retaining, motivating and rewarding employees, consultants, non-employee directors and other selected service-providers who contribute to the success of the Company, by authorizing Incentive Awards (as defined below) to incentivize such individuals to perform at the highest level, to strengthen the mutuality of interests between such individuals and the Company’s shareholders and, in general, to further the best interests of the Company and its shareholders.
2.
Definitions
As used in the Plan (as defined below) or in any instrument governing the terms of any Incentive Award granted under the Plan, the following definitions apply to the terms indicated below:
(a)
Accounting Forfeiture Event” has the meaning set forth in Section 32.
(b)Affiliate” means, with respect to a specified person, a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified person.
(c)
Annual Limit” has the meaning set forth in Section 3.
(d)Award Agreement” means an agreement, in a form approved by the Committee from time to time, including, without limitation, written or electronic, entered into by a Participant (as defined below) and the Company, evidencing the grant of an Incentive Award under the Plan.
(e)Board” or “Board of Directors” means the Board of Directors of IFF (as defined below).
(f)Cash Incentive Award” means an award granted to a Participant pursuant to Section 8.
(g)Cause” has the meaning defined in the Award Agreement, the ESP if the Participant is a participant in the ESP, in any employment or severance agreement between the Company and the Participant then in effect or, if none, as defined under the severance policy applicable to the Participant at the time of the Participant’s termination of Employment, if any, or if no such definition exists, the meaning as determined by the Committee in its sole discretion.

 
 
 
 
 
 



(h)A “Change in Control” shall be deemed to have occurred if, after the Effective Date, there shall have occurred any of the following:
(i) any Person (as defined below) becomes the “beneficial owner,” as such term is defined in Rule 13d-3 under the Exchange Act (as defined below), directly or indirectly, of securities of the Company representing 40% or more of the combined Voting Power (as defined below) of the Company’s then outstanding Voting Securities (as defined below), other than beneficial ownership by the Company, any employee benefit plan of the Company or any Person organized, appointed or established pursuant to the terms of any such benefit plan; or
(ii) individuals who at the Effective Date (as defined below) constitute a majority of the Board (the “Incumbent Directors”) cease to constitute a majority of the Board for any reason; provided, however, that any individual becoming a director subsequent to the Effective Date whose election or nomination for election to the Board was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be an Incumbent Director; provided, however, that no individual shall be an Incumbent Director if such individual is initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board; or
(iii) the consummation of:
(A)A merger, consolidation, reorganization or similar transaction with or into the Company or in which securities of the Company are issued, as a result of which the holders of the outstanding Voting Securities of the Company immediately before such event own, directly or indirectly, immediately after such event less than 60% of the combined Voting Power of the outstanding Voting Securities of the parent entity resulting from, or issuing its Voting Securities as part of, such event;
(B)A complete liquidation or dissolution of the Company; or
(C)The sale or other disposition of all or substantially all of the assets of the Company (on a consolidated basis) to any Person other than (x) the Company, (y) an employee benefit plan (or a trust forming a part thereof) maintained by the Company or (z) a Person whose Voting Securities immediately following such sale or disposition will be owned by the holders of the outstanding Voting Securities of the Company immediately prior thereto, in substantially the same proportions.
Notwithstanding the foregoing, no payment or settlement of any Incentive Award that constitutes “non-qualified deferred compensation” within the meaning of section 409A of the Code (as defined below) shall be made solely upon the occurrence of a Change in Control to the extent such Change in Control does not also qualify as a “change in control event”


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within the meaning of Treasury Regulation §1.409A-3(i)(5)(i) and such payment or settlement shall occur on its otherwise scheduled payment and/or settlement date(s).
(i)Code” means the Internal Revenue Code of 1986, as amended from time to time, and all regulations, interpretations, and administrative guidance issued thereunder.
(j)Committee” means the Compensation Committee of the Board of Directors or such other committee as the Board of Directors shall appoint from time to time to administer the Plan or to otherwise exercise and perform the authority and functions assigned to the Committee under the terms of the Plan.
(k)Common Stock” means International Flavors & Fragrances Inc.’s common stock, par value 12.5 cents per share, or any other security into which the common stock shall be changed pursuant to the adjustment provisions of Section 10.
(l)Company” means IFF and all of its Affiliates, collectively (and any successors or assigns thereto).
(m)Confidential Information” has the meaning set forth in Section 32.
(n)Covenant Forfeiture Event” has the meaning set forth in Section 32.
(o)Covered Employee” means each Participant who is an executive officer (within the meaning of Rule 3b-7 under the Exchange Act) of IFF.
(p)Deferred Compensation Plan” means any plan, agreement, or arrangement maintained by the Company from time to time that provides opportunities for deferral of compensation, including, without limitation, the International Flavors and Fragrances Inc. Deferred Compensation Plan.
(q)Disability” means, unless otherwise set forth in the Participant’s Award Agreement or any employment agreement between the Company and the Participant then in effect, a condition that entitles the Participant to long term disability benefits under any applicable Company disability plan, any successor plan, or as defined under any applicable local laws, rules, or regulations.
(r)Early Retirement” means, unless otherwise set forth in the Participant’s Award Agreement, the termination of the Participant’s Employment at the election of the Participant after attaining age 55 plus ten years of service to the Company.
(s)Effective Date” has the meaning set forth in Section 30.
(t)Employment” means the period during which an individual is providing services to the Company as an employee, non-employee director, consultant, or other service provider, as applicable. “Employed” shall have a correlative meaning.


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(u)ESP” means the International Flavors and Fragrances Inc. Executive Severance Policy, as amended and restated from time to time.
(v)Excess Compensation” has the meaning set forth in Section 32.
(w)Exchange Act” means the Securities Exchange Act of 1934, as amended.
(x)Fair Market Value” means, with respect to a share of Common Stock, unless otherwise set forth in the Award Agreement, as of the applicable date of determination, the closing price as reported on the date of determination on the principal national securities exchange in the United States on which shares of Common Stock are then traded. In the event that the price of a sha