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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996 Commission file number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
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(Exact Name of Registrant as specified in its charter)
New York 13-1432060
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
521 West 57th Street, New York, N.Y. 10019-2960
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes X No
----- -----
Number of shares outstanding as of August 7, 1996: 110,724,373
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1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
6/30/96 12/31/95
Assets ---------- -----------
Current Assets:
Cash & Cash Equivalents ......................... $ 226,800 $ 251,430
Short-term Investments .......................... 75,670 45,503
Trade Receivables ............................... 299,154 253,913
Allowance For Doubtful Accounts ................. (8,334) (8,602)
Inventories: Raw Materials ...................... 220,889 233,759
Work in Process .................... 27,080 27,739
Finished Goods ..................... 128,463 153,049
---------- ----------
Total Inventories .................. 376,432 414,547
Other Current Assets ............................ 89,258 79,186
---------- ----------
Total Current Assets ............................ 1,058,980 1,035,977
---------- ----------
Property, Plant & Equipment, At Cost .............. 857,623 839,206
Accumulated Depreciation .......................... (399,039) (370,621)
---------- ----------
458,584 468,585
Other Assets ...................................... 30,168 29,707
---------- ----------
Total Assets ...................................... $1,547,732 $1,534,269
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Bank Loans ...................................... $ 16,978 $ 12,185
Accounts Payable-Trade .......................... 53,249 63,282
Dividends Payable ............................... 37,773 37,749
Income Taxes .................................... 87,784 70,471
Other Current Liabilities ....................... 96,030 92,714
---------- ----------
Total Current Liabilities ....................... 291,814 276,401
---------- ----------
Other Liabilities:
Deferred Income Taxes ........................... 13,937 13,420
Long-term Debt .................................. 9,892 11,616
Other ........................................... 118,765 116,272
---------- ----------
Total Other Liabilities ........................... 142,594 141,308
---------- ----------
Shareholders' Equity:
Common Stock (115,761,840 shares issued in '96
and in '95) ................................... 14,470 14,470
Capital in Excess of Par Value .................. 139,144 142,476
Retained Earnings ............................... 1,089,761 1,069,421
Cumulative Translation Adjustment ............... 50,274 75,049
---------- ----------
1,293,649 1,301,416
Treasury Stock, at cost -- 4,664,567 shares in
'96 and 4,808,005 in '95 ...................... (180,325) (184,856)
---------- ----------
Total Shareholders' Equity ...................... 1,113,324 1,116,560
---------- ----------
Total Liabilities and Shareholders' Equity ........ $1,547,732 $1,534,269
========== ==========
See Notes to Consolidated Financial Statements
2
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands except per share amounts)
3 Months Ended 6/30
-----------------------
1996 1995
-------- --------
Net Sales ........................................ $374,397 $394,306
-------- --------
Cost of Goods Sold ............................... 201,807 197,911
Research and Development Expenses ................ 23,096 22,729
Selling and Administrative Expenses .............. 55,355 55,603
Nonrecurring Charge .............................. 49,707 --
Interest Expense ................................. 747 1,047
Other (Income) Expense, Net ...................... (2,699) (3,034)
-------- --------
328,013 274,256
-------- --------
Income Before Taxes on Income .................... 46,384 120,050
Taxes on Income .................................. 16,681 44,348
-------- --------
Net Income ....................................... $ 29,703 $ 75,702
======== ========
Earnings Per Share ............................... $0.26 $0.68
Dividends Paid Per Share ......................... $0.34 $0.31
6 Months Ended 6/30
-----------------------
1996 1995
-------- --------
Net Sales ........................................ $757,164 $767,900
-------- --------
Cost of Goods Sold ............................... 405,878 388,695
Research and Development Expenses ................ 46,045 44,870
Selling and Administrative Expenses .............. 110,676 109,165
Nonrecurring Charge .............................. 49,707 --
Interest Expense ................................. 1,293 1,612
Other (Income) Expense, Net ...................... (7,113) (7,534)
-------- --------
606,486 536,808
-------- --------
Income Before Taxes on Income .................... 150,678 231,092
Taxes on Income .................................. 54,811 85,434
-------- --------
Net Income ....................................... $ 95,867 $145,658
======== ========
Earnings Per Share ............................... $0.86 $1.31
Average Number of Shares Outstanding (000's) ..... 111,032 111,492
Dividends Paid Per Share ......................... $0.68 $0.62
See Notes to Consolidated Financial Statements
3
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
6 Months Ended 6/30
---------------------
1996 1995
-------- --------
Cash Flows From Operating Activities:
Net Income ......................................... $ 95,867 $145,658
Adjustments to Reconcile to Net Cash Provided
by Operations:
Nonrecurring Charge ............................. 49,707 --
Depreciation .................................... 23,078 20,446
Deferred Income Taxes ........................... (11,263) 5,126
Changes in Assets and Liabilities:
Current Receivables ............................ (51,696) (71,083)
Inventories .................................... 25,410 (30,265)
Current Payables ............................... 99 11,735
Other, Net ..................................... (444) (6,129)
-------- --------
Net Cash Provided by Operations .................... 130,758 75,488
-------- --------
Cash Flows From Investing Activities:
Proceeds From Sales/Maturities of Short-term
Investments ...................................... 12,424 49,115
Purchases of Short-term Investments ................ (43,830) (69,342)
Additions to Property, Plant & Equipment,
Net of Minor Disposals ........................... (45,278) (37,018)
-------- --------
Net Cash Used in Investing Activities .............. (76,684) (57,245)
-------- --------
Cash Flows From Financing Activities:
Cash Dividends Paid to Shareholders ................ (75,503) (69,157)
Increase in Bank Loans ............................. 4,937 3,395
Decrease in Long-term Debt ......................... (1,138) (1,237)
Proceeds From Issuance of Stock Under
Stock Option Plans ............................... 6,288 5,293
Purchase of Treasury Stock ......................... (5,319) (21,037)
-------- --------
Net Cash Used In Financing Activities .............. (70,735) (82,743)
-------- --------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents ............................. (7,969) 17,269
-------- --------
Net Change in Cash and Cash Equivalents ............ (24,630) (47,231)
Cash and Cash Equivalents at Beginning of Year ..... 251,430 230,581
-------- --------
Cash and Cash Equivalents at End of Period ......... $226,800 $183,350
======== ========
Interest Paid ...................................... $ 1,263 $ 2,004
Income Taxes Paid .................................. $ 48,451 $ 69,463
See Notes to Consolidated Financial Statements
4
Notes to Consolidated Financial Statements
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes, and management's discussion and analysis of results of operations
and financial condition included in the Company's 1995 Annual Report to
Shareholders. In the opinion of the Company's management, all normal recurring
adjustments necessary for a fair statement of the results for the interim
periods have been made.
Statement of Financial Accounting Standard No. 121, Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, is
effective for fiscal years beginning after December 15, 1995. The standard
requires that long-lived assets and certain identifiable intangibles held by an
entity be reviewed for impairment whenever events or circumstances indicate that
the carrying value of an asset may not be recoverable. The effect of this
standard was not material to the Company.
In June 1996, the Company announced the final phase of its program to expand and
streamline its worldwide aroma chemical production facilities. This program will
include the phase out of aroma chemical production at the Company's Union Beach,
New Jersey plant over the 18 month period ending December 31, 1997, and the
closure of smaller capacity aroma chemical facilities in Mexico City, Mexico and
Rio de Janeiro, Brazil by the end of 1996. Most of the aroma chemical volume
currently produced at Union Beach will be transferred to the Company's newly
constructed, state-of-the-art facility in Augusta, Georgia. In addition, aroma
chemical production capacity in Benicarlo, Spain will be expanded. The closure
of the three facilities will affect approximately 220 employees associated with
aroma chemical manufacturing at these locations, including 170 jobs at the Union
Beach facility.
The aroma chemical streamlining resulted in a one-time pretax charge to second
quarter 1996 earnings of $49,707,000 ($31,315,000 after tax or $.29 per share).
Cost savings from this program have been specifically identified and are
expected to ultimately increase pretax earnings by $20,000,000 annually, on
completion of the phase-out of Union Beach operations.
The reserve established as a result of the one-time charge consists of the
following components:
Employee related ......................... $10,629,000
Closing manufacturing plants ............. 39,078,000
-----------
Total nonrecurring charge ............. $49,707,000
===========
Utilization of the reserve since the June 1996 announcement has not been
material.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Operations
Worldwide net sales for the second quarter of 1996 were $374,397,000, compared
to $394,306,000 in the 1995 second quarter. For the first six months of 1996,
net sales totaled $757,164,000, compared to $767,900,000 for the six month
period in 1995. Sales in the second quarter and the first six months of 1996
were unfavorably impacted by translation of European currencies into a stronger
U.S. dollar.
Net income for the second quarter of 1996, including the one-time charge
discussed below, totaled $29,703,000 compared to $75,702,000 in the prior year
second quarter. On the same basis, net income for the first six months of 1996
totaled $95,867,000, compared to $145,658,000 for the comparable 1995
5
period. Net income for the second quarter and six month period ended June 30,
1996, excluding the one-time charge, was $61,018,000 and $127,182,000,
respectively.
The Company's sales and earnings for the first half of 1996 were affected by
slow customer reordering patterns for fragrances, both in Europe and the United
States. The disruption of reorder patterns began with sluggish retail sales
during the 1995 holiday season, and continued during the first half of 1996.
During the first half of 1996, margins were unfavorably affected by the low
volume of sales in the period. Sales, earnings and margins are also being
impacted by highly competitive conditions for aroma chemicals, which have caused
the Company to lower prices for certain aroma chemicals. The Company expects
stronger sales and earnings during the second half of the year.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first half 1996 and 1995 are detailed below.
First Half
-----------------
1996 1995
---- ----
Cost of Goods Sold .......................... 53.6% 50.6%
Research and Development Expense ............ 6.1% 5.8%
Selling and Administrative Expense .......... 14.6% 14.2%
In June 1996, the Company announced the final phase of its program to expand and
streamline its worldwide aroma chemical production facilities. This program will
include the phase out of aroma chemical production at the Company's Union Beach,
New Jersey plant over the 18 month period ending December 31, 1997, and the
closure of smaller capacity aroma chemical facilities in Mexico City, Mexico and
Rio de Janeiro, Brazil by the end of 1996. Most of the aroma chemical volume
currently produced at Union Beach will be transferred to the Company's newly
constructed, state-of-the-art facility in Augusta, Georgia. In addition, aroma
chemical production capacity in Benicarlo, Spain will be expanded.
These steps are intended to improve the Company's production capabilities, to
achieve cost efficiencies in the United States as well as internationally, and
to maintain and extend the Company's leadership position in the aroma chemical
market. They will also assure that the Company will have sufficient aroma
chemical supply to meet its own and its customers' needs for the foreseeable
future.
The closure of the three facilities will affect approximately 220 employees
associated with aroma chemical manufacturing at these locations, including 170
jobs at the Union Beach facility.
The aroma chemical streamlining resulted in a one-time pretax charge to second
quarter 1996 earnings of $49,707,000 ($31,315,000 after tax or $.29 per share).
Cost savings from this program have been specifically identified and are
expected to increase pretax earnings by $20,000,000 annually, on completion of
the phase-out of Union Beach operations.
The reserve established as a result of the one-time charge consists of the
following components:
Employee related .......................... $10,629,000
Closing manufacturing plants .............. 39,078,000
-----------
Total nonrecurring charge .............. $49,707,000
===========
6
Of the charge, approximately $33,000,000 represents asset writedowns and other
non-cash related costs. Usage of the reserve since the June 1996 announcement
has not been material.
The phased transfer of production from Union Beach to Augusta will result, until
the full closure of Union Beach, in some duplication of operating expenses which
will affect both operating margins and earnings. However, the cost savings from
the Company's program to streamline its worldwide aroma chemical facilities will
more than offset the effect of these conditions when the program is fully
implemented.
The effective tax rates for the second quarter and first six months 1996 were
36.0% and 36.4%, respectively, as compared to 36.9% and 37.0% for the comparable
periods in 1995. The lower effective tax rate reflects the effects of lower tax
rates in various tax jurisdictions in which the Company operates.
Statement of Financial Accounting Standard No. 121, Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, is
effective for fiscal years beginning after December 15, 1995. The standard
requires that long-lived assets and certain identifiable intangibles held by an
entity be reviewed for impairment whenever events or circumstances indicate that
the carrying value of an asset may not be recoverable. The effect of this
standard was not material to the Company.
Financial Condition
The financial condition of the Company continued to be strong. Cash, cash
equivalents and short-term investments totaled $302,470,000 at June 30, 1996. At
June 30, 1996, working capital was $767,166,000 compared to $759,576,000 at
December 31, 1995. Gross additions to property, plant and equipment during the
first half of 1996 were $45,688,000.
In January 1996, the Company's cash dividend was increased 9.7% to an annual
rate of $1.36 per share, and $.34 per share was paid to shareholders in both the
first and second quarters of 1996. The Company anticipates that its growth,
capital expenditure programs and share repurchase program will be funded from
internal sources.
The cumulative translation adjustment component of Shareholders' Equity at June
30, 1996 was $50,274,000 compared to $75,049,000 at December 31, 1995. Changes
in the component result from translating the net assets of the majority of the
Company's foreign subsidiaries into U.S. dollars at current exchange rates as
required by the Statement of Financial Accounting Standards No. 52 on accounting
for foreign currency translation.
7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of Registrant's shareholders held Thursday, May 9, 1996,
at which 94,048,305 shares, or 84.8%, of Registrant's Common Stock were
represented in person or by proxy, the 12 nominees for director of Registrant,
as listed in Registrant's proxy statement dated March 28, 1996 previously filed
with the Commission, were duly elected to Registrant's Board of Directors. There
was no solicitation of proxies in opposition to these nominees.
At such annual meeting, the shareholders also voted with respect to the other
matter submitted for shareholder consideration as follows, the vote being
legally sufficient to adopt the proposal:
Proposal to approve alternative performance goals in connection with
the grant of a restricted stock award to the Registrant's Chairman
under a proposed new employment contract, in order to preserve the
deductibility under the Internal Revenue Code of such award.
No. of Shares Voted
-------------------
FOR ......................... 90,951,816
AGAINST ..................... 2,610,282
ABSTAIN ..................... 486,207
8
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed no report on Form 8-K during the quarter
for which this report on Form 10-Q is filed.
9
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: August 14, 1996 By: /s/ THOMAS H. HOPPEL
------------------------------------------
Thomas H. Hoppel, Vice-President and Chief
Financial Officer
Dated: August 14, 1996 By: /s/ STEPHEN A. BLOCK
------------------------------------------
Stephen A. Block, Vice-President Law
and Secretary