================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1999 Commission file number 1-4858 INTERNATIONAL FLAVORS & FRAGRANCES INC. ------------------------------------------------------ (Exact Name of Registrant as specified in its charter) NEW YORK 13-1432060 - --------------------------------------------- ------------------- (State or other jurisdiction of incorporation (IRS Employer or organization) identification No.) 521 West 57th Street, New York, N.Y. 10019-2960 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 765-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding as of May 7,1999: 106,048,298 ================================================================================
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERNATIONAL FLAVORS & FRAGRANCES INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands) 3/31/99 12/31/98 ---------- ---------- ASSETS Current Assets: Cash & Cash Equivalents ....................... $ 101,845 $ 114,960 Short-term Investments ........................ 1,205 1,039 Trade Receivables ............................. 288,169 264,352 Allowance For Doubtful Accounts ............... (9,786) (9,517) Inventories: Raw Materials ................... 226,273 235,552 Work in Process ................. 5,585 8,251 Finished Goods .................. 151,648 160,158 ---------- ---------- Total Inventories ............... 383,506 403,961 Other Current Assets .......................... 61,624 73,233 ---------- ---------- Total Current Assets .......................... 826,563 848,028 ---------- ---------- Property, Plant & Equipment, At Cost ............. 920,382 913,397 Accumulated Depreciation ......................... (411,859) (414,613) ---------- ---------- 508,523 498,784 Other Assets ..................................... 40,866 41,252 ---------- ---------- Total Assets ..................................... $1,375,952 $1,388,064 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank Loans .................................... $ 48,666 $ 29,072 Accounts Payable-Trade ........................ 69,191 60,331 Dividends Payable ............................. 40,297 40,301 Income Taxes .................................. 42,046 46,647 Other Current Liabilities ..................... 80,199 96,557 ---------- ---------- Total Current Liabilities ..................... 280,399 272,908 ---------- ---------- Other Liabilities: Deferred Income Taxes ......................... 33,842 30,730 Long-term Debt ................................ 3,948 4,341 Retirement and Other Liabilities .............. 134,564 135,034 ---------- ---------- Total Other Liabilities .......................... 172,354 170,105 ---------- ---------- Shareholders' Equity: Common Stock (115,761,840 shares issued) ...... 14,470 14,470 Capital in Excess of Par Value ................ 136,317 136,443 Restricted Stock .............................. (6,187) (6,750) Retained Earnings ............................. 1,219,103 1,210,620 Accumulated Other Comprehensive Income: Cumulative Translation Adjustment .......... (39,827) (9,130) ---------- ---------- 1,323,876 1,345,653 Treasury Stock, at cost - 9,717,042 shares in '99 and 9,715,775 in '98 ................ (400,677) (400,602) ---------- ---------- Total Shareholders' Equity .................... 923,199 945,051 ---------- ---------- Total Liabilities and Shareholders' Equity ....... $1,375,952 $1,388,064 ========== ========== 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 3/31 --------------------- 1999 1998 -------- -------- Net Sales .......................................... $367,765 $373,411 -------- -------- Cost of Goods Sold ................................. 206,469 198,207 Research and Development Expenses .................. 25,925 23,850 Selling and Administrative Expenses ................ 63,580 57,373 Interest Expense ................................... 991 459 Other (Income) Expense, Net ........................ (2,554) (3,272) -------- -------- 294,411 276,617 -------- -------- Income Before Taxes on Income ...................... 73,354 96,794 Taxes on Income .................................... 24,574 34,168 -------- -------- Net Income ......................................... 48,780 62,626 Other Comprehensive Income: Foreign Currency Translation Adjustments ........ (30,697) (10,947) -------- -------- Comprehensive Income ............................... $ 18,083 $ 51,679 ======== ======== Net Income Per Share - Basic ....................... $0.46 $0.58 Net Income Per Share - Diluted ..................... $0.46 $0.58 Average Number of Shares Outstanding - Basic ....... 105,907 108,129 Average Number of Shares Outstanding - Diluted ..... 106,128 108,524 Dividends Paid Per Share ........................... $0.38 $0.37 See Notes to Consolidated Financial Statements
3 INTERNATIONAL FLAVORS & FRAGRANCES INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) 3 Months Ended 3/31 ---------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ............................................ $ 48,780 $ 62,626 Adjustments to Reconcile to Net Cash Provided by Operations: Depreciation .................................... 12,658 11,972 Deferred Income Taxes ........................... 7,456 1,636 Changes in Assets and Liabilities: Current Receivables .......................... (26,707) (51,448) Inventories .................................. 7,320 (9,577) Current Payables ............................. (8,049) 10,325 Other, Net ................................... 5,215 2,256 --------- --------- Net Cash Provided by Operations ....................... 46,673 27,790 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds From Sales/Maturities of Short-term Investments .............................. 221 29,999 Purchases of Short-term Investments ................... (392) 0 Additions to Property, Plant & Equipment, Net of Minor Disposals .............................. (34,445) (12,860) --------- --------- Net Cash (Used in) Provided by Investing Activities ... (34,616) 17,139 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash Dividends Paid to Shareholders ................... (40,301) (40,407) Increase in Bank Loans ................................ 21,243 638 Decrease in Long-term Debt ............................ (214) (892) Proceeds From Issuance of Stock Under Stock Option Plans......................................... 646 1,049 Purchase of Treasury Stock ............................ (847) (60,765) --------- --------- Net Cash Used in Financing Activities ................. (19,473) (100,377) --------- --------- Effect of Exchange Rate Changes on Cash and Cash Equivalents ................................ (5,699) (2,260) --------- --------- Net Change in Cash and Cash Equivalents ............... (13,115) (57,708) Cash and Cash Equivalents at Beginning of Year ........ 114,960 216,994 --------- --------- Cash and Cash Equivalents at End of Period ............ $ 101,845 $ 159,286 ========= ========= Interest Paid ......................................... $ 801 $ 428 Income Taxes Paid ..................................... $ 19,725 $ 17,034 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 1998 Annual Report to Shareholders. In the opinion of the Company's management, all normal recurring adjustments necessary for a fair statement of the results for the interim periods have been made. Effective January 1, 1999, the Company adopted Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up Activities, which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires that costs of start-up activities, including organization costs, be expensed as incurred. The effect of adopting this Standard was not material. As described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company's 1998 Annual Report to Shareholders, the Company undertook a program to phase out and close certain of its aroma chemical production facilities during 1996. The status of the reserve is as follows: BALANCE AT UTILIZED BALANCE AT 12/31/98 IN 1999 3/31/99 ---------- ---------- ---------- Employee related ............... $ 521,000 $ 205,000 $ 316,000 Closing manufacturing plants ... 2,200,000 913,000 1,287,000 ---------- ---------- ---------- Total .......................... $2,721,000 $1,118,000 $1,603,000 ========== ========== ========== <TABLE> <CAPTION> The Company's reportable segment information, based on geographic area, for the first quarter 1999 and 1998 follows: North Latin 1999 (Dollars in thousands) America EAME America Far East Eliminations Consolidated - ---------------------------------- ---------- ---------- ---------- ---------- -------------- -------------- <S> <C> <C> <C> <C> <C> <C> Sales to unaffiliated customers .. $118,509 $157,504 $ 48,540 $ 43,212 $ -- $367,765 Transfers between areas .......... 14,105 31,047 148 2,492 (47,792) -- -------- -------- -------- -------- -------- -------- Total sales ...................... $132,614 $188,551 $ 48,688 $ 45,704 $(47,792) $367,765 ======== ======== ======== ======== ======== ======== Operating profit ................. $ 10,120 $ 47,323 $ 7,054 $ 7,646 $ 1,639 $ 73,782 ======== ======== ======== ======== ======== Unallocated expenses ............. (1,991) Interest expense ................. (991) Other income (expense), net ...... 2,554 -------- Income before taxes on income .... $ 73,354 ======== <CAPTION> North Latin 1998 (Dollars in thousands) America EAME America Far East Eliminations Consolidated - ---------------------------------- ---------- ---------- ---------- ---------- -------------- -------------- <S> <C> <C> <C> <C> <C> <C> Sales to unaffiliated customers .. $121,102 $159,711 $ 51,703 $ 40,895 $ -- $373,411 Transfers between areas .......... 19,585 27,302 179 3,947 (51,013) -- -------- -------- -------- -------- -------- -------- Total sales ...................... $140,687 $187,013 $ 51,882 $ 44,842 $(51,013) $373,411 ======== ======== ======== ======== ======== ======== Operating profit ................. $ 21,982 $ 54,035 $ 12,162 $ 7,657 $ (182) $ 95,654 ======== ======== ======== ======== ======== Unallocated expenses ............. (1,673) Interest expense ................. (459) Other income (expense), net ...... 3,272 -------- Income before taxes on income .... $ 96,794 ======== </TABLE>
5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATIONS Worldwide net sales for the first quarter of 1999 were $367,765,000, compared to $373,411,000 in the 1998 first quarter. North American flavor sales continue to grow, reflecting a strengthening of the U.S. food and beverage market. In addition, the Company is beginning to see a resumption of growth in the Far East. However, a number of factors combined to offset these positive developments. Sales were adversely affected by weakness in aroma chemical sales, in both EAME and North America, and because of pricing pressure on certain non-proprietary chemicals produced by the Company. The currency and ensuing economic crisis in Brazil, the Company's largest market in Latin America, also significantly impacted both sales and operating results. Sales in the first quarter of 1999 were not significantly affected by translation. The percentage relationship of cost of goods sold and other operating expenses to sales for the first quarter 1999 and 1998 are detailed below. FIRST QUARTER -------------------- 1999 1998 ---- ---- Cost of Goods Sold .......................... 56.1% 53.1% Research and Development Expenses ........... 7.0% 6.4% Selling and Administrative Expenses ......... 17.3% 15.4% Cost of goods sold, as a percentage of net sales, increased from the prior year primarily due to the circumstances impacting aroma chemicals, both in terms of weakness in demand and in pricing pressures. Selling and administrative expenses increased as a percentage of sales primarily due to costs of the Company's Y2K program. The costs for this program amounted to approximately $.04 per share for the current quarter; such expenses are expected to continue at about the same level through the end of the second quarter of 1999. Excluding the Y2K program costs, selling and administrative expenses would have represented approximately 15.7% of sales, in line with 1998 levels. There were no comparable levels of spending for Y2K in the 1998 first quarter. Net income for the first quarter of 1999 totaled $48,780,000 compared to $62,626,000 in the prior year first quarter. The decline in net income from the prior year was primarily attributable to the increase in cost of goods sold, as a percentage of sales, and the costs of the Company's Y2K program. Basic and diluted earnings per share for the current quarter were both $.46, compared to $.58 in the prior year first quarter. As described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company's 1998 Annual Report to Shareholders, the Company undertook a program to phase out and close certain of its aroma chemical production facilities during 1996. The status of the reserve is as follows:
6 BALANCE AT UTILIZED BALANCE AT 12/31/98 IN 1999 3/31/99 ---------- ---------- ---------- Employee related ............... $ 521,000 $ 205,000 $ 316,000 Closing manufacturing plants ... 2,200,000 913,000 1,287,000 ---------- ---------- ---------- Total .......................... $2,721,000 $1,118,000 $1,603,000 ========== ========== ========== The effective tax rate for the first quarter 1999 was 33.5% as compared to 35.3% for the same period in 1998. The lower effective rate reflects the effects of lower tax rates in various tax jurisdictions in which the Company operates. FINANCIAL CONDITION The financial condition of the Company continued to be strong. Cash, cash equivalents and short-term investments totaled $103,050,000 at March 31, 1999, and working capital was $546,164,000 compared to $575,120,000 at December 31, 1998. Gross additions to property, plant and equipment during the first three months of 1999 were $34,664,000. In January 1999, the Company's cash dividend was increased to an annual rate of $1.52 per share from $1.48 in 1998, and $.38 per share was paid to shareholders in the first quarter of 1999. The Company anticipates that its growth, capital expenditure programs and share repurchase program will be funded mainly from internal sources. The accumulated comprehensive income component of Shareholders' Equity, comprised principally of the cumulative translation adjustment, at March 31, 1999, was ($39,827,000) compared to ($9,130,000) at December 31, 1998. 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. YEAR 2000 ISSUE The Company has instituted a comprehensive program to address its "Year 2000" needs (the "Y2K Program"). The Y2K Program is currently on schedule to be completed prior to January 1, 2000, and in most cases no later than September 30, 1999. The Y2K Program has been designed to evaluate and, if necessary, repair or replace those computer programs and embedded computer chips that are significant to the Company and that use only the last two digits to refer to a year ("Y2K Code"), so that such Y2K Code will be "Year 2000 Capable," that is, will recognize dates beginning in the year 2000. For purposes of the Y2K Program, Y2K Code is that which the Company concludes could, if not made Year 2000 Capable, materially affect the Company's operations and ability to service its customers, or create a safety or environmental risk. In addition to dealing with the Company's Y2K Code, the Y2K Program also is designed to identify and evaluate the Year 2000 readiness of the Company's key suppliers of inventory and non-inventory goods and services, and of the Company's significant customers. The Y2K Program, as it relates to the Company's computer programs and embedded technology, has five phases: (1) assessing computer programs and embedded technology to identify Y2K Code; (2)
7 assigning priorities to the identified Y2K Code; (3) repairing or replacing Y2K Code to make such Y2K Code Year 2000 Capable; (4) testing the repaired or replaced Y2K Code; and (5) developing and implementing, as necessary, contingency plans to address the possibility that the Company or third parties, whose operations or business could affect the Company, do not become Year 2000 Capable. The Company has engaged certain outside consultants with recognized expertise in assessing and dealing with Year 2000 needs, principally Computer Sciences Corporation, to assist in the management of the Y2K Program and in the repair and testing of certain Y2K Code. The Y2K Program focuses on Company Y2K Code in three principal areas: (1) infrastructure; (2) applications software; and (3) facility operations, where the great majority of embedded technology is found. The infrastructure area involves hardware and systems software other than applications software. As hardware and systems software is repaired, upgraded or replaced, they are tested to assure that they are Year 2000 Capable. The Company expects the infrastructure portion of the Y2K Program to be completed by June 30, 1999. Significant portions of the Company's application software will be replaced by new software, principally SAP, an enterprise requirements planning ("ERP") software package. At March 31, 1999, the global design for the SAP project was complete and the first implementation, encompassing a portion of the Company's North American operations, occurred on May 3, 1999, its scheduled date under the SAP project plans; the North American implementation of SAP is expected to be completed by the end of the second quarter. Applications software Y2K Code not being replaced as part of the SAP project is being repaired, upgraded or replaced (where an upgrade or replacement is available from the supplier of such software) to make such Y2K Code Year 2000 Capable. This portion of the Y2K Program is expected to be completed by September 30, 1999, consistent with the schedule established by the Y2K Program. Facility operations include hardware, software and associated embedded computer chips used in the operation of all facilities owned by the Company, including, but not limited to, equipment used in manufacturing and research and development, as well as security and other systems that may have date sensitive operating controls. The Company is completing the assessment of these systems and is testing critical systems to ensure Y2K Capability. This portion of the Y2K Program is on schedule, and the Company expects it to be completed early in the fourth quarter of 1999. The Company has identified its key suppliers of inventory and non-inventory goods and services and has contacted them, in writing and in some cases through face-to-face discussions and analysis, to ascertain the extent of their Year 2000 Capability. Similarly, the Company has also been communicating with significant customers about their and the Company's Year 2000 Capability plans and progress. This portion of the Y2K Program is expected to be completed in the third quarter of 1999. The total cost to the Company of the Y2K Program is estimated to approximate $45 million of which approximately $38 million has been expended at March 31, 1999. Of the Y2K Program costs, approximately $21 million represents capital expenditures associated with replacement hardware, software and associated items. The remaining amount, totaling approximately $24 million, represents the costs of repair, testing and related efforts, and is being expensed as incurred. Of the $38 million spent as at March 31, 1999, approximately $20 million related to capital and the balance of $18 million was expensed. These amounts do not include the estimated cost of the SAP project.
8 The failure to make Y2K Code Year 2000 Capable could result in an interruption in, or failure of, certain business activities or operations, which could materially and adversely affect the Company's results of operations, liquidity and/or financial condition. The Company currently expects that the Company's Y2K Code will be Year 2000 Capable on or before December 31, 1999. Due to general uncertainty about the overall extent of the Year 2000 problem, however, including, but not limited to, uncertainty about the extent of Year 2000 Capability of the Company's suppliers and customers, the Company is currently unable to determine whether the consequences of the failure of entities other than the Company to be Year 2000 Capable will have a material impact on the Company's results of operations, liquidity or financial condition. Subject to the above uncertainties, however, the Company believes that, with the completion of the Y2K Program as scheduled, and with the implementation of SAP, the likelihood of material interruptions of the Company's normal business should be reduced. Notwithstanding the Company's belief, the Company is currently unable to predict, and thus to describe, its most likely worst case Year 2000 scenario. To address the possibility that the Company or its suppliers, customers, or other third parties are not successful in becoming Year 2000 Capable, the Company has commenced to develop contingency plans for the critical aspects of its operations. Such plans will be designed to avoid or mitigate potential serious disruptions in the Company's business and will be refined and modified as the Company monitors and evaluates the progress of its Y2K Program. OTHER INFORMATION The Company is evaluating its selling, administrative, and manufacturing functions with the intention of further streamlining operations and reducing operating costs. The Company anticipates that such cost reductions will be announced and implemented in the second quarter, and through the remainder of the year. CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements in this Management's Discussion and Analysis which are not historical facts or information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those expressed or implied by such forward-looking statements. Risks and uncertainties with respect to the Company's business include general economic and business conditions, the price and availability of raw materials, the ability of the Company and third parties, including customers and suppliers, to adequately address the Year 2000, and political and economic uncertainties, including the fluctuation or devaluation of currencies in countries in which the Company does business.
9 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Number 10(a) Agreement dated March 3, 1998 between Registrant and Ronald S. Fenn, Vice-President of Registrant. 10(aa) Amendment dated March 24, 1999 to the above agreement with Mr. Fenn. 27 Financial Data Schedule (EDGAR version only). (b) Reports on Form 8-K Registrant filed no report on Form 8-K during the quarter for which this report on Form 10-Q is filed.
10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL FLAVORS & FRAGRANCES INC. Dated: May 14, 1999 By:/s/ DOUGLAS J. WETMORE -------------------------------------------- Douglas J. Wetmore, Vice-President and Chief Financial Officer Dated: May 14, 1999 By:/s/ STEPHEN A. BLOCK -------------------------------------------- Stephen A. Block, Vice-President Law and Regulatory Affairs and Secretary
EXHIBIT INDEX Exhibit No. Descriptions ----------- ---------------- 10(a) Agreement dated March 3, 1998 between Registrant and Ronald S. Fenn, Vice-President of Registrant. 10(aa) Amendment dated March 24, 1999 to the above Agreement with Mr. Fenn. 27 Financial Data Schedule (EDGAR version only).