ITEM 1. BUSINESS.
International Flavors & Fragrances Inc., incorporated in New York in 1909, is a leading creator and manufacturer of flavor and fragrance products used by other manufacturers to impart or improve flavor or fragrance in a wide variety of consumer products. Fragrance products are sold principally to manufacturers of perfumes, cosmetics, soaps and detergents, and flavor products to manufacturers of prepared foods, beverages, dairy foods, pharmaceuticals and confectionery products.
The present world-wide scope of the Company's business is in part the result of the combination in December 1958 of the business theretofore conducted primarily in the United States by the Company under the name van Ameringen-Haebler, Inc. ("VAH") with the business conducted primarily in Europe by N. V. Polak & Schwarz's Essencefabrieken, a Dutch corporation ("P & S"). The P & S enterprise, founded in Holland in 1889, was also engaged in the manufacture and sale of flavor and fragrance products, with operations in a number of countries where VAH was not an important factor.
The major manufacturing facilities of the Company are located in the United States, Holland, France, Germany, Great Britain, Ireland, Spain, Switzerland, Argentina, Brazil, Mexico, Australia, China, Hong Kong, Indonesia and Japan. Manufacturing facilities are also located in seven other countries. The Company maintains its own sales and distribution facilities in 33 countries and is represented by sales agents in additional countries. The Company's principal executive offices are located at 521 West 57th Street, New York, New York 10019 (Tel. No. 212-765-5500). Except as the context otherwise indicates, the term "the Company" as used herein refers to the Registrant and its subsidiaries.
MARKETS
Fragrance products are used by customers in the manufacture of such consumer products as soaps, detergents, cosmetic creams, lotions and powders, lipsticks, after-shave lotions, deodorants, hair preparations and air fresheners, as well as in other consumer products designed solely to appeal to the sense of smell, such as perfumes and colognes. The cosmetics industry, including perfumes and toiletries, is one of the Company's two largest customer groups. Most of the major United States companies in this industry are customers of the Company, and five of the largest United States cosmetics companies are among its principal customers. The household products industry, including soaps and detergents, is the other important customer group. Four of the largest United States household product manufacturers are major customers of the Company. In the five years ended December 31, 1996, sales of fragrance products accounted for approximately 60%, 59%, 59%, 57% and 57%, respectively, of the Company's total sales.
Flavor products are sold principally to the food and beverage industries for use in such consumer products as soft drinks, candies, baked goods, desserts, prepared foods, dietary foods, dairy products, drink powders, pharmaceuticals and alcoholic beverages. Two of the Company's largest customers for flavor products are major producers of prepared foods and beverages in the United States. In the five years ended December 31, 1996, sales of flavor products accounted for approximately 40%, 41%, 41%, 43% and 43%, respectively, of the Company's total sales.
PRODUCTS
The Company's principal fragrance and flavor products consist of compounds of large numbers of ingredients blended by it under formulas created by its perfumers and flavorists. Most of these compounds contribute the total fragrance or flavor to the consumer products in which they are used. This fragrance or flavor characteristic is often a major factor in the public selection and acceptance of the consumer end product. A smaller amount of compounds is sold to manufacturers who further blend them to achieve the finished fragrance or flavor in their consumer products. Thousands of compounds are produced by the Company, and new compounds are constantly being created in order to meet the many and changing characteristics of its customers' end products. Most of the fragrance compounds and many of the flavor compounds are created and produced for the exclusive use of particular customers. The Company's flavor products also include extractives, concentrated juices and concentrates derived from various fruits, vegetables, nuts, herbs and spices as well as microbiologically derived ingredients. The Company's products are sold in solid and liquid forms and in amounts ranging from a few pounds to many tons, depending upon the nature of the product.
The ingredients used by the Company in its compounds are both synthetic and natural. Most of the synthetic ingredients are manufactured by the Company. While the major part of the Company's production of synthetic
ingredients is used by it in its compounds, a substantial portion is sold to others. The natural ingredients are derived from flowers, fruits and other botanical products as well as from animal products. They contain varying numbers of organic chemicals, which are responsible for the fragrance or flavor of the natural product. The natural products are purchased for the larger part in processed or semi-processed form. Some are used in compounds in the state in which they are purchased and others after further processing. Natural products, together with various chemicals, are also used as raw materials for the manufacture of synthetic ingredients by chemical processes.
MARKET DEVELOPMENTS
The demand for consumer products utilizing flavors and fragrances has been stimulated and broadened by changing social habits resulting from such factors as increases in personal income, employment of women, teen-age population, leisure time, health concerns and urbanization and by the continued growth in world population. In the fragrance field, these developments have expanded the market for colognes, toilet waters, deodorants, soaps with finer fragrance quality, men's toiletries and other products beyond traditional luxury items such as perfumes. In the flavor field, similar market characteristics have stimulated the demand for such products as convenience foods, soft drinks and low-cholesterol and low-fat food products that must conform to expected tastes. New and improved methods of packaging, application and dispensing have been developed for many consumer products which utilize some of the Company's flavor or fragrance products. These developments have called for the creation by the Company of many new compounds and ingredients compatible with the newly introduced materials and methods of application used in consumer end products.
PRODUCT DEVELOPMENT AND RESEARCH
The development of new fragrance and flavor compounds is a complex artistic and technical process calling upon the combined knowledge and talents of the Company's creative perfumers and flavorists and its application chemists and research chemists. Through long experience the perfumers and flavorists develop and refine their skill for creating fragrances or flavors best suited to the market requirements of the customers' products.
An important contribution to the creation of new fragrance and flavor products is the development in the Company's research laboratories of new ingredients having fragrance or flavor value. The principal functions of the fragrance research program are to isolate and synthesize fragrance components found in natural substances and through chemical synthesis to develop new materials and better techniques for utilization of such materials. The principal functions of the flavor research program are to isolate and produce natural flavor ingredients utilizing improved processes.
The work of the perfumers and flavorists is conducted in 30 fragrance and flavor laboratories in 24 countries. The Company maintains a research center at Union Beach, New Jersey. The Company spent $93,545,000 in 1996, $90,846,000 in 1995 and $81,369,000 in 1994 on its research and development activities, all of which were financed by the Company. These expenditures are expected to increase in 1997 to approximately $100,000,000. Of the amount expended in 1996 on such activities, 57% was for fragrances and the balance was for flavors. The Company employed 778 persons in 1996 and 765 persons in 1995 in such activities.
The business of the Company is not materially dependent upon any patents, trademarks or licenses.
DISTRIBUTION
Most of the Company's sales are made through its own sales force, operating from eight sales offices in the United States and 42 sales offices in 32 foreign countries. Sales in other countries are made through sales agencies. For the year ended December 31, 1996, 30% of the Company's sales were to customers in North America, 35% in Western Europe and 35% in the rest of the world. See Note 10 of the Notes to the Consolidated Financial Statements for other information with respect to the Company's international operations.
The Company estimates that during 1996 its 30 largest customers accounted for about 54% of its sales, its four largest customers and their affiliates accounted for about 12%, 6%, 5% and 3%, respectively, of its sales, and no other single customer accounted for more than 3% of sales.
GOVERNMENTAL REGULATION
Manufacture and sale of the Company's products are subject to regulation in the United States by the Food and Drug Administration, the Agriculture Department, the Alcohol, Tobacco and Firearms Bureau of the Treasury
Department, the Environmental Protection Agency, the Occupational Safety and Health Administration and state authorities. The foreign subsidiaries are subject to similar regulation in a number of countries. Compliance with existing governmental requirements regulating the discharge of materials into the environment has not materially affected the Company's operations, earnings or competitive position. The Company expects to spend in 1997 approximately $4,500,000 in capital projects and $14,100,000 in operating expenses and governmental charges for the purpose of complying with such requirements. The Company expects that in 1998 capital expenditures, operating expenses and governmental charges for such purpose will not be materially different.
RAW MATERIAL PURCHASES
Some 5,000 different raw materials are purchased from many sources all over the world. The principal natural raw material purchases consist of essential oils, extracts and concentrates derived from fruits, vegetables, flowers, woods and other botanicals, animal products and raw fruits. The principal synthetic raw material purchases consist of organic chemicals. The Company believes that alternate sources of materials are available to enable it to maintain its competitive position in the event of any interruption in the supply of raw materials from present sources.
COMPETITION
The Company has more than 50 competitors in the United States and world markets. While no single factor is responsible, the Company's competitive position is based principally on the creative skills of its perfumers and flavorists, the technological advances resulting from its research and development and the customer service and support provided by its marketing and application groups. Although statistics are not available, the Company believes that it is one of the four largest companies producing and marketing on an international basis a wide range of fragrance and flavor products of the types manufactured by it for sale to manufacturers of consumer products. In particular countries and localities, the Company faces the competition of numerous companies specializing in certain product lines, among which are some larger than the Company and some more important in a particular product line or lines. Most of the Company's customers do not buy all their fragrance or flavor products from the same supplier, and some customers make their own fragrance or flavor compounds with ingredients supplied by the Company or others.
EMPLOYEE RELATIONS
The Company at December 31, 1996 employed approximately 4,630 persons, of whom about 1,510 were employed in the United States, 510 in Holland, 270 in England, 260 in France and 2,080 elsewhere. The Company has never experienced a work stoppage or strike and it considers that its employee relations are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES.
The principal manufacturing and research properties of the Company are as follows:
LOCATION OPERATION -------- --------- UNITED STATES New York, NY ............. Fragrance laboratories. Augusta, GA .............. Production of fragrance chemical ingredients. Union Beach, NJ .......... Production of fragrance chemical ingredients (through December 1997); research and development center. Hazlet, NJ ............... Production of fragrance compounds; fragrance laboratories. South Brunswick, NJ ...... Production of flavor ingredients and compounds and fruit preparations; flavor laboratories. Salem, OR ................ Production of fruit and vegetable concentrates, fruit and vegetable preparations and flavor ingredients. Menomonee Falls, WI ...... Production of flavor compounds, flavor ingredients, bacterial cultures and fruit preparations.
HOLLAND Hilversum ................ Flavor and fragrance laboratories. Tilburg .................. Production of flavor and fragrance compounds and flavor ingredients.
FRANCE Bois-Colombes ............ Fragrance laboratories; flavor laboratories. Dijon .................... Production of fragrance compounds, flavor ingredients and compounds and fruit preparations.
GERMANY Emmerich/Rhein ........... Production of fruit preparations and flavor ingredients and compounds; flavor laboratories.
GREAT BRITAIN Haverhill ................ Production of flavor compounds and ingredients, fruit preparations and fragrance chemical ingredients; flavor laboratories.
IRELAND Drogheda ................. Production of fragrance compounds.
SPAIN Benicarlo ................ Production of fragrance chemical ingredients.
SWITZERLAND Reinach-Aargau ........... Production of fruit preparations and flavor ingredients and compounds; flavor laboratories.
ARGENTINA Garin .................... Production of fruit preparations and flavor ingredients and compounds; production of fragrance compounds; flavor laboratories.
BRAZIL Rio de Janeiro ........... Production of flavor ingredients and compounds, fruit preparations and fragrance compounds, flavor laboratories. Sao Paulo ................ Fragrance laboratory. Taubate .................. Production of flavor compounds.
MEXICO Tlalnepantla ............. Production of flavor compounds, fruit preparations and fragrance compounds; flavor and fragrance laboratories.
AUSTRALIA
Dee Why .................. Production of flavor compounds; flavor and fragrance laboratories.
LOCATION OPERATION -------- --------- CHINA Guangzhou ................ Production of flavor and fragrance compounds; flavor laboratories. Xin'anjiang .............. Production of fragrance chemical ingredients.
HONG KONG .................. Production of fragrance compounds; fragrance laboratories.
INDONESIA Jakarta .................. Production of flavor and fragrance compounds and ingredients; flavor and fragrance laboratories.
JAPAN Tokyo .................... Flavor and fragrance laboratories. Gotemba .................. Production of flavor and fragrance compounds.
The principal executive offices of the Company and its New York laboratory facilities are located at 521 West 57th Street, New York City. Such offices and all of the above facilities of the Company are owned in fee, except those in Wisconsin, China, Hong Kong, and the Indonesian landsite, which are leased. The Company believes that the remaining facilities meet its present needs, but that additional facilities will be required to meet anticipated growth in sales.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Various Federal and State authorities and private parties claim that the Company is a potentially responsible party as a generator of waste materials for alleged pollution at a total of 11 waste sites operated by third parties located principally in New Jersey and Pennsylvania. The governmental authorities seek to recover costs incurred and to be incurred to clean up the sites. The private suits generally seek damages for alleged injuries and, in one case, a waste site's owners/operators seek contribution and indemnification for their share of remedial action costs incurred and to be incurred at the site.
The waste site claims and suits usually involve million dollar amounts, and most of them are asserted against many potentially responsible parties. Remedial activities typically consist of several phases carried out over a period of years. Most site remedies begin with investigation and feasibility studies, followed by physical removal, destruction, treatment or containment of contaminated soil and debris, and sometimes by groundwater monitoring and treatment.
The Company believes that the amounts it probably will have to pay for clean-up costs and damages at all sites will not be material to the Company's financial condition, results of operations or liquidity, because of the involvement of other large potentially responsible parties at most sites, because payment will be made over an extended time period and because, pursuant to an agreement reached in July 1994 with three of the Company's liability insurers, defense costs and indemnity amounts payable by the Company in respect of the sites will be shared by the insurers up to an agreed amount.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF REGISTRANT:
YEAR FIRST BECAME NAME OFFICE AND OTHER BUSINESS EXPERIENCE(2) AGE OFFICER ---- --------------------------------------- --- ------- Eugene P. Grisanti(1) .. President; Chairman of the Board 67 1964
Brian D. Chadbourne .... Senior Vice-President and Director 44 1996 since January 1997; Vice-President September-December 1996; President and Chief Executive Officer, Keebler Company, a baked goods manufacturer, a subsidiary of United Biscuits plc 1993-1996; Managing Director, United Biscuits plc prior thereto
Hendrik C. van Baaren .. Senior Vice-President; Director 57 1983
Stephen A. Block ....... Vice-President and Secretary since 52 1993 1993; Senior Vice President, General Counsel, Secretary and Director, International Specialty Products Inc. from 1991 to 1992 and GAF Corporation from 1990 to 1992
Eric Campbell .......... Vice-President; Director, Human 50 1996 Resources, Avon Products, Inc. from 1991 to 1995
Ronald S. Fenn ......... Vice-President 59 1986
Thomas H. Hoppel ....... Vice-President and Chief Financial 66 1976 Officer; Director
Ira Katz ............... Vice-President 63 1987
Carlos A. Lobbosco ..... Vice-President 57 1993
Lewis G. Lynch, Jr. .... Vice-President 61 1975
Stuart R. Maconochie ... Vice-President 57 1989
Rudolf Merz ............ Vice-President 57 1982
Michael D. Sweeney ..... Vice-President 53 1994
Douglas J. Wetmore ..... Controller 39 1992
James P. Huether ....... Treasurer 40 1996
- ----------
(1) Chairman of Executive Committee of the Board of Directors.
(2) Employed by the Company or an affiliated company for the last five years, except as otherwise indicated.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
(a) Market Information.
The Company's common stock is traded principally on the New York Stock Exchange. The high and low stock prices for each quarter during the last two years were:
1996 1995 ---------------- ---------------- QUARTER HIGH LOW HIGH LOW - ------- ------ ------ ------ ------ First ............................... $51.88 $47.13 $53.13 $45.13 Second .............................. 50.75 44.63 53.63 45.63 Third ............................... 47.88 41.00 53.38 46.38 Fourth .............................. 47.13 40.75 55.88 45.88
(b) Approximate Number of Equity Security Holders.
(A) (B) NUMBER OF RECORD HOLDERS AS TITLE OF CLASS OF DECEMBER 31, 1996 -------------- --------------------------- Common stock, par value 12 1/2(cent)per share ...... 5,611
(c) Dividends.
Cash dividends declared per share for each quarter since January 1995 were as follows:
1997 1996 1995 ---- ---- ---- First .................. $.36 $.34 $.31 Second ................. .34 .31 Third .................. .34 .31 Fourth ................. .36 .34
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Operations
In 1996, worldwide net sales were $1,436,053,000 compared to $1,439,487,000 and $1,315,237,000 in 1995 and 1994, respectively. Sales of fragrance products were $813,918,000, $819,263,000 and $772,786,000 in 1996, 1995 and 1994, respectively. Fragrance sales decreased 1% in 1996 in comparison to 1995, following an increase of 6% in 1995 over 1994. Flavor sales were $622,135,000, $620,224,000 and $542,451,000 in 1996, 1995 and 1994, respectively. Flavor sales were essentially flat in 1996 in comparison to 1995; in 1995, flavor sales increased 14% over 1994.
Sales outside the United States represented approximately 70% of total sales in 1996, 1995 and 1994. The following table shows net sales on a geographic basis:
SALES BY DESTINATION PERCENT PERCENT (DOLLARS IN THOUSANDS) 1996 CHANGE 1995 CHANGE 1994 ---------------------- ---------- ------ ---------- ------ ---------- North America ........... $ 427,219 -2% $ 437,227 4% $ 418,565 Western Europe .......... 501,166 -4% 520,382 11% 470,281 Other Areas ............. 507,668 5% 481,878 13% 426,391 ---------- ---------- ---------- Total net sales ....... $1,436,053 0% $1,439,487 9% $1,315,237 ========== ========== ==========
In 1996, fragrance sales were affected by slow customer reordering patterns in Europe and the United States, as well as a temporary slowdown in new product introductions. Flavor sales were affected by the downsizing and restructuring of some of the Company's major U.S. food customers, as well as the unusually cool and wet summer in Europe and the United States which resulted in lower flavor sales to the beverage, ice cream and yogurt industries. The Company believes these circumstances to be temporary. Both fragrance and flavor sales were strongest in the Far East and Latin America. Sales were unfavorably impacted by translation of European currencies into a stronger U.S. dollar; if the dollar exchange rate remained the same during 1996 and 1995, sales would have increased approximately 1% worldwide.
In 1995, the Company achieved solid growth in sales with increases in all geographic areas. Fragrance sales were strongest in Europe and the Far East. Flavor sales were strong in all areas of the world, with exceptional gains achieved in Latin America. Sales were favorably affected by translating stronger foreign currencies into the U.S. dollar; if the dollar exchange rate remained the same during 1995 and 1994, sales would have increased approximately 5% worldwide.
Although the Company's reported sales and earnings are affected by the weakening or strengthening of the U.S. dollar, this has no long-term effect on the underlying strength of our business.
The percentage relationship of cost of goods sold and other operating expenses to sales were as follows:
1996 1995 1994 ---- ---- ---- Cost of goods sold ............... 54.2% 51.9% 51.5% Research and development expenses ........................ 6.5% 6.3% 6.2% Selling and administrative expenses ........................ 15.6% 15.1% 15.8%
Cost of goods sold includes the cost of materials purchased and internal manufacturing expenses. In 1996, margins on sales and cost of goods sold were unfavorably affected by moderated sales of higher margin fine fragrances. In addition, highly competitive conditions for aroma chemicals caused the Company to reduce selling prices for certain aroma chemicals in order to maintain its markets. As noted below, the Company incurred certain duplicate manufacturing costs in 1996 in connection with the phasing out of its Union Beach production facility.
Research and development expenses have consistently been between 6% and 7% of sales. These activities contribute in a significant way to the Company's business. The expenses are for the development of new and improved products, technical product support, compliance with governmental regulations and help in maintaining our relationships with our customers who are often dependent on technical advances.
Selling and administrative expenses are necessary to support the Company's sales and operating levels and have remained relatively constant as a percentage of net sales.
Operating profit, as shown in Note 10 of the Notes to the Consolidated Financial Statements, was $296,456,000 in 1996, $390,702,000 in 1995 and $354,425,000 in 1994. In 1996, operating profit included a nonrecurring charge of $49,707,000. Operating profit was also unfavorably affected by the lower margins on sales. In 1995, the profit growth was primarily the result of the sales growth for the period.
Interest expense amounted to $2,740,000, $3,160,000 and $13,470,000 in 1996, 1995 and 1994, respectively. This expense relates primarily to bank loans taken out by some of the Company's subsidiaries and may be significantly affected by very high interest rates in hyperinflationary countries where local bank borrowing is used as a hedge against devaluations. Interest expense decreased in 1996 due to lower average interest rates on borrowings, partially offset by somewhat higher average bank loans outstanding during the year. Interest expense decreased in 1995 primarily due to lower average interest rates, mainly in Brazil. The borrowings in Brazil were intended to serve as hedges against the devaluations which occurred in that country, particularly during the first half of 1994. In 1994, substantial offsetting exchange gains, included in other income, were generated in Brazil. More details on bank loans and long-term debt are contained in Note 6 of the Notes to the Consolidated Financial Statements.
Other income was $11,405,000 in 1996, compared to $12,871,000 in 1995 and $25,213,000 in 1994. In 1996, other income decreased primarily as a result of lower interest income, due to lower average interest rates, partially offset by lower exchange losses. The decrease in other income in 1995 was primarily due to lower exchange gains attributable to the hedging activities in Brazil mentioned above.
Net income in 1996, including the nonrecurring charge, totaled $189,894,000. Excluding the nonrecurring charge, net income was $221,209,000, a decrease of $27,608,000 or 11% from the prior year. Net income in 1995 was $248,817,000, an increase of $22,795,000 or 10% over 1994. Net income in 1994 was $226,022,000.
During 1996, the Company undertook a program to expand and streamline its worldwide aroma chemical production facilities. This program includes the phase-out of production at the Company's Union Beach, New Jersey plant by December 31, 1997, and the closure of smaller capacity facilities in Mexico City, Mexico and Rio de Janeiro, Brazil during 1996. Most of the volume currently produced at Union Beach will be transferred to the Company's state-of-the-art facility in Augusta, Georgia. In addition, 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. These steps 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 closures will affect approximately 220 employees associated with aroma chemical manufacturing at these locations. At December 31, 1996, 50 employees had been terminated in connection with this program.
The aroma chemical streamlining resulted in a nonrecurring pretax charge to second quarter 1996 earnings of $49,707,000 ($31,315,000 after tax or $.29 per share). Of the charge, approximately $33,000,000 represents asset writedowns and other non-cash related costs. Cost savings from this program have been specifically identified and are expected to increase annual pretax earnings by $20,000,000, on completion of the phase-out of Union Beach operations.
The reserve established as a result of the nonrecurring charge, and movements therein during 1996, are as follows:
BALANCE ORIGINAL UTILIZED AT END (DOLLARS IN THOUSANDS) RESERVE IN 1996 OF YEAR ---------------------- ------- ------ ------- Employee related ................... $10,629 $ 560 $10,069 Closing manufacturing plants ....... 39,078 6,446 32,632 ------- ------ ------- Total ............................ $49,707 $7,006 $42,701 ======= ====== =======
Until the closure of Union Beach, the phased transfer of production to Augusta will result in some duplication of operating expenses which will affect both operating margins and earnings.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Under FAS 121, long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. The effect of adopting this standard was not material to the Company.
Under Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based Compensation, companies can elect, but are not required, to recognize compensation expense for all stock-based awards using a fair-value methodology. The Company adopted the disclosure-only provisions of this standard in 1996. More details on the Company's stock-based compensation are contained in Note 9 of the Notes to the Consolidated Financial Statements.
In October 1996, the American Institute of Certified Public Accountants issued the Statement of Position 96-1 (SOP 96-1), Accounting for Environmental Remediation Liabilities. SOP 96-1 establishes guidance for when environmental remediation liabilities should be recorded and the factors to be considered in determining amounts recognized. This standard is effective for years beginning after December 15, 1996. The Company is studying the implications of SOP 96-1 but does not believe the impact on operating results or financial condition will be material.
Compliance with existing governmental requirements regulating the discharge of materials into the environment has not materially affected the Company's operations, earnings or competitive position. In 1996, the Company spent approximately $3,800,000 on capital projects and about $15,300,000 in operating expenses and governmental charges for the purpose of complying with such regulations. Expenditures for these purposes will continue for the foreseeable future. In addition, the Company is party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act or similar state statutes. It is expected that the impact of any judgments in or voluntary settlements of such proceedings will not be material to the Company's financial condition, results of operations or liquidity.
Financial Condition
The financial condition of the Company continued to be strong during 1996. Cash, cash equivalents and short-term investments totaled $317,983,000 at December 31, 1996, compared to $296,933,000 and $301,808,000 at December 31, 1995 and 1994, respectively. Short-term investments held by the Company are high-quality, readily marketable instruments. Working capital totaled $725,892,000 at year-end 1996, compared to $759,576,000 and $704,763,000 at December 31, 1995 and 1994, respectively. Gross additions to property, plant and equipment were $80,782,000, $96,196,000 and $103,019,000 in 1996, 1995 and 1994, respectively, and are expected to approximate $85,000,000 in 1997.
In September 1992, the Board of Directors authorized the repurchase of up to 7.5 million shares of the Company's common stock on the open market or through private transactions, as market and business conditions warrant. In September 1996, the Board of Directors authorized the repurchase of an additional 7.5 million shares. The reacquired shares will be available for use under the Company's employee benefit plans and for general corporate purposes. At December 31, 1996, the 1992 repurchase program was virtually complete.
The Company has almost no long-term debt and anticipates that its growth and capital expenditure programs, and the above share repurchase plans will continue to be funded from internal sources.
During 1996, the Company paid dividends to shareholders totaling $150,864,000, while $138,048,000 was paid in 1995, and $120,520,000 in 1994. In January 1997, the cash dividend was increased 5.9% to an annual rate of $1.44 per share. This increase follows an increase of 9.7% in January 1996 and 14.8% in January 1995. The Company believes these increases in dividends to its shareholders can be made without limiting future growth and expansion.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS:
PAGE NO. -------- Consolidated Statements of Income and Retained Earnings for the three years ended December 31, 1996 12 Consolidated Balance Sheet--December 31, 1996 and 1995 13 Consolidated Statement of Cash Flows for the three years ended December 31, 1996 14 Notes to Consolidated Financial Statements 15 Report of Independent Accountants 25
Financial Statement Schedules: VIII -- Valuation and Qualifying Accounts and Reserves for the three years ended December 31, 1996 S-1
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The second quarter of 1996 reflects a nonrecurring charge to expand and streamline the Company's worldwide aroma chemical production facilities, as discussed in Note 2 of the Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET
ASSETS
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is the leading creator and manufacturer of flavors and fragrances used by others to impart or improve flavor or fragrance in a wide variety of consumer products. Fragrance products are sold principally to makers of perfumes and cosmetics, hair and other personal care products, soaps and detergents, household and other cleaning products and area fresheners. Flavors are sold primarily to makers of dairy, meat and other processed foods, beverages, snacks and savory foods, confectionery, sweet and baked goods, pharmaceutical and oral care products and animal foods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and all subsidiaries.
CURRENCY TRANSLATION
The assets and liabilities of non-U.S. subsidiaries which operate in a local currency environment are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Accumulated translation adjustments are shown as a separate component of shareholders' equity.
For those subsidiaries which operate in U.S. dollars, or which operate in a highly inflationary environment, inventory and property, plant and equipment are translated using the approximate exchange rates at the time of acquisition. All other assets and liabilities are translated at year-end exchange rates. Except for inventories charged to cost of goods sold and depreciation, which are remeasured for historical rates of exchange, all income and expense items are translated at average exchange rates during the year. Gains and losses as a result of remeasurements are included in income.
CASH EQUIVALENTS
Highly liquid investments with maturities of three months or less at date of purchase are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (generally on an average basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is calculated on a straight-line basis, principally over the following estimated lives: buildings and improvements, 10 to 30 years; machinery and equipment, 3 to 10 years; and leasehold improvements, the shorter of 10 years or the remaining life of the lease.
When properties are retired or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts and the resultant gain or loss is included in income.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under FAS 121, long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. The effect of adopting this standard was not material to the Company.
INCOME TAXES
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, based on tax laws as currently enacted. Additional taxes which would result from dividend distributions by subsidiary companies to the parent company are provided to the extent such dividends are anticipated. No provision is made for additional taxes on undistributed earnings of subsidiary companies which are intended to be permanently invested in such subsidiaries.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RETIREMENT BENEFITS
Current service costs of retirement plans and post-retirement health care and life insurance benefits are accrued currently. Prior service costs resulting from improvements in these plans are amortized over periods ranging from 10 to 20 years.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values.
RISKS AND UNCERTAINTIES
The diversity of the Company's products, customers and geographic operations significantly reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition, sources of supply or markets. It is unlikely that any one event would have a severe impact on the Company's operating results.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1996, the American Institute of Certified Public Accountants issued the Statement of Position 96-1 (SOP 96-1), Accounting for Environmental Remediation Liabilities. SOP 96-1 establishes guidance for when environmental remediation liabilities should be recorded and the factors to be considered in determining amounts recognized. This standard is effective for years beginning after December 15, 1996. The Company is studying the implications of SOP 96-1 but does not believe the impact on operating results or financial condition will be material.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares outstanding. The number of shares used in the computations were 110,773,000, 111,262,000 and 111,527,000 in 1996, 1995 and 1994, respectively.
NOTE 2. NONRECURRING CHARGE
During 1996, the Company undertook a program to expand and streamline its worldwide aroma chemical production facilities. This program includes the phase-out of production at the Company's Union Beach, New Jersey plant by December 31, 1997, and the closure of smaller capacity facilities in Mexico City, Mexico and Rio de Janeiro, Brazil during 1996. Most of the volume currently produced at Union Beach will be transferred to the Company's state-of-the-art facility in Augusta, Georgia. In addition, production capacity in Benicarlo, Spain will be expanded.
The closures will affect approximately 220 employees associated with aroma chemical manufacturing at these locations. At December 31, 1996, 50 employees had been terminated in connection with this program.
The aroma chemical streamlining resulted in a nonrecurring pretax charge to second quarter 1996 earnings of $49,707,000 ($31,315,000 after tax or $.29 per share). Of the charge, approximately $33,000,000 represents asset writedowns and other non-cash related costs.
The reserve established as a result of the nonrecurring charge, and movements therein during 1996, are as follows:
BALANCE ORIGINAL UTILIZED AT END (DOLLARS IN THOUSANDS) RESERVE IN 1996 OF YEAR - ---------------------- ------- ------- -------
Employee related ........................ $10,629 $ 560 $10,069 Closing manufacturing plants ............ 39,078 6,446 32,632 ------- ------- ------- Total ................................. $49,707 $ 7,006 $42,701 ======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. MARKETABLE SECURITIES
Marketable securities are included in cash equivalents and short-term investments, as appropriate.
At December 31, 1996 and 1995, marketable securities totaling $177,868,000 and $120,230,000, respectively, were available for sale and recorded at fair value which approximated cost. Realized gains and losses on the sale of marketable securities were not material.
NOTE 4. INVENTORIES
DECEMBER 31, ---------------------------- 1996 1995 ---------- -------- (DOLLARS IN THOUSANDS)
Raw materials .................................... $211,124 $233,759 Work in process .................................. 24,644 27,739 Finished goods ................................... 133,310 153,049 -------- -------- $369,078 $414,547 ======== ========
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ---------------------------- 1996 1995 ---------- -------- (DOLLARS IN THOUSANDS)
Land ............................................. $ 34,965 $ 36,219 Buildings and improvements ....................... 283,016 264,462 Machinery and equipment .......................... 511,271 470,680 Construction in progress ......................... 48,972 67,845 -------- -------- 878,224 839,206 Accumulated depreciation ......................... 410,427 370,621 -------- -------- $467,797 $468,585 ======== ========
NOTE 6. BORROWINGS
Bank loans (all foreign) averaged $15,007,000 in 1996, $12,124,000 in 1995 and $15,937,000 in 1994. The highest levels were $18,925,000 in 1996, $17,131,000 in 1995 and $28,677,000 in 1994. The 1996 weighted average annual interest rate on these loans (based on balances outstanding at the end of each month) was approximately 9% and the average rate on loans outstanding at December 31, 1996 was 7%. These rates compare to 13% and 8%, respectively, in 1995, and 92% and 16%, respectively, in 1994. In 1994, the interest rates were substantially affected by very high rates in hyperinflationary countries, principally Brazil, where local borrowing was used as a hedge against devaluations. Excluding these countries, the weighted average annual interest rate and the average rate on loans outstanding at December 31, 1994 would have been 6% and 7%, respectively.
Long-term debt (all foreign) consists of various loans from financial institutions, with interest rates ranging between 2.1% to 3.5%, and with terms of between five and fifteen years. Aggregate payments for the next five years of long-term debt outstanding at December 31, 1996 are $2,072,000 annually in 1997 through 1998, $1,295,000 in 1999, $518,000 in 2000, and $489,000 in 2001. At December 31, 1996 and 1995, the estimated fair value of long-term debt, based on borrowing rates currently available to the Company with similar terms and maturities, approximated the recorded amount.
Cash payments for interest were $2,688,000 in 1996, $3,326,000 in 1995 and $13,743,000 in 1994.
At December 31, 1996, the Company and its subsidiaries had available unused lines of bank credit aggregating approximately $77,200,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. INCOME TAXES
1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS)
U.S. income before taxes ................... $ 19,860 $101,764 $ 98,122 Foreign income before taxes ................ 279,243 291,959 262,234 -------- -------- -------- Total income before taxes .................. $299,103 $393,723 $360,356 ======== ======== ========
The following table shows the components of current and deferred income tax expense by taxing jurisdiction, both domestic and foreign:
1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS)
Current Federal ....................... $ 15,138 $ 26,806 $ 40,737 State and local ............... 2,835 5,600 7,155 Foreign ....................... 93,507 106,056 90,251 -------- -------- -------- 111,480 138,462 138,143 -------- -------- --------
Deferred Federal ........................ (10,640) 1,418 (4,063) State and local ................ (2,356) (339) (304) Foreign ........................ 10,725 5,365 558 -------- -------- -------- (2,271) 6,444 (3,809) -------- -------- -------- Total income taxes ............. $109,209 $144,906 $134,334 ======== ======== ========
At December 31, 1996 and 1995, gross deferred tax assets were $67,100,000 and $52,300,000, respectively; gross deferred tax liabilities were $55,200,000 and $43,200,000, respectively. No valuation allowance was required for deferred tax assets. The principal components of deferred tax assets (liabilities) were:
1996 1995 -------- -------- (DOLLARS IN THOUSANDS)
Employee and retiree benefits ......................... $ 33,000 $ 30,000 Inventory ............................................. 10,700 9,500 Property, plant and equipment ......................... (24,100) (24,400) Other, net ............................................ (7,700) (6,000) -------- -------- $ 11,900 $ 9,100 ======== ========
A reconciliation between the U.S. federal income tax rate and the effective tax rate is:
1996 1995 1994 ---- ---- ----
Statutory tax rate .................................. 35.0% 35.0% 35.0% Difference in effective tax rate on foreign earnings and remittances .................................... 1.8 2.1 1.4 State and local taxes ............................... 0.1 0.9 1.2 Other, net .......................................... (0.4) (1.2) (0.3) ---- ---- ---- Effective tax rate .................................. 36.5% 36.8% 37.3% ==== ==== ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes paid were $124,435,000 in 1996, $139,523,000 in 1995 and $107,347,000 in 1994.
Undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $438,000,000 at December 31, 1996. Any additional U.S. taxes payable on these foreign earnings, if remitted, would be substantially offset by credits for foreign taxes already paid.
NOTE 8. SHAREHOLDERS' EQUITY
The following table shows treasury shares acquired and, as appropriate, the use of treasury shares for stock plans:
NUMBER AMOUNT OF (IN SHARES THOUSANDS) ---------- ----------
Balance January 1, 1994 .............. 3,701,259 $ 133,803 Acquisitions ......................... 888,583 32,920 Used for stock plans ................. (292,302) (10,665) --------- --------- Balance December 31, 1994 ............ 4,297,540 156,058 Acquisitions ......................... 877,738 42,251 Used for stock plans ................. (367,273) (13,453) --------- --------- Balance December 31, 1995 ............ 4,808,005 184,856 Acquisitions ......................... 1,407,667 62,815 Used for stock plans ................. (425,349) (17,131) --------- --------- Balance December 31, 1996 ............ 5,790,323 $ 230,540 ========= =========
Transactions in treasury shares resulted in net charges to Capital in excess of par value of $4,092,000, $3,546,000 and $3,996,000 in 1994, 1995 and 1996, respectively.
Changes in the cumulative translation adjustment were (in thousands):
Balance January 1, 1994 ............................ $ 448 Translation adjustments ............................ 41,350 -------- Balance December 31, 1994 .......................... 41,798 Translation adjustments ............................ 33,251 -------- Balance December 31, 1995 .......................... 75,049 Translation adjustments ............................ (27,494) -------- Balance December 31, 1996 .......................... $ 47,555 ========
On February 13, 1990, the Company adopted a shareholder protection rights agreement (the "Rights Agreement") and declared a dividend of one right on each share of common stock outstanding on February 28, 1990 or issued thereafter.
Until a person or group acquires 20% or more of the Company's common stock or commences a tender offer that will result in such person or group owning 20% or more, the rights will be evidenced by the common stock certificates, will automatically trade with the common stock and will not be exercisable. Thereafter, separate rights certificates will be distributed and each right will entitle its holder to purchase one share of common stock for an exercise price of $66.67.
If any person or group acquires 20% or more of the Company's common stock, then 10 business days thereafter (the "Flip-in Date") each right (other than rights beneficially owned by holders of 20% or more of the common stock or transferees thereof, which rights become void) will entitle its holder to purchase, for the exercise price, a number of shares of common stock having a market value of twice the exercise price.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If the Company is involved in a merger or sells more than 50% of its assets or earning power, each right will entitle its holder to purchase, for the exercise price, a number of shares of common stock of the acquiring company having a market value of twice the exercise price. If any person or group acquires between 20% and 50% of common stock, the Company's Board of Directors may, at its option, exchange one share of common stock for each right. The rights may be redeemed by the Board of Directors for $0.0033 per right prior to the Flip-in Date. The rights will expire on February 28, 2000, unless previously redeemed by the Board in accordance with the terms of the Rights Agreement.
Dividends paid per share were $1.36, $1.24 and $1.08 in 1996, 1995 and 1994, respectively.
NOTE 9. STOCK OPTIONS
The Company has various stock option plans under which the Company's officers, directors and key employees may be granted options to purchase the Company's common stock at 100% of the market price on the day the option is granted.
Stock option transactions were:
WEIGHTED SHARES OF COMMON STOCK AVERAGE OF ------------------------ EXERCISE PRICE AVAILABLE UNDER OF SHARES FOR OPTION OPTION UNDER PLAN ---------- --------- -------------- Balance January 1, 1994 ........... 2,367,339 2,459,655 $29.64 Granted ........................... (790,500) 790,500 36.12 Exercised ......................... -- (292,302) 20.84 Terminated ........................ 51,149 (51,149) 27.89 Lapsed ............................ (18,621) -- -- --------- --------- Balance December 31, 1994 ......... 1,609,367 2,906,704 32.24 Granted ........................... (804,500) 804,500 49.88 Exercised ......................... -- (367,273) 27.08 Terminated ........................ 58,299 (58,299) 34.40 --------- --------- Balance December 31, 1995 ......... 863,166 3,285,632 37.09 Granted ........................... (639,500) 639,500 48.06 Exercised ......................... -- (425,349) 29.78 Terminated ........................ 13,428 (13,428) 38.21 --------- --------- Balance December 31, 1996 ......... 237,094 3,486,355 $39.98 ========= =========
The following table summarizes information concerning currently outstanding and exercisable options:
During 1996, options to purchase common stock were granted at exercise prices ranging from $43.38 to $48.13 per share. At December 31, 1996, the price range for shares under option was $13.67 to $49.88; options for 1,408,983 shares were exercisable at that date. During 1996, 425,349 shares of common stock under option were exercised at prices ranging from $13.67 to $38.17.
Except for certain options granted to foreign employees which can be exercised immediately, options generally become exercisable no earlier than two years from the date of grant. All options expire ten years after date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date, consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced by approximately $2,700,000, or $.02 per share in 1996, and $1,200,000, or $.01 per share, in 1995. These pro forma amounts may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.
Using the Black-Scholes option valuation model, the estimated fair values of options granted during 1996 and 1995 were $9.98 and $10.89, respectively. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions. In addition, such models require the use of subjective assumptions, including expected stock price volatility. In management's opinion, such valuation models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Principal assumptions used in applying the Black-Scholes model were as follows:
1996 1995 ----- ----- Risk-free interest rate .......................... 6.6% 6.4% Expected life, in years .......................... 5 5 Expected volatility .............................. 16.8% 17.6% Expected dividend yield .......................... 2.8% 2.5%
NOTE 10. INTERNATIONAL OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, operating profit (United States, Other Foreign and Consolidated) reflects the nonrecurring charge of $49,707,000 for expanding and streamlining the Company's aroma chemical production facilities.
Transfers between geographic areas are accounted for at prices which approximate arm's length market prices. Unallocated assets are principally cash and short-term investments. Net foreign exchange losses of $668,000 in 1996, $2,535,000 in 1995, and net gains of $13,543,000 in 1994 are included in other income.
Worldwide sales to the Company's largest customer amounted to 12%, 11% and 13% of worldwide net sales in 1996, 1995 and 1994, respectively.
NOTE 11. RETIREMENT BENEFITS
The Company and most of its subsidiaries have pension and/or other retirement benefit plans covering substantially all employees. Pension benefits are generally based on years of service and on compensation during the final years of employment. Plan assets consist primarily of equity securities and corporate and government fixed income securities. Substantially all pension benefit costs are funded as accrued; however, such funding is limited, where applicable, to amounts deductible for income tax purposes. Certain other retirement benefits are provided by balance sheet accruals. Contributions to defined contribution plans are mainly determined as a percentage of profits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pension expense included the following components:
The funded status of pension plans at December 31 was:
Principal actuarial assumptions used to determine the above data were:
In addition to pension benefits, certain health care and life insurance benefits are provided to all United States employees upon retirement from the Company. Such coverage is provided through insurance plans with premiums based on benefits paid. The Company does not generally provide health care and life insurance coverage for retired employees of foreign subsidiaries; however, such benefits are provided in most foreign countries by government-sponsored plans, and the cost of these programs is not significant to the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expense recognized for postretirement benefits other than pensions included the following components:
The components of the benefit obligation of the U.S. plan, included in Retirement and other liabilities, at December 31 were:
Principal actuarial assumptions used to determine the above data were:
The effect of a one percent increase in the assumed medical rate of inflation would increase the accumulated postretirement benefit obligation by approximately $7,000,000; the annual service and interest cost would not be materially affected.
NOTE 12. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company sometimes uses forward exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. These contracts, the counterparties to which are major international financial institutions, generally involve the exchange of one currency for a second currency at a future date, and have maturities which do not exceed six months. Gains and losses on such contracts are recognized in income as incurred, effectively offsetting the losses and gains on the foreign currency transactions that are hedged. At December 31, 1996 and 1995, the value of outstanding foreign currency exchange contracts was not material.
The Company has no significant concentrations of risk in financial instruments. Temporary cash investments are made in a well-diversified portfolio of high-quality, liquid obligations of government, corporate and financial institutions. There are also limited concentrations of credit risk with respect to trade receivables because of the large number of customers spread across many industries and geographic areas.
NOTE 13. CONTINGENT LIABILITIES
There are various lawsuits and claims pending against the Company. Management believes that any liability resulting from those actions or claims will not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of INTERNATIONAL FLAVORS & FRAGRANCES INC.
In our opinion, the consolidated financial statements listed in the index appearing under Item 8 on page 11 present fairly, in all material respects, the financial position of International Flavors & Fragrances Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York 10036 January 30, 1997
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) See Item 8 on page 11. (b) No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1996. (c) Exhibits. (d) Not applicable.
NUMBER ------
3 Restated Certificate of Incorporation of Registrant, incorporated by reference to Exhibit 3 to Registrant's Report on Form 10-K for fiscal year ended December 31, 1993 (File No. 1-4858).
3(b) By-laws of Registrant, incorporated by reference to Exhibit 3(b) to Registrant's Report on Form 10-K for fiscal year ended December 31, 1993 (File No. 1-4858).
3(c) Amendment to By-laws adopted December 12, 1996.
4(a) Shareholder Protection Rights Agreement dated as of February 20, 1990 between Registrant and The Bank of New York, as Rights Agent, incorporated by reference to Exhibit 4 to Registrant's Report on Form 8-K dated February 13, 1990 (File No. 1-4858).
4(b) Amendment No. 1 dated as of April 6, 1990 to Shareholder Protection Rights Agreement, incorporated by reference to Exhibit 4 to Registrant's Report on Form 10-Q dated May 14, 1990 (File No. 1-4858).
4(c) Amendment No. 2 dated as of March 8, 1994 to Shareholder Protection Rights Agreement, incorporated by reference to Exhibit 4(c) to Registrant's Report on Form 10-K for fiscal year ended December 31, 1993 (File No. 1-4858).
4(d) Specimen certificates of Registrant's Common Stock bearing legend notifying of Shareholder Protection Rights Agreement, incorporated by reference to Exhibit 4(b) to Registrant's Report on Form 10-K for fiscal year ended December 31, 1989 (File No. 1-4858).
9 Not applicable.
10(a) Agreement dated as of January 1, 1992 between Registrant and Eugene P. Grisanti, Chairman and President of Registrant, incorporated by reference to Exhibit 10(a) to Registrant's Report on Form 10-K for fiscal year ended December 31, 1991 (File No. 1-4858).
10(b) Form of Executive Severance Agreement approved by Registrant's Board of Directors on February 14, 1989 incorporated by reference to Exhibit 28(b) to Registrant's Report on Form 10-K for fiscal year ended December 31, 1988 (File No. 1-4858).
10(c) Registrant's Executive Death Benefit Plan effective July 1, 1990, incorporated by reference to Exhibit 28 to Registrant's Report on Form 10-K for fiscal year ended December 31, 1990 (File No. 1-4858).
10(d) Supplemental Retirement Investment Plan adopted by Registrant's Board of Directors on November 14, 1989 incorporated by reference to Exhibit 28 to Registrant's Report on Form 10-K for fiscal year ended December 31, 1989 (File No. 1-4858).
10(e) Supplemental Retirement Plan adopted by Board of Directors on October 29, 1986, incorporated by reference to Exhibit 10(b) to Registrant's Report on Form 10-K for fiscal year ended December 31, 1986 (File No. 1-4858).
10(f) Restated Management Incentive Compensation Plan of Registrant, incorporated by reference to Exhibit A to the Registrant's Proxy Statement dated March 28, 1995 (File No. 1-4858).
10(h) Stock Option Plan for Non-Employee Directors, incorporated by reference to Exhibit A to the Proxy Statement of Registrant dated April 3, 1990 (File No. 1-4858).
10(i) Registrant's Directors' Deferred Compensation Plan adopted by Registrant's Board of Directors on September 15, 1981, incorporated by reference to Exhibit 10-A to Registrant's Report on Form 10-Q dated November 12, 1981 (File No. 1-4858).
NUMBER ------
10(j) Director Charitable Contribution Program adopted by the Board of Directors on February 14, 1995 incorporated by reference to Exhibit 10(j) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-4858).
10(k) Agreement dated as of July 22, 1996 between Registrant and Hugh R. Kirkpatrick, former Senior Vice-President and Director of Registrant.
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 List of Principal Subsidiaries. See page E-1 of this Form 10-K.
22 Not applicable.
23 Consent of Price Waterhouse LLP. See page 29 of this Form 10-K.
24 Powers of Attorney authorizing George Rowe, Jr. and Stephen A. Block to sign this report and amendments thereto on behalf of certain directors and officers of the Registrant.
27 Financial Data Schedule (EDGAR version only).
28 Not applicable.
99 None.
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED HEREUNTO DULY AUTHORIZED.
INTERNATIONAL FLAVORS & FRAGRANCES INC. (REGISTRANT)
By /s/ THOMAS H. HOPPEL ----------------------------------------- THOMAS H. HOPPEL VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER Dated: March 27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
PRINCIPAL EXECUTIVE OFFICER:
EUGENE P. GRISANTI President and Chairman of the Board
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
DIRECTORS:
MARGARET HAYES ADAME BRIAN D. CHADBOURNE ROBIN CHANDLER DUKE RICHARD M. FURLAUD HERBERT G. REID March 27, 1997 GEORGE ROWE, JR. STANLEY M. RUMBOUGH, JR. HENRY P. VAN AMERINGEN HENDRIK C. VAN BAAREN WILLIAM D. VAN DYKE, III
ORIGINAL POWERS OF ATTORNEY AUTHORIZING GEORGE ROWE, JR. AND STEPHEN A. BLOCK, AND EACH OF THEM, TO SIGN THIS REPORT ON BEHALF OF CERTAIN DIRECTORS AND OFFICERS OF THE REGISTRANT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 33-66756 and No. 33-47856) and the Registration Statement on Form S-8 (No. 33-54423) of International Flavors & Fragrances Inc. of our report dated January 30, 1997 appearing on page 25 of this Form 10-K.
PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York 10036
March 27, 1997
SCHEDULE VIII
INTERNATIONAL FLAVORS & FRAGRANCES INC. AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED DECEMBER 31, 1996
FOR THE YEAR ENDED DECEMBER 31, 1995
FOR THE YEAR ENDED DECEMBER 31, 1994
S-1