International Flavors & Fragrances(IFF) - 2019 Q2 - Quarterly Report

FORM 10-Q Cover Page This document is a Quarterly Report (Form 10-Q) for IFF, filed for the period ended June 30, 2019, identifying the company as a Large Accelerated Filer with 106.8 million shares outstanding - The document is a Quarterly Report (Form 10-Q) for the period ended June 30, 2019, filed by International Flavors & Fragrances Inc. (IFF)[1] Registered Securities Information | Class Title | Trading Symbol(s) | Name of each exchange on which registered | | :---------------------------------------- | :---------------- | :--------------------------------------- | | Common Stock, par value 12 1/2¢ per share | IFF | New York Stock Exchange | | 6.00% Tangible Equity Units | IFFT | New York Stock Exchange | | 0.500% Senior Notes due 2021 | IFF 21 | New York Stock Exchange | | 1.750% Senior Notes due 2024 | IFF 24 | New York Stock Exchange | | 1.800% Senior Notes due 2026 | IFF 26 | New York Stock Exchange | - The registrant is classified as a Large Accelerated Filer[4] - As of July 24, 2019, 106,774,947 shares were outstanding[6] PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and accompanying notes for the reporting period ITEM 1. FINANCIAL STATEMENTS. This section presents IFF's unaudited consolidated financial statements, including balance sheets, income, comprehensive income, cash flows, and shareholders' equity, reflecting the Frutarom acquisition and recent accounting pronouncements Consolidated Balance Sheet This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates Consolidated Balance Sheet Data | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------- | :------------ | :---------------- | | ASSETS | | | | Cash and cash equivalents | $426,717 | $634,897 | | Total Current Assets | $2,990,026 | $2,941,860 | | Total Assets | $13,348,082 | $12,889,395 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total Current Liabilities | $1,149,533 | $1,128,311 | | Long-term debt | $4,428,675 | $4,504,417 | | Total Shareholders' Equity | $6,199,379 | $6,032,951 | Consolidated Statement of Income and Comprehensive Income This section details the company's financial performance over specific periods, presenting net sales, gross profit, operating profit, and net income attributable to IFF stockholders Consolidated Statement of Income and Comprehensive Income Data | Metric (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $1,291,568 | $920,016 | $2,588,970 | $1,850,944 | | Gross profit | $546,239 | $398,717 | $1,077,498 | $804,525 | | Operating profit | $199,937 | $154,509 | $363,807 | $329,363 | | Net income attributable to IFF stockholders | $136,377 | $99,149 | $245,206 | $228,564 | | Net income per share - diluted | $1.20 | $1.25 | $2.16 | $2.87 | - Net sales increased significantly by 40% for both the three and six months ended June 30, 2019, primarily due to the Frutarom acquisition[10] - Diluted EPS decreased by 4% for the three months ended June 30, 2019, and by 25% for the six months ended June 30, 2019, despite higher net income, due to an increase in average shares outstanding[10] Consolidated Statement of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods, reflecting changes in liquidity Consolidated Statement of Cash Flows Data | Cash Flow Item (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $184,916 | $55,169 | | Net cash used in investing activities | $(146,238) | $(69,467) | | Net cash used in financing activities | $(234,433) | $(24,537) | | Net change in cash, cash equivalents and restricted cash | $(193,702) | $(45,623) | | Cash, cash equivalents and restricted cash at end of period | $454,820 | $322,423 | - Net cash provided by operating activities increased significantly from $55.2 million in 2018 to $184.9 million in 2019, driven by higher net income and working capital changes[12] - Cash used in investing activities increased due to higher cash paid for acquisitions and additions to property, plant, and equipment[12] - Cash used in financing activities increased substantially, primarily due to decreased borrowings, debt repayments, and higher dividend payments[12] Consolidated Statement of Shareholders' Equity This section presents changes in the company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive income, over specific periods Consolidated Statement of Shareholders' Equity Data | Metric (in thousands) | Balance at December 31, 2018 (in thousands) | Balance at June 30, 2019 (in thousands) | | :----------------------- | :--------------------------- | :----------------------- | | Common stock | $16,066 | $16,066 | | Capital in excess of par value | $3,793,609 | $3,805,883 | | Retained earnings | $3,956,221 | $4,069,211 | | Accumulated other comprehensive (loss) income | $(702,227) | $(668,359) | | Treasury stock, at cost | $(1,030,718) | $(1,023,422) | | Noncontrolling interest | $10,423 | $10,608 | | Total Shareholders' Equity | $6,043,374 | $6,209,987 | - Total Shareholders' Equity increased from $6,043.4 million at December 31, 2018, to $6,210.0 million at June 30, 2019, primarily due to net income and an increase in capital in excess of par value[17] - Retained earnings increased by $112.9 million during the six months ended June 30, 2019, reflecting net income partially offset by cash dividends declared[17] NOTE 1. Nature of Operations and Summary of Significant Accounting Policies This note describes the company's business operations, fiscal year, and significant accounting policies, including revenue recognition, receivables, and recent accounting standard adoptions - The Company operates on a 52/53 week fiscal year, with June 30 and December 31 used for presentation convenience[19] - The Company sells certain accounts receivable on a non-recourse basis, which positively impacted cash provided by operations by $24.0 million for the six months ended June 30, 2019, compared to a $25.5 million decrease in the prior year[21] Receivables and Contract Assets Summary | Receivable Type (in thousands) | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------- | :------------ | :---------------- | | Receivables (included in Trade receivables) | $1,055,133 | $946,938 | | Contract asset - Short term | $1,095 | $487 | Revenue Breakdown Summary | Metric (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Flavor Compounds | $729,279 | $450,540 | $1,449,481 | $899,559 | | Fragrance Compounds | $375,696 | $372,034 | $764,807 | $750,666 | | Ingredients | $186,593 | $97,442 | $374,682 | $200,719 | | Total revenues | $1,291,568 | $920,016 | $2,588,970 | $1,850,944 | - The Company adopted ASU 2018-16 (SOFR OIS Rate) and ASU 2018-07 (Nonemployee Share-Based Payments) as of December 29, 2018, with no material impact on financial statements[26][30] - ASU 2017-12 (Hedging Activities) adoption on December 29, 2018, resulted in a $1.0 million decrease in the beginning balance of the currency translation adjustment and an increase in Retained Earnings[32][33] NOTE 2. Net Income Per Share This note details the calculation of basic and diluted net income per share, considering net income attributable to IFF stockholders and weighted average shares outstanding Net Income Per Share Data | Income Item (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to IFF stockholders | $136,377 | $99,149 | $245,206 | $228,564 | | Net income available to IFF stockholders | $135,864 | $99,149 | $245,063 | $228,564 | | Weighted average common shares outstanding (basic) | 111,996 | 79,065 | 111,930 | 79,041 | | Weighted average shares assuming dilution (diluted) | 112,872 | 79,303 | 113,131 | 79,347 | | Net income per share - basic | $1.21 | $1.25 | $2.19 | $2.89 | | Net income per share - diluted | $1.20 | $1.25 | $2.16 | $2.87 | - Diluted EPS decreased year-over-year for both the three-month ($1.20 vs $1.25) and six-month ($2.16 vs $2.87) periods, despite higher net income, primarily due to a significant increase in weighted average shares outstanding, influenced by the issuance of Tangible Equity Units (TEUs) in September 2018[36][39] - Quarterly dividends declared increased from $0.69 per share in Q2 2018 to $0.73 per share in Q2 2019, and from $1.38 to $1.46 for the six-month periods[37] NOTE 3. Acquisitions This note provides details on recent acquisitions, including the Frutarom acquisition, outlining purchase price allocations, goodwill, and intangible assets recognized - In Q2 2019, IFF acquired the remaining 50% interest in a Canadian equity method investee for approximately $40.0 million, consolidating it under the Frutarom segment and recording $24.0 million in goodwill and $15.0 million in intangible assets[41] - In Q1 2019, IFF acquired 70% of a European company and increased its stake in an Asian company from 49% to 60% for a total of $52.0 million, resulting in $56.0 million in goodwill and $18.0 million in intangible assets, both managed under the Frutarom segment[42] - The purchase price allocation for the Frutarom acquisition (completed Oct 4, 2018) was updated in Q2 2019, leading to a $40.9 million increase in goodwill, primarily due to a $21.7 million decrease in identifiable intangible assets and a $58.3 million increase in property, plant, and equipment[45][48] Acquisitions Summary | Metric (in thousands) | As reported in the fourth quarter of 2018 (in thousands) | Measurement period adjustments (in thousands) | As reported in the second quarter of 2019 (in thousands) | | :--------------- | :---------------------------------------- | :----------------------------- | :---------------------------------------- | | Identifiable intangible assets | $2,690,000 | $(21,700) | $2,668,300 | | Other non-current assets | $353,710 | $58,336 | $412,046 | | Goodwill | $4,243,079 | $40,857 | $4,283,936 | | Total Purchase Consideration | $7,030,894 | | $7,030,894 | Pro Forma Financials Summary | Pro Forma Item (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :--------------- | :------------------------------- | :----------------------------- | | Unaudited pro forma net sales | $1,321,321 | $2,637,054 | | Unaudited pro forma net income attributable to the Company | $102,269 | $214,889 | NOTE 4. Restructuring and Other Charges, Net This note details costs associated with restructuring initiatives, including facility closures and headcount reductions, primarily related to the Frutarom integration - As part of the Frutarom Integration Initiative, IFF plans to close approximately 35 manufacturing sites by the end of fiscal 2020, incurring $5.1 million in costs (including $1.5 million for severance) during the first six months of 2019 related to six facility closures[54] - In the first six months of 2019, IFF incurred $13.6 million in severance charges for approximately 190 headcount reductions, primarily in the Scent business unit and for a new shared service center in Europe[55] Restructuring and Other Charges Summary | Restructuring Item (in thousands) | Employee Related Costs (in thousands) | Other (in thousands) | Total (in thousands) | | :----------------------- | :--------------------- | :---- | :---- | | Balance at December 31, 2018 | $4,125 | $1,075 | $5,200 | | Additional charges, net | $15,126 | $3,573 | $18,699 | | Payments | $(5,503) | $(1,150) | $(6,653) | | Balance at June 30, 2019 | $13,748 | $3,498 | $17,246 | NOTE 5. Goodwill and Other Intangible Assets, Net This note provides a breakdown of goodwill and other intangible assets, including customer relationships and trade names, and details amortization expenses and future amortization estimates Goodwill Summary | Goodwill Item (in thousands) | Goodwill (in thousands) | | :----------------------- | :------- | | Balance at December 31, 2018 | $5,378,388 | | Acquisitions | $86,702 | | Frutarom measurement period adjustment | $40,857 | | Foreign exchange | $370 | | Balance at June 30, 2019 | $5,506,317 | Intangible Assets Summary | Asset Type (in thousands) | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------- | :------------ | :---------------- | | Asset Type | | | | Customer relationships | $2,650,432 | $2,658,659 | | Trade names & patents | $177,800 | $177,770 | | Technological know-how | $470,294 | $451,016 | | Other intangible assets, net | $2,944,667 | $3,039,322 | - Amortization expense significantly increased to $47.9 million for Q2 2019 (from $9.6 million in Q2 2018) and $95.5 million for the six months ended June 30, 2019 (from $18.8 million in 2018), primarily due to the Frutarom acquisition[60] Estimated Future Intangible Amortization Expense Summary | Expense Type (in thousands) | 2019 (in thousands) | 2020 (in thousands) | 2021 (in thousands) | 2022 (in thousands) | 2023 (in thousands) | | :----------------------- | :--- | :--- | :--- | :--- | :--- | | Estimated future intangible amortization expense | $96,198 | $185,650 | $180,819 | $176,863 | $176,749 | NOTE 6. Other Assets This note details other non-current assets, including operating lease right-of-use assets, deferred income taxes, and overfunded pension plans, reflecting the impact of new accounting standards Other Assets Summary | Asset/Liability (in thousands) | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------- | :------------ | :---------------- | | Operating lease right-of-use assets | $308,965 | — | | Deferred income taxes | $97,629 | $89,000 | | Overfunded pension plans | $83,095 | $75,158 | | Cash surrender value of life insurance contracts | $46,159 | $43,179 | | Other | $54,919 | $81,336 | | Total | $590,767 | $288,673 | - Total other assets significantly increased from $288.7 million at December 31, 2018, to $590.8 million at June 30, 2019, primarily due to the adoption of ASU 2016-02, which introduced operating lease right-of-use assets[61] NOTE 7. Debt This note provides a detailed breakdown of the company's debt obligations, including various notes and term loans, along with their effective interest rates and maturity profiles Debt Summary | Debt Type (in thousands) | Effective Interest Rate | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------- | :---------------------- | :------------ | :---------------- | | 2020 Notes | 3.69% | $298,954 | $298,499 | | 2021 Euro Notes | 0.82% | $338,505 | $337,704 | | 2023 Notes | 3.30% | $298,850 | $298,698 | | 2024 Euro Notes | 1.88% | $565,404 | $564,034 | | 2026 Euro Notes | 1.93% | $902,063 | $899,886 | | 2028 Notes | 4.57% | $396,535 | $396,377 | | 2047 Notes | 4.44% | $493,361 | $493,151 | | 2048 Notes | 5.12% | $785,890 | $785,788 | | Term Loan | 3.65% | $324,370 | $349,163 | | Amortizing Notes | 6.09% | $103,968 | $125,007 | | Total debt | | $4,512,906 | $4,553,059 | | Less: Short-term borrowings | | $(84,231) | $(48,642) | | Total Long-term debt | | $4,428,675 | $4,504,417 | - Total debt decreased slightly from $4,553.1 million at December 31, 2018, to $4,512.9 million at June 30, 2019, with a notable reduction in Amortizing Notes and Term Loan[62] NOTE 8. Leases This note details the impact of adopting new lease accounting standards, including the recognition of right-of-use assets and operating lease liabilities, and related lease costs - The Company adopted ASU 2016-02, "Leases (Topic 842)," on December 29, 2018, using the modified retrospective approach, resulting in the recognition of a $308.3 million right-of-use asset and $313.3 million in total operating lease liabilities[64][69] - The adoption also led to a net increase of $23.1 million in retained earnings due to the elimination of deferred gains on prior sale-leaseback transactions[69] Operating Lease Cost Summary | Metric (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :----------------------- | :------------------------------- | :----------------------------- | | Operating lease cost | $13,337 | $25,806 | Lease Liabilities and Terms Summary | Metric (in thousands) | June 30, 2019 (in thousands) | | :----------------------- | :------------ | | Operating lease right-of-use assets | $308,965 | | Total operating lease liabilities | $314,130 | | Weighted Average Remaining Lease Term (in years) | 11.8 | | Weighted Average Discount Rate | 3.18% | NOTE 9. Income Taxes This note provides information on the company's income tax positions, including unrecognized tax benefits, deferred tax liabilities for repatriation, and effective tax rates - As of June 30, 2019, the Company had $46.9 million in unrecognized tax benefits and $3.4 million in accrued interest and penalties, totaling $50.3 million for uncertain tax positions[72][73] - A deferred tax liability of $85.8 million was recorded for the repatriation of funds to the U.S., with $42.1 million from IFF non-U.S. subsidiaries and $43.7 million associated with Frutarom[74] Effective Tax Rate Data | Tax Rate Type | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Reported | 18.1% | 18.7% | 17.8% | 18.6% | | Adjusted (Non-GAAP) | 18.5% | 18.4% | 18.5% | 18.4% | - The effective tax rate decreased year-over-year for both periods, primarily due to a more favorable mix of earnings (including integration and restructuring costs), partially offset by higher repatriation costs[77][78] NOTE 10. Stock Compensation Plans This note details the company's stock-based compensation expense, including equity-based and liability-based awards, and their impact on financial results Stock Compensation Expense Summary | Compensation Type (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Equity-based awards | $10,696 | $7,554 | $18,300 | $15,174 | | Liability-based awards | $2,061 | $242 | $2,791 | $397 | | Total stock-based compensation expense | $12,757 | $7,796 | $21,091 | $15,571 | | Less: Tax benefit | $(2,141) | $(1,335) | $(3,523) | $(2,898) | | Total stock-based compensation expense, after tax | $10,616 | $6,461 | $17,568 | $12,673 | - Total stock-based compensation expense increased by 63.6% for the three months and 35.5% for the six months ended June 30, 2019, compared to the prior year, driven by both equity-based and liability-based awards[79] NOTE 11. Segment Information This note provides financial information by operating segment (Taste, Scent, Frutarom) and geographic region, detailing net sales and segment profit, and outlines planned business unit reorganization - IFF is organized into three reportable operating segments: Taste (Flavor Compounds), Scent (Fragrance Compounds, Fragrance Ingredients, Cosmetic Active Ingredients), and Frutarom (naturals-focused flavor compounds, functional foods, specialty fine ingredients)[80][81][82] Segment Performance Data | Metric (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales: | | | | | | Taste | $434,179 | $450,540 | $878,781 | $899,559 | | Scent | $475,671 | $469,476 | $964,023 | $951,385 | | Frutarom | $381,718 | — | $746,166 | — | | Consolidated | $1,291,568 | $920,016 | $2,588,970 | $1,850,944 | | Segment profit: | | | | | | Taste | $98,081 | $109,605 | $206,536 | $221,169 | | Scent | $91,244 | $80,780 | $177,059 | $174,056 | | Frutarom | $37,493 | — | $66,584 | — | - Consolidated net sales increased by 40% for both the three and six months ended June 30, 2019, primarily driven by the inclusion of Frutarom sales[86] - Taste segment profit decreased by 10.5% for the three months and 6.6% for the six months, while Scent segment profit increased by 13% and 1.7% respectively[86] Geographic Sales Data | Period | Europe, Africa and Middle East (in thousands) | Greater Asia (in thousands) | North America (in thousands) | Latin America (in thousands) | | :----------------------- | :----------------------------- | :----------- | :------------ | :------------ | | Three Months Ended June 30, 2019 | $528,094 | $293,257 | $293,918 | $176,299 | | Three Months Ended June 30, 2018 | $292,848 | $242,221 | $249,054 | $135,893 | | Six Months Ended June 30, 2019 | $1,057,700 | $581,219 | $594,977 | $355,074 | | Six Months Ended June 30, 2018 | $602,161 | $485,779 | $490,199 | $272,805 | | Consolidated | $1,291,568 | $920,016 | $2,588,970 | $1,850,944 | - The Company announced a reorganization of its business unit structure into three segments: Taste, Scent, and Nutrition & Ingredients, to be implemented over the next six to nine months[89] NOTE 12. Employee Benefits This note details the net periodic benefit cost for U.S. and Non-U.S. pension and postretirement plans, including expected contributions and total postretirement benefit income Net Periodic Benefit Cost Summary | Benefit Cost Type (in thousands) | U.S. Plans (3 Months Ended June 30, 2019) (in thousands) | U.S. Plans (3 Months Ended June 30, 2018) (in thousands) | Non-U.S. Plans (3 Months Ended June 30, 2019) (in thousands) | Non-U.S. Plans (3 Months Ended June 30, 2018) (in thousands) | | :----------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net periodic benefit (income) cost | $220 | $(805) | $1,326 | $(252) | Net Periodic Benefit Cost Summary | Benefit Cost Type (in thousands) | U.S. Plans (6 Months Ended June 30, 2019) (in thousands) | U.S. Plans (6 Months Ended June 30, 2018) (in thousands) | Non-U.S. Plans (6 Months Ended June 30, 2019) (in thousands) | Non-U.S. Plans (6 Months Ended June 30, 2018) (in thousands) | | :----------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net periodic benefit (income) cost | $439 | $(1,609) | $2,652 | $(507) | - The Company expects to contribute $4.2 million to U.S. pension plans and $19.3 million to Non-U.S. plans in 2019. As of June 30, 2019, $8.3 million had been contributed to non-U.S. plans[91] Total Postretirement Benefit Income Summary | Benefit Type (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total postretirement benefit income | $(469) | $(339) | $(937) | $(679) | NOTE 13. Financial Instruments This note describes the company's financial instruments, including cash, derivatives, and debt, and their fair value measurements, along with hedging strategies for currency and interest rate exposures - The Company uses a fair value hierarchy (Level 1, 2, 3) for financial instruments, with structured liabilities classified as Level 2 based on observable inputs like LIBOR swap curves and forward rates[93][94] Financial Instruments Fair Value Data | Metric (in thousands) | June 30, 2019 Carrying Value (in thousands) | June 30, 2019 Fair Value (in thousands) | December 31, 2018 Carrying Value (in thousands) | December 31, 2018 Fair Value (in thousands) | | :----------------------- | :----------------------------- | :----------------------- | :------------------------------- | :----------------------------- | | Cash and cash equivalents | $426,717 | $426,717 | $634,897 | $634,897 | | Derivatives (assets) | — | $14,353 | — | $7,229 | | Derivatives (liabilities) | — | $6,342 | — | $6,907 | | Total Long-term debt | $4,428,675 | $4,475,596 | $4,504,417 | $4,476,790 | - The Company uses foreign currency forward contracts to reduce exposure to cash flow volatility from intercompany loans, receivables, payables, and anticipated raw material purchases, with maturities not exceeding twelve months[96] - Certain Euro Notes (2021, 2024, 2026) are designated as hedges of net investments in Euro functional currency subsidiaries, with value changes due to foreign exchange recorded in OCI[98] Foreign Currency and Cross Currency Swaps Summary | Financial Instrument (in thousands) | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------- | :------------ | :---------------- | | Foreign currency contracts | $394,538 | $585,581 | | Cross currency swaps | $600,000 | $600,000 | Derivative Gains (Losses) Summary | Metric (in thousands) | Three Months Ended June 30, 2019 Gain (Loss) (in thousands) | Three Months Ended June 30, 2018 Gain (Loss) (in thousands) | Six Months Ended June 30, 2019 Gain (Loss) (in thousands) | Six Months Ended June 30, 2018 Gain (Loss) (in thousands) | | :----------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Foreign currency contracts (not hedging) | $(3,932) | $4,685 | $(3,006) | $1,070 | | Deal contingent swaps (foreign currency) | — | $10,979 | — | $10,979 | | Deal contingent swaps (interest rate) | — | $(24,937) | — | $(24,937) | - The Company expects $5.7 million (net of tax) of derivative gain in AOCI to be reclassified into earnings within the next 12 months[106] NOTE 14. Accumulated Other Comprehensive Income (Loss) This note details changes in accumulated other comprehensive income (loss), including foreign currency translation adjustments, derivative gains, and pension liability adjustments, net of tax Accumulated Other Comprehensive Income (Loss) Summary | Comprehensive Income Item (in thousands) | Accumulated other comprehensive (loss) income, net of tax, as of December 31, 2018 (in thousands) | Net current period other comprehensive income (loss) (in thousands) | Accumulated other comprehensive (loss) income, net of tax, as of June 30, 2019 (in thousands) | | :----------------------- | :----------------------------------------------------------------- | :--------------------------------------------------- | :----------------------------------------------------------------- | | Foreign Currency Translation Adjustments | $(396,996) | $28,363 | $(368,633) | | Gains on Derivatives Qualifying as Hedges | $4,746 | $318 | $5,064 | | Pension and Postretirement Liability Adjustment | $(309,977) | $5,187 | $(304,790) | | Total | $(702,227) | $33,868 | $(668,359) | - Accumulated other comprehensive loss improved from $(702.2) million at December 31, 2018, to $(668.4) million at June 30, 2019, primarily driven by positive foreign currency translation adjustments and pension/postretirement liability adjustments[107] Comprehensive Income and Affected Line Items Summary | Metric (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | Affected Line Item in the Consolidated Statement of Income and Comprehensive | | :----------------------- | :----------------------------- | :----------------------------- | :-------------------------------------------------------------------------- | | Gains (losses) on derivatives qualifying as hedges (Total, net of income taxes) | $4,263 | $(4,955) | Cost of goods sold / Interest expense | | Losses on pension and postretirement liability adjustments (Total, net of income taxes) | $(5,187) | $(5,333) | Net periodic benefit cost | NOTE 15. Commitments and Contingencies This note outlines the company's commitments and potential liabilities, including bank guarantees, environmental remediation, and legal proceedings, and the estimated range of possible losses - As of June 30, 2019, IFF had $58.7 million in bank guarantees and standby letters of credit, including $17.7 million for tax disputes in Brazil, and had pledged $10.1 million in assets for these assessments[109][110] - The Company had $107.6 million in available lines of credit, in addition to $1.0 billion under its Amended Credit Facility, with no material drawdowns as of June 30, 2019[111] - IFF is a Potentially Responsible Party (PRP) at seven third-party waste sites, with an estimated future cost of less than $3.0 million, which is not expected to have a material adverse effect[114][115][116] - The Guangzhou Taste plant (net book value $64.0 million) faces potential zoning changes preventing manufacturing, while the Guangzhou Scent plant (net book value $9.0 million) had zoning changed preventing expansion[118][119][120][121] - The Zhejiang Ingredients plant (net book value $19.0 million) is being relocated, with expected compensation of up to $50.0 million, of which $15.0 million was received in Q4 2017[122][123] - Investigations into improper payments made by two Frutarom businesses in Russia and Ukraine indicate that such payments occurred and senior management was aware, but IFF believes the impact is not material to financial condition, though costs could be material in a fiscal quarter[127][128] - The aggregate range of reasonably possible losses for third-party contingencies (labor, contract, technology, tax, product-related claims, business litigation) in excess of accrued liabilities is estimated at $0 to approximately $10.0 million[132] NOTE 16. Redeemable Noncontrolling Interests This note details redeemable noncontrolling interests in certain Frutarom subsidiaries, including their acquisition, share of profit, and measurement period adjustments - Certain Frutarom subsidiaries have noncontrolling interests with redemption features, allowing holders to sell their interests to Frutarom based on a multiple of average EBITDA[133] Redeemable Noncontrolling Interests Summary | Interest Type (in thousands) | Redeemable Noncontrolling Interests (in thousands) | | :----------------------- | :---------------------------------- | | Balance at December 31, 2018 | $81,806 | | Acquired through acquisitions during 2019 | $26,273 | | Share of profit or loss attributable to redeemable noncontrolling interests | $3,371 | | Measurement period adjustments | $5,700 | | Balance at June 30, 2019 | $115,540 | - Redeemable noncontrolling interests increased from $81.8 million at December 31, 2018, to $115.5 million at June 30, 2019, primarily due to new acquisitions and measurement period adjustments[135] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the Company's financial condition and results of operations for the three and six months ended June 30, 2019, compared to the prior year periods, highlighting the significant impact of the Frutarom acquisition, strategic initiatives under Vision 2021, and key financial performance metrics Overview This section provides a high-level overview of IFF's business segments, strategic initiatives, and the ongoing integration of Frutarom, including synergy targets and organizational changes - IFF is a global leader in fragrance compounds (Scent business) and flavor compounds (Taste business), with the Frutarom business focusing on naturals-focused flavor compounds and specialty fine ingredients[136][137][138] - The new Vision 2021 strategy focuses on unlocking growth, driving innovation, managing the portfolio, and accelerating business transformation, including the Frutarom integration[139][140] - The Frutarom Integration Initiative aims for $145.0 million in synergy targets, including $40.0 million in cost synergies by end of 2019, and involves closing approximately 35 manufacturing sites by end of fiscal 2020[141] - Organizational changes include reorganizing business units into Taste, Scent, and a new Nutrition & Ingredients segment, with full integration expected within 12-18 months from June 30, 2019[142] Financial Performance Overview This section summarizes the company's key financial performance metrics for the quarter, including sales growth, gross margins, operating profit, interest expense, and cash flows, highlighting the impact of the Frutarom acquisition - Q2 2019 sales increased 40% reported and 45% currency neutral, with Frutarom acquisition contributing 41% to reported growth and 43% to currency neutral growth[143] - Gross margins decreased to 42.3% in Q2 2019 from 43.3% in Q2 2018, mainly due to lower margins in Frutarom and unfavorable price versus input costs[146] - Operating profit increased by $45.4 million to $199.9 million in Q2 2019, but as a percentage of sales, it decreased from 16.8% to 15.5%. Adjusted operating profit increased to $213.9 million from $169.8 million[148] - Interest expense decreased to $32.6 million in Q2 2019 from $53.2 million in Q2 2018, primarily due to $35.7 million in financing fees incurred in Q2 2018 for the Frutarom acquisition[150] - Cash flows from operating activities for the six months ended June 30, 2019, increased to $184.9 million (7.1% of sales) from $55.2 million (3.0% of sales) in the prior year, driven by higher earnings and product recall claim settlements[151] Results of Operations This section provides a detailed analysis of the company's consolidated financial results, including net sales, gross profit, operating profit, net income, and key margin percentages for the three and six months ended June 30, 2019 and 2018 Results of Operations Data | Metric (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $1,291,568 | $920,016 | $2,588,970 | $1,850,944 | | Cost of goods sold | $745,329 | $521,299 | $1,511,472 | $1,046,419 | | Gross profit | $546,239 | $398,717 | $1,077,498 | $804,525 | | Operating profit | $199,937 | $154,509 | $363,807 | $329,363 | | Net income attributable to IFF stockholders | $136,377 | $99,149 | $245,206 | $228,564 | | Diluted EPS | $1.20 | $1.25 | $2.16 | $2.87 | | Gross margin | 42.3% | 43.3% | 41.6% | 43.5% | | Operating margin | 15.5% | 16.8% | 14.1% | 17.8% | | Effective tax rate | 18.1% | 18.7% | 17.8% | 18.6% | - Net sales increased 40% for both the three and six months ended June 30, 2019, primarily due to the Frutarom acquisition[153] - Gross margin decreased by 100 bps for the three months and 190 bps for the six months, while operating margin decreased by 130 bps and 370 bps respectively[153] Second Quarter 2019 in Comparison to Second Quarter 2018 This section provides a detailed comparison of the company's financial performance for the second quarter of 2019 against the same period in 2018, focusing on sales, expenses, and segment profit drivers - Q2 2019 sales increased 40% reported and 45% currency neutral, with the Frutarom acquisition contributing 41% reported and 43% currency neutral[158] Q2 2019 vs Q2 2018 Performance | Segment | % Change in Sales - Reported | % Change in Sales - Currency Neutral | | :------ | :--------------------------- | :----------------------------------- | | Taste | -4 % | -1 % | | Scent | 1 % | 4 % | | Frutarom | N/A | N/A | | Total | 40 % | 45 % | - Taste sales declined 4% reported and 1% currency neutral, driven by volume reductions, partially offset by new wins[161] - Scent sales increased 1% reported and 4% currency neutral, reflecting new wins and price increases, partially offset by volume reductions[162] - Frutarom sales were $382.0 million, comprising $295.0 million in Flavor Compounds and $87.0 million in Ingredient product categories[164] - Cost of goods sold as a percentage of sales increased by 100 bps to 57.7% due to higher raw material costs[165] - R&D expenses as a percentage of sales decreased to 6.6% from 8.1%, mainly due to lower R&D expenses in the Frutarom segment[166] - S&A expenses increased by $52.7 million to $210.1 million, but decreased as a percentage of sales to 16.3% from 17.1%, primarily due to the Frutarom acquisition and lower personnel costs[167][168] - Amortization of acquisition-related intangibles increased significantly to $47.9 million from $9.6 million, primarily due to the Frutarom acquisition[170] Q2 2019 vs Q2 2018 Segment Profit Data | Segment | Q2 2019 Segment Profit (in thousands) | Q2 2018 Segment Profit (in thousands) | Q2 2019 Profit Margin | Q2 2018 Profit Margin | | :------ | :--------------------- | :--------------------- | :-------------------- | :-------------------- | | Taste | $98,081 | $109,605 | 22.6% | 24.3% | | Scent | $91,244 | $80,780 | 19.2% | 17.2% | | Frutarom | $37,493 | — | 9.8% | N/A | | Consolidated Operating Profit | $199,937 | $154,509 | 15.5% | 16.8% | - Taste segment profit decreased by $11.5 million due to unfavorable price vs. input costs, product mix, and volume reductions[173] - Scent segment profit increased by $10.5 million, benefiting from cost savings, productivity initiatives, and favorable price to input costs[174] - Global expenses decreased to $12.9 million from $20.6 million, driven by gains from currency hedging and lower incentive compensation[176] First Six Months 2019 in Comparison to First Six Months 2018 This section provides a detailed comparison of the company's financial performance for the first six months of 2019 against the same period in 2018, analyzing sales, expenses, and segment profit drivers - First six months 2019 sales increased 40% reported and 44% currency neutral, with Frutarom acquisition contributing 40% reported and 41% currency neutral[180] H1 2019 vs H1 2018 Performance | Segment | % Change in Sales - Reported | % Change in Sales - Currency Neutral | | :------ | :--------------------------- | :----------------------------------- | | Taste | -2 % | 1% | | Scent | 1 % | 4% | | Frutarom | N/A | N/A | | Total | 40 % | 44% | - Taste sales decreased 2% reported but increased 1% currency neutral, driven by new wins partially offset by volume reductions[183] - Scent sales increased 1% reported and 4% currency neutral, reflecting new wins and price increases, partially offset by volume reductions[184] - Frutarom sales for the six months were $746.2 million, including $570.7 million in Flavor Compounds and $175.5 million in Ingredient product categories[186] - Cost of goods sold as a percentage of sales increased by 190 bps to 58.4% due to higher raw material costs[187] - R&D expenses as a percentage of sales decreased to 6.8% from 8.3%, mainly due to lower R&D expenses in the Frutarom segment[188] - S&A expenses increased to $423.3 million from $300.1 million, but remained stable as a percentage of sales (16.3% vs 16.2%), primarily due to the Frutarom business addition and integration costs[189] - Amortization expenses increased to $95.5 million from $18.8 million, primarily due to the Frutarom acquisition[193] H1 2019 vs H1 2018 Segment Profit Data | Segment | 6 Months Ended June 30, 2019 Segment Profit (in thousands) | 6 Months Ended June 30, 2018 Segment Profit (in thousands) | 6 Months Ended June 30, 2019 Profit Margin | 6 Months Ended June 30, 2018 Profit Margin | | :------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Taste | $206,536 | $221,169 | 23.5% | 24.6% | | Scent | $177,059 | $174,056 | 18.4% | 18.3% | | Frutarom | $66,584 | — | 8.9% | N/A | | Consolidated Operating Profit | $363,807 | $329,363 | 14.1% | 17.8% | - Taste segment profit decreased by $14.6 million due to unfavorable price vs. input costs[197] - Scent segment profit increased by $3.0 million, with profit margin slightly up due to cost savings and productivity initiatives[198] - Global expenses decreased to $31.6 million from $44.4 million, driven by currency hedging gains and lower incentive compensation[199] - Interest expense decreased to **$6