International Flavors & Fragrances(IFF) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides International Flavors & Fragrances Inc.'s (IFF) unaudited consolidated financial statements and management's discussion and analysis for the period, along with disclosures on market risk and internal controls ITEM 1. FINANCIAL STATEMENTS. This section presents the unaudited consolidated financial statements for International Flavors & Fragrances Inc. (IFF), including the balance sheet, income statement, cash flow statement, and statement of shareholders' equity, along with accompanying notes detailing significant accounting policies, acquisitions, restructuring activities, and other financial disclosures Consolidated Balance Sheet The consolidated balance sheet provides a snapshot of IFF's financial position as of September 30, 2020, compared to December 31, 2019, showing changes in assets, liabilities, and shareholders' equity | (DOLLARS IN THOUSANDS) | September 30, 2020 | December 31, 2019 | | :------------------------------------------------ | :----------------- | :------------------ | | ASSETS | | | | Total Current Assets | $2,946,205 | $2,942,544 | | Property, plant and equipment, net | $1,380,423 | $1,386,920 | | Goodwill | $5,427,482 | $5,497,596 | | Other intangible assets, net | $2,675,482 | $2,851,935 | | Total Assets | $13,085,374 | $13,287,411 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total Current Liabilities | $1,616,259 | $1,552,190 | | Long-term debt | $3,890,762 | $3,997,438 | | Total Shareholders' Equity | $6,078,207 | $6,217,304 | | Total Liabilities and Shareholders' Equity | $13,085,374 | $13,287,411 | Consolidated Statement of Income and Comprehensive Income (Loss) The consolidated statement of income and comprehensive income (loss) details IFF's financial performance for the three and nine months ended September 30, 2020, compared to the same periods in 2019, highlighting net sales, gross profit, operating profit, and net income | (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | $1,268,076 | $1,267,345 | $3,814,166 | $3,856,315 | | Gross profit | $524,427 | $533,088 | $1,572,136 | $1,610,586 | | Operating profit | $150,289 | $184,664 | $465,881 | $548,471 | | Net income attributable to IFF stockholders | $84,828 | $127,124 | $295,639 | $372,330 | | Net income per share - diluted | $0.75 | $1.13 | $2.64 | $3.30 | Consolidated Statement of Cash Flows This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2020, and 2019, showing the overall change in cash and cash equivalents | (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $415,028 | $383,035 | | Net cash used in investing activities | $(118,726) | $(157,842) | | Net cash used in financing activities | $(418,009) | $(365,808) | | Net change in cash, cash equivalents and restricted cash | $(140,419) | $(144,468) | | Cash, cash equivalents and restricted cash at end of period | $483,526 | $504,054 | Consolidated Statement of Shareholders' Equity The consolidated statement of shareholders' equity details the changes in each component of equity, including common stock, capital in excess of par value, retained earnings, and accumulated other comprehensive loss, for various periods ending September 30, 2020, and 2019 | (DOLLARS IN THOUSANDS) | Balance at Sep 30, 2020 | Balance at Dec 31, 2019 | Balance at Sep 30, 2019 | Balance at Jan 1, 2019 | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :--------------------- | | Common stock | $16,066 | $16,066 | $16,066 | $16,066 | | Capital in excess of par value | $3,847,824 | $3,823,152 | $3,816,352 | $3,793,609 | | Retained earnings | $4,170,894 | $4,117,804 | $4,114,299 | $3,956,221 | | Accumulated other comprehensive loss | $(939,419) | $(716,894) | $(867,552) | $(702,227) | | Treasury stock, at cost | $(1,017,158) | $(1,022,824) | $(1,023,346) | $(1,030,718) | | Total Shareholders' Equity | $6,090,315 | $6,229,548 | $6,066,988 | $6,043,374 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures for the consolidated financial statements, covering accounting policies, estimates, cash management, revenue recognition, recent accounting pronouncements, and the impact of the COVID-19 pandemic on financial estimates NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines IFF's basis of financial statement presentation, the use of estimates, and specific accounting policies for cash, accounts receivable, and revenue recognition. It also details the adoption of new accounting standards and their impact, including the measurement of expected credit losses - The interim financial statements are unaudited and include normal recurring adjustments. The company operates on a 52/53 week fiscal year, with September 30 and December 31 used for presentation[16] - Management's estimates and judgments in financial statements consider the economic implications of COVID-19, particularly for assessing impairment risk of long-lived assets[17] Cash and Cash Equivalents (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | September 30, 2020 | December 31, 2019 | | :----------------------- | :----------------- | :------------------ | | Cash and cash equivalents | $469,840 | $606,823 | | Restricted cash | $12,841 | $17,122 | | Total | $483,526 | $623,945 | - IFF uses factoring agreements to sell receivables on a non-recourse basis, removing $209.3 million and $205.7 million from its balance sheets as of September 30, 2020, and December 31, 2019, respectively. These programs increased cash provided by operations by $3.6 million for the nine months ended September 30, 2020[21] Total Revenues by Segment (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Taste revenues | $765,238 | $782,428 | $2,343,884 | $2,398,549 | | Total Scent revenues | $502,838 | $484,917 | $1,470,282 | $1,457,766 | | Total revenues | $1,268,076 | $1,267,345 | $3,814,166 | $3,856,315 | - The company adopted ASU 2018-15 (Cloud Computing Arrangements) and ASU 2018-14 (Retirement Benefits) effective the first day of its 2020 fiscal year, with no material impact on consolidated financial statements[27][28] - It also adopted ASU 2016-13 (Expected Credit Losses) and determined no adjustment was required to bad debt allowances[30] Allowances for Bad Debts (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Allowances for Bad Debts | | :----------------------- | :----------------------- | | Balance at December 31, 2019 | $16,428 | | Bad debt expense | $7,443 | | Write-offs | $(587) | | Foreign exchange | $(771) | | Balance at September 30, 2020 | $22,513 | - During Q1 2020, IFF increased its allowances for bad debts by approximately $3.0 million due to higher expected future write-offs from the COVID-19 pandemic's impact on customer liquidity, with no further increases in Q2 or Q3 2020[34] NOTE 2. NET INCOME PER SHARE This note provides a reconciliation of the shares used in the computation of basic and diluted net income per share, detailing adjustments for dilutive securities and dividends declared Net Income Per Share Reconciliation (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income attributable to IFF stockholders | $84,828 | $127,124 | $295,639 | $372,330 | | Net income available to IFF stockholders | $85,692 | $128,860 | $300,603 | $373,923 | | Weighted average common shares outstanding (basic) | 112,183 | 111,998 | 112,148 | 111,953 | | Weighted average shares assuming dilution (diluted) | 113,622 | 113,493 | 113,631 | 113,133 | | Net income per share - basic | $0.76 | $1.15 | $2.68 | $3.34 | | Net income per share - diluted | $0.75 | $1.13 | $2.64 | $3.30 | - The Company declared quarterly dividends of $0.77 per share for Q3 2020 and $0.75 per share for Q3 2019. For the nine months ended September 30, 2020 and 2019, total dividends were $2.27 and $2.21 per share, respectively[36] NOTE 3. ACQUISITIONS This note details the pending acquisition of DuPont's Nutrition & Biosciences (N&B) business, including financing arrangements and shareholder approval. It also summarizes IFF's acquisition activities in 2019, which involved increasing ownership in several companies - IFF entered into definitive agreements to acquire DuPont's Nutrition & Biosciences (N&B) business, with DuPont receiving a $7.3 billion special cash payment. DuPont shareholders will own approximately 55.4% of IFF post-transaction, expected to close in early 2021[40][41] - N&B issued $6.25 billion in senior unsecured notes and secured $1.25 billion in term loan facilities to finance the special cash payment, replacing bridge loan commitments. IFF shareholders approved the issuance of IFF Common Stock for the transaction on August 27, 2020[42][43] - In 2019, IFF acquired the remaining 50% interest in a Canadian investee for approximately $37 million and acquired 70% of a European company and increased ownership in an Asian company from 49% to 60% for a total of $52 million. These acquisitions resulted in goodwill and intangible assets[44][45] NOTE 4. RESTRUCTURING AND OTHER CHARGES, NET This note outlines the various restructuring programs, including the Frutarom Integration Initiative, 2019 Severance Program, and 2017 Productivity Program, detailing the types of charges incurred and the expected total costs. It also provides a rollforward of restructuring liabilities and charges by segment - The Frutarom Integration Initiative aims to optimize the manufacturing network by closing approximately 35 sites by the end of 2021. As of September 30, 2020, 16 sites have closed, with total expensed costs of $18.3 million. Total program costs are estimated at $40 million to $50 million[49] - The 2019 Severance Program incurred $21.7 million in severance charges for approximately 190 headcount reductions, primarily in the Scent business unit and for a new shared service center. Total program costs are expected to be around $25 million[50] Restructuring Liabilities Rollforward (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Balance at Dec 31, 2019 | Additional Charges (Reversals), Net | Non-Cash Charges | Cash Payments | Balance at Sep 30, 2020 | | :----------------------- | :---------------------- | :---------------------------------- | :--------------- | :------------ | :---------------------- | | 2017 Productivity Program | $1,194 | $0 | $0 | $(277) | $917 | | Frutarom Integration Initiative | $6,523 | $7,938 | $(4,276) | $(4,033) | $6,152 | | 2019 Severance Plan | $13,368 | $358 | $0 | $(4,905) | $8,821 | | Total restructuring | $21,085 | $8,299 | $(4,276) | $(9,215) | $15,893 | Restructuring and Other Charges by Segment (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Taste | $1,139 | $2,541 | $7,941 | $7,618 | | Scent | $358 | $803 | $358 | $11,703 | | Shared IT & Corporate Costs | $0 | $372 | $0 | $3,094 | | Total Restructuring and other charges, net | $1,497 | $3,716 | $8,299 | $22,415 | NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET This note details the movements in goodwill, including measurement period adjustments and foreign exchange impacts, and the reallocation of goodwill due to a reporting structure reorganization. It also provides a breakdown of other intangible assets, their amortization, and potential COVID-19 related impairment risks Goodwill (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Goodwill | | :----------------------- | :--------- | | Balance at December 31, 2019 | $5,497,596 | | Measurement period adjustments | $(15,283) | | Foreign exchange | $(54,831) | | Balance at September 30, 2020 | $5,427,482 | - In Q1 2020, goodwill was reallocated between reporting units (Cosmetic Active Ingredients, Natural Product Solutions, Fine Ingredients, Taste) due to a reorganization of the Company's reporting structure[55] Other Intangible Assets, Net (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | September 30, 2020 | December 31, 2019 | | :----------------------- | :----------------- | :------------------ | | Customer relationships | $2,639,670 | $2,653,446 | | Trade names & patents | $180,173 | $178,968 | | Technological know-how | $466,154 | $468,256 | | Other | $2,489 | $40,362 | | Total carrying value | $3,288,486 | $3,341,032 | | Total accumulated amortization | $(613,004) | $(489,097) | | Other intangible assets, net | $2,675,482 | $2,851,935 | Estimated Future Intangible Amortization Expense (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | 2020 | 2021 | 2022 | 2023 | 2024 | | :----------------------- | :--- | :--- | :--- | :--- | :--- | | Estimated future intangible amortization expense | $48,270 | $190,415 | $186,485 | $186,368 | $186,368 | - While no impairment charges are currently anticipated due to COVID-19, a prolonged pandemic could increase the risk of asset write-downs and impairments to goodwill and intangibles, potentially having a material adverse impact on IFF's business and results[59] NOTE 6. OTHER ASSETS This note provides a breakdown of other assets, including operating lease right-of-use assets, deferred income taxes, overfunded pension plans, and cash surrender value of life insurance contracts, as of September 30, 2020, and December 31, 2019 Other Assets (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | September 30, 2020 | December 31, 2019 | | :----------------------- | :----------------- | :------------------ | | Operating lease right-of-use assets | $298,455 | $287,870 | | Deferred income taxes | $154,504 | $125,552 | | Overfunded pension plans | $99,212 | $85,657 | | Cash surrender value of life insurance contracts | $47,417 | $47,578 | | Other | $56,194 | $61,759 | | Total | $655,782 | $608,416 | NOTE 7. DEBT This note details IFF's debt structure, including various notes and term loans, their effective interest rates, and maturities. It also covers the new 2022 Term Loan, the repayment of 2020 Notes, and amendments to existing debt agreements in anticipation of the DuPont N&B transaction Debt (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Effective Interest Rate | September 30, 2020 | December 31, 2019 | | :----------------------- | :---------------------- | :----------------- | :------------------ | | 2020 Notes | 3.69 % | $0 | $299,381 | | 2021 Euro Notes | 0.82 % | $350,646 | $334,561 | | 2023 Notes | 3.30 % | $299,234 | $299,004 | | 2024 Euro Notes | 1.88 % | $584,429 | $558,124 | | 2026 Euro Notes | 1.93 % | $931,723 | $890,183 | | 2028 Notes | 4.57 % | $396,925 | $396,688 | | 2047 Notes | 4.44 % | $493,887 | $493,571 | | 2048 Notes | 5.12 % | $786,160 | $785,996 | | Term Loan | 3.65 % | $239,766 | $239,621 | | 2022 Term Loan | 1.73 % | $199,261 | $0 | | Amortizing Notes | 6.09 % | $47,970 | $82,079 | | Total debt | | $4,331,724 | $4,382,396 | | Less: Short-term borrowings | | $(440,962) | $(384,958) | | Total Long-term debt | | $3,890,762 | $3,997,438 | - On May 15, 2020, IFF entered into a $200 million senior unsecured two-year term loan facility (2022 Term Loan Agreement) with China Construction Bank Corporation[63] - As of September 30, 2020, $200 million was outstanding under this agreement[65] - During Q3 2020, IFF repaid its 2020 Notes, a $300 million payment, with approximately $200 million sourced from the 2022 Term Loan Agreement proceeds[66] - On August 25, 2020, IFF amended its Revolving Credit Agreement, Term Loan Credit Agreement, and 2022 Term Loan Agreement[68] - The Revolving Credit Facility will increase from $1 billion to $2 billion upon completion of the DuPont N&B Transaction, and the maximum permitted net debt to Consolidated EBITDA ratio will increase to 4.75x post-transaction[69] NOTE 8. LEASES This note details IFF's operating leases for various facilities and equipment, outlining lease terms and the components of lease expense and supplemental cash flow information related to leases Lease Costs (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating lease cost | $12,971 | $12,422 | $36,978 | $38,228 | | Finance lease cost | $1,292 | $0 | $2,846 | $0 | Supplemental Cash Flow Information Related to Leases (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :----------------------------- | :----------------------------- | | Operating cash flows from operating leases | $39,429 | $36,932 | | Operating cash flows for finance leases | $96 | $0 | | Financing cash flows for finance leases | $2,445 | $0 | | Right-of-use assets obtained in exchange for lease obligations (Operating leases) | $36,782 | $26,710 | | Right-of-use assets obtained in exchange for lease obligations (Finance leases) | $3,964 | $2,316 | NOTE 9. STOCK COMPENSATION PLANS This note details the stock compensation plans for IFF's officers, management, and directors, including equity-based and liability-based awards, and provides a breakdown of related compensation expense and tax benefits Stock-Based Compensation Expense (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equity-based awards | $8,195 | $8,126 | $27,177 | $26,426 | | Liability-based awards | $850 | $39 | $3,347 | $2,830 | | Total stock-based compensation expense | $9,045 | $8,165 | $30,524 | $29,256 | | Less: Tax benefit | $(1,803) | $(1,143) | $(5,765) | $(4,666) | | Total stock-based compensation expense, after tax | $7,242 | $7,022 | $24,759 | $24,590 | NOTE 10. SEGMENT INFORMATION This note describes IFF's reorganized reporting structure into two segments: Taste and Scent. It provides detailed descriptions of each segment's product offerings and how segment performance is evaluated, along with disaggregated net sales and segment profit information - In Q1 2020, IFF reorganized its reporting structure into two segments: Taste and Scent, consolidating most of the former Frutarom business into the Taste segment. Prior year amounts have been recast to conform to this new structure[73] - The Taste segment includes flavor compounds, savory solutions, inclusions, and nutrition and specialty ingredients, managed geographically for flavor compounds and globally for other products[74] - The Scent segment comprises fragrance compounds (Fine and Consumer Fragrances), fragrance ingredients, and cosmetic active ingredients[75] Net Sales and Segment Profit (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales: Taste | $765,238 | $782,428 | $2,343,884 | $2,398,549 | | Net sales: Scent | $502,838 | $484,917 | $1,470,282 | $1,457,766 | | Consolidated Net sales | $1,268,076 | $1,267,345 | $3,814,166 | $3,856,315 | | Segment profit: Taste | $101,600 | $121,425 | $346,223 | $383,450 | | Segment profit: Scent | $101,388 | $87,894 | $277,156 | $272,061 | | Operating profit | $150,289 | $184,664 | $465,881 | $548,471 | Net Sales by Geographic Region (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Europe, Africa and Middle East | $481,088 | $512,715 | $1,487,538 | $1,570,415 | | Greater Asia | $283,204 | $281,461 | $868,025 | $862,680 | | North America | $320,753 | $286,741 | $924,661 | $881,718 | | Latin America | $183,031 | $186,428 | $533,942 | $541,502 | | Consolidated | $1,268,076 | $1,267,345 | $3,814,166 | $3,856,315 | NOTE 11. EMPLOYEE BENEFITS This note provides a breakdown of pension and other defined contribution retirement plan expenses for both U.S. and Non-U.S. plans, as well as income recognized for postretirement benefits other than pensions, for the three and nine months ended September 30, 2020, and 2019 Postretirement Benefit Income (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | U.S. Plans: Net periodic benefit (income) cost | $(563) | $220 | $(1,687) | $659 | | Non-U.S. Plans: Net periodic benefit (income) cost | $1,405 | $1,326 | $4,216 | $3,978 | | Total postretirement benefit income | $(537) | $(469) | $(1,607) | $(1,406) | - IFF expects to contribute $4.4 million to U.S. pension plans and $20.9 million to Non-U.S. plans in 2020[85] - For the nine months ended September 30, 2020, $15.6 million was contributed to non-U.S. plans and $3.3 million in benefit payments were made for non-qualified U.S. plans[85] NOTE 12. FINANCIAL INSTRUMENTS This note discusses the fair value measurements of financial instruments, categorizing them by hierarchy levels. It also details IFF's derivative instruments, including foreign currency forward contracts, cash flow hedges, debt-related hedges, and cross-currency swaps, and their impact on the financial statements - IFF uses a fair value hierarchy (Level 1, 2, 3) for valuation techniques, prioritizing observable market data[87] - Structured liabilities are classified as Level 2, based on observable inputs like LIBOR swap curves and forward rates[88] Fair Value of Financial Instruments (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | September 30, 2020 Carrying Value | September 30, 2020 Fair Value | December 31, 2019 Carrying Value | December 31, 2019 Fair Value | | :----------------------- | :-------------------------------- | :---------------------------- | :------------------------------- | :----------------------------- | | Cash and cash equivalents | $469,840 | $469,840 | $606,823 | $606,823 | | Credit facilities and bank overdrafts | $1,666 | $1,666 | $3,131 | $3,131 | | Derivative assets | $2,534 | $2,534 | $3,575 | $3,575 | | Derivative liabilities | $16,021 | $16,021 | $7,415 | $7,415 | | Long-term debt (total) | $4,330,058 | $4,636,319 | $4,379,265 | $4,445,785 | - IFF uses foreign currency forward contracts to reduce exposure to cash flow volatility from intercompany loans, receivables/payables, and raw material purchases. These contracts generally have maturities not exceeding twelve months[92] - The Company maintains cash flow hedges to protect against currency risk for USD-denominated raw material purchases by EUR functional currency entities. Effective portions are recorded in OCI, and realized gains/losses are recognized in Cost of goods sold[94] - IFF designated its 2021, 2024, and 2026 Euro Notes as hedges of net European investments, with changes in value due to foreign exchange movements recorded in OCI as foreign currency translation adjustments[95][96] - During Q3 2020, IFF unwound two EUR/USD cross currency swaps, paying $14.6 million, net of accrued interest. The loss from termination was included in accumulated other comprehensive loss. Two remaining swaps had a net liability of $8.5 million as of September 30, 2020[97] Notional Amounts of Derivative Instruments (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | September 30, 2020 | December 31, 2019 | | :----------------------- | :----------------- | :------------------ | | Foreign currency contracts | $392,199 | $473,600 | | Cross currency swaps | $300,000 | $600,000 | NOTE 13. ACCUMULATED OTHER COMPREHENSIVE LOSS This note presents the changes in accumulated balances for each component of other comprehensive (loss) income, including foreign currency translation adjustments, gains/losses on derivatives, and pension/postretirement liability adjustments, for the nine months ended September 30, 2020, and 2019 Accumulated Other Comprehensive Loss (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Foreign Currency Translation Adjustments | Gains (Losses) on Derivatives Qualifying as Hedges | Pension and Postretirement Liability Adjustment | Total | | :----------------------- | :--------------------------------------- | :----------------------------------------------- | :---------------------------------------------- | :---------- | | Balance at Dec 31, 2019 | $(373,043) | $2,068 | $(345,919) | $(716,894) | | Net current period other comprehensive income (loss) | $(226,519) | $(6,405) | $10,399 | $(222,525) | | Balance at Sep 30, 2020 | $(599,562) | $(4,337) | $(335,520) | $(939,419) | Reclassifications Out of Accumulated Other Comprehensive Loss (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Affected Line Item in the Consolidated Statement of Income and Comprehensive Income (Loss) | | :----------------------- | :----------------------------- | :----------------------------- | :--------------------------------------------------------------------------------------- | | Gains (losses) on derivatives qualifying as hedges (Total, net of income taxes) | $3,883 | $5,975 | Total, net of income taxes | | Losses on pension and postretirement liability adjustments (Total, net of income taxes) | $(10,399) | $(7,729) | Total, net of income taxes | NOTE 14. COMMITMENTS AND CONTINGENCIES This note details IFF's various commitments and contingencies, including bank guarantees, letters of credit, lines of credit, and ongoing litigation matters. It also covers governmental investigations, potential plant closures in China, and the financial implications of the pending DuPont N&B transaction - As of September 30, 2020, IFF had $46.3 million in bank guarantees and standby letters of credit, including $13.5 million for tax disputes in Brazil[106][107] - The company has also pledged $7.2 million in assets to challenge these assessments[107] - IFF had $107.2 million in available lines of credit and $627.7 million in capacity under its Credit Facility as of September 30, 2020, with no material amounts drawn[109] - IFF is involved in several litigation matters, including a securities class action lawsuit in the U.S. and Israel related to the Frutarom acquisition and alleged improper payments[112][113] - There are also claims against former Frutarom executives regarding a $20 million bonus[114][115] - The Israel Police and Israeli Securities Authority launched an investigation into Frutarom and former executives on June 3, 2020, concerning suspected bribery, money laundering, and securities act violations[116] - IFF faces potential plant closures in China due to zoning changes, with the Guangzhou Taste plant (net book value ~$60M) and Guangzhou Scent plant (net book value ~$9M) at risk[117][118][119] - Production ceased at the Zhejiang Ingredients plant in 2019, with ownership transferred to the government in Q2 2020, and $13 million in relocation compensation received in Q3 2020[120][121][122] - The Merger Agreement for the DuPont N&B Transaction includes contingent payments, such as a $521.5 million termination fee to DuPont under certain circumstances, and a 50/50 split of debt financing commitment fees if the agreement is terminated[126] - In Q1 2020, IFF recognized an additional $3.5 million recovery from a favorable Brazilian tax ruling on PIS/COFINS overpayments, plus $2.7 million from another subsidiary, recorded as a reduction in Selling and Administrative expenses[129] - The aggregate range of reasonably possible losses for third-party and government-related contingencies, in excess of accrued liabilities, is estimated at $0.1 million to approximately $12.0 million[130] NOTE 15. REDEEMABLE NONCONTROLLING INTERESTS This note provides details on redeemable noncontrolling interests arising from the Frutarom acquisition, which include redemption features based on EBITDA multiples. It outlines the changes in these interests, including acquisitions, foreign exchange impacts, profit share, and redemptions - Certain noncontrolling interests from the Frutarom acquisition carry redemption features, allowing holders to sell their interests to Frutarom based on an EBITDA multiple. These options have identical price and exercise conditions[131] Redeemable Noncontrolling Interests (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Redeemable Noncontrolling Interests | | :----------------------- | :---------------------------------- | | Balance at December 31, 2019 | $99,043 | | Impact of foreign exchange translation | $16,268 | | Share of profit or loss attributable to redeemable noncontrolling interests | $3,480 | | Redemption value adjustment for the current period | $(4,964) | | Measurement period adjustments | $(1,426) | | Dividends paid | $(1,626) | | Exercises of redeemable noncontrolling interests | $(10,770) | | Balance at September 30, 2020 | $100,005 | - During 2020, IFF paid $13.1 million to purchase certain noncontrolling interests for which the option had been exercised in Q4 2019[134] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section provides management's perspective on IFF's financial condition and results of operations, including an overview of the company, the impact of the COVID-19 pandemic, details on the pending DuPont N&B transaction, and a comprehensive analysis of financial performance for the third quarter and first nine months of 2020 compared to 2019 OVERVIEW This overview introduces IFF as a leader in sensory experiences, highlighting its two segments (Taste and Scent) and the strategic importance of the Frutarom acquisition. It also discusses the ongoing impact of the COVID-19 pandemic on operations, customer demand, and supply chain, and provides an update on the pending DuPont N&B transaction - IFF operates in two segments, Taste and Scent, following a Q1 2020 reorganization that consolidated most of the former Frutarom business into Taste[136] - The Frutarom acquisition in 2018 expanded IFF's portfolio and customer base[137] - IFF has been designated an essential business in most locations, keeping all manufacturing facilities open despite minor disruptions[140] - The company has implemented various measures to protect employee health and safety, including remote work, enhanced cleaning, and personal protective equipment[142] - In Q3 2020, consolidated revenue was flat on a reported basis and increased 1% currency neutral, a sequential improvement from Q2[144] - Consumer Fragrances performed well, offsetting reduced demand in retail food services (Taste) and Fine Fragrances due to COVID-19 restrictions[144] - Minimal disruption to the supply chain has occurred through Q3 2020, though some raw material distribution and transport logistics delays persist[146] - IFF increased inventory levels and anticipates additional costs from labor, shipping, cleaning, and raw materials due to COVID-19[147] - The COVID-19 pandemic's impact on future financial results remains uncertain, with potential for continued volatility in retail, travel, and consumer behavior[149] - While no impairment charges are currently anticipated, a prolonged pandemic could increase the risk of asset write-downs and impairments[150] - The pending DuPont N&B transaction, approved by IFF shareholders on August 27, 2020, is expected to close in early 2021, creating a global leader in high-value ingredients and solutions across various markets[152][153][154] Sales Performance (Q3 2020 vs Q3 2019) | Metric | Q3 2020 Reported | Q3 2020 Currency Neutral | Q3 2019 Reported | Q3 2019 Currency Neutral | | :----- | :--------------- | :----------------------- | :--------------- | :----------------------- | | Sales | Flat | +1% | N/A | N/A | | Scent Sales | +4% | +4% | N/A | N/A | | Taste Sales | -2% | -1% | N/A | N/A | - Gross margin decreased to 41.4% in Q3 2020 from 42.1% in Q3 2019, primarily due to unfavorable price vs. input costs, sales volume reductions, and unfavorable mix from COVID-19, partially offset by productivity and integration initiatives[158] - Operating profit decreased by $34.4 million to $150.3 million (11.9% of sales) in Q3 2020 from $184.7 million (14.6% of sales) in Q3 2019[159] - Adjusted operating profit decreased to $193.4 million (15.2% of sales) from $200.9 million (15.9% of sales), mainly due to unfavorable price vs. input costs and volume reductions from COVID-19[159] RESULTS OF OPERATIONS This section presents a detailed comparative analysis of IFF's financial results for the three and nine months ended September 30, 2020, and 2019, covering key income statement items such as net sales, gross profit, operating profit, and net income, along with their respective changes and margins Consolidated Results of Operations (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change (%) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change (%) | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Net sales | $1,268,076 | $1,267,345 | 0% | $3,814,166 | $3,856,315 | (1)% | | Gross profit | $524,427 | $533,088 | (2)% | $1,572,136 | $1,610,586 | (2)% | | Operating profit | $150,289 | $184,664 | (19)% | $465,881 | $548,471 | (15)% | | Net income attributable to IFF stockholders | $84,828 | $127,124 | (33)% | $295,639 | $372,330 | (21)% | | Diluted EPS | $0.75 | $1.13 | (34)% | $2.64 | $3.30 | (20)% | | Gross margin | 41.4% | 42.1% | (0.7)pp | 41.2% | 41.8% | (0.6)pp | | Operating margin | 11.9% | 14.6% | (2.7)pp | 12.2% | 14.2% | (2.0)pp | THIRD QUARTER 2020 IN COMPARISON TO THIRD QUARTER 2019 This section provides a detailed comparison of IFF's financial performance for the third quarter of 2020 against the same period in 2019, analyzing sales by segment, cost of goods sold, R&D, S&A expenses, restructuring charges, amortization, and segment profit, along with interest expense, other income/expense, and income taxes - Sales for Q3 2020 were flat on a reported basis and increased 1% currency neutral compared to Q3 2019[161] - Scent segment sales grew due to Consumer Fragrances, while Taste segment sales declined due to reduced demand in retail food services[161] Sales Change by Segment (Q3 2020 vs Q3 2019) | Segment | % Change in Sales - Q3 2020 vs. Q3 2019 Reported | % Change in Sales - Q3 2020 vs. Q3 2019 Currency Neutral | | :------ | :----------------------------------------------- | :------------------------------------------------------- | | Taste | -2% | -1% | | Scent | 4% | 4% | | Total | 0% | 1% | - Taste sales decreased 2% reported and 1% currency neutral in Q3 2020, driven by volume reductions from COVID-19 in all regions except North America, partially offset by new wins[163] - Scent sales increased 4% reported and currency neutral in Q3 2020, led by Consumer Fragrances due to new wins and volume increases[164] - This was partially offset by declines in Fine Fragrances due to COVID-19 disruptions in retail markets[164] - Cost of goods sold as a percentage of sales increased to 58.6% in Q3 2020 from 57.9% in Q3 2019, mainly due to higher raw material costs from COVID-19, partially offset by productivity and integration initiatives[165] - R&D expenses as a percentage of sales increased to 7.1% in Q3 2020 from 6.7% in Q3 2019, primarily due to an increase in Applied R&D expenses[166] - S&A expenses increased by $23.7 million to $234.5 million (18.5% of sales) in Q3 2020[167] - Adjusted S&A expense decreased by $2.8 million to $193.6 million (15.3% of sales)[167] - Restructuring and other charges decreased to $1.5 million in Q3 2020 from $3.7 million in Q3 2019[168] - Amortization of acquisition-related intangibles decreased to $47.7 million in Q3 2020 from $48.4 million in Q3 2019[169] Segment Profit (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | | Segment profit: Taste | $101,600 | $121,425 | | Segment profit: Scent | $101,388 | $87,894 | | Operating profit | $150,289 | $184,664 | | Profit margin: Taste | 13.3% | 15.5% | | Profit margin: Scent | 20.2% | 18.1% | | Consolidated Profit margin | 11.9% | 14.6% | - Taste segment profit decreased by $19.8 million to $101.6 million (13.3% of sales) in Q3 2020, primarily due to volume reductions and unfavorable price vs. input costs from COVID-19, partially offset by new wins and integration initiatives[172] - Scent segment profit increased by $13.5 million to $101.4 million (20.2% of sales) in Q3 2020, driven by new wins and productivity initiatives, partially offset by unfavorable price vs. input costs and mix[173] - Global expenses increased to $9.6 million in Q3 2020 from $8.4 million in Q3 2019[174] - Interest expense increased to $34.8 million in Q3 2020 from $33.5 million in Q3 2019, with the average cost of debt rising to 3.1% from 3.0%[175] - Other expense (income), net, decreased by $15.6 million to $9.9 million of net expense in Q3 2020, primarily due to foreign exchange losses[176] - The effective tax rate for Q3 2020 was 18.3%, up from 17.2% in Q3 2019[177] - The adjusted effective tax rate increased to 18.5% from 18.1%, mainly due to an unfavorable mix of earnings and increased loss provisions, partially offset by lower repatriation costs[177] FIRST NINE MONTHS 2020 IN COMPARISON TO FIRST NINE MONTHS 2019 This section compares IFF's financial performance for the first nine months of 2020 against the same period in 2019, detailing sales by segment, cost of goods sold, R&D, S&A expenses, restructuring charges, amortization, and segment profit, along with interest expense, other income/expense, and income taxes - Sales for the first nine months of 2020 decreased 1% reported and increased 1% currency neutral[178] - Scent sales grew due to Consumer Fragrances, while Taste sales declined due to reduced demand in retail food services from COVID-19[178] Sales Change by Segment (First Nine Months 2020 vs 2019) | Segment | % Change in Sales - First Nine Months 2020 vs. 2019 Reported | % Change in Sales - First Nine Months 2020 vs. 2019 Currency Neutral | | :------ | :----------------------------------------------------------- | :------------------------------------------------------------------- | | Taste | -2% | 0% | | Scent | 1% | 2% | | Total | -1% | 1% | - Taste sales decreased 2% reported and were flat currency neutral for the first nine months of 2020, primarily due to volume reductions from COVID-19, partially offset by new wins[180] - Scent sales increased 1% reported and 2% currency neutral for the first nine months of 2020, driven by Consumer Fragrances[181] - This was partially offset by declines in Fine Fragrances due to COVID-119 and Fragrance Ingredients due to price reductions and supply-chain challenges in India[181] - Cost of goods sold as a percentage of sales increased to 58.8% in the first nine months of 2020 from 58.2% in 2019, mainly due to higher raw material costs from COVID-19, partially offset by productivity and integration initiatives[182] - R&D expenses as a percentage of sales decreased to 6.7% in the first nine months of 2020 from 6.8% in 2019[183] - S&A expenses increased to $694.6 million (18.2% of sales) in the first nine months of 2020 from $634.1 million (16.4% of sales) in 2019, driven by higher employee-related expenses and incentive compensation[184] - IFF recognized $5.7 million in income from Brazilian tax recoveries, reducing S&A expenses[185] - Restructuring and other charges decreased to $8.3 million in the first nine months of 2020 from $22.4 million in 2019, primarily due to lower costs from the 2019 Severance Plan[186] - Amortization expenses increased to $144.9 million in the first nine months of 2020 from $144.0 million in 2019[187] Segment Profit (DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :----------------------------- | :----------------------------- | | Segment profit: Taste | $346,223 | $383,450 | | Segment profit: Scent | $277,156 | $272,061 | | Operating profit | $465,881 | $548,471 | | Profit margin: Taste | 14.8% | 16.0% | | Profit margin: Scent | 18.9% | 18.7% | | Consolidated Profit margin | 12.2% | 14.2% | - Taste segment profit decreased to $346.2 million (14.8% of sales) in the first nine months of 2020, primarily due to volume reductions and unfavorable price vs. input costs from COVID-19, partially offset by new wins and integration initiatives[190] - Scent segment profit increased to $277.2 million (18.9% of sales) in the first nine months of 2020, driven by new wins and productivity initiatives, partially offset by unfavorable price vs. input costs and mix[191] - Global expenses increased to $49.6 million in the first nine months of 2020 from $36.0 million in 2019, due to higher incentive compensation and lower gains from currency hedging[192] - Interest expense decreased to $99.0 million in the first nine months of 2020 from $102.7 million in 2019, primarily due to debt repayments[193] - The average cost of debt was 3.0% in 2020, up from 2.9% in 2019[193] - Other expense (income), net, decreased by $19.9 million to $4.8 million of net expense in the first nine months of 2020, primarily due to foreign exchange losses[194] - The effective tax rate for the first nine months of 2020 was 16.9%, down from 17.6% in 2019, primarily due to lower repatriation costs and non-U.S. provision to return adjustments, partially offset by an unfavorable mix of earnings and increased loss provisions[195] Liquidity and Capital Resources This section analyzes IFF's liquidity and capital resources, including cash balances, restricted cash, and cash flows from operating, investing, and financing activities. It also discusses the Frutarom Integration Initiative, the impact of the DuPont N&B transaction on capital, debt covenants, and senior notes - Cash and cash equivalents were $469.8 million at September 30, 2020, down from $606.8 million at December 31, 2019[198] - A portion of this cash is held outside the U.S. and is generally available for repatriation, subject to certain state and foreign withholding taxes[199] - Restricted cash of $13.7 million primarily relates to amounts escrowed for future payments to former Frutarom option holders[200] - Cash flows from operating activities increased to $415.0 million (10.9% of sales) for the first nine months of 2020, up from $383.0 million (9.9% of sales) in 2019, driven by lower net working capital, partially offset by lower cash earnings[201] - Net investing activities used $118.7 million in the first nine months of 2020, compared to $157.8 million in 2019[205] - Capital expenditures decreased to $124.1 million from $160.4 million[206] - Capital spending for 2020 is expected to be about 4% of sales, down from 5% in 2019[206] - The Frutarom Integration Initiative is expected to incur $40-50 million in restructuring costs, with $18.3 million expensed to date[207] - Most activities and charges are expected to be completed by the end of 2021[208] - The company expects to achieve $145 million in synergy targets[209] - Cash used in financing activities increased to $418.0 million in the first nine months of 2020 from $365.8 million in 2019, primarily due to higher debt repayments, partially offset by new debt financing[210] - Dividends paid totaled $240.3 million[211] - The DuPont N&B transaction involves N&B as the initial borrower for a $1.25 billion term loan facility and $6.25 billion in senior unsecured notes to finance the special cash payment[216] - IFF will guarantee or assume these obligations post-merger[216] - As of September 30, 2020, IFF was in compliance with all debt covenants, with a Net Debt/adjusted EBITDA ratio of 3.44 to 1.0, well below the maximum permitted ratio of 4.0 to 1.0[218][220] - Post-N&B transaction, the maximum ratio will increase to 4.75 to 1.0[220] Adjusted EBITDA (DOLLARS IN MILLIONS) | (DOLLARS IN MILLIONS) | Twelve Months Ended Sep 30, 2020 | | :---------------------- | :------------------------------- | | Net income | $379.1 | | Interest expense | $134.5 | | Income taxes | $77.5 | | Depreciation and amortization | $331.4 | | Specified items | $161.8 | | Non-cash items | $38.1 | | Adjusted EBITDA | $1,122.4 | Net Debt (DOLLARS IN MILLIONS) | (DOLLARS IN MILLIONS) | September 30, 2020 | | :---------------------- | :----------------- | | Total debt | $4,331.7 | | Cash and cash equivalents | $469.8 | | Net debt | $3,861.9 | - As of September 30, 2020, IFF had $3.88 billion in senior unsecured notes outstanding, with maturities ranging from September 2021 to September 2048[224] - The $300 million 3.40% senior notes that matured in September 2020 were repaid[224] Non-GAAP Financial Measures This section defines and reconciles various non-GAAP financial measures used by IFF, including currency neutral metrics, adjusted gross margin, adjusted operating profit, adjusted selling and administrative expenses, and adjusted effective tax rate. It also provides reconciliations for net income and foreign currency impact - IFF uses non-GAAP measures like currency neutral metrics, adjusted gross margin, adjusted operating profit, adjusted S&A expenses, and adjusted effective tax rate to provide additional information on underlying operating results and comparable year-over-year performance[228] - These are supplemental to GAAP and not substitutes[229] - Currency neutral metrics are calculated by translating prior year sales at current year exchange rates[230] - Adjusted gross margin excludes operational improvement initiatives, Frutarom integration costs, FDA recall, and Frutarom acquisition costs[230] - Adjusted S&A expenses exclude Frutarom integration/acquisition costs, compliance review/legal defense costs, and N&B transaction/integration costs[231] - Adjusted operating profit excludes these items plus restructuring charges and losses on asset sales[232] Reconciliation of Gross Profit (DOLLARS IN THOUSANDS) | Reconciliation of Gross Profit (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | | :---------------------------------------------------- | :------------------------------ | :------------------------------ | | Reported (GAAP) | $524,427 | $533,088 | | Adjustments | $103 | $(3,455) | | Adjusted (Non-GAAP) | $524,530 | $530,633 | Reconciliation of Selling and Administrative Expenses (DOLLARS IN THOUSANDS) | Reconciliation of Selling and Administrative Expenses (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | | :------------------------------------------------------------------------- | :------------------------------ | :------------------------------ | | Reported (GAAP) | $234,520 | $210,829 | | Adjustments | $(40,993) | $(14,361) | | Adjusted (Non-GAAP) | $193,627 | $196,468 | Reconciliation of Operating Profit (DOLLARS IN THOUSANDS) | Reconciliation of Operating Profit (DOLLARS IN THOUSANDS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | | :-------------------------------------------------------- | :------------------------------ | :------------------------------ | | Reported (GAAP) | $150,289 | $184,664 | | Adjustments | $43,091 | $16,270 | | Adjusted (Non-GAAP) | $193,380 | $200,934 | Reconciliation of Net Income (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | Reconciliation of Net Income (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) | Three Months Ended Sep 30, 2020 Net Income Attributable to IFF (l) | Three Months Ended Sep 30, 2020 Diluted EPS (m) | Three Months Ended Sep 30, 2019 Net Income Attributable to IFF (l) | Three Months Ended Sep 30, 2019 Diluted EPS (m) | | :------------------------------------------------------------------------- | :------------------------------------------------- | :---------------------------------------------- | :------------------------------------------------- | :---------------------------------------------- | | Reported (GAAP) | $84,828 | $0.75 | $127,124 | $1.13 | | Adjustments | $35,282 | $0.31 | $9,231 | $0.07 | | Adjusted (Non-GAAP) | $120,110 | $1.06 | $136,355 | $1.20 | Reconciliation of Gross Profit (DOLLARS IN THOUSANDS) | Reconciliation of Gross Profit (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------------------------------------------------- | :----------------------------- | :----------------------------- | | Reported (GAAP) | $1,572,136 | $1,610,586 | | Adjustments | $1,107 | $6,656 | | Adjusted (Non-GAAP) | $1,573,243 | $1,617,242 | Reconciliation of Selling and Administrative Expenses (DOLLARS IN THOUSANDS) | Reconciliation of Selling and Administrative Expenses (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Reported (GAAP) | $694,641 | $634,111 | | Adjustments | $(91,741) | $(40,107) | | Adjusted (Non-GAAP) | $598,260 | $593,904 | Reconciliation of Operating Profit (DOLLARS IN THOUSANDS) | Reconciliation of Operating Profit (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------------------------------- | :----------------------------- | :----------------------------- | | Reported (GAAP) | $465,881 | $548,471 | | Adjustments | $106,356 | $69,933 | | Adjusted (Non-GAAP) | $573,829 | $619,554 | Reconciliation of Net Income (DOLLARS IN THOUSANDS) | Reconciliation of Net Income (DOLLARS IN THOUSANDS) | Nine Months Ended Sep 30, 2020 Net Income Attributable to IFF (l) | Nine Months Ended Sep 30, 2020 Diluted EPS | Nine Months Ended Sep 30, 2019 Net Income Attributable to IFF (l) | Nine Months Ended Sep 30, 2019 Diluted EPS | | :-------------------------------------------------- | :------------------------------------------------ | :-------------------------- | :------------------------------------------------ | :-------------------------- | | Reported (GAAP) | $295,639 | $2.64 | $372,330 | $3.30 | | Adjustments | $89,354 | $0.74 | $51,641 | $0.44 | | Adjusted (Non-GAAP) | $384,993 | $3.38 | $423,971 | $3.74 | Operating Profit Reconciliation | Operating Profit: | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | % Change - Reported (GAAP) | (18.6)% | 15.9% | (15.1)% | 12.2% | | Items impacting comparability | 14.8% | 6.3% | 7.7% | 8.0% | | % Change - Adjusted (Non-GAAP) | (3.8)% | 22.2% | (7.4)% | 20.2% | | Currency Impact | 5.1% | 1.1% | 2.8% | 1.9% | | % Change Year-over-Year - Currency Neutral Adjusted (Non-GAAP)* | 1.3% | 23.3% | (4.6)% | 22.1% | Cautionary Statement Under the Private Securities Litigation Reform Act of 1995 This section provides a cautionary statement regarding forward-looking statements in the report, outlining various risks and uncertainties that could cause actual results to differ materially from projections. Key risks include the impacts of COVID-19, integration of acquisitions (Frutarom and N&B), increased leverage, competition, supply chain disruptions, and regulatory compliance - Forward-looking statements are based on management's current assumptions and expectations, but actual results may differ due to inherent risks and uncertainties[248] - These include disruptions from COVID-19, risks related to the integration of Frutarom and N&B, unanticipated costs, and the ability to realize expected synergies[249] - Other significant risk factors include increased leverage, ability to compete, customer demand changes, supply chain disruptions, volatility in raw material prices, IT system breaches, regulatory compliance costs, currency fluctuations, global economic uncertainty, and the impact of legal claims and tax legislation[249] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. This section states that there are no material changes in market risk compared to the information provided in the 2019 Form 10-K - There are no material changes in market risk from the information provided in the 2019 Form 10-K[254] ITEM 4. CONTROLS AND PROCEDURES. This section confirms the effectiveness of IFF's disclosure controls and procedures and states that there have been no material changes in internal control over financial reporting during the quarter ended September 30, 2020 - The CEO and CFO concluded that IFF's disclosure controls and procedures were effective as of September 30, 2020[255] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[257] PART II. OTHER INFORMATION This section details IFF's legal proceedings, supplemental risk factors related to the COVID-19 pandemic, and a list of exhibits filed with the report ITEM 1. LEGAL PROCEEDINGS. This section details ongoing legal proceedings, including securities class action lawsuits in the U.S. and Israel related to the Frutarom acquisition and alleged improper payments, as well as claims against former Frutarom executives and an investigation by Israeli authorities - A putative securities class action was filed in the U.S. against IFF and its executives on August 12, 2019, alleging false statements regarding the Frutarom acquisition and improper payments[261] - An amended complaint was filed on March 16, 2020, adding Frutarom and former officers as defendants[261] - Two motions for securities class actions were filed in Israel in August 2019, making similar allegations related to the Frutarom acquisition and improper payments[262] - One motion was amended to remove IFF and its officers and add factual allegations from the U.S. complaint[262] - IFF and Frutarom filed a claim in Israel against former Frutarom CEO Ori Yehudai and directors, challenging a $20 million bonus due to alleged breaches of fiduciary duty related to improper payments[263] - Mediation is scheduled for Q4 2020[263] - On June 3, 2020, Israeli authorities commenced an investigation into Frutarom and former executives for suspected bribery, money laundering, and securities act violations[265] ITEM 1a. RISK FACTORS. This section presents a supplemental risk factor detailing the material adverse impacts of the COVID-19 pandemic on IFF's operations, financial condition, results of operations, and cash flows, including risks related to workforce safety, supply chain disruptions, customer demand changes, and market volatility Supplemental Risk Factor: The COVID-19 pandemic may materially and adversely impact IFF's operations, financial condition, results of operations and cash flows. The COVID-19 pandemic poses significant risks to IFF, affecting operations through workforce disruptions and increased costs, supply chains with distribution delays and higher raw material costs, and customer demand, particularly for products sold in retail outlets. It also introduces market-related risks impacting pension plan funding and asset valuations - COVID-19 measures (e.g., business closures, travel restrictions) have impacted IFF's workforce and operations, as well as those of its customers, vendors, and suppliers[267][268] - While manufacturing plants operate, workforce disruptions from infections could lead to temporary closures, reduced production, and increased costs[269][270] - Supply chain disruptions, pri