10-K 1 iff10k2017.htm 10-K Document


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2017
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from              to
            
Commission File Number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
(Exact name of registrant as specified in its charter)
NEW YORK
13-1432060
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
521 WEST 57TH STREET, NEW YORK, N.Y.
10019
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (212) 765-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value
New York Stock Exchange
12 1/2¢ per share
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    
þ
Accelerated filer   
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  þ
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $10,661,701,005 as of June 30, 2017.
As of February 15, 2018, there were 78,927,638 shares of the registrant’s common stock, par value 12  1/2¢ per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2018 Annual Meeting of Shareholders (the “IFF 2018 Proxy Statement”) are incorporated by reference in Part III of this Form 10-K.
 




INTERNATIONAL FLAVORS & FRAGRANCES INC.
TABLE OF CONTENTS
 
 
 
PAGE
 
PART I
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 1B.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
PART II
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
ITEM 7.
 
 
 
ITEM 7A.
 
 
 
ITEM 8.
 
 
 
ITEM 9.
 
 
 
ITEM 9A.
 
 
 
ITEM 9B.
 
 
 
 
PART III
 
ITEM 10.
 
 
 
ITEM 11.
 
 
 
ITEM 12.
 
 
 
ITEM 13.
 
 
 
ITEM 14.
 
 
 
 
PART IV
 
ITEM 15.
 
 
 
ITEM 16.
 
 
 

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PART I
When used in this report, the terms “IFF,” “the Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc., and its subsidiaries.
 
ITEM 1.
BUSINESS.
We are a leading innovator of sensory experiences that move the world. We co-create unique products that consumers taste, smell, or feel in fine fragrances and beauty, detergents and household goods, and food and beverages. Our approximately 7,300 team members globally take advantage of our capabilities in consumer insights, research and product development (“R&D”), creative expertise and customer intimacy to partner with our customers in developing innovative and differentiated offerings for consumer products. We believe that our collaborative approach will generate market share gains for our customers.
Our international presence positions us to serve both our global customers and the increasing number of regional and high-end and middle-market specialty consumer goods producers. We operate thirty-seven manufacturing facilities and sixty-nine creative centers and application laboratories located in thirty-seven different countries. We partner with our customers to develop over 46,000 products that are provided to customers in approximately 162 countries.
We principally compete in the flavors and fragrances market, which is part of a larger market that supplies a wide variety of ingredients and compounds used in consumer products. The broader market includes large multi-national companies and smaller regional and local participants that supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients. The global market for flavors and fragrances has expanded consistently, primarily as a result of an increase in demand for, and an increase in the variety of, consumer products containing flavors and fragrances. Management estimates that in 2017 the flavors and fragrances market was approximately $24.8 billion, and forecasted to grow approximately 2-3% by 2021, primarily driven by expected growth in emerging markets.
In 2017, we achieved sales of approximately $3.4 billion, making us one of the top four companies in the global flavors and fragrances sub-segment of the broader consumer products ingredients and compounds market. We believe that our global presence, diversified business platform, broad product portfolio and global and regional customer base position us to achieve long-term growth as the flavors and fragrances markets expand.
We operate in two business segments, Flavors and Fragrances. In 2017, our Flavors business represented 48% of our sales, while our Fragrances business represented 52% of sales. Our business is geographically diverse, with sales to customers in the four regions set forth below:
Region
% of 2017 Sales
Europe, Africa, Middle East
31
%
Greater Asia
27
%
North America
27
%
Latin America
15
%
We are committed to winning in emerging markets. We believe that more significant future growth potential for the flavors and fragrances industry, and for our business, exists in the emerging markets (all markets except North America, Japan, Australia, and Western, Southern and Northern Europe). Over the past five years our currency neutral sales growth rate in emerging markets has outpaced that of developed markets. We expect this long-term trend to continue for the foreseeable future.
We have operated in some of the largest emerging markets for multiple decades. As a result of these established operations, sales in emerging markets represented 48% of 2017 sales and 51% of 2016 sales. As our customers seek to grow their businesses in emerging markets, we provide them the ability to leverage our long-standing international presence and extensive market knowledge to help drive their brands in these markets. To stay competitive in our industry, we must adapt to rapidly shifting consumer preferences and customer demands. We believe our consumer insights and customer relationships help to drive innovation that benefits us and our customers. During 2017, our 25 largest customers accounted for 50% of our sales. Sales to our largest customer across all end-use categories accounted for 11% to 12% of our sales for each of the last three fiscal years. These sales were principally in our Fragrances business.

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For financial information about our operating segments and the geographic areas in which we do business, please see Note 13 of our Consolidated Financial Statements included in this Form 10-K.
Vision 2020 Strategy
We continued to execute against the four pillars of our Vision 2020 strategy originally announced in 2015 and refreshed in 2017, which focuses on building differentiation and accelerating growth to create shareholder value:
(1)
Innovating Firsts - We seek to strengthen our position by driving differentiation in priority R&D platforms across both businesses. In 2017, we launched three captive fragrance molecules and three new flavor modulators. We achieved continued growth of our sweetness and savory modulation portfolio sales and encapsulated-related sales. We also launched Re-Imagine, a program to accelerate flavor innovation and increase agility to capture unmet opportunities in the changing food and beverage market.
(2)
Winning Where We Compete - Our goal is to achieve a #1 or #2 market leadership position in key markets and categories and with specific customers. In 2017, we grew our sales in both our Flavors and Fragrances businesses in North America and the Middle East and Africa, geographic area we targeted for growth. We also created Tastepoint by IFF, designed to leverage our expertise in and to service the middle-market customer in North America, and opened an expanded facility in Cairo, Egypt to support our regional focus on growth in the Middle East and Africa.
(3)
Becoming Our Customers' Partner of Choice - Our goal is to attain commercial excellence by providing our customers with in-depth, local consumer understanding, industry-leading innovation, outstanding service and the highest quality products. In 2017, we introduced IFF Taste Design, a combination of artisanal, handcrafted techniques and proprietary technologies that drive consumer preference and market differentiation. In addition, we were rated gold by EcoVadis for sustainability, received an “A” rating and were awarded leadership status for our climate change and an "A-" for water management strategy by CDP.
(4)
Strengthening and Expanding the Portfolio - We actively pursue value-creation through partnerships, collaborations, and acquisitions within flavors, fragrances and adjacencies. We prioritize opportunities that provide (i) access to new technologies, (ii) the ability to increase our market share in key markets and with key customers or (iii) access to adjacent products or services that will position us to leverage our expertise in science and technology and our customer base. During 2017, we acquired Fragrance Resources to further improve our market position with regional customers in specialty fine fragrances, and PowderPure to further expand product offerings of clean label flavors solutions. We also became the first sensorial innovator of flavors, fragrances and cosmetic actives to join the MIT Media Lab, a leader in research and technologies that transform the everyday for consumers around the world.
Our Product Offerings
Flavors
Flavors are the key building blocks that impart taste experiences in food and beverage products and, as such, play a significant role in determining consumer preference for the end products in which they are used. As a leading creator of flavor compounds, we help our customers deliver on the promise of delicious and healthy foods and drinks that appeal to consumers. While we are a global leader, our Flavors business is more regional in nature, with different formulas that reflect local taste preferences. We create our flavors in our regional creative centers which allow us to satisfy local taste preferences, while also helping to ensure regulatory compliance and production standards. We develop thousands of different flavors and taste offerings for our customers, most of which are tailor-made. We continually develop new formulas in order to meet changing consumer preferences and customer needs.
Our Flavors compounds are ultimately used by our customers in the following four end-use categories of consumer goods: (1) Savory, for use in soups, sauces, condiments, prepared meals, meat and poultry, potato chips and other savory snacks; (2) Beverages, for use in juice drinks, carbonated beverages, flavored waters and spirits, (3) Sweet, for use in bakery products, candy, chewing gum and cereal and (4) Dairy, for use in all dairy products such as yogurt, ice cream and cheese and other products that have a creamy flavor.

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We continue to build upon our strengths and to focus on addressing industry trends that will allow us to differentiate ourselves from our competitors and deliver accelerated growth consistent with our Vision 2020 strategy. These trends include:
Continued Consumer Demand for Fresh, Clean and Authentic Products. Consumers in developed markets increasingly want to make food choices that promote a healthy lifestyle and are moving towards products with “all natural” or healthier ingredients. In addition, consumers, non-governmental organizations and governmental agencies are seeking more transparency in product labeling. In response, many of our customers are announcing initiatives to provide “clean label” products (products that do not include any artificial ingredients). As a result of these trends, we believe our Vision 2020 strategy’s focus on innovation, including our modulation technology, delivery systems and our naturals and proprietary ingredients will help our customers address changing consumer demands. In 2017, we acquired PowderPure, a company that used a specialized drying technology to create all-natural flavors by eliminating water while leaving the taste, nutrition and color matrix intact.
Expansion of Consumer Food Companies. The number of participants in the food industry continues to expand, with mid-sized regional companies and companies focused on niche-product categories joining the traditional global companies to drive and accelerate product innovation. As a result, larger food and beverage companies are seeing slower growth than in previous years. We continue to look for innovative and value-creating methods for serving this growing customer base. In 2017, we announced the creation of Tastepoint by IFF, representing the collaboration of Ottens Flavors and David Michael, a program designed to service the middle-market customer in North America by providing the approach of a smaller company, backed by expertise traditionally reserved for companies with a more global reach.
Fragrances
Our Fragrances business derives revenue from two sources, Fragrance Compounds and Ingredients.
We are a global leader in the creation of fragrance compounds that are integral elements in the world’s finest perfumes and best-known consumer products, within fabric care, home care, personal wash, hair care and toiletries. Our Fragrance ingredients business is a vertically integrated operation, originating with the development in our research laboratories of naturals, synthetic and proprietary molecules and innovative delivery systems, progressing to our manufacturing facilities that produce these ingredients in a consistent, high-quality and cost-effective manner and transitioning to our creative centers and application laboratories where our perfumers partner with our customers to create unique fragrance compounds for use in a variety of end-use products. We also produce cosmetic active and functional ingredients for use in cosmetics.
By providing our fragrance development teams with an extensive portfolio of innovative, high-quality and effective ingredients to support their creativity, we are able to provide our customers with a unique identity for their brands. These ingredients or fragrance compounds can then be combined with our innovative delivery systems, including our proprietary encapsulation technology, which consists of individual fragrance droplets coated with a protective polymeric shell to deliver superior fragrance performance throughout a product's lifecycle. These delivery systems are key differentiators in the growth of our consumer fragrance compounds.
Fragrance Compounds. Fragrance Compounds are unique and proprietary combinations of multiple ingredients that are ultimately used by our customers in their consumer goods. Our creative and commercial teams within Fragrance Compounds are organized into two broad categories, Fine Fragrances and Consumer Fragrances.
(1)
Fine Fragrances - Fine Fragrances focuses on perfumes and colognes. IFF’s scientists and perfumers collaborate to develop new molecules, new natural extractions, and innovative processes that enliven perfumers' palettes and help them create unique, inspiring fragrances. We have created some of the industry-leading fine fragrance classics as well as cutting-edge niche fragrances, as evidenced by the number of top sellers.
(2)
Consumer Fragrances - Our Consumer Fragrances include five end-use categories of products:
i.
Fabric Care - laundry detergents, fabric softeners and specialty laundry products;
ii.
Home Care - household cleaners, dishwashing detergents and air fresheners;
iii.
Personal Wash, including bar soap and shower gel;
iv.
Hair Care; and
v.
Toiletries.
Ingredients. Fragrance Ingredients consists of active and functional ingredients that are used internally and sold to third parties, including customers and competitors, for use in preparation of compounds. While the principal role of our Fragrance

5


Ingredients facilities is to support our Fragrance Compounds business, we utilize our excess manufacturing capacity to manufacture and sell certain fragrance ingredients to third parties. We believe that this business allows us to leverage our fixed costs while maintaining the security of supply for our perfumers and ultimately our customers. Fragrance Ingredients available for sale to third parties include innovative ingredients that leverage our manufacturing experience as well as a limited amount of cost-competitive, commodity ingredients. As our Fragrance Compounds business grows, we expect that the percentage of capacity allocated to the production of Fragrance Ingredients for sale to third parties may decrease. Fragrance Ingredients also includes our cosmetic active and functional ingredients, which provide biologists and cosmetic chemists with innovative solutions to address cosmetic challenges such as skin aging and hair protection.
With approximately 1,300 separate fragrance and active and functional cosmetic ingredients, plus additional botanicals and delivery systems, we believe we are a leader in the industry with the breadth of our product portfolio.
Consistent with our Vision 2020 strategy, Fragrances continues to build upon our strengths to differentiate ourselves from our competitors, address evolving consumer demands and deliver accelerated growth. Specifically, we intend to focus on:
(1)
Delivery Systems. We continue to invest in our delivery system technologies, including expansion of our market-leading encapsulation technology, which we believe will allow us to differentiate our products and those of our customers. Our encapsulation technology extends, controls the release of and increases aromas in a variety of consumer products. We have expanded our portfolio to offer multi-functional delivery systems with cosmetic actives that work to enhance skin penetration, protect the active against interactions with other ingredients, provide long-lasting release, facilitate formulation of challenging ingredients and allow a better-targeted action.
(2)
Consumer Demand for Natural and Organic Products. Increased demand for natural ingredients is a primary driver of future growth in Fine Fragrances. We believe that our in-house naturals operations, led by Laboratoire Monique Rémy (“LMR”) in Grasse, France, are industry leading in the processing of quality materials and offer decades of experience understanding natural products and perfecting the process of transforming naturals, such as narcissus, jasmine and blackcurrant bud, into pure absolutes that retain the unique fragrance of their origin. Our objective is to expand our naturals capabilities by offering our clients naturals and proprietary ingredients.
(3)
Transparency in Labeling. As consumers worldwide seek to require transparency in labeling, our customers will progressively seek to differentiate their products through proprietary molecules. A major emphasis of our research program is the creation of new proprietary molecules and ingredients.
Research and Product Development Process
Consumer Insights
We believe that the first step to creating a unique scent or taste experience begins with gaining insight into the consumer. By developing a deep understanding of what consumers value and prefer, we are better able to focus our R&D and creative efforts. Our quest to bring innovative, exciting, and winning ideas to our clients begins with insight into the consumer.
Our consumer insight and marketing teams work tirelessly interpreting trends, monitoring product launches, analyzing quantitative market data, and conducting numerous consumer interviews annually. Our sensory experts direct research programs exploring topics such as fragrance performance, the psychophysics of sensory perception (including chemesthetic properties such as warming, cooling, and tingling), the genetic basis for flavor and fragrance preference, and the effects of aromas on mood, performance, health, and well-being.
Based on this information, we develop innovative programs to evaluate potential products that enable us to understand the emotional connections between a prospective product and the consumer. We believe this ability to pinpoint the likelihood of a product’s success translates into stronger brand equity, resulting in increased returns and greater market share gains for our customers as well as IFF.
Research and Development
We consider our R&D infrastructure to be one of our key competencies and we focus and invest substantial resources in the research and development of new and innovative molecules, compounds, formulas and technologies and the application of these to our customers’ products. We spend approximately 8% of our sales on the research, development and implementation of new molecules, compounds and technologies that help our customers respond to changing consumer preferences. Using the knowledge gained from our Consumer Insights program, we strategically focus our resources around key R&D platforms that address consumer needs or preferences, or anticipate future preferences. By aligning our resources around these platforms, we ensure the proper support and focus for each program so that it can be further developed and eventually accepted for

6


commercial application. As a result of this investment, we have been granted 341 patents in the United States since 2000, including twenty-seven in 2017, and we have developed many unique molecules and delivery systems for our customers that are used as the foundations of successful flavors and fragrances around the world.
We principally conduct our R&D activities in Union Beach, New Jersey, where we employ scientists and application engineers who collaborate with our five other R&D centers around the world, to support the:
discovery of new materials;
development of new technologies, such as delivery systems;
creation of new compounds; and
enhancement of existing ingredients and compounds.
As of December 31, 2017, we employed about 1,600 people globally in R&D activities. We spent $286.0 million, $254.3 million and $246.1 million, or approximately 8.4%, 8.2% and 8.1% of sales in 2017, 2016 and 2015, respectively, on R&D activities.
Our ingredients research program discovers molecules found in natural substances and creates new molecules that are subsequently tested for their sensorial value. To broaden our offerings of natural, innovative and unique products, we seek collaborations with research institutions and other companies throughout the world. We have established a number of such collaborations to strengthen our innovation pipeline. We may also consider acquiring companies that could provide access to new technologies, consistent with our Vision 2020 strategy.
The development of new and customized flavor and fragrance compounds is a complex process calling upon the combined knowledge of our scientists, flavorists and perfumers. Scientists from various disciplines work in project teams with flavorists and perfumers to develop flavor and fragrance compounds with consumer preferred performance characteristics. The development of new flavor and fragrance compounds requires (i) an in-depth knowledge of the flavor and fragrance characteristics of the various ingredients we use, (ii) an understanding of how the many ingredients in a consumer product interact and (iii) the creation of controlled release and delivery systems to enhance flavor and fragrance performance. To facilitate this process, we have a scientific advisory board that provides external perspectives and independent feedback on our R&D and sustainability initiatives.
In 2017, we launched Re-Imagine, a multi-tiered program to accelerate innovation and increase agility to capture unmet opportunities in the changing food and beverage market. Based on a combination of future trends analysis, consumer insights, and a modernized cross-category development process, the program guides our research and development efforts to ensure an innovation pipeline that addresses evolving consumer needs and desires.
Creative Application
We also have a network of sixty-nine creative centers and application laboratories around the world where we create or adapt the basic flavors or fragrances that we have developed in the R&D process to commercialize for use in our customers’ consumer products. Our global creative teams consist of perfumers, fragrance evaluators and flavorists, as well as marketing, consumer insights and technical application experts, from a wide range of cultures and nationalities. In close partnership with our customers’ product development groups, our creative teams create the sensory experiences that our customers are seeking in order to satisfy consumer demands in each of their markets.
Development of new flavors and fragrances is driven by a variety of sources including requests from our customers, who are in need of a specific flavor or fragrance for use in a new or modified consumer product, or as a result of internal initiatives stemming from our Consumer Insights program. Our product development team works in partnership with our scientists and researchers to optimize the consumer appeal of the flavor or fragrance. A collaborative process between our researchers, our product development team and our customers then follows to perfect the flavor or fragrance so that it is ready to be included in the final consumer product.
In addition to creating new flavors and fragrances, our researchers and product development teams advise customers on ways to improve their existing products by adjusting or substituting current ingredients with more readily accessible or less expensive materials or by modifying the current ingredients to produce an enhanced yield. This often results in creating a better value proposition for our customers.
Our flavor and fragrance compound formulas are treated as trade secrets and remain our proprietary asset. Our business is not materially dependent upon any individual patent, trademark or license.

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Supply Chain
We strive to provide our customers with consistent quality products on a timely and cost-effective basis by managing all aspects of the supply chain, from raw material sourcing through manufacturing, quality assurance, regulatory compliance and distribution.
Procurement
In connection with the manufacture of compounds, we use natural ingredients and, primarily in our fragrance compounds, synthetic ingredients. We purchase approximately 11,000 different raw materials from about 3,000 domestic and international suppliers and distributors. Approximately half of the materials we purchase are naturals or crop-related items and the other half are synthetics and chemicals. Natural ingredients are derived from flowers, fruits and other botanical products as well as from animal products. They contain varying numbers of organic chemicals that are responsible for the fragrance or flavor of the natural product. Natural products are purchased in processed or semi-processed form. Some are used in compounds in the state in which they are purchased and others are used after further processing. Natural products, together with various chemicals, are also used as raw materials for the manufacture of synthetic ingredients by chemical processes. Our flavor products also include extracts and seasonings derived from various fruits, vegetables, nuts, herbs and spices as well as microbiologically-derived ingredients.
In order to ensure our supply of raw materials, achieve favorable pricing and provide timely transparency regarding inflationary trends to our customers, we continue to be focused on (i) implementing a forward-buy strategy, (ii) entering into supplier relationships to gain access to supplies that we do not have, (iii) implementing indexed pricing, (iv) reducing the complexity of our formulations and (v) evaluating whether it is more profitable to buy or make an ingredient. We are also concentrating on local country sourcing with our own procurement professionals.
Manufacturing and Distribution
We have thirty-seven manufacturing sites around the world that supports more than 46,000 products. Our major manufacturing facilities are located in the United States, the Netherlands, Spain, Great Britain, Indonesia, Turkey, Brazil, Mexico, China, India, and Singapore. Our supply chain initiatives in developing markets are focused on increasing capacity and investments in key technologies. Within our more mature markets, we tend to focus on consolidation and cost optimization as well as implementing new technologies. In addition to our own manufacturing facilities, we develop relationships with third parties, including contract manufacturing organizations that permit us to expand access to the technologies, capabilities and capacity that we need to better serve our customers.
Based on the regional nature of the Flavors business and the concerns regarding the fragile nature of transporting raw materials, we have established smaller manufacturing facilities in our local markets that are focused on local needs. Products within the Fragrances business are typically composed of compounds that are more stable and more transportable around the world. Consequently, we have fewer manufacturing facilities within our Fragrances business, which produce compounds and ingredients for global distribution.
In 2017, we continued to invest in our facilities. Major capital projects included the construction of a second Flavors compounding site in China, breaking ground on a new Flavors and Fragrances plant in India as well as completing the relocation of one of our Fragrance Ingredients plants to a new site in Jiande, China. In addition, we reached an agreement to relocate our other Fragrance Ingredients facility in China from Hangzhou to the Jiande site by 2020.
Sustainability
As a leading global creator of flavors and fragrances for a wide variety of consumer products, sustainability has been an important part of how we do business. Our sustainability strategy is centered on three main aspects: Positive Principles, Regenerative Products and Sensational People.
Positive Principles - We seek to embed the principles of eliminating the concept of waste, using clean renewable energy, and celebrating diversity into our company and culture.
Regenerative Products - We strive to intentionally design our products to continuously support well-being and have a positive contribution to society and the environment in a circular economy.
Sensational People - We seek to engage our employees and stakeholders to make a positive difference in the world.
In 2017, we joined Food Reform for Sustainability and Health (FReSH), a project of the World Business Council For Sustainable Development designed to improve the health of people and the planet by recalibrating the global systems of consumption, transportation, production and agriculture. Our participation in the food loss and waste work stream is aligned

8


with our strategy that calls for developing regenerative products using circular economy principles. We also partnered with Mars Wrigley Confectionery to enhance the livelihoods of farmers in India while securing our supply chain of high-quality natural mint. In addition, we were named by CDP to the Climate "A" list for the third consecutive year for our leadership in carbon management. CDP also awarded us leadership status for our water management strategy. In addition, we maintained "Gold" status with an EcoVadis score of 72 out of 100 points, placing us in the top 1% of suppliers in the industry segment. The EcoVadis platform promotes increased focus on sustainable performance throughout the supply chain, emphasizing the environment, fair labor and fair business practices.
Governmental Regulation
We develop, produce and market our products in a number of jurisdictions throughout the world and are subject to federal, regional and local legislation and regulations in each of the various countries. Our flavor and many of our fragrance products are intended for the food, beverage and pharmaceutical industries, which are subject to strict quality and regulatory standards. As a result, we are required to meet these strict standards which, in recent years, have become increasingly stringent.
Our products and operations are subject to regulation by governmental agencies in each of the markets in which we operate. These agencies include (1) the Food and Drug Administration and equivalent international agencies that regulate flavors and other ingredients in consumer products, (2) the Environmental Protection Agency and equivalent international agencies that regulate our manufacturing facilities, (3) the Occupational Safety and Health Administration and equivalent international agencies that regulate the working conditions in our manufacturing, research laboratories and creative centers, (4) local and international agencies that regulate trade and customs, (5) the Drug Enforcement Administration and other local or international agencies that regulate controlled chemicals that we use in our operations and (6) the Chemical Registration/Notification authorities that regulate chemicals that we use in, or transport to, the various countries in which we manufacture and/or market our products. We have seen an increase in registration and reporting requirements concerning the use of certain chemicals in a number of countries, such as Registration, Evaluation, Authorisation and Restriction of Chemicals ("REACH") regulations in the European Union.
In addition, we are subject to various rules relating to health, work safety and the environment at the local and international levels in the various countries in which we operate. Our manufacturing facilities throughout the world are subject to environmental standards relating to air emissions, sewage discharges, the use of hazardous materials, waste disposal practices and clean-up of existing environmental contamination. In recent years, there has been a significant increase in the stringency of environmental regulation and enforcement of environmental standards, and the costs of compliance have risen significantly, a trend we expect will continue in the future.
Competition
The flavors and fragrances market is part of a larger market which supplies a variety of ingredients and components that consumer products companies utilize in their products. The broader market includes large multi-national companies or smaller regional and local participants which supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic ingredients.
The market for flavors and fragrances is highly competitive. Based on annual sales, our main competitors consist of (1) the three other large global flavor and fragrance manufacturers, Givaudan, Firmenich and Symrise, (2) mid-sized companies, (3) numerous local and regional manufacturers and (4) consumer product companies who may develop their own flavors or fragrances.
We believe that our ability to compete successfully in the flavors and fragrances sub-market is based on (1) our in-depth understanding of consumers, (2) innovation, arising from the creative skills of our perfumers and flavorists and the technological advances resulting from our research and development activities, (3) our ability to create products which are tailor-made for our customers’ needs, (4) developing strong customer intimacy, (5) driving efficiency in all that we do, (6) quality products, and (7) our broad-based regulatory capabilities.
Large multi-national customers and, increasingly, mid-sized customers, may limit the number of their suppliers by placing some on “core lists,” giving them priority for development and production of their new or modified products.
To compete more successfully in this environment, we must make continued investments in customer relationships and tailor our research and development efforts to anticipate customers’ needs, provide effective service and secure and maintain inclusion on certain “core lists.”

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Employee Relations
At December 31, 2017, we had approximately 7,300 employees worldwide, of whom approximately 1,800 are employed in the United States. We believe that relations with our employees are good.
Availability of Reports
We make available free of charge on or through the Investor Relations link on our website, www.iff.com, all materials that we file electronically with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the SEC. During the period covered by this Form 10-K, we made all such materials available through our website as soon as reasonably practicable after filing such materials with the SEC.
You may also read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and you may obtain information on the operation of the Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov that contains reports, proxy and information statements and other information that we file electronically with the SEC.
A copy of our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Audit Committee, Compensation Committee and Nominating and Governance Committee of the Board of Directors are posted on the Investor Relations section of our website, www.iff.com.
Our principal executive offices are located at 521 West 57th Street, New York, New York 10019 (212-765-5500).
Executive Officers of Registrant
The current executive officers of the Company, as of February 27, 2018, are listed below.
Name
 
Age
 
Position
Andreas Fibig
 
56
 
Chairman of the Board and Chief Executive Officer
Richard A. O'Leary
 
57
 
Executive Vice President and Chief Financial Officer
Nicolas Mirzayantz
 
55
 
Group President, Fragrances
Matthias Haeni
 
52
 
Group President, Flavors
Gregory Yep
 
53
 
Executive Vice President, Chief Global Scientific & Sustainability Officer
Susana Suarez-Gonzalez
 
48
 
Executive Vice President, Chief Human Resources Officer
Anne Chwat
 
58
 
Executive Vice President, General Counsel and Corporate Secretary
Francisco Fortanet
 
49
 
Executive Vice President, Operations
Andreas Fibig has served as our Chairman since December 2014 and Chief Executive Officer since September 2014. Mr. Fibig has been a member of our Board of Directors since 2011. From 2008 to 2014, Mr. Fibig served as President and Chairman of the Board of Management of Bayer HealthCare Pharmaceuticals, the pharmaceutical division of Bayer AG. Prior to this position, Mr. Fibig held a number of positions of increasing responsibility at Pfizer Inc., a research-based pharmaceutical company, including as Senior Vice President in the US Pharmaceutical Operations group from 2007 through 2008 and as President, Latin America, Africa and Middle East from 2006 through 2007.
Richard A. O'Leary has served as our Executive Vice President and Chief Financial Officer since October 2016. Mr. O’Leary originally joined our Company in July 2007. Mr. O’Leary was our Senior Vice President, Controller and Chief Accounting Officer from July 2015 until his appointment as Chief Financial Officer, and served as our Vice President and Controller from May 2009 to November 2014. Mr. O’Leary served as our Interim Chief Financial Officer from November 2014 to July 2015 and from July 2008 to May 2009. Mr. O’Leary was Vice President, Corporate Development from July 2007 to May 2009. Prior to joining our Company, Mr. O’Leary served in various positions at International Paper Co., a paper and packaging company, which he originally joined in 1986, including, as Chief Financial Officer of International Paper Company (Brazil) from June 2004 to June 2007. Prior to International Paper, Mr. O’Leary was with Arthur Young & Co.

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Nicolas Mirzayantz has served as our Group President, Fragrances since January 2007, and originally joined our Company in 1988. Prior to his appointment as Group President, Fragrances, he served as a member of our Temporary Office of the Chief Executive Officer from October 1, 2009 until February 2010, our Senior Vice President, Fine Fragrance and Beauty Care and Regional Manager North America, from March 2005 to December 2006, our Senior Vice President, Fine Fragrance and Beauty Care from October 2004 to February 2005, and our Vice President Global Fragrance Business Development from February 2002 to September 2004.
Matthias Haeni has served as our Group President, Flavors since April 2014. Mr. Haeni joined us in 2007 in the role of Regional General Manager, Flavors Greater Asia. In 2010, Mr. Haeni transferred to Hilversum, The Netherlands where he served as Regional General Manager for Flavors Europe, Africa, and the Middle East (EAME).
Gregory Yep has served as our Executive Vice President, Chief Global Scientific & Sustainability Officer since June 2016. Prior to joining our Company, Dr. Yep was Senior Vice President of Research, Development & Applications with The Kerry Group from January 2015 to June 2016, where he was responsible for creating strategy and implementation of technical platforms in the taste and nutrition, food and beverage and the biotechnology industry. Previously, he was Senior Vice President of R&D at PepsiCo from June 2009 to December 2015 and was Global Vice President, Application Technologies at Givaudan Flavors and Fragrances from December 2005 to June 2009. Earlier in his career, Dr. Yep was at McCormick & Company, where he held executive roles of increasing responsibility in food science. Dr. Yep holds a bachelor’s degree in biology and chemistry from the University of Pennsylvania, and master’s degree and Ph.D. in organic chemistry from Johns Hopkins University.
Susana Suarez-Gonzalez has served as our Executive Vice President, Chief Human Resources Officer since November 2016. Prior to joining our Company, Ms. Gonzalez was Senior Vice President Global Operations & Centers Expertise, Human Resources of Fluor Corporation from 2014 to 2016, and was responsible for the global execution of HR services as well as all corporate HR functions, encompassing global benefits, compensation, talent development, recruiting and human resources information systems. Ms. Gonzalez began her career at Fluor in 1991, and during her 25 years with the company, she held various leadership positions across several business groups and functions including construction, marketing, sales, project engineering and human resources.
Anne Chwat has served as our Executive Vice President, General Counsel and Corporate Secretary since August 2015 and as our Senior Vice President, General Counsel and Corporate Secretary from April 2011 to August 2015. Prior to joining us, Ms. Chwat served as Executive Vice President and General Counsel of Burger King Holdings, Inc., a fast food hamburger restaurant company, from September 2004 to April 2011. From September 2000 to September 2004, Ms. Chwat served in various positions at BMG Music (now Sony Music Entertainment), including as Senior Vice President, General Counsel and Chief Ethics and Compliance Officer.
Francisco Fortanet has served as Executive Vice President, Operations since August 2015 and as Senior Vice President, Operations from February 27, 2012 to August 2015. Mr. Fortanet joined our Company in 1995, and has served as our Vice President, Global Manufacturing Compounding from January 2007 to February 2012, our Vice President, Global Manufacturing from January 2006 to January 2007, our Regional Director of North America Operations from December 2003 to January 2005, the Project Manager of a Special Project in IFF Ireland from May 2003 to December 2003 and as our Plant Manager in Hazlet, New Jersey from October 1999 to May 2003.
ITEM 1A.
RISK FACTORS.
We routinely encounter and address risks in conducting our business. Some of these risks may cause our future results to be different - sometimes materially different - than we presently anticipate. Below are material risks we have identified that could adversely affect our business. How we react to material future developments, as well as how our competitors and customers react to those developments, could also affect our future results.
Our business is highly competitive, and if we are unable to compete effectively our sales and results of operations will suffer.
The market for flavors and fragrances is highly competitive. We face vigorous competition from companies throughout the world, including multi-national and specialized flavor, fragrance and cosmetic ingredients companies, as well as consumer product companies who may develop their own flavors, fragrances or cosmetic ingredients. In the flavors industry, we also face increasing competition from ingredient suppliers that have expanded their portfolios to include flavor offerings. Some of our competitors specialize in one or more of our product sub-segments, while others participate in many of our product sub-segments. In addition, some of our global competitors may have greater resources than we do or may have proprietary products that could permit them to respond to changing business and economic conditions more effectively than we can.

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Consolidation of our competitors may exacerbate these risks. With our entry into cosmetic ingredients, we may face greater competition-related risks in this market than with our core historic flavor and fragrances businesses.
Competition in our business is based on innovation, product quality, regulatory compliance, pricing, quality of customer service, the support provided by marketing and application groups, and understanding of consumers. It is difficult for us to predict the timing, scale and success of our competitors’ actions in these areas. In particular, the discovery and development of new flavors and fragrance compounds and ingredients, protection of the Company’s intellectual property and development and retention of key employees are critical to our ability to effectively compete in our business. Increased competition by existing or future competitors, including aggressive price competition, could result in the potential loss of substantial sales or create the need for us to reduce prices or increase spending, and this could have an adverse impact on sales and profitability.
If we are unable to provide our customers with innovative, cost-effective products that allow them to achieve their own profitability expectations, our sales and results of operations will suffer.
During 2017, our 25 largest customers accounted for 50% of our sales, and the largest customer across all end-use categories accounted for 11% to 12% of our sales for each of the last three fiscal years. Loss of or a reduction in sales to our largest customer or any of our other large customers for an extended period of time could adversely affect our business or financial results.
Large multi-national customers, and increasingly, middle-market customers are unilaterally limiting the number of their suppliers or rationalizing the number of products that they offer to increase their margins and profitability. As part of these initiatives, these customers are creating “core lists” of suppliers and giving these “core lists” suppliers priority for new or modified products. Recently, these customers are making inclusion on their “core lists” contingent upon a supplier providing more favorable commercial terms which may adversely affect our margins. These and other profitability initiatives being pursued by our customers reduce the market opportunity for which we compete and subject the volume and pricing of the remaining suppliers to downward pressure. To be successful in this competitive environment, we must continue to make investments in customer relationships and tailor product research and development in order to anticipate customers’ needs, deliver products that contribute to our customers’ profitability, provide effective customer service and offer competitive cost-in-use solutions to secure and maintain inclusion on certain “core lists” and our share of our customers’ purchases. If we are unable to do so, it could adversely impact our future results of operations.
We may not successfully develop and introduce new products that meet our customers’ needs, which may adversely affect our results of operations.
Our ability to differentiate ourselves and deliver growth in line with our Vision 2020 strategy largely depends on our ability to successfully develop and introduce new products and product improvements that meet our customers’ needs, and ultimately appeal to consumers. Innovation is a key element of our ability to develop and introduce new products. We cannot be certain that we will be successful in achieving our innovation goals, such as the development of new molecules, new and expanded delivery systems and other technologies. We currently spend approximately 8% of our sales on research and development; however, such investments may only generate future revenues to the extent that we are able to develop products that meet our customers’ specifications, are at an acceptable cost and achieve acceptance by the targeted consumer market. Furthermore, there may be significant lag times from the time we incur R&D costs to the time that these R&D costs may result in increased revenue. Consequently, even when we “win” a project, our ability to generate revenues as a result of these investments is subject to numerous customer, economic and other risks that are outside of our control, including delays by our customers in the launch of a new product, the level of promotional support for the launch, poor performance of our third-party vendors, anticipated sales by our customers not being realized or changes in market preferences or demands, or disruptive innovations by competitors.

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A disruption in our manufacturing operations or our supply chain could adversely affect our business and financial results.
As a company engaged in research and development, manufacturing and distribution on a global scale, we and our suppliers are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems, disruption or loss of key research or manufacturing sites, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters, international conflicts, terrorist acts and other external factors over which we have no control. While we operate research and development and manufacturing facilities throughout the world, many of these facilities are extremely specialized and certain of our facilities or certain suppliers are the sole source of a specific ingredient or product. If our research and development activities or the manufacturing of ingredients or products were disrupted, the cost of relocating or replacing these activities or reformulating these ingredients or products may be substantial, which could result in production or development delays or otherwise have an adverse effect on our margins, operating results and future growth.
A disruption in our supply chain, including the inability to obtain ingredients and raw materials from third parties, could adversely affect our business and financial results.
In connection with our manufacture of our fragrance and flavor compounds, we often rely on third party suppliers for ingredients and raw materials that are integral to our manufacture of such compounds. Our purchases of raw materials are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, governmental actions and other factors beyond our control. In addition, our ingredient suppliers, similar to us, are subject to the risks inherent in manufacturing and distribution on a global scale, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems, disruption or loss of key research or manufacturing sites, product quality control, safety and environmental compliance issues, licensing requirements and other regulatory issues, as well as natural disasters, international conflicts, terrorist acts and other external factors over which they have no control. These suppliers also could become insolvent or experience other financial distress. For example, a fire at the manufacturing facility of BASF Group ("BASF"), one of our suppliers, in 2017 caused them to declare a force majeure and has resulted in a disruption of the availability of certain ingredients used in some of our fragrance and flavor compounds. If our suppliers are unable to supply us with sufficient ingredients and raw materials to meet our needs, we would need to seek alternative sources of such materials or pursue our own production of such ingredients or direct acquisition of such raw materials. However, for certain of our raw ingredients and raw materials we rely on a limited number of suppliers where there are not readily available alternatives. If we are unable to obtain or manufacture alternative sources of such ingredients or raw materials at a similar cost, we would seek to (i) reformulate our compounds and/or (2) increase pricing to reflect the higher supply cost. However, if we are not able to successfully implement any of these alternatives, we could experience disruptions in production, increased cost of sales and a corresponding decrease in gross margin or reduced sales if our competitors were able to more successfully adjust to such market disruption. Such fluctuations and decrease in gross margin could have a material adverse effect on our business, results of operations and financial condition.
We may not be able to successfully identify and complete sufficient acquisitions to meet our Vision 2020 strategy, and even if we are able to do so, we may not realize the anticipated benefits of these acquisitions.
As part of our Vision 2020 strategy, we intend to add between $500 million and $1.0 billion of sales growth through acquisitions within the flavors and fragrances industries and adjacencies. Since 2015, we have completed five acquisitions which align with this strategic objective, most recently acquiring Fragrance Resources, a privately-held fragrance company, and PowderPure, a producer capable of providing clean label flavor solutions, in 2017.
Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis or at all.
Even if we complete an acquisition, we may not realize the anticipated benefits of such acquisition. Our recent acquisitions have required, and any similar future transactions may also require, significant efforts and expenditures, including with respect to integrating the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with acquisition activities and integration efforts, which include:
diversion of management attention from managing our historical core business;
potential disruption of our historical core business or of the acquired business;
the strain on, and need to continue to expand our existing operational, technical, financial and administrative infrastructure;

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challenges related to the lack of experience in operating in the geographical or product markets of the acquired business;
challenges in controlling additional costs and expenses in connection with and as a result of the acquisition;
difficulties in assimilating employees and corporate cultures or in integrating systems and controls;
difficulties in anticipating and responding to actions that may be taken by competitors;
difficulties in realizing the anticipated benefits of the transaction;
potential loss of key employees, key customers, suppliers or other partners of the acquired business; and
the assumption of and exposure to unknown or contingent liabilities of acquired businesses.
If any of our acquisitions do not perform as anticipated for any of the reasons noted above or otherwise, there could be a negative impact on our results of operations and financial condition.
The interruption or failure of key information technology systems or a loss of data, malicious attack or other breach of security of our information technology systems, may have a material adverse effect on our ability to conduct our business, subject us to increased operating costs, damage our reputation and expose us to litigation.
We rely on information technology systems, including some managed by third-party providers, to conduct business and support our business processes, including product formulas, product development, sales, order processing, production, distribution, internal communications and communications with third parties throughout the world, processing transactions, summarizing and reporting results of operations, complying with regulatory, tax or legal requirements, and collecting and storing customer, supplier, employee and other stakeholder information. These systems may be susceptible to disruptions or outages due to fire, floods, power loss, telecommunications failures, natural disasters, cyber-attacks, failed upgrades or other similar events, or due to the poor performance of third-party providers. An effective response to disruptions will require effort and diligence on the part of our employees and third-party providers to avoid any adverse impact to our business. In addition, our systems and proprietary data stored electronically may be vulnerable to computer viruses, cybercrime, computer hacking and similar information security breaches, which in turn could result in the unauthorized release or misuse of confidential or proprietary information about our business (including, but not limited to, the trade secrets upon which we rely to protect our proprietary fragrance and flavor formulations), employees, or customers, and disrupt our operations. Depending on their nature and scope, these threats could potentially lead to improper use of our systems and networks, manipulation and destruction of data or product non-compliance. The occurrence of any of these events could disrupt our business and have a material adverse effect on our sales, subject us to increased operating costs, damage our reputation and expose us to litigation or regulatory proceedings.
If we are unable to successfully market to our expanding and decentralized Flavors customer base, our operating results and future growth may be adversely affected.
The industries in which our Flavors customers operate are expanding and becoming increasingly decentralized. Our historical customer based was primarily comprised of large food and beverage companies, which have faced, in recent years, growing competition from mid-size regional companies and companies focused on niche-product categories driving and accelerating product innovation. In connection with Vision 2020, we identified serving these clients as a key element of our business strategy and invested in this strategy through the acquisition of Ottens Flavors and David Michael. In 2017, we announced the creation of Tastepoint by IFF, designed to service the middle-market customer in North America which is focused on servicing customers with the “can-do” approach of a smaller company backed by expertise traditionally reserved for companies with a more of a global reach. However, if we are unable to successfully implement this strategy or gain market share with this growing customer base, our future growth could be adversely affected.
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency with respect to product ingredients. Consumers, especially in developed economies such as the United States and Western Europe, are shifting away from products containing artificial ingredients to all natural, healthier alternatives. In addition, there has been a growing demand by consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could affect the

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types and volumes of our flavors and fragrances that our customers include in their product offerings. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We may not succeed in establishing and maintaining collaborations, joint ventures or partnerships, and such arrangements may not lead to development or commercialization of products, which may limit our ability to execute our Vision 2020 strategy and adversely affect our future growth.
From time to time and in line with our Vision 2020 strategy, we may evaluate and enter into collaborations, joint ventures or partnerships to enhance our research and development efforts. Our ability to generate revenues from such collaborations will depend on our partners’ abilities and efforts to successfully perform the functions assigned to them in these arrangements. The process of establishing and maintaining collaborative relationships is difficult, time-consuming to negotiate, document and implement. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we choose to enter into such arrangements, and the terms of the arrangements may not be favorable to us. Additionally, collaborations may not lead to development or commercialization of products in the most efficient manner, or at all. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully transition terminated collaborative agreements, it could limit our ability to execute our Vision 2020 strategy and adversely affect our future growth.
We have made investments in and continue to expand our business into emerging markets, which exposes us to certain risks.
As part of our growth strategy, we have increased our presence in emerging markets by expanding our manufacturing presence, sales organization and product offerings in these markets, and we expect to continue to expand our business in these markets. In addition to the currency and international operation risks described below, our operations in these markets may be subject to a variety of other risks. Emerging markets typically have a consumer base with limited or fluctuating disposable income and customer demand in these markets may fluctuate accordingly. As a result, decrease in customer demand in emerging markets may have an adverse effect on our ability to execute our growth strategy. In addition, emerging markets may have weak legal systems which may affect our ability to enforce our intellectual property and contractual rights, exchange controls, unstable governments and privatization or other government actions that may affect taxes, subsidies and incentive programs and the flow of goods and currency. In conducting our business, we move products from one country to another and may provide services in one country from a subsidiary located in another country. Accordingly, we are vulnerable to abrupt changes in trade, customs and tax regimes in these markets that may have significant negative impacts on our financial condition and operating results.
The impact of currency fluctuation or devaluation in the international markets in which we operate may negatively affect our results of operations.
We have significant operations outside the United States, the results of which are reported in the local currency and then translated into United States dollars at applicable exchange rates for inclusion in our consolidated financial statements. The exchange rates between these currencies and the United States dollar have fluctuated and will continue to do so in the future. Changes in exchange rates between these local currencies and the United States dollar will affect the recorded levels of sales, profitability, assets and/or liabilities. Additionally, volatility in currency exchange rates may adversely impact our financial condition, cash flows or liquidity. Although we employ a variety of techniques to mitigate the impact of exchange rate fluctuations, including sourcing strategies and a limited number of foreign currency hedging activities, we cannot guarantee that such hedging and risk management strategies will be effective, and our results of operations could be adversely affected.
Our international operations are subject to regulatory, political and other risks that could materially and adversely affect our revenues, cash flows or financial position.
We operate on a global basis, with manufacturing and sales facilities in the United States, Europe, Africa, the Middle East, Latin America, and Greater Asia. During 2017, 75% of our net sales were to customers outside the United States and we intend to continue expansion of our international operations. As a result, our business is increasingly exposed to risks inherent in international operations. These risks, which can vary substantially by location, include the following:
governmental laws, regulations and policies adopted to manage national economic and macroeconomic conditions, such as increases in taxes, austerity measures that may impact consumer spending, monetary policies that may impact inflation rates, currency fluctuations and sustainability of resources;

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changes in environmental, health and safety regulations, such as the continued implementation of the European Union’s REACH regulations and similar regulations that are being evaluated and adopted in other markets, and the burdens and costs of our compliance with such regulations;
the imposition of or changes in tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements, by the United States or other Countries, which could adversely affect our cost or ability to import raw materials or export our flavors or fragrances to surrounding markets;
risks and costs arising from language and cultural differences;
changes in the laws and policies that govern foreign investment in the countries in which we operate, including the risk of expropriation or nationalization, and the costs and ability to repatriate the profit that we generate in these countries;
risks and costs associated with political and economic instability, bribery and corruption, and social and ethnic unrest in the countries in which we operate;
difficulty in recruiting and retaining trained local personnel;
natural disasters, pandemics or international conflicts, including terrorist acts, or national and regional labor strikes in the countries in which we operate, which could interrupt our operations or endanger our personnel; or
the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations and the enforceability of contract rights and intellectual property rights.
The occurrence of any one or more of these factors could increase our costs and adversely affect our results of operations.
Economic uncertainty may adversely affect demand for consumer products using flavors and fragrances and this may have a negative impact on our operating results and future growth.
Our flavors and fragrance compounds and ingredients are components of a wide assortment of global consumer products throughout the world. Historically, demand for consumer products using flavors and fragrances was stimulated and broadened by changing social habits and consumer needs, population growth, an expanding global middle-class and general economic growth, especially in emerging markets. The global economy has experienced significant recessionary pressures and declines in consumer confidence and economic growth. While some segments of the global economy appear to be recovering, the ongoing global recessionary economic environment in Europe has, and may in the near future, increase unemployment and underemployment, decrease salaries and wage rates, increase inflation or result in other market-wide cost pressures that will adversely affect demand for consumer products in both developed and emerging markets. In addition, growth rates in the emerging markets have moderated from previous levels. Reduced consumer spending may cause changes in our customer orders including reduced demand for our flavors and fragrances, or order cancellations.
The timing of placing of orders and the amounts of these orders are generally at our customers' discretion. Customers may cancel, reduce or postpone orders with us on relatively short notice. Significant cancellations, reductions or delays in orders by customers could affect our quarterly results.
It is currently anticipated that these challenging economic uncertainty will continue to affect certain of our markets during 2018 which could adversely affect our sales, profitability and overall operating results.
Our success depends on attracting and retaining talented people within our business. Significant shortfalls in recruitment or retention could adversely affect our ability to compete and achieve our strategic goals.
Attracting, developing, and retaining talented employees, including our perfumers and flavorists, is essential to the successful delivery of our products and success in the marketplace. Furthermore, as we continue to focus on innovation, our need for scientists and other professionals will increase. Competition for all these types of employees can be intense. The ability to attract and retain talented employees is critical in the development of new products and technologies which is an integral component of our growth strategy. However, we may not be able to attract and retain such employees in the future. If we experience significant shortfalls in recruitment or retention, our ability to effectively compete with our competitors and to grow our business could be adversely affected.

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Failure to comply with environmental protection laws may cause us to close, relocate or operate one or more of our plants at reduced production levels, which could adversely affect our operating results and future growth.
Our business operations and properties are subject to extensive and increasingly stringent federal, state, local and foreign laws and regulations pertaining to protection of the environment, including air emissions, sewage discharges, the use of hazardous materials, waste disposal practices and clean-up of existing environmental contamination. Failure to comply with these laws and regulations or any future changes to them may result in significant consequences to us, including the need to close or relocate one or more of our production facilities, administrative, civil and criminal penalties, liability for damages and negative publicity. If we are unable to meet production requirements, we can lose customer orders, which can adversely affect our future growth or we may be required to make incremental capital investments to ensure supply. For example, in 2015 Chinese authorities notified us of compliance issues pertaining to the emission of odors from several of our plants in China and, consequently, we invested approximately $6.5 million in odor-abatement equipment at these facilities and have located a site for construction of a second flavors manufacturing facility in China, with an estimated cost of $45 million. We have also recently completed negotiations with the Chinese government concerning the relocation of a second Fragrance facility in China. Idling of facilities or production modifications has caused or may cause customers to seek alternate suppliers due to concerns regarding supply interruptions and these customers may not return or may order at reduced levels even once issues are remediated. If these non-compliance issues reoccur in China or occur or in any other jurisdiction, we may lose business and may be required to incur capital spending above previous expectations, close a plant, or operate a plant at significantly reduced production levels on a permanent basis, and our operating results and cash flows from operations may be adversely affected.
Our ongoing optimization of our manufacturing facilities may not be as effective as we anticipate, and we may fail to realize the expected cost savings and increased efficiencies.
As part of our strategy, we seek to enhance our manufacturing efficiency and align our geographic manufacturing footprint with our expectations of future growth and technology needs. Many of our facilities are located in close proximity to our customers in order to minimize both our customers’ and our own costs. However, we may not have sufficient demand to utilize all of our production capacity and may be required to ship excess products to other regions in which we operate, which will increase our costs and decrease our margins. To operate more efficiently and control costs, from time to time, we also execute rationalization activities, which include manufacturing facility consolidations. For example, we are in the midst of relocating our Flavors facility in Hangzhou, China, constructing a new facility in Indonesia and expect to begin relocating a Fragrance facility in China. We also recently broke ground on a new Flavors and Fragrances facility in India. The spending associated with these projects may result in capital spending above previous expectations. Our ability to realize anticipated cost savings, synergies and revenue enhancements from these activities may be affected by a number of factors and may pose significant risks, including:
the risk that we may be unable to integrate successfully the relocated manufacturing operations;
the risk that we may be unable to effectively reduce overhead, coordinate management and integrate and retain employees of the relocated manufacturing operations;
the risk that we may face difficulties in implementing and maintaining consistent standards, controls, procedures, policies and information systems;
potential strains on our personnel, systems and resources and diversion of attention from other priorities; and
unforeseen or contingent liabilities of the relocated manufacturing operations.
Furthermore, our rationalization and consolidation actions may not be as effective as we anticipate, and we may fail to realize the cost savings we expect from these actions. Actual charges, costs and adjustments due to these activities may vary materially from our estimates, and these activities may require cash and non-cash integration and implementation costs or charges in excess of budgeted amounts, which could offset any such savings and other synergies and therefore could have an adverse effect on our margins.
Volatility and increases in the price of raw materials, energy and transportation could harm our profits.
We use many different raw materials for our business, including essential oils, extracts and concentrates derived from fruits, vegetables, flowers, woods and other botanicals, animal products, raw fruits, organic chemicals and petroleum-based chemicals. Historically, we have experienced a considerable amount of price volatility in natural products that represent approximately half of our raw material purchases, and we expect this volatility to continue in the near future. For example, during and in 2017 we experienced increases in the prices of certain naturals, including citrus and vanilla. Availability and pricing of these natural products can be impacted by crop size and quality, weather, alternative land use, and other factors which we cannot control.

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If we are unable to increase the prices to our customers of our fragrance or flavor products to offset raw material and other input cost increases, or if we are unable to achieve cost savings to offset such cost increases, we could fail to meet our cost expectations and our profits and operating results could be adversely affected. Increases in prices of our products to customers may lead to declines in volume, and we may not be able to accurately predict the volume impact of price increases, which could adversely affect our financial condition and results of operations.
Similarly, commodities and energy prices are subject to significant volatility caused by market fluctuations, supply and demand, currency fluctuations, production and transportation disruptions, and other world events. As we source many of our raw materials globally to help ensure quality control, if the cost of energy, shipping or transportation increases and we are unable to pass along these costs to our customers, our profit margins would be adversely affected. Furthermore, increasing our prices to our customers could result in long-term sales declines or loss of market share if our customers find alternative suppliers or choose to reformulate their consumer products to use fewer ingredients, which could have an adverse long-term impact on our results of operations.
To mitigate our sourcing risk, we maintain strategic stock levels for critical items. However, if we do not accurately estimate the amount of raw materials that will be used for the geographic region in which we will need these materials, our margins could be adversely affected.
If we are unable to maintain the integrity of our raw materials, supply chain and finished goods, or fail to comply with applicable regulations, it may result in regulatory non-compliance, litigation costs, customer loss and harm to our reputation, all of which may adversely impact sales and our results of operations.
The development, manufacture and sale of our products are subject to various regulatory requirements in each of the countries in which our products are developed, manufactured and sold. In addition, we are subject to product safety and compliance requirements established by the industry or similar oversight bodies. We use a variety of strategies, methodologies and tools to (i) identify current product standards, (ii) assess relative risks in our supply chain that can impact product integrity, (iii) monitor internal and external performance and (iv) test raw materials and finished goods to minimize the likelihood of product or process non-compliance.
Gaps in our operational processes or those of our suppliers could adversely affect the quality of our finished products, subject us to a recall and result in a regulatory non-compliance event. For instance, we may be required to recall certain of our products should they be mislabeled, contaminated or damaged, and certain of our raw materials could be blocked from entering a country if they are subject to import alerts. Product non-compliance events could subject us to customer claims, recalls, penalties, litigation costs and settlements, remediation costs or loss of sales. As our flavors and fragrance compounds and ingredients are used in many products intended for human use or consumption, these consequences would be exacerbated if we or our customer did not identify the defect before the product reaches the consumer and there was a resulting impact at the consumer level. Such a result could lead to potentially large scale adverse publicity, negative effects on consumer's health, recalls and potential consumer litigation. In addition, if we do not have adequate insurance or contractual indemnification from suppliers or other third parties, or if insurance or indemnification is not available, the liability relating to product or possible third-party claims arising from defective products could adversely affect our business, financial condition or results of operations. Furthermore, adverse publicity about our products, or our customers' products that contain our ingredients, including concerns about product safety or similar issues, whether real or perceived, could harm our reputation and result in an immediate adverse effect on our sales and customer relationships, as well as require us to utilize significant resources to rebuild our reputation.
Our performance may be adversely impacted if we are not successful in managing our inventory and/or working capital balances.
We evaluate our inventory balances of materials based on shelf life, expected sourcing levels, known uses and anticipated demand based on forecasted customer order activity and changes in our product/sales mix. Efficient inventory management is a key component of our business success, financial returns and profitability. To be successful, we must maintain sufficient inventory levels and an appropriate product/sales mix to meet our customers’ demands, without allowing those levels to increase to such an extent that the costs associated with storing and holding other inventory adversely impact our financial results. If our buying decisions do not accurately predict sourcing levels, customer trends or our expectations about customer needs are inaccurate, we may have to take unanticipated markdowns or impairment charges to dispose of the excess or obsolete inventory, which can adversely impact our financial results. Additionally, we believe excess inventory levels of raw materials with a short shelf life in our manufacturing facilities subjects us to the risk of increased inventory shrinkage. If we are not successful in managing our inventory balances and shrinkage, our results of and cash flows from operations may be negatively affected.

18



We sell certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. The cost of participating in these programs was immaterial to our results in all periods. Should we choose not to participate, or if these programs were no longer available, it could reduce our cash flows from operations in the period in which the arrangement ends.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act or similar U.S. or foreign anti-bribery and anti-corruption laws and regulations in the jurisdictions in which we operate.
The global nature of our business, the significance of our international revenue and our focus on emerging markets create various domestic and local regulatory challenges and subject us to risks associated with our international operations. The U.S. Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery and anti-corruption laws and regulations in other countries generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business or for other commercial advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.
We operate or may pursue opportunities in some jurisdictions, such as China, India, Brazil and Africa, which pose potentially elevated risks of fraud or corruption or increased risk of internal control issues. In certain jurisdictions, compliance with anti-bribery laws may conflict with local customs and practices. From time to time, we have conducted and will conduct internal investigations of the relevant facts and circumstances, control testing and compliance reviews, and take remedial actions, when appropriate, to help ensure that we are in compliance with applicable corruption and similar laws and regulations. Detecting, investigating and resolving actual or alleged violations of the FCPA or similar laws is expensive and could consume significant time and attention of our senior management. We could be subject to inquiries or investigations by government and other regulatory bodies. Any allegations of non-compliance with the FCPA or similar laws could have a disruptive effect on our operations in such jurisdiction over the near term, including interruptions of business or loss of third-party relationships, which may negatively impact our results of operations or financial condition. Any determination that our operations or activities are not in compliance with the FCPA or similar laws could expose us to severe criminal or civil penalties or other sanctions, significant fines, termination of necessary licenses and permits, and penalties or other sanctions that may harm our business and reputation.
Our ability to compete effectively depends on our ability to protect our intellectual property rights.
We rely on patents and trade secrets to protect our intellectual property rights. We often rely on trade secrets to protect our proprietary fragrance and flavor formulations, as this does not require us to publicly file information regarding our intellectual property. From time to time, a third party may claim that we have infringed upon or misappropriated their intellectual property rights, or a third party may infringe upon or misappropriate our intellectual property rights. We could incur significant costs in connection with legal actions to assert our intellectual property rights against third parties or to defend ourselves from third party assertions of invalidity, infringement or misappropriation or other claims. Any settlement or adverse judgment resulting from such litigation could require us to obtain a license to continue to use the intellectual property rights that are the subject of the claim, or otherwise restrict or prohibit our use of such intellectual property rights. Any required licensing fees may not be available to us on acceptable terms, if at all. For those intellectual property rights that are protected as trade secrets, this litigation could result in even higher costs, and potentially the loss of certain rights, since we would not have a perfected intellectual property right that precludes others from making, using or selling our products or processes. The ongoing trend among our customers towards more transparent labeling could further diminish our ability to effectively protect our proprietary flavor formulations.
For intellectual property rights that we seek to protect through patents, we cannot be certain that these rights, if obtained, will not later be opposed, invalidated, or circumvented. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If other parties were to infringe on our intellectual property rights, or if a third party successfully asserted that we had infringed on their intellectual property rights, it could materially and adversely affect our future results of operations by (i) reducing the price that we could obtain in the marketplace for products which are based on such rights, (ii) increasing the royalty or other fees that we may be required to pay in connection with such rights or (iii) limiting the volume, if any, of such products that we can sell.
Our results of operations may be negatively impacted by the outcome of uncertainties related to litigation.

19



From time to time we are involved in a number of legal claims and litigation, including claims related to intellectual property, product liability, environmental matters and indirect taxes. We cannot predict the ultimate outcome of such litigation. In addition, we cannot provide assurance that future events will not result in an increase in the number of claims or require an increase in the amount accrued for any such claims, or require accrual for one or more claims that has not been previously accrued. In addition, if we were found liable, we could be subject to certain indemnification claims. There can be no assurance that our insurance will be adequate to protect us from all material expenses related to pending and future claims or that such levels of insurance will be available in the future at economical prices.
The level of returns on pension and postretirement plan assets and the actuarial assumptions used for valuation purposes could affect our earnings and cash flows in future periods. Changes in government regulations could also affect our pension and postretirement plan expenses and funding requirements.
The funding obligations for our pension plans are impacted by the performance of the financial markets, particularly the equity markets, and interest rates. Funding obligations are determined under government regulations and are measured each year based on the value of assets and liabilities on a specific date. If the financial markets do not provide the long-term returns that are expected under the governmental funding calculations, we could be required to make larger contributions. The equity markets can be very volatile, and therefore our estimate of future contribution requirements can change dramatically in relatively short periods of time. Similarly, changes in interest rates and legislation enacted by governmental authorities can impact the timing and amounts of contribution requirements. An adverse change in the funded status of the plans could significantly increase our required contributions in the future and adversely impact our liquidity.
Assumptions used in determining projected benefit obligations and the fair value of plan assets for our pension and other postretirement benefit plans are determined by us in consultation with outside consultants and advisors. In the event that we determine that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return on assets, or expected health care costs, our future pension and postretirement benefit expenses could increase or decrease. Due to changing market conditions or changes in the participant population, the assumptions that we use may differ from actual results, which could have a significant impact on our pension and postretirement liabilities and related costs and funding requirements.
Any future impairment of our tangible or intangible long-lived assets may adversely impact our profitability.
A significant portion of our assets consists of long-lived assets, including tangible assets such as our manufacturing facilities, and intangible assets and goodwill. As of December 31, 2017, we had recorded approximately $1.6 billion of intangible assets and goodwill including goodwill and intangible assets related to our acquisitions. Long-lived assets are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Additionally, goodwill is subject to an impairment test at least annually. Indicators such as under performance relative to historical or projected future operating results, changes in the Company’s strategy for its overall business or use of acquired assets, unexpected negative industry or economic trends, decreased market capitalization relative to net book values, unanticipated competitive activities, change in consumer demand, loss of key personnel and acts by governments and courts may signal that an asset has become impaired. To the extent any of our acquisitions do not perform as anticipated, whether due to internal or external factors, the value of such assets may be negatively affected and we may be required to record impairment charges. Our results of operations and financial position in future periods could be negatively impacted should future impairments of our long-lived assets, including intangible assets or goodwill occur.
Changes in our tax rates, the adoption of new United States or international tax legislation, or changes in existing tax laws could expose us to additional tax liabilities that may affect our future results.
We are subject to taxes in the United States and numerous foreign jurisdictions. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in liabilities for uncertain tax positions, cost of repatriations or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on our profitability.
We have and will continue to implement transfer pricing policies among our various operations located in different countries. These transfer pricing policies are a significant component of the management and compliance of our operations across international boundaries and overall financial results. Many countries routinely examine transfer pricing policies of taxpayers subject to their jurisdiction, challenge transfer pricing policies aggressively where there is potential non-compliance and impose significant interest charges and penalties where non-compliance is determined. There can be no assurance that a governmental authority will not challenge these policies more aggressively in the future or, if challenged, that we will prevail. We could suffer significant costs related to one or more challenges to our transfer pricing policies.

20



We are subject to the continual examination of our income tax returns by the Internal Revenue Service and foreign tax authorities in those countries in which we operate, and we may be subject to assessments or audits in the future in any of the countries in which we operate. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals, and while we do not believe the results that follow would have a material adverse effect on our financial condition, such results could have a material effect on our income tax provision, net income or cash flows in the period or periods in which that determination is made.
In addition, a number of international legislative and regulatory bodies have proposed legislation and begun investigations of the tax practices of multi-national companies and, in the European Union (“EU”), the tax policies of certain EU member states. One of these efforts has been led by the OECD, an international association of 34 countries including the United States, which has finalized recommendations to revise corporate tax, transfer pricing, and tax treaty provisions in member countries. Since 2013, the European Commission (“EC”) has been investigating tax rulings granted by tax authorities in a number of EU member states with respect to specific multi-national corporations to determine whether such rulings comply with EU rules on state aid, as well as more recent investigations of the tax regimes of certain EU member states. Under EU law, selective tax advantages for particular taxpayers that are not sufficiently grounded in economic realities may constitute impermissible state aid. If the EC determines that a tax ruling or tax regime violates the state aid restrictions, the tax authorities of the affected EU member state may be required to collect back taxes for the period of time covered by the ruling. In late 2015 and early 2016, the EC declared that tax rulings, related to other companies, by tax authorities in Luxembourg, the Netherlands and Belgium did not comply with the EU state aid restrictions. If the EC were to successfully challenge tax rulings applicable to us in any of the EU member states in which we are subject to taxation, we could be exposed to increased tax liabilities.
The recently adopted US tax legislation may result in additional tax liabilities that may affect our future results and profitability.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revises the U.S. tax code effective January 1, 2018 by, among other things, lowering the corporate income tax rate from a top marginal rate of 35% to a flat 21%, limiting deductibility of interest expense and performance based incentive compensation, transitioning to a territorial system and creating new taxes associated with global operations. The Tax Act impacted our consolidated results of operations during the 2017 fourth quarter and is expected to continue to impact our consolidated results of operations in future periods. In particular, the transition to the new territorial tax system required us to record a one-time tax or “toll charge” which resulted in a provisional incremental tax expense of $100.6 million principally related to previously unremitted earnings on non-U.S. subsidiaries. The cash portion of the "toll charge" will be payable in installments over 8 years beginning in 2018. In addition, the reduction of the U.S. corporate tax rate resulted in a provisional net deferred tax expense of $38.6 million related to the remeasurement of net deferred tax assets as a result of the reduction in the corporate income tax rate. Given the significant complexity of the Tax Act, anticipated guidance from the U.S. Treasury about implementing the Tax Act and the potential for additional guidance from the SEC or the FASB, the Company’s provisional charge may be adjusted during 2018 and is expected to be finalized no later than the fourth quarter of 2018. Other provisions of the Tax Act that impact future tax years are still being assessed. Any material revisions in the Company's computations could adversely affect its cash flows and results of operations.
In future periods, we expect that our effective tax rate will be impacted by the lower U.S. corporate tax rate that will initially be offset by the elimination of the deductibility of performance based incentive compensation, and other provisions of the Tax Act that may impact us prospectively. However, the ultimate impact of the Tax Act will depend on additional regulatory or accounting guidance that may be issued with respect to the Tax Act and any operating and structural changes that we may undertake to permit us to benefit from the new, lower U.S. tax rate prospectively. This could adversely affect our results of operations.
The potential government regulation of certain of our product development initiatives is uncertain, and we may be subject to adverse consequences if we fail to comply with applicable regulations.
As part of our ingredients research program, we seek to collaborate with research institutions and companies throughout the world, including biotechnology companies. However, it is unclear whether any of our product developments will be classified as genetically modified food products subject to regulation as a biotechnology product. The manufacture of biotechnology products is subject to applicable Current Good Manufacturing Practice (CGMP) regulations as prescribed by the Food and Drug Administration and the applicable standards prescribed by European Commission and the competent authorities of European Union Member States and to other rules and regulations prescribed by foreign regulatory authorities. Compliance with these regulations can be expensive and time consuming. Such regulation could also subject us to requirements for labeling and traceability, which may cause our customers to avoid our affected products and seek our

21



competitors’ products. This may result in our inability to realize any benefit from our investment and have an adverse effect on our operating results. 
The United Kingdom’s expected departure from the European Union in 2019 could have an adverse effect on us.
In June 2016, the United Kingdom held a referendum in which a majority of voters voted to exit the European Union, commonly referred to as “Brexit” and negotiations are underway to determine the terms of the U.K.’s withdrawal from the European Union. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the European Union, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the European Union or other nations as the U.K. pursues independent trade relations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. The effects of Brexit will depend on any agreements the U.K. makes to retain access to European Union or other markets either during a transitional period or more permanently. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the U.K. from the European Union would have and how such withdrawal would affect us. Adverse consequences concerning Brexit or the European Union could include deterioration in global economic conditions, instability in global financial markets, political uncertainty, volatility in currency exchange rates, or adverse changes in the cross-border agreements currently in place, any of which could have an adverse impact on our financial results in the future.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
 

22



ITEM 2.
PROPERTIES.
Our principal properties are as follows:
Location
Operation
United States
 
Carrollton, TX(1)
Production of flavor compounds; flavor laboratories.
Hazlet, NJ(1)
Production of fragrance compounds; fragrance laboratories.
Jacksonville, FL
Production of fragrance ingredients.
New York, NY(1)
Fragrance laboratories; corporate headquarters.
South Brunswick, NJ(1)
Production of flavor compounds and ingredients; flavor laboratories.
Union Beach, NJ
Research and development center.
France
 
Neuilly(1)
Fragrance laboratories.
Grasse
Production of fragrance compounds, and cosmetic ingredients.
Great Britain
 
Haverhill
Production of flavor compounds and ingredients, and fragrance ingredients; flavor laboratories.
Netherlands
 
Hilversum
Flavor and fragrance laboratories, and administrative offices.
Tilburg
Production of flavor compounds and ingredients, and fragrance compounds.
Spain
 
Benicarló
Production of fragrance ingredients.
Egypt
 
Cairo
Production of flavor compounds and manufacturing.
Argentina
 
Garin
Production of flavor and fragrance compounds; flavor and fragrance laboratories.
Brazil
 
Rio de Janeiro
Production of fragrance compounds.
São Paulo
Flavor and fragrance laboratories.
Taubate
Production of flavor compounds and ingredients.
Mexico
 
Tlalnepantla
Production of flavor and fragrance compounds; flavor and fragrance laboratories.
India
 
Mumbai(2)
Flavor and fragrance laboratories.
Chennai(2)
Production of flavor compounds and ingredients, and fragrance compounds; flavor laboratories.
Australia
 
Dandenong
Production of flavor compounds and flavor ingredients.
China
 
Guangzhou(3)
Production of flavor compounds.
Guangzhou(3)
Production of fragrance compounds.
Shanghai(4)
Flavor and fragrance laboratories.
Xin’anjiang(5)
Production of fragrance ingredients.
Zhejiang(3)
Production of fragrance ingredients.

23



Location
Operation
Indonesia
 
Jakarta
Production of flavor compounds and ingredients; flavor and fragrance laboratories.
 
 
Japan
 
Gotemba
Production of flavor compounds.
Tokyo
Flavor and fragrance laboratories.
 
 
Singapore
 
Jurong(4)
Production of flavor and fragrance compounds.
Science Park(1)
Flavor and fragrance laboratories.
 
 
Turkey
 
Gebze
Production of flavor compounds.
 
 
Israel
 
Kibbutz Givat-Oz(3)
Production of fragrance ingredients.
 
 
Germany
 
Hamburg
Production of fragrance compounds.
_______________________
(1)
Leased.
(2)
We have a 93.4% interest in the subsidiary company that owns this facility.
(3)
Land is leased and building, machinery and equipment are owned.
(4)
Building is leased and machinery and equipment are owned.
(5)
We have a 90% interest in the subsidiary company that leases the land and owns the buildings and machinery.
Our principal executive offices and New York laboratory facilities are located at 521 West 57th Street, New York City.
 
ITEM 3.
LEGAL PROCEEDINGS.
We are subject to various claims and legal actions in the ordinary course of our business.
Environmental
Over the past 20 years, various federal and state authorities and private parties have claimed that we are a Potentially Responsible Party (“PRP”) as a generator of waste materials for alleged pollution at a number of waste sites operated by third parties located principally in New Jersey and have sought to recover costs incurred and to be incurred to clean up the sites.
We have been identified as a PRP at eight facilities operated by third parties at which investigation and/or remediation activities may be ongoing. We analyze our potential liability on at least a quarterly basis. We accrue for environmental liabilities when they are probable and estimable. We estimate our share of the total future cost for these sites to be less than $5.0 million.
While joint and several liability is authorized under federal and state environmental laws, we believe the amounts we have paid and anticipate paying in the future for clean-up costs and damages at all sites are not material and will not have a material adverse effect on our financial condition, results of operations or liquidity. This assessment is based upon, among other things, the involvement of other PRPs at most of the sites, the status of the proceedings, including various settlement agreements and consent decrees, and the extended time period over which payments will likely be made. There can be no assurance, however, that future events will not require us to materially increase the amounts we anticipate paying for clean-up costs and damages at these sites, and that such increased amounts will not have a material adverse effect on our financial condition, results of operations or cash flows.

24



Other
We are also a party to other litigations arising in the ordinary course of our business. We do not expect the outcome of these cases, singly or in the aggregate, to have a material effect on our consolidated financial condition.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.

25



PART II 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information.
Our common stock is traded principally on the New York Stock Exchange. The table below shows the high and low sales prices for our common stock, and the cash dividends we paid per share for each quarterly period in 2017 and 2016: 
 
2017
 
2016
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
High
$
136.89

 
$
139.73

 
$
145.01

 
$
155.44

 
$
122.38

 
$
131.30

 
$
143.43

 
$
143.64

Low
115.26

 
128.98

 
131.69

 
144.47

 
97.24

 
114.65

 
124.77

 
116.64

Dividends declared per share
0.64

 
0.64

 
0.69

 
0.69

 
0.56

 
0.56

 
0.64

 
0.64

Our current intention is to return 50%-60% of adjusted Net Income through a combination of dividends and share repurchases; however, the payment of dividends and share repurchases is determined by our Board of Directors (“Board”) at its discretion based on various factors, and no assurance can be provided as to future dividends.
Approximate Number of Equity Security Holders.
Title of Class
Number of shareholders of record as of February 15, 2018
Common stock, par value 12  1/2¢ per share
1,735
Issuer Purchases of Equity Securities.
The table below reflects shares of common stock we repurchased during the fourth quarter of 2017.
Period
Total Number of
Shares
Repurchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Approximate Dollar Value
of Shares That May Yet
be Purchased Under the
Program
October 1 - 31, 2017 (1)

 
$

 

 
$
56,087,164

November 1 - 30, 2017 (2)
19,144

 
150.40

 
19,144

 
297,120,829

December 1 - 31, 2017 (2)
12,901

 
153.42

 
12,901

 
295,141,499

Total
32,045

 
$
151.61

 
32,045

 
$
295,141,499

 
(1)
Shares were repurchased pursuant to the repurchase program originally announced in December 2012 and amended in August 2015 (i) to increase from $250 million to $500 million the total purchase price of shares that may be repurchased under the program and (ii) to extend the program through December 31, 2017. Authorization of the repurchase program may be modified, suspended, or discontinued at any time.
(2)
Shares were repurchased pursuant to the repurchase program originally announced in December 2012, amended in August 2015 and further amended in November 2017 (i) to approve an additional $250 million to be added to the approximately $50 million remaining from the first amended program, thus increasing to $300 million total purchase price of shares that may be repurchased under the program and (ii) to extend the program through November 1, 2022. Authorization of the repurchase program may be modified, suspended, or discontinued at any time.

26



Performance Graph.
The following graph compares a shareholder’s cumulative total return for the last five fiscal years as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the S&P 500 Index; and (iii) a customized Peer Group. The graph is based on historical stock prices and measures total shareholder return, which takes into account both changes in stock price and dividends. The total return assumes that dividends were reinvested daily and is based on a $100 investment on December 31, 2012.
chart-32c0bdb9b90556d79a1.jpg
SOURCE: S&P Capital IQ

27



Due to the international scope and breadth of our business, we believe that a Peer Group comprising international public companies, which are representative of the customer group to which we sell our products, is the most appropriate group against which to compare shareholder returns. See the table below for the list of companies included in our Peer Group.
Peer Group Companies
 
Avon Products, Inc.
Hormel Foods Corporation
Campbell Soup Company
Kellogg Company
Church & Dwight Co., Inc.
The Estée Lauder Companies Inc.
The Clorox Company
McCormick & Company, Incorporated
The Coca-Cola Company
McDonald’s Corporation
Colgate-Palmolive Company
Nestle SA
ConAgra Brands, Inc.
PepsiCo, Inc.
Edgewell Personal Care Company(1)
The Procter & Gamble Company
General Mills, Inc.
Revlon, Inc.
Heinz (HJ) Co.(1)
Sensient Technologies Corporation
The Hershey Company
Unilever N.V.
Hillshire Brands Co.(1)
YUM! Brands, Inc.
(1)
In July 2012, Sara Lee Corp. spun off certain of its businesses and changed its name to Hillshire Brands Co. Heinz (HJ) Co. was acquired by Hawk Acquisition Holding Corp on June 7, 2013 and has only been included through that date. Hillshire Brands Co. was acquired by Tyson Foods on August 28, 2014 and has only been included through that date. Edgewell Personal Care has been included starting from July 1, 2015 when it spun off from Energizer Holdings.
ITEM 6.
SELECTED FINANCIAL DATA.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following selected consolidated financial data is derived from our Consolidated Financial Statements. This data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
 
Net Income (Loss) Per Share
 
Net Sales
 
Gross Profit(a)
 
Net Income (Loss)(b)
 
Basic
 
Diluted(c)(d)
Quarter
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
First
$
828,293

 
$
783,312

 
$
364,666

 
$
360,209

 
$
115,764

 
$
118,603

 
$
1.46

 
$
1.48

 
$
1.45

 
$
1.47

Second
842,861

 
793,478

 
374,589

 
365,641

 
109,795

 
116,733

 
1.39

 
1.46

 
1.38

 
1.46

Third
872,940

 
777,001

 
382,056

 
346,268

 
110,261

 
89,777

 
1.39

 
1.13

 
1.39

 
1.12

Fourth
854,625

 
762,559

 
357,690

 
326,952

 
(40,155
)
 
79,918

 
(0.51
)
 
1.00

 
(0.51
)
 
1.00

 
$
3,398,719

 
$
3,116,350

 
$
1,479,001

 
$
1,399,070

 
$
295,665

 
$
405,031

 
$
3.73

 
$
5.07


$
3.72

 
$
5.05

 _______________________
* See the following chart for (a)-(c) footnote explanations.

28



Included in the above quarterly results are the following:
 
Footnotes
 
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

Gross Profit
(a)
Net Income(b)
Diluted EPS
(c)
Description
Q1 2017
 
 
 
 
Operational Improvement Initiatives
621

466

0.01

Represents accelerated depreciation in Hangzhou, China.
Acquisition Related Costs
5,301

5,650

0.07

Represents the amortization of inventory "step-up" related to the acquisitions of David Michael and PowderPure, included in Cost of goods sold and transaction costs related to the acquisitions of Fragrance Resources and PowderPure, included in Selling and administrative expenses.
Integration Related Costs
88

829

0.01

Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
Tax Assessment

3,458

0.04

Represents the reserve for payment of a tax assessment related to commercial rent for prior periods.
Restructuring and Other Charges, net

7,176

0.09

Represents severance costs related to the 2017 Productivity Program.
Gain on Sale of Assets

(14
)

Represents gains on sale of assets.
CTA Realization

(12,214
)
(0.15
)
Represents the release of CTA related to the liquidation of a foreign entity.
Q2 2017
 
 
 
 
Operational Improvement Initiatives
445

334


Represents accelerated depreciation in Hangzhou, China.
Acquisition Related Costs
5,606

4,806

0.06

Represents the amortization of inventory "step-up" related to the acquisitions of David Michael, Fragrance Resources and PowderPure, included in Cost of goods sold and transaction costs related to the acquisitions of Fragrance Resources and PowderPure, included in Selling and administrative expenses.
Integration Related Costs
98

488

0.01

Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
Legal Charges/Credits, net

646

0.01

Represents additional charge related to litigation settlement.

Tax Assessment

(12
)

Represents the reversal of a portion of the reserve for payment of a tax assessment related to commercial rent for prior periods.

Restructuring and Other Charges, net

866

0.01

Represents severance costs related to the 2017 Productivity Program.
Gain on Sale of Assets

(46
)

Represents gains on sale of assets.
FDA Mandated Product Recall
3,500

2,262

0.03

Represents additional charges recognized to accrue for an estimate of the Company's incremental direct costs and customer reimbursement obligations, in excess of the Company's sales value of the recalled products, arising from an FDA mandated recall of consumer products as a result of raw material received and identified by the Company as containing contamination.

Q3 2017
 
 
 
 
Operational Improvement Initiatives
407

305


Represents accelerated depreciation in Hangzhou, China.
Acquisition Related Costs
5,147

3,487

0.04

Represents the amortization of inventory "step-up" related to the acquisitions of David Michael, Fragrance Resources and PowderPure, included in Cost of goods sold and transaction costs related to the acquisitions of Fragrance Resources and PowderPure, included in Selling and administrative expenses.
Integration Related Costs
131

428

0.01

Represents costs related to the integration of the David Michael and Fragrance Resources acquisitions.
Restructuring and Other Charges, net

2,237

0.03

Represents severance costs related to the 2017 Productivity Program.
Gain on Sale of Assets

(21
)

Represents gains on sale of assets.
Q4 2017
 
 
 
 
Operational Improvement Initiatives
329

247


Represents accelerated depreciation in Hangzhou, China.
Acquisition Related Costs
(194
)
(68
)

Represents the amortization of inventory "step-up" related to the acquisitions of David Michael and Fragrance Resources, included in Cost of goods sold and transaction costs related to the acquisitions of David Michael and Fragrance Resources, included in Selling and administrative expenses.
Integration Related Costs
163

1,102

0.01

Represents costs related to the integration of the David Michael.
Restructuring and Other Charges, net

3,967

0.05

Represents severance costs related to the 2017 Productivity Program.
Gain on Sale of Assets

(44
)

Represents gains on sale of property in Brazil.
FDA Mandated Product Recall
7,500

4,848

0.06

Represents additional charges recognized to accrue for an estimate of the Company's incremental direct costs and customer reimbursement obligations, in excess of the Company's sales value of the recalled products, arising from an FDA mandated recall of consumer products as a result of raw material received and identified by the Company as containing contamination.

UK Pension Settlement Charges

2,243

0.03

Represents pension settlement charges related to one of the Company's UK plans.
U.S. Tax Reform

139,172

1.76

Represents charges incurred related to enactment of certain U.S. tax legislation changes in December 2017. The amount includes approximately $38.6 million related to adjustments to net deferred tax assets and $100.6 million related to a liability for taxes on deemed repatriation of earnings.


29



 
Footnotes
 
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

Gross Profit
(a)
Net Income(b)
Diluted EPS
(c)
Description
Q1 2016
 
 
 
 
Operational Improvement Initiatives
$
268

$
201

$

Accelerated depreciation in Hangzhou, China.
Acquisition Related Costs
889

669

0.01

Expense related to the fair value step up of inventory and additional transaction costs related to the acquisition of Lucas Meyer.
Legal Charges/Credits, net

(1,044
)
(0.01
)
Amounts expected to be received related to the Spanish capital tax settlement.
Restructuring and Other Charges, net
101

82


Accelerated depreciation related to restructuring initiatives.
Q2 2016
 
 
 
 
Operational Improvement Initiatives
831

623

0.01

Accelerated depreciation in Hangzhou, China and severance costs in Guangzhou, China.
Acquisition Related Costs

315


Additional transaction costs related to the acquisition of Lucas Meyer.
Restructuring and Other Charges, net
182

147


Accelerated depreciation and severance costs related to restructuring initiatives.
Q3 2016
 
 
 
 
Operational Improvement Initiatives
791

602

0.01

Accelerated depreciation and dismantling costs in Hangzhou, China and severance costs in Guangzhou, China.
Acquisition Related Costs

510

0.01

Transaction costs related to the acquisition of David Michael.
Legal Charges/Credits, net

16,250

0.20

Legal charge related to litigation accrual.
Restructuring and Other Charges, net
190

154


Accelerated depreciation costs related to restructuring initiatives.
Q4 2016
 
 
 
 
Operational Improvement Initiatives
502

379


Accelerated depreciation, dismantling and idle labor costs in Hangzhou, China and the partial reversal of severance accruals related to prior year operational initiatives in Europe.
Acquisition Related Costs
6,759

6,586

0.08

Transaction costs related to the acquisition of David Michael and Fragrance Resources as well as expense related to the fair value step up of inventory on the David Michael acquisition.
Legal Charges/Credits, net

16,250

0.20

Legal charge related to litigation accrual.
Restructuring and Other Charges, net
185

(158
)

Accelerated depreciation related to restructuring initiatives, severance costs related to the termination of a former executive officer and the partial reversal of restructuring accruals recorded in the prior year.
Gain on Sale of Assets

(5,160
)
(0.06
)
Gain from sale of property in Brazil.
(d)
The sum of the 2017 Net Income per diluted share by quarter does not equal the earnings per share for the full year due to rounding.

30



INTERNATIONAL FLAVORS & FRAGRANCES INC.
FIVE-YEAR SUMMARY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE AMOUNTS) 
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Consolidated Statement of Income Data
 
 
 
 
 
 
 
 
 
Net sales
$
3,398,719

 
$
3,116,350

 
$
3,023,189

 
$
3,088,533

 
$
2,952,896

Cost of goods sold(a)
1,919,718

 
1,717,280

 
1,671,590

 
1,726,383

 
1,668,691

Gross profit
1,479,001

 
1,399,070

 
1,351,599

 
1,362,150

 
1,284,205

Research and development expenses
286,026

 
254,263

 
246,101

 
253,640

 
259,838

Selling and administrative expenses(b)
557,311

 
566,224

 
494,517

 
507,563

 
499,805

Restructuring and other charges, net(c)
19,711

 
(1,700
)
 
7,594

 
1,298

 
2,151

Amortization of acquisition-related intangibles
34,694

 
23,763

 
15,040

 
7,328

 
6,072

Gain on sales of fixed assets(d)
(184
)
 
(10,836
)
 

 

 

Operating profit
581,443

 
567,356

 
588,347

 
592,321

 
516,339

Interest expense
65,363

 
52,989

 
46,062

 
46,067

 
46,767

Other (income) expense, net(e)
(20,965
)
 
(9,350
)
 
3,184

 
(2,807
)
 
(15,638
)
Income before taxes
537,045

 
523,717

 
539,101

 
549,061

 
485,210

Taxes on income(f)
241,380

 
118,686

 
119,854

 
134,518

 
131,666

Net income
$
295,665

 
$
405,031

 
$
419,247

 
$
414,543

 
$
353,544

Percentage of net sales
8.7

 
13.0

 
13.9

 
13.4

 
12.0

Percentage of average shareholders’ equity
17.8

 
25.1

 
26.9

 
27.7

 
26.0

Net income per share — basic
$
3.73

 
$
5.07

 
$
5.19

 
$
5.09

 
$
4.32

Net income per share — diluted
$
3.72

 
$
5.05

 
$
5.16

 
$
5.06

 
$
4.29

Average number of diluted shares (thousands)
79,370

 
79,981

 
80,891

 
81,494

 
81,930

Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
368,046

 
$
323,992

 
$
181,988

 
$
478,573

 
$
405,505

Receivables, net
663,663

 
550,658

 
537,896

 
493,768

 
524,493

Inventories
649,448

 
592,017

 
572,047

 
568,729

 
533,806

Property, plant and equipment, net
880,580

 
775,716

 
732,794

 
720,268

 
687,215

Goodwill and intangible assets, net
1,572,075

 
1,365,906

 
1,247,393

 
752,041

 
696,197

Total assets
4,598,926

 
4,016,984

 
3,702,010

 
3,494,621

 
3,331,731

Bank borrowings, overdrafts and current portion of long-term debt
6,966

 
258,516

 
132,349

 
8,090

 
149

Long-term debt
1,632,186

 
1,066,855

 
935,373

 
934,232

 
932,665

Total Shareholders’ equity(g)
1,689,294

 
1,631,134

 
1,594,989

 
1,522,689

 
1,467,051

Other Data
 
 
 
 
 
 
 
 
 
Current ratio(h)
2.5

 
1.8

 
2.0

 
3.3

 
2.9

Additions to property, plant and equipment
$
128,973

 
$
126,412

 
$
101,030

 
$
143,182

 
$
134,157

Depreciation and amortization expense
117,967

 
102,469

 
89,597

 
89,354

 
83,227

Cash dividends declared per share
$
2.66

 
$
2.40

 
$
2.06

 
$
1.72

 
$
1.46

Number of shareholders of record at year-end
1,735

 
1,892

 
2,013

 
2,105

 
2,255

Number of employees at year-end
7,299

 
6,932

 
6,732

 
6,211

 
6,000


31



_______________________ 
(a)
The 2017 amount includes $15,860 of costs related to the fair value step-up for the Fragrance Resources and PowderPure acquisitions, $1,802 of operational improvement initiative costs consisting of accelerated depreciation, FDA mandated product recall costs of $11,000, and $480 of integration costs related to the 2017 Productivity Program. The 2016 amount includes $7,648 of costs related to the fair value step-up for the David Michael and Lucas Meyer acquisitions, $2,391 of operational improvement initiative costs consisting of accelerated depreciation and $658 of accelerated depreciation related to restructuring activities. The 2015 amount includes $6,825 of costs related to the fair value step-up of inventory for the Ottens Flavors and Lucas Meyer acquisitions and $1,115 of operational improvement initiative costs in Europe and Asia. The 2014 amount includes $7,641 of accelerated depreciation associated with the Fragrance Ingredients rationalization and operational improvement initiative costs in Europe and Asia. The 2013 amount includes $8,770 of accelerated depreciation associated with the Fragrance Ingredients rationalization and several locations in Asia.
(b)
The 2017 amount includes $4,529 of costs related to the Fragrance Resources and PowderPure acquisitions, $3,258 of integration costs related to the 2017 Productivity Program, $1,000 of additional charge related to litigation settlement, $5,331 of reserve for payment of a tax assessment related to commercial rent for prior periods and $1,882 of UK pension settlement charges. The 2016 amount includes $48,518 of legal charges/credits principally related to litigation accrual, $4,547 of acquisition-related costs related to the acquisitions of Lucas Meyer, David Michael and Fragrance Resources and $1,364 of severance costs related to the termination of a former executive officer. The 2015 amount includes $10,530 of reversal of the previously recorded provision for the Spanish capital tax case, $7,192 of expense for the acceleration of the contingent consideration payments related to the Aromor acquisition and $11,517 of acquisition-related costs for the Ottens and Lucas Meyer acquisitions. The 2013 amount includes $13,011 of expense associated with the Spanish capital tax case.
(c)
Represents severance costs related to the 2017 Productivity Program which were partially offset by the reversal of 2015 severance charges that were no longer needed. For 2016, represents accelerated depreciation related to restructuring initiatives and severance costs related to the termination of a former executive officer and the partial reversal of restructuring accruals recorded in the prior year. For 2015, 2014 and 2013, restructuring and other charges were the result of various restructuring and reorganization programs of the Company.
(d)
The 2016 amount includes $7,818 of gains related to the sale of property in Brazil.
(e)
The 2017 amount includes $12,217 from the release of CTA related to the liquidation of a foreign entity. The 2014 and 2013 amount includes $723 and $14,155, respectively, of net gains related to the sale of non-operating assets.
(f)
The 2017 amount represents charges incurred related to enactment of certain U.S. tax legislation changes in December 2017. The amount includes approximately $38.6 million related to adjustments to deferred tax assets and $100.6 million related to a liability for taxes on deemed repatriation of earnings. The 2015 amount includes $10,478 of settlements due to favorable tax rulings in jurisdictions for which reserves were previously recorded for ongoing tax disputes.
(g)
Includes noncontrolling interest for all periods presented.
(h)
Current ratio is equal to current assets divided by current liabilities.


32



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(UNLESS INDICATED OTHERWISE, DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Overview
Company background
We are a leading innovator of sensory experiences, co-creating unique products that consumers taste, smell, or feel in fine fragrances and cosmetics, detergents and household goods, and food and beverages. We take advantage of our capabilities in consumer insights, research and product development (“R&D”), creative expertise and customer intimacy to partner with our customers in developing innovative and differentiated offerings for consumers. We believe that this collaborative approach will generate market share gains for our customers. Our flavors and fragrance compounds combine a number of ingredients that are blended, mixed or reacted together to produce proprietary formulas created by our flavorists and perfumers.
Flavors are the key building blocks that impart taste experiences in food and beverage products and, as such, play a significant role in determining consumer preference for the end products in which they are used. As a leading creator of flavors, we help our customers deliver on the promise of delicious and healthy foods and drinks that appeal to consumers. While we are a global leader, our flavors business is more regional in nature, with different formulas that reflect local taste preferences. Our flavors compounds are ultimately used by our customers in four end-use categories: (1) Savory, (2) Beverages, (3) Sweet and (4) Dairy.
We are a global leader in the creation of fragrance compounds that are integral elements in the world’s finest perfumes and best-known consumer products within fabric care, home care, personal wash, hair care and toiletries products. Our Fragrances business consists of Fragrance Compounds and Fragrance Ingredients. Our Fragrance Compounds are defined into two broad categories, Fine Fragrances and Consumer Fragrances. Consumer Fragrances consists of five end-use categories of products: (1) Fabric Care, (2) Home Care, (3) Personal Wash, (4) Hair Care and (5) Toiletries. Fragrance Ingredients consist of active and functional ingredients that are used internally and sold to third parties, including customers and competitors, and are included in the Fragrances business unit.
The flavors and fragrances market is part of a larger market that supplies a wide variety of ingredients and compounds that are used in consumer products. The broader market includes large multinational companies and smaller regional and local participants which supply products such as seasonings, texturizers, spices, enzymes, certain food-related commodities, fortified products and cosmetic active ingredients. The global market for flavors and fragrances has expanded consistently, primarily as a result of an increase in demand for, as well as an increase in the variety of, consumer products containing flavors and fragrances. In 2017, the flavors and fragrances market was estimated by management to be approximately $24.8 billion and is forecasted to grow approximately 2-3% by 2021, primarily driven by expected growth in emerging markets.
Development of new flavors and fragrance compounds is driven by a variety of sources, including requests from our customers who are in need of a specific flavor or fragrance for use in a new or modified consumer product, or as a result of internal initiatives stemming from our consumer insights program. Our product development team works in partnership with our scientists and researchers to optimize the consumer appeal of the flavor or fragrance. It then becomes a collaborative process among our researchers, our product development team and our customers to perfect the flavor or fragrance so that it is ready to be included in the final consumer product.
2017 Overview
Our 25 largest customers accounted for 50% of total sales in 2017; this percentage has remained fairly constant for several years. Sales to our largest customer across all end-use categories accounted for 11% to 12% of our sales for each of the last three fiscal years. A key factor for commercial success is inclusion on our strategic customers’ core supplier lists, which provides opportunities to win new business. We are on the core supplier lists of a large majority of our global and strategic customers within Fragrances and Flavors.
Sales in 2017 increased 9% on both a reported and currency neutral basis (which excludes the effects of changes in currency), with the effects of acquisitions contributing approximately 5% to both the reported and currency neutral growth rates. Flavors achieved reported sales growth of 9% and currency neutral sales growth of 10%, with the effect of acquisitions contributing approximately 5% to both reported and currency neutral growth rates. Fragrances achieved sales growth of 9% on both a reported and currency basis in 2017, with the effect of acquisitions contributing approximately 5% to both reported and currency neutral growth rates. Sales growth excluding acquisitions was driven by new win performance (net of losses) in both Flavors and Fragrance Compounds. Additionally, Fragrance Ingredients sales were up 8% on a both a reported basis and

33



currency neutral basis, principally driven by higher volumes. Overall, our 2017 results continued to be driven by our strong emerging market presence that represented 48% of total sales and experienced 4% reported and currency neutral growth in 2017. From a geographic perspective, North America ("NOAM"), Europe, Africa and Middle East ("EAME"), Greater Asia ("GA") and Latin America ("LA") all delivered sales growth on a consolidated basis in 2017, led by NOAM.
On January 17, 2017, we completed the acquisition of Fragrance Resources, Inc. ("Fragrance Resources"), a privately-held fragrance company with facilities in Germany, North America, France and China, for approximately €143.4 million (approximately $151.9 million). The acquisition is expected to strengthen our fragrances market position in North America and Germany. On April 7, 2017, we completed the acquisition of Columbia PhytoTechnology, LLC d/b/a PowderPure ("PowderPure"), a processor of all-natural food ingredients, for approximately $54.6 million. PowderPure was acquired to expand our expertise and product offerings of clean label solutions within the Flavors business. These acquisitions did not have a material impact on our 2017 results.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revised the U.S. tax code effective January 1, 2018 by, among other things, lowering the corporate income tax rate from a top marginal rate of 35% to a flat 21% and establishing a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. The Tax Act impacted our fourth quarter consolidated results of operations and is expected to continue to impact our consolidated results of operations in future periods. In particular, the transition to the new territorial tax system required the Company to record a one-time tax or “toll charge” which resulted in a provisional incremental tax expense of $100.6 million principally related to previously unremitted earnings on non-U.S. subsidiaries. The cash portion of the "toll charge" will be payable in installments over 8 years beginning in 2018. In addition, the reduction of the U.S. corporate tax rate resulted in a provisional net deferred tax expense of $38.6 million related to the remeasurement of net deferred tax assets as a result of the reduction in the corporate income tax rate.
2017 Sales by Business Unit
chart-67e276843e6c5a15bf9.jpg
Sales by Destination
(DOLLARS IN MILLIONS)
2017
 
Percent
of sales
 
2016
 
Percent
of sales
 
2015
 
Percent
of sales
Europe, Africa and Middle East
$
1,065

 
31
%
 
$
965

 
31
%
 
$
946

 
31
%
Greater Asia
904

 
27
%
 
880

 
28
%
 
839

 
28
%
North America
902

 
27
%
 
769

 
25
%
 
718

 
24
%
Latin America
528

 
15
%
 
502

 
16
%
 
520

 
17
%
Total net sales, as reported
$
3,399

 
 
 
$
3,116

 
 
 
$
3,023

 
 

34



 
Year Ended December 31,
Sales by Category
2017
 
2016
 
2015
Flavor Compounds
48
%
 
48
%
 
48
%
Consumer Fragrances
31
%
 
32
%
 
32
%
Fine Fragrances
11
%
 
10
%
 
10
%
Fragrance Ingredients
10
%
 
10
%
 
10
%
Total Net Sales
100
%
 
100
%
 
100
%
FINANCIAL PERFORMANCE OVERVIEW
Reported and currency neutral sales for 2017 increased 9% year-over-year (including approximately 5% growth from acquisitions). We continue to benefit from our diverse portfolio of end-use product categories and geographies and had sales growth in all four regions and in all categories. Both Flavors and Fragrances benefited from new win performance (net of losses) and the effect of acquisitions. Exchange rate variations did not have a material impact on revenue in 2017. The effect of exchange rates can vary by business and region depending upon the mix of sales by country as well as the relative percentage of local sales priced in U.S. dollars versus local currencies. We saw currency neutral sales growth during each quarter of 2017.
We believe that market conditions and the macro-economic environment will continue to be volatile in many markets in 2018 but that. overall, there will be slight improvements as compared to recent years. Pressures from increasing costs and the impact of a supply chain disruption related to a key ingredient manufactured by BASF and used in the flavors and fragrances industry are expected to reduce our currency neutral operating profit growth in 2018. The BASF supply chain disruption is not expected to be resolved until the second half of 2018.
On a long-term basis, we expect that sales growth for the industry will generally be in line with the underlying assumptions that support our long-term strategic goals, albeit with some risk in the near term given the continuing global economic uncertainty. We believe changing social habits resulting from increased disposable income, improved focus on personal health and wellness awareness should help drive growth of our consumer product customers’ businesses.
Gross margin decreased 140 basis points ("bps") year-over-year. Included in 2017 was $15.9 million of acquisition-related inventory "step-up" costs, $11.0 million relating to an FDA mandated product recall, $1.8 million of costs associated with operational improvement initiatives and $0.5 million of integration related costs, compared to $7.6 million of acquisition-related inventory "step-up" costs, $2.4 million of costs related to operational improvement initiatives and $0.7 million of costs related to accelerated depreciation included in Cost of goods sold included in 2016. Excluding these items, adjusted gross margin decreased 80 bps compared to the prior year period. The decrease was principally driven by higher costs including higher claim expense and higher input costs, offset by the favorable impact of productivity initiatives. Volumes were slightly higher but were offset by slightly unfavorable mix.
During 2017, the raw material cost environment continued its recent upward trend. We believe that, in 2018, we will continue to see higher prices on certain categories (such as vanilla and citrus), increases related to turpentine and oil derived materials and higher costs on a key ingredient due to the BASF supply disruption related to one of our key ingredients. We continue to seek improvements in our margins through operational performance, cost reduction efforts and mix enhancement.
Operating profit increased $14.1 million to $581.4 million (17.1% of sales) in 2017 compared to $567.4 million (18.2% of sales) in 2016. Included in 2017 were restructuring and other charges of $19.7 million, acquisition-related costs of $20.4 million, $11.0 million relating to an FDA mandated product recall, reserve for payment of a tax assessment related to commercial rent for prior periods of $5.3 million, integration related costs of $4.2 million, pension settlement charges of $2.8 million, operational improvement initiative costs of $1.8 million, additional charge related to litigation settlement of $1.0 million and gain on sale of fixed assets of $0.2 million. Included in 2016 were net legal charges/credits of $48.5 million, acquisition-related costs of $12.2 million, gain on sale of fixed assets of $7.8 million, operational improvement initiative costs of $2.4 million and restructuring and other charges, net of $0.3 million. Excluding these charges, adjusted operating profit was $647.4 million (19.0% of sales) for 2017 versus $623.0 million (20.0% of sales) for 2016. The decrease in operating profit as a percentage of sales was principally driven by lower gross margins in 2017. Foreign currency changes had a favorable impact on operating profit of 1% in 2017 and an unfavorable impact on operating profit of approximately 2% in 2016.
Cash flows from operations were $390.8 million or 11.5% of sales in 2017 as compared to cash flows from operations of $550.1 million, or 17.7% of sales, during 2016. The decrease in operating cash flows in 2017 as compared to 2016 is principally related to the impact of increased core working capital requirements (trade receivables, inventories and accounts payable) and due to payments on legal claims along with payments for severance, integration and acquisition costs.

35



Our capital spend was $129.0 million (3.8% of sales) during 2017. In light of our requirement to begin relocating our Fragrance facility in China and the ongoing construction of a new facility in India, we expect that capital spending in 2018 will be about 4.5-5% of sales (net of potential grants and other reimbursements from government authorities). During 2017, we received approximately $15.0 million in payments related to the future relocation of our Zhejiang Ingredients plant and total payments for which are expected to approximate up to $50 million.
Results of Operations 
 
Year Ended December 31,
 
Change
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Net sales
$
3,398,719

 
$
3,116,350

 
$
3,023,189

 
9.1
 %
 
3.1
 %
Cost of goods sold
1,919,718

 
1,717,280

 
1,671,590

 
11.8
 %
 
2.7
 %
Gross profit
1,479,001

 
1,399,070

 
1,351,599

 
 
 
 
Research and development (R&D) expenses
286,026

 
254,263

 
246,101

 
12.5
 %
 
3.3
 %
Selling and administrative (S&A) expenses
557,311

 
566,224

 
494,517

 
(1.6
)%
 
14.5
 %
Restructuring and other charges, net
19,711

 
(1,700
)
 
7,594

 
(1,259.5
)%
 
(122.4
)%
Amortization of acquisition-related intangibles
34,694

 
23,763

 
15,040

 
46.0
 %
 
58.0
 %
Gain on sales of fixed assets
(184
)
 
(10,836
)
 

 
(98.3
)%
 
100.0
 %
Operating profit
581,443

 
567,356

 
588,347

 
 
 
 
Interest expense
65,363

 
52,989

 
46,062

 
23.4
 %
 
15.0
 %
Other (income) expense, net
(20,965
)
 
(9,350
)
 
3,184

 
124.2
 %
 
(393.7
)%
Income before taxes
537,045

 
523,717

 
539,101

 
 
 
 
Taxes on income
241,380

 
118,686

 
119,854

 
103.4
 %
 
(1.0
)%
Net income
$
295,665

 
$
405,031

 
$
419,247

 
 
 
 
Net income per share — diluted
$
3.72

 
$
5.05

 
$
5.16

 
(26.3
)%
 
(2.1
)%
Gross margin
43.5
%
 
44.9
%
 
44.7
%
 
(140.0
)
 
20.0

R&D as a percentage of sales
8.4
%
 
8.2
%
 
8.1
%
 
20.0

 
10.0

S&A as a percentage of sales
16.4
%
 
18.2
%
 
16.4
%
 
(180.0
)
 
180.0

Operating margin
17.1
%
 
18.2
%
 
19.5
%
 
(110.0
)
 
(130.0
)
Adjusted operating margin (1)
19.0
%
 
20.0
%
 
20.2
%
 
(100.0
)
 
(20.0
)
Effective tax rate
44.9
%
 
22.7
%
 
22.2
%
 
2,220.0

 
50.0

Segment net sales
 
 
 
 
 
 
 
 
 
Flavors
$
1,632,166

 
$
1,496,525

 
$
1,442,951

 
9.1
 %
 
3.7
 %
Fragrances
1,766,553

 
1,619,825

 
1,580,238

 
9.1
 %
 
2.5
 %
Consolidated
$
3,398,719

 
$
3,116,350

 
$
3,023,189

 
 
 
 
(1)
Adjusted operating margin for the year ended December 31, 2017 excludes net legal charges/credits of $1.0 million, acquisition related costs of $20.4 million, gain on sale of assets of $0.2 million, operational improvement initiative costs of $1.8 million, restructuring and other charges, net of $19.7 million, FDA mandated product recall costs of $11.0 million, UK pension settlement charge of $2.8 million, tax assessment of $5.3 million, and integration related costs of $4.2 million.
Adjusted operating margin for the year ended December 31, 2016 excludes net legal charges/credits of $48.5 million, acquisition related costs of $12.2 million, gain on sale of assets of $7.8 million, operational improvement initiative costs of $2.4 million and restructuring and other charges, net of $0.3 million.
Adjusted operating margin for the year ended December 31, 2015 excludes acquisition related costs of $18.3 million, the reversal of the previously recorded provision for the Spanish capital tax case of $10.5 million, Restructuring and other charges, net of $7.6 million, accelerated contingent consideration payments of $7.2 million and operational improvement initiative costs of $1.1 million.
Cost of goods sold includes the cost of materials and manufacturing expenses; raw materials generally constitute approximately 70% of the total. R&D expenses relate to the development of new and improved molecules and technologies, technical product support and compliance with governmental regulations. S&A expenses include expenses necessary to support

36



our commercial activities and administrative expenses principally associated with staff groups that support our overall operating activities.
2017 IN COMPARISON TO 2016
Sales
Sales for 2017 totaled $3.4 billion, an increase of 9% from the prior year on both a reported and currency neutral basis. Sales growth reflected new win performance (net of losses) in both Flavors and Fragrance Compounds. On both a reported and currency neutral basis, the effect of acquisitions was approximately 5% to net sales amounts. In addition, Fragrance Ingredients sales were up 8% on both a reported and currency neutral basis, principally driven by volume growth.
Flavors Business Unit
Flavors sales in 2017 increased 9% on a reported basis and 10% on a currency neutral basis versus the prior year period. Acquisitions accounted for approximately 5% of the net sales growth on both a reported and currency neutral basis. Overall growth was primarily driven by mid single-digit growth in Savory combined with low single-digit growth in Beverage, Sweet and Dairy. Regionally, the Flavors business delivered reported and currency neutral growth across all regions. Sales growth was led by NOAM, driven by double-digit gains in Savory and low single-digit gains in Dairy. LA sales growth was primarily driven by double-digit growth in Savory and Dairy, and mid single-digit growth in Sweet. Sales growth in EAME was driven by high single-digit gains in Beverage and Dairy, combined with mid single-digit gains in Savory and Sweet. Sales growth in GA was driven by mid single-digit gains in Beverage and low single-digit gains in Sweet and Savory. Globally, Flavors growth included mid single-digit growth in emerging markets. Overall, emerging markets represented approximately 49% of total Flavors sales.
Fragrances Business Unit
Fragrances sales in 2017 increased 9% on both a reported basis and currency neutral basis. Acquisitions accounted for approximately 5% of both reported and currency neutral sales growth. Year-over-year, 2017 sales performance was led by double-digit growth in Fine Fragrance and Home Care, high single-digit growth in Fabric Care and Fragrance Ingredients, and mid single-digit growth in Personal Wash and Toiletries.
Sales growth within the regions was led by EAME reflecting double-digit gains in Fine Fragrances, Fragrance Ingredients, Home Care and Personal Wash, high single-digit growth in Fabric Care, and mid single-digit growth in Hair Care. NOAM sales growth was primarily driven by double-digit growth in Fine Fragrances, Toiletries, Fabric Care and Home Care. GA sales growth was primarily driven by double-digit gains in Fine Fragrances and Home Care, high single-digit gains in Fabric Care, and mid single-digit gains in Toiletries and Personal Wash. LA sales growth was primarily driven by double-digit gains in Fragrance Ingredients and Home Care, and low single-digit gains in Toiletries, Fabric Care and Personal Wash.
Fragrance Ingredients sales grew by high single-digits principally due to higher volumes.
Globally, Fragrances growth included low single-digit growth in emerging markets. Overall, emerging markets represented 47% of total Fragrance's sales.
Sales Performance by Region and Category 
 
 
% Change in Sales — 2017 vs. 2016
 
 
Fine Fragrances
 
Consumer Fragrances
 
Ingredients
 
Total
Fragrances
 
Flavors
 
Total
NOAM
Reported
21
 %
 
10
%
 
3
%
 
13
%
 
23
%
 
17
%
EAME
Reported
22
 %
 
11
%
 
10
%
 
15
%
 
6
%
 
10
%
 
Currency Neutral(1)
22
 %
 
10
%
 
10
%
 
14
%
 
8
%
 
11
%
LA
Reported
4
 %
 
1
%
 
37
%
 
2
%
 
7
%
 
5
%
 
Currency Neutral(1)
-1
 %
 
1
%
 
36
%
 
0
%
 
6
%
 
4
%
GA
Reported
23
 %
 
5
%
 
1
%
 
6
%
 
1
%
 
3
%
 
Currency Neutral(1)
25
 %
 
6
%
 
2
%
 
6
%
 
1
%
 
3
%
Total
Reported
18
 %
 
7
%
 
8
%
 
9
%
 
9
%
 
9
%
 
Currency Neutral(1)
16
 %
 
7
%
 
8
%
 
9
%
 
10
%
 
9
%

37



_______________________
(1)
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 2017 period.
NOAM Flavors sales growth, which included the impact of acquisitions, primarily reflected double-digit gains in Savory and low single-digit gains in Dairy, which more than offset low single-digit declines in Beverage. Total Fragrances sales growth reflected double-digit growth in Fine Fragrances (primarily driven by the impact of acquisitions), Toiletries, Fabric Care and Home Care, and low single-digit gains in Fragrance Ingredients and Personal Wash, which more than offset low single-digit declines in Hair Care.
EAME Flavors sales growth primarily reflected high single-digit gains in Dairy and Beverage, and mid single-digit gains in Savory and Sweet. EAME total Fragrances sales growth was driven by double-digit gains in Fine Fragrances, Fragrance Ingredients, Home Care and Personal Wash, high single-digit growth in Fabric Care, mid single-digit growth in Hair Care, and low single-digit growth in Toiletries.
LA Flavors sales growth was driven by double-digit growth in Savory and Dairy and mid single-digit growth in Sweet. LA total Fragrances sales growth was led by double-digit gains in Fragrance Ingredients and Home Care, low single-digit gains in Toiletries, Fabric Care and Personal Wash, which offset double-digit declines in Hair Care and low single-digit declines in Fine Fragrances.
GA Flavors sales growth was led by mid single-digit gains in Beverage, and low single-digit gains in Savory and Sweet, which more than offset the high single-digit declines in Dairy. GA total Fragrances sales growth primarily reflected double-digit gains in Fine Fragrances and Home Care, high single-digit gains in Fabric Care, mid single-digit gains in Toiletries and Personal Wash, and low single-digit gains in Fragrance Ingredients. These gains more than offset low single-digit declines in Hair Care.
Cost of Goods Sold
Cost of goods sold, as a percentage of sales, increased 140 bps, to 56.5% in 2017 compared to 55.1% in 2016. Included in cost of goods sold was $15.9 million of acquisition-related inventory "step-up" costs, $11.0 million related to an FDA mandated product recall, $1.8 million of costs associated with operational improvement initiatives, and $0.5 million of integration related costs, in 2017. For 2016, included in costs of goods sold was $7.6 million of acquisition-related inventory "step-up" costs, $2.4 million of costs associated with operational improvement initiatives and $0.7 million of costs related to accelerated depreciation.
Research and Development (R&D)
R&D expenses, as a percentage of sales, remained relatively consistent with the prior year period at 8.4% in 2017 compared to 8.2% in 2016. The slight increase in 2017 was principally driven by recent acquisitions, and, to a lesser extent, incentive compensation.
Selling and Administrative (S&A)
S&A, as a percentage of sales, decreased 180 bps to 16.4% versus 18.2% (or 15.9% and 16.4% on an adjusted basis in 2017 and 2016, respectively). Included in 2017 were commercial real estate tax assessment charges of $5.3 million, acquisition and integration related costs of $4.5 million and $3.3 million, respectively, UK pension settlement charge of $1.9 million and net legal charges/credits, principally related to a litigation accrual of $1.0 million, compared to net legal charges/credits, principally related to a litigation accrual of $48.5 million, acquisition related costs of $4.5 million and severance costs related to the termination of a former executive officer of $1.4 million in 2016. During 2017, costs were higher as a result of recently acquired companies, offset by slightly lower legal and professional fees associated with various finance initiatives, and decreases in legal and patent fees.
Restructuring and Other Charges
Restructuring and other charges primarily consist of separation costs for employees, including severance, outplacement and other benefit costs. 

38



 
For the Year Ended
December 31,
(DOLLARS IN THOUSANDS)
2017
 
2016
Flavors
$
4,505

 
$
(1,119
)
Fragrances
13,077

 
(581
)
Global
2,129

 

Total
$
19,711

 
$
(1,700
)
2015 Severance and Contingent Consideration Charges
During the fourth quarter of 2015, we established a series of initiatives intended to streamline the Company's management structure, simplify decision-making and accountability, better leverage and align its capabilities across the organization and improve efficiency of its global manufacturing and operations network. As a result, in 2015, the Company recorded a pre-tax charge of $7.6 million, included in Restructuring and other charges, net, related to severance and related costs pertaining to approximately 150 positions that were affected. During 2016, the Company recorded a credit of $1.7 million related to the reversal of severance accruals that were determined to be no longer required. Separately, in 2015, the Company recorded a charge of $7.2 million, included in Selling and administrative expenses, associated with the acceleration from 2016 to 2015 of contingent consideration payments from the Aromor acquisition that were triggered by certain of the management structure changes noted above. In addition, during 2017, the Company made payments of $0.2 million related to severance and recorded a credit of $2.3 million related to the reversal of severance accruals that were determined to be no longer required.
2017 Productivity Program
On February 15, 2017, we announced that we were adopting a multi-year productivity program designed to improve overall financial performance, provide flexibility to invest in growth opportunities and drive long-term value creation. In connection with this program, we expect to optimize our global footprint and simplify the Company's organizational structures globally. In connection with this initiative, the Company expects to incur cumulative, pre-tax cash charges of between $30-$35 million, consisting primarily of $24-$26 million in personnel-related costs and an estimated $6 million in facility-related costs, such as lease termination, and integration-related costs.
The Company recorded $20.6 million of charges related to personnel-related costs in 2017, with the remainder of the personnel-related and other costs expected to be recognized by the end of 2018. The Company made payments of $14.0 million related to severance in 2017. The overall charges were split approximately evenly between Flavors and Fragrances. This initiative is expected to result in the reduction of approximately 370 members of the Company’s global workforce, including acquired entities, in various parts of the organization.
Amortization of Acquisition-Related Intangibles
Amortization expenses increased to $34.7 million in 2017 compared to $23.8 million in 2016. The increase of $10.9 million is principally due to the acquisitions of Fragrance Resources and PowderPure in 2017, as well as recognizing a full year of amortization in 2017 from the acquisition of David Michael as compared to 2016.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and certain non-recurring items, Interest expense, Other expense, net and Taxes on income. See Note 13 to our Consolidated Financial Statements for the reconciliation to Income before taxes. 

39



 
For the Year Ended
December 31,
(DOLLARS IN THOUSANDS)
2017
 
2016
Segment profit:
 
 
 
Flavors
$
375,208

 
$
337,242

Fragrances
335,412

 
334,220

Global Expenses
(63,180
)
 
(48,487
)
Operational Improvement Initiatives
(1,802
)
 
(2,402
)
Acquisition Related Costs
(20,389
)
 
(12,195
)
Integration Related Costs
(4,179
)
 

Legal Charges/Credits, net
(1,000
)
 
(48,518
)
Tax Assessment
(5,331
)
 

Restructuring and Other Charges, net
(19,711
)
 
(322
)
Gain on Sale of Assets
184

 
7,818

FDA Mandated Product Recall
(11,000
)
 

UK Pension Settlement Charges
(2,769
)
 

Operating Profit
$
581,443

 
$
567,356

Profit margin
 
 
 
Flavors
23.0
%
 
22.5
%
Fragrances
19.0
%
 
20.6
%
Consolidated
17.1
%
 
18.2
%
Flavors Business Unit
Flavors segment profit increased $38.0 million to $375.2 million in 2017 (23.0% of segment sales) from $337.2 million (22.5% of sales) in the comparable 2016 period. The increase in segment profit and profit margin principally reflected productivity initiatives and solid top-line growth.
Fragrances Business Unit
Fragrances segment profit increased $1.2 million to $335.4 million in 2017 (19.0% of segment sales), compared to $334.2 million (20.6% of sales) reported in 2016. The increase in segment profit and profit margin was principally driven by volume growth and the benefits from cost and productivity initiatives offset slightly by the impact of acquisitions.
Global Expenses
Global expenses represent corporate and headquarter-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In 2017, Global expenses were $63.2 million compared to $48.5 million during 2016. The increase was principally driven by lower gains on our cash flow hedging program and higher incentive compensation costs.
Interest Expense
In 2017, interest expense increased $12.4 million to $65.4 million, compared to $53.0 million in 2016 reflecting the impact of our issuance of Senior Notes - 2017 in the second quarter of 2017. Average cost of debt was 4.1% for the 2017 period compared to 3.8% in 2016.
Other (Income) Expense, Net
Other income, net increased approximately $11.6 million to $21.0 million of income in 2017 versus $9.4 million of income in 2016. The increase was largely driven by gains on foreign currency of approximately $13 million in the current year versus approximately $5 million in the prior year, as well as proceeds from certain life insurance policies of approximately $4 million in 2017.

40



Income Taxes
The effective tax rate was 44.9% in 2017 as compared to 22.7% in 2016. Excluding $139.2 million related to the U.S. tax reform, legal charges/credits, net of $0.4 million, acquisition related costs of $6.5 million, gain on sale of assets of $0.1 million, operational improvement initiative costs of $0.5 million, restructuring and other charges, net of $5.5 million, FDA mandated product recall costs of $3.9 million, UK pension settlement charge of $0.5 million, tax assessment of $1.9 million, and integration related costs of $1.3 million, the adjusted effective tax rate for 2017 was 20.7%. For 2016, the adjusted tax rate was 23.8% excluding $17.1 million, $4.1 million, $0.6 million and $0.1 million of tax benefits associated with pretax legal charges/credits, acquisition-related costs, operational improvement initiatives and restructuring related costs, respectively, as well as a $2.7 million tax charge related to the gain on sale of property. The year-over-year reduction principally reflects the reversal of certain valuation allowances on U.S. state deferred taxes.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revised the U.S. tax code effective January 1, 2018 by, among other things, lowering the corporate income tax rate from a top marginal rate of 35% to a flat 21%, limiting deductibility of interest expense and performance based incentive compensation, transitioning to a territorial system and creating new taxes associated with global operations.
The Tax Act impacted our consolidated results of operations during the 2017 fourth quarter and is expected to continue to impact our consolidated results of operations in future periods. In particular, the transition to the new territorial tax system required us to record a one-time tax or “toll charge” which resulted in a provisional incremental tax expense of $100.6 million principally related to previously unremitted earnings on non-U.S. subsidiaries. The cash portion of the "toll charge" will be payable in installments over 8 years beginning in 2018. In addition, the reduction of the U.S. corporate tax rate resulted in a provisional net deferred tax expense of $38.6 million related to the remeasurement of net deferred tax assets as a result of the reduction in the corporate income tax rate. Given the significant complexity of the Tax Act, anticipated guidance from the U.S. Treasury about implementing the Tax Act and the potential for additional guidance from the SEC or the FASB, the Company’s provisional charge may be adjusted during 2018 and is expected to be finalized no later than the fourth quarter of 2018. Other provisions of the Tax Act that impact future tax years are still being assessed. Any material revisions in the Company's computations could adversely affect its cash flows and results of operations.
Based on our current assessment and understanding of the Tax Act and the Company’s current global operating structure, the Company believes its effective tax rate will be approximately 21% in 2018. The impact of the Tax Act may differ from this estimate, due to, among other things, changes in interpretations and assumptions the Company has made, additional guidance that may be issued by the taxing authorities as well as operating and/or structural changes that the Company may take as a result of the Tax Act.
Adoption of ASC Topic 740
Effective January 1, 2017, the Company prospectively applied new accounting guidance which required all excess tax benefits/deficiencies be recognized as income tax expense/benefit in the Consolidated Statement of Comprehensive Income. This change resulted in a $3.3 million benefit to income tax expense for the year ended December 31, 2017. For 2016, benefits of $5.3 million were recognized in equity.
2016 IN COMPARISON TO 2015
Sales
Sales for 2016 totaled $3.1 billion, an increase of 3% from the prior year. Excluding currency impacts, sales increased 5%. Sales growth reflected new win performance (net of losses) in both Flavors and Fragrance Compounds. On both a reported and currency neutral basis, the effect of acquisitions was approximately 2% to net sales amounts. In addition, Fragrance Ingredients sales were up 9% on a reported basis and 10% on a currency neutral basis, driven entirely by the impact of acquisitions. Overall organic sales growth includes 1% growth from both developed and emerging markets and on a currency neutral basis, 4% growth from emerging markets and 1% growth from developed markets, respectively.

41



Flavors Business Unit
Flavors sales in 2016 increased 4% on a reported basis and 6% on a currency neutral basis versus the prior year period. Acquisitions accounted for approximately 3% of the net sales growth on both a reported and currency neutral basis. Overall growth was primarily driven by to mid single-digit growth in Savory, Sweet and Dairy combined with low single-digit growth in Beverage. Regionally, the Flavors business delivered reported and currency neutral growth across all regions. Sales growth was led by NOAM, driven by high single-digit gains in Sweet and low single-digit gains in Beverage and Dairy. Sales growth in GA was driven by mid single-digit gains in Savory, Beverage and Sweet and high single-digit gains in Dairy. Sales growth in EAME was driven by mid single-digit gains in Savory and Sweet and high single-digit gains in Dairy. LA sales growth was primarily driven by double-digit growth in Savory and Dairy and high single-digit growth in Sweet. EAME performance continues to be led by our performance in the emerging market countries within the region. Globally, Flavors growth included mid single-digit growth in emerging markets. Overall, emerging markets represented approximately 52% of total Flavors sales.
Fragrances Business Unit
Fragrances sales in 2016 increased 3% on a reported basis and 4% on a currency neutral basis. Acquisitions accounted for approximately 2% of both reported and currency neutral sales growth. Year-over-year, 2016 sales performance was led by high single-digit growth in Fragrance Ingredients (which was driven entirely by the impact of acquisitions) and mid single-digit growth in Fabric Care, Home Care and Personal Wash. Sales growth within the regions was led by GA reflecting double-digit gains in Fragrance Ingredients and Fabric Care and high single-digit growth in Personal Wash. NOAM sales growth reflected double-digit gains in Fragrance Ingredients, Fabric Care and Home Care categories, which more than offset low single-digit declines in Fine Fragrance. EAME sales growth reflected double-digit gains in Fragrance Ingredients and Hair Care and low single-digit gains in Fabric Care. LA sales declined reflecting double-digit declines in Fragrance Ingredients as well as high single-digit declines in Hair Care and mid single-digit declines in Fabric Care and Home Care which more than offset double-digit gains in Personal Wash. Excluding the effects of acquisitions, Fragrance Ingredients sales declined low single-digits. Globally, Fragrances growth included low single-digit growth in emerging markets. Overall, emerging markets represented 48% of total Fragrances sales.
Sales Performance by Region and Category 
 
 
% Change in Sales — 2016 vs. 2015
 
 
Fine Fragrances
 
Consumer Fragrances
 
Ingredients
 
Total
Fragrances
 
Flavors
 
Total
NOAM
Reported
-2
 %
 
8
 %
 
10
 %
 
6
 %
 
8
%
 
7
 %
EAME
Reported
-1
 %
 
1
 %
 
13
 %
 
3
 %
 
1
%
 
2
 %
 
Currency Neutral(1)
0
 %
 
2
 %
 
14
 %
 
4
 %
 
5
%
 
4
 %
LA
Reported
-6
 %
 
-5
 %
 
-15
 %
 
-6
 %
 
1
%
 
-3
 %
 
Currency Neutral(1)
-3
 %
 
-3
 %
 
-13
 %
 
-4
 %
 
5
%
 
-1
 %
GA
Reported
0
 %
 
6
 %
 
13
 %
 
7
 %
 
4
%
 
5
 %
 
Currency Neutral(1)
2
 %
 
7
 %
 
11
 %
 
8
 %
 
6
%
 
6
 %
Total
Reported
-2
 %
 
2
 %
 
9
 %
 
3
 %
 
4
%
 
3
 %
 
Currency Neutral(1)
-1
 %
 
3
 %
 
10
 %
 
4
 %
 
6
%
 
5
 %
_______________________
(1)
Currency neutral sales growth is calculated by translating prior year sales at the exchange rates for the corresponding 2016 period.
NOAM Flavors sales growth, which included the impact of acquisitions, primarily reflected high single-digit gains in Sweet and low single-digit gains in Beverage and Dairy. Total Fragrances sales growth reflected double-digit gains in Fragrance Ingredients (driven entirely by the impact of acquisitions), Fabric Care and Home Care categories, which more than offset low single-digit declines in Fine Fragrance.
EAME Flavors sales growth primarily reflected mid single-digit gains in Savory and Sweet and high single-digit gains in Dairy. EAME total Fragrances sales growth was driven by double-digit gains in Fragrance Ingredients (driven entirely by the impact of acquisitions) and Hair Care and low single-digit gains in Fabric Care.
LA Flavors sales growth was driven by double-digit growth in Savory and Dairy and high single-digit growth in Sweet. LA total Fragrances sales declined reflecting double-digit declines in Fragrance Ingredients as well as high single-digit declines in Hair Care and mid single-digit declines in Fabric Care and Home Care which more than offset double-digit gains in Personal Wash.

42



GA Flavors sales growth was led by mid single-digit gains in Savory, Beverage and Sweet and high single-digit gains in Dairy. GA total Fragrances sales growth primarily reflected double-digit gains in Fragrance Ingredients (driven entirely by the impact of acquisitions) and Fabric Care and high single-digit growth in Personal Wash.
Cost of Goods Sold
Cost of goods sold, as a percentage of sales, decreased 20 bps, to 55.1% in 2016 compared to 55.3% in 2015. Included in cost of goods sold was $7.6 million of acquisition-related inventory "step-up" costs, $2.4 million of costs associated with operational improvement initiatives and $0.7 million of costs related to accelerated depreciation in 2016 and $6.8 million of acquisition-related inventory "step-up" costs and $1.1 million of costs related to operational improvement initiatives included in 2015.
Research and Development (R&D)
R&D expenses, as a percentage of sales, remained relatively consistent with the prior year period at 8.2% in 2016 compared to 8.1% in 2015. The slight increase in 2016 was principally driven by slightly higher salary costs and, to a lesser extent, the effect of recent acquisitions.
Selling and Administrative (S&A)
S&A, as a percentage of sales, increased 180 bps to 18.2% versus 16.4% (or 16.4% and 16.1% on an adjusted basis in 2016 and 2015, respectively). Included in 2016 were net legal charges/credits, principally related to litigation accrual, of $48.5 million, acquisition-related costs of $4.5 million and severance costs related to the termination of a former executive officer of $1.4 million, compared to acquisition related costs of $11.5 million, accelerated contingency payments of $7.2 million and the reversal of the previously recorded provision related to the Spanish capital tax case of $10.5 million included in 2015. Additionally, during 2016, costs were higher as a result of legal and professional fees associated with various finance initiatives and the effect of recently acquired companies, offset by slightly lower salary costs and the effect of foreign currency.
Restructuring and Other Charges
Restructuring and other charges primarily consist of separation costs for employees, including severance, outplacement and other benefit costs. 
 
For the Year Ended
December 31,
(DOLLARS IN THOUSANDS)
2016
 
2015
Flavors
$
(1,119
)
 
$
4,198

Fragrances
(581
)
 
1,347

Global

 
2,049

Total
$
(1,700
)
 
$
7,594

Amortization of Acquisition-Related Intangibles
Amortization expenses increased to $23.8 million in 2016 compared to $15.0 million in 2015. The increase of $8.7 million is principally due a full year of amortization in 2016 related to the acquisitions of Ottens Flavors and Lucas Meyer as compared to 2015 as well as the acquisition of David Michael in 2016.
Operating Results by Business Unit
We evaluate the performance of business units based on segment profit which is defined as operating profit before Restructuring and certain non-recurring items, Interest expense, Other expense, net and Taxes on income. See Note 13 to our Consolidated Financial Statements for the reconciliation to Income before taxes. 

43



 
For the Year Ended
December 31,
(DOLLARS IN THOUSANDS)
2016
 
2015
Segment profit:
 
 
 
Flavors
$
337,242

 
$
318,476

Fragrances
334,220

 
321,764

Global Expenses
(48,487
)
 
(28,180
)
Restructuring and other charges, net
(322
)
 
(7,594
)
Gain on sales of fixed assets
7,818

 

Spanish capital tax charge reversal

 
10,530

Operational improvement initiative costs
(2,402
)
 
(1,115
)
Acquisition related costs
(12,195
)
 
(18,342
)
Accelerated contingent consideration

 
(7,192
)
Legal charges/credits, net
(48,518
)
 

Operating Profit
$
567,356

 
$
588,347

Profit margin
 
 
 
Flavors
22.5
%
 
22.1
%
Fragrances
20.6
%
 
20.4
%
Consolidated
18.2
%
 
19.5
%
Flavors Business Unit
Flavors segment profit increased $18.8 million to $337.2 million in 2016 (22.5% of sales) from $318.5 million (22.1% of sales) in the comparable 2015 period. The increase in segment profit and profit margin principally reflects productivity initiatives and solid top-line growth.
Fragrances Business Unit
Fragrances segment profit increased $12.5 million to $334.2 million in 2016 (20.6% of sales), compared to $321.8 million (20.4% of sales) reported in 2015. The increase in segment profit and profit margin was principally driven by volume growth and the benefits from cost and productivity initiatives.
Global Expenses
Global expenses represent corporate and headquarter-related expenses which include legal, finance, human resources and R&D and other administrative expenses that are not allocated to an individual business unit. In 2016, Global expenses were $48.5 million compared to $28.2 million during 2015. The increase is principally driven by lower gains on our cash flow hedging program and higher incentive compensation costs.
Interest Expense
In 2016, interest expense increased $6.9 million to $53.0 million, compared to $46.1 million in 2015 reflecting the impact of borrowings under the Euro Senior Notes - 2016. Average cost of debt was 3.8% for the 2016 period compared to 4.5% in 2015.
Other (Income) Expense, Net
Other (income) expense, net increased approximately $12.5 million to $9.4 million of income in 2016 versus $3.2 million of expense in 2015. The increase was largely driven by gains on foreign currency of approximately $5.0 million in the current year versus losses of approximately $6.0 million in the prior year.

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Income Taxes
The effective tax rate was 22.7% in 2016 as compared to 22.2% in 2015. Excluding $17.1 million, $4.1 million, $0.6 million and $0.1 million of tax benefits associated with pretax legal charges/credits, net, acquisition-related costs, operational improvement initiatives and restructuring related costs, respectively, as well as a $2.7 million tax charge related to the gain on sale of property, the adjusted tax rate for 2016 was 23.8%. Excluding $6.2 million, $2.3 million and $0.3 million of tax benefits associated with pretax acquisition-related costs, restructuring charges and operational improvement initiatives, respectively, a $10.5 million tax settlement received in 2015 due to favorable tax rulings in Spain and another jurisdiction as well as a $2.9 million charge related to the reversal of the previously recorded provision for the Spanish capital tax case, the adjusted tax rate for 2015 was 24.2%. The year-over-year reduction reflects a benefit from lower cost of repatriation and mix of earnings, which were partially offset by loss provisions.
Liquidity and Capital Resources
CASH AND CASH EQUIVALENTS
We had cash and cash equivalents of $368.0 million at December 31, 2017 compared to $324.0 million at December 31, 2016, of which $286.6 million of the balance at December 31, 2017 was held outside the United States. Cash balances held in foreign jurisdictions are, in most circumstances, available to be repatriated to the United States.
Effective utilization of the cash generated by our international operations is a critical component of our strategy. We regularly repatriate, in the form of dividends from our non-U.S. subsidiaries, a portion of our current year earnings to fund financial obligations in the U.S. These repatriations of current year earnings totaled $192.2 million, $134.5 million and $184.6 million in 2017, 2016, and 2015, respectively. The Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax and will not be subject to additional U.S. tax when repatriated. We may repatriate a portion of these accumulated earnings of non-U.S. subsidiaries to fund financial obligations in the U.S., but we do not expect to incur any significant, additional taxes related to such amounts.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating cash flows in 2017 were $390.8 million compared to $550.1 million in 2016 and $467.3 million in 2015. The decrease in operating cash flows in 2017 as compared to 2016 was principally related to the impact of increased core working capital requirements (trade receivables, inventories and accounts payable) and due to payments on legal claims along with severance, integration and acquisition costs.
Working capital (current assets less current liabilities) totaled $1.13 billion at year-end 2017 compared to $0.71 billion at December 31, 2016. This increase in working capital of $417.1 million primarily reflected increases in accounts receivable and inventory offset by an increase in accounts payable and a decrease in short term borrowings as compared to the prior year. In the prior years, current liabilities included a $250 million liability related to the maturity of a payment due on one of our senior notes.
Additionally, we continue to sell certain accounts receivable on a non-recourse basis to unrelated financial institutions under “factoring” agreements that are sponsored, solely and individually, by certain customers. We believe that participating in the factoring programs strengthens our relationships with these customers and provides operational efficiencies. We estimate that, as a result of participating in the programs, there was a beneficial impact on cash provided by operations of approximately $7.6 million, $34 million and $3.4 million in 2017, 2016 and 2015, respectively. The cost of participating in these programs was immaterial to our results in all periods.
CASH FLOWS USED IN INVESTING ACTIVITIES
Net investing activities in 2017 utilized $299.9 million compared to $355.5 million and $577.2 million in 2016 and 2015, respectively. The decrease in cash paid for investing activities was primarily driven by lower payments for acquisitions. In 2017, we acquired Fragrance Resources and PowderPure for approximately $137.5 million (net of cash acquired) and $54.2 million (net of cash acquired), respectively, in addition to a purchase price adjustment of $0.7 million related to David Michael in 2017. In 2016 we paid approximately $237.5 million for the acquisition of David Michael, and in 2015 we paid approximately $188.5 million (net of cash acquired) and $305.1 million (net of cash acquired), for Ottens Flavors and Lucas Meyer, respectively.
Additions to property, plant and equipment were $129.0 million, $126.4 million and $101.0 million in 2017, 2016 and 2015, respectively (net of grants and other reimbursements from government authorities). These investments largely arise from

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our ongoing focus to align our manufacturing facilities with our customer demand, primarily in emerging markets, and new technology consistent with our strategy.
In light of our requirement to begin relocating our Fragrance facility in China and the ongoing construction of a new facility in India, we expect that capital spending in 2018 will be about 4.5-5% of sales (net of potential grants and other reimbursements from government authorities).
CASH FLOWS USED IN FINANCING ACTIVITIES
Net financing activities in 2017 utilized $42.6 million compared to $34.4 million and $165.0 million in 2016 and 2015, respectively. The increase in outflow of cash used in financing activities in 2017 as compared to 2016 principally reflected slightly higher debt repayments in 2017 offset by lower treasury share repurchases. The decrease in outflow of cash used in financing activities in 2016 as compared to 2015 principally reflected borrowings under the Euro Senior Notes - 2016 which were offset by repayment of our Senior Notes - 2006 as well as higher dividend payments and treasury share repurchases in 2016.
At December 31, 2017, we had $1,639.2 million of debt outstanding compared to $1,325.4 million outstanding at December 31, 2016.
We paid dividends totaling $206.1 million, $184.9 million and $158.9 million in 2017, 2016 and 2015, respectively. The cash dividend declared per share in 2017, 2016 and 2015 was $2.66, $2.40 and $2.06, respectively.