UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐ 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, NY 10019-2960

(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	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value 12 1/2¢ per share	IFF	New York Stock Exchange
6.00% Tangible Equity Units	IFFT	New York Stock Exchange
0.500% Senior Notes due 2021	IFF 21	New York Stock Exchange
1.750% Senior Notes due 2024	IFF 24	New York Stock Exchange
1.800% Senior Notes due 2026	IFF 26	New York Stock Exchange

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  ☒    No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒   No   ☐

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 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark 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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ☐ No  ☒ 

Number of shares outstanding as of May 1, 2020: 106,851,144

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED BALANCE SHEET

(Unaudited)

(DOLLARS IN THOUSANDS)	March 31, 2020			December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	433,246		$	606,823
Restricted cash	9,699			17,122
Trade receivables (net of allowances of $18,728 and $16,428, respectively)	943,114			876,197
Inventories: Raw materials	553,433			565,071
Work in process	48,297			44,532
Finished goods	474,183			513,465
Total Inventories	1,075,913			1,123,068
Prepaid expenses and other current assets	356,322			319,334
Total Current Assets	2,818,294			2,942,544
Property, plant and equipment, at cost	2,632,441			2,690,768
Accumulated depreciation	(1,293,317		)	(1,303,848		)
	1,339,124			1,386,920
Goodwill	5,267,559			5,497,596
Other intangible assets, net	2,677,446			2,851,935
Other assets	586,653			608,416
Total Assets	$	12,689,076		$	13,287,411
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Bank borrowings, overdrafts, and current portion of long-term debt	$	385,569		$	384,958
Accounts payable	456,156			510,372
Accrued payroll and bonus	87,083			102,704
Dividends payable	80,062			80,038
Other current liabilities	418,125			474,118
Total Current Liabilities	1,426,995			1,552,190
Long-term debt	3,946,905			3,997,438
Retirement liabilities	261,512			265,370
Deferred income taxes	616,084			641,456
Other liabilities	494,193			502,366
Total Other Liabilities	5,318,694			5,406,630
Commitments and Contingencies (Note 15)
Redeemable noncontrolling interests	102,713			99,043
Shareholders’ Equity:
Common stock 12 1/2¢ par value; 500,000,000 shares authorized; 128,526,137 shares issued as of March 31, 2020 and December 31, 2019; and 106,812,257 and 106,787,299 shares outstanding as of March 31, 2020 and December 31, 2019, respectively	16,066			16,066
Capital in excess of par value	3,835,265			3,823,152
Retained earnings	4,162,347			4,117,804
Accumulated other comprehensive loss	(1,164,208		)	(716,894		)
Treasury stock, at cost (21,713,880 and 21,738,838 shares as of March 31, 2020 and December 31, 2019, respectively)	(1,021,620		)	(1,022,824		)
Total Shareholders’ Equity	5,827,850			6,217,304
Noncontrolling interest	12,824			12,244
Total Shareholders’ Equity including Noncontrolling interest	5,840,674			6,229,548
Total Liabilities and Shareholders’ Equity	$	12,689,076		$	13,287,411

See Notes to Consolidated Financial Statements

1

INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE (LOSS) INCOME

(Unaudited)

	Three Months Ended
	March 31,
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)	2020			2019
Net sales	$	1,347,317		$	1,297,402
Cost of goods sold	781,450			766,143
Gross profit	565,867			531,259
Research and development expenses	85,909			90,596
Selling and administrative expenses	229,714			213,182
Amortization of acquisition-related intangibles	48,350			47,625
Restructuring and other charges, net	4,918			16,174
Losses (gains) on sales of fixed assets	754			(188		)
Operating profit	196,222			163,870
Interest expense	32,140			36,572
Other loss (income), net	10,574			(7,278		)
Income before taxes	153,508			134,576
Taxes on income	26,297			23,362
Net income	127,211			111,214
Net income attributable to noncontrolling interests	2,604			2,385
Net income attributable to IFF stockholders	124,607			108,829
Other comprehensive (loss) income, after tax:
Foreign currency translation adjustments	(452,278		)	42,377
Gains (losses) on derivatives qualifying as hedges	1,447			(97		)
Pension and postretirement net liability	3,517			2,593
Other comprehensive (loss) income	(447,314		)	44,873
Comprehensive (loss) income attributable to IFF stockholders	$	(322,707	)	$	153,702
Net income per share - basic	$	1.16		$	0.97
Net income per share - diluted	$	1.15		$	0.96
Average number of shares outstanding - basic	112,082			111,864
Average number of shares outstanding - diluted	113,594			113,389

See Notes to Consolidated Financial Statements

2

INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
(DOLLARS IN THOUSANDS)	2020			2019
Cash flows from operating activities:
Net income	$	127,211		$	111,214
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization	80,595			81,775
Deferred income taxes	2,221			(12,389		)
Losses (gains) on sale of assets	754			(188		)
Stock-based compensation	8,624			7,604
Pension contributions	(5,397		)	(3,956		)
Changes in assets and liabilities, net of acquisitions:
Trade receivables	(133,291		)	(55,935		)
Inventories	(568		)	(24,719		)
Accounts payable	(31,635		)	8,988
Accruals for incentive compensation	(19,340		)	(36,969		)
Other current payables and accrued expenses	(65,158		)	(11,321		)
Other assets	42,462			(9,978		)
Other liabilities	10,467			(6,894		)
Net cash provided by operating activities	16,945			47,232
Cash flows from investing activities:
Cash paid for acquisitions, net of cash received	—			(33,895		)
Additions to property, plant and equipment	(48,294		)	(57,609		)
Proceeds from life insurance contracts	1,739			1,890
Proceeds from disposal of assets	3,806			3,970
Contingent consideration paid	—			(4,655		)
Net cash used in investing activities	(42,749		)	(90,299		)
Cash flows from financing activities:
Cash dividends paid to shareholders	(80,038		)	(77,779		)
Increase in revolving credit facility and short term borrowings	169			2,895
Repayments on debt	(11,584		)	(36,156		)
Contingent consideration paid	(327		)	—
Purchases of redeemable noncontrolling interest	(14,173		)	—
Proceeds from issuance of stock in connection with stock options	—			200
Employee withholding taxes paid	(1,275		)	(1,339		)
Net cash used in financing activities	(107,228		)	(112,179		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(42,529		)	3,853
Net change in cash, cash equivalents and restricted cash	(175,561		)	(151,393		)
Cash, cash equivalents and restricted cash at beginning of year	623,945			648,522
Cash, cash equivalents and restricted cash at end of period	$	448,384		$	497,129
Supplemental Disclosures:
Interest paid, net of amounts capitalized	$	41,755		$	48,506
Income taxes paid	32,636			33,326
Accrued capital expenditures	19,013			14,241

See Notes to Consolidated Financial Statements

3

INTERNATIONAL FLAVORS & FRAGRANCES INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(DOLLARS IN THOUSANDS)	Common stock		Capital in excess of par value			Retained earnings			Accumulated  other comprehensive (loss) income			Treasury stock					Non-controlling interest		Total
												Shares		Cost
Balance at January 1, 2019	$	16,066	$	3,793,609		$	3,956,221		$	(702,227	)	(21,906,935	)	$	(1,030,718	)	$	10,423	$	6,043,374
Net income						108,829											844		109,673
Adoption of ASU 2016-02						23,094													23,094
Adoption of ASU 2017-12						981													981
Cumulative translation adjustment									42,377										42,377
Losses on derivatives qualifying as hedges; net of tax $44									(97		)								(97		)
Pension liability and postretirement adjustment; net of tax $836									2,593										2,593
Cash dividends declared ($0.73 per share)						(77,799		)											(77,799		)
Stock options/SSARs			3,424									13,978		660					4,084
Vested restricted stock units and awards			(2,405		)							13,401		629					(1,776		)
Stock-based compensation			7,604																7,604
Redeemable NCI			370																370
Balance at March 31, 2019	$	16,066	$	3,802,602		$	4,011,326		$	(657,354	)	(21,879,556	)	$	(1,029,429	)	$	11,267	$	6,154,478

(DOLLARS IN THOUSANDS)	Common stock		Capital in excess of par value			Retained earnings			Accumulated  other comprehensive (loss) income			Treasury stock					Non-controlling interest			Total
												Shares		Cost
Balance at January 1, 2020	$	16,066	$	3,823,152		$	4,117,804		$	(716,894	)	(21,738,838	)	$	(1,022,824	)	$	12,244		$	6,229,548
Net income						124,607											617			125,224
Cumulative translation adjustment									(452,278		)									(452,278		)
Gains on derivatives qualifying as hedges; net of tax $(176)									1,447											1,447
Pension liability and postretirement adjustment; net of tax $(1,022)									3,517											3,517
Cash dividends declared ($0.75 per share)						(80,062		)												(80,062		)
Stock options/SSARs			(490		)							13,763		672						182
Vested restricted stock units and awards			(1,827		)							11,195		532						(1,295		)
Stock-based compensation			8,624																	8,624
Redeemable NCI			5,806																	5,806
Dividends paid on noncontrolling interest and Other						(2		)									(37		)	(39		)
Balance at March 31, 2020	$	16,066	$	3,835,265		$	4,162,347		$	(1,164,208	)	(21,713,880	)	$	(1,021,620	)	$	12,824		$	5,840,674

See Notes to Consolidated Financial Statements

4

INTERNATIONAL FLAVORS & FRAGRANCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These interim statements and related management’s discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related notes and management’s discussion and analysis of results of operations, liquidity and capital resources included in our 2019 Annual Report on Form 10-K (“2019 Form 10-K”). These interim statements are unaudited. The year-end balance sheet data included in this Form 10-Q was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. We have historically operated and continue to operate on a 52/53 week fiscal year ending on the Friday closest to the last day of the quarter. For ease of presentation, March 31 and December 31 are used consistently throughout this Form 10-Q and these interim financial statements and related notes to represent the period-end dates. For the 2020 and 2019 quarters, the actual closing dates were April 3 and March 29, respectively. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. When used herein, the terms “IFF,” the “Company,” “we,” “us” and “our” mean International Flavors & Fragrances Inc. and its consolidated subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. The inputs into our judgments and estimates consider the current economic implications of COVID-19 on our critical and significant accounting estimates, including estimates associated with future cash flows that are used in assessing the risk of impairment of certain long lived assets. Actual results could differ from those estimates.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Company's statement of cash flows periods ended March 31, 2020 and March 31, 2019 to the amounts reported in the Company's balance sheet as at March 31, 2020, December 31, 2019, March 31, 2019 and December 31, 2018.

(DOLLARS IN THOUSANDS)	March 31, 2020		December 31, 2019		March 31, 2019		December 31, 2018
Current assets
Cash and cash equivalents	$	433,246	$	606,823	$	483,504	$	634,897
Restricted cash	9,699		17,122		13,625		13,625
Noncurrent assets
Restricted cash included in Other assets	5,439		—		—		—
Cash, cash equivalents and restricted cash	$	448,384	$	623,945	$	497,129	$	648,522

Accounts Receivable

The Company has various factoring agreements in the U.S. and The Netherlands under which it can factor up to approximately $100 million in receivables. In addition, the Company has factoring agreements sponsored by certain customers. Under all of the arrangements, the Company sells the receivables on a non-recourse basis to unrelated financial institutions and accounts for the transactions as a sale of receivables. The applicable receivables are removed from the Company's Consolidated Balance Sheet when the cash proceeds are received by the Company.

Through these factoring programs, the Company removed $200.3 million and $205.7 million of receivables from its balance sheet for the periods ended March 31, 2020 and December 31, 2019, respectively.

The impact on cash provided by operations from participating in these programs was a decrease of $5.4 million for the three months ended March 31, 2020 and an increase of $5.2 million for the three months ended March 31, 2019.

The cost of participating in these programs was $1.2 million for both of the periods ending March 31, 2020 and 2019.

5

Revenue Recognition

The Company recognizes revenue when control of the promised goods is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods. Sales, value added, and other taxes the Company collects are excluded from revenues. The Company receives payment in accordance with standard customer terms.

The following table presents the Company's revenues disaggregated by product categories:

	Three Months Ended March 31,
(DOLLARS IN THOUSANDS)	2020		2019
Taste
Flavor compounds	$	576,368	$	567,314
Savory solutions	155,764		136,337
Inclusions	30,146		28,633
Nutrition and specialty ingredients	43,955		44,208
Flavor ingredients	24,089		28,310
Total Taste	830,322		804,802
Scent
Fine fragrances	94,150		106,074
Consumer fragrance	314,028		283,221
Fragrance ingredients	108,817		103,305
Total Scent	516,995		492,600
Total revenues	$	1,347,317	$	1,297,402

Contract Assets

With respect to a small number of contracts for the sale of compounds, the Company has an “enforceable right to payment for performance to date” and as the products do not have an alternative use, the Company recognizes revenue for these contracts over time and records a contract asset using the output method. The output method recognizes revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract.

The following table reflects the balances in the Company's accounts receivable, contract assets, and contract liabilities for the periods ended March 31, 2020 and December 31, 2019:

(DOLLARS IN THOUSANDS)	March 31, 2020		December 31, 2019
Receivables (included in Trade receivables)	$	961,842	$	892,625
Contract asset - Short term	1,951		2,736
Contract liabilities - Short term	11,379		11,107

Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to simplify various aspects related to the cessation of reference rates in certain financial markets that would otherwise create modification accounting or changes in estimate. This guidance is effective for March 12, 2020 through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through March 31, 2020 but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify various aspects related to accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service

6

Contract (a consensus of the FASB Emerging Issues Task Force).” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance effective the first day of its 2020 fiscal year. The adoption did not have an impact on its consolidated financial statements but may impact the Company in the future as and when it enters into cloud computing arrangements.

In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans (Subtopic 715-20)", which modifies the disclosure requirements on company-sponsored defined benefit plans. The ASU is effective for fiscal years beginning after December 15, 2020 on a retrospective basis to all periods presented. Early adoption is permitted. The Company adopted the guidance effective the first day of its 2020 fiscal year. The adoption did not have an impact on its Consolidated Financial Statements and will have a minimal impact on its disclosures in future periods.

Adoption of Standard Related to Expected Credit Losses

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", with subsequent amendments, which requires issuers to measure expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking information to estimate credit losses, which may result in earlier recognition of losses.

The Company adopted the guidance effective the first day of its 2020 fiscal year and performed an evaluation of the applicable criteria, including the aging of its trade receivables, recent write-off history and other factors related to future macroeconomic conditions. As a result of the evaluation, the Company determined that no adjustment would be required to the level of its allowances for bad debts or to the carrying value of any other financial asset.

The Company is exposed to credit losses primarily through its sales of products. To determine the appropriate allowance for expected credit losses, the Company considers certain credit quality indicators, such as aging, collection history, and creditworthiness of debtors. Regional and Global Credit committees review and approve specific customer allowance reserves. The allowance for expected credit losses is primarily based on two primary factors: i) the aging of the different categories of trade receivables, and ii) a specific reserve for accounts identified as uncollectable.

The Company also considers current and future economic conditions in the determination of the allowance. At March 31, 2020, the Company reported $961.8 million of trade receivables, net of allowances of $18.7 million. Based on an aging analysis at March 31, 2020, approximately 87% of our accounts receivable were current based on the payment terms of the invoice. Receivables that are past due by over 365 days account for less than 1% of our accounts receivable.

The following is a rollforward of the Company's allowances for bad debts for the three months ended March 31, 2020:

(DOLLARS IN THOUSANDS)	Allowances for Bad Debts
Balance at December 31, 2019	$	16,428
Bad debt expense	4,751
Write-offs	(1,301		)
Foreign exchange	(1,150		)
Balance at March 31, 2020	$	18,728

The Company adjusted the amount of the allowances for bad debts as of December 31, 2019 to reflect the correct classification of amounts between the allowances for bad debts and Trade Receivables. The adjustment was for $8.2 million and had the effect of increasing both the allowances for bad debts and Trade Receivables.

During the first quarter of 2020, the Company increased its allowances for bad debts by approximately $3.0 million to reflect higher expected future write-offs of receivables due to the impact of the COVID-19 pandemic and its impact on the liquidity of certain customers.

7

NOTE 2. NET INCOME PER SHARE

A reconciliation of the shares used in the computation of basic and diluted net income per share is as follows: 

	Three Months Ended March 31,
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)	2020		2019
Net Income
Net income attributable to IFF stockholders	$	124,607	$	108,829
Add: Reduction in redemption value of redeemable noncontrolling interests in excess of earnings allocated	5,806		370
Net income available to IFF stockholders	$	130,413	$	109,199
Shares
Weighted average common shares outstanding (basic)(1)	112,082		111,864
Adjustment for assumed dilution(2):
Stock options and restricted stock awards	349		362
SPC portion of TEUs	1,163		1,163
Weighted average shares assuming dilution (diluted)	113,594		113,389
Net Income per Share
Net income per share - basic	$	1.16	$	0.97
Net income per share - diluted	1.15		0.96

_______________________ 

(1) For the three months ended March 31, 2020 and 2019, the tangible equity units (“TEUs”) were assumed to be outstanding at the minimum settlement amount for basic earnings per share. See below for details.

(2) Effect of dilutive securities includes dilution under stock plans and incremental impact of TEUs. See below for details.

The Company declared a quarterly dividend to its shareholders of $0.75 and $0.73 for the three months ended March 31, 2020 and 2019, respectively.

There were no stock options or stock-settled appreciation rights (“SSARs”) excluded from the computation of diluted net income per share for the three months ended March 31, 2020 and 2019.

The Company issued 16,500,000 TEUs, consisting of a prepaid stock purchase contract ("SPC") and a senior amortizing note, for net proceeds of $800.2 million on September 17, 2018. For purposes of calculating basic net income per share, the SPCs were assumed to be settled at the minimum settlement amount of 0.3134 shares per SPC for March 31, 2020 and 2019, respectively. For purposes of calculating diluted earnings per share, the SPCs were assumed to be settled at a conversion factor not to exceed 0.3839 on March 31, 2020 and 2019, respectively. The SPC conversion factor is based on the 20 day volume-weighted average price (“VWAP”) per share of the Company’s common stock. Per the TEU agreement, the maximum settlement amount is 0.3839 shares per SPC.

The Company has issued shares of purchased restricted common stock and purchased restricted common stock units (collectively “PRSUs”) which contain rights to nonforfeitable dividends while these shares are outstanding and thus are considered participating securities. Such securities are required to be included in the computation of basic and diluted earnings per share pursuant to the two-class method. The Company did not present the two-class method since the difference between basic and diluted net income per share for both unrestricted common shareholders and PRSU shareholders was less than $0.01 per share for each period presented, and the number of PRSUs outstanding as of March 31, 2020 and 2019 was immaterial. Net income allocated to such PRSUs was $0.2 million for both the three months ended March 31, 2020 and 2019.

NOTE 3.    ACQUISITIONS

Pending Transaction with Nutrition & Biosciences, Inc.

On December 15, 2019, the Company entered into definitive agreements with DuPont de Nemours, Inc. (“DuPont”), including an Agreement and Plan of Merger, pursuant to which DuPont will transfer its nutrition and biosciences business to Nutrition & Biosciences, Inc., a Delaware corporation and wholly owned subsidiary of DuPont (“N&B”), and N&B will merge with and into a wholly owned subsidiary of IFF in exchange for a number of shares of IFF common stock, par value $0.125 per

8

share (“IFF Common Stock”) (collectively, the “DuPont N&B Transaction”). In connection with the transaction, DuPont will receive a one-time $7.3 billion special cash payment (the “Special Cash Payment”), subject to certain adjustments. As a result of the DuPont N&B Transaction, holders of DuPont’s common stock will own approximately 55.4% of the outstanding shares of IFF on a fully diluted basis.

Completion of the DuPont N&B Transaction is subject to various closing conditions, including, among other things, (1) approval by IFF’s shareholders of the issuance of IFF Common Stock in connection with the transaction; (2) the effectiveness of the registration statements to be filed with the Securities and Exchange Commission pursuant to the Merger Agreement; and (3) the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (which waiting period has expired), and obtaining certain other consents, authorizations, orders or approvals from governmental authorities. We expect that the transaction will close in early 2021.

On December 15, 2019, IFF and N&B entered into a commitment letter which provides $7.5 billion in an aggregate principal amount of senior unsecured bridge term loans (the "Bridge Loans"). On January 17, 2020, N&B entered into a term loan credit agreement providing for unsecured term loan facilities in an aggregate principal amount of $1.25 billion (the “Term Loan Facilities”), which reduced the commitments under the Bridge Loans commitment letter by a corresponding amount. N&B will be the initial borrower under the remaining $6.25 billion tranche of the 364-day senior unsecured bridge facility (the “Bridge Facility”) (or, if applicable, any replacement debt financing), which, together with the Term Loan Facilities, will be used to finance the Special Cash Payment and to pay related fees and expenses. Following the consummation of the merger, all obligations of N&B with respect to the Term Loan Facilities and the Bridge Facility (if any) or, if applicable, the replacement debt financing, will be guaranteed by IFF (or at the election of N&B and IFF, assumed by IFF).

2019 Acquisition Activity

During the second quarter of 2019, the Company acquired the remaining 50% interest in an equity method investee located in Canada. The purchase of the additional interest increased the Company's ownership of the investee to 100%. The purchase price for the remaining 50% was approximately $37 million, including cash and an accrual for the amount expected to be paid in contingent consideration. The Company began to consolidate the results of the acquired entity from the date on which it acquired the remaining 50% interest during the second quarter of 2019. Goodwill of approximately $30 million and intangible assets of $20 million were recorded in connection with the acquisition.

During the first quarter of 2019, the Company acquired 70% of a company in Europe and increased its ownership of an Asian company from 49% to 60%. The total purchase price for the two acquisitions made in the first quarter of 2019 was $52 million, excluding cash acquired and including $19 million of contingent consideration and deferred payments. The purchase price allocations have been performed and resulted in goodwill of approximately $47 million and intangible assets of $28 million.

During the first quarter of 2020, the Company completed the purchase price allocations for all three of the transactions that were made during 2019. As a result of finalizing the purchase price allocations, adjustments were recorded to increase fixed assets by $13 million and customer relationships and other intangible assets by $5 million and to decrease goodwill by $15 million. The income statement impact of the finalization of purchase accounting was not material.

Pro forma information has not been presented as the entities acquired in 2019 were not material.

NOTE 4.    RESTRUCTURING AND OTHER CHARGES, NET

Restructuring and other charges primarily consist of separation costs for employees including severance, outplacement and other benefit ("Severance") costs as well as costs related to plant closures, the costs of accelerated depreciation of fixed assets associated with plants ("Fixed asset write-down") and all other related restructuring ("Other") costs. All restructuring and other charges, net expenses are separately stated on the Consolidated Statement of Comprehensive (Loss) Income.

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Frutarom Integration Initiative

In connection with the acquisition of Frutarom, the Company began to execute an integration plan that, among other initiatives, seeks to optimize its manufacturing network. As part of the Frutarom Integration Initiative, the Company expects to close approximately 35 manufacturing sites over the next twelve months with most of the closures targeted to occur before the end of fiscal 2021. During 2019, the Company announced the closure of ten facilities, of which six facilities are in Europe, Africa and Middle East, two facilities in Latin America, and one facility in each North America and Greater Asia regions. During the three months ended March 31, 2020, the Company announced the closure of four facilities, of which two facilities are in Europe, Africa and Middle East, one facility in Latin America, and one facility in North America. Since the inception of the initiative to date, the Company has expensed $15.3 million. Total costs for the program are expected to be approximately $60 million including cash and non-cash items.

2019 Severance Program

During the year ended December 31, 2019, the Company incurred severance charges related to approximately 190 headcount reductions, excluding those previously mentioned under the Frutarom Integration Initiative. The headcount reductions primarily related to the Scent business unit with additional amounts related to headcount reductions in all business units associated with the establishment of a new shared service center in Europe. Since the inception of the program, the Company has expensed $21.3 million to date. Total costs for the program are expected to be approximately $25 million.

2017 Productivity Program

In connection with the 2017 Productivity Program, the Company recorded $24.5 million of charges related to personnel costs and lease termination costs since the program's inception to date. Total costs for the program are expected to be approximately $25 million.

Changes in Restructuring Liabilities

Changes in restructuring liabilities by program during the three months ended March 31, 2020 were as follows:

(DOLLARS IN THOUSANDS)	Balance at December 31, 2019		Additional Charges (Reversals), Net			Non-Cash Charges			Cash Payments			Balance at March 31, 2020
2017 Productivity Program
Severance	$	1,106	$	—		$	—		$	(146	)	$	960
Other(1)	88		—			—			—			88
Frutarom Integration Initiative
Severance	4,038		1,869			—			(928		)	4,979
Fixed asset write down	—		3,366			(3,366		)	—			—
Other(1)	2,485		(317		)	—			1			2,169
2019 Severance Plan
Severance	12,897		—			—			(1,048		)	11,849
Other(1)	471		—			—			—			471
Total restructuring	$	21,085	$	4,918		$	(3,366	)	$	(2,121	)	$	20,516

_______________________ 

(1) Other includes supplier contract termination costs, consulting and advisory fees.

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Charges by Segment

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:

	Three Months Ended March 31,
(DOLLARS IN THOUSANDS)	2020		2019
Taste	$	4,918	$	2,553
Scent	—		10,900
Shared IT & Corporate Costs	—		2,721
Total Restructuring and other charges, net	$	4,918	$	16,174

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

Movements in goodwill during 2020 were as follows:

(DOLLARS IN THOUSANDS)	Goodwill
Balance at December 31, 2019	$	5,497,596
Measurement period adjustments(1)	(15,283		)
Foreign exchange	(214,754		)
Balance at March 31, 2020	$	5,267,559

_______________________ 

(1) Measurement period adjustments relate to adjustments recorded in connection with completing the purchase price allocation related to the 2019 Acquisition Activity. See Note 3 for details.

Reallocation of goodwill

In the first quarter of 2020, in connection with the reorganization of the Company's reporting structure, certain entities were moved between reporting units. As a result of the movements, Goodwill was reallocated between reporting units as follows:

(DOLLARS IN THOUSANDS)	Increase (decrease) to Goodwill
Cosmetic active ingredients	$	110,788
Natural Product Solutions	(78,945		)
Fine Ingredients	(29,221		)
Taste	(2,622		)
Total	$	—

See Note 11 for further information on the reorganization.

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Other Intangible Assets

Other intangible assets, net consisted of the following amounts: 

	March 31,			December 31,
(DOLLARS IN THOUSANDS)	2020			2019
Asset Type
Customer relationships	$	2,561,536		$	2,653,446
Trade names & patents	174,134			178,968
Technological know-how	455,226			468,256
Other	22,410			40,362
Total carrying value	3,213,306			3,341,032
Accumulated Amortization
Customer relationships	(348,509		)	(302,047		)
Trade names & patents	(30,595		)	(27,213		)
Technological know-how	(137,162		)	(135,269		)
Other	(19,594		)	(24,568		)
Total accumulated amortization	(535,860		)	(489,097		)
Other intangible assets, net	$	2,677,446		$	2,851,935

Amortization

Amortization expense was $48.4 million and $47.6 million for the three months ended March 31, 2020 and 2019, respectively.

Amortization expense for the next five years is expected to be as follows:

(DOLLARS IN THOUSANDS)	2020		2021		2022		2023		2024
Estimated future intangible amortization expense	$	135,577	$	178,000	$	174,245	$	174,135	$	174,135

NOTE 6.     OTHER ASSETS

Other assets consisted of the following amounts: 

(DOLLARS IN THOUSANDS)	March 31, 2020		December 31, 2019
Operating lease right-of-use assets	$	287,301	$	287,870
Deferred income taxes	96,109		125,552
Overfunded pension plans	89,819		85,657
Cash surrender value of life insurance contracts	43,694		47,578
Other(a)	69,730		61,759
Total	$	586,653	$	608,416

_______________________ 

(a) Includes finance lease right-of-use assets, restricted cash, land usage rights in China and long term deposits.

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NOTE 7.    DEBT

Debt consisted of the following:

(DOLLARS IN THOUSANDS)	Effective Interest Rate		March 31, 2020			December 31, 2019
2020 Notes(1)	3.69	%	$	299,598		$	299,381
2021 Euro Notes(1)	0.82	%	327,408			334,561
2023 Notes(1)	3.30	%	299,080			299,004
2024 Euro Notes(1)	1.88	%	546,009			558,124
2026 Euro Notes(1)	1.93	%	870,689			890,183
2028 Notes(1)	4.57	%	396,766			396,688
2047 Notes(1)	4.44	%	493,676			493,571
2048 Notes(1)	5.12	%	786,050			785,996
Term Loan(1)	3.65	%	239,665			239,621
Amortizing Notes(1)	6.09	%	70,882			82,079
Bank overdrafts and other			2,594			3,131
Deferred realized gains on interest rate swaps			57			57
Total debt			4,332,474			4,382,396
Less: Short-term borrowings(2)			(385,569		)	(384,958		)
Total Long-term debt			$	3,946,905		$	3,997,438

_______________________ 

(1) Amount is net of unamortized discount and debt issuance costs.

(2) Includes bank borrowings, overdrafts and current portion of long-term debt.

NOTE 8.  LEASES

The Company has operating leases for corporate offices, manufacturing facilities, research and development facilities, and certain transportation and office equipment, all of which are operating leases. The Company's leases have remaining lease terms of up to 40 years, some of which include options to extend the leases for up to 5 years.

The components of lease expense were as follows:

	Three Months Ended		Three Months Ended
(DOLLARS IN THOUSANDS)	March 31, 2020		March 31, 2019
Operating lease cost	$	12,443	$	12,469
Finance lease cost	753		—

Supplemental cash flow information related to leases was as follows:

	Three Months Ended		Three Months Ended
(DOLLARS IN THOUSANDS)	March 31, 2020		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	12,331	$	11,076
Operating cash flows for finance leases	33		—
Financing cash flows for finance leases	721		—
Right-of-use assets obtained in exchange for lease obligations
Operating leases	10,968		9,249
Finance leases	1,930		452

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NOTE 9. INCOME TAXES

Uncertain Tax Positions

As of March 31, 2020, the Company had $71.4 million of unrecognized tax benefits recorded in Other liabilities and $0.7 million recorded to Other current liabilities. If these unrecognized tax benefits were recognized, the effective tax rate would be affected.

At March 31, 2020, the Company had accrued interest and penalties of $14.2 million classified in Other liabilities and less than $0.1 million classified in Other current liabilities.

As of March 31, 2020, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $86.4 million associated with tax positions asserted in various jurisdictions, none of which is individually material.

The Company regularly repatriates earnings from non-U.S. subsidiaries. As the Company repatriates these funds to the U.S., they will be required to pay income taxes in certain U.S. states and applicable foreign withholding taxes during the period when such repatriation occurs. Accordingly, as of March 31, 2020, the Company had a deferred tax liability of $42.6 million for the effect of repatriating the funds to the U.S., attributable to various non-U.S. subsidiaries. There is no deferred tax liability associated with non-U.S. subsidiaries where we intend to indefinitely reinvest the earnings to fund local operations and/or capital projects.

The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review. In addition, the Company has open tax years with various taxing jurisdictions that range primarily from 2010 to 2019. Based on currently available information, the Company does not believe the outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on its results of operations.

The Company also has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, sales and use taxes and property taxes, which are discussed in Note 15.

Effective Tax Rate

The effective tax rate for the three months ended March 31, 2020 was 17.1% compared with 17.4% for the three months ended March 31, 2019. The quarter-over-quarter decrease is primarily due to lower repatriation costs and the reversal of loss provisions, partially offset by an unfavorable mix of earnings.

NOTE 10.    STOCK COMPENSATION PLANS

The Company has various plans under which its officers, senior management, other key employees and directors may be granted equity-based awards. Equity awards outstanding under the plans include PRSUs, restricted stock units ("RSUs"), SSARs and Long-Term Incentive Plan awards. Liability-based awards outstanding under the plans are cash-settled RSUs.

Stock-based compensation expense and related tax benefits were as follows:

	Three Months Ended March 31,
(DOLLARS IN THOUSANDS)	2020			2019
Equity-based awards	$	8,624		$	7,604
Liability-based awards	(639		)	730
Total stock-based compensation expense	7,985			8,334
Less: Tax benefit	(1,394		)	(1,382		)
Total stock-based compensation expense, after tax	$	6,591		$	6,952

NOTE 11. SEGMENT INFORMATION

During the first quarter of 2020, the Company reorganized its reporting structure and combined substantially all of the components of the former Frutarom reportable operating segment into the former Taste reportable operating segment. Prior year amounts have been recast to conform to the current year reporting structure. As a result of the reorganization, the Company is now organized into two reportable operating segments, Taste and Scent; these segments align with the internal structure used to manage these businesses.

Taste is comprised of a diversified portfolio across flavor compounds, savory solutions, inclusions and nutrition and specialty ingredients. Flavor compounds provide unique flavors that are ultimately used by IFF's customers in savory products,

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beverages, sweets, and dairy products. Savory solutions include marinades or powder blends of flavors, natural colors, seasonings, functional ingredients and natural anti-oxidants that are primarily designed for the meat and fish industry. Inclusions provide taste and texture by, among other things, combining flavorings with fruit, vegetables, and other natural ingredients for a wide range of food products, such as health snacks, baked goods, cereals, pastries, ice cream and other dairy products. Nutrition and specialty ingredients primarily consist of natural health ingredients, natural food protection, natural colors and flavor ingredients. The flavor ingredients market includes natural flavor extracts, specialty botanical extracts, distillates, essential oils, citrus products, aroma chemicals, and natural gums and resins. Such ingredients are used for food, beverage, and flavors and are often sold directly to food and beverage manufacturers who use them in producing consumer products.

Scent is comprised of (1) Fragrance Compounds, which are ultimately used by our customers in two broad categories: Fine Fragrances, including perfumes and colognes, and Consumer Fragrances, including fragrance compounds for personal care (e.g., soaps), household products (e.g., detergents and cleaning agents) and beauty care, including toiletries; (2) Fragrance Ingredients, consisting of synthetic and natural ingredients that can be combined with other materials to create unique fine fragrance and consumer compounds; and (3) Cosmetic Active Ingredients, consisting of active and functional ingredients, botanicals and delivery systems to support our customers’ cosmetic and personal care product lines. Major fragrance customers include the cosmetics industry, including perfume and toiletries manufacturers, and the household products industry, including manufacturers of soaps, detergents, fabric care, household cleaners and air fresheners.

The Company's Chief Operating Decision Maker evaluates the performance of these reportable operating segments based on segment profit which is defined as operating profit before restructuring, global expenses (as discussed below) and certain non-recurring items, Interest expense, Other income (expense), net and Taxes on income.

The Global expenses caption represents corporate and headquarter-related expenses which include legal, finance, human resources, certain incentive compensation expenses and other R&D and administrative expenses that are not allocated to individual reportable operating segments.

Reportable segment information was as follows:

	Three Months Ended
	March 31,
(DOLLARS IN THOUSANDS)	2020